Tech Bytes – Tid Bits in Tech News:

On Monday, the Federal Communications Commission (FCC) formally welcomed Massachusetts Verizon into the market for long-distance service. This decision should sit well with consumers, who will benefit most from deregulation.

By a 3-1 margin, the FCC ruled that Verizon Massachusetts met the criteria set out in the 1996 Telecommunications Act, which provided a procedure for local Bell telephone companies to enter the long distance market.

The ’96 Act was intended to break down regulatory barriers and create a truly competitive telecommunications marketplace; cable companies would compete with phone companies, who would compete with wireless providers, who would compete with portable computer manufactures, etc.

The investment possibilities in such a wide-open market are boundless: investment-driven innovations in information, voice, and video services would provide consumers with new enhanced services at affordable prices.

Since enactment, the telecommunications marketplace has become the classic good news, bad news story. The good news is that investment in broadband Internet and wireless services has been impressive. Investment in wireless networks averaged $12 billion annually between 1997-1999; broadband Internet service has grown from practically zero subscribers in 1996 to over 3 million in 2000; investment in high-speed wireless and satellite Internet connections continues at an impressive rate.

Yet, Monday’s decision made Massachusetts only the fifth state in a little over 5 years to have full long distance competition. Some commentators fear that long distance approval will allow the Bell companies to “re-monopolize” the telecommunications market.

These analysts point out that the local telecommunications market remains dominated by the Bell companies: New competitors currently serve less than 8 percent of retail lines, while investment in new facilities, network upgrades, and new retail services has been a fraction of what was expected.

Moreover, the capital markets have eroded the chance for a more competitive local marketplace. In the past 12 months, numerous Bell competitors have filed for bankruptcy, seen their stock prices plummet, or watched as their bond ratings fell to junk status. Meanwhile, the Bell companies have remained well capitalized and, for the most part, immune to the recent stock market downturn. When coupled with service complaints and claims of preferential treatment for Bell customers, it becomes easy to see why some commentators urged the FCC to reject Verizon’s long-distance application in Massachusetts.

But by rejecting Verizon’s long-distance application, the FCC would have done nothing to remedy the situation and penalized consumers in the process. The reason for the Bells’ dominance has little to do with any perceived discrimination or service problems and nearly everything to do with a regulatory morass that discourages investment and inhibits competition.

As is the case with the California energy crisis, price caps for retail service discourage competition because they prevent competitors from recovering the sunk costs of building new facilities. Massachusetts’ “universal service” fund and price-cap regulation allow – actually require – Verizon to charge prices that would lead to a predatory pricing antitrust suit in any other industry!

Simply put, Verizon’s success is a direct result of government-mandated pricing policies that set retail rates below cost and drive competitors from the market. Originally instituted to ensure that every citizen has a local phone line, mandatory below-cost pricing now prevents real competition.

In this anti-competitive environment, investment has been directed to the higher-margin long-distance, wireless and Internet markets where price competition is fierce and an abundance of new services have come to market. Yet, consumers still face bottlenecks that prevent a ubiquitous high-speed Internet from becoming a reality.

The reason? The regulation that, until Monday, prevented Verizon Massachusetts from entering the long-distance market. Just as mandated predatory pricing has discouraged investment in local competition, a government-erected long-distance barrier has prohibited Internet investment in residential and rural areas where it is needed most. Monday’s decision will help to ease this problem, but Massachusetts consumers will continue to suffer until the long-distance network bans are removed in all states.

Verizon’s antagonists ignore reality when they warn that Monday’s decision is tantamount to “re-monopolization.” Verizon’s entry into long-distance will do little to make the market for residential voice service in Massachusetts more competitive, but it will do nothing to make it less so.

Just as deregulating long-distance entry will lead to greater investment in Internet connectivity, local rate deregulation will spur investment in local facilities. In both instances, the greatest consumer benefit will come from a completely deregulated marketplace.