Texas Telecommunications:Texas Telecommunications:Everything’s Dynamic Except the PricingEverything’s Dynamic Except the Pricing

Jerry ElligJerry ElligSenior Research FellowSenior Research Fellow

Mercatus Center at George Mason UniversityMercatus Center at George Mason UniversityPrepared for the Texas Public Policy FoundationPrepared for the Texas Public Policy Foundation

Policy Orientation for State LegislatorsPolicy Orientation for State LegislatorsJanuary 2005January 2005

At a glance …At a glance …

Regulatory reform has benefited Regulatory reform has benefited consumers of most telecom servicesconsumers of most telecom services

Main exception: LocalMain exception: Local

Why?Why?

What can be done about it?What can be done about it?

Equipment competition legal in 70sEquipment competition legal in 70s

1972-87: Phone and PBX prices fell 6-7% 1972-87: Phone and PBX prices fell 6-7% annuallyannually

Phone prices fell by half in 10 years after Phone prices fell by half in 10 years after 1984 AT&T breakup1984 AT&T breakup

BLS real consumer price index for telecom BLS real consumer price index for telecom equipment fell by half since 1997equipment fell by half since 1997

Long-distance competition legal in late 70sLong-distance competition legal in late 70s

Long distance revenues net of access charges

0

5

10

15

20

25

30

35

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

FCC, Telecommunications Industry Revenues (2002), p. 30

Revs/ min

Access char ges/ min

Revs-access char ges

Wireless spectrum doubled 1993-95Wireless spectrum doubled 1993-95

1995-99: Prices fell 17% annually1995-99: Prices fell 17% annually

BLS Real consumer price index, wireless

0.0

20.0

40.0

60.0

80.0

100.0

120.0

1997 1998 1999 2000 2001 2002 2003

Cell phone subscribers outnumber Cell phone subscribers outnumber incumbent telcos’ customersincumbent telcos’ customers

9.16

13.54

2.17

11.37

2001

11.3310.13Mobile wireless

12.5412.95Total wireline

2.272.18Competitor wireline

10.2710.77Incumbent wireline

20032002Texas Subscribers

(millions)

Internet prices continue to fallInternet prices continue to fall

Internet services, real consumer price index

90.0

95.0

100.0

105.0

110.0

115.0

120.0

1997 1998 1999 2000 2001 2002 2003

Source: Authors' calculations based on data at Bureau of Labor Statistics, CPI web site

Broadband continues to growBroadband continues to grow

Growth in Texas high-speed lines

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Dec. 1999* Jun. 2000 Dec. 2000 Jun. 2001 Dec. 2001 Jun. 2002 Dec. 2002 Jun. 2003 Dec. 2003

Source: FCC, High-speed services statistics released June 2004. *Separate categories not available for Dec. 1999.

Total*

Other

Cable

DSL

Local residential rates stagnateLocal residential rates stagnate(frozen by law in 1995)(frozen by law in 1995)

Real local rates (excluding federal subscriber line charge)

$0

$5

$10

$15

$20

$25

Source: Federal Communications Commission, Reference Book of Rates, Price Indexes, and Household Expenditures on Telephone

Service (2003), Tables 1.2 and 1.4. Figures include surcharges and taxes.

Br ownsvi l le

Cor pus Chr isti

Dal las

Ft Wor th

Houston

San Antonio

Why?Why?

Large incumbents’ basic local rates fall Large incumbents’ basic local rates fall $600 million short of covering costs$600 million short of covering costs

Shortfall covered byShortfall covered byMandated excessive intrastate long-distance Mandated excessive intrastate long-distance

access charges ($382 million)access charges ($382 million)Higher charges for vertical features (eg call Higher charges for vertical features (eg call

waiting)waiting)Universal service funding for high-cost and rural Universal service funding for high-cost and rural

serviceservice

How can competitors compete?How can competitors compete?

Lease incumbent’s network at regulated rates Lease incumbent’s network at regulated rates even further below cost than the retail priceeven further below cost than the retail price

Compete only for customers who want packages Compete only for customers who want packages of servicesof services

Use a lower-cost technologyUse a lower-cost technology

Use a technology that creates more value for Use a technology that creates more value for consumers than incumbent’sconsumers than incumbent’s

Avoid stifling new technologiesAvoid stifling new technologies

Voice over Internet ProtocolVoice over Internet Protocol

BroadbandBroadband

Cable telephonyCable telephony

WirelessWireless

Remove cross-subsidiesRemove cross-subsidies

Consumers gain $89 million if intrastate Consumers gain $89 million if intrastate access charges cut to interstate levelsaccess charges cut to interstate levels

Cap basic local phone rates at cost or Cap basic local phone rates at cost or deregulatederegulate

Avoid bailing out incumbents if Avoid bailing out incumbents if deregulated rates fail to cover historical deregulated rates fail to cover historical costscosts

Reform universal serviceReform universal service

Avoid distorting consumer decisions via funding methodAvoid distorting consumer decisions via funding method

Target funding Target funding

Avoid rewarding companies for increasing costsAvoid rewarding companies for increasing costs

Discontinue wireline subsidies where good alternatives Discontinue wireline subsidies where good alternatives existexist

Define desired outcomes and measure whether program Define desired outcomes and measure whether program is causing them to occuris causing them to occur

For further information …For further information …

Robert W. Crandall and Jerry Ellig, “Texas Robert W. Crandall and Jerry Ellig, “Texas Telecommunications: Everything’s Telecommunications: Everything’s Dynamic Except the Pricing,” TPPF Dynamic Except the Pricing,” TPPF Research Report (January 2005). Research Report (January 2005).

Available at www.TexasPolicy.comAvailable at www.TexasPolicy.com