Politics & Policy

How to Fix The Telecom Mess?

 

When Hurricane Isabel cut a wide swath through the mid Atlantic, electricity

went out and cable went dark for millions in the region, most for two or three

days; some for much longer. For most of those who lost power, though, one connection

remained on–their old standby wireline phone. Even when the batteries of those

cell phones that remained working died, the local phone line was alive.

It was designed to be that way. Phone service is considered so vital for emergency

purposes that local phone lines have their own little power system–the equivalent

of a nine-volt battery per line–to keep phones up and running even when other

electrical devices are cut off. Government protection and subsidization through

regulated rates on business and long-distance services over decades created

this $300 billion network that today’s local phone monopolies inherited and

maintain.

That network places great responsibility upon local phone companies. And I

commend their service. But it also provides them with huge competitive advantages.

As the Supreme Court noted last year in upholding the Federal Communication

Commission’s pricing guidelines for the leasing of the local network to competitors,

the networks provide the Bells with “almost an insurmountable competitive

advantage,” as access elements are extremely “costly to duplicate”

even for “large competitive carriers” that might have the resources

to replicate them.

I am no fan of regulation. It can stifle innovation and produce huge economic

inefficiencies. But to simply let a protected monopoly loose into other competitive

telecommunications markets, including video, long distance, Internet, and wireless

services, as Ms. Katz suggest, is an invitation to disaster. Unregulated monopolies

can kill competition and stifle innovation, too.

That certainly was the case in the early 1990s when then Pacific Bell and other

Bell operating companies proposed treating calls to Internet Service Providers–the

gateways to the Internet–like long-distance calls with 19-cents-a-minute charges.

They said Internet calls threatened the viability of their networks. The FCC

demurred, and wouldn’t allow the per minute charges. As it turned out, the ISPs

investments actually helped improve the local networks.

Similarly, the Bells kept high-speed digital-subscriber technology in the closet

for years until Covad and other local data telecom companies showed how to make

it available over Bell lines to both residential and small-business consumers.

The Telecommunications Act of 1996 was written in large measure at the behest

of the regional Bell operating companies because they wanted the freedom to

get into those competitive arenas. Seven at the time, they have since merged

themselves into four. They still control 85 percent of the local-market phones.

They have been granted permission to provide long-distance service in 42 states.

Two–SBC and Verizon–are key players in the wireless market.

Their failure to fulfill their promises of opening their networks to competitors

in return was the source of the telecom carnage of recent years. Interim regulations

finally being enforced to pry those networks open provide the best hopes for

a telecom resurgence in a competitive telecommunications sector. It is the path

to true deregulation.

The Supreme Court noted that the Bells have an almost insurmountable monopoly.

The advocates of rapid deregulation would get rid of the almost and spread that

monopoly over the entire telecommunications landscape. What would happen then

to innovation, jobs, and the economy would dwarf the devastation of Isabel.

For the light of competition would go out not for days or weeks, but decades.

–Duane D. Freese, formerly on the editorial board

at USA Today, is a columnist and editorial consultant

for Tech

Central Station.

Telecom socialists demand government control of the local calling network because

companies like SBC, Verizon, Qwest, and BellSouth are, supposedly, just too

darn profitable. In reality, federal regulation has eroded telecom stock values

and destroyed thousands of jobs.

The economic hardship that has roiled the industry for more than two years

won’t likely reverse any time soon. The release last month of revised federal

rules–576 pages added to the 10,000 already issued–perpetuates investment

disincentives that undermine market growth and technological innovation.

Corporate welfare is the crux of the problem. Under the guise of promoting

competition in local calling, the so-called Baby Bells are forced by federal

law to provide virtually unlimited network access to competitors at below-cost

rates. Apparently lost on regulators is the ferocious competitive challenge

posed by wireless and cable firms that have actually figured out how to do business

without benefit of government-mandated subsidies.

Regulators calculate access rates based on a complex formula devised by the

FCC that assumes the costs of operating and maintaining a network built in the

future. This hypothetical network is presumed to feature the most advanced technology

and to operate at optimum efficiency. Of course, no such network actually exists.

Consequently, the rates paid to the Bells by competitors do not cover the costs

of operating and maintaining the existing network.

AT&T and other firms that benefit from the forced-access regime insist that

the regulated rates still enrich the major local service providers. But if profits

were to be had, it’s a good bet that competitors would not shun infrastructure

investment in favor of interconnection.

The Bells are not alone in decrying the heavy discounts afforded rivals. Wall

Street likewise recognizes the revenue hemorrhage. On Feb. 20, for example,

the day the FCC announced its new forced-access order, the regional Bells together

lost $15 billion in market capitalization–more than the value of Ford Motor

Co.

Precursor Research characterizes the FCC regulations as “anti-investment”

and “wealth destroying,” concluding: “This order is horrible

for shareholders of SBC, Qwest, BellSouth, Verizon and FON, and equipment suppliers.”

Jeffries & Company, Inc., refers to the below-cost rates as “sharp

discounts.”

Anna-Maria Kovacs of Commerce Capital Markets has calculated that access rates

fall “radically” below actual costs, by some 50 percent to 60 percent.

J. P. Morgan Securities likewise reports that the Bells lose about 60 percent

of line revenue when a competitor woos a new customer, but retain 95 percent

of the service costs–a losing formula, even to the mathematically challenged.

And Baird U.S. Equity Research concludes that competitors’ exploitation of the

forced-access scheme has “weakened the financial position” of the

Bell companies.

Even if it could somehow be shown that the Bells profit from forced-access,

this regulatory seizure of private assets is antithetical to America’s core

values. Market competition is indeed beneficial, as is evident in the awesome

growth of cellular and cable services. But there’s little economic or social

benefit to be derived from a telecom underclass dependent on subsidies to survive.

– Diane Katz is director

of science, environment, and technology policy for

the Mackinac Center

for Public Policy, a Michigan-based nonprofit,

nonpartisan research and educational institute.

 
 

Members of the National Review editorial and operational teams are included under the umbrella “NR Staff.”

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