A recent vote on deregulation by the Federal Communications Commission left many questions unanswered and none of the players in the telecommunications industry entirely satisfied. It was the kind of decision, however, that will affect the future of telecom companies in far-reaching ways, some of them not yet fully understood, according to experts at Wharton and two think tanks.


The February 20, 2003, vote was both technical and confusing and held little immediate import for consumers who use telephones, digital subscriber lines (DSL) and cable Internet connections. What’s more, nothing the commissioners decided is likely to be final until key issues are challenged and sorted out in federal court. Indeed, it is not clear exactly what the five-member panel decided: Aside from some summary sheets handed out on the day of the vote, details will not be known until the agency issues a lengthy report later this spring.


But telecom experts say the vote was a defeat for the FCC’s chairman, Michael Powell, and his attempt to push for continued deregulation of the nation’s local telephone companies. “There were no clear winners and losers in this game,” says David Farber, a professor of telecommunications systems at the University of Pennsylvania who also teaches at Wharton. “Nobody in the telecom industry is very happy. Nobody got everything they wanted.”


“The main news is this is a hit for the chairman, a bad hit,” notes Gerald Faulhaber, professor of business and public policy and management at Wharton and a former AT&T executive.


The scenario leading up to the vote began last year when the U.S. Court of Appeals for the District of Columbia ordered the FCC to revisit some important telecom rules. Powell saw this as an opportunity to make sweeping changes in regulations affecting local phone companies. He wanted to put an end to requirements that the former regional Bells lease their networks at discounted rates to competitors. He also wanted to codify regulations so that states would have little say in telecom regulations in the future. But a fellow Republican commissioner, Kevin Martin, joined forces with two Democrats on the commission to block Powell’s aims, at least in part.


The commission voted 3-2 that the regional Bells must continue to abide by current rules requiring them to lease their existing telephone networks to WorldCom, AT&T and other competitors at low prices established by state regulators. The rules had been put in place following the breakup of AT&T to encourage local phone competition. This vote by the FCC was seen as a defeat for the Bells, which had lobbied for years to do away with the rules. With a Republican administration in the White House and in the GOP in control of Congress – and with Republicans in the majority on the FCC – the Bells hoped their time had come.


However, one part of the split decision went Powell’s way. The commission also voted to end requirements that the Bells lease to their competitors new or upgraded networks for high-speed Internet access (as opposed to their voice lines for telephone service). The Bells have already been installing fiber-optic equipment to replace old network components but have held off making big investments in new broadband services. This part of the decision was considered a victory for the Bells. With the Bells free to set rates, subject to regulatory approval, competitors of the Bells are put on the defensive: They now have to figure out whether they can still afford to offer broadband services to their customers – or should construct their own networks.


Powell issued a partial dissent. That part of the ruling allowing the states to continue their active role in writing their own rules for local telephone rates, he complained, would result in confusion and inconsistency. He also said the vote would spur court challenges and dampen investment in America’s telephone system.


On the day of the vote, the stock prices of the Bells – BellSouth, Qwest, SBC and Verizon – dropped.


“The regional Bells wanted all the restrictions lifted but that was never going to happen,” Faulhaber says, adding that while the Bells have complained about the compromise vote, he suspects the regionals are, all in all, “secretly pleased by the whole thing. Going forward, it gives them more incentives to put in new technologies [for broadband services],” which he sees as a positive development.


“I think it’s damaging that the chairman did not win on the local-competition part of this decision; that could hold back the advent of real competition for a long time,” says James L. Gattuso, a research fellow in regulatory policy at the Heritage Foundation. “The question is whether that’s outweighed by liberalizing the rules for broadband, which was a very good thing in my mind.”


Gattuso, a former FCC staff member, adds: “If you had to have a choice and could do only one thing right, [the commissioners] handled the future right. Broadband is the future. Standard voice telephony [belongs to] the past.”


Robert W. Crandall, an economist at the Brookings Institution, says cable companies could be hurt because the vote may make it harder for them to offer telephony service to their customers, an area of potential growth. Crandall notes that the stocks of cable companies fell slightly on the news of the FCC’s decision.


Farber and Faulhaber agree that the vote will hurt small companies that are broadband service providers of high-speed Internet and network access through DSL lines, T1 lines and dial-up services. The biggest financial impact will be felt by companies, such as Covad Communications, that offer DSL services because they are almost entirely dependent on leasing lines from the Bells, according to Faulhaber. “The companies offering DSL over phone-company lines are small players and they have not been a significant market force for several years.”


Crandall cautions that the complete impact of the FCC’s decision will not be certain for months because of likely legal challenges by the Bells and others. As soon as the commission’s final report is published, “it will be a race to the courthouse.”


Powell’s inability to produce a majority for policies he supports could be a warning sign that deregulation of the telecom sector may slow down, Crandall adds. “Things are changing rapidly in telecommunications. It’s a highly politicized environment. [The commissioners] are subject to enormous political pressures. What I’d like to see is someone willing to make tough political decisions and do something bold. If [Powell] can’t even muster a majority when he has three Republicans on the commission, this doesn’t bode well for doing daring things in the future.”


The next major item on the commissioners’ agenda, Crandall points out, is a set of decisions about how far the government should go in easing regulations restricting the number of TV stations that broadcast networks and newspapers can own. “There’s a lot of populist pressure on them to do something. I fear they won’t be able to take any decisive, bold steps.”