TCS Daily

Well Enough Alone

By James K. Glassman - November 15, 2002 12:00 AM

The subject today is "what vision will govern broadband?" The alternatives that are offered in the title are "deregulation, open access" and "structural separation." I have a fourth alternative: competition. It is competition that increases capital investment and brings benefits to consumers - lower prices and higher quality. And it is competition that boosts economic growth and enriches societies.

With telecommunications, as with electric utilities, we face a tough problem: how to bring a sector in which monopolies were nurtured and protected for a century by governments to a status of robust competition.

The first steps were taken 20 years ago with the breakup of AT&T into a long-distance company that was immediately thrust into competition with other firms - leading to huge declines in prices and vastly improved service - and seven local telephone monopolies. In 1996, Congress, with the support of every free-market member, overwhelmingly agreed on a blueprint to bring competition to the remainder of the telecom sector. The Telecom Act of 1996 was good, welcomed by all parties - though later resisted by the regional monopoly Bells, which, through mergers, became just four firms.

But despite this resistance, the Telecom Act is working. The subject today is broadband, but I also have some words to say on local service - the last mile to the home - which is inextricably bound to broadband.

We hear over and over that there is a crisis in broadband. Yet look at the statistics.

At the end of this year, according to the best estimates, there will be 19 million broadband subscribers - a gain of about 50 percent despite a rotten economy. At the end of 2001, there were 13 million broadband subscribers, according to the FCC. At the end of 2000, there were just 7 million. At the end of 1999, fewer than 3 million. In other words, in just three years, subscribers have risen more than sixfold. For DSL alone, subscribers have grown from fewer than 400,000 in 1999 to about 4 million at the end of last year. SBC recently reported that its Internet subscribers passed the 2 million mark in October - up 65 percent this year alone.

In Hartford, Connecticut, near my home, there are now 366,000 broadband subscribers, an increase of 198 percent in 12 months. This growth comes as the result of competition. The Bells had DSL technology long ago, but like good monopolists, they limited supply and raised prices. Only competition ignited the growth of broadband.

But are these figures really so great? As a good libertarian, I am agnostic on the question. I set no goal for broadband subscribers, just as I set no goal for the number of people who should go to the latest Adam Sandler movie or should buy butter as opposed to margarine.

It is only central planners - the kind of people that Friedrich von Hayek, the man for whom this wonderful auditorium is named, railed against - who make such claims. They are the people who believe that the word "should" applies to economics.

Still, it is legitimate to ask whether obstacles have been placed in the way of supply or demand by government. That's subjective, but we have evidence. First, look at the rate that broadband technology has been adopted by consumers, in comparison with other technologies. It took only four years since its introduction for 10 million Americans to subscribe to broadband, but it took nine years for 10 million to start using cell phones, nine years for VCRs, 22 years for fax machines.

Second, broadband is available to the vast majority of Americans. According to a recent study by the Florida Public Service Commission, "It has taken just five years for 80 percent of American households to have...broadband [service] available." But only about 15 percent of households are actually subscribing - leaving "quite a gap," says the study, "between supply and demand."

Supply is not a problem. Demand may be. There are several problems with demand. One is intellectual property protection problems that entertainment firms worry about, so they aren't excited about putting their content on the web. But the main difficulty is that many Americans simply do not believe the price is worth the extra speed. In testimony at the FCC recently, Barry Nalebuff, the Milton Steinbach Professor at the Yale School of Management, put it very well, "The problem with broadband is that there aren't any good killer applications. We had one, it was called Napster, and it was unfortunately illegal... In general, we don't have any application that everybody thinks we must own."

Frankly, in this regard, I was a little surprised that Adam Thierer, whom I have long admired, criticized the Bush Administration for the lack of a "broadband policy." He wrote: "Although the administration has supported a handful of minor initiatives, its first 20 months have been characterized by a lot of talk but very little action."

Initiatives? Action? Sounds like a meeting of the liberal caucus on Capitol Hill.

First, the administration has taken appropriate steps on the demand side, especially in trying to sort out thorny issues of property rights. Second and more important, this administration does not believe in broadband policy any more than it believes in synfuels policy or hamburger policy or any other kind of industrial policy. It wants competition, broadly, in telecom, as in everything else, and, evidently and correctly, it believes the Telecom Act of 1996 will provide that competition.

I have to say, parenthetically, that this is a politically savvy administration. If broadband - or telecom policy in general - were hurting consumers (and, remember that Adam Smith told us to worry about consumers and producers can worry about themselves), then they would be fretting over how to change it. In fact, the administration has a victory on its hands - as long as Michael Powell does not snatch it away.

Not only is broadband spreading, but competition in local service is, at last, a reality - at least in some states. Consumers are enjoying major price cuts - an average of $13 per customer in New York, a one-third reduction in Michigan in the basic calling plan. Just last week, Ameritech Illinois announced an unlimited calling plan capped at $13.50 a month, a reduction - the second this year - SBC estimates will save consumers $24 million.

Competitive local exchange carriers are entering the local market, and the Bells are entering long distance. That was the way it was supposed to work. Yes, CLECs are competing with the Bells locally by leasing unbundled network elements at reasonable rates in many states. That is precisely the way that competitors like Sprint and MCI entered long distance after the breakup of ATT in the 1980s. And, by the way, even though they grouse about "synthetic competition," how do you think the Bells are able to offer their customers long-distance service? By building their own facilities-based long-distance networks? Of course not. They are leasing the lines of long-distance companies. Is that synthetic?

One thing, however, is synthetic - or awfully fishy: the lack of competition between the Bells themselves. There was an appalling story in the Chicago Tribune two weeks ago in which Richard Notebaert, who heads Qwest, said it would be fundamentally wrong to compete for Ameritech's residential customers. "It might be a good way to turn a quick dollar," Notebaert said, "but that doesn't make it right." If UNE-P rates are so low, why don't Bells themselves use them to compete outside their own regions?

Alas, the ideal of competition is not alive and well throughout the telecom universe. But it is heating up. SBC reported that competitors have gained a total of 4.2 million UNE-P lines allowing them to compete at the local level. Meanwhile, SBC has gained a total of 5.9 million lines. This is what happens with competition.

It is incredible - and disturbing - to see the chairman of the FCC threatening to take steps that would kill competition in the cradle. Politically and economically, such an action would be a disaster. A new paper by my AEI colleague, Kevin Hassett, and Laurence Kotlikoff of Boston University and the National Bureau of Economic Research, shows clearly that competition stimulates telecom investment. That's no surprise. Monopolists and duopolists restrict supply and raise prices. The notion that less competition would spur capital expenditures in broadband is ludicrous on its face, and academic research shows just the opposite.

But back to the issue at hand, broadband...

Deregulation? That is what we are getting. As Kevin Wright, chairman of the Illinois Commerce Commission recently wrote in a letter to several members of Congress: "Regulators need look no further than recent history for an analogous situation in which regulatory restraint resulted in a successful creation of a competitive marketplace in the telecommunications industry. Similar arguments [to those] being advanced by the RBOCs today were advanced by AT&T during the post-breakup period. In that instance, congressional leaders, along with the regulators had the patience and vision to allow market forces to work and, as a result, the price of long-distance has plummeted. The big winners were long-distance consumers."

Structural separation? Frankly, it was not long ago that I believed that structural separation might be needed. That each Bell had to be broken up into a wholesale company that would own the last mile and lease to all comers, including a retail Bell company, which would be separate. I wrote as much. Today, I believe that, if competition is allowed to take its course, structural separation will be unnecessary.

But if monopoly forces have their way, almost certainly we will be back to the same situation that prevailed before AT&T was broken up, though in this case there will be four (or maybe two or three) regional Bell monopolies, acting as a cartel. In that case, there are only two alternatives: the first is a severe and pervasive re-regulation of every aspect of telecom, including broadband; the second, is serious structural separation. Neither will be pretty.

But then, it doesn't have to happen - not if we leave well enough along and let competitive forces work their will.

These remarks were presented at the Cato Institute Conference on Technology and Society: Telecom and Broadband Policy After the Market Meltdown.

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