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Competition and Chaos

U.S. Telecommunications since the 1996 Telecom Act

Robert Crandall

Publication Year: 2005

The 1996 Telecommunications Act was an attempt to increase competition among telecommunications providers in the United States by reducing regulatory barriers to market entry. This competition was expected to drive innovation in the telecommunications sector and reap economic benefits for both American consumers and telecommunications providers. The legislation, however, had a markedly different impact. While many of the more aggressive providers enjoyed sharp short-term rises in stock market values, they soon faced sudden collapse, leaving consumers with little or no long-term benefit.

In Competition and Chaos, Robert W. Crandall analyzes the impact of the 1996 act on economic welfare in the United States and how the act and its antecedents affected the major telecommunications providers. He argues that the act was far too stringent, inviting the Federal Communications Commission and state regulators to micromanage competitive entry into local telecommunications markets. Combined with the bursting of the dot.com and telecom stock market bubbles, this aggressive policy invited new and existing firms to invest billions of dollars unwisely, leading to the 2001–02 collapse of equity values throughout the sector. New entrants into the market invested more than $50 billion in unproductive assets that were quickly wiped out through massive failures. The 1996 act allowed the independent long-distance companies, such as MCI and AT& T, to live a few years longer. But today they are a threatened species, caught in a downward spiral of declining prices and substantial losses. The industry is preparing for an intense battle for market share among three sets of carriers: the wireless companies, the local telephone carriers, and the cable television businesses. Each has its own particular advantage in one of the three major segments of the market —voice, data, and video —but none is assured a clear path to dominance. Although the telecom stock market collapse is now history and the survivors are investing once again, Crandall concludes that the regulators have failed to adapt to the chaos to which they contributed.

Published by: Brookings Institution Press

Title Page

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pp. iii


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pp. v-vi

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pp. vii-viii

The last five years have not been kind to investors in the high-technology sectors of the economy. After enjoying a meteoric rise between 1998 and early 2000, most high-tech company stocks plummeted, driving the NASDAQ index down by more than 70 percent in just 18 months. Telecommunications stocks played a major role in this high-tech “bubble,” rising to unsustainable heights on the back of exaggerated ...

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pp. ix-11

For numerous comments and suggestions, thanks go to James Alleman, Jerry Ellig, Thomas Hazlett, Eli Noam, J. Gregory Sidak, Hal Singer, and Leonard Waverman. I would also like to thank Simone Berkowitz, Jesse Gurman, and Shen Wu for research assistance. The manuscript was edited by Vicky Macintyre and fact checked by Stephen Robblee. The ...

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Chapter 1. Introduction

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pp. 1-6

Ten years ago, most of the world’s telecommunications companies were state-owned monopolies, performing much like the post offices from which they had sprouted in the early decades of the twentieth century. Those in the United States were different: they had never been government- owned, and the private>/em> national operator, AT&T, was broken up ...

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Chapter 2. Opening Telecom Markets: The 1996 Telecommunications Act

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pp. 7-16

Before 1996 the U.S. telecommunications sector was mired in a policy morass from which there appeared to be no escape. Though never formally shown to be a “natural monopoly,” it was heavily regulated by politically responsive officials intent on using their powers for income redistribution.1 In this pursuit, the regulators often protected the monopoly ...

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Chapter 3. The First Eight Years under the New Law

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pp. 17-30

The 1996 Telecommunications Act not only freed the Bell operating companies from the 1982 line-of-business restrictions but also exposed them to extensive local competition for the first time. Long-distance companies could now enter local markets and therefore offer integrated service packages to their customers. With Internet use also gathering ...

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Chapter 4. Local Competition under the 1996 Act

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pp. 31-58

Decades of regulation have left the U.S. telecommunications sector with a distorted rate structure.1 A substantial share of long-distance revenue has traditionally been used to defray the non-traffic-sensitive costs of the local network, through carrier access charges and excessive intrastate rates. In addition, local residential rates have been kept artificially low, particularly ...

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Chapter 5. Effect of the 1996 Act on Incumbent Local Companies

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pp. 59-77

There can be little doubt that the incumbent telephone companies have lost subscribers to the new entrants since 1996. Between 1996 and 2000, a period of vibrant economic expansion, these losses occurred against a backdrop of subscriber line growth and a generally buoyant stock market. Now, however, the total number of access lines in the country is ...

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Chapter 6. The Death of Distance and of the Long-Distance Carriers

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pp. 78-93

Before 1970 there were no separate, independent long-distance carriers in the United States. As in other countries, long-distance service was provided by integrated companies that offered local connections and long distance. AT&T, the leading carrier, provided access to more than 80 percent of local access lines and virtually all interstate long-distance service in ...

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Chapter 7. The Rapid Growth of Wireless Telecommunications

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pp. 94-109

The number of wireless or “cellular” subscribers in the United States will soon exceed the number of traditional telephone lines.1Most subscribers now have a choice of five national cellular carriers. Nevertheless, regulators continue to view the provision of “local” telephone access and exchange services as a local monopoly, thereby requiring government regulation. ...

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Chapter 8. The Broadband Revolution

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pp. 110-132

Although the Internet did not develop commercially until 1990 and the World Wide Web was not available until 1991, it did not take long for these forces and household ownership of personal computers to create a “Nation Online.”1 Just twenty years ago, only 8 percent of U.S. households had a computer; but by 2003, 61.8 percent had one.2 Residential Internet ...

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Chapter 9. Telecom Reform in Other Countries

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pp. 133-155

Telecom liberalization has now spread to virtually every developed country in the world and even many developing countries. Although the United States has had perhaps the most aggressive policy of encouraging local entry and has had long-distance competition for several decades, other countries have also opened their telecom markets to competition in recent ...

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Chapter 10. A Look Back and a Look Forward

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pp. 156-172

No one looking back over the past nine years of meteoric events in the telecom sector can confidently predict what will happen in the next nine years. Who can say how the politics of regulation will affect the sector after the rather disappointing impact of the 1996 Telecom Act on traditional wire-based telephone operations? In hindsight, perhaps the stock ...

Appendix: Estimates of Bell Company Cumulative Capital Expenditures across States, 1996-2003

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pp. 173-178


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pp. 179-206


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pp. 207-212

E-ISBN-13: 9780815797708
E-ISBN-10: 0815797702

Page Count: 212
Publication Year: 2005