Regulation crept along as technology flew

Competition has come from a direction never envisioned by lawmakers

February 15, 2005|By Tricia Bishop | Tricia Bishop,SUN STAFF

When legislators created the Telecommunications Act of 1996, they viewed the world of local vs. long-distance communications as all there was: a pair of different animals that needed to be taught how to play well together.

They didn't see that technology would come along - as it so often does - to make all their efforts moot. Cable and wireless companies sneaked into the market while traditional land-line phone companies, cousins by comparison, were busy arguing over sharing their equipment, as the act required.

Now, what's left of the land-line companies - local or long distance - has reacted by joining forces to survive against the new competition.

The latest are former competitors Verizon Communications and MCI Inc., which announced a $6.7 billion merger yesterday - two weeks after SBC Communications Inc. detailed plans to link with AT&T Corp.

Put in place to encourage competition and the development of new communications companies, the act has spurred more mergers than it dissuaded.

`The law is broken'

"Certain people on the fringe or in the know at the time knew what the capabilities of the Internet could be, but definitely the lawmakers and the regulatory people in Washington were not in on this one," said Braden Cox of the Competitive Enterprise Institute, a Washington think tank that advocates free-market policies. "We know the law is broken."

Though the commercial Internet was beginning to take off, and high-speed DSL connections were on the horizon, lawmakers and regulators of the mid-1990s were focused on fostering competition among land-line phone companies, all but forcing the regional telephone giants to allow competition in their local markets in order to offer the long-distance services that then seemed lucrative.

The regulators did not see that cable companies would develop the capability of offering phone services over the Internet, that wireless companies would make the notion of paying extra for long distance as old-fashioned as playing music on a record player, or that millions of people would discover they didn't need a land line at all.

"The long-distance industry as we know it in the past is largely dead," said Adam D. Thierer, director of telecommunication studies at the Cato Institute in Washington, a libertarian, market-oriented think tank. "Younger generations or average Americans now think in terms of buckets of minutes."

New businesses

When the Telecommunications Act was put in place, companies such as Verizon, SBC, BellSouth Corp. and Qwest Communications International Inc. - the four major regional phone companies - grumped because it required they lease their lines at wholesale rates to long-distance competitors such as MCI and AT&T and anyone else who might come along.

The act forced the regional companies to go head-to-head with competitive long-distance companies, but it was also meant to encourage new businesses - "competitive local exchange carriers" (CLECs) - to develop.

And they did, mostly during the technology craze of the late 1990s, though collectively they never got very far. Two-thirds of the companies that cropped up went out of business within a few years, and they never penetrated more than 10 percent of the market.

Today just a handful remain, among them Covad Communications, which has revamped its strategy to focus less on traditional telephone service and more on emerging technologies such as Internet calling.

"I think some will successfully navigate themselves into a position where they're using sounder business models," said Steven Titch, a telecom analyst for the nonprofit Heartland Institute in Chicago. "Others will have to move out of the business or be acquired."

A subsidiary of AT&T built the nation's first long-distance network, beginning work in 1885. For much of the next century, the company essentially had a monopoly on long-distance service in the United States until MCI, then a tiny upstart, prevailed in a lawsuit seeking to end AT&T's dominance.

Troublesome rules

In 1984, the Department of Justice dismantled Ma Bell. Seven regional Bell companies - two of which later combined with each other and GTE to become Verizon - were created along with a new AT&T that retained its long-distance roots.

The Telecommunications Act of 1996 tried to take the breakup a step further. It has been a troublesome arrangement ever since.

Federal courts have sent the regulations back to the Federal Communications Commission for revision three times. Telecommunications officials on both sides of the issue said the rules have slowed innovation in two ways: by making the bigger Bells unwilling to develop new technologies they knew they might have to share, and by making the smaller companies complacent because their place was assured through forced line-leasing at discount rates.

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