Phone competition off to a slow start; ratepayers waiting
Nearly 18 months have passed since the signing of the Telecommunications Act of 1996. Pacific Bell was supposed to be offering long-distance service. AT&T was supposed to be offering local phone service. TCI Cable was supposed to be doing both.
None of this has happened in any significant measure, especially in the local telephone market.
In fact, true competition is so far off for residential phone users that many telecommunications analysts believe it won't happen for decades, if at all. Others go so far as to question whether the whole bold scheme of competition was an idea hatched out of naiveté, that it isn't even possible for the local telephone market to function in anything other than a monopoly environment.
Analysts and consumers alike are beginning to realize that not only is the local telephone market the hardest, most complicated market to transform, but that recent developments -- for example, speculation that AT&T would merge with the new SBC/Pacific Telesis -- threaten to rebuild powerful components of the original Bell monopoly. (Merger talks between AT&T and SBC were reported halted Friday over the issue of how and when SBC would open its local market to competition in order to satisfy regulator.)
How did things get this way so quickly?
In the local telephone market, two fundamental conflicts exist that serve to inhibit competition.
The dominant phone company, in California's case Pacific Bell, is supposed to be both the facilitator to new companies entering the local phone market, while simultaneously competing with them.
Pac Bell owns the local phone network -- 10 million lines connecting nearly all of California's homes. GTE Corp. is in the same boat as Pac Bell. GTE has a smaller service area in the state, but also has been operating in a monopoly environment for more than six decades.
Pac Bell and GTE agreed to open up their monopoly, which meant granting access to their phone lines, their services and the rest of the state's telephone infrastructure, which the two companies have built over the past 62 years.
In return, regional phone companies such as Pac Bell can enter the lucrative long-distance phone market, but only after their current local markets have competition.
So far, GTE has lost less than 1 percent of its local telephone business to competitors since the Telecomm Act was passed in February 1996. Pac Bell, meanwhile, has lost about the same. Such small numbers hardly speak to competition.
Reluctant to share
The result has been incessant battles over how much Pac Bell will charge competitors to use the phone network, whether or not Pac Bell and GTE are purposely slow to switch customers from it to a competitor such as AT&T or MCI, and who is truly at fault for such a failed vision. All of which is occurring at a time when Pac Bell is suffering from a major decline in service due to an underestimation of demand.
In addition, local phone competition will not happen quickly because big companies -- MCI and AT&T, for example -- say they can't make enough money selling local service to residents.
``There has to be a financial incentive to get into the game. You do it because you believe you can make money,'' said Betsy Bernard, former CEO of Pacific Bell Communications, the division that oversees its long-distance initiatives. ``Economics will drive what companies do.''
No clear advantage
This combined dilemma has thwarted competition thus far.
Tom Long, telecommunications analyst for TURN, a San Francisco consumer advocacy group, sees an inherent conflict of interest -- Pac Bell controlling the very phone arena in which it is supposed to be competing.
``The monopoly is expected to treat competitors fairly at the same time it has a great deal at stake,'' Long said. ``Because competitors are taking away business, it's not surprising that the incumbent is doing everything it can to make it difficult for its competitors. Anyone who didn't realize this wasn't paying attention. Regulators must realize they have to get tough on the incumbent.''
Blair Levin, chief of staff for the Federal Communications Commission, agreed that opening the local market to competition is the thorniest issue the FCC faces, but disagreed that it can't be done.
``Clearly the local market is the toughest,'' he said. ``Clearly there is a conflict of interest. But there have been other antitrust cases where the solution was to unpack components of the local monopoly.
``But it's not fair to say Congress missed the boat. What I think is: Not only do you need the right set of rules, but the right enforcement.''
Dishes no comparison
But satellite companies are not dependent on a cable company's network to function, while competing local phone-service providers are totally reliant on the existing local phone company to offer service.
The solution, say telecommunications analysts, is for competitors to begin building their own local telephone networks.
But this seems far-fetched, as competitors begin to realize that it took Pac Bell the better part of a century to build today's network in a monopoly environment. To build a competing network of similar size and scope would not only take decades, but also tens of billions of dollars. It's a chance no one is willing to take.
``Think of what a competitor would have to do to go against Pac Bell,'' said Long of TURN. ``It would cost billions to replicate Pac Bell's network, without any guarantee of a return.''
SBC's cable debacle
The alternative for any company that hopes to compete with Pac Bell is to cut a deal, or ``interconnect agreement,'' to lease or ``re-sell'' service using Pac Bell's lines, which thus far hasn't proven to be a money-maker.
Consider:
All of which presents something of an irony, since local competition in the business market is thriving. There, state and federal regulators take a more hands-off approach.
Businesses do not have the option of choosing a flat, state-regulated monthly fee for local calling as in the residential market. Instead, they pay for all calls by the minute. Therefore, competition for business service is much more pure: Whichever company has the combination of the lowest rates and good service is in a good position to succeed.
But more importantly, many competitors in the business market own much of their own local phone network, or ``loops.'' That allows them to set their own prices and deliver their own services, without being at the mercy of the existing local phone company.
No profit in home service
The residential market is very different. Prices for home phone service are capped by the California Public Utilities Commission and Federal Communications Commission for Pacific Bell. Competing phone companies usually charge about the same basic rate of $11.25 per month, thus making it harder for any one company to make money. Pac Bell can make money on the residential side selling ``premium services,'' such as call waiting, call forwarding and Caller ID, while competing companies -- because they do not own their own telephone lines and the infrastructure necessary to offer such services -- cannot.
What remains is an economic lose-lose scenario: Competitors are in business to break even at best, and that isn't enough of a reason to spend millions to enter the market.
Some think it can work
``Building facilities isn't the only answer, but you won't have real competition until competitors can access the network that the monopoly controls,'' he said. ``The phone companies are absolutely dragging their feet in opening the market and letting competitors use the network.''
Selwyn, who has testified before the California PUC on a number of issues, says that the logistics of resale is what is keeping it from working, instead of the notion that only building a network will lead to competition.
For example, in an era of high-speed communications, Pac Bell and its competitors communicate by fax machine, which leaves the door open for the possibility of numerous errors. For instance, if
AT&T signs a customer on one date, but Pac Bell disconnects that customer from its network before AT&T's service is to begin, a consumer can go days or even weeks without a telephone.
Competitors say Pac Bell is purposely stalling.
MCI says it had to tell its potential customers that they had to wait 30 days or more before they could switch from Pac Bell.
``They want to make sure that not too many people can sign up with competitors,'' he said. ``MCI had to quote 30 days for service,'' Jim Lewis, MCI's vice president for local competition. ``How many customers would sign up with your company if they had to wait a month to get a phone? That's anti-competitive.'' AT&T filed a complaint with the PUC citing similar difficulties.
Pac Bell denies it is at fault for the shortcomings of competition. If anything, says Pac Bell's Regulatory Vice President Lee Bauman, Pac Bell has great incentive to move quickly to open its market. The faster that happens, the faster Pac Bell can jump into long distance.
``It astounds me that competitors say we're dragging our feet,'' Bauman said. ``We have a vested interest that competition works. For us, there is much at stake.''
Another view, such as that of San Francisco-based Consumer Action, is that Pac Bell doesn't own the local network at all. Says Ken McEldowney, executive director: ``The people own the network. It was built through ratepayer money. Pac Bell may have built it physically, but they had a monopoly and got the money from all California phone customers.''
While the finger-pointing and accusations lead to lengthy court battles, at the bottom of the pile are California phone customers, who are almost exactly where they were two years ago: mad at their phone company with little choice but to sit there and take it.
