Hell's Bells

The Telecommunications Act of 1996 was supposed to open up the local phone loop and end the so-called Baby Bells' monopolies. Instead, the Bells filed lawsuits to protect their privileges, then dragged their feet; now they're appealing to politicians for help. The result: more monopolies. In 1996, there were eight local companies—the seven Baby Bells plus GTE. Now there are only four. Verizon—a combination of BellAtlantic, Nynex, and GTE—had $65 billion in revenues in 2000, 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, twice that of AT&T.

These companies monopolize the last mile of telecommunications into the home, a status protected by state regulators. As a result, they have steadily increased their returns. Even Bell South, a relative laggard, had a 26 percent return on equity in 1999, compared with 13 percent as recently as 1993.

Further evidence that the Bells are winning a war of attrition came after Thanksgiving weekend. Covad Communications Group, one of the largest upstarts to enter the high-speed Internet data transmission market, announced not only that it was laying off 400 workers, but also that it would stop building out its DSL network. Analysts are predicting that data communications will grow at an annual rate of 70 percent over the next few years, and the high-speed service Covad provides seems like just what people want. Yet the one-time darling of investors has seen its stock plunge 93 percent in the past year. In an attempt to stay in business, it has sold a 6 percent stake to SBC. Covad isn't the only company to cut back an expansion plan and seek a partnership with a Bell: NorthPoint, for example, will soon merge into Verizon.

In theory, the Telecom Act required the Bells to unbundle their networks and sell components to competitors at discounted rates. The carrot was that when there was sufficient competition, they'd be allowed into the long-distance business. But the Bells have sidestepped those rules. And now, with breathtaking audacity, they're trying to gut the Telecom Act's requirements. The Internet Freedom and Broadband Deployment Act—a true misnomer—would let the Bells immediately enter the long-distance data business and, soon after, the rest of long-distance services. The law would do so without opening local service to competition.

Meanwhile, the Bells are creating a thicket of new problems for their biggest potential competitor, the cable television industry. Arcane restrictions already make it impossible for cable companies to provide phone service to anywhere near the percentage of households that the Bells do. The Bells propose to hobble them some more, funding campaigns to force cable companies to open their lines to all Internet service providers.

The local monopoly lives—and grows. Without firm action, the Telecom Act's 5-year-old promise of greater choice will instead come down to this: the Bells, the Bells, only the Bells.