peterm@rwing.uucp (Peter Marshall) (04/01/91)
"The Baby Bells Learn a Nasty New Word: Competition," BUSINESS WEEK, 3/25/91: Breaking up local phone monopolies -- via new technologies -- looks to be the "issue of the 1990s...." After sweeping the long-distance business in the 1980s, competition is headed for local phone service. The regional monopolies of local phone companies are beginning to be undermined by such technologies as microwaves, fiber optics, and wireless phone systems. Long-distance carriers and cable-TV companies are trying to grab some of the market for local communications. And government officials are questioning the need to maintain the century-old system of regulated local phone monopolies. All that makes competition in local phone service "the biggest telecommunications issue of the 1990s." But there's a hitch: Local phone companies complain that they're not yet free to compete. There's little danger of the phone monopolies crumbling overnight. Still, veterans of the 1984 Bell System breakup know how quickly -- and how drastically -- things can change. Some Baby Bell executives are seizing on the nascent competition to justify deregulation. The challengers who claim they will make all this happen are not a formidable lot -- yet. For example, the combined revenue of the alternate-access companies -- fiber-optic and microwave -- will be $150 million this year, says Yankee Group Inc. All but one of the upstarts are losing money. But they have on their side the awesome power of an idea whose time has come: competition. Already, regulators are beginning to hand down rulings that challenge the monopoly system. In 1988, for example, the Federal Communications Commission issued a precedent-setting ruling that softens the previously rigid geographic boundaries of local phone companies. It allowed Southwetern Bell to provide phone service to an Atlantic Richfield Co. research center in an area served by a GTE Corp. phone company. Similar border crossings are probably happening quietly all over the country. To date, the states have outdone the FCC in promoting competition -- particularly New York. By the end of the decade, small businesses and even residential customers may have some choice in local phone services, too. That is, if new wireless phones, called personal communications networks (PCNs), live up to their promise. Backers say that PCNs could actuallly form a second phone system paralleling the wired system. Not surprisingly, the Baby Bell holding companies are eager to seize control of PCNs. In a move that could undermine the local wired system, some are seeking to operate PCNs themselves, rather than through their regulated telephone companies. A more immediate threat to the phone monopolies could come from the cable-TV industry. If phone companies gain admittance to the cable-TV business -- as they have been lobbying for permission to do -- several cable-TV companies are poised to counterattack. Even as competition appears, however, business customers complain that the local phone companies still behave like monopoly public utilities. According to some critics, the Baby Bells largely ignored the local phone business. In the seven years since the Bell breakup, they have pumped millions into other businesses. In 1989, the Baby Bells actually generated slightly more cash flow from depreciation than they spent on new investments. In effect, they treated their core businesses as cash cows. Meanwhile, the new competitors continued to attack with derring-do. Traditional phone companies just don't work that way. The difference in corporate culture is immense. However quickly competition comes, the direction is certain. The walls, indeed, are tumbling down. "Divestiture Revisited," FORBES, 3/18/91: Since the breakup of the Bell System seven years ago, the regional telephone utilites have been in clover. Their comfortable business of colelcting monthly rent for telephone lines and taking a large commission for handling connections for long-distance companies has made them Wall street favorites. The stock prices of the seven regional Baby Bells have on average tripled, to a level of twice book value. All this good fortune is built on an assumption that is no longer valid: that local telephone service is and will remain a monopoly. An onslaught of new technologies, hungry entrepreneurs and pro-competition regulators are all teaming up ... the fuse is lit. The money at stake is an annual revenue stream of about $14 billion. This revenue excludes the fixed-rate "access charge". Bypassing the local telephone company in most American cities to avoid padded monopoly charges is now a fast-growing business of $100 million a year. Bypassers are starting to do to the local phone companies what MCI did to AT&T's long-distance business in the 1970s. But the competitive threat doesn't stop there. Competitive forces are only starting to be felt now in local service. If nothing else happens, the competitors could quite possibly siphon off an estimated $5 billion in revenues from the telephone companies by the end of this decade. More important, the mere threat of bypass, microwave and radio links will be enough to force realignments in rates. Is there economic justifiaction for the $14 billion in fees paid to local monopolies? Some, but not much ... where did the 45% rate- sharing formula come from? Out of the air. Competition is coming to the local telephone monopoly, bringing with it all kinds of new services for the Information Age. The smartest thing that politicians and regulators can do is get out of the way.