Monopolies in the Telecommunications Industry

The communications industry has been growing and evolving since the invention of the telephone. It has become an industry of choice and pricing benefiting the consumer thanks to the competitive local exchange carriers (CLEC). The road leading to this choice has been an uphill battle all the way for the CLEC's, and the industry is in danger of falling apart completely. A comparison can made to the battles the CLEC's face:

You and a few friends sit down to play a friendly board game of Monopoly. However, there is a catch, one person gets to start the game already owning Boardwalk and Park Place, and they already have Hotels built as well. If you started to play the board game, you would be almost certain to fail. This is essentially what has happened, to all CLECs of today. They have had to fight with an incumbent local exchange carrier (ILEC), who is overcharging them for access to the ILEC network and forcing them out of business.

How the Monopoly Began

These CLECs are going out of business after only being in operation, just a few years. It is very tough for them to gain a market share when they are competing with a company that has essentially been around for century. AT&T or American Telegraph and Telephone, was a monopoly that was built up through a century of government protection, tax dollars, and subsidies. The government saw what effect AT&T was having on the nation in innovation and pricing, and was fed up with their antics. Pricing at the time in the early 1980’s for Telecommunication service was very high compared to the prices and the average household income of today. So to try and foster competition, the government broke AT&T up into eight individual companies. The eight companies were the long distance company still known today as AT&T and seven Regional Bell Operating Companies (RBOCs). Now through mergers and acquisitions the seven RBOCs are back down to four. These 4 RBOCs, who now have a stranglehold on the telecom industry, are: Verizon, BellSouth, SBC, and Qwest.

This government interference opened up room for competition in long distance services that we have today. This was an effective breakup because AT&T was no longer associated with the RBOC’s, and had to pay for local network access to the RBOCs just like the new, enterprising long distance carriers. Although AT&T still owned most of the long haul/long distance lines, it was finally close to being on a level playing field with the likes of MCI and SPRINT. MCI and SPRINT still at times needed to lease parts of the AT&T long haul network to provide their service, but they were now equal in paying for access in the local markets.


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Monopolization of Local Access

Now that AT&T no longer had control of the local markets, the copper networks in the local markets were then inherited by the seven RBOC’s. These networks were inherited, not built out by the companies themselves. Remember how, I stated previously the copper networks in the US were built mostly by taxpayer dollars. This copper network I have been referring to has also come to be known as the Public Switched Telephone Network or (PSTN). With the RBOCs claiming ownership of the PSTN we were essentially back at square one in dealing with a monopoly, only this time it was in local access. So to try and bring about more competition, in 1996, Congress passed the Telecommunications ACT of 1996. This bill forced the opening of the RBOC’s networks to ensuing competition. It was to do so by requiring the unbundling of network elements (which are the individual portions of the phone lines), permitting line sharing (the ability to deliver data services over the existing phone lines), and collocation (which is the ability to put equipment in the Central Offices of the phone companies). The purpose was to help speed to market new communications services and better choices in local markets. However the RBOC’s have since the inception of the Telecom ACT of 1996 stifled competition by over charging for network access to these new competitors.

RBOCs fight back

The RBOC’s then saw what deregulation did to the monopoly of their AT&T predecessor and according to James Glassman of the American Enterprise Institute:

"The incumbents saw the lay of the competitive landscape, and they didn’t like it. They were being realistic. The best kind of business is an unregulated monopoly; second best is a regulated monopoly, especially if you have a relationship of decades with regulators; and worst of all is an unregulated competitor. Being a regulated monopoly is a nice business. In 2000, SBC, for example earned $7.7 billion and produced cash flow of $15 billion on $53 billion in sales. Total market capitalization for the two largest RBOCs alone: $287 billion, versus $67 billion for AT&T. As regulated monopolies, they are certainly not hurting. But as deregulated competitors, they might be. They only had to look at what happed to the long distance firms to realize that for some companies, competition is not so joyful. This was the specter staring at the Bells, and they reacted with complete rationality. They stalled, they obfuscated, and then they moved to execute the coup de grace-legislation that would remove the most important provisions of the Telecommunications Act of 1996." (James Glassman, American Enterprise Institute, Wall Street Journal)

To begin their fight against the Telecom Act and the CLECs, the RBOCs pulled their political strings with the likes of Billy Tauzin (R.,La.) and John Dingell (D., Mich.). These two men proposed new legislation that would remove the provisions of the Telecom Act that helped to bring about competition in the first place. Their bill, now known as the Tauzin-Dingell bill would make three very anti-competitive changes to the current law. First it would allow the RBOCs to immediately offer data long distance, which would remove their incentive to open their networks for local access to competitions. Because part of the Telecom Acts provisions were that the RBOCs had to provide proof that their networks were adequately open to competitors before they could be allowed into long distance. Secondly, it would allow the RBOCs to deny inter connection in their facilities to certain parts of their system, if those parts are upgraded. Thirdly, it would impose limits on the FCC and it’s ability to set wholesale pricing guidelines on what should be charged to the CLECs. Essentially the RBOCs would then be able to charge what ever they wanted for network access, to components that was given to them by the taxpayers of this country over the last century.


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Misconceptions of the Tauzin-Dingell Bill

The RBOC’s and the two legislators have been falsely proclaiming the Tauzin-Dingell bill as a way to speed new types of services and innovation to market. Yet over the past year, all the companies who have been responsible for new innovation and services being brought to business and consumers, have been negatively impacted on the stock market. Especially on days when there is news in favor of Tauzin-Dingell the CLECs’ usually encounter large market capitalization losses. Overall since the March of 2000 and the burst of the internet bubble, the CLECs’ have gone from a combined market capitalization of $242 billion to now under $25 billion. This also accounts for huge losses by many investors in the telecom industry

How the Telecommunications Act Failed

One of the reasons why the CLECs and investors have failed, is because the Federal Communications Commission (FCC) was not given enough control by Congress to enforce the provisions of the Telecom Act. If the FCC had been given greater control they would have been able to levy heavier fines to the RBOCs for anti trust violations. Recently the Chairman of the FCC, Michael Powell, sent a letter to the leaders of the Senate and House Commerce and Appropriations Committees. In his letter he too, complained about the limited powers of the FCC and recommended a longer statute of limitations than the current one, year period for FCC investigations in local competition violations. Michael Powell also said: "the commission’s forfeiture authority against common carriers for any single continuing violation of the Act or the Commission’s rules is limited to $1.2 million, including inflationary adjustments. Given the vast resources of many of the nation’s ILECs, this amount is insufficient to punish and to deter violations in many instances. Congress should consider increasing the forfeiture amount to at least $10 million in order to enhance the deterrent effect of Commission fines" “ In addition, Congress should consider other mechanisms to compensate harmed CLECs and to enhance deterrence in this area. For example, Congress could give the Commission the authority to award punitive damages, attorneys fees and costs in formal complaint cases filed” (Michael Powell, FCC Chairman, http://www.fcc.gov, May 4, 2001)

Comparing Monopolies

These are terribly strong words by the Chairman of the FCC to the supposedly innocent RBOCs. However, I agree with Chairman Powell on his views of the industry. This is an industry that should be open to the Public, and the last mile copper network should not be considered an individual companies property. It is in fact property that the American people paid for from the beginning, and should be open to all competitive services. Some people have tried to compare the monopolies of the RBOC’s to that of the so called, Microsoft Monopoly. However, to me, this is like comparing apples to oranges. Microsoft never had the ability to squeeze competition out by not allowing access to infrastructure; that was not rightfully theirs. Microsoft came to be the juggernaut they have become, because of exclusive contracts with manufacturers, who gladly signed on with Microsoft to be their provider. They were not handed anything by any means to squeeze competitors from, unlike the original AT&T and now the four Baby Bells are now doing.

Conclusion

We now know why AT&T was originally broken up, and how the RBOCs came to be a monopoly of their own. We also know what the RBOCs have done to try and stifle competition even further. Now we need to offer up solutions for the problem. The only way now, that I see, for the fortune of the CLEC’s to be changed, would be to break the RBOC’s up into two individual companies. The first company would be wholesale company, who still acts as a caretaker, and an access point for resellers and other CLEC’s to the last mile PSTN network running to our homes and businesses. They would then charge access to the public network at equal rates to all competitors. The second company would be the retail company, who would have to acquire services, from the wholesaler at the same pricing as all other CLECs. This is the only way that equality can become of the telecom industry; in it's current state.

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