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The GOP and telecom: Why they both hate you
Robert Hallock
September 22, 2009 4:33 PM ET in Tech
Suspicious and familiar politics were at play last Monday when a Michigan Chamber of Commerce forum bankrolled by two of the United States’ largest telecom companies tapped Glenn Beck for the keynote address. This would hardly be noteworthy but for recent Democratic efforts to bust several of telecom’s outstanding oligopolistic practices. Landing a Republican icon as a keynote speaker is not only a nod to the GOP’s recent fetish with telecom protectionism, but a sign that the industry will not accept the Democrats’ populist pill.
The ghost of telecom past
Disagreement over how best to regulate telecom in the US is a surprisingly recent event. For the entire 20th century, oversight of the burgeoning industry could easily be characterized as bipartisan. Indeed, Democrats and Republicans worked in concert during the Nixon, Ford, Carter, Reagan and Clinton administrations to realize two landmark initiatives: The Bell System Divestiture of 1982 and the Telecommunications Act of 1996.
Bell System Divestiture
The corporate monopoly is more reviled than ever amongst the American public, but it ruled telecom with absolute authority for most of the 20th century.
Established in 1877, the eponymous American Bell Telephone Company leveraged Alexander Graham Bell’s telephone patent to establish local calling exchanges in major US cities. These local exchanges were known as Bell Systems, and they were responsible for routing calls between a major city and its suburbs. Growth was quick, and by the mid-1880s, every major city had its own local Bell System.
While American Bell was rapidly gaining control of local communication, the company’s management was working to replace the telegraph for inter-city communication as well. By March of 1885, American Bell’s leadership had established and incorporated a second company in New York called American Telephone and Telegraph. By 1892, AT&T was well on its way to realizing a cost-effective, nation-wide calling network when New York and Chicago were connected for the first time.
By 1894, the confluence of restrictive Massachusetts corporate law and the expiration of Bell’s telephone patent plunged American Bell deep into financial hardship. Unable to hold out, the United States’ only long distance company became the sole owner of the country’s largest local calling network when AT&T acquired American Bell in 1899.
By 1907, the government openly agreed that AT&T then-president Theodore Vail’s “One Policy, One System, Universal Service” model could best provide the telephone to the public without the trouble of competitors developing incompatible systems. And the rest, they say, is history.
Through the next 70 years, AT&T would enjoy its status as a government-sanctioned monopoly. Through control of telephone manufacture and connection, 22 Bell Operating Companies, the decisions of local municipalities, government encouragement, and insurmountable incumbency, AT&T was unmatched until it all came crashing down on January 8, 1982.
The Department of Justice intervenes
In 1974, the US Department of Justice alleged that profits from dominant phone manufacturer and wholly-owned subsidiary, Western Electric, were being used to subsidize AT&T’s network in violation of antitrust law.
The United States vs. AT&T case stretched eight years until the winter of 1982 when Judge Harold H. Greene decreed that AT&T’s 22 Bell Operating Companies would be split and reorganized into seven separate Regional Bell Operating Companies, or RBOCs. The monopoly breakup took effect on January 1, 1984, and several big names in corporate history were born: Ameritech, Pacific Telesis, Southwestern Bell, Bellsouth, Bell Atlantic, Nynex and US West.
Aftermath of the Bell Divestiture
For AT&T, the divestiture had the primary effect of reducing the company’s size and value by 70%. The divestiture also forced AT&T to rely almost exclusively on the long distance market it had developed since the 1800s for revenue. Finally, the firm’s leaner size put it into direct competition with Sprint and MCI, two firms that previously posed no threat.
Meanwhile, the role of providing local calling fell to the seven RBOCs and two pre-existing carriers which were never majority owned by AT&T. Each of the nine companies oversaw one geographically distinct region of the country known as a Local Access and Transport Area (LATA). Because each of the nine companies was formed from a piece of a nation-wide monopoly, each company enjoyed so-called “local monopoly” status in their respective LATAs.
Lastly, dismantling AT&T dramatically improved the situation for GTE. GTE was the nation’s second largest telecom provider during the Bell System days, and it too maintained a set of seven Bell-like regional operating companies. Because the firm was never an AT&T holding, GTE’s infrastructure was not restricted to RBOC LATAs. AT&T’s exit in the local calling market also had the effect of making GTE the largest national network. The confluence of these qualities made it an instrumental component of the company we know today as Verizon.
Verdict: Bipartisan
This entire process of breaking the century-old Bell monopoly was started by a Republican Attorney General, overseen by two Democratic Attorney Generals, and seen to conclusion by another Republican. The Bell Divestiture organization would remain in effect until the government invited restructuring in 1996.
Telecommunications Act of 1996
The Telecommunications Act of 1996 was the first major rework of US telecom law since 1934. The TCA was at the time considered an act to provide a new competitive telephone market in the United States.
A 1995 House report optimistically wrote that the Act was “to provide for a pro-competitive, de-regulatory national policy framework” designed to rapidly accelerate information services deployment “by opening all telecommunications markets to competition.”
To accomplish the goal, the TCA would consider SNET, Cincinnati Bell, the RBOCs and GTE as Incumbent Local Exchange Carriers (ILECs) and set them loose to expand and restructure. To offset the inevitable race towards oligopoly, the feds also created policies that allowed for the simple and inexpensive establishment of local competitors known as Competing Local Exchange Carriers (CLECs). The feds predicted that the simplicity of CLEC creation would naturally bust the local monopolies of the ILECs through an abundance of consumer choice.
Devastating aftermath
Unfortunately for consumers, the Telecommunications Act of 1996 has several fatal flaws that continue to have a chilling effect on US telecom policy.
Foremost, the act was primarily concerned with the traditional telephone. Neither broadband nor cellular services were substantial at the time the bill was created. This means that a patchwork of FCC rulings, minor legislation and snap judgments have served in place of real policy for nearly a decade.
The act also draws a distinction between a “telecommunications service” and an “information service.” Carriers that offer information services, e.g. broadband, are not subject to the interconnection and pro-competition clauses of the act.
The Digital Subscriber Line (DSL) was not classified as an information service until 2005. This means DSL deployment from traditional telcos was mired in the red tape, high carrier interconnection costs, and dizzying array of complex fees typical of services classified as telecommunications. This not only stunted the growth of the DSL market, but it is one of the major reasons why DSL is historically more expensive than cable.
The RBOCs and their post-merger territories.
Cable internet, meanwhile, was considered an information service from its inception. This allowed cable ISPs to build a nation-wide cable network with very little regulation. In this way, cable connections were permitted to become the dominant standard through a lack of competition from DSL.
The act has also had a damaging effect on the deployment of next-generation broadband services. Because the Telecommunications Act allowed the RBOCs to reorganize, the firms raced to merge and acquire. Within a decade, the nation was owned by just three companies: AT&T, Verizon, and Qwest. None of these carriers have the incentive, or perhaps even the ability, to economically deploy their fiber services in competing markets. If you’ve ever wondered why you can’t get Verizon’s FiOS outside of the northeast, you now know why.
Last, but certainly not least, the ease in which companies were able to establish CLECs led to a tremendous boom of competing local carriers. Users were spread so thin amongst these companies that the market almost entirely collapsed. Major CLECs like Adelphia were acquired or went bankrupt, and few large CLECs remain today.
The RBOC consolidation (Image: Wikimedia Foundation)
In total, the Telecommunications Act of 1996 significantly failed to systematically create the new competitive market intended by Congress. Through short-sightedness, blinding optimism, corporate oligopolism and new technological developments, the Telecommunications Act of 1996 has given US telecom every tool it needs to divert the nation away from an open, abundant, competitive and non-discriminatory market.
Verdict: Bipartisan
The eager optimism the 104th US Congress had for the darling of its tenure is palpable. It breezed through the Senate in less than seven months with a vote of 91-3. Both parties truly worked together to create a willfully anti-consumer telecommunications market.
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