Economic and Political Consequences of the 1996 Telecommunications Act

See Crandall and Hazlett for a more recent analysis. This paper investigates the economic and political consequences of the 1996 Telecommunications Act by examining relevant marketplace data. In key segments of the telephone and cable television industries, the reform appears to be encouraging competition. Interestingly, stock price data indicate that the wave of "mega-mergers" in telecommunications, an unannounced and possibly unanticipated result of the Telecommunications Act, appears to be associated with consumer benefits. These improvements in competitiveness are modest by some standards, but impressive when judged against the results of other legislation with the announced goal of increasing market rivalry (e.g., the 1984 and 1992 Cable Acts). Federal policy makers also appear to be reaping benefits from the Telecommunications Act. The "deregulation"-which very cautiously opened markets, mandating extensive FCC rulemaking in the transition to competition-is associated with a sharp increase in political contributions to federal policymakers from telecommunications firms and executives. This is seen as an intended consequence of the act's major reform: Removing policy jurisdiction from Judge Harold Green's divestiture oversight and placing it in the hands of the Federal Communications Commission, a regulatory agency answerable to Congress.

Tragedy of the Regulatory Commons: LightSquared and the Missing Spectrum Rights

The endemic underuse of radio spectrum constitutes a tragedy of the regulatory commons. Like other common interest tragedies, the outcome results from a legal or market structure that prevents economic actors from executing socially efficient bargains. In wireless markets, innovative applications often provoke claims by incumbent radio users that the new traffic will interfere with existing services. Sometimes these concerns are mitigated via market transactions, a la “Coasian bargaining.” Other times, however, solutions cannot be found even when social gains dominate the cost of spillovers. In the recent “LightSquared debacle,” such spectrum allocation failure played out. GPS interests that access frequencies adjacent to the band hosting LightSquared’s new nationwide mobile network complained that the wireless entrant would harm the operation of locational devices. Based on these complaints, regulators then killed LightSquared’s planned 4G network. Conservative estimates placed the prospective 4G consumer gains at least an order of magnitude above GPS losses. “Win win” bargains were theoretically available, fixing GPS vulnerabilities while welcoming the highly valuable wireless innovation. Yet transaction costs—largely caused by policy choices to issue limited and highly fragmented spectrum usage rights (here in the GPS band)—proved prohibitive. This episode provides a template for understanding market and non-market failure in radio spectrum allocation

Telecommunications Policy Reform in the United States and Canada

The Telecommunications Act of 1996 marked a fundamental departure in U.S. regulation. Monopoly market structures were officially deemed inefficient, and extensive rules were authorized to jump-start competition. Canada opened long-distance markets to entrants in 1992, and did likewise with local telephone access five years later, but employed distinct tools from those utilized by U.S. regulators. In this paper we compare and contrast the two alternative approaches to deregulation. The conventional wisdom is that telephone competition in the U.S. has lagged under the Telecommunications Act. Rates are alleged to have risen for most customers, just the reverse of what was promised by policy makers. We examine broad trends within the sector, and conclude that the Act, while flawed, actually scores well in comparison to previous reform measures. We prefer the approach taken in Canada, however, which is less regulation-intensive in the transition to competition.

The Case for Liberal Spectrum Licenses: A Technical and Economic Perspective

The traditional system of radio spectrum allocation has inefficiently restricted wireless services. Alternatively, liberal licenses ceding de facto spectrum ownership rights yield incentives for operators to maximize airwave value. These authorizations have been widely used for mobile services in the U.S. and internationally, leading to the development of highly productive services and waves of innovation in technology, applications and business models. Serious challenges to the efficacy of such a spectrum regime have arisen, however. Seeing the widespread adoption of such devices as cordless phones and wi-fi radios using bands set aside for unlicensed use, some scholars and policy makers posit that spectrum sharing technologies have become cheap and easy to deploy, mitigating airwave scarcity and, therefore, the utility of exclusive rights. This paper evaluates such claims technically and economically. We demonstrate that spectrum scarcity is alive and well. Costly conflicts over airwave use not only continue, but have intensified with scientific advances that dramatically improve the functionality of wireless devices and so increase demand for spectrum access. Exclusive ownership rights help direct spectrum inputs to where they deliver the highest social gains, making exclusive property rules relatively more socially valuable. Liberal licenses efficiently accommodate rival business models (including those commonly associated with unlicensed spectrum allocations) while mitigating the constraints levied on spectrum use by regulators imposing restrictions in traditional licenses or via use rules and technology standards in unlicensed spectrum allocations.

The Political Economy of Cable - "Open Access."

Advocates of "open access" claim that Internet Service Providers (ISPs) should be able to use a cable TV system's bandwidth on the same terms offered to ISPs owned by the cable system. On that view, "open access" mitigates a monopoly bottleneck and encourages the growth of broadband. This paper shows that cable operators do enjoy market power, and do seek to leverage a dominant position in video into the broadband access market by allocating too little bandwidth for Internet access. Yet, rather than protect cable operators from cannibalizing their cable TV revenue, this strategy defends against imposition of common carrier regulation, which would allow system capacity to be appropriated by regulators and rival broadband networks. Ironically, the push for "open access" limits Internet access by encouraging this under-allocation of broadband spectrum, and by introducing coordination problems slowing technology deployment. These effects are empirically evident in the competitive superiority of cable's "closed" platform vis-a-vis "open" DSL networks, and in financial market reactions to key regulatory events and mergers in broadband.

Legislators v. Regulators: The Case of Low Power FM Radio

The recent Federal Communications Commission rule making for low power FM radio has been widely reported as an instance where Congress sharply rebuked the Commission for enacting rules too favorable to entrants. Because rival policy optima are quantifiable in this case, the preferences of consumers, Congress and the Commission can be directly compared. While differences in policy preferences of Congress and the regulatory agency were visible to interest groups, they appear extremely modest when compared to the open entry (welfare maximizing) policy alternative. A financial event study reveals that incumbent broadcast station equity values were neither threatened by the Commission's low power FM rules, nor materially enhanced by their reversal in Congress. This lends empirical support to the Congressional Dominance view of regulation, and illustrates the margins on which blame- and credit-shifting strategies are utilized by policy makers.

Is Federal Preemption Efficient in Cellular Phone Regulation

While many recent state-level efforts to regulate various aspects of the cellular phone industry have been abandoned in favor of federal regulations, other attempts by state regulators still exist. For this reason, Thomas Hazlett proposes that federal regulation is generally more appropriate than state-level action, due to the nature of the cellular industry. After a brief history of the industry, the author analyzes the pros and cons associated with state and federal regulation. The Article then proceeds to address the efficiencies created by national networks and proposes that the fragmentation of controlling regulatory power would reduce these efficiencies. Following a review of regulatory experiments, the author concludes that federal regulation is most appropriate and efficient, and that further state regulation of the cellular telephony could lead to undesirable balkanization of the industry