Telecommunications The Transition to Competition

Milestones  1963 – MCI first attempts to offer long distance service to the public  1983 – AT&T Divestiture Creates 7 “RBOCs” for local service FCC creates “access charges,” equal access (1+) for long distance competitors Incentives for “by-pass” of local companies  1989 – FCC adopts Price Cap for AT&T  1990s – States begin to adopt Price Caps for local telephone companies  1993 – FCC auctions wireless frequencies  1996 – Telecommunications Act Allows entry in local telephone service

Mergers  1997 SBC/Pac Tel Bell Atlantic/NYNEX  1998 MCI/Worldcom SBC/SNET  1999 SBC/Ameritech  2000 Qwest/US West Bell Atlantic/GTE (becomes Verizon)  2005 SBC/AT&T (becomes AT&T) Verizon/MCI  2006 AT&T/BellSouth  Pending 2011 AT&T/T-mobile

Trends  Growth and Change Local Access Lines (and VOIP) declined by a sixth from 2000 to 2008  192,432,000 to 162,230,000 (ILECs down to 118,000,000)  New entrants account for about 40%; 25% sales  Resale accounts for about 6% of lines Wireless subscribers almost triple to 280,000,000  Market Structure Local Wireline: AT&T 45%, Verizon 30%, Qwest 8.8%, all others 16.4% Long Distance: AT&T 26.1%, Verizon 23.3%, Qwest 5.2%, Sprint 1.3%, Others 44.2%

FCC Rules on Resale  § (b): A LEC must provide services to requesting telecommunications carriers for resale that are equal in quality, subject to the same conditions, and provided within the same provisioning time intervals that the LEC provides these services to others, including end users.  § (a): An incumbent LEC shall offer to any requesting telecommunications carrier any telecommunications service that the incumbent LEC offers on a retail basis to subscribers that are not telecommunications carriers for resale at wholesale rates that are, at the election of the state commission – (1) Consistent with the avoided cost methodology described in §§ and ;

States Determination of Avoided Cost for Wholesale Rates  State regulators performed cost studies in the late 1990s  Avoided costs were set at 15% to 25% of retail rates  Wholesale rates were set as retail rates less avoided costs  W = Retail – Avoided Cost  W = (Retail rate)[(100 – ac%)/100]

AT&T “Cash Back” Proceedings  Resellers request resale of AT&T promotions: Cash Back; Word of Mouth referral; Line Connection Charge Waiver (LCCW)  AT&T agrees that “Cash Back” and LCCW are available for resale; the wholesale rates are the only issues.  AT&T opposes resale of W-o-M referral promotion

The Promotions  Cash Back Sign up for new AT&T service Apply for cash back Receive debit card or bill credit if qualify  LCCW Line connection charge is waived for qualifying retail customers at point of sale Resellers pay regular wholesale rate, apply for waiver received as a bill credit if qualify  Word of Mouth Referral Existing AT&T customer registers for W-o-M Convince new customer to buy AT&T service Referring customer applies for incentive Receive debit card/bill credit if qualify

Effective Retail Rate Approach  Retail = $50; cash back =$30; ac = 0.20  Without cash back W = Retail – (Retail*ac) = $50–($50*0.2) = $40 W = Retail – avoided cost = Retail(1-ac)  AT&T W = (Retail – cb) – [(Retail - cb)*(ac)] W = ($50-$30)-[($50 - $30)*0.2]=$20-$4 =$16 W = (Retail – cb)*(1-ac)  Resellers W = (Retail – cash back) – (Retail*ac) W = ($50 - $30) – ($50*0.2) = $20-$10 = $10 W = [Retail *(1– ac)] – cash back

Problem of Negative Price  Rate issue only in month cash back is received; regular retail rate is paid in all other months  Negative Effective Retail Rate $20 retail; $50 cash back; ac = 0.2  Effective Retail = $20-$50 = -$30 AT&T  W = ($20-$50)(1-0.2) = -$24 Resellers  W = $20(1-0.2)-$50 = $16-$50 = -$34

Resellers’ Rebate Approach  Price discount Price is lower immediately for life of promotion  Rebate is not a price discount Pay regular retail price every month Apply for rebate Receive rebate later if qualify  These promotions are rebates No change in retail price/rate Change in terms and conditions Must be available for resale under same conditions as retail under FCC rules

Wholesale rate for rebate  Retail rate has not changed W = Retail(1-ac) is unchanged  Rebate paid same as retail Effective retail = retail-rebate Effective wholesale = W - rebate  Result same as resellers’ Effective Retail Rate approach W = $50(1-0.2) - $30 = $40-$30 = $10 W = $20(1-0.2)-$50 = $16-$50 = -$36

Issues to decide  Wholesale rate for Cash Back W = (Retail – cb)*(1-ac) W = [Retail *(1– ac)] – rebate  Wholesale rate for LCCW Retail = $50, after waiver = 0, ac =0.2 W = (ERR)*(1-ac) = 0 W = [Retail *(1– ac)] – rebate = $40-$50 =-$10  Resale of Word-of-Mouth referral AT&T: marketing expense, no resale Resellers: rebate must be resold Wholesale rate same as cash back if resold