Laissez-Faire Has Got to Go

By Richard Thayer, PhD

First Appeared in the Bandwidth Desk, October 18th, 2002

Competition is not working well in the telecommunications industry and here's why: We have it in our heads that competition and regulation are diametrically opposed to each other, which they are not.

Over 40+ years, the United States has been engaged in a grand experiment to foster competition in telecommunications, which, from its beginnings in 1876, under the leadership and dominance of the Bell System, had created a remarkable communications system that included the vast majority of American homes. It was the envy of other nations everywhere.

Today the industry is in disarray. World-class companies are in bankruptcy or struggling to survive. Stocks are in the tank. The giant "baby" Bells, greatly worried about their future prospects and fighting with their own unions, continue to expand their long distance reach. Satellite providers are still consolidating or trying to do so. Wireless companies duke it out in a cutthroat price war, which no one may win.

Is this the telecommunications industry envisioned by competitive pioneers, such as MCI founder William McGowan and Federal District Court Judge Harold Greene, who oversaw AT&T's 1984 divestiture? More to the point, does today's industry structure adequately serve consumers and business and will it enable telecommunications to once again power the nation's economy as it did a decade ago?

Congress, the Administration and the FCC appear frozen in deregulatory paralysis, much as the Administration is locked into a single tax-cut mentality that has let the nation's overall economy flounder in its present dismal straits.

We seem to be bankrupt of good ideas. But surely it must be obvious to anyone paying attention that industry and government can do a better job at telecommunications competition than they have done so far. Prices for local service are high and customers often have no alternative provider to whom they can resort. Long distance prices are lower, but there is concern whether that will last. Affordable high-speed Internet access is simply not available for small businesses and residential customers in 96% of rural America, according to a recent study by the Institute at Biltmore, in western North Carolina, which found that companies sometimes charge five times as much for high-speed access in rural areas as in urban centers, cutting off rural America from advanced telecom and IT.

Large business pressured the federal government to replace regulated monopoly with competition after World War II, because, in spite of its achievements, the old system was out of step with the booming economy of the post-war era. AT&T was autocratic and arbitrary in introducing and pricing new products and services, and complicated cross-subsidies forced business customers to pay high rates that defrayed the costs of service for residential customers.

To foster competition in the telecom industry, the federal government began by deregulating the industry and allowing railroads and utilities with existing rights of way, to provide their own communications services, and then permitting select carriers, to serve specific customers, such as allowing MCI to provide private-line services for truckers traveling between St. Louis and Chicago.

Less regulation was seen as helpful to competition and, as competition increased, the view was that the need for regulation would further diminish.

That was not the view of all regulators charged with the task of turning the industry toward competition. Dr. Alan Pearce, former Chief Economist at the FCC, and later on the staff of the House Telecommunications Subcommittee and then on the staff of the White House Office of Telecommunications Policy, recalls that "as the transition from regulated monopoly to competition began to pick up steam in the 1970s, it was quite clear that a competitive industry would require as much regulatory supervision as had monopoly." "A different form of regulation was needed," he says, "to prevent dominant established carriers from using their power and incumbency to squelch newcomers." Newspapers had fought the proliferation of radio in the 1920s, Dr. Pearce notes, and, in the 1950's, TV broadcasters argued vigorously against allowing cable to expand beyond the remote communities it was originally intended to serve. Similar tactics could be used to stifle competition in telecommunications.

As the federal government took major steps toward a more competitive telecom industry - the FCC's decisions on cellular licenses in 1981-1982, the break-up of the Bell System in 1984, and cable deregulation, each involving new challenges for federal regulators - Congress responded again and again with further cuts in the FCC budget.

Rapid expansion of the Internet, which began in the early nineties, and the Budget Reconciliation Act of 1993 further expanded FCC responsibilities. Congress and the administration had become aware that significant revenue could be generated for the government by auctioning spectrum licenses, which had not previously been done. The 1993 Act gave the FCC the task of organizing and conducting spectrum auctions.

Passage of the Telecommunications Act three years later, which made competition the policy of the nation, vastly increased the FCC's workload. The FCC rushed to define rules for the emerging marketplace, following passage of the Act, but did not have the resources to develop a comprehensive economic model to compensate all players fairly in this transitional marketplace. Still, Congress gave the Commission no increase in resources to cope with a situation that was rapidly spiraling out of control. Some of the FCC's experienced senior staffers, overwhelmed with impossible workloads, left the Commission in the 1990s and they could not be replaced.

The Clinton-era commission of the late nineties has been replaced by a commission with a hands-off policy toward incumbent companies in the Bush Administration. Neither approach has supported a fair and open marketplace and the industry itself has not shown much leadership. Rosalind Allen, formerly Director of Legal Analysis in the FCC's Office of Plans and Policy and currently Of Counsel to Arnold & Porter's telecommunications practice, points out that we cannot expect government alone to make competition work in telecommunications or elsewhere; industry to share responsibilities as well: plan and invest wisely, develop and execute sound business plans, and manage prudently and ethically.

Customers, investors, the economy and the nation are the losers in the present environment and will continue to be so until sound and adequate regulation is recognized as a prerequisite and a safeguard for competition in telecommunications and until industry leaders step forward to regenerate the prestige and dynamism of earlier years.

Richard Thayer is President & CEO of Telecommunications & Technologies, International, Inc. (www.ttinetwork.com), a market intelligence firm in Chevy Chase, MD. Contact by email: rt@ttinetwork.com or phone: 877.913.2883.
Copyright 2002, TTI and Scudder Publishing Group, LLC. www.scudderpublishing.com.