Commentary: Broadband Policy: Did Somebody Say Oligopoly?

The glorious, competitive free-for-all envisioned in the Telecommunications Act of 1996 hasn't arrived. It's time to think of something new, and Federal Communications Chairman Michael K. Powell may have just the right strategy. Let the oligopolies duke it out, he is saying--though never in those words.

In the past two years, most post-1996 telecom upstarts have melted down. Ideologues on all sides bicker over the reasons, but everyone agrees that the landscape today looks a lot like the communications market of the past. Local and long-distance giants control the voice markets, and they are rapidly tightening their grip on high-speed Internet services known as broadband. Consolidation is now ripping through the related sectors of cable, satellite TV, media, and wireless telecommunications.

For the Telecom Act's champions, this is a great disappointment--and it got worse on Feb. 14. That's when the FCC tentatively ruled that the Bells' consumer Internet offerings are information, not telecom, services. The distinction allows the FCC to ease regulations without a congressional act. Nobody knows how the agency will use this, but it raises the possibility that independent service providers could lose power vis-à-vis the Bells. What's more, the FCC may soon allow the Bells more flexibility on pricing.

Oligopolies and monopolies may sound menacing. But the communications market has lived with them for more than a century: Western Union in telegraphs, AT&T (T ) in phones, the cable-TV monopolies, and the wireless-phone duopolies. These industries evolved and thrived, so long as there was federal, state, and local regulation.

Should the Bells, the cable companies, and long-distance carriers be allowed to dominate broadband? Perhaps the better question is: Are there any measures that could prevent it? The total assets of the U.S. local phone industry are about $300 billion, or six times greater than the assets of long-distance carriers, says analyst Scott C. Cleland of Precursor Group, a research house in Washington. In the era of competition, telecom companies had to go to Wall Street to cover capital expenses. They generated about $40 billion in negative free cash flow--meaning capital investment minus profits--the largest amount of any industry in modern history, says analyst Blake Bath of Lehman Brothers Inc. Unbridled competition literally bankrupted the industry.

Some folks argue that the Bells warped the market by bullying rivals and stalling on their obligations to share their networks. But even former Clinton adviser Larry Irving, a board member at Covad Communications Co. (COVD ), says the implosion can't be blamed entirely on the Bells. "There were bad business plansit was death by a thousand cuts," he says.

In Powell's vision, the Bells will still face competition. But it will come from big players, not startups requiring handholding in Washington. Already, households with cable modems outnumber those with Bell-style digital subscriber lines. Comcast Cable Communications Inc. (CMCSK ) President Stephen P. Burke, for one, intends to push cable modems out to small businesses, which currently favor DSL. And AT&T is going after the same market with its own DSL offerings, says AT&T director Kamie Zaracki.

Powell's new regime won't be perfect. It won't deliver the lowest possible prices. And it may not stimulate massive innovation--although pessimists should recall that AT&T managed to invent the cell phone, the transistor, and the laser during the height of its monopoly power.

Pricing aside, regulated monopolies and oligopolies are good at building ubiquitous networks like the phone system. Today's Internet couldn't exist without the phone system, and broadband needs the same shot at ubiquity. So when Powell talks about deregulation, let's be perfectly clear. He's talking about oligopolies, which will always require a government referee. And that's not always a bad thing.

By Steve Rosenbush

With Catherine Yang in Washington

— With assistance by Catherine Yang

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