Free-Market Lessons from the Gadget Boom

For years, the press was filled with stories about how the U.S. had fallen behind Europe in wireless.  A 1999 TIME article entitled "Why Your Cell Phone Stinks" boasted that Europeans routinely used their mobile phones to pay bills, make reservations, and share digital photos.  Americans, meanwhile, were still catching up with Europeans in text messaging.

Europe's wireless industry was booming.  Unlike in the U.S., nearly everyone in Europe had mobile phones, and they worked on all mobile networks, because every phone manufacturer and every mobile network operator used the exact same technology.  The lesson, according to the pundits, was that markets for new technologies do best when solutions are developed by industry-wide panels of experts and technical standards are enforced by governments.

Wireless was growing in the U.S., but at a slower rate.  The pundits grumbled that new technologies do not fare as well in the U.S. because of what they called "market fragmentation."  Consumers had to choose among competing standards.  There were different mobile phone models for each network.

The evidence seemed to say that industrial planning and government mandates are superior to competition.

Fast-forward to 2012.  Europe's wireless industry is on the ropes.  Finland's Nokia, for years the world's leading maker of mobile phones, is sinking almost as fast as it rose to the top.  The U.S. leads Europe in fourth-generation (4G) network deployments and user adoption of smartphones.  AT&T, T-Mobile, and Verizon Wireless have built nationwide 4G networks, and Sprint's is under construction.  Two thirds of the mobile phones sold in the U.S. today are smartphones.

There is, in fact, a global wireless gadget boom underway, and it is being driven by three U.S. companies: Apple, Google, and Amazon.  Sales of smartphones, tablets, and e-readers have skyrocketed over the past few years.  More than one million wireless gadgets based on U.S. technology are being activated around the globe each day.

There's no denying that Europe profited -- though only temporarily -- from the highly controlled manner in which it developed the second-generation (2G) mobile phone standard known as GSM.  GSM quickly became the world's dominant 2G technology.  However, GSM triumphed not due to planning committees and government mandates.  It was the first 2G system to be widely deployed, and it introduced desperately needed competition to Europe's telecom market.

There's also no denying that the gadget boom was created by private companies working independently of each other.  The iPhone was developed by Apple alone and in secret using a mix of voluntary standards and proprietary technologies.  The same is basically true for Google's Android and Amazon's Kindle.

The case for mandatory technology standards sounds compelling, but it isn't.  Twenty years ago, pundits warned that U.S. travelers would need to carry multiple devices because the country lacked a single, nationwide wireless standard.  It didn't occur to the pundits that operators would build nationwide networks and manufacturers would squeeze multiple standards into devices.  For example, the Apple iPhone 5 supports up to fifteen different wireless modes encompassing cellular, Wi-Fi, Bluetooth, and radio-locating.

In theory, industry planning committees bring together the best minds to develop the best possible solutions.  In practice, committees tend to be dominated by people representing the status quo.  Agreements are reached through a process of negotiation and compromise.  That process tends to produce predictable, lowest-common-denominator solutions.  Committees are where innovation comes to die.

Mandatory standards are supposed to eliminate market uncertainty, maximize economy of scale, and ensure that products from different vendors work together.  However, any new technology faces market uncertainty, and a single standard does not guarantee buyers.  Nor do mandatory standards ensure maximum economy of scale; that would require that manufacturers buy the same components from the same suppliers.  And few standards are so comprehensive that products designed by different vendors work together on the first try.  The advantages of one-size-fits-all standards are illusory.

There are other ways to short-circuit competition.  One is giving loans, grants, and regulatory waivers to companies that policy wonks feel are helping the U.S. meet strategic national goals.  As we've seen, these actions are more likely to produce scandals (for example, Solyndra and LightSquared) than innovative technology and modern infrastructure.

The real lesson of the last decade is that top-down planning and control stifles innovation.  When politicians impose their priorities on tech industries, we end up with Chevy Volts and bankruptcies.  When tech companies are free to develop products that they believe people will buy, we get iPhones, Androids, and Kindles.  

Ira Brodsky is the author of The History of Wireless: How Creative Minds Produced Technology for the Masses.

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