by Archie M. Richards, Jr., CFP^®
March 3, 2003

In the past three years, scores of high-tech companies have gone bankrupt and stock prices have fallen tremendously. The cause was the Federal Communications Commission (FCC), which smothered development of the Internet.

The only value of the Internet is the information it carries. This includes video, music, movies, multimedia, and voluminous data, all of which require enormous information-carrying capacity. The Internet's fiber-optic trunk lines have this capacity (called "broadband"). But broadband connection to the Internet has been put in place for only a small portion of U.S. homes and small businesses.

In the late-1990s, Internet technology surpassed all expectations. Internet traffic rose more than 3,000 times in six years, an increase of 300,000 percent! The government encouraged companies to incur debt to build the Internet. High-tech companies proceeded on the assumption that the FCC would deregulate. Broadband trunk lines were installed, and stock prices soared. But alas, the FCC regulated all the more, as follows:

• It created new layers of price controls.

• It required the sharing of high-speed access lines.

• It micromanaged contract negotiations between competitors.

• It gave new powers to public-utility commissions of the fifty states.

• It perpetuated the absurd distinction between long distance and local phone service. (A call across the continent costs phone companies no more to arrange than a call across the street.) The Commission even added "Internet service providers" as a third tier.

• The FCC required seven wireless carriers in every U.S. region. Given the money needed for investment, seven was too many. But the government prevented the companies from consolidating, causing many to go broke.

• The Commission required local phone companies to rent or sell portions of the Internet to competitors at deeply discounted prices. But the companies didn't want to engage in giveaways to competitors, and the competitors didn't want to piggyback on facilities owned by others. Investment stalled.

• The Commission sold a portion of the electro-magnetic spectrum used for wireless transmissions. A small company, NextWave, bid $4.7 billion on the auction and won. Unexpectedly, the FCC then auctioned additional spectrum. This devalued the portion just sold to NextWave. As a result, NextWave could no longer borrow the funds it needed for development, forcing it into bankruptcy. The FCC therefore revoked its sale to NextWave and resold that portion to other companies for $16 billion. In 2001, a Federal appeals court decided that the FCC had erred.

Incredibly, the Commission then required the winners of the second auction to come up with the $16 billion on ten days notice! For almost two years, until the Supreme Court decided in NextWave's favor, the money was frozen as short-term debt, unavailable for investment.

All in all, the FCC has enmeshed the telecom industry in a Byzantine maze in which few could make money except lobbyists and lawyers. Investment in the Internet has slowed way down. Surviving high-tech companies have been greatly weakened.

In February 2003, the FCC stupidly decided to continue many of its restrictions. The Commission and the Department of Justice even eye the survivors as monopoly threats. Some courts are allowing triple-damage antitrust cases, as if telecom companies were hawking asbestos.

The FCC was created in the 1930s to allocate portions of the radio spectrum, which was then considered scarce. The spectrum is scarce no longer. New technologies can divide it into more useful portions than are needed. The FCC serves no good purpose. The U.S. telecommunications industry needs private ownership of the spectrum and unhindered free markets.

In South Korea, 70 percent of homes and small businesses have broadband. Penetration is also high in China and Japan. The U.S. is falling behind. The FCC has squashed the U.S. telecom industry like an elephant in a flower bed.

I expect the stock market to rise. But recovery would be faster if the FCC were simply disbanded. Its 30,000 employees could engage in activities that benefit humanity for a change. With the FCC gone, the broadband trunk lines that now lie dark would spring to life.