No broadband cure for ailing telecoms

August 05, 2002|By Harold Furchtgott-Roth

THE DOWNFALL of WorldCom is just the latest in a series of calamities that has befallen U.S. telecommunications companies in the past two years.

Most telecommunications companies did not need to resort to clever accounting tricks. They failed or faltered the old-fashioned way: They were simply unprofitable, sometimes as the result of vague and constantly changing government rules.

The telecommunications sector is in chaos. Companies left and right are either moribund, bankrupt or desperately trying to avoid those conditions. The Nasdaq telecommunications index has lost the vast majority of its value in the past two years. Hundreds of billions of dollars of shareholder equity have been forever lost. Hundreds of billions of dollars of corporate bonds have been heavily discounted. Countless privately held companies have gone under or never gotten off the ground. Pension and retirement plan values have dwindled. Hundreds of thousands of workers, once standing on the frontier of American technology, are unemployed or underemployed

Something is wrong.

The failure has not been one of technology, entrepreneurship or competition. In fact, consumers today have access to technologies unimaginable just a few years ago.

The crisis in telecommunications is in great measure attributable to the absence or unenforceability of fundamental economic foundations: property and contract.

The Telecommunications Act of 1996 opened up previously restricted telecommunications markets to competition. But the property and contract rights were to be written by regulatory agencies.

New telecommunications companies made enormous multi-year investments assuming that the legal rights of property and contract under initial regulations would be enforceable and remain in place. However, a stable regulatory environment was just a mirage.

Regulatory agencies would change some rules every year or so; the courts were just as likely to throw out the rest. Enforcement of property and contract rules was elusive or more costly than the property itself.

The solution should be a renewed dedication to economic principles to protect and enforce meaningful property and contract rights. But the proposed solution around the country is "IP."

In Washington, "IP" means industrial policy, but it has a less offensive pseudonym: broadband.

Broadband is just a popular way of saying high-speed data services. The words do not appear in the Constitution, and they barely appear in federal communications, and never in the exalted context of industrial policy to which it is used today.

Fifteen years ago, some senior government officials trembled because Japan was feared to be leapfrogging the United States by mandating standards for high-definition television (HDTV). It was a disaster not because of inferior technology but because the Japanese government tried to reach a specific technological outcome. Broadband today sounds eerily like Japanese HDTV of the past.

When governments speak of the necessity of a specific technology, and when they enshroud that technology in the mystique of national development, ordinary citizens should tremble.

To hear the policy debate in Washington, one would willingly believe that all the problems of the telecommunications sector can be traced to an insufficiency of investment in broadband.

All empirical evidence suggests exactly the opposite: There has been too much, not too little, economic investment in broadband.

Many companies (Northpoint, Rhythms, Global Crossing and Williams Communications, to name just a few) have gone bankrupt with a broadband-focused business plan. WorldCom built one of the first Internet backbones and has some of the largest broadband businesses in America.

Anyone who believes there is a shortage of broadband investment can buy all they want in bankruptcy court, or the public stock exchanges, for pennies on the dollar.

Nor is the problem lack of widespread broadband availability. Practically every business of any size, where most broadband traffic likely will remain, has multiple choices of broadband providers. Even residential consumers have multiple choices for broadband services. Roughly 80 percent of American homes have access to cable modem service, 50 percent have access to DSL service, and practically all households could have satellite as a backstop.

The problem is not even one of demand. Demand is growing rapidly by any conventional standard. Just a few years ago, no businesses or residences had broadband services. Today, businesses of any size use it extensively, and more than 10 percent of American households subscribe. Residential subscriptions are growing at double-digit rates.

The FCC has multiple proceedings under way specifically aimed at promoting broadband. These are not aimed at solving the core problems of telecommunications: hazy and ever-changing rules with unenforceable property and contracts. Rather, these are aimed at applying different rules to different technologies, possibly outside of existing law, and, amazingly, even at taxing the Internet.

No one in America - least of all distressed companies, unemployed workers and dismayed retirees - needs broadband industrial policy.

It is time the government returned to what America does best: sound economics.

Harold Furchtgott-Roth is a visiting fellow at the American Enterprise Institute and a former commissioner of the Federal Communications Commission.

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