Is Telecom's Future The Bells, The Bells, and Only The Bells?

Where's the competition? Nearly five years after passage of the Telecommunications Act of 1996, it's fading out of sight.

In long distance, competition is hotter than ever. Consumers are getting huge breaks on their national and international long-distance calls. Price pressures have reduced profits, spurred a 60 percent decline in stock prices for long-distance companies and forced major carriers AT&T and MCI/WorldCom to restructure.

At the local level, though, the story is very different. The Telecom Act's key purpose was to open up the local phone loop and end the monopolies of the regional Bell operating companies, the RBOCs or Baby Bells. But Business Week may have been prescient last year in labeling one of the Baby Bells leaders, SBC Chairman Ed Whitacre, "The Last Monopolist." For this market has turned away from competition. It's moving toward a remonopolization of all telecommunications services from the bottom up.

Where in 1996, there were eight local companies – the seven Baby Bells plus GTE, the giant non-Bell local and long-distance company—there now are only four. Verizon is a combination of BellAtlantic, Nynex and GTE. This year, it will have $65 billion in revenues – up from $13 billion in 1996. SBC Communications – formed from Southwestern Bell, PacTel and Ameritech, the Bell of the Midwest—has a market capitalization of more than $160 billion – or twice that of AT&T. These companies are behemoths.

Make no mistake. These companies are monopolies. They control the last mile of telecommunications into the home. Their status is protected and regulated by state officials, often captive and generous. As a result, the Bells have steadily increased their returns. Even a relative laggard like Bell South had a return on equity in 1999 of 26 percent – compared with 13 percent as recently as 1993. The stock markets have rewarded these firms with strong valuations, even as the competitive long-distance companies have suffered in the market.

The competition that Congress and President Clinton envisioned with the Telecom Act just hasn't happened. The Bells first filed lawsuits, then dragged their feet. Now, they have appealed to politicians. As they drag out the deregulation process, smaller companies that had hoped to compete are dropping by the wayside.

Further evidence that the Bells are winning a war of attrition came after the Thanksgiving weekend.

Covad Communications Group, one of the largest upstarts (called C-LECs, or competitive local exchange carriers) competing with the Baby Bells in the area of high-speed Internet data transmission, announced not only that it was laying off 400 workers but also that it would stop building out its digital subscriber line (DSL) network. It can't raise the money to go on. The one-time darling of investors has seen its stock plunge 93 percent in the last year.

But why? Analysts are predicting that data communications will grow at an annual rate of 70 percent over the next few years. The kind of high-speed service Covad provides would seem just what people want.

Even so, Covad now joins Rhythms Connections, NorthPoint Communications and numerous other competitors to the local Bells in cutting back expansion plans and seeking partnership with the Bells to stay afloat. Covad, in an attempt to stay in business, has sold a 6 percent stake to SBC. NorthPoint has agreed to merge into Verizon.

Such deals violate the intent of the Telecom act and the rules for its implementation. Those rules, written by the Federal Communication Commission, required the Bells to unbundle their networks and sell components to C-LECs at discounted rates so they could compete. The carrot for the Bells was that when there was sufficient competition, they'd be allowed into the long distance business.

Only the Bells have sidestepped those rules to get what they want. As Jennifer Files wrote last week in the San Jose Mercury News: "Dependent on networks owned by the phone companies they compete against, [C-LECs] wound up stuck in legal and lobbying fights for fairer access to the larger companies' systems.

The markets recognize what's going on. The low stock prices for the stocks of Bell competitors reflect the reality that they don't have a chance to succeed – given the Bells' continuing grip on the politicians and their unwillingness to offer proper discounts or even, for that matter, to pay the bills they owe C-LECs that complete their calls.

After the would-be competitors have invested more than $100 billion and spent nearly five years trying to break into the market, the Bells continue to control 95 to 98 percent of local access lines. No wonder competitors want to give up or join up rather than fight, especially when regulators—despite the lack of local competition—have granted Verizon the right to long-distance service in New York and SBC a similar deal in Texas.

With almost breathtaking audacity, the Bells are now trying to gut the Telecom Act entirely. They have pursued federal legislation that would allow them immediately to get into the long-distance data business (soon the large majority of all long distance, and the most lucrative part) without fulfilling their obligation to open up local service to competition, under the Internet Freedom and Broadband Deployment Act – a true misnomer.

Meanwhile, the Bells are creating a thicket of new problems for their biggest potential competitors for both local and Internet services – the cable television industry.

Arcane cable restrictions on ownership already make it impossible for potential cable competitors to the local phone monopolies to provide phone service to anywhere near the percentage of households that the Bells do.

Still, the Bells propose to hobble them some more. They have funded campaigns to force cable companies to open up their lines to all Internet Service Providers (or ISPs). Such "open access" – which is actually forced access – has not even been shown to be technically feasible yet. But regulators are going along. The Federal Trade Commission, which previously had been a staunch opponent of such policies as undue government interference in private enterprise, has held up the merger of America Online and Time Warner in an attempt to require Time Warner's cable operations to open up to ISPs on politically mandated terms. William Kennard, the FCC chairman, now appears to have reversed the stance that both he and his predecessor, Reed Hundt, had taken against just such intervention.

All of this gives the Bells more time to roll out and improve their own DSL service, locking in their captive audience.

Congress and the regulators need to wake up. The reason American consumers do not have the best telecommunications possible is simple: The local monopoly lives. And it grows. With firm action to enforce the Telecom Act, consumers will soon find that the promises of choice, made back in 1996, will come down to this – The Bells, the Bells, only the Bells.