The Telecom Meltdown’s Gang of Four — Plus Gore

First the prequel: In the immediate aftermath of the passing of China’s revolutionary leaders, Mao Zedong and Zhou Enlai, a claque of left-wing hardliners known as the “Gang of Four” sponsored by Mao’s widow, Jiang Qing, launched an effort to block pro-market reforms. They did not succeed, and China began a long, robust economic expansion.

America’s has its own “Telecom Gang of Four” which helped create a telecom meltdown that threatens, if unchecked, to become a “telecom nuclear winter.” WorldCom’s disgraced CEO, Bernie Ebbers, has been made Public Enemy Number One. His company’s financial fraud did great harm to his company, its employees and investors. But greater harm was done to the now-devastated sector by four people whose actions contributed mightily to the telecom bubble and the meltdown that followed. And they, like the originals, had a sponsor.

Meet the “Telecom Gang of Four”—two of whom are still at large: (1) Senator Ernest “Fritz” Hollings; (2) former FCC Chairman Reed Hundt; (3) immediate past FCC Chairman William Kennard; and (4) current WorldCom CEO John Sidgmore. Their “Madame Jiang” patron was former Vice President (and possible 2004 Presidential candidate), Al Gore. All played a lead role in telecom’s crash.

Senator Hollings. He has used his senatorial powers to block the Baby Bells and deregulatory reform at every turn for twenty years, spearheading legislative efforts to hamstring the Bells in the drafting of the 1996 Act. Had the Bells been allowed into long distance sooner, the triopoly price structure that was artificially sustained to benefit the three largest firms would have collapsed, and prices would have plummeted. The existence of a price umbrella also encouraged over-building of facilities which could not be fully used because Senator Hollings and his allies on the Hill and at the FCC blocked deregulation for the Bells.

Reed Hundt. President Clinton’s first FCC chairman deliberately tilted the post-1996 Act rules of the road against the Bells. He also blocked early vertical re-integration of local and long distance (the aborted 1997 AT&T-SBC merger). Finally, he favored a chosen industry — new local resale entrants subsidized by FCC policy. (Hundt knew which firms he had helped in the competitive arena: after leaving office he linked up lucratively with one such entrant.) Hundt marveled in his memoirs at how the Bells thought he would pass up the opportunity to determine the industry’s winners and losers — to be, as he put it, “master builder” of the new age. The results do not enhance his résumé today.

William Kennard. The second Clinton-era chairman, Kennard used his agency’s power to delay mergers so as to extort concessions from SBC and Verizon that further hampered their efforts to compete effectively. He forced them to enter new markets without regard to economic viability, subject to fines paid to the Treasury if the Bells withdrew before three years passed. He made them sell their network facilities at steep discounts, and forced them to forego judicial review of the merger conditions. In doing so he effectively created special rules for the Bells, bypassing the agency’s normal procedure, and thus evading judicial review. Kennard also opened up Bell company central offices and “last mile” lines to pervasive micro-management, rendering them de facto community property to subsidize non-Bell competitors.

John Sidgmore. In 1996 Sidgmore was Chairman of UUNet, the company that managed half of domestic Internet traffic. Around the time UUNet was acquired by WorldCom, Sidgmore claimed that traffic on the Net was exploding at 100 percent per quarter. But by 1997 Net traffic was, by most measures, roughly only doubling annually. The larger number, not revised until after the telecom bubble burst, was widely believed in the industry and in government, as UUNet was by far the largest carrier of Internet traffic and thus presumably had the best knowledge of actual volume. The vastly over-hyped figure spurred countless firms to over-invest in facilities to cash in on an anticipated data services boom that suddenly fizzled.

Al Gore. The former vice president once joked on late night TV that voters should remember that he had invented the Internet and that he could take it away. Gore’s pro-regulatory approach, pushed by his ideological soul mates Hundt and Kennard at the FCC, took much of it away from the Bells. He provided strong White House support for keeping telephone companies shackled, while he switched to deregulation for the industry that as senator he had branded “the Cable Cosa Nostra.” Accordingly, cable got a huge head start in broadband, one the Bells, even if freed, will be hard pressed to overcome.

Thus did the Telecom Gang of Four and its Clinton White House patron block full deregulation, market price competition and industry consolidation. And thus did the meltdown in the telecom sector reach epic proportions. Without rollback of the Gang’s policies, there is a grave risk that the industry will implode. Given the value of the tech sector to the overall economy, this catastrophe must not be allowed to happen. The original Gang of Four’s ideas were not good for China’s future. The Telecom Gang’s ideas have already inflicted — and so long as the rules they pushed hold sway surely will continue to inflict — vast economic harm.

It is time for the new Gang of Four to be consigned to the dustbin of history — by methods gentler than visited upon Mao’s widow and her cohorts, but quickly and decisively. Then telecom can revive and help power the next wave of New Economy growth, conferring lasting benefits on investors and consumers.

John C. Wohlstetter is a senior fellow with the Seattle-based Discovery Institute.