WASHINGTON-Real competition will not succeed in the marketplace until “realistic rates” can be reached and subsidies cut back or restructured-including those earmarked for universal service, said three Wall Street analysts who testified before a Senate subcommittee last Wednesday.
Sen. John McCain (R-Ariz.), chairman of the Commerce, Science & Transportation Committee, wants to revamp the Telecommunications Act of 1996, an act for which he did not vote. Earlier in the week, McCain introduced a bill that will, if successful, cut out all “checklist” items regional holding companies and Bell operating companies must fulfill before they can offer long-distance service to their customers; such checklists have kept Ameritech Corp. and BellSouth Corp. out of the running thus far. McCain then scheduled a Wall Street panel to assess the impact of the act, two years out, on the capital market.
In his introductory remarks, Sen. Conrad Burns (R-Mont.), chairman of the communications subcommittee, said, “Competing providers and competing networks offering consumers competitively priced services are what the telecommunications act is all about. With local competition evolving, new high-speed data networks are being built, and wireless competition is becoming a reality.”
However, the burden of universal service may be more than just a hindrance to new competitors.
George Reed-Dellinger, senior vice president and telemedia analyst for HSBC Washington Analysis, pointed to several factors that have skewed implementation of the act as Congress originally had planned. First, people expected too much too soon. Second, a Republican-based act is being regulated by a Democratic Federal Communications Commission and state regulatory agencies that “at the margin tend to favor the interests of the rate payer over the shareholder, the small competitors over the incumbent monopolies.” Third, legislative and regulatory changes have “run ahead of changes in technology,” he said. “Promises of a tenfold increase in programming channels, interactive media and wireless bypass have failed to materialize, not because of government inefficiencies, but because the technological advances in expanding bandwidth, upgrading switches and developing the necessary software have not been forthcoming.”
Reed-Dellinger also said that judging the act by Wall Street stock performance may be misleading. “First, the market itself has been reaching record highs, having climbed about 70 percent since the beginning of 1996. Second, the bill impacted different sectors and companies in different ways … While the act should not have been viewed as a `zero-sum’ game, the tendency on Wall Street was to single out winners and losers, a phenomenon fueled by the trade press.”
Carriers were viewed as big winners, but much of their success cannot be attributed to the telecom act. Rather, Reed-Dellinger said lower interest rates and bond yields coupled with higher-than-expected growth, new services, enhanced wireless offerings and cost-cutting probably were the real factors behind increased performance.
On the other hand, the act spurred capital investment in communications, he said, citing Teligent Inc. and Globalstar L.P. as two big winners whose names were unknown until recently and which forwarded successful initial public offerings. On the down side, despite the act, many personal communications services licensees were subject to reduced investment.
Reed-Dellinger told the subcommittee that Congress should have “provided more guidance on rate rebalancing and, where necessary, granted the FCC pre-emption authority. A technical correction act regarding universal service is probably necessary and may provide Congress with another opportunity to step up to this difficult political issue.” In addition, rates related to the Communications Assistance for Law Enforcement Act and to enhanced 911 services also need to be monitored and controlled.
“In general, financial markets dislike competition and uncertainty,” said Scott Cleland, managing director of the Precursor Group of Legg Mason Wood Walker Inc. Increasing competition, he explained, creates uncertainty regarding future profit margins.
Wireless companies probably will be some of the first carriers to “extend more of the benefits of the act,” Reed-Dellinger said, when it comes to serving rural and high-cost urban areas. But that will happen down the road, and they will need some universal-service help. And there are definite cases where subsidies will be needed. “No one in his right mind in the capital market is willing to invest in rural areas because the return on investment takes too long,” commented Tod Jacobs, senior telecommunications analyst for Sanford C. Bernstein & Co. Inc. “Wireless local loop strategy will be too expensive and too slow for most people.” However, major players like AT&T Corp. may be willing to partner with others to do this, he added.
Like Reed-Dellinger, Cleland believes most people overestimated how fast technology was going to grow, particularly cable technology and wireless services. “Greatly overhyped was the reliability of wireless technology at a replacement price,” he said. “That prospect is still a few years off at least, and then probably will only begin as a niche service.” Cleland also said that regulators were guilty of trying “to cram the telecom act’s `two-pipe policy’ into what remains a predominately `one-pipe world.’ ” That second wire into the home-which some thought would be a wireless connection-just has not happened yet.
Residential customers may not reap the benefits of competition any time soon, whether it be offered by wireless or wireline competitors, because of subsidies into which each must pay upon entering the local-loop marketplace. According to Cleland, competition and universal service are incompatible goals. “Unless regulators perfectly balance everything, and the courts stay out of the way, either universal service will end up undermining competition or competition will end up undermining universal service … Currently, prices are set politically, not by market forces. If competition ultimately eliminates subsidies, then American residential customers’ rates are going up-probably by a lot.”
