Don't Hang Up on Competition


Decade after decade, populist politicians and consumer advocates attacked Ma Bell, railing against the evils of the phone monopoly. Today, their victory is nearly complete, thanks to a decade of deregulatory moves by the Federal Communications Commission (FCC) and a seven-year Justice Department antitrust case. But just as the hated monopoly is finally expiring, a rump protest in Congress threatens to undo much that the deregulators have wrought. Ironically, the protestors are…the populists and consumer advocates!

What's happened is a failure to think through what competition—the only alternative to monopoly—really means. For most of this century, plain old telephone service was all there was, and it was provided by monopoly firms, most of them part of the Bell System (AT&T). To promote "universal service," both the regulators and the companies supported a whole system of subsidies. Long-distance users were systematically overcharged to subsidize local customers; and long-distance rates were averaged, so that high-traffic routes subsidized low- traffic ones.

That, of course, is one way to run a telephone system. But it's a costly one, both in the arrogance of a monopoly provider and in the inefficiency bred by subsidies and lack of competition. As new technologies came along in the 1960s, competitors began chipping away at the monopoly's edges. First the FCC legalized "foreign attachments"—non-Bell phones, answering machines, PBXs, etc. Later it began allowing firms like the pioneering MCI to offer discount long-distance services. By the late '70s, the monopoly was in shreds.

Consumers have benefited enormously from these changes. Today you can purchase your own cordless, memory-dialing, privacy-screening telephone from any of dozens of firms, saving a fortune over leasing (forever) from Ma Bell. And you can choose from a variety of long-distance companies, at rates as much as 50 percent lower than Bell's. Lower rates and all-digital links have enabled businesses to take full advantage of the computer revolution, transmitting huge volumes of data, often as a substitute for costly travel.

The breakup of AT&T is simply the culmination of these trends. With long-distance service increasingly digital and competitive, it made no sense for Bell to be stuck forever with artificially high long-distance rates to subsidize local users. So as part of the breakup that is spinning off local Bell companies, the FCC wants to allow the new (long-distance) AT&T to price competitively. To make up for the loss of subsidy at the local level, the FCC would allow the locals to charge an additional flat monthly fee—called an "access charge"—on the grounds that customers should pay for the local line that gives them access to the long-distance network.

It is this "access charge," and the resulting increase in the local portion of phone bills, that has aroused the populists in Congress. Yet once the FCC allowed companies like MCI to begin competing in long-distance eight years ago, it was inevitable that long-distance charges would no longer be able to subsidize local service—and therefore that local rates would have to go up. Yet it is only now, when the horse has long since galloped out of the barn, that the politicos are trying to slam the door.

The would-be reregulators realize what a bind their inattention has put them in. They cannot simply forbid the local access charges and require that AT&T continue to subsidize the local companies. That would drive more long-distance users to the new competitors. So they want to tax all long-distance users, on a per-minute basis, to raise funds for local subsidies. But that will only prompt more large business users to build their own private systems to bypass the common carriers altogether. So the pols want to tax bypass systems, too. In other words, if you develop, at your own expense, a microwave/satellite cross-country telecommunications system, you will still have to pay a tax so that Joe Smith can get cheap phone service at his weekend cabin in the Rockies. And this is being advocated in the name of fairness!

What lies behind such measures is the wrong-headed idea that telephone service is a right and some people must be forced to provide it for others. The opposite idea is that telephone service, like other goods, is a matter of choice—and that those who choose to live in low-demand, high-cost areas should be free to make that choice and pay the price. This is the principle we've accepted in deregulating airlines, trucks, and buses. It's working well, providing large cost savings and more choices of service for most users and only modest cost increases or reductions in service for small numbers of users. The same will be true for telecommunications.

We are just at the beginning of a revolution in telecommunications spawned by advancing technology. As Peter Samuel pointed out in REASON in October, the advent of cellular radio networks, microwave links, fiber-optic circuits, two-way cable, "intelligent" phones, and home computer terminals opens the door to a host of services whose exact forms we can only imagine. Which of these will be provided by local cable companies? Which by local phone companies? Which by radio common carriers? Nobody knows.

But those who would reassert regulatory control are making one huge assumption: that regulators know better than competing firms and consumers who should develop which technology and how each should be marketed and priced. Whether inspired by panic over losing control or by sheer political opportunism, the regulatory impulse is wrong and must be resisted.

It is wrong because it seeks to undo a decade of progress toward user-pays telecommunications. It is wrong because it risks holding back an explosion of new and beneficial services. But most of all it is wrong because it would substitute force for choice. Deregulating telecommunications is not merely sensible; it's also the right thing to do.