Was the Telecom Act of 1996 a boon or bomb for U.S.?

The Telecom Act of 1996 was enacted to promote competition. It was supposed to create certain funds for universal service and to develop a better infrastructure. Ten years later, can we say this was good for America?

How much money was wasted? Did we ever really achieve the open competition the act was intended to establish?

Wednesday is the tenth anniversary of the act. Especially for those who may not know the roots of all of these controversies surrounding competition and the development of broadband infrastructure capabilities, it would be good to look back and see how we got here.

The revestiture of AT&T

Twelve years before the telecom act in 1984, AT&T spun off its Bell system into seven regional Bell operating companies (RBOCs): Ameritech, Bell Atlantic, Bell South, NYNEX, US West, Southwestern Bell and Pacific Telesis. AT&T spun off 22 operating companies into these seven RBOCs. This was called the divestiture of AT&T. At the time, it was thought to be a good idea. Throughout the years, the seven RBOCs became recognized as the local exchange carriers (LECs), the legacy telephone companies and the incumbents.

So many names were given to these local phone company entities across the years as competitors battled with them for market share and control of the local markets. The RBOCs wanted to dominate the local markets. Even though the intent was to break up telecom monopolies, there were some who still wanted to cling onto the idea.

AT&T, Sprint and MCI wanted to gain access to the local markets with new market plans and some RBOCs like Ameritech had strategies of getting a piece of the long-distance markets. Because they weren't successful, some started merging.

Southwestern Bell started buying up other companies and soon acquired Pacific Telesis. It also shortened its name and bought out Ameritech. You could slowly see that the seven RBOCs were combining into larger and larger entities. In effect, it was a “revestiture” of the Bell system.

A pork chop bill

The Telecom Act of 1996 was enacted before some of these big mergers happened. It was supposed to open up the doors to more competition. Instead, we saw mergers and less competition.

I remember writing an article in Network World about how much pork was in the bill. I named it a “pork chop bill”. The act created some entities that I thought were nothing but new bureaucracies. My take on it in April 1996 was:

The Telecommunications Act of 1996 is not that great a piece of legislation unless you're a regional Bell operating company or a Washington, D.C. bureaucrat looking to find a new staff position in a federal agency. It's got more pork in it than a Jimmy Dean sausage.

The act contains sections that, in effect, guarantee rates to carriers that might lose market share as a result of increased competition as well as the creation of several funds and agencies that sound good if you're in favor of bureaucratic and corporate welfare.

For example, the act creates an entity called the Telecommunications Development Fund. It has three main goals: to provide capital in the form of loans or other investments for small businesses, to fund studies and research on emerging technologies and to support universal service to rural and urban areas. It also will be a source of new jobs for bureaucrats caught in the current wave of government downsizing.

The act also establishes a joint board on universal service to advise the FCC on modifying the definition of universal service. Redefining what universal service is and creating a mechanism to fund every eligible phone company to provide it, though, might prove to be a form of “telewelfare”. This does not encourage competitiveness.

It rewards stagnant organizations that will be losing their monopoly market share to new entrants in their territories.

Even back then I saw what amounted to telewelfare. It doesn't seem like many people saw that back then.

At the time, the O.J. Simpson trial was going on and more media attention was around that than this bill. I used to joke that more people could name four or five attorneys on the O.J. trial than they could name four provisions of the 1996 act, which affected their life a lot more than the O.J. trial. I continued:

If creating a fund to subsidize local telephone companies were not enough, the act also establishes a non-profit corporation called the National Education Technology Funding Corp. Part of its mission involves distributing funds collected from federal agencies to primary and secondary schools to promote technology and universal access.

While this all sounds good, who will be judging whether this money is being spent wisely? For example, some school districts are already buying RBOC distance-learning solutions that some critics say are overdesigned and overpriced. This RBOC sales tactic is just another mechanism to siphon federal money in the guise of adding technology to schools.

As for opening competition, parts of the act actually guarantee a closed market for certain services to carriers that obviously had some good lobbyists. For example, there's a section that guarantees exclusivity to RBOCs that bought alarm-monitoring services prior to the signing of the bill. How much did Ameritech (which bought National Guardian Alarm Services in 1995) pay its lobbyists to get that piece of tenderloin into the bill?

Another dubious section of the act involves pole attachments and rights of way. Utilities that “own” or “control” poles, conduits, ducts and rights of way have to follow certain pricing guidelines when charging other entities for their use. The act discusses how utilities should apportion the cost of providing access to other carriers.

Wait a second! The rights of way are owned by the municipalities. The utilities only lease them. Nowhere in the act is it stated that the utilities have to share that revenue with the municipalities.

… From a users' perspective, this means that your firm as well as you as an individual will be paying higher taxes to offset the shortfall caused by the municipalities not being able to charge the real values for rights of way. Where were all the local government lawyers and council members when this idea was being baked?

That was written 10 years ago. It seems like we're going about telecom the wrong way yet again.

Congressional hearings

Some people have recently argued in front of Congress that we are living in a very competitive time in a global market and we are behind some of our trading partners who have emphasized the need for broadband connectivity. Others are arguing for the old telecom companies by saying they need a piece of the action in order to build more infrastructure.

Who really got the benefits from the Telecom Act of 1996? Did the Bell companies invest in the infrastructure or do you believe the claims of the book that Bruce Kushnick just wrote on the “$200 billion broadband scandal”? He claims:

1. The public subsidies for infrastructure were pocketed. The phone companies collected more than $200 billion in higher phone rates and tax perks (or about $2,000 per household).

2. The world is laughing at the U.S. Korea and Japan have 100 Mbps services as a standard. America could have been No. 1 had the phone companies actually delivered. Instead, we are 16th in broadband and falling in technology dominance.

3. Harm to the economy: $5 trillion was lost because new technologies and services that America would have developed happened in Korea.

4. Fake … consumer groups and biased non-profit think tanks are now the major force in broadband regulation and policy.

I believe them. I have been writing about it for 10 years.

Carlinism: The Congressional hearings are nothing more than a telecom industry “ring the phone” version of “Wag the Dog”.


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