News and Views

The Telecommunications Act of 1996:
A Commentary on What Is Really Going on Here

by Warren J. Sirota

The Telecommunications Act of 1996 was finally passed, after twelve years of Congress scrupulously shirking its responsibilities in this most important sector. Rightfully, this major change in the nation's regulatory structure is receiving considerable media and press attention. Unfortunately, but as planned by Congress, most of the attention is going to the wrong issue, the Decency Act. This blatantly unconstitutional provision is a red herring distracting the public's attention with an emotional issue. If one is truly concerned with how well our communications infrastructure serves consumers, what will really shape our future is the elimination of barriers between the industry's segments, e.g., local and long distance services, broadcast and cable television, etc.

The need for major change was long overdue. In fact, the FCC chided Congress in the Second Computer Inquiry (1982) for failure to overhaul the Telecommunications Act of 1934, and issued mandates in the hope of spurring Congressional action. Instead, the result was the Bell System breakup of 1984, an effort lead by the Justice Department. Congress refused to act. With that track record, it is not surprising the new law perpetuates Congress' inability to legislate decisively. By foisting the Decency Act on the American public, Congress has created a forum for an emotional issue that grabs everyone's attention, knowing that the provisions will not stand up to legal challenges. In fact, the new law established a judicial panel to determine the constitutionality of the Decency Act. If lawmakers did their jobs, a new law would not require a built-in judicial review; lawmakers are paid to make intelligent, wise decisions, not to pass the buck.

The Decency Act creates, in the minds of some, a moral high-ground, presumably to protect America's youth. Who can argue with that? Just about everybody concerned, because it has become the central issue of debate, as planned. However, the Decency Act, one way or the other, has very little to do with the real issues facing consumers and their public communications infrastructure. How much choice will consumers, in urban, suburban and rural areas have in the future? Will there be real market place competition? Will consumers benefit from lower rates? Will there be Universal Service, a crucial component of an egalitarian society? Despite having tried to cover their tracks with decency provisions, Congress has not set objectives for the nation's public networks.

Make no mistake, this is historic legislation, despite its lack of vision. America will live with the consequences, good, bad or indifferent, for many years to come. Having taken more than a decade to do something, it is unlikely Congress will revisit the issues for many more years. Therefore, some historical perspectives are in order, especially since prior policy has given America the best communications networks in the world, and the leadership position for the future.

Universal Service for public communications was a founding principal of this nation. In 1753 Benjamin Franklin became deputy postmaster general for the American colonies. At that time, weeks and sometimes months, were required for mail to travel by stagecoach from one part of the colonies to another. Franklin understood the need for reliable, economical mail service, and standardized the weight and distance postage rate schedule that existed. He also put a bookkeeping system into every post office, and regular weekly deliveries became standard procedure. Franklin's programs were so successful, that when independence came, postal service was written into the United States Constitution. By 1812, more than 50,000 miles of post roads were in use.

Private enterprise played a role as well. Pony Express was established in 1860 as a way to get mail to California faster than postal service. But it was quickly displaced in 1861 by modern electronics-transcontinental telegraph. By the end of the nineteenth century, telephone companies arrived. Although Bell is the recognized inventor, it was Theodore Vail, the leader of AT&T, who had the vision for Universal Service. The phone would be easy to use, affordable for every person, and ubiquitous. All he asked for in exchange was a government mandated monopoly. So was born the Bell System. As noted above, the dismantling of that monopoly began over fourteen years ago by actions of the FCC and then the Justice Department.

So what is really going on today? One way to find out, is by comparison with other examples of regulatory devolution. The only recent deregulation models to follow are the Airline and Banking industries. Each has some similarities to Telecommunications. In terms of the service provided, Banking is the more likely model since the service provided is less tangible, similar to telephone service. Airlines, however are more like telephone companies in the need to make large capital outlays before they can provide the service. Where has deregulation taken these industries?

In Banking, deregulation began a consolidation trend that continues today. Branches are closed and many jobs are lost. And while there seems to be a lot of competition among big banks, has the consumer benefited? Most credit card interest rates are still in the 17-19% range, despite several years of low inflation and a drop in all other rates. Furthermore, there are less neighborhood branches and less choice for many. It is hard to see how this has benefited the consumer, other than those with stock in banks.

The Airline story is a little different. Indeed, here the little guys became upstarts and competition benefited consumers; airfares dropped dramatically; so low that many airlines went bankrupt. Consolidation occurred, and as a whole, the industry has lost money for many years. Good for consumers in the near term, but not necessarily the way to build a vital, national industry.

So how has telecommunications deregulation faired since the Bell System break-up? The experts predicted competition would reduce phone rates. In reality, it was merely a new form of regulation which shifted costs away from business, and to the consumer. While rates did go down for business users, they went up for residential customers, which make up 60-65% of telephone revenues in the country. That is, the largest group of users saw their rates go up. Now that local service will be deregulated, the same is likely to happen. The large regional Bell companies will cater to big business with volume discounts, since a single large account can be a significant loss of annual revenue. On the other hand, a single consumer account is insignificant to the $15 billion each regional telephone company collects yearly. The vast majority of consumers are slow to change their ways, nor will they have much choice in the near future. Therefore, the Bell companies do not fear a serious loss of consumer revenue. Potential competitors in the local service market are likely to "cream skim" business accounts, as MCI did in the seventies.

Real competition in the consumer market requires a huge investment, first to build the appropriate infrastructure (it is a lot more than hanging wires on poles), and then to create a mass marketing campaign. The result will probably be a silent truce between local telephone and cable companies, and a battle for local service between the regional Bell companies and the long distance providers: AT&T, MCI and Sprint.

Supporters of local deregulation argue that dropping the barriers among potential competitors will create more choice and competition for the average consumer, thus lowering rates. That is not likely to happen during the next five years. In fact, both telephone and cable companies will probably raise rates for consumers. That is the lesson of history. Nothing will stop it since there will not be significant competition in the consumer segment for local services. The Telecommunications Act takes care of that, replacing rate regulation with free market forces.

The majority of consumers do worry about rate increases. That is why everyone in Congress got together to assuage public concerns. The vote on this bill was an unusual show of bipartisan support, but that does not make it the right plan. To de-focus people from the real issues, and to create a perception of diligence on Congress' part, we were given the Decency Act. It is a provision that looks good politically but ultimately will do very little except waste taxpayer money, time and attention on a legal battle. Congress is clearly unable to grapple with the tough issues facing our society. Instead of debating the issue and devising a law consistent with the Constitution, Congress threw up its collective hands and threw the issue to the judicial branch.

When we are told that this new set of laws will encourage competition to the benefit of consumers, let us understand that it encourages competition among very large corporations. AT&T and the local Bell companies are all Fortune 50 companies. While elected representatives frequently extol small businesses as the engines of job creation, this law does little to encourage new entrepreneurial stars, as Apple and Microsoft once were. For example, in the regulated world, and certainly prior to the Bell breakup, AT&T could not offer free Internet service as they just have. While AT&T is to be lauded for a program which can truly bring Universal Service to the Internet, it will effectively eliminate many "mom and pop" Internet access providers that have sprung up around the country.

So here is what we, as consumers, are likely to see over the next several years:

  • Cable TV rates will rise.
  • Local telephone rates will go down for business customers.
  • Local telephone rates for consumers will stay the same or rise.
  • There will be consolidation among the large players in their traditional segments.

Beyond that, the crystal ball is clouded by Congress' lack of vision and obfuscation of the important issues.

The bottom line is that real competition and new innovative services will not arrive for many years. When they do, very large carriers will be the only service providers. Innovative services and price competition in the consumer segment will first occur in the markets that are upper and middle class on the socio-economic scale. Universal Service will become the lowest common denominator, the life-line, for communications service. And by the year 2000, the Decency Act will be forgotten.

Warren J. Sirota is an independent management consultant who has worked at the forefront of information technology for over twenty-two years. He focuses on the integration of computers and communications, applications for people-to-people communications, and organizational change. Warren is the editor of News & Views and can be reached at (914) 747-2304, or by email: 73510.500@compuserve.com

Last updated on 10/31/99.

(c) Copyright WATPA 1998.