Rivalrous Telecommunications Networks With and Without Mandatory Sharing

I. INTRODUCTION II. NETWORK SHARING RULES PURSUANT TO THE TELECOMMUNICATIONS ACT OF 1996 III. TESTING THE "STEPPING STONE" THEORY A. Growth in CLEC Lines B. Cable Telephony: The Dog That Didn't Bark. IV. INVESTMENT AND NETWORK SHARING IN TELECOMMUNICATIONS MARKETS A. Wireline Telecommunications Investment B. Telecommunications Regulation and Investment Decline C. Regulated Resale as a Business Model D. Revealed Policy Preferences of Equipment Suppliers V. WIRELESS NETWORKS A. Fixed-to-Mobile Substitution B. Spectrum Allocation C. State Regulation of Cell-Phone Rates D. Resellers in an Unregulated Market VII. CONCLUSION I. INTRODUCTION The 1996 Telecommunications Act ("1996 Act"), passed with bipartisan support, aimed to overturn the existing regime of regulated monopoly. Competition would be introduced, and regulation would fade away. Rival networks would then provide the consumer protection long delegated to state and federal agencies. Elements of this strategy were cleanly implemented and have proven effective. These include two important policies to assist new network formation. The first was a federal preemption of state-issued franchise monopolies in local telecommunications. Most states had permitted but one operator, per area, to offer local phone service. In addition to other advantages, this measure instantly allowed 11,000 locally franchised cable TV operators to compete in a head-to-head rivalry with local exchange carriers ("LECs"). A second competitive strategy was an interconnection mandate, meaning that new networks would be able to exchange traffic with existing networks, thus facilitating entry. These rules enabled the emergence of hundreds of competitive local exchange carriers ("CLECs") in the aftermath of the 1996 Act. (1) The third strategy, however, has proven more problematic and will be the focus of this Essay. To assist the emergence of competition, the 1996 Act decreed that firms were to be given the opportunity to serve local phone customers without building physical network infrastructure, sharing the facilities owned by incumbent local exchange carriers ("ILECs"). If negotiations over wholesale rates proved unsuccessful, regulation would provide a solution. Competitive entrants would be offered each unbundled piece of existing phone networks (e.g., local loops and switching) at prices set by the government. Regulated wholesale access would be a stepping stone for new networks, which would then have the economic ability and incentive to construct new facilities of their own. The object of this approach was not retail competition on the reseller model, which with wholesale price controls--transferred fundamental economic planning from capital markets to governments. Rather, the aim was to create new physical networks by incentivizing infrastructure build out. The 1996 Act was clear on this point, as federal courts have held, yet it downloaded sufficient transition management responsibility to the Federal Communications Commission ("FCC") and state public utility commissions for the policy to become conflicted. Regulators found their authority over price controls a tempting source of rent redistribution. Wholesale access terms were imposed to create retail competition by disrupting the crucial signals sent by retail customers to capital markets. The long-term adjustments prompted by nominal price reductions were largely external to the calculus of decisionmakers in this process, a nonmarket failure. The central contradictions of the regime were manifested in the costs and benefits flowing from favorable resale terms offered CLECs to use the networks owned by ILECs. Terms making resale entry attractive simultaneously undercut incentives for entrants and incumbents to invest in fixed infrastructure. There is a theoretical argument that, while wholesale price regulation may induce some disinvestment in local telephone networks, this effect can be fully offset by strong economies of scope between retail service and infrastructure ownership. …