SMART Letter #82
Here Comes the Bailout
January 7, 2003
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SMART Letter #82 -- January 7, 2003
Copyright 2003 by David S. Isenberg
isen.com - "quid with no pro quo"
isen@isen.com -- http://isen.com/ -- 1-888-isen-com
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CONTENTS
> Here Comes the Bailout
> Conferences on my Calendar
> Copyright Notice, Administrivia
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HERE COMES THE BAILOUT, by David S. Isenberg
The U.S. FCC is going to bail out the failing local telephone
dinosaurs, despite our "fail fast" letter to FCC Chairman
Michael Powell (http://netparadox.com), which calls on the
FCC to shun measures that would prop up the dying telephone
industry. I'm shocked, shocked that Powell is ignoring our
letter!
The FCC is planning to eliminate wholesale rate rules,
called UNE-P, that make it possible for companies that do
not yet own their own last mile to enter the local
telephone service marketplace. The UNE-P rules were
established to make local competition possible. (For a
good overview of the current UNE-P debate see
http://tinyurl.com/46co .)
UNE-P rules, established by the FCC pursuant to the 1996
Telecom Act, are solidly grounded in basic network
economics. If new-entrant telephone companies were
required to build their own network in order to enter local
service, they would need to spend huge amounts of capital
before one penny of revenue came in. Chairman Powell
ignores this as he calls for, "only facilities-based
competition" (e.g., see http://tinyurl.com/46b7). Without
UNE-P, potential local competitors (like AT&T and WorldCom)
would shut down their local competition efforts because
they'd have to build their own networks -- not an
insurmountable barrier, but an untenable business
proposition for a telephone company.
Today, facilities-based competition is an oxymoron.
Incumbent local telephone companies have facilities, but no
competition. Locked-in customers of the Bell System
monopoly financed these facilities. Arguably they belong
to the customers as much as to monopoly-heritage telephone
companies. The post-1996 FCC was following this logic when
it made rules requiring monopoly-heritage phone companies
to make their network elements available to new entrants at
discounted, wholesale rates.
Under the no-UNE-P scenario that the FCC is pushing, the
ILECs will indeed have more cash -- but will they invest
this cash in their networks? It ain't necessarily so,
according to what Bruce Kushnick has been saying for years
(see http://newnetworks.com). Kushnick presents an example
of how in 1993, New Jersey Bell convinced the New Jersey
Public Utilities Commission to institute new, "incentive
based" rate rules. In return, NJ Bell promised to spend
US$1.5 billion to "greatly accelerate deployment of
advanced technologies," including fiber to the home. In
1997, the New Jersey Ratepayer Advocate (a NJ State
Official) reported that NJ Bell spent not $1.5 billion but
only $79 million. At the same time, Kushnick reports, the
new regulatory "incentives" gave NJ Bell a $955 million
windfall that resulted not in advanced services, but in $1
additional dividend payouts of -- surprise! -- about $955
million. And -- more surprise! -- no New Jersey homes got
"advanced technologies" under the "incentive based" system.
It was all quid, and no pro quo.
New Jersey is not an exception. Kushnick found the same
pattern in state after state -- the incumbent telephone
company goes to the regulators hat in hand, saying, "Give
us rate relief and we will bring you the future." Then,
years later, rates are higher, but the future has not
arrived. Now this drama plays at the FCC.
The incumbent telephone companies are actually right that
they'll get a more sustainable business model without UNE-P
-- this business model is called "monopoly". And they are
right when they say that existing UNE-P rules could weaken
them to the point that they'll no longer be able to provide
network service as usual. But this is a good thing when
the whole industry is dying! Let the obsolete telephone
companies die. If current UNE-P rules help them die
sooner, even better.
Neither today's UNE-P pricing, nor the unfettered incumbent
telephone companies will bring the new "best network" we
know is possible. The best way to do that is via
structural separation; we must recognize a new natural
monopoly at the level of poles, conduits, dark fiber and,
perhaps, spectrum. The incumbent telephone companies have
fought this kind of structural separation with every lawyer
and lobbyist they could buy, because they have no business
model for lower layer services that are separate from
application-layer services. Indeed, the current wholesale
rules were forged in 1996 to ward off structural
separation. For the new network to arrive, the incumbents
must die.
Michael Powell ascended to the FCC Chairmanship talking
about economist Joseph Schumpeter's creative destruction
view of capitalism. Now Powell thinks he can trust the
incumbent local telephone companies to bring creation
without destruction. When no marketplace exists, there is
no magic hand, only magical thinking. Powell should know
better.
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CONFERENCE ON MY CALENDAR
February 4, 2003, Santa Barbara CA. Center for
Entrepreneurship and Engineering Management (CEEM) at UC
Santa Barbara. http://ceem.engr.ucsb.edu/events.html
March 31 through April 3, 2003, San Jose CA. VON. I am
organizing a panel on April 1 (5:00 to 6:15 PM) that I
promise will have the most interesting speakers of the
entire conference. April 1 is one of my favorite holidays.
You will believe EVERYTHING my panel presents.
http://www.von.com
April 22-25, 2003, Santa Clara CA. O'Reilly Emerging
Technology Conference. Undefined, but it'll be something
about why do The Stupid Network at all if you can't make
money from it. http://conferences.oreillynet.com
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provided that the two lines below are reproduced with it:
Copyright 2003 by David S. Isenberg
isen@isen.com -- http://isen.com/ -- 1-888-isen-com
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