http://www.businessweek.com/stories/1994-12-04/congress-set-the-phone-companies-free

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Congress, Set The Phone Companies Free


Economic Viewpoint

CONGRESS, SET THE PHONE COMPANIES FREE

In 1982, after a lengthy court battle, AT&T agreed to divest itself of the 22 Bell companies that operated its local exchange networks. The presiding judge, Harold H. Greene, gave the seven surviving regional Baby Bells a monopoly on local telephone service in their territories. AT&T was limited mainly to long distance and, as a carrot, entry into the computer business.

Rapid changes in the telecommunications industry have since rendered these and other restrictions obsolete. Unfortunately, the judge kept the power to deny--subject to appeal to higher courts--any proposed changes by telephone companies in their activities. But because Greene is a judge, not a businessman, it isn't surprising that he has been slow in recognizing the radical transformation of telecommunications. As a consequence, he has been an obstacle to efficient organization of the industry.

His 1982 judgment was based on the belief that the local exchange was a "natural monopoly," since many telephone calls could be handled cheaply by a single company that strung wires in a town. Indeed, the lawsuit arose because AT&T was alleged to have used this monopoly power to block competition in long-distance calls. The judge justified his imposition of line-of-business restrictions on the Baby Bells as being necessary to prevent them from leveraging their monopoly power in local exchanges to compete unfairly in other markets.

Among other things, Judge Greene blocked the Baby Bells from selling phone services and many products outside the regions where they operated local exchanges. Yet the potential abuse of monopoly power in local service could hardly apply to activities lying entirely outside the Baby Bells' own markets. There, they would simply be new entrants who would compete against established companies in supplying telephone services and products.

WONDER WIRE. When AT&T was broken up, the potential abuse of monopoly power may have justified some control over telephone pricing. But most other curbs on phone companies made little sense even then, and the revolutionary changes in telecommunications have destroyed the case even for price controls.

That's because cable-TV-wire systems and cellular phones have the potential to override any local monopoly power the Baby Bells have. About 90% of American houses have access to cable, and cable wiring can be fitted to provide two-way telephone communication. But regulations have kept cable companies from providing phone service and limit video programming offered by phone companies. Competition would increase if these companies were allowed to pool their knowledge--and offer both local and long-distance phone services along with video and TV services.

YANKEE RAIDERS. Several months ago, Judge Greene finally approved the merger of AT&T and McCaw Cellular Communications Inc., the nation's largest cellular-phone company. Other mergers are rapidly taking place among telephone, cellular, and cable companies--partly to position them for the upcoming auction of additional radio-frequency licenses, for providing cellular-phone, paging, E-mail, and many other services.

Competition in long-distance phone calls and video programming has been vigorous in the U.S. But America is falling behind Britain and New Zealand, for example, in other services. Britain now lets cable companies offer both phone and TV services through their wires. Cable outfits are competing for local customers against British Telecom PLC, the dominant phone supplier. The paradox is that the competition is coming from U.S. cable companies and Baby Bells, which are doing overseas what they cannot do at home: freely offer both cable-TV and telephone service.

New York, California, and several other states have begun to allow much greater intrastate competition in local phone and cable-TV services. But federal legislation to overhaul telecommunications got bogged down during the current congressional term in conflicts between Republican- and Democratic-sponsored bills. In the Congress soon to end, Bob Dole (R-Kan.) took the lead in the Senate in calling for substantial deregulation of the telecommunications industry. That's a good reason to believe the new Republican-dominated Congress will move quickly to scrap the regulations on prices and on what lines of business the phone, cellular, video, and cable companies may offer. As a result, consumers will be able to get full benefit of new technology.

No judge--and no lawmaker, regulator, or economist--can foresee the future in an industry changing as fast as telecommunications. That is why competition, rather than officials and bureaucrats, should determine its evolution.GARY S. BECKER


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