Telecom and Government

by Colin Berkshire

Telecom has always had a strange love/hate relationship with government. But most people don’t know how strange this relationship really is.

I don’t understand why you pay only an 8% sales tax when you buy Coca-Cola but you pay a 35% sales tax when you buy phone service. What possible social justification is there for taxing people for staying in touch 3x as much as for people getting fat? The taxes on telecommunications are bizarre.

The Telecom industry has lived through decades of hurt and stagnant growth and unprofitability. The industry is littered with the caucuses of Northern Telcom/Nortel, Lucent, and Bell Laboratories. It’s hard to find any significant and profitable Telecom company except the cellular oligopolies.

I will maintain that if you tax any industry 35% it will be in a world of hurt. look at the airline industry, with its 35% taxation. Airlines are perpetually as sick as Telecom companies because the government has taxed the life out of this entire industry. I bet if you taxed Apple 35% it would whither and die. Tax the banana business 35% and watch it shrivel. Telecom is and will remain sick as long as it is taxed-to-the-max.

But Telecom and the government gets weirder. Consider anti-trust consumer regulations.

Telecom is largely exempt from anti-trust laws, through a complex web of exemptions. This was acceptable in bygone eras because Telecom services were heavily regulated through tariffs and standardized pricing. The thinking went that since state and federal regulators were ensuring non-discriminatory service and pricing with a regulated return on investment, that there was no need for anti-trust regulation.

But when Telecom was deregulated, these exemptions were not terminated. It is funny how an industry can beg for deregulation while quietly failing to mention that it should now be subject to anti-trust consumer protections.

So, Verizon Wireless and AT&T are completely exempt from the Robinson-Patman Act for all cellular and landline services. They can offer discriminatory pricing in ways that Apple Computer never could. I am always astounded how this never gets mentioned by the press. (The exemption in this case is that telecommunications services are exempt, while telecommunications products are not exempt.) By the way, an interesting side-note is that this same exemption applies to Microsoft for their software but not to, say, Dell for the sale of computers. How bizarre is that?

I am not saying that only Telecom is exempted. Far from. There is a specific exemption from anti-trust for professional baseball. Professional football is exempt from anti-trust laws provided that they do not compete against college or high-school football. (Seriously, I cannot make this stuff up.) Newspapers are exempt, as are banks.

But, because telecommunications is largely exempt from anti-trust regulation it doesn’t function as a fair and open industry. History says those businesses which have stifled competition become “sick.” True to life, Telecom has been and remains structurally sick, dominated by a few predatory monopolies.

The relationship between telecom and government gets weirder still.

Historically (but not so much today) the telecom business has had an entirely hidden military component.

NORAD, the early warning system built and maintained through the 1960s and 1970s were products of Western Electric. Funded by expenses being tucked into the telecom rate base, these projects conveniently circumvented congressional oversight. In the same way, America’s nuclear weapons were almost entirely designed by…AT&T. (WTF?!) Sandia Laboratories designed the US nuclear arsenal and Sandia was a subsidiary of AT&T and Western Electric until the divestiture. Really. In exchange for shouldering the burden of this substantial expense, AT&T was granted immunity from anti-trust so as to protect it against competition and allow it to have bloated rates to fund such projects of national importance.

(Interesting story about the Bell System and NORAD here.

So, telcom is much like an animal that is dying from parasites. These parasites suck life’s juices out of the animal they attach themselves to. No one parasite will usually kill its host. But by the time you have a 35% sales tax, monopolization, selective regulation, and a myriad of them you have where we are today.

If I were to make a list of industries to NOT participate in I would put telecom, airlines, and banking into the list of sick industries. Sadly, some of us happen to just like the business and we recklessly choose to participate with impossible odds stacked against success.

Remind me again why telcom should have a 35% sales tax?