TCS Daily

To Revive The New Economy, Release A Chokehold - Break Up The Bells

By James K. Glassman - April 11, 2001 12:00 AM

When is being half right all wrong? When you correctly diagnose the condition but then provide a remedy that could kill the patient.

Rep. Billy Tauzin, R La., is making exactly that fatal mistake regarding the nation's telecommunications.

In a presentation to the Progress & Freedom Foundation, the powerful Commerce Committee chairman recently stated clearly and correctly that the primary threat to future economic growth is a continued meltdown in the information technology sector. Since March 2000, stock prices for telecommunications companies have dropped 70 percent, many have gone bankrupt and others are quickly running out of cash. A domino effect has knocked down the profits of the suppliers that serve them.

Tauzin also was also exactly right when he said that a strong rebound in telecommunications requires two things: first, reliable energy supplies and, second, widespread availability of broadband to speed delivery of services from the current-copper crawl pace.

But Tauzin's remedy is all wrong. He thinks the best way to boost broadband is by releasing the regional Bell monopolies from their obligations under the Telecommunications Act of 1996. Such a move would kill competition and innovation, the keys to a rebound in both broadband and the economy as a whole.

What were the obligations? Five years ago, the Bells agreed to open their local loops to competitors. In exchange, the Bells would be able to get into the long-distance market.

Unfortunately, little has changed since 1996. The Bells dragged their feet, and they continue to have a chokehold on the "last mile" of phone line into the home. Some 95 percent of U.S. residences still have a regulated Bell monopoly as their local service provider. And, like all monopolies, the Bells have been raising their local rates and doing little to improve service.

That dismal picture isn't a result of a lack of effort by other carriers. Cable companies and competitive local exchange carriers - CLECs - that compete directly with the Bells have poured more than $100 billion into creating a reliable high-speed nationwide communications network -- only to see their efforts stymied by the Bells foot dragging and legal maneuvers. The last mile remains critical to just about every telecom provider, and in all but four states, the Bells dominate it.

Hope for real competition is rapidly running out. Two months ago, one of the largest CLECs, Covad Communications cut back the planned expansion of its national DSL broadband network. Two weeks ago, another large CLEC, NorthPoint Communications, which is in bankruptcy, ended service to 100,000 customers, Last week, Rhythm NetConnections ran out of money. And soon, PSInet, which laid a million miles of fiber optic through 28 countries and 90 metropolitan areas of the United States, could follow suit. As PSInet founder William Schrader says, the "dinosaurs" (as he calls the Bell monopolies) are winning because "deregulation has stopped, and they will become monopolists again because the competition can't compete with monopolists."

Indeed, the monopolists are only getting bigger. Thanks to mergers among themselves, the seven Bells plus non-Bell local giant GTE have become just four companies - SBC, Verizon, Bell South and Qwest. And in addition to merging to reduce competition, they have reneged on the promises they made (to win merger approvals) to get into each other's territories. Verizon, formed when BellAtlantic merged with Nynex and GTE, announced last month it would slow down an already sluggish expansion into other Bells' regions. And SBC says it won't come close to its target - set for the Federal Communications Commission when it merged with Ameritech, the Midwest monopoly - to enter 30 major-city markets.

Yet, as far as Tauzin is concerned, it is the Bells that are the victims - facing unfair competition, denied a level playing field and abused by regulators. So, to make things equal, he would let the Bells get into the most lucrative part of the long distance-market - data transmission - without having to open up their local loops. He would also release them from their promises to compete with each other.

"Why," he asks, "should we have different regulation for broadband delivery on a satellite, as opposed to a cable, as opposed to a telephone DSL line, as opposed to a wireless delivery terrestrial system, if it's all the same product that is delivered to the consumer."

Why? It's not hard to understand. Local phone companies and their competitors are treated differently because they are different. For one thing, cable companies built their own networks in a competitive market -- while the local phone companies have had long distance companies, Internet Service Providers and CLECs kicking in with access charges, mandated by government, to help maintain the local network. For another, the Bells for the past century have been a monopoly and nurtured by government. Finally, the Telecom Act, passed overwhelmingly in Congress, specified a clear glide slope to deregulation, with different rules for different players - but with the outcome the same for all: deregulation.

Nothing makes clearer the control exercised by the Bells than a remarkable admission by SBC's chairman Ed Whitacre. On March 14, he wrote Tauzin that "a million consumers" in Illinois "cannot now, and may never, have access to DSL service" if his company isn't relieved of state regulations requiring it to unbundled its services and offer them to competitors at a wholesale rate.

Does SBC own the DSL market the way it owns local service? Whitacre thinks so.

As Illinois Commerce Commissioner Terry S. Harvill noted in a letter to the House Speaker Dennis Hastert two weeks later: "Mr. Whitacre's statement is clear: Ameritech Illinois controls the market so completely that it can determine if more than a million consumers in Illinois will have access to broadband services. If the market were competitive, SBC/Ameritech would not be able to unilaterally halt the deployment of DSL infrastructure and deny these customers advanced telephone service."

And that, as Harvill said, is truly chilling. In fact, the Bells have now gobbled up 75 percent of the DSL market nationwide, and they are acting just like monopolists always act - they are reducing service and raising prices.

What will happen if the powerful local Bells get what they want from Tauzin and Congress? History shows it won't be the expansion of affordable broadband.

In the past, the Bells tried to kill the Internet in its crib by putting per-minute charges on local calls made to the Internet Service Providers (ISPs) that connected consumers to the Internet. Just such policies in Europe and Japan have curbed the Internet's growth there, to those nations' economic detriment. In the U.S., brave CLECs stepped up to the plate and gave those ISPs good low-cost service.

The Bells also kept DSL service under wraps for more than a decade, not wanting to divert business from their high-speed, high-cost T1 lines. Only when the upstart CLECs began delivering it to customers at affordable prices did the Bells start to do the same. And now that competition from the upstarts is waning (as the Bells drag their feet on local connections, file lawsuits and renege on agreements to pay their "reciprocal compensation" bills), the Bells are making DSL service less affordable once again. A competitive market would not allow SBC to hike prices for its DSL service 25 percent, as it did last month.

What to do? Certainly, the answer is not to follow the choice that Tauzin recommends. That would insure no competition at the local level - and the vaunted deregulation of telecommunications would be even farther off. No, to achieve deregulation, the answer is to break the Bells up - not geographically, but functionally, as some states, like Pennsylvania are already trying to do.

Each local phone company should be divided into two businesses: wholesale and retail. The wholesale side would sell local service both to its own retail side and to any other company that wanted to purchase that service. That's how to achieve real competition, to boost quality and push down prices.

Giving in to the Bells' demands for a rollback of the Telecommunications Act of 1996 is a prescription for disaster that will throttle the prospects of the New Economy for decades to come.

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