roundtable: MFJ and long distance -Reply

roundtable: MFJ and long distance -Reply

MFJ and long distance -Reply

FIKE@entc.tamu.edu
Mon, 01 May 1995 13:57:43 -0600 

Message-Id: <sfa4e9cf.089@entc.tamu.edu>
Date: Mon, 01 May 1995 13:57:43 -0600
From: FIKE@entc.tamu.edu
To: roundtable@cni.org
Subject:  MFJ and long distance -Reply


Tim Stanley wrote:

>>>>>>>>>>>>>>>
> I have a few questions/statements on Bell Operating company access
> into  the long distance market.
> 
> I see the Bell Operating companies sometimes arguing that there is
> competition in the local market. But when reading the fine print it 
> says "there is as much local competition as is allowed by law." Which 
> does not seem to be much (This seems analogous to Clinton's statement
> on smoking dope, "I broke no American laws").
> 
> My first question is this. Is there competition in the local market?  
> Seems to me there is not. Maybe for some large business centers, but I  
> have certainly never been offered a choice among local service providers.
> Even in the intra-area long distance market I have to dial 5 extra 
> digits to use AT&T or MCI.
> 
<<<<<<<<<<<<<<<<<<<

In order to discuss the issue of Competition in the Local Exchange, one
must first define what is meant by "competition".  The LECs use a rather
self-serving definition, essentially one that says if any customer has an
alternative provider for any service offered by an LEC, then ipso-facto,
competition exists!

A more concrete definition, and one that amateurs and lawmakers can
easily understand, is the simple question, "Do you have a choice in the
provider of your telephone service?  Do you know of anyone who has
such a choice?"  Since the answer to these questions, in almost any
group, is "No", the point is established that competition means choice,
and few customers of any category have a choice.

What the Bells are concerned about on this one is the large business
customers.  In this, as in most other industries, a few customers account
for a disproportionately large share of the revenues. I recall hearing
some time back that 2% of Illinois Bell's customers accounted for more
than 25% of the company's revenues; similar statistics apply to other
major industrial states.  And not only do the large business customers
account for lots of volume, the services that they use (such as digital
transport) are high-priced services that carry substantial profit.

This, of course, is the reason for the existence of the Competitive
Access Providers, such as Teleport and MFS.  They go after the
business customers, primarily in the CBD, offering not only a way to
bypass the LEC's access charges, but also an alternative for enterprise
connectivity, such as tieing a company's lans together between
buildings.  And they want to offer Centrex, as well (and are doing so 
in some locations). 

Add to that the prospect of the cable companies offering dialtone over
their coax networks, and MCI or AT$T connecting directly to their large
customers and bypassing the LEC, and you see that the LECs have
some reason to be worried.

So this is the "Local Competition" that the LECs are unhappy about.

>>>>>>>>>>>>>>>>>>>>>>>>>>
> 
> Are there any profits from offering local service to me? What about
> universal access, will competitors have to subsidize low income/rural
> individuals too?
> 
<<<<<<<<<<<<<<<<<<<<

Yes, definitely.  The question is, "where?".  For years it has been 
an article of faith in the industry that business and LD subsidize 
residential service.  Again, this is a self-serving definition for the 
LECs, which goes directly to the heart of "Universal Service".  Whether 
it is true or not is debatable (my guess is that it is often true), 
since the telcos do not keep (publicly-accessible) books that admit to 
easily answering the question.  But, it is an easy argument against 
exchange-area competition to say that it will raise monthly telephone 
bills for widows and orphans.  So, the LECs can press willing 
legislators for subsidies in one form or another to keep from raising 
residential rates.

The argument here is subsidize the consumer directly, if that is deemed
to be good public policy; don't subsidize a company.

>>>>>>>>>>>>>>>>
> 
> Onto the MFJ. The MFJ seems to state it is meant to protect competition 
> in the long distance market (see language of the MFJ below). I do not 
> believe that with all of the excess capacity for long distance calls 
> that allowing the RBOCs to enter into long distance will adversely 
> effect long distance competition. In fact I would expect that we would 
> see one more long distance competitor in each of the 7 regions and more 
> competition.  If an RBOC ever got too much market power in the long 
> distance market of its region then I am sure the Antitrust Division of 
> the DOJ could step in again.
> 
> On the other hand it seems that the RBOCs might shift some of their long
> distance costs onto their local customers. This certainly is bad, but I 
> do not think that it would result in the RBOCs harming long distance 
> competition. The RBOCs would be shifting costs to increase profits in 
> the regulated market they already have a monopoly in, the local market, 
> not to leverage their local market position to get a monopoly in the 
> long distance market. It is really a separate issue, at least concerning 
> the long distance restriction, that does not seem directly addressed by 
> the MFJ.
> 
> So the question then is whether the MFJ is there to protect the local
> customer or to promote long distance competition. I see it doing first 
> but not the second. As the MFJ states that it is meant to do the second, 
> should the MFJ be lifted?
> 
> My opinion is that it should not be lifted until there is at least 
> some more local market competition (or at least some of the 
> local/state regulations lifted). But this an economic opinion, not a 
> legal opinion.  From the legal standpoint, for the promotion of 
> competition in long distance, it seems the MFJ should be lifted.
> 
<<<<<<<<<<<<<<<<

The reason for the interexchange prohibition in the MFJ was to keep 
the RBOCs from rebuilding the vertically-integrated monopoly that the
government was trying to reign in via the anti-trust suit, and also to 
take away the incentive for them to engage in the sort of illegal 
behavior (in the DOJ's view) that they had previously been directed to 
do by their owner, AT$T.

You are right; there is little chance for the RBOCs to dominate the
Interexchange market.  But there are concerns about anticompetitive
behavior on the part of the LECs if they were in the long-distance 
market, since the IXCs would then depend on a competitor (the LECs) 
to reach their customers.  As well as the issue which you address, 
cross-subsidy from the monopoly business (local service) to the 
competitive business (long-distance).

>>>>>>>>>>>>>>>
> 
> Then again maybe Congress will pass a telecom bill making all of this 
> go away. Then again, maybe not.
> 
<<<<<<<<<<<<<<<

Competition in the local exchange and RBOC entry into the interexchange
will occur, just as surely as God made little green apples, and even
Congress can't do much more than slow it down.  What we the public
need to do is to be sure that we get a quid pro quo from the RBOCs. 
They want this so badly that they can taste it; now is the time to get 
the concessions that WE want in return.  To me, that is the heart of the
argument about legislation.

Sorry I was so wordy, but the questions seemed important and
deserving of an answer.

John L. Fike, Ph.D., P.E.
Director
Center for Telecommunications Technology Management
Texas A&M University
College Station 77843-3367

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