From the March 31, 2003 issue of Telecom Flash

     Americans don't feel comfortable with monopolies because they are, well, un-American. Yet our unwillingness to consider the pragmatic inevitability of monopoly power constantly distorts policy decisions -- with last month's FCC ruling a prime case in point. The resulting compromise consigns a trillion dollar segment of the economy to a decade or more of unproductive malaise.

     After weeks of open dispute between the five FCC commissioners, the majority ruling ended up mired in a classic Washington, something-for-everyone muddle.

• It reaffirms the rights of traditional long-distance companies like AT&T and WorldCom to below-cost access to the local connecting infrastructure owned by the RBOCs. Although this will temporarily permit more competition for local voice traffic, that competition is "synthetic" because the competition merely transfers income from the RBOCs to the new entrants. Since no new infrastructure is built, the day the transfer rules lapse will be the day competition ends.
  
  
• It gives the Bells the right to total control over their broadband investments. Yet, as everyone in the industry knows, data via the Internet is the future, not voice over narrowband copper. Preferential rates for voice now, as well as ongoing requirements to maintain bypassed wires for the benefit of competitors, simply undercuts profitability at the Bells and thus impedes their ability to rapidly expand high-speed, broadband access to the Internet. The result will be to slow the spread of broadband to the majority of U.S. population and all the innovative new services -- including inexpensive voice over the Internet -- that broadband promises.
  
  
• It puts America's telecom future almost entirely in the hands of state regulators. Not only did it reaffirm the rights of individual states to set rates, but a close reading of the preliminary ruling reveals dozens of "exceptions" by which state utility boards can overrule FCC national standards for everything from business voice lines to in-building wiring. This return to state sovereignty undermines any hope that the telecom industry can attain the national economies of scale for Internet-based communication that will ultimately bring down costs. Instead, telecom companies appear certain to find themselves in the truly horrible situation of needing to install different equipment under different rules in different states.

     The result will be continuing court challenges, economic uncertainty and, of course, hesitant investment.

    The FCC ruling will give satisfaction to those who blame the Bells for actively subverting the 1996 Telecom Act. Indeed, it is an open industry "secret" that the Bells found numerous ways to impede transactions exercising their statutory obligation for resale. Yet, as anyone who has shared a driveway with a neighbor knows, some situations automatically lead to conflict. The Act created just such a situation. Insisting that the Verizons and BellSouths of the world share access equipment with competitors like AT&T and Covad was like insisting that United share airline seats with Southwest.

     Instead of undermining the Bell monopolies, we need to recognize that some monopolies are "natural." Specifically, the economics of capital recovery and the complexity of easements dictate there can only be one local loop per city. A second local loop, with identical capabilities, is something neither consumers nor the capital markets will support. At the same time we need to recognize that monopolies that keep to their business are good for business . The danger of monopolies arises when their owners use their position to leverage control into related markets -- as Microsoft did moving from operating systems into spreadsheets.

     We could avoid that danger by reaffirming the Bells' historic task of delivering telecom access to customers for a fair rate of return. In exchange for wireline network sovereignty, however, we should insist that the Bells give up service sovereignty, where there is no natural monopoly. That would open the field to hundreds of competitors with fresh approaches to voice mail, video and music delivery, always-on dial tone, voice-over-Internet and many others.

     Moreover, the oligopolies that control cable and wireless communication would at least bring a measure of indirect competition to the Bells -- especially if competition were held on a level playing field. They, too, should separate service from transport, and be subject to the same panoply of universal service fees and shared access rules faced by the RBOCs. The FCC could add even more zest to the competition by opening portions of wireless spectrum to unregulated competition. These airwaves are easier to share, with lower capital costs and less state regulation, and would draw many new business entrants. And more competition from wireless providers would spur still more competition from wireline and cable.

     In combination, such an approach would give stability and clarity to telecom over the next decade, while opening the way to a measure of innovation and new telecom business formation. Truly attractive start-up investment opportunities would still be relatively rare, and, as a venture capitalist, I would not be terribly excited. But at least I would not be depressed, which, looking at the current mess the FCC has left us with, is what I am now.

Greg Blonder, former Chief Technical Advisor to AT&T, is a partner with Morgenthaler Ventures and is based in Princeton, N.J.