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Call to Patriotism 

If fighting terrorism requires a stimulated economy, no move could be more welcome than the dismantling of Pac Bell

Wednesday, Nov 7 2001
Mayor Willie Brown recently christened the week starting this Sunday as "San Francisco: Open For Business Week." By displaying "America: Open For Business" posters in their windows, the mayor says, San Francisco stores will "let the world know that this city, and this nation, will rise from the ashes of the national tragedy and get this economy moving again."

I'm anxious to see San Franciscans rise from the ashes. So I spoke with Kellie Gillespie, who works at one of several storefronts already displaying the flag-festooned posters -- Arthur J Sullivan & Co., at Market and 15th. "I wouldn't say consumers are coming here more, with the signs," said Gillespie. "But everybody's here in spirit." Sullivan & Co., a Castro District crematorium and funeral parlor, has hosted just one funeral since Sept. 11. So it appears Mayor Brown's sign campaign isn't having its desired effect.

Still, it just so happens that San Franciscans can stimulate the economy in a very real way, without signs or flags, and it's as close as the nearest telephone. In the spirit of true economic patriotism, I'd like to declare the coming seven days "Dismantle Pac Bell Week."

When most people think of the abuses of SBC Communications Inc., the parent company for the Pacific Bell Telephone Co., they usually recall days spent arguing with surly phone attendants over billing errors, or weeks spent waiting to get a phone line installed. But SBC/Pac Bell hasn't just enraged its customers on a regular basis; it's helped ruin San Francisco's once-flourishing technology industry.

Some San Francisco Internet companies failed merely because they were based on nonsensical business plans. But many had bet their hopes on the rapid, cheap construction of high-speed Internet infrastructure, often referred to as "broadband." Early in the Internet boom this wasn't an unreasonable proposition -- innovation, entrepreneurship, and plentiful financing had spawned hundreds of promising businesses based on the idea of providing cheap, high-speed Internet access to the masses. Hundreds of millions more dollars were invested by companies wishing to provide local telephone service, which is used for dial-up Internet connections. But to work, both broadband Internet providers and local telephone retailers had to hook into Pacific Bell's local telephone network. DSL (digital subscriber line) service works by routing high-speed Internet service over local telephone lines already installed in people's homes. Pac Bell now directly serves 80 percent of these DSL customers, renting the other 20 percent to competitors at a wholesale rate of $35 per month. Competing local telephone companies initially hoped to compete by offering superior service and price, by serving niche markets, or by packaging local service with other telephone services. The Matt Smith household, for instance, has Sprint as its local telephone company.

A 1996 federal law urged Baby Bell local telephone companies (and both SBC and Pac Bell were portions of the original national Bell Telephone monopoly, broken up in 1984) to open their markets to long distance competition. But rather than allowing others to use Pac Bell or SBC lines, local-service monopolies quickly realized there was more money to be made merging into behemoths, then using their size to exert monopoly power over their competitors. (For example, Pac Bell merged with SBC in April of 1997.) They flouted provisions in the Telecommunications Act of 1996 that called for fair competition; they delayed and sabotaged the intent of the act, charging unfairly high prices to competitors who needed to hook into Pac Bell's wires.

Partly as a result, affordable broadband Internet service never really happened, and media-based Internet startups -- many premised on the ability to provide video over the Internet -- were never able to offer anything more than a frustratingly slow, hokey-looking facsimile of television. And so they failed.

Hundreds more businesses pinned hopes on retail. Founders of now-ridiculed companies such as Webvan believed that the Internet would dramatically change the way people consumed everything: entertainment, news, pet food, and groceries. But their faith was based on the idea of ubiquitous, cheap, high-speed Internet. Once every household can watch every movie ever made, immediately, for pennies, they wouldn't think twice about pausing to click for dog food, the idea went.

This future never arrived. And these companies also failed. Financing for virtually all Internet-based ventures was completely turned off in the fall of 2000. Hardware companies producing the Internet's backbone saw their stocks plummet. This autumn, financing for startups focused on the next wave of communications hardware -- fiber-optic switching and the like -- ceased. It turned out that the digitally wired future these companies had bet on was far too dependent on the local telephone lines owned by the anti-competition, anti-innovation Baby Bells.

Now, high-speed Internet providers such as Covad Communications, Northpoint Communications, and Rhythm Netconnections have gone bankrupt. Meanwhile, Pac Bell recently hiked the price of its own buggy, badly staffed version of broadband DSL service from $39.99 to $49.99.

"They're harming all of us," says Mark Anderson, publisher of the technology investment newsletter Strategic News Service. "Whether you're a doctor or lawyer, whether you're trying to sell groceries or buy groceries, you're harmed by the lack of a broadband road to customers. It's an offense to the United States and to the world economy."

For the past month, Pac Bell has raised the pitch of its years-long effort to convince state and federal regulators that it has played fair in the local-telephone and Internet-provider market, and so ought to be allowed to expand into the long distance sector. Given Pac Bell's history of monopolizing the local market, this is an absurd claim; even so, regulators seem ready to accept it at face value. But these regulators are mandated by federal law and the California constitution to protect us from abusive monopolies. The fact they would consider Pac Bell's request demonstrates that these are times that try patriots' souls. If we don't act now, turncoat regulators may destroy our collective economic patrimony.

About The Author

Matt Smith


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