Let the race begin.
As expected, the passage of the bill prompted a wave of change. Every week brings another announcement of a merger or acquisition. Bell Atlantic and Nynex, two of the regional Bell operating companies, have agreed to merge. U S WEST is acquiring Continental Cablevision. The three major long-distance providers - AT&T, MCI and Sprint - plan to launch their attacks on the local telephone markets. Futurists predict that the sweeping reform will bring about new products and services as well as lower prices, all to the benefit of consumers. At a meeting of FEI's Committee on Information Management, three executives in the telecommunications industry talked about the impact of the law on their business.
by David Laube Vice president and CIO U S WEST Communications Denver
When I joined U S WEST 13 years ago, I'd spent about half my career in high-tech, start-up companies. My biggest concern was that U S WEST was in a stodgy industry and might be a boring place to work. That notion was quickly dispelled with AT&T's divestiture, and now with the Telecommunications Act of 1996.
To put the new legislation in context, the United States operated under a telecommunications law that was drafted in 1934. It was the monopoly model, which said the cost of building competing networks is a waste of resources. The objective was to provide everybody in the United States with telephone service.
The model worked extremely well. The United States has the highest penetration rate of telephone service of any country in the world. But although the law created one network, it also created subsidized pricing where the price was not linked with cost. For example, long distance subsidized local rates. Urban customers subsidized rural customers. Business customers subsidized residential customers. This was okay, because there was no competition.
Then, competition was introduced in the late 1960s in the equipment business. Now you were allowed to own your own telephone. Some years later, MCI used technology to create competition in the long-distance business, and look what happened. This and other innovations in technology drove divestiture. In 1984, the courts broke up AT&T. The company kept the long-distance business and the equipment manufacturing business, but it put the local telephone business into the seven regional Bell operating companies.
In the years since divestiture, technological change likewise made the divestiture model obsolete. Telephone service can be provided over cable TV wires, video can be sent over telephone wires and the distinction between inter- and intra-LATA long distance became irrelevant. Even the cost of building completely new networks has dropped significantly. It was time for a new approach. That's why Congress passed the new telecommunications law.
Let's look at the impact the new legislation will have on the customer. The biggest change customers will see is incredible choice, whether they want it or not.
The competition for local residential telephone service is going to be very intense. In addition to the traditional telephone companies, local telephone service will be offered by the local cable companies over their cable wires. The long-distance companies have announced that they're getting into the local telephone business. Other companies have started to build their own networks to offer telephone service in major cities. The telecommunications legislation requires that the local telephone companies allow others to resell their services, and these resellers are, at this moment, getting into position all over the country. When you factor in five or more wireless telephone alternatives in major markets, you can see that all the ingredients are present for a gigantic battle over market share.
The second area in which customers will see more choice is in the long-distance business. While AT&T, MCI and Sprint have captured much of today's market, the legislation will allow the seven regional Bell operating companies to enter the business. This means that many consumers could have 10 or more choices for long-distance service.
The third area of choice will be video entertainment services. Although cable companies today have essentially a monopoly in many areas, the new legislation allows telephone companies to offer similar video services over the telephone wire. In addition, we're now seeing competition appear for video services from direct-broadcast satellite offerings and from wireless cable companies.
All this competition will drive another benefit for the customer - market innovation. In order to gain market share, many companies will develop new products and services very rapidly. Then they'll bundle and package product offerings across multiple-product lines. For example, you might see the cable TV company offering an inexpensive second telephone line if the customer will subscribe to a premium video service like HBO. Or if you spend $50 a month on long-distance service, you might get a discount on your local telephone service and two free pay-per-view movies. At U S WEST, we've already done some mock-up bills that show various combinations of products and services wrapped up in an assortment of discounts. Customers will have the ultimate flexibility to tailor their purchases exactly to fit their needs.
There's considerable uncertainty over whether the legislation will result in lower costs to customers. Normally you'd expect that competition would result in lower prices. But there are still billions of dollars of subsidies in the present pricing structure, and it's not clear how the transition to competition will affect this situation. For example, there may be some swings in pricing based on geography. If competition drives prices closer to costs, then rural customers may see prices at $35, rather than the $15 they pay today. If it's the public policy of this country to keep rural rates in parity with urban rates, then who will pay the remaining $20? That's the type of issue the Federal Communications Commission and the state commissions will be dealing with in the coming months.
Most carriers supported the bill because it essentially lets everyone into everyone else's market. But although the bill says "let competition rule," in reality, we'll have to go through some transitions first.
We'll gradually see local telephone competition, first through resellers, then from cable companies and facility-based carriers. Once local competition has been established, competition in the long-distance business will intensify. During this period, some difficult complexities in the local telephone network will have to be solved. Issues such as where do competitors connect into the local telephone network, how do customers keep their telephone numbers when they switch carriers and who pays for the costs of this transition will have to be resolved.
In the coming months, the FCC will debate these issues, and the future landscape of the telecommunications industry will be decided. The FCC will look at pricing processes, policies related to the points of interconnection and opening up telephone company databases to all competitors.
U S WEST's strategy is to have one of the wires into the home, either the telephone wire or the cable wire. That's why shortly after the bill was signed, we announced the pending acquisition of Continental Cablevision, making U S WEST one of the largest cable companies in the country. We now have the potential to leverage our infrastructure, our systems, and potentially, a brand across all of the areas we serve.
It's a very exciting time in the telecommunications industry. Whatever happens in the next 12 to 18 months, when we're settling on the rules, is going to drive what we'll have for a long time to come. We're just now starting to see what it's going to look like, but we don't really know, because we don't have seven or eight local competitors - yet.
GOING THE DISTANCE
by James Lewis Regional executive, public affairs MCI San Francisco (415) 978-1004
The remarkable thing about the Telecommunications Act is that at the end of the legislative session last year, all of us endorsed the bill. That was after years of wrangling on Capitol Hill, with the Bell companies on one side and competitors on the other, fighting about how to change this industry and whether or not we needed the legislation. I think the Bell companies decided this bill was about as good as they were going to get. We decided it wasn't so bad, and in fact, we see some significant positives.
MCI was particularly interested in a facet of the bill that would open local telephony markets to competition. Until then, it was theoretically possible for MCI and others to provide local telephone service in competition with the incumbent telephone companies in six states. In 44 states, it was unlawful for us to do so.
About two years ago, we began pushing to make it lawful, on a state-by-state basis, to compete with the Bell companies. By the time the legislation came to the fore early this year, we could provide local service in 38 states. The legislation wiped off the map any remaining legal barriers in the states, and it created ways to get over structural barriers. The bill also changed the way in which Bell companies could enter the long-distance market. Before the law was passed, the United States District Court determined whether, to what extent and when Bell companies could enter the long-distance market. Now it's no longer a matter for the district court. It's a matter for the FCC, so clearly the bill has shifted the jurisdiction.
If you look at the structure of the telecommunications industry in the United States post-divestiture, you'll see that the legacy of these historic legal barriers is that long-distance carriers need to use the facilities of local phone companies to get to our customers. We pay a fee to the regional Bell operating companies, which is about seven times above cost. About 40 percent of MCI's total cost structure goes to paying local telephone companies' access charges.
Think of that in your businesses. Do you have any single item of cost that represents 40 percent of your cost structure? That's a lot of money, and it becomes particularly significant if that entity suddenly gets permission to compete against you. So we were very concerned that the Bell companies not be permitted to provide long-distance service to our customers unless and until we had an alternative to using their access facilities.
The bill creates a bizarre system of regulation that requires long-distance carriers and cable TV companies that want to enter the local telephony markets to go to the incumbent local phone companies to negotiate the terms for entry. The bill says local phone companies have an obligation to open up their networks and interconnect with others, and it establishes negotiation as the way to do that.
We went down that road before the integrated Bell system, and it didn't work. The incumbent provider has no incentive to negotiate. There's no equality in bargaining power in these negotiations. But now the theory is the Bell companies do have incentives to negotiate: the long-distance carrot. They may not enter long distance unless and until they're ready to negotiate a fair price with the MCIs of the world.
To get started, we must interconnect our local networks. We see resale as a very important way to jump-start competition in the local market. But it's a transition strategy. We'll construct our local facilities and put in switches. We'll start in heavily concentrated areas, but eventually we'll extend our distribution networks and use unbundled loops to the residential networks. That'll take time. Until then, we need the ability to resell services. We're telling the FCC and states that we need a 40-percent discount off retail services.
There's another way to do it: Use the network functions, which the legislation calls unbundled network elements, of the incumbent local telephone companies. In other words, you don't buy the entire retail package from the local phone company. The bill says the phone companies must permit others to buy parts of their network and sets a very generous standard in pricing. There are fights going on right now at the FCC about how the pricing should be set.
What we envision happening is MCI will enter the market through a combination of avenues: reselling bundled offerings of the phone companies, buying unbundled network elements and constructing our own facilities. Our strategy is to get into the local telephone service market, because we believe our brands are one of our most important assets. And we believe we can leverage our brand equity significantly in the local telephone markets.
We've got a base of 20 million customers. One telecommunications analyst on Wall Street believes MCI has an advantage coming into this new environment because all our customers chose MCI at one time or another. And we've got an energized sales force that's been focusing on the local markets for the last six to eight months.
By the end of 1997, we expect to have 50 local switches in service. Switching technology has changed so much that we can serve much more efficiently with one or two or three switches in a serving area than we could with the traditional telephone architecture, where you have a tandem switch and many end offices.
As for other areas of telecommunications, MCI recently won the right to provide direct TV service, so we've created two new companies. One will target the residential market and provide video entertainment services, and the other will target businesses and provide information services. Some companies are providing those services today, but we're going to put the MCI marketing engine behind us with innovative pricing and packaging. Our new services will be available first through resold services of the Bell Atlantic Companies and later through our own networks.
On the issue of subsidies, we tell the FCC and state regulators that services should be priced at economic cost, and that includes access, by the way. Historically, some of the local phone companies have priced their services above anybody's measure of economic cost. Of course, some of their services are priced below economic cost. But if you have this subsidy flowing with direct competition into the markets, you've got problems.
Interestingly, U S WEST and MCI began cooperating about two years ago. We hired an economic and engineering consulting firm based in Colorado, and we agreed that we'd jointly fund a study to determine the 1996 economic cost of local telephone networks, because we knew going into the project that we'd disagree on how to use the output of this study. But we knew someone had to do this work, because no one had done it before. MCI and U S WEST agree the economic cost of providing local phone service varies directly - and in some cases, dramatically - on population density. So if you're serving rural areas more than urban areas, your economic costs will be high.
So we said it should be national policy that no one should have to pay more than $18 a month for residential telephone service, including dial tone, 911, operator services, white pages and direct resources. The difference between $18 and the total cost is the subsidy. Somebody's got to pay for that, and it should be anyone who wants to provide local phone service, whether it's MCI, U S WEST, a cellular company or a cable TV company. All should be required to contribute to a central fund to provide subsidy flow.
Historically, a subsidy flow rested entirely within the rate structure of the incumbent telephone company. Soon customers will have a choice of service provider, so they'll decide which company gets their portion of the subsidy. But today, you don't have that choice. It's U S WEST, Pacific Telesis or Nynex. That's why MCI Metro can't go into a rural area and serve it, because we don't have access to the subsidy flow.
At some point in the future, the distinction between local phone companies and long-distance carriers will diminish. But it'll take a while. In the meantime, we want people to start thinking of MCI as a full-service communications company rather than as a long-distance phone company.
BRINGING CABLE TO THE TABLE
by Dilpreet Jammu Director of new business development Jones Intercable Englewood, Colo. (303) 784-8396
The Telecommunications Act represents an incredible opportunity for accelerated change throughout our entire industry. The fundamental shifts occurring during the next five years will surpass those of the past 100 years of telephony and telecommunications development. The winners in this new age will be those companies that are able to understand the new environment, recognize their competition, use their infrastructure wisely, develop and package the right services for the customer and find the right strategic partner.
The computing industry has had a major impact on all service providers. With increasing computing power come new applications that require greater memory and higher bandwidths. We're now a society of distributed computing engines connected by a series of networks - the Internet. If we don't change to meet this new challenge, cable operators could see their annual growth rates drop to 5 percent. The average regional Bell operating company, such as Nynex or Bell Atlantic, is in an even worse position. These companies' annual growth rates could be less than 3 percent.
We see competition from land-line service providers, such as the regional Bell operating companies, interexchange carriers and utilities. Competition is also heating up in the area of wireless service providers, such as direct-broadcast satellite, wireless cable and personal communications systems. Utilities companies, which are also experiencing regulatory changes, will probably have the cash and an interest in pursuing telecommunications services. One interesting competitor is the information services provider, such as America OnLine. In this arena, we're competing for the consumer's time. The person who surfs the Internet for five or six hours a night has less time for cable television. Our challenge is to provide the services to this growing market segment.
The wise use of resources and infrastructure will be a key differentiator. The average telephone company has legacy billing systems, centralized network intelligence in the form of large switches and a narrow-band twisted pair network (copper wires that can't carry huge quantities of data) to the home. The workforce, although highly trained, is also highly specialized in one or, at the most, two disciplines. Compare this to the cable operators, who have built broadcast networks with high-bandwidth coaxial cable to the home. The inherent nature of this network and the services provided (monthly vs. transactional or per-call billing) has resulted in simple billing systems and little centralization of network intelligence.
Without the legacy systems and centralized intelligence, workforce training is simplified, and job responsibilities may be broader. The coaxial drop to the home is also a significant advantage in a competitive environment. With bandwidth-hungry multimedia applications and more computers connected to the Internet each day, the need for centralized network intelligence may diminish. The Internet telephone is a classic example. The computer in the home has the embedded intelligence to make the telephone call. The network provides only the bandwidth and simple data routers to ensure that the information gets through. There are no per-minute charges for an Internet call (to date), and hence the billing requirements are simplified.
Our research and experience have shown that today's consumers are interested in packaged services. We recently launched packaged cable and telephone service to our residential customers in large multidwelling units in our Alexandria, Va., system near Washington, D.C. The brand name for our service is Futurecom. The package consists of a 54-plus channel cable service combined with a telephone service for $37.32. Our research suggested that customers like such features as call waiting, identification masking, unlimited local calling, free unlisted phone numbers and free inside wire maintenance. Rather than charge for these key features, we decided to include them in our basic package.
Based on our market research, we also added four other packages. These packages include a telephone set with simple, clearly marked buttons that the customer can use to access services with just one touch. The phone also has a built-in screen, so our customer doesn't need to purchase a separate device to use caller identification services. The combination of telephone and cable service at an attractive price has resulted in a more than 25-percent penetration rate in many of our targeted multidwelling units. With number portability, we expect this penetration rate to increase.
The right strategic partner is a critical element to success. Years ago, our entire industry was focused on delivering four services: basic, basic plus, premium and pay. Today, we must go forward, from offering these four services in a monopoly environment to providing many complex services while facing full-fledged competition.
We must be smarter and more focused. As an industry, we currently don't have all the skill sets needed to compete with the larger telecommunications players, so a strategic partnership is necessary. Jones Intercable recently formed an alliance with Bell Canada Enterprises. This gives us access to capital, as well as to intellectual property, in cablephone technology, telephony services, directory services, mobility services, gateway networks, satellite networks and consulting services in a number of companies across the globe. Our relationship began overseas in the United Kingdom, where we learned to compete against British Telecom, the incumbent telephone service provider. We hope to use our experience and our knowledge here at home to provide our customers with superior packages and services.
Going forward, we believe that additional strategic partnerships will be required to strengthen our position. Many of these will be at the local level and will allow us to pursue new services, targeted at specific end-users.
In general, the Telecommunications Act isn't about words: It's about actions. It will be what we, as operators, choose to make it. Many new companies will be formed, and I hope that many of the old companies will be allowed to disappear. We can't afford to encumber the next generation of business opportunities with the protectionist attitudes of yesterday. Let the competition begin.
RELATED ARTICLE: BUILDING A NEW FRAMEWORK
On August 1, the Federal Communications Commission adopted a set of general rules to allow states to implement the local competition provisions (Section 251) of the Telecommunications Act of 1996. Within the framework of the rules, each state will develop specific rates and procedures. Here are a few highlights.
The rules require local exchange carriers to make certain minimum points of interconnection at local and tandem switches available to competing carriers. The incumbent carriers must provide any technically feasible methods of access requested by another carrier, including physical equipment.
Incumbent carriers also must make certain network elements available to new entrants into the market, on request. These are network interface devices; local loops; local and tandem switches; inter-office transmission facilities; signaling and call-related database facilities; operations support systems and information; and operator and directory assistance facilities.
Since the Telecommunications Act requires existing carriers to offer for resale any service provided at retail to noncarrier customers, the new rules contain a methodology and definitions to apply the law's "avoided cost standard." This standard requires states to identify which marketing, billing and collection costs are avoidable when an existing carrier provides services wholesale, and the states also must calculate the portion of the retail rates attributable to those costs.
The FCC's next step is to develop rules and guidelines that address universal service and access charge reform. For more information, contact the FCC at (202) 418-0200, or online at http//:www.fcc.gov.
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|Title Annotation:||Information Management; includes related article on new regulatory framework; impact of Telecommunications Act of 1996 on telecommunications industry|
|Date:||Sep 1, 1996|
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