Carried Away…
October 13, 2009
I just responded to a post on the Internet Evolution blog. The topic is Australia Telecoms and the Australian government having things backwards. Here’s what I posted …
–Dave
“Whenever you have politicians and lobbyists – whom for the vast majority are lawyers – involved in regulations and legislation, you get nothing but a cluster %$#%!
Outside of the “too big to fail” companies and their lobbyists; regulators or politicians rarely give attention too or the commonsense of the “too small to listen to” companies. This is what makes things ass-backwards.
The Communications Act of 1996 as an example is a failure and I am still waiting for a solution that is obvious to me.
The Communications Act of 1996 in theory was created to facilitate local competition in telecoms. The general idea was to have the ILECs “rent” pieces and parts of their legacy networks to new “small” competitors in order to build a customer base and cash flows. These new companies were called CLECs, BLECs, DLECs, etc. Good in theory, but bad legislation. Since Congress only listened to the lobbyists and the ‘Too Big to Fail” companies we ended up with a telecom meltdown 2001-2003. Why did it happen?
The meltdown was not the result of private sector capital investment — there were billions of dollars invested. No government money was needed – what was needed was commonsense – something you rarely find inside the beltway.
What we had was a massive, irrational exuberance and land grab resulting in the overbuilding of fiber optic capacity in the top 12 cities in the United States. Common business plan themes: mass populations are concentrated there and low hanging fruit aka an easy buck, a fast buck to be made. Critical note, contrary to what was being printed by the media at the time — there was no nation wide fiber glut – the fiber glut was in these big cities because of the irrational expenditure of capital against a demand that didn’t exist (though Jack Grubman said so) where said demand exists now and is growing at predictable, consistent rates.
The rest of America was virtually ignored by the fiber Barons all with the same idea, all in the same place — capture 12% market share, for example, in Chicago and you breakeven! The problem was 50 new entrants with lots of capital to spend wily nilly all seeking a 12% share – that’s like 6000% market share for each to breakeven before you figured in the incumbents – ILEC, cable company and back then long distance companies.
Thus the telecom meltdown.
How could this all have been avoided? Simply by understanding human behavior within the context of deregulating a market. Our politicians and lobbyists do not think in this manner as long as campaign contributions and the pork keeps coming from the “Too Big to Fail” companies.
What the Communications Act of 1996 did not have was a sunset provision on renting pieces and parts from the incumbent carriers to new competitors. My opinion, if you had a 7-year sunset provision in the Act whereby the ILEC must continue to make UNE-P, UNE-L, Copper Loops, Special Access, etc available after 7 but they are no longer required to be price regulated. Moreover, after an additional seven years, if an ILEC chooses, they are no longer required to sell UNE-P, UNE-L, Copper Loops, Special Access, etc. to anyone if they choose not to do so.
So new competitors get up to 14-years to figure things out before a free market takes over.
Imagine up to fourteen-years of rational exuberance, capital deployment efficiencies and thoughtful execution.
Translated: a sunset provision would have rationalized the expenditure of private capital sector funds knowing that as a new competitor your rental costs go up after seven years and after an additional seven years, your rented network can go away. This would shape human behavior differently — from Wall Street, to entrepreneurs to PE firms and VC’s. I believe a more efficient and rational deployment of fiber broadband facilities would have resulted and in later years followed by natural consolidation of new competitors to achieve scale and optimizing capital deployed in a high fixed cost business. This is called Economics 101.
The 2001-2003 telecom meltdown is water over the dam. This is why we are seeing government now sticking their nose where it should not belong — funding with public money, entities or entities with management that went bankrupt before with dismal track records, definitions of broadband that do not match reality and or a politically-enabled request for funds based upon an arbitrary, non-measurable process between the Federal and State governments to award said funding. I can only imagine under the ARRA BTOP/BIP programs as states rank projects for the Federal government to consider, that State requested funded proposals will receive their highest recommendations and top ranking. After all, most states are “shovel ready”, have exceptional optical telecom network management experience, a proven record in deploying broadband infrastructure, very efficient with capital and can execute the infrastructure within 2-years under statute!
I say, go back and amend CA 1996 — put in some sunset provisions and let the private capital markets figure things out. Private capital is not flowing into telecom infrastructure for further broadband deployments because capital sources were burned in the meltdown and in general, uncertainty in regulations still exist and now direct government participation assures us private capital to further wait and see. By the way, those in the private sector that choose not to invest into “broadband infrastructure” today because we were “burned” in the meltdown are not innocent victims. Lack of due diligence, greed and lacking local telecom expertise was your demise – ignoring successful operating companies who navigated these waters who you deny financing to today because of your past indiscretions is an interesting way to look at not putting your capital to work.
Pretty much globally, we now have governments sticking there cash where they have no core competency. I don’t believe this will help matters as political interests will trump what is really required.
I am just one person where common sense can sometimes keep me awake at night.”
Written by Dave Rusin - Telecom Executive
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