TCS Daily

Tauzin-Dingell Will Kill New Telecom Investment, Study Says

By James K. Glassman - December 8, 2001 12:00 AM

The House leadership has shown little enthusiasm for the pet project of Reps. Billy Tauzin (R-La.) and John Dingell (D-Mich.), a bill that would gut the 1996 Telecommunications Act, which was responsible for a huge capital-spending boom in the late 1990s. But, kicking around for nearly two years, the bill is set to come to the floor next week.

Tauzin, after all, is chairman of the Commerce Committee, and the lack of a vote was getting awfully embarrassing. But congressional etiquette, in this case, could produce terrible economic consequences.

The Tauzin-Dingell bill, as it's called, would entrench and expand the monopoly power of the four Bell companies, kill off competitors, and slow the roll-out of broadband technology - fast connections to the Internet, so vital to the economy.

The foundation of the act was the requirement that local Bell monopolies "unbundle" their networks and let anyone with courage and capital enter the market to sell communications services to consumers. The idea was that competition, not monopoly, would lead to innovation. Unfortunately, the Tauzin-Dingell bill destroys the unbundling requirement.

Why? Tauzin-Dingell advocates argue that broadband has slowed because the Bells have no incentive to upgrade their facilities if they must allow competitors to connect with their systems. This argument is utterly fallacious, and now, just in time for the vote, a new study by the prestigious Organization for Economic Co-operation and Development (OECD) shows why.

In fact, the OECD study proves a case that's the precise opposite of what the Bells are claiming. The study shows that unbundling leads to new investment by both competitors and incumbents. It's logical to assume that a reduction or elimination of unbundling - which is what the Bells want - will bring investment to a halt by both.

The study, titled "The Development of Broadband Access in OECD Countries," examines the experience of the 26 industrialized OECD countries, including the U.S., that have passed unbundling requirements such as those in the 1996 telecom act. The OECD found, contrary to the assertions of Tauzin-Dingell advocates, that an enormous investment boom resulted from unbundling, or opening, local telecom networks.

"Initiatives to open the local loop are viewed by most OECD governments as being fundamental to promoting a fast rollout of broadband services," says the report. "To date the major criticism of unbundling or line sharing [is] that such policies allegedly discourage investment in new infrastructure. No evidence has been forwarded to substantiate that claim."

Of course not - since there is no such evidence.

The study continues: "By way of contrast, there are huge investments being made by new entrants in local access markets, where unbundled elements are available, to provide broadband services. These investments take the form of facilities that link unbundled elements to provide broadband services and in alternative infrastructures that do not use unbundled elements."

The OECD found that, instead of discouraging new investment, an unbundling policy encouraged it. In fact, such a policy is the best way to get competitors to build out their own infrastructure - and "in the long run infrastructure competition is the best way to develop broadband services." Now, this may sound counter-intuitive: competitors who can tap into an incumbent's network are most likely to invest in their own infrastructure. But it is what the OECD found, and it makes sense - they can't get their businesses launched without having access to unbundled elements, but, in the end, they need their own infrastructure to win customers.

The report is emphatic: "To suggest that new entrants will not invest in their own infrastructure is erroneous."

And the report adds: "Nor does unbundling deter incumbents from investing in upgrading networks."

This is no mere speculation. It is a report that studies the available evidence in more than two dozen countries. And it absolutely refutes the main argument that the Bells are making on Capitol Hill.

  • The Bells say that unbundling gives the CLECs a free ride, and it deters the CLECs from investing in their own facilities. That is "erroneous," according to the OECD.

  • Next, the Bells say that they themselves are deterred from investing in upgrading their networks if they have to share them (for a price, of course) with the CLECs. That's not true either, says the OECD.

In other words, the basic economic argument of the Tauzin-Dingell is dead wrong.

The investment boom, the OECD study indicates, comes from two factors. First, feisty competitors see that they have a foot in the door and rush in to compete with the old monopolies. Second, the monopolies themselves feel compelled to invest in order to keep up with the entrants.

What ensues is a virtuous cycle that is great for consumers, and raises the quality of service, expands the breadth of choices, and lowers costs as well. A typical OECD example is Germany, which, while being a leader in unbundling, has an incumbent telecommunications carrier (Deutsche Telekom) that is upgrading its facilities at a rapid pace.

As the OECD puts it: "There is no evidence that unbundling has slowed investment in new infrastructures or innovation. In OECD countries that have introduced unbundling, investment is proceeding apace."

But what is great for consumers is bad for monopolies. They would rather keep the entrants away, and continue to charge households high prices for old-fashioned telephone service. Hence, the Tauzin-Dingell bill, which attempts to set the clock back to the good old days of regulated monopoly.

Between the lines, the study also suggests something of a puzzle. Unbundling has led to unprecedented waves of investment spending, but lately that spending has fizzled out in the United States. What's different about the U.S.? Clearly, there can be only one answer. In the U.S., a particularly aggressive monopoly presence has attempted to litigate and legislate the new entrants out of existence.

The Bells are great at this kind of game. Their proficiency is the reason that legislation as dangerous as Tauzin-Dingell is scheduled to come to the floor. As Bob Metcalfe, the legendary high-tech entrepreneur, put it recently, "The core competency of the regional phone companies has become lobbying and litigation."

Meanwhile, the U.S. consumer and the U.S. economy suffer.

The Bells have to answer the ringing affirmation of unbundling contained in the OECD study. But what can they possibly say? If I were a member of the House, I wouldn't vote for Tauzin-Dingell until I got a straight answer.


TCS Daily Archives