The bankers vs. the academics

Robert Konefal, Managing Director, Corporate Finance Group, Moody's Investors Service, said [.pdf] in part, "UNE-P, cable competition, resale, and wireless substition are now having a notable effect on the RBOC's performance. . . We believe the ILECs will suffer a further decline in market share to AT&T and possibly to CLECs coming out of bankruptcy. We also expect the ILECs will continue to invest heavily in new facilities, focusing on DSL and long distance."

When Konefal referred to "wireless substitution" he was saying that many RBOCs are losing local phone revenue because people are abandoning first or second phone lines in favor of cell phones. He failed to mention, however, that most cell phone service is offered by the RBOCs.

Konefal further commented "It is perhaps telling on the state of the CLECs that Moody's has withdrawn coverage of many of them because they have defaulted, filed for bankruptcy, and are not issuing debt. But there is a question as to what happens when CLECs emerge from bankruptcy [protection] with their debt loads dramatically reduced. None of them attained the critical mass to become profitable, so that challenge remains. They also need new capital, which will be very difficult to obtain. However, some CLECs built substantial facilities-based networks and could still be a legitimate threat in certain cities."

Lara Warner, a director at Credit Suisse First Boston, told the FCC [.pdf], "I think it is important to recognize that your goals of introducing competition run contrary to market wishes. The market generally does not like competition introduced into a regulated industry because it many times threatens returns in the short term. The lack of certainty has only exacerbated the situation as the market listens to the rhetoric of both sides and tries to determine the winner. Certainty as soon as possible is important."

Kim Wallace, Managing Director and Chief Political Analyst, Lehman Brothers, agreed [.pdf] that deregulation could be pursued without creating a telecommunications monopoly. He said, "As competition grows in telecom and media markets, or in markets such as wireless services where competition is robust, the agency could justifiably act to deregulate. . . without significantly risking consumer choice."

Although the three Wall Street representatives supported the ILECs, the three academics supported the CLEC point of view.

Barry Nalebuff, a professor at the Yale University School of Management said [.pdf] that there are 24 million broadband users and that they are happy. He said that the incumbents dislike competition and do not innovate. His recommendations included charging a nominal fee for each e-mail to eliminate spam, and "put more pressure, not less, on opening up local markets."

Hal Varian, Dean of the School of Information Management and Systems, University of California, Berkeley, said [.pdf] that the problem was oversupply and lower-than-forecast demand. He said that although there are no easy answers, the FCC should not relax the antitrust and merger guidelines.

Larry White, professor of Economics at the New York University Stern School of Business, said [.pdf], "slack antitrust standards for airline and railroad mergers have had unfortunate outcomes." Pointing to history, he said that such policies have created disasters in the airline and railroad industries.

This split in opinion, between the academics on one side favoring competition and regulation, and the investment community on the other side favoring relief for the ILECs and deregulation, mirrors the split within the commission itself.

1. The playing field and the players

2. Preparing for chaos

3. The bankers vs. the academics

>4. No room for compromise

5. Course unclear