The Slate Gist

Telecommunications Reform

The United States is in the midst of something called “telecommunications reform.” What is it, and how is it going?

The Telecommunications Act, passed in February 1996, was the first congressional overhaul of telecommunications policy since 1934. The new law promised to promotecompetition by repealing government regulations. A key to this hope is digital technology, which turns all forms of communication–voice, data, or video–into streams of numbers, which can be carried by any communications channel–telephone lines, coaxial cable, or the airwaves. Telecommunications reform is supposed to break down existing barriers between these media so that, for example, phone companies will sell television hookups and cable companies will offer telephone service. It is also supposed to end the distinction between local and long-distance phone companies, allowing each to go after the other’s business.

The early results have been poor to middling. Competition (particularly in local residential telephone service) has been slow to bloom. And the promised “convergence” of the various communications media has not arrived. Some critics say the problem is that deregulation didn’t go far enough. The new law deregulates some aspects of the telecom industry while maintaining or even adding new regulations in others. Other critics say the problem is too much deregulation. They point especially to a series of giant mergers–most notably those reassembling the old Ma Bell telephone monopoly that was broken up–that the new law does nothing to discourage.

The telecom law rewrites the ground rules in three areas of the communications industry: telephone service, cable, and broadcasting.

Telephony. The Telecommunications Act is intended to erode the local-phone-service monopoly enjoyed by the seven regional “Baby Bells” (and by AT&T for most of a century before that). It requires the Bells to make their facilities–the “local loop” linking home phones to the telephone network–available to competitors, so that the latter can compete without running wires to every house. It also requires the Baby Bells to resell their entire bundle of services wholesale to companies that might wish to compete on the retail level. Customers who want to switch phone companies must be able to keep their old phone numbers and can’t be required to dial extra access codes.

The drafters of the law expected these provisions to leave the Baby Bells facing a variety of competitors: wireless services, small startup local service providers, cable and utility companies (who own valuable rights of way), other Baby Bells–and, perhaps most importantly, long-distance companies such as AT&T.

The act permits the Baby Bells to offer long-distance service–something the AT&T breakup decree had forbidden–but only after they have taken 14 specific steps to open up their own local phone markets. The act also explicitly requires the Federal Communications Commission, for the first time, to ensure “universal service“–guaranteeing that rural and other underserved areas receive telephone services comparable to those provided in urban areas. In May the FCC rolled out a universal service plan, which included discounted Internet hookups for schools and libraries, to be funded by charges on all interstate telecommunications providers.

Cable. In 1984, Congress passed a law deregulating cable prices (even forbidding local governments from setting rates). In 1992 it reregulated cable prices. In the 1996 act it deregulated them again. Starting in April 1999, cable companies will be able to set their own rates, except on “basic tier” service (the no-frills menu of broadcast and public-access programming). Even for basic-tier service, the statute allows cable companies to begin charging market rates as soon as they face competition from another local provider. The act allows local phone companies to provide video programming to homes (whether via cable, wireless, or through telephone lines), and it lets phone and cable companies in most local markets own up to 10 percent of one another.

Broadcast. As called for by the new law, the FCC in April gave each of the nation’s 1,600 television broadcasters a second channel of spectrum space. Critics call this a giveaway of a public resource worth billions of dollars. The broadcasters are supposed to use the extra spectrum space for the new digital signals. They are also supposed to give their current spectrum space back in 2006, when non-digital TV broadcasting is supposed to stop. But the broadcasters are now pushing to hold on to the additional spectrum space.

The act also ends long-standing rules against cross-ownership in broadcasting. Anyone may now own an unlimited number of radio stations, subject only to caps on local concentration. Likewise for TV stations, as long as one owner’s signals do not reach more than 35 percent of the nation’s households. The new law also makes it easier for broadcasters to renew their licenses, and requires TV manufacturers to install parent-friendly V-chips. Finally, the statute included the Communications Decency Act, which was struck down this week by the Supreme Court. Has deregulation worked? During 1996, cable-TV prices shot up at more than twice the rate of inflation. Non-discount long-distance rates rose even faster. Local phone rates are going up, too, though some of this rise may be attributable to a reduction in subsidies.

Competitors have not rushed in. The Baby Bells still monopolize the local-household phone market (although competition for business phone customers is more visible). AT&T–though it is gradually losing market share and lives in fear of Baby Bells entering the market–still dominates long distance. The cable companies are facing some increased competition from direct-broadcast satellite providers, but they have maintained their grip. (Rupert Murdoch recently abandoned plans for a major satellite assault on the cable market.) Ironically, price competition has emerged most robustly among businesses not addressed by the new law, such as DBS, cellular phone, and Internet service providers.

The hoped-for “convergence” of industries and technologies has not come to pass. The big cable companies–balking at the costs of converting one-way cable to two-way voice lines–have shelved plans to get into the local phone business. Likewise the Baby Bells, who, facing economic and technical obstacles, have abandoned plans to branch out into video. And the long-distance companies have made only tentative steps toward invading the local residential-telephone market. Even for a mammoth like AT&T, the economics of going local are close to prohibitive, because the “local loop” is the most expensive part of the entire system to build and operate. AT&T’s plan, announced in February, to use wireless systems to offer local phone service has been widely dismissed as unconvincing. It would be much cheaper for the Baby Bells, with local facilities and a built-in customer base, to break into the long-distance market. But that 14-point checklist is a formidable obstacle.

Meanwhile, merger mania has seized the telecom industry. The Justice Department approved a merger between Bell Atlantic and NYNEX in April. Time Warner bought Turner Broadcasting. Westinghouse purchased both CBS and radio rival Infinity Broadcasting. And U.K. giant British Telecom purchased MCI. Now AT&T wants to merge with SBC (which became the nation’s largest Baby Bell by swallowing Pacific Telesis), a move strongly opposed by outgoing FCC Chairman Reed Hundt.