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

Chapter 10. A Look Back and a Look Forward

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 market bubble and excesses of 1998–2000 could not have been avoided, for the Internet created incredible expectations. Regulators may not have created it, but they did contribute to the bubble by encouraging entrants having little hope of survival. Now, five years after the bubble burst, some important lessons are emerging from the shakeout that ensued. Clearly, it is not productive to try to create competition by allowing new, relatively small firms to exploit regulatory arbitrage opportunities in delivering yesterday’s services. The emphasis should be on facilitating investment in new, high-speed services and the applications or content that may be required to amortize such investment. Regulated Competition Has Not Worked As the preceding chapters have demonstrated, the U.S. experience with telecom liberalization since 1996 has not been a happy one. For nine years, regulators have attempted to create competition in local services and have 156 A Look Back and a Look Forward 10 10-1617-6 CH10 3/8/05 7:17 PM Page 156 A Look Back and a Look Forward 157 succeeded mostly in sowing confusion and uncertainty in a sector in the grip of declining revenues. Because of the new regulatory provisions in the 1996 Telecommunications Act, a legal and political battle developed among the incumbent local telephone carriers—principally the Bell companies —and the long-distance companies and the new local entrants (the CLECs). The latter two groups are now in steep decline after spending more than $200 billion on capital facilities between 1996 and 2003. In the post-1996 era of telecom regulation, considerable effort was put into creating an environment conducive to the entry of new carriers into fixed-wire local markets.1 The entrants this attracted offered little in the way of innovation or new services. They were mainly interested in exploiting the arbitrage opportunities created through the regulation of wholesale and retail rates, and most of them failed with a vengeance when the telecom stock market bubble burst in 2000–02. The regulators’ response was to try to protect some of their progeny by creating larger potential arbitrage margins through the unbundled network element (UNE) platform. Unfortunately , this strategy simply allowed the arbitrageur entrants (that is, those with no local capital facilities) to grow at the expense of those who had already invested billions of dollars. Regulation thus helped to condemn to an early death the only set of new entrants who could possibly innovate through their own network facilities, though most of the latter firms would no doubt have failed eventually because they could not differentiate themselves from the incumbents. Now the courts have condemned the UNE platform as well, eliminating even the lure of regulatory arbitrage. As it turned out, the regulatory strategy of the Federal Communications Commission (FCC) and of the state regulators to promote entry into local fixed-wire services was not only wasteful but unnecessary. Meaningful massmarket competition did not develop through unbundled network elements or their platform. For the most part, these policies simply transferred billions of dollars from incumbent telephone companies to fund marketing campaigns required to sell the same service under a different name. Instead, competition has developed in ways totally unanticipated by regulators, namely through unregulated wireless providers and cable broadband platforms . Fortunately, federal and state regulators were denied the right to regulate wireless rates and services, and cable television regulation was scaled back considerably in 1996. As a result, the wireless sector began to launch an unregulated competitive rate war and to offer national calling plans as soon as it could consolidate into six national players after new frequencies were auctioned in 1995–96. At about the same time, cable operators began 10-1617-6 CH10 3/8/05 7:17 PM Page 157 158 A Look Back and a Look Forward to expand their capabilities to meet satellite competition and were thus poised to be early movers in the broadband race. The result has been a dramatic shift of telecom revenues from traditional long-distance carriers and, to a lesser extent, incumbent local companies to wireless...