Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (9 page)

When the Republicans took control of both houses of Congress in the 1994 election, however, the bill had to be reintroduced on a bipartisan basis. Many Republicans had already voted for it, so it became the first section of another bill. The other sections of the new bill were not quite what Markey had wanted: Title 2 once more deregulated cable pricing, and Title 3 deregulated other media. Now in the minority, Markey and his team battled on, getting amendments added and changes made, eventually reaching the point at which the bill, though not as strong as the 1994 draft, nonetheless would launch greater competition. It is now known as the 1996 Telecommunications Act.
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The 1996 Telecommunications Act

Here are the conditions that shaped the 1996 act: the Baby Bells were demanding permission to compete with the cable companies and to offer long-distance services. The cable companies were finding ways to continue to overcharge consumers. Consumers wanted competition for local phone service. And congressional power now belonged to the Republicans.

The 1996 act set up a grand bargain: it tried to force competition into all telecommunications markets while also deregulating them. The Bells had to give smaller companies access to their circuits, and the cable companies had to allow the Bells to compete with them for cable service. Local telephone companies could now offer long-distance service outside their own service areas, but in order to offer long distance inside their service areas, they had to prove that they had opened their local phone markets to competition. Rate regulation for cable systems was ended other than for the “basic tier” of programs; the theory was that stiffer competition from telephone companies (now in the video business) would constrain rates.
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Congress did leave in place an FCC requirement that limited the percentage of the market that one cable provider could control up to 30 percent of all pay-TV subscribers. The FCC argued that the 30-percent-ownership limit was “generally appropriate to prevent the nation's largest MSOs [multiple systems operators—that is, the cable companies] from gaining enhanced leverage from increased horizontal concentration,” while ensuring that “the majority of MSOs continue[d] to expand and benefit from the economies of scale necessary to encourage investment in new video programming services and the deployment of advanced cable technologies.”
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What the act did not do was keep the cable companies from clustering their operations (“you take Minnesota, I'll take Sacramento”) or the telephone companies from consolidating. Even before it passed, two of the Baby Bells, NYNEX and Bell Atlantic, were rumored by the
Wall Street Journal
to be considering a merger. Within a few years, the Baby Bells were merging rapidly: SBC bought Pacific Telesis, then Bell Atlantic and NYNEX merged. There was activity in long-distance markets as well: AT&T bought Teleport, and MCI bought a metropolitan fiber network called MFS. Bell Atlantic merged with GTE and renamed itself Verizon.
SBC bought Ameritech. By 2005 America was effectively left with two wired companies—Verizon and SBC.
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At the same time, MCI and the old AT&T (still in long distance) kept trying to enter local markets and were having a hard time. They faced a firestorm of litigation over the regulations the FCC had created to force incumbents to share their facilities with their competitors. Essentially, the Baby Bells used the courts to avoid the act's requirement that they open up their local networks to competition. The ensuing litigation went on for ten years. When it was over, the 1996 effort to open up phone lines to competition was widely considered a failure. In the end, the D.C. Circuit and the FCC so softened SBC's obligation to lease its facilities that AT&T had effectively no chance to get into local competition with the Baby Bells. The regulators had been thoroughly outlawyered.
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AT&T gave up and announced in January 2005 that it would be bought by SBC—and bringing everything full circle, SBC renamed the new entity AT&T. Verizon acquired MCI at the same time. Both Verizon and SBC claimed that they could increase efficiency by combining long-distance with local phone services, but whether those cost savings would be passed along to consumers was not clear. The new AT&T, as an integrated company, saw “positive indications of pricing stability” after the merger. In other words, competition would not be a problem.
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What had happened to the competition that the 1996 law was supposed to foster? The act's fundamental assumption, that open platforms and alternative technologies would undermine the market power of the incumbent carriers over basic communications platforms—and that behavioral regulations on these actors would make structural limitations unnecessary—has proven overly optimistic. Although the phone companies were supposed to allow competing carriers to share their facilities, and the cable companies were supposed to compete with the phone companies to provide distribution of video content, data, and phone services, the opposite happened. On the phone side, without limits on mergers, consolidation and litigation foiled the act's open-access mandates. At the same time, cross-technology competition between phone and cable turned out to be weak: when it came to wired access, the incumbent cable operators had unbeatable economic advantages over the phone companies.

Internet access, a service provided by both phone and cable companies, could have disrupted all these giant companies’ efforts to block competition, if only the open-access mandates of the act had held firm. But the mergers were not what undermined the power of Internet access to eliminate the gatekeeping role that the carriers enjoyed. It was the FCC itself.

Michael Powell, chairman of the FCC from 2001 to 2005 and now the leader of the cable industry's trade association, has an easy speaking style. He is clearly aware of the overstated rhetoric that often characterizes titanic battles over telecommunications policy and is happy to follow suit in his tone and choice of words. He raises his eyebrows, speaks blazingly fast, makes his points lightly, and, having made them, moves on. He often told reporters that he was enjoying being the FCC chairman, and he seemed to mean it.

Powell was born in 1963 in Birmingham, Alabama, and as the only son of General Colin Powell, he heard the call to public duty at a young age. Scholarly by temperament but convinced of the importance of the armed forces, he enlisted in the army after college and suffered a broken back when the jeep he was in crashed in a rainstorm and rolled over on him; he was flown back to Washington and spent more than a year recuperating. Law school, an appellate clerkship, private practice, and a stint as chief of staff at the Antitrust Division of the Department of Justice launched his public career. During the Clinton administration he was named an FCC commissioner, and he became chairman when his party came to power in January 2001.

Powell is a genuine student of technology who was convinced early on of the transformative power of the Internet. He downloaded Skype as soon as it was released. On his arrival at the FCC, he was shocked to find that 40 percent of the staff engineers were close to retirement. Powell brought an intellectual, inquiring joy to his role at the Commission, setting up “FCC University” to ensure that all staff members understood the technologies and economic questions they were dealing with. As he explained in 2002, “I wanted the FCC University to be the very best employee development program that anyone can find in the US government.”
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Robert
Pepper, who served as a policy adviser to six FCC chairmen between 1989 and 2005, said during the Powell chairmanship, “Out of the modern chairmen, Michael Powell is the most technologically sophisticated. He absolutely understands the power of technology. He invested in technology at the FCC—we hired new engineers, we revitalized the technology side of the FCC.”
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Powell's focus at the FCC was to move the agency away from what he liked to call the one-wire problem. As he saw it, for decades telephone service was provided by a single, integrated monopoly—Bell Telephone—whose services had to be regulated to avoid price gouging. In exchange for the grant of that monopoly, the company was obligated to provide certain social goods, like making sure that everyone had a telephone connection and agreeing to serve everyone on reasonable and nondiscriminatory terms.

This was the right approach when there was only “one wire” going into each home. But Powell believed that other technologies, such as cable and perhaps wireless, would become viable competitors to the telephone, creating the possibility of multiple wires competing to provide a range of services. The problem, he thought, was that the regulatory structure had not yet adapted to this new reality.
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Powell's view, which he shared with many conservative economists in the early 2000s, was that when it came to Internet access, competition was not defined as different companies with the same technology vying for customers. Rather, different media—cable, wireless, satellite, and possibly “broadband over powerline” (using electrical connections to send data transmissions)—would compete, thereby providing the constraints on monopoly power that had once been imposed by regulatory structures. Instead of having the government force the key incumbent distribution network—before 1996, the telephone network—to make its poles and lines available to competitors providing Internet access, the distributors (now including wireless and cable as well as phone companies) would compete with one another to serve consumers. The result: protection for consumers against abusive pricing and monopoly-quality service without heavy-handed government regulation.

Powell's goal, then, was to facilitate the creation of multiple communications companies and technologies that would be able to reach homes
and provide high-speed access to the Internet. Even a company with a monopoly over, say, cable would still have to compete with telephone and other companies. The existence of multiple deregulated platforms would drive down the price of connectivity and unleash innovation.
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In the long run, Powell's prediction proved wrong. Cable's advantages eventually became unbeatable: more than 90 percent of new wired Internet access subscriptions now go to the local cable incumbent, not the phone company, while wireless access is an entirely separate market.
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But for a few years in the early 2000s, things worked out as he had anticipated: cable systems offered high-speed Internet access and made a few of their channels available for two-way transmissions running over the same hybrid coaxial fiber that brought the cable content into the home: cable-modem service. The development of the cable-modem service in turn drove the phone companies to improve their version of Internet access service over their metal lines: digital subscriber lines, or DSL. These services were clear competitors, at least initially, as they gave consumers access to the Internet at roughly similar speeds.
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This is where the problems began. The different modalities raised a regulatory conundrum: was high-speed Internet access via cable analogous to high-speed Internet over the phone, and therefore in need of the same common-carriage regulations? Or was it something new that should be left unregulated? Powell had another problem in creating a level playing field: if the two services were functionally indistinguishable, why should they be regulated in different ways?

The cable companies were confident they had the answer. Cable had never been regulated as a common-carriage service in the past; phone had been. It would stifle innovation, cable operators claimed, to treat cable-modem Internet access as a common-carriage system, even if the services provided were functionally the same as those of phone companies.
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Powell is by nature a free-market advocate, and he was frustrated by the weight of federal common-carriage regulation under Title II of the 1996 Telecommunications Act. He could not imagine why access to the Internet should be hampered by outmoded regulation. He would point out to anyone who would listen that the 1996 act took as gospel a model in which the technology of any infrastructure is understood to be integrated with the use
made of the technology: if a company is running copper wires and providing voice services, for example, it falls under Title II of the 1996 act and is regulated as a common carrier; if it is running coaxial fiber wires and providing entertainment, it is a cable service and falls under Title VI; if it is a broadcaster using the airwaves, it falls under Title III. He felt that these distinctions were fine for old technologies. But they made no sense from a regulatory perspective when it came to Internet access. “When AT&T provides voice, video, and data over the same set of wires,” Powell said, “you have a mess on your hands.”
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Powell believed that when it came to high-speed Internet access via cable modems, he had a choice. He could take the existing Title II common-carriage requirements (nondiscrimination, sharing of connections) and “forbear” from—refuse to enforce heavily—the most onerous requirements, until only the portion of the regulation appropriate for high-speed Internet access was left. Or he could decide what social policies were truly needed (emergency service availability via 911 functionality, assistance to law enforcement) and apply regulations concerning them to high-speed Internet access one by one. As a free-market advocate, he was much happier “regulating up,” starting with a blank, unregulated slate, than ”deregulating down,” starting with the multiple requirements of Title II. “Deregulating down” would require hundreds of pages of “forbearance” findings, a process he found distasteful and wasteful.

Powell had to act: cable-modem Internet access service was already in use, but it was in regulatory limbo. There had been a tussle since 1998 over how to treat it, but by the end of 2001 the Federal Communications Commission had not expressed a view except through one-off assertions in merger reviews. Powell's approach to this question set the United States on the road toward the titanic battles of 2010. Thanks to his bottom-up approach, the essential communications network of our time, access to the Internet, has no basic regulatory oversight at all.