Lassman to Glassman: Back Off of Break Up, It’s a Toxic Prescription

This piece originally ran on National Review’s website on April 17.

Jim Glassman hit the nail on the head in the lead of an article that appeared in this space on Friday (Break Up the Bells – 04/13/01). He asked, “When is being half right all wrong?” The answer of course, is when “you correctly diagnose the condition but provide” a lethal remedy.

The topic of telecommunications and regulation is quite vexing for many conservatives and free market advocates. What policy should be pursued in a marketplace so heavily regulated? How should we determine if one regulatory avenue is better or worse than another when a free market – where entry and exit to a market as well as prices are determined without “expert” government assistance – is unavailable in the near term?

One standard is to consider the likelihood that a given policy would lead to interminable, long-term, and unrelenting government intervention. The remedies that Mr. Glassman suggests are dubious, when judged by this and other market-oriented standards. With due respect to Mr. Glassman, it is he, not deregulatory advocates in Congress, who advocates a toxic prescription to telecommunications woes.

A well-established diagnosis of the telecommunications marketplace is that more competition would result in a better deal for consumers. Suggesting a break up – a prescription for more regulation – is toxic to the emergence of competition. Glassman’s solution is an invitation to the ills of limited competition and ongoing regulatory control.

All too often we look at the 1996 Telecommunications Act as a panacea. In reality, it is more like a competition placebo. The Telecommunications Act determined that competition was the goal, and that regulation would be the method by which we obtained the goal. When in a regulatory corner, lawmakers and regulators decided that the only way out was more regulation. The Telecommunications Act promised competition and delivered regulation. This temptation must be avoided today.

Regulation has inadvertently created a thriving competitive marketplace in lucrative high-end business and data services that includes a merry band of players who did little to invest, extend, or otherwise improve the underlying facilities necessary to run a telecommunications network. While there is great public lament as the death knell sounds for many “competitive local exchange carriers” (CLECs), there is hardly a peep about the source of the scourge: continued regulation of the underlying network.

Congress directed the Federal Communications Commission to make it economically unattractive to build telecommunications facilities. Without new facilities, owned independently of the former monopolist Bell companies, new CLEC entrants are forever required to turn to government for ever more invasive regulatory control over existing facilities. As one example, Mr. Glassman recommends a government break-up of the incumbent telephone companies.

Radical surgery is a dangerous procedure at any time. However, the odds are stacked higher against consumers and a free market because this proposal requires that the network itself would continue in perpetuity as a regulated monopoly.

Mr. Glassman is right to worry about sluggish expansion of new networks and the glacial spread of market-saving competition. But he has the linkage between expansion and government policy reversed. New networks are not built because a company makes a promise during the multi-tiered extortion process we call merger review. Rather, competition emerges when government officials are taken out of the decision-making process.

Pro-competition rhetoric must be examined to see if the policy prescriptions it supports actually enhance, rather than hinder, true competition. It is evident that a forced divestiture and additional wholesale price regulation would make it easier for an abundance of players to lease elements of the existing Bell network. However, such mandated competition would be neither strong nor lasting. Healthy competition will result from facility-based alternatives to the Bells – hybrids of new telephone, cable TV, wireless, or other promising networks – and not from an artificial split between wholesale and retail or facilities (networks) and services.

In light of the California electricity woes, it is more evident now than ever that a forced separation of an integrated network enterprise guarantees unintended consequences.

To be sure, it would be easy to think of the Bells as the “bad guys.” They, like each of their competitors, are forever trying to rig the system to garner special privileges or to place undue burdens on their competitors. To be sure, there are no angels among telecommunications firms. The men and women at the helm of these titanic firms behave rationally. They respond to the world around them. Executives monitor performance indicators and price surveys as well as competitive or innovative actions by their competition. Unfortunately, at this time too much of their world is dominated by regulatory controls.

New government regulations that would create a monopoly lock on the vital link between the network and consumers – and subsequently require regulated access prices – is a prescription for disaster.

The tonic is clear, and it is within reach: aggressive and immediate deregulation of every mile within any telecommunications network.

After all, the 1996 Act was written to “promote competition and reduce regulation.”

Kent Lassman is the director of technology and communications policy at Citizens for a Sound Economy Foundation.