The End of Telephone Competition as We Know It
The impossible has happened. Rivals Sage Telecom and SBC recently negotiated a seven-year pact whereby SBC will lease wholesale access to its network at a set price. And they did this without the government telling them they had to-it was a voluntary, mutually advantageous act. [1]
Critics of telephone deregulation said it couldn't happen. SBC, the former monopolist in the $128 billion market for local telephone service, would refuse to give up its alleged stranglehold on the industry and then bleed its competitors into bankruptcy.
Despite such doom and gloom cries, competitors are already working together to function in this "brave new world." The market, it turns out, works in the telecom sector just as it does everywhere else.
The implications for regulatory policy in Ohio and elsewhere are profound.
Following the 1996 Telecommunications Act, the Federal Communications Commission (FCC) established a complicated scheme whereby state commissions set the price for access to the existing network for competing phone companies.
The FCC's actions in this regard were highly controversial. Already having been challenged and thrown back by courts several times, the latest court ruling threw out the entire framework. As a result, the FCC is now urging companies to work out arrangements on their own to avoid further litigation.
"We call upon the telecommunications industry to begin a period of commercial negotiations designed to restore certainty and preserve competition in the telecommunications market," the FCC stated recently. [2] "In the past, the Commission has been divided on these issues. Today, we come together with one voice to send a clear and unequivocal signal that the best interests of consumers are served by negotiation." [3]
The Sage-SBC agreement clearly shows that not only are such private sector resolutions a possibility, they are in fact a reality. Sage Telecom is SBC's third largest network user and reaches roughly half a million customers. [4]
The agreement also highlights the absurdity of the heavy-handed approach the FCC has typically taken. While Congress had hoped the 1996 Telecom Act would foster competition in the industry, the FCC's interpretation has accomplished very little along these lines.
First, despite receiving instructions from Congress to handle the matter, the FCC handed off a good chunk of their duties to state regulators. Then, using a complex but unrealistic formula devised by the FCC, state regulators set the prices competitors paid for access to the local networks. [5]
These prices, however, did not come anywhere near what would have been set under normal market negotiations. The result was a severe drop-off in investment throughout the telecom sector. [6] Companies simply had no incentive to build new or improve upon existing infrastructure. The same was true for competitors with cheap access to infrastructure as well as the network providers who would see any investment eaten away at by those using their lines at bargain basement prices. [7]
Now, the stage has been set for a new era in the industry. With a host of new technologies such as wireless and voice-over-internet service, negotiated wholesale access may no longer be the necessary condition for a competitive telecom market that it once was. Nonetheless, it is certainly a welcome and long-overdue component. Proper pricing determined through open negotiations - rather than bureaucratic formulas - will finally restore the incentive to put money back into the system.
As a healthy marketplace freed from dependence on counterproductive regulations develops, consumers will be the ultimate beneficiaries. Hopefully, the other players in the industry will follow the lead of Sage and SBC and open the doors to greater competition.
Footnotes:
[1] Bloomberg News, "SBC Negotiates a Deal to Let a Rival Use Its Lines," The New York Times, 5 April 2004. Available at: http://www.nytimes.com/.
[2] Christopher Stern and Griff Witte, "FCC Pushes Phone Settlement," The Washington Post, 1 April 2004. Available at: http://www.washingtonpost.com/.
[3] Ibid.
[4] Ibid.
[5] Wayne T. Brough, "Bringing U.S. Telecom Regs Up to Speed" ( Washington, D.C.: Citizens for a Sound Economy, 26 March 2004). Available at: http://www.cse.org/.
[6] Ibid.
[7] Ibid.
