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How the Deregulatory Meltdown affected telecom, and what can we do now to fix it? Lee L. Selwyn Economics and Technology, Inc. One Washington Mall, 15 th Floor Boston, Massachusetts 02108 +1 (617) 598-2200 NASUCA Mid-Year Meeting June 29, 2009 / Boston. The deregulation experiment. - PowerPoint PPT Presentation

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  • How the Deregulatory Meltdown affected telecom, and what can we do now to fix it?

    Lee L. SelwynEconomics and Technology, Inc.One Washington Mall, 15th FloorBoston, Massachusetts 02108+1 (617) 598-2200

    NASUCA Mid-Year MeetingJune 29, 2009 / Boston

    Economics and Technology, Inc. / June 2009

  • The deregulation experiment Across the US economy, the last eight years were dominated by a concerted effect to elevate laissez-faire to new heights, and to

    DEREGULATE FOR THE SAKE OF DEREGULATION

    Economics and Technology, Inc. / June 2009

  • The deregulation experimentAntitrustBankingSecuritiesReal estate lendingConsumer protectionTrade policyEnvironmental policy

    Economics and Technology, Inc. / June 2009

  • The deregulation experimentAntitrust enforcement was largely nonexistentUnder the rubric of enhancing Americas global competitiveness, traded away domestic competition for increased market concentration and consolidation of market powerConsolidations resulted in entities too big to fail we put all of our eggs in one basketCatalyzed much of the current economic meltdown

    Economics and Technology, Inc. / June 2009

  • The deregulation experimentBanking and FinanceLost sight of critical role of financial institutions as economic driversInstead of financing and supporting economic activity and growth, banking and financial sectors turned their attention to conjuring up derivative instruments that were essentially side bets on the outcome of economic events

    Economics and Technology, Inc. / June 2009

  • The deregulation experimentResidential real estate financing victimized the most vulnerable consumersAbsurdly easy credit drove up home prices and created the real estate bubbleLoan originators had no skin in the game, no incentive to properly vet prospective borrowersWorked like a Ponzi scheme that was utterly dependent upon prices continuing to riseWhat the residential mortgage lenders did makes Bernie Madoffs scam (which also depended on a continuing bull market) look like chump change

    Economics and Technology, Inc. / June 2009

  • The deregulation experimentConsumer protections/safeguards ignoredAllowed consumers to run up huge credit card and other debt (e.g., auto loans)Once the economy began to sour, debt-burdened consumers were forced to curtail consumption in a big way mushrooming the scope and extent of the economic meltdown

    Economics and Technology, Inc. / June 2009

  • The deregulation experimentTrade policyBlind focus on globalization led to the virtual eradication of US manufacturing capacity across a broad range of industriesGeorge Perots giant sucking soundJust try to buy Made in USA products theyre pretty hard to findLoss of US manufacturing capacity/capability may be largely irreversibleLong-term impact on US economyTrade deficit, growing dependence on foreign manufacturing, escalating government and private debt, will all negatively affect US standard of living for generations

    Economics and Technology, Inc. / June 2009

  • The deregulation experimentEnvironmental policy (was there any?)Allowed US automakers to take advantage of SUV loophole in CAFE (Corporate Average Fuel Economy) standards, which pumped up demand for these vehicles, contributed to big 2008 jump in gas prices, and which in turn triggered the cratering of demand for SUVs and most other carsFailure to capture real environmental costs in product prices triggered grossly inefficient consumptionRefusal to commit public sector funding for energy-efficient infrastructure investment e.g., mass transit, high-speed rail

    Economics and Technology, Inc. / June 2009

  • The deregulation experiment

    TELECOM DEREGULATION HAS PRODUCED COMPARABLY NEGATIVE RESULTS

    Economics and Technology, Inc. / June 2009

  • How we got towhere we are

    Economics and Technology, Inc. / June 2009

  • The Shrinking Natural Monopoly:Pre-Carterphone (before 1970)

    Economics and Technology, Inc. / June 2009

  • The Shrinking Natural Monopoly:Pre-divestiture (before 1984)

    Economics and Technology, Inc. / June 2009

  • The Shrinking Natural Monopoly:as envisioned by TA96

    Economics and Technology, Inc. / June 2009

  • The Shrinking Natural Monopoly:as envisioned by the Powell/Martin FCC

    Economics and Technology, Inc. / June 2009

  • The deregulation experimentLack of antitrust enforcement together with premature elimination of TA96 market-opening measures and competitive safeguards resulted in a perfect storm, assuring the demise of telecom competitionMergers of incumbent carriersRetail and wholesale price deregulationHorizontal integration of intermodal competitorsUse of regulation to block and frustrate entry

    Economics and Technology, Inc. / June 2009

  • Economics and Technology, Inc. / June 2009

  • Economics and Technology, Inc. / June 2009

  • Economics and Technology, Inc. / June 2009

  • A Mass Market Cable/Telco duopolyCableHead-end

    Cable IPNetwork

    CableCo - ClosedTerminatingILEC/CLEC

    Economics and Technology, Inc. / June 2009

  • Enterprise market: no real competition

    ILEC

    THE LOCALBOTTLENECKENDURES

    Economics and Technology, Inc. / June 2009

  • The deregulation experiment Absent regulatory constraints on telecom carrier prices and earnings, the now-deregulated incumbent carriers have escalated their prices and have been able to pursue tactics that have operated to crush their competition.

    Economics and Technology, Inc. / June 2009

  • RBOC profits soar under deregulationEscalating RBOC Interstate RORsFCC AuthorizedROR: 11.25%

    Economics and Technology, Inc. / June 2009

    Chart1

    0.18689734880.19411738070.17181770950.1818784628

    0.20429248910.19687235690.17311857450.1899741132

    0.21214354510.19280201510.17224081260.192646109

    0.17739967270.20176175860.15294217250.1696300227

    0.19344613340.23274283290.12438554110.1689111882

    0.2133036210.28178086010.15891230310.1977483082

    0.25736678550.32669014860.1903159750.2364775341

    0.26531712520.42717896960.21192118070.2620619046

    0.34980676190.53245650020.25192425560.3295657646

    AT&T

    Qwest

    Verizon

    Total

    Sheet1

    INTERSTATE RETURNS

    199920002001200220032004200520062007

    AT&T19%20%21%18%19%21%26%27%35%

    Qwest19%20%19%20%23%28%33%43%53%

    Verizon17%17%17%15%12%16%19%21%25%

    Total18%19%19%17%17%20%24%26%33%

    Sheet2

    Sheet3

  • RBOC profits soar under deregulationEscalating RBOC Special Access RORsFCC AuthorizedROR: 11.25%

    Economics and Technology, Inc. / June 2009

    Chart1

    0.37481550840.32180721860.0985821190.2264334514

    0.40182109130.38135153590.15258578920.2775970297

    0.56202436180.44696278260.22339842380.3816274396

    0.54271788870.57740056050.24075515990.3966115887

    0.63491706220.65840893330.2310829950.4290736131

    0.76446679840.75093882190.31637174840.5280789135

    0.94479772641.09420554310.41965028090.6800226732

    0.99915921181.32206385230.51775814320.7779209178

    1.37592494651.75376742870.6271484071.0135972988

    AT&T

    Qwest

    Verizon

    Total

    Sheet1

    INTERSTATE RETURNS

    199920002001200220032004200520062007

    AT&T37%40%56%54%63%76%94%100%138%

    Qwest32%38%45%58%66%75%109%132%175%

    Verizon10%15%22%24%23%32%42%52%63%

    Total23%28%38%40%43%53%68%78%101%

    Sheet2

    Sheet3

  • RBOC profits soar under deregulationRBOC Total Interstate ILEC RORs for 2007FCC AuthorizedROR: 11.25%

    Economics and Technology, Inc. / June 2009

  • RBOC profits soar under deregulationRBOC Special Access RORs for 2007FCC AuthorizedROR: 11.25%

    Economics and Technology, Inc. / June 2009

  • The deregulation experiment RBOC commitments to invest in infrastructure and broadband offered as a carrot to achieve deregulation turned out to have been empty promises

    Economics and Technology, Inc. / June 2009

  • Economics and Technology, Inc. / June 2009

  • LEVEL OF REGULATION

    Economics and Technology, Inc. / June 2009

  • RBOCs have disinvested in their core networks

    Economics and Technology, Inc. / June 2009

  • The aftermath of telecom deregulationRBOCs abandoned many marketsAfter first convincing regulators that mergers would produce increased efficiency and broad public benefits, Verizon has been off-loading its less profitable wireline markets onto undercapitalized and underqualified buyersHawaii (former GTE) filed for Chapter 11 in 2008Northern New England Fairpoint near collapse, states providing bailout funds, service in meltdownPending sale of most of smaller former GTE territories to Frontier would nearly quadruple size of company

    Economics and Technology, Inc. / June 2009

  • The rationale for deregulation

    The Powell/Martin agenda was rationalized on the basis of several repeatedly repeated but factually vacant -- contentions

    Economics and Technology, Inc. / June 2009

  • The rationale for deregulationThe incumbent telcos:claimed that telecom services at all levels local, long distance, wireless, broadband were all highly competitiveargued that incumbent telecom carriers should be treated just like CLECs and cable companies I.e., not subject to regulationpromised to build out a national broadband infrastructure if they were left alonethreatened to withhold their investment in and development of broadband service if forced to unbundle their networksconvinced policymaker

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