Why Did the U.S. Telecommunications Industry Collapse?

The U.S. telecommunications industry has collapsed. As I write this essay, Global Crossing is bankrupt, WorldCom is near bankruptcy, and Qwest may have narrowly avoided it. AOL TimeWarner has lost tens of billions of dollars of shareholder value since its merger, and AT&T continues to divest businesses after having spent more than $100 billion to buy cable television companies that by 2002 it hoped to sell for half their purchase price. Wireless carriers and equipment manufacturers have lost three-quarters of a trillion dollars in market capitalization between January 2001 and June 2002.

By the summer of 2002, some in Washington indelicately asked, “Does the Federal Communications Commission bear some responsibility for this debacle?” Despite the revelation of accounting fraud at WorldCom and investigations being made of other carriers, it is not sufficient to dismiss the collapse as the result of simple corruption, or in the amorphous jargon of business journalists, “speculative excess.” Joseph Schumpeter’s famous phrase “creative destruction” is mouthed with greater frequency than insight. Yet, it is incorrect to attribute the collapse to the inevitable workings of the invisible hand of the marketplace. The FCC’s hand has been all too visible, explicitly influencing the expectations upon which speculation, and investment, rest.

Two areas of regulatory policy show how the FCC can distort efficient outcomes. One is the FCC’s complex and contentious policies for the mandatory unbundling of local exchange networks. The second is the FCC’s mishandling of Auction 35, the spectrum auction for wireless telephony frequencies that has become frozen in seemingly endless litigation.

Note: Downloadable document is in English and Japanese.

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