First the prequel: In the immediate aftermath of the passing of
China’s revolutionary leaders, Mao Zedong and Zhou Enlai, a claque
of left-wing hardliners known as the “Gang of Four” sponsored by
Mao’s widow, Jiang Qing, launched an effort to block pro-market
reforms. They did not succeed, and China began a long, robust
economic expansion.
America’s has its own “Telecom Gang of Four” which helped create
a telecom meltdown that threatens, if unchecked, to become a
“telecom nuclear winter.” WorldCom’s disgraced CEO, Bernie Ebbers,
has been made Public Enemy Number One. His company’s financial
fraud did great harm to his company, its employees and investors.
But greater harm was done to the now-devastated sector by four
people whose actions contributed mightily to the telecom bubble and
the meltdown that followed. And they, like the originals, had a
sponsor.
Meet the “Telecom Gang of Four”-two of whom are still at large:
(1) Senator Ernest “Fritz” Hollings; (2) former FCC Chairman Reed
Hundt; (3) immediate past FCC Chairman William Kennard; and (4)
current WorldCom CEO John Sidgmore. Their “Madame Jiang” patron was
former Vice President (and possible 2004 Presidential candidate),
Al Gore. All played a lead role in telecom’s crash.
Senator Hollings. He has used his
senatorial powers to block the Baby Bells and deregulatory reform
at every turn for twenty years, spearheading legislative efforts to
hamstring the Bells in the drafting of the 1996 Act. Had the Bells
been allowed into long distance sooner, the triopoly price
structure that was artificially sustained to benefit the three
largest firms would have collapsed, and prices would have
plummeted. The existence of a price umbrella also encouraged
over-building of facilities which could not be fully used because
Senator Hollings and his allies on the Hill and at the FCC blocked
deregulation for the Bells.
Reed Hundt. President Clinton’s first
FCC chairman deliberately tilted the post-1996 Act rules of the
road against the Bells. He also blocked early vertical
re-integration of local and long distance (the aborted 1997
AT&T-SBC merger). Finally, he favored a chosen industry — new
local resale entrants subsidized by FCC policy. (Hundt knew which
firms he had helped in the competitive arena: after leaving office
he linked up lucratively with one such entrant.) Hundt marveled in
his memoirs at how the Bells thought he would pass up the
opportunity to determine the industry’s winners and losers — to
be, as he put it, “master builder” of the new age. The results do
not enhance his résumé today.
William Kennard. The second
Clinton-era chairman, Kennard used his agency’s power to delay
mergers so as to extort concessions from SBC and Verizon that
further hampered their efforts to compete effectively. He forced
them to enter new markets without regard to economic viability,
subject to fines paid to the Treasury if the Bells withdrew before
three years passed. He made them sell their network facilities at
steep discounts, and forced them to forego judicial review of the
merger conditions. In doing so he effectively created special rules
for the Bells, bypassing the agency’s normal procedure, and thus
evading judicial review. Kennard also opened up Bell company
central offices and “last mile” lines to pervasive
micro-management, rendering them de facto community property to
subsidize non-Bell competitors.
John Sidgmore. In 1996 Sidgmore was
Chairman of UUNet, the company that managed half of domestic
Internet traffic. Around the time UUNet was acquired by WorldCom,
Sidgmore claimed that traffic on the Net was exploding at 100
percent per quarter. But by 1997 Net traffic was, by most measures,
roughly only doubling annually. The larger number, not revised
until after the telecom bubble burst, was widely believed in the
industry and in government, as UUNet was by far the largest carrier
of Internet traffic and thus presumably had the best knowledge of
actual volume. The vastly over-hyped figure spurred countless firms
to over-invest in facilities to cash in on an anticipated data
services boom that suddenly fizzled.
Al Gore. The former vice president
once joked on late night TV that voters should remember that he had
invented the Internet and that he could take it away. Gore’s
pro-regulatory approach, pushed by his ideological soul mates Hundt
and Kennard at the FCC, took much of it away from the Bells. He
provided strong White House support for keeping telephone companies
shackled, while he switched to deregulation for the industry that
as senator he had branded “the Cable Cosa Nostra.” Accordingly,
cable got a huge head start in broadband, one the Bells, even if
freed, will be hard pressed to overcome.
Thus did the Telecom Gang of Four and its Clinton White House
patron block full deregulation, market price competition and
industry consolidation. And thus did the meltdown in the telecom
sector reach epic proportions. Without rollback of the Gang’s
policies, there is a grave risk that the industry will implode.
Given the value of the tech sector to the overall economy, this
catastrophe must not be allowed to happen. The original Gang
of Four’s ideas were not good for China’s future. The Telecom
Gang’s ideas have already inflicted — and so long as the rules
they pushed hold sway surely will continue to inflict — vast
economic harm.
It is time for the new Gang of Four to be consigned to the
dustbin of history — by methods gentler than visited upon Mao’s
widow and her cohorts, but quickly and decisively. Then telecom can
revive and help power the next wave of New Economy growth,
conferring lasting benefits on investors and consumers.
