TCS Daily

Opening the Bottlenecks

By Duane D. Freese - November 5, 2004 12:00 AM

Telecommunications faces a crossroads in the coming year. Will regulators promote competition in the local market after an appeals court decision this year? Or will Congress have to step in to accomplish the task? TCS Deputy Editor Duane Freese questioned Georgetown University economics professor and telecommunications expert John Mayo about what's happened in telecom and what needs to be done to promote growth in the sector and the economy.

Tech Central Station: This has been an eventful year in telecom, particularly with the D.C. Appeals Court overturning FCC rules promoting local phone competition and the subsequent withdrawal of AT&T from much of the residential consumer market. What's your sense of where we are and the prospects for continued competition?

John Mayo: After three decades of bi-partisan support for introducing competition deeper and deeper into telecommunications markets, the D.C. Appeals Court opinion and the administration's decision not to go forward to seek a Supreme Court review create the profound risk, if not imminent reality, of the re-monopolization of traditional telecommunications. Virtually every avenue for entry anticipated under the Telecommunications Act has now either been revealed to be economically unsound (for example, widespread facilities-based deployment) or blocked by competition-stifling regulation (for example, unbundled network access of the platform of network elements). While technologists will point toward the possibility of New Age technologies to solve the monopoly problem, these offer, at best, a medium-to-long run solution to a short run -- in your face -- monopoly problem. And, even the realization of such long-run solutions will require the immediate adoption of competition-enabling policies for which the present FCC has not shown an appetite.

TCS: What can regulators or Congress do to encourage competition in the new environment? Are there different answers in the business market and the consumer market?

Mayo: Regulators would be well served to embrace, as fully as possible, competition-enabling policies that were envisioned under the Telecommunications Act. While both the FCC and the Court of Appeals seem mired on this point, the act's unambiguous support of a no-holds-barred approach toward competition was not missed by the Supreme Court in its Verizon opinion. Unfortunately, the FCC and administration's decisions have directly led vital pro-competitive members of the industry to exit or retreat significantly from residential markets, an area in which no business can logically compete without governmentally mandated access to the "last mile" facilities. The situation is only slightly better in the business market. There, the vast majority of businesses simply cannot be economically served with stand-alone facilities. This suggests that, like the residential market, the FCC's current rulemaking has the potential to kill competition in this arena as well. Barring substantive decisions by the FCC to change course, Congressional action to force open these markets will be necessary.

TCS: Should Congress reopen the 1996 Telecom act? If so, what changes would you like made? Are there different answers for the business and residential market?

Mayo: While students of the industry agree that the current situation is not working to promote competition, there are very different interpretations of why it is not working. My own view is that the act, while not perfect, has many of the necessary foundations to enable the FCC and state regulators to move to truly open local exchange markets to competition. The sound intent of the act has, however, been undermined by the natural proclivities of the incumbent local exchange companies (ILECs) to protect their monopoly positions by whatever means possible. These companies have challenged virtually every court decision that has favored opening telecommunications markets. And, in regulatory circles, the ILECs have spun a "yarn" that policies denying access to markets will actually promote competition. If regulators can avoid these distractions and instead focus on the intent of the act, a massive re-opening of the Telecommunications Act will not be necessary.

TCS: And if regulators don't focus on the act's intent?

Mayo: Then re-opening the act is the only option to do the fundamental fixes necessary to provide a sustainable foundation for telecommunications competition in the future. In the event that the act is opened, the first matters that must be corrected are the unsustainable system of inter-carrier compensation and the terribly inefficient universal service mechanisms that are currently in place.

TCS: Every institution or organization that takes part in this debate seems to line up with one side or the other, i.e. - The Bells or their competitors, the so-called CLECs (Competitive Local Exchange Carriers). Has the tenor of the discussion satisfied you?

Mayo: In a market in which ILECS have monopoly interests in preserving their multi-billion dollar positions within the industry and entrants have self-serving interests in opening markets in an attempt to earn some of those profits, it would be surprising if there were not rancorous debates. The tenor of the debate has not troubled me nearly so much as the decision-making that has on several occasions ignored important lessons from economic theory, from economic history and from the successes of previous pro-competitive telecommunications policies.

TCS: If Congress reopens the act, what can third parties and independent "experts" like yourself do to help it get reform right this time?

Mayo: If the Act is re-opened, it will be critical to re-establish and reinforce the need for a comprehensive, pro-competitive platform for competition in telephony. Economic theory and economic history provide clear and unequivocal evidence that competition-enabling policies will create consumer choice, lower prices, greater innovation and investment. Consumers, businesses and the economy as a whole will benefit far more under an "open" telecommunications model than one that insulates incumbents from competition.

TCS: One of the hot issues on the table right now is VoIP and how to regulate it, particularly whether VoIP should be subject to access fees and whether it should be regulated by the federal government or the states. What's your view?

Mayo: VOIP is one of the potential technological solutions to the short-run re-monopolization of the industry that looms in the immediate future. In order for VOIP to hold any real promise as a viable competitive alternative to the ILECs, it will be necessary that regulators not extend the current anachronistic system of regulatory access fees to this new service. The fact that such access charges have been inappropriately elevated for traditional services does not make it right to extend those fees to VOIP. Simply put: two wrongs don't make a right. Rather, the emergence of VOIP should perhaps be used as a catalyst by the FCC for fundamental reform of the current inter-carrier compensation system, which imposes both competitive and efficiency losses on the industry and economy in the billions of dollars every year.

TCS: Will government decide the future of telecom or the markets? Based on your understanding of business history and markets, do you think consolidation is inevitable?

Mayo: Both economic and policy forces are at work in the industry. Economic forces will drive firms to seek to control and maintain whatever bottlenecks in the industry exist. Economic forces will, as we have seen with the recent Cingular-AT&T Wireless merger, occasionally lead to increased consolidation. Unequivocally, government cannot afford to stand on the sidelines and watch as firms with control of bottlenecks act to exclude rivals. Economic history, however, is not unequivocal on the merits of consolidation. Occasionally, economies of scale and synergies point toward the efficiency merits of mergers and consolidations. On other occasions, mergers are sought to create or enhance market power. Certainly mergers on the scale of the recently approved Cingular-AT&T Wireless merger deserve careful government scrutiny if we are at all serious about promoting or preserving competition.

TCS: Gaze into your crystal ball. What will telecom look like in 2010?

Mayo: Ask me again in five years!


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