Pipe dreams: Will Rush To Deregulate Telecom Really Expand Broadband?

Deregulation is all the rage in the new Congress and the incoming Bush administration. Indeed, some members of Congress already are spouting pipe dreams—promises of how faster telecommunications deregulation will quickly bring faster communications lines into people's homes and offices.

Politicians will rue the day they made that promise. Their constituents will expect results, and results won't be forthcoming. The reason is simple: the kind of "deregulation" that these politicians want would kill off competitors to the local telephone companies—which, over the past few years, have become remonopolized (merged into just four behemoth firms)—and would almost certainly lead to slower, not faster, dissemination of speedy broadband Internet connections.

Guess who will be blamed for the failure? Not so much the phone companies as the members of Congress and the Administration themselves.

The thirst for such broadband pipes -cable, telephone digital subscriber lines (DSL), fixed wireless or satellite—is considered insatiable. Morgan Stanley Dean Witter forecasts global bandwidth demand for carrying data, voice and video will expand 12 fold in the next four years. This follows a near doubling in demand in just the last year. Broadband is the key to opening fabulous new services to consumers—such as plucking any video you want right off the Internet rather than running down to the store.

Many in Congress claim the only way to meet this demand is to open the data long-distance markets to those local monopolists, the regional Bell operating companies. "The dynamic has completely changed from a few months ago," Rep. Robert Ehrlich, R-Md., a member of the House panel overseeing telecommunications, told Multichannel News recently. "I suspect a broadband bill will move … very early in the 107th Congress."

By a "broadband bill," Ehrlich means the legislation that has been circulating in Congress that, incredibly, would allow the local Bell monopolies to get into the data part of the long-distance business without opening their local switch to competition. The data part—that is, the online or Internet part—is the profitable part of the long-distance business, the other being the voice part, which cutthroat competition has knocked rates down in recent years from a dollar or more per minute to only a few cents. The data part already represents more than half the long-distance volume, and, in a few years, will represent about 80 percent.

The idea of the Telecommunications Act of 1996 was to let the Bells into long distance only after they had cooperated in opening up their own local systems to competitors. So far, they have accomplished this feat in only two states. Now, with the chance to get into long distance without the quid pro quo, they are dragging their feet—and, as a result, local rates remain uncompetitive and high and the rollout of broadband has faltered.

In making his prognostication, Ehrlich was in the right place—Las Vegas. At the very least, any sudden move to deregulate the Bells is a huge gamble. All members of Congress have to do is look at the history of the Bells' promises to businesses, consumers and state lawmakers a decade ago to see the dangers of deregulating them before competition in the local market takes hold.

Southwestern Bell in its 1986 annual report claimed that high-speed integrated service digital networks—ISDN—would become commercially available by 1988 and "revolutionize day-to-day communications." Ameritech in its 1991 annual Report did the same, with "results in higher productivity and lower on-line charges for consumers." Other Bell companies did much the same.

But the high-speed networks never happened. What did happen, as outlined by Bruce Kushnick in "How the Bells Stole America's Digital Future," was relief for the Bells from onerous cost-based rate-of-return regulation. The states gave them generous incentives to spur the advent of those services. Instead of hooking homes to broadband, though, they simply bilked consumers for bigger profits. Their profit margins from local service increased to almost four times those of competitive long-distance companies. Local prices either stayed the same or in some increased, as long-distance rates plummeted.

Where has that money gone? The local monopolies, formed with the breakup of AT&T, used the cash to buy each other up, along with smaller competitors. Where once there were seven regional Bells and GTE, only four Bells remain. And they are gigantic. For example, as of last week, AT&T had a market capitalization—or stock value, according to investors—of $150 billion. If that sounds large, it isn't. Verizon, a remonopolized Bell formed from NYNEX, Bell Atlantic and GTE, has the same market cap as AT&T, while the cap of SBC, another remonopolized giant, is even larger. What do consumers think of this development? Most of them, of course, are unaware of the corporate machinations, but they are screaming about poor service.

How would further deregulation of the Bells to allow them into long distance service do anything to advance competition? Domestic long-distance prices can't fall much further, and the Bells continue to control 95 to 98 percent of local markets. And as a report for the Organization of Economic Cooperation and Development noted, they are cross-subsidized to the tune of $6 billion to $15 billion by the very long-distance carriers with which they would compete.

I bow to no one in my zeal for deregulation. Anyone who has read my articles and columns over the years knows that. But deregulation of businesses that have been nurtured and reinforced by government regulators over a century is a tricky business. It cannot happen overnight. To have simply allowed the local Bells to expand into new lines of endeavor immediately would have squashed competition flat. Successful deregulation in the past—whether it was airlines or trucking or long-distance phone service—was phased in over years to allow competition to develop. Damaging deregulation has occurred when old participants have gotten new powers without facing market forces to hold them in check. The freeing of the savings and loan from lending restrictions, for example, wreaked financial havoc.

Congress and President Clinton understood that fact, and they fashioned a law in 1996 that would phase in deregulation through an incentive system. It was a triumph for all concerned, but, as soon as it was signed, the local Bell monopolies, which had agreed to it, began to attack it in the courts. When they lost, they started to drag their feet. When that didn't work, they turned to Congress to gut the old law.

Only the risk of losing their local market to either cable modems or wireless or some new technology will spur the Bells to deliver their own version of broadband—DSL—at affordable prices for consumers. And only by the Bells having to meet a strict standard for entry into long-distance markets will local competition emerge.

A vote for rapid deregulation of the Bells could end up much like a vote from a fledgling democracy for a totalitarian regime—one choice now, no choice thereafter. And then the nation's hopes for a rapid delivery of broadband services, so important to the flourishing of the New Economy, would truly become a pipe dream.