The U.S. Supreme Court’s June 14 decision not to review the D.C. Circuit Court of Appeals rejection of the FCC’s Unbundled Network Elements Platform (UNE-P) scheme is a welcome body blow to what, for all practical purposes, has been an absurd, counterproductive way to foster local telecommunications competition.
Imagine if Herb Kelleher, instead of launching Southwest Airlines by raising capital, buying planes, hiring pilots, and leasing airport terminal gates, went to the Civil Aeronautics Board complaining that United Airlines and American Airlines are just too big and the only way to create competition was to force the two leading airlines to:
- Lease some aircraft and daily flight routes to Southwest at a substantially discounted price, say $1,000 a plane and route;
- Sublease some terminal gates, also at a substantial discount, say $10 a month; and
- Pay for the reconfiguration of passenger cabins to Southwest’s specifications.
That is exactly how the FCC has regulated local telecommunications for the past eight years.
Fortunately, when airlines were deregulated, there was no “unbundled aircraft elements platform.” We know the Southwest story as one of a smart, innovative, and popular low-cost airline whose success led to the revitalization of underused airports like Chicago’s Midway and Dallas’ Love Field. Thousands of new jobs were created directly and indirectly. Boeing won contracts to build the airline’s fleet of 737s. All this while airfares continued to fall.
If Airlines Were Deregulated Like Telecom
But what would have happened if the CAB had taken the same course as the FCC?
Southwest certainly would have been in a position to slash fares, since it would be acquiring equipment from the bigger airlines at sub-market prices. But it would have had no incentive to discount. It could stay just as competitive by charging the same fares as the larger airlines, yet it would be more profitable because it could pocket the savings its regulated, below-market wholesale prices gave it.
To consumers, adding Southwest Airlines to the market in this way might have looked like increased competition. But in reality, all Southwest would have done is shift aircraft and resources from other airlines to itself. It would not have added to the total seats available, number of passenger routes, or passenger miles flown.
At the same time, the bigger airlines would have been reluctant to open new routes or invest millions of dollars for new planes, knowing they would be forced to lease the planes and routes at a loss to competitors. Instead of building more planes for everyone, Boeing would see a steady decline in orders, which would ripple through the entire aviation manufacturing sector.
The government does not make airlines compete like this. But for the past eight years, it has forced such rules on Bell companies and competitive local exchange companies (CLECs). Hence, the wireline local telecom industry has suffered from limited services, lack of innovation, minuscule growth in net revenues, and a troubled manufacturing sector.
UNE-P led to a general reluctance on the part of incumbent local exchange companies (ILECs) to invest in the hardware and software facilities that would have spread the penetration of broadband services. Investment slows in the face of uncertainty, and no one knew whether the FCC was going to demand these facilities be shared with competitors at less than cost.
Property rights theorists call this the “Tragedy of the Anti-Commons.” The regulated partitioning of property rights, in which several parties are given a claim, leads to underdevelopment of the resources. This contrasts with the “Tragedy of the Commons,” wherein a lack of delineated property rights–as is often the case with grazing lands, forests, and fisheries–leads to overuse and resource depletion.
The end of a policy that forced sharing of existing facilities under regulated wholesale rates will give a much-needed boost to the beleaguered telecom manufacturing industry. Now that UNE-P appears down for the count, manufacturers and service providers will be able to do business like any other group of enterprises.
By not reviewing the D.C. Circuit Court’s decision, the High Court not only repudiated the UNE-P model of subsidized competition, but took a strong stand in favor of commercial property rights. The public interest will benefit from a long-sought recovery in the telecom sector, continued low prices, greater access to broadband, and a wider range of choices.
Steven Titch is managing editor of IT Update. His email address is [email protected].