It’s Time to Deregulate

Published February 1, 2004

It is commonplace when speaking of the revolution roiling the local telecommunications marketplace to refer to Joseph Schumpeter’s reminder in his 1942 classic, Capitalism, Socialism, and Democracy, that “[t]his process of Creative Destruction is the essential fact about capitalism.” For who can survey the telecommunications scene today without sensing, intuitively, that we are in the midst of a period of unprecedented change?

Since 2001, the number of wireless subscribers in the U.S. has exceeded the number of wireline subscribers, and the gap is growing rapidly. IDC forecasts that, even absent substantial improvements in wireless technology or service quality, by 2007 9.8 percent of all U.S. households will rely on wireless as the primary means of voice communications and not have primary access lines, more than double the IDC year-end 2002 estimate of 4.4 percent of all U.S. households. Further improvements in wireless technology or the quality of service offerings would increase the primary line displacement rate.

Email and instant messaging continue to be used as substitutes for traditional wireline local and long distance usage. Released in August 2003, a J.D. Power study found that among dial-up users, email displaced 23 percent of local calls and instant messaging 18 percent of local calls. For high-speed users, email displaced 24 percent of local calls and IM 20 percent.

The truth, of course, is that the market disruption we are witnessing, spurred by the digital revolution’s continuing technological wonders, necessarily will cause, surely sooner rather than later, destruction of the traditional public utility regulatory model that has been applied to the incumbent local telephone companies. That “command and control” model, including regulation of retail rates, may have been appropriate in an era when the local telephone company clearly possessed dominant market power. But it is no longer appropriate in today’s dynamic market environment.

Unless one closes his or her eyes to what is happening in the real-world telecommunications marketplace, it is clear regulators must modify existing regulatory regimes to take account of the changes in the competitive landscape. The question now facing policymakers is whether the overly burdensome and outdated regulatory requirements that apply currently to the incumbent wireline phone companies will be changed quickly and substantially enough so that they are allowed to compete effectively with other competitors that are not similarly regulated.

The marketplace evolution generally proceeds through three stages–non-competitive, contestable, and effectively competitive. A report we wrote for the Progress and Freedom Foundation, published in December 2003, shows that local wireline service offered by the incumbent local telephone companies is at least contestable, if not effectively competitive.

That being so, the nation’s consumers will benefit greatly from the stimulation of investment and innovation in new communications and information services and equipment that will follow reliance on free-market principles and adoption of deregulatory policies. An important step that should be taken promptly is the deregulation of local service rates at the retail level.

This essay is based on the preface, introduction, and executive summary of “Trends in the Competitiveness of Telecommunications Markets: Implications for Deregulation of Retail Local Services,” by Richard O. Levine, Joseph S. Kraemer, and Randolph J. May (Washington, DC: Progress and Freedom Foundation, December 2003). The entire study is available online at