Friday, June 8, 2018

Pay Attention to Product Life Cycles

The demise of long distance was the first indication that product life cycles operate in the telecom industry, as they do in all other industries. Decades ago, profits from the lucrative long distance calling business (driven by the business segment) were used to support money-losing consumer operations.

Once that ceased to be the case, service providers had to turn elsewhere for revenue and growth, notably to mobile services, which has been the global growth driver for decades.

Skype and other over the top alternatives have made the decline sharper.  

“Unintended consequences” might represent the more-significant of outcomes from the last two major transformations of U.S. telecom law.

The breakup of the AT&T system--a historical anomaly, as it turned out--was designed to “solve” the problem of high long distance prices. The Telecommunications Act of 1996 was intended to “solve” the problem of high prices for local telecommunications services.

The 1984 divestiture completely missed the coming role of mobile services. In fact, mobile arguably had more to do with falling long distance prices than did competition among fixed network service providers.

The U.S. Department of Justice concluded in 2007 that divestiture did not work as expected, and that similar outcomes (much lower prices and much higher usage) would have been produced by less-complicated measures.

The 1996 Telecommunications Act, likewise, was supposed to introduce local telecom competition, in the same way the the 1983 breakup of the Bell system was intended to spur competition in long distance voice.

The Act opened competition in the “local” telecom business, initially driven by mandatory wholesale policies that allowed new competitors wholesale access to existing facilities, and then on a reliance on facilities-based supply.

What was missed? The internet. Ironically, to the extent the Telecommunications Act of 19996 has succeeded, it is because of value created by the internet and its apps and services, not new competition for local voice services.

The point is that, however well intentioned, major efforts to revamp communications policy have succeeded (in a generous interpretation)  “despite the new policies,” as much as “because of the new policies,” as maturing product life cycles eviscerated the very markets policymakers tried to make “more competitive.”

It is the two major unintended developments--mobility and internet--that have lead to higher value and lower prices for consumers, not the intended changes (breaking up AT&T, opening local telecom to competition). In the case of the divestiture, policymakers missed mobility; in the case of the Telecom Act, they missed the internet.

The point is a huge dose of humility should be brought to the whole process of shaping policy to promote investment and competition in communications facilities and services. Our track record is not very good.

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