Politics & Policy

How to Fix The Telecom Mess?, Part Ii


Think about it:

‐The four Bell operating companies control a $300 billion communications

network with direct contact to more than 100 million homes.

‐They can now provide long-distance service in 42 states–aided by wholesale

leasing of long-distance companies’ networks at steep discounts.

‐As Eduardo Menasce of Verizon admitted to Network World Fusion,

“It’s much easier (for us) to go after long-distance. It’s less capital

intensive to move from local to long-distance than the other way around.”

While it takes only 15 minutes for a Bell to switch another company’s long-distance

customer to its service, its taken days and even months for the Bells to switch

local customers from their switches to a competitors’, the key to facilities-based


‐The SBC, Bell South, and Verizon have wireless stakes that make the bundling

of local, long-distance and wireless services for consumers simple.

The Bells with all these advantages nonetheless continue to lose local customers.

Why? To hear the critics of the Telecommunications Act of 1996 its because “SBC,

Verizon, Bell South, and Qwest have been forced by federal law to allow rivals

to utilize their networks at below cost rates.”

And what is the evidence of this? Well, the Bells say it’s so.

It is nonsense. As the Supreme Court noted in approving the FCC-pricing guidelines,

the Bells’ below-cost argument falls on the facts.

The 1996 act says that the Bells, in return for being allowed into long distance,

have “[t]he duty to provide, to any requesting telecommunications carrier

for the provision of a telecommunications service, nondiscriminatory access

to network elements on an unbundled basis at any technical feasible point on

rates, terms and conditions that are just reasonable and nondiscriminatory.”

That’s what Unbundled

Network Elements Platform provides–reasonable rates. Last year, SBC’s

CEO bragged to financial analysts that the company’s wireline margins were 42.1

percent. The discounts that state utility commissions, following FCC-pricing

guidelines for leasing the unbundled network element platform (UNE-P), amounts

to about 20 percent on average.

Independent studies by University of California-Berkeley economist Yale Braunstein

and economists Randolph Beard, George Ford, and Christopher confirm that the

Bells are making a profit on their UNE-P leases. Brounstein’s study in California

estimated that SBC earns as much as $4 a month in profit on about a $14 wholesale

price, or a margin of nearly 28 percent. Overall, CompTel estimated the annualized

profit for the Bells from UNE-P leases at $600 million.

So there is no “below cost subsidy.”

But UNE-P is vital to getting local competition underway. Competitors that

tried to provide facilities-based competition from the start went bankrupt –

wasted by the Bells adamant refusal despite billions in fines and levies to

provide them the access to individual network elements they were entitled to

by law.

The new competitors using UNE-P are winning customers by the millions by providing

tailored services to meet customer needs. As their customer base expands, they

will put in their own switches and lines so they can further differentiate their

service from the Bells. It happened in long distance, and there’s no reason

to believe that it won’t happen with local. With real competition, appropriate

deregulation can ensue.

But kill UNE-P and wholesale leasing now and re-monopolization will result:

All of the millions of customers who have proactively switched to a competitive

provider will be left without a choice. They will be forced to go back to a

provider they actively chose to leave. Protecting monopolies at the expense

of millions of satisfied customers is a recipe for disaster.

Think about it.

–Duane D. Freese, formerly on the editorial board

at USA Today, is a columnist and editorial consultant

for Tech

Central Station.

Advocates of telecom regulation insist that government control is necessary to

ensure “fair” competition in the local calling market. But it is precisely

such federal and state meddling that has impeded greater choice and value in local

wireline services.

It was government, after all, that granted AT&T its lucrative monopoly,

thereby stifling for decades greater innovation in communications technology.

Government also preserved the local/long-distance apartheid that unnecessarily

limited consumer service options. And government, too, delayed by a decade the

advent of wireless telephony, while continuing to hoard the broadcast spectrum

as if Walter Cronkite still ruled the airwaves.

With respect to local wireline service, government regulation has sucked billions

of dollars from the economy over the past seven years by forcing major telecom

companies to subsidize rivals with below-cost network access. This forced-access

regime does little more than allow a firm to slap their name on existing network

services and call it competition.

In fact, to the extent government focuses regulatory attention on the wireline

network, Grandma Bell’s dominance is actually secured. Network subsidies dissuade

recipients from establishing the independent facilities that would constitute

meaningful competition. Moreover, the incumbent carriers are robbed of revenue

that could otherwise be invested in network upgrades and telecom R&D.

The economic and social impact of thwarted technology is incalculable. The

manufacture of parts for new products and the thousands of jobs that would otherwise

be created are forsaken. Unrealized are new tools to increase knowledge, productivity

and convenience, necessary elements to improved living standards.

That’s what is really “unfair.”

The real competitive action is taking place beyond the artificial market boundaries

delineated by a time-warped FCC. According to federal data, for example, the

number of cellular subscribers has increased from 92,000 in 1984 to more than

140 million by 2002. Monthly rates for cellular service, once triple the cost

of a copper line, have dropped by half in recent years–while regulated wireline

rates have actually risen. Meanwhile, cable and voiceover-Internet telephony

are rapidly expanding.

No government policy, no matter how well intentioned, can create a dynamic

telecommunications market. On the contrary, technological progress feeds on

freedom and thrives in the absence of centralized authority.

The recent FCC rewrite of telecom regulation conceded as much in liberating

broadband from much of the forced-access rules that slowed its deployment. But

in stubbornly sticking with wireline regulation, the commission is perpetuating

the costly conceit that more government regulation is the remedy to failed government


As FCC Chairman Michael Powell stated: “The Majority’s decision substantially

repeats the errors of our past approaches.”

Laissez-faire, in this instance, is more than mere ideological musing. The

recent accumulation of $1 trillion in corporate telecom debt and $2 trillion

worth of lost market valuation are but the latest evidence that America simply

cannot afford the regulatory status quo.

– 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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