March 2001
One week after the act was signed I wrote an op-ed article in the Los Angeles Times: (click here to read that article.)
At the time this was a hypothesis. Which is what academics call a wild guess unsupported by evidence. But now, 5 years later, we actually have data points.
We should take this act very seriously. But precisely for that reason my conclusion is: the act made no big difference. Yes, the passing of 5 years of time made a difference, but if we had no Act, the combination of FCC, PUCs, smaller pieces of law and Congressional pressures, Judge Greene and other courts, would have reached pretty much the same results, act or no act. Surely it could not have been any slower.
Now of course many people worked very long and hard in implementing the Act, but they would have worked just as hard in other ways, too. On the margin there were some pluses or minuses. But if you look at the whole incredible revolution we are now witnessing, the 96 Act is merely a pimple on the nose of the digital revolution. The act is the result of change, not the cause of change. So let’s keep perspective. We are in the midst of unprecedented progress that transforms society and economy.
Sure, a bad law or a bad regulation can make a difference. The ICC harmed national rail transport almost as much as incompetent RR managers did themselves. But rail deregulation killed RRs too, look at Britain, and RR seem to work best where they get a huge government subsidy, like in France.
What are some of the things that either did not happen, or happened, regardless of the Act?
Investments. Telecom stocks, like other tech stocks, generally went up, and then they generally went down, like the rest of tech stocks. It didn’t take an Act. For a while, all these investment bankers and fund managers kept repeating to each other that competition would unleash profits. What this overlooked is that usually it’s companies with market power that are profitable, like Intel or Microsoft, rather than small businesses competing in a commodity business, like long distance entrants. But now economy 101 sinks in, and Wall St is rediscovering its soft spot for the big incumbents.
The second thing that Wall Street kept repeating was that the act would create greater certainty. Oh, Really? Throw a 300page law, that papers over many divisions among the numerous warring and worrying industries and companies, in a high-change, high stakes, dynamic industry sector, into an environment teeming with Washington lawyers, an FCC commission with more egos than expertise, more courts than even in Florida after an election, 51 touchy state commissions, and you expect certainty?
Actually, the fastest growth of investment had been in 2 areas left alone by the act, Internet and wireless. The whole act mentions Internet only once seriously, and then in a way that has not withstood Sup Ct. review. That was on the issue of child-proofing the IN, which was just about the only issue that the public ever read about the bill during its drafting process. The rest just wasn’t much news to normal people and was seen more of an intra-industry fight.
When the Act was finally passed, the White House. Congress, Washington lobbyists, and journalists together created the impression that the law had created local competition, whereas in fact is was merely a step –albeit an important one—in the opening of local markets to competition, a process that had been pushed for years in many of the economically more important states.
ILEC entry into IX (Greene would have done that on largely the same criteria, and certainly not slower, since that would have been impossible). Instead, we got the 14 points checklist, which is a pretty inflexible instrument.
Local telecom Competition?
As mentioned, such competition had already been happening before 96. It would have continued apace after 96. It has been very slow to reach residential customers, partly because the retail rates are set low by regulation. The 96 Act did not change this political/regulatory dynamic. Costs are high, and retail prices are low. Cable TV and cell phone companies are the most promising entrants, because for them the residential voice service is an incremental business, and costs are therefore incremental only.
Competition to cable? There is no more cable competition that in 96. The exception is DBS, and it is unrelated to the Act.
The Internet. The IN, touted as exhibit A for the benefits of keeping government out, was actually the creature of government.
Wireless has grown enormously, but not because of the act. It’s growing in Cambodia, too. In fact, the US is behind its international peers. Whatever happened was initiated already before 96.
Deregulation. Deregulation was really a false promise. Break open the new, i.e., demonopolize , and deregulate at same time, are inconsistent, at least for a considerable early period. So we got those wordy FCC orders, half of them sent back by the courts anyway. FCC had powers to forebear from some regulations, but did not do so. This system became highly complicated, with new unbundling, forward-looking pricing, resale discounts, collocations, and much more, with no relief in sight.
What happened was that Congress enshrined the suspicions of decades of divided government into legislation, and those provisions, while maybe reflecting the equilibrium of yesterday, are becoming the disequilibria of tomorrow, and very hard to change.
The other reason for Congress to seize control was that it recognized that becoming the arbiter rather than delegating this to a bunch of FCC bureaucrats and judge Greene could be a very lucrative opportunity for increasing their clout and coffers.
Thus, one cannot say that there is less government regulation than before 96. The opposite is true.
International liberalization. Global liberalization has progressed rapidly. The WTO agreement is recognition of that trend. Though trade negotiators of course want us to believe that it is the cause not the result of these trends. But this agreement had very little to do with 96 act. There has been an explosion of international cables. Again, very little had to do with the act.
Greater efficiency. Interconnection Pricing moved more to a cost based arrangement, both through incremental cost methodology and the move to flat rate charges. These things were part of a trend of many years, and would have happened anyway, as the CALLS compromise shows.
Connectivity of classrooms. The E-rate program. It has accelerated connectivity of classrooms, but this connectivity would have happened anyway, just more slowly.
Overcoming the digital divide and other aspects of universal service. Domestically, the Digital divide is being resolved, largely by itself, plus a more judicious and less political interpretation of the same numbers. Internationally it’s a different story.
Internet connectivity will cease to be a major issue, at least for narrowband, because IN will be freed from the tyranny of the PC.
Let’s start with a popular item that will make very little difference.
FCC Reorganization. Any regulatory system is inherently slow relative to the issues of a dynamic environment. You can reorganize the FCC all day long and it won’t make much difference after some early Hawthorne effect except take much attention away.
As I said earlier, the 96 Act is the result of change, not its cause. Fundamental forces destabilized the previous equilibrium, and did so for 20 years, and the act merely updated the law to reality, and in the process also helped it a tiny bit further along.
So what are the forces of change for the next 5 years? Of course, there will be change. in order to deal with some little admin or problem or inconsistency or weird court decision that was not anticipated. And of course there will be endless efforts to grandstand on the morality issues, knowing fully well that the courts will take it off the books again. And of course there is some change due to democratic changes in government with different priorities
Major trends and forces of change include:
Wireless expansion.
Note that the Act was largely irrelevant to the development of mobile communications. And here, the environment is as dynamic as can be. More wireless subscribers than fixed line subscribers. M-commerce. M-mail. Data services. Lots of handheld devices. Wideband and broadband. Cell-radio and cell TV. Downloaded mp3. Machine-to machine communications. Car to highway communication. Sensors everywhere, wireless tags on every suitcase and container. Communicating with distant control systems.
All this requires much more spectrum allocation, mostly at its higher ends.
It also requires a change in the allocation system, which right now is based on auctions. Which are based on the notion of exclusivity and ownership. This system has bled the wireless 8industry sector white and slowed its development. Its bad policy, bad economics, bad technology, and bad law.
Gov in effect asked each company how much it was willing to pay in order to survive.
This is not to say that spectrum use should be free or given to the companies with the biggest campaign contributions or the best lawyers. Instead, we should move to a system of open and unlicensed access, where you pay for usage, not for ownership, like cars on the toll road.
Widespread wireless usage also will probably mean to keep the system of Recipient party pays (RPP) rather than calling party pays (CPP). In CPP, there is no real competitive incentive to reduce interconnection charges, because both the wireless company and the subscriber shift the burden to the interconnecting caller, who has no practical choice.
We’ll also probably go to face calls for the inclusion of mobile service in universal service. And of rules to protect against wireless telemarketing and of abuse of location information. And we’ll face a lot of security problems with wireless hackers.
We’ll
also encounter new issues. In Japan, which has a competitive wireless field,
NTT DoCoMo has created, through its superiority in the instant messaging, network
externalities that give it unbeatable advantage. It’s like the AOL instant
messaging situation which the FTC addressed recently, and it will lead
regulators to require cross-platform opening in order to establish competition.
Optonics revolution.
The 80s and 90s were characterized by a revolution in bit preprocessing. Transmission was the scarce and expensive resource, and its allocation was a political and regulatory matter. But now, we are in the midst of an enormous revolution in optical transmission technology. Soon, a single sheath of cable strands will be able to transmit petabits per seconds, more than the entire national networks a few years ago. This makes transmission abundant, time-insensitive and flat priced, and almost distance insensitive. Long distance becomes commodity. We need not worry about it becoming controlled by anyone.
The powerful backbone networks make the narrowness of the skinny local networks even more apparent, and doubly a bottleneck. It leads to broadbanding, whether by DSL and even more by cable networks, since they are already in place. Fixed wireless should be encouraged by more spectrums. Laser-based wireless optical networks will emerge, and require no license. Fiber will migrate closer the user, to sub-loop platforms and pedestals and eventually to the home, and will lead to calls for regulated access to these nodes. This braodbanding should be encouraged, and the best way to do so is to deregulate it all the way.
Digital convergence.
Everyone is against categories. Pigeonholes. Silos. Stacks. Un-level playing fields. Sure. . Nobody likes inconsistencies, but there is no way they will disappear if you try to deal with x policy issues with less than x policy tools. This is something that you can actually prove mathematically. Kenneth Arrow got for this impossibility theorem a Nobel Prize in economics. So we should be modest in our expectations.
Globalization of economies. Telecommunications used to be national and territorial. They are becoming international and distance insensitive. Foreign companies are beginning to enter the US, and will introduce new regulatory dynamics. The proposed acquisition of VoiceStream by Deutsche Telekom is an example.
Reassertion of economies of scale and scope For a while, we could ignore these economies, because the inefficiency of the incumbents masked them, and provided an umbrella. But the inefficiency has declined with threats of competition, and now economy of scale and scope are back, and the small entrants are on the ropes. Yes, part of it is they being stymied by their supplier/competitor. But we should consider the possibility that the incumbents may be stronger for reasons beyond discrimination. And where does that leave policy? It would have been a dead end. Or, to phrase it more positively, a transitory policy for a transitional phase
We are now at cross road about regulation. Very significant one, Local facilities based competition is failing for non-business users. Sure it’s more than it used to be, but it’s been a disappointment. Not much competition here.
All 3 major IXCs are for sale. We have an FCC chairman who gives an FCC green light on mergers. We have a justice department that is likely to be friendly. We have ILECS that have passed, or are close to passing, 271 approvals for larger markets.
We have a Wall Street community that is shifting its endorsement from the entrants to the incumbents.
All this creates a window of opportunity to major mergers. In a fairly short time, we might be looking at 3 or 4 ILEC companies, vertically integrated into long distance, owning the major long distance companies, plus most wireless, and ISP backbones.
Before some people get upset, remember that the goal is not to stop national footprints. National footprints are good as long as they are not exclusive. They are better than regional fortresses, with their potential to be leveraged vertically. National footprints emerge in the wireless field despite a Byzantine auctioning system. Verizon, with its GTE properties, could be national presence. Qwest has CLECs around the country. SBC is under FCC obligations, and once they get 271 approvals this might become a business proposition.
Now if you drop structural policy, that is, control of the market structure, which has been the mainstay of Washington policy for decades, th3e question is what to do. The question for policy is: moving forward or moving back?
Moving back is to conclude that market power is here to stay, and to regulate it like in the old days, with some modern twists to hide that.
Moving forward means to push not just competition but competitors, by give entrants various advantages. And this also means regulation.
None of these choices is attractive.
The third option is to declare victory and end most regulation.
This is less likely. Not because of bureaucrats who cant let go. It’s because interest groups want something. What they want, most of all is some economic redistribution in their direction.
The second reason is that there is fraud and bad faith, though this needs not be dealt with through telecom bodies. And the third reason is that market power can be persistent and structural. Again, this can be dealt with through other bodies.
Because total deregulation is therefore less likely, maybe one should sunset sections of the Act. Now for 5 years from now. The probability is not the rules per se, but rather than entire industries grow under its umbrella, so you can never take the umbrella away. If people know that rules will vanish, they will hurry and create facilities.
Principles and process
The genius of the American system of telecom reform has been in the past its instrumentalism. Almost a Common law approach. No big battle, but small skirmishes. Experimentation by the States. This was in contrast to other countries, which had big reform legislation that took decades to pass and were out of date from day one. America avoided that process, and opted for messy progress over an orderly snails pace. Until the 1996 Act.
So I do not wish for us to have a Telecom Act of 2006 that cleans up previous problems and creates new ones, as part of industry compromises of established players. But rather, any future legislation should reduce telecom law to a few broad principles. Areas declared out of bounds for regulation. And areas in which a commission should follow broad policy principles laid down by Congress. We should learn from controls in computers, where we have a hierarchy of control instructions. Assembly language, machine language, operating system, applications programs. In societal rules, one should think of a similar hierarchy.
But then put people on the FCC who will not. But who will use this discretion to ratchet down rather than ratchet up.
Some regulation can also be
undertaken by the industry itself, as self-regulation. But keep in mind that
self-regulations historically almost invariably became an instrument for cartel
behavior, and excluded the public interest. So self-regulations could be
delegated by an FCC or state, subject to some policy principles, and subject to
review. In other words, we should have regulated self-regulation.
My conclusion: if the act made no difference, why keep it? Let’s sunset big parts of it in 5 years out of its misery, and replace it with a combination of broad legislative principles applied by the fed and state commissions, by a system of regulated self-regulation, and by a large-scale forbearance by the commissions. Then, let’s meet again in 5 years and review if that system has been worse that the aftermath of 96. Is this alternative system likely to happen? No. Is it very ambitious? Not really. Is it desirable? Yes.
Click here to read the LA Times Article.