Breaking Up (the Bells) is Hard to Do
What Neil Sedaka crooned about in the 1960s is just as true today; breaking up is hard to do. Especially when we’re talking about breaking up America’s massive and incredibly complex telecommunications system. Yet that is exactly what some policy makers at both the federal and state level are now proposing as the silver bullet solution to the competitive woes of the local telephone marketplace.Divestiture bills are now floating through the halls of Congress, as well as many state legislatures and regulatory commissions, that would require the Regional Bell Operating Companies (RBOCs), or "Baby Bells" as they are more commonly known, to separate their wholesale (wires and switches) and retail (business services) functions into distinct companies.
If you’re scratching your head and asking yourself, "Haven’t we tried something like this before?" you’d be correct. Regulators and the courts put the communications sector through one gut-wrenching divestiture in the early 1980s that broke the AT&T empire into long-distance and local components in order to encourage competition in the former and quarantine monopoly power in the latter. The results were somewhat mixed with consumers enjoying some degree of long-distance competition, but limited options in the local market.
The Telecommunications Act of 1996 was suppose to change the latter part of the equation by opening local Bell networks to resale competition, but mandated infrastructure sharing has proven to be a bust. Competitive telecom resellers didn’t bother building their own facilities to directly compete against the Bells, but instead looked to hitch a free-ride on the backs of the Bells’ existing networks – hardly genuine competition.
So along come the supporters of what might best be labeled, "Baby Bell Breakup Round Two," with promises that if we just take one more stab at slicing the Bells’ empire in two, everything will be fine. Policy makers should think twice about the logic of another divestiture for telecom, however, and bear a few things in mind when faced with such proposals.
First, structural separation is hardly simple regulatory surgery. Rather, it is more akin to amputation, and in this case the proposed radical surgery is for a patient who doesn’t need any appendages removed in the first place. The American telecommunications system is far more complicated than many policy makers can possibly understand or appreciate. Forcing the Bells to split their system in two is likely to be a very messy and drawn-out process, taking years to accomplish and merely providing a steady flow of work for the armies of lawyers, engineers, economists, and consultants who will be brought in to iron out the ugly details.
Second, forced divestiture is not likely to help spur any real competition or investment. While splitting the Bells in two might make it a bit easier for regulators to encourage more of the same sort of freeloading by rivals that the Telecom Act’s open access provisions have fostered, that isn’t the sort of genuine competition consumers are looking for. America needs competition in network creation, not just more companies using the same old copper lines to deliver plain vanilla telecom services.
Third, divestiture proponents conveniently ignore another troubling issue associated with splitting the Bell networks into wholesale and retail components: Who will maintain and upgrade the last mile to our homes and businesses after divestiture? Turning the local loop into the equivalent of just another lackluster public utility service not only stamps out investment incentives but leaves troubling questions about future network management unanswered.
Finally, breaking up the nation’s communications grid would have profound ramifications for the economy as a whole. The harm that would come to the Bells and their millions of employees and shareholders is obvious. But consider the impact on communications equipment providers, computer companies, broadband application and content providers, and the many other sectors and businesses that depend upon a stable communications industry.
In conclusion, Baby Bell Breakup Round Two would set back telecommunications policy 20 years and constitute possibly the most radical, pro-regulatory measure to come along for any American industry in decades. Competition is coming to local telephone markets, largely through the explosion in demand for wireless cellular and satellite-based services. With time and further deregulation, consumers will be offered a cornucopia of communications choices as the convergence of wireless services, digital technologies, and computer-driven systems overtake the technologies and networks of the past. Hair-brained ideas like another big breakup of the local telephone network will not get us there any faster.
Adam Thierer (athierer@cato.org) is the Director of Telecommunications Studies at the Cato Institute in Washington, D.C. and an adjunct scholar with the Buckeye Institute in Columbus.
