For whom the Bells toll

Citation

Curwen, P. (2003), "For whom the Bells toll", info, Vol. 5 No. 1. https://doi.org/10.1108/info.2003.27205aab.002

For whom the Bells toll

As seven years have passed since the 1996 Telecommunications Act ushered in a new era of competition between long-distance and local carriers in the USA, it would seem reasonable to suppose that it is all over bar the shouting. Unfortunately, progress in opening up local markets has been pitifully slow in practice, and the Regional Bell Operating Companies (RBOCs or Baby Bells) still dominate their markets. However, there are finally some signs that the competitive landscape is undergoing real change.

In essence, the principle underlying the 1996 Act was that the Baby Bells would be authorised to supply long-distance services to their local customers – provision to customers in other Baby Bells' territories is anyway permissible – provided that they opened up their local markets to all comers. This required them to satisfy a number of agencies, including, in particular, the Federal Communications Commission (FCC), that their markets were truly open, and this process proved initially to be somewhat tortuous. Furthermore, although this was not envisioned in the 1996 Act, the financial markets were always aware that there was considerable scope for mergers among both the Baby Bells and the long-distance carriers, and the number of the former was gradually whittled down to four. All have now applied for permission to provide long-distance services in respect of most of the states that they encompass, and over the past two years a significant number of authorisations have been forthcoming.

This is plainly visible by reference to Table I which shows that there were seven authorisations in 2001 and 26 in 2002, compared with a total of only two by the end of 2000. Furthermore, the situation improved significantly at the end of 2002 because Qwest Communications – which at the time provided long-distance services in 14 states but was obliged to forgo them as a condition of its take-over of US West, and which is currently teetering on the edge of a Chapter 11 bankruptcy filing, in part due to accounting irregularities – was forced to resubmit all of its applications. The majority of the states are therefore open for competition.

Naturally, it may be argued that "open for competition" and "experiencing competition" are not the same thing. As noted, for example, in a previous "Rear view" (info, 2000), the delay in granting authorisations was in good part accounted for by controversy over the terms on which new entrants would be able to lease local access lines from the Baby Bells. Indeed, it was frustration with this issue that induced AT&T to decide to gain local access not via leased lines but via cable. The purchases of the likes of TCI and MediaOne proved, however, to be misguided, leading to the recent disposal of the cable businesses to Comcast. This means that AT&T and others – including upstarts Talk America and Supra Telecom – must rely upon state regulators to force Baby Bells to lower their wholesale rates for leased lines, and it is in this respect that progress has been made in roughly a dozen states including California and New York. According to UBS Warburg, rivals had taken control of less than 2 per cent of the Baby Bells' local lines by the end of 2000 and roughly 3.5 per cent by the end of 2001. A figure of 7.2 per cent is forecast for the end of 2002 which, while nothing startling, is still a doubling in one year and, if that can be continued, real progress will be visible by the middle of the decade.

More important, however, than the specific market share gained by rivals is the expectation that encroaching competition will galvanise the Baby Bells to improve their services. This is not altogether good news since, as they suspected in the immediate aftermath of the 1996 Act, they arguably have more to lose than to gain by opening up their markets. The problem is that long-distance telephony is essentially a commodity with prices held down by surplus capacity. It has been estimated that one local customer lost approximates to five long-distance customers gained. In principle, the manifestations of the problem of over-supply, as evidenced in particular by the bankruptcies of WorldCom and Global Crossing, should have been resolved by market forces – primarily via the closure of surplus carriers. Unfortunately, whatever its virtues, Chapter 11 often serves simply to return bankrupt companies to their old markets, having been cleansed of their debts and hence prepared to compete even harder than before.

During 2002, AT&T gained over two million local lines with its "Any Distance" package, while WorldCom subsidiary MCI, Chapter 11 notwithstanding, continued to provide, with some success, a more widespread service with its "The Neighbourhood" package. The upstarts by their nature have tended to provide a service in only one or two states, but in that respect they arguably pose a worse threat to incumbents. The Baby Bells are understandably alarmed but their hands are tied because it is local regulators who determine the wholesale cost of leased lines and hence, by implication, the profit margins available to efficient rivals. Endless whingeing about how unfairly low these are being set is likely to fall on deaf ears, if only because cheap telephony goes down well with voters and, while the Baby Bells are entitled to appeal local charges to the courts or the FCC, these are normally unwilling to interfere with decisions taken by local regulators unless they have obviously acted in a prejudicial manner or grossly misinterpreted their obligations under the 1996 Act. Needless to say, whingeing is not the exclusive preserve of the Baby Bells: AT&T, for example, recently refused to sign up new customers in most of Pennsylvania on the grounds that wholesale prices had been set too high.

The Baby Bells are certainly attracting long-distance customers – for example, BellSouth had 416,000 business and domestic connections at the end of September 2002 but, as noted, pure telephony is a cut-throat business. This is why the Baby Bells will be forced to innovate, since adding value normally adds profitability. One obvious route is the provision of broadband. Hence, BellSouth had nearly one million broadband customers at the same date and can be expected to upgrade its lines as speedily as possible, although one drawback is that, if a household has two separate lines – for telephony and computer, a broadband connection providing voice and data over a single line enables one of the two lines to be shut down. Another noticeable trend, for all types of carrier, is the bundling of services. For example, Verizon Communications' "Veriations All" package, introduced in August 2002, costs up to 30 per cent less than the total of the unbundled elements, while SBC Communications provides its "Connections" package, and BellSouth its "Complete Choice" package, at a lesser discount. Obviously, discounts are prima facie costly, but their great benefit is that they reduce churn, which is even costlier. Increasingly, bundled packages provide wireless services at comparable rates with fixed-wire connections, since another serious threat to the Baby Bells – the third is from e-mail – arises from the possibility that customers will change over to a wireless-only lifestyle. In these respects, it can be said that the 1996 Act is finally beginning to yield some of the benefits first promised so long ago.

Nevertheless, it is too much to ask for absolute clarity as to what is, or is not, permissible in a country as litigious as the USA. Although the FCC appeared to have made a fairly definitive ruling in 1999, with national effect, about what parts of a local network had to be made available to competitors and at what price, the District of Columbia Court of Appeals ruled in May 2002 that the Baby Bells did not need to provide local access to competitors such that their customers could have a different provider for broadband Internet services from for voice telephony, and asked the FCC to reconsider its rules on the grounds that they did not take sufficient account of differences in local circumstances. Since it refused the FCC's request for a reconsideration, this now leaves the FCC with a decision as to whether to appeal to the Supreme Court. Meanwhile, that was the route chosen by AT&T, WorldCom and Covad Communications in December 2002, so this saga still appears to have some way to run.

Peter CurwenVisiting Professor at the School of Management, Strathclyde University.E-mail:pjcurwen@hotmail.com

Referenceinfo (2000), Rear view, "TELRIC to bite the dust", Vol. 2 No. 5, pp. 351-2.