October 24, 2017

How Denmark Has Overtaken the U.S. As a Telecom Policy Leader

Andrea O'Sullivan

Feature Writer
Summary

It's all about deregulation to foster innovation.

In the 1990s, the world looked to the United States as a model for deregulatory telecom and tech policy. Not only was the country fortunate enough to house Silicon Valley's pressure cooker of internet innovation, but its policy makers seemed to deeply understand the need for a culture and regulatory approach that truly embraced experimentation and permissiveness.

Regulators around the world took notice and strove to emulate the success of the U.S. approach. Denmark in particular styled its own telecommunications regulations on the U.S. model, slashing its chief telecom regulator altogether and assigning small regulatory functions to other departments.

It was a smash success. Today, the Danes enjoy some of the highest quality broadband and mobile penetration in the world at affordable prices with little government intervention, explains a recent Mercatus research paper by telecom scholars Roslyn Layton and Joseph Kane. By eliminating a source of regulatory capture and streamlining regulatory obligations, regulators could dedicate resources to working on actual problems, like creating a lean, digital bureaucracy appropriate for the information revolution.

Ironically, a decade later, the U.S. has since slid back into a precautionary mindset towards technology policy. Today, it seems that the Danish student has surpassed the American teacher, and the Federal Communications Commission (FCC) may well be turning to the Danish model to recapture some of our earlier progress.

This was the takeaway of a recent event hosted by the Mercatus Center on the topic of Danish telecom deregulation as a model for U.S. policy. The discussion—emceed by yours truly—presented two panels on the respective topics of Denmark as a case study and the concrete lessons that the U.S. can extract from the Danish experience.

Such great promise

On the first panel, my Mercatus Center colleague Brent Skorup facilitated a dialogue with Layton, former FCC Commissioner Robert McDowell, and Phoenix Center president and telecom scholar Lawrence Spiwak on the Danish telecom miracle. Deregulation not only spurred a veritable renaissance of broadband investment and deployment, it also cut down on cronyism by eliminating a major target of corporate lobbying. Layton's policy recommendations were clear: "The job of a telecommunications regulator is to put itself out of business."

At one point, the U.S. was moving close to that ideal. President Bill Clinton's extraordinary "Framework for Global Electronic Commerce" of 1997 outlined a hands-off posture toward Internet technologies that could have been drafted by Milton Friedman himself. Good riddance to the heavy-handed, precautionary regulation of the past. In its place would be a "market-driven arena" in which government involvement would be limited to ensuring "industry self-regulation and private sector leadership."

The FCC started to turn over a new leaf as well. Unlike the booming new native internet industry, the underlying telecom infrastructure that made such developments possible were theretofore unfortunately burdened by antiquated telephone regulations established in the wake of the Great Depression.

That government-first mindset changed with the ascendancy of Chairman William Kennard to the FCC in 1997. Kennard fully understood the potential of the internet to revolutionize commerce and daily life. More importantly, he was acutely aware of the potential for bad policy to stifle the amazing opportunities that digital technologies presented. In his view, the best way to promote fast, expansive, affordable telecom access was to "resist the urge to regulate" and allow the market to drive development. So Kennard steered the FCC to peel back bad regulations and leave as much space for innovation for new technologies as possible. The general goal was for the FCC to move "from an industry regulator to a market facilitator" by 2005, as Skorup cited from Kennard's 1999 strategy document.

Straying from the course

Yet, as McDowell and Spiwak pointed out at the event, the FCC has strayed far from these ideals in the years since. There is no question that the policies that were implemented worked—spurring an "incredible explosion of entrepreneurial brilliance" in McDowell's estimation.

But the federal government stopped short of amending or repealing important portions of the 1934 Federal Communications Act that regulated new technologies in an outdated and inappropriate manner. More control means less flexibility and ultimately fewer opportunities for consumers and entrepreneurs.

Furthermore, political changes influenced the culture of the FCC during the Obama administration, which turned to more aggressive attempts to design industry landscapes. It's not just a "net neutrality" thing, either—although that was a huge expansion in government power. Spiwak pointed to examples like the FCC's attempted crackdown on set top boxes (and eventually TV streaming apps) to demonstrate how such interventions could intentionally siphon profits from targeted firms and therefore limit investment. One study from the Phoenix Center estimated the opportunity cost of such policies to be roughly $20 to $30 billion in lost service advancements a year.

In less than a decade, the United States regressed from being a world leader in laissez faire telecom oversight—with the dazzling results that followed—to a run-of-the-mill command-and-control style industrial planner whose thinking was mired in the bad old days of the Great Depression.

There is good news. Under the capable leadership of current Chairman Ajit Pai, the FCC is well-poised to return to and even exceed its glory days of light touch regulation and permissionless innovation. It may just mean that the US will take a page from the book of one of its old students.

The student becomes the teacher?

The second panel of the event featured a fascinating conversation between Pai and one of the former Danish regulators involved in their successful deregulation, Jakob Willer. Wall Street Journal Chief Economics Commentator Greg Ip moderated, probing the panelists to explore the similarities and tensions between the two regulatory bodies.

It was a fairly unique exchange. Willer and his colleagues had been deeply inspired by the vision outlined by former Chairman Kennard in his 1999 FCC Strategy Document, traveling to the U.S. in 2000 to pick the FCC's brains and determine how Denmark could best adopt this framework. They really meant business. Willer described their goals as to promote "market-led development" and a "technology neutral regulatory environment."

Perhaps most importantly, Danish deregulation has been stable, remaining consistent throughout the swings of electoral politics since 1999. In fact, the biggest threat to Danish telecom does not come from within its borders at all, but from Brussels, which seeks to impose harsh "net neutrality" regulations on European Union member states.

Many of Willer's observations dovetailed nicely with the path forward that Pai sketched for the FCC. Both men agreed on the importance of preventing regulations from discouraging investment and innovation. Pai stated that he hoped to turn the FCC away from the "economics-free zone" of his predecessor and toward a culture where economic analysis drives all ex ante regulation.

We might not expect the FCC to disband completely in the next few years—as Pai quipped, he certainly does not want to see himself put out of a job during his term. And there are important differences between Denmark and the U.S. that change the calculus of regulatory effectiveness—Denmark is blessed with a smaller population and greater city density, which makes broadband deployment a bit easier, for instance.

Still, Americans should take heart that the FCC is looking to the world's most successful telecom deregulator as an inspiration for policy. And Pai has made it abundantly clear that his agency will focus on disbanding old regulations that make no sense and directing resources to addressing contemporary problems as the Danes did. If the agency stays the course, the FCC may very well return to its glory as a global leader in smart telecom oversight.