article

Soap Box – The Real McCoy

Posted: 10/2001

Soap Box

The Real McCoy
By H. Russell Frisby Jr.

The Telecommunications Act, which held so much promise when it became law 51/2 years ago, did little to settle the debate over the future of telecommunications in America.

If anything, the fevered pitch over that last bastion of monopoly power — the local loop — has increased since 1996.

The battle rages because of the gap between what was heralded and hoped for — opening the long monopolized local telecommunications networks to competition — and what has been achieved — relatively nothing. This is not for lack of effort by Congress, the Federal
Communications Commission (www.fcc.gov), public service commissions and thousands of competitors big and small.

All of our collective efforts have not been enough to change one fundamental reality: “A monopoly always will behave like a monopoly unless it is given incentive to do otherwise.” And the only incentive that works is the bottom line. That’s the real McCoy.

With the best of intentions, we’ve been treating the symptoms of monopoly and not the disease.

The breakup of Ma Bell demonstrated that monopolies don’t work and that competition does work.

We thought it would be better to avoid the lengthy and expensive anti-trust litigation of the AT&T Corp. (www.att.com) breakup. Instead, we chose to apply the rubric of deregulation legislatively and hoped to deliver the many benefits of competition to consumers as quickly as possible.

What the endless debate and legislative action surrounding the Telecommunications Act overlooked was that ILECs are, by nature, monopolistic enterprises.

As a monopoly supplier and competitor in the local phone market, the ILECs are driven by an inherent conflict of interest. There is no incentive for them to give up that monopoly. It is this essential conflict threatens to drive competition out of business.

In the optimistic wake of the Act’s passage, billions of dollars were funneled to competitors that were eager to benefit consumers by investing in new technologies and offering better services at lower prices.

However, the Bells caught on quickly that the Act, for which they fought so aggressively, was not turning out quite they way they had planned. Why give up the Holy Grail of the last mile to compete in a long-distance market that was fast becoming a commodity? Why risk giving up market share with the greatest margins and the most to leverage, the local market?

And so, the ILECs have engaged in a three-pronged attack to keep the Telecommunications Act from ever being realized. They have tied up competitors and the Act in court; they prevented competitors from gaining access to the local network; and they have tried to convince members of Congress to change the law the ILECs once wanted so desperately.

Unfortunately, for everyone but the monopolies, that strategy has done its damage. The continued dominance of the ILECs has signaled to capital markets that competition is a risky investment, and those markets have closed their doors to competitors.

The introduction of the Tauzin-Dingell bill has shown in high relief the sheer political power of the monopolies and their willingness to do anything to get out from under the law. It is unlikely that the controversial bill will pass this year.

If one wants to gauge the ILECs’ will to win, look to the crippled CLEC industry. ILECs have been somewhat successful in convincing policymakers and the press that the demise of the CLEC industry has everything to do with unsound business plans. Of course, the reality is that most competitors have been hamstrung because ILECs have prevented them from reaching customers. The rest of the supply chain followed, crumbling right behind them.

For proof, consult FCC’s most recent report on local competition. The FCC found 51/2 years after the Act, the ILECs still control more than 93 percent of America’s local phone lines.

The bloody experience of the past few years has made it clear that regulatory orders alone are not likely to open local markets to competition. In the endless litigation that surrounds the implementation of the Telecommunications Act we are losing sight of one basic truth: It is simply unnatural for an incumbent local exchange carrier (ILEC), or any monopolist, to do anything to compromise its own financial security.

Rather than continuing to rely exclusively on regulation to open the local exchange network to multiple providers, the only true and effective solution is to adopt a corporate structure that realigns the incumbent’s commercial incentives to achieve, rather than frustrate, access to the local network.

As Congress rightly recognized, gaining access to the ILEC’s inherited network is essential for competition to succeed in the local market and in all adjacent markets, such as long distance, high-speed access, networking, and the Internet itself.

To implement a structural approach that is effective and workable, several core conditions are necessary. Most important is that the ILEC’s retail affiliate compete, as would any competitive local exchange carrier (CLEC), with sufficient separation from its incumbent parent to assure independent decision-making. This goal can be achieved by adopting a capital structure that includes a separate publicly-traded stock in the retail affiliate, and by requiring that the retail affiliate obtain access to the existing network through the same interfaces and procedures as all other entrants.

Adopting a structural incentive plan is a simple solution to a complex problem. Structural incentives, once implemented, require less regulatory oversight and should largely be self-enforcing. Because inefficient provisioning systems would harm its own retail operation, an incumbent’s wholesale affiliate should proactively seek efficient practices, while its retail operations could be regulated like any other competitor. The same powerful incentives that frustrate regulators would be harnessed to promote competition instead.

Many state commissions are examining structural incentives as a viable alternative to regulatory oversight.

And now, Congress will address this issue. On Aug. 3, Senate Commerce Chairman Ernest F. (“Fritz”) Hollings (D-S.C.) introduced legislation to functionally separate the regional Bell operating companies into wholesale and retail subdivisions. Given the ILECs’ refusal to honor their legal commitments to open their local networks as codified in the Telecommunica-tions Act, this bill would strengthen and enforce the Telecommunications Act, leveling the playing field.

The “Telecommunications Fair Competi-tion Enforcement Act of 2001” is a bold step forward in an effort to stop the stonewalling and litigation that has delayed implementation of critical interconnection, unbundling, collocation and resale requirements.

There probably will be an outcry from the ILECs that will try to shake the walls of Congress. The refrain will be very familiar: “It will be too expensive, too difficult to divvy up the assets, too time-consuming, and it will take too many years.” These words will be so familiar that it may almost sound like 1984, around the break up of AT&T, but there will be one new underlying threat, which we have already heard, “It will be the death knell for advanced broadband service.”

Competition, or at least the promise of it, forced the ILECs to finally deploy DSL — a decade-old high-speed technology — to consumers. It was a perfect example of how and why competition works.

Legislators need to be reminded of the tactics of deceit and confusion that the incumbents are employing to get the Telecommunications Act changed. The ILECs callously are manipulating Congress’ fear that rural America will be cut off from broadband, creating lifeless communities unable to attract and retain businesses and therefore, jobs.

The proposals the ILECs advocate will do nothing to help rural areas, or for the matter, inner cities. In fact, 95 percent of the U.S. population lives within 50 miles of a high-speed Internet on-ramp and more than half the American people already have access to broadband connectivity.

Deregulating the Bells and opening up long-distance service to the Bells has little to do with the actual deployment of high-speed Internet access, and it may well preclude these communities from ever seeing broadband.

When the last remaining competitors are driven out, these communities will go back under the dominance of their local monopoly, its prohibitively high prices and its unwillingness to invest in its infrastructure. We already know this. It happened for years before the Act, and if the Act is gutted, it will go right back to the way it was.

The Hollings bill is about enforcing access and about creating an environment where competition thrives. It is a first step by Congress to enforce a structure that relies on incentives to achieve the goal of nondiscriminatory access, where an ILEC’s own commercial success depends on its ability to offer efficient access to the existing network. The bill is backed by strong enforcement measures with penalties for anti-competitive behavior and a code of conduct. It also has strict performance standards that will help to stop the tactics the incumbents have used to hold on to their monopolies.

This bill is about providing monopolies with an incentive to open up their local bottlenecks to competitors.

Despite ILECs’ onslaught, the competitive industry has had its victories. We’re still standing. People are starting to realize that the ILECs tell Congress one story, and the rest of America another.

Telecommunications is a hot topic on the Hill, and there is finally legislation that addresses the fundamental realities of competition. The accounts of the death of competition are highly overrated, and there is momentum building toward real solutions like structural separation and enforcement.

Finally, we are beginning to talk about the real McCoy. And that is good news for competition, for consumers and for the future of the Internet.

H. Russell Frisby Jr. is president of the Competitive Telecommunications Association (CompTel,
www.comptel.org). He can be reached at 202-296-6650.

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ROUND TABLE

On the Fallout of the NextWave
Reorganization*

"It is past time for the FCC to stop its legal delaying tactics and return the licenses to NextWave Telecom, as instructed by the Court of Appeals. The court’s decision confirmed that NextWave’s efforts to commercialize its licenses should not have been halted by the FCC. The FCC continues to unfairly penalize consumers who want access to advanced 3G telecom services that NextWave Telecom will provide.”

— Michael Wack, senior vice president and deputy general counsel,

NextWave Telecom Inc. (www.nextwavetel.com)

“Revamp the whole auction process. It is difficult to understand how the FCC expects a company that qualifies for preferential ‘entrepreneur’ status can afford wireless licenses … To qualify as an entrepreneur, gross revenue for the two previous years must not exceed $125 million and assets must be less than $500 [million]. Again, how can anyone expect such a company to pay several billion dollars for licenses without going into Chapter 11.”

— Roger Entner, wireless analyst, The Yankee Group (www.yankeegroup.com)

“The NextWave situation underscores why it is critically important for the government to develop and implement a long-term spectrum management policy, to ensure the American people and businesses can take advantage of benefits to come in a world of next-generation wireless telecommunications. It’s time to eliminate the spectrum cap, identify additional unencumbered spectrum and bring it to market in short order.”


Corrections

* In the August issue of PHONE+, Michael Conway was misidentified in the Back Office article, “Convergent Billing Slow to Catch On Despite Promise.” Conway is the vice president of product development for Primal Technologies Inc. (www.
primaltech.com
). As such his comments do not in any way reflect the views of Primal Solutions Inc. (www.primal.com).

*
AFN Communications LLC (www.afncommunications.com) was misidentified in the Wholesale Channel story, “Data Adds to Wholesale Market. In the feature story “True Broadband at Last,” AFN Communications name and URL were incorrect, as was the name of the quoted source, AFN’s senior manager for product marketing Sunita Krishna. And finally, while AFN has 2,000 route miles of lit fiber as noted in the article, the entire 8,000 route mile initial network will be lit within a few months.

We regret these errors.


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