Selloff of stocks starts a blame game

June 1, 2001


The political joke, "Prepare Three Envelopes," describes how one powerful congressman and his ally at the Federal Communications Commission are handling the recession in both the telecommunications and high-tech sectors. The joke's gist: A new chairman opens a desk drawer and sees that someone has left three envelopes labeled "use in crisis 1, use in crisis 2, use in crisis 3." The chairman confronts the first crisis and opens the first envelope, finding a note advising, "blame your predecessor"; the advice for the second crisis is "blame your staff" and the advice for the third crisis is "prepare three envelopes." The first envelope was opened recently by Rep. Billy Tauzin, (R-LA), the new chairman of the House Committee on Energy and Commerce.

According to Tauzin, "The meltdown in the information technology [IT] sector is of grave concern."

He blames the FCC for the meltdown and insists on "reform of the FCC... an anachronism built...defined, run, organized, and postured around the super-regulatory models of the 1930s," which in the Clinton years "embarked upon a new and more pernicious form of regulation."

These remarks appear in a paper released by the Progress & Freedom Foundation (PFF), a Washington, DC claque for incumbent telephone companies. Tauzin dismisses the notion of the FCC as an arm of the federal government's executive branch, attacking the FCC's former chairman for conducting "personalized, subjective regulation" and being insubordinate, acting "without regard to Congressional intent, oversight, or will." The PFF president lauded the congressman: "The problems are in significant measure the result of failed public policies...Chairman Tauzin has got it exactly right."

Monopoly in local telecom markets and the spread of DSL technology in those markets caused the IT meltdown.

In spite of the Telecommunications Act of 1996, incumbents retain a 95% market share in local telecom access markets and have merged with each other to expand their control over the nation's access to telecommunications. The mergers prompted Sen. Ernest Hollings, (D-SC) to enter a statement into the congressional record in 1999: "One company will now control one-third of all access lines in the United States, even though its market is not open to competition. Competition again becomes a casualty of the unwillingness of Bell companies to open their markets and let go of their monopolies." The Senator also introduced Senate Bill S. 1312, legislation which said, "A Bell operating company [BOC] is required to meet the market opening requirements...of the Telecommunications Act of 1996 for half of the states in its region by Feb. 8, 2001. The FCC is required to assess a forfeiture penalty of $100,000 for each day a BOC is in violation of this requirement."

S. 1312 never became law, but the bill is a record of congressional concern about pervasive monopoly in local access markets. The standard retort to charges of monopoly control is, "Big is not necessarily bad." Big is bad because the monopoly retards the rate of technological improvement in local networks, choking back the traffic that should flow from local networks to the core networks, thus reducing the demand for IT services, creating idle capacity in the core networks and diminishing market valuations for such companies as Level 3, Global Crossing, and their suppliers. Big is bad because the incumbents rely exclusively on digital subscriber loop technology to offer so-called "broadband services." DSL is an interim technology with physical limitations constricting traffic flows. The longer DSL dominates local telephone architecture, the longer core-network providers and their suppliers will suffer from diminished market valuations, according to "The Bandwidth Gap," a report authored by David Prior of the Phillips Group, a British consultancy based in London.

Prior maintains that traffic flows from local networks to core networks are "limited by the access technology in use...recent experiences with DSL provisioning... suggest that such activity will not meet expectations [of improved traffic flows to the core]...without action to reduce the bandwidth gap, the effects of the gap will continue to be felt beyond 2015." Prior concludes, "While technology...create[s] bigger and cheaper capacity in the core... legacy architectures...continue to restrict...load."

The FCC's new chairman, Michael Powell, does not recognize problems of DSL technology and legacy networks. In a June 1999 speech, he praised DSL: "There are a number of quite viable technologies and service providers in the broadband race, including DSL." In a recent statement to the Subcommittee on Telecommunications and the Internet, he praises legacy systems: "The legacy world to our back is a proud one. This nation built the finest voice-communication system in the world" and proposes a seemingly even-handed policy toward all segments of the telecom industry: "We will do everything we can to facilitate the timely and efficient deployment of broadband infrastructure...we will endeavor to promote the growth of a wide variety of technologies that can compete with each other...and will strive not to favor-or uniquely burden-any particular one." But the incumbents' monopoly control and further use of DSL technology will continue to limit traffic flows from local networks to core networks, thus limiting the demand for IT services. Powell's policy means a long night of suffering for the IT sector.

Powell clearly agrees with Tauzin's blame assessment and the goal of reforming the FCC. In his statement to the Subcommittee on the Internet, Powell avoids discussing the market's decline: "I cannot predict the future, nor can anyone else at the Commission," adding that his reformed FCC would be "a force that is well-trained in tactics, strategy, and the weapons it will need. A force that is disciplined and able to adjust quickly and adapt to fluid conditions, threats and opportunities, both will present themselves through the haze. I hope to build, along with my colleagues and the outstanding FCC staff, just such a unit-one well suited to an uncertain future."

His sidestepping the discussion of market issues and his resort to a military metaphor are ways to avoid explaining how his reformed FCC would reverse the IT sector's meltdown. The military metaphor is inaccurate, because the military can strategize and execute with a high degree of autonomy, largely free of the checks and balances that restrict a civilian agency, like the FCC.

When Tauzin and Powell substitute finger-pointing and rhetoric for detailed plans of economic recovery for the business sector they are regulating, they lower their credibility and alienate the risk-taking venture-capital side of the private sector that pinned its profit hopes on a high-bandwidth economy.

Tauzin's concluding remarks in his PFF paper are apt: "We are prepared to do some very exciting things. How we come out of it all will be tempered by the fact that the Senate is so evenly divided." The second envelope is ready, but its contents may be changed to "blame the Senate."

Stephen N. Brownwrites on public policy in telecommunications. He can be contacted by e-mail at [email protected] or telephone: (615) 399-1239.