Bad regulation is far worse than no regulation or why we are long ATT.

I have a small apartment in San Francisco and I live in a high rise that has an exclusive contract with ATT to provide all voice/video and data for all the 400+ units in the complex. The setup is kind of interesting because originally the building was just wired for Directv, resold through ATT until recently when they launched their Uverse product. Uverse itself is essentially a beta product at this point, and really comes up short by comparison to modern video offerings from cable and satellite, particularly in terms of High Def sports or movies.

You would think AT&T would be hesitant in selling it's UVerse product along side the robust offering from ATT and the numbers after 6 months post launch demonstrate that. AT&T is probably 40% cheaper (yep 40%) with all their incentives and still 80% or more of the building still uses Directv.

Seemingly undaunted, AT&Ts strategy in the building however, is to retard the Directv service so demonstrably they can push their uninspiring Uverse product down people's throats. The theory is, if you get enough outages and problems, you'll be so fed up, Uverse will start to look like a innovative and cutting edge product.

It's kind of a new strategy in marketing, resell your competitors product on an exclusive basis, but do it so badly that they want to try your own inferior product at a much higher margin. The building is under exclusive contract so you have to choose one or the other-or move.

It's pretty much genius. If the Nobel prize has a subcommittee for innovations in marketing, AT&T deserves a win here.

The point was driven home this weekend when I emailed in to find out about adding the HD package (which they don't really let you do since they don't want the DTV HD offering to be better than UVERSE) and I asked what was in current package. In response, my service was disconnected and my DVR service deactivated. How does their customer service go from a question about programming packages to resetting the DVR and disconnecting the service. Of course, it's no problem for ATT since they have an exclusive contract and it's not like I can cancel and go somewhere else. Welcome to communist Russia.

My point is remember the early 1990s when we had Telecommunications reform? The big magnum opus of Congress was the Reform act of 1996. This act, indirectly or directly, opened the door for billions of capital reallocations into new companies, called CLECs (remember that term), and thousands of new startups in telecommunications hardware. Huge reallocations of talent as well and a massive bubble in telecom equities.

So was it all worth it? On the equipment side, how many strong equipment vendors do we have?

When is the last time you have seen an exciting or innovavite business plan for systems company? It's been a while.

What about the public markets? Even worse, Cisco essentailly dominates the space with most of the major vendors in hybernation and or bringing down the scale of their product lines. Even strong secondary public equipment vendors have difficulty competing and Cisco operates with operating margins that would make most internet services businesses blush.

On the services side, what do we have? We've gone from one big carrier nation wide, to regional LECs, to basically the same thing we started with a cable MSO if you are lucky.

We like to talk about the best thing of the American sytstem is "free markets", but do we really have that? When we do have regulation is it so infected by lobbying by big Telcos that the innovation is bait and switch? Anyone who has tried to roll out a telecommunications services business has to be prepared for that same kind of run around when trying to establish interconnect with Verizon or ATT -you have to connect at some point to them to do business. They'll comply with the existing regulatons in most cases, but bend or ignore it where they can, and if they can stall, delay or prevent you from launching, they'll do so using every trick in the book. By the time you do roll out, you'll have wasted valuable months of cash burn and need to go back to investors and explain to your board why you have not launched service on time. All 100% within FCC regulations. Which is pretty much why we have no CLECS left

We've essentially gone from One big telecom company, to regional bells, to thousands of CLECS
and now back to one or two big telecom companies. The billions spent on capital, human and otherwise, really just seems to be wasted.

The current and past financial crisis starting with Long Term Capital Management has convinced me that we do need some form of regulation in periods of extreme fear and greed. But we can't have any effective regulation if Congress is so infected with lobbyist that the regulation we get is so riddled with loopholes and corruption that in the end it has no real effect. Bad regulation is far far worse than no regulation at all.

And by the way, AT&T is still trying to figure out how to turn my service back on. And as a matter of disclosure in our fund we have a very large long position in AT&T. Who wouldn't?