Don’t look now, but a digital communications world seemingly with unlimited choices, is about to come full circle.
In 1984, the government broke-up AT&T, and that left the parent company with only domestic and international long distance and the networks that supported long-haul communications. Everything else, including the newborn cellular service, was divvied up between eight Regional Bell Operating Companies, popularly known as the Baby Bells.
What changed in 1984? Not much, we already had the option of choosing a long distance carrier, we didn’t need to blowup the phone company to achieve that. Cellular was new and by government edict, we had at least two choices, neither one associated with the old AT&T. But after the divorce, we still had only one choice for a local telephone company. It had a new name, e.g. NYNEX, U.S. West, but that was about it, nothing else changed.
The breakup of AT&T coincided with the introduction of cellular, and the FCC awarded a minimum of two wireless licenses in every territory, with one of the licenses reserved for the local Baby Bell. But Uncle Sam insisted the “dial-tone telephone business” not be used to subsidize the cellular business, and so the Baby Bells had to set up separate companies to handle cellular.
And telephone subscribers had the newfound option of choosing a long distance carrier, but it could not be the local telephone company. That resulted in a separate telephone bill from the long distance company, but the Baby Bell’s graciously agreed to stuff that bill in the same envelope with the local telephone bill.
And if they subscribed to cellular service, they found another telephone bill in the mailbox—even if the telephone company owned the cellular company. You see, the phone company was not allowed to mail a cellular bill from its sister company, even though they had the same family name. Got it?
Things rocked along for a few years; long distance rates plummeted, and cellular service steadily grew and expanded to include all U.S. metropolitan areas and most of the rural countryside. Over time new competitors entered the market and cellular rates declined too. But local dial tone service was stagnated with ho-hum technology and high rates; in fact the cost of local telephone service went up. In 1996, Congress stepped in and fixed everything with The Telecommunications Act of 1996—or so they thought.
The Telecommunications Act of 1996 was meant to introduce competition and hence, better service and lower costs. Instead it was the law from hell, and the landscape is littered with casualties. Hundreds of companies failed, including almost all of the Competitive Local Exchange Carriers (CLEC), that were formed to provide local competition and an alternative to the Baby Bell monopolies. Billions of investor dollars were washed down the drain.
What happened? Timing, for one. The act was passed in the early days of Internet incubation, and once the web took off, business plans bloomed—some on the back of napkins—investment bankers and venture capitalists poured in, speculators followed, a lottery mentality set in and the rest is history; too many gold-diggers, and too little gold. The newcomers were met by entrenched Baby Bell monopolies, veterans at manipulating regulations and regulators. Profits were illusory and when the capital markets ran dry, the new ventures went belly up along with thousands of small businesses that supported them with ancillary products and services.
The Baby Bells dug in their heels and refused to cooperate with those who would divvy up their gravy train. Don't forget, the Bell operating companies controlled the "last mile". The "last mile" being the copper wire that connects the telephone user to the telephone switch housed in a place called the central office. That's a lot of gobble-de-gook, which means that anyone who wants to provide a competitive service for you or me must rent that connection from the local telephone company. Or, build a new network. Can you imagine the cost and the time required to build another nationwide telephone network?
The Bells were required by law to make the network available to competition, but they shuffled their feet with the skill of hip-hop professionals. Onerous operating policies prevented or deferred competitors from attaching their equipment to the network. The Bells employed an army of well-paid lobbyists in Washington and in every state capitol to maintain their monopolies, and when that failed, they called on another army of well-paid attorneys to march in and appeal their case before the courts and the fifty public utility commissions that administer state regulations. We should not forget that we paid for those activities-the costs were buried in our telephone bills. Still are.
Pricing represented about the only leverage available to regulators, and a few states led the way by setting reasonable transfer prices that allowed local competitors e.g. WorldCom (now MCI) and the new AT&T to offer local telephone service at substantially lower rates. Of course the armies of Baby Bell attorneys fought those regulations tooth and nail, and when they won, it meant there would be no competition for local telephone service in that area.
Do you have an alternative for local telephone service? Have you looked at what you're paying for local service? How about five years ago? Ten years a go? Now compare that to your long distance bill for the same period. Since 1984, long distance rates have gone down 80% and local service has gone up 36%. The same local dial tone network arrangement vigorously resisted by The Baby Bells—sharing network resources with competition—financed the start-up of the long distance industry in the eighties. Good enough for the last century, but not this one.
Michael Powell, the soon departing FCC Chairman allowed this bloodbath to happen. Mr. Powell likes big. He said if we want choices, we should pay for another nationwide telephone network, even though we already paid for this one, and to insure that that happened, Mr. Powell wanted to freeze out competitors by de-regulating the wholesale rates paid to the Baby Bells. In other words allow The Baby Bells to set prices too high for anyone like AT&T or MCI to afford them. Mr. Powell said that encouraged competition.
The Baby Bells run roughshod over the FCC, the Congress and many of the state Public Utility Commissions. With few exceptions those regulators are rubber stamps for The Baby Bell monopolists. One of those exceptions occurred February 27, 2003 when FCC Commissioners rebelled and rebuffed Mr. Powell and his Baby Bell partners by giving wholesale transfer-pricing authority to the states. That was good news for consumers who lived in states with consumer oriented public utility commissions, but meaningless for others.
I can't help but recall another FCC ruling concerning my other favorite monopoly, cable TV. At about the same time The FCC was giving a green light to local telephone competition, it declined to approve a satellite TV merger, because it would have ''killed competition''. Ostensibly the commissioners were worried that rural satellite customers, adrift with only one satellite carrier and with no access to cable, would have no options. Hello? What options does a Comcast cable customer have? Or Cox? Or Time-Warner? Or Charter? Theoretically satellite is an option for everyone, but innumerable restrictions and obstructions, e.g. high-rise buildings, onerous homeowner associations, etc., make that problematical.
The FCC also ruled that cable companies could wall off their lines to competitors, thus assuring there would be no alternative for cable-or for that matter, broadband Internet access via cable. (VOIP is another issue and I will get to that.) Twenty years ago, before the break-up of the old AT&T, we had one choice for local telephone service and one choice for cable TV. Has anything changed?
The Baby Bells own the central offices (remember that place where the switching equipment is located?). They claim that, because of their miserable profit margins, much of the equipment there remains outdated and inadequate for today's applications, and they can't afford to upgrade it, recognizing that to do so would mean upgrading their competition as well.
OK, let's look at DSL, the broadband Internet service provided by The Baby Bells. Much of the country is without DSL service because the Bells have neglected to upgrade the central office technology that restricts the effective DSL range to about 18,000 ft. That means your house must be within 18,000 ft. of the central office (not as the crow flies, but as the wire winds its way from the central office to your house), but new technology extends that range. Broadband is hot, why haven't they upgraded the network? Because that would open the gates to competition. And so, the network we paid for has remained devoid of new technology, because the monopolists want another exclusive license, or prohibitive pricing, either of which would condemn competition.
Well, they got it. On the same day the FCC gave the states authority to set wholesale pricing for local telephone service, they took the opposite tack with broadband service, and gave the Baby Bells unlimited flexibility to set their own rates. In effect, the telephone network is now off limits to other broadband providers. The FCC gave with one hand, and took away with the other. Go figure.
Fast forward. Later the FCC rescinded the wholesale dial-tone rate regulations, thus permitting the Baby Bells to price out their competitors. And so, the local telephone network we financed with high monopolistic rates and numerous local, state and federal excise taxes (look at your bill) for over 100 years is off limits to all competition.
On the other hand the communications landscape is undergoing tumultuous change. Cellular has become a way of life, and for many consumers, their only telephone. And when did you last see a teenager without a cell phone glued to his ear?
Inside the house and the office, Voice Over IP (VOIP) is catching on fast. Anyone with a high-speed broadband connection can talk over the Internet, and wave bye-bye to the local telephone company. The standard features included with VOIP dwarf the Plain-Jane dial-tone services we are accustomed to. And at this early stage, the rates are significantly lower, including the absence of any sales and excise taxes. The savings can be dramatic. The Baby Bells and the cable operators are getting into this business. Watch for another blood bath; independents will be priced out or gobbled up.
OK, we’ve had cellular for twenty years and now we have the option of VOIP, isn’t that enough? For many, maybe so, but not for all.
Because of competition, cellular rates have declined over the years, but when compared to standard, no frills local dial-tone service, cellular remains expensive. And it has other limitations too. Family plans, that include multiple handsets and group billing plans are fine for those who can afford them, but prohibitive for low-income households. And cellular is a personal service, not a family service; voice mail and other features are not shared.
Voice Over IP is the biggest threat the Baby Bells have faced in their short lives, but VOIP is only available to those who can afford an expensive two-way cable connection. Add the cost for VOIP and the cost for broadband ISP to a basic cable TV subscription and you get a big number, over $100.00. Again, not an option for low-income households.
The brave new world of digital communications is exciting; it connects us in ways not imaginable even a generation ago, but it leaves others behind. Who is looking out for them? Will the FCC and the state Public Utility Commissions mandate continued universal telephone service that guarantees basic dial-tone service to rural communities, shut-ins and others? What will happen to local dial-tone rates as more and more users abandon the copper-wire telephone network for newer digital services?
And how will more consolidation benefit users? Thanks to competition, long distance rates have fallen 80% since 1984. And thanks to an environment that forced wide-open competition we enjoy nationwide cellular service at rates that have fallen dramatically since the technology was introduced in 1985. But basic local telephone service has increased 36% since the breakup of the old AT&T. Where would rates be today if the Baby Bells had faced competition for dial-tone service?
Did you notice, the original eight Baby Bells have merged into the Gang of Four? And that soon AT&T will be gone for good, absorbed by a charter member of that Gang, namely SBC. And do you remember MCI, the company that started it all in 1968 when it challenged AT&T’s long distance monopoly? They’ll soon be history, too. MCI, later acquired by crooks at WorldCom, barely escaped that kidnapping, only to be swallowed up by another Gang member, Verizon. (That adoption is in limbo, pending a higher offer from Qwest, who previously gobbled up U.S. West).
Cellular is on a similar diet program. Two industry founders, Cellular One and Nextel will disappear in 2005, absorbed by larger players. As I write this, in early 2005, two Baby Bell cellular offspring’s, Cingular and Verizon Cellular, control over 50% of the cellular market and they are stalking for more.
Where are we headed? The experts claim that everything that came before were only prelims for the big fights to come between the telephone companies and the cable TV companies. Read American and United my friends; there will be no Southwest in this fight.
Hold on to your wallet; your communications bill will soon look like a car payment.