Telecom Ownership Needs to Be Diversified
"The Hill" October 20, 1999
The Telecommunications Reforms Act of 1996 is a lemon and it's not hard to understand why. When the bill was written, special interests had a seat at the table, but consumers, in whose name the bill was advanced, did not. Despite the pro-consumer benefits it was hyped with, the Act represents Congress' attempt to cater to the fundamentally irreconcilable interests of the telecom industry's big incumbent players and their big-business customers. Because Congress gave prime consideration to the Act's impact on big business, not the average consumer, the Act's ultimate futility was guaranteed. To believe that the Act is working in the interests of consumers, rather than big businesses, you have to agree with its perverse logic: that is, that the Act must raise prices in order to lower them; overregulate in order to deregulate; plow up the proverbial playing field in order to level it; and increase concentration in order to increase competition. I'll confess to a preference for common sense over Orwellian logic, and therefore I've never been on the Act's bandwagon and never will be. Common sense tells you that the higher telephone, cable TV, and wireless bills that consumers have been paying since 1996 aren't going to drop, and the increasing concentration among companies in the telecommunications industry isn't going to stop. In perhaps its greatest irony, the Act has succeeded in laying the foundation for more regulation, more concentration of control, and higher rates, even as it proves that competition, not regulation, produces better service at lower prices. Let's focus for a moment on the consequences of the increasing industry concentration the Act has spawned. Why is this happening? because more venturesome companies are acquiring telecom businesses so they can expand into new markets, and this, in turn, forces more conservative companies to either increase their share of their existing markets by buying out their competitors --or sell out. Thus has the Act remade seven Regional Bell Operating Companies into four, created the two largest long-distance telephone companies out of the original four largest, and transformed what was widely called "Ma Bell" into what is now being widely called "Ma Cable." Depending on your perspective, you can view this merger mania as a rational marketplace responding to an irrational law, or as a gratuitous industry sellout of consumer welfare for corporate profit. But on one point there can be no disagreement: whatever its causes, and whatever its ultimate effects on the industry and on different classes of consumers, this telecom industry merger cotillion leaves would-be industry entrants and small telecom businesses without partners while the big players dance. Since new entry and the ability to grow existing businesses are key components of competition, and since competition is the surest way to achieve the goals of better service and lower prices, trampling small business underfoot in the industry's dash to consolidate ill serves consumers' interests. Small businesses have always faced substantial problems in trying to become independent, long-term players in the telecommunications market. These problems have been even more severe for members of minority groups and for women, because they have historically found it more difficult to obtain necessary capital. But the sheer size and scope of the industry concentration incentives unleashed by the Act have made what was once a high barrier well-nigh insurmountable. While nobody might have reasonably expected a small business to acquire either TCI or Sprint, for example, it's easy to forget that telecommunications industry transactions today are routinely valued in excess of $1 billion. Even radio, which has always been a comparatively easy telecom industry segment to buy into, has been priced out of range of most would-be entrants: in today's market multiple-station acquisitions are necessary, and significant radio station deals are averaging above $6 billion. Telephony and cable prices are also high, with average cable deals hovering at about $2 billion, wireline telephony deals between $5 and $10 billion, and wireless telephony deals between $1 and $2 billion. Even worse, these megaprices aren't the only barriers small businesses encounter in trying to enter and survive in the telecom industry today. The tax code adds insult to injury by making cash sales less attractive to sellers than stock-swaps. So new entrants and smaller incumbents, which typically finance telecom acquisitions through cash rather than like-kind stock transactions, are less-preferred purchasers than large incumbents. But what should Congress do? Clamp down on merger activity? Insist that hopelessly-outdated FCC ownership restrictions be retained? Rush to concoct new telecom ownership "opportunities" that, in the real world, present small business with only one real opportunity, the opportunity to fail? None of these would succeed because all of them --like the Telecom Act -- ignore marketplace realities instead of working with them. What will work is to give established telecom industry players economic incentives to deal with new entrants and small businesses that counterbalance the incentives they currently have to deal with larger companies. Last week Communications Subcommittee Chairman Conrad Burns joined me in introducing the Telecommunications Ownership Diversity Act of 1999. The Act is intended to promote entry into the telecommunications industry during this period of restructuring by providing carefully-limited changes to the tax law. These changes will level the playing field for new entrants and small businesses by giving telecommunications business sellers a tax deferral when a property is bought for cash by a small business telecom company. The Act will also encourage the entry of new players and the growth of existing small businesses by enabling the seller of a telecom business to claim the tax deferral on gain if it invests the proceeds of any sale of its business in purchasing an interest in an eligible small business. The telecommunications businesses eligible for this capital gains tax deferral are broadly defined to include not only broadcast and cable TV-type businesses, but also wireline and wireless telephone service providers and resellers, Internet service providers, information technology hardware and software companies, and video service providers. The Secretary of the Treasury is directed to establish the eligibility criteria for small businesses and individuals to qualify, based on the characteristics of the different types of telecommunications businesses and on actual data from recent marketplace transactions. In setting these limits the Secretary is empowered to establish different qualifications for different classes of eligible purchasers, such as minorities and women, to the extent consistent with law. To eliminate the potential for abuse, the Act would require the eligible purchaser to hold any property acquired for three years, during which time it could only be sold to an unrelated eligible purchaser. The General Accounting Office is required to thoroughly audit and report on the administration and effect of the Act every two years. I could say that, by utilizing tax deferral options in this way, we would simply be sharing with smaller companies a portion of the investment benefits our tax laws give to major telecom companies. That would be accurate, as far as it goes. But the real need for this Act is much more fundamental, and much simpler, than that. Hallmark developments in the telecommunications industry have been made by gifted individuals with small companies and unlimited vision. In this sense the telecommunications industry is a true microcosm of the American free-market system, in which the benefits produced by its entrepreneurs generate benefits that extend to all of us. It is therefore critically important that new entrants and small businesses have a chance to participate across the broad spectrum of industries that will make up the telecommunications market in the Information Age. We have an chance to make sure that, at the end of the day, we won't regret what "it might have been" for small business. We have a chance to make sure that, at least when it comes to new entry and small business, the Telecom Act lemon gives us lemonade, not just a sour aftertaste. By enabling individuals and small businesses to use Telecom Act-generated industry restructurings as opportunities for expansion, we will keep faith with those who have been, and remain, enduringly valuable contributors to our free-market system and to our individual consumer welfare.
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