Monday, September 22, 2008

Don't Confuse Financial and Communications Markets

Absent clear-headedness, the financial crisis facing the U. S. threatens more than the financial institutions that made, packaged, and resold, and re-packaged and re-sold, bad loans. It threatens to give all deregulatory efforts, however justified, a bad name. And it may threaten to give all those who reflexively favor more regulation, regardless of the circumstances, a newfound regulatory cudgel. If so, and if this reflexive approach were to be applied to today’s communications markets, it would be most unfortunate.

It may well be there have been failures of government oversight that could have prevented or ameliorated the current financial crisis, although history is likely to show that government intervention, or at least encouragement, bears some portion of responsibility as well. For example, Congress, with the Administration’s acquiescence, steadfastly encouraged Fannie and Freddie to back more and more, larger and larger home loans to those who, realistically, could not afford them. In all bubbles, the “just sign on the dotted line” mentality takes hold until bursting-time.

Due to ongoing technological innovation and past successful efforts to eliminate or reduce outdated legacy regulations, most communications markets are now workably competitive. This is especially true with respect to broadband communications. Firms formerly known as “cable television” operators and “telephone” companies are engaged in fierce competition in many places to provide integrated “triple play” packages of Internet, video, and voice services. They also provide these services on a stand-alone basis for those who don’t prefer the bundle. In its last broadband report, the FCC found that over a year ago 96% of the nation’s zip codes were served by two or more broadband providers.

Of course, the wireless firms we still often call “cellphone” companies increasingly compete in the broadband marketplace. Now you can watch many of your favorite television shows and other videos on your “cellphone,” not to mention accessing your email, stock quotes, weather reports, and favorite websites. Satellite operators HughesNet and WildBlue offer high-speed broadband service across the U. S.

For a recent announcement of one of the latest technological broadband innovations (and new ones come at you every day), AT&T’s new “HomeManager”™ “phone” caught my eye. AT&T describes the portable device, with a seven-inch color touch screen, this way:

"AT&T HomeManager provides one-touch access from anywhere in the home to a robust lineup of popular features and content, including visual voice mail, weather reports, e-mail access, local news, a portable speakerphone and more. From a broadband-enabled base station, information is sent directly to the cordless touch screen, delivering quick and easy access to relevant information."

Developed in collaboration with equipment manufacturer Samsung, AT&T says HomeManager™ “is a game-changing device that provides true convergence to wireless, wireline and Internet users.” Whether or not the new device is a game-changer, I do not know, although it seems pretty cool. I suspect that, like AT&T, the other broadband providers, like AT&T, have their own “game-changers” in the works -- constantly.

The point is that the broadband marketplace continues to evolve in a generally competitive environment in which the providers are – and, alas, must be – responsive to consumer demand. In this environment, it is such responsiveness to consumer demand that leads to the roll-out of innovative services at reasonable prices.

Government intervention in the form of imposition of legacy command-and-control regulation almost certainly will stifle the innovation and investment that currently characterizes the marketplace. Indeed, the rapid expansion in the availability of broadband service has not come cheap. Cable operators have spent well over $100 billion upgrading their systems to handle digital broadband since passage of the 1996 Telecommunications Act. To remain competitive, AT&T and Verizon reportedly have spent more than $70 billion in the last two years to expand capacity with fiber optic technology and other capacity-enhancing equipment.

This is not to say that even more competition of the facilities-based variety would not be welcome, or that the FCC has no role in facilitating such additional competition. For instance, I have urged the Commission in comments to act promptly to grant the Clearwire-Sprint applications that would allow the New Clearwire venture to construct and operate a new nationwide wireless broadband network using WiMax technology. And it is not to say there are not specific instances of “market failure” where government intervention may be appropriate. For example, in remote rural areas where there is no satisfactory broadband service, it may be appropriate for the government to provide narrowly targeted subsidies to providers through a competitive bidding process.

To continue thriving, the communications marketplace, especially broadband, does not need more regulation. Indeed, there are still many legacy regulations that should be eliminated. While the government should stand ready to intervene, if necessary, in specific instances of demonstrable market failure, it would be very unfortunate if, in the wake of the financial crisis, reflexive generic calls for “more regulation” were imported into markets which bear little or no resemblance to the financial services marketplace.

In other words, we will all be the worse off if policymakers should ever blithely assume that the causes and cures for the current financial distress provide a justification for applying heavy-handed regulation in the communications marketplace.