Modern tech markets share several key economic characteristics with the telecommunications markets of the recent past, a new working paper from Georgetown Law’s Jonathan Nuechterlein and Howard Shelanski argues. And while telecom regulators have over the years sought to address these key issues of network effects, economies of scale, and switching costs through various interventions, the paper notes that not all of these approaches were successful.
As former officials at the Federal Communications Commission and the Federal Trade Commission (Nuechterlein served as the FTC’s general counsel and as deputy general counsel for the FCC, while Shelanski was the FCC’s chief economist and director of the FTC’s Bureau of Economics), the pair thoughtfully examine how past regulatory experiences in telecom might inform today’s debates about regulating digital platforms. The working paper suggests that policymakers should carefully weigh the costs and benefits of similar interventions in tech markets, recognizing both the parallels and the differences between these sectors.
Network Effects and Interconnection
Network effects are observed where a service becomes more valuable as more people use it. Nuechterlein and Shelanski note that, in early telephone markets, these dynamics created winner-take-all scenarios, as consumers naturally gravitated toward the network with the most users:
The absence of interconnection arrangements among rival networks thus created a cutthroat race to build the largest customer base in the shortest time frame; the winner could then put all rivals out of business by pointing out the limited value of their smaller networks.
Regulators responded with mandatory interconnection requirements, forcing larger networks to exchange traffic with smaller ones.
While some tech markets exhibit similar network effects, the authors highlight important differences. Most notably, “multihoming”—that is, using multiple competing services simultaneously—is much easier in digital markets than in traditional telecom. As Nuechterlein and Shelanski note, consumers can easily switch between iMessage and WhatsApp, or among various social-media platforms, which wasn’t possible with physical telephone networks.
This distinction is crucial. The ease of multihoming in digital markets “attenuates the role of network effects” and makes interconnection mandates potentially less necessary than they were in telecom. The authors cite the FCC’s 2003 decision to abolish interoperability requirements for AOL’s instant messaging as evidence that multihoming can enable competition without regulatory intervention:
As it explained, “many consumers [we]re willing to use multiple platforms” for instant messaging, including new services by Microsoft and Yahoo! in addition to AOL, suggesting “that consumer lock-in is not a concern here.”
Scale Economies and Data Sharing
The enormous fixed costs of building physical infrastructure in telecom created significant advantages for incumbents. The Telecommunications Act of 1996 attempted to address this by requiring incumbents to lease network elements to competitors at regulated rates.
Digital platforms similarly benefit from scale, particularly regarding data. Platforms with more users collect more data, which can improve their services and attract even more users. Some commentators have proposed data-sharing mandates as a solution, similar to the asset-sharing regime in telecom.
Nuechterlein and Shelanski are, however, skeptical of broad data-sharing proposals, drawing on the mixed results of the 1996 act’s asset-sharing regime. That regime created “only a pale substitute for genuine competition” because beneficiaries could profit without innovating. Real competition ultimately came not from companies leasing incumbent facilities, but from facilities-based competitors like wireless and cable providers. As I argued in an earlier Telecom Hootenanny:
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.
This historical lesson is particularly valuable. Nuechterlein and Shelanski remind us that “sometimes real competition is what happens while competition policy is making other plans.”
Policymakers should be cautious about imposing asset-sharing remedies that might create regulatory uncertainty without fostering genuine innovation.
Switching Costs and Portability
In telecom, local number portability requirements allowed consumers to keep their phone numbers when changing providers, eliminating a major barrier to switching. This intervention was largely successful because its competitive benefits outweighed its implementation costs.
Similar switching costs exist in tech markets when consumers can’t easily transfer their data between platforms. The authors note that some tech companies have already created the Data Transfer Project to facilitate data portability, suggesting that “regulatory jawboning might be sufficient to create the requisite industry norms” without formal regulation.
Critical Assessment
The greatest strength of the Nuechterlein and Shelanski paper is its nuanced approach to regulatory parallels. Rather than simply transplanting telecom solutions to tech markets, the authors carefully analyze when such interventions might be appropriate and when they might be counterproductive.
One paper can cover only so much territory. For example, the authors note that multihoming is indeed easier in many digital contexts. This observation, however, invites a deeper investigation into the role of default settings and user habits in creating de facto single-homing behavior. Multihoming is quickly becoming one of the “big issues” in antitrust policy, as demonstrated by the FTC’s investigation of Amazon and, as Jonathan Barnett notes, by the long-running Google Search case:
Put differently: if users can easily switch or multi-home, it is unclear how Google could expect that a default arrangement could be used to shield its leadership position from entry by equally or more efficient competitors.
Nuechterlein and Shelanski provide a valuable framework for thinking about tech regulation through the lens of telecom history. Their central insight—that we should carefully weigh the costs and benefits of regulatory interventions, rather than assuming they will always promote competition—is particularly important.
As policymakers contemplate new regulations for digital platforms, this paper offers a timely reminder that regulatory solutions that seem obvious in theory can have complex and sometimes counterproductive effects in practice. The most successful interventions, like number portability, tend to directly address consumer pain points without imposing excessive implementation costs or stifling innovation.
