The Regulatory State Does Not Like You

Two important regulatory rulings have been issued in the last day that will have a profound effect on your life, both immediately and over the long run. One forces a continued degradation of AT&T’s cell phone coverage by forbidding a merger with the embattled company T-Mobile. The other targets a feature of Google’s Android phone on grounds that it too closely resembles a feature of the iPhone over which Apple holds the patent.

Neither regulatory decision will help you. In fact, both directly target your well being. AT&T has had trouble for years and has lost market support for its spotty cell coverage relative to its competitors. To prevent the company from reinventing itself through a merger is very bad for consumers. And it is the same with the Apple/Google decision. This intervention takes away a software feature from people who want to use something other than Apple’s phone. Both decisions are blatantly harmful to consumers and to the cause of competition.

Who issued these rulings? The merger decision was handed down by the U.S. Justice Department. The Apple/Google decision was handed down by the U.S. International Trade Commission. If you don’t recall having been asked who should populate these bureaucracies or whether they should have jurisdiction over your technology, your memory is not failing you. Welcome to the U.S. version of regulatory central planning, replete with mandarins and apparatchiks that purport to have total control over the direction and pace of economic development. They serve special interests but do not serve the rest of us.

There was a time when this type of regulation was said to be necessary for the consumer. In fact, this is still widely believed. But look at what is happening here. The consumers are the ones who are being left out, denied the right to influence the direction of technological change. The bureaucrats are thwarting the desires of those who actually use cell phones in their daily lives.

The reason for the Apple victory against Google is fairly straightforward, though there is no way it could have been predicted in advance. Apple, the current industry leader, wanted to harm its main competition. It has a huge war-chest of patents and a fierce desire to use them to firm up a monopolistic status. The ruling is rather narrow and concerns the ability to use the content of one application to drive the behavior of another application, such as clicking on an address to open up a navigation tool. But what matters here are not the specifics but the power of Apple to enforce its claims. This is what chills pro-consumer development down the line.

Keep in mind that American consumers of the Android phone are already using the now-forbidden phone features. This is what gives lie to the claims of Apple that Android “stole” – a word used by the Apple spokesman – something or anything at all. When someone steals something from you, you no longer have it. The Android offering of this feature did not prevent Apple from using the same feature. Therefore, it cannot be theft.

At most, the similarity of software functioning it is a good example of the learning process that open market competition permits and encourages. In a thriving marketplace, everyone learns from everyone else, and each firm strives to be ever more excellent in the service of the public. Apple’s claims amount to a demand that no one else be permitted to compete using any features that it uses. This is a paradigmatic case of how patents are seriously harming economic development.

Software patents of this sort were nowhere known in the early years of the software industry. both Steve Jobs and Bill Gates have publicly reflected on how, In those days, they all learned from each other. They would watch the competition and emulate what succeeded in order to stay in the running, while striving to innovate constantly in order to gain the advantage. It was a free market and it gave birth to the modern world. But in the mid to late 1980s, the government started issuing patents that began the process of freezing development in place. Today, the entire sector has become a thicket of claims and counterclaims that only the most well-heeled companies can navigate.

The case of the AT&T merger with T-Mobile is even more interesting still for the layers upon layers of interest groups involved here. It was to be the bigger-ticket merger this year: $39 billion. Those kinds of numbers always have big institutions behind them. The choice partners here were J.P. Morgan and Morgan Stanley, along with others, who were to earn $150 million in accounting fees on the deal. It was a good bet for everyone involved. Market competition is difficult enough but there was always a very dangerous elephant in the living room: a government powerful enough to overrule the market process. This introduced the great uncertainty.

Left out of the deal completely was the influential mother of innumerable crony deals of late: Goldman Sachs. In this way, the defeat of this merger is a huge victory for Goldman because it slams its most direct competitors in the investment banking industry. The Wall Street Journal reports that the failure of the deal moves Goldman from #2 to #1 in the industry. Are we really supposed to believe that Goldman, which has massive influence within the Obama administration thanks to a well-documented revolving door between the two institutions, had no influence at all over this decision?

Two more beneficiaries include Verizon and Sprint, and carrier stock prices reshuffled very quickly in their favor as soon as the announcement came over the ticker. AT&T was slammed not only because its path to the future was blocked but also because it now owes $4 million in accounting fees to T-Mobile’s parent company, a charge that is going to further hurt its ability to invest and compete.

Both decisions are bad on their own terms, but worse in terms of what they imply about the future of digital development. They make investors fearful, give unwarranted power to politically connected companies, and impose a general feeling of legal uncertainty about what is and is not possible in the great struggle to serve the consuming public. The decisions add a dangerous component of monopolization and stagnation in what should be a competitive and dynamic sector.

These are not going to kill progress in the digital marketplace but they distort its pathway, and with costs that are largely unseen. When your cellphone lacks features or your service provider’s coverage isn’t what it should be, whom do you blame? Most people will blame the business. They should be blaming the central planners – the real hidden hand that is working to dim the lights and make finding our way to a brighter future ever more difficult.


Jeffrey Tucker

The Daily Reckoning