We all know that the telecommunications industry is an economic mess. Since 2000 the equipment firms (the Lucents and Nortels) have cut 500,000 jobs, says Matthew Flanigan of the Telecommunications Industry Association, because capital investment by their customers -- the Verizons and Sprints -- has dropped 56 percent. Stock prices have tumbled. In 2002 WorldCom (in bankruptcy) declined 99 percent and BellSouth 32 percent. This industry needs confidence.
It isn't coming from the Federal Communications Commission, which just issued a new "deregulation" decree. The ruling oozes obscurity and guarantees more time-consuming court challenges. No industry will confidently invest in the future if (a) the economy is weak, (b) the industry has surplus capacity and (c) the rules for recovering its investment are unclear. Telecom now suffers all three ailments. The FCC can't be blamed for (a) and (b) -- the Internet "bubble" is a prime culprit -- but it bears much responsibility for (c).
Under the Telecommunications Act of 1996, the FCC oversees deregulation. In plain language, this means ensuring competition for local -- not just long-distance -- phone and data services. The incumbent local phone companies (Verizon, Qwest, BellSouth and SBC) had virtual monopolies. They would open their networks to competitors, including long-distance companies (AT&T, WorldCom) and new companies (called CLECs, for "competitive local exchange carriers"). In return, the local phone companies (Verizon et al.) would be allowed to offer long-distance service.
Sounds simple. It hasn't been. Only recently have the telecom rivals entered each other's markets, offering customers cost savings and convenience ("bundled" local, long-distance and -- possibly -- Internet service, all with one bill). AT&T now has about 2.7 million local customers. BellSouth says it has signed up 1 million long-distance customers since last May. The process has been molasses-like, and it's unclear whether the new competition is constructive -- or destructive.
Until now, we've had the worst kind of competition: combat among lawyers, lobbyists and publicists. Neither the local phone companies nor their long-distance rivals have wanted the other in their private preserves. Their battalions of advisers have tried to persuade the FCC, state regulators and the courts to write rules giving one side a competitive advantage.
The FCC's latest decree continues this wasteful process. Even the press release is mystifying. (A sample: "The [FCC] finds that switching -- a key UNE-P element -- for business customers served by high-capacity loops such as DS-1 will no longer be unbundled based on a presumptive finding of no impairment." Got that?) One part of the decree helps one side; another aids the other. Each side will probably appeal what it dislikes. Indeed, because the FCC assigns some matters to state regulatory agencies, there may be dozens of decisions and appeals. This is a godsend for lawyers.
Despite baffling details, the central issues in this political-legal shootout are simple. AT&T and its allies say: We must be able to lease parts of the local phone companies' networks at reasonable rates; otherwise, we can't offer local phone service; it's prohibitively expensive to lay wires to every home. To which Verizon and its allies reply: The rates at which the FCC forces us to lease our networks aren't reasonable -- they're ridiculously low; we can't make new investments if the only result is to subsidize our competitors.
They're both right. The AT&T camp needs temporary access to local phone networks -- switching centers, "trunk" transportation of masses of messages and "the last mile" of copper wires into homes. But most of this assistance should be temporary. Except for the existing "last-mile" lines, AT&T and others should install their own networks. The Verizon camp correctly argues that the mandatory leasing of its networks is not genuine competition. No one has an incentive to invest under these artificial rules. The buying and reselling of communication capacity from other companies' systems may temporarily drive down prices. But it won't encourage innovation and may threaten reliability by weakening the industry financially.
Genuine competition today involves technologies as much as companies. By some estimates, 6.5 million wireless phone customers have already abandoned traditional phones. Cable, phone and satellite companies offer different Internet technologies. Long-distance companies have ways of getting into homes (alliances with cable firms, a technology called "fixed wireless," use of the Internet for phone service) aside from piggybacking their rivals' networks. What defines true competition is that no one can predict the outcome.
The FCC doesn't grasp this. Its rules have tried to shape the result. Ideally, Congress should push the telecoms to negotiate a settlement -- the end of mandatory sharing after a two- to five-year transition -- that would be enacted into law. Local competition would be only temporarily nurtured. Unfortunately, the lawyers and lobbyists who dominate this process benefit from continuing conflict, which may condemn the telecom industry -- and the rest of us -- to a long stay in regulatory purgatory.