Who Killed Telecom? Why the Official Story Is Wrong

February 7, 2005 • Policy Analysis No. 533

In the mid‐​1990s as it seemed that lawmakers were about to abandon much of the regulatory apparatus that had hampered the telecommunications industry since the 1930s, the telecom equipment industry began to boom, helped in part by the rise of the Internet. The deregulatory trend led ultimately to the 1996 Telecom Act, and soon the architects and implementers of that act were congratulating themselves on a job well done. We were supposedly building a new telecom infrastructure fit for the information age.

Then, in 2000, shipments of telecommunications equipment went into sharp decline, and construction of the information age infrastructure came to a grinding halt. Lots of money and jobs were lost, and the new class of telecom industry executives that had emerged in the post‐​deregulatory era got most of the blame. These people were thought to be manipulating the market and misleading consumers about sales and growth. Once the truth came out—so goes the “official” story—the market collapsed.

However, even a fairly cursory glance at the actual history of this period suggests that the “official” story exaggerates the powers of senior telecom executives and that a far better place to look for a source of telecom’s collapse is the Federal Communications Commission, which at the time was determined to crowd as many firms as possible into the telecom sector. That strategy was to be achieved by lowering barriers to entry and, in particular, by giving newcomers low cost access to the networks of the carriers. When it became obvious that the market was top heavy with competitors, the telecom bust occurred.

It would have been far better if deregulation had simply let market forces do their work without scoring success primarily on the number of competitors. If there was worry that the incumbent carriers were so powerful that no meaningful competition could emerge, policymakers should have taken a look at newer technologies such as wireless and voice‐​over‐​IP, which are potentially highly disruptive of the incumbent players’ position. The good news is that the kind of regulatory measures that brought about the telecom bust now look like they are failing legal challenges. But what happened to telecom in the late 1990s remains a cautionary tale of how reforming regulation rather than truly deregulating can lead to disaster. With Congress potentially poised to re‐​open and revise the Telecom Act, lawmakers must learn from the mistakes of the past and ensure they do not repeat them.

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