Download Lee Selwyn

How the Deregulatory Meltdown
affected telecom, and what can we
do now to fix it?
Lee L. Selwyn
Economics and Technology, Inc.
One Washington Mall, 15th Floor
Boston, Massachusetts 02108
+1 (617) 598-2200
NASUCA Mid-Year Meeting
June 29, 2009 / Boston
1
The deregulation experiment
Across the US economy, the last eight years
were dominated by a concerted effect to
elevate laissez-faire to new heights, and to
DEREGULATE FOR
THE SAKE OF
DEREGULATION
Economics and Technology, Inc. / June 2009
2
The deregulation experiment
•
•
•
•
•
•
•
Antitrust
Banking
Securities
Real estate lending
Consumer protection
Trade policy
Environmental policy
Economics and Technology, Inc. / June 2009
3
The deregulation experiment
• Antitrust enforcement was largely
nonexistent
– Under the rubric of enhancing America’s global
competitiveness, traded away domestic competition
for increased market concentration and
consolidation of market power
– Consolidations resulted in entities “too big to fail” –
we put all of our eggs in one basket
– Catalyzed much of the current economic meltdown
Economics and Technology, Inc. / June 2009
4
The deregulation experiment
• Banking and Finance
– Lost sight of critical role of financial
institutions as economic drivers
– Instead of financing and supporting
economic activity and growth, banking and
financial sectors turned their attention to
conjuring up derivative instruments that
were essentially “side bets” on the outcome
of economic events
Economics and Technology, Inc. / June 2009
5
The deregulation experiment
• Residential real estate financing
victimized the most vulnerable
consumers
– Absurdly easy credit drove up home prices and
created the real estate bubble
– Loan originators had no “skin in the game,” no
incentive to properly vet prospective borrowers
– Worked like a Ponzi scheme that was utterly
dependent upon prices continuing to rise
– What the residential mortgage lenders did makes
Bernie Madoff’s scam (which also depended on a
continuing bull market) look like chump change
Economics and Technology, Inc. / June 2009
6
The deregulation experiment
• Consumer protections/safeguards
ignored
– Allowed consumers to run up huge credit
card and other debt (e.g., auto loans)
– Once the economy began to sour, debtburdened consumers were forced to curtail
consumption in a big way – mushrooming
the scope and extent of the economic
meltdown
Economics and Technology, Inc. / June 2009
7
The deregulation experiment
• Trade policy
– Blind focus on globalization led to the virtual
eradication of US manufacturing capacity across a
broad range of industries
• George Perot’s “giant sucking sound”
• Just try to buy “Made in USA” products … they’re pretty
hard to find
• Loss of US manufacturing capacity/capability may be
largely irreversible
– Long-term impact on US economy
• Trade deficit, growing dependence on foreign
manufacturing, escalating government and private debt,
will all negatively affect US standard of living for
generations
Economics and Technology, Inc. / June 2009
8
The deregulation experiment
• Environmental policy (was there any?)
– Allowed US automakers to take advantage of SUV
loophole in CAFE (Corporate Average Fuel
Economy) standards, which pumped up demand for
these vehicles, contributed to big 2008 jump in gas
prices, and which in turn triggered the cratering of
demand for SUVs and most other cars
– Failure to capture real environmental costs in
product prices triggered grossly inefficient
consumption
– Refusal to commit public sector funding for energyefficient infrastructure investment – e.g., mass
transit, high-speed rail
Economics and Technology, Inc. / June 2009
9
The deregulation experiment
TELECOM DEREGULATION HAS
PRODUCED COMPARABLY
NEGATIVE RESULTS
Economics and Technology, Inc. / June 2009
10
How we got to
where we are
Economics and Technology, Inc. / June 2009
11
The Shrinking Natural Monopoly:
Pre-Carterphone
(before 1970)
Pre - Carterphone
Local
Switch
Network

Toll
Switch
Long Distance
Network
Equipment Mfg.
Company
Monopoly Franchise
Telco Owned - Closed
Com petition
Telco Owned - Open
Economics and Technology, Inc. / June 2009
Non-Telco Owned
12
The Shrinking Natural Monopoly:
Pre-divestiture
1984)
Post (before
- Divestiture
IXC
Local
Switch
Network
Toll
Switch
IXC
IXC
Equipment Mfg.
Equipment Mfg.
Company
Company
Monopoly Franchise
Telco Owned - Closed
Competition
Telco Owned - Open
Economics and Technology, Inc. / June 2009
Non-Telco Owned
13
The Shrinking Natural Monopoly:
as envisioned byToday
TA96
Local
Switch
Network
Access
Switch
IXC
CAP
IXC
CAP
Monopoly Franchise
Telco Owned - Closed
Competition
Telco Owned - Open
Economics and Technology, Inc. / June 2009
IXC
Non-Telco Owned
14
The Shrinking Natural Monopoly:
as envisioned by the
Future Powell/Martin FCC
Local
Switch
Network
Access
Telco
Long Distance
Switch
IXC
CLEC
IXC
CLEC
Monopoly Franchise
Telco Owned - Closed
Competition
Telco Owned - Open
Economics and Technology, Inc. / June 2009
IXC
Non-Telco Owned
15
The deregulation experiment
• Lack of antitrust enforcement together with
premature elimination of TA96 market-opening
measures and competitive safeguards resulted
in a “perfect storm,” assuring the demise of
telecom competition
–
–
–
–
Mergers of incumbent carriers
Retail and wholesale price deregulation
Horizontal integration of “intermodal” competitors
Use of regulation to block and frustrate entry
Economics and Technology, Inc. / June 2009
16
Economics and Technology, Inc. / June 2009
17
Economics and Technology, Inc. / June 2009
18
Economics and Technology, Inc. / June 2009
19
A Mass Market Cable/Telco duopoly
An Alternative Future
Local
Switch
An Alternative
Network
Local
Cable
Switch
Head-end
Network
Monopoly Franchise
Competition
Toll
Switch
Future
TollCable IP
Network
Switch
Long Distance
Network
Long Distance Terminating
Network
ILEC/CLEC
Telco Owned - Closed
Non-Telco Owned
Telco Owned - Open
CableCo - Closed
Economics and Technology, Inc. / June 2009
20
Enterprise market: no real competition
An Alternative Future
Local
ILEC
Switch
Network
Toll
Switch
Long Distance
Network
THE LOCAL
BOTTLENECK
ENDURES
Monopoly Franchise
Competition
Telco Owned - Closed
Non-Telco Owned
Telco Owned - Open
Economics and Technology, Inc. / June 2009
21
The deregulation experiment
Absent regulatory constraints on
telecom carrier prices and earnings,
the now-deregulated incumbent
carriers have escalated their prices
and have been able to pursue tactics
that have operated to crush their
competition.
Economics and Technology, Inc. / June 2009
22
RBOC profits soar under deregulation
Escalating RBOC Interstate RORs
60%
50%
40%
30%
20%
FCC
Authorized
ROR: 11.25%
10%
0%
1999
AT&T
2000
2001
2002
Qwest
2003
2004
2005
Verizon
Economics and Technology, Inc. / June 2009
2006
2007
Total
23
RBOC profits soar under deregulation
Escalating RBOC Special Access RORs
200%
175%
150%
125%
100%
75%
50%
FCC
Authorized
ROR: 11.25%
25%
0%
1999
2000
AT&T
2001
2002
Qwest
2003
2004
2005
Verizon
Economics and Technology, Inc. / June 2009
2006
2007
Total
24
RBOC profits soar under deregulation
RBOC Total Interstate ILEC RORs for 2007
60%
53%
50%
40%
35%
33%
30%
25%
20%
FCC
Authorized
ROR: 11.25%
10%
0%
The "New"
at&t
Qwest
Verizon
RBOC
Average
Economics and Technology, Inc. / June 2009
25
RBOC profits soar under deregulation
RBOC Special Access RORs for 2007
200%
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
175%
138%
101%
62%
FCC
Authorized
ROR: 11.25%
The "New"
at&t
Qwest
Verizon
RBOC
Average
Economics and Technology, Inc. / June 2009
26
The deregulation experiment
RBOC “commitments” to invest in
infrastructure and broadband –
offered as a carrot to achieve
deregulation – turned out to have
been empty promises
Economics and Technology, Inc. / June 2009
27
Economics and Technology, Inc. / June 2009
28
LEVEL OF REGULATION
Economics and Technology, Inc. / June 2009
29
RBOCs have disinvested in their core networks
Economics and Technology, Inc. / June 2009
30
The aftermath of telecom deregulation
• RBOCs abandoned many markets
– After first convincing regulators that mergers would
produce increased efficiency and broad public
benefits, Verizon has been off-loading its less
profitable wireline markets onto undercapitalized and
underqualified buyers
– Hawaii (former GTE) – filed for Chapter 11 in 2008
– Northern New England – Fairpoint near collapse,
states providing bailout funds, service in meltdown
– Pending sale of most of smaller former GTE territories
to Frontier – would nearly quadruple size of company
Economics and Technology, Inc. / June 2009
31
The rationale for deregulation
The Powell/Martin agenda was
rationalized on the basis of
several repeatedly repeated –
but factually vacant -contentions
Economics and Technology, Inc. / June 2009
32
The rationale for deregulation
The incumbent telcos:
• claimed that telecom services at all levels – local, long
distance, wireless, broadband – were all highly
competitive
• argued that incumbent telecom carriers should be
treated just like CLECs and cable companies – I.e., not
subject to regulation
• promised to build out a national broadband infrastructure
if they were left alone
• threatened to withhold their investment in and
development of broadband service if forced to unbundle
their networks
• convinced policymakers that if they did not build
broadband, nobody else would.
Economics and Technology, Inc. / June 2009
33
The rationale for deregulation
The FCC’s big “come bet”
Competition will be here soon,
so let’s deregulate now.
But the FCC’s premature
deregulation actually worked to
derail nascent competition
Economics and Technology, Inc. / June 2009
34
The aftermath of telecom deregulation
• FCC deregulated for deregulation’s
sake
– Confused MEANS with ENDS
– No goal other than deregulation itself
– No benchmark for judging success
– No process for ex post evaluation of
outcomes
Economics and Technology, Inc. / June 2009
35
The aftermath of telecom deregulation
• So as not to be confused by any facts,
the FCC has actually worked to
dismantle the means for making such
assessments going forward
– Blew off 2000 commitment to review
CALLS plan in 2005
– Eliminated cost allocation rules
– Eliminated ARMIS reporting
– Frustrated state PUC efforts to maintain
these mechanisms
Economics and Technology, Inc. / June 2009
36
The aftermath of telecom deregulation
So what did
telecom deregulation
actually achieve?
Economics and Technology, Inc. / June 2009
37
The aftermath of telecom deregulation
• A legacy of failure
– RBOC capital investment levels declined
– Competitors exited the market or merged with
incumbent carriers, and the few that have survived
have scaled back on their capital spending
– Market concentration has increased
– Prices and earnings have soared
• And now the federal government is handing out
stimulus money to construct broadband and
wireless infrastructure that the deregulated
telcos and cablecos failed to build
Economics and Technology, Inc. / June 2009
38
Looking forward,
Fixing the problem
Economics and Technology, Inc. / June 2009
39
Fixing the problem
The American public has now experienced firsthand what can happen in the absence of
effective regulation.
The situation in telecom is no different from the
rest of the US economy, but may be less visible
to the public and to policymakers
LET’S NOT WASTE THIS OPPORTUNITY TO
REGAIN PUBLIC SUPPORT FOR TELECOM
REGULATION
Economics and Technology, Inc. / June 2009
40
Fixing the problem
• Identify and establish specific policy goals
– Competition where economically feasible
– Regulation where necessary – and to facilitate
development of competition (TA96 model)
– Broadband infrastructure development and universal
broadband availability – may require reinvigoration of
“natural monopoly” approach
– Where telecom is key input to other economic
sectors, assure efficient and cost-based transfer
prices either through competition or regulation
Economics and Technology, Inc. / June 2009
41
Fixing the problem
• Require functional if not full structural separation
of wholesale and retail services
– Bell System break-up demonstrated benefit of full
structural separation, but less draconian measures
may still be viable
– Several European countries have adopted “functional
separation” models – e.g., British Telecom’s
“Openreach” wholesale entity
– Australia has embarked upon a government-funded
broadband network (which will ultimately be
privatized) providing open nondiscriminatory access
to retail and other telecom carriers
Economics and Technology, Inc. / June 2009
42
Fixing the problem
UK Ofcom’s solution
Economics and Technology, Inc. / June 2009
43
Fixing the problem
• Retail price deregulation must be linked to
continued availability of wholesale services at
cost-based rates – or retail/wholesale functional
separation.
– Retailing of telecom represents as much as 40% of
total value added in final retail price
– Competition at the retail level was fully contemplated
in TA96 and is not, as Bells claim, “phony” or
“artificial” competition
– In some cases, Bell wholesale prices are higher than
its retail rates – how can anyone compete with that?
Economics and Technology, Inc. / June 2009
44
Fixing the problem
• Reinvigorate regulatory institutions and
mechanisms
– Reinstate reporting and monitoring requirements
(e.g., ARMIS, state-level reporting)
– Establish specific criteria for determining
effectiveness of regulatory model (e.g., earnings
levels, price levels, market shares, penetration rates)
– Avoid “transition” arrangements that create regulatory
uncertainty and that discourage entry and investment
– Establish and maintain schedule for periodic (e.g.,
triennial) reviews and corrective measures
Economics and Technology, Inc. / June 2009
45
Fixing the problem
• Identify and address (at a national level)
specific issues and concerns. Examples:
– RBOC earnings on wireline telecom services
are above overall RBOC corporate earnings,
suggesting that these services are crosssubsidizing other (competitive) ventures (e.g.,
Verizon’s FiOS, AT&T’s uVerse)
– If wireless is a true intermodal competitor to
wireline, the two lines of business should be
made structurally separate
Economics and Technology, Inc. / June 2009
46
Fixing the problem
• Identify and address (at a national level)
specific issues and concerns. More
examples
– Bundling of basic and optional services, and
of telephone and other services (e.g.,
wireless, video, Internet) has generally
escalated consumer telecom costs
– Wireless E911 is still largely a fantasy -households that “cut the cord” and abandon
wireline service may not realize the risk
Economics and Technology, Inc. / June 2009
47
Fixing the problem
• The RBOCs have been particularly
successful in convincing policymakers and
the public that telecom is competitive and
that regulation is not required
• NASUCA needs to better communicate the
factual vacancy of these claims, and better
explain the need for and public benefit of
affirmative regulation and of consumeroriented regulatory advocacy
Economics and Technology, Inc. / June 2009
48