Washington DC vs. Silicon Valley

November 20, 1998 • Commentary

What has happened to our vision of an unregulated Silicon Valley? With the Internet II and the enthusiasm of some in the high‐​tech community for the Gore tax, the cautious embrace of the antitrust antics at the Department of Justice, and stepped‐​up campaign contributions, perhaps the computer industry has been folded into the mutual shakedown scheme carried on inside the Beltway. But freedom remains the essence of the innovation at the heart of Silicon Valley. Washington, D.C., and Silicon Valley are destined to enter a fundamental cultural struggle. Like it or not, the high‐​tech community will not be able to buy its way out of regulatory entanglements. It will have to fight for fundamental institutional change.

In the first eight months of 1998, Democrats and Republicans raised more than $3 million from the 50 most generous computer companies. In 1997 and 1998, politicians raised about $195,000 per month from this group, compared with a low of $117,000 in 1993 and 1994. A primary reason for the change is Silicon Valley’s understanding of the threat posed by Washington, D.C. Reed Hastings, president of TechNet, is quoted as saying, “We don’t want to take it for granted that political figures who didn’t grow up in the technology industry understand how important it is, how fragile it is, how complex.”

How effective will campaign donations be as a defensive mechanism? In any business, if you don’t donate and your competitor does, you may find that he’s gotten an edge on you. And investments in lobbying have won the industry some successful reprieves from regulation, like the relaxation of caps on the number of high‐​tech immigrants.

So perhaps donations are necessary, but they won’t be sufficient. A company that gives generously can stave off regulatory threats, but it can also learn to use the regulatory process against rivals or to bleed the taxpayer for subsidies. Once that strategy becomes widespread in an industry, everyone is hurt. Each company coughs up more than ever in political “investments,” but so do their opponents, fighting an anti‐​competitive war of all against all through the political process. The regulatory monster learns that alternating threats and bribes, not good policy, bring the greatest rewards.

High‐​tech products will continue to be the focus of regulatory efforts because decentralized networks like the Internet give individuals unprecedented power of choice, a sure‐​fire way to irritate regulators. Consumers everywhere perversely seek out Web sites devoted to sex, gambling, bizarre political commentaries, off‐​label uses of medications and encryption products. Silicon Valley can expect continued pressure to build certain choices out of its networks: to build in monitors, back doors and rating engines instead.

Internet telephony and Web TV are scarcely regulated at all compared with the other half of the communications industry, traditional telephony and broadcasting. The resulting instability will generate continuous pressure to either deregulate both halves of the industry or regulate both halves. The unfairness is real, and it won’t go away, and neither will the obvious inefficiencies of regulatory arbitrage.

So when Washington, D.C., offers up subsidies for wiring the schools, beware: Internet service providers will next be called upon to contribute to the massive universal service fund. And classification as a “telecommunications service” for purpose of getting a subsidy leads inexorably to the conclusion that, under the Communications Assistance for Law Enforcement Act, Internet “telephones” should subject to the same built‐​in surveillance requirements that now apply only to traditional telephone carriers.

If campaign donations can’t make the inherent tension go away, what can? The answer is to remove the massive powers of government that create both the threat of regulation and the temptation to lobby for special favors. If this country were governed by a king, a lot of people would have a problem with it, and it wouldn’t matter much to them if he were a good king or a bad king. They would argue that a monarch just isn’t the kind of institution that belongs in a free, innovative society.

Similarly, the debate about the future of freedom in Silicon Valley is not so much about the politics of who is in power as it is about whether the institutions of government we have created belong in a free, innovative society. Government involvement in everything from education to the Federal Communications Commission, from the sad state of the Social Security system to the failure of the First Amendment to keep Congress from regulating speech on electronic media should be open to question, especially in Silicon Valley.

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