3 Telecommunications Regulation : an Introduction

T HE u.s. TELECOMMUNICATIONS sector is going through a significant change. A number of factors contribute and define this change. The first is the rapid technological change in key inputs of telecommunications and computer-based services and in complementary goods, which have dramatically reduced the costs of traditional telecommunications services and have. made many new services available at reasonable prices. For example, telecommunications cost reductions have made access to the Internet affordable to the general public. The second reason for the revolutionary change has been the sweeping digitization of the telecommunications and the related sectors. Not only has the underlying telecommunications technology become digital, but the consumer and business telecommunicqtions interfaces have become more versatile and closer to multifunction computers than to traditional telephones. Digitization . and integration of telecommunications services with computers create significant business opportunities, impose significant pressure on traditional pricing structures, especially in voice telephony, and threaten the fundamental features of the traditional regulatory regime. The third reason for the current upheaval in the telecommunications sector was the passage of an important new law to govern telecommunications in the United States, the Telecommunications Act of 1996. Telecommunications has traditionally been subject to a complex federal and state regulatory structure. The 1996 act attempted to adapt the regulatory structure to technological reality, but various legal challenges by the incumbents have so far delayed, if not nullified, its impact. . In general, regulation should be used only when it is clear that deregulated markets are likely to fail even in the presence of reasonably strict antitrust en. forcement. Clearly, the success or failure of a market in the absence of regulation depends crucially on the demand and cost conditions under the present