The Dark Side of Incentive Creation

Much of the debate about broadband and next generation network development focuses on the alleged need for government to create incentives for carriers to invest. Ironically much of the excuses given for the disinclination to have invested emphasizes how government created disincentives, marketplace distortion and regulatory uncertainty.

So let me get this straight. The same person or corporation, with libertarian/deregulatory instincts, rails against government intervention as likely to fail even as they assert the need for incentive creation with a straight (if not disingenuous) face.

Let’s examine incentive creation, a government activity that has become so important that we now have a new word for it: incentivize, as in the FCC needs to incentivize broadband development in rural areas by expanding the universal service program.

With all this incentivization going on it’s no wonder that arbitrage and gaming opportunities abound. The most recent example lies in the realization by rural wireline telephone companies, particularly those entrepreneurial independent telephone companies in Iowa (see http://www.techdirt.com/articles/20070315/193857.shtml) that they can convert the universal service mission into cold cash. Because Congress and the FCC have created incentives for rural phone companies to wire up the hinterland, the crafty beneficiary of such incentives can earn extra cash by stimulating inbound traffic to the hinterland.

Brilliant! Funds designed to encourage telephone companies to serve expensive remote areas now flow more robustly into the coffers of the more creative incentive exploiters who offer outbound international long distance and conference calling all for the cost of the inbound call to rural Iowa. Wireless subscribers incur no additional charges for such calls made at nights and on weekends and cheap “postalized” long distance plans and calling cards offer 3-5 cents per minute calling any time of the day. The carriers handling the Iowa-bound call end up paying the Iowa telephone company as much as 7 cents a minute to terminate the call. Of course the call does not end ringing the telephone of some rural farmer in Iowa. It routes to a switch that provides second dial tone for outbound calling.

This clever money maker exploits the incentive to build out networks into the hinterland. Some of the outbound calling carriers, such as AT&T, have unilaterally decided to refuse to complete such calls. Unilaterally acting as judge, jury and executioner violates these carriers’ common carrier legal responsibilities. It also shows these carriers as asleep at the switch when the Iowa telephone company tariffed the extortionate 7 cent rate.

But most importantly the Iowa gambit shows that incentive creation has the very same potential to distort the marketplace and favor one group of stakeholders over others as the much more discussed disincentive creation.