Comparative Telecomunications Law Spring, 2007 Prof. Karl Manheim 7: : Wireline Telephony POTS: Plain Old Telephone Service Copyright © 2007

Spring 2007CTL2 Basics of Wireline Telephony Technology Economics Regulation

Spring 2007CTL3 Basics of Wireline Telephony Technology

Spring 2007CTL4 Telephones tele - afar phone - voiced sound

Spring 2007CTL5 Accoustics to Electricity & Back

Spring 2007CTL6 Telephone Networks

Spring 2007CTL7 Telephone Networks Physical Network Components Customer Premises Equipment (CPE)  Phones, appliances, switches, internal wiring Local Exchange  Series of local loops (subscriber loop) primer & graphicsprimer & graphics  Owned by Local Exchange Carrier (LEC) Local Exchange Central Office (CO) LEC facility where access lines connect to switching equipment for connection to Public Switched Telephone Network (PSTN). Inter-Exchange (IXC) (long lines)  Trunk lines between COs Foreign Exchange  Dedicated line between customer & distant exchange office

Spring 2007CTL8 Public Switched Tel Network (PSTN)

Spring 2007CTL9 Switched Networks Circuit switching keeps circuit open for exclusive use of 2 or more connected users  temporary dedicated connection mechanical, electromechanical or electronicelectromechanical

Spring 2007CTL10

Spring 2007CTL11 Switched Networks Packet switching data is divided into packets  each packet finds its own route  no dedicated connection between users

Spring 2007CTL12 Basics of Wireline Telephony Technology Economics

Spring 2007CTL13 Telephone Economics (1) Economic Network Components Customer Premises Equipment  Who should own? Local Loop  Competitive, Natural or Regulated Monopoly? Local Exchange (switching office & equipment)  Competitive, Natural or Regulated Monopoly? Inter-Exchange  Competitive, Natural or Regulated Monopoly?

Spring 2007CTL14 Local Loop Natural monopoly Natural in sense that market place would devolve to monopoly Lack of competition from substitute goods (until recently)  Compare to earlier communications monopolies (e.g., Western Union - telegraphy)  See anti-competitive agreement by Western Union and Bell Telephone in 1870s. Compare to regulatory monopolies  Intellectual property, licensing agencies

Spring 2007CTL15 Local exchange (LEC) Not a natural monopoly Different LECs could service a community Not a regulatory monopoly Period of unrestrained competition ( )  Bell patents (first issued in 1876) began to expire  Multiple exchange networks flourished Independent phone companies had as many subscribers (3million) as Bell companies Anti-competitive monopolization by Bell begins 1911  Bell System formed in 1911  acquisition of competitor LECs facilitated by denial of interconnection by Bell long lines

Spring 2007CTL16 Inter-exchange (IXC) Originally conceived of as natural monopoly Multiple services at turn of century - creating competing networks, unable to communicate w/ each other IXC monopoly helped AT&T to monopolize local exchanges AT&T acquires LD patents, providing superior service Local exchanges were required to subscribe to AT&T long lines, creating a unified telephone monopoly

Spring 2007CTL17 Basics of Wireline Telephony Technology Economics Regulation

Spring 2007CTL18 1st Bell Antitrust Investigation 1913 Antitrust Complaint charges AT&T with conspiracy to monopolize and restrain trade in northwestern states. Kingsbury Commitment AT&T Vice Pres. Nathan Kingsbury offers to  End certain anticompetitive practices  Be regulated by ICC (later FCC) as “common carrier” Consent decree entered 1914  Locks in Bell dominance in local- and inter-exchange markets

Spring 2007CTL19 Monopoly Status Horizontal integration Bell owns most of the LECs Bell owns all the long distance lines Vertical integration Bell owns telephone service top to bottom  CPE  LEC  IXC 1934  Congress passes Com’n Act  Bell owns 80% of US telephones

Spring 2007CTL20 Universal Service 1910 AT&T plan to provide interconnectivity “One Policy, One System, Universal Service” “One Policy, One System, Universal Service” Accepted by congress in 1921  Graham Act exempts AT&T vertical integration (interconnectivity) from Sherman Act Accepted again by congress in 1934 Used as policy justification for regulated monopoly (instead of market efficiency justification)

Spring 2007CTL21 Cross-Subsidies Universal service policy Indirect subsidies  Business vs. Residential  Urban vs. rural  Long distance vs. local Promotes universal service Allows for skimming (e.g., MCI) Impairs ability to subsidize  Nationwide rate averaging Low use lines subsidized by high use ones Direct subsidy -  low income rates - Universal Service Fund

Spring 2007CTL22 Telecom Competition in EU Framework Directive Art. 14 Undertakings (telcos) with SMP  2. An undertaking shall be deemed to have significant market power if, either jointly or in combination with others, it enjoys a position equivalent to dominance … a position of economic strength affording to the power to behave in an appreciable extent independently of competitors, customers and ultimately consumers.

Spring 2007CTL23 2nd Bell Antitrust Investigation 1949 Department of Justice antitrust case alleged "AT&T and Western Electric had monopolized and conspired to restrain trade in the manufacture, distribution, sale, and installation of telephones, tele- phone apparatus, equipment, materials, and supplies.” sought structural relief by divesting Western Electric 1956 Consent Decree Department of Defense comes to AT&T’s rescue  Antitrust Subcommittee of House Com. on the Judiciary reported that willingness of the Attorney General to forego the original goals of the antitrust action demonstrated "partiality toward the defendants incompatible with the duties of his public office."

Spring 2007CTL Consent Decree Enjoined AT&T from engaging in any business other than common carrier comm’n services excluded from the computer industry in US Western Electric barred from any activity other than manufacturing equipment of a type to be used to provide telephone service. AT&T required to license Bell patents to any applicant in exchange for royalties No other restraints on AT&T

Spring 2007CTL25 3rd Bell Antitrust Investigation Continued monopolization by Bell especially in equipment and LD technologies Resisted market entry by competitors AT&T resists competition  Successfully delays MCI entry until 1972  hastens development of efficient microwave systems  undercuts competitors with bulk long line discounts

Spring 2007CTL DOJ Antitrust case Allegations Anticompetitive practices in intercity & equipment mkts  Denied attachment of competitors equipment Monopolization violates § 2 of Sherman Act  AT&T's operating revenues = 2% of GNP Findings “AT&T... exercised monopoly power over nearly every sector of the telecommunications industry within US” Regulatory failure

Spring 2007CTL Modified Final Judgment Injunction rejected as unenforceable Equipment and service subsidiaries No divestiture of Western Electric or Bell Labs 1984 Spin-off of (BOCs) & Exchange Areas Divestiture of local operating companies  would prevent AT&T from monopolizing long distance LECs could connect to other IXCs  the 22 BOCs  the 158 LATAs158 LATAs BOCs to remain as (natural) monopolies  regulated by state PUCs

Spring 2007CTL28 Divestiture Memorial to the Bell System

Spring 2007CTL29 Telco Mergers US Increase market share by consolidation Mergers for Monopoly / Oligopoly  Greater market power EU Increase market share by geographic expansion Mergers increase competition, not decrease it  Through convergence, merged telcos provides new (competitive) services

Spring 2007CTL30 The RBOCs 22 BOCs consolidated into 7 RBOCs link Ameritech now part of SBC Bell Atlantic merged with GTE (now Verizon) Bell South (the only original RBOC remaining) Nynex merged with Bell Atlantic (now Verizon) Pacific Telesis Group (now part of SBC) Southwestern Bell (now part of SBC) US West (merged in 2000 with Quest) US geographically divided into 158 LATAs SBC merger w/ AT&T leaves 3 RBOCs

Spring 2007CTL31 The RBOCs Ma Bell is Back