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Waves of the Future: Are We Ready to Deregulate Telecommunications?

By Crandall, Robert W. | Brookings Review, Winter 1996 | Go to article overview

Waves of the Future: Are We Ready to Deregulate Telecommunications?


Crandall, Robert W., Brookings Review


ARE WE READY TO DEREGULATE TELECOMMUNICATIONS?

The shift in the political control of Congress following the 1994 elections has spawned a new effort to revise the 1934 Communications Act to "reform" regulation in the telecommunications market and increase competition in rates and service. But so far, the revolutionary 104th Congress has done little more than nibble at the margins of a huge regulatory problem.

The 1934 Communications Act, as modified over the years, still provides the authority for regulating local technology companies, long-distance companies, international carriers, satellite companies, radio broadcasters, cable television companies, paging companies, cellular carriers, fiber-optics Competitive Access Providers, wireless cable operators, and a host of specialized radio services. Many of these services did not even exist in 1934, and the technology for delivering the others has changed dramatically in the past 60 years. The obvious question is why a 1934 statute should mandate such pervasive regulation in such a radically transformed market. But under legislation pending in both the House and the Senate, no service that is now regulated would be totally freed from regulation. What is called for is drastic change - change as far-reaching as the 1978 Airline Deregulation Act that gradually phased out the Civil Aeronautics Board. Airlines were deregulated because the cost to society of regulating them was far greater than the prospective costs of any monopoly power that would emerge in an unregulated market. But the social costs of regulating telecommunications exceed even those of regulating airlines. The risk is continuing to "reform" telecommunications regulation rather than drastically curtailing it is substantial.

The Rationale for Regulation

When the Communications Act was first passed, AT&T controlled all long-distance telephone services in the United States and owned more than 80 percent of local telephone circuits. To most observers, the communications sector was inevitably dominated by a few huge concerns, such as AT&T and NBC (radio broadcasting only, for television did not yet exist), who could exploit their economic and social power if left unregulated. To let one firm set prices on all telephone calls or a few radio networks control the airwaves was unthinkable, particularly at the outset of the New Deal.

But AT&T's control of the telephone industry was as much a product of regulation and legislation as of natural economic forces. AT&T had already submitted to regulation before World War I rather than face antitrust attack for its anticompetitive practices. And even in 1934 the commercially usable radio frequencies could support many radio networks. Even then, we probably did not need regulators to keep a few commercial interests from controlling the supply of editorial opinion and news to the public.

A second reason for regulating telecommunications is so-called network "externalities." Your or my valuation of telephone or video networks may depend in part on how many others are connected to them. To facilitate the growth of these networks, first movers may have to be protected or additional subscribers subsidized by being allowed to connect at less than cost. Initially, a temporary grant of monopoly may be better than competition to assure network growth. And someone, perhaps the government, may have to set standards so that all users can send and receive messages over the network.

Federal subsidies, for example, nurtured the recently developed Internet (though rates charged for using it have not been regulated). But the other big communications networks are hardly in need of government stimulus. The telephone industry now serves about 94 percent of all households. Four major commercial television networks serve viewers. Cable systems pass 95 percent of all households with scores of channels of service. Wireless cable systems serve most major markets.

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Waves of the Future: Are We Ready to Deregulate Telecommunications?
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