Unnatural Monopoly

For a long time, introductory economics textbooks taught that telephone service was a "natural monopoly." After the breakup of Ma Bell, competition among long-distance carriers became commonplace, but the assumption that local telephone service was destined to be a monopoly lingered. The competition emerging from a combination of deregulation and new technologies suggests that this assumption may also be mistaken.

New competitors are beginning or planning to offer local phone service at cheaper prices, in more-convenient forms, and in better-tailored packages. For example, Chicago-based Metropolitan Fiber Systems operates fiber-optic telephone networks in 12 cities nationwide, connecting businesses in 850 buildings to each other and to long-distance carriers. In New York, the company recently started connecting its customers to businesses off its network, via NYNEX lines. It plans to offer similar service in Boston and other cities.

Metropolitan Fiber has applied to the Illinois Commerce Commission for permission to offer direct dial-tone service to its customers, who currently use dedicated lines. It would charge businesses for transporting calls to Illinois Bell's central switching office and for additional services such as call forwarding, at rates lower than those offered by Illinois Bell.

Meanwhile, McCaw Cellular, the nation's largest mobile-phone company, and Tele-Communications Inc., a major cable-TV firm, are testing a wireless telephone service for residential customers. The system, in experimental use in Oregon, bypasses the local phone company by using McCaw's cellular phone network and TCI's fiber-optic TV cables. Customers communicate with small, hand-held sets that are more portable than conventional cordless phones.

AT&T is planning to experiment with pocket phones that would be linked by its nationwide network of 3,000 microwave towers. After making sure that the system won't interfere with existing equipment, the company expects to distribute the radiophones to test groups of 1,000 people each in Boston, Atlanta, and Los Angeles by 1993.

Although local phone companies do not relish the prospect of competition, deregulation offers them a consolation prize. Last fall, a federal appeals court ruled that the Baby Bells may offer their own news and information services, in competition with some of the same companies that will soon be trying to grab a share of their telephone business.