Local Loop: NASDAQ Noose
eisenach, jeffrey a.
Local Loop: NASDAQ Noose Al Gore's Internet socialism is choking the technology sector BY JEFFREY A. EISENACH The tech sector's problems lie largely inside the Beltway, but neither the Bush tax...
...For AT&T and the failing CLECs, LoopCos would be a dream come true...
...As break-even dates receded and regulatory advantages eroded, investors began jumping ship...
...It derived from a similar plan for "Independent System Operators" (ISOs) to manage the electric transmission grid...
...Under the act, the local phone companies, essentially the Baby Bells, but known by the impossible acronym ILECs (for incumbent local exchange carriers), were required to lease their facilities to competitors at FCC-determined prices...
...That would include the cable companies and wireless and satellite companies...
...It's going to take longer and cost more because the Clinton Administration, the guys who were supposed to get the Net, arranged matters so the cable and local phone companies best positioned to do the job can't make money at it...
...Between September 1, 2000, and the end of the year, the market valuation of publicly traded CLECs fell by nearly $100 billion, a 75 percent drop...
...On the other side are the weaker CLECs who want even cheaper access to the ILECs lines, and the long distance companies, led by AT&T, who favor just about anything that hurts the ILECs, their sworn Baby Bell enemies...
...Since then, the idea has spread to the states, and a version is actually close to being adopted in Pennsylvania...
...With some cooperation from state regulators, they set the prices at which new entrants (known as "Competitive Local Exchange Carriers," CLECs, or just "The Good Guys") could lease facilities from the incumbent ILECs at levels significantly below actual costs...
...The Clinton White House thought the ISO idea was great, and California had already adopted it...
...But it would also restore the incentives for everyone to invest...
...Not surprisingly, CLECs proliferated...
...With LoopCos leasing out facilities at below-cost prices, no one would have an incentive to invest in the new facilities, broadband or otherwise, that define meaningful competition...
...Most of the rest are on life support, laying off workers, canceling expansion plans and conserving cash in hopes of a brighter tomorrow...
...Box 969 • Ashland, Oregon 97520 1-800-729-2665 http: //www.blackstoneaudio.com BLACKSTONE AUDIOBOOKS THE AMERICAN SPECTATOR ¦ April 2001 17 decide on priorities for the year...
...Along with the CLECs collapsed the Clinton Administration's strategy for deploying local broadband, depressing both the near-term order sheets and the midterm prospects of the rest of the information technology sector...
...This also meant, of course, that you could become a phone company without making much in the way of useful additions to the local infrastructure...
...Nevertheless, the Clinton Federal Communications Commission, under Gore friend Reed Hundt and his successor Bill Kennard, plunged ahead...
...When Nortel and Lucent cancel orders, Cisco Far more critical is the government-induced failure of the telecom networks to supply the most critical missing link to the broadband future: the local loop, the "last mile" of connection between hugely capacious The Clinton Administration, the guys who were supposed to get the Net, made it impossible for the phone companies to bring it on home...
...And their enemies the ILECs would be—well, dismembered...
...If AT&T has its way, other states will soon follow...
...Referring specifically to the California ISO, it proposed separating the local loop from the rest of the phone company, to be managed by a LoopCo whose board would have a "minimum number This blueprint for local loop socialism seems to have originated within Al Gore's office in 1997...
...Then they created other advantages for the new entrants, including an arbitrage scheme known as reciprocal compensation that allowed the newcomer CLECs to reap billions in payments from the incumbent phone companies and imposed new costs on the incumbents, requiring them, for example, to segregate broadband services like DSL into separate subsidiaries...
...In February the members of TechNet, the Silicon Valley lobbying group that includes companies like Cisco, Hewlett-Packard, Intel, Microsoft, and Sun Microsystems, met to New Titles Published Each Month...
...That would make it harder for the weaker CLECs to compete...
...Adequately upgrading the local loop, even with high-speed copper DSL lines or broadband-capable coax cable rather than optical fiber, will under any circumstances take years and require investments measured in hundreds of billions, in a process governed by the physical realities of trenches, truck rolls, and central offices of brick and mortar...
...Investors, spooked by the collapse of the dot.corns, began asking the CLECs some tough questions about business models and prospects of profitability, just as the courts, responding to ILEC lawsuits, were telling the FCC to reconsider key elements of its CLEC-friendly policies...
...In the political battle looming in the wake of the Clinton policy collapse, in an FCC filing by Level 3, a company with especially close ties to Gore's staff...
...On the business end, the messy physicality of the business—construction costs, permit delays and balky new technologies—proved more than most of them could handle...
...Only a few—most notably Allegiance, NextLink (now XO) and MacLeod— had robust plans and the ability to execute them, usually including real infrastructure improvements and important alliances...
...It was a one-two punch the CLECs could ill afford...
...That's why...
...Not until the last mile can deliver on the promises of no-delay data downloads, video on 16 THE AMERICAN SPECTATOR ¦ April 2001 demand, and teleconferencing as cheap as 10-10-221 will the Net fulfill its promise...
...Financed by regulatory largesse and many of the same venture capitalists who funded the Internet retailers, the CLEC newcomers joined the likes of DrKoop.com as darlings of the 5000 NASDAQ...
...The board overruled them, making it a top priority...
...Access to new capital dried up, and companies like ICG (November) and Northpoint (January) declared bankruptcy...
...One thing is certain: Putting LoopCos in charge of the broadband won't rejuvenate the economy or revise the NASDAQ...
...The Telecommunications Act of 1996, passed just as the Web was becoming a reality, was intended to create the same sort of competition for local telephony as in long distance...
...Set the prices low enough, went the theory, and lots of upstarts would get into the telephone business as resellers, jump-starting a competitive industry by giving new entrants a fair chance against the "entrenched monopolists...
...Available for Purchase or Rental by Mail for a free catalogue, write or call: Dept AS • P.O...
...Show up at Cisco or Lucent and you'd be provided with a line of credit good for millions of dollars in new switches and other equipment...
...Calling the telecom version a "LoopCo," Gore's team started promoting the idea in the Fall of 1997...
...For the first time ever the staff proposed adding local broadband deployment as an issue, albeit on the "second-tier...
...They propose to declare the last mile once and for all a natural monopoly, seize the local infrastructure from the Baby Bells, and place it in the hands of a board of "stakeholders" charged with running the whole thing in "the public interest...
...In March 1998, LoopCo surfaced in public of outside public directors...
...optical networks promising a terabyte transformation of the world economy, and the pathetic trickle of bits that can actually reach most American desktops, at home or office...
...California's ISO was soon helping to bring on the energy crisis and bankrupting utilities...
...the ILECs, most of the cable companies, and some of the stronger, facilities-based CLECs all favor loosening regulations that limit their ability to profit from new facilities...
...trims revenue projections, and the optical and semi-conductor components makers slow down their lines, they are not reacting primarily to the dot.com crash—since most of the departed never generated much network traffic anyway—nor to the general slowdown in the economy...
...Local Loop: NASDAQ Noose Al Gore's Internet socialism is choking the technology sector BY JEFFREY A. EISENACH The tech sector's problems lie largely inside the Beltway, but neither the Bush tax cut nor more rate cuts by the Fed will by themselves revive the NASDAQ...
...Of course, the Telecommunications Act's vision of a competitive market for local telecom services would be dismembered as well...
...Laid out in a February speech by AT&T CEO Michael Armstrong, this blueprint for local loop socialism— Armstrong calls it "structural separation"—appears to have originated in the office ofVice President Al Gore back in 1997...
...Not needing to invest in new facilities to reach local customers, they could lease access from the LoopCo's at prices likely to be far below replacement costs...
...But as Alex Mandl, CEO of Teligent, said last month, "Those that cannot get more financing will fall away," and for now the money window is closed...
...Experience in the telecommunications business...
...To do that, we should try an idea seldom seen in telecom recently: the profit motive...
...No DSL or Internet cable yet...
...Telecommunications equipment makers contributed easy financing...
...Last summer reality began to set in...
...Cable companies were also subjected to regulation, described euphemistically as "open access" requirements...
...Left to their own devices they would presently render the notion of natural monopoly absurd by providing multiple broadband alternatives in the same neighborhood...
...Strictly optional...
Vol. 34 • April 2001 • No. 3
