Development of the Telecommunications Industry

Early History initial telephone service Alexander Graham Bell

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.

AT&T Parent Co. held patent rights franchised individual cities.

LD lines Started slowly expensive

, patents ran out Local competitors came in Bell System network refused to connect competitors Competitors threatened antitrust action – Kingsbury Commitment in 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.

S tructure 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 Avg Cost Per Line Per Month Avg Usage Per Month (Min.) Only Local Calls$20400 Only LD Calls$16100 Both$24500 Suppose the local loop has the following cost and demand characteristics:

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).

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.

Other Landmarks 1951, Charleston Plan 1970, Ozark Plan

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.