Competition and Chaos: U.S. Telecommunications since the 1996 Telecom Act

Preface

The last five years have not been kind to investors in the hightechnology 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 hightech “bubble,” rising to unsustainable heights on the back of exaggerated expectations created by the Internet and falling dramatically in the wake of dashed expectations and a number of corporate scandals. A major change in U.S. regulatory policy coincided with this telecommunications stock bubble. The 1996 Telecommunications Act opened all telecom markets to competition for the first time and placed regulators in the position of facilitating competition rather than presiding over protected monopolies. This book analyzes the impacts of this tectonic shift in regulatory policy on consumers and telecom companies. I conclude that much of the new policy of assisting new, small-scale entrants was a failure, inducing investors to squander billions of dollars while producing little in the way of new services or innovation. In fact, the new entrants substantially depressed productivity growth in the sector. The major development in telecommunications since 1996 involves high-speed connections to the Internet. These “broadband” connections were not generally available to the mass market when the 1996 act was vii Preface 00-1617-6 FM 3/8/05 7:09 PM Page vii viii Preface passed and therefore did not feature prominently in the debate over future telecom policy. Nor had the new national wireless carriers, such as PCS Sprint, Nextel, or T-Mobile, begun to compete aggressively with the two established wireless carriers that had emerged earlier from the FCC’s 1980s policy. The diffusion of broadband, particularly over cable television systems , and the rapid growth of “cellular” wireless systems created a competitive environment that could not have been foreseen in early 1996, when the new act was signed into law. Nine years after the passage of the Telecommunications Act, it is quite clear that the sector is settling down into a competitive struggle among three alternative communications platforms—namely, those of the wireless carriers, the large traditional Bell telephone companies, and the cable television companies. The new high-speed Internet services are driving technology and investment, and the role of voice communications has been dramatically reduced. Traditional voice telephony is migrating to the Internet along with most other services. In this world, the new small-scale entrants attracted into the sector by the 1996 law are failing rapidly. Even the traditional long-distance companies will not be able to survive as independent entities because the prices they can command have declined so rapidly that they have not been able to cover the costs of the very large investments they made in the 1990s. As this book goes to press, the two largest long-distance carriers (AT&T and MCI) are in the process of being swallowed by the two largest Bell companies (Verizon and SBC). Regulation works very poorly in a market with rapidly changing technology and strong rivalry among a changing group of large players. As a result, my book recommends a major deregulation of telecommunications so that market forces can drive the necessary investments. And I argue that, to the extent Congress wishes to continue the myriad subsidy programs described as “universal service” policy, it should pay for these policies from general revenues, not from taxes on still-evolving telecommunications services. 00-1617-6 FM 3/8/05 7:09 PM Page viii ...