February 21, 2003

Telecom Regulation Is Very Hard

Telecom regulation is very, very important and very, very hard. The very smart Kevin Werbach tries to provide a summary of what the FCC is thinking--and why. It doesn't look good, at least not from where he sits:


Another telecom scenario: Dana Blankenhorn sees a silver lining for DSL providers like Covad and Earthlink in yesterday's FCC decision. He thinks they can use wireless to bypass the Bells. The big problem I see is that they will need capital to adopt this strategy, and Wall Street is unlikely to give it to them in the current environment.

Microsoft and Intel have an opporuntiy to influence the outcome, though. Microsoft put several billion dollars into cable a few years ago when cable stocks were tanking. The investment and vote of confidence helped pull cable into its current broadband lead.


What the FCC was thinking: How could the FCC take such damaging steps for competitive broadband, when it was supposedly pulling back on Chairman Powell's "deregulation" agenda? The answer is in Commissioner Martin's statement.

First, he says this was a compromise between "competition" and "deregulation". These two words have mystical force in telecom policy. If you live in the Beltway echo chamber and not in the real world of business and networks, it's easy to think they mean something in the abstract. Powell (and the Bells) wanted deregulation, the Democrats (and the new entrants) wanted competition, so we get a "principled, balanced approach" that does some of both. Sorry, the world doesn't work that way, as the Wall Street reaction to the decision demonstrates.

Second, the High Tech Broadband Coalition, spearheaded by Intel, successfully convinced the FCC that it was a proxy for "the tech industry". Martin specifically notes in his statement that, "we endorse and adopt in total the High Tech Broadband Coaltition's proposals...." (emphasis his). That's a big flashing red light saying, "hey, tech industry, you should love this and give us credit!"

Trouble is, there isn't a single "tech industry" on telecom issues. There are vendors, and there are service providers. Intel and Microsoft sell software and hardware to broadband service providers, including the incubments. Their interests don't always coincide with companies that make money selling broadband connectivity to end-users.

The technology vendors are rightly focused on next-generation networks that deliver 10-100 megabits per second to the home. I'm far less troubled by the elimination of sharing requirements for new fiber deployments (what the High Tech Broadband Coalition endorsed) than the destruction of line-sharing for today's DSL. The problem isn't with Intel's position, it's with the set of compromises the FCC made.

The trouble is that you can't just give the tech vendors something, and the incumbent carriers something, because they play different roles. Intel, Cisco, and Microsoft won't be the ones building the networks. The telcos have to deploy the infrastructure, and they won't do that if they feel wronged by the FCC's overall decision and have no competitive pressure. The order does precisely that. It re-energizes the Bells' obstructionist strategy, and it takes away near-term competitive threats from independent DSL providers that might have spurred them to invest anyway.

Verizon Senior VP Tom Tauke's quote says it all: "The future of telecommunications is broadband, and on this issue the commission appears to have moved in the right direction but may have important details wrong. Moreover, the future investment in the wireline network is tied to a strong financial base for the overall business." Doesn't sound like someone planning to "jump start investment in next-generation networks," as Commissioner Martin predicted.

Additional (consistent) perspectives from Bruce Kushnick and Dave Burstein.


The market has spoken: Wall Street has passed its snap judgment on yesterday's FCC decision, and the results aren't good. The Bell Company stocks tanked. The stocks of competitors such as AT&T fell slightly along with the market. And competitive DSL providers such as Covad were absolutely crushed.

The message loud and clear is that investors don't fully understand what the FCC did, but they don't like it. If the rationale was to promote investment and broadband deployment, it's hard to see how that will happen.

The majority's notion was that eliminating sharing rules for broadband (both today's DSL and tomorrow's fiber networks) will spur the Bells to invest heavily. Yet those very companies are vocally denouncing the order and threatening more lawsuits. Having investors sell off your stock isn't exactly a push toward new investment. And for consumers, the decision means higher broadband prices, when the clear lesson from countries such as Japan and Korea is that broadband penetration zooms when prices drop.

Posted by DeLong at February 21, 2003 01:52 PM | TrackBack

Comments

When I see commentary along the lines of the above, I wonder what planet I live on . . . . . . . when have the Bells not been obstructionist? Would a single FCC decision have changed that? Doubtful, to my mind, considering the past couple of decades experience.

Long-term, the Bells are dead regardless of the FCC's policy moves. The old RBOC's benefited greatly in the 1990s from households and consumers adding extra land-lines for 56k modem connections and fax and extra voice connections . . . . but that was the 1990s. Dead and gone, nowadays.

Speaking as a consumer who's had two separate DSL connections and worked on his father's ad-nauseum, DSL sucks. Big-time. So DSL sucks and on top of that the 56k modem and fax business is going away and on top of that many consumers are ditching their single land-line connection and living off their single cell phone. All that together kills the RBOC's no matter what the FCC says.

The future of broadband connectivity is in cable modems and wireless. The Bells are the old horse and buggy manufacturers of the 19th century. Our kids won't even remember'em, and that's a good thing.

Posted by: Anarchus on February 21, 2003 05:53 PM

While the Telecommunications Act of 1996 was in some ways damaging to the RBOCs it also was enabling to the SBC Ameritech merger. (Ask David he would know) That Act was a deplorable attempt at deregulating an industry by regulating it. It is notable that it was mostly fostered by Republicans and opposed by Democrats. Cable companies were the main beneficiaries. With the advent of wireless, satellite and cable competition directly into the home it seems absurd to continue handcuffing the RBOCs. People who fail to realize that Cable companies can directly compete with RBOCs just don't understand the market.
For a long time the argument has been that that the breakup of ATT caused the increased competition and spurned a communications revolution. Well maybe. But as the history of the late 1990 showed investing in the "Internet" communications network has done little but raise the level of debt of most phone companies. From the perspective of the RBOCs I think it is only fair to surmise that DSL service has been a losing battle.

Wednesday, March 15, 1995 Mr. DeLAY. Mr. Speaker, Government regulations impose a tremendous burden on our Nation's economy. Excessive regulations result in higher prices for American consumers and fewer jobs for American workers. One of the primary goals of the Contract With America is to reduce onerous Government regulations and break down unnecessary barriers to competition. In that regard, I was especially interested to learn of a new study released by the independent Wharton Econometrics Forecasting Associates [WEFA] Group. Their study documents the positive impact that would result from greater competition in the U.S. communications industry. They conclude that full, immediate, and simultaneous competition in all communications markets would result in more jobs, lower prices, and a stronger economy. I urge my colleagues to carefully consider the results of the WEFA study as we continue to more forward with our efforts to deregulate our Nation's economy. Economic Impact of Deregulating the U.S. Communications Industries-- Highlights of Findings

Also form 1995
HON. EDWARD J. MARKEY of massachusetts in the house of representatives
http://frwebgate1.access.gpo.gov/cgi-bin/waisgate.cgi?WAISdocID=54610622984+11+0+0&WAISaction=retrieve
The hooplah many of us heard as recently as a few months ago about a video world with over 500 channels being offered to millions of consumers by the end of the year is pure fantasy. The high tech hype has confronted engineering reality. The phone companies are still figuring out how to make the technology work. To pretend, as H.R. 1555 does, that 15 months from now, this world will have suddenly changed to one of widespread delivery of commercially competitive cable service from a telephone company, is sheer folly.

Posted by: Bruce Ferguson on February 21, 2003 07:12 PM

A former university professor indicted this week as a terrorist leader attended a 2001 group meeting in the White House complex with President Bush's senior adviser, Karl Rove, administration officials said yesterday.

http://www.washingtonpost.com/wp-dyn/articles/A44894-2003Feb21.html

Posted by: Bruce Ferguson on February 21, 2003 08:51 PM

Where broadband use has become widespread, as in South Kroea, what conditions have contributed? Where does the United States stand in relations to other countries in broadband use?

Perhaps some readers who are more knowledgeable can suggest a couple of moderate cost broadband possibilities. Do you use the computer as a phone? Though I read of computer-phone use, I have never found anyone who uses the compuet as a phone.

Thanks.

Posted by: randall on February 22, 2003 05:33 AM

I quoted your take on the finacial markets at the URL above.

And added: Time to dust off that line about the Three Great Lies.... "The check is in the mail"; and "Fiber to the curb if you'll just give us ...."

Posted by: Don Weightman on February 22, 2003 10:04 AM

I know nothing about US telcos. But what is interesting is Brad's point - that regulating the telecom industries is really, really hard but really, really important. The thing is that nobody anywhere in the world seems to have a remotely satisfactory model - governments everywhere are struggling with it. AFAIK the only reason Korea is doing OK is because of massive expenditure of taxpayer's money - whether this will payoff is yet to be seen.
I'm going to be a bit more sympathetic in future to my own country's (Australia's) regulators - I've always thought them idiots. Its possible that the problems are so hard that it doesn't matter whether they're idiots or not!

Posted by: derrida derider on February 23, 2003 03:36 AM

DD

Please discuss Australia's experience at some point.

Posted by: randall on February 23, 2003 07:36 AM

A friend of mine who is a retired senior executive of AT&T, recently told me:

"...the reason why broadband has not permeated the marketplace, either by AOL, AT&T, Comcast, or anyone else, is the hold the Regional BOC have over local distribution facilities. Yes, owning TV cable distribution facilies does provide access into the home, but not without significant capital costs of upgrading the distribution systems to equip them to handle two way communication, instead of the one-way delivery of TV signals. Broadband high speed Internet service is not going to become more or less universally available until the monopoly over local distribution facilities is broken, and not even Microsoft can do that. It is not a question technical expertise, but rather, of monopoly control support primarily by state PUCs. "

Also, Arnold Kling has two good pieces on this, see his blog entry;

http://econlog.econlib.org/archives/000040.html

Posted by: Patrick R. Sullivan on February 23, 2003 10:58 AM

so i worked in telecom, selling equipment to various people for various people to do various things...

here's why the us market sucks so badly: bells have no incentive to provide dsl service... it eats their t1 business and they don't make up on the residential side for a while

they screw the competition by being slow at provisioning (having a union around to blame is great, as does having a bad rep already) and hence convince customers to not believe the comp... then if comp proves a market exists, they'll scoop residential biz once they've pushed the comp under... it's called strategic incompetence, and i wrote a large amount about it (none of it public)

from the cable side, it's expensive, it's a new biz, and you need good concentration. cable has been insanely successful in canada because the companies consolidated into regions... ontario is almost entirely served by 1 cable company, which then has the mass to saturate the market... they co-operated with other firms to share the branding and the retail side (same packaging, just different provider name, sometimes hard to make sure you bought the right thing) in ontario rogers is losing business because they have too many customers... the excite death was massive news as everyone had to switch their email... their were numerous articles providing step by step instructions on how to do this, in newspapers (not ads, editorial)

dsl is cheap to install, provided you have a good line (switch some cards, i can do it...) but you have to test the line, and it can cost alot... why would you test the line if there's a significant chance that someone else will get the money for it? so that slows dsl...

the last thing is that companies were built from the outeset on very bad foundations. covad et al based their business plans on using rboc facilities and assumed they'd get excellent service. they were complete idiots. they should have planned to be facilities based and taken opportunities as they came to save costs, but instead ran a biz too close to the wire...

as for internet phone stuff... nick denton (behind gawker, gizmodo, etc) uses vonage, and likes it (it's an internet based phone service)

lots of people and companies are using VoIP and MAJOR MAJOR MAJOR companies are or were going through acquisition of massive quantities of it (like _______ & _________ & ____ & _______ &______)

lots of companies around the world are doing this (cisco has a great product to leverage internal nets, mitel does cool stuff with ip pbxs) what you need is a good sustained connection, and many broadband compnies drop below dial up spees at times (it works fine over dialup too.. sounds like a cell)

the best thing to do would get the government out of the way and not regulate telecom... that way people won;t be conned into "share and share alike" business plans, but will rather plan on vicious fights to the death, which will lead to a healthy market

but of course no one here will trust me, cause i don't think nationalising the commanding heights is a good idea...

good bye comrades!

Posted by: libertarian uber alles on February 24, 2003 09:19 AM

I think they should all be treated equal even the VoIP company's
Vonage Forum

Posted by: antipas on April 12, 2003 01:57 PM
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