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Jewish World Review April 24, 2001 / 2 Iyar, 5761

James K. Glassman

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Consumer Reports

Who’s To Blame For Broadband Crisis? Wired Article Points To Bells --
MORE and more Americans are starting to realize that the Internet revolution is being stopped dead in its tracks. The reason: a lack of fast broadband connections. According to Frank Rose, writing in the new issue of Wired, “Barely 5 percent of U.S. households have even the most rudimentary form of broadband. … Most people are stuck with 56k modems, analog TV, and Web browsers that take forever to download postage stamp-sized videos that are too grainy to make out anyway.

“The digital future has arrived,” Rose continues, “but the analog past won’t go. Data flashes across the continent at the speed of light only to end up dribbling out of your wall in the tech version of Chinese water torture.”

The results of this Broadband Crisis are clear: E-commerce businesses and telecom suppliers have gone bankrupt, stock prices have plummeted, and the economy has slowed.

But why has the crisis developed, and what can be done about it?

For the answer to the first question, turn to Rose’s long and lucid article, “Telechasm: Can We Get To The Future From Here? First We Have To Get Telecom Out of the Stone Age.” Rose understands the problem and lays the blame at the feet of the regional Bell monopolies. “The Baby Bells control the local loop – the copper lines that reach every home and business in the country – and therefore have a stranglehold on access to customers.” The four regional monopolies (Verizon, Bell South, SBC and Qwest) “own 88 percent of the 185 million local lines in the U.S.,” writes Rose. “Guardians of the status quo, locked in a culture in which the number-one goal is stability, they’re the force most responsible for holding back the future. …

“The Bells plod along, upgrading on their own terms, deferring the future as long as possible. What do they have to lose? They get to roll out broadband when they feel like it – conveniently enough, after most of their competitors have died off.”

But how did we get into this fix? Wasn’t the Telecommunications Act of 1996 supposed to bring to the same kind of competition to the local loop that the initial breakup of AT&T has brought to long distance, driving down rates, raising quality, increasing innovation?

It was. But immediately after the bill became law, the Bells started fighting it in court. Then, they started dragging their feet. Today, five years later, its goals are still far from being met. Last week, federal regulators certified Massachusetts as only the fifth state in which the local monopolies have opened competition enough to be permitted into long distance. “The last five years in the communications services industry,” writes Scott Schiesel in Sunday’s New York Times, “left broad sections of the industry, largely the ones that consumers interact with and spend money on every day, almost as cloistered as they had ever been.”

So far, it appears, the Bells are the winners in the 21st century telecom world, and consumers are the losers. Hence, the headline on Schiesel’s piece: “Sitting Pretty: How the Bells May Conquer Their World.” Look at the statistics that he cites: The Bells control 96.8 percent of the local lines of residences and small businesses. “Since 1984, the Consumer Price Index has risen 73 percent. Over the same period, local communications prices are up 70.2 percent while long-distance prices are down almost 34 percent.” The difference: There’s fierce competition in long distance, but monopolies reign in local service.

It was not supposed to be this way. The Telecom Act required the Bells to cooperate in opening their local loops to competitors (just as AT&T was forced after 1984 to open up long distance), but, as economist Nicholas Economides of New York University points out, the 1996 law “didn’t have deadlines and punishments to make people do what they were supposed to do.” Instead, it offered the Bells a tradeoff: Open your local loop, and you can expand into long distance.

“But,” writes Rose, “the incumbents decided not to cooperate.” As a result, only five states have been certified, and, even in those, the opening process is dubious. New York, where I live, has been a mess, with the local Bell company, Verizon, actually losing tens of thousands of orders of customers who wanted to switch to a competitor.

But why have the Bells been uncooperative? Don’t they want to get into long distance?

Sure, they want to. But they have other ways. They have simply ignored the Telecom Act of 1996 and decided, as Economides says, “instead, they would lobby Congress to get into long distance.” Lobbying and filing lawsuits – those are what the Bells, as century-old regulated monopolies, do best.

As Rose writes: “While they stall on the local loop, the Bells have lobbied Congress to give them long distance anyway – not long-distance voice, which is no longer a fast-growing market, but long-distance data services, which are exploding.”

It is hard to think of a worse solution to the Broadband Crisis than to let the Bells into long distance without opening the “last mile” – the bottleneck they control – to competition. But, incredibly enough, Rep. Billy Tauzin, the flamboyant populist from Louisiana who now heads the House Energy and Commerce Committee, has introduced a bill to remove the only incentive the Bells now have to bring telecommunications into the 21st Century.

Writes Rose: “Tauzin is right about one thing: The Telecom Act should be revisited.” But not in the way Tauzin wants – in fact, the changes should move in the opposite direction. “In an ideal world,” Rose continues, “the Bells would be given strict deadlines for opening the local loop – or they’d have to stop retailing local service and act simply as wholesalers, selling their lines to other companies that would compete for customers.”

True. But that’s not going to happen at the federal level. This sort of action would work well at the state level, and some states, including Pennsylvania, have begun to take measures to break the Bells up, at least functionally, into wholesale and retail pieces.

If Tauzin’s bill passes, expect a long, long wait for broadband. The Bells had DSL technology (a means of speeding up signals down copper wires) for a decade before rolling it out for customers. They only started to roll out DSL in a serious way when the 1996 law presented them with competitors. Now that they have squelched those competitors through legal action and foot-dragging, they have gained the upper hand in DSL. So they are back to acting as monopolists always do: limiting supply and innovation and raising prices.

Many of the competitors spawned by the Telecom Act – companies called Competitive Local Exchange Carriers, or CLECs, are now in deep trouble, running out of money. As Schiesel points out in the New York Times, “Companies like ICG and E.spire have filed for bankruptcy protection. And more are expected.”

As a result of the delays, writes Rose, “e-commerce will flag. Web businesses that rely on advertising will need deep, deep pockets, because it will be years before audience reaches critical mass. Net-based entertainment will remain a quixotic vision. Video-on-demand will remain tantalizingly out of reach. The U.S. could lose its lead in Internet development to Western Europe, where the local loop is being forced open aggressively. The new economy will continue to lose steam, threatening prosperity in the U.S. and around the world.”

Meanwhile, there’s concern that Michael Powell, the new chairman of the Federal Communications Commission, while talking a good game, is not dedicated to competition the way that his two Democratic predecessors, Reed Hundt and William Kennard, were. Kennard says flatly that letting the Bells into long distance – Tauzin-style – is “a prescription for disaster. You’d be telling most Americans, ‘Forget about competitive choice for DSL service – we’re going give it to the incumbent monopolists.’”

Powell, on the other hand, “sounds like God’s gift to the Bells,” writes Rose. Powell says he wants a free-market solution. “But,” writes Rose, “free-market solutions only work when the market is actually free; an entrenched monopoly can stifle competition for years.”

It is not a pretty picture.

The good news, however, is that, thanks to clear, straightforward reporting, Americans are beginning to learn about the Broadband Crisis, this massive debacle. It is a complex matter, to be sure. But at some point, consumers – that is, voters – will become outraged at the high prices and poor service. They will wonder what happened to the promise of fast Internet access. And they will not look with favor on politicians whose main interest is in shoring up the Bells’ monopoly.

When will this revelation occur? Thanks to articles like the cover story in the May issue of Wired, a lot sooner than Billy Tauzin, Michael Powell and the folks who run the four Bell monopolies may think.

JWR contributor James K. Glassman is the host of Tech Central Station. Comment by clicking here.


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