Perspective: The telecom blame game

With the 1996 Telecom Act taking its lumps for the current telecom debacle, consultant Fred Goldstein says the explanations can be found in looking at the many examples of greed and poor investment judgments.

3 min read
The Telecommunications Act of 1996, which removed monopoly protection from local telephone companies, ushered in a new era of competition. Critics now blame that same legislation for the turmoil that has engulfed the telecommunications industry the last couple of years.

It's convenient rhetoric but inaccurate history.

In fact, the current "bust" grew out of the mid-1990s boom that accompanied the rapid emergence of a consumer Internet. Because of increased demand for more servers and bandwidth per user, it wasn't long before long-haul fiber optic networks began to use up their spare capacity serving ISPs (Internet service providers). The pressure was so great that local phone companies were swamped by a 5 percent monthly increase in modem calls.

Indeed, the Telecom Act's timely passage helped alleviate a severe crunch in telephone switching capacity. Just how fast Internet bandwidth demand really grew remains a controversial question.

Still, Internet growth rate percentages probably peaked in the 1995-1997 time frame, just as the Telecom Act was extending and allowing competition to affect incumbent local telephone companies.

But some investors apparently believed this growth could be sustained for a decade or more. With the economy booming and capital cheap in 1997, they were only too happy to fund new telecom schemes.

Qwest got spun off of the Southern Pacific Railroad. Peter Kiewit Sons, an Omaha, Neb., construction company, sold local fiber carrier MFS to WorldCom and started Level 3, a long-haul carrier focused on the Internet.

Revisionists are just confusing the issue when they take aim at the Telecom Act.
When Williams Group's non-compete arrangement with WorldCom expired, it started Wilcom, another provider of long-haul circuits. Any one of these ventures might have saturated the market, but the Telecom Act had nothing to do with any of that. Demand forecasts were so irrationally exuberant that investors blindly opened their checkbooks to anything associated with the Internet.

The Ma Bell example
A similar blame game played out after the restructuring of AT&T in 1984, when divestiture was blamed for many of the unpleasant changes that followed.

In breaking up, Ma Bell had spun off its local exchange monopolies in return for permission to enter other competitive businesses, especially computing. But divestiture didn't reduce the subsidies that lowered the price of local telephone service, or put the "access charges" on bills. That it happened around the same time as divestiture was a coincidence, based on an earlier change in FCC policy. The removal of tariffs from telephone gear was another coincidence that actually resulted from the FCC's pre-divestiture "Computer II" decision.

DLECs and oversupply
Another example of faulty blame accompanied the creation of that other by-product of the Telecom Act: the DSL specialist competitive local exchange carriers (CLECs), sometimes referred to as data local exchange carriers (DLECs). The legislation made incumbent local exchange carrier's (ILEC) unbundled loops available to them at a time when the ILECs were failing to exploit new DSL technology.

Unfortunately, too much capital raced in at once, tempting too many players to overbuild. The investment community simply didn't take the time to learn how to profit from the new rules.

The Telecom Act was a response to regulatory friction that limited innovation.

Making matters worse, the ILECs were masters of finding by-the-book ways of making their lives difficult. Other CLECs have met mixed results as incumbents have flexed their muscles to retain market share. Surviving CLECs are frugal, agile and innovative--all values encouraged by the Telecom Act.

The Telecom Act was a response to regulatory friction that limited innovation. The old monopolies, saddled with slow depreciation schedules, had little incentive to disrupt their franchises with new services. But the legislation created a more normal marketplace for local services. Revisionists are just confusing the issue when they take aim at the Telecom Act. The real cause behind the subsequent telecom debacle was the combination of greed and poor investment judgment that clouded people's better thinking.

This story should remind us that the bottom line is more important than just a "story," "hard assets" or the latest technology. This is even true for a business as dependent on technology as is telecommunications.