The Telecommunications Meltdown in the United States: Reasons and Solutions

Abstract

With breathtaking speed, attitudes about the information and telecommunications marketplace have careened from irrational exuberance to extraordinary pessimism. Share prices, investor enthusiasm and prospects for an Information Age revolution have waned. Until 2001 many practitioners, consumers and academics thought that the Internet had the potential tochange many of the ways we engage in social and commercial transactions. Forecasters breathlessly projected triple digit annual increases in demand and revenues with no end to the “blue sky.” These forecasts helped fuel the view that the fundamental rules about business and markets did not apply to Information Age industries. Belief in a “rising tide raising all ships” became the prevailing wisdom, so much so that companies could emphasize the need to gain market share with little regard to the short term prospect for breaking even much less generating a profit.

With painful clarity fundamental rules about business and markets do apply to Information, Communications and Entertainment (“ICE”) industries. The Internet does not change the human condition, in terms of fear, greed, wishful thinking, trust and any number of traits that affect stakeholder behavior. If greed previously drove short term thinking with an emphasis on talking up share prices, then currently fear creates disincentives for investment and triggers the prevailing wisdom that years must pass before any information or telecommunications venture can operate profitably and make the substantial investments necessary to provide new convergent, broadband ICE services. While hindsight offers clear vision, we might benefit in reviewing the recent technological, marketplace, legislative and regulatory history with an eye toward recalibrating our critical analysis.

This paper will identify how stakeholders and governments made false assumptions about the near term demand for ICE services and the prospects for seamless convergence of information and telecommunications technologies and markets. While incumbent carriers might have tolerated significant regulatory burdens and revenue impediments during a rising tide of demand and investment, they have little tolerance now that upside opportunities, such as long distance telephone service, appear less robust. With the passing of only a few months market exuberance has careened to pessimism as stakeholders realize that the Internet does not suspend fundamental business rules. 5 Likewise, convergence of telecommunications and information processing does not exempt the former from rules affecting the latter, (e.g., the business plan destructiveness of Moore’s Law that doubles the capacity of new investments even as it halves the value of sunk investments).

The paper concludes that when all parties have a shared and flawed vision of the future they may fail to appreciate the difficulty and expense in making the necessary short term structural and regulatory adjustments. The paper provides suggestions on how legislatures and regulators might creative incentives for broadband deployment and an expedited absorption of excess capacity.