TCS Daily

Broadband Misinformation

By Bruce Fein - March 2, 2004 12:00 AM

Internet broadband is flourishing under regulations issued by the Bush administration pursuant to the pro-competition Telecommunications Act of 1996. Average monthly rates have plunged from approximately $80 to $40 or less. Residential and small business subscribers have mushroomed. Broadband is an option for virtually every individual in the United States. The number of broadband households is projected to reach about 50 million by 2009, a tenfold increase in eight years. Nine million new subscribers are anticipated in 2004 alone.

The Wall Street Journal's "Broadband Fiasco" editorial (February 11, 2004) deploring the Administration's anti-monopoly unbundling regulations was uncharacteristically misinformed. The Administration's Triennial Review Order, currently under attack in the United States Court of Appeals for the District of Columbia Circuit, ended unbundling obligations for new broadband construction that previously saddled Baby Bell local phone monopolies. Line sharing that gave birth to Covad and like broadband providers was phased out over three years.

The Baby Bells for years had been chorusing for what the Administration ordered in the TRO. The monopolists promised to invest billions in new fiber and to create countless jobs if they could deny new entrants access to their high speed lines. But when the TRO granted their wishes, the Baby Bells renounced their investment promises.

A new demand emerged. The Administration must also jettison unbundling obligations for their local phone networks to fatten Baby Bell monopoly profits in order to finance new fiber construction. But the claim that the Bells are without the internal funds needed for broadband investment was definitively discredited by the staggering $41 billion cash acquisition of AT&T Wireless by BellSouth and SBC (Cingular). That purchase also disproved a sister Baby Bell canard that wireless is the equivalent of land-line service for antitrust purposes. BellSouth and SBC plan to tie the two together for a flat rate, which would be senseless if the products were identical. Indeed, the percentage of land-line subscribers who have fled exclusively to wireless service approximates a microscopic 2%.

The WSJ Editorial Board neglected to read its own paper in citing the Japanese broadband experience to disparage the Commission's unbundling rules. A featured WSJ story on October 17, 2003, underscored that Japan was lagging behind the United States in broadband until its Ministry of Telecommunications and Fair Trade Commission compelled monopolist NTT to unbundle loops for leasing to competitors at low rates. The broadband tale continued: "[Until unbundling] NTT dragged its feet. Just as the Baby Bells sometimes resisted helping broadband providers in the U.S...."

In any event, the editorial's genuine gripe is not about broadband, but about the Administration's consumer-friendly unbundling rules for the Baby Bells' local phone monopolies. The editorial obtusely champions their abandonment, which would kill or cripple budding competition in favor of industry lethargy and inflated prices in a market responsible for 80% of all telecommunications revenues.

The Baby Bells acquired monopoly power over local exchange service by government gift. Competition was generally illegal until the 1996 Act. With government protection, the Bells constructed local networks that enjoyed immense economies of scale in loops, switches, and transport. For every additional subscriber, the average cost of service dipped. A Republican controlled Congress understood that lurching towards a completely deregulated local exchange market before monopoly power had been clipped would have been economically foolish and inequitable. The 1996 Telecommunications Act thus required the monopolists to unbundle local network elements for leasing at cost-based rates to incubate competition. In exchange, the Baby Bells were authorized to enter long-distance.

The unbundling regime is succeeding. Competitive local exchange carriers (CLECs) have captured 15% of the market and 20 million customers. Residential and small business subscribers are saving approximately $10 billion annually in discount phone prices. Innovative service packages at flat rates are blossoming. The Baby Bells are earning approximately $600 million annually from leasing their networks, and are dominating the long distance market, for example, Verizon's 61% market share in New York. CLECs have invested more than $150 billion in new facilities since the 1996 Act, disproving the Baby Bell contention that unbundling squelches the incentive for new construction. Where the monopolists confront the greatest local phone competition, they invest the most in upgrading their facilities. And no consumer group is pleading to terminate the unbundling regime on the counterfactual theory that it handcuffs phone choices or otherwise.

The telecommunications industry is prospering with unbundling. Thus, Adam Quinton, Merrill Lynch Vice President, underscored before the House Telecommunications Subcommittee on February 4, 2004: "A crucial measure of the health of an industry is cash flow. Combined aggregate free cash flow before dividends in 2001 for all of U.S. telecom service providers covered by Merrill Lynch research was negative $4.1 billion. We estimate that in 2003 it was positive to the tune of $42 billion...Indeed, all of SBC, BellSouth and AT&T have acknowledged their stronger balance sheets and healthy cash flows, raising their dividends to equity owners by between 16 percent and 27 percent in 2003."

The competitive need for unbundling will end when the local exchange market shares of the Baby Bells tumble below 50%. That benchmark equates with AT&T's long distance market share 12 years after the MFJ's antitrust divestiture decree. Instant deregulation of local exchange would perversely reward government created monopolies. They are the least likely candidates for slashing prices, innovating, or pioneering revolutionary technologies like VOIP which would strand their antiquated copper wire investments.

Bruce Fein is a former general counsel of the Federal Communications Commission and former associate deputy attorney general during the Reagan administration.


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