Reforming the FCC

If you want to understand the happenings in telecom policy, you should follow the money. In particular, the FCC reports about $300 billion in telecom spending per year. Independently, AT&T and Verizon report over $200 billion in annual revenues. The next largest carrier is a rounding error by comparison. With this breakdown in industry revenue, you wouldn’t be off base concluding that telecom policy is all about AT&T and Verizon.

In fact, telecommunications policy has been all about AT&T and its progeny for more than a hundred years. As an indicator of its past performance, AT&T has entered into three antitrust decrees since its inception. So even without reading the subpoenaed records of the Bell executives, these decrees should tell you that the culture at AT&T and its progeny is monopolization. And they have the size, power and time to make it happen.

For example, the ink hadn’t dried on the third antitrust decree which had split AT&T into eight significant parts, when the local Bells set about putting Humpty Dumpty back together again. And a scant twelve years after the historic 1984 Consent Decree was signed, Congress passed legislation allowing the Bells to be themselves again – and even relieved them from the nation’s antitrust laws, presumably to avoid a fourth antitrust decree.

In the 1970’s, this sort of legislation was introduced every year and came to be called the Bell Bills. Looking back, my hat is off to the Bells for snookering everybody on the 1996 legislation given its prominent and controversial history. But then again the biggest change agents in the telecom landscape – Judge Skelly Wright, Judge Harold Greene and MCI CEO Bill McGowan – were long gone by then.

Turning to the FCC, the FCC has more often acted to protect the Bells than to promote competition. For example, in the late 1950’s the courts forced the FCC to adopt rules to allow third party equipment to attach the network. The FCC soon followed this precedent by limiting restrictions on the resale of the carriers’ underlying transmission facilities. Later, in the Carter Administration when I was at the FCC, the Commission took a more proactive stance on competition and authorized competitive cellular telephone service, deregulated cable television systems, and adopted a favorable regulatory framework for competitive common carriers.

Unfortunately, the progress toward a competitive industry over the next twenty years vanished relatively quickly after the Bells were freed from antitrust constraint.

Where does the competitive landscape stand today? First, all of the fierce, innovative competitors are long gone. Second, cable TV does have a toe-hold in the local telecommunications market, but is hobbled by scattered coverage and its heritage of poor service. Third, a small percentage of households use cellular service for their local phone service. But the Baby Bells dominate wireless service (including the cellular, PCS, and 700 MHz bands) and have no incentive to compete against the local exchange provider (namely, themselves). Moreover, the FCC – either wittingly or unwittingly – has carved up the spectrum in such a way as to undercut the provision of robust wireless service to homes and businesses in the local telecom market.

In a nutshell, the current market structure does not allow for meaningful competition to take root in the local telecommunications industry. Better or different regulation at the FCC will not change this outcome. The history of this industry is that structural solutions are needed if competition is to take root.

In particular, the most effective way to address AT&T’s and Verizon’s re-monopolization of the telecommunications industry is to: 1) require AT&T and Verizon to divest their wireless divisions to their existing shareholders and let them operate as standalone business; 2) have the FCC undertake a detailed analysis and subsequent frequency reallocation to enable the wireless carriers to offer a complete package of services to their customers, and 3) require all facilities-based providers to allow unencumbered attachments to their networks and unfettered resale of their facilities.

Taken together, these policies would jump-start competition and innovation in the local telecommunications industry and would not harm anyone because the surviving local AT&T and Verizon entities would be able to resell wireless service and offer a competitive bundled service.

As I have written elsewhere:

“While people today are accustomed to 150 video channels being wired into their homes with nothing to watch, the kids born today in the Information Age will be able to instantaneously search and retrieve video, audio, text or voice of their choice over a single channel at any time from any location. Everybody will also be able to produce and send information in any form from any place at any time. Networks will be open, allowing access by any device on an unrestricted basis. Devices will cater to the specific requirements of the consumer, whether multipurpose or specific to unique applications such as exploring information from outer space.”

This vision of the future is based on what customers want. But innovation in telecommunications that addresses customer requirements will come only when the right structure for the industry is in place. Customers do not want a new fiber connection to the home, as in AT&T’s and Verizon’s interest. They want a broadband IP structure that can deliver voice, data and video – everywhere and anywhere that they happen to be. Anything less will fall short of the potential benefits available from the efficient utilization of the public’s – not AT&T’s and Verizon’s – airwaves.

The government’s job is to let private industry achieve the full potential of utilizing the public’s airwaves. To accomplish this outcome, structural relief is required. With structural separation, the right incentives will be in place so that innovation will flourish and progress will be made on developing services that customers really want.

Is that too much to expect?