TCS Daily

A 'Doofus' Position

By James K. Glassman - December 19, 2002 12:00 AM

The Wall Street Journal's editorial page is the best in the world. But even the best make embarrassing mistakes - which is the nicest thing I can say for the Journal editorial that appeared Tuesday under the headline, "Telecom Meltdown, the Sequel."

The editorial conflated two very different high-tech issues. On the one hand, the Journal appropriately criticized FCC Chairman Michael Powell's decision to block a merger between the nation's two major satellite TV companies. On the other hand, the Journal naively accepted - hook, line, and sinker - the claims by the Bell companies that, if the FCC doesn't gut the 1996 Telecommunications Act, their survival is at stake. Thus, second "meltdown."

What the Bells want is to continue and extend their century-old monopoly by getting the FCC to enact new rules to wipe out their pesky competitors - tough companies that have persevered against all odds and are now bringing consumers something they've never seen before: real choice, which in turn has led to lower prices and better service.

Choice and competition were the objectives of the law to deregulate telecom - passed six years ago with the vote of every free-market conservative in Congress. Support for the law was confirmed just last week in a letter signed by leaders of 22 conservative groups, including Grover Norquist of Americans for Tax Reform and David Keene of the American Conservative Union.

Among other things, conservatives worry that the Federal Communications Commission under Powell, a protégé of Clinton administration anti-trust chief Joel Klein, will aggressively set industrial policy and usurp the proper authority of the states.

After years of foot-dragging, lawsuits and lobbying by the Bells, the reform regime in telecom is finally succeeding. For evidence, the editorialists at the Journal could have turned to the news pages of their own paper - to a Dec. 12 article headlined, "Baby Bells Lose Clients to AT&T, WorldCom."

The reporter, Yochi J. Dreazen pointed out, for example, that every day nearly 2,000 Michigan residents switch their local phone service from SBC, the second-largest Bell. As a result, over the past four months, SBC has "cut the prices on many of its local packages by as much as 30 percent." In New York, 5 million consumers have changed phone providers and, according to a study, are saving up $324 annually per line.

As Dreazen writes, "The Bells could be excused for having thought this day would never come. As recently as the beginning of this year, the Bells looked invincible after the demise of hundreds of upstart local companies whose creation was prompted by the Telecommunications Act of 1996."

Now, thanks to state implementation of sensible UNE-P (unbundled network element platform) pricing based on costs, telephone competition is spreading. By the end of this year, 10 million U.S. households will be getting local service from a non-Bell, up from 7.5 million in July.

The Bells, in their desperation, keep trying to find new reasons to turn back the clock and kill the law that has brought all this competition. First, they claimed there was a broadband "crisis." Alas, broadband subscriptions have been soaring, even in a time of economic stagnation.

The latest argument by the Bells (to the politicians, not to the stock analysts) is that they face financial trouble - and the Journal editorial, in coy language, appears to accept this outrageous assertion: "The Bells - Verizon, SBC and Bell South - once looked like the least-beaten-up winners of the telecom wars. Rumors of their survival may have been premature."

In fact, according to the Value Line Investment Survey, SBC and Verizon, the two largest Bells by far, will this year have revenues of $120 billion and earnings of $16 billion. Return on equity for each company is a whopping 22.5 percent, and each is ranked "A+" (just one notch below the highest rating) for financial strength. Yes, the Bells have lost local customers, but they have gained long-distance customers. Suddenly, there is competition in both local and long-distance, which is exactly what the Telecom Act envisioned.

While most free-market supporters back the approach to deregulation embodied in the 1996 law, intelligent people can differ. The problem with the Journal editorial was that it didn't meet its own high standards.

These are serious issues, and they require serious consideration. The Journal editorial, however, glibly tossed around phrases like "doofus regulatory distinction," in an attempt, I suppose, to make complicated matters seem oh-so-easy. There's nothing doofus about any of this - except, perhaps, the Bells' claim (echoed by the Journal) that their "survival" is at stake.

The Journal seems to blame the "telecom meltcom" on regulators. In fact, between 1996 and 2001, the revenue of U.S. telecom providers grew at an average annual rate of 4.3 percent. This is a growing, not shrinking, sector of the economy. Certainly, there have been huge declines in many telecom stocks, but the losses were the result of technology breakthroughs, increased competition and, in some cases, irrationally exuberant expectations, which in turn led to plummeting prices for consumers and businesses. What's wrong with that?

As Adam Smith wrote in 1783: "Consumption is the sole end and purpose of all production, and the interest of the producers ought to be attended to, only in so far as it may be necessary for promoting that of the consumer." The Journal, and other backers of the Bell position, fret that these particular producers need protection against competition. Otherwise, a "second telecom meltdown" will occur. In truth, however, consumers are benefiting from the current competitive regime. Producers, to put it bluntly, should fend for themselves.

The Journal editorial concludes, "[T]he Bells should be allowed their best chance to prosper in the new world." Absolutely. And their best chance is to accept the fact that the benefits of being a regulated monopolist are over. This is a new competitive world. And it is a tough one. In the past, lawsuits and cozy relations with regulators reigned. Now, the best technology and the smartest manager will determine the winners.



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