February 6, 2015, 2:27 pm

Kevin Drum simply does not understand why Wall Street might be piling into broadband stocks despite proposed "tough new regulations." He posits a number of hypotheses -- that Wall Street expected the rules to be worse than they turned out to be. But this can't be it because the hundreds of pages of rules are still a secret. He also hypothesizes there might be some nefarious secret loophole buried in the rules Wall Street knows about but we don't.

This is crazy! How can a reasonably bright person like Drum who writes about the political economy not understand the issue of regulatory capture? Seriously, I have always figured that the Left, which has a seemingly infinite appetite for regulation, must favor regulation because they find the benefits to out-weight the crony-ist downsides. Is it really possible Drum is unfamiliar with the downsides altogether, or is he just being coy?

Here is what regulation, particularly utility-style regulation, tends to do -- it locks in current business models and competitors. It makes it really hard for new entrants to challenge incumbents with innovative new business models or approaches, because regulations have been written based on the old business model and did not take the new one in account. So a new entrant must begin business by getting regulators to allow their new model, which never happens because by this time incumbents have buildings full of lobbyists aimed at the regulatory process. Go ask Tesla and Uber and Lyft about how easy it is to enter a heavily regulated business even with a superior new business model.

This is particularly true in the technology world. The biggest threat to incumbency is someone with a new technology or approach to the technology. Don't believe me? I suggest you go to the offices of Netscape or AOL or Lycos or Borders or Circuit City or Radio Shack and interview them about the security of their multi-billion dollar businesses in the face of new online technologies. At best, regulators put a huge speed bump in the way of competitors, costing them time and money to get their alternative business model approved. At worst, regulators block new competitors altogether.

I will give you a thought experiment. Let's say these exact same rules were adopted in the year 2000, when AOL and Earthlink dial-up ruled the internet access world. Would cable and satellite and DSL have grown as quickly? I can see the regulators now -- "hey, all the rules specify phone dial up. There's nothing here about cable TV. Sorry [Cox, Comcast, whoever] you are going to have to wait until we can write new rules.

The other thing that happens with utility-style regulation is that companies in the business tend to get their returns guaranteed. Made a bad investment in a competitive market? Well good luck getting customers to pay extra to bail you out from your bad decision when they have other options. But what happens when your local power company wastes $10 billion on a nuclear plant that never opens -- it gets built into your rate base!

In the cast of broadband, they are locked in what business school students would see as a classic supply chain battle. Upstream companies like Netflix supply content via downstream broadband companies. Consumers are only willing to pay a certain amount for this content, so the upstream and downstream fight a lot over who gets what share of that consumer $. This happens everywhere in the business world, from Cable TV to oil refining to selling TV's at Wal-Mart. There is a real danger that broadband will lose this fight in the future -- but not now. Regulated industries never die, they appeal to their regulators for help.

As of yesterday, Wall Street is looking at broadband companies and realizing that they are now largely immune from competition and some level of minimum returns are likely now gauranteed forever. Consumers should hate this, but what's not to love for Wall Street?

Postscript: Kevin Drum describes the new regulation this way: "Basically, under Wheeler's proposal, cable companies would no longer be able to sign special deals to provide certain companies with faster service in return for higher payments." This is a bit like describing the Patriot Act as a law to force people to take their shoes off at the airport. Yes, it does that narrow thing, but it does a LOT else. The proposal is hundreds of freaking pages long. It does not take hundreds of pages to do the narrow little niche thing Drum (like most neutrality supporters) wants.

This Administration has cleverly taken this one tiny concern people have and have used it as an excuse to do a major regulatory takeover of the Internet. This is a huge Trojan Horse. But I have already ranted about the details of that and you can read that here.