Valuing the Effect of Regulation on New Services in Telecommunications

Abstract

THIS PAPER DEALS with how to value the introduction of new services in telecommunications.Much public discussion has centered on the evolving "information superhighway" as well as on the many new services that may be offered as high-capacity fiber optic transmission networks are extended into the telecommunications infrastructure.The Federal Communications Commission (FCC) has decided to tax longdistance users to subsidize Internet access to schools and libraries.The cost is estimated to exceed $2 billion a year.Numerous cable companies, such as Time Warner, have announced plans to upgrade their current coaxial-based networks to combined fiber-coax networks.This increased transmission capacity will allow many more channels of entertainment, high-speed access to information, and new interactive services.How can society establish the value of these new services and increased choices?This question has potentially important economic consequences and equally important public policy implications.Because of the network structure of telecommunications, public policy has always played a large role in its production and regulation.In countries such as the United States and Canada, very strict regulation (which is only slowly being loosened) has limited the ability of companies to compete freely in telecommunications.By demonstrating how to value new telecommunications services, I allow for a more reasoned approach to the necessary benefit-cost calculations; this approach can help both I thank Hyde Hsu, Renu Sharma, and Tomomi Kumagai for research assistance. 1. Hicks (1940). I recently used this methodology to value new varieties of consumer goods; see Hausman (1996a).2. This estimate is the calculation of the well-known welfare triangle, which measures consumer surplus and approximates the gain in consumer welfare.stock the new brand on their shelves.Consumers then decide whether the new brand will be successful by voting with their consumer expenditure.Regulation makes introduction of new telecommunications services much different.In the United States telecommunications companies must typically file an application with the FCC and state regulators.Potential competitors of the new service have economic incentives to attempt to stop or delay introduction of the new service.While regulators review the applications and attempt to sort out these claims, the new service can be delayed for many years, even decades.My approach allows estimation of the cost of these regulatory delays by valuing the economic gains that consumers would have had if the service had been available during the period of regulatory delay.To assess the economic costs of regulatory delay, I first consider the particular example of voice messaging services offered by the Bell operating companies.AT&T initially proposed to offer these services in the late 1970s.The FCC first delayed its decision and then refused to allow the Bell operating companies to offer these voice messaging services on an integrated basis with the rest of their telecommunications services.In 1986 the FCC reversed its decision.By then, however, the AT&T divestiture decree, the Modification of Final Judgment (MFJ), forbade the Bell operating companies to offer voice messaging services.Two years later, in 1988, the MFJ court vacated the restriction on information services, which included voice messaging services, and the Bell operating companies began to offer the services the next year, more than ten years after they were first proposed to be offered.The services have been available since 1990, and about 16 million consumers bought them in 1996.If, as I estimate, the consumer value from these services was $1.27 billion in 1994, then the approximate ten-year regulatory delay cost consumers billions of dollars.Applying the methodology to the cost of regulatory delay in the introduction of cellular telephone service, I estimate the cost to consumers to be closer to $100 billion in total, with more than $25 billion lost in a single year.This cost of regulatory delay in the introduction of new telecommunications services has not received the attention it deserves.Although the potentially adverse effect of regulation on "dynamic economic efficiency" is often mentioned, the literature on the effects of regulation has largely ignored the actual effects of regulatory delays in