Deregulation's big lie

FCC chairman Michael Powell says the WorldCom debacle may result in more telecom mergers. So who ends up losing? We all do, explains one industry expert.

Published July 16, 2002 7:30PM (EDT)

If the latest multibillion-dollar accounting scandal shuts down WorldCom, a worst-case scenario could see some 20 million customers losing their dial tone. To prevent this data-death fallout, Federal Communications Commission chairman Michael Powell suggested, in an interview in Monday's Wall Street Journal, that a Baby Bell might be allowed to buy the nation's second-largest long-distance carrier to keep the phone and data lines open.

Wait. A large regional phone carrier eating up a major long-distance provider? "Hello, this is Ma Bell calling!"

This isn't how things were supposed to happen. The breakup of the AT&T monopoly in 1984 was designed to end monopoly control of phone services. The further deregulation of the telecom industry after the Telecom Reform Act of 1996 also promised that increased competition would bring lower prices and better service to consumers.

But Robert McChesney, a professor at the Institute of Communications Research at the University of Illinois at Urbana-Champaign, argues that it's precisely the deregulation of the telecommunications industry that has led to the current industry crisis. And according to McChesney, Powell is little more than a tool of free-market absolutists, accelerating the reconcentration of control in the industry -- only this time, without any government oversight to make sure that customers don't get taken to the cleaners.

The author of "Telecommunications, Mass Media, and Democracy: The Battle for the Control of U.S. Broadcasting, 1928-1935" and "Rich Media, Poor Democracy: Communication Politics in Dubious Times," McChesney explained his views in a phone interview with Salon.

FCC chairman Michael Powell said that the current "utter crisis" in the telecom business could be a reason to allow a Baby Bell to take over WorldCom. What's your reaction to this?

It shows what a big lie deregulation was based on.

The big lie of deregulation was that by letting these companies do whatever they wanted with much less oversight, competition would force them to better serve the public with lower prices and better service through the force of market competition.

But what "deregulation" really means isn't [a kind of] deregulation where there is no regulation [at all]. It just means regulation on behalf of powerful interests with no one representing the public. So these companies totally fleeced the public and left everyone -- their shareholders, workers and taxpayers -- holding the bag.

And we got worse service; prices have come down marginally in some markets, but I think that most economists think they would have come down much more dramatically had there been genuine competition. So, we have the worst of both worlds. We have concentration without any public oversight or much less public oversight.

And that's the deplorable situation we're in today, where we have a company like WorldCom, which controls an enormous percentage of Internet traffic, teetering on the edge of going out of business. It would have been unthinkable for this to take place six years ago. It used to be if you're going to have highly concentrated markets at least the government would be there looking out for us. Now, that's gone.

And having Michael Powell in charge of representing the interests of the public, the taxpayers and the citizenry vis-à-vis large corporations is similar to having Jeb Bush's secretary of state in Florida, Katherine Harris, be in charge of Al Gore's recount team. He's even admitted that he has no notion of what "public interest" means.

Why's that?

Michael Powell makes his father look like Thucydides.

He is a free-market-spouting politician who thinks that markets can do no wrong. Even in situations like communications markets, which are highly concentrated and are regulated as public services everywhere in the civilized world. And he came into office saying that he just didn't understand the whole notion of public interest regulation or public service.

He comes in with this sort of theological zeal for free markets, greased no doubt by a decade of being wined and dined by the Cato Institute and the Heritage Foundation, and having no doubt a golden carpet laid in front of his feet by people trying to kiss up to his father. He's unprepared to really deal with the magnitude of a crisis like this, which requires a real understanding of the role of regulation to protect the public interest of a vital national resource like communication.

Do you think that if a Baby Bell is allowed to buy WorldCom it will be a step back toward the kind of monopoly that the breakup of Ma Bell was supposed to end?

Look at what's happened since 1996.

In 1996 when the Telecom Act was passed, it explicitly deregulated ownership in the telecommunications field.

At that time, we had maybe 12 major companies -- the seven Baby Bells, AT&T, Sprint, GTE, MCI, maybe WorldCom was coming up then.

And we've had a lot of small companies try to start up in the meantime. But basically that group of 12 companies has now shrunk in half due to mergers.

The seven Baby Bells have swallowed up GTE and merged down to four companies. We've had AT&T go on to be the biggest cable company in the country, although that's now in the process of changing. But what we've seen is tremendous consolidation, not expansion.

And this process is continuing. The irony here is that we're returning to a totally concentrated situation with the difference being that now we don't have the formal legal protections written in the law so that there can be oversight to make sure that we don't get fleeced.

The key part of the deal for the telecommunications industry in the regulatory system that existed in this country from the 1930s until 1996 was that it let these monopolies and semi-monopolies rake in profits.

They let them make a killing and not have any competition, and the public paid for that with all the things that happen in monopolies. But also the trade-off was that it forced these companies to provide universal service.

That was the deal. That was what the public really got out of it, because left to the market, poor people never would have gotten phones, rural areas never would have gotten phones.

But now the ability to get concessions in exchange for granting these monopoly and semi-monopoly markets is gone.

This is not Michael Powell's creation. But he does have wiggle room within the law that he once again is just incapable of grasping or incapable of wanting to grasp. So closely wed is he to the "anything that makes money for rich contributors of the Republican Party is good" theology that he just can't deal with a situation like this. He really is way over his head. He is just a bagman for moneyed interests.

So, his solution is just to let these guys get bigger. It's understandable in terms of this crisis, someone's got to take over WorldCom, but that's sort of like stopping the bleeding, maybe.

There's a much broader problem that this will lead to that will be much worse, if we just let WorldCom get swallowed up by one of the few remaining Baby Bells.

Do you see the current telecom crisis as a result of the Telecom Reform Act?

I would say that the whole deregulatory environment is absolutely the center of this. And the deregulatory environment not just for telecom, but more broadly with accounting and corporate governance in general that affects all sectors of the economy. But the deregulation in telecommunications, which at one time was a heavily regulated industry -- maybe the most heavily regulated in the country -- combined with the loosening up of accounting and banking and financial regulations, the relaxation or even elimination of those, is clearly what created this crisis.

There is no reason that you would have these sorts of crises otherwise. It's not like this is a sector, like the horse and buggy industry in 1920, that's going out of business.

This is a sector that's booming in many respects. Now, to some extent the problem also is that you just had a traditional capitalist bubble where investment poured in way in excess of what was needed, and that's what business cycles take care of. And that was a factor here too, how much I don't know. But the corruption involved in WorldCom, and all these other telecom scandals, couldn't have existed under old standards of regulation, where you have WorldCom and other telecom companies sort of trading customers to boost the impression of how many accounts they actually hold.

Do you think that calling this an "utter crisis" could be used as an excuse for allowing business interests to do what they would want to do anyway?

Not necessarily. I think there is a genuine crisis, and this is the only solution they're capable of coming up with because they're incapable of thinking in any other way.

What would be another possible solution?

The ideal solution would be to have the relevant committee of Congress immediately convene hearings to take up this whole question of telecommunications and this crisis here, get to the bottom of it and then determine how this industry should be structured, not to do it piecemeal.

It's absolutely too important to let some huge new zillion-dollar corporation be formed, and then say: "Well, we'll take this up in a few years." By then that lobby will be so strong, they'll be flossing their teeth with politicians' underpants. You've got to do it now, ahead of time.

And that would be the democratic and the rational solution. Address the crisis in the legislative arena, have hearings. And you would think that logically you're going to come up with probably some fairly strict standards for accountability, and for consumer protection for these companies and for public service, for things that they're going to be required to do. Those things won't happen if you just sort of let these companies take over a third of the country, and then say: "We'll try to regulate you, after you've gotten back on your feet, and you own half the politicians, and hopefully half the country's forgotten about this crisis by then."

How likely do you think it is that Congress will convene these sorts of hearings about telecom in general?

I think all these politicians in Washington, who have basically been on the take for the last decade, understand that they're out there on some thin ice in the fog with the electorate on this one. And if the economy heads south, and more of these crises ensue, they're going to have a tough time in their constituents. So, I think there's an understanding that they might have to do something.

So, it's an interesting period. It's a little bit up for grabs. It's unclear where we're going to go; a lot will be determined by how much the scandals of this administration and this government get publicized, and how many more scandals emerge. At some point, even with our society's profound ability to let moneyed interests dominate everything, if the scandals get too intense, I think it will force action.

And telecommunications, it's not just like everyone in business is against the public here. It's not to be understood that way politically. There are also strong elements in the business community that would not be happy with WorldCom and a major Baby Bell linking up, because it would raise their prices, and business is one of the main users of telecommunications. So, we shouldn't view it too much in a populist manner, the entire class of capitalists vs. the masses.

One of the things Powell insinuated is that more telecom companies might be coming out with these accounting irregularities.

If they don't, the CEOs there have been asleep at the switch. This was the time to make your killing. Come on, I mean, unless you've got Mister Rogers as the CEO of course you're going to be monkeying around like WorldCom. Look at the money these guys made. If they played by the rules, these guys would be paupers, Ken Lay wouldn't even talk to them as he passed them on the way to the golf course.

By Katharine Mieszkowski

Katharine Mieszkowski is a senior writer for Salon.

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