Michael Powell's telecom epiphany

In the wake of WorldCom's implosion, Federal Communications Commission Chairman Michael Powell declared in a recent interview that the telecommunications industry is in a state of "utter crisis." To paraphrase an old saw: "No kidding, Sherlock!"

Acknowledgment of the severity of the telecommunications industry's woes is important. Until you admit you've got a very sick patient on your hands, you are not likely to go about prescribing a cure with any sense of urgency.

What to do to restore the sector's health? Powell's remarks are instructive on this point as well. According to the report in The Wall Street Journal, "Mr. Powell said the government bore some responsibility for the industry's problems, which began with the frenzy to create new companies after the landmark 1996 Telecommunications Act."

This admission is significant. If government policy helped create the mess, presumably a change in policy can contribute to its resolution.

In short, what Powell most needs to do is to accelerate action on proposals pending at the FCC that would lessen regulation of the telecommunications industry, particularly ones that would free the former Bell companies from rules that discourage investment in new broadband networks.

While the FCC's most recent report indicates there are about 13 million high-speed lines connecting homes and businesses to the Internet, almost no one disputes that the overall economy would receive a substantial pick-me-up if broadband is available on a more ubiquitous basis.

Apart from the economic stimulus resulting from the investment in new plants, widespread access to high-speed connections will lead to expenditures to develop next-generation applications, such as Internet telephony, Web-delivered software, and telemedicine. Bill Gates was right when he recently commented: "The broadband problem is particularly frustrating because it is the one piece of the physical infrastructure that is limiting a 'miracle environment' of new applications--thanks to ever-increasing computer speed, power, and video-display capabilities."

If government policy helped create the mess, presumably a change in policy can contribute to its resolution.

Powell has recognized the crucial role that broadband can play not only in restoring the telecommunications sector's health, but in more broadly stimulating economic activity. That's why last October he declared: "The widespread deployment of broadband infrastructure has become the central communications policy issue today."

In light of the substantial investment required to build out new networks, he emphasized that "broadband service should exist in a minimally regulated space." The problem is that, today, broadband services offered by the former Bell companies continue to exist in a heavily regulated space, despite the fact that cable operators have about twice as many broadband subscribers as the phone companies.

It doesn't have to be this way. While ambiguous in some respects, the 1996 Telecommunications Act points in a deregulatory direction. Congress understood that competition was emerging in all sectors of the communications industry and rapid technological change was rendering obsolete the traditional public-utility regulatory model.

But Powell's Clinton-appointed predecessors nevertheless adopted regulations that were designed and had the effect of encouraging anyone with a briefcase and a business plan labeled "telecommunications" to become a telephone company and attract funding.

The regulations did so by requiring the Bell companies to share their network facilities--even new fiber lines used to deliver broadband--with their competitors at below-book prices. Competitors thus were deterred from investing in their own facilities. After all, why invest in constructing new facilities when it is less expensive just to lease at regulated rates? And the Bells have no incentive to invest in new facilities because they must share them at below-cost prices that preclude earning a real-world profit.

While ambiguous in some respects, the 1996 act points in a deregulatory direction.

Reed Hundt, the former FCC chairman who crafted the rules to implement the 1996 act, said that he thereby created 250 new local telephone companies and a half dozen new long distance companies. Was there really reason to believe that the marketplace would support this many competitors once irrational exuberance waned?

Based upon past his pronouncements, when Powell speaks of the government bearing responsibility for the industry's problems, I'm pretty confident that what he has in mind is the current unduly burdensome and costly regulatory regime, especially as it applies to broadband.

Since taking the FCC's helm in January 2001, Powell has been rather deliberate in diagnosing what ails the telecommunications industry. Now that he has acknowledged the industry is in "utter crisis," it's high time to administer the cure by moving quickly to eliminate regulations that stifle new investment in facilities and that hold back innovative new services.