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House leadership has shown little enthusiasm for the pet project of
Reps. Billy Tauzin (R., La.) and John Dingell (D., Mich.), a bill
that would gut the 1996 Telecommunications Act, which was responsible
for a huge capital-spending boom in the late 1990s. But, kicking around
for nearly two years, the bill is set to come to the floor this week.
Tauzin, after
all, is chairman of the Commerce Committee, and the lack of a vote
was getting awfully embarrassing. But congressional etiquette, in
this case, could produce terrible economic consequences.
The Tauzin-Dingell
bill, as it's called, would entrench and expand the monopoly power
of the four Bell companies, kill off competitors, and slow the roll-out
of broadband technology — fast connections to the Internet,
so vital to the economy.
The foundation
of the act was the requirement that local Bell monopolies "unbundle"
their networks and let anyone with courage and capital enter the
market to sell communications services to consumers. The idea was
that competition, not monopoly, would lead to innovation. Unfortunately,
the Tauzin-Dingell bill destroys the unbundling requirement.
Why? Tauzin-Dingell
advocates argue that broadband has slowed because the Bells have
no incentive to upgrade their facilities if they must allow competitors
to connect with their systems. This argument is utterly fallacious,
and now, just in time for the vote, a new study by the prestigious
Organization for Economic Co-operation and Development (OECD) shows
why.
In fact, the
OECD study proves a case that's the precise opposite of what the
Bells are claiming. The study shows that unbundling leads to new
investment by both competitors and incumbents. It's logical to assume
that a reduction or elimination of unbundling — which is what
the Bells want — will bring investment to a halt by both.
The study,
titled "The Development of Broadband Access in OECD Countries,"
examines the experience of the 26 industrialized OECD countries,
including the U.S., that have passed unbundling requirements such
as those in the 1996 telecom act. The OECD found, contrary to the
assertions of Tauzin-Dingell advocates, that an enormous investment
boom resulted from unbundling, or opening, local telecom
networks.
"Initiatives
to open the local loop are viewed by most OECD governments as being
fundamental to promoting a fast rollout of broadband services,"
says the report. "To date the major criticism of unbundling
or line sharing [is] that such policies allegedly discourage investment
in new infrastructure. No evidence has been forwarded to substantiate
that claim."
Of course not
— since there is no such evidence.
The study continues:
"By way of contrast, there are huge investments being made
by new entrants in local access markets, where unbundled elements
are available, to provide broadband services. These investments
take the form of facilities that link unbundled elements to provide
broadband services and in alternative infrastructures that do not
use unbundled elements."
The OECD found
that, instead of discouraging new investment, an unbundling policy
encouraged it. In fact, such a policy is the best way to get competitors
to build out their own infrastructure - and "in the long run
infrastructure competition is the best way to develop broadband
services." Now, this may sound counter-intuitive: competitors
who can tap into an incumbent's network are most likely to invest
in their own infrastructure. But it is what the OECD found, and
it makes sense — they can't get their businesses launched without
having access to unbundled elements, but, in the end, they need
their own infrastructure to win customers.
The report
is emphatic: "To suggest that new entrants will not invest
in their own infrastructure is erroneous."
And the report
adds: "Nor does unbundling deter incumbents from investing
in upgrading networks."
This is no
mere speculation. It is a report that studies the available evidence
in more than two dozen countries. And it absolutely refutes the
main argument that the Bells are making on Capitol Hill.
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The Bells say that unbundling gives the CLECs a free ride, and
it deters the CLECs from investing in their own facilities. That
is "erroneous," according to the OECD.
·
Next, the Bells say that they themselves are deterred from investing
in upgrading their networks if they have to share them (for a
price, of course) with the CLECs. That's not true either, says
the OECD.
In other words,
the basic economic argument of Tauzin-Dingell is dead wrong.
The investment
boom, the OECD study indicates, comes from two factors. First, feisty
competitors see that they have a foot in the door and rush in to
compete with the old monopolies. Second, the monopolies themselves
feel compelled to invest in order to keep up with the entrants.
What ensues
is a virtuous cycle that is great for consumers, and raises the
quality of service, expands the breadth of choices, and lowers costs
as well. A typical OECD example is Germany, which, while being a
leader in unbundling, has an incumbent telecommunications carrier
(Deutsche Telekom) that is upgrading its facilities at a rapid pace.
As the OECD
puts it: "There is no evidence that unbundling has slowed investment
in new infrastructures or innovation. In OECD countries that have
introduced unbundling, investment is proceeding apace."
But what is
great for consumers is bad for monopolies. They would rather keep
the entrants away, and continue to charge households high prices
for old-fashioned telephone service. Hence, the Tauzin-Dingell bill,
which attempts to set the clock back to the good old days of regulated
monopoly.
Between the
lines, the study also suggests something of a puzzle. Unbundling
has led to unprecedented waves of investment spending, but lately
that spending has fizzled out in the United States. What's different
about the U.S.? Clearly, there can be only one answer. In the U.S.,
a particularly aggressive monopoly presence has attempted to litigate
and legislate the new entrants out of existence.
The Bells are
great at this kind of game. Their proficiency is the reason that
legislation as dangerous as Tauzin-Dingell is scheduled to come
to the floor. As Bob Metcalfe, the legendary high-tech entrepreneur,
put it recently, "The core competency of the regional phone
companies has become lobbying and litigation."
Meanwhile,
the U.S. consumer and the U.S. economy suffer.
The Bells have
to answer the ringing affirmation of unbundling contained in the
OECD study. But what can they possibly say? If I were a member of
the House, I wouldn't vote for Tauzin-Dingell until I got a straight
answer.
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