How The Bells Stole America's Digital Future

The Key Flaw in Incentive Regulation Plans

There is a significant flaw in the incentive regulation plans adopted by the various states. When a monopolist is deregulated before competition takes hold, the result is an unregulated monopoly.

One of the concerns that incentive regulation was supposed to address was the absence, in cost-based regulation, of rewards for efficiency. Under traditional regulation, if a less efficient firm had higher costs, regulators authorized higher rates. A firm that used innovation to become a more efficient provider of existing services, or to offer new services, would receive no more or less financial benefit than a firm that was not innovative at all. The key benefit of traditional regulation was that the monopolist had no incentive to reduce customer service, since the cost would always be recovered in rates.

On a purely theoretical level, there is nothing wrong with a regulatory policy that is designed to encourage efficiency and innovation. Nor is there anything wrong with a regulatory strategy intended to produce a substantial upgrade in the quality and capability of the telephone network.

But it was a mistake for regulators to simply trust that competition would develop immediately, bringing better and more efficient service, and multi-billion dollar investments in new networks. Yet that, in essence, is what happened. Profits and prices were subject to much less regulation. Regulators expected the additional revenue that the Bells were able to generate in this relaxed regulatory environment to finance construction of a fiber optic network. But without competition, the Bells kept the excess revenue, and there was no accountability to ensure that they actually built the networks they had promised to build.

If the Bells were confronted with actual and substantial competition in the local service market, it might have been reasonable to allow issues such as service quality and the pace of deployment of advanced telecommunications capabilities to be determined by the market. But there has not yet been any substantial local exchange competition, particularly for residential customers.

More Recent Moves to Block the Digital Future: DSL and the Bells

The Bells' failure to deploy the promised fiber optic networks was a major blow to America's digital future. If the Bells had kept their promises, almost half of America's households and the vast majority of U.S. schools would already have access to a fully interactive high-speed network. Instead, only about 500,000 have been wired to the fiber optic network, less than 5% of the 50 million Internet users in the U.S. subscribe to high-speed Internet service today, and there are four times as many cable modem subscribers as DSL subscribers.[48] In fact, it was the growing demand for cable broadband that finally motivated the Bells to launch aggressive plans to rollout DSL service. And now that they've jumped on the high-bandwidth bandwagon, there is mounting evidence that the Bells are doing everything possible to put competitive DSL providers at a disadvantage.

ISPs Have A Litany of Complaints About the Bells

A recent survey of Internet service providers conducted by New Networks Institute for the Commercial Internet eXchange (CIX) and the United States Internet Service Provider Association (USISPA) found a high degree of dissatisfaction among competitive DSL resellers.

With an estimated 7,000 providers throughout the United States, small and mid-size ISPs serve 46% of all online customers.[49] These companies, not the Bell monopolies, have been the real innovators of America's digital future. But according to the findings of a survey released by NNI on April 12, the Bells and GTE are providing competitive ISPs with substandard customer service and stifling competition. The result is a loss of revenue for ISPs.[50]

Across the board, ISPs rated their customer service experiences with the Bells as substandard in virtually all categories. Only 8% of ISPs surveyed gave the Bells an overall passing grade (above 6.5 out of a possible 10 points). The average grade was 3.7, well below an acceptable standard. The survey also found that 62% of ISPs reported frequent or continual phone line problems, 57% reported instances in which it took months for orders to be fulfilled, and 46% reported being unable to buy a service for resale even when the service was advertised. In addition, 46% of the ISPs reported that it could take several days for repairs to be made to installed phone lines. In the words of one Texas ISP:

"Network switch screw-ups take us down regularly. Inadequate trunking (phone lines) causes circuit busies. Poor equipment causes slow connections. Southwestern Bell lies to our clients when they foul up service and try to take our clients."[51]

About 40% of the responding ISPs reported that they offered or soon plan to offer DSL service. Those already offering DSL also reported a host of problems in dealing with the Bells:

ISPs that purchased DSL from Competitive Local Exchange Carriers (CLECs) for resale to consumers believed the CLECs delivered better service, but felt the CLECs were also being hampered by the Bells. ISPs gave CLECs an approval rating twice that of the average rating for the Bells. Moreover, a majority of small ISPs in secondary markets across America reported that there were no competitive resellers and the Bells were either freezing them out of the market by pricing their own DSL service below the ISP's cost, or were not providing adequate customer service. Here is what one ISP reported:

"A CLEC must work with Southwestern Bell to gain access to the network, and when SWB screws them, they become another layer of confusion. To coordinate both large companies into a cohesive troubleshooting team in a crisis is impossible."[52]

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