Deregulation and Competition.
MCI Chairman Bill McGowan, one of the world's most vocal proponents of competition in telecommunications ... and one of the most fortunate beneficiaries of such competition . . . eloquently stated the case for competition when he addressed the ITU's "Forum 83" in Geneva, Switzerland, last Fall. Said McGowan: "The explosion in telecommunications technology and growth is one of the most significant developments in the latter half of the twentieth century. There are two basic factors that have caused the burgeoning of telecommunications and will continue to drive it.
"The first is that communications is addictive. The simple fact is that the easier and less expensive it is for people to communicate, the more they will.
"The second basic factor in the worldwide growth of telecommunications is demographics. Throughout the world, the new generation coming to maturity is much comfortable with telecommunications than its predecessors. I call members of this new generation "willing users" because they have grown up to expect . . . and will continue to demand . . . more and better telecommunications services and equipment at reasonable costs.
"This growth in telecommunications will stimulate competition as alert companies in different countries respond to emerging opportunities. One result will be the creation of new economic entities, and their resence will stimulate existing organizations. The growing competition will, in turn, cause economic growth as it inevitably results in new products and services at lower costs.
"We have already experienced this happy result many times in major segments of the information economy. To cite one obviously example, the performance of computers has risen and the cost has fallen by orders of magnitude. Technological innovation has, of course, played a major role, but I believe the results would not have been nearly so dramatic without worldwide competition in computers. Similarly, competition has helped fuel performance improvements and cost reductions in other segments of the information economy such as data processing services, software and semiconductor memories.
"Today we are experiencing growing competition in many parts of the world in telecommunications equipment. More and more companies offering quality products at competition prices are finding new markets opening to them. Canadian, French, West German, Japanese and Swedish companies, among others, are competing in the United States with AT&T's equipment subsidiary, Western Electric. Ericsson advertises that it has sold a family of digital systems to 70 telephone companies in 46 countries. Competition in equipment is well accepted worldwide.
"Competition in voice serives, on the other hand, is not. It is just emerging as a significant factor in the United States. Only in recent months have we seen trhe beginning of competition in international voice. Yet I firmly believe competition in this area will become more widespread as nations realize it can offer significant advantages.
"In the United States, the movement toward more competition in telecommunications is relatively advanced following a major shift in government policy. From the early part of this century up to 15 years ago, there was no competition in equipment or voice services. The local telephone company was a government-regulated monopoly and the sole source of equipment, which could only be leased, not purchased. Long distance service was regulated as a de facto monopoly. Then, in 1968, the "Federal Communications Commission, the national regulatory agency, cracked the window of competition slightly by permitting customers to buy equipment such as telephones and private branch exchanges (PBX's) from any qualified supplier instead of leasing them solely from the local telephone monopoly.
"Why did the United states decide to permit competition in telecommunication?
"One reason is the long-standing philosophical commitment to a free market economy and the belief that intelligent competition provides a beneficial economic stimulant. Both major political parties in the United States share these views.
"Another reason is that MCI and other companies eager to serve telecommunications markets emerged. When they found themselves unfairly excluded from these markets, they responded by demanding to be allowed to enter.
"Still another reason was the growing realization that recent advances in technology were not being incorporated quickly enough into the national telecommunications system. For example, AT&T, despite having the great research capabilities of Bell Laboratories entirely at its disposal, has been slow to introduce that most modern technology, such as digital switches. Two major reasons for such delays are the company's monopoly structure itself and the regulatory environment in which it operates. Both AT&T's previous investments in earlier technology and equipment and the desire of regulators to hold down costs by setting lengthy depreciation schedules created powerful economic disincentives against investing in newer technology.
"One of the clear results of increased competition in telecommunications in the United States has been the emergence of new products in the marketplace. In the long distance market, for example, the presence . . . and forceful requests . . . of MCI encouraged some equipment manufacturers to come forth with new ideas and products. These companies previously had been excluded from the market because AT&T bought equipment only from its Western Electric subsidiary. The emergence of other customers has provided the necessary stimulus for equipment makers to invest in research, development, production and marketing of products for a growing market."
The FCC opened door after door to competition during these two decades . . . the Carterfone Decision (1968), the Specialized Common Carrier ruling (1970), and the "Open Skies" policy for domestic satellite carriers (1971).
The FCC has begun a process of selective deregulation, including terminal equipment, enhanced services and resale services. It has also classified terrestrial microwave carriers as non-dominant and has removed the requirements for cost support data with their tariff filings.
Government struck its biggest blow for competition in communications, of course, when Justice filed suit against AT&T in 1974 and, ten years later, Judge Harold Greene ordered divestiture (see story, page 102).
Herbert Jasper, executive vice president of the Ad Hoc Committee for Competitive Telecommunications, makes this judgement: "As government involvement in competitive decision-making is reduced, companies will be able to compete through their engineers and salespersons, rather than through their lawyers. This should permit and encourage the intercity industry sector to be even more innovative, efficient, economical and responsive.
"The divestiture of the BOCs, the growth of competition, and the deregulation of nondominant competitors should also help AT&T because it will force it to become leaner, more innovative and more agile."
Everyone has an opinion on the direction deregulation should take . . . and what the results will be.
The Office of Plans and Policy of the Federal Communications Commission recently released a "Working Paper" considering, from the point of view of economic theory, the implications of divestiture of the local telephone companies for AT&T's competitive position. Working Paper #11, "Divestiture of AT&T and the Separate Subsidiary Requirements," by Florence Setzer, suggests that because of divestiture and increased competition in AT&T's markets some FCC restrictions designed to prevent abuse of AT&T's power may no longer be necessary. The paper concentrates on two possible "abuse" areas: tying the purchase of competitively-supplied products and services to the purchase of monopoly services, and cross-subsidizing competitive activities with revenues from regulated ones. Such cross-subsidy would allow AT&T to underprice its competitors in the competitive industry, possibly allowing it to gain a monopoly there, and would raise rates for customers of its regulated telephone service.
The Yankee Group's Howard Anderson points out that, with the creation of the seven new holding companies, "interconnect vendors have new potential distributors (or competitors) in the regional operating companies (ROCs), and will benefit from a growing recognition and acceptance of competition by business and residential users alike."
Oddly, MCI is worried about "premature deregulation"! MCI President Orville Wright says: "MCI advocates a three-stage relaxation of AT&T's regulatory burden. Each of these stages would be initiated by an FCC rulemaking proceeding.
"The first stage of transition, and one which could be initiated this year, would eliminate what we call the regulatory underbrush." This includes the large number of industry reports required under the current rules. Facility authorizations could also be streamlined during this first stage.
"The second stage of the transition would deal with rate regulation. This stage could be initiated after equal access has had its impact throughout the marketplace. Once it is determined that AT&T, while still dominant, no longer exerts monopoly power in the interexchange marketplace, the FCC could safely eliminate rate-of-return and cost-of-service regulation of all AT&T services. We feel a reasonable benchmark for this stage might be a drop to between 60 to 65 percent of the relevant market share.
"The third and final stage of the transition would be initiated once it can be determined that AT&T is no longer dominant in the market. At that point, the FCC could consider removing regulatory controls over the resale and sharing of services, bundling of services and required interconnections.
"Such actions should be tied to a benchmark finding that AT&T's share of the relevant intercity revenues constitute no more than approximately 40 percent of the market.
"At each of these stages, we feel the FCC should study current market conditions, including the potential market impact of inconsistent state regulation, and then attempt to harmonize regulatory oversight with market power.
"We do not feel the commission should try to select specific services for regulatory change. The relevant product market encompasses all of AT&T's intercity services. Likewise, the relevant geographic market is national. This requires that change be implemented on a national basis.
"By phasing out the regulation of AT&T in this manner, the FCC would retain only those controls needed to address AT&T's market power at each stage of the transition. Such an approach will encourage additional competitive entry without unduly restricting AT&T's ability to respond to that competition."
Let AT&T Chairman Charles Brown have the last word. Taking a broad brush, overall view, Brown says: "Today, the scope and sophistication of a country's telecommuncations system actually helps determine its GNP . . . and its global competitiveness. With divestiture and increasing deregulation, and the investment and innovation in the United States telecommunications industry that will result, America is well positioned to maintain its strong leadership position in the emerging global information economy."
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|Date:||Sep 1, 1984|
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