Two Bizarre and Backward Ideas for Broadband Deployment

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The controversial broadband deregulation bill, H.R. 1542, TheInternet Freedom and Broadband Deployment Act of 2001, recentlypassed out of the House Energy and Commerce Committee by a narrowmargin. The bill, which is sponsored by Committee Chairman BillyTauzin (R-La.) and ranking member John D. Dingell (D-Mich.), takessmall but important steps to liberalize the broadband marketplaceby allowing the incumbent local telephone exchange carriers (or"Baby Bells") to offer Internet and data services acrosslong-distance boundaries. The Bells are currently not allowed toserve the long-distance voice marketplace without the approval ofstate and federal regulators. The amended version of the bill wouldalso somewhat limit the line- sharing requirements placed on theBells by the Telecommunications Act of 1996, but it would stillrequire them to share certain portions of their networks withcompetitors.

Final passage of the Tauzin-Dingell bill in the House is farfrom certain, and it appears increasingly unlikely that thelegislation will even see the light of day in the Senate, which isless enthusiastic about deregulation in general. Despite the bill'slimited chances of passage, however, a vociferous and remarkablyacrimonious public advertising campaign has been launched byopponents of the bill. Supporters of the bill have fought back withTV, radio, and print ads of their own. Policymakers and the generalpublic are more than a little confused about what these ads reallymean since the ads speak in vague generalities about how best to"promote competition" and "encourage investment."

But the enemies of broadband deregulation are doing more thanjust spending their millions on annoying ads. They're proposingsome remarkably dangerous regulatory ideas to counter the limitedregulatory relief envisioned under the Tauzin-Dingell measure. Twospecific pro-regulatory proposals are of great concern:

Bad Broadband Idea #1 - New Market Restrictions andAntitrust Authority: Reps. John Conyers Jr. (D-Mich.) andChris Cannon (R-Utah) have introduced two bills, H.R. 1697 and H.R.1698, which would thwart Bell entry into the long distancemarketplace by placing new regulatory and antitrust obstacles intheir way. H.R. 1697, The Broadband Competition and Incentives Actof 2001, would forbid the Baby Bells from serving the long distancemarket if they still served 85 percent of the business orresidential market. H.R. 1698, The American Broadband CompetitionAct of 2001, would go much further by adding two new sections tothe Clayton Act that would significantly step up antitrustenforcement against the Bells if they somehow failed to satisfy theregulatory requirements of the Telecom Act.

Similar proposals to allow increased antitrust oversight byDepartment of Justice were entertained, but ultimately rejected, inthe months preceding enactment of the Telecom Act. Nonetheless, theConyers-Cannon bills would reopen the Telecom Act and reverse thisruling by virtually mandating that the DOJ and the antitrust courtsbecome more active in industry policymaking. Ironically, theprimary reason Congress undertook efforts to pass what waseventually to become the Telecom Act of 1996 was to removeauthority over this sector from the courts and transfer it toCongress. The Conyers-Cannon bills would reverse this trend andinvite unwarranted DOJ meddling in telecom markets and a wave oftime-consuming antitrust litigation.

Incidentally, one of the Conyers-Cannon bills, H.R. 1697, wouldalso authorize the attorney general to make $3 billion in directloans or loan guarantees to broadband service providers to helpencourage competition with incumbent local carriers. This proposalis unprecedented in that it would put the Department of Justice inthe position of becoming a market facilitator, a role usuallyreserved for the Department of Agriculture or the Department ofCommerce. Moreover, such subsidy efforts are tantamount to thecreation of a New Deal entitlement mentality for the Internet.Markets--not mandates or subsidies--are the best way to spreadbroadband.

Bad Broadband Idea #2 - A Second Baby BellBreakup: A far more radical proposal is simultaneouslybeing floated by many of the same parties that are supporting theConyers-Cannon effort. Although the telephone industry alreadyunderwent a major breakup in 1984, some parties are calling for asecond divestiture for this marketplace. While the firstdivestiture divided the telephone market into two major segments(long distance and local), this divestiture would further subdividethe local telephone market into wholesale and retailcomponents.

These so-called "structural separation" proposals represent atruly disturbing and completely unworkable industrial policy. It isdifficult to comprehend how the unnatural wholesale-retail divisionwould actually work, given that all wholesale and retail activitiestake place over the same sets of wires. Moreover, this proposalwould discourage network investment and innovation by treatinglocal telecom infrastructure as a shared resource. Finally, itwould wreak havoc on financial markets by essentially expropriatingassets owned by millions of individual and institutionalshareholders. Structural separation proposals, therefore, representa dangerous step backward toward the old regulated monopoly modelof telecom industry micromanagement.

Both of these ill-advised regulatory efforts are based on thepremise that the local loop and rural marketplace are hopelesslyuncompetitive and devoid of sufficient investment. But that is notreally the case any longer. It is important to recognize that thelocal telephone loop now faces credible competition from wirelesscarriers. In an important study in the August 1999 edition of theHastings Law Journal, economists J. Gregory Sidak, Hal J.Singer, and David Teece, note, "Wireless local telephony alreadyprovides a substitute for wireline access."

The authors go on to ask: "If wireless is indeed an accesssubstitute for wireline copper loops, and if wireless thus permitsthe competitive supply of bundled services that are satisfactorysubstitutes in consumers' minds for the typical bundle of servicesthat consumers have until now demanded in conjunction with standardwireline access, then Congress, the FCC, the state public utilitiescommission, and the courts must ask: Is the great experiment ofmandatory unbundling of telecommunications networks worth thecandle?"

Precisely. But why is no one else in the public policy communityasking that same question? Though it would certainly be preferableto have even more facilities-based competitors to the localtelephone incumbents, the radical and incredibly intrusiveregulatory remedies that are currently being proposed to facilitatethis objective are not justified.