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The Cost of ISDN vs. the cost of Social Engineering
Since I know how much you love my writing, I thought I'd attach the
following essay, which ran as my regular Op-Ed column in today's issue of
I'm please to see that we've found ourselves on the opposite sides of yet
another issue. If you didn't exist, I would have to invent you <g>.
COMPETITION IS THE SOLUTION, NOTE MORE REGULATION
Carping about proposed ISDN rate hikes has become all the rage. It's also
creating a growing synergy between computer professionals who understand
ISDN's pivotal role in the growth of the industry and die-hard
public-policy advocates grasping at any opportunity to extend the life of
tottering regulatory regimes. But such an alliance is fraught with danger.
Irate technologists should think twice before jumping into bed with
Naderite social engineers, who may help win this battle at the cost of
losing the war.
The most recent brouhaha was kicked off by an apparent betrayal by those
regional Bell companies that had been the most aggressive in deploying
ISDN. Chief among them is Pacific Bell, who, aided by the most reasonable
ISDN prices in the land, doubled its number of installed ISDN lines in the
past ten months.
Unfortunately, PacBell's original forecasts of the number of users that
would be located more than three miles from a central office were grossly
out of whack. Rather than 12 percent, as estimated in its provisional
tariff filing, distant users jumped to an astonishing 30 percent . I guess
all those yuppies that moved out to the 'burbs are finding it tedious to
check their stock portfolios using "old fashioned" 28.8 kilobit-per-second
Supporting distant users requires additional loop electronics, a cost
PacBell hadn't rolled into its original calculations. So, how about
charging a higher installation fee for remote users? Nope. Differential
pricing violates a fundamental regulatory tenant under which city dwellers
are gouged to subsidize suburban and rural users. Fixing the "problem",
therefore, requires a rate hike for all.
In what PacBell surely views as an opening shot in a protracted
negotiation, they proposed bumping ISDN charges up to $1.25 per hour per B
channel. Similar moves are rippling though US West and Bell Atlantic,
which remain exceedingly wary of flat-rate usage schemes that might
encourage users to nail up connections permanently. These tariffs would
make ISDN as prohibitively expensive as, say, America Online or CompuServe.
The Consumer Project on Technology (CPT), a Ralph Nader-backed
organization, would have you believe that this charging scheme is a dire
threat to democracy. In a blizzard of state public-service commission
filings, CPT won the hearts of industry technophiles who are ready to join
forces with anyone trying to block these ill-timed increases. Even
venerable Intel Corp. weighed in, arguing before the Washington State
Utilities and Transportation Commission that US West should not be allowed
to hike rates since it would hurt Intel's efforts to sell multimedia
The heart of the CPT argument is that it is evil for phone companies to set
prices based on "value" (i.e., willingness to pay) rather than "cost."
CPT's solution? Give an administrative law judge extraordinary powers to
set ISDN prices!
Just stop for a minute and imagine Andy Grove teaming up with Ralph Nader
to argue that prices should be set by costs and not value. I wonder what
a judge would chose as a "just and reasonable" price for a Pentium chip?
Whether you believe in free markets or not, cost-based tariffing is
fundamentally flawed because it is impossible to construct meaningful cost
models within the regulated Bell businesses. It's like asking a steel mill
in the old Soviet Union what it "costs" to make steel. With so many
bizarre cross subsidies, twisted accounting practices, and distorted
allocation procedures, determining "costs" is nothing but an enormous shell
The long-term remedy, of course, is competition. CPT correctly points out
that there's not much of that yet, so they claim price regulation would be
temporary. But just how is this "temporary" situation supposed to come to
an end if ISDN prices are set so low that only an idiot would enter the
market to try and compete? Of course, the social engineers have a ready
answer for that: Give them subsidies from the Universal Service fund!
The whole Rube Goldberg regulatory structure has to go. The more out of
line a Bell company's pricing policies are, the faster they will attract
hungry competitors. We've waited 20 years for ISDN. It's far better to
wait a little longer than have this issue used as sucker bait to keep the
regulators in business.
# # #
COPYRIGHT 1996 CommunicationsWeek
Bill Frezza is president at Wireless Computing Associates and co-founder of
the online forum DigitaLiberty. The opinions expressed here are his own.
Bill can be reached at email@example.com or techweb.cmp.com/gurus.