Sunday, May 03, 2009

The Fantastic World of Monopoly

Telecom Was A Fantasy World Of Monopoly
For most of its life, the telecom industry was simply the telephone industry, primarily offering voice service across a ubiquitous, regulated network. When Bell's patents expired in 1893, the industry became very competitive. Eventually, AT&T managed to create a system of territorial exclusivity, and by the time the Communication Act of 1934 was passed, there was no competition left. So the regulations of the day locked in the monopoly.

Once competition is prohibited, prices can more easily deviate wildly from costs.

A part of telecom policy was the coupling of physical facilities to the services that used them. Telephone wires were owned by the service provider, and were only designed, or upgraded, as that service provider saw fit. This vertical integration was not an issue when the one service that really mattered was Plain Old Telephone Service.
In that era, the main issue was balancing the price of calls vs. the price of the line itself. Only a small portion of the actual cost of telephone service is usage sensitive. Long distance calls, and in some places local calls, were priced far above cost, in order to subsidize the fixed price of local service and pay for the expensive wires up on the poles and under the streets.
This service-driven model quietly started to fall apart in the 1980s when fiber optics became practical. Fiber changed the key economics.
Up until then, high-capacity services were very expensive to provision, so they had to be expensive. Even a measly copper T1 circuit, 1.5 megabits, leased for thousands per month. A strand of fiber was far more versatile, and had enough capacity to "bypass" many billable phone calls. Fiber could have been seen as infrastructure, but that was not compatible with a service-driven business model.

Interestingly, history is repeating itself. Owners of fiber backbones such as Level3are now refusing to sell "dark fiber" and are insisting upon selling services by the month.
This practice (which, by the way, has hurt my own ISP severely; the local cable company got fiber before it started, and now we cannot) can only take place if the owner of the fiber has significant market power -- that is, if there is no alternative provider that WILL lease or sell dark fiber.
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