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Weekly UpdatesA particularly difficult technical problem was defining the connection point between the long-distance and local companies. As in the case of terminal equipment deregulation, any conceptual line often ran through the middle of a piece of equipment, such as a switch. The long-distance companies wanted to be able to connect their lines to a so-called "Class 4" toll office, where their traffic could be concentrated before being delivered to the local telephone switch. AT&T asserted that these "Class 4" offices were the heart and soul of the long-distance network, and stripping AT&T of these assets would make it impossible for it to operate a long-distance network. (9) The negotiations over the consent decree almost broke down over this issue, and it was finally resolved in AT&T's favor.
The number of regional companies needed to be determined. The MFJ did not specify this. If there were too few, it was feared AT&T would be accused of retaining its monopoly. If too many, the resulting entities might be too small to operate effectively. The balance was struck at seven. In the end it turned out to be too many, since subsequent mergers have reduced it to three.
The size and makeup of the local service areas--Local Access and Transport Areas (LATAs)--had to be determined. If they were too large, insufficient scope was left for the long-distance carriers, including AT&T. If they were too small, the local networks of the telephone companies would be disrupted.
Ownership of common switching and transmission systems needed to be determined according to rules that had yet to be developed. Much equipment was shared. It had to be assigned to one company and partially leased to the other, a particularly difficult task if competitive neutrality was to be maintained for long-distance carriers. All parties were very intent on owning as many assets as possible even though in some cases they did not need them all.
The local network switches had to be reconfigured to accommodate multiple interexchange carriers. This reconfiguration involved accommodating a different dialing plan, or allowing customers to pre-specify their interexchange carrier and routing the calls appropriately. Accomplishing reconfiguration required substantial software modifications to the electronic switches that served eighty percent of Bell's customers. The other twenty percent, still served by older electromechanical switches, could not access other interexchange carriers (except by using the old dialup mode) until the switches were replaced.
Billing arrangements needed to be devised so that the local companies could bill AT&T's customers for long-distance services (as they had always done) without competitive disadvantage to other long-distance carriers.
Private line provisioning had always been done cooperatively between local telephone companies and AT&T Long Lines. After divestiture, this relationship needed to be formalized. This was the first major failure; it took a year for private line provisioning to return to an acceptable process.
The planning took two years, and divestiture may well have cost the $20 billion that AT&T had been saying it would when defending the suit, but by then, who was counting?
IV. NEAR-TERM RESULTS
The conceptual framework envisioned in the MFJ did not survive the implementation of divestiture for very long. The monopoly/competitive distinction broke down almost immediately. Yellow Pages and cellular telephone service, both competitive businesses, were assigned to the "monopoly" telephone companies. This happened because the perception in the minds of most people at the time, including Judge Greene, was that AT&T had the better of the deal, and the local companies had been shortchanged. The assignment of Yellow Pages and cellular to the local companies was an attempt to even the scales.
AT&T retained its dominant position in the long-distance market, albeit with declining market share. Despite the fact that long distance was now competitive, the FCC retained its jurisdiction and continued to regulate AT&T.
Nevertheless, the separation was accomplished successfully. All entities were able to operate and the American telecommunications system still worked, except for private line installations, which took a year to straighten out.
The local telephone companies were not content to stay in the local business and began agitating for relief almost immediately. They succeeded with the Telecommunications Act of 1996, (10) where they traded their local monopoly for permission to enter the long-distance market. (11) Under the Act, access pricing was to be "cost-based," setting the stage for years of controversy as to just what that meant.
V. LONGER-TERM RESULTS
After the 1996 Telecommunications Act, the FCC struggled mightily to force competition into the local markets by requiring the local Bell companies to lease their lines to others at regulated low prices. This effort ultimately failed, as might have been foreseen. Any arrangement that requires a provider of goods or services to rely on a competitor whose prices are arbitrarily set by a regulator at levels that the competitor believes are below cost is not a recipe that can long survive.
AT&T failed in its attempts to enter the computer market. It tried desperately, first by developing its own product, based on controllers that had been designed for telephone switching systems, and then by several ill-conceived acquisitions. It squandered billions of dollars on these ventures, under the misapprehension that its allegedly superior technology would overcome its lack of understanding of the computer market.
New technologies, in the form of digital cable systems and cellular services, ultimately provided effective competition in local markets.
Long-distance service was not viable as a stand-alone business. The long-distance carriers were ultimately absorbed by the local telephone companies, which also merged with each other. The original seven Regional Bell Operating Companies combined to form three companies (two large and one small).
The manufacturing arm of AT&T was unable to succeed without its captive telephone company market. Part of the reason was that the local telephone companies increasingly viewed AT&T as a competitor (which it was) and were reluctant to buy equipment from it. Finally, the unit was split off as Lucent Technologies.
Enormous investments were made, and much money lost, in building excess long-distance transmission capacity using fiber-optic cables. Technological changes made the conventional switching systems manufactured by the giant telecommunications equipment companies obsolete. The result of these forces was that Lucent Technologies and other major telecommunications equipment companies found their main businesses disappearing. As of this writing, it is not clear how many, if any, of these companies will survive.
VI. CONCLUSIONS
The telecommunications environment in the United States has been so transformed by new services and technologies in the past twenty-five years as to be almost unrecognizable. It is, on balance, competitive and many new services have appeared. It is likely, however, that had divestiture never happened, the industry would have landed in much the same place:
* Terminal equipment, which could clearly be supplied competitively and easily connected to the network, had been deregulated and became competitive before divestiture;
* Manufacturing has been decimated by competition and technological changes unrelated to divestiture. AT&T, which had retained control of its captive manufacturer, was ultimately obliged to spin it off for business reasons;
* Long-distance services have become almost free, thanks to low-cost fiber-optic transmission systems;
* Local competition for basic telephone service is thriving, based on technologies that barely existed in 1982 (digital cellular and voice over IP on cable);
* Data communications has finally become a significant market, thanks to the Internet; and
* Video services are no longer separate from telecommunications, and are now fully part of the mix.
Every one of these changes happened as a result of technological change, not organizational rearrangement (although some regulatory changes would have been necessary to allow them to develop). Two of the three remaining Bell Operating Companies offer a full range of services, including wireless and high-speed Internet access, and are rapidly deploying equipment that will allow them to provide video services as well, putting them in full competition with the cable companies. Wireless services are also dominated by the two large Bell Operating Companies, now called AT&T and Verizon.
The national telecommunications organizational structure now involves more services than wireline telephony (Internet access, wireless, and video) and is essentially a duopoly instead of a monopoly. It has several regional companies on both sides, and manufacturing is not controlled by any of the service providers. The amount of regulation is significantly reduced, as most markets are now thought of as competitive. The penetration of high-speed Internet access, although still growing, lags behind a number of other countries.
For all that, an enormous amount of money and effort was spent: operationally, on modifying the telephone network; administratively, on lawyers and consultants in regulatory proceedings and lawsuits; and financially, in investments that ultimately failed to deliver a return. All of this for little long term benefit. Perhaps, as a nation, we should think long and hard before imposing government-sponsored restructuring on major industries, even for apparently laudable objectives.
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