The World Beyond the Bells


Part I:

What, No Telephone?

In a recent paper entitled The Future of the Bells,1 we learned that our four remaining Bell telephone companies, the incumbent local exchange carriers (ILECs), are holding a collective $135 billion debt in the form of long-term loans, and that their income stream for repaying these loans is diminishing because of market pressures based on a new set of technologies and telecommunications needs (e.g., the Internet and mobile communications such as cell phones). Recognizing that the telecommunications network has become an essential part of our daily lives, we saw how the ILECs have held their monopoly position against the government's policies and against the public interest by maintaining exclusive control over the last mile: the connection between the telecommunications network and nearly all homes and businesses. But even their arrogance and monopoly position will not save them from increasing debt and decreasing business. The paper concluded that as the ILECs' financial problems increase and bankruptcies are announced, we may witness the end of an era.

If the ILECs' monopoly power is effectively limited by new policy, legal and financial means (as they slowly declare bankruptcy and merge into greater monopolies), what will become of the telephone network? This is an important question in two contexts:

1) the telephone network is an important element of our social fabric, and

2) ILECs provide DSL service which is one of two major broadband2 Internet access technologies.

A major disruption of telephone and telecommunications services would be disastrous for our society, businesses, and government. Communication is so critical to our daily lives that the networks are becoming a part of our social and cultural "commons."3 Current and perceived threats to the stability of this resource are causing an ad hoc social movement to emerge. New technologies are evolving to empower this social movement, which in turn is challenging controls by monopoly powers.

In order to circumvent the ILEC- and cable-controlled wires, people are increasingly turning to wireless technologies that make use of radio spectrum-arguably another element of the public commons (explored below). Many different factors will affect the uses and successes of this approach. This essay discusses some of the opportunities that will arise in a newly-competitive telecommunications marketplace.

The Goliaths of Broadband

Over the last few years, we have seen several prominent Internet service providers4 abruptly close their doors, leaving a large body of commercial, non-profit and residential customers stranded and without a connection to the Internet. Many of these carriers were operating as competitive local exchange carriers (CLECs). Abetted by the Telecommunications Act of 1996,5 the CLEC market rose and fell at the hands of a "deregulated" but tightly controlled telephone line-based environment. The CLEC bankruptcies were the result of a number of factors, with the major one being the inability to work with or circumvent the ILEC's last mile barriers.

Competition as we have come to know it in recent years is quickly and quietly disappearing. The many Internet Service Providers (ISPs) from which we have chosen are now or soon to be gone. Infinite variety has been largely replaced by two choices: a monopoly phone company offering DSL, and a monopoly cable company offering cable modem service.6

Digital Subscriber Line (DSL), a copper loop transmission technology, is a product offered by the phone companies to allow Internet access over (and not interfering with) a regular phone line. The ILECs hold over 80% of the DSL market,7 having largely foreclosed a competitive future from CLECs. While some of the telephone companies are currently on shaky financial ground, their future as providers of "broadband" services is, at least temporarily, supported by current congressional and regulatory activities, discussed below.

What if you don't want, or for reasons of distance or availability, can't get DSL? "The only real competition is cable-which also has consolidated into four main players and is dominated by two"8 (AT&T Broadband, which is merging with Comcast, and Time Warner Cable). Encouraged by the Telecommunications Act of 1996, cable is also a viable competitor for local phone service.

Regulation Overview

In recent years many of the policy decisions made by Congress and the FCC have favored ILECs and/or cable companies. The Tauzin-Dingell bill that passed the House earlier this year, for example:

"...(gives) the Bells control of the nation's telecommunications and technology infrastructure and threaten(s) the future deployment of both broadband and dial-up Internet access, as well as of competitive telephone service. The result for consumers would be less choice, lower quality service and higher prices for everything from basic phone service to Internet access."9

Similar bills are circulating in the Senate. The FCC is likewise concluding that "competition" will be promoted best by market forces.

"The FCC tentatively concluded the wireline broadband Internet access services-whether provided over a third party's facilities or self-provisioned facilities-are information services, with a telecommunications component, rather than telecommunications services. Information services include such services as voice mail and e-mail, which ride over telecommunications facilities."10 This information services classification would free the ILECs of requirements that have forced them to unbundle their networks and allow competitors to use their phone plants to deliver competing DSL services.11 The effect of this regulatory decision is profound. "The Federal Communications Commission is quietly handing over control of the broadband Internet to a handful of massive corporations."12

With demand for broadband service growing, how is it that monopoly ILECs could be going bankrupt? Minimal competition for broadband services between ILECs and cable, or in some areas ILECs alone, is bad for customers: higher prices, long service contracts, expensive equipment charges. Although the ILECs' reluctance to unbundle their local resources is foreclosing the Competitive Local Exchange Carrier (CLEC) market's future,13 the fact remains that competition from DSL service resellers would have promoted sales of ILEC resources as well. Service expansion is also hindered by the shortage of installation personnel-and ILECs are not hiring to expand at this time. Finally, what little competition exists between ILECs and cable providers helps lower prices. But DSL prices remain higher than cable, and itwo cable modems are being installed for every one DSL modem that's installed. Price parity affects market parity. The ILECs seem bent on squeezing every last penny from their diminishing future. Once other broadband and mobile communications alternatives are set loose on the marketplace, ILECs will certainly be in for a wild ride.

While current regulatory support firmly favors market forces, consumer demand may not last. Dissatisfaction with customer pricing and service, problematic timely delivery and declining quality of service are fueling the larger debate about a structural separation of the carriers from control of the content that travels over the Internet.

In addition, calls are coming from many public and commercial fronts imploring the Bush administration to develop a comprehensive policy to encourage broadband deployment and use. No clear plan or path has yet been announced, though the FCC said "that it will review most of its media ownership limits in one sweeping proceeding, delaying an expected relaxation of the caps for nearly a year."14 A senior researcher at SRI Consulting Business Intelligence predicts that "such potential relaxation of media ownership does not appear likely to create a more competitive DSL market, but more likely will enable further consolidation and quite possibly fewer competitive choices for subscribers."15

Part II: Goliath, meet David. And Dave. And Davy . . . | Footnotes