Telecom Landscape Has Changed

The mergers of SBC-AT&T and Verizon-MCI will benefit everyone by creating cost savings from increased operational efficiencies. Although the telecom marketplace will never look the same, one thing that unfortunately hasn’t changed in telecom is a culture of reliance on regulation.

Competitors like Cbeyond, Eshelon, Level 3, NuVox, Qwest, SAVVIS, TDS Metrocom and XO, argued that the sky will fall without divestiture or other draconian conditions. These smaller and less-efficient carriers wanted to capture some of the Fortune 1000 companies, governments and other large institutional customers of AT&T and MCI who prefer to purchase telecommunications from larger carriers that can offer end-to-end service.

Not for the first time, small competitors saw the merger review process as a substitute for investment and competition in the marketplace. They produced a long list of self-serving proposals for lowering their own customer acquisition and operating costs through regulatory intervention. To their credit, the FCC and the Department of Justice listened politely and then rejected the most egregious efforts of the smaller carriers to game the system.

But the small competitors got more than they deserved. Regulators will insist that the competitors get network access at frozen rates, among other things, and that consumers have the option to subscribe to DSL without maintaining traditional phone service.

Absent a finding that the mergers will substantially lessen competition, there is no justification for frozen rates or other accommodations for competitors. Mandating stand-alone DSL is superficially appealing but anticompetitive because cable and wireless services are free from similar requirements. Under Chairman Kevin Martin, the FCC wisely eliminated inequitable regulation and leveled the playing field between the competing cable, telephone and wireless platforms. And earlier this year, the FCC prohibited states from requiring telephone companies to furnish DSL to the customers of their competitors. But before the benefits of these deregulatory policies can even be fully felt, a timid and unprincipled FCC is stepping back.

Part of the blame rests with Congress for allowing the FCC and the Department of Justice to engage in duplicative reviews of telecom mergers. The FCC’s process is subject to fewer clear standards and, in the words of former House Commerce Chairman Billy Tauzin (R-LA), “can leave applicants slowly twisting in the wind to be picked apart by both regulatory enthusiasts and private party shakedown artists.” Blame also rests with the Bush Administration, which has spent months trying to come up with nominees to fill two open seats on the FCC and which may wake up one day to find a majority of Democrats following Commissioner Abernathy’s departure deadline.

Deregulation is good for consumers because it promotes investment. But signs that regulators continue to view telephone companies as playthings or opportunities for experimentation will divert investment.

In an industry characterized by rapid technological change, there are too many risks that regulatory intervention can backfire, no matter how well-intentioned. The current artificial industry structure was created by a federal judge at the behest of regulators in the early 1980s to jump-start competition in long distance. It has been a mixed bag. The declining cost of providing long distance created an illusion of competition. But for almost two decades, long distance was an oligopoly. Rep. John Dingell observed in 1995 that the rates charged by AT&T, Sprint and MCI flew “as closely together as do the parts of a B-52.” And a former AT&T executive joked that long distance was the most profitable business in America next to importing illegal cocaine.

The oligopoly was finally broken by advances in technology and hard-fought deregulation, which allowed mobile phone service providers, the Baby Bells, cable providers and Internet-based vendors to offer long distance at flat rates or even free. While new technologies were slashing costs, AT&T and MCI raised rates for many of their consumer and small business services. AT&T lost almost half its long distance customer base in just 2 years. MCI lost 60%. Both firms gave up actively marketing traditional phone services to the mass market in 2004.

Regulators who approved the acquisitions of these former icons by Verizon and SBC correctly understood that the present industry structure is artificial and unsustainable. They also understood that there is no chance the mergers can harm consumers or small businesses, because there will be no loss of competitive choices. Besides halting their active marketing efforts, AT&T and MCI also reduced their workforces, terminated relationships with outside suppliers and dismantled infrastructure. These actions make their decisions to get out of the mass market virtually irreversible.
The small and less-efficient competitors argued with some success that the mergers could raise prices for large enterprise customers. But the truth is there is less risk the merging entities will seek to raise prices for their best customers than pass along a portion of their savings from the increased operational efficiencies these mergers will permit.

What the small competitors can’t seem to see are the vast legitimate opportunities available to them. The market is still evolving and hasn’t been fully defined, let alone fully exploited. Equipment maker Cisco Systems recently calculated that only 5% of all business buildings with 20 or more employees have fiber connections, and that 75% of the remainder are less than a mile from existing fiber network connection points. New technologies are reducing the cost of building these connections.

GigaBeam Corp., based in Herndon, Va., claims to offer fiber-like capacity that is 50% to 80% below current costs using point-to-point wireless technology operating in the upper frequency bands. Renaissance Integrated Solutions of Armonk, N.Y. has patented a technology which extends existing local fiber networks to include all commercial and residential buildings as part of the rehabilitation of water, sewer and natural gas pipelines and laterals. These emerging technologies are examples of the rapidly changing landscape in telecom. They portend a future of expanding business opportunities and shifting competitive advantages.

The rise and fall of AT&T and MCI prove that there are no permanent winners in telecom. That’s why regulators ought to declare victory and go home.

Hance Haney is Director and Senior Fellow of the Discovery Institute’s Technology & Democracy Project.