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Chapter 3. The First Eight Years under the New Law
- Brookings Institution Press
- Chapter
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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. Longdistance companies could now enter local markets and therefore offer integrated service packages to their customers. With Internet use also gathering momentum and equity markets enjoying a surge of historical proportions, the United States found itself in the middle of a seemingly unending economic boom. The Growth of Telecom: Rhetoric versus Reality A hot topic of this period was the potential of the “information superhighway .”1 The declining cost of fiber-optics transmission and the progress driving microprocessor technology (at a rate commensurate with Moore’s Law) led some to predict that communications bandwidth would soon be virtually free.2 Households, businesses, and every profession from physicians to teachers would be able to send and receive high-speed video images that would substitute for personal diagnoses, provide remote monitoring, allow remote tutoring, and supply personalized access to entertainment. Once the telecommunications sector was opened to competition and deregulated , innovation could flourish, thereby allowing subscribers access to new services and providing existing services at dramatically lower prices. 17 The First Eight Years under the New Law 3 03-1617-6 CH03 3/9/05 4:19 PM Page 17 18 The First Eight Years under the New Law The Investment Boom Unfortunately, as explained earlier, the 1996 act did not deregulate telecommunications . Instead it created a vast new system of wholesale-price regulation that was only vaguely spelled out in the statute. Incumbents’ local telecommunications services, in particular, would continue to be intensely regulated by the states and the Federal Communications Commission (FCC). By contrast, long-distance and wireless services had been more or less deregulated before the act was passed, so both sectors had already begun to invest heavily in infrastructure in the early 1990s. The lure of the Internet would entice them to accelerate this investment after 1996. In addition, new local carriers sprouted from everywhere and were able to attract enormous amounts of capital. The result was an investment boom that continued for more than five years. Between 1987 and 1996, nominal capital spending increased at an average rate of 4.8 percent a year (figure 3-1).3 In the next four years, it soared to more than 20 percent a year. By 2000 real capital spending had risen 148 percent from its 1996 level. This surge was accompanied by an even greater rise in the price of telecom equities. In 2000–01 this stock market “bubble” burst (figure 3-2).4 The new local telephone carriers, the competitive local exchange carriers (CLECs), suffered the greatest decline, followed by the wireless carriers and the long-distance companies.5 Many of the CLECs and long-distance companies were forced into bankruptcy, and there is now very little market value left in these two segments of the telecom sector. Between January 2000 and January 2003, the value of most U.S. telecommunications carriers, particularly the long-distance companies and new local entrants, dropped precipitously, their total loss reaching almost $1 trillion. As a result, capital spending declined substantially in 2001–02 and continued to do so as the bankruptcies among telecommunications carriers reached alarming levels (see table 3-1). The capital-spending boom spread far beyond fiber-optic transmission facilities.6 Capital spending by new local carriers increased from virtually nothing to more than $20 billion in 2000.7 In the wireless sector outlays jumped from $8.5 billion in 1996 to $18.4 billion in 2000, and among the regional Bell companies (including GTE) capital spending rose from $20.8 billion in 1996 to $35.7 billion in 2000, even though these firms were by and large banned from interstate communications.8 Once the stock market bubble burst and scores of carriers collapsed, a climate of depression descended on the U.S. and world telecommunica03 -1617-6 CH03 3/9/05 4:19 PM Page 18 [34.201.69.22] Project MUSE (2024-03-29 11:22 GMT) The First Eight Years under the New Law 19 tions sectors, intensified by the excess capacity in data and voice transmission the boom had created. The long-distance and local failures, combined with the reductions in Bell-company cash flow, brought total capital spending in the U.S. telecom sector down to about $50 billion in 2003, which was even less than its 1996 level. Telecom stock prices experienced a...