Subject: [NEXTEL-1] Economist Blasts FCC For Anti-Competitive Policies

From: [email-masked]
Date: Thu, 16 Oct 2003 07:29:27 -0400

Economist Blasts FCC For Anti-Competitive Policies

Oct 15, 2003

The FCC has lost its faith that the success of competition in long distance can be

replicated in local voice telecommunications as well as in broadband Internet
service. Even worse, the commission seems to have forgotten that Congress,
through the 1996 Telecom Act, directed the commission to encourage
competition. Unfortunately, the FCC seems to be doing exactly the opposite,
according to Nicholas Economides, a noted professor of economics at New York
University's Leonard N. Stern School of Business.

Economides is a recognized expert on antitrust and regulatory matters in
telecommunications and other network industries. He is one of a growing number
of economists in U.S. academic circles and elsewhere who have begun to sharply
criticize the FCC's most recent policymaking initiatives.

Economides told TPR that the commission's decision on broadband last February
as well as the agency's general approach to telecommunications suggests that
the FCC simply "disregards the importance of fostering competition in local
telecommunications, as well as the benefits that competition will bring."

The professor was referring to the FCC's Feb. 20 decision in the Triennial Review
Order. That decision, among other things, allows the Bell companies and other
incumbent local exchange carriers (ILECs) to exclude their technologically
enhanced high-speed networks from the list of so-called unbundled network
elements (UNEs) they are otherwise required to offer new entrant competitors at
legally mandated wholesale rates.

Economides contends that the results of the FCC's "loss of faith in competition"
are likely to be highly detrimental to the U.S. economy.

"Consumers have benefited and will continue to benefit from the opening of the
local telecommunications network to the tune of tens of billions of dollars," he
said. "But changes contemplated by the FCC in the network access rules or the
methodology of cost calculation can easily wipe out these benefits. Even a tiny
reduction in the growth of the U.S. economy precipitated by a slowing of the
growth of the Internet as a result of the [TRO] decision will result in additional
tens
of billions of losses."

In Economides' view, the telecom industry has been blessed by significant
technological changes and innovation that have cut costs dramatically. These
innovations have driven down costs of essential inputs to telecom services, such
as computing, information storage, and transmission, he says. And such costs
are expected to keep decreasing for many years to come. He notes that
digitization, the integration of telecom services, and the widespread adoption of
the
Internet have created "very significant business opportunities and many new
products and services." Yet consumers - both business and residential - have not
reaped the full benefits of the cost reductions and the innovations, he said.

"Historically, in many industries, the creation and enhancement of competition
have made it possible for consumers to reap the benefits of technological
innovation. But in a network industry, such as telecommunications, services are
produced by combining different elements and components of a far-flung network.
Here, consumers can benefit fully only when the markets for each of the
constituent parts of the network are competitive," Economides told TPR.

As Economides explains, if a service requires components A and B, but only the
A market is competitive while the B market is monopolized, consumers will never
receive the full benefits of innovation. "Instead the company that monopolizes the

B market will reap these benefits," he said. "Unfortunately, in the
telecommunications sector, while the long- distance market is effectively
competitive, the local market isn't. And this state of affairs represents a
failure on
the part of regulators."

There are three crucial requirements necessary to expand, enhance, and
maximize competition, Economides said. "The first crucial requirement is to
create new markets, whenever possible. But what can be done for markets or
components where it does not seem possible or economically feasible to have
effective competition in the foreseeable future? This state of affairs accurately
describes local telecommunications markets. These markets, in the absence of
regulatory intervention, remain monopolies for the Baby Bells ... If left
unregulated,
the monopolists in these markets would effectively restrict sales and reduce the
variety of offerings."

What makes matter worse, he said, is the issue of interexchange access. "Since
long distance calls pass through local wires in their origination and termination,

local monopolists ... also absorb the benefits that consumers could get from long
distance. It is evident therefore that the monopoly power of the incumbent local
monopolists needs to be restricted and contained from spilling over and distorting

other markets," Economides said, adding, "This is the second crucial
requirement."

The third requirement is the creation, fostering, and enhancement of competition
whenever possible, even if that means occasionally creating semi-artificial
environments that imitate competitive markets, Economides said. These artificial
environments can serve as incubators, fostering the conditions that help
competition flourish over time. The way that long-distance service developed in
the
past 20 years provides an excellent example of this theory working in practice.

As Economides observes, the long distance market has been the big success
story in telecommunications in the past quarter century. Consumers have
benefited tremendously from the long distance competition that started with the
breakup of AT&T in 1981. Several competitors, like MCI, created their own
networks, and hundreds of resellers entered the field.

"In the 22 years since deregulation, prices of long distance calls have decreased
by a factor of 5 to 10," Economides said. "Today, they are falling at an annual
rate
of between 10 and 20 percent. Low long distance prices, especially for bulk data
transmission, have allowed the Internet to grow and become both ubiquitous and
affordable."

Even so, the success of competition in long distance service was not immediate.
For several years, entrants did not have their own networks, and were simply
reselling long distance minutes they bought in bulk from AT&T. Regulators created
an environment in which AT&T was required to sell in bulk, and in which AT&T was
forced to allow entrants such as MCI and Sprint to interconnect with the AT&T
network. The regulators' forward-looking policies ultimately delivered remarkable
benefits to consumers as long distance providers aggressively cut prices to gain
market share. In contrast to the overwhelming success of competition in long
distance, competition in local service ranged from minimal to lukewarm for a
number of years, Economides said. "Since the beginning of 2002, competition in
local service has increased significantly. However, some federal
telecommunications regulators, including FCC Chairman Michael Powell, seem
intent on changing regulations in ways that are likely to eliminate competition.
And
regulators have already taken steps that strengthen the market power of
incumbent monopolists in the provision of high bandwidth [i.e., broadband]
Internet
services. The immediate consequence will be price increases in broadband
Internet service," he predicted.

"But why not replicate the long distance success story in creating local
competition?" Economides asked rhetorically. "Does it make any sense that
federal regulators are facilitating higher Internet prices when all agree that the

Internet is an engine for growth?"

He noted that the past few years have been not been particularly good ones for the

telecom industry. The dot-com bubble popped, and major players like WorldCom
and Global Crossing went bankrupt. But amid the gloom, "the emerging
competition in local telecommunications should have been heralded as a big
success story and embraced by regulators," Economides said.

"Instead, the FCC last upheld the network access rules that fostered local
competition by the thinnest of margins - a 3-2 vote. Significantly, Powell was in
the
minority - meaning he lobbied against the pro-competitive rules," Economides
said.

"Now the FCC is considering starting hearings aimed in re-evaluating - which
really
means 'increasing' - the cost at which the local telecom networks are to be made
available for leases. Such a cost increase would likely stop the emerging local
competition in its tracks," he warned.

------------------------ Yahoo! Groups Sponsor ---------------------~-->
Buy Ink Cartridges or Refill Kits for your HP, Epson, Canon or Lexmark
Printer at MyInks.com. Free s/h on orders $50 or more to the US & Canada.
http://www.c1tracking.com/l.asp?cid=5511
http://us.click.yahoo.com/mOAaAA/3exGAA/qnsNAA/61FxlB/TM
---------------------------------------------------------------------~->

Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/