Southern Bell is AT&T’s biggest subsidiary.
If you’re unhappy with your phone company, it’s easy to switch to MCI.
Since deregulation, long distance no longer subsidizes local calls. ..MR0-
If you answered “true” to any of the above, well, join the club of the confused. Nearly a decade after the federal government broke up the venerable Bell System, most Americans are still bewildered about their telephone service. But if you’re unclear on the corporate relationship between Ma Bell and its former Babies (there’s none) and you think MCI brings calls into your kitchen (it doesn’t), brace yourself: things are about to get a lot worse. The system under which a regulated monopoly runs the local phones is headed toward collapse. Technological advances are turning local service into a hotly contested industry, bewildering consumers and undermining the principle that every household has the right to a low-cost phone.
You can’t hear the competition just yet. Wherever you live or work, your dial tone comes from the same source it always has a monopoly that owns the wires, poles and switches serving you and your neighbors. Even if you use a cellular phone in your car, your regular phone company ends up carrying the call. But the day when Americans can choose who provides their basic phone service is just around the corner. In some places, it may arrive next year. Says Federal Communications Commission economist Robert Pepper: “There is no longer any niche that is a stand-alone monopoly.”
The impending face-off between telephone and cable television, of course, has been predicted ever since the 1982 court order breaking up the Bell System barred the seven regional Bell companies from owning information services or TV programs. In Washington, phone companies, some of which want to compete in cable, and the cable industry, which wants to keep out the Bells while being freed to enter the phone business, have battled to a draw. Last week’s FCC action rolling back many cable rates only strengthens cable operators’ interest in telephones. But beware the premature sightings of a fiberoptic future in which telephones, computers and television merge, allowing you to have long-distance medical diagnosis, a video call with Grandma or any movie you want to see. A far less futuristic reality is staring consumers in the face. The technology to allow choice in local telephony-a business more than four times the size of cable television-is here. Competition is beginning to affect phone service in ways no one envisioned five years ago. Consider:
Ameritech, which serves 17 million phone lines from Ohio to Wisconsin, last month asked the Federal Communications Commission to open local telephone service to competition and, in trade, to free it from many restrictions on its business.
Rochester Telephone Corp. filed a deregulation plan with New York regulators in February. If they approve, 1 million customers would have to decide next spring whether to stay with Rochester Tel or to switch to competitors-assuming competitors emerge. In return, much of the company would become totally unregulated.
In February, Southwestern Bell acquired two cable systems in suburban Washington, D.C., where it already owns a cellular-phone system. Industry sources speculate that it may seek to combine its cable and cellular capabilities to provide basic phone service in competition with the local monopoly, Bell Atlantic. (Southwestern Bell says it has no such plans.)
What’s driving such moves? Local phone service is still a hugely profitable business, with state regulators setting prices to guarantee phone companies a return on their investment. Regulations keep local rates low; the $13 a month the average household pays for basic service is only about half of what that line costs the phone company. It gets much of that money back by charging a few cents a minute to call outside the local area to nearby towns. Other sources of profit also hold residential rates down: pay phones, Yellow Pages advertising, business customers and charges for connections to long-distance companies. But alternatives to the local network, from private lines to competing pay phones, are squeezing those easy profits. Phone companies fear being left with only the low-volume customers nobody else wants. “It’s not going to take 20 years to get competition in local telephones,” says Ameritech’s Richard Brown. “It’s going to explode on us.”
In cities like Grand Rapids, Mich., competition is a reality. Varnum, Riddering, Schmidt & Howlett, a law firm, now diverts much of its phone traffic to an upstart competitor called City Signal. City Signal, one of about 20 companies around the country known as CAPs-competitive access providers-has 180 miles of fiber connecting 200 buildings around Grand Rapids. The CAPs aren’t much more than a mosquito buzzing round an elephant; their total revenue in 1992, $200 million, was a tiny fraction of the $90 billion Americans spent on local calls. But they are starting to take a serious bite out of corporate business. When they talk to local clients, Varnum’s 126 lawyers communicate on Michigan Bell, but City Signal’s fiber links the law firm directly to its long-distance carrier. The law firm gets a better connection and can use the fiber to link computers in three local offices. City Signal charges the longdistance carrier 2.5 cents a minute, far below Michigan Bell’s rate. Those pennies add up: Ameritech, Michigan Bell’s parent company, collects $2.7 billion a year-almost one fourth of its revenue-for providing the local leg of long-distance calls, but it claims to have lost 30 percent of that market among big Grand Rapids businesses.
Competition has a very different face in tiny Quitaque, Texas. Last December GTE Corp. disconnected the lines that tied Quitaque’s 500 or so residents to each other and the outside world. The phones and wiring inside their homes are unchanged, but the entire local network now runs by radio, not by wire. For Jo Patrick, who lives on a farm near town, the experimental system brought an immediate benefit: “I don’t have that party line anymore.” Patrick still has no choice about which company to use, but there’s no reason she couldn’t. The ability to run phones without stringing wires makes competition feasible in small towns where it was previously a pipe dream.
And competition looks different still in Dunedin, Fla., where housekeeper Laurie Neff gave up her wired phone last December to test an experimental wireless “personal communications network.” Instead of connecting to an in-home transmitter plugged into a phone line like today’s pocket phones, PCNs transmit radio signals to antennas placed every few hundred feet. From there the signals may pass into cables owned by a phone company, a cable TV operator or even an electric utility. By adding a few amplifiers and switches, the cable owner could carry the call across town. Depending on FCC rulings, there may be five PCNs in a single area, driving prices low enough to make some customers abandon wired phones altogether. (Among those testing the technology is The Washington Post Company, which owns cable systems and NEWSWEEK.) “It has the potential to be much less expensive than cellular and to be priced at a modest premium over land-line telephone service,” says William Killen Jr. of Cox Enterprises, which is also testing a PCN in San Diego.
Local phone companies are busy maneuvering to meet the competitive challenge. Ameritech, for example, wants the 1982 court order breaking up the Bell System revised to let it sell long-distance service; with lines already in place, it could handle calls between Chicago and Cleveland that it now hands to a long-distance company. Sprint, which runs long distance as well as 5.9 million local lines, recently bought back into the cellular business; once local service is deregulated, says president John Frazee Jr., “a company is going to be hamstrung if it is only a wireline company or only a cellular company or only a long distance company. New Jersey Bell recently won reduced regulation in return for a promise to speed installation of fiber. The company touts fiber’s capabilities, but that’s not its only motivation: if it gets fiber into place now, it will have a leg up on would-be competitors.
Who’ll compete with your local phone company? Probably lots of folks at once. The same technological changes eroding the Bells’ monopoly mean that no one need build an entire network. Local calling will be broken down into pieces-service from the customer to the nearest pole; service from the pole to the switching office; switching itself, and so forth. Competitors will mix and match: a PCN company could use its radio technology to take a call from your home to the street, pay a competitive access provider to move it to the phone company’s office and have the phone company carry it to the pole nearest to whomever you’re calling. Consumers may get service from resellers who own no facilities at all. The local phone company will rent its lines and switches to all comers. “We would hope that the new networks coming on would be attached to our core business,” says Southern Bell planner Robert Burns.
Many would-be phone companies have a vision of the future that cuts out the local Bell altogether. “Having to pay your competitor for the most important part of the network is not a viable strategy,” insists City Signal president Brad Evans. So all sorts of new alliances are shaping up. The prototype, if there is one, may be Philadelphia-based Comcast. Best-known as a cable TV operator, Comcast also controls Eastern TeleLogic, a competitive-access provider in Philadelphia. It is buying 20 percent of Teleport Communications Group, which runs fiber-optic networks in New York and other cities. Comcast also owns 30 percent of Fleet Call, which is building a wireless voice, data and paging network, and it has a passel of cellularphone licenses. The pieces fit together: the wireless companies need land links-and the access providers and cable companies have plenty of capacity to carry phone calls on their fiber. Says Comcast president Brian Roberts, “If you want competition in the local phone business, it’s not a technological leap of faith.”
It is, however, a regulatory leap of faith, and therein lies the rub. Warns consultant Robert Rosenberg of Insight Research: “We’re rushing headlong to deregulation of local telephone service, and in that rush we’re going to be leaving some of our countrymen behind.” In return for giving up their monopolies, Ameritech and Rochester Tel want less regulation. In theory, no problem; competition, after all, is supposed to hold prices down. But bargaining power is everything. Large customers will see costs drop. Small businesses and families that make few calls, especially in rural areas, may find few competitors begging for their business and could pay more. “There’s certainly much more in it for big people,” says economist William E. Taylor.
The longstanding national policy of assuring every household an affordable phone may be one of the casualties. In the short term, the problem is easy to gloss over; to smooth the way for deregulation, Rochester Tel proposes to hold down local rates until 1999. “But then they’ll have to go to market level,” adds VP John Purcell. Unless regulators force all users of the phone system to help finance universal service, government subsidies may be the only way to keep basic rates low.
Universal service isn’t the only tough issue for regulators. There’s also a question familiar to air travelers: under deregulation, what keeps the big boys from muscling out the little ones? Keeping the playing field level requires rules to ensure that providers can interconnect on equal terms. The most important concerns your phone number. At the moment, it belongs to the phone company, not to you. Unless you can keep it, you’re not likely to switch carriers. Other questions that seem trivial to telecom techies but vital to customers are still unsettled. If you want to call John Q. Public in Tampa but you don’t know which company serves his phone, how will you get his number? So far, nobody has an answer.
When you’ll have a choice of phone companies will depend on where you live. While states like Michigan push competition, others are hanging back. But the changed environment hasn’t escaped local phone monopolies. “The fact that they’re willing to offer customer service on Saturday, that they’re willing to do installations with guaranteed delivery dates, those are responses to competition,” says Teleport VP Joel Gross. “You’re already starting to see some benefit to the consumer by the threat we pose.” Consumers can only hope that the benefits don’t vanish once fullfledged competition becomes a fact.
PHOTOS (17): Photo collage of telephone paraphenalia (PHOTO ILLUSTRATION BY SILVIA OTTE; NC, ROBERT HOLMGREN, NC, BARTH-H. ARMSTRONG ROBERTS, ARCHIVE, NC, NC, LEVY-PHOTOTAKE, BETTMANN, STEVEN PUMPHREY, NC, BETTMANN, GRANT-PHOTO RESEARCHERS, NC, BETTMANN, NC)
PHOTO: Richard Brown, Ameritech (ANDY GOODWIN)
PHOTO: Bell buster: A City Signal employee at work (PETER YATES-SABA)
TECHNOLOGY TODAY
The local telephone company is not going to go away. It will still offer basic service, although unlimited local calling for a standard, flat rate may soon become just a memory.
The same wires and cables that bring you MTV could also carry your dial tone if regulators would allow it. And with a little switching gear, the cable companies can even deliver those calls across town without the phone company’s help.
Why reinvent the wheel? Companies will emerge to acquire, for example, access to homes from a cable company, switching from a competitive access provider, local delivery on phone-company lines, long distance via AT&T, MCI or Sprint-and, by purchasing at huge volumes, be able to offer complete packages to individual customers at a discount.
Not for use in the home, but a variety of now radio technologies are competing for business telephone calls, paging services and data transmissions. Salespeople will be carrying laptop computers that connect directly with their home base by radio. All the systems have the potential to bypass the phone company.
New digital cellular systems will handle lots more traffic than today’s and keep it safe from eavesdroppers and competition from PCN may force rates down enough for upscale callers to make it their basic phone.
Personal communications networks, using low-powered pocket phones linked by radio to a cell tied into a phone or cable system, may be cheap enough to replace the wired phone that you have in your kitchen.
