Recent headlines about the U.S. Justice Department’s (DOJ) antitrust case targeting Google Search echo a familiar policy script. In a recent Wall Street Journal op-ed, Thomas Lenard and Scott Wallsten warn that forcing Google to share its technology could undermine innovation—a lesson they say we should have learned from telecommunications policy decades ago.
In 1996, Congress passed the Telecommunications Act with grand ambitions to inject competition into local telephone markets. The strategy seemed straightforward: mandate that established telephone companies share their networks with new competitors at regulated prices. Sound familiar?
The act’s core mechanism was “unbundling”—requiring incumbent telephone companies to lease portions of their networks to new market entrants at artificially low prices. Policymakers believed this would create a “stepping stone” for competition. New firms could use established infrastructure to launch services as a first step toward eventually building their own networks.
Reality proved dramatically different. The policy’s theoretical elegance collapsed under real-world (and entirely predictable) complications.
The first problem was pricing. As with nearly all forced-sharing arrangements, unbundling came along with rate regulation. The Federal Communications Commission (FCC) set network-access prices using a theoretical forward-looking cost model that the agency termed “total element long-run incremental cost,” or TELRIC.
The regulated prices, however, were based on a hypothetical efficient network built at then-current prices and did not account for actual historical costs. The result was that the pricing scheme systematically undervalued infrastructure. At these rates, incumbent firms couldn’t generate sufficient returns to justify further investment. Simultaneously, new entrants found it cheaper to lease infrastructure than to build their own—exactly the opposite of the intended outcome, as noted by Glen O. Robinson and Dennis L. Weisman:
The reason the stepping stone model has failed is that the rules used to implement it ignored the key assumption on which the model depended, a set of economic incentives to invest in facilities. By mandating access on price and other terms that were cheaper than the cost (including risk) of new investment, the FCC effectively ensured that new entrants would not follow the yellow brick road to facilities-based construction.
Imagine telling a tech startup that it can use Google’s search index for pennies, with no incentive to develop competing technology. That’s precisely the mechanism the DOJ now proposes for Google.
The telecommunications experiment revealed a fundamental policy error: regulatory frameworks that force successful companies to subsidize actual and potential competitors rarely generate meaningful innovation. They create dependency, not dynamism.
New competition in the telecommunications market emerged not from forced sharing, but from technological disruption. Cable telephony, wireless networks, and voice-over-internet protocols (VoIP) transformed telecommunications, rendering the complex unbundling regulations obsolete. These technologies arose from private investment, not regulatory mandates.
By 2005, regulators effectively abandoned the unbundling experiment. The stepping stones never crossed the stream. What appeared to be a thoughtful intervention had instead discouraged investment and slowed technological progress.
The proposed Google remedy follows an eerily similar script. Forcing the company to share search technologies, user data, and artificial-intelligence research threatens to reproduce the unbundling policy’s fundamental failures. Competitors will have less incentive to innovate, instead free riding on Google’s investments. In turn, free riding by competitors will reduce Google’s incentives to innovate. Rather than a stepping stone, such forced sharing will create a vicious whirlpool, sinking investment in innovation.
True competition emerges from environments that reward risk-taking and innovation, not from regulatory handicapping that punishes success. When policymakers attempt to engineer market outcomes through complex sharing requirements—especially when tied to rate regulation—they often achieve the opposite of their intentions.
This isn’t to argue that large technology platforms should operate without scrutiny. Antitrust policy has a critical role to play in maintaining competitive markets. But that role should focus on preventing anti-competitive behavior, not micromanaging firms’ research and development.
The telecom-unbundling experience offers a clear warning: regulatory interventions that seem elegant in theory can become destructive in practice. As courts and regulators consider remedies for big tech, they would do well to study this history and recognize that innovation flourishes through competition, not compulsion.
