Impact of the Telecommunications Act of 1996

Regulations play a critical role in the rate of innovation, costs and availability of telecommunications technologies. Carriers recognize this and spend enormous amounts of money on lobbying. In the six months prior to passage of the Telecommunications Act, RBOCs gave $2.3 million to congressional campaign funds and the top three long distance carriers donated $2.1 million. A top executive of Verizon stated publicly that his regulatory staff was more important in his business strategy than his marketing staff.

One of the objectives of the Telecommunications Act of 1996 was to open the lucrative, local telephone service market to competition. According to the United States Telephone Association booklet Phone Facts 1998, this market was $96 billion in 1997. At that time, the combined market share of all incumbent local telephone companies, including RBOCs and independents, was 97.7%. In the latest period analyzed by the FCC's Industry Analysis Division, December 2000, the incumbent's overall market share was 91.5%. However, according to the June 4, 2001 Barron's Online, “The Bells' Toll” by Jonathon R. Laing, their market share of business customers is 16%. These statistics support the fact that competition is heavier in the more lucrative business market.

The slow growth of local competition is a sharp contrast to AT&T's long distance market share before and after the 1984 divestiture. In 1984, AT&T's share of the long distance market according to the FCC was 90%. Three years later, in 1987, its share was 78.6%. By 1999, AT&T's portion had dropped to 40%. Many factors contribute to the disparity of impact of deregulation on long distance and local telecommunications service. These include the cost and complexity of any one CLECs connecting to a majority of the RBOC's 9825 central offices and other facilities, legal challenges to the Act and delays and high prices from incumbents for leasing unbundled network elements.

The Act spurred new investment in equipment and services for high-speed Internet access telecommunications. According to the Association for Local Telecommunications Services (ALTS) Annual Report on the State of the Local Telecom Industry, 2001, 36% ($20 billion) of venture capital spending in the first three quarters of 2000 was for the communications sector. In 1999, that figure was $11.2 billion. The RBOCs also increased spending dramatically in that period for communications infrastructure. Verizon Communications, in its 2000 Annual Report, stated it spent $3.9 billion for data equipment in 2000 and planned to spend $4.7 billion in 2001. SBC, in its 2000 Annual Report, projected investing $6 billion in 2001 for DSL infrastructure for high-speed Internet access and fiber optic networking.

Unfortunately, these investments have lowered incumbent's 2001 earnings projections. In addition, many new telecommunications providers have gone out of business due to the high cost of building infrastructure, the cost and delays associated with connecting to incumbent facilities and the large number of competitors. It's unclear how these downturns will impact end users. The Telecommunications Act and the resultant increase in competition spurred investment in the telecommunications sector. A major decrease in competition might prove a disincentive for further growth in investments by regional Bell telephone companies. It has already lowered capital investments available to telecommunications entrepreneurs.

Deregulation, technology and competition have major impacts on prices. Cable TV, which was deregulated by the Act, but where because of the high cost of infrastructure, there is very little competition, has seen large price increases. According to the advocacy group Consumers Union, cable television rates have increased 31.9% since passage of the Telecommunications Act of 1996. This is the exact opposite of the trend in long distance prices. Combined factors of improved technology, increased competition and elimination of long distance revenue subsidization of local service has caused the following decreases in average revenue per minute for interstate and international calls. These figures are restated in 1999 dollars as reported by the Federal Communication's Industry Analysis Division:

A decrease in competition has the potential to cause price increases for high-speed Internet access. This already occurred when Verizon and SBC raised their DSL prices in 2001.

Mergers and acquisitions along with the increased permissions granted Regional Bell Operating Companies to sell long distance is creating a landscape similar to that prior to divestiture when a large company dominated the telecommunications landscape. Verizon is the largest local and cellular telephone company in the United States and SBC is the second largest. Between them they control 61% of the local lines and 65% of the cellular numbers as well as a growing percentage of the long distance market. Judge Harold H. Greene, who presided over the 1984 divestiture, might have been prescient when he made the following statement, which was quoted in The Wall Street Journal, 12 February 1996, page B1 article by Leslie Cauley. (The quote was reprinted in the article, “The Failure of Telecom Reform,” published in Telecommunications Online, September 1996, by D. Linda Garcia.)

“I'm a little concerned [whether] there are sufficient safeguards against the kinds of mergers and acquisitions that might give some small group of companies or individuals a stronghold over U.S. telecom markets…I'd hate to see the AT&T monopoly be reconstituted in some form. It would be like I'd wasted the past 18 years.”