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Tech Industry

A vote on avoiding tech disaster

On the eve of a key regulatory decision, UC Berkeley economist Yale Braunstein writes that the collapse of the competitive telecom industry could have been averted. Here's how.

Most of us are familiar--and, in the case of stockholders, painfully familiar--with the rise and fall of the so-called dot-bombs, those Internet companies that consumed vast quantities of capital before collapsing under the weight of their quixotic business plans.

Another emerging sector, consisting of hundreds of new telecommunications companies that compete with the Bell phone monopolies, has spiked and plummeted alongside the high-tech market over the last 18 months. Though less visible to the general public, the devastation of this industry--which has absorbed over $100 billion in investment and lost even more in market capitalization--is arguably of far greater consequence to the average consumer.

Every competitive carrier that goes out of business adds to market power of incumbent corporations like SBC Pacific Bell, meaning less choice and higher prices for services that, unlike sock puppets and home-delivered video games, we use and need every day.

And unlike the saga of the doomed e-tailers, the demise of the competitive carriers was neither inevitable nor irrevocable. Many competitive carriers did suffer from unrealistic expectations and sloppy execution. But a difference of 5 percent or less in operating margins would have allowed many others to survive and grow. In fact, a change being considered by state regulators could help close that margin and inject a much-needed dose of vitality to an industry that has grown stagnant and unresponsive.

In February 2002, the California Public Utilities Commission gave preliminary approval to a proposal that would lower wholesale rates charged by the dominant Bell companies to lease parts of their network to competitive carriers. While this sounds like an arcane regulatory matter, this could provide a new lease on life to a technology sector that had been consigned to share the much-maligned Internet dust heap.

Some background: The decision sets the prices for what are called "unbundled network elements," the components that are combined like a Chinese menu to provide everything from a simple residential dial tone to more advanced Internet and telecommunications services.

Each element can be bought or sold by telephone companies, whether large or small, and combined into retail offerings. Though largely hidden from consumers, this is a common approach to businesses. For example, when you buy a new car, you may give little thought to the fact that many components--from the transmission to the CD player--are made by outside suppliers.

Unlike the saga of the doomed e-tailers, the demise of the competitive carriers was neither inevitable nor irrevocable.
So long as the supplier markets are reasonably fair and competitive, there is little need for regulation or governmental oversight. The telecommunications industry, still dominated by the progeny of the old "Ma Bell" monopoly, is not such a market.

Federal law, through the 1996 Telecommunications Act, requires the dominant Bell companies to make key parts of their networks--those "unbundled elements" mentioned earlier--available to other competitive carriers at fair wholesale prices. Any phone company, obviously, needs to reach customers. The competitive carriers spawned after 1996 had only two options: Run a copper wire to every household in the state, or pay to lease access from Verizon or Pacific Bell.

In recent years, those wholesale prices have been artificially high--so high, in fact, that they have contributed to SBC Pacific Bell's 30 percent rate of return on equity over the past five years. Meanwhile, the competitive carriers are struggling to gain any profit margin whatsoever under the current pricing system.

Which is where this pending decision comes in.

This sector has been brutally culled, and strong survivors are poised for growth and profitability if regulators give them a fighting chance to win customers and attract new investment capital.
The ability and proclivity to correct wholesale rates empowers California's PUC and other state regulators to revive and monitor the telecommunications sector. The CPUC should be able to find prices that approximate those that would exist in a competitive market. This would balance the interests of the competitive carriers, the incumbent Bells and consumers. And under the CPUC's plan, the regulators could approve future rate corrections to allow Pacific Bell to recover lost revenue.

Thursday, the CPUC appears ready to take an important first step toward lowering consumer prices, increasing choice, and saving up to 70,000 jobs that could be lost if the remaining competitive carriers go under. This sector has been brutally culled, and strong survivors are poised for growth and profitability if regulators give them a fighting chance to win customers and attract new investment capital.

Then we might see the blooming of affordable new products, services and choices that we were promised years go. And jilted tech investors might get some of their money back.