Out of the Loop - What Ever Happened to Competition for Local Phone Service?
It's Simple Economics
By BART ZIEGLER
It is called the last mile, and it is the last big battleground for telephone
competition.
Consumers today can choose their
long-distance company, cellular-phone service
and Internet provider from a host of
competitors. But when it comes to local phone
service, most of us are still stuck in telecom's Dark Ages. We have one
choice -- in most cases, the same company that has enjoyed a monopoly
since the days when the Wright Brothers took their first flight.
The key reason: These local phone companies control that precious last
mile or so of wire that links our homes and offices to the nearest
phone-switching station. With that "local loop" bottleneck firmly in their
grasp, they have kept out the competition, since few competitors can
afford to duplicate that costly infrastructure.
The Telecommunications Act of 1996 was supposed to change all that.
Local-phone providers were directed to lease their lines to others, ushering
in what was billed as a new era of competition.
But nearly three years later, consumers have seen little change. What
happened?
For one thing, outside of a few small start-ups offering competition in a
handful of communities, the leasing approach just hasn't worked out as
planned. While the big guns like AT&T Corp. have tried offering local
service, most of their efforts have faltered -- because, the would-be
providers complain, the local phone monopolies charge too steep a price
to lease the lines.
The Bells, for instance, typically give the new players discounts of 17% to
25% off what they charge consumers for local service, says Yankee
Group, a Boston-based telecommunications consulting firm. But that hasn't
left enough room for an acceptable profit once the new entrants factor in
other costs associated with their service, including billing and customer
service, Yankee says.
Limited Options
Meanwhile, efforts to get around the Bells' last-mile stranglehold have also
come up short. Cable-TV companies have rolled out phone service in a
few regions, but it could be years before these systems are widespread,
thanks to the cost and complexity of upgrading cable lines to provide
phone service. And a few companies are testing wireless alternatives for
home phone service, but early results have been disappointing. AT&T, for
one, has put on hold a once-ambitious plan to roll out a wireless system
called Project Angel, due in part to the high cost of the equipment.
So, why doesn't some smart company just build its own local system and
bypass the Bells? The key reason is money. It would cost $3,000 to
$5,000 per home -- or hundreds of billions of dollars nationwide -- to
duplicate the local phone network. That is, if a company could ever get the
regulatory and other permission needed to dig up streets to lay the cables
and install other facilities that would be required. "The cost is enormous,"
says Boyd Peterson, a telecom analyst at Yankee Group. "And once you
do that, there's no guarantee you're going to have a customer at the other
end."
The last-mile bottleneck doesn't just limit customer choice in local service.
It has also become the technological hurdle that prevents consumers from
getting speedy Internet access, videophone service and other
long-promised innovations. The problem is that most of these local links
consist of ancient copper lines that can't readily transmit this promised
flood of new services.
As a result, some say it's time for a radical solution. They say we should
finally just acknowledge the obvious -- that the local loop is a "natural"
monopoly -- and create separate companies to own and operate these
lines. The new owners of the local phone infrastructure would be
encouraged to upgrade the lines and then lease them at a uniform rate to all
comers, including the incumbent Baby Bell that used to own them.
It's the same idea governing the way many states are deregulating the
electric-utility industry: They are allowing companies to split their
power-generation units from those that own the lines that run to homes,
factories and offices. The logic is that it would cost far too much for
anyone to re-create the power-distribution system, so why not turn it into a
separate operation that rents access to its lines to everyone?
But others say that analogy doesn't hold for the phone industry. While
electrical power can be sent to homes only through wires, there are other
ways to transmit phone calls. So the local phone system isn't necessarily a
natural monopoly. Moreover, such a breakup would raise thorny financial
and regulatory questions: How would shareholders of the Bells be
compensated for losing this very lucrative asset? What rates would these
new local systems charge, and who would set them?
More Flexibility
These issues lead others to argue that the solution to local competition is
for regulators and lawmakers to encourage alternatives, including wireless
and cable TV-based phone services. This might require a rethinking of
some regulations that make it difficult for new providers to break into local
service. And would-be wireless providers may need more leeway in
locating the necessary antenna towers and other equipment; such antenna
siting has become a costly and time-consuming issue as many communities
have moved to block them.
At least one big would-be local competitor agrees with the need for
nontraditional systems: Just a few months ago, AT&T agreed to pay more
than $30 billion for cable giant Tele-Communications Inc. AT&T plans to
juice up TCI's extensive network so it can provide phone and speedy
Internet service to millions of homes as well as advanced video features.
To some people, the AT&T-TCI announcement sounded suspiciously like
the "information superhighway" hoopla of several years ago. Back then,
cable companies also said they would provide phone service as well as
500 channels of video as they beefed up their lines. Most people are still
waiting.
Yet this time around, a consensus seems to have jelled, among regulators,
legislators and industry executives, that local-service competition is vital.
And lawmakers have made it clear to federal regulators that they are
unhappy with how the telecom act turned out.
"Is there a silver bullet that's suddenly going to make local competition
happen overnight? Absolutely not," says Yankee Group's Mr. Peterson.
But "we're starting to see fissures in the dam."
--Mr. Ziegler, a deputy news editor in The Wall Street Journal's New
York bureau, served as contributing editor of this report.
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