Thursday, April 19, 2007

Government Rent Seeking Versus Commercial Profit Seeking

Managers of commercial ventures invariably have to decide the proper balance of profit seeking investments and efforts versus seeking benefits (rents) from various government programs. For example, a professional sports team might leverage the possibility of leaving a city if the local or state taxpayers do not underwrite construction of a new stadium.

In telecommunications incumbent carriers have engaged in similar leverage: limiting investment in next generation networks unless and until government creates financial incentives or other inducements, e.g., removing “regulatory uncertainty” which might just mean unfavorable and costly regulatory obligations. For example, a telephone company might not build a fiber optic network capable of providing video competition with incumbent cable television ventures in a particular state or region unless and until the newcomer can avoid having to secure operating authority (a franchise) from each and every municipality within which the newcomer wants to operate. I understand that CEO of one major telephone company opted to “punish” the state of Illinois by targeting other states for new technology trials.

The tension between rent seeking and profit seeking has adversely affected the pace of next generation network deployment. Too many actual or prospective investors recognize the benefits in seeking government-generated incentives to invest. It becomes difficult to determine when competitive necessity would have forced an investment without government assistance and when incentive creation was necessary.

The recent substantial infusion of capital investment by incumbent carriers into next generation networks may evidence a healthy response to the elimination of unbundling and below market access pricing regulations. But it just as readily may evidence the fact that incumbent ventures, cable television and telephone companies alike, could not longer rely on core and previously captive revenues streams.

How much longer could the incumbent local exchange telephone companies see declining local voice service revenues, before they had to find and serve new profit centers? When stakeholders demand government incentives, it probably makes sense to ask whether the stakeholders would make the investment and take the risk without special accommodations.

1 comment:

Abol said...

Hi, I think we have common view on this topic. My post on this : http://confluence-divergence.blogspot.com/2007/07/rent-seeking-is-good.html