Cleaning Up Your Own Messes

Thanks to nearly a century of interference and bungling, the federal government has managed to make quite a mess of the telecommunications market. Not only was there rampant abuse of the patent system by men like Alexander Graham Bell in the late 1800s, the feds also made the Bell phone system a de jure monopoly in 1917, a decision that stood until 1984 when “Ma Bell” got broken up.

Even then, they still screwed things up. Instead of allowing competing carriers across the spectrum by divorcing the retail and wholesale aspects of the phone system, they instead made a semi-competitive market only for long distance and broke up the rest of the company into smaller, regional monopolies. This move lead to decreased network quality and a reputation of terrible service from the incumbent providers.

Congress took a second stab at bringing a competitive environment to phone service with the Telecommunications Act of 1996. In theory, the incumbent’s networks would now be open to competition both at the local and long distance level with competitive rates. With also opened up the market to competing DSL providers. In practice, the incumbent phone companies managed to sabotage competing providers at every step until the FCC decided in 2003 that they were no longer required to lease lines to competitors at discount rates.

In that same period, the seven regional phone monopolies condensed into just three companies that control over 90% of the local phone service market. Pricing has risen sharply over the last decade, the industry manages to place at the bottom in the American Consumer Satisfaction Index year after year and we have fewer Internet Service Providers now than we did in 1997. All of this is the exact opposite of what Big Telco said would happen if the Telecommunications Act of 1996 was passed into law.

Big Cable isn’t doing too much better. Smaller cable companies have been swallowed whole by larger systems, leaving us with a handful of cable companies (Time Warner, Comcast, Cox and Charter) with a dominance in the cable market that goes unchallenged. Even the supposed competition from satellite TV has been a bust; we currently have on Dish Network and DirecTV in that space and AT&T has been rumored to have been eyeing at least one of them as an acquisition target.

It’s pretty obvious that the federal government (and, to a lesser degree, state PUCs) have no idea how to properly foster competition for telephone, Internet and television services. At every turn, their moves have just entrenched incumbencies further and further against any competitive efforts. Very few are willing to pony up the cash and army of robot lawyers needed to go head-to-head with The Cable Company or The Phone Company with the risk of failure against their powerful lobbyists and marketing machines is so high.

This leads a lot of people to assume that the best source of action is to walk away from the market and drop as many regulations as possible. This may seem like a good idea on the surface, but it’s poison for consumers. It is, in effect, asking the government to just walk away from the monster they created so that the problem will fix itself. This might sound good in theory, but it’s destined for failure in practice.

Instead, the government should find ways to promote new competition and undo the decades of monopoly protection they’ve engaged in. Probably the best of these is requiring that all networks, regardless of medium, be operated as wholesale networks with multiple competing providers. Such a scheme would only work if the wholesalers are not allowed to also be retailers. This gives the infrastructure company the motivation to build the best network possible and the retailers the motivation to provide the best services possible.

This proposal isn’t likely to happen. It’s a death sentence for the profitable status quo enjoyed by incumbents and would be opposed at every turn. (If you though the 1984 breakup was big, you ain’t seen nothin’ yet.) The high cost of network construction means that competing providers would be unlikely to enter the market as well. Most low estimates are that a telecommunications system takes a solid 10-15 years to achieve a return on the initial investment with a take rate anywhere from 25-35%. Building a network to cover a small town of 10,000 can run $20M or more. Given the large up-front investment and long ROI, it’s nearly impossible to crack an existing market.

Where we’re left is that there must be, by some means, a wholesale telecommunications network that remains retailer-neutral. The telcos have shown an inability to provide such a service despite being given over $200B to do so under the Telecommunications Act of 1996. They’ve also demonstrated a willingness to compete with lawyers and legislation instead of products and services. It’s time to let communities start taking matters into their own hands.

This is why I’m strongly in favor of the Community Broadband Act that Congress seems unable to pass. It would allow any community to construct their own telecommunications network if they determine that the incumbent providers are not meeting their needs. The bill is largely similar to the Municipal Cable Television and Public Telecommunications Act passed in Utah to allow for systems like UTOPIA and iProvo, It does not require that there be competing retailers, an oversight that should definitely be corrected, but it provides a good, solid foundation for getting more competition into the market.

Whatever solution get decide on, simply walking away from the mess should not be on the table. Doing so would be incredibly irresponsible and set us further back than we already are.

If you like this article and are more interested in municipal broadband and telecommunications, visit, my blog dedicated to those topics.

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2 Responses

  1. Jeremy says:

    You’ve sold me.

    I really liked your comparison in an earlier post or comment of this proposed separation of communications network and retailer industries with the way our national air travel system is run. Airports are municipal responsibilities that are used by private carriers competing for our business. Customers are well served under this system for air travel mainly because true competition is fostered among the carriers using the public network of airports. I believe consumers would be well served in the communications market as well under your proposed model for the same reason…true competition.

    Thanks for this comprehensive explanation. I wish I had put the pieces together in my head earlier to see that UTOPIA isn’t just a cool but expensive technological gadget that some cities are trying to provide their citizens. It is a complete revolution in the way the communications market would work in our state.

  1. June 2, 2008

    […] central reason why telecommunications sucks so bad is that we've been pumping state and federal dollars into propping up incumbent phone carriers like Qwest while enforcing very few requirements that serve the public interest. A key point of […]

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