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A Market Fails at Internet Speed
Published on Sunday, April 8, 2001 in the Boston Globe
A Market Fails at Internet Speed
by Robert Kuttner
 
LAST WEEK a company called NorthPoint Communictions went bankrupt, causing more than 100,000 customers nationwide, mostly businesses, to lose access to the Internet with 48 hours' notice. The biweekly magazine that I edit, the American Prospect, is one of them.

NorthPoint operates high-speed digital subscriber lines - DSLs - which it leases from major phone companies. Smaller companies that offer Internet access directly to the public use companies like Northpoint as their wholesale network.

NorthPoint was one of those new economy companies that grew too fast, took on more than it could service, and watched its stock crash.

The DSL industry, for the most part, is just barely profitable, in part because new companies jockeying for market share try to underprice one another. In many respects, this industry is an unregulated house of cards, financially and technically.

When NorthPoint went bankrupt, AT&T agreed to buy most of NorthPoint's physical assets but not its customer base. And because this industry is in such a state of flux, you can't just change Internet providers on a few days' notice. As a result, tens of thousands of customers, like The American Prospect, will be without service for as long as several weeks.

Note the several ironies. Enthusiasts of the new economy, whether entrepreneurs or technology buffs, tend to be free-market purists. Their premise is that this technology is evolving so rapidly and marvelously that the government's main job is to stay out of the way.

But in this case, as in others, the absence of regulation has left consumers at the mercy of a highly unstable industry. As recently as 1995, the Internet was still more a novelty than an essential service. Today most businesses rely heavily on it.

At The American Prospect, we use the Internet for everything from e-mail to receiving articles from writers to getting our final layouts to the printer.

We also have two Web sites that complement the print magazine. Like everyone else today, we can't efficiently operate without the Internet.

When NorthPoint went belly up, it hurt not just consumers like our magazine. It also damaged the Internet service providers who relied on NorthPoint.

Ironically, these highly libertarian, market-worshiping small companies asked the California Public Utilities Commission to order NorthPoint to keep its services operating. The commission, whose authority in this matter is far from clear, did issue such an order April 3, directing NorthPoint not to abandon its customers unless it gave 30 days' notice.

But a spokesman for the commission said the order is effectively moot because NorthPoint has already pulled the plug. Basically, there is no system of rules regulating Internet service.

If Congress tried to create a coherent framework to regulate the Internet and its providers as a necessary public utility, these same Net entrepreneurs would be screaming the loudest against government intrusion. (Indeed, some of shrillest advocates of the position that the government should keep its hands off high tech were the ones who went running to the Justice Department for help when Microsoft started playing cute with antitrust violations.)

For roughly a century, essential public services have been regulated to ensure access and reasonable pricing. Public policy has sought to guarantee that everybody has secure access to electricity, to phone service, and (in metropolitan areas) to gas, water, and sewer service as well, and that nobody gets gouged.

But this sort of regulatory protection is increasingly out of fashion.

In California, electricity deregulation left consumers at the mercy of power companies charging extortionate rates with the further insult of periodic brownouts.

It is somehow poetic justice that the free-market gang in Silicon Valley is having to pay extortionate electricity rates, occasionally in semidarkness.

It is also fitting that the most extreme celebrants of the free market are now digging out from the stock market crash.

In the late 19th and early 20th centuries, we had to learn the hard way why basic services need to be regulated. Without a measure of regulation, public utilities oscillate between chaos and concentration, between ruinous competition and price-gouging. That certainly describes today's deregulation.

Yes, entrepreneurship produces wondrous invention. But the history of democratic capitalism keeps demonstrating why entrepreneurs need to be housebroken. A pristine free market is not the solution; it's the problem.

But it's really more like the 1880s, the era of public-be-damned, robber-baron capitalism.

When our Internet access went down at The American Prospect, one of our younger staffers said, ''Wow, it's like the '80s,'' imagining what life must have been like in the archaic, pre-Internet age.

Robert Kuttner is co-editor of The American Prospect.

© Copyright 2001 Globe Newspaper Company

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