All Commentary
Monday, May 1, 1995

Phones and Freedom

A Free Market Is the Most Fertile Environment for Human Progress

Mr. Mattocks, a telecommunications specialist, resides with his family in Bellefonte, Pennsylvania.

After a recent departmental meeting at work, my boss asked a colleague and me to stay and discuss progress on a common project. After we had dispensed with the business at hand, the discussion moved on to new topics and an open-ended question and answer period. In this relaxed atmosphere I asked my boss to bring me up to date on what was outlined on the blackboard behind him: a recent proposal by an alternative long-distance provider for cutting our telecommunications costs. We are mutually responsible for providing technical support to a relatively large company with its own telephone switch and so I am curious to learn all I can about this dynamic field.

He went over the physical layout of the company’s equipment and services, highlighting the advantages and improvements that had been made over the competition’s current approach. This was one of the “big three” long-distance companies and a sizable investment of billions of dollars had been made in building transmission towers and installing sophisticated state-of-the-art equipment and software, all for the purpose of acquiring new customers in order to make a profit. At this point, my colleague made an interesting statement–one of those remarks that grabs your attention but you don’t know why until you think about it later. He said, “I don’t know how these companies can justify all this duplication of equipment,” or something along that line. The wheels inside my head began turning as the conversation drifted off to other topics.

Yes, how can companies like these justify the expenditure of billions of dollars to duplicate something that is already there? I was intrigued by the sentiment I had just heard–genuinely and honestly expressed–one of those attitudes that are the real root causes behind much of what goes on in our world.

I am not being judgmental. We all have first impressions that often are out of our mouths before being processed by our brains. But as I gave my colleague’s honest query more thought I began to see in a microcosm much of the wisdom and many of the benefits of the free market philosophy, along with the disadvantages of its alternative. Let me explain.

The Benefits of Competition

In our community, within one block there are two supermarkets, each with its own bakery and deli and aisles upon aisles of foods in every shape and form. Within the same block are three banks, each offering competitive rates on certificates of deposit, home equity loans, and checking accounts. These enterprises compete against one another for customers and must do so at the right price and by providing the best value for that price. They all have expenses which include the cost of their property, equipment, labor, and advertising. The more efficient a firm’s system of providing goods and services at the lowest possible cost, the greater its profit and chance of survival. The joint pressures of price competition, cost containment, and creativity in providing new goods and services to attract and keep customers all result in lower prices and more readily available goods and services for the entire community.

If we were to complain that all this expense was unnecessary—or, more fashionably, that the duplication was environmentally wasteful—we would be shooting ourselves in the foot. If we were to grant only one supermarket owner, or one banker, the exclusive privilege of providing these goods and services (or worse yet have a government grocery store or a government bank), he would no doubt get rich (charging monopoly prices) and lazy (less incentive for more efficient operations). Prices would be higher and there would be less attention to consumer convenience as we all went to do business at the same place (services would not be as readily available).

Boris Yeltsin, the maverick Muscovite who championed political freedom in Russia in the late eighties, comments in his book Against the Grain about his first trip to an American supermarket. “When I saw those shelves crammed with hundreds, thousands of cans, cartons and goods of every possible sort, for the first time I felt quite frankly sick with despair for the Soviet people. That such a potentially superrich country as ours has been brought to a state of such poverty! It is terrible to think of it.”[1] He had experienced firsthand the alternative to “not being able to justify all that duplication,” the alternative to the one supermarket/one bank per community concept that had been implemented in his native Russia. He came to this conclusion: “If one accepts the private ownership of property then this means the collapse of the main buttress that supports the state’s monopoly of property ownership … we soon realize that we are practically the only country left on earth which is trying to enter the twenty-first century with an obsolete nineteenth-century ideology; that we are the last inhabitants of a country defeated by socialism.”[2] It should have come as no surprise to find out that when the Iron Curtain fell, it was discovered that much of the U.S.S.R.’s telecommunications infrastructure had not been upgraded for many decades.

Market Forces at Work

Gas stations, convenience stores, hardware stores, and fast-food restaurants are other businesses where we see these same market forces at work. Despite the advantage of being able to eat Mexican, pizza, burgers, chicken, or fish, each a different night of the week, it is natural to wonder, “Where is the saturation point?” Perhaps the answer is in a simple equation: where supply is greater than demand, or where a good return can no longer be received from the capital investment necessary to compete profitably. Or even simpler yet: where there are too few paying customers. The more entrepreneurial among us defy the saturation point daily, thinking of ways to create new demand for their products and services. They offer their wares at better prices, provide them more conveniently, make them better quality or with new added value that no one had thought of before.

Though not as readily visible, there exists a market for long-distance services, whose participants are influenced by the same forces as the grocery store owner and the banker. Since the divestiture of AT&T’s Bell System in 1984, Sprint and MCI’s increasing participation in the national telephony market has had effects similar to those we have discussed in local retail markets. Long-distance rates have dropped an average of 40 to 45 percent,[3] and every day we hear of new, gee-whiz services available over our plain old telephone service line.

In fact, industry analysts point out that “during the last decade, the lessons and benefits of long-distance telephone competition have begun to echo in the local telecommunications marketplace. Business users have begun to appreciate and demand more choices for vendor diversity, for network reliability, and cost savings. Other states including Washington and Maryland have joined New York in authorizing local telephone service competition.”[4] Like MCI and Sprint ten years ago, two new competitors in providing local dial-tone service are Metropolitan Fiber Systems (MFS) and Teleport Communications Group (TCG). MFS currently has networks in 18 cities and an additional 13 under construction. TCG has service available in the New York metropolitan area with seven other states targeted for expansion.[5]

These established players are now looking over their shoulders at some major new and potential entrants. Cable companies, cellular/wireless alliances, and long-distance companies interested in saving on access charges they must pay to local Bell operating companies are beginning to enter the playing field. Time Warner (whose entry into the Rochester, New York, market has been called the most significant step so far in promoting local competition[6]), Cox Cable, Viacom, and TCI are cable companies that could offer phone services.[7] AT&T is in the process of acquiring McCaw Communications, the largest cellular service provider in the United States. MCI has invested more than a billion dollars in Nextel, a special mobile radio company that uses a technology to compete with cellular. Sprint has formed an alliance to bid for personal communications services licenses, and merged with Centel to provide cellular services.[8] MCI’s Metro subsidiary is building a metropolitan area network in Atlanta to compete for local phne service there, part of its plan to spend two billion dollars this year constructing fiber-optic networks in the 20 largest U.S. cities.[9] And low earth-orbiting satellites may also become part of the telecommunicating landscape in the future.

“The End User as King”

With all these companies stumbling over themselves to provide the least expensive, most efficient, most ingenious system of local phone service, whom do you think will benefit? In an article entitled, “The End User as King,” industry pioneer Craig McCaw is quoted as having said, “Our customers don’t care whether we use TDMA, CDMA (communications technologies/protocols) or spaghetti. They only care that we provide them with the services they need, when they want them, and at a price they can afford.”[10] Two other consultants and telecommunications industry analysts stated it in similar terms, “The more competitors there are in a market, the more competitive the market will be, which will bring down prices and increase service quality”;[11] and, “Business users are likely to benefit from improved quality and reduced prices.”[12] Dr. Joseph S. Kraemer, Managing Director of EDS’s Communications Industries Consulting practice, notes that “in response to competitive threats, local exchange carriers (LEC’s) are rapidly implementing new services, cutting costs, improving productivity and accelerating the deployment of new technology, all of which benefits the LEC’s customers.”[13]

Cries can nonetheless be heard for government intervention, regulation, and a return to the good old days. Kraemer has identified a number of regulatory attitudes and actions that “could either delay or stop local exchange competition.” He adds: “Without a credible competitive threat, the incentive to continue to improve productivity and accelerate technology deployment will be eliminated.”[14] Turning the table around, the regional Bell operating companies have rightfully asked to be freed from the restrictions preventing them from competing in the cable and long-distance markets.

In all the talk about an “information superhighway” and the “national information infrastructure” the key question is: Will it be public or private? Here again we see a replay of a monopoly’s or government’s sluggishness versus the speed of the free market. Vice President Gore has been an outspoken proponent of government intervention and in 1991 proposed spending two billion dollars of taxpayers’ money for research and upgrades in hopes of channeling private investment activity. Informed critics said this top-down approach would create a very elegant network “but it may be obsolete by the time it’s deployed.”[15] In a typical week’s telecommunications news, the private sector announces plans and demonstrates prototypes, while the White House says it will take slightly longer than previously expected just to name the members of a task force.[16] A perceptive letter to the editor in one trade magazine stated, “I am not the least bit interested in having the federal government take the lead with regard to the information highway. The agony and confusion in corporate information systems during the last decade in dealing with mainframes, PCs, workstations, networks, etc., will be dwarfed by the problems accompanying federal leadership.”[17]

A host of companies are vying for customers in the potentially lucrative market currently dominated by online services providers CompuServe, Prodigy, and America Online.[18] PC software giant Microsoft now offers online commerce with its Microsoft Network online service, and giants IBM and (once again) MCI have respectively launched their IBM Global Network and marketplace MCI offerings with e-mail, electronic software distribution, and multimedia online catalogs and ordering systems.[19]

Whether in supermarkets, banking, or telecommunications, a free market unhampered by government intervention is the most fertile environment for human progress and for the best allocation of scarce resources. Temporary setbacks notwithstanding, this truth will win out in the end. We will do better to cooperate with it than to endure the hard lesson learned by nations that ignore the simple yet profound principles of freedom.

1.   Boris Yeltsin, Against the Grain (New York: Summit Books, 1990), p. 255.

2.   Ibid, p. 262.

3.   David Buerger, “It’s Time for Competition in the Local Loop,” Communications Week, April 19, 1993, p. 70.

4.   Paul Keleher, “Local Exchange Competition- Are Users Ready for Another Divestiture?”, Telecommunications, December 1994, p. 45.

5.   Robert O’Brien and Dolores Kazanjian, “Competitive Access Providers Enter Local Dial Tone Market,” Telecommunications, October 1994, p. 17.

6.   Annie Lindstrom, “Rochester Telephone to Open Competition,” Communications Week, May 23, 1994, p. 103.

7.   Dr. Joseph S. Kraemer, “Local Competition.” In “Changing Ground Rules for Network Access,” a supplement to Business Communications Review, September, 1994, p. 8.

8.   Ibid., pp. 7, 8.

9.   Mary Thyfault, “MCI Details Local Plans,” Information Week, May 2, 1994, p. 18.

10.   Charles F. Mason, “The End User as King,” Wireless, Sept./Oct. 1994, p. 64.

11.   John Rendleman, “MCI Reaches Out to Grab Share of Local Service,” Communications Week, date unknown.

12.   Annie Lindstrom, “Looming Local-loop Battle is Good News for Users,” Communications Week, April 19,1994, p. 59.

13.   Kraemer, op. cit., p. 10.

14.   Ibid.

15.   Peter Coy, “How Do You Build an Information Highway?” Business Week, September 16, 1991, p. 108.

16.   Annie Lindstrom, “NII: Gov’t Delay, Private Sector Advances,” Communications Week, December 20,1993, p. 49.

17.   Jules Jacquin, “Feds Keep Out!”, Information Week, February 14, 1994, p. 6.

18.   Clinton Wilder, “Prodigy in Two Parts,” Information Week, December 19, 1994, p. 20.

19.   Clinton Wilder, “Microsoft Going Online,” Information Week, November 28, 1994, p. 15; Joe Paone, “IBM Creates Its Own Internet,” Midrange Systems, September 16, 1994, p, 1; John Rendleman, “Collaboration Objective of Network-MCI”, Communications Week, September 19, 1994, p, 1.