TechKnowledge No. 32

Forced Access Follies Continue: The Case of Special Access Services

By Adam D. Thierer
January 28, 2002

Romper Room economics are alive and well in the U.S. telecommunications industry. The “let’s share everything” regulatory philosophy that has driven public policymaking in this sector since the passage of the Telecommunications Act of 1996 continues to menace the marketplace. Though it goes by many different monikers (open access, interconnection, unbundling, line sharing, collocation), there is one defining characteristic of this regulatory crusade: a lot of people want something for nothing.

In this case, numerous telecom companies and their lobbying outfits continue to demand that regulators give them access to the networks, facilities, and technologies owned by the Bell Operating Companies (“Baby Bells”) and that the price of that access be set below the actual costs of those services. In the past, when governments mandated that private property be commandeered and used for some higher common good, it was called socialism. In the modern telecom marketplace, it’s known as competition.

Many public officials have mistakenly come to believe that they can create competition in this market by mandating that new telecom upstarts be given access to old Baby Bell facilities at a reduced rate so that they can then resell access on their own at a higher rate. But although policymakers were successful in engineering an increase in the number of firms in this sector, that increase has always been an illusory and fleeting form of “competition” to the incumbent players.

Imagine this hypothetical scenario: Lawmakers encourage a large number of firms to enter the market for cola beverages by mandating that Coke and Pepsi share their soda formulas and manufacturing facilities with rival firms at a regulated wholesale rate. New firms are given the right to purchase soda for 17 to 25 percent less that what it actually cost Coke and Pepsi to produce each can or bottle. Having received the products from Coke and Pepsi at such a steeply discounted rate, these new “rivals” then turn around and sell the beverages under their own brand name for a profit.

As a result, several dozen new “competitors” enter this market, in which there are presently only two primary providers. That’d be great, right? No, it wouldn’t, because it would not promote genuine competitive rivalry to Coke and Pepsi but would instead encourage a handful of opportunists to make money off an existing product without offering the public anything legitimately innovative or unique. Even worse, it might discourage Coke and Pepsi from creating new products, since they would likely fear additional government mandates forcing them to share their innovations with other companies. Finally, while the overall number of firms in the market would increase temporarily, the charade would end once investors realized there was no legitimate business model behind this parasitic regulatory scheme.

That scenario illustrates what’s happening today in the American telecom marketplace. Firms are engaging in a blatant form of regulatory arbitrage by reselling access to existing lines that the government gave them access to at generously discounted wholesale rates, which are significantly less than the actual cost of providing those expensive networks. Under the Telecom Act, such infrastructure socialism was to be limited to the old voice-based copper lines that the Bells already had in the ground for many years while they were still protected monopolies. But the open-ended language and ill-defined terminology of the Telecom Act encouraged creative and quite expansive interpretations of “access” from the start.

The Federal Communications Commission took full advantage of the act’s vague language and formulated a remarkably lengthy and controversial set of rules to encourage an increase in the number of players in the market without worrying about what would happen once rational markets exposed the regulatory house of cards embodied in this scheme. While a number of new firms did indeed enter the local telephone market in the late 1990s, by 2000 it was becoming increasingly clear that investors would not sustain companies that made infrastructure sharing the heart of their business model. So, even with all the gaming of the system undertaken by FCC and state regulators in an effort to prop up what telecom guru Peter Huber of the Manhattan Institute calls a Potemkin Village vision of telecom competition, markets and savvy investors saw through this fiasco and started penalizing firms that did not adopt more sensible business plans.

Regrettably, however, it has become increasingly obvious that all this gaming of the system has had a deleterious impact on innovation and investment. Incumbents have been somewhat reluctant to offer new services for fear of potential sharing requirements. And rivals have forgone new facilities-based investments of their own since the discounted price of access to existing Bell networks proved to be a deal too enticing to pass up.

Despite this grim reality, the forced-access witch hunt continues unabated and appears ready to claim another victim: special access services. These are the dedicated private links that the Bells provide to long distance telephone companies as well as large business customers who demand high capacity lines, primarily (but not exclusively) for data transport. The FCC initiated a Notice of Proposed Rulemaking late last year that raised the question of whether these services should be subjected to many of the same forced access requirements that have been imposed on traditional voice networks. Filings last week by the Association for Local Telecommunications Services and the Competitive Telecommunications Association enthusiastically support such a move by the FCC, which isn’t really surprising given that these groups are fanatical anti-Bell zealots. In fact, ALTS president John Windhausen Jr. went so far as to equate the Bells to mass murderers in a recent press release, in which he claimed, “The Bell Companies are as bad as serial killers; they have become addicted to bad behavior.”

Such is the maturity level of the modern debate over telecom policy in this country. The Bell critics should stop spending so much time pleading for special favors and start putting their money where their mouth is by investing in networks of their own so that they can legitimately square off against the Bells. There’s nothing stopping such companies from building their own lines except an ill-advised industrial policy that encourages them to hitch a free ride on the existing system instead of building their own.

Forced access has become a public policy fiasco of the highest order. It was never intended to be a permanent part of the telecom landscape, but rather it was supposed to be a halfway house on the road to pure market deregulation. Now it has become an enshrined article of regulatory faith; a quasi-religious doctrine that proclaims that a numerical nose count of new entrants is more important than network investment and genuine facilities-based competition. Basing the future of this industry on such an ethos will eventually result in its ruin, since regulatory arbitrage can’t work forever. Government price controls and mandated infrastructure sharing may create the illusion of temporary competition in the short term, but in the long run, the investment and innovation in new communications infrastructure that America so desperately needs will be put on hold.

Adam Thierer (athierer [at] cato [dot] org) is the director of telecommunications studies at the Cato Institute in Washington. To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.