Politics & Policy

How to Fix The Telecom Mess?


It was 1956 and life was simple. If

you wanted a telephone, easy. You had one choice–an

AT&T Western Electric black rotary phone. For long

distance, again you had a single company–good old Ma

Bell, AT&T. And for local service, well there were

2,000 local companies, but only one for the place you

lived. And 85 percent lived in AT&T country.

Ma Bell was ubiquitous, and hardly innovative. (That

rotary phone was created in 1919; not put on line

until 1949).

Then came the “Hush A Phone” decision,

allowing private consumers to hook up other phones

and even fax machines to their lines. A dozen years

later, alternative long-distance carriers gained permission

to hook into the Bell’s network.

Then in 1984, thanks in large measure to AT&T

refusing to fairly open its network to MCI and Sprint,

Ma Bell was broken up into AT&T long distance

and seven independent regional Bell operating companies.

The success of long-distance competition led Congress

in 1996 to try to get competition rolling in the local

market with a new telecommunications act.

The Bells agreed both in negotiations of the act

and in agreements that allowed them to merge into

four regional local phone giants that they would open

their loops at affordable rates to competitors. But

implementation of that act has been dragged out by

the Bells’ litigating and lobbying.

Their refusal to deal fairly with competitors–reflected

in billions in assessed fines and other levies–forced

many competitive local exchange carriers into bankruptcy.

The Bells, in short, created much of the current financial

mess in telecommunications.

At last, though, the FCC got it right. It set up

pricing guidelines that state utility commissions

began to implement two years ago for the leasing of

the Bells’ systems, including the whole platform (so

called UNE-P). The FCC reaffirmed those rules last


The Bells naturally don’t like it. They are back

in court to maintain their monopoly stranglehold on

local phone service. But competition should not be

cast aside to protect monopolists.

Competition in long distance brought in dramatically

lower prices for consumers, who’ve seen the cost of

an average call drop from 35 cents a minute (62 cents

in 2001 dollars) in 1983 before AT&T’s breakup

to 10 cents a minute now.

The only place in telecommunications where costs

to consumers have risen has been local phone service.

Even as the average household monthly phone bill for

long distance dropped from $20.85 a month in 1995

to $12.39 a month in 2002, local phone bills have

climbed–from $29.82 a month to $36.33 a month.

As was the case with MCI and Sprint who leased much

of AT&T’s network to provide long distance before

building out their own systems, new local players

need affordable access to the Bell networks legacy

if they are to build a customer base and then grow.

If that creates a little more telecom messiness for

a time, so be it. A lasting competitive framework

is vital if consumers are to get products and services

they want at prices that they can afford.

It ain’t as simple as 1956, but neither are modern

communications capable on old black rotary phones.

–Duane D. Freese, formerly on the editorial board

at USA Today, is a columnist and editorial consultant

for Tech

Central Station.

The current “telecom mess” is largely the result of

federal policy that has misdirected vast amounts of

capital and squandered precious technological opportunity.

Abandoning this flawed regulatory regime is key to reviving

the telecom market.

The crux of current policy is a welfare program of

sorts conceived by Congress to induce competition

in local calling. Major wire-line companies such as

SBC, Verizon, BellSouth, and Qwest have been forced

by federal law to allow rivals to utilize their networks

at below-cost rates. New entrants were to build independent

facilities with which to compete once they established

a foothold in the market.

In reality, the generous subsidies have skewed investment

incentives and worsened the very market conditions

that Washington presumed to rectify.

According to FCC data, competitors have indeed expanded

their share of the local telephone market from 4.3

percent in 1999 to 13.2 percent in 2002. But the proportion

of independently owned access lines has actually fallen,

while competitors’ dependence on subsidized access

to incumbent networks has increased. In 1999, rivals

relied on subsidized access to serve 23.9 percent

of their customers. By 2002, they were utilizing subsidized

access to serve 55.4 percent of customers.


The upshot is this: Rather than bringing advanced

technologies and applications to market, billions

of investor dollars have instead flowed to Baby Bell

wannabees whose business plans offer little more than

a new billing address. The incumbents, meanwhile,

saddled with 10,000 pages of access regulations, have

only inched away from copper loops that date back


The economic impact has been devastating, contributing

to the loss of 500,000 telecom-related jobs and $2

trillion in market valuation since 2000, as well as

a 14 percent decline in telecom R&D. The policy

blunders are all the more tragic in light of the awesome

advances in technology that otherwise could have benefited

millions of Americans.

Unfortunately, a majority of the FCC refuses to concede

the obvious failure of the forced-access regime. The

commission last month issued its third rewrite of

the rules in seven years, comprising 576 pages of

mind-numbing dos and don’ts. As FCC Commissioner Michael

Powell lamented: “The majority has brought forth

a molten morass of regulatory activity that may very

well wilt any lingering investment interest in the


The order also promises to unleash a litigation frenzy.

Twice before, the agency’s forced-access orders failed

constitutional muster, and legal challenges already

have been filed against the latest version. At least

the lawyers are happy.

It is instructive to note that the most dynamic sectors

of telecom–wireless and cable telephony–are also

the least regulated. That same vitality could be had

industry-wide were Congress to sunset the forced-access

regime and declare the market open on a date certain.

The greater difficulty is summoning the political

will to dismantle the regulatory machine. Thousands

of bureaucrats and their K Street allies are heavily

invested in the status quo. But as America’s telecom

pioneers have repeatedly taught the world, we can

accomplish whatever we imagine.

– 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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