The Speaker’s Misguided Notions of Telecom Regulation

Published May 5, 2005

In a January interview with Illinois Issues magazine, Illinois House Speaker Michael Madigan listed telecommunications reform as one of his top priorities for the current session. That’s good, because given the rapid change in the industry, delay would be unwise.

Illinois’ consumers and businesses risk missing out on the revolution in telecommunications taking place around the country and around the world. A telecom reform bill is currently being debated in the House, although much of the talk seems focused not on the content of reform, but whether the vote ought to be delayed for another year.

Unfortunately, Speaker Madigan has a troublesome misunderstanding of the telecom industry. “Why couldn’t we follow the model that we followed in electric utility deregulation, where, in essence, we made Commonwealth Edison and the other distribution companies common carriers and took them out of the generation business?” he asked his interviewer in January.

In Speaker Madigan’s scenario, SBC–and by logical extension any other major facilities-based telecom service provider in Illinois–would be divided into independent wholesale and retail arms. The wholesale arm would likely own the switching and transmission facilities. The retail arm would be responsible for marketing and selling service to customers. This is called “structural separation.”

There are several reasons why Madigan’s proposal is unworkable. For delivering electricity, the wholesale/retail approach makes sense because only a single infrastructure, unlikely to be duplicated, is in place. Large swaths of the country are served by single homogenous grids, sections of which are owned by local power companies.

The telecommunications industry is very different. Multiple national and local telecom networks cris-cross the nation and reach into our neighborhoods. The supply chain is diverse and ever-shifting. Consumers have choices … and service providers do, too. They can turn to many competing vendors for telephone, television, Internet access, and new services that combine and blend elements of all three services.

It’s difficult for policymakers to accept the breathless cries of “telecom monopoly!” from various interest groups when at the end of the day they call their family on a Verizon cell phone, drive home with the aid of a GM satellite navigation system, download their email from AOL, Yahoo, or MSN, and watch television with Comcast cable or a DirecTV satellite dish.

Besides competition among different technologies (called cross-platform competition), there is fierce competition based on differentiation of service. For example, Comcast, a facilities-based cable TV provider, has a strategic agreement with Microsoft and Gemstar-TV Guide to improve the functionality and features of its digital video recorders (DVRs). Comcast seeks to provide new applications and a better user experience, with the ultimate aim of attracting more customers.

If Speaker Madigan has his way and a new law decrees a structural separation between telecommunications service providers and owners of the underlying network, it’s unlikely Comcast would be able to bring the improved technology to Illinois. The value of these improvements depends on Comcast’s ability to leverage its ownership of the underlying network technology.

So while our Indiana neighbors would get DVRs and video-on-demand with graphical menus and pushbutton programming, we in Illinois would be stuck with 10-year-old VCRs still flashing 12:00.

In a competitive market, consumers benefit most when competitors are free to make their own business decisions, form alliances, and develop unique and differentiated services. That’s why it’s so frustrating to see legislators floating regulatory “solutions” that approach the telecom industry as if innovation and change were problems to be solved or prevented, rather than key factors in the future growth and competitiveness of Illinois and the U.S.

Legislators are consumers, too, which may help explain why they appear to be gridlocked on reform. No matter where they stand politically, they sense the disconnect between the rhetoric of lobbyists and their everyday experiences.

That’s why I hope Speaker Madigan was just musing when he suggested restructuring the Illinois telecom industry. It would be a pointless attempt to keep a rapidly changing industry heavily regulated and compartmentalized. The Speaker’s plan would treat telecom service as if it were a uniform, non-configurable, one-size-fits-all commodity instead of the most rapidly changing and most competitive sector of the U.S. economy.

In today’s market, where consumers can buy a wide variety of voice, data, and entertainment services in almost any combination and at a wide range of prices, there is simply no reason to go back to the old days of price controls and subsidies.

Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute and managing editor of IT&T News.