How Lobbyists Crushed the ’96 Act and US Broadband With It

Professor Susan Crawford, a former special assistant to President Obama, claims in her new book “Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age” that the US telecom and cable market is sliding towards a de-facto monopoly. Telecom TV’s Martyn Warwick provides an excellent summary here. While reading this summary, it struck me that Crawford seems to place the blame on misguided regulation and the Telcos and Cablecos themselves. I’d like to offer that the real blame lies with the pay-to-play government that quickly dismantled the Telecom Act of 1996 and, in no small part, caused the Internet bubble to burst.

I was a regulatory reporter in 1996, living in Washington DC where I covered the evolving Telecom Act in excruciating detail. During one session in the FCC’s halls where network and OSS unbundling was being discussed, I was stuffed into a room full of state PUC staffers who, frankly, didn’t pay attention to anything that was said all day. I thought right then and there that the Act was vulnerable because those responsible for enforcing it didn’t understand it or care about it. Being older and more seasoned now, I wonder if perhaps they all knew it didn’t matter because lobbyists were about to gut it anyway.

The lobbyist who led the Telco charge against the ’96 Telecom Act was Bill Daley, a former US Secretary of Commerce and one of the most influential lobbyists in Washington. He was President of SBC at the time. I Ask yourself a simple question: What was a powerful lobbyist doing as President of a massive Telco? I believe his job, above all other things, was to sink the ’96 Act before it could take hold. He, and others working for the same agenda, did so brilliantly. What amazed me at the time was how seemingly innocuous their surgical strike was. Though many elements of the Act were subtly changed, I think the biggest blow was the change in wholesale rates for loop unbundling. It basically made it economically undesirable, if not unfeasible, for CLECs to turn a profit on voice and DSL unbundling.

I firmly believe this shift in the wholesale rate structure was ultimately devastating to the US economy. For starters, ask yourself this – why is the country that invented broadband ranked something like 16th in the world in broadband penetration? If you remember back to 1996, there were many CLECs emerging who had DSL services as their centerpiece. The Internet revolution was on and these companies wanted to invest in driving broadband into the market. When the wholesale rates changed, many of their business models went toes up. They could burn cash, to an extent, to gain subscribers at a cost-competitive rate – even if at a small loss – until they reached enough scale to achieve profitability (I’m oversimplifying, but you get the idea). The wholesale rates went up and these companies, already heavy into network equipment investments and burning venture cash, had nowhere to go. Capital dried up too, because why would their investors push more cash into a business model that was fighting upstream against Bill Daley holding hands with his pals in the U.S. Congress?

Here’s the even bigger problem – Wall Street was flying high in the dot-com bubble. The failure of DSL competitors to drive broadband into the market set it up for the big burst. Sure, speculation overvalued all kinds of ridiculous dot-com business models, and we can point a finger at Wall Street if we want to (and if we have any fingers left that aren’t already pointing that way). But projections for DSL penetration which were based on successful CLEC competition fed into the models that projected success for a fair percentage of the emerging dot-com start-up population. So, when broadband penetration didn’t expand, because the lobbyists changed the wholesale rules on the DSL investors, there just weren’t enough broadband-connected users in the US to feed the dot-coms. The DSL guys failed. Many, if not most, dot-coms failed. Wall Street imploded, taking many blue chip stocks (and massive amounts of US wealth and 401K savings) with it. And no one pointed the finger at Congress which wrote the ’96 Act and then allowed big-money lobbyists to dismantle it.

So, while I appreciate and mostly agree with the spirit of what Professor Crawford is arguing, and I agree that the real power in the US telecom market is in the hands of very few companies, I don’t believe the primary blame belongs with Telcos and Cablecos. Have they manipulated regulations in their own favor? Yes, and that’s dirty business. But there is no large industry in the US that isn’t permitted to the same. The point of having regulations is to keep market abuses in check; i.e. to stop major corporations from tilting the playing field in their own favor. But if you step back and look at US industries like banking, food, telecom, energy, and firearms, they all push Congress and their respective regulators around with their lobbying power. Ultimately the blame rests with Congress which has failed to do its job in nearly every industry it is ultimately tasked with regulating.

Telecom TV’s Warwick calls out this quote from Crawford:

 “We are in this position as a country because we assumed that the magic of the marketplace would provide competition and provide world-class communications, but history has demonstrated that left to their own devices, companies will gouge the rich, leave out the poor, cherry-pick markets and focus solely on their profits. It isn’t evil, it’s just the way things work.”

This is where I respectfully disagree with the Professor, because I don’t think anyone assumed that the “magic of the marketplace would provide competition.” We assumed, wrongly, that the Telecom Act of 1996 would provide competition. It would have done so had the major Telcos’ lobbyists not been permitted to gut it and subsequently re-write rules that aligned with their strategic plans.

We now know, especially in the wake of the financial meltdown and Sandy Hook, that there are no depths to which Congress will not stoop in order to satisfy lobbyists and reap monetary rewards. We should not be surprised that large corporations act in their own self-interest; that’s like being surprised when we hear that a lion at a zoo takes a bite out of a zookeeper. The problem here is that the zookeeper – Congress – serves the lions’ interests so much so that the spectators – the American people (and our friends in Europe and elsewhere, btw) – are the ones who are eaten alive.

The US’s shortcomings in regards to broadband are just another embarrassment (like our gun laws, our banking regulations, our education system, etc.)  brought upon our nation by officials we elect to serve in a system that is morally and ethically bankrupt as a result of having passively legalized collusion and corruption. As Crawford astutely points out, the local and regional efforts made by public-private partnerships to build out competitive networks have very little chance of succeeding against the lobbying status-quo. We have to hope that market participants like Google have enough power, influence, and capital to manipulate the rules in a slightly better direction.

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Edward Finegold
About Edward Finegold 122 Articles
Ed is now Director, Strategy for NetCracker. Previously, for 15 years he was a reporter, analyst and consultant focused on the OSS/BSS industry and a regular contributor to BillingViews.

1 Comment

  1. Ed,

    Thanks for a highlighting this thought stream. I have not read the book, though I did read Martyn Warwick’s piece – as well as the comments below his article which were even more enlightening.

    You fundamentally question the way in which the US (and other Western economies) are governed across a range of industries. You highlight the responsibility that is placed on Congress and the national regulator – neither of whom are capable of balancing the forces of industrial and commercial lobbying. The banking crisis has done little to stem the tide. All that has happened is that governments have taken on the debt for failing to regulate properly in the first place.

    Your description of the 1996 act and the subsequent dot-com crash reminds me of the classic shape of the Gartner Hype Cycle. Sure we had a bubble – but are we not now enjoying the fruits of this with the new access technologies available?

    Underlying this, it appears to me that most proprietary, less successful network technologies naturally end up collapsing to a single owner over time. Whether it is voice (PSTN interconnect), data (X.25, token ring, modem banks), cable (DOCSIS) or mobile networks (the recent network sharing arrangements for GSM & 3G), the patterns are the same. The cost of maintaining old technologies becomes prohibitive and the money markets demand “rationalisation” and “consolidation” because of the madness of maintaining two networks and all the support systems associated with running the same technologies over the same geographic area.

    The challenge, I think, is that regulators (particularly in Europe) try to govern the whole thing by using the rear-view mirror and are, themselves, hamstrung by their own rules and regulations which they hide behind to cover their own incompetence and lack of vision. They are full of economists as well – so the end-result is a given!

    Your article points to one of the central issues – the wholesale price for local loop unbundling (and now sub-loop unbundling). Whilst the incumbents (particularly in rural areas) command a near 100% monopoly on existing lines, new entrants have to build out their networks and gain market share to about 20-30% before they can break even. This is risky and takes a few years. In the current economic climate, finding banks and other forms of borrowing that will invest in such schemes is near impossible. Added to that the incumbent’s lobbying capabilities are so powerful, they seek out and destroy any competitors’ offerings before they are incubated by configuring new technologies that will out-smart their competitor’s offerings. We have exactly that in the UK, where the wholesale price of Fibre-to-the-Cabinet has been greater than the retail price being offered by the incumbent.

    It reminds me of the old story of the old man looking for the key to his house under the lamp post. A passer-by asks him what he is doing. The old man says he is looking for the key to his house. The passer-by asks him why he is looking in that place. The old man says: “It is because this is where the light is”. The passer-by says tot he old man: “Where did you drop the key?” The old man says: “Oh, I dropped it over there by the door, but it is dark over there and I cannot see as well”.

    The problem for me, is that the government bodies responsible for policy as well as the National Regulatory Authorities are looking for the answer in the wrong place. One of Warwick’s commentators refers to the early voice regulation (and the Kingsbury Commitment of 1913) which was concerned with interconnection to AT&T’s network at independent exchanges. Over time, the incumbents have cleverly moved the light to shine on other areas and draw it away from exchanges – which they now own, manage and manipulate to their own ends.

    The solution is simpler than we think. We need to create a new set of independent, local digital exchanges that are capable of coping with the demand for wholesale internet, mobile companies, businesses and other digital service providers, whilst opening up the opportunities to interconnect at these exchanges in as many ways as are practical. This is already starting to happen in Europe where the idea of a mutally-owned exchange is more the norm.

    If we support these new types of independent exchanges, then we can create the new competitive environment that is required for the right services in the new economy to emerge and flourish. Put the light near the door and we might get the right solution. Keep looking where the light is and where we did not drop the key and we don’t stand a chance.

    If we have any role (as observers, commentators and writers), we have the obligation to seek out these types of new ideas so that they are understood and debated. I welcome your thoughts on whether or not you think this line of thinking is worth pursuing. And whether Billing Views is the right place to kick-off the debate!

    Best,

    Lorne

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