Strangled telecom: how a natural monopoly stays that way

by Andy Oram

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Few will make the connection. But yesterday's news about a Supreme
Court ruling on municipal phone networks represents another knot in
the noose tightening around the neck of new and innovative
communications technologies. Twenty years from now, as we're all
complaining about the lack of viable and affordable high-speed
communications--just as people were complaining twenty years ago, and
as we are complaining now--we'll hardly remember the quiet gurgling
noise made by the promise of innovation as it got slowly strangled to
death. And unless we learn the tricks of the dominant monopolies, we
will pass through death after death.

The first finger on the throat: Section 251 undermined

What constitutes competition? The landmark Telecom Act of 1996 was the
communications update to Nikolai Bukharin's call on Russian peasants:
"Enrich yourselves." Here, the long-distance, local, and cable
companies were supposed to invade each other's turf and vastly expand
communications offerings for the public. But the 1996 act left scant
opportunity for new, small providers. It did open a chink in the armor
of monopoly through the well-known Section 251, which required
incumbent phone companies to open their networks to competition in a
variety of ways. But the Bell companies made sure that part of the law
would subsequently be rendered toothless.

The major extraction was performed by Michael Powell's FCC on August
21, 2003, when it heeded Bell company claims that the requirement to
support competition was holding back their own deployment of
high-speed connections. The FCC cleverly worked around the spirit (in
my opinion) of Section 251 by separating phone networks into the old
and the new. On the old ones--which support ADSL at best--competition
would be required as specified in the Telecom Act. On new
ones--especially those built on fiber--the Bells would not have to
allow competition.

Well, maybe the gutting of Section 251 was inevitable; a lot of
observers figured it would be. The Bells were so effective at making
life impossible for competitors that it would have taken years of
sympathetic courts (which, as we will see, are not anxious to play
that role) to force a competitive environment. The hundred little ways
Bells undermine the law have been documented in lawsuits and FCC
documents, as summarized in my article

Bell Telephone Companies' Applications to Enter Long-Distance Market

Furthermore, the Bells made sure over and over, year after year, to
get their well-funded congressional backers to introduce bills that
would weaken Section 251. The FCC knew it was under tremendous
political pressure to give the Bells some relief, and since Powell's
sincere ideological bent lay in that direction anyway, Section 251 had
to give.

The pressure increases: competitive charges overturned

But the FCC has been consistent about promoting competition in one
manner: by setting low rates for the lease or sale of incumbent
telephone companies' lines and equipment. The FCC figured that most of
this stuff had been laid down ages ago and had paid for itself many
times over; it was about time to share the wealth with competitors who
might make better use of it. (I will look at the implications of sunk
investments later in the article.) So the FCC tried to set prices
based not on what it cost to install the equipment, but on how much it
could earn in the future--in other words, to treat the incumbents on
the same level as the competitors.

The Bells found that a pretty hard vampire to kill, but it looks like
they've finally sunk the silver stake in place. The matter has gone
back and forth in the courts for years, but the tide has turned
against the FCC. Whatever the merits of the courts' rulings, the
effect is to cut off innovation and sacrifice the public interest in
favor of the Bells' monopoly status.

Sliding up the other side of the neck: municipal networks constrained

If it is effectively impossible to offer service over existing phone
equipment, new equipment must be laid down. And that requires a major
economic player; Mom-and-Pop ISPs are not the ones to drive this
revolution. Enter, then, the municipal governments.

Cities around the country, alarmed by the loss of jobs and population
and understanding that only a modern telecommunications infrastructure
offers the hope of survival, have become so frustrated by the refusal
of existing phone companies to build advanced networks that they've
taken the law (so to speak) into their own hands. Just as cities built
electrical grids and other utilities in the past, they are building
their own phone and cable networks today.

Despite the incumbent phone companies whining and hand-wringing over
declining profits, they turn out to have plenty of money to stop this
threat too. The cities and towns are truly their most formidable
competitor, and they've left no stone unturned in the fight against
municipal networks. In dozens of states they've gotten laws passed
that specifically target municipalities. These laws ban the creation
of municipal networks outright, or place on them onerous burdens in
terms of financing and regulation.

The cynicism as well as destructiveness of these laws is
staggering. Towns are closing up and blowing away in some parts of the
country. Young people abandon them for places with a more advanced
economic infrastructure. These towns need modern networks the way they
need a police force or water lines. And their


reveal that they have repeatedly tried to get help from commercial
phone companies, to no avail.

So if you and your neighbors want to put together a lawn-mowing or
snow-shoveling collective, or organize to volunteer in your local
schools, you are free to do so. But in many states you can't string a
network. The Telecom Act actually includes a clause prohibiting the
states from stopping competition. But the Supreme Court, in
yesterday's ruling, assumed this clause applies only to private,
commercial firms. You and your neighbors--you have no right to

Natural monopolies and unnatural acts

Most of the political attention in the computer industry is focused
right now on the Microsoft monopoly and the punitive European Union
fine. There may be little that governments can do in this regard,
because it seems inevitable for functions to be aggregated and
subsumed into a common base as they become widespread--as people take
them for granted. There was a time when Windows had no TCP/IP network
stack. Who could ask for that to be unbundled now? The question
becomes whether a single company can use its strangle-hold to suppress
innovation and extract an unfair amount of payment for a common
technological base.

In the same way, telecom seems to settle into a "natural monopoly," to
cite the notorious term introduced by AT&T president Theodore Vail
But as it becomes more and more widespread and taken for granted, it
deserves less and less to be a cash cow for private companies. Even
back in 1907, Vail recognized that regulation was necessary. At this
point, municipal ownership can often be justified.

Backers of the phone company position have sneered recently that phone
companies are being unfairly constrained from using their own
facilities the way they wish. After all, they own the lines, the
poles, and the switching equipment. Who has the right to tell them how
to use it?

Well, the answer is that the companies don't own a right to these
things free and clear. They've had ninety years of regulated monopoly
status during which to build them up. The public granted them the
right to lay lines and build networks. It was a partnership between a
company and the public.

Because capitalist laws are too crude to reflect this subtle
partnership, the equipment is formally the property of the phone
companies. But for phone companies to abandon their responsibility to
support competition would be the communications equivalent of the land
enclosures and expulsions that impoverished millions of people from
the seventeenth century to the current day.

What is the trend in competition?