every level of the telecommunications

A consequence of increased competition at every level of the telecommunications value chain was that the industry players found themselves operating with tighter margins and lower revenues.

The 1996 Telecommunications Act and subsequent FCC decisions led to a further evolution of the regulatory environment. The impact of these developments on innovation and RD—and on the industry more broadly—has been the subject of much debate. Some caution, for example, that such policies as unbundling and the use of total element long-run incremental costs in the regulation of incumbent local exchange carriers had the effect of dampening investment by the local exchange carriers because competitors could appropriate some of the investment made by the carriers. Others cite significant benefits of these policies to the consumer (reduced prices) and the market (lower barriers to market entry).

From about 1990 to 2000, the period of high growth in the telecommunications industry meant that there were sufficient revenues to attract many new entrants into the telecommunications market, each of which invested heavily in creating new network facilities. This time period also saw venture capital play a more prominent role in the telecommunications industry (Box 2.1). Capital expenditures by these new carriers provided significant revenue streams to equipment vendors, and it appeared that research in telecommunications was continuing at a pace comparable to that of the Bell System prior to divestiture. But once this large build-out had been completed, and as the Internet bubble popped, investment declined significantly.
When the so-called Internet bubble burst at the end of the 20th century, much of the telecommunications industry was faced with a glut of infrastructure investments as the demand for these facilities slowed, leading to wholesale failures of major companies throughout the industry. During the boom years, companies had accumulated debt on the order of several trillion dollars across all players in the industry and suddenly had to service the debt with rapidly decreasing revenues. A result was wide-scale layoffs of workers, failures of several major telecommunications players, and drastic reductions in capital spending by carriers,
Although it is sometimes argued that the venture capital invested in industry is supplanting traditional mechanisms for achieving innovation, venture capital represents development funding, not research funding. Leading-edge developers that have a profit requirement will quickly curtail their research directions in favor of achieving corporate financial goals. Moreover, the surge in funding that peaked in 2000 has fallen off almost as quickly as it appeared. Total telecommunications venture funding peaked at nearly $5 billion in the second quarter of 2000 before dropping back down to roughly $560 million per quarter just 2 years later—a level that has remained fairly constant into 2006

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