TCS Daily

Where's the Revolution?

By Duane D. Freese - February 6, 2006 12:00 AM

When President Bill Clinton signed the Telecommunications Act of 1996 on Feb. 8 that year, he called it "truly revolutionary legislation" and proclaimed that "with a stroke of a pen, our laws will catch up with the future."

If it was a revolution, in some respects it was a revolution sideways.

The current situation certainly doesn't fit the visions of the act's authors. Former Sen. Larry Pressler, R-S.D., had opined in the euphoria after passage that it would spur great innovation "by getting everybody into everybody's business." The theory was that long distance and cable companies would get into local phone. Local phone and cable into long distance. Long distance and local phone into video transmission. The competition would bring lower prices for consumers and a grand array of wonderful new services as the nation became laced with high-speed fiber optic networks to meet an information-hungry society's expanding economic needs.

The seven regional Bell operating companies consolidated into four, and two of them -- SBC and Verizon -- have completed mergers swallowing up long-distance giants AT&T and MCI (a.k.a. WorldCom). The four continue to control 85% of local phone lines, with the average rate for a residential access line after inflation costing more in 2003 than in 1996.

Multi-channel video is worse. There's competition from satellite providers, but that's pretty much it. On the wired side, cable giants such as Cox, Comcast and Time-Warner dominate the video delivery field. As a result, cable rates have risen 3% faster than inflation since 1996.

And while it prompted some capital investment -- with expenditures on telecom skyrocketing from $60 billion to more than double that between 1996 and 2001 -- they by 2003 tumbled below 1996 levels.

On this 10th Unhappy Anniversary of the Telecom Act, it is thus important to understand what has gone wrong -- and right -- in communications as Congress prepares reforms.

One lesson from the 1996 Act is that managed competition doesn't work.

For starters, the profits of both regional Bell operating companies and competitive local exchange carriers, including long distance companies, got eaten up in endless regulatory arbitrage. The FCC simply lacked both the will and legally the clout, as court decisions ultimately made clear, to force open the Bells' lines. And the Bells had little economic incentive to open them.

The economic carrot they were offered was long distance service. But it was a service that was being chomped down by three uncontrolled rabbits -- the cellular phone industry, in which the Bells had big stakes; the Internet, which regulators and Congress had granted hands off protection; and new technology.

Overall, cell phone usage went from 38 million in 1996 to over 180 million by the end of 2004, while the Internet with its ubiquitous free email and instant messaging went from virtually nothing to reach 68% of North America's population over the last decade. Energizing each has been the development of voice over Internet protocol (VoIP) which has increased carrying capacity, security and reliability of communications systems, actually turning Internet phone calls from a toy for hobbyists to a tool for business.

Little wonder, then, that long distance, once the profit prize, saw revenues plummet from a peak of $93 billion in 1999 to below $60 billion by 2003, while wireless revenues with anytime, anywhere pricing packages doubled in that same period to $85 billion and Internet companies such as Google surpassed in capital the largest telecom company.

The Telecom Act's so-called "deregulation," as Pressler said, had a "fair amount of regulation." Way too much. The act itself ran 128 pages, each of which required the FCC to write about 100 pages of regulation to implement. And every page of it put money in the pockets of lobbyists and lawyers, but little into new broadband pipes and better services.

So what should Congress do now? Well, if hands off the Internet and cell phones worked to spread them, how about hands off of broadband?

To start with, how about getting rid of the local franchise rules so telephone companies or other new entrants can provide video services over the high-speed broadband pipes with which they are replacing their old copper phone systems?

Current cable franchising provisions were outlined by the Cable Act of 1992. It declared the local community owned franchising rights, could impose franchising fees of up to 5% of a cable provider's gross revenues for cable services and could require the cable provider to make available capacity for public, education, and government programming. In addition, local franchises could set build out requirements so that cable providers served the whole community, not just a part of it.

When Congress in 1994 considered rolling back these franchise rights as part of telecommunications reform, state and local officials raised hell. "Congress was attempting to disempower local governments in the name of freedom for the telecommunications industry," said James L. Ley, an assistant county manager for Clark County, Nev., "we almost lost our right to self-determination.

"It was spun to Congress that local governments were just another unneeded, regulatory roadblock in the path toward building the information superhighway, and they should be eliminated," he said.

It turns out that those who did that spinning were right, as cable and phone competition demonstrate.

Cable companies were freed by the Telecom Act from having to get a franchise to provide phone service, enabling 3 million consumers to bundle together their voice and video services. Meanwhile, phone companies have been constrained from providing video services by arcane, anti-competitive local franchise rules.

As Sanford Bernstein & Co. cable and satellite analyst Craig Moffett noted, franchise build out requirements not only alter the economics for phone companies to provide service, but make it "logistically difficult to comply with franchise agreements to completely cover entire franchise areas" as "the Bells' fiber build outs will occur central office by central office, not along franchise-area boundaries."

And as a Phoenix Center study pointed out, communities and their consumers will benefit if competition happens - but it has to happen for there to be a benefit. And build out requirements deter that.

Elimination of cable franchise rules would be the biggest thing Congress could do to actually accomplish what Pressler and other reformers wanted in 1996 -- "getting everybody into everybody's business."

Managed competition is a loser - for consumers and the country. Congress as it looks at reforms needs to avoid creating new rules and protections and instead remove barriers to competition and let market forces start to work. Otherwise, a decade from now we'll all be looking back and still asking: Where's the revolution?

TCS Daily Archives