Development of the Telecommunications Industry

1. Development of the Telecommunications Industry

2. Early History • initial telephone service • Alexander Graham Bell

3. In 1878, telephone exchanges established in major cities • provided lines, switches and phones - isolated from other cities • no service in smaller towns or rural areas.

4. AT&T Parent Co. • held patent rights • franchised individual cities.

5. LD lines • Started slowly • expensive

6. 1893-1894, patents ran out • Local competitors came in • Bell System network refused to connect competitors • Competitors threatened antitrust action – • Kingsbury Commitment in 1913. Agreed to interconnect. • Bell Companies and Independents exchanged territories

7. Bell vs. Independents • By 1982, 25 Bell Cos. 81% lines, 41% of geography; 1432 independent, 19% lines, 59% geography • Regulated monopoly at the local level with unregulated monopoly at interstate level until 1934 Communications Act.

8. The Communications Act of 1934 • Established FCC to regulate communications – see overhead

9. Common Carrier provisions of the Act (partial list) • Obligation to serve all who request service. • Right of commission to require interconnection with other carriers • Rate to be just and reasonable • Unreasonable discrimination prohibited.

10. Common Carrier Provisions (cont’d) • Publicly available tariffs for all communications charges must be filed and followed in a non-discriminatory manner.

11. Structure of FCC • 7 members appointed by President for 7 years. No more than 4 of the seven from one political party. • In 1983, reduced to 5 for 5 years. President designates chairman.

12. Separation of local and LD costs • Suppose the local loop has the following cost and demand characteristics:

13. What Share does each service pay? • There are economies of scope. Producing them separately costs $24 which is much less than $36. • How to you allocate costs between services? • Each should at least cover its incremental cost. Local (24-16=8) LD (24-20=4).

14. Smith v. Illinois Bell – • Supreme Court ruled that local telephone network was jointly used for local and LD and some of the cost of local must be allocated to LD. • This was the legal foundation for separations.

15. Other Landmarks • 1951, Charleston Plan • 1970, Ozark Plan

16. Local vs. Long Distance • Settlements -dividing up the revenues was not fee for service but based on specified portion of costs. • The effective price per minute was higher for high-cost independents and lower for low-cost urban cos. • LD rates still based on geographically-averaged rates.

17. 1956 Consent Decree • Western Electric subsidiary of the then AT&T-Bell System provided telephone equipment to local telephone cos. • Incentive to overcharge local cos. for equipment and make excess profits in the unregulated Western Electric.

18. 1956 Consent Decree (cont’d) • Gov't wanted divestiture of Western Electric • AT&T won.