IT Industry
There are many changes that occurred in the
industrial organization of
interexchange telecommunication services in the
United States during the
1985-1995 period. Let’s look at the general idea
of Telecommunications. It is
the two-way exchange of info in the form of
voice or data messages between tow
users at distinct geographic locations"
(5, 7). The two-way exchange is now a
numerous way exchange through the use
of computers and the Internet. There are
four important areas of the
telecommunication industry in the United States.
Technology plays a major
role in telecommunications. Before technology, there
was no such thing as
telecommunications. During the ten year period there are
some key advances in
telecommunications due to technology. With growing
technology, more companies
want a piece of the action. There is a significant
increase in long distance
carriers and an increase in the size of these
carriers. There is also a large
influx in pricing and competition during this
period. Another key factor in
the success of the telecommunication industry is
the regulations established
for individual carriers and the industry as a whole.
With the increasing
size of the industry and the major technological advances,
stricter
regulations must be present to keep the structure of the
industry.
Lastly, there are some differences between local and long
distance carriers that
must be looked at to fully understand the industry.
There is also a fifth major
aspect that defines Telecommunications, that is
the American Telephone
&Telegraph Company (AT&T) and the history
behind it. Technology is a key
aspect in the growth of telecommunications. If
one had to point to the single
most important reason for the new competition
in local telephone markets. It is
the advance of technology. Digitalization
has reduced barriers between voice
telephone, data, and media services (9,
29). Microprocessors are the principal
component of digital switches. So as
their performance increases and their price
falls, switching costs fall and
scale and scope economies increase (9, 13).
Scope economies mean that a
few companies produce many services. The adoption of
digital technology in
all aspects of the network has improved performance and
lowered costs.
Digital transmission, whether over copper of fiber cables or over
the
airwaves, is cleaner and more secure due to more durable cables(9,
16).
Technological advances such as fiber optics and wireless
transmission have paved
the way for competition in the local exchange. But,
new technology alone could
not bring competition to the local exchange (9,
10). It takes innovations in
communications technology and new service
offerings pressure both suppliers and
industry regulators to change (9, 2).
In 1984, there was a large growth in the
size of the industry and of its
respective business. Teleport offered
competitive local business services in
New York City (9, 9). Competition is met
with aggressive responses, including
price cuts and improved service offerings.
The new competitiveness
effected rates and offerings of local exchange carriers
in years to come. In
particular, the integration of local, long distance,
cellular and cable
services establishes the groundwork for offering innovative
service packages
at Bundled Rates (9, 11). Two factors are most important for
the relative
advantages of the various new competitors: The incremental costs of
building
local telephone networks and the pre-existing goodwill with
potential
subscribers (9, 37). There were gains and mistakes made by several
competitive
firms during this period. Instead of divesting itself, Ameritech
proposed to
interconnect with competitors and unbundled its network services
selling
services at nondiscriminatory cost-based rates (9, 11). They were
trying to be
competitive in a world of monopoly. In 1994, MCI decided on a
strategy to build
its own local networks in selected cities for selected
customers. Problems
struck when they could not reach households. It proved to
be very expensive and
MCI quietly scaled back its plans. MCI then decided
to grow internally by
creating its MCImetro division (9, 11). These firms
were trying different
approaches to compete with AT&T after the
divesture. The cost wars during
the period also had an affect on companies
entering the market. Since average
costs are everywhere declining, strong
scale economies prevail. Scope economies
occur when a single firm can provide
an entire array of services more cheaply
than a collection of firms who
specialize in just a few of those services. Scope
economies stem from the
joint use of facilities by several services without
substantial congestion
problems. Costs of local exchange service is "sub
additive" which requires
the cost of a given level of local services when
supplied by a single firm is
less than when parceled out to two or more firms.
If production
experiences scale economies, then costs are sub additive (9, 14).
In
1985, the traditional common carriers recorded about 106.2 billion dollars
in
operating revenues from domestic and international telephone and
telegraph
services. Operating revenues increased to 113.6 billion dollars in
1986. This
does not include specialized common carriers, domestic satellite
companies, or
interconnect companies (2, 132). In 1991 AT&T produced
34,384 million
dollars in operating revenues and 38,069 million dollars in
1995. MCI produced
8,266 million dollars in 1991 and 14,617 million
dollars in 1995. Sprint
produced 5,378 million dollars in 1991 and 7,277
million dollars in 1995. ( 7 )
Rate regulation reforms began in the late
1980’s. At that time, all states and
the FCC regulated telephone rates to
ensure the firm did not earn more than its
allowed rate of return on invested
capital. In 1990, the FCC adopted the new
regulatory scheme of "price caps"
with profit sharing for the Local Exchange
Carrier’s (LEC’s). A price-
cap scheme places a ceiling on the average
revenue a firm can charge on all
services, with appropriate adjustments over
time for inflation and the rate
of productivity improvement that comes form
technical change (9, 44).
Price-caps are increasingly replacing rate-of-return
as the form of
regulation in the telecommunications industry. Profit sharing
mechanisms
could also be implicit in the FCC form of price-cap regulation. High
profits
could induce the FCC to set lower price caps, thus allowing consumers to"share"
what was formerly profit (10, 8). With time and the pressure form
courts and
lawmakers, regulators have gradually opened communication markets
to
competition and realized the benefits of lower prices and improved service
(9,
3). Between the AT&T divesture in 1984 and the passage of the
Telecom Act in
1996, more and more states started to allow and encourage
competition in
interexchange markets (9, 46). The interest in local
competition really began in
the late 1980’s, through proceedings on "Open
Network Architecture" (ONA)
that were intended to give service providers
access to unbundled parts of the
ILEC networks (9, 39). Procompetitive
collaboration between carriers was
initiated by FCC decisions on interstate
access by information services
providers and Interexchange Carrier’s (IXC’s)
(9, 47). States regulate
prices for intrastate services, and the FCC
regulates interstate services (10,
8). In order to keep local residential
rates low, regulators allowed business
and long-distance access rates to
increase (9, 39). Today, rate-of-return
regulation and price-cap regulation
are commonly used in seeking to protect
telephone customers from excessively
high prices resulting from the carrier’s
exercise of market power (4, 58). In
1996, Congress passes the Telecom Act which
seeks to open local exchange to
competition through facilities-based entry (9,
9). There are differences
in local and long-distance carriers that show the
structure of the industry.
There are advantages and disadvantages for each type
of carrier. The
advantage of the IXC’s over LEC’s is that their brand-name
recognition is
nation-wide, while the LEC’s only command regional brand-name
recognition.
But, it appears harder for IXC’s to enter local markets than it
is LEC’s to
enter long distance markets (9, 36). Local exchange rates are
under state
control except for access provided for interstate services. Scope
economies
dictate that local and long distance share the same local loops and
switching
(9, 41). This lowers the overhead costs of both the LEC’s and the
IXC’s.
Local exchange service comes highly bundled and highly inelastic while
the
long-distance exchange is more elastic and less bundled. Since local
calling
areas seem to be growing, the size of local exchange markets would be
growing
too(9, 25). 85% of outgoing calls are local. In 1995, households
spent $19.49
per month on basic service (9, 18). Local switching charges re
levied because a
long distance telephone call must be switched through the
local network, thus
tying up switching capacity that has alternative uses.
The carrier common line
charge is levied specifically to defray the costs of
the local telephone
distribution plant, and not the costs of completing long
distance calls (10, 5).
Long distance companies also purchase a different
form of carrier access,
special access, from local telephone companies.
Special access lines are leased
by the month at rates corresponding to their
capacity and distance. Actual usage
is not metered. Special access, which is
supplied by local telephone companies,
competes with third party firms. These
third party firms, called Competitive
Access Providers or CAPs, build
small networks in downtown business area that
connect users to long distance
companies without the use of local telephone
networks. This is an example of
a volume discount rate (10, 7). American
Telephone and Telegraph has had
quite the history of ups and downs. At one time,
they were relatively the
only long-distance telephone company in existence. In
the past twenty years
or so, AT&T’s dominance has been reversed by legal
decisions, legislative
developments, and competitive forces (9, 2).
"Modification of Final
Judgment" called for the divestiture of the Bell
Operating Companies on
January 1, 1984 (9, 8). Although AT&T was able to
take advantage of the
brand loyalty to the Bell system, from which it continued
to benefit after
the breakup (9, 28). AT&T was broken up into smaller local
firms. At
first, the non-AT&T long distance companies, known as the
Other
Common Carriers (OCC’s), had inferior connections to the local
telephone
companies. This sort of access is called "non-premium access". The
FCC has
since made new regulations(10, 6). As part of the settlement, the
divested local
telephone companies were obligated to install switching
equipment that allowed
for "equal access" by any long distance company. This
allowed AT&T’s
competitors to introduce services that were comparable to
AT&T’s.
AT&T’s market share dropped from 95% to 80% between the
years, 1982-1987.
By 1991, MCI’s and Sprint’s revenue market shares had
climbed to 17% and
10%. Suprisingly though, since the divestiture;
industry output measured by the
number of calling minutes, had nearly tripled
(10, 4). While the FCC regulates
AT&T prices directly, the OCC’s and
the third party-access providers are
not regulated directly. The FCC decided
to move to price-cap regulation for
AT&T in May 1989 (10, 8). The
specific form of price-cap regulation adopted
for AT&T divided services
into three "baskets". "Basket 1" includes
residential and small business
services, international services and operator
assisted and calling card
services. "Basket 2" is limited to 800 number
services. And, "Basket 3"
contains all remaining services, principally those
offered to large
businesses. Each basket has its own price-cap. As services have
been shown to
be competitive, they have been removed from price-cap regulation.
In
October 1991, the FCC permitted AT&T to negotiate contracts with
large
business customers as an alternative to using the tariffed prices (10,
9). A
simple rate rebalancing could be held up for several months. These
delays
hampered AT&T’s ability to respond rapidly to increasingly
aggressive
competition from the other interexchange carriers. Commercial
customers were
demanding a host of new digital and other advanced
telecommunication and data
services. AT&T’s incentives to efficiently
invest a new technology were
silenced by rate-of-return regulation. Since
divestiture in 1984, the FCC has
continued to regulate AT&T as a dominant
interstate carrier in the market
for long distance telephone services. In the
spring of 1989, price-cap
regulation of AT&T replaced traditional
rate-of-return regulation. The
change was designed to proved AT&T with
improved incentives and greater
pricing flexibility in increasingly
competitive long distance markets while
protecting against
cross-subsidization, monopoly and predatory pricing (5, 167).
The
telecommunications industry has come a long way through out the past
two
centuries. It all began with the invention of the telephone by Alexander
Graham
Bell. This took place in 1874 and is said to be the beginning of
an era. There
have been thousands of advances since then. We can see this
through the period
discussed in this essay. It is a small but significant
time in the development
of the telecommunications industry. We have seen
changes in technology, sizes
and competitiveness of companies, and
regulations. We have also looked at the
important differences between LEC and
IXC carriers. Lastly we learned about one
of the most prestigious telephone
companies ever, AT&T. I feel that I have
learned a lot while researching
for and writing this paper. I think that I have
a good understanding of price
discrimination, natural monopolies and competitive
industry. It is truly
amazing to think about the importance of the
telecommunications industry to
the world today.
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