One of the hottest issues in tech policy this year is the regulation of wireless networks. The transition to digital television is almost complete, and the FCC is planning to conduct an auction next year to determine who will get to use the old analog television spectrum once the television stations are done using it. Some scholars have argued that the FCC should impose a variety of regulations on the winner of that auction to promote competition in the market for wireless services.

I’m skeptical of this argument, but I do think the critics are right about one thing: in the long run, open networks (like the Internet) do tend to be more innovative than closed ones (like AOL). This is true for much the same reason that free markets are superior to central planning; open networks facilitate decentralized decision-making and low barriers to entry for entrepreneurs. The people who founded Netscape, Google, eBay, Yahoo, and dozens of other successful Internet businesses didn’t have to ask anyone’s permission to do so.

Right now, the wireless networks are not as open as many people in the technology industry would like. Someone wanting to create a new cell phone or a new wireless application or service has to go through a long and cumbersome negotiation process with each wireless carrier. There are good reasons to think this is slowing down the pace of innovation in the wireless market. However, the big debate is over what to do about this. Some people think the FCC should step in and mandate open access to wireless networks. For reasons I laid out in TechKnowledge last month, I think that’s a bad idea. My view is that the wireless industry is still in its infancy, and that market forces will drive carriers to gradually open their networks over time.

Last week, we saw two examples of how this might happen. First, Ed Felten, a computer science professor at Princeton, had a great post pointing out one way the iPhone could shake up the wireless marketplace:

An open system would provide more benefit overall, but most of that benefit would accrue to consumers. The carriers would rather get a big share of a small pie, than a small share of a big pie. In most markets, competition keeps this kind of thing from happening, by forcing producers to account for consumer preferences. You would expect competition to have forced the mobile networks open by now, whether the carriers liked it or not. But this hasn’t happened yet. The carriers have managed to keep control by locking customers in to long contracts and erecting barriers to the entry of new devices and applications. The system seemed to be stuck in an unstable equilibrium. All we needed was some kind of shock, to get the ball rolling downhill.

Only a company with marketing muscle, design mojo, and a world-historic Reality Distortion Field could provide the needed bump. Apple decided to try, in the hope of selling zillions of the new, more capable devices. The real significance of the iPhone, whether it succeeds or fails in the market, is that it will trigger the transition to more open networks. Once people see that a pretty good phone can be a pretty good mobile computer, they won’t settle for less anymore; and mobile networks will be pried open.

One of the issues that critics of the wireless carriers often cite is the fact that American carriers have refused to support cell phones with built-in WiFi connections, which could save consumers money by allowing them to save money on their calling plans by making free calls over the Internet. Critics charge that carriers refuse to allow that because they want to force you to make every call over their network, allowing them to soak you with per-minute usage fees. Today David Pogue has an article in the New York Times describing a new offering from T‑Mobile that allows consumers to do just that: when the phone detects an Internet connection nearby, it will automatically route calls via the WiFi network, and the customer isn’t charged for the call. As Pogue points out, this is a direct result of T‑Mobile’s desire to get a leg up on the competition:

Have T‑Mobile’s accountants gone quietly mad? Why would they give away the farm like this?

Because T‑Mobile benefits, too. Let’s face it: T‑Mobile’s cellular network is not on par with, say, Verizon’s. But improving its network means spending millions of dollars on new cell towers. It’s far less expensive just to hand out free home routers.

Furthermore, every call you make via Wi-Fi is one less call clogging T‑Mobile’s cellular network, further reducing the company’s need to spend on network upgrades.

T‑Mobile has the smallest market share of the four national wireless carriers, so they have the least to lose and the most to gain from a shake-up of the market. As a result, they’ve proven most willing to take risks in order to gain market share. If this service proves to be a hit, as I suspect it will, it will force the larger carriers to follow suit or risk losing market share.

That’s how competition works–it steadily forces companies to offer more consumer-friendly products and services whether they like to or not. It’s frustratingly slow for people who are used to the rough-and-tumble of the promiscuously open Internet. But it’s moving in the right direction, and given the FCC’s poor track record when it comes to protecting consumers, I think it would be a mistake for Congress or federal regulators to try to “fix” it.