Development of the Telecommunications Industry

Early History initial telephone service Alexander Graham Bell people rented instruments and provided their own wire. Bell telephone patents protected telephone instruments not wires or switches.

In 1878, telephone exchanges established in major cities provided lines, switches and phones - isolated from other cities no service in smaller towns or rural areas. 1880 1.1 phones per thousand 1894 4.1 per thousand (1894 expiration of Bell's basic patent)

AT&T Parent Co. held patent rights franchised individual cities. Each co. prohibited from building lines outside its territory or connecting to other exchanges by means other than the parent co.

LD lines Started slowly expensive NY-Phila 1885, NY-Boston 1889, charged by minute $5.45 min charge for NY to Chicago. NY to San Francisco $20.70 for a three min. call.

1893-1894, patents ran out Local competitors came in Bell System network refused to connect competitors Competitors threatened antitrust action – Kingsbury Commitment in 1913. Agreed to interconnect. Bell Companies and Independents exchanged territories Local competitors came in Bell System network refused to connect competitors Competitors threatened antitrust action – Kingsbury Commitment in 1913. Agreed to interconnect. Bell Companies and Independents exchanged territories

Bell vs. Independents By 1982, 25 Bell Cos. 81% lines, 41% of geography; 1432 independent, 19% lines, 59% geography Regulated monopoly at the local level with unregulated monopoly at interstate level until 1934 Communications Act.

The Communications Act of 1934 Established FCC to regulate communications – see overhead

Common Carrier provisions of the Act (partial list) Obligation to serve all who request service. Right of commission to require interconnection with other carriers Rate to be just and reasonable Unreasonable discrimination prohibited.

Common Carrier Provisions (cont’d) Publicly available tariffs for all communications charges must be filed and followed in a non-discriminatory manner.

Structure of FCC 7 members appointed by President for 7 years. No more than 4 of the seven from one political party. In 1983, reduced to 5 for 5 years. President designates chairman.

Separation of local and LD costs Suppose the local loop has the following cost and demand characteristics: Avg Cost Per Line Per Month Avg Usage Per Month (Min.) Only Local Calls $20 400 Only LD Calls $16 100 Both $24 500 There are two types of costs: Traffic-Sensitive(TS) and Non-Traffic-Sensitive (NTS). These costs are NTS.

What Share does each service pay? There are economies of scope. Producing them separately costs $24 which is much less than $36. How to you allocate costs between services? Each should at least cover its incremental cost. Local (24-16=8) LD (24-20=4). Is access a separate good that should get allocated costs by itself or is access only good for calls? Allocating more to LD lowers cost of local and promotes universal service. Before 1934, LD was unregulated and there was an incentive to minimize the costs allocated to LD (no constraint on profit). Current usage is dependent on current (relative) prices.

Smith v. Illinois Bell – Supreme Court ruled that local telephone network was jointly used for local and LD and some of the cost of local must be allocated to LD. This was the legal foundation for separations. Separations is the cost allocation process that divides commonly used plant into state and interstate jurisdictions. Based on relative use. FCC and States argued over separations.

Other Landmarks 1951, Charleston Plan 1970, Ozark Plan 1951, Charleston Plan, FCC agreed to shift costs from intrastate to interstate rather than lower interstate rates. 1970, Ozark Plan, Separations used a factor of three times interstate usage. 6% interstate meant 18% of costs allocated to interstate; 82% of costs allocated to intrastate.

Local vs. Long Distance Settlements -dividing up the revenues was not fee for service but based on specified portion of costs. The effective price per minute was higher for high-cost independents and lower for low-cost urban cos. LD rates still based on geographically-averaged rates.

1956 Consent Decree Western Electric subsidiary of the then AT&T-Bell System provided telephone equipment to local telephone cos. Incentive to overcharge local cos. for equipment and make excess profits in the unregulated Western Electric.

1956 Consent Decree (cont’d) Gov't wanted divestiture of Western Electric AT&T won.