By Dr. Gary Wolfram
The recent proposed merger of AT&T and T-Mobile has brought telecommunications to the headlines.
For an economist who understands the efficiency and equity of the market system, the telecom industry is interesting from a theoretical perspective. It poses the problem of how one might move from a system of government-regulated monopoly to a competitive market. Historically, the telephone industry began as a competitive market. Then Theodore Vail, mimicking the process of Samuel Insull in the electric industry, persuaded the government to grant a local monopoly over the phone industry to AT&T.
The telephone industry, by becoming a regulated monopoly, eliminated the threat of competition and guaranteed itself a profitable rate of return.
To be fair, embracing regulation was only part of a determined strategy by Vail to achieve monopoly of the telecom. The aggressive use of patents and patent litigation, as well as a merger strategy, led to Bell system dominance by the early part of the 20th century. However, the use of the courts and the regulatory agencies were a significant factor in creating the Bell monopoly.
The point here is that it was the political process that was a determining factor in the emergence of a phone monopoly. Monopolization did not occur due to a single seller dominating in an unregulated environment.
In 1982, AT&T settled an anti-trust suit pushed by MCI and agreed to split itself into seven Regional Bell Operating Companies (RBOCs) and a long distance carrier beginning in 1984. GTE then spun off its Sprint division, merged it with US Telecom and began offering long distance competition as Sprint. The subsequent competition in long distance was successful in dramatically lowering rates. This worked in good part because the owner of the infrastructure, the RBOCs, did not retail long distance and thus did not have a reason to deny access to other firms.
The sticking point began when, under the 1996 Telecommunications Act, an attempt was made to create a competitive market in all phone service.
The problem, of course, is that if I own the line into your house and sell local phone service, why would I ever allow a competitor to sell service to you over my lines? The fundamental issue is the infrastructure to provide telecommunications services was laid out under a risk free environment under a legal monopoly and this in itself has created a barrier to competition.
That created the anomaly in the telecommunications industry in that you need some government regulation in order to implement competition. The regulator has to provide the access to the infrastructure. This becomes even more complicated as new infrastructure is laid down.
For example, suppose AT&T has the legacy lines and switches, so the only way that ACME telephone can provide competition is to have use of those lines. The perhaps obvious answer is to have the government regulatory body, such as the Michigan Public Service Commission, settle disputes and require equal access to firms who are willing to pay the marginal cost of using the lines.
It becomes more difficult when AT&T has laid out new lines – say, fiber-optic lines that support broadband. Since these lines were laid after the government monopoly had been lifted, should other firms have access to these lines? And what if ACME lays out fiber optic lines but needs to connect it to an AT&T switch in order to get access to your house? Will AT&T have the incentive to develop and build infrastructure if it has to allow access to other firms even at marginal cost? Will competitive firms build infrastructure if they are not certain that they can connect to customers with it?
One might think this this problem will be solved with the movement to wireless communication. Unfortunately, this is not the case. Wireless calls travel wirelessly only from the closest tower to the cell phone. But the towers are connected to the same wireline network that connect wireline phones. There are some towers that have a powerful line of site microwave antennae, but generally the tower is connected to an underground wired T1 or T3 line. As there becomes more cell traffic – such as videos playing on cell phones – the wireline infrastructure becomes more, rather than less, important and the need to ensure quality and reliable wireline interconnections increases.
Given the intricacies specific to telecom, it is important that the legislature take the time to carefully examine changes to Michigan’s Telecommunications Act – with an eye to ensuring that the network of telecommunications does not inadvertently return to an era of monopolization.
Gary Wolfram is the William E. Simon professor in economics and public policy at Hillsdale College.
This article was re-posted with the author’s permission and originally appeared on The Michigan View, which is a product of The Detroit News.
