Though Tim Lee’s new National Affairs essay is primarily about “keeping the Internet competitive,” it also makes a much broader point about why deregulation efforts have succeeded in some domains and failed in others:

Why did trucking deregulation prove so much easier and more successful than telecommunications deregulation? One of the most important factors was that the underlying infrastructure of the trucking industry — that is, America’s system of roads — was owned by the government and therefore open to the public. As a result, creating a competitive industry required only the repeal of the formal legal barriers to entry. In the case of the telecommunications industry, however, the basic infrastructure — the system of cables that carry voice and data — was owned by a private monopoly, AT&T. This meant that, to create a competitive telecommunications market, regulators had to do more than repeal regulations that excluded new competitors. They also needed to ensure that the incumbent (AT&T) did not use its control of that infrastructure to perpetuate its monopoly in adjacent markets — such as telephone handsets, computer networking, and long-distance calling.
The emergence of the internet offered a new way forward. The internet’s protocols establish a fundamental, and important, division of labor: On one end are providers of access to the internet, mostly phone and cable companies like Verizon and Comcast. On the other are providers of content through the internet — the vast array of web sites from which people around the world derive entertainment, get their news, conduct online commerce, and so forth. Between them are yet more companies maintaining the basic infrastructure of the internet’s “backbone” — the massive networks of cables and switches necessary to route data around the globe.
This division of labor was established by technical standards and has been preserved by market forces, and as a result the internet has experienced very little active government oversight. This has also kept the barriers to entry low for providers of internet content and applications, thereby promoting rapid innovation. And as legacy communications services, such as telephony and video, are increasingly delivered through the competitive internet, the need for regulators to actively supervise those markets may naturally decline as well.
But while the internet’s division of labor has proved extremely durable so far, there is strong reason to believe that, in the coming years, a serious threat will be posed to its continued effectiveness. A steady consolidation of the market in broadband access to the internet — which is increasingly dominated by a few massive national telephone and cable-television providers — threatens to undermine the internet’s decentralized structure, and to upend the economics of internet access and content provision. Should that disruption occur, the FCC would be forced to intervene to prevent broadband incumbents from undermining competition on the open internet. The government would be pulled into precisely the sort of complex and error-prone regulatory process that bogged down telecommunications in the 20th century. [Emphasis added]

As Tim explains later in the essay, the problem isn’t private ownership of critical infrastructure as such:

Imagine that Congress privatized the interstate highway system by selling shares in a private company — Interstate, Inc. — that owned the nation’s freeways. A naïve observer might regard this as a step toward reducing government interference with the free market. The reality, however, would be far more complicated. Interstate, Inc. would quickly realize that vertical integration had the potential to dramatically increase its profits. It could, for instance, acquire a shipping subsidiary such as UPS and then jack up highway tolls for other shipping companies. Forced to raise prices or use much slower side streets, independent shipping firms would be put at a serious, and likely fatal, disadvantage. And with other firms out of business, Interstate, Inc.’s shipping subsidiary could restrict output and raise prices, establishing a lucrative shipping cartel.
Interstate, Inc. wouldn’t have to stop there. Just as it used its dominance in the freeway market to take over the shipping business, it could use its dominance in shipping to muscle out businesses that depend on moving goods around the country. For example, it might acquire an e-commerce subsidiary that could then offer its customers much lower shipping rates than other e-commerce sites. It would wind up being the dominant e-commerce firm not because it offered better products or customer service, but because it controlled one of its competitors’ essential inputs. In this and myriad other ways, a freeway monopolist could become extremely wealthy extracting rents and undermining competition in a host of industries that rely on access to the freeways. Significant harm would be done not only to those industries but also to consumers, who would be penalized with higher prices and fewer choices.
None of this is to say that freeways shouldn’t be privatized. The point, rather, is to highlight the often overlooked dangers inherent in privatization of government-sponsored infrastructure. If government does allow for the privatization of crucial infrastructure, it must then prevent this kind of rent-seeking by the assets’ new owners. This, in turn, requires recognizing the risk of rent-seeking early and intervening while there is still time. Once monopolistic firms are allowed to vertically integrate into competitive industries (as when Interstate, Inc. enters the shipping and e-commerce markets), it becomes very difficult for policymakers to prevent such anti-competitive conduct down the road. [Emphasis added]

After elaborating on what the worst-case scenario would look like, Tim explains how the effort to reform the telecommunications market went awry. Pre-1996, there was a working assumption that there were natural monopolies in, for example, local telephone service, and that close regulatory oversight was necessary. After the Telecommunications Act of 1996, restrictions on vertical integration were loosened in the hope that phone and cable companies would start competing on each other’s turf to the benefit of consumers. In addition, incumbents were required to give competitors access to their infrastructure. Unfortunately, this “unbundling” didn’t work very well. Incumbents resented the fact that they had to give competitors access to networks that they had built at great expense; independent competitors claimed (rightly) that the incumbents made life difficult for them, for obvious reasons. The incumbents eventually won, and as a result most U.S. households have fairly limited options with regards to broadband service: you can go with the local telephone company or the local cable company, or perhaps a satellite service or two. The hope is that technologies like WiMAX might introduce more competition, but that’s still along way off.

So we’re faced with the danger that broadband providers will engage in new forms of rent-seeking. To prevent this from happening, Tim recommends that federal regulators work “to prevent any single firm from gaining too large a share of the national broadband market” by:

(1) Requiring greater transparency regarding the terms of interconnection;

(2) preventing mergers that increase the market share of the largest broadband providers; and

(3) keeping an AT&T-style divestiture/break-up as a last resort in case (1) and (2) aren’t enough.

I get the sense that I’m somewhat more optimistic about a technological solution than Tim, though he acknowledges its appeal:

It would be wonderful if the structure of the telecommunications industry, like the structures of the shoe and restaurant industries, were governed by ordinary market forces. Over time, this may happen: Future improvements in wireless technology, in particular, might make wireless internet access a real alternative to broadband access, and might lower the barriers to entry in the wireless market enough to render the regulatory precautions proposed here unnecessary. And telecom regulators should certainly try to ensure that any efforts to keep broadband competitive do not create barriers to entry for new firms in the wireless market, or in telecommunications more generally.

But as he goes on to explain, entry into the broadband market is controlled by governments — and so it is reasonable to expect the government to use this authority to protect the interests of consumer and citizens by preventing excessive consolidation, assuming technological advances don’t obviate the need for regulation.

Tim has written a truly outstanding essay that is well worth your time. My summary hasn’t really done it justice.