Telecommunications- The USA: The US Wireline Sector (April 2005)
Prior to 1984, the U.S. Telecom market was a monopoly. AT&T owned the 22 local Bell telephone companies that sold local, long distance, international long distance, the white and yellow pages and telephone equipment. Customers typically had only one option for telephone service – their local Bell Company, a subsidiary of AT&T.
WorldCom MCI and Sprint had entered the long distance market as competitors to AT&T. However they were at a significant disadvantage, as they needed the services of a local Bell company for the origination and termination of calls. As AT&T, the owner of the Bells, itself was a provider of long distance they were not very accommodating to the competitive carriers. Competitors frequently complained to the US Justice Department about AT&T’s lack of cooperation. As a result, the Justice Department filed an antitrust suit against AT&T in 1974 which was finally resolved in 1984.
In the settlement, the 22 local Bell companies were divested from AT&T and seven Regional Bell Operating Companies (RBOCs) were formed – Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell Communication (SBC) and US West. Each RBOC was granted a distinct geographic territory, termed a Local Access Transport Area (LATA) in which they would operate. They were allowed to sell calls only within their LATA. For call extending outside their LATA they needed the service of a long distance carrier. The RBOC’s were also permitted to continue publishing and marketing the telephone directories but were not permitted to manufacture equipments.
Thus, AT&T lost control of the local business but continued to be the leader in interstate and international long distance. It also had the telephone equipment business that was later spun off into a separate company – Lucent Technologies.
The Telecommunication Act 1996
The next major impetus for change in the US telecommunication industry came in the form of the Telecommunication Act 1996. The main factors that led to the Telecommunication act of 1996 were
• RBOCs lobbying efforts to enter interstate long distance
• Long distance carrier’s desire to enter the local market
• To increase competition in the local market – it was thought that increased competition would force the RBOCs to upgrade their network in order to stay competitive with the upstart carriers.
The Telecommunication Act of 1996, in order to promote competition in local telephony, introduced legislations that forced local telephone giants to offer rivals low-cost access to their networks. Since it was felt that it would not be possible for new entrants to build facilities that could compete with the incumbent’s, they were allowed unbundled low-cost access to the incumbent’s facilities. This provided an easy entry for competitors and the ones to benefit most were long distance carriers like AT&T and WorldCom as they could then offer both long distance and local service to consumers.
The act was such structured that it would loosen the incumbent’s hold on the local market but provide them with the means of entry in the long distance market – something the RBOCs desperately wanted. Thus, the RBOCs had to comply with a 14 point “competitive checklist” before they filed for entry into long distance. The 14 points ensure that the incumbent have opened their network to competition. The clauses of the “competitive checklist” are as follows:
• Competitors must be allowed to interconnect to the incumbent’s facilities, allowing them to access pieces of the incumbent’s network.
• Competitors must be allowed nondiscriminatory access to unbundled network elements.
• Competitors must be allowed nondiscriminatory access to RBOC-owned poles, ducts, and rights-of-way.
• Competitors must be given access to unbundled local loop transmissions from the central office to the customer’s premise.
• Competitors must be given access to unbundled trunk transmission.
• Competition must be given access to unbundled local switching as distinct from transmission services.
• Competitors must receive nondiscriminatory access to 911, E911, directory assistance, and operators.
• RBOCs must supply white pages directory listing for competitors’ customers.
• RBOCs must provide competitors’ customers nondiscriminatory access to telephone numbers.
• Telephone number portability and interim telephone number portability until full portability is possible must be available.
• Nondiscriminatory access to services that allow competitive carriers to supply dialing parity (allowing competitors’ customers to choose their long distance provider) must be made available.
• Reciprocal compensation agreements must be in place.
• RBOCs must provide for the resale of telecom services at cost, with no provision for profit.
Industry Structure
Local Exchange carriers (LECs)
Local exchange carriers are typically the first and final link between customers and the party that is called. The major local carriers in the US are still the RBOCs referred to as the incumbent local exchange carriers (ILECs). There are currently 4 RBOC’s of the 7 originally– SBC, Bellsouth, Verizon and Qwest.
SBC Communication – SBC merged with Pacific Telesis in 1997 and Ameritech in 1999 (both bell companies), which has made it the incumbent local service provider in 13 states.
BellSouth – BellSouth operates as the incumbent in 9 states. It has got approval to provide long distance in all states.
Verizon – Verizon was formerly known as Bell Atlantic Corporation, which was formed as a breakup of AT&T. It merged with NYNEX in 1997. It again merged with GTE Corporation in June 2000 after which it started operating as Verizon Communication.
Qwest – The Company, formerly US West, operates as the incumbent in 14 states.
As the RBOCs have gained entry into long distance the competition in local service has stiffened (as they have to satisfy the 14 point competitive checklist). The competitors referred to as Competitive Local Exchange Carriers (CLECs) are in a better position to fight the RBOCs as they now have more flexible access to the incumbent’s network. The CLEC’s include among others the long distance providers AT&T and Sprint who are now operating as CLECs in few states.
Long Distance Carriers or Inter Exchange Carriers (IXCs)
Long distance carriers carry the calls from one (the dialing party’s) local exchange to another (the receiver’s) local exchange. The main players in the long distance market are AT&T, WorldCom MCI and Sprint. Until 1984, AT&T held a virtual monopoly but since then Sprint, MCI and various small players have been gaining share from AT&T. However in a major reshuffle Recently in Jan ’05, SBC has acquired AT&T in a $16bn stock and cash deal. While Verizon has acquired MCI for around $8.6bn cash and stock deal, however it is still to get ratified by the shareholders.
Entry of the RBOCs into long distance has led to heightened competition in the long distance market and thus led to a steep fall in long distance prices over the last couple of years. The RBOCs can package all the services (local, LD, wireless and broadband) in one attractive bundle, which appeal more to the consumers. Thus the long distance carriers have been losing market share, particularly in the consumer segment. Though Sprint and AT&T have also entered some states as CLECs, long distance still constitutes majority of their revenues.
WorldCom MCI and Sprint had entered the long distance market as competitors to AT&T. However they were at a significant disadvantage, as they needed the services of a local Bell company for the origination and termination of calls. As AT&T, the owner of the Bells, itself was a provider of long distance they were not very accommodating to the competitive carriers. Competitors frequently complained to the US Justice Department about AT&T’s lack of cooperation. As a result, the Justice Department filed an antitrust suit against AT&T in 1974 which was finally resolved in 1984.
In the settlement, the 22 local Bell companies were divested from AT&T and seven Regional Bell Operating Companies (RBOCs) were formed – Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell Communication (SBC) and US West. Each RBOC was granted a distinct geographic territory, termed a Local Access Transport Area (LATA) in which they would operate. They were allowed to sell calls only within their LATA. For call extending outside their LATA they needed the service of a long distance carrier. The RBOC’s were also permitted to continue publishing and marketing the telephone directories but were not permitted to manufacture equipments.
Thus, AT&T lost control of the local business but continued to be the leader in interstate and international long distance. It also had the telephone equipment business that was later spun off into a separate company – Lucent Technologies.
The Telecommunication Act 1996
The next major impetus for change in the US telecommunication industry came in the form of the Telecommunication Act 1996. The main factors that led to the Telecommunication act of 1996 were
• RBOCs lobbying efforts to enter interstate long distance
• Long distance carrier’s desire to enter the local market
• To increase competition in the local market – it was thought that increased competition would force the RBOCs to upgrade their network in order to stay competitive with the upstart carriers.
The Telecommunication Act of 1996, in order to promote competition in local telephony, introduced legislations that forced local telephone giants to offer rivals low-cost access to their networks. Since it was felt that it would not be possible for new entrants to build facilities that could compete with the incumbent’s, they were allowed unbundled low-cost access to the incumbent’s facilities. This provided an easy entry for competitors and the ones to benefit most were long distance carriers like AT&T and WorldCom as they could then offer both long distance and local service to consumers.
The act was such structured that it would loosen the incumbent’s hold on the local market but provide them with the means of entry in the long distance market – something the RBOCs desperately wanted. Thus, the RBOCs had to comply with a 14 point “competitive checklist” before they filed for entry into long distance. The 14 points ensure that the incumbent have opened their network to competition. The clauses of the “competitive checklist” are as follows:
• Competitors must be allowed to interconnect to the incumbent’s facilities, allowing them to access pieces of the incumbent’s network.
• Competitors must be allowed nondiscriminatory access to unbundled network elements.
• Competitors must be allowed nondiscriminatory access to RBOC-owned poles, ducts, and rights-of-way.
• Competitors must be given access to unbundled local loop transmissions from the central office to the customer’s premise.
• Competitors must be given access to unbundled trunk transmission.
• Competition must be given access to unbundled local switching as distinct from transmission services.
• Competitors must receive nondiscriminatory access to 911, E911, directory assistance, and operators.
• RBOCs must supply white pages directory listing for competitors’ customers.
• RBOCs must provide competitors’ customers nondiscriminatory access to telephone numbers.
• Telephone number portability and interim telephone number portability until full portability is possible must be available.
• Nondiscriminatory access to services that allow competitive carriers to supply dialing parity (allowing competitors’ customers to choose their long distance provider) must be made available.
• Reciprocal compensation agreements must be in place.
• RBOCs must provide for the resale of telecom services at cost, with no provision for profit.
Industry Structure
Local Exchange carriers (LECs)
Local exchange carriers are typically the first and final link between customers and the party that is called. The major local carriers in the US are still the RBOCs referred to as the incumbent local exchange carriers (ILECs). There are currently 4 RBOC’s of the 7 originally– SBC, Bellsouth, Verizon and Qwest.
SBC Communication – SBC merged with Pacific Telesis in 1997 and Ameritech in 1999 (both bell companies), which has made it the incumbent local service provider in 13 states.
BellSouth – BellSouth operates as the incumbent in 9 states. It has got approval to provide long distance in all states.
Verizon – Verizon was formerly known as Bell Atlantic Corporation, which was formed as a breakup of AT&T. It merged with NYNEX in 1997. It again merged with GTE Corporation in June 2000 after which it started operating as Verizon Communication.
Qwest – The Company, formerly US West, operates as the incumbent in 14 states.
As the RBOCs have gained entry into long distance the competition in local service has stiffened (as they have to satisfy the 14 point competitive checklist). The competitors referred to as Competitive Local Exchange Carriers (CLECs) are in a better position to fight the RBOCs as they now have more flexible access to the incumbent’s network. The CLEC’s include among others the long distance providers AT&T and Sprint who are now operating as CLECs in few states.
Long Distance Carriers or Inter Exchange Carriers (IXCs)
Long distance carriers carry the calls from one (the dialing party’s) local exchange to another (the receiver’s) local exchange. The main players in the long distance market are AT&T, WorldCom MCI and Sprint. Until 1984, AT&T held a virtual monopoly but since then Sprint, MCI and various small players have been gaining share from AT&T. However in a major reshuffle Recently in Jan ’05, SBC has acquired AT&T in a $16bn stock and cash deal. While Verizon has acquired MCI for around $8.6bn cash and stock deal, however it is still to get ratified by the shareholders.
Entry of the RBOCs into long distance has led to heightened competition in the long distance market and thus led to a steep fall in long distance prices over the last couple of years. The RBOCs can package all the services (local, LD, wireless and broadband) in one attractive bundle, which appeal more to the consumers. Thus the long distance carriers have been losing market share, particularly in the consumer segment. Though Sprint and AT&T have also entered some states as CLECs, long distance still constitutes majority of their revenues.
posted by Vikas Maheshwari, CFA at 7:43 PM
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