The Telecom Crisis

...Is a new triumph of conservatism inescapable...

...The rhetoric of "competition" has not abated...

...Wireless systems were also built out at a phenomenal rate, from tens of millions of phones in use to a billion in the nineties...

...Costs of residential phone service were being shifted to consumers...

...beyond the goal of rescuing the industry from itself, however, the objective of such a revival remains vague...

...The industry's highwage union jobs, associated with the formation of the Communications Workers of America in the late 1940s, remained largely offlimits to workers of color...

...Long viewed as leading the way into the "information age" of productivity and enlightenment, they are suddenly presenting symptoms of what appears to be the same life-threatening disease...

...The level of uncertainty—indeed, of volatility—has simply grown too high...

...Eli Noam, writing in the Financial Times article cited earlier, says that "for telecoms to recover, the corporate strategies and public policies of more than two decades have to change radically...

...Giant equipment manufacturers such as Lucent, Nortel, and Alcatel, some of which had pumped up their own sales by helping to finance start-up carriers, now suffered calamitous revenue declines...

...By the late 1990s, however, the system was growing shaky...

...In the United States, dozens of companies have gone bankrupt over the past two years, with no end in sight...

...A final, seemingly remote macro-economic trend suddenly intervened...

...The result was to unleash capitalism's full "animal spirits" on the already superheated stock market, and on the information network sector that had become its poster child...

...the takeoff of the Internet...

...DAN SCHILLER, author of Digital Capitalism: Networking the Global Market System, is a professor at the University of Illinois at UrbanaChampaign...

...Wireless service providers, long-distance companies, local-exchange carriers and even Internet-based telephone services all sought to carve out for themselves the largest share of the overall market for voice communications...

...A cascade of new consumer electronics playthings, and—ultimately perhaps even more important—stock market profits for uppermiddleclass investors helped mute any serious political opposition...

...Projections of exponential increases in demand for telecom capacity became the rule...

...The U. S. Department of Commerce, Economics and Statistics Administration's estimate of business spending on communications just for the year 2000 came in at $258 billion...

...In 1934-1935, the FCC was chartered to conduct a top-to-bottom investigation of the telephone industry...

...As corporate and military investment accelerated and enlarged the technological revolution around telecommunications, phenomenal organizational and technical change gripped business at large, from agriculture and manufacturing to retail trade and services...

...Not only was the day-to-day operation of the new "information economy" reliant on networks...

...Lucent Technologies, the largest U.S...

...President Lyndon Johnson's Task Force on Communications Policy launched "competition" as official policy to guide and shape U.S...

...Network-enabled services became part of everyday life at work and, soon enough, at home...

...But the telecom industry was also taking on gargantuan debts...

...It also altered the legal mandate for regulation, by providing a general basis for the regulatory abdication (known as "forbearance"), which had long since become common practice...

...What triggered this continuing corporate stampede into telecommunications...

...Throughout Europe, recently privatized national telecom operators such as France Telecom and Deutsche Telekom spent tens of billions of dollars each acquiring wireless franchises within their national markets, and making cross-border investments as well...

...And, despite continued demand—people and organizations still need communications, the crash notwithstanding—the combination of overcapacity and unbridled competition remains lethal...

...Service charges grew more inequitable...

...trading partners countenanced comparable service monopolies...

...Planners are betting that this policy mix will reduce the overhang in network capacity, raise prices to consumers, and induce capital once again to look with favor on the industry...

...Wireless carriers and equipment makers alone claimed to have lost 65 percent of their market value ($850 billion) since January 2001...

...Predictably, demand could not keep up...

...Absent such statistics, of course, regulation itself is compromised...

...The World Trade Organization Agreement on Basic Telecommunications opened still further investment opportunities: stock offerings by newly privatized national telecom operators such as Deutsche Telekom and France Telecom, joint-ventures, and solely owned network investment projects in and across national markets...

...The industry's woes are rocking global finance, evoking comparisons to the 1980s savings and loan debacle...

...Between the First World War and the late 1960s in the United States, regulation closely limited competition in this industry...

...One application after another was introduced: Computerized Reservations Systems, Automated Teller Machines, telemarketing systems, and 800 numbers for direct sellers, government agencies, and medical and insurance service providers...

...local telecom companies shot sharply upward...

...Actual "killer applications" were preoccupying strategic planners for the military-industrial complex, as this crucial institution embraced concepts such as the electronic battlefield and infowar...

...j UST WHAT sorts of changes are likely...

...For companies in virtually every industry, Internet investment at any price and for seemingly any purpose began to pass for strategic wisdom...

...for example, the ostensible costs of interconnecting local- and longdistance networks, and the supposed costs of providing universal service...

...Bankrupt Global Crossing has accepted a buyout bid by Hutchison Whampoa (Hong Kong-based) and Singapore Technologies Telemedia (regulators still need to sign off on the transaction...

...Suddenly, after a decade awash in funds, there is almost no capital available for telecom investment...

...Competition intensified...

...Nevertheless, a few sober observers are concluding that competition has become part of the problem...

...and the U.S...

...And, of course, competition imposed enormous regulatory costs, as authorities sought to develop sustainable rules...

...Household penetration levels increased annually until they exceeded 90 percent beginning in the 1970s because, under this new regulatory regime, phone service finally became generally affordable...

...Parallel rivalries erupted in each and every corner of the industry...

...over 4,000 by 2001...

...The number of phone lines served by existing local carriers actually declined for the first time since the Great Depression...

...and, unthinkable only months ago, new legislation to grant the FCC itself clear-cut regulatory authority over data services, including the Internet backbone ("so that we can limit any service disruption in these troubled times...

...The plight of our core infrastructure during this wrenching transition into an informationalized capitalism merits just such a searching and sustained public inquiry...

...Years had been spent developing that sector for investors, and now, dollars, yen, marks, pounds, francs and other currencies poured in...

...In just one market segment, international telecom services, by 1996 there were already an estimated 470 carriers worldwide...

...In a 1998 report for the Economic Policy Institute on WorldCom's proposed takeover of MCI, I forecast that on financial and other grounds "MCI-WorldCom is a mistake waiting to happen...

...Working with state public utility commissions, and with the aid of further reform legislation passed during the 1940s, the FCC crafted policies to underwrite an inclusive nationwide household telephone service...

...We may thank not only Wall 66 n DISSENT / Winter 2003 Street and its cheerleaders, but also—and especially— the U.S...

...Whereas the FCC had once kept close watch on network service levels, it now abdicated any statistical collection role in regard to data traffic...

...Overcapacity and destructive competition, old economic scourges, have come to haunt the frontier of twenty-first century capitalism...

...policy response to the Asian financial crisis of 1997-1998...

...The task force specifically urged that the FCC approve licenses for telecommunications companies wishing to compete with AT&T...

...As events have shown, what was waiting to happen was a fiasco embracing much more than just two companies...

...And the telecom infrastructure supposedly needed to carry the torrents of Internet traffic seemed to justify further spectacular expenditures...

...market to push—successfully—for comparable neoliberal telecommunications "reforms" abroad...

...Dozens of new providers of local exchange services went bankrupt...

...At the same time, business and academic commentators gleefully hailed the "information revolution...

...Insider trading, accounting fraud, ties between commercial and investment banking services, and other forms of corporate malfeasance and corruption ran at least as deep in the United States as in Japan, a country at which top U.S...

...It triggered a huge merger and acquisition binge across the greater communications industry, as companies frantically attempted to forestall rivals while themselves seizing turf in adjacent markets...

...Copyright ©2003 Dan Schiller...

...Executives doing the "perp walk" in handcuffs may be satisfying theater for the mass audience, but punishment of individual malefactors does little to relieve the underlying problem...

...A bit of history helps...

...By the mid-1980s, all told, a trilliondollar corporate capital investment had been made in information technology, including telecommunications, and it went up from there...

...New cycles of market entry by would-be competitors were spurred by ever-increasing network investment and proliferating new applications, international and domestic...

...The New Deal regime was at an end...

...For this, we need significant alterations in the structure and policy of telecom...

...Residential ratepayers, taxpayers, and employees are thus to bail the industry out of its difficulties...

...Responsibility for detecting faults in and repairing "inside wiring" was likewise shifted to the homeowner...

...Even Internet plumbing manufacturer Cisco (though still profitable), saw its revenues and stock price plummet...

...Technological breakthroughs boosted information-carrying capacity by two orders of magnitude...

...The embrace of the Internet triggered its own frenzied corporate scramble for immediate profits...

...companies began to cook the books to placate investment analysts and shareholders...

...In addition, the federal government seems eager to pump billions of dollars into the industry in the guise of "homeland security...

...the World Trade Organization Basic Telecom68 n DISSENT / Winter 2003 munications Agreement of 1997...

...It was at this point that the finance officers of several U.S...

...In response to the Asian financial crisis of 1997-1998, the United States opened a flood of easy money...

...Almost all U.S...

...Four events of the mid-1990s paved the way for that debacle: passage in the United States of the Telecommunications Act of 1996...

...The industry became ever more heavily dependent on advertising, which, previously, had been much less significant...

...it also began to accelerate market development of new information-intensive industries, from business services to education...

...Bad loans to the telecom industry hang over major banks and insurance companies...

...One horizontally and vertically integrated company—American Telephone and Telegraph (AT&T)— provided local telephone service to around four-fifths of household users...

...By the late 1970s, it was clear that the main advocates and beneficiaries of the new policies were business users of the network...

...QuAL1TY OF SERVICE became worse than an embarrassment...

...But some wider benefits of the system were also real...

...By the 1990s, nevertheless, the FCC was handing out licenses to enter telecom markets like a barker at a county fair, while also working with Executive Branch agencies and the World Bank to use its leverage over the huge U.S...

...Abroad, the situation is no better...

...Internationally, after decades of underdevelopment, wireline networks were rapidly modernized and extended, and the number of phones increased explosively...

...Will service downgrades and rate hikes for household consumers, insecurity and layoffs for employees, and network development on behalf of transnational business users and military agencies continue indefinitely...

...As Alan Stone points out in How America Got On -Line, while the Consumer Price Index between 1960 and 1973 increased by 44.4 percent, the residential telephone service component of the CPI increased by a mere 14.6 percent...

...Technological advances and speculative finance had produced what some analysts believe may have been a fivehundredfold increase in long distance capacity over a bare half-decade...

...By 2002, 104 million outgoing telemarketing calls were being made each day, and the telemarketing industry's annual sales had reached six hundred billion dollars...

...AT&T unceasingly took in monopoly profits, in part because its unregulated equipment manufacturing subsidiary allowed it to manipulate the ratemaking process...

...0 UTRIGHT HYPE now began to pass for sagacity...

...Where did all these companies come from...

...CEOs were called to testify, while a research staff investigated the basic issues involved...

...The average expenditure was between fifty million dollars and a hundred million dollars...

...maker of telecom equipment, has suffered ten straight unprofitable quarters through October 2002 and recorded gigantic losses...

...Where the FCC earlier had withdrawn the right of hotels to impose telephone surcharges, now regulators allowed carriers to contract with state prisons to supDISSENT / Winter 2003 n 67 TELECOM CRISIS ply collect telecom services and to charge inmates' families rates as high as ten times normal direct-dial rates...

...A gigantic speculative tidal wave was taking shape—destined to end in the crash of high-tech stock values...

...70 n DISSENT / Winter 2003...

...Private investors have grown as reluctant to invest as, before, they had been rash in doing so...

...policymakers had been railing for a decade...

...telecommunications...

...During the late 1930s, the Roosevelt administration convened a "Temporary National Economic Committee," an extraordinary initiative to document and diagnose the causes of the Great Depression...

...Yes—unless greater public accountability is immediately instituted...

...Will this work...

...OVER THE COURSE of thirty-five years— roughly from 1965 to 2000—the direction and substantive character of U. S. (and ultimately of global) telecom system development were redefined...

...What else should we expect, when the well-connected telecom industry has spent the past decade funding major political parties on a lavish scale...

...Fears grew that even China, which during the 1990s staged an unprecedented network development binge to create the world's second largest domestic telecommunications system, was becoming a saturated market...

...it doubled to around a hundred billion dollars annually between 1996 and 2000...

...Outside AT&T's area, local service was offered on a monopoly basis by independent carriers...

...Shady practices came to pervade the entire industry...

...By 1989, the annual expenditures of the top hundred business telecommunication users ran the gamut from a billion dollars at the top of the list to about twenty million dollars at the bottom...

...Each competitor also created a separate and largely duplicative management and staff...

...In fact, local carriers were devouring their own markets, as subscribers to their wireless subsidiaries began to substitute wireless for wireline service, and as they offered high speed DSL services that don't require secondline dedicated phone circuits...

...No segment of the greater telecom industry escaped, as competition led to cannibalism...

...Regulation imposed a true measure of social responsibility on AT&T and TELECOM CRISIS the industry it led...

...Injustices, to be sure, persisted...

...Layoffs throughout the industry—more than five hundred thousand as of August 2002, and still counting—have eliminated many more jobs than have been created in telecom since 1996...

...Newly created jobs at start-up competitor companies were increasingly shorn of any right to collective bargaining, while millions of call-center employees across the length and breadth of industry labored for low pay in high-tech sweatshops...

...Picking up the theme in the American Prospect (September 9, 2002), Paul Starr offers up the view that a new cycle of "regulation in the public interest" is warranted...

...no one really knows how acute this threat may become...

...As the Internet's technical capabilities beckoned, the need for an "Internet strategy" became a corporate buzzword...

...Every subsequent FCC chair, whether appointed by a Republican or Democratic president, has concurred that deregulation and liberalization should be the rule and that regulation should be the exception...

...And before long, these users were pursuing a still more sweeping goal—to ensure that the merger of telecom and the computer proceed largely outside traditional utility regulation...

...Equipment spending by U.S...

...These institutional users were setting their sights on a highly attractive target—the regulatory requirement that their rates subsidize the costs of providing service to ordinary customers...

...Both houses of Congress were represented, as were some of the administration's top economic planners and antitrust officials...

...The top ten business users that year reflected the unfolding diversity of corporate networking applications: General Motors, General Electric, Citicorp, International Business Machines, American Express, Westinghouse, McDonnell Douglas, Sears, Ford, and Boeing...

...Government: Congress, the executive branch, and the Federal Communications Commission...

...the two hundred and fifty million dollar deal values the carrier's twentybilliondollar-plus fiber optic network at something more than one penny for each dollar invested in it...

...MEANWHILE, largely unnoticed, the public was losing out...

...The Telecommunications Act continued the process of liberalization by setting down terms on which local and long-distance carriers could invade one another's markets...

...Substantial and generally superfluous administrative and sales costs, mostly charged to rate- and taxpayers, accompanied the rise of competition in consumer telecom services...

...Recent congressional testimony by FCC chair Michael Powell gives an indication...

...It is long past time to establish a widely accessible, open-ended forum to consider what purposes, what functions, we want our telecom system—and indeed, the overall system of societal information provision—to serve...

...in several key areas policymakers are steaming ahead with deregulation...

...As long-distance rates declined, mainly to the benefit of high-volume business users and well-heeled residential callers, local rates remained high...

...A growing array of redundant network operators claimed justification for their existence—often to promote still further capital spending increases— with an eye to bolstering their straTELECOM CRISIS tegic position in the increasingly precarious competitive environment...

...In November 2002, Germany's Deutsche Telekom announced the largest corporate loss in that nation's history...

...All this began to change in the 1960s...

...Eli Noam observed in the Financial Times (July 19, 2002) that the "cumulative debt of the seven largest European carriers is greater than Belgium's gross domestic product...

...Looming on the horizon, then, are a reconsolidation of oligopoly power, a new ratepayerfunded service to pull us out of the existing slump, enlarged federal contracts for carriers and equipment suppliers, and a more comprehensive federal steering role...

...His suggestions include federal action to hasten broadband (high speed Internet) service deployment...

...Directory information now would be supplied only for a fee...

...support for mergers between long distance and local exchange carriers...

...HowDISSENT / Winter 2003 n 69 TELECOM CRISIS ever, policy prescriptions for stabilizing the industry remain confusing and uncertain...