Competition and Chaos

Competition and Chaos: U.S. Telecommunications since the 1996 Telecom Act

ROBERT W. CRANDALL
Copyright Date: 2005
Pages: 212
https://www.jstor.org/stable/10.7864/j.ctt127xk7
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  • Book Info
    Competition and Chaos
    Book Description:

    The 1996 Telecommunications Act was an attempt to increase competition among telecommunications providers in the United States by reducing regulatory barriers to market entry. This competition was expected to drive innovation in the telecommunications sector and reap economic benefits for both American consumers and telecommunications providers. The legislation, however, had a markedly different impact. While many of the more aggressive providers enjoyed sharp short-term rises in stock market values, they soon faced sudden collapse, leaving consumers with little or no long-term benefit.

    InCompetition and Chaos, Robert W. Crandall analyzes the impact of the 1996 act on economic welfare in the United States and how the act and its antecedents affected the major telecommunications providers. He argues that the act was far too stringent, inviting the Federal Communications Commission and state regulators to micromanage competitive entry into local telecommunications markets. Combined with the bursting of the dot.com and telecom stock market bubbles, this aggressive policy invited new and existing firms to invest billions of dollars unwisely, leading to the 2001-02 collapse of equity values throughout the sector. New entrants into the market invested more than $50 billion in unproductive assets that were quickly wiped out through massive failures. The 1996 act allowed the independent long-distance companies, such as MCI and AT& T, to live a few years longer. But today they are a threatened species, caught in a downward spiral of declining prices and substantial losses. The industry is preparing for an intense battle for market share among three sets of carriers: the wireless companies, the local telephone carriers, and the cable television businesses. Each has its own particular advantage in one of the three major segments of the market -voice, data, and video -but none is assured a clear path to dominance. Although the telecom stock market collapse is now history and the survivors are investing once again, Crandall concludes that the regulators have failed to adapt to the chaos to which they contributed.

    eISBN: 978-0-8157-9770-8
    Subjects: Technology, Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-viii)
  4. Acknowledgments
    (pp. ix-x)
  5. 1 Introduction
    (pp. 1-6)

    Ten years ago, most of the world’s telecommunications companies were state-owned monopolies, performing much like the post offices from which they had sprouted in the early decades of the twentieth century. Those in the United States were different: they had never been government-owned, and theprivatenational operator, AT&T, was broken up in 1984 to ensure greater competition in long-distance and equipment markets. Twelve years after the breakup of AT&T, Congress passed the 1996 Telecommunications Act, opening all telecommunications to competition and launching a new era in the sector.¹ No one could have guessed how this era would unfold.

    As...

  6. 2 Opening Telecom Markets: The 1996 Telecommunications Act
    (pp. 7-16)

    Before 1996 the U.S. telecommunications sector was mired in a policy morass from which there appeared to be no escape. Though never formally shown to be a “natural monopoly,” it was heavily regulated by politically responsive officials intent on using their powers for income redistribution.¹ In this pursuit, the regulators often protected the monopoly power of incumbents so as to have monopoly rents to shift among constituent groups.²

    In the 1950s, however, the courts began to get involved as competitors stormed the walls. By the 1980s court challenges based on the country’s antitrust laws were succeeding, and the courts became...

  7. 3 The First Eight Years under the New Law
    (pp. 17-30)

    The 1996 Telecommunications Act not only freed the Bell operating companies from the 1982 line-of-business restrictions but also exposed them to extensive local competition for the first time. Longdistance companies could now enter local markets and therefore offer integrated service packages to their customers. With Internet use also gathering momentum and equity markets enjoying a surge of historical proportions, the United States found itself in the middle of a seemingly unending economic boom.

    A hot topic of this period was the potential of the “information superhighway.”¹ The declining cost of fiber-optics transmission and the progress driving microprocessor technology (at a...

  8. 4 Local Competition under the 1996 Act
    (pp. 31-58)

    Decades of regulation have left the U.S. telecommunications sector with a distorted rate structure.¹ A substantial share of long-distance revenue has traditionally been used to defray the non-traffic-sensitive costs of the local network, through carrier access charges and excessive intrastate rates. In addition, local residential rates have been kept artificially low, particularly in less densely populated areas, while local single-line business rates are generally more than twice as high, despite the fact that the average business line is shorter than the average residential line.² In view of this distortion, entrants should have ample opportunity to target business and residential subscribers...

  9. 5 Effect of the 1996 Act on Incumbent Local Companies
    (pp. 59-77)

    There can be little doubt that the incumbent telephone companies have lost subscribers to the new entrants since 1996. Between 1996 and 2000, a period of vibrant economic expansion, these losses occurred against a backdrop of subscriber line growth and a generally buoyant stock market. Now, however, the total number of access lines in the country is declining as residences reduce their use of second lines and some simply rely on wireless service as their only telephone service.¹ More important, the equity markets in general have soured on telecommunications. In this environment, the incumbents’ loss of retail (end-user) lines to...

  10. 6 The Death of Distance and of the Long-Distance Carriers
    (pp. 78-93)

    Before 1970 there were no separate, independent long-distance carriers in the United States. As in other countries, long-distance service was provided by integrated companies that offered local connections and long distance. AT&T, the leading carrier, provided access to more than 80 percent of local access lines and virtually all interstate long-distance service in the country. Entry in long-distance services first appeared in the 1970s, not necessarily because nonintegrated entry made economic sense but because state and federal regulators overpriced long-distance service. If entrants such as MCI or Sprint could gain access to AT&T’s and other local companies’ lines to originate...

  11. 7 The Rapid Growth of Wireless Telecommunications
    (pp. 94-109)

    The number of wireless or “cellular” subscribers in the United States will soon exceed the number of traditional telephone lines.¹ Most subscribers now have a choice of five national cellular carriers. Nevertheless, regulators continue to view the provision of “local” telephone access and exchange services as a local monopoly, thereby requiring government regulation. But if nearly every current user of ordinary local telephone service will soon be carrying a wireless handset, and if this wireless service can be purchased from five national vendors, how can local telephone companies enjoy any market power in traditional voice services?

    American consumers clearly have...

  12. 8 The Broadband Revolution
    (pp. 110-132)

    Although the Internet did not develop commercially until 1990 and the World Wide Web was not availabel until 1991, it did not take long for these forces and household ownership of personal computers to create a “Nation Online.”¹ Just twenty years ago, only 8 percent of U.S. households had a computer; but by 2003, 61.8 percent had one.² Residential Internet connections lagged behind the growth in household computers at first, but by 2003 more than 50 percent of households were connected to the Internet (figures 8-1 and 8-2). According to the Census Bureau, between 1998 and 2003 the share of...

  13. 9 Telecom Reform in Other Countries
    (pp. 133-155)

    Telecom liberalization has now spread to virtually every developed country in the world and even many developing countries. Although the United States has had perhaps the most aggressive policy of encouraging local entry and has had long-distance competition for several decades, other countries have also opened their telecom markets to competition in recent years. The United Kingdom began by privatizing British Telecom in 1984 and opening entry into telecom services in 1985.¹ Japan opened its national and international calling markets to competition in 1985, and Canada liberalized its long-distance market in 1992 and its local telecom markets in 1997.² The...

  14. 10 A Look Back and a Look Forward
    (pp. 156-172)

    No one looking back over the past nine years of meteoric events in the telecom sector can confidently predict what will happen in the next nine years. Who can say how the politics of regulation will affect the sector after the rather disappointing impact of the 1996 Telecom Act on traditional wire-based telephone operations? In hindsight, perhaps the stock market bubble and excesses of 1998–2000 could not have been avoided, for the Internet created incredible expectations. Regulators may not have created it, but they did contribute to the bubble by encouraging entrants having little hope of survival.

    Now, five...

  15. Appendix: Estimates of Bell Company Cumulative Capital Expenditures across States, 1996–2003
    (pp. 173-178)
  16. Notes
    (pp. 179-206)
  17. Index
    (pp. 207-212)
  18. Back Matter
    (pp. 213-213)