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 thissector since the passage of the Telecommunications Act of 1996continues to menace the marketplace. Though it goes by manydifferent monikers (open access, interconnection, unbundling, linesharing, collocation), there is one defining characteristic of thisregulatory crusade: a lot of people want something for nothing.
In this case, numerous telecom companies and their lobbyingoutfits continue to demand that regulators give them access to thenetworks, facilities, and technologies owned by the Bell OperatingCompanies ("Baby Bells") and that the price of that access be setbelow the actual costs of those services. In the past, whengovernments mandated that private property be commandeered and usedfor some higher common good, it was called socialism. In the moderntelecom marketplace, it's known as competition.
Many public officials have mistakenly come to believe that theycan create competition in this market by mandating that new telecomupstarts be given access to old Baby Bell facilities at a reducedrate so that they can then resell access on their own at a higherrate. But although policymakers were successful in engineering anincrease in the number of firms in this sector, that increase hasalways been an illusory and fleeting form of "competition" to theincumbent players.
Imagine this hypothetical scenario: Lawmakers encourage a largenumber of firms to enter the market for cola beverages by mandatingthat Coke and Pepsi share their soda formulas and manufacturingfacilities with rival firms at a regulated wholesale rate. Newfirms are given the right to purchase soda for 17 to 25 percentless that what it actually cost Coke and Pepsi to produce each canor bottle. Having received the products from Coke and Pepsi at sucha steeply discounted rate, these new "rivals" then turn around andsell 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 begreat, right? No, it wouldn't, because it would not promote genuinecompetitive rivalry to Coke and Pepsi but would instead encourage ahandful of opportunists to make money off an existing productwithout offering the public anything legitimately innovative orunique. Even worse, it might discourage Coke and Pepsi fromcreating new products, since they would likely fear additionalgovernment mandates forcing them to share their innovations withother companies. Finally, while the overall number of firms in themarket would increase temporarily, the charade would end onceinvestors realized there was no legitimate business model behindthis parasitic regulatory scheme.
That scenario illustrates what's happening today in the Americantelecom marketplace. Firms are engaging in a blatant form ofregulatory arbitrage by reselling access to existing lines that thegovernment gave them access to at generously discounted wholesalerates, which are significantly less than the actual cost ofproviding those expensive networks. Under the Telecom Act, suchinfrastructure socialism was to be limited to the old voice-basedcopper lines that the Bells already had in the ground for manyyears while they were still protected monopolies. But theopen-ended language and ill-defined terminology of the Telecom Actencouraged creative and quite expansive interpretations of "access"from the start.
The Federal Communications Commission took full advantage of theact's vague language and formulated a remarkably lengthy andcontroversial set of rules to encourage an increase in the numberof players in the market without worrying about what would happenonce rational markets exposed the regulatory house of cardsembodied in this scheme. While a number of new firms did indeedenter the local telephone market in the late 1990s, by 2000 it wasbecoming increasingly clear that investors would not sustaincompanies that made infrastructure sharing the heart of theirbusiness model. So, even with all the gaming of the systemundertaken by FCC and state regulators in an effort to prop up whattelecom guru Peter Huber of the Manhattan Institute calls aPotemkin Village vision of telecom competition, markets and savvyinvestors saw through this fiasco and started penalizing firms thatdid not adopt more sensible business plans.
Regrettably, however, it has become increasingly obvious thatall this gaming of the system has had a deleterious impact oninnovation and investment. Incumbents have been somewhat reluctantto offer new services for fear of potential sharing requirements.And rivals have forgone new facilities-based investments of theirown since the discounted price of access to existing Bell networksproved to be a deal too enticing to pass up.
Despite this grim reality, the forced-access witch huntcontinues unabated and appears ready to claim another victim:special access services. These are the dedicated private links thatthe Bells provide to long distance telephone companies as well aslarge business customers who demand high capacity lines, primarily(but not exclusively) for data transport. The FCC initiated aNotice of Proposed Rulemaking late last year that raised thequestion of whether these services should be subjected to many ofthe same forced access requirements that have been imposed ontraditional voice networks. Filings last week by the Association for Local Telecommunications Services and theCompetitiveTelecommunications Association enthusiastically support such amove by the FCC, which isn't really surprising given that thesegroups are fanatical anti-Bell zealots. In fact, ALTS presidentJohn Windhausen Jr. went so far as to equate the Bells to massmurderers in a recent pressrelease, in which he claimed, "The Bell Companies are as bad asserial killers; they have become addicted to bad behavior."
Such is the maturity level of the modern debate over telecompolicy in this country. The Bell critics should stop spending somuch time pleading for special favors and start putting their moneywhere their mouth is by investing in networks of their own so thatthey can legitimately square off against the Bells. There's nothingstopping such companies from building their own lines except anill-advised industrial policy that encourages them to hitch a freeride on the existing system instead of building their own.
Forced access has become a public policy fiasco of the highestorder. It was never intended to be a permanent part of the telecomlandscape, but rather it was supposed to be a halfway house on theroad to pure market deregulation. Now it has become an enshrinedarticle of regulatory faith; a quasi-religious doctrine thatproclaims that a numerical nose count of new entrants is moreimportant than network investment and genuine facilities-basedcompetition. Basing the future of this industry on such an ethoswill eventually result in its ruin, since regulatory arbitragecan't work forever. Government price controls and mandatedinfrastructure sharing may create the illusion of temporarycompetition in the short term, but in the long run, the investmentand innovation in new communications infrastructure that America sodesperately needs will be put on hold.