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12 Jun 2005

Telephone deregulation vs. airline deregulation Email

[This doesn't have much to do with e-mail, at least not until the big phone companies take over the Internet market in the US and impose their own Bell-shaped policies on it. So sue me.]

I wish the FCC would revisit the key issue of essential facilities, the bits of the telephone infrastructure that everyone needs to use and nobody can afford to duplicate.

The other day I read a most interesting little book Lessons from Deregulation, by Alfred Kahn, the architect of airline deregulation in the 1980s. It was published a year ago and is available either as a printed book or as a PDF.

Executive summary: he still thinks deregulation is swell.

The first half of the book is about airline deregulation, the second half is about telecom deregulation. I found Kahn's analysis of airline deregulation quite persuasive, not surprising since he was in charge of it. The analysis of telecom was much less persuasive. Kahn has been firmly on the side of the Bells in just about every disagreement. He argues, not unreasonably, that forcing competitors to rent facilities to each other below cost, as many state regulators have done, is no way to create a competitive market, and he thinks that cable and wireless will create true competition, but it seemed to me he was missing something critical.

What struck me at the end of the book is how completely opposite the outcomes of the two deregulations have been. In the airline industry, the old incumbents are all in dreadful shape, being walloped by nimble new entrants. In the telecom industry, after a flurry of competition aided by free money and regulatory pushing, the incumbents are crushing the new entrants and are well on their way to establishing a cozy geographically divided duopoly. What's the difference?

The old-line incumbent airlines (IALs from now on) certainly had their share of both self-inflicted and external injuries, but the old-line phone companies (ILECs, incumbent local exchange carriers, in telecom-ese) did plenty of dumb things, too. The critical difference is that the ILECs owned the essential facilities, and the IALs didn't.

In the airline industry, the essential facilities are airports and air traffic control. Airports are owned by various government agencies and paid for by user fees. ATC has always been Federal and is more or less paid for by ticket taxes.

Imagine a world where the IALs owned the airports. You want to add a route to Dallas? Too bad, American owns one airport, Braniff (which is still in business due to its duopoly profits) owns the other, and neither is willing to sell landing and gate slots at a price anyone else can afford. For a while, the CAB required them to sell Unbundled Flight Elements (UFEs) at a set price, but the IALs all moaned and groaned about how unfair the prices were. Remarkably, despite claims that the UFE prices were below their own costs, none of the IALs ever took advantage of the UFE bargains to invade each other's territory.

When the new entrants complained to the Civil Aviation Board that the legacy airports gave the IALs a stranglehold on access to passengers, the CAB said that rapidly changing technology would level the playing field, citing as an an example a helicopter service between a parking lot in Philadelphia and an abandoned shopping center in southeast Washington DC. Besides, the IALs are promising to roll out personal jet packs, (FTTP, for Flying To The Premises), although a few soreheads pointed out they'd been promising them since the early 1990s and to date they were only available in the financial districts of New York and San Francisco.

Well, enough of that. Nothing like that could ever happen, could it?

I'm hardly the first to advocate separating the ILECs into regulated wire companies and unregulated switch companies, but the more I see of the telecom landscape, the more I believe that we'll never have real competition so long as one party owns a facility that nobody else can afford to replicate. The ILECs have a century of practice assigning costs to infrastructure to show how expensive it is, and they're never going to give anyone else a fair price so long as they can sell it to themselves for funny money.

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