Wednesday, 13 November 2002 8:30 am
I wrote yesterday about how the current telecommunications industry structure is perfectly set up for self-annihilation, which it is in the process of carrying out.  On Monday I pointed out how the slow-motion demise of Bell Labs may already be at the root of the current malaise in the computer industry.  What can be done to solve these two problems?

The telecommunications industry is currently in such serious trouble that it is worthwhile to think about what type of alternative industry structure would serve us better.  Let’s have a look at how things used to work, well before we got into the current mess.

Before 1980, under the regulated monopoly model, things worked like this: Bell Labs Research would investigate a number of promising research areas that could have beneficial impact on the Bell System network. Bell Labs development divisions would initiate product development on the technologies with the most promise (e.g. transistors, fiber optics, microwave, digital transmission, time slot interchange, cellular telephony, asynchronous transfer mode switching).  Simultaneously, the Bell Labs systems engineering departments would put together a deployment plan for the Bell System operating companies, and instruct Western Electric to manufacture a sufficient quantity to meet their plan.  Finally, the Bell Telephone companies would be instructed to install the new products rolling off the Western Electric lines.  Bell Labs, the Bell Telephone companies, and Western Electric were all fully owned by AT&T.  AT&T’s rates were regulated by the FCC and state public utility commissions, primarily on a “rate of return” basis (meaning that the maximum rate of return that AT&T was allowed to earn was fixed by regulation).  AT&T was generally prevented from entering unregulated businesses.

The positive aspects this industry structure were:  (1) Bell Labs was extremely well funded, because higher costs increased AT&T’s revenues, and the regulators looked favorably upon funding research at the famous institution; (2) many non-telecommunications technologies flowed out of Bell Labs which AT&T was obligated to license gratis or at extremely reasonable rates (e.g. transistors, UNIX, C, C++), creating the basis for the electronics and computer revolution; (3) AT&T’s stock and bonds were among the most secure and stable in the world, thought safe enough for “widows and orphans”; (4) the US enjoyed the highest-quality, most modern, and lowest cost telephone network in the world.

Today, thanks to deregulation, we do not enjoy any of these benefits anymore.  The competitive environment that deregulation introduced may have cut telephone costs to consumers, but in the end it may actually just have transferred costs to their mutual funds and 401K via stock depreciation and bond defaults.  Competition may have forced broadband and Internet to roll out faster than they would have otherwise, but the fact that the US is now behind other countries in the rollout of both puts that into question. 

In the context of the current  disaster in telecommunications (yet to completely unfold), it is tempting to think: why not go back to the way things were?  Wouldn’t the nation be better served by going back to a regulated monopoly, given what we know now?  It is clearly doable, because we did it before.  With about $600 billion of telecommunications debt in jeopardy, and perhaps the nation's financial system and pension plans as well, why not?   Hmm…