Commentary: The Decision That Could Reshape Telecom

By Catherine Yang

With 500,000 jobs and $2 trillion in market valuation lost in the telecom bust, it's natural that the hunt for scapegoats is nearly as fierce as the search for solutions. That's why Federal Communications Commission Chairman Michael K. Powell is under rising pressure to move fast. Indeed, Powell is close to acting on the agenda he sketched when he took the job last year. His idea is to cut back regulations by the end of the year on established local phone companies, mainly the former Bells. This could give them a clearer path to profits, he says, and spur a much-needed investment binge. To Capitol Hill Republicans worried about midterm elections, delay could cost votes back home. "I consider him a close friend, but deregulation can't wait," says House Commerce Committee Chairman W.J. "Billy" Tauzin (R-La.).

But speed is no substitute for smarts. The problem with the much-maligned Telecom Act of 1996 may well be that it hasn't really been given a chance --until this year. The Act called for the Bells to lease their lines to rivals, creating competition in local markets. In exchange they could sell long-distance service. The idea: accept short-term regulation to make much broader deregulation possible.

For years, though, the Bells protected the status quo through regulatory and legal roadblocks. But now that AT&T (T ) and other rivals have finally found a way to compete with the Bells, the results are promising. If Powell abandons the approach of the 1996 law and gives the Bells the rules they want, he may well cut off competition just as it's getting good.

Why are the outsiders winning? From California to New York, state regulators are finally applying the 1996 Act more aggressively. Increasingly, challengers can lease Bell lines at a low enough rate to provide service and make money. Over the past two years, AT&T has introduced local service in eight states, serving 1.5 million customers. And rates are coming down. In Michigan, incumbent Bell SBC Communications Inc. has shaved local rates 33% since February, when AT&T plowed into the market. AT&T is racing to extend this service nationally, with an eye to building its own network within four years. "Hopefully, the FCC won't tamper," says AT&T Chairman C. Michael Armstrong.

For Powell, son of Secretary of State Colin Powell, the pressure to act is immense. The telecom industry has imploded since he took office in January, 2001. And the Bells argue that network sharing discourages investment. They say they won't invest in massive fiber-optic upgrades, wiring broadband to millions of American homes, if they have to share these networks with competitors at cut-rate prices. BellSouth Corp. says it dropped $85 million worth of planned spending to upgrade its broadband network this year because of network-sharing rules. And Powell, who declined to comment, is correct that competition will eventually come from wireless companies and satellite-based service providers.

For now, however, Powell's plans threaten to create oligopolies. In local markets, the Bells would again reign supreme. In broadband, the Bells, with their digital-subscriber-line services, would likely divvy up the market with cable companies. "What Powell calls deregulation, I call remonopolization," says H. Russell Frisby Jr., president of the Competitive Telecommunications Assn., a group of Bell rivals.

Sadly, a regulatory scheme that ensures rich profits for the Bells alone is likely to hit consumers in the wallet--and slow down innovation even more. Consider recent history. Today, broadband is available to 80% of U.S. households, but less than 20% have signed up for it. Why? Experts say high prices are keeping consumers from embracing it en masse. And prices are high, in part, because lax early enforcement of the 1996 Act helped snuff out competition. Startups had to lease lines at sky-high rates, making it nearly impossible to earn a profit. This turned Bells and local cable companies into the only broadband players in town.

Powell's approach would enshrine this cozy arrangement, not fix it. "When you have a duopoly, you don't have aggressive competition on price," says Charles S. Golvin, a broadband analyst at Forrester Research Inc. And if Powell's reforms drive prices up, many of the same politicians who are clamoring for deregulation will be pounding on his door again, calling for price relief.

Read a Letter to the Editor about this story.

Yang covers telecommunications from Washington.

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