The end of core : should disruptive innovation in telecommunication invoke discontinuous regulation?

• Main Author: Vaishnav, Chintan
• Other Authors: Charles Fine.
• Format: Others
• Language: English
• Published: Massachusetts Institute of Technology 2011
• Subjects: Engineering Systems Division.
• Online Access: http://hdl.handle.net/1721.1/62869

Thesis (Ph. D.)--Massachusetts Institute of Technology, Engineering Systems Division, 2010. === This electronic version was submitted by the student author. The certified thesis is available in the Institute Archives and Special Collections. === Cataloged from student submitted PDF version of thesis. Page 247 blank. === Includes bibliographical references (p. 239-246). === This research analyzes how a telecommunications regulator can balance regulation with innovation, at a reasonable cost. This question has gained critical importance for telecom regulators as the unregulated Internet technologies such as voice and video over Internet disrupt the regulated traditional technologies such as telephony and television and the historical paradigm of the regulator. The existing U.S. telecommunications regulations were created in the integral age. In that paradigm, functional components that constitute a service compliant with regulation resided inside the network core; each operator was vertically integrated and controlled the total functionality necessary to deliver a service; a few such operators controlled the industry; they faced low competition and were under limited pressure to adopt innovation; and consumers had limited choice. The Internet has introduced a polar opposite paradigm-the modular age. In this paradigm, functional components that constitute a service are dispersed across the network core and edges; each firm controls only a subset of the total functionality necessary to constitute a service; many modular firms interoperate to deliver a service; firms compete fiercely and are under great pressure to innovate; and consumers enjoy far greater choice due to the multi-modal competition among multiple technologies. Although transitioning from an integral to a modular age dramatically flips the environment, the current regulatory response to this dramatic shift has been hesitant to shift its intellectual roots. Consequently, this thesis describes and analyzes the new telecommunications paradigm and explores its implications for an appropriate regulatory paradigm. The research uses the regulation of voice communications in the United States as a representative case. We analyze the new telecommunications paradigm as a dynamic complex system. Our research approach rests upon four principles of systems: two organizational principles (hierarchy and feedback) and two behavioral principles (emergent behavior and strategic and statistical behavior).The telecommunications system is viewed as one of the many subsystems that together fulfill the objectives of a society. The dynamics of the telecommunications system itself are conceptualized as those resulting from the interactions of four subsystems: regulatory dynamics, corporate strategy dynamics, consumer dynamics, and technology dynamics. The regulatory objectives to be fulfilled are conceived as an emergent property of such a system of systems. To carry out this research, we have developed a system-level dynamic feedback model and two case studies. As modular entrants of Internet-based technology disrupt integrated incumbents of traditional technology, bewildering dynamic complexity complicates decision-making by policymakers, managers, consumers, and technologists alike. Our model makes understandable the emergent behavior amidst the uncertainty that surrounds such a disruption phenomenon. The model formulations are behavioral. They are derived from the existing theories of technology and industry disruption, where possible. Alternatively, where theories have a gap, the decision processes of stakeholders, gleaned from unstructured interviews, are mathematised as the basis for the model formulations. The resulting structure is a fully endogenous systems model of regulation, competition, and innovation in telecommunications. In the first case study we analyze the regulatory environment of pre vs. post-Internet periods, both quantitatively and qualitatively. For the analysis, public comments in response to the Telecommunications Act of 1996 Notice for Proposed Rulemaking (NPRM) are compared with those in response to the IP-Enabled Services NPRM published in 2004. The analysis demonstrates how the differences in the integral and modular age are reflected in the regulatory record. The second case study analyzes how market, technology, organizational, and regulatory uncertainties affect technology and industry disruption. For this case, we use a combination of industrial statistics and content analysis of media publications. The analysis demonstrates the limits to technology and industry disruption. The case studies complement the model in two ways: first, they facilitate further refinement of the systems model; second, they empirically validate the arguments deduced from model analysis. Through this research we answer three questions: (1) Can the regulatory structure designed in an integral age-in its objectives, obligations (requirements), and enforcement mechanisms-work for a modular age? (2) How can regulators and managers improve decision making amidst the uncertainty surrounding the disruption of an integrated technology and industry by a modular one? (3) What is the new role of the telecommunications regulator and how can it be fulfilled in the modular age of the Internet? Our analysis shows that the current regulatory structure is inadequate for responding to the challenges the modular age poses. Firstly, the current objectives are appropriate but cannot be met unless regulators discontinue the merely efficiencycentered thinking and begin to address objectives at the societal level. Secondly, the current obligations may attain short-term goals, but have undesirable long-term consequences. Devising obligations that are appropriate in the long-term requires regulators to discontinue myopic measures such as incremental regulation of new technologies. Finally, the current enforcement mechanisms are blunted by the dynamic complexity of the modular age. Enforcing regulations effectively in the modular age necessitates adding to the regulatory quiver new mechanisms that are more versatile than the merely adversarial command-and-control mechanisms. Through model analysis, we demonstrate how a lack of understanding of the various uncertainties, and misperceptions of feedback in a complex system where regulators, firms, consumers, and technologists constantly interact, could lead to decisions that are costly for regulators as well as managers. Yet, as we demonstrate, with better grasp of the dynamic complexity involved, they can significantly improve decision-making to meet the challenges of the modular age. We argue that the most critical role for the telecommunications regulator in the new telecommunications paradigm is to sustain a balance between regulation and innovation, at a reasonable cost. Achieving such a balance in a modular structure is not trivial because of several natural tendencies. First, achieving high compliance at low cost is difficult because in highly modular architectures and industries, coordination costs, such as the time to build consensus, can be inordinately large. Second, keeping the innovationlevel high is difficult because it requires fighting the natural tendency of modular firms to gain and abuse market power. We propose a combination of two policy levers-Limiting Significant Market Power (SMP) Accumulation and Building Broad-based Consensus around Regulatory Issues-that most effectively achieve the desired balance and remain inadequately explored in the United States. We contend that implementing these policy levers will require, first, a more broadly construed antitrust regulation in the United States that will ensure higher modularity, and, second, a telecommunications regulatory agency that is empowered and organized to pursue objectives at the societal level and to build broad-based consensus among divergent interests in a highly modular structure. === by Chintan Vaishnav. === Ph.D.