How The Bells Stole America's Digital Future

Introduction and Summary

"Bell Atlantic-New Jersey (BA-NJ) has over-earned, under-spent and inequitably deployed advanced telecommunications technology to business customers, while largely neglecting schools and libraries, low-income and residential ratepayers and consumers in Urban Enterprise Zones as well as urban and rural areas."[1]

The explosive growth of the Internet and the World Wide Web over the last few years has generated increased interest in making sure that these new services are available to all Americans in their homes and schools. The goal is not only to ensure that all Americans have access, but also to ensure the availability of access over advanced high-speed networks. And if the Regional Bell Operating Companies (RBOCs) had delivered on the promises they made in the early 1990s, 44 million households–almost half of America's households–and the vast majority of the nation's schools would already be wired with fiber optic networks. Instead, as of January 2000, only about 500,000 households had access to these advanced networks.

chart showing 44 million households promised vs half-million 
households delivered to date

Source: Bell Annual Reports, New Networks Institute, 1994-2000

What Happened to the "Information Superhighway?"

By the year 2000, the information superhighway was to have delivered an incredible array of advanced services over a very high-speed network. A network operating at speeds a hundred times faster than the asynchronous digital subscriber line (ADSL) service that the Bells are finally starting to deploy over the same copper wire network used for voice communication. In fact, by now the full-motion video, 800-channel network was to have changed our lives for the better, and even ushered in a new era of competition in cable television services.

The Bells' promises were grandiose. For example, California's Pacific Telesis was supposed to have rewired the state by 2000 with a $16 billion advanced network:

"In November 1993, Pacific Bell announced a capital investment plan totaling $16 billion over the next seven years to upgrade core network infrastructure and to begin building California's 'Communications Superhighway.' This will be an integrated telecommunications, information and entertainment network providing advanced voice, data and video services. Using a combination of fiber optics and coaxial cable, Pacific Bell expects to provide broadband services to more than 1.5 million homes by the end of 1996, 5 million homes by the end of the decade." [2] (Emphasis added.)

Pacific Telesis wasn't alone. All of the Bells made similar promises, and in many states they used those promises to convince policymakers to change the way they were regulated. Changes that replaced traditional rate-of-return regulation–intended to protect customers from profit gouging–with alternative regulatory schemes (sometimes called incentive or price cap regulation). These new regulatory frameworks gave the Bells more profits, ostensibly to be used to build advanced networks. However, in most states these advanced networks were never built and the additional revenues were never returned to customers.

All of this has had a serious impact on America's digital future, which policymakers must address. If the Bells had rolled out the advanced networks that they promised to build–when they promised to build them–the vast majority of Americans would now have access to the Internet over fiber optic networks. The Bells had agreed to wire not just the lucrative high-income neighborhoods, but low-income and rural communities, schools, libraries and health care facilities. By failing to fulfill their promises, the Bells helped create America's digital divide. In the words of New Jersey Ratepayer Advocate Blossom Peretz:

"...[L]ow income and residential customers have paid for the fiber-optic lines every month but they have not yet benefited."[3]

Broken promises were the norm throughout America. For example, Ameritech Ohio was supposed to have wired all of the state's public schools with two-way, fully interactive services. And unlike the ADSL service that the Bells have recently started to deploy, the advanced networks that they promised to build offered the same high speed in both directions:

"The Company's infrastructure commitment in this Plan shall consist of the commitment to deploy, within five years of the effective date of the Plan and within the Company's existing service territory, broadband two-way fully interactive high quality distance learning capabilities to all state chartered high schools including vocational, technical schools, colleges and universities; deploy broadband facilities to all hospitals, libraries, county jails and state, county and federal court buildings."[4]

What Happened to All the Money for the "Information Superhighway?"

New Networks Institute (NNI) estimates that consumers have already paid over $45 billion in extra telephone charges, and continue to pay over $8 billion annually.[5] As monopoly providers of local phone service, the Bells are still subject to some regulation, yet they are among the most profitable companies in America today. Bell profit margins are more than double that of the major competitive long distance companies and other regulated utilities and literally 167% above the profit margins of some of America's best-known companies. Much of this excess profit is a result of the financial incentives that were supposed to build the infrastructure for America's digital future.

This report is divided into two parts. Part I, "How the Bells Stole America's Digital Future," documents the promises that the Bells made to regulators to construct high-speed fiber optic networks, often in exchange for financial incentives. But the promises weren't fulfilled, and the additional revenue generated excess Bell profits. If the Bells had delivered what they promised, low-income urban neighborhoods and rural communities would have been wired by now and the digital divide might have been avoided.

Part II, "Bell Company Profits Are Outrageous," describes how the Bells profited from these broken promises. Excess earnings, higher rates for services and massive staff cuts have resulted in a significant increase in profits and a significant decline in the quality of customer service.

The digital divide exists today in part because the Bells broke their promises–promises that were often tied to requests for regulatory changes. It's importantto remember the Bells' history of broken promises because these companies are once again asking that the rules be changed. This time, the Bells are asking Congress to let them into long distance data markets before their local markets are open to competition as required by the Telecommunications Act of 1996. Given the track record of broken promises documented in this report, granting the Bells' request would be a mistake.

Next: Part I: How the Bells Stole America's Digital Future | Table of Contents