The History of US Telecommunications Deregulation

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What We Can Learn From the History of Deregulation: US Telecommunications

Do you own your phone? Do you use speed dialing, call waiting, or voice mail? Do you have a cell phone? Do you send text messages? What about cable TV? Do you have broadband internet access?

The reason these inexpensive and invaluable products and services exist is because of deregulation of the telecom industry. And these products and services started because a company set up its own microwave relay communications network to offer shipping businesses low-cost long distance service between Chicago and St. Louis. It wanted to compete with “Ma Bell”.

Until 1969, telecommunications in the United States was a monopoly under the control of AT&T and its seven regional Bell companies. The consumer only had one choice for their phone company and only one choice in rates. Additional services were few and expensive. Consumers could not own their own phone and had to rent it from the phone company. In fact, there was a prohibition against “foreign attachments” which even prohibited consumers from putting a protective cover on their phonebook. “Ma Bell”, as the government-backed monopoly was called, did what it liked.

When MCI Communications Corporation sued AT&T for restraint of trade in March, 1974, their action precipitated an investigation by the Federal Communications Commission and then a lawsuit by the Department of Justice. The result was that by 1984, AT&T was forced to divest itself of all involvement with the regional Bell companies and stick to providing long distance service. The “Baby Bells” meanwhile, continued to run the local and regional telecommunications but, neither they or AT&T stayed in their respective slots much longer.

The AT&T break up unleashed a flood of technological advances for consumers. Within a few short years, consumers could choose and buy their own telephone equipment. They could buy phones made by a variety of makers that re-dialed or had built-in answering machines. FAX machines became commonplace in business settings and some migrated to homes.

But the changes were not just limited to consumer products. The breakup ushered in changes in product development, services, consumer choice and prices that were unimagined at the time. While the process has been rocky at times, consumers have, through the years, experienced greater benefits and advances than the Bell system could have delivered if it had been left in place.

In the wake of the AT&T breakup, government regulators permitted third parties to “connect” to the telephone network, designating it as a “common carriage” network. Long distance companies mushroomed: including MCI, Sprint, and hundreds of small start ups. With stiff competition for customers looking to save on their long distance, these companies offered additional services that previously had only been available to businesses that could afford them: call waiting, speed dialing, three-way calling, and voice mail. Consumers gained a vast choice of services from a number of providers.

Meanwhile, the FCC was breaking up Bell Labs’ monopoly on cellular phone technology. Under development since 1947, radio-based telephone technology became commercially viable in the mid-1980s. In 1984 as the Bell System fractured, Motorola was selling its DynaTAC 8000X, a two-pound cell phone for $3,995.

One of the biggest advances came in the development of voice and data transmission over
phone lines. Beginning in the 1960s, the telephone system gradually began converting its internal connections to digital switching systems. Developed in the mid-1980s, Integrated Services Digital Network (ISDN) digitally transmits voice and data over ordinary telephone copper wires, resulting in potentially better voice quality than an analog phone can provide.

Coupled with the introduction of the personnel computer at the same time, a revolution in telecommunication poised to take the stage.

In 1979, the first text-only email service was launched. In ten years, more consumers were buying personal computers and signing up with email and bulletin-board services such as Compuserve, Prodigy, and America On-Line. On August 6, 1991, the first web-site went on-line at CERN. By 1993, advances in speedier network systems working via phone lines, such as Digital Subscriber Lines (DSL), and internet service providers (ISP’s) began selling access via phone modem to growing computer networks throughout the globe. In 1994, in an effort to standardize practices, Tim Berners-Lee founded the World Wide Web Consortium (W3C) at MIT.

By 1996, the World Wide Web was changing people’s commerce, creativity, and communication.

Meanwhile, the Baby Bells had drifted far from just regulating their regional phone systems. The biggest, originally named Southwestern Bell Corporation, had three main markets: directory publishing, mobile business phone service, and phone equipment. In 1987, it acquired Metromedia’s cellular and paging service making it the third largest in the US. In 1993, it bought two cable companies in Maryland and Virginia, becoming the first regional Bell telephone company to own a cable company outside of its service area. In 1995 Southwestern Bell Corp. became SBC Communications and began acquiring other Baby Bell companies.

Technology, demand, and SBC’s actions, like many other telecommunications companies at the time, had changed the industry so much that the Communications Act of 1934 no longer applied. The Telecommunications Act of 1996 was designed to open up markets to competition. It relied on rapidly spreading advanced voice and information technologies by requiring companies that used similar underlying network technologies to provide a single type of service. For example, there are separate regulatory regimes for carriers providing voice telephone service and providers of cable television, and a third for information services. This allowed local regional Bells to offer long distance services (previously not permitted under the divestiture agreement from 1982) once they proved their local markets had been opened up to competition.

As a consequence, the Act reduced long distance telephone rates, increased the number of long distance minutes used, and improved entry and competition in the long distance telecommunications sector. The Act also sought to maintain a significant distinction between providers of telecommunications services and information services. A carrier providing information services is not a ‘telecommunications carrier’ under the act when it is selling broadband Internet access.

Some, like the consumer watchdog group Common Cause, think that the 1996 deregulation went too far. Part of the fault may be that the legislation failed to anticipate developments in technology and integration of the World Wide Web. Nearly 15 years later, the convergence of telephone, broadcast, cable, and internet service technologies has blurred the distinction between information and telecommunications carriers, creating much controversy.

The Communications Opportunity, Promotion and Enhancement (COPE) Act of 2006 was a bill in the US House of Representatives meant to overhaul the Telecommunications Act of 1996. Unfortunately, it contained two provisions; one dealing with net neutrality that angered carriers, and one that replaced the current system of local cable franchise set-ups that angered state and local governments. In the end, the measure was defeated by a vote of 269-152.

While attempts to re-craft the rules for telecommunications floundered at the national level, Texas set out in 2005 to further level the playing field within its borders. With traditional phone and cable companies allowed to compete with each other to provide video, telephone, and internet services since 1995, it was felt there was room for improvement. The legislation, titled an “Act Relating to Furthering Competition in the Communications Industry”, contains three major reform measures.

Broadband internet access (Chapter 43): allows electric utilities to offer broadband Internet access over their network facilities through “broadband over power lines” or “BPL.” By introducing a new player into the broadband access market who already has a vast wired network (the power lines themselves), traditional telecom and cable service providers would face stiffer competition.

Local telephone markets (Chapter 65): deregulated pricing in certain local-exchange markets by requiring at least three service providers to be competing in that market. For example: the local incumbent phone service, a facilities-based provider, and wireless services provider. The idea is that all three can provide access to the local exchange network whether through wires, wireless cell phone, or Voice Over Internet Protocol (VOIP). Local exchange service providers will then need to set their rates to reflect market prices.

Video programming (Chapter 66): means a provider needs a single state-issued franchise instead of requiring one from each locality. This allow them to offer service to any local market in Texas. By eliminating the cost of building a local hard-wired cable network and using the existing one, the law encourages new providers to start up new competing businesses in new areas. Through competition, the number of service providers will increase, leading to lower prices and an increase in quality and quantity of services.

Many effects of the Texas law are still unclear because the legislature left many details to the PUC. There are other problems, too, with newly enfranchised video providers dropping Public, Educational and Government access channels (PEG). Federal Cable rules restricts how PEG stations can spend their money and while the current state law states 1 percent of the providers’ revenue goes to municipalities to support PEG, this funding can only be used for capital expenses and not operations.

Meanwhile, parallels abound at the Federal level. Whether Congress follows Texas’ model or not remains to be seen.

What the deregulation of telecommunications teaches us is that while an institutional monopoly may be a short-term solution for a technologically developing market, it’s effectiveness and capacity to innovate degrades over time. Back on March 5, 1974, the 50 year old regulated monopoly under mighty “Ma Bell” seemed like it would last another 50 years. Unfortunately, marketing and development of its products stagnated and it offered few choices to the average consumer. More technologies and innovations became available to the consumer in the first ten years of deregulation and competition than the Bell system would have released in 50 years. How do we know this? Consider that at the very least it took a federal court case to allow consumers to own their own home phone equipment.

Of course, the competitive marketplace has its own challenges. In a competitive market, businesses find the monopoly position fleeting because if they charge too much or the quality of their products or services slides, entrepreneurs will find a way to offer a better product or service for a lower cost. With emerging technologies coming on-line nearly every day, many are able to do just that. Because the marketplace is fraught with change, Federal and State regulatory agencies overseeing the industry must hustle to update the rules to ensure that service providers are competing on an even playing field. Competition and innovation from other non-traditional telecom businesses into the marketplace (cable, broadcast TV, and even power utilities), is already reducing prices, like long distance calling and high speed internet access, and providing a wealth of choices “Ma Bell” never could.

Using the Past to See the Future

Just as dismantling the Bell monopoly unleashed a flood of technical innovations, choice, and lower costs in the telecom industry, the deregulation of the energy market in Texas has also seen similar results. During the monopoly years, the average consumer’s telecom and broadcast choices were a rented phone, a radio, and a TV that got 4 channels. Following deregulation, choices in service became available because of competition. So, too, when the Texas electricity market deregulated in 1999, service to consumers improved because competition among service providers made them create more choices that fit consumers’ needs. During the monopoly years, the Bell System dribbled out technological innovations only after the whole monolithic system was ready to adopt them. But following deregulation, companies developed and deployed cutting edge technology because it expanded their markets and gave the consumer integrated communication services. At first these advances were on phones and FAX machines, now they’re on iPhones and other smart devices. So, too, when Texas electricity was deregulated, power generation and transmission companies invested in more efficient systems, such as Smart Meters and green renewable energy, because they developed and expanded their markets to meet the demand for more efficient and environmentally responsible energy.

Lastly, during the monopoly years, telephone prices were all but etched in stone. Deregulation has since cut prices by allowing different kinds of companies to compete in both local and long distance services. The same is true of the Texas electricity market. By isolating the generator from directly supplying the consumer, the price of electricity has dropped because electricity service providers shop around for competitively priced energy and pass their deal pricing onto their consumers.

In the near future, a high-speed optical cable called Light Peak will make copper wire cables as obsolete as cassette tapes and floppy disks, bringing new opportunities and choices to the way we all communicate.

Meanwhile, Texas electricity is already seeing the future through advancements in energy efficiency and renewable energy. With Smart meters, consumers can better monitor their energy usage and improve their efficiency. By using energy wisely, they save money. Meanwhile, more Texas utilities sell renewable-sourced power now than ten years ago. And this is not just because it is popular, but because green power sources are less expensive to operate in the long term than conventional systems. They produce no exhaust gases, no hazardous ash, nor water pollution. Due to the state’s commitment to renewable energy, a full 9,000 megawatts of installed wind turbines is already putting electricity into the state’s electric grid. And given the state’s abundance of sunshine, solar power has become a focal point for new development of battery storage and solar panels for the home. A University of Texas study found Texas could generate up to 123,000 new jobs by moving aggressively toward solar power panel manufacturing and installation.

Because of deregulation in Texas, competition and innovation give Texas’ energy consumers real choices. Because of deregulation, Texas’ future is calling.

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