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Chapter 4. Financial, Strategic, and Political Conduct of the ILECs
- Brookings Institution Press
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97 4 Financial, Strategic, and Political Conduct of the ILECs The ILECs’ financial, strategic, and political conduct—like their technological behavior—seems focused on preserving their local services monopolies and preventing competitors from gaining access to their infrastructure. They have been very slow to modernize local loop infrastructure, even when sharply increasing demand for digital services since 1994 warranted such investments. They have treated their monopoly local services markets as cash cows, using cash flow for dividends, share repurchases , acquisitions, and lobbying activities rather than for R&D or capital investment in new technology. They have merged with and acquired each other, reducing the total number of large local services providers from 9 to 4 since passage of the 1996 Telecommunications Act. They have deliberately and systematically avoided competing with each other despite making repeated public statements implying that it would be economically rational for them to do so, and in some cases despite stating that they intended to do so.And they have engaged in massive, highly coordinated political, lobbying, regulatory, and litigation activities intended to preserve the status quo. ILEC Investment and Financial Priorities Since their creation in 1984, and even more strikingly since the advent of the Internet revolution in 1994, the ILECs have failed to invest in technological upgrading of the local loop, despite the 1901-04_CH04.qxd 03/03/04 10:58 Page 97 98 , , fact that much could have been done with comparatively modest investments . This could have been achieved, for example, by reducing the average length of copper wire loops required to deliver service to residences and then installing coaxial cable, fiber, and distributed electronics at points intermediate between central offices and local loop terminations (that is, homes or offices). These intermediate points, such as so-called pedestals, already exist for most copper loops in the United States. Installing highercapacity channels and improved electronics at pedestals and at other “subloop ” concentrator locations would greatly increase the reach and speed of digital services delivered over the local loop, because the quality and performance of digital services such as DSL over copper wire is heavily distance-dependent. If undertaken gradually, these improvements would have required surprisingly limited financial commitments, because (even for the most expensive fiberoptic cable) most of the cost of laying new cabling is the physical cost of construction, not the cost of the cable. Total investment in the local loop has generally equaled only about 8 percent of ILEC revenues, and the majority of this investment is independent of the technical characteristics of the channel. In 1997, according to available ILEC data, the entire U.S. copper-loop infrastructure, for both homes and businesses combined, absorbed 40 percent of ILEC network capital investment, which amounted to less than 20 percent of revenues.1 Thus the ILECs could have increased their total local loop capital investment by 25 percent by spending about 2 percent of revenues. This would have produced an enormous increase in the data capacity of the local loop, both for business and residential markets. However, this did not occur. Instead, ILEC network capital spending in relation to revenues and usage has declined since 1994. By contrast, capital investment before AT&T’s divestiture in 1984 grew steadily,and capital investment in long-distance services continued to grow as the long-distance industry became more competitive. ILECs’ financial and investment behavior suggests that they have been treating their core telecommunications networks (in both voice and data) as cash cows.2 Throughout the 1990s their operating margins increased, but instead of modernizing their networks, the ILECs used the cash thereby generated for diversification, dividend payments, stock buybacks, debt retirement, lobbying activities, or retained earnings. Once again,this conduct stands in contrast to that of most high-technology firms, including data services firms such as Internet service providers, which generally do not pay dividends or repurchase large quantities of their stock, preferring to invest in technological innovation, R&D, and growth. This is surely one reason that the ILECs’ rates of technology improvement are so 1901-04_CH04.qxd 03/03/04 10:58 Page 98 [52.90.211.141] Project MUSE (2024-03-28 10:23 GMT) , , 99 sharply inferior to those of competitive high-technology firms or of internal networks run by large IT users. While the ILECs’ capital investment remains high by the standards of most low-technology industries, their behavior for most of the last decade, including most of the post-Internet era, has clearly been contrary to that of all other information technology sectors. Total ILEC capital...