To understand the legal and business positions taken by industry stakeholders in the United States, some knowledge of the key events which have shaped public policy is essential. These events are best viewed as a struggle between groups who want unfettered competition, groups who want monopoly power and protection, and groups who want inexpensive service.
Western
Building the Bell System
1980s to Today Pulling it apart...
Figure 1-12: Telecommunications industry monopolization and demonopolization This same paradigm applies to most countries. Key events in the history of the telecommunications industry in the United States are as follows:
• In 1876, Bell applied for and received a patent for the telephone. Bell obtained the exclusive rights to this invention for 17 years. Bell companies were formed and many local networks were built. Long-distance service began. Although many challenge the patent, Bell prevailed.
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• Bell's patent expired in 1893. Many companies began building networks. Bell responded in some cases by refusing to interconnect its network with the new companies' networks (thereby forcing some businesses to subscribe to both networks) and by buying its competitors. The federal government brought antitrust actions.
• The Kingsbury Commitment occurred in 1913. The U.S. government left Bell companies intact. In return, Bell companies agreed to stop buying
independent companies, except with Interstate Commerce Commission approval, and to allow interconnection between its networks and the networks of the independent companies.
• The Communications Act of 1934 was signed, forming the Federal Communications Commission. This act signaled the birth of modern telecommunications regulation. Bell companies dominated the industry, building their own equipment through the Western Electric subsidiary, and built international networks. Western Electric, in addition to telephone equipment, made washing machines and movie sound systems. Questions arose as to whether ATT subsidizes competitive Western Electric products by paying abnormally high prices for equipment needed by its monopoly Bell Telephone subsidiaries. Antitrust activity began again in 1949.
• The Consent Decree of 1956 was signed. The antitrust case was settled when ATT agreed to divest itself of international companies, and to limit Western Electric to manufacturing only telecommunications equipment. Western Electric left the other businesses, and agreed to license its patents, at reasonable rates, to other companies.
At the end of its first century, the Bell System, headed by ATT, served more than 80 percent of the nation's telephone subscribers, from 23 operating telephone company subsidiaries, and also owned Western Electric and Bell Laboratories.
ATT carried essentially all U.S. long-distance traffic.
The Bell System was built during this time. Concurrently, more than 1,800 independent telephone companies were formed in non-Bell territory. The largest of these was General Telephone and Electric (GTE), which also had a
manufacturing subsidiary. United Telephone was another large independent company.
As newer technologies were developed, the FCC intentionally ensured that ATT did not have a monopoly in them. ATT was specifically prohibited from owning and operating satellite communications systems, and half of the cellular telephone licenses were granted to non-Bell companies.
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Figure 1-13: Telecommunications industry regulation before 1980s
As the 1980s began, wire line telephony was still a regulated monopoly. Satellite communications and cellular service were not monopolies, and were somewhat more loosely regulated. The FCC and Congress were under increasing pressure to change the nature of the industry. Users wanted services they could not get.
Manufacturers wanted additional business opportunities.
The technology had changed so that making telecommunications equipment was easier. The distinction between telecommunications equipment, which ATT's Western Electric subsidiary equipment was allowed to make, and computing equipment, which Western Electric was forbidden to make, became blurred. In addition, courts had ruled that the FCC could not prohibit non-Western Electric equipment from being connected to the Bell network.
The FCC attempted to resolve the questions through an inquiry called the Computer Inquiry (later called Computer Inquiry I, or CI-I). Following are two key decisions related to Computer Inquiry:
• The CI-I decision, in 1971, was issued by the FCC. Although it was intended to draw a line between communications and data processing, its largest consequence was a decision that allowed competitors' CPE to be connected to Bell lines without the previously required "protective coupling device." The FCC set up an equipment registration program, defined the RJ-11 jack, and opened the CPE market to competition in the process.
• The CI-II decision, in 1980, defined enhanced services. Bell companies were to be allowed to provide enhanced services, but only through a fully separate subsidiary, to ensure that basic monopoly revenues were not used to
subsidize enhanced services. Similarly, the Bell System was required to provide CPE through a fully separate subsidiary.
While the struggle continued over provision of CPE and data services, MCI and other competitive distance carriers had forced an opening of the long-distance market. The result of the struggles was another antitrust case, which resulted, in 1982, in a modification of the 1956 consent decree. This was called the Modified Final Judgment, or MFJ.
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A key finding that led to the MFJ was that the Bell companies, through their control of local network access, had an unfair advantage over other long-distance providers. Following is a description of the impact of MFJ:
• In 1984, the MFJ was implemented. It required ATT to divest itself of the local telephone company subsidiaries, the LECs, which were organized into seven holding companies called the Regional Bell Operating Companies (RBOCs). The RBOCs own the LECs, along with other subsidiaries such as CPE providers and Yellow Pages directory companies. The RBOCs, which have an effective monopoly over local access, were prohibited from providing long-distance service and from manufacturing. They could provide CPE only through separate subsidiaries. ATT, which no longer had any monopoly power, could enter any business it wanted to.
The intent of the MFJ was to regulate the companies who had control of access, and to deregulate everyone else. The LECs were restricted from carrying
telephone calls outside their local access transport area (LATA), which was a geographical area roughly equivalent to a Census Bureau standard
metropolitan statistical area (MSA). Calls beyond the LATA had to be carried by the IXCs, who were to be given equal access to the LEC local networks.
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metropolitan statistical area (MSA)A term used by government agencies and other organizations that divides the United States into 306 areas according to population density. Cellular contracts are awarded by MSA.
GTE also had control over access in the geographical areas where it had the local telephone service monopoly, and was subject to many of the same regulations as the RBOCs.
Telco Switch
IXC Switch
Telco Switch Access Access
Regulated Not Regulated Beginning of 1990s
Figure 1-14: Telecommunications industry regulation -- 1990s (United States)
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After 1984, most customers dealt with three companies for telecommunications:
a CPE provider, an LEC for local service and an IXC for long-distance service.
This situation was still unsatisfactory for a great many stakeholders. Some wanted to be able to provide local telephone service in competition with the RBOCs. The RBOCs, in turn, wanted to be able to provide long-distance service and to move out of their restricted territories. The result was compromise legislation. Following is a description of the impact of the Telecommunications Reform Act of 1996:
• The Telecommunications Reform Act of 1996 was intended to begin
competition for local telephone service. Recognizing that the cost of access, particularly for residential and small business subscribers, was a barrier to entry for new companies, the Act required the FCC to set up rules to allow new competitors (CLECs) to use pieces of the ILECs network for a fair price.
After it was proved that local exchange competition existed, the ILEC would be allowed to enter the long-distance market. This decision would occur on a state-by-state basis.
Telephony has now been largely deregulated. Recognizing that local access is still a major barrier to entry for new competitors, ILECs are required to provide access to their networks under two different mechanisms. One is called an
"unbundled loop" which is priced according to agreements between the parties and ratified by the regulators. A second mechanism is through the provision of
"unbundled network elements" which have been decided between the ILECs and the regulators and made available then to competitors.
The term "unbundled loop" means that the loop is provided without any other telephony services, such as switching, dial tone and so forth. The term has more recently been translated as "voice-grade unbundled loop," meaning that the performance is guaranteed only for voice-grade traffic. Unbundled network elements implies that other pieces of local access and switching can be provided, such as switching and local transmission, through the same pricing and
ordering mechanisms.
Figure 1-15: Telecommunications industry regulation — 2000s
At the beginning of the 21st century, the recognized and regulated monopoly part of the network is the local loop and some elements of local switching. Virtually all other telecommunications services have been left to regulation via
competition in the marketplace. The ILECs have largely realized their goal of being able to reenter the long-distance market.
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The struggles have not ceased, however, but are moving into other arenas.
Because enhanced services were never regulated (from CI-I, CI-II, and the MFJ), if an ILEC can convince regulators that most aspects of DSL service are
enhanced, that means DSL service should be unregulated, and the ILEC need not provide access to DSL transport for resale by competitors under the 1996 Act.
Similar struggles are going on in cable television, because cable also offers "last mile" connectivity to residences and small business, and cable operators are offering telephone service and high-speed Internet connectivity. Clearly, the telecommunications marketplace will remain fluid for the foreseeable future.