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Newsgroups: alt.philosophy.objectivism From: frankp@galena.bellcore.com (Frank Perez) Subject: Free Market Telecommunications Industry Organization: Bellcore, Livingston, NJ Date: 7 Jan 93 19:43:57 GMT Message-ID: <frankp.726435837@galena> Summary: Free Market Telecommunications Industry Lines: 1997

Dear Objectivists:

Below is an article I have written "The Case for a Completely Deregulated Free Market Telecommunications Industry." I have included quotes from Ayn Rand. It is NOT a complete philosophical paper, but I thought I'd offer it to Objectivists to see what there comments are.

Sincerely yours,

Franklin Perez

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Date: March 5, 1992 From: Franklin Perez

Subject: The Case for a Completely Deregulated Free Market Telecommunications Industry

1. Introduction

"There is no general theory of public utility regulation. What often passes for theory is a reconstruction of historical events woven into a pattern of generalization to meet contemporary issues. Thus, while the thesis that `Regulation is the law's substitute for competition' is the legend on the wall of the Michigan Public Service Commission's hearing room,1 there is scant evidence that those who invoke the slogan have examined the differential impact of market competition and regulated monopoly on price, market development, and innovation. While market competition provides consumers no perfect guarantee of price benefits or rapid technical and operating innovation, it creates a readier climate for such developments than does regulated [government-enforced] monopoly. The available historical evidence indicates that, at least in the communications industry, regulation has served to stabilize price and earnings of the carriers, has inhibited innovation in rate structures, and has protected the carriers from the competitive inroads of private manufactures and suppliers."2

Many individuals supporting the public utility paradigm for telecommunications do so on the basis that if telecommunications were left to be at the whims of the free market system, the natural monopoly nature of telecommunications would manifest itself, leaving one private monopoly firm to occupy the field. I will demonstrate in this paper that (a) telecommunications is not

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1. Richard Gabel, "The Early Competitive Era in Telephone Communication, 1893-1920," Law and Contemporary Problems 34 (Spring 1969): 340. "AT&T, Profit, Performance and Progress, A study of Regulated and Nonregulated Industry for Bell System Use 64 (1952)."

2. Ibid.: 340.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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a natural monopoly and (b) the best environment for telecommunications is the free enterprise system as follows:

1. The section, "Survey of the Competitive Era: 1893 - 1920," gives a brief history of the competitive era in telephony from 1893 - 1920. This section sheds light on the charge that "competition in communications led to inefficiency, poorer quality, and higher cost in telephony...."3 It indicates basically that the net effects of telephone competition were favorable.

2. The section, "Debunking the Natural Monopoly Theory," will demonstrate that, at least in the United States, the eventual formation of mainly one firm providing all the telecommunications was not the result of the natural monopoly nature of telecommunications in a free market, but more than likely was due to governmental interferences such as the issuance of exclusive franchises in many key high- volume major cities.

3. The section, "Effects of the Public Utility Paradigm in Telecommunications," basically states that public regulation of privately-owned government-enforced telephone franchises is bad.

4. The section, "Free Market Telecommunications Environment," describes the benefits of a free market telecommunications environment. It goes into the effects that it has had on those parts of the telecommunications industry that have undergone deregulation, the effects of having a competitive environment in the local loop, and the net effects of having a completely deregulated telecommunications industry.

2. Survey of the Competitive Era : 1893 - 1920

"The independent telephone industry began in 1893 with the expiration of the Bell System patents on the telephone handset. From its inception until about 1913 there was limited interconnection between the independent and the Bell exchanges. Refusal to interconnect was, of course, a tool employed in the competitive battle for domination of the industry.

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3. Ibid.: 341.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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Interconnection refusal was not limited to the strictly duplicating situations, but was also extended to service areas where Bell had never chosen to provide telephone service. When competition took the form of overlapping exchanges of rival companies,4 the impact on plant requirements was apparent. A subscriber desiring telephone service with access to all users was required to obtain two separate telephone instruments; a separate subscriber loop had to be furnished from each telephone instrument to a central office, necessitating separate central office lines both served by switchboard operators.5 There clearly must have been some duplication of facilities and investment under this arrangement. However, the degree of `inefficiency' and `higher cost' has never been demonstrated, and perhaps it is not determinable."6

It is interesting to note which would be cheaper - (a) subscribing to two telephone companies in a competitive telephone environment or (b) being forced to subscribe to a government- enforced monopolistic franchised telephone company if one wants telephone service. It turns out that it is actually possible to have telephone service cheaper in case (a). In fact, according to a 1909 AT&T annual report, in 1894 at the beginning of telephonic competition, the Bell System was charging an annual average of $65.00 to residential customers connected to AT&T exchanges that were facing competition,7 while in 1909, when telephonic competition was really under way, the Bell System was charging an annual average of $22.80 to residential customers connected to those same exchanges,8 and the independents were charging an annual average of $23.25 to those same residential customers.9

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4. Ibid.: 341. "In 1907, overlapping territory was estimated at 20%, but this was only about one-third of all exchanges. G. Johnston, Some Comments on the 1907 Annual Report of AT&T (Int'l Independent Tel. Ass'n, Sept. 1908)."

5. Ibid.: 341. "The duplication of subscriber directory services must have been a source of annoyance to business customers."

6. Ibid.: 341-342.

7. Ibid.: 346.

8. Ibid.

9. Ibid.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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Notice then that in 1907, a residential customer could subscribe to the Bell and independent telephone companies for a total annual charge of $46.05, a lot cheaper than the annual charge of $65.00 in 1894, when telephonic competition was just beginning and the Bell System had almost all the telephone market.

"Early Bell System telephone development [during its patent monopoly] took place at the business core of large urban communities.10 Since territorial extension by the competing independents was for the most part to contiguous rather then overlapping geographic areas,11 the provision of distribution plant must have been more often complementary than duplicative. For the small central offices in use at the time there were no significant differences in cost per line for separate as against combined switching facilities, and, in the absence of interconnection, this could not have materially affected total investment.12 Dual services, in the absence of interconnection of the rival companies at the central offices, necessarily required dual telephone instruments, but the instrument and its associated wiring probably made up less than ten per cent of the average investment per station.13 Any rigorous examination of the effect of competition on communication costs would require knowledge of the capacity and rate of utilization of facilities prior to and subsequent to the inroads made by the independents."14

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10. Ibid.: 342. "1910 AT&T Ann. Rep. 23-24."

11. Ibid.: 341. "In 1907, overlapping territory was estimated at 20%, but this was only about one-third of all exchanges. G. Johnston, Some Comments on the 1907 Annual Report of AT&T (Int'l Independent Tel. Ass'n, Sept. 1908)."

12. Ibid.: 342. "In 1902 the average switchboard served 225 lines. Bureau of the Census, Special Reports - Telephones and Telegraphs, table 37, at 33 (1902)."

13. Ibid.: 342. "Investment per station at the turn of the century was about $200. 1911 AT&T Ann. Rep. 17. This source shows the average plant cost per exchange station from 1895 to 1911. The concurrent investment in station equipment is estimated at about $20 per station."

14. Ibid.: 342.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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"A characteristic of telephone service is that it must be planned for and constructed in anticipation of future demand. A common lament of the Bell System at the time (reflected in reports to shareholders) was that its own facilities were continually inadequate to meet market demand or were not physically located where demand had developed.15 It can be conjectured that where independents did make inroads into Bell territory and literal duplication of service areas occurred, it was largely due to either the unavailability of Bell plant or the promotional efforts and attractive pricing offered by independent operating companies."16

"In evaluating the [common] charge that telephone competition engendered inefficiency, poorer quality, and higher costs, several considerations must be borne in mind. All competition involves some redundancy of plant facilities and work effort. The question is whether the pressure of competing market forces produces a better or cheaper product than a single supply service. The evidence is clear that under a regime of monopoly supply, during the period 1879-93, the system was stagnant. The competitive period following expiration of the Bell patents in 1893-94 resulted in the most rapid rate of growth of service in the history of the industry as well as in a substantial reduction in rates for business and residential telephone service. This comparison alone does not satisfactorily or completely answer the question whether competition was inefficient and costly. Yet with respect to the duplication argument for inefficiency we see evidence of plant redundancy within the Bell System itself - duplication and triplication of exchange cable facilities, establishment of second and third wire centers within a few years of opening an initial office. Of course, this evidence may merely attest to the lack of omniscience of a highly centralized, carefully planned telephone organization. But just as Bell spokesman would argue that a second cable on the pole line does not represent inefficiency or high cost, the independents could insist, during the competitive era, that in a period of extremely rapid growth (created by their existence) all facilities were efficient, necessary, and provided at reasonable cost."17

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15. Ibid.: 342. "1900-07 AT&T Ann. Reps."

16. Ibid.: 342.

17. Ibid.: 342-343.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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"The infusion of competition did force a substantial disruption of the operations of the Bell System. Profitability, rate levels and structure, and the whole innovative process were markedly affected by the coming of competition. The Bell System did not take this assault lightly. It changed tactics and practices and ultimately appealed for state intervention - the regulatory process - to stabilize and normalize competitive forces."18

3. Debunking the Natural Monopoly Theory

3.1 Customers Will Eventually Subscribe to the Larger Telephone Network

It has often been asserted that telephone service is a natural monopoly, and thus that it should be regulated since telephonic competition eventually leads to one telephone company controlling the market. One argument goes as follows: "In the early years of telephony, many cities had more than one telephone company.... Wherever that happened, it created a bothersome and unstable situation. Frequently, the person one sought to phone was served by the other company. Business offices and heavy phone users had to have two telephones. Generally, the greatest value from having a phone was obtained by subscribing to the larger of the two systems, for in that way one could reach more people. As a result, whenever one company became much larger than another, the swing to the bigger system would accelerate, and soon the smaller company would have to throw in the sponge. The only way for some companies to keep going for a while was to cut rates, but in the end this meant that they did not have the capital for expansion. At least within single communities the phone system was a natural monopoly."19

The assertion that individuals will automatically swing to the larger system is disputed by Kenneth Lipartito (with respect to the long-distance toll network (Bell System) being the larger network): "Though not totally false, this interpretation misses many crucial aspects of the story. Competition had demonstrated that telephone service was not a natural monopoly. It had neither the declining long-run average costs nor the fixed capital

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18. Ibid.: 343.

19. Ithiel de Sola Pool, Technologies of Freedom (London: The Belknap Press of Harvard University Press, 1983), p. 102.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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investment that restricted entry.... A small-scale telephone independent with a relatively modest initial outlay could offer rudimentary but profitable service in even poor regions like the South.20 Though Bell, with its more extensive system, could provide a level and quality of service that small-scale competitors could not match, that service was also more costly than independent alternatives. In places like the South, where demand for high-quality long-distance service was moderate, Bell's superior quality service was not a decisive factor in competition. Finding numerous customers who preferred their cheaper alternatives, independents flourished even while Bell built its integrated local and long-distance system. In the Midwest, competitors even began to make inroads in the long- distance market, suggesting that AT&T might not remain dominant even here.21 "22

The assertion that at "least within single communities the phone system was a natural monopoly" can also be disputed. According to the natural monopoly theory, two different telephone companies serving the same geographical area eventually leads to one company overtaking the other. What this theory ignores is that each telephone company can serve a market niche based on class of individuals that the other does not provide. In fact a "curious and intriguing feature of the era of telephone competition is that in the older cities where it occurred, there was a tendency for the sides to be drawn along class lines. The two competing

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20. Kenneth Lipartito, The Bell System and Regional Business: The Telephone in the South, 1877-1920 (Baltimore: Johns Hopkins University, 1989), p. 250. "For information on the economics of the telephone industry, see Robert Bornholz and David Evans, `The Early History of Competition in the Telephone Industry,' in David Evans, ed., Breaking Up Bell: Essays on Industrial Organization and Regulation (New York, 1983), 7-40."

21. Ibid., p. 250. "Bornholz and Evans, `The Early History,' 12-15. McMeal, The Story of Independent Telephony, 81-84. As shown in chap. 5, the Interstate Telephone Company in North Carolina successfully fended off Bell incursions in this way. In the Midwest, associations of independent firms, as well as several larger companies, built similarly successful regional networks."

22. Ibid., p. 115.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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systems not being interconnected, it was possible to talk only to those on the same system; naturally, one wanted to be able to talk to one's friends, and perhaps those one would like to be able to claim as friends. In Minneapolis, for example - according to the recollection of a survivor of the competitive era there - the Bell exchange, being the longer-established, was the exchange of the socially elite [i.e., the wealthy], while the competing Tri-State Telephone Company was for just about everybody else [i.e., the not so wealthy]."23 Therefore, assuming that individuals within the same socioeconomic class will tend to want to interact with each other as opposed to interacting with individuals of a different socioeconomic class, there is the strong possibility that one telephone company will develop a market niche for offering high-quality, expensive local telephone service attracting individuals of the higher socioeconomic classes while the other telephone company will develop a market niche for offering lower-quality, less expensive local telephone service attracting individuals of the lower socioeconomic classes. There is evidence to indicate that this is what actually happened: In the South and Midwest, "new... firms grew by offering cheaper, lower-quality service, carving out an important niche for themselves in the telephone market.24 "25

3.2 Natural Monopoly Theory Assumes Essentially Free Market

"It is imperative that one be clear and specific in one's definition of `monopoly.' When people speak, in an economic or political context, of the dangers and evils of monopoly, what they mean is a coercive monopoly - i.e., exclusive control of a given field of production which is closed to and exempt from competition, so that those controlling the field are able to set arbitrary production policies and charge arbitrary prices, independent of the market, immune from the law of supply and demand. Such a monopoly, it is important to note, entails more

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23. John Brooks, Telephone: The First Hundred Years (New York: Harper and Row, 1976), p. 110.

24. Kenneth Lipartito, The Bell System and Regional Business: The Telephone in the South, 1877-1920 (Baltimore: Johns Hopkins University Press, 1989), p. 248. "AT&T Archives, box 1033, Central Union Organization and Development, 1883-1912, Allen- Fish, 11 February 1903."

25. Ibid., p. 104.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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than the absence of competition; it entails the impossibility of competition. That is a coercive monopoly's characteristic attribute, which is essential to any condemnation of such a monopoly."26

"In the entire history of capitalism, no one has been able to establish a coercive monopoly by means of competition on a free market. There is only one way to forbid entry into a given field of production: by law. Every coercive monopoly that exists or has ever existed - in the United States, in Europe, or anywhere else in the world - was created and made possible only by and acts of government: by special [exclusive] franchises, licenses, subsidies, by legislative actions which granted special privileges (not obtainable on a free market) to a man or a group of men, and forbade all others to enter that particular field."27

Many individuals espousing the natural monopoly theory of telecommunications base their conclusions on the assumption that an essentially free enterprise system occurred for telecommunications during the 1893-1920 time frame in the United States. This was not true of many situations. From the onset of telephonic competition, there were severe governmental intrusions that either impeded or barred a competitor from offering telephone service within a geographic region.

There were numerous cases of independent telephone companies wanting to establish telephone service in several major high- demand cities where the Bell System was entrenched and were either (a) denied a franchise or (b) granted franchises only after meeting onerous requirements that the entrenched firm was not required to meet.28 Examples of such practices are listed below:

1. "In Buffalo, for example, a franchise was granted to the Frontier Telephone Company on condition that it pay the city fifty thousand dollars in cash and a 3 percent gross receipts tax, and give the city the free use of one hundred

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26. Ayn Rand, Capitalism: The Unknown Ideal, (New York: The New American Library, 1966), p. 72.

27. Ibid., pp. 72 - 73.

28. John Brooks, Telephone: The First Hundred Years (New York: Harper and Row, 1976), p. 112.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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telephones, while none of these impositions were put upon the local Bell licensee. Frontier soon went broke."29

2. In "San Francisco, representatives of the Bell licensee were accused of outright bribery to bring about the defeat of a competing franchise - in response, it is true, to an attempt by the city's political boss to extort an improper payment from the franchise seeker."30

3. In 1899, when the Telephone, Telegraph and Cable Company tried to set up telephone service in the "richly profitable New York City territory"31 in competition with the Bell System, they were denied permission to set up business.32 John Brooks elaborates: "[B]y 1899 the Bell interests were fighting it out in the streets of New York - or rather, in the conduits under the streets. The New York Telephone Company[, the Bell system company,] had its underground wires in the conduits of the Empire City Subway Company, and when the promoters of would-be telephone competition asked permission to install wires of their own there, the Empire City Subway Company refused - logically enough, since New York Telephone controlled Empire City Subway through stock ownership. The courts [even] refused the independents permission to build their own underground conduits, and that was the end of the threat of telephone competition in New York City."33 (Note: The evil here is not that the Empire City Subway Company refused to let the would-be competitor install wires in its conduits - the Company was merely exercising its private property rights - but that the government, in this case, the courts, refused to let the would-be competitor build its own conduits, thereby creating a government enforced monopoly situation.)

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29. Ibid.

30. Ibid.

31. Ibid., p. 106.

32. Ibid., pp. 106, 108. From what is stated on page 108, I conclude that the company that was denied a franchise was the Telephone, Telegraph and Cable Company because this company was organized in 1899.

33. Ibid., p. 106.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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4. "In Connecticut, for example, competition developed for the first time in 1899 in the form of an independent company that planned to establish service in New London using the Strowger automatic system. After extended court hearings - at which the president and superintendent of the local Bell licensee, the Southern New England Telephone Company, testified at length - the petition for a charter was denied, and so the competitive project died."34

5. In Chicago, the Interstate Independent Association, an association of independents providing long-distance service in the Midwest, was denied access to the underground conduits controlled by the city. Yet, the Bell System was allowed access to these same conduits.35

The licensing procedure was also used to keep out prospective telephone competitors, thus helping the entrenched telephone company. "Before the license could be issued, the utility had to satisfy the licensing authority that its service would be `in the public convenience.' For example, the state of Ohio required a telephone company to secure a certificate of convenience from the Public Utilities Commission before exercising a franchise in any town where there was already a telephone company furnishing adequate service.36 In the village of Mendon, where one company was already providing phone service, another company obtained a franchise to do the same but was refused a certificate of necessity by the state on the grounds that it was not in the public convenience to have two telephone companies. The Supreme Court of Ohio in 1921 sustained the denial."37

There is strong evidence to indicate that a lot of the success of the Bell System, the entrenched firm in most of the major profitable cities, in driving out the smaller independent

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34. Ibid.

35. Kenneth Lipartito, The Bell System and Regional Business: The Telephone in the South, 1877 - 1920 (Baltimore: Johns Hopkins University Press, 1989), pp. 105 - 106.

36. Ithiel de Sola Pool, Technologies of Freedom (London: The Belknap Press of Harvard University Press, 1983), p. 274. "Sec. 614-52, Ohio General Code."

37. Ibid., p. 102.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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telephone companies was not due to the workings of the natural monopoly inherent in telecommunications, but was due primarily to government-enforced monopoly privileges given to the Bell System in these major cities. Political muscle, not the so-called inherently monopolistic nature of telecommunications, played a key role in the Bell System appearing to possess monopoly power. "Although some competitors arose to challenge Bell at its strong points - the nation's large cities - few succeeded unless they could exploit a weakness in Bell structure or gain political support from city and state governments anxious to discipline the Bell [government-enforced] monopoly.38 "39

There did arise during this period, in the smaller and mid-sized cities where telephonic competition was allowed to flourish, a regional long-distance company in the Midwest, thereby challenging AT&T's dominance in the long-distance business. "Connections to electrical manufactures and early efforts in urban telephony served... [the midwestern independents] well in the long run, enabling them to construct their own regional systems in places between large cities and rural areas where Bell's long-distance network was not yet extensive.40 By connecting with each other, midwestern companies extended service from `the eastern slope of the Rocky Mountains to the Atlantic Coast....'41 As a result, midwestern firms were... able to stand

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38. Kenneth Lipartito, The Bell System and Regional Business: The Telephone in the South, 1877 - 1920 (Baltimore: Johns Hopkins University Press, 1989), p. 245. "Philadelphia was the one major eastern city where competitors made a significant challenge."

39. Ibid., p. 94.

40. Ibid., p. 248. "AT&T Archives, Toll Maps. The maps show that AT&T's system grew by connecting major cities along heavy use routes first, then by filling in the gaps. It was in these gaps that the independents could build their own long- distance network. See also Ronald Abler, `The Telephone and the Evolution of the American Metropolitan System,' in Ithiel de Sola Pool, ed., The Social Impact of the Telephone (Cambridge, Mass., 1977). Also, McNeal, Independent _T_e_l_e_p_h_o_n_y_, 81-84."

41. Ibid., p. 248. "James B. Hoge, `National Inter-State Telephone Association,' The Telephone Magazine (July 1905): 34."

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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up to Bell's competitive use of long-distance lines.... To combat Bell's head start in long-distance telephony and its advantages in system engineering, midwestern promoters also formed an association. With strong support from non-Bell manufacturing concerns, the Interstate Independent Association helped to overcome the limitations small size imposed on many competing firms. The organization started a clearing house to handle toll receipts and pooled resources to build main trunk lines to big cities."42

Why, may one ask, did the Interstate Independent Association not survive to become a national long-distance network in competition with AT&T ? Was it the doing of the so-called natural monopoly nature of telecommunications ? Or could it have been the fact that the Bell System had established exclusive franchises to operate in all the major high-volume cities "such as New York, Chicago, and St. Louis, and used profits from [government- enforced] monopolized intercity markets to subsidize price wars in competitive local ones...."43 ? In fact, the Interstate Independent Association "tried to bring political pressure to bear to overcome Bell's dominance of the Illinois Tunnel Company, the body that controlled access to Chicago's underground conduits.44 Bell [via city hall] had been successful in keeping the city's conduits closed to competing firms, shutting them out of the key juncture point for long-distance service in the Midwest. Ultimately, the association failed to crack Bell's [government-enforced] monopoly in the city."45

It would be erroneous from the evidence presented that the formation of one "monopoly" telephone network in the United States was the product of the natural monopoly nature of telecommunications when you consider the fact that the Bell System had been given exclusive franchises in many key high- volume cities such as New York, Chicago, and Saint Louis and had used the profits from these areas and the intercity trunk routes

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42. Ibid., p. 105.

43. Ibid., p. 123.

44. Ibid., p. 248. "AT&T Archives, box 1337, Interstate Independent Telephone Association, 1902, to Meany, 11 December 1902."

45. Ibid., p. 106.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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connecting these areas "to subsidize price wars in competitive" local markets.

It seems clear now how in the United States, one telephone firm was able to establish a "monopoly" situation, thus causing only one major telephone network to occupy the field. The formation of one "monopolistic" telephone network came about not because of the free market or the so-called natural monopoly nature of telecommunications, but because of the opposite principle - governmental intrusions into the free market.

It is very possible, then, that a telephone firm that has business entities operating under conditions where no competitors are allowed to enter (and can thus charge exorbitant prices) can go ahead and use the profits from the coercive monopoly enterprises to subsidize price wars in other areas with other telephone firms that do not have coercive monopoly enterprises. In time, the firms that do not have coercive monopoly enterprises will fade away either by going out of business or selling to the larger firm.

In this country, the process of having only one major "monopolistic" telephone network was accelerated even more when the Bell System, under President Vail, announced in 1909 - 1910 that it would welcome public regulation of the telephone industry. "Regulation [, though,] is a two-sided coin: on one side [, the first series of objectives,] lies the aspect of public protection - profit limitations, the obligation to provide service at nondiscriminatory rates, and so forth. The other side of the coin [, the second series of objectives,] bears the aspect of utility protection - including bars to competitive entry, exclusive franchise, and the right of eminent domain. With an insight that was to serve Bell corporate interests well, Vail anticipated the limited inroads that public regulation would make in obtaining the first series of objectives and the extensive benefits conferred by the second. Real power would always rest with those responsible for management of telephone operations, and Vail was always insistent on the distinction between `regulation' and `management' Although the program of acquiring independent properties was being pursued unabated, the combined objective of `Universal Service - One System, One Policy' could not be achieved without political intervention. Bell's response to this limitation was the promotion of regulatory authority in utility commissions."46

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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"Other paths were possible [for telephony development in the United States if no exclusive franchises had been given within any geographical regions and the laws of the free market were allowed to prevail]. Local companies in the South and Midwest could have kept large blocks of... [customers] beyond Bell System reach, cooperating to form an alternative to AT&T's [long- distance service]. As late as 1907 independents carried 20 percent of all toll calls, mainly in the midsized city market.47 In addition, several large financiers from the East almost extended capital to the independents to help them wrest control of major cities from Bell as well."48

3.3 Technical Nature of Telecommunications Leads To Monopoly Firm

One argument in favor of the natural monopoly view of telecommunications states that "simple economies of scale in the provision of a standardized service dictate that one firm... [will eventually wind up] provid[ing] that service"49 if the laws of free market economics were allowed to proceed "because it is [more] technically efficient to have a single producer or enterprise."50 Even if this were true for telecommunications, which in my opinion seems doubtful considering what has been written in the section "Natural Monopoly Theory Assumes Essentially Free Market," Milton Friedman, winner of the Nobel Prize in Economics, notes that a private monopoly may be the best alternative. Milton Friedman states the following:

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46. Richard Gabel, "The Early Competitive Era in Telephone Communication, 1893-1920," Law and Contemporary Problems 34 (Spring 1969): 356 - 357.

47. Kenneth Lipartito, The Bell System and Regional Business: The Telephone in the South, 1877 - 1920 (Baltimore: Johns Hopkins University Press, 1989), p. 256. "Bureau of the Census, Telephones and Telegraphs, 1912, table 28, p. 38."

48. Ibid., p. 146.

49. Ibid., p. 151.

50. Milton Friedman, Capitalism and Freedom (Chicago: The University of Chicago Press, 1982), p. 28.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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1. "When technical conditions make a monopoly the natural outcome of competitive forces, there are only three alternatives that seem available: private [unregulated] monopoly, public [government-owned] monopoly, or public regulation [of a privately-owned government-enforced monopoly].... [Which is the best among all these three alternatives ?] Henry Simons, observing public regulation of monopoly in the United States, found the results so distasteful that he concluded public monopoly would be... [the best option]. Walter Eucken, a noted German liberal, observing public monopoly in German railroads, found the results so distasteful that he concluded public regulation would be... [the best option]. Having learned from both, I... conclude that, if tolerable, private monopoly may be the... [best option]."51

2. "If society were static so that the conditions which give rise to a technical monopoly were sure to remain, I would have little confidence in this solution. In a rapidly changing society, however, the conditions making for technical monopoly frequently change and I suspect that both public regulation and public monopoly are likely to be less responsive to such changes in conditions, to be less readily capable of elimination, than private monopoly."52

3. "Railroads in the United States are an excellent example. A large degree of monopoly in railroads was perhaps inevitable on technical grounds in the nineteenth century.53 This was the justification for the Interstate Commerce Commission. But conditions have changed. The emergence of road and air transport has reduced the monopoly element in railroads to negligible proportions.

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51. Ibid., p. 28.

52. Ibid.

53. I tend to disagree with this statement. I think that a major reason for the monopolistic behavior of some railroads was due to the issuing of exclusive franchises to railroads, most notably the Central Pacific in California. See Ayn Rand, Capitalism: The Unknown Ideal (New York: The New American Library, 1964), pp. 102 - 109. See also Burton W. Folsom, Jr., The Myth of the Robber Barons (Herndon, Virginia: Young America's Foundation, 1991), pp. 17 - 39.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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Yet we have not eliminated the ICC. On the contrary, the ICC, which started out as an agency to protect the public from exploitation by the railroads, has become an agency to protect the railroads from competition by trucks and other means of transport, and more recently even to protect existing truck companies from competition by new entrants.... If railroads had never been subjected to regulation in the United States, it is nearly certain that by now transportation, including railroads, would be a highly competitive industry with little or no remaining monopoly elements."54

I believe that if such a private non-coercive monopoly does develop, it should be "tolerated."

"[I]f one considers the only kind of monopoly that can exist under capitalism, a non-coercive monopoly, one will see that its prices and production policies are not independent of the wider market in which it operates, but are fully bound by the law of supply and demand; that there is no particular reason for or value in retaining the designation of `monopoly' when one uses it in a non-coercive sense; and that there are no rational grounds on which to condemn such `monopolies.'"55

Remember, a "`coercive monopoly' is a business concern that can set its prices and production policies independent of the market, with immunity from competition, from the law of supply and demand. An economy dominated by such monopolies would be rigid and stagnant."56

"The necessary precondition of a coercive monopoly is closed entry - the barring of all competing producers from a given field. This can be accomplished only by an act of government intervention, in the form of special regulation [favoring the entrenched firms], subsidies, or [exclusive] franchises. Without government assistance, it is impossible for a would-be monopolist to set and maintain his prices and production policies

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54. Milton Friedman, Capitalism and Freedom (Chicago: The University of Chicago Press, 1982), p. 29.

55. Ayn Rand, Capitalism: The Unknown Ideal (New York: The New American Library, 1966), pp. 74 - 75.

56. Ibid., p. 68.

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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independent of the rest of the economy. For if he attempted to set his prices and production at a level that would yield profits to new entrants significantly above those available in other fields, competitors would be sure to invade his industry."57

"It takes extraordinary skill to hold more than fifty percent of a large industry's market in a free economy. It requires unusual productive ability, unfailing business judgement, unrelenting effort at the continuous improvement of ones's product and technique. The rare company which is able to retain its share of the market year after year and decade after decade does so by means of productive efficiency - and deserves praise, not condemnation."58

"Now if a company were able to gain and hold a non-coercive monopoly, if it were able to win all the customers in a given field, not by special government-granted privileges, but by sheer productive efficiency - by its ability to keep its costs low and/or to offer a better product than any competitor could - there would be no grounds on which to condemn such a monopoly. On the contrary, the company that achieved it would deserve the highest praise and esteem."59

4. Effects of the Public Utility Paradigm in Telecommunications

"For much of this century, fairness and efficiency in American telecommunications have been sought through the public utility paradigm of governmental regulation.60 The paradigm is expressly premised on the assumption that the industry constitutes a `natural monopoly' in which a single entity can provide better service at lower costs than a number of competing suppliers.61

__________

57. Ibid.

58. Ibid., p. 66.

59. Ibid., p. 75.

60. Mark S. Fowler, Albert Halprin, and James D. Schlichting, "`Back to the Future:': A Model for Telecommunications," Federal Communications Law Journal Vol. 38, No. 2 (August 1986): 150. " See generally G. Brock, The Telecommunications Industry 158-61, 177-99 (1981)."

61. Ibid.: 150. "2 A. Kahn, The Economics of Regulation 2, 146

Copyright 1992 by Franklin Perez. All rights reserved. No part of this document may be reproduced, in any form or by any means, without permission in writing from the author.

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Under the public utility paradigm, it is thought to be both more efficient and more fair for government to grant an exclusive franchise to one company than to let market forces reign. The governmentally bestowed monopoly, however, creates strong incentives for overpricing and reduced output of the monopoly services.62 In addition,... governmentally granted market power can be used to leverage other markets through anticompetitive conduct, such as the discriminatory provision of regulated services to competitors and their customers in these other markets or the cross-subsidization of competitive offerings through improper cost allocation between regulated and unregulated services."63

"The public utility paradigm employs intrusive governmental regulation to combat these possible harms. To prevent the reduced output of monopoly services, the public utility paradigm strictly controls entry and exit, closely regulates both the prices and the conditions of service, and imposes an obligation to serve all applicants under reasonable conditions.64 The use of governmentally granted market power to leverage other markets is prevented by setting prices for regulated services and by severely restricting the utility's participation in competitive markets."65

"The public utility paradigm has incorporated a number of specific regulatory practices to implement entry/exit regulation and rate-of-return ratemaking in telecommunications. First, costs that are joint or common to more than one service66 and local plant costs have been recovered from telephone services according to social and political objectives, with little regard for the

_________________________________________________________________

(1971)."

62. Ibid.: 150. "See, e.g., Averch and Johnson, Behavior of the Firm under Regulatory Constraint, 52 Am. Econ. Rev. 1053 (1962)."

63. Ibid.: 150.

64. Ibid.: 151.

65. Ibid.: 151.

66. Ibid.: 151. "For an explanation of joint and common costs, see page 168 and note 61 below."

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social welfare benefits of economic efficiency. Second, uneconomically slow depreciation of investment has artificially depressed current rates while maintaining a high level of investment on which companies have earned a return. Third, widespread averaging of costs and rates has allowed a nationwide sharing of the costs of wiring the entire country for universal service,67 but has greatly limited telephone companies' incentives to run their operations efficiently. Finally, possible anticompetitive use of governmentally granted market power was not merely restrained, but affirmatively prohibited under the 1956 Consent decree, barring AT&T, which through its Bell System affiliates had also become the preeminent local exchange carrier, from engaging in any business other than the provision of common carrier communications services.68 "69

"An important, although not immediately apparent, effect of a national telecommunications monopoly subject to government regulation has been the imposition of significant direct and indirect (or opportunity) costs on society. The public utility paradigm has exacted significant efficiency costs in resource allocation: distorting investment decisions, limiting private incentive to innovate with new technology, and worse, affirmatively discouraging innovation that would render obsolete vast amounts of embedded equipment that is included in the rate base. Moreover, regulation has tended to discourage price competition and provided only limited incentives to cut costs or increase management efficiencies. Regulation has tended as well to limit the choices available to consumers: regulatory price

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67. Ibid.: 152. "Universal service was also achieved through the Rural Electrification Act of 1936, which provided additional funds to provide service to rural areas of the country. 7 U.S.C. ... 901 et seq. (1982)."

68. Ibid.: 152. "Similarly, Western Electric, AT&T's wholly owned equipment manufacturing subsidiary, was precluded from manufacturing equipment other than the type of equipment used by the Bell System for furnishing common carrier communications services. AT&T and Western Electric also were required to license their patents to all applicants upon payment of appropriate royalties. _S_e_e United States v. Western Electric Co., 1956 Trade Cas. (CCH) 1 68,246 (D.N.J. Jan. 24, 1956)."

69. Ibid.: 152.

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ceilings prevent the supply of higher-quality, higher-priced offerings; regulatory price floors discourage the supply of low- quality inexpensive options that many consumers would find attractive. Furthermore, it has limited the ability of market participants to respond quickly to changes in demand and supply. Regulation also tends to react much more slowly than the marketplace to the changing reality of technology.70 In addition, substantial private and public resources have been spent simply administering the entire regulatory system. Finally, regulatory ratemaking not only has led to significant direct administrative costs, but also has been subject to serious practical difficulties, making terribly elusive the goal of keeping prices close to costs.71 "72

"Perhaps the most costly aspect of traditional public utility regulation, however, has been its self-perpetuating character. It is impossible to test [completely] its central premise - that telecommunications is a natural monopoly - for regulation itself erects barriers to entry and provides existing firms with the opportunity to block or delay the plans of a firm wishing to offer a new product or service or to enter a new market.73 The costs and delays inherent in obtaining regulatory approval for such entry undoubtedly have led many firms to avoid entering the market when they were otherwise ready, willing, and able to provide a service or product that consumers would buy at market price."74

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70. Ibid.: 152. "A primary effect of regulation is, in fact, to slow down change. It has been argued that the pace of progress under regulation will be determined by existing firms, with the ability of new firms to make changes reduced or eliminated. See G. Brock, supra note 7, at 14-15. See also V. Goldberg, Regulation and Administered Contracts, 7 Bell J. Econ. 426 (1976)."

71. Ibid.: 153. " See G. Brock, supra note 7, at 15-16."

72. Ibid.: p. 153.

73. Ibid.: 153. " Id. Existing firms can also create barriers to entry by such methods as building excess capacity. Id. at 25-34."

74. Ibid.: 153.

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It is clear that public regulation of the telephone industry has been harmful. As an aside, it is worth mentioning that public regulation of any industry is harmful. The most notable examples are the airline, airmail transport, taxicab, railroad, automobile, trucking, electric utility, natural gas, banking, securities, broadcasting, food and beverage, building and housing, pharmaceutical, and insurance industries.75

5. Free Market Telecommunications Environment

"[R]ecent changes in telecommunications regulation suggest that the time has come to replace the traditional public utility paradigm of government regulation with a competitive industry paradigm. The effects of the recent injection of competition into significant segments of interstate telecommunications, the benefits flowing from deregulation in other industries formerly regulated as public utilities, and the promise of new technologies on the brink of realization all demonstrate the necessity for changing our model for telecommunications.... [T]elecommunications should become a ... competitive marketplace in which competition drives prices to costs and lowers costs to the minimum, in which products and services are provided whenever end users are willing to pay the necessary costs of production.... Realization of these efficiency benefits of competition will provide greater value in the future for every telecommunications dollar."76

"The benefits of competition in the markets for CPE and interexchange communications are clearly evident today. It is indisputable that the market for telecommunications equipment is vigorously competitive, with numerous well-financed ventures holding significant market shares.77 AT&T's predominant market

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75. Bernard H. Siegan, Economic Liberties and the Constitution (Chicago: University of Chicago Press, 1980), pp. 288-300.

76. Mark S. Fowler, Albert Halprin, and James D. Schlichting, "`Back to the Future:': A Model for Telecommunications," Federal Communications Law Journal Vol. 38, No. 2 (August 1986): 158.

77. Ibid.: 158. "See Customer Premises Equipment, 100 F.C.C.2d 1298, 1313-16 (1985); Furnishing of Customer Premises Equipment and Enhanced Service, Order, 102 F.C.C.2d 655 (1985) [hereinafter cited as AT&T Structural Relief Order],

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share of the new private branch exchange (PBX) and key system markets has declined drastically in the last few years so that it no longer can be said to dominate any segment of the equipment marketplace.78 The benefits of such competition are palpable. It is estimated that sales revenues in the CPE market increased by nearly 50% between 1983 and 1985.79 More than 2000 vendors are supplying end users with $14 billion worth of terminal equipment.80 The introduction of competition has also provided consumers with a wider variety of CPE options and with less expensive alternatives than existed in the earlier monopoly market. Consumers can obtain such new CPE features as automatic redial, hold, and other call-handling options. A wide variety of new terminal equipment has also appeared, including wireless telephony, customized dialing, and other speciality phones, as well as varieties of decorator phones. It is estimated, for instance, that there are currently 3 million cordless telephones in use. The benefits for business users have also been substantial; PBX and key system prices have been dropping.81 Nevertheless, the capabilities of business CPE have increased, with such features as high-speed facsimile and integrated data and voice capabilities now being commonplace."82

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aff'd in principal part on recon. Memorandum Opinion and Order on Reconsideration, FCC 86-34] (released Aug. 7, 1986) [hereinafter cited as AT&T Structural Relief Reconsideration]."

78. Ibid.: 159. "See AT&T Structural Relief Order,... 102 F.CcC.2d at 676-77."

79. Ibid., 159. "Telecommunications: A Market Profile, Wall St. J., Feb. 24, 1986 @ 4 (Telecommunications Special Report), at 5D."

80. Ibid.: 159. "See Furnishing of Customer Premises Equipment by the Bell Operating Telephone Companies, Notice of Proposed Rulemaking, FCC 86-113, para. 32 (released Mar. 28, 1986) [hereinafter cited as BOC Structural Relief NPRM]."

81. Ibid.: 159. "Zorpette, The Telecommunications Bazaar, IEEE Spectrum, November 1985, at 59 & 61. For instance, the average wholesale price of a key system has dropped from $300 per unit in 1983 to $225 in 1985. Id. at 59."

82. Ibid.: 159.

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"It is also apparent that the interexchange market is well on the way to complete competition. The majority of Americans now have a choice of long-distance carriers. A number of competitors with substantial resources have obtained significant market shares in a few short years. Because of the advent of these competitors and movement toward more rational economic pricing of regulated services,83 usage rates for interstate MTS and WATS services have decreased more than 20% in two and one-half years, stimulating significant additional usage of the public switched network.84 With the achievement of `equal access' for long-distance competitors,... the shape of the interexchange market should be determined primarily by competitive forces.85 "86

__________

83. Ibid.: 159. " See infra pages 167-83."

84. Ibid.: 159. "Press Release, `Interstate Long Distance Rate Reductions Worth More Than $2 Billion Become Effective," Mimeo No. 4871 (released May 30, 1986)."

85. Ibid.: 160. "The Commission recently determined that current policies governing competition in the interexchange marketplace and the transition to equal access are fundamentally sound. See OCC Joint Petition for Expedited Rulemaking. Notice of Proposed Rulemaking, 50 Fed. Reg. 50,316 (1985) [hereinafter cited as OCC NPRM]. The Commission is committed, however, to taking all actions needed to ensure a level playing field for competition in this market. See Separate Statement of Chairman Mark S. Fowler, id. at 50,328-29. For example, the Commission has addressed a number of transitional problems resulting from the presubscription process under which customers select their primary interexchange carrier before conversion of their telephone company central office to equal access. In particular, the Commission found that the routing to AT&T of all traffic from customers who fail to presubscribe was unreasonable and discriminatory. It mandated instead a uniform pro rata allocation plan that became effective May 31, 1985. Moreover, the Commission resolved a number of questions related to presubscription, including, inter alia, the controlling indication of customer choice, the retroactive allocation of customers converted to equal access prior to the default order, and the applicability of charges for customers requesting changes to their initial presubscription. See Investigation of Access and Divestiture Related Tariffs, 101 F.C.C.2d 911, modified on recon., 102 F.C.C.2d 503 (1985)."

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Opening up the local loop to competition by allowing more than one wire to the home will open up the local exchange market. There is no reason that I can think of why this would not be feasible under our current technology. As a possible implementation using "copper wire" technology, one could have poles along public streets which are owned by the state or local government, and then have many cables from different local exchange companies sharing the same poles. At the same time, you could have the various local exchange companies set up their own poles along private property; as an incentive for an owner to allow a telephone pole in his/her own private property, the local exchange could give the owner X dollars' worth of free telephone calls. What you would have is a situation where, within one geographical area, several exchanges offer local telephone service with trunk connections to different competing telephone networks; and with today's microwave/radio technology those trunks would be even easier to establish with various networks since there are no right-of-way problems. The telephone user when making a call could always indicate over what network to make the call in the PIC portion of the called digits. There would develop a symbiotic relationship between the local exchange companies and the telecommunications network companies. It would be in the interests of the local exchange companies to connect with as many telephone networks as possible, and it would be in the telecommunications network companies' interests to connect to as many local exchanges as possible. Central office switches could even be set up in apartments and homes. Having nearby neighbors connected via wire, or even more convenient wireless local loop, to the central office switch is entirely possible in a competitive telecommunications industry with our current technology. The development of cellular technology for the local loop would probably even fix the problem of being able to access more than one local loop as well as the telephone pole problem. Also, the cable company wire to the home could potentially serve as a second local loop.

"It... [definitely] appears that developing technologies and financial innovation... [will] make the competitive industry paradigm the most appropriate long-term model for the local exchange markets. Those markets still must be considered [government-enforced] monopoly markets [with respect to the hardwire local loop] in most areas. They have, at least until now, experienced the least amount of technological innovation.

_________________________________________________________________

86. Ibid.: 160.

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Limited local exchange competition, however, has already begun to appear.87 Digital Termination Systems (DTS), a microwave digital service, has been introduced in several cities for data transmission. Cellular radio systems have begun to operate in a number of cities across the country and will be extended into hundreds of additional cities.... As cellular technology advances and costs are reduced, cellular systems may become direct competitors of local exchange carriers. Similarly, fixed microwave or cellular systems may prove to be more efficient for hooking up end users in rural states than traditional copper wire. At least some interexchange carriers have begun to provide interexchange access service directly to end users in competition with the local exchange carrier. Some real estate developers have started placing electronic switches in multitenant buildings to provide tenants with more efficient access to the local exchange carrier's central office and to various interexchange carriers.88 Apartment buildings with master antennas and cabling for TV should also be providing local telephone service in the near future. Competition is likely to develop between cable companies and local exchange carriers for the provision of local voice, data, and video services as the telephone companies lay more wide-band capacity and institute an Integrated Services Digital Network (ISDN), and the cable companies begin installing switches in their existing systems.89 "90

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87. Mark S. Fowler, Albert Halprin, and James D. Schlichting, "`Back to the Future:': A Model for Telecommunications," Federal Communications Law Journal Vol. 38, No. 2 (August 1986): 161. " See, e.g., Pepper, Competition in Local Distribution: The Cable Television, in Understanding New Media: Trends and Issues in Electronic Distribution of Information 147 (B. Compaine ed. 1984)."

88. Ibid.: 161. " See, e.g., Aronow, Smart Buildings and Shared Tenant Services: A Preliminary Analysis, 37 Fed. Com. L.J. 521 (1985)."

89. Ibid.: 162. "An ISDN would provide end-to-end voice and data communications through the same digital transmission media. At present the Communications Act prohibits telephone companies from providing video programming directly to subscribers in their telephone service areas. 47 U.S.C.A. @ 613(b)."

90. Ibid.: 162.

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"The appearance of competitive markets throughout the telecommunications industry will allow a maximization of public benefits.... As competition invades the entire marketplace, producers will have to price their services at cost and to lower costs as much as possible, or risk losing customers. This efficient telecommunications pricing system could well reduce the use of averaging, allowing prices to vary more directly with the marginal costs of serving customers.91 At a minimum, it appears likely that firms will find it necessary to treat customers or classes of customers with reasonable marketplace alternatives, and therefore high demand elasticities, on a special basis in order to retain them on the network. Many carriers are likely to employ two-part tariffs, with lump-sum access charges for non- traffic-sensitive costs of the local loop and separate usage- sensitive charges for traffic-sensitive costs. As in other competitive markets, a firm's ability to judge accurately the relative cost efficiencies of various pricing alternatives will be an important factor determining its success in the marketplace. Only firms using the most efficient methodologies will ultimately be able to provide the greatest values to consumers and thus survive the discipline of the marketplace."92

"Besides precipitating changes towards more rational pricing of telecommunications products and services, the advent of a competitive marketplace will leave no companies with sufficient market power to present a significant danger of anticompetitive behavior. Whenever a firm attempts to engage in improper cost- shifting or to discriminate against competitors, it will run serious risks of losing customers and revenues. Regulation to constrain such acts simply will be unnecessary."93

"The significant increase in technological and financial innovation caused by competition in telecommunications may also

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91. Ibid.: 162. "Kahn, supra note 6, at 149. Of course, the entire fragmentation of the network by individual customer is unlikely to occur because it would be administratively inefficient. Most businesses in competitive markets today use some averaging techniques to achieve administrative or transactional efficiencies that may more than counterbalance losses from pricing inefficiencies."

92. Ibid.: 162.

93. Ibid.: 162 - 163.

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in fact resolve the chief fairness issue in telecommunications today, ensuring that everyone who desires telephone service can obtain it at an affordable price. Competition may drive prices and costs so low that no need will exist for subsidies for telephone service to any American consumer."94

"Thus, achievement of a competitive world in telecommunications promises enormous benefits in efficiency and fairness. Prices will accurately reflect costs, leading to the production of goods and services only when there are consumers willing to pay those costs. All companies will find it necessary to reduce costs to the minimum, seeking more efficient methods of organizing the production of telecommunications services. Both these developments will advance fairness in the industry. No longer will certain classes of ratepayers be required to contribute the costs of providing services to others who have the ability to pay for them. And no longer will the costs to society of providing universal service be significantly higher than necessary."95

6. Conclusion

"In a sense all business enterprise is a flight from competition. The penalties of competition - low or nonexistent profits - may be avoided by superior efficiency, by product innovation or differentiation, or by attenuation of the competitive process through [(a)] control over supply and price wielded monopolistically [through exclusive franchises] or [(b)] through conspiracy or tacit understanding with competitors. Confronted by the vigorous competitive inroads of independent operating companies, the Bell System sought to escape the unaccustomed hardships of competition by acquiring competitors [, who were not allowed by law into certain high-volume, profitable cities that Bell was serving], by limiting their markets and their services, and by espousing the development of governmental regulatory functions. The public service commissions, which ultimately stabilized rates and earnings, adopted the norms of business policy urged by the [Bell] System and imposed strictures on the `unintelligent competition.' The advantages thus gained by the Bell System over its remaining competition have been parleyed into a practically unassailable market position fortified by

__________

94. Ibid.: 163.

95. Ibid.: 163.

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political and legal ramparts [up to the year 1984, which was when the MFJ agreement was reached with Judge Green.]"96

"[T]elephone competition during the years 1893 - 1920 was neither inefficient nor costly but was, on the contrary, productive of benefits sharply outweighing the costs. It was not... the working out of the competitive market process toward the emergence of inevitable `natural' monopoly which destroyed the structure that permitted competition to flourish and its benefits to be enjoyed; it was... [(1) the issuing of exclusive franchises to the Bell System at many of the key high volume cities and (2)] a poorly conceived, Bell-inspired, protectionist regulatory policy which failed to preserve such competition...."97

We should seriously start moving towards a formal deregulation plan for the telecommunications industry, even up to the local loop. Given today's technology and the evidence presented pertaining to telephony history and public regulation, there is no excuse for keeping the local wire loop owned by a government- enforced, publicly regulated, private monopoly telephone firm or for that matter, any part of the telecommunications industry.

As a general aside, the leaders of the telecommunications industry should seriously consider supporting a constitutional amendment that advocates the separation of State and Economics in order to take away the authority of government officials to give exclusive franchises or special subsidies. "If men are concerned about the evils of monopolies, let them identify the actual villain in the picture and the actual cause of the evils: government intervention into the economy. Let them recognize that there is only one way to destroy monopolies: by the separation of State and Economics - that is, by instituting the principle that the government may not abridge the freedom of production and trade."98 This will not only help the telecommunications industry, but help other industries and the nation as well.

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96. Richard Gabel, "The Early Competitive Era in Telephone Communication, 1893-1920," Law and Contemporary Problems 34 (Spring 1969): 358.

97. Ibid.: 358 - 359.

98. Ayn Rand, Capitalism: The Unknown Ideal (New York: The New American Library, 1966), pp. 76 -77.

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Franklin Perez