IP: what is the end result should the FCC decide to reward 'market power'?

[Dave Farber <dave@farber.net>]

------ Forwarded Message
From: Dewayne Hendricks <dewayne@warpspeed.com>


[Note:  This item is from reader Gordon Cook.  This is a bit old and
I'm cross posting it from another list.  However, there is some very
good stuff here that I wanted to share with my readers.  DLH]

At 7:28 -0700 7/20/02, Gordon Cook wrote:
>From: Gordon Cook <cook@COOKREPORT.COM>
>To: CYBERTELECOM-L@LISTSERV.AOL.COM
>Subject: what is the end result should the FCC decide to reward
>'market power'?
>Date: Sat, 20 Jul 2002 07:28:21 -0700
>MIME-Version: 1.0
>
>see especially  the last part of what is being proposed by noam at
>the end of his message below
>
>add this to the probe research report on cyber security and it is a
>death sentence for
>non bell headed telecom
>
>are we not now about to adopt a national policy of rewarding
>
>1. use of inefficient technology
>
>2. fear of innovation
>
>3. acquisition of debt in pursuit of diseconomies of scale
>
>4. fraud
>
>5.  if you are small and want to innovate forget it because investors
>like market power and even though the industry is bankrupt we do what
>investors like
>
>Questions:
>
>1.  what does this do to companies whose business models depend on
>lowcost telecom?
>
>2. does this leave the road open for alternative innovative less
>costly telecom?
>
>3.  does it set the US up as the bastion of bell headed bigger is
>better inefficiency such that countrries like canada and chine can
>built modern systems that out compete us?
>
>4.  does this postpone any chance of modernizing the US system for
>the next 25 years  by preserving investor capital
>
>5.   does it leave countries outside our borders free to cherry pick
>US business?
>
>6. does it mean that any company investing in unlicensed wireless
>better shut its doors?
>
>from mat lodge on nanog
>http://www.proberesearch.com/alerts/networksecurity.htm
>
>Their point is that, given the current climate, the RBOCs are likely
>to be setting the agenda for cyber security. To quote Probe's first
>two conclusions:
>
>"First, the RBOCs will be the focus of developing a telecom national
>security plan;
>
>Second, the RBOCs will use this position to force costs onto all
>players. For example, co-location will be viewed as increasing the
>risk to telecom, so carriers may be forced to abandon co-location in
>favor of smaller nodes and these nodes will have to have remote
>backup nodes."
>
>from farbers IP
>From: "John F. McMullen" <observer@westnet.com>
>Date: Sat, 20 Jul 2002 06:01:45 -0400 (EDT)
>
>>From the Financial Times --
>http://search.ft.com/search/article.html?id=020719000702&query=Eli+Noam&vsc_
>appId=totalSearch&state=Form
>
>Too weak to compete
>by Eli Noam
>
>A stench of scandal is hanging over the telecommunications industry. But
>to focus on individual misdeeds is to miss the fundamental structural
>problems of telecoms economics and policy. These problems will not go away
>with corporate reforms or criminal sanctions.
>
>For telecoms to recover, the corporate strategies and public policies of
>more than two decades have to change radically. The basic policy,
>spreading from the US and the UK to become the new orthodoxy, has been to
>force the traditionally monopolistic markets open. After a period of
>protection for new entrants, competition would take hold and the role of
>government would wither away.
>
>Wherever one looks, however, telecoms companies are drowning in red ink.
>The cumulative debt of the seven largest European carriers is greater than
>Belgium's gross domestic product. In the US, most of the new entrants into
>local telecoms have gone bankrupt. All big long-distance carriers are
>bleeding. Across the sector, stock market valuations have dropped
>dramatically. Performance has been poor in such a large number of
>companies and countries that one cannot simply blame specific management
>teams.
>
>Although growth is unlikely to return to the levels of the boom years, the
>present downturn is probably only temporary. Yet the real problem for the
>industry is that it has entered a period of chronic volatility in which
>boom-and-bust patterns will become a common occurrence rather than an
>aberration.
>
>One cannot really blame a drop in consumer demand for this instability.
>Telecoms usage has kept growing at a rate that would make most other
>industries proud.
>
>The problem is not low demand but low prices, based on oversupply. During
>the late 1990s, the network companies over-optimistically projected their
>market shares over the long term. This was aggravated by the tendency of
>analysts to value a company's progress by physical measures of its
>infrastructure, such as cell sites and fibre miles. In consequence,
>capital expenditures grew enormously, in the US by an annual rate of 29
>per cent.
>
>A related factor was that while the cost of building a network is high,
>the incremental costs of serving a customer are low. Hence, competitive
>prices dropped dramatically, 54 per cent annually for transatlantic
>circuits and 43 per cent for trans-Pacific ones. Business plans based on
>higher prices became worthless.
>
>Technological and economic obsolescence will gradually take capacity out
>of circulation. But disinvestments take time. For Texas office space, it
>took more than a decade to dissipate the excess supply. Another strategy
>would be to stimulate a substantial growth in user demand, probably from
>video over the internet. But this, too, will take time. And when it
>arrives, it will stimulate another boom-and-bust cycle.
>
>In the meantime, what will telecoms companies do? The textbook responses
>are to cut costs and prices. But these strategies will quickly be matched
>by competitors and will leave everyone even worse off.
>
>The main strategy will therefore be to raise prices above competitive
>levels, reducing competition and the commodification that lowers
>profitability and future investments. To do so this requires market power,
>or at least collaborative cartels or oligopolies within market segments,
>both among telecoms companies and with related platforms such as cable
>operators and wireless carriers.
>
>Such market power is highly valued by investors. In the US, rural phone
>companies maintained their value much better than those active in
>competitive markets.
>
>The problem with any cartel is its instability. Hence, government will
>become engaged in the process. Historically, government has often been
>recruited as an enforcer of cartels to stabilise vital industries whose
>competitive equilibrium was not sustainable. In the US, airline and
>railroad competition was, and to a certain extent still is, reduced by
>government regulatory bodies. In telecoms, for many decades the Federal
>Communications Commission and the state utility commissions played a
>similar role.
>
>It will not be easy for politically sensitive regulators to hold off from
>stabilising the industry when the downturn persists, when essential
>service providers falter, when service quality deteriorates and employment
>drops.
>
>For governments to moderate competition in favour of stability would
>require a fairly radical departure in regulatory philosophy. For a
>generation now, liberalisation, deregulation and competition have been the
>keystones of telecoms policy.
>
>One business cycle later, competition is giving way to consolidation and,
>soon, co-operation. Thus, the traditional system of regulated market power
>will return. This scenario, unfortunately, will look more like the old
>telecoms than the new, but we must face reality rather than engage in
>denial.
>
>The writer is professor of economics and finance at Columbia university
>
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>------ Forwarded Message
>From: "Faulhaber, Gerald" <faulhabe@wharton.upenn.edu>
>Date: Sat, 20 Jul 2002 08:33:44 -0400
>To: "'Dave Farber'" <dave@farber.net>
>
>The Noam FT article is a very thoughtful piece by one of the bright lights
>in telecoms economics.  I hope his conclusion is not true, but in fact
>regulators/politicians may see their role as "rescuing the industry from
>itself."  There are already worrying signs of this in the US, and the
>European governments are ever ready to jump in to "fix" the industry.  A
>distressing outcome, but quite possible.
>
>Professor Gerald Faulhaber <http://rider.wharton.upenn.edu/~faulhabe>
>Business and Public Policy Department
>Wharton School, University of Pennsylvania
>Philadelphia, PA 19104
>


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