The triennial review sets up more telecom failure, permanent damage

The FCC’s triennial review order envisions a steady transition in the telecommunications industry over the next several years, with increasing competition benefiting consumers and businesses, even as 51 state jurisdictions dutifully phase out UNE-P. The order takes it as given that the type of competition imagined by the Telecommunications Act of 1996 is actually taking place as planned and that no unforeseen side effects have arisen. But that is clearly not the case.

The majority of the competition that has been created comes in the form of existing long-distance carriers using UNE-P to supplement their packages of services, not new facilities built by CLECs. Rather than encouraging rationalization of the market around sustainable, facilities-based competition, the order extends the life of the current policy through attempts at fine-tuning, rather than adjusting to the realities since 1996. It extends an era of uncertainty that is depressing investment and threatening long-term damage to U.S. technology innovation.

Recent studies by The Eastern Management Group have outlined the major economic benefits that have been forgone by favoring UNE-P over facilities-based models. Just among the companies we spoke with for our qualitative studies, we found billions of dollars of capital investment, jobs and tax revenues that current policies have blighted on the vine.

The almost universal reaction among those in the industry--with the exception of those following an exclusively UNE-P model--is that the triennial review provides no certainty about the phase-out of UNE-P and will continue to push investors toward other sources of growth outside telecommunications.

Ironically, one of the recent studies, on cable overbuilders, showed that facilities-based models can indeed become cash flow positive. But faced with the potential of competition from UNE-P-based firms, the overbuilders cannot attract new capital to build out their networks.

Many CLECs, of course, have come and gone; some are just emerging from Chapter 11. But the triennial review’s extension of the current policy does nothing to eliminate the artificial influences on the market that helped create the current situation. Meanwhile, the long-distance firms that are the major users of UNE-P are looking increasingly fragile. If their influence fades through acquisition or worse, they will leave no new local facilities in the place of their UNE-P usage.

So we have stimulated business models that do not encourage the economically healthy growth of new facilities, while choking off investment in those that do. The capital available during the heyday of a still fresh 1996 Act was diffused between UNE-P and facilities-based models. The current policy has already produced one crop of weak companies and business models, and the triennial review does nothing to prevent another sickly season as companies come out of Chapter 11 with less debt but the same bad ideas.

Even more worrying, we may have permanently discouraged a generation of engineers and other business innovators from investing their talents in telecommunications. Several of the industry people consulted for recent studies volunteered their concerns that the length of the telecom recovery was doing permanent damage to our national competitiveness. Centers of innovation are being pushed overseas, in key areas such as wireless and broadband technologies.

To follow up on theses concerns, we examined US Patent and Trademark Office data on patents granted. The evidence was sobering. Key patent-producing telecom firms have seen their R&D budgets decline, both in absolute dollars and as a percent of revenues. Recently the figures have improved a bit in some cases, but only because the previous drops were so precipitous. As one engineer and entrepreneur asked, given the tens of thousands of skilled engineers and innovators who have left the industry, who will train the next generation?

While the triennial review order proceeds as if the implementation of the 1996 Act has gone basically according to plan, our recent studies indicate this is a false dawn. Not only has positive economic growth from new facilities been forgone, but the future of the industry in the U.S. may have been mortgaged for bureaucratic consistency and political expediency. There is still time to turn from this disastrous course, but this is a big ship, and a new hand on the wheel cannot come too soon.

John Malone is President and CEO of Eastern Management Group, one of the oldest and largest management consulting firms focused exclusively on the communications industry. He provides professional services to leading edge communications companies and governmental institutions worldwide. He and his firm have advised every major telecommunications manufacturer, software company and carrier in North America, Asia, Latin America and Europe. John Malone has been professionally involved with the telecommunications industry for more than 30 years.