The Uncertain Future of the Telecommunications Industry

The U.S. telecommunications industry is riding a roller coaster. For most of the 1990s, the industry's future looked very promising. The growth of Internet use, the promise of a broadband network, and a less restrictive regulatory environment that was promised by the Telecommunications Act of 1996 led industry experts to forecast rapidly growing demand for core network services along with high-margin business opportunities in an expanding array of new information services. The industry backed these expectations with massive investments to expand the capacity of both wireless and wire line networks as well as to facilitate the expected boom in high-speed data transmission.

But a funny thing happened on the way to the boom. Demand growth for both standard telephone and broadband services, while strong, did not exhibit the explosion that the industry consensus had anticipated. In wireless telephony, demand grew at a healthy pace, but profits for some wireless carriers were not sufficient to justify the cost of the licenses that the Federal Communications Commission (FCC) had allocated through its auctions. Even in cable television, which was more successful in introducing broadband access than either wire line or wireless telephone companies, competition from two strong satellite broadcasters caused the fraction of households that are served by cable to decline for the first time since the technology was invented fifty years ago. In nearly all of the industry, as capacity expanded more rapidly than demand and competition envisioned began to take hold, prices fell. In an industry in which profitability had been all but guaranteed by regulation for most of the twentieth century, firms began to see red ink. A few major and many minor players fell into bankruptcy.

The growing gap between expectations and reality in industry performance has given rise to new calls to rethink the structure of communications policy. While few have called for outright subsidies, a la Chrysler and Lockheed in eras past, to bail out failing firms, the more common proposal is some form of targeted subsidy of broadband access for households or relief from paying for the auctioned radio telephone licenses. Others focus their complaints on various components of federal and state regulation. Among the favorite targets are: (1) requirements that incumbent local telephone companies lease facilities to their competitors at prices that approximate those that would arise under competition; (2) differences among new wire line, wireless, and long distance carriers concerning policies for setting prices that these companies pay for interconnection with incumbent local access carriers; (3) and the process by which the FCC collects and redistributes the Universal Service Fund for the purpose of subsidizing service to high-cost areas and low-income residential customers. A few simply want the government walk away from the entire mess by deregulating the industry and closing down the FCC.

The ultimate goal of this essay is to offer guidelines for future policy in the industry. But before reaching that point, we first provide a broad-brush assessment of its current condition. In doing so, we do not find conditions to be so bleak as to constitute a crisis, and certainly not to justify scrapping the movement towards more competition and less regulation that has characterized national communications policy for more than three decades. Indeed, the current financial problems of the industry, while real, do not threaten its ability to continue to provide high-quality services at ever-declining prices. Nevertheless, while regulation is not the primary cause of the industry's problems, the post-Act regulatory regime has flaws that ought to be corrected—most notably, interconnection pricing for long-distance carriers and the process for collecting and disbursing the Universal Service Fund.