Politics & Policy

Deregulate Telecommunications

We need to do so now more than ever.

By Stephen Moore and Cesar Conda

Last week’s mega-merger between Verizon and MCI is just the latest indication that the entire telecommunications industry is restructuring itself at a pace that’s way too fast for Congress and federal regulators. In response to this $6 billion acquisition by Verizon, some consumer groups are demanding new regulations and new anti-trust measures to stem the consolidation in the industry. Yet phone service prices have fallen by 40 percent over the past decade and a half — and they continue to fall in large part because of the dynamism and rapid technological innovation in this critical information-age industry.

Consumers have benefited enormously when the federal government has allowed the free market to play its course in telecommunications. That “faith in markets” philosophy is the critical policy course that the next chairman of the Federal Communications Commission must pursue aggressively. Michael Powell, the current FCC chairman, is exiting in March. He will leave behind a legacy of success, as measured by the growth and innovation of the industry during his tenure. Most of the time Powell applied a light hand of regulation and stayed on a prudent pro-investment course. The challenges for Powell’s successor will be to further push the boundaries of a deregulatory framework. If Congress and the FCC do so, many telecommunications analysts believe that we could see more than $100 billion of new capital investment in the communications sector in the next few years.

It appears that the front runner for the job is current FCC commissioner Kevin Martin. Martin is a top-notch legal and economic mind, but he is controversial too. Many conservatives have opposed Martin because he voted in 2003 against Powell, and with the Democrats, on continuing the Gore-Hundt regulations, which forced the incumbent Bells to make the unbundled elements of their networks available to their competitors at government-set prices. These deep-discount access fees undercut the profit incentive of the Bells to invest in their networks and created an obstacle to last-mile broadband deployment to homes. We strongly opposed Martin’s stance on this issue.

However, Martin has an impeccable free-enterprise pedigree, having worked with conservative heroes such as Judge Kenneth Starr and supply-sider Larry Lindsey. And on most issues where he has had to take a tough stand, he has sided with free markets. He dissented on the foolish decision by Powell to require TV sets to include digital tuners. He approved relaxation of media ownership rules. He has been unflinching in his support of deregulating broadband service.

Most critical of all is that Martin takes a “pro-property rights” stance when it comes to issues of capital investment. This position is opposed to the “pro-competition” model embraced by liberals on the commission who believe that access to new capital investment should be shared by all comers. We have likened this line of thinking to requiring the entrepreneur who builds a lemonade stand to share that stand with all the other sellers who come along later. Such a regulatory framework hurts consumers in the long term by discouraging new investment right from the start.

What seems beyond dispute is that over the next few years Congress must rewrite the Telecommunications Act. This will involve redesigning the entire spider web of regulations that have dominion over traditional local and long-distance phone service, wireless service, the Internet, broadband, and cable TV. These networks all intersect and now all essentially compete with each other on price, speed, and convenience for customers. In fact, the telecom industry, which was once thought to be a natural monopoly, and thus a natural candidate for price regulation, is now arguably the most cost-competitive industry in America.

Seventy-five years ago it cost $300 to make a three-minute phone call from San Francisco to New York. That same call now costs roughly 30 cents. That isn’t a result of price controls, it is a result of technological innovation and fierce competition for telephone customers. Now that the phone companies compete with the Internet, wireless technology, and cable companies for communications services, the competitive price pressures are more, not less, intense than ever before.

The old regulatory rationale is no longer really relevant to this new marketplace in communications. More important, the current regulatory structure, which is now demonstrably anti-consumer, should be scrapped almost entirely.

The entire telecommunications industry should be deregulated, letting unfettered competition, innovation, and new investment continue to drive down consumer costs, expand choices, and grow the economy. That’s the philosophical mindset we wish to see from the next FCC chairman — and from Congress too.

— Steve Moore is president of the Free Enterprise Fund and Cesar Conda is a senior fellow at Freedom Works in Washington, D.C..

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