Telecomm history and regulation

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Telecomm history and regulation

• MGT 825

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Brief History of Telecommunications

• 1876 Alexander Graham Bell receives patent for
  the telephone. Bell speaks the first complete
  sentence transmitted by a variable resistance
  transmitter (Mr. Watson, come here. I want
  you!). The first two way conversation takes
  place between Cambridgeport and Boston.
• 1878 The first telephone exchange is opened in
  New Haven CT with 28 subscribers.
• 1885 - - The certificate of incorporation for the
  American Telephone and Telegraph Company is filed
  in New York City. Its broad claim...to establish
  telephone communication to cities on the American
  continent and elsewhere around the world by wire,
  cable and "other appropriate means".
• Bell system built out over and between major
  urban areas in the 1880s-1890s.

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• 1893/1894 principal Bell system patents expired.
  98 independent commercial telephone systems were
  established, both in cities that American Bell
  had originally bypassed and in competition with
  ATT.
• Build-out of independent systems peaked in 1907,
  with independent systems accounting for 50 of
  telephones (about 3mm). In 1907, 50 of US
  cities had competing telephone services.

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How could this happen if network externalities
were important?

• Evidence (Mobius 2001) that competing systems in
  cities served ethnically and socioeconomically
  islands of customers.
• 75 of calls social according to data from the
  turn of the century.
• Many businesses subscribed to both phone networks
  in a city.

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How did ATT regain its Monopoly?

• By the 1920s, ATT had regained its monopoly over
  telephone service.
• Acquisitions
• Demand forces from businesses who did not want to
  subscribe to both.
• Bell system extensions and improvements to long
  distance service made their local services
  relatively more attractive consumers switched.
• ATT long lines initially refused to interconnect
  with competing local carriers.
• Predation? (Weiman and Levin 1994)
• ATT CEO motto One policy, one system, one
  Universal Service

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ATT divisions (pre-1984)

• Regional Bell Operating Companies (RBOCs)
• Provided local telephone service.
• ATT Long Lines
• Provided long distance service
• Western Electric
• Provided Equipment
• Bell Laboratories
• RD (invented, among other things, the transistor)

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Early Regulatory History

• By 1925, RBOC price regulations in most states.
• Entry sometimes explicitly forbidden.
• Federal Communications Commission created in
  1934.
• FCC regulated long distance rates. Any changes
  to the service required approval.

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Universal Service

• Universal service requirements an important
  component of state and federal regulations.
• Universal service arguably necessitated
  cross-subsidization in telecomm pricing.
• Certainly, urban consumers subsidized rural ones.
• Arguably, long-distance/business customers
  subsidized local residential service.
• Universal service under the 1996 Telecomm Act
  includes 411 service, 911 service, touch tone,
  operator access, access to a long distance
  carrier.

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What precipitated the ATT antitrust case?

• Competitors like MCI wanted to enter the long
  distance market, using new microwave technology.
• FCC allowed limited long distance competition.
• Complex regulatory issues because high long
  distance rates allegedly cross-subsidized
  universal local service.

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ATT breakup

• 1974 DOJ filed an antitrust case against ATT.
• 1984 ATT broken up into
• ATT Long Distance service
• Faced serious competition from MCI, Sprint,
  others.
• Average revenues per minute for interstate and
  international calls originating in the United
  States dropped from 62 cents per minute in 1983
  to 10 cents per minute in 2001.
• 7 RBOCs
• Remained monopolies in local telephone service
  and intrastate toll service.
• Often intrastate toll calls more expensive than
  interstate long distance calls
• Not allowed to enter the long distance market,
  provide certain other services, or manufacture
  equipment.

Rationale?
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Alphabet Soup

• RBOC Regional Bell Operating Company
• ILEC Incumbent Local Exchange Carrier
• ILEC RBOCs GTE SNET Cincinnati Bell
  plus a few others.

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Purpose of the 1996 Telecom Act

• Attempt to end the monopoly franchise system
  governing local wireline calling.
• Set the conditions by which carriers would be
  allowed to provide local and long-distance
  services.
• Requirement that ILECs provide network access to
  CLECs at regulated rates.
• Include long-distance, cable, wireless firms.
• Once the local market was shown to be
  functionally open to competition, the ILECs were
  allowed to enter the long-distance market, offer
  TV services, and manufacture equipment.

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Other provisions in the Act

• Phase out of price controls on cable TV
• Mandated telecommunications subsidies to public
  schools.
• Relaxed restrictions on cross-ownership of media
  properties.

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Unbundled network elements (UNEs)

• CLECs to petition FCC for access to the ILECs
  network. The idea was that CLECs would partially
  (and perhaps temporarily) use part of the ILECs
  network, while building out their own facilities.
• For example, cell phone users need to receive
  calls from and send calls to the local loop.
• FCC to consider, at a minimum, whetherthe
  failure to provide access to such network
  elements would impair the ability of the
  telecommunications carrier seeking access to
  provide the services that it seeks to offer

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UNEs (continued)

• FCC authority to determine which switches, lines,
  etc. would be shared and how UNE would be priced.
• Later, FCC required all ILECs to provide all
  elements of the network platform (UNE-P) at
  regulated rates, allowing CLECs to resell ILEC
  services.

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UNEs pricing

• 1996 Act held that prices charged should be based
  on cost (Section 252d(1))
• Left it to the FCC to define cost
• State regulators to actually implement the FCC
  cost formula
• Cost formula FCC established Total Element Long
  Run Incremental Cost (TELRIC)

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TELRIC

• Forward looking, long-run, (minimized) economic
  cost of an unbundled element, including the
  competitive return on capital.
• Long run means costs measured with reference to
  a period long enough such that all costs are
  avoidable.
• Forward looking means replacement cost rather
  than historic cost.
• Cost calculation assumes the most efficient
  telecommunications technology currently available
  and the lowest cost network configuration, given
  the existing location of the incumbent LECs wire
  centers.
• Fixed costs not directly linked to the element,
  such as executives, billing costs, etc. cant be
  included.

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Example

• CLEC wants to rent copper loop into a house from
  a ILEC
• Payment to the ILEC based on what it would cost
  to build a brand new copper loop with the most
  efficient and lowest cost equipment available
  today, without consideration of what the ILEC
  actually paid historically to construct it.
• Functionally, its an AC measure.

ATT embarks on a CLEC strategy
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Arguments for/against UNEs/TELRIC

• For
• More competition is better
• UNE-P a possible stepping stone to
  facilities-based CLEC competition.
• Certain parts of the network may have natural
  monopoly characteristics, but other parts dont.
  Allow entrant to rent the parts that do.
• ILEC investments were made under a regulatory
  regime with protected rates of return.

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Against

• TELRIC prices discourage facilities-based entry.
• Why enter if you can get access to ILECs network
  on the cheap?
• TELRIC doesnt compensate ILECs for their
  historical costs.
• State PUCs were random in implementing TELRIC,
  leading to unacceptable cross-state variation in
  what ILECs can charge for unbundling.
• TELRIC removes ILECs incentives to invest in
  risky new services/technology
• If it doesnt work out, ILEC stuck paying for it.
• If it does work out, CLEC can just rent it at
  cost.

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Slow death of UNEs

• Bush FCC chairs not fans of UNEs.
• Court decisions limiting the scope of UNEs.
• Bush admin didnt appeal.
• UNEs deemed not appropriate for broadband
  infrastructure.
• UNE-P effectively eliminated.

France, Korea, Japan going in the other direction
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Telecomm meltdown in local-long distance
telephone markets

• As of June 2003, 3.4 of end-users were served
  over CLEC-owned facilities.
• Most CLECs went bankrupt
• CLECs disproportionately serve large businesses,
  institutions, and government customers.
• RBOCs have been approved to enter the
  long-distance markets in all states.

UNE-P CLECs
Facility CLECs
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Mergers

• 7 RBOCs -gt 3 surviving
• Vertical re-integration
• ATT SBC BellSouth
• MCI - Verizon

Why was local and long distance broken up in the
first place, and why is it okay to put it back
together now?
Some conditions put on mergers Net neutrality
for a time, naked DSL, etc.