Deregulation has changed the telecommunications industry by transforming local and long distance monopolies into highly competitive suppliers of communications offerings. The telecommunications industry, however, was originally regulated to assure that a standard level of telephone service was available at a reasonable cost. It was regulated, as all monopolies are, to serve everyone equally.
The telecommunications pie was divided into different sectors: AT&T provided long distance; Bell, GTE and other private and cooperative phone companies handled local calls; and interconnecting trunks linked the network to everyone in the United States. Local telephone companies were subsidized with a percentage of the revenue AT&T earned from long distance service so they could lower local telephone charges to their residential and commercial customers.
Commercial customers who made many long distance calls had three different options to lower their long distance bill. A commercial customer in Porter, Indiana, for example, could lease an AT&T WATS line for a flat rate per month and call customers on that line or have customers call them at no charge. If the Porter customer frequently called clients located in a specific city, such as St. Louis, it could lease from AT&T a designated long distance line, called a Full Period Line. A Full Period Line would bring St. Louis dial tone straight to Porter, allowing unlimited local calls to be made in the St. Louis area. The final option was to lease an AT&T Pick-Up & Ring line that would allow Porter to call directly to one St. Louis telephone number by just picking up the phone. Pick-Up & Ring lines were also known as hot lines, because Porter would always reach its St. Louis client.
All three of these long distance options, however, did not require AT&T to construct a new line for the commercial customer. They were merely regulated tariff billing arrangements offered by AT&T for the commercial customer with unique long distance needs.
In 1968, the Supreme Court ruled on the Carter Telephone Decision, the first step toward deregulation in the telecommunications industry. This decision permitted any private company to access non-regulated long distance lines as long as it did not compromise telephone service on any level, from local telephone companies to long distance interconnections. As a result, entrepreneurs with the capital and vision to create their own long distance network would serve as long distance brokers to individual customers by leasing and billing long distance service.
Deregulation led directly to the creation of several long distance carriers, the most notable being MCI. MCI determined that the most profitable approach to marketing their services was to sell to commercial customers with national long distance needs such as banks, airlines, transportation firms and brokerage house.
Setting up a long distance network is a capital intensive endeavor. MCI therefore determined that it could best launch its new long distance network by leasing existing lines from AT&T, the national regulated long distance monopoly. MCI leased WATS lines, Full Period Lines and Pick-Up & Ring Lines from AT&T and constructed their own network by interfacing these leased lines with their own computerized switching central offices. By calculating aggregate phone traffic volumes of many commercial customers, they could determine the best combination of line leases to obtain from AT&T and broker as MCI lines to the commercial customer. Although commercial customers were actually using AT&T lines, they were billed by MCI for each minute of use, often at a substantially lower rate than the commercial customer would have paid directly to AT&T.
To understand how MCI could charge less than AT&T, it is important to note that AT&T rates were set by regulatory agencies and averaged over both profitable and unprofitable territories. MCI saw the opportunity to cherry-pick the most lucrative territories and customers, and steadily increased their long distance options to create a new long distance empire. The economic rule - if you can't build a better mouse trap, then sell the one you have cheaper - applied perfectly to this scenario, MCI simply leased regulated lines from AT&T and leased them again at unregulated prices.
As their success grew, MCI continued to cherry-pick more profitable commercial customers, accumulating capital to eventually build their own long distance lines, supplement their network offerings and rely on regulated AT&T lines only when it was to their economic advantage.
AT&T reacted to such deregulated activities by attempting to impede the progress MCI was making in serving their best national long distance customers. AT&T created the notion that it was necessary to install an interface device between MCI customers and AT&T long distance lines to "protect the integrity of the network." For the most part, this interface device created no mechanical or switching advantage, but did allow AT&T the opportunity to create an obstacle to interconnecting MCI networks and create additional revenue for line leases.
Initially, the interface requirements successfully confused MCI customers, created a fear that the MCI network would compromise long distance service and basically served as the proverbial fly in the ointment to impeded MCI's progress. Eventually, the notion of the interface was proven to be superfluous and eliminated by regulatory bodies.
Large long distance businesses soon caught on. Realizing that their long distance bills could be lowered, they simply took some lessons from MCI. National corporations with high long distance requirements purchased their own long distance switching equipment, determined the least expensive long distance service offered by AT&T and MCI and leased lines to connect to their own private network known as a WATSBOX. The WATSBOX analyzed long distance needs, analyzed the number called, selected the least expensive line to transmit the call and even billed appropriate parties instantaneously.
As a result of the 1984 deregulation of AT&T and its Bell systems in 1984, AT&T long distance charges have been deregulated to compete again MCI, Sprint and other national competitors. This deregulated climate has led to residence long distance options so that most consumers can choose their long distance carrier and switch carriers at will. We have all been solicited to change our long distance company with claims of less expensive service or higher voice quality.
As a result, aggressive advertising has temporarily transformed consumer choice to consumer confusion over pricing and long distance offerings. Those options for long distance service, however, have lowered long distance charges throughout the United Sates.
One cannot pretend that deregulation of the telecommunications industry has merely lead to consumer confusion. Prior to deregulation, the consumer could only lease telephones from their local phone company and make long distance calls on AT&T lines. Since 1984, a cadre of telecommunications offering have been entering the market such as cellular phones, cable television, elaborate commercial telephone switching computers, TDDs for the deaf community, and the Internet. In a previously regulated market, these offerings were under development but slow in the offering.
The telecommunications industry changed from night to day, from a monopoly to a competitive oligopoly requiring innovation and new marketing strategies. Consumers can buy a phone in any department store, change long distance carriers instantaneously and have conversations on portable phones anywhere and anytime they choose. Local telephone companies and long distance carriers are constantly advertising new communications offerings to their consumers.
Economists have determined the telecommunications industry survived deregulation by following the several basic rules:
* Provide better service at a lower cost.
* Embrace the competitive market and meet challenges.
* Create a customer contract with important customers.
* Treat every customer like an important customer.
* Change paradigm from supplying service to supplying customer solutions.
* Seek opportunities to expand your market using vertical or horizontal integration of service offerings.
* Analyze and recommend the best solution to business problems rather than the least expensive service you can offer.
* Train managers and employees about your offering, your customer and their industry.
* Invent new and clever way to meet the customer's needs.
As you have read this article, you have realized the parallels to the electric utility industry. Deregulation of the telephone industry turned a low-risk industry into a rapidly-changing, dissaggregated industry in which customers are not viewed as belonging to traditional rate classes and who require differentiation of services and products. In many respects, the electric utility industry is moving in a similar direction. The Public Utilities Regulatory Policy Act of 1978 and the Energy Policy Act of 1992 eliminated the regulatory monopoly status of the generation and transmission portions of the industry. Retail customers choices are increasing, and they are requiring more services and products. The list of basic rules which allowed the telecommunications industry to survive deregulation appear to have similar applicability for the electric utility industry.
Amy Johnston is a senior management consultant with the National Rural Electric Cooperative Association. Johnston brings to NRECA over eight years of management development and consulting experience in corporate and academic settings. Before joining NRECA, Johnston designed and piloted the management development program at Prudential Home Mortgage. Her management experience includes five years in the telecommunications industry as a business systems analyst and department head.
Johnston is a human resource specialist in equal employment law, interviewing, employee motivation, performance evaluation, conflict resolution and problem solving. She is currently an adjunct assistant professor of management and organizational behavior at the University of Maryland at University College. She also taught management in Italy and Turkey with the University of Maryland European Division, and was a lecturer at the University of Pisa, Italy.
Johnston holds a bachelor's degree in economics from Saint Mary's College, with a second major from the University of Notre Dame. She earned a master's in business administration from Loyola University, Chicago, and a master of arts degree from the University of Chicago.…