Finding the Way Out of the Telecom Mess

Published December 1, 2003

The current “telecom mess” is largely the result of federal policy that has misdirected vast amounts of capital and squandered precious technological opportunity. Abandoning this flawed regulatory regime is key to reviving the telecom market.

The crux of current policy is a welfare program of sorts conceived by Congress to induce competition in local calling. Major wire-line companies such as SBC, Verizon, BellSouth, and Qwest have been forced by federal law to allow rivals to utilize their networks at below-cost rates. New entrants were to build independent facilities with which to compete once they established a foothold in the market.

In reality, the generous subsidies have skewed investment incentives and worsened the very market conditions that Washington presumed to rectify.

According to FCC data, competitors have indeed expanded their share of the local telephone market, from 4.3 percent in 1999 to 13.2 percent in 2002. But the proportion of independently owned access lines has actually fallen, while competitors’ dependence on subsidized access to incumbent networks has increased. In 1999, rivals relied on subsidized access to serve 23.9 percent of their customers. By 2002, they were utilizing subsidized access to serve 55.4 percent of customers.


The upshot is this: Rather than bringing advanced technologies and applications to market, billions of investor dollars have instead flowed to Baby Bell wannabees whose business plans offer little more than a new billing address. The incumbents, meanwhile, saddled with 10,000 pages of access regulations, have only inched away from copper loops that date back decades.

The economic impact has been devastating, contributing to the loss of 500,000 telecom-related jobs and $2 trillion in market valuation since 2000, as well as a 14 percent decline in telecom research and development. The policy blunders are all the more tragic in light of the awesome advances in technology that otherwise could have benefitted millions of Americans.

Unfortunately, a majority of commissioners on the FCC refuses to concede the obvious failure of the forced-access regime. In August, the commission issued its third rewrite of the rules in seven years, comprising 576 pages of mind-numbing dos and don’ts. As FCC Commissioner Michael Powell lamented: “The majority has brought forth a molten morass of regulatory activity that may very well wilt any lingering investment interest in the sector.”

The order also promises to unleash a litigation frenzy. Twice before, the agency’s forced-access orders failed constitutional muster, and legal challenges already have been filed against the latest version. At least the lawyers are happy.

It is instructive to note that the most dynamic sectors of telecom–wireless and cable telephony–are also the least regulated. That same vitality could be had industry-wide were Congress to sunset the forced-access regime and declare the market open on a date certain. The greater difficulty is summoning the political will to dismantle the regulatory machine. Thousands of bureaucrats and their K Street allies are heavily invested in the status quo. But as America’s telecom pioneers have repeatedly taught the world, we can accomplish whatever we imagine.

Diane Katz ([email protected]) is director of science, environment, and technology policy for the Mackinac Center for Public Policy. This article appeared in National Review Online on October 1, 2003.