How the U.S. government killed new communication technologies

The federal government had to break up a telephone monopoly once, but have they set themselves up to do it again? This analysis of telecommunications policy will show you where we've been and where we're going—and why you should be worried.

Earlier this year in the article “The death and rebirth of the central office,” I discussed the next-generation competitive local exchange carrier (NG-CLEC). These NG-CLECs use standard, off-the-shelf technology to create affordable high-speed data and voice networks for their small-business customers. Since TechRepublic published the article, many of you have sent e-mail reflecting your concern about the reconsolidation of power in the Regional Bell Operating Companies (RBOCs)—and for good reason. At the current rate, all of our choices for alternative communication providers (other than the RBOCs) will have disappeared within 12 months. In this article, we’ll look at why this is happening and what, if anything, you can do to stop it.

How CLECs were born
In the 1980s, AT&T had a lock on what’s referred to as the “local loop” or the “last mile.” Now, in all fairness, AT&T, as a privately-held company, had also invested billions of its own dollars to build these last-mile connections to every residence and business in the United States. In this case, however, the government felt that AT&T was using its local-loop monopoly to defend its larger monopoly on long-distance service. Of course, smaller firms wanted to use AT&T’s infrastructure to provide their products. The gnat that started the AT&T breakup was a small company named McCaw Communications, who simply wanted to provide more convenient communication links for truckers.

Judge Harold Greene, who presided over the case, ordered AT&T to divest itself of its local phone service. As a result of Greene's order, little McCaw became MCI, and AT&T was broken up into a series of smaller, RBOCs (e.g. Pacific Bell and South Central Bell). In the early 90s, as long-distance competition was flourishing, the RBOCs came under fire by a new generation of “McCaws” called competitive local exchange carriers (CLECs). These companies purchased phone lines from the RBOCs and sold them in packages, adding value by bundling them with voice mail or other services. Once the RBOCs figured out that this practice could diminish their ability to up-sell customers to their advanced services, they began refusing to offer the services to the upstart CLECs. The 1996 Telecommunications Act was designed, among other things, to force the RBOCs to sell access to the “last mile” to their CLEC competitors. The “stick” in the legislation that was supposed to ensure RBOC compliance was that RBOCs weren’t supposed to be able to offer long-distance service in their own regions without opening the local loop to competition—but this was later removed by a lower court.

The current CLEC situation
Over the last few years, CLECs have flourished. With last-mile access finally granted, many creative companies have found ways to package and market not only local phone service, but also high-end services such as voice mail and fax lines. When the Internet took off, the CLECs were the first ones to see the benefit of bundling Internet access with phone service. Digital subscriber lines (DSLs) were also a product of the CLECs.

When DSL equipment vendors released the technology that made it possible to pass high-speed data quickly over standard copper wiring, the race was on to see who would implement it first. To the surprise of many, it wasn’t the RBOCs, who had millions of dollars in the bank and millions of customer relationships. Instead, it was an upstart group of CLECs who saw the opportunity to differentiate themselves in the market by providing a truly revolutionary service. The RBOCs had been getting fat, dumb, and happy by restricting the sale of high-speed data connections to the use of the more traditional 1.544MB T1. And, since they were charging $1,200 per month for the service plus an additional $3,000 for equipment and $2,000 for installation, they didn’t have much of a reason to kill their cash cow. CLECs, on the other hand, saw the opportunity to get into the data business relatively cheaply (by reselling RBOC copper) and offer a service that could not only compete with the RBOCs in performance but could also be delivered for a fraction of the cost.

New CLECs were springing up like weeds, and many of them began making a national splash in both their media presence and their soaring stock prices. Large players like NetRhythms and Covad even bought up smaller regional players (like BlueStar). It was beginning to look like the long-distance bonanza of the late 80s. Customers won because long distance became cheaper and there were more vendors offering it. But the government made a major mistake in its handling of the RBOCs that’s beginning to come back and haunt us. The 1996 Telecommunications Act didn’t restrict the RBOCs’ right to sell to the public directly. Nor did it specifically state pricing guidelines that the RBOCs had to follow in selling the services to the CLECs.

Giving suppliers the right to sell directly to the public and compete with their own customers was simply foolish. Once the RBOCs decided to get into the DSL business, they started selling directly to customers at the same price they were selling to the CLECs. To tighten the noose around the collective CLEC necks, they even reduced prices on T1s to match the prices of the CLECs and started charging CLECs the same price as they charged the end customer. The RBOCs would also delay the installations requested by CLECs while speeding up their own service requests.

Look at the results: Many CLECs have already failed, and two of the largest remaining CLECs—NetRhythms and Covad—have only enough cash to last them another 12 months.

What you can do about it
Now the trap for consumers is set. Once the last remaining CLECs fail, the RBOCs can raise the prices on all of their data (and voice) services, and there’s nothing we can do about it. If your business relies on your ability to get affordable, high-speed data communications (and whose doesn’t?), then you need to start writing your federal representatives, state Public Services Commission, and the FCC to let them know that this eventuality is untenable.
What other telecom and technology topics are affecting your business? Does your company do any lobbying? Can the federal government resolve these issues? Send us an e-mail and tell us what you think.

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