A new telecom experiment, but not the one that matters

The past seven years have been an experiment in reforming the US telecommunications industry. By most measures, that experiment has been a grand failure. The industry is in shambles, with one bankruptcy after another. The promised local competition and new services have been slow to emerge.

There are two possible interpretations. One is that the government hasn’t gone far enough in promoting competition; the other is that it went too far. For the most part, FCC Chairman Michael Powell believes the second interpretation. For two years, he has signaled that he wanted to eliminate some of the rules requiring local phone companies to open their networks to competitors. Now, if press reports are to be believed, the FCC is about to act on this initiative.

I’m one of those who believes that competition failed to materialize largely because incumbents blocked it, not because telecom is a "natural monopoly" or because the government created an un-economic market environment. But I sympathize with Powell’s viewpoint. A "damn the torpedoes" approach is hard to justify, and I’m skeptical the government could beat more blood out of the Bell Company stones even if it tried its hardest. Whatever was the right answer in 1996, a different approach is called for in 2003.

Chairman Powell is beginning down the path of a new experiment. The questionable assumption last time was that imcumbents would open their networks to competitors. This time, it’s that removing those requirements will spur incumbents to invest and compete. If that’s the sole thrust of FCC policies, we’ll look back in 2010 to a story of failure similar to what we see today.

The only way out is with real competition. And the only way to have real competition, given today’s conditions, is through new platforms. With widepsread fiber to the curb deployments seemingly at least a decade off, there are only three realistic possibilities: cable, wireless, and voice over IP. And cable will only be energized in telephony if it faces the other two new competitors; otherwise it will be content to divide up the market with the Bells.

So the key to telecom salvation lies in wireless and voice-over-IP in the last mile. Both require enlighted regulatory policies. The government must free the spectrum for unlicensed technologies, and must provide clarity to enable voice-over-IP communications to ride on third-party broadband networks. So far, Powell’s FCC has suggested that it might move on the former, and has said nothing on the latter.

The unbunbling rules are the site of all the sound and fury, generating huge lobbying expenditures and editorial ink. But in the long run, they don’t matter. The real action is elsewhere. A smart FCC would use the unbundling battle as a smoke screen to move forward in the other two areas.