Time to Free Up Both Phone and Cable

By Thierer, Adam D. | Consumers' Research Magazine, October 1994 | Go to article overview

Time to Free Up Both Phone and Cable


Thierer, Adam D., Consumers' Research Magazine


The technological boundaries between long-distance telephone service, regional telephone service, cable television, computer technology, and other multi-media communications services are becoming increasingly blurred. Innovation in the telecommunications industry is occurring so rapidly that the same service today can be carried by different technologies and industries. Within 10 to 20 years, to refer to these technologies as separate sectors will be meaningless. These many voice, video, and data services are rapidly combining to create a new communications medium commonly known as "the information highway." Once in place, this highway will allow Americans to use these combined services right from their living room through their television sets, telephones, or computers.

In essence, the information highway represents nothing more than the removal of regulatory barriers that have been artificially holding back these innovations. Today, the development of an information highway is being constrained by a patchwork of different federal, state, and local regulations that have erected artificial barriers between the local telephone, long distance, cable, broadcast, and computer informational services industries.

Federal, state, and local governments have regulated the telecommunications industry throughout this century. Although the intent of regulation was to extend service to as many Americans as possible, the price paid for that social goal has been the creation of uncompetitive, sheltered monopolies. Not only has government regulation meant monopolies within several segments of the industry (such as telephone, cable television, and most broadcasting), but it has protected those monopolies from competition. In addition, the regulatory split between local, state, and federal regulatory agencies creates jurisdictional headaches for firms and for consumers. When viewed in its entirety, this system is responsible for the complex web of inefficient, and often contradictory, regulations that discourage true telecommunications competition. Consequently, unlike a competitive market, the telecommunications market is distorted by inefficient pricing, a lack of product and service innovation, and limited entry by new firms.

How Phone Monopolies Developed. In the early years of this century, vigorous competition did exist within many local telephone markets. Although patent protection allowed the Bell system to develop without the threat of competition throughout the late 1800s, by the turn of the century the number of independent firms was rising dramatically and over 3,000 competitors existed. Illinois, Indiana, Iowa, Missouri, and Ohio each had over two hundred telephone companies competing within their borders. By 1907, non-Bell firms operated 51% of the telephone business in local markets. Many urban subscribers, moreover, were able to choose among competing telephone providers, driving prices down considerably.(1)

AT&T, which owned the Bell system, offered to attempt to extend telephone service to every American while not acquiring other rivals, in exchange for limited government protection from competition. AT&T's proposed policy, referred to by company executives as "universal service," was adopted as federal regulatory policy when, during World War I, the federal government took over the entire telephone industry for one year for national security reasons.

Despite attempts to inject competition into the system after World War I, the overriding goal of universal service required a firm with the economies of scale only AT&T possessed. Without the size or financial resources of AT&T, non-Bells could not meet government demands for lower rates on rural service. Universal service was finally codified as the raison d'etre of the Federal Communications Commission (FCC) under the Communications Act of 1934. The policy was attractive to the activist government of the period, since telephone service was increasingly considered a necessity for all Americans. …

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