Playing Monopoly…For Real

Who has not heard the case for Ma Bell, reigning first lady of American capitalism? The telephone company is extolled by many as a shining example of private enterprise, in contrast to the dreadful inefficiency and bungling of the government-run postal system, and of overseas government telephone systems. Poor A.T.&T., we may hear, beset by those nasty regulators at the FCC and attacked by the Antitrust Division of the Justice Department. And also, of late, by hundreds of upstart, would-be competitors, hurling accusations of "monopoly" and "predatory pricing."

Unfortunately for conservative mythology, however, the truth is quite a different matter. The telephone company—A.T.&T. and its affiliated Bell System companies—is in fact one of the most vicious coercive monopolies of the 20th century. It holds a legal monopoly on virtually all interstate long-distance telephone service and its member companies all hold exclusive franchises, legally excluding all competitors. Far from being the victim of FCC regulation, A.T.&T. worked tirelessly to bring about both Federal and state regulation, so as to establish and maintain its monopoly status. And if the company has its way, its monopoly will soon be significantly strengthened and hundreds of firms will be forced out of business.

This will come about if A.T.&T. succeeds in what Business Week terms its "most daring political power play since the passage of the Communications Act of 1934," namely lobbying through Congress the "Consumer Communication Reform Act of 1976" (S3192 and HR12323). This misleadingly titled bill would force a halt to budding competition in long-distance service, permit A.T.&T. to acquire the companies thus forced out of business, and transfer jurisdiction over interconnection of terminal and accessory equipment from the FCC to the 50 state public utility commissions (thereby vastly increasing the cost to small companies of marketing such equipment nationwide). The legislation already has 16 sponsors in the Senate and 175 in the House.

The bill is the company's latest response to a series of FCC decisions over the past decade, opening up two chinks in its monopoly. The first was the 1968 Carterfone decision, which permitted the attachment of customer-owned equipment to the phone lines. Some 400 independent telephone and accessory equipment suppliers have sprung up since that decision, offering a host of innovative equipment, much of it still unduplicated by Ma Bell. The second was a series of decisions permitting the existence of specialized common carriers, to compete with Ma Bell in providing long-distance, private-line service for businesses. These decisions have led to the growth of a number of large firms offering microwave and satellite communications services, frequently providing new types of service and substantial cost savings.

Ma Bell's initial response to these pressures was to use delaying tactics. Bringing to bear the full weight of its legal resources, it threw up one procedural roadblock after another, via the courts, the FCC, and the state utility commissions. MCI Communications Corp., the first microwave system competitor, spent $25 million in legal fees over a six-year period before finally being able to begin service. Data Transmission Co. (Datran), the second-largest microwave operator, recently filed for bankruptcy after exhausting its capital fighting A.T.&T. in endless court battles; it has also filed a $285 million antitrust suit against what it claims are A.T.&T's "predatory pricing tactics." Though such techniques have taken their toll, they have generally not been sufficient to stop the new competitors. Hence, Ma Bell's current resort to legislation.

Clearly, there is no justification for the use of government force to maintain a monopoly. Such coercion is wrong, period. But given the longstanding existence and political power of such a legal monopoly, the best approach to dealing with it (and its 3 million shareholders) is not always self-evident. Obviously, a fully-competitive communications industry is not going to spring into existence overnight. Probably the best we can hope for is to accelerate the process of chipping away at the monopoly—the course hesitantly begun by the FCC and now boldly challenged by A.T.&T.'s bill.

To defeat the "Consumer Communications Reform Act" requires a thorough debunking of Ma Bell's principal argument: that competitors must not be allowed to "skim the cream" off the business, taking over the high-profit segments and leaving such segments as residential service to absorb a larger share of the costs of maintaining the telephone system. A.T.&T. has recently been raising the spectre of 60 to 75 percent rate increases for basic home telephone service as a possible outcome of increased competition.

There are two responses to this argument. The first is to attack the figures themselves. A.T.&T.'s quoted figures are worst-case estimates, assuming virtually complete loss of long-distance and terminal equipment revenues to competitors. In fact, such competitors to date have garnered under five percent of these markets. In addition, the company's cost accounting methods are open to serious question. Recent studies by the public utility commissions of New York, Massachusetts, and Vermont have found that terminal and private line may, in fact, be subsidizing basic home telephone service, rather than the other way around as Ma Bell alleges. These findings have been sufficiently persuasive that the FCC concluded in September that there is no basis for A.T.&T.'s claims of actual or potential harm from competition.

Even if such cream-skimming were going on, it would be no justification for monopoly. Why should business users be expected to subsidize home telephone service, or city apartment dwellers subsidize affluent country estate residents? Prices should be set by supply and demand, not by Ma Bell's maternalistic redistribution policies.

If average residential rates do increase somewhat as a result of ending cross-subsidies due to competitive pricing, it will be a small price to pay for breaking Ma Bell's monopoly. Already, the effects of even limited competition have been substantial. Telephone company personnel are for the first time studying marketing on a major scale. A host of new PBX's, answering devices, terminals, and specialized telephones is now available, from both the phone companies and the interconnect industry. New types of low-cost, secure, data and voice long-distance services are proliferating as new companies—MCI, IBM, RCA and many others—enter the field.

All of which shows the amazing vitality of even small doses of free enterprise. Competition works! We must not be blinded by A.T.&T's capitalist rhetoric or its scare-mongering tactics. Its "daring political power play" must be decisively defeated.