Why Large Corporations Often Secretly Embrace Regulation

I wrote the other day about how Kevin Drum was confused at why broadband stocks might be rising in the wake of news that the government would regulate broadband companies as utilities.  I argued the reason was likely because investors know that such regulation blocks most innovation-based competition and tends to guarantee companies a minimum profit -- nothing to sneeze at in the Internet world where previous giants like AOL, Earthlink, and Mindspring are mostly toast.

James Taranto pointed today to an interesting Richard Eptstein quote along the same lines (though he was referring to hospitals under Obamacare):

Traditional public utility regulation applies to such services as gas, electric and water, which were supplied by natural monopolists. Left unregulated, they could charge excessive or discriminatory prices. The constitutional art of rate regulation sought to keep monopolists at competitive rates of return.

To control against the risk of confiscatory rates, the Supreme Court also required the state regulator to allow each firm to obtain a market rate of return on its invested capital, taking into account the inherent riskiness of the venture.

  • Not Rick

    One of the things I learned in my Economics of Regulation course in collage was that any time you get the opportunity to become regulated, you should jump on it. It give's you a form a security that no unregulated business can achieve. Sure you might not be able to increase your stock price 10 fold in 9 months but then, you don't have to struggle to be efficient, you don't have to worry about keeping stock holders and a board of directors happy, they know exactly what they're getting, because the government sets their rate of return. Think of it as a guaranteed rate of return that automatically adjusts for inflation and is not subject to the usual volatility of the free market. Easy money.

    Were this usually goes bad is that the regulations create unintended consequences. Lack of innovation, slowed expansion, and sometimes serious market manipulations - Think ENRON. If you want regulated supply to work, you need to keep a direct connection between the supplier and consumer, if you allow middle men to lock up the supply in contracts and then resell it, you get all of the downsides and none of the upsides. Sadly, with our Crony Capitalist system, regulations are too often designed to achieve exactly that result.

  • Dan Wendlick

    The way I see it, the upgrades necessary to the Internet infrastructure necessary to allow millions of people to stream Hi-Def video will cost pretty much the same no matter who pays for them. The question becomes whether that cost should be borne by the entire Internet community or by those driving the increase in demand. It is somewhat naieve to think that the big Streaming services are going to eat the costs of any bandwith prioritization charges. Once their market share stabilizes, they are going to pass them along to their customers in the form of higher monthly fees. Instead of $60 to your ISP and $40 to Netflix, you're going to give $60 to Netflix and $40 to your ISP. you're still going to spend that same $100 a month as a consumer to get the ability to stream movies.

  • Nimrod

    Big surprise, google has no problem with (and probably supports) regulation: http://www.washingtonpost.com/blogs/the-switch/wp/2015/01/27/google-strong-net-neutrality-rules-wont-hurt-the-future-rollout-of-google-fiber/

    Regulation will probably force existing carriers to perform expensive upgrades while google is rolling out its initial service with no changes. If they have any problems they can just lobby for special treatment for themselves.

    Regulation is a great way for a large company to crush smaller competition. The same thing is happening with e cigs: big tobacco is all over this "regulate ecigs!" and wants the most draconian regulation possible, at least equal to that of much more dangerous real tobacco cigs. Why? They're losing market share (which they've already been hedging against by buying ecig companies themselves) and now seek to destroy all other competition.

    And the anti-ecig cargo cultists have no problem with playing right into it and thus supporting big tobacco.

  • Harry

    Where I live, local municipalities have the power to grant a monopoly to a cable company the right to string its cables along telephone poles. In exchange, the municipality gets a fee from each cable customer. As I write this, I wonder about the perversity of this system, but I digress.

    These fees show up in one's bill as franchise fees. Of course, many do not blame the municipal leaders, they complain about the cable company, the counterparty in this agreement. What a great way to levy a tax!

    In my case, my sole cable choice is Comcast.

    My only leverage is to threaten annually to switch my television service to DirectTV, which I do. This takes about two hours of wait time to get a live salesperson who has the authority to cut a deal.

    North of me, another cable company dominates a large area, with the same arrangements of franchise fees.

    Now, the argument is that no cable company would ever string cable unless it were guaranteed a monopoly franchise, guaranteeing a return on the investment of all that cable, back when cable was the only available technology.

    My question is, why give the township, or the borough, or the city that power to grant the franchise? Why not let any cable company pay whoever owns the pole for the stringing the cable, bypassing the municipality altogether?

    I know there are many other questions one might ask on the subject, but I would be interested if somebody could give a straight answer to that one.

  • epobirs

    Isn't it a bit redundant to invoke both Earthlink and Mindspring, which have been a single entity for many years?

  • davesmith001

    The only problem I have with this post is the word "secretly" in the title. Often the support is not secret.

  • Matthew Slyfield

    Who is your local phone company?

  • Harry

    Verizon. DSL is unavailable; I happen to be at the end of a copper wire. Across the road, a quarter mile away, is a DSL connection. I have good wireless for my iPhone, but that's another story.

  • TruthisaPeskyThing

    I wonder if people pay enough attention to the truth-filled quote from James Taranto, "To control against the risk of confiscatory rates, the Supreme Court also required the state regulator to allow each firm to obtain a market rate of return on its invested capital, taking into account the inherent riskiness of the venture."
    Sometimes, businesses can have trouble in passing taxes onto customers, but that is never the problem in regulated businesses. Legally, the regulated rates need to be adjusted upwards when a regulated business is exposed to higher taxes.

  • Matthew Slyfield

    I wasn't thinking of DSL. If your local phone company was AT&T I was going to suggest looking into Uverse.

    Uverse is TV and Internet over two copper wire pairs. Internet connection speeds are well above standard DSL.

  • Orion Henderson

    I guess. If you only see it is a zero sum game. With regulated ISP's it is a zero sum game because the technology will never change. New technologies will die before they can start. So yes, with regulation it is only a matter of how do you slice the apple pie and it is never a choice of what kind of pie.

  • marque2

    My local phone company here in Tulsa, advertized a fantastic $29 a month rate for 10 mbs something or other (can't be called high speed any longer), but the state of OK forces them to offer phone service with that, and assesses all the special phone charges, so my Internet bill is huge. Cox the cable company doesn't have to do this.

    But agree with you, half the problem we have is there is no competition. One cable company and one phone company for everyone - if you are lucky. There are towns in CA where DSL wasn't allowed because the Cable company bribed the city enough to ban it. There are other places where the phone company never installed DSL.

    If the cities weren't allowed to grant monopoly access, we would have much more choice, and in the backend there would be more competition as well. Net neutrality wouldn't be a problem. Best way to increase internet speed is to increase local competition - not mandate it be called 25 mb/s, or demand net neutrality on behalf of Google.

  • TeleprompterOTUS

    Where there is a lack of competition in ISPs, pricing will provide incentive for competition so the providers won't be able to gouge forever. Where there is competition, greater government regulation guarantees that the price of service will go up, the quality of service will go down, and the variety of what you are able to access will be diminished. The first 2 are obvious since there is no natural monopoly on ISPs. Regulating content is really what this is all about and that is exactly what we will get and the "fairness doctrine" will re-emerge with a leftist/socialist slant on everything. Guaranteed.

  • bigmaq1980

    Presumably you favor government intervention and are arguing that we should individually be indifferent because the outcome is the same to us - "same $100 a month".

    But, that bypasses the whole point of the post ... answering why would the stock prices rise.

    And, it only looks at it from the immediate term, conflating that as long term outcome.

    We don't know where innovation will take us, but we do know that regulation does create obstacles to innovation / disruption.

    This is something that is highly desirable to incumbent companies, particularly where technology is involved.

    Regulation has the potential to create a zero sum outcome, in their favor. At the very least, it will significantly reduce their risk (lowering the "discount factor" on the future "cash flow" the companies are expected to earn = higher NPV = higher stock price).

  • bigmaq1980

    Sort of a nit, as the point is that companies often don't openly advertize that they lobby for specific legislative outcomes, (but even if they do) nor do they specifically fully disclose / publicize **ALL** their rationale (real motives) for supporting the positions they do. We usually only hear the "customer consumable" rationale. Thus, we are often left guessing (even though it might be an obvious guess).

  • Harry

    Dan, I think wireless will do it. There is an AT&T mounted on a water tower one mile from where I sit. The water tower, absent regulatory hurdles, has plenty of room for many companies who are willing to buy a high-capacity router, and buy the signal and give me the Comcast Triple Play without Comcast. The big disappointment will be to miss a few live Phillies and Flyers games.this should be doable at a subscription fee of, say $900 a year, even with the $700 per year franchise fees to pay for the township manager's $100,000 per year pay package.