Growing, Growing, Gone? The Future of Telecommunications Regulation

By Solveig Singleton
September 26, 1998

Tired of waiting for the Starr report to download? Blame the shortage of bandwidth. We need bigger digital pipelines to speed video, voice and data connections to our homes and offices. Electronic commerce waits for consumers to get faster on-line access. Digital traffic jams discourage would-be telecommuters. Ultimately, perhaps there will be virtual reality field trips, business conferencing and grocery shopping over the Internet. But not yet. Not without true deregulation.

In regions like West Virginia, Internet backbones, the conduits of fiber optic cable that carry massive amounts of long-haul Internet traffic, are scarce. Even in more developed areas, most connections to homes and small businesses are low-speed, low-capacity lines.

In any other industry, a situation like this would attract new investment. But the growth of bandwidth one would expect in the face of demand has not materialized. The pace of innovation in equipment and consumer applications, from digital television to Internet telephony, has outstripped the evolution of the networks. This is no market failure. It is the revenge of the regulators.

The story begins with the best of intentions at the Federal Communications Commission. Through the 1970s and 1980s, bright economists at the agency realized that archaic regulation of telephone and broadcast service was not working, and they began to roll back regulation. Along the way, they ended the Fairness Doctrine, which mandated that broadcasters be “fair” — and discouraged radio and television from tackling controversial issues for fear of endless entanglement in adjudications of “fairness.” When the Fairness Doctrine died, radio and television responded with an explosion of programs that cover heated public debates.

The FCC could only do so much without help from Congress. Responding to the overwhelming consensus that telecommunications could not thrive without statutory deregulation, Congress passed the Telecommunications Act of 1996. Today, though, telecommunications is back to business as usual. An activist FCC has found new ways to keep itself busy, while competitors trade bitter accusations and file reams of paper. The promised explosion of bandwidth is fizzling out.

What went wrong? Defenders of the 1996 act say that, for now, we need the FCC and regulation, to grow competition. Deregulation can come later. But the micro-managed “competition” and expanded universal service the FCC now favors come at a high cost: the innovation and investment that free markets will bring.

For the time being, building bandwidth has taken a back seat to short-term political goals, most of them manifested by little more than finger pointing and name calling. Lobbyists, pundits and politicians find it easy to bash the former Bell Operating Companies. But if those companies were freed to enter long-distance markets, they would be among the most active new investors in long-distance high-speed data networks.

Some lawmakers and regulators like to point fingers at cable companies for raising rates. But we would do better to recognize that regulating, deregulating, reregulating, rederegulating and rereregulating cable rates hardly invites the investment in cable networks necessary for them to grow into next-generation two-way data networks.

What about bandwidth in rural areas? Regulators took the easy road, promising lots of other people’s money to fund telephone service for rural areas and for other kinds of “universal service.” Then they complained when AT&T and other companies had the guts to let the public know about those hitherto hidden taxes by including the information on bills. But the abandonment of price regulation and universal service cross-subsidies would do much more for bandwidth than taxing and spending by sleight of hand. To encourage competition, prices must be allowed to rise and fall freely. Price regulation discourages new entrants. Who wants to compete against a subsidized company whose rates are held below the market price? If prices are free to rise, investors will be encouraged to deploy satellite technology and other innovations to bring lower costs and amazing new services to the next generation of rural residents. Subsidies, on the other hand, create a self-fulfilling prophecy of stagnation.

More bandwidth across the board would come from freeing the electromagnetic broadcast spectrum from Soviet-style central planning and licensing. Private owners should be allowed to buy and sell property rights to spectrum and use it as they please. Wireless and satellite technologies could lead the way in bringing low-cost bandwidth to homes, schools and businesses for everything from local phone service to Internet access.

The Telecommunications Act of 1996 has failed to break the bandwidth bottleneck. The act deserves a little credit for removing some legal barriers to competition. But in many areas the act failed to recognize that deregulation means freedom. A statute that makes it illegal for Company A to compete with Company B is not a good thing. But allowing competition only if Company A spends two years wrestling with regulators and subsidizes Company C is not much better. The guiding principle of the next generation of reforms should be: regulatory discretion is not freedom. Markets need freedom to operate, and only when they are freed will we see new bandwidth.

Solveig Singleton is director of information studies at the Cato Institute and coeditor of a new book from Cato, Regulators’ Revenge: The Future of Telecommunications Deregulation.