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Telecommunications and Federal Deregulation

The last five years have witnessed historic changes in the realm of communications technology. Government policy makers have struggled to keep up with rapidly evolving Internet, telephone, and cable television technology, trying to generate an effective regulatory balance that ensures consumer protection and facilitates the efficient deployment of new technology by eager companies.

One of the most important responses to the changes in the telecommunications sector—the Federal Telecommunications Act of 1996—offered a decrease in government regulation as a response to the uncertainties of technological innovation. Since the passage of the Act, the degree of monopoly power and market concentration the telecommunications sector has been on the rise, a phenomenon with potentially serious consequences for the deployment of technology in disadvantaged communities. This section examines policy responses to public and private sector concerns over technology at the federal, state and local levels.


The FCC and Telecommunications Policy

As the telecommunications industry has expanded with the growth of the "New Economy," the influence and importance of the Federal Communications Commission (FCC) has also grown.

The Federal Communications Commission was established under President Franklin D. Roosevelt in 1934 to ensure that the emerging radio market would serve the public interest and to prevent domination of the new medium by large national monopolies. When it was initially created, the FCC adopted several key principles that defined its authority. One important aspect of the FCC’s founding philosophy was the assumption that the airwaves would be a publicly owned asset, with American civic society acting as the chief proprietor of the radio (and eventually television) bandwidth.

Historically, the degree to which the FCC has been able or willing to enforce this ideal has varied. Until the Act of 1996, private corporations were granted temporary licenses and loaned a portion of the bandwidth "on the condition that they act as responsible trustees of the public interest." (1) The policy implications of this position were as follows:

  • Based on the belief that local companies would be more responsive to local interests than large conglomerates, restrictions were placed on the number of radio stations that a company could own.
  • The FCC enforced official preferences toward local ownership of services in order to prevent the formation of monopolies in the radio industry.
  • A "fairness doctrine" required radio and television stations to grant "equal time" to divergent political viewpoints in order to ensure that diverse viewpoints could not be excluded.
  • Large telephone service companies were required to dedicate themselves to providing universal access to all citizens.

Although industry’s influence in telecommunications policy was substantial, policies such as these ensured that the interest of the public would not be completely neglected.

The Federal Telecommunications Act of 1996

The early to mid-90's marked a change in the government’s historical relationship to the telecommunications industry. With the election of Bill Clinton - a moderate, pro-business Democrat - and the Republican ascendancy of 1994, an ideological shift took place in the way policy makers think about federal regulations. (2) Lawmakers began to favor laissez-faire, free market solutions to policy problems. In response to issues in the realm of telecommunications policy such as competition, prices, and universal service, many politicians felt they should "get rid of the rules and let competitive markets provide choice, fairness, and opportunity on their own." (3)

Not coincidentally, these shifts in regulatory thinking came at a time of increasingly media-oriented political campaigns and of huge donations by media corporations to public officials. (4) It was in this environment that Congress passed the Telecommunications Act of 1996. The Act specified that rather than the previous arrangement in which companies were lent frequencies on a short-term basis, the government would now auction off long-term control. The legislation effectively redefined ownership of the airwaves as "private sector ownership, rather than public or nonprofit ownership." (5)

Because there would be greater opportunity for profit, it was argued that deregulation would encourage private sector investment in new technologies and extended service. Faith in a laissez-faire system of oversight convinced politicians that competition between several different companies would ensure that the public interest was served. In addition to auctioning off of the public bandwidth, the Act was intended to foster competition in the local telephone access market.

Since the break up of AT&T in 1984, the "Baby Bells" had provided local telephone access as officially sanctioned, natural monopolies. Due to the extensive infrastructure required for telephone networks, the economies of scale in the local telephone market are so pronounced that balanced competition among multiple firms was not viewed as feasible. (6) As a consequence, the government allowed local Bells to operate as regional monopolies under a strict regulatory regime to prevent practices harmful to consumers. For example, after the 1984 breakup, federal and state regulators prevented excessive pricing by the regional Bells. The government also enforced the universal service provision by insisting that all citizens have telephone access, including rural and underserved communities.

With deregulation in 1996, however, regulatory relief was granted to the regional Bells in exchange for their cooperation in the creation of competition in the local telephone market in the previously exclusive domains of the Bells. In exchange for cooperation, the Bells would be allowed to compete in new sectors such as long distance, wireless communications, and Internet access under decreased government regulation. The Act stated that the Bells should open up the local telephone networks - which they had built and owned - to competing local telephone companies. The barriers to access in the local telephone market meant that if effective competition were to flourish, the Bells would have to provide this infrastructure to other firms at a low cost. Once effective competition had been established, the ability of the Bells to expand into other markets and services would be granted.

These provisions of the 1996 legislation have also been under attack by the Bells and their allies in Congress. The Tauzin-Dingell Act - which has yet to receive a full House vote - calls for the lifting of restrictions that were imposed on the Bells by the 1996 Act and for further deregulation of the local telephone market. (7) At present, the outcome of the Tauzin-Dingell legislation is uncertain. Even without the further deregulation called for by Tauzin-Dingell, the Bells have largely been able to retain monopoly status in the local telephone market while concurrently increasing their strength in other markets. As shall be shown, this phenomenon will have important consequence for the next stage in the development of the Internet, broadband cable access.

The Consequences of Deregulation for Public Access

It is difficult to precisely determine the effects of the 1996 Act on the telecommunications industry. However, it is clear that in the radio industry, extreme market concentration has been the result. Since the FCC’s creation in the 1930's, companies could own only two stations in any given market and no more than 28 stations nationwide. These rules "were designed to keep ownership as diverse as possible and keep the stations' focus as local as possible." (8) After these rules were lifted in 1996, a wave of mergers and consolidation swept through the industry. Today, four companies control 90% of all nationwide advertising revenue. The largest radio broadcasting company, Clear Channel Communications, owns in excess of 1,200 stations. (9) Cost-cutting measures by new corporate owners have resulted in a scaling back of local news coverage, job cuts, and the homogenization of programming across the nation. (10)

The effects of deregulation in the cable television industry have also been problematic. Deregulation of this industry occurred before effective competition had emerged. This led to what the Consumer Federation of America has called a "consumer disaster" of high prices and a neglected commitment to open access. (11) A rise in corporate profits did not lead to a decrease in costs, since there were no mechanisms in place to tie profits to prices. According to the CFA study, consumers have been hurt by a lack of competition in the market, with cable television rates rising at three times the rate of inflation. With the exception of a two-year period following the 1992 Cable Consumer Protection Act, cable prices have risen rapidly since policy liberalization began in 1984. Since expanded deregulation in 1996, cable prices have risen at an especially rapid rate. This is largely because effective competition has been unable to emerge while existing cable companies actively resist opening access to their networks to potential competitors.

A third industry, just emerging when the 1996 Act was signed into law, has been profoundly affected by the deregulation. High-speed, broadband Internet access - touted by some as the next phase of the digital revolution - will likely surpass standard dial-up connections as the preferred method of gaining access to the Internet. Telephone and cable companies are the most capable of providing broadband service, by upgrading existing cable and television networks across the country.

Currently, most people have access to the Internet through a dial-up modem connection. The dial-up Internet Service Provider (ISP) market includes over 6,000 independent providers, as phone lines have always operated under conditions of open access. (12) The broadband industry, on the other hand, is dominated by the major players in the cable and telephone markets. One benefit of this market concentration has been that the large telecommunications companies have had access to the capital needed to fund expensive broadband deployment.

However, the lack of consumer choice within the broadband industry could also pose several problems. As provided by the 1996 Telecommunications Act, the FCC allowed large national and multinational firms to bid for frequency rights. Consequently, it was difficult for small, local efforts to compete against large corporations. The result was that 62 of the 99 Internet broadband licenses were won by 3 national bidders, which undercut the professed goal of increased competition. (13)

As in the cable and local telephone industries, broadband competition will be dependent upon the willingness of network owners to open up to competitors. This hasn’t happened in cable or local telephone service, and without government enforcement there is no reason to believe that competition will happen with broadband. If competition does not emerge in the broadband industry, consumers will likely see increased costs. Also, community based organizations that have long relied on partnerships with local businesses will likely find it more difficult to gain help from large, bureaucratic national corporations.

Further, the nature of the Internet could be altered by large broadband providers. The Internet has always existed under the model of open access - one’s ability to navigate the Web has by definition been unrestricted. (14) However, "the industry’s plan for the next generation of the Internet is essentially a closed model" in which cable ISPs will have the power "to determine who has access to deliver information to citizens." (15) For example, cable ISPs could potentially “restrict customers’ access to [other services'] news, movies, or music. (16) Large ISPs will also be able to "direct traffic toward those content areas in which profits from advertising and e-commerce can be maximized." (17)

This development would be a setback for those interested in shifting the focus of technology from a strictly commercial orientation to one that is more oriented towards community and the public interest. While effective competition could prevent this shift in the nature of Internet access, without government intervention it is unlikely that the cable and telephone giants will open their networks to competitors.

More info

Telecom Policy and Public Access in Texas

Notes

  1. Miller, Steven. Civilizing Cyberspace. ACM Press. New York. (1996)
  2. Boehlert, Eric. One Big Happy Channel? Salon.com, June 28, 2001.
  3. Miller, Steven.
  4. Hazlett, Thomas. Economic and Political Consequences of the 1996 Telecommunications Act Three Years Later. Policy Brief #13 Update. The Brookings Institution. (1998)
  5. Miller, Steven.
  6. Litan, Robert and Roger Noll. Unleashing Telecommunications: The Case for True Competition. Policy Brief #39. The Brookings Institution. (1998)
  7. McGuire, David. Bells, Rivals Gear Up for Battle. The Washington Post, Wednesday, February 28, 2001.
  8. Boehlert, Eric. Radio's Big Bully. Salon.com, April 30, 2001. 
  9. Koerner, Brendan. Losing Signal. Mother Jones Magazine. September-October, 2001.
  10. Boehlert, Eric.
  11. Consumer Federation of America. Lessons from the 1996 Telecommunications Act. (2000)
  12. Larson, Gary and Jeffrey Chester. Song of the Open Road: Building a Broadband Network for the 21st Century. The Center for Media Education. (2000)
  13. Miller, Steven.
  14. Lessig, Lawrence. Innovation, Regulation, and the Internet. The American Prospect. March 27-April 10, 2000.
  15. Larson, Gary and Jeffrey Chester.
  16. Koerner, Brendan.
  17. Larson, Gary and Jeffrey Chester.

this page last updated
April 15, 2002