In February of 1996, the U.S. Congress enacted the Telecommunications Act of
1996. The Act was one of the most substantial changes in the regulation of any
industry in recent history. The Act replaced all current laws, FCC regulations,
and the consent degree and subsequent court rulings under which AT&T was
broken into the "baby Bells." It also overruled all existing state
laws and prohibited states from introducing new laws. Practically overnight, the
telecommunications industry went from a highly regulated and legally restricted
monopoly to open competition. Or almost open competition. It has been more than
three years since the Act became law, and while we have seen some changes, they
have not been as substantial as many analysts, law- makers, and regulators had
anticipated. The Act addressed five major areas of telecommunications: 1) Local
telephone service, 2) Long distance telephone service, 3) Cable television
service, 4) Radio and television broadcasting, 5) Censorship of the internet.
The primary goal of the Act was to promote competition for local telephone
services, long distance telephone services, and cable TV services.
Inter-exchange carriers (IXC) (such as AT&T, Sprint, and MCI) and cable TV
companies (such as TCI and Jones Inter-cable) are permitted to offer local
telephone service. The "baby Bells" or Regional Bell Operating
Companies (RBOC) (also called Local Exchange Carriers (LEC) such as BellSouth
and Ameritech were permitted to offer long distance telephone services and cable
TV services. The RBOC were also permitted to manufacture their own equipment and
to offer online information services and electronic publishing (but under tight
controls until 2000). Incidentally, electric utility companies, another
traditionally highly regulated industry, were permitted to enter the local
telephone market. I believe that the Act made the most impact on Local telephone
service. Local telephone service had been a regulated monopoly for almost 100
years. Local telephone services are currently controlled by a handful of RBOCs
who have not been known for innovation or cost cutting. Under this new Act,
local service was now open for competition. Other companies are permitted to
build their own local telephone facilities and offer services to customers.
However, building entirely new facilities are prohibitively expensive. Under the
Act, existing RBOCs would have to offer their telephone services to other
companies (e.g., AT&T) at wholesale prices. These other companies will then
resell the services to consumers at retail prices in competition with the RBOC.
The wholesale prices are set by state regulatory agencies and typically are
around 20% under the RBOCs current retail prices (but some states have set them
as low as 40% under retail). One of the major concerns of permitting open
competition were the very real fear that the profit motive would lead companies
to focus on the most profitable markets and avoid the least profitable ones. For
example, after deregulation of the airline industry, prices dropped dramatically
for large urban centers, but steadily rose for small rural centers. Common sense
suggested that the same events would occur in the telephone market. Urban
customers would benefit from increased competition while rural customers would
see their prices increase sharply to accurately reflect the high cost of
providing services in sparsely populated areas. Many of the RBOCs proposed price
increases of $10 per month in rural areas. Therefore, the Act contained a
universal service requirement, which mandated RBOCs to provide rural and other
high-cost areas with similar types and quality of services and technologies that
they provide to other areas and to do so at reasonable rates. RBOCs were also
required to provide special, less expensive access to schools, hospitals, and
libraries. RBOCs (with the exception of small RBOCs) were required to contribute
to a universal service fund, which was used to partially subsidize the RBOCs
providing services under the universal service requirements. One year after the
Act was passed the expected competition for local telephone service had not
materialized. The RBOCs launched several court challenges and managed to delay
any real changes. Several cable TV companies have test marketed local telephone
service, but none have committed to providing full scale services; most have
quietly terminated plans to enter the market after unsuccessful test-marketing.
Similarly, most telephone companies have quietly terminated plans to provide
video to their customers. Most analysts expected the Big Three IXCs (AT&T,
MCI, and Sprint) to quickly charge into the local telephone market. Sprint has
made small moves also providing cellular telephone services in five urban areas.
AT&T has barely begun test-marketing the reselling of RBOC services in
California -- although it claims it will soon begin reselling RBOC services in
all 50 states (something it has been claiming since early 1996). Only MCI has
begun building its own local telephone network. It has established fiber optic
services (SONET) in 18 large urban centers and is actively trying to lure the
largest corporate customers away from the local RBOCs. There has been active
competition in the long distance telephone market for many years, but RBOCs have
been specifically prohibited from providing long distance services. The Act
permitted the RBOCs to provide long distance outside the regions in which they
provide local telephone services. However, they are prohibited from providing
long distance services inside their region until at one viable competitor exists
for local telephone services. To date, several RBOCs (e.g., GTE and SNET) have
moved aggressively into the long distance market. They have focused exclusively
on out-of-region long distance by buying long distance services from IXCs and
reselling them, usually to large corporate accounts. However, none have moved
into the in-region long distance market because none face real local
competition. All of the RBOCs claim to have plans to offer in-region long
distance, but because they have been aggressively fighting court battles to keep
competitors out of their local telephone markets. While more competition in the
long distance markets has occurred in recent years, it is still an open question
whether most people will see competition in the long telephone market. Many
analysts believe that local competition will focus on business customers, not
the more common household customer. Even with competition reaching households,
most analysts believe it will be another few years for all customers to have a
viable option for local telephone service. On February 15, 1997, 68 counties
signed an historic agreement to deregulate or at least lessen regulation in
their telecommunications markets. The countries all agreed to permit foreign
firms to compete in their internal telephone markets. Major U.S. firms (e.g.,
AT&T, MCI, BellSouth) are now permitted to offer telephone service in most
of the industrialized and emerging nations in North America, South America,
Europe, and Asia. Likewise, overseas telecommunications giants (e.g., British
Telecom) are permitted to enter the U.S. market. This increased competition in
the U.S., but the greatest effect is likely to be felt in emerging countries.
Cable television and television broadcasting also met changes. Deregulation of
the cable industry meant big changes. Rate regulation requirements were removed
this year also allowing cable companies to offer long distance services. The act
also mandated the use of the “V-chip”. A computer chip installed in new TVs
to censor certain programs from children. The TV companies were allowed to reach
35 percent of the nation’s televisions (previously 25 percent) giving them a
broader audience. The terms for the licenses to broadcast were lengthened from 5
to 8 years, and were given 6MHz of digital bandwidth, which equals to an
additional channel. The Telecommunications Act that sought Internet censorship
was struck down by the Supreme Court in June 1996. It was ruled that Internet
censorship was unconstitutional. The ACLU and many civil rights activists were
firmly against this policy. As Thomas Jefferson put it “ Congress shall make
no law respecting an establishment, or prohibiting the free exercise thereof; or
abridging the freedom of speech, or of the press; or the right of the people
peaceably to assemble, and to petition the Government for a redress of
grievances”. All in all, the Telecommunications Act of 1996 brought tremendous
changes into the telecommunications field. Such regulatory acts are needed to
insure consumer rights in this “Corporate” world we live in. The gift of
choice, the freedom to revel in our options is one of the foundations of how
this great country came to be. We need to cherish that fact…for eternity.