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Serious Problems and the Politicians Who Ignore Them

09/25/2002

Since the height of the Internet bubble, the U.S. telecommunications sector has shed $2 trillion in market capitalization, 500,000 jobs, and nearly 70 companies. Many telecom firms that have survived will not for long, as the typical company faces annual interest payments equal to its revenue and investors unwilling to provide another dime.

Given the industry’s importance to the U.S. economy, it is disappointing, to say the least, that policymakers have not attempted to formulate a coherent policy to address the malaise. Telecommunications spending fueled the huge increase in business investment in the late 1990s, which was the biggest component of the historic Gross Domestic Product (GDP) growth. Between 1996-2000, telecom firms purchased more than $100 billion in fiber optics and hundreds of billions more on network computing equipment like switches, routers, and servers.

While such investment was unsustainable, as the industry now suffers from overcapacity and low prices, policymakers could take steps to eliminate the barriers to investment and consolidation that have exacerbated the problem. The Federal Communications Commission (FCC) has issued some positive statements about how telecom policy must be changed to address the new reality. Chairman Michael Powell has spoken of taking a friendlier posture towards industry consolidation and has initiated rulemakings to reduce some of the regulations that prevent the former Bell companies from entering certain markets.

Unfortunately, little action has followed these encouraging words. The FCC rulemaking on what portions of the former Bells’ privately financed and operated networks must be made public has been delayed and, worse, statements made in the wake of the WorldCom bankruptcy filing suggest that Powell’s FCC would keep bankrupt carriers in operation, lessening the economic rationale for the consolidation that would benefit the industry.

But if the FCC seems unwilling to implement policies to offer a glimpse of hope to an industry in depression, the chance that the Congress will champion reform is even more remote. Politicians have never treated telecom policy with the type of seriousness that it deserves. Both parties are split evenly on fundamental questions about regulation and antitrust enforcement and use industry segmentation to cultivate campaign donations.

Instead of trying to sort through complex issues, politicians and lobbyists try to boil down complex questions into easily digestible soundbites, which typically include the word “competition.” Occasionally, in the process of oversimplifying their argument, someone will say something illuminating about their side’s position, however unwittingly.

This happened last week when Charlie Black, co-chairman of the Voices for Choices coalition, which champions regulations on the former Bell companies, said, “America's phone networks are emphatically not the private domain of any one company or group of companies.” Black supports a continuation of current policy, which turns virtually every piece of the former Bells’ networks into public property.

While the question of public access to the existing telephone network is a difficult one, since it was constructed by a monopoly that enjoyed publicly sanctioned rates that guaranteed a profit, new Internet facilities are a different matter entirely. These facilities are constructed with private risk capital, which seeks the highest possible return.

The 1996 Telecommunications Act created a regime where the former Bells would be required to share their network with new entrants, in exchange for entry into the long-distance market. But almost as the act was signed into law, the Internet’s potential became clear to telephone company executives, rendering voice service an afterthought. At the same time, long-distance rates began their downward trend towards zero, further depressing the incentive to invest in, or enter, voice communications.

The new local telephone competitors created by the telecom act had little interest in voice telephone service, but they were intent on capitalizing on the act’s sharing provisions to enter the local broadband Internet market. The FCC obliged by extending the sharing mandate to facilities used for Internet service, despite the fact that the act itself did not explicitly authorize the FCC to do so. As a result, investment in local broadband Internet facilities stagnated as the former Bells were reluctant to invest in a shared resource and new telecom firms invested in unregulated portions of the network, leading to a glut in long and medium range Internet facilities.

This stagnation continues and policymakers have done next to nothing to address it. The former Bells and their allies advocate deregulation; their foes want new regulations to make the telephone network a permanent public resource. The force of the two interest groups has created a Newtonian balance on Capitol Hill, where politicians seem reluctant to put the issue to rest because it could mean the end to the recurring and lavish campaign contributions telecom firms must make for their voices to be heard.

It is not surprising that the local broadband Internet market is so dysfunctional. By forcing the former Bells to share virtually every part of their network, the FCC offers a glimpse of why communism failed. In telecommunications, the wires are the means of production. When the FCC requires those wires to be shared, it socializes the means of production, eliminates the profit motive, and invites influence peddling where lawyers and lobbyists work to help the state decide how to divide the revenues generated by the shared resource.

Eventually, enough telecom firms will go bankrupt that this industry will no longer be the money tree politicians see it as today. When that happens, steps will be taken to privatize and deregulate local telecommunications networks because this is the only way that the sector can provide the investment opportunities to return to growth. It is just a shame that politicians – particularly those in the Republican Party who will soon be on the campaign trail promoting the virtues of self-reliance, private property, and entrepreneurship – are willing to subject investors and consumers to a socialist famine in the meantime.