The Telecommunications Act of 1996 at 30, Part 1: Why It Was Needed

February 8^th marks the 30^th anniversary of President Bill Clinton signing the Telecommunications Act of 1996 into law. Its passage marked a crucial moment in the history of information and communications technology (ICT) policy in the United States. I was actively involved in the debates leading up to the passage of the Telecom Act during my time as an analyst at the Heritage Foundation in the early 1990s. In this 4-part series, I discuss how the Telecom Act came about, its lasting impact, and the path forward for communications and media reforms.

The Telecom Act’s overall effect has been mixed. The law did help to somewhat move the U.S. away from a convoluted analog era regulatory regime that had served the public poorly. Part 1 in this series looks back at the historical problems that led Congress to pass the Telecom Act. Unfortunately, as part 2 in the series explains, reforms unfolded quite slowly and the law’s ambiguity created new problems. Specifically, the Federal Communications Commission (FCC) continued to meddle in ICT markets in costly, inefficient ways.

Part 3 argues that the best thing about the Telecom Act lies in what it did not do. Specifically, the law treated some sectors (like wireless markets) with a much lighter regulatory touch while largely ignoring other technologies (like the internet, digital commerce, and social media). Immediately after the Telecom Act’s passage, regulators prioritized older sectors, such as wireline telephony, cable television, and over-the-air radio and television broadcasting, over emerging technologies. This was a blessing. By passing a mostly backwards-looking law, Congress created an implicit policy firewall between the analog and digital eras. Regrettably, older sectors continued to labor under mountains of meddlesome regulatory policies. Luckily, however, newer technologies—especially online services, personal computing, electronic commerce, and smartphone hardware and applications—enjoyed general regulatory forbearance and benefited from a presumptive freedom to innovate.

Unfortunately, many problems with the Telecom Act remain because Congress failed to provide a clear vision and timetable for reform, while also leaving the door open to ongoing FCC regulation. Part 4 will focus on the reforms still needed 30 years later.

A Response to Analog Era Regulatory Mistakes

The primary objective of the Telecom Act was “’[t]o promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies.” Congress was responding to the convoluted thicket of federal, state, and local regulations that limited innovation and competition in ICT sectors. The FCC was responsible for much of this problem, but every state also had a public utility commission (PUC) that established entry requirements, regulated rates, and managed market outcomes in various ways.

Geographic monopolies in telephony, cable, and broadcasting developed not by natural market forces, but through intentional political decisions and the imposition of a wide variety of regulatory mechanisms. These included line-of-business restrictions, operating licenses and permits, price controls and rate-of-return regulations, technical device/equipment regulations, and various quality-of-service or access requirements. There were also overlapping and inefficient “universal service” subsidies that distorted markets and reinforced monopolies. Meanwhile, under the theory that the government owned the airwaves, the FCC tightly controlled wireless spectrum allocation and use decisions. As a result, bureaucrats possessed sweeping control over the information means of production for the nation. These policies created direct barriers to new entry, innovation, consumer choice, and free speech.

The Telecom Act was also a response to the 1982 antitrust breakup of AT&T by the Department of Justice (DOJ). Incredibly, the DOJ handed control of the resulting AT&T antitrust consent decree to just one judge on the U.S. District Court for the District of Columbia. This arrangement left him free to dictate important policies for the communications marketplace unilaterally, adding another layer of court-based regulation to what the FCC and the state PUCs were already imposing. With the Telecom Act, Congress looked to reassert its authority over these issues to address this problem.

The “Public Interest” Charade

In sum, for most of the 20^th century, a multi-headed regulatory hydra comprehensively controlled almost every facet of American communications and media technology, with the notable exception of newspapers, publishing, and computing. Strangely, therefore, the oldest and newest ICT sectors were largely exempt from most of this regulatory regime, but everything in between was smothered in multiple confusing layers of technocratic regulations, distortionary subsidies, antitrust micromanagement, and speech controls.

While the policies imposed by the FCC, state PUCs, and the courts were supposed to serve “the public interest,” by the early 1990s it became clear that this system was broken and failing consumers. As enforced by politicians and bureaucrats, “the public interest” ultimately had little to do with what the public actually wanted—more competition, more choices, and more diverse content. Instead, the system was often serving private interests who had “captured” the regulatory process. As the early 1990s witnessed the dawn of digital technologies, personal computers, the internet, electronic commerce, and advanced wireless systems, it was obvious the old regulatory system had to come in line with modern marketplace realities and consumer desires.

Part 2 explains how Congress sought to fix the Telecom Act’s problems, but failed to deliver a proper solution.