June 21, 2001
Commentary
Broadband Failure
Has a Political Cause
By James K. Glassman. Mr. Glassman
is a resident fellow at the American
Enterprise Institute and host of
TechCentralStation.com, a Web site
that receives advertising revenue from,
among others, AT&T.
"All this year, victims of the 'tech
wreck' have been looking furiously for
someone to blame," wrote Ethan H.
Hugo of David L. Babson & Co. in a
recent letter to clients. Who's the
scapegoat? Alan Greenspan? Greedy
underwriters? Day traders? Instead of the
usual suspects, Mr. Hugo offered as
culprit "the slow adoption of residential
high-speed 'broadband' Internet access.
This is the business factor that has been
causing so many shattered dreams."
He's right. The agonizingly slow
deployment of broadband has stopped
the Internet in its tracks. The technology
for fast connections is well established,
but 19 out of 20 U.S. families are stuck
with poky dial-up modems, so it takes
them an hour to download a video file
that broadband could handle in two
minutes.
By now, if broadband were widespread,
Web companies would be offering
online sports and movies, zippy online
banking, video telephone calls, useful
education services and health care. With
widespread broadband, Americans
would be buying faster, better
computers, and telecom firms would be
making huge investments in
infrastructure. Instead, orders for capital
equipment have fallen 13% since last
year. Meanwhile, e-commerce firms that
were counting on broadband are going
out of business, the economy is suffering
and, as Mr. Hugo says, high-tech stocks
have suffered a train wreck.
Mr. Hugo, however, is wrong in one
important particular. The broadband
disaster is not strictly a business matter.
Its causes and its remedy are, in fact,
political. The problem is the bottleneck
at the "last mile" -- the copper wires that
lead into every American home. Today,
17 years after the court-ordered breakup
of all-powerful AT&T, the local Bell
monopolies -- once seven companies,
now merged into four -- serve 95% of
residences and small businesses.
Deregulating a monopoly built up
through a century of government
protection and subsidies isn't easy. If
you do it all at once, the monopolist gets
a windfall and blows away all potential
competitors. So the Telecommunications
Act of 1996 provided a more sensible
blueprint. In a replay of the system that
successfully deregulated long distance
(driving prices down 40% since 1984),
the bill required the Bells to unbundle
their networks and resell their services at
non-discriminatory wholesale rates to
competitors. But the law lacked
timetables and penalties. Instead, it
offered an incentive: Open up your local
loops, it told the Bells, and, state by
state, you will be allowed into long
distance. This seemed a decent deal for
getting the benefits of lower prices,
higher quality and broader dissemination
to consumers.
The Telecom Act was the catalyst for a
new industry, as 300 feisty competitive
local exchange carriers (or CLECs), like
Covad and Northpoint, were born. The
Bells, which had kept a broadband
technology called digital subscriber line,
or DSL, on the shelf for 10 years, finally
began to deploy it. But the Bells dragged
their feet on allowing the CLECs into
the local loop. The Bells were fined
$370 million for their lack of
cooperation last year -- a pittance
compared to the tens of billions of
dollars at stake. As Francis Rose wrote
in Wired magazine: "The
Telecommunications Act of 1996, which
was intended to end the Bells' monopoly
on local lines and transform the industry
into a competitive free-for-all, has
proved toothless."
But the CLECs' misery wasn't over. Last
year, two powerful congressmen, Reps.
Billy Tauzin (R., La.) and John Dingell
(D., Mich.), introduced a bill that would
immediately welcome the Bells into the
data part of long distance (the "good"
part, which now represents 75% of all
long-distance traffic, and rising) without
opening their local networks. It would
also bar the CLECs from connecting
with more advanced parts of the Bells'
loops.
Merely the existence of the contentious
bill -- which passed Mr. Tauzin's
Commerce Committee, got an
unfavorable report from the Judiciary
Committee and is now in the lap of the
Rules Committee -- has eviscerated the
CLECs. I recently completed a study
with William Lehr, an MIT economist,
that found that the progress of the
Tauzin-Dingell bill is directly correlated
with the obliteration of the market
capitalization of the CLECs.
We constructed a broad CLEC index,
which reached a peak market cap of
$242 billion in March 2000. By last
month, the market cap had dropped to
$38 billion -- an 83% decline. Of course,
the stock market as a whole, and
high-tech stocks in particular, also fell
over that period, but the tech-heavy
Nasdaq (with the CLECs in our index
removed) declined 48%. The drop in the
CLEC index was greater by
three-quarters than the Nasdaq loss.
In what economists call an "event
study," Mr. Lehr and I looked closely at
eight specific days when favorable news
was reported on the progress of
Tauzin-Dingell. During those days
alone, the market cap of the CLEC index
fell by $87 billion. In other words, 42%
of the total decline in the CLECs' value
occurred on positive Tauzin-Dingell
days. A rich academic literature shows
that capital investment for companies
and sectors is tied to the direction and
extent of market capitalization. We can
expect, then, a sharp decline, probably
between 40% and 80%, in capital
investment by the CLECs in the near
future -- that is, if any CLECs survive.
People of goodwill can differ on how to
solve the broadband crisis, but the
choice comes down to this: trust the
monopolists or trust competition. The
Tauzin-Dingell bill may squash the
CLECs, goes the reasoning of its more
candid advocates, but it will lead to
more deployment of broadband -- and it
gets the government out of the business
of overseeing the interconnection
process, so it's deregulation.
I disagree. Once the CLECs are wiped
out, the Bells will extend their local
monopoly into long distance and
broadband, and Congress -- whether we
like it or not -- will not stand by and
allow them to set prices, quality and
extent of service. What will the
politicians do? Reregulate, of course.
We'll be back in the pre-1984 era before
we know it. Instead, the way to spread
broadband is to enforce the Telecom Act
of 1996 and unleash competition -- the
messier and more chaotic, the better. |
