TCS Daily

Trusting Monopolists

By James K. Glassman - February 25, 2002 12:00 AM

The Federal Communications Commission last Thursday proposed exempting high-speed Internet access services from the rules that foster competition in basic telephone services. "If adopted," reported the Washington Post the next day, "the rules would hand large regional telephone companies a key victory."

The FCC proposal tracks the most important provision in legislation introduced two years ago by Reps. Billy Tauzin (R-La) and John Dingell (D-Mich). That bill, which strongly favors the four mega-Bell regional monopolies, is set to go to the House floor for a long-delayed vote this week.

While likely to pass the House, where a defeat would be an enormous embarrassment to the new chairman and the ranking member of the powerful Commerce Committee, it is expected to encounter strong resistance in the Senate, where the chairman of the key committee, Sen. Fritz Hollings (D-S.C.) staunchly opposes it. But the FCC would accomplish the aims of the Tauzin-Dingell bill without a new law being passed.

Predictably, the FCC decision devastated the stocks of competitors to the four Bells. While the new proposed rulemaking - in Orwellian fashion - promises "to promote widespread deployment of high-speed broadband Internet access services" - its effect will be to cripple severely and probably kill off the remaining Competitive Local Exchange Carriers (CLECs) that blossomed with the Telecommunications Act of 1996, a law that the FCC would effectively gut.

Clear evidence of the damage to the CLECs came last week and this week in the form of sharp declines in stock prices. Last year, working with economist William Lehr of the Massachusetts Institute of Technology, I constructed an index of CLEC stocks and concluded in an "event study" that on days on which news favored Tauzin-Dingell, the index declined sharply.

On the first full trading day after the FCC rulemaking was announced, the CLEC index dropped 6.2 percent, a loss of $272 million in market capitalization. (By comparison, the Nasdaq Composite Index fell 2.1 percent that day.) Over a period of four trading days, from Feb. 14 through 20, the CLEC index dropped 12.6 percent, compared with a decline in the Nasdaq of 4.4 percent.

In its decision, the FCC appeared almost to write off the CLECs as competitors to the Bells and, instead, to trust the Bell monopolies to roll out Digital Subscriber Line (DSL) services and to further upgrade their networks on their own, without the pressure of CLEC competition.

The new rules, said the Post, "would significantly shift the federal government's approach to telecommunications policy." It is now clear that the FCC chairman, Michael Powell, favors competition among different platforms for broadband delivery systems - mainly, DSL (which works over telephone lines) and cable (which works over coaxial cables now used mainly for TV) - rather than competition within the DSL platform itself, as the Telecom Act of 1996 envisioned.

As a result, wrote Jonathan Krim in the Post, "Consumer groups and independent Internet access providers argue that this policy will leave the country with a tiny number of broadband providers that would wield tremendous power over the availability of Internet service and content. Localities typically are served by only one cable company and one telephone carrier."

The result would almost certainly be higher prices and diminished service.

"If you don't have competition within each platform, then you will spend all this effort to end up with a duopoly or an oligopoly," the Post quoted David Baker, policy director for EarthLink, Inc., the nation's second-largest Internet access provider, as saying.

Two recent reports, one from the FCC itself and the other issued by the Department of Commerce, conclude that hi-speed internet access in the U.S. is being rolled out in a timely manner, and show evidence of a huge increase in broadband-equipped homes last year. Even in the face of such evidence, the FCC is turning away from the policy adopted by Congress and the President six years ago and instead is choosing a policy that could be termed, "Trust the monopolist."

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