TELCOS POISED FOR BIG PUSH FOR OVERALL DEREGULATION, USTA SAYS

Some convention speakers said they saw a turnaround in the telecom industry (CD June 3 p9), but others, such as BellSouth Chmn. Duane Ackerman, said the decline was at best slowing. Telecom Industry Assn. (TIA) Pres. Matthew Flanigan was among the most optimistic, saying the industry was “moving forward to recovery.” He said some sectors were recovering faster than others, but TIA was projecting an overall “single-digit” revenue increase for the industry this year.

The convention floor certainly didn’t indicate a turnaround -- after attendance fell 30% last year to less than 37,000, convention experts were speculating the figure was down another 10-15% this year, and that those who did come might be staying a shorter time. Organizer TIA won’t release audited figures for some time, although exhibit space certainly was down.

Maybe more importantly, industry officials noted a lack of major new technologies at the convention. While many new products, as usual, were being displayed on the convention floor, most seemed to involve minor tweaks and improvements, rather than radically new approaches.

“That’s because of the total collapse in investment capital,” said Margaret Greene of BellSouth, chmn. of USTA. She said there were no major new technologies because both operators and vendors had been forced to axe R&D spending: “Manufacturers are in a near-death spiral.”

The “stifling regulatory environment” caused the collapse in capital and R&D, USTA Pres. Walter McCormick said in an interview. He said “a whole new world of products” was “not happening because not a single person knows what the regulatory environment will be.”

“Total deregulation just has to happen,” McCormick said. He said the govt. already had deregulated all of the industries that previously faced common carrier-like regulation such as wireline, including railroads, trucking and airlines: “The time for [telecom] deregulation has come.” Greene agreed, saying in an interview that prolonged govt. regulation of railroads “basically killed” that industry: “If they don’t deregulate, they very likely will kill the wireline industry.”

McCormick and Greene were less clear on how total deregulation of wireline would occur. McCormick suggested it could happen through court action, and Greene cited “a lot of action” at the state level, but neither suggested specific plans for a major national campaign. McCormick said deregulation was the main issue at USTA meetings before the convention: “One of the big misperceptions is that this is an RBOC issue. But it’s an issue for the entire industry. It begins with a recognition of a common problem, and I believe there’s now an overwhelming consensus on that.”

Greene said telecom companies weren’t necessarily committing more resources to lobbying govt. for overall deregulation, but she believed they would redirect efforts from pressing for individual deregulatory actions and toward an overall philosophy of deregulation. Officials acknowledged that generating public support for deregulation would be harder than for airline deregulation, when airline fares were unreasonably high. But Greene said the recent loss of thousands of jobs was creating employee and union pressure for change: “Our biggest ally is the CWA.”

Delays with the Triennial Review order are an example of the need for overall change, rather than dealing with individual issues, Greene said: “Every day that goes by without the Triennial, people become more concerned. There’s an increasing sense of frustration.” With appeals and other actions, the “best case” for the rules’ being final is 2007, she predicted, with the possibility it could take decades, as has been true with the Computer decisions that still are under appeal.

“Meanwhile, technology is exploding,” Greene said: “There’s a fundamental mismatch in clock speed” between technology and govt. regulation. “That’s a recipe for disaster,” she said. “Regulation has killed other industries, and we may be on track for the same thing.”

The real reason for the Triennial Review delay may be the loss of a philosophical basis to justify regulation, Greene said. McCormick agreed there no longer was a philosophical justification for regulation: “The real issue is whether the markets are truly contestable. If they aren’t, it’s difficult to have full economic deregulation.” But he said the telephone market clearly was contestable, as evidenced by the rapid growth of wireless and the arrival of competitors such as cable. McCormick said the industry had been pushing for “regulatory parity” with such industries, but had come to realize that “regulatory parity really means deregulation.”

Neither McCormick nor Greene envisioned total deregulation of the wireline industry, they said. Greene said there would remain areas where there was no viable competitive alternative to the incumbent wireline operator, and they should be regulated and have universal service rules. McCormick said there would continue to be regulation on an antitrust basis, and on issues involving such things as consumer protection and safety.

The alternative, they said, is a complete stall of the telecom industry. Greene compared it to a “standing derailment” of a train, in which the infrastructure just collapses under it: “Once upon a time, that was inconceivable” for the telecom industry.

The lack of investment caused by the lack of regulatory certainty was clear on the convention floor, McCormick said from an office overlooking the floor. He said companies couldn’t show a business plan with enough assurance of success to convince Wall St. to provide funding for new projects: “As a result, there’s complete stasis.” Greene cited the example of what she called an erroneous Wall St. Journal article predicting more deregulation via the Triennial Review. The stock market immediately boosted the market value of USTA members by $15 billion, she said, then took all that valuation back within days when it appeared the article’s prediction was wrong. “This just shows there is money out there waiting to be invested,” Greene said. “It’s just not going to come into this industry in this environment.”