TCS Daily

Mistaken Powell Doctrine

By James K. Glassman - March 28, 2002 12:00 AM

A dangerous idea is floating around Washington - the idea that a monopoly can do a better job for consumers than a load of feisty competitors, slugging it out. We tried the trust-the-monopolist idea before in telecommunications with a behemoth called American Telephone & Telegraph, which was coddled and protected by government for a century. AT&T was broken up; long distance was deregulated; prices came down; innovation flourished.

Now, worked up into a lather because they say that too few Americans have fast connections to the Internet, politicians in Congress and techno-bureaucrats in the White House and regulatory agencies have decided that the solution, once more, is to hand the job of spreading broadband by telephony exclusively over to the Bell companies. Yes, to those regional giants - once seven, now merged into four -- that provide service to 95 percent of U.S. homes.

Incredibly, the politicians are calling this idea "deregulation." I believe in deregulation, and I know it when I see it. This is not deregulation.

Even if a trust-the-monopolist policy could work, who on earth would pick a Bell company to lead America into a new high-tech era? The Bells, with their stultifying bureaucracies, have never excelled at innovation. Their expertise has been in lobbying politicians and regulators and in filing lawsuits.

In 1996, Congress overwhelmingly passed a telecommunications reform act. A major aim was to end the monopoly status of the local Bell operating companies that control the "last mile" - the wire leading from homes and offices into the broader telecom network. The question was how to give other companies access to that wire - access that would finally extend telecom competition beyond long distance, into local service and broadband as well.

The answer was, first, to require the Bells to allow other companies - called Competitive Local Exchange Carriers, or CLECs - to connect with their systems, at a price, and, second, to give the Bells a carrot, an incentive. If they opened up their networks, the Bells would be allowed into long distance. So far, the act hasn't worked. The Bells have obstructed interconnection, and they have shown little interest in long distance.

What to do? The logical answer would be to apply more heat to the Bells to get them to abide by the law. Instead, the House recently passed a bill called Tauzin-Dingell, after the chairman and ranking member of the Commerce Committee, that scraps key provisions of the 1996 act. Hardly anyone in Washington disputes the fact that, if it becomes law, Tauzin-Dingell will give the Bells an effective monopoly in telephony - not just over local service but broadband and eventually long distance as well. The CLECs will simply be out of luck.

You might think that the new FCC chairman, Michael Powell, who extols free markets, would be vigorously opposing Tauzin-Dingell. Instead, he just issued a broadband proposal (called a "rulemaking") that is nearly identical to the bill. That's nice insurance for the Bells: the Senate may not pass the legislation, but the FCC can enact its provisions anyway.

Business Week, in an editorial March 18, described the situation bluntly and accurately: "The President isn't being served by his Federal Communications Commission Chairman Michael K. Powell.... Powell is about to reward the Baby Bells for their past monopolistic behavior by expanding their broadband business. The Bells have circumvented the Telecommunications Act of 1996 by crushing all new competition in their old markets. They've paid hundreds of millions in fines for unfairly squeezing competitors. Now they are, in effect, being given more monopoly power in new markets. Powell isn't boosting competition, he's extending the Bells' monopoly power."

Powell tosses around the term "deregulation" frequently, but his brand of deregulation would not create or reflect competition. The Bells would have a monopoly when it comes to broadband delivered over phone lines, and their only "competition" will come from cable companies that deliver their own broadband service over coaxial cables.

What Powell seems to be saying is that, instead of competition within each "pipe" - or technology - there will be competition between pipes. But, in a practical sense, here is the choice with which most Americans will be faced, at best: 1) a giant Bell monopoly if they choose DSL, the telephony version of broadband or 2) a cable company.

Economists call this condition a "duopoly," and it's not very attractive to consumers. Duopolists tend to divide up the territory - which is what the Bells have already done. While each Bell has the right to compete with any other Bell in local service, none has. That's the definition of an anti-consumer cartel.

I have a prediction to make: If the Bells at last get their way and either the FCC or the Congress scraps the 1996 reform act, politicians will find that there's hell to pay.

Some 85 percent of Americans have access to broadband, but only 10 percent of them have adopted it. Why not more? Two big reasons are high cost and poor service. That situation can only get worse if a monopoly or a duopoly prevails. My guess is that consumers will blame the politicians who killed the policy that would, ultimately, have given them more choices than a Bell vs. a cable company.

But does America even have a broadband crisis?

That all depends on how you define a crisis. In 2001, the number of U.S. homes and offices with broadband connections roughly doubled, from 6.5 million to 12.5 million. Over the past two years, BellSouth has gone from 30,000 DSL subscribers to 600,000, and it expects 1.1 million by the end of 2002. That is not only not a crisis, it may not be a real problem.

The problem isn't supply, anyway. It's demand, as the chairman of the president's Council of Economic Advisors, Glenn Hubbard, has pointed out. More consumers aren't paying $500 a year because the Internet isn't offering them good enough services and programming. For one thing, entertainment companies are reluctant to put their music and video offerings on the Web for fear they'll be stolen.

Now, that's a legitimate job for politicians - protecting property rights. What's not legitimate is adopting an industrial policy that picks the Bells as the go-to monopolists to solve a broadband supply problem that might not exist.

The White House worries that Silicon Valley won't recognize that its heart is in high tech, so it's toying with embracing a Bell-driven industrial policy. That's nonsense. With sensible tax, trade and intellectual-property policies, the administration is heading in exactly the right direction - helping technology by creating the right environment for growth and innovation, not by picking winners and losers.

"Listen," said Commerce Secretary Donald Evans to Morton Kondracke in an interview in Roll Call March 18, "there's nothing more important to future innovations and development of our technology industry here in America than a strong education policy." Absolutely. Boost the demand side, cut taxes, increase trade and immigration, and get serious about education. There's a smart tech policy.

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