Telecom's Information Superhighway Wasn't Paved with Gold
The information superhighway is still the road to the future, but the telecommunications industry should not expect wholesale deregulation to happen along the way, U.Va. law professor Glen Robinson told the state's industry leaders at their annual "summit" at the Tides Inn in Irvington Oct. 17.
Regulation was not the primary factor in the recent decline of the industry, and major changes in the character, form and magnitude of regulations that are now in place are unlikely, Robinson told members of the Virginia Corporations Commission and the Virginia Telecommunications Industry Association in his keynote address, "The Future of Telecommunications Regulation."
The financial decline of the telecom industry in the past two years is greater than that of any other sector of the economy, said Robinson, who holds the David A. Harrison Professorship of Law. One measure of the decline is the loss of stock market value. At its peak at the end of March 2000 the U.S. telecom services sector (as defined by the Dow Jones Telecom Index) had a market cap of roughly $1.15 trillion, he said. On October 15, 2002, the market cap was $315 billiona loss of nearly $800 billion.
However, Robinson noted, a look at the sudden loss in value also requires us to look at the flip side, namely the unprecedented inflation in value that preceded it.
"Global Crossing could be the poster child for the telecom bubble," he said. "It is now in Chapter 11, of course. But at the height of the bubble this is the firm that George Gilder in 2000 predicted 'would battle 360networks [also in Chapter 11] for global dominance in telecom.' Apparently a lot of others shared Gilder's view, for within only two years of its IPO, Global Crossing had a market cap greater than that of General Motors, despite having no positive earnings. Needless to say, this is the kind of speculation that feeds tulip-bulb manias. And Ponzi schemes."
The bubble was not simply a matter of stock speculation, Robinson said. The industry borrowed billions of dollars from banks and investors to build the new information superhighway. "Not an ordinary superhighwayit was the yellow-brick road to the Land of Oz. The superhighway was to be the infrastructure for a fairy tale economy that had been promised by the dot-com explosion. Unfortunately, otherwise sober telecom execs took to muttering about Metcalf's Law and a lot of other stuff they didn't understand and confused it with a business plan."
Now that the bubble has burst, the question is what has been learned from it. According to Robinson, we may not have learned the right thing. "Current conventional wisdom is that we must correct the securities markets and the accounting and executive practices of the firms. These are important matters," he pointed out, "but none are special to the telecom industry. Those who are looking for something distinctive about this industry quite naturally focus on the fact that it is regulated, and many critics think that is where a large share of the blame lies."
Robinson criticized this school of thought. Although he is critical of many present regulatory policies, he does not believe that they produced the telecom bubble. "Attempts to reevaluate the policies should not dwell or focus on the current financial conditions alone for that would produce short-run solutions to long-run problems," he said. "Above all, any policy evaluation should be based on a realistic expectation of what can be accomplished.
"The explosive growth in electronic communicationswired and wireless telecom, satellite broadcast, Internetgave us a vision of a Land of Oz, and Congress and the FCC might have erred in encouraging investors to think that it was closer at hand than it was. Some critics are continuing to make this mistake."
Even before the recent downturn in the telecom sector there were complaints about the lack of progress in local telecom markets, Robinson said, and also about the lack of progress in allowing Bell Operating Companies entry into long distance. More recently there have been complaints about the lack of progress in mobile wireless and the lack of progress in broadband Internet access. "These complaints all show a remarkable lack of patience both with the market and with the successful implementation of regulatory policy changes," said Robinson.
As for the prospects for regulation, he doubted wholesale deregulation was likely.
"I am always amused when I read the common references to Congress and the FCC's deregulation of local telecom markets since 1996. They did no such thing. Local telecom markets are more regulated than they have ever been. People see competition displacing monopoly and they think it must also be displacing regulation as well. It doesn't work that way. Sometimes competition produces deregulation, but sometimesoften in factit simply produces a different kind of regulation. That is what has happened since 1996. It is what has happened since 1976. Of course, some things have been deregulated, and some of the regulation is different from what it was. On the whole, the new regulation is an improvement on the oldwhich is to say that we are better off now than we were 20 years ago. So it would not be fair to say that there has not been progress; only that it is not quite what some people expected."
Robinson remains optimistic about the
industry's future. "The information superhighway is still
the way to the future," he said, "and the telecom industry
is a critical part of it. I poked fun at those who thought they
were building the yellow brick road to the Land of Oz. But the
vision part of it wasn't so bad; the problem was the uncommon
sense of urgency about realizing it. The best thing we might hope
to come out of the debacle of the last couple of years will be
patience. If we get that we can hold on to the vision."
Reported by M. Marshall