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Deregulation Fails to Deliver
Two years ago, in the Telecommunications Act of 1996, the Republican-controlled Congress and the Clinton/Gore Administration gave up on consumer protection and gave in to the telecommunications industry's demands for deregulation.
To be sure, policy-makers paired concessions to the telephone and cable industries with promises that American consumers would enjoy more choices and lower prices. In fact, however, consumers face higher prices for many services, and the promised explosion of competition is nowhere in sight. By relaxing ownership limits on telephone, cable, and media companies and by expediting deregulation of cable TV rates, policy-makers put the cart before the horse-and the cart is overflowing with industry consolidation and inflated prices.
The Act's excessive reliance on undeveloped market forces has resulted in industry consolidation through merger, rather than an eruption of competition. The urge to merge rather than compete has engulfed virtually all facets of telecommunications, leaving consumers paying inflated prices from entrenching monopolies that are inadequately disciplined by either the market or regulation.
Contrary to policy-makers' expectations, elimination of ownership restrictions and barriers to cross-industry competition has not resulted in substantial "emerging" competition among local telephone, cable TV, long distance telephone, and other industry players. The Act's fundamental premise-that breaking down legal barriers to market entry would free the cable companies to attack the local phone market, unleash local phone companies to assault cable companies, and enable long distance carriers to lead the charge for one-stop shopping of all telecommunications services-has gone . . .poof.
The seven regional Bell telephone monopolies effectively lobbied Congress to lift the judicial consent decree in the AT&T breakup's so they could become seven new competitors in the long distance market and so they would gain incentives to compete against each other in their local phone business. However, since passage of the Telecom Act, the seven Bells have reversed course by consolidating into five larger local phone monopolies. First, SBC merged with Pacific Telesis, then Bell Atlantic with NYNEX. Now SBC is expanding again by purchasing Connecticut's local telephone monopoly, the Southern New England Telecommunications Corp., and Ameritech's Midwest telephone monopoly.
Similarly, the cable industry boldly told Congress that with less regulation it would be "the other wire" into the home, competing aggressively against the telephone industry. Instead of being the "wire to the future" as cable's feel-good advertising would have you believe, in reality the industry is wired to consumers' pocketbooks, ringing up exorbitant charges that include cable rates rising at five times the pace of inflation. Moreover, since passage of the act, major players in the cable industry have pulled back from head-to-head competition with phone companies and instead consolidated power in their cable markets.
For example, the two largest cable companies, Tele-Communications Inc. (TCI) and Time Warner Inc., which serve more than half of all cable households in this country, are now tied at the hip through Time Warner's purchase of Turner Broadcasting Corp. (That transaction transformed TCI's stake in Turner Broadcasting into a 10 percent ownership of Time Warner.) Through ownership of dozens of the most popular cable channels, these companies exert inordinate power over video pricing, and as a result of their horizontal dominance, they control which programming can get on enough cable systems to have a chance of market survival.
With relaxed regulatory oversight, TCI continues to expand its market power through complicated transactions that increase its control over popular TV programming and involvement in cable system management. For example, TCI, through transactions with Rupert Murdoch's News Corp. and Cablevision Systems Corp., now has a substantial ownership stake in cable systems serving more than a third of all cable households. It has also gained substantial ownership of more than 20 regional sports channels, Rainbow Media, the New York Knicks, the New York Rangers, and Madison Square Garden -- in addition to the dozens of cable networks TCI already owns. By locking up an elaborate web of economic interests, this cartel has a stranglehold on a critical segment of the entertainment industry.
And the long distance companies that promised to build local phone networks and offer one-stop shopping have stopped in their tracks. After thumping their chests about new wireless technology, billions of dollars invested in building local systems, and much ballyhooed Internet services, the long distance companies have garnered about 1 percent of the local phone market. Now AT&T seems more interested in merging with a local Bell monopoly, and MCI is joining forces with fellow long distance company WorldCom.
Back on the local telephone side of the ledger, merger mania leaves Bell Atlantic controlling local phone service from Maine to North Carolina (except Connecticut) with a built-in long distance network that can originate and complete about 45 percent of long distance calling along the Eastern seaboard and New England. If SBC's transactions are consummated, it will control a third of all local phone lines and 50 percent of business lines in the entire country.
With the nation then effectively divided into three or four mega-regional local phone monopolies, Consumers Union believes the urge to combine each of the dominant long distance networks, AT&T, MCI/WorldCom, and Sprint, with a local partner will be irresistible.
Apparently both the local and long distance companies hope no one will notice that they are cashing in on today's monopolies in return for nothing more than the same empty promises they made to Congress about "tomorrow's competition." As USA TODAY noted in a recent editorial: "Consolidation today, competition tomorrow could put off forever the services consumers should have gotten yesterday."
What went wrong? First, Congress confused promises with real market competition and went too far in eliminating regulatory checks on market concentration. With Senior Judge Harold Greene and the AT&T consent decree out of the way and the Federal Communications Commission pushed by Congress to defer to the market, both telephone and cable companies seized the opportunity to expand their monopolies before anyone else could challenge them. Why risk retaliation from potential competitors when you can solidify your existing monopoly base and make bigger profits?
Then antitrust officials failed to follow up on Congress' desire to promote "emerging" cross-market competition and effectively blinked at the early wave of mergers that have set the tone for market consolidation. By refusing to set even modest limits on either SBC or Bell Atlantic, the Department of Justice signaled that it was afraid to apply the fundamental "emerging competition" logic of the Telecom Act through the merger review process. Similarly, by refusing to disentangle TCI from Time Warner or Cablevision, the Federal Trade Commission has made it immensely more difficult for satellite or other competitors to price compete against the cartel of companies that dominate the cable industry.
Given this monopolistic entrenchment, it is not surprising that consumers are facing prices vastly inflated above competitive market levels. Local telephone rates are up as much as 20 percent in some states, and most local phone companies have been attempting to double their local rates, in one form or another. In-state long distance prices (a market still dominated by the Bell companies) have been rising at twice the rate of inflation, and interstate long distance charges have barely declined. Not only are cable TV prices rising four to five times faster than inflation, but consumers are also beginning to face billions of dollars in unnecessary "line items" that are tacked onto monthly local and long distance phone bills, ostensibly in response to the Telecom Act.
What can be done to salvage Congress' goal of cross-market, aggressive competition? Consumers Union believes policy-makers must now recognize that aggressive regulatory intervention and antitrust enforcement are necessary to put a lid on monopolistic pricing and market-concentrating transactions. By disallowing rate hikes and market consolidation until competition develops enough to overcome monopolistic endeavors regulators would protect consumers while the market has an opportunity to sort out which aspects of telecommunications can really become competitive.
Without this aggressive intervention by Congress, regulators, and antitrust officials, the promises of growing consumer choice and lower prices in telecommunications and cable are unlikely to materialize. Consumers will ultimately hold policy-makers accountable if the Telecommunications Act results in mega-regional local/long distance telephone monopolies, and entrenched local cable monopolies that control the most popular TV channels. Even if new services become available and competition unfolds for high-end wireless and Internet offerings, skyrocketing cable and local phone charges could result in a massive consumer revolt against those who delivered the overheated promises of the 1996 statute.
It's time to admit the obvious: This law, which was signed with elaborate fanfare and high expectations by all, has imploded. As Joel Klein, assistant attorney general for Antitrust, said recently, the cable industry is "one of the most durable and powerful monopolies in this country." These companies have "the least incentive to go after their current monopoly and seek to erode it." The 1996 law didn't come close to fixing this situation. In fact, it only made matters worse.
The inaction and regulatory blunders emanating from the FCC may undermine that agency's very purpose for existing. Recently, FCC Chairman William Kennard delivered a body blow to consumers by declining to take action to stop skyrocketing monopolistic cable rates. By waving a white flag and surrendering to the status quo and the astronomical cable bills that come with it, Chairman Kennard is ceding authority from his office that will be difficult to restore in the future. Why should Congress give his agency power to police the telecommunication industry if, when he has that responsibility, he is unwilling to exercise it? The FCC's failure to attack monopolistic practices makes a mockery of the agency and its mission.
The question before policy-makers today, with the afterglow of the 1996 act just about burnt out, is whether public officials will deliver on their promises to the American consumer. The time is ripe to take up the call from disillusioned consumers who still dream of the magic of the telecommunications marketplace and demand action on the elusive promise of lower prices and explosive competition.
Gene Kimmelman is the Co-Director of the Washington, D.C. office of Consumers Union, the publisher of Consumer Reports magazine.
