TCS Daily

An Open Response to Adam Thierer

By Malcolm Wallop - February 27, 2004 12:00 AM

Recently, you may have received "An Open Letter to Pro-Regulation Conservatives" from the CATO Institute's director of telecommunications studies Adam Thierer challenging the principled policy positions of conservative stalwarts Grover Norquist, Bruce Fein and Jim Glassman on telecommunications policy.

In his open letter, Thierer questions the conservative credentials of Norquist, Glassman and Fein with the assertion that they are somehow "pro-regulation" for supporting Bush Administration policies to open the local phone monopolies to competition. Thierer's letter asks a simple question regarding a competitive telecommunications marketplace: "Do you trust free markets or government mandates to get this done?" Fair question, but asking the question another way shines a light on what this contentious debate is all about: "Do you trust free markets or government-granted monopolies to get this job done?"

As much as Mr. Thierer would like to cloud the debate by arguing that this is a "mandates, not markets" issue, the question is really about "monopolies, not markets" and here apparently Mr. Thierer has clearly come down on the side of monopolies.

Leasing = Competing (What's Good for the Goose is Good for the Gander)

Mr. Thierer suggests that Norquist, Glassman and Fein are somehow betraying their conservative principles by arguing that competitors should have access to the Bell monopolies' infrastructure to offer local phone service. If it's not facilities based, he argues, then it isn't real competition. Following such logic then, the Bell monopolies who are now aggressively offering long distance service in all 50 states, should also be forced to build out their own long distance facilities rather than leasing at steep wholesale discounts the long distance network. If Mr. Thierer truly believes that competition must be facilities based, then surely he'd also agree that the Bells should be prevented from offering long distance service until they too build their own nation-wide long distance networks.

Conveniently for the Bells, they don't need to build their own long distance networks to offer long distance service because competition has already paved the way for them. Thanks in large part to AT&T refusing to open its own network to MCI and Sprint in 1984, Ma Bell was broken up by the Reagan Administration (hardly an Administration known for its devotion to government regulation) into AT&T long distance and the regional Bells. AT&T was required to lease its network to competitors, resulting in vigorous facilities-based competition in long distance today. And with that competition comes choices for the Bells. They don't need to build their own networks today, precisely because there are now multiple facilities-based competitors from which they can choose. And it's precisely that competition that allows the Bells the opportunity to shop for the lowest wholesale rates among facilities-based long distance providers.

What a delicious irony it must be for Mr. Thierer and the Bells that the 1984 decision to force Ma Bell to share its network with competitors has created facilities-based competition today that frees the Bells from having to build their own long distance networks.

Demonizing the Baby Bells or "The Devil's in the Details"

Mr. Thierer also asserts that Norquist, Glassman and Fein advocate "forced access" as a way to compel the Bell monopolies to "atone" for their monopolistic sins. This isn't about atonement, though, it's about requiring the Bells to lease access at compensatory rates, plus profit, to networks built with ratepayer money during nearly a century of government protected monopoly. Mr. Thierer argues unpersuasively that the Bells are no longer monopolies. In fact, since the passage of the Telecommunications Act of 1996, local competition has developed at a glacial pace and the Bell monopolies still control between 85% and 90% of the local markets. That's hardly a competitive environment, but why let a few inconvenient facts get in the way of a good argument.

In an extreme case of pretzel logic, Mr. Thierer cites wireless competition as an example of the new competitive threats the Bell companies face. Given SBC and BellSouth's announcement of their intention to purchase AT&T Wireless for $41 billion last week through their Cingular subsidiary, Mr. Thierer's timing couldn't have been worse. Should the merger be approved (and it should), those two companies alone will have access to 46 million wireless subscribers, and the companies' coverage will extend to 97 out of the nation's top 100 wireless markets. Verizon Communications, another Bell company, has an additional 37.5 million wireless customers throughout the country. It's the height of absurdity to somehow argue that the Bells face competitive threats from their own wireless subsidiaries.

And the Bells aren't going to advance wireless technologies in ways that bypass their telephone wires out-of-region for fears of facing the same threat in-region. Lets face it, the Bells have not competed with each other anywhere over the last 5 years, and they're not going to start now with wireless.

Mr. Thierer also cites Voice over Internet Protocol as a dire threat to the Bell companies, despite the fact that today no such competition exists. While someday VoIP may be a threat to the Bells, today the entire VoIP customer base nationwide is less than 135,000 customers. It's certainly understandable from a business standpoint that the Bell companies would cry wolf about the threat of VoIP, but taking such threats seriously makes for really bad public policy.

Picking Winners & Losers = Industrial Policy

Mr. Thierer singles out Americans for Tax Reform's Grover Norquist for imploring the White House to reject calls by "many deregulation-minded analysts for a 'national broadband policy.'" Conservatives should be interested to know which "deregulation-minded analysts" Mr. Thierer is referring to: In a January 16th letter to the White House -- the letter that Mr. Norquist felt compelled to respond to -- Senator Hillary Clinton, Senator John Kerry and seven other Democrat Senators implored the Bush Administration to enact a "national broadband policy." Since Senator Clinton's last foray into "national policies" almost resulted in a government takeover of our entire national health care system, it's certainly curious to say the least that Mr. Thierer would cite the Senator as a "deregulation-minded analyst."

As Mr. Norquist correctly pointed out, liberals and their big labor allies like the Communications Workers of America would like nothing more than a "national broadband policy" to protect union jobs. CWA's President Morty Bahr has consistently criticized the Bush Administration and Republicans for "creating competition" rather than "pushing out broadband deployment" -- "competition," not surprisingly being the pejorative word for big labor and its liberal allies.

Interestingly, Senator Hillary Clinton's letter to President Bush cites the success of broadband deployment in Japan as one of the reasons a "national broadband policy" is needed. Japan's broadband success story is actually very instructive, but probably not for the reasons Mr. Thierer and Senator Clinton suspect:

According to an October 17, 2003 Wall Street Journal article on broadband rollout in Japan, NTT -- Japan's telephone monopoly -- was lagging far behind the U.S. in fast Internet connections during most of the '90s. While the Japanese monopoly had promised to offer broadband services to every home by the late 1990s, the company hadn't delivered. In 1999, a tiny telecom startup named Tokyo Metallic Communications Corp. asked the government to open the monopoly controlled market for broadband services by forcing NTT to let the smaller company lease its copper wire phone lines for broadband services. The government acted, forcing the NTT monopoly to let competitors access its network at wholesale rates, and today Japan has almost 12 million high-speed Internet subscribers -- a broadband penetration rate of 10%, similar to U.S. levels.

In other words, the success of Japan's broadband rollout occurred precisely because the government forced the national monopoly to allow competitors to access its network, not because the government allowed the company to continue its monopolistic practices -- as Mr. Thierer suggests should be the policy of the Bush Administration today.

The Real "Socialists"

Here's yet another inconvenient fact that seems to have eluded Mr. Thierer: The Bell monopolies never built the local telecommunications network in the first place. Nor did they do any of the heavy-lifting normally associated with a free market: raising the private risk capital, and jumping feet first into the breach of a chaotic marketplace... with no guarantees... where success depends on skill, cunning, and smarts.

In one of the largest corporate welfare giveaways in the history of our federal government, the networks the Bells claim to have built were actually built by the old Ma Bell and were gifted to the local monopolies by the federal government in 1984. The sweetheart deal got even better for the Bells, as the feds generously gave the Bells huge subsidies in the form of access charges and user taxes financed by consumers and long distance companies, and that the Bells continue to receive to this day.

In fact, the Bells themselves are today the ultimate beneficiaries of the old "Soviet-style micromanagement of telecom markets" that Mr. Thierer decries. After benefiting from this massive government giveaway, and continuing to benefit today from huge government subsidies financed by their competitors and consumers, it's a remarkable development that the Bells now condemn regulation in communications. It will be interesting to see how loudly they condemn regulation as the FCC moves later this year to address intercarrier compensation reform and the billions of dollars in above-cost access charge subsidies the Bells continue to receive from ratepayers.

Conservative Pro-Free Market, Pro-Competition Approach

In December of 2002, 22 well-respected national and state free-market organizations, urged the FCC to protect consumers from the Bell monopolies efforts to thwart competition by denying competitors access to their infrastructure. These organizations were joined by numerous other organizations, including the National Federation of Independent Business, who believed then that local competition would lead to lower prices, better service and superior quality for consumers. The marketplace has now borne out the wisdom of this pro-competitive policy: More than 19 million consumer and small business phone users are now served by competitors, and even the Bells themselves have been forced to lower prices and improve service to meet this competitive threat... where it exists.

Mr. Thierer believes that Glassman, Fein and Norquist have asked the free market movement to "follow them down a path that essentially rejects free markets." A free market economy is an economy where consumers have power, not where consumers are held captive. In telecommunications today, there is still not a vibrant free market primarily because monopolistic practices and cartel-like behavior by the Bell companies continues to pervert the marketplace.

While consumers today finally are starting to have a choice in local phone service, the solution that Mr. Thierer proposes would ensure that nothing approaching a free market will ever occur in telecommunications. Free marketers can disagree about this issue, but they should argue the facts and not question others' free market credentials.

The author was elected to the Senate in 1976 and served for eighteen years, retiring in 1994. He is Chairman and Founder of Frontiers of Freedom.


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