NCPA - National Center for Policy Analysis

Regulation Spoils Innovation, Competition in Telecom Industry

May 6, 2004

Despite federal and state government regulations intent on fostering competition in the telecommunications industry, Diane Katz of the Mackinac Center for Public Policy says competition has fizzled, workers have lost their jobs, investors have lost their savings, and consumers have enjoyed fewer quality products.

The core of these telecom regulations requires large wire-line companies to allow rivals to use their networks at below-cost rates for local calling. Lawmakers thought this policy of "forced access" would encourage new entrants to build new facilities of their own to compete against incumbent utilities. Most competitors, however, have opted instead to resell the network services they obtained at a discount. As a result, competition has faltered:

  • In 2002, about 89 percent of the wire lines billed by competitors were served -- in whole or in part -- by an incumbent network, up from 62 percent in 1999.
  • Competitors utilized their own facilities to serve 10 percent of their customers in 2002, down from 29 percent in 1999.
  • For every new line competitors served via independent facilities, they added three lines dependent on an incumbent network.

This policy miscalculation has had serious consequences. Because government required incumbents to subsidize their rivals, investors saw little benefit in providing new telecom capital.

  • Losing its vitality, the market valuation of publicly traded telecom companies has fallen by $2 trillion in the past 3 years, leading to the loss of 500,000 jobs.
  • There has also been a 60 percent reduction in total capital spending on telecom facilities -- inhibiting innovation and potentially jeopardizing network reliability.

The reliance on incumbent networks, concludes Katz, has largely failed to stimulate new products or services, or even lower telephone rates -- the hallmarks of competition.

Source: Diane Katz and Theodore R. Bolema, "Crossed Lines: Regulatory Missteps in Telecom Policy," Mackinac Center for Public Policy, December 2003.

 

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