Two Bizarre and Backward Ideas for Broadband Deployment

May 23, 2001 • TechKnowledge No. 9

The controversial broadband deregulation bill, H.R. 1542, The Internet Freedom and Broadband Deployment Act of 2001, recently passed out of the House Energy and Commerce Committee by a narrow margin. The bill, which is sponsored by Committee Chairman Billy Tauzin (R‐​La.) and ranking member John D. Dingell (D‐​Mich.), takes small but important steps to liberalize the broadband marketplace by allowing the incumbent local telephone exchange carriers (or “Baby Bells”) to offer Internet and data services across long‐​distance boundaries. The Bells are currently not allowed to serve the long‐​distance voice marketplace without the approval of state and federal regulators. The amended version of the bill would also somewhat limit the line‐ sharing requirements placed on the Bells by the Telecommunications Act of 1996, but it would still require them to share certain portions of their networks with competitors.

Final passage of the Tauzin‐​Dingell bill in the House is far from certain, and it appears increasingly unlikely that the legislation will even see the light of day in the Senate, which is less enthusiastic about deregulation in general. Despite the bill’s limited chances of passage, however, a vociferous and remarkably acrimonious public advertising campaign has been launched by opponents of the bill. Supporters of the bill have fought back with TV, radio, and print ads of their own. Policymakers and the general public are more than a little confused about what these ads really mean 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 than just spending their millions on annoying ads. They’re proposing some remarkably dangerous regulatory ideas to counter the limited regulatory relief envisioned under the Tauzin‐​Dingell measure. Two specific pro‐​regulatory proposals are of great concern:

Bad Broadband Idea #1 — New Market Restrictions and Antitrust Authority: Reps. John Conyers Jr. (D‐​Mich.) and Chris Cannon (R‐​Utah) have introduced two bills, H.R. 1697 and H.R. 1698, which would thwart Bell entry into the long distance marketplace by placing new regulatory and antitrust obstacles in their way. H.R. 1697, The Broadband Competition and Incentives Act of 2001, would forbid the Baby Bells from serving the long distance market if they still served 85 percent of the business or residential market. H.R. 1698, The American Broadband Competition Act of 2001, would go much further by adding two new sections to the Clayton Act that would significantly step up antitrust enforcement against the Bells if they somehow failed to satisfy the regulatory requirements of the Telecom Act.

Similar proposals to allow increased antitrust oversight by Department of Justice were entertained, but ultimately rejected, in the months preceding enactment of the Telecom Act. Nonetheless, the Conyers‐​Cannon bills would reopen the Telecom Act and reverse this ruling by virtually mandating that the DOJ and the antitrust courts become more active in industry policymaking. Ironically, the primary reason Congress undertook efforts to pass what was eventually to become the Telecom Act of 1996 was to remove authority over this sector from the courts and transfer it to Congress. The Conyers‐​Cannon bills would reverse this trend and invite unwarranted DOJ meddling in telecom markets and a wave of time‐​consuming antitrust litigation.

Incidentally, one of the Conyers‐​Cannon bills, H.R. 1697, would also authorize the attorney general to make $3 billion in direct loans or loan guarantees to broadband service providers to help encourage competition with incumbent local carriers. This proposal is unprecedented in that it would put the Department of Justice in the position of becoming a market facilitator, a role usually reserved for the Department of Agriculture or the Department of Commerce. Moreover, such subsidy efforts are tantamount to the creation of a New Deal entitlement mentality for the Internet. Markets–not mandates or subsidies–are the best way to spread broadband.

Bad Broadband Idea #2 — A Second Baby Bell Breakup: A far more radical proposal is simultaneously being floated by many of the same parties that are supporting the Conyers‐​Cannon effort. Although the telephone industry already underwent a major breakup in 1984, some parties are calling for a second divestiture for this marketplace. While the first divestiture divided the telephone market into two major segments (long distance and local), this divestiture would further subdivide the local telephone market into wholesale and retail components.

These so‐​called “structural separation” proposals represent a truly disturbing and completely unworkable industrial policy. It is difficult to comprehend how the unnatural wholesale‐​retail division would actually work, given that all wholesale and retail activities take place over the same sets of wires. Moreover, this proposal would discourage network investment and innovation by treating local telecom infrastructure as a shared resource. Finally, it would wreak havoc on financial markets by essentially expropriating assets owned by millions of individual and institutional shareholders. Structural separation proposals, therefore, represent a dangerous step backward toward the old regulated monopoly model of telecom industry micromanagement.

Both of these ill‐​advised regulatory efforts are based on the premise that the local loop and rural marketplace are hopelessly uncompetitive and devoid of sufficient investment. But that is not really the case any longer. It is important to recognize that the local telephone loop now faces credible competition from wireless carriers. In an important study in the August 1999 edition of the Hastings Law Journal, economists J. Gregory Sidak, Hal J. Singer, and David Teece, note, “Wireless local telephony already provides a substitute for wireline access.”

The authors go on to ask: “If wireless is indeed an access substitute for wireline copper loops, and if wireless thus permits the competitive supply of bundled services that are satisfactory substitutes in consumers’ minds for the typical bundle of services that consumers have until now demanded in conjunction with standard wireline access, then Congress, the FCC, the state public utilities commission, and the courts must ask: Is the great experiment of mandatory unbundling of telecommunications networks worth the candle?”

Precisely. But why is no one else in the public policy community asking that same question? Though it would certainly be preferable to have even more facilities‐​based competitors to the local telephone incumbents, the radical and incredibly intrusive regulatory remedies that are currently being proposed to facilitate this objective are not justified.

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