No, Telecom Progress Hasn't Slowed

from the wonders-of-competition dept

Thu, Jul 24th 2008 3:21pm — Timothy Lee

Megan McArdle points to a post by "cactus" claiming that progress in the telecom industry has slowed since the passage of the 1996 Telecom Act, and suggests that this is an argument against deregulation. Megan points out that cactus is likely exaggerating the responsiveness of Baby Bell customer service in the early 1990s. Here's another part of the argument that's really misguided:

"My guess is that the improvement in technology available to the consumer from 1984 to 1996 is more significant than the improvement from 1996 to 2008. (Anyone remember using a BBS?) And the improvements on the cell phone side of the business seem to come mostly on the manufactured hand-unit, which was never regulated because it isn't a natural monopoly."

The problem with this is that if we're talking about Internet access, there were no improvements at all between 1984 and 1996 in what phone companies offered to residential customers to get online. In 1984, if you wanted to get online, you got a second phone line and purchased a modem. In 1996, if you wanted to get online, you got a second phone line and got a modem. Now, the 1984 modem was probably 1200 bps, while the 1996 modem was probably 28,800 bps. And the 1984 online service was probably Compuserve, while the 1996 online service might have been a real ISP. But of course the Baby Bells weren't major players in the modem or online service markets during these years, and neither market was regulated. So touting them as evidence of the virtues of the pre-1996 regulatory regime, while dismissing the analogous improvement in cell-phone handsets since 1996, is disingenuous.

More broadly, it's just silly to claim that progress in the telecom industry has slowed over the last 12 years. Between 1984 and 1996, typical home online speeds increased from 1200 bps to 28.8 kbps, an impressive 24-fold improvement. By 2008, typical internet speeds were upwards of 3 mbps, an even more impressive 100-fold improvement. And 28.8 was the fastest you could go in 1996 without paying exorbitant charges for a dedicated data line. In contrast, some broadband providers are offering speeds as high as 20 mbps—a 700-fold improvement—for under $70/month. Now, I don't think improvements in the telecom market have been primarily due to the 1996 Telecom Act (which wasn't especially deregulatory anyway). Primarily, I think the progress was due to two things: cable companies getting into the broadband and phone markets (which which has created pressures for faster DSL and fiber roll-outs), and the government auctioning off spectrum to increase competition in the wireless market (which has provided additional competition for the Baby Bells' phone business). The former was likely sped along by some provisions of the 1996 Telecom Act, although the the "local loop unbundling" fiasco may have stunted development of DSL service during the same period. On the other hand, spectrum auctions were first authorized by Congress in 1993, so the latter can't be credited to the Telecom Act.

The bottom line, though, is that deregulation is most successful when it's designed to increase competition. A well-designed deregulatory scheme will enhance competition by removing barriers to entry and letting new firms enter the market. Poorly-designed "deregulation" will leave barriers to entry in place and simply relax regulations that limit the monopolist's ability to extract monopoly rents. There was some of each in the 1996 Telecom Act, but either way it's clear that progress continued at a brisk clip after 1996, and increased competition was a big part of that. If Congress wants that progress to accelerate over the next decade, it should look for ways to further increase competition in the telecom industry, not try to turn back the clock to the 1980s.

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Filed Under: deregulation, progress, regulation, telecoms

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Anonymous Coward, 24 Jul 2008 @ 6:42pm

A point..
The increase in speed between 1984 and 1996 had little to do with telcoms as it was the modem technology of "over the line" data transmission and compression which was inovated and as far as I know, no "telcom" had anything to do with that. During that time you had to tell the telcom that there was static on your line in order for them to clean it up enough for a 28.8 modem to actually get advertized performance. (And you had to complain a hell of a lot for them to do ANYTHING, to clean up the line at that time.)

So, just another argument in favor of what you are saying.

KB
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Bdragun, 24 Jul 2008 @ 7:59pm

Telcom/Deregulation
Deregulation came about because the public felt it unfair for just telephone companies to be able to wire,build networks and connect them to services.Telcom is just a word that is used to let one know that they can wire you,not that it is any cheaper than a phone company.Pretty much,deregulation allows anyone to build you a network or system,even provide services without the expense of the infrastucture it takes to provide the services we all want,because they rent the cable pairs from telephone companies at cost and charge you a bundle so you think you really are getting something,when it is still routed through your local phone companies cable and equipment.This allows those telcom service providers to make a ton of money and pay little to get you that service you need so bad that you just knew would be cheaper than your local phone company. DUH
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Tom Bozzo, 25 Jul 2008 @ 5:57am

Innovation pre-1996
You need to be a little careful in timing data-service innovations. The current broadband technologies provided over the copper phone network existed before the '96 Telecom Act was passed, and whatever its faults a major goal of the act was to encourage deployment of services that were already on the telcos' shelves.

I'm also not sure what you mean by the local-loop-unbundling "fiasco." Are facilities-based (other than the loop) CLECs not competition? The UNE fiasco represented, in large part, ILECs' unwillingness to accept TELRIC plus a markup for their network elements, lest entrants compete prices to those levels, and persuading sympathetic courts that it was "unfair" for that to happen to them.
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Peter Radizeski, 25 Jul 2008 @ 7:04am

Telecom Innovation
The only Innovation since 1996 was the Integrated T1. Big deal. All other innovation is the result of the Carterphone decision in which any device can be connected to the telephone service. It has been all CPE (customer premise equipment) that has been innovated - cellular handsets, PC's, modems, routers. Any speed increases I would not call Innovative, simply chip manufacturers trying to make money and stay in business.

We have had a poorly designed Unregulation system in the US - entirely the fault of Powell and Martin. We needed Competition and we needed an FCC that would force the ILEC's to open the networks AND force the CLEC's to live up to its promise to move to facilities, which they did not do.

Telecom is all about the Arbitrage play for how to con people out of money. Ask Vonage or SunRocket or MagicJack.
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DG Lewis, 25 Jul 2008 @ 9:24am

Innovation since 1996
"The only Innovation since 1996 was the Integrated T1. Big deal. All other innovation is the result of the Carterphone decision..."

Really. Try hooking up your FTTH ONT to a POTS loop and see how it works. Or your VDSL modem. I guess the 80 wavelengths of 40 Gb/s capacity carrying the internet traffic across the country are CPE as well. Plus the gigabit routers that get the bits from Techdirt's hosting site to your computer - all because of Carterphone.

Oh, and Local Loop Unbundling only "stunted" DSL because the telcos decided that if the rules weren't slanted their way, they weren't going to play. They could have rolled out DSL service at any time -- I remember reading requirements for ADSL in the late 1980s -- but chose not to because they didn't like the rules, so DSL service stayed on the sidelines until they managed to get the UNE-L rules sufficiently gutted by the courts.
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Chris, 25 Jul 2008 @ 6:25pm

Wireless and loop unbundling
Two points. First, loop unbundling and UNEs weren't the fiasco, "UNE-P"-- the UNE "platform" -- is what took the air out of facilities-based competition. The 1996 Act required the telcos to (a) unbundle and lease UNEs (unbundled network elements) at long-run incremental cost, and (b) permit resellers to buy their local services for resale at a discount that reflected the retail costs saved by the telcos (on average, after lots of regulatory litigation, about 25%). The intent was that new entrants would invest in their own switches and backbone and least the last mile and other bits of the network from the telcos as needed, filling in with resale in areas where they didn't have their own facilities. Then the new entrants who didn't really want to invest in facilities and who were dissatisfied with the 25% wholesale discount for resellers convinced the FCC to require the telcos to provide a UNE "platform" -- that is, lease all the network elements to the new entrant AND link them together, so that the new entrant could, basically, lease end-to-end service facilities. Basically, it was functionally the same as reselling the telco's services, with one huge difference: the price was set at a hypothetical incremental cost instead of discounted from the retail rate to reflect actual cost savings. In effect, non-facilities-based new entrants could now lease the entire local exchange network from the telcos at "cost," thus eliminating the need to invest in their own facilities. This non-facilities-based model essentially destroyed the business case for investing in facilities for the mass (consumer and small business) market. It also undercut the telcos' incentive for upgrading the network. The 1996 Act was far from perfect, but the FCC's UNE-P decision was a disaster.

Second, with respect to wireless, competition and associated innovation was jumpstarted in 1993, when Congress established a national, uniform, deregulatory, regulatory structure for wireless by, among other things, preempting state and local regulation of wireless rates and entry conditions, directing the FCC to forebear from subjection wireless to unnecessary regulation, and establishing a federal policy of promoting competition in wireless markets. The auctioning of PCS spectrum in 1996 was another significant step as well. At about the same time, digital technology dramatically reduced the amount of radio spectrum required to carry a wireless call, increasing the capacity of the carriers' existing licenses severalfold.
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Adam, 27 Jul 2008 @ 12:52pm

So why do we lag behind other developed nations?
If deregulation is such a godsend then how come we lag so far behind Europe and Asia in broadband access, cell phone service, etc, etc etc?
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Noni Mausa, 27 Jul 2008 @ 1:57pm

Interesting stuff, the bits I can understand.

Just a notelet for readers who may not have read cactus's original post on Angry Bear -- chiefly it had to do with the lousy customer service he received in trying to get a new net hookup:
We called Time Warner. They gave us an appointment for Saturday, from 8 to 10. At 10:30, after sitting in the new and still empty apartment for 2.5 hours, I called. They told me the appointment was actually for Friday from 8 to 10. I noted politely that we wouldn't have made the appointment for Friday from 8 to 10 for a number of reasons, not the least of which was that we hadn't signed a lease then. I also noted that nobody called us to ask us why we weren't there, which presumably would have been done had the appointment been the day earlier.

So they gave me another appointment - from 2 to 4. At 4:30 I called to ask if/when someone was coming. I was told to stick around. We finally left at five minutes to 6. Put another way, I waited five minutes shy of six hours for no reason at all. That's six hours of my Saturday I'm not getting back.
In my experience a lot of the service people for utilities like this are actually "independent contractors" which is code for "underpaid people for whom we are not responsible". I don't know if this was the case with Time Warner, but it can be a problem.

BTW, my first so called net connection circa 1989 was membership in a few BBS's, at 300 baud. You could watch the letters march across the screen.

Noni
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Dick Buckley, 27 Jul 2008 @ 9:29pm

TELRIC
As Chris said UNE-P was a disaster because it allowed CLECs to compete without building any OSP facilities. They were simply reselling existing plant while bad mouthing the ILEC as having antiquated plant. And contrary to Tom Bozzo's claim that the ILECs were unwilling to accept TELRIC plus a markup, TELRIC includes a markup. The real question was, based on the TELRIC rules, what was the cost of a UNE. If you believed AT&T, it was half of what the ILEC claimed it was. I testified in about 10 Qwest states on the cost of a loop and never encountered a sympathetic court. The state commissions had a bias toward lower costs (in line with CLEC models) because they felt it would encourage competition. Reselling someone else's plant is not competition and does not encourage building a competitive network. Wireless and cable were the only true local loop competitors. CLECs were short term arbitrage on regulated rates.
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Tom Bozzo, 28 Jul 2008 @ 6:14pm

More TELRIC
Dick Bunkley is right about TELRIC, though of course the markup isn't part of the "true" LRIC of the element. In my early career, I'd played a small role in advancing the argument back that TELRIC wasn't necessarily compensatory of incumbents' actual costs, which is almost trivially true at least in some cases.

The effects of TELRIC pricing on competition and efficiency are more complicated. Pricing UNEs at TELRIC should mostly dissipate monopoly rents (assuming the markup reflects efficiently incurred overheads), which usually would be looked on kindly from the perspective of competition policy. That will discourage some entry, but the entry that occurs should be at least statically efficient (with costs not exceeding telephony LRIC); and meanwhile you're paying the ILEC as if the market were contestable until such an entrant comes around. Allow UNE pricing at incumbents' actual costs and you may get entry from statically inefficient competitors and meanwhile would also expect be paying the incumbent prices reflecting at least some exercise of market power. You then cross fingers and hope that the market structure provides dynamic efficiency benefits once there's a competitive network in place.
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