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    Private Sector: Varied, changing telecommunications industry needs no FCC engineering

    BY Wayne T. Brough
    07/20/2004
    by Wayne T. Brough on 7/20/04.

    Since the U.S. Circuit Court of Appeals for the District of Columbia rebuked the Federal Communication Commission's attempts to engineer a competitive marketplace for telecommunications, the industry has been at an impasse.

    Daniel Marsula, Post-Gazette
    Click photo for larger image.

    However, recent actions by the Bush administration may break the logjam and open the door to real competition. In June, the solicitor general chose not to challenge the D.C. circuit court ruling with an appeal to the Supreme Court. In addition, the Supreme Court decided against a stay of the decision, which means as of June 15, the FCC's rules fell by the wayside. Rejecting the old rules offers an opportunity to begin the transition to a more market-oriented telecommunications policy.

    The FCC may release an interim order until new rules can be established; but more importantly, FCC commissioners have been pressing market players to negotiate and come to terms in the marketplace rather than rely on regulation. Given that this latest round of litigation was the third time the agency's rules have been criticized by the courts, the pursuit of market-based pricing to replace price controls is a welcome change.

    The current stalemate arises from the Telecommunications Act of 1996, which sought to create an open and competitive market. Today, that competition is emerging, but not in ways the regulators anticipated. As demand for voice, data and video transmission converged into a single demand for information transmission, the market moved toward broadband technology capable of providing rapid transmission of any data. Consumers care less about how data is transmitted than about how much data is transmitted.

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    This new market is most evident in the emergence of wireless services for voice and PDAs, as well as the revolution under way in Internet telephony -- VoIP -- which is making cable a formidable challenger to traditional wire line service.

    Satellite providers also have entered the market, and even power companies are developing the technology to transmit data over their power lines.

    Despite these transformations, state and federal regulators maintained a parochial view of a balkanized market, with different sets of rules for wire line telephone companies, wireless providers, cable providers and others. Consequently, when regulators sought to promote competition with local phone companies, this meant wire line competition -- ignoring the other relevant players in the market.

    And if it was assumed that only one wire could reach the end user, competition meant that wire had to be shared.

    To implement the act, then, the FCC and state regulators established rules about what equipment had to be shared, and at what prices. The methodology employed by the regulators provided access at rates with substantial discounts, which has created an artificial market that allows competitors to lease equipment at below market prices.

    While the regulations created a system of managed competition, it did little to promote real competition or long-run investment. To the contrary, the rules allowing forced access to local lines created strong incentives not to invest. The new competitors have found it cheaper to lease at subsidized rates, which can be seen in the significant decline in capital investment concurrent with an increased reliance on access at regulated rates. At the same time, the local phone companies have little incentive to invest in new equipment, knowing that it will be made available to their rivals at a deep discount that does not allow cost recovery.

    The Court of Appeals recognized these problems and rejected the FCC's policies precisely because they hampered market competition. Those with a vested interest in the old system -- beneficiaries of discounted access to competitors' equipment -- vigorously sought to overturn the case in the Supreme Court. But the solicitor general's decision all but eliminates this option.

    Some groups may continue to press for an appeal, but without the FCC or federal government as a party to the suit, it is unlikely the Supreme Court will take the case. Those who benefited from the old regime must now make way for a more market-oriented approach to telecommunications, which is good news for consumers and for innovation.

    In a rapidly evolving telecommunications market, clinging to a poorly functioning model of regulated competition has plagued the recovery of the telecommunications and technology sectors. Since the high-tech crash more than 500,000 jobs have been lost; widespread broadband deployment holds the promise of creating 1.2 million new jobs. Where wireless, cable and other providers offer strong discipline on prices and expanded customer choice, efforts should be made to accelerate the transition to new markets, not forestall the inevitable change that technology is driving.

    (Wayne T. Brough, Ph.D., of Washington, D.C., is chief economist at Citizens for a Sound Economy, a national nonprofit organization founded in 1984 that fights for free markets and limited government.)