Ch 14 Defining The Telephone Monopoly

Ch. 14 – Defining the Telephone Monopoly
a. Precursors to Divestiture
i. Competition in CPE
1. Bell Prohibited interconnecting non Bell products with their network
a. Based on the idea that foreign products would affect the service offered. This became the metric of judgment.
2. In 1948 FCC allowed recording devices, struck down “foreign attachments” stipulations
3. In 1954 the FCC retreated an allowed Bell System to ban Jordaphone – an early answering machine
4. In 1955 Hush-a-phone (providing privacy in crowded environments) FCC supported Bell’s ban, but the DC Circuit court struck this down.
5. 1968 FCC followed this direction in not letting Bell ban Carterfone device – court battle ensued with Carterfone winning. The decision in all cases was based on Bell System proving that the device adversely affected the networks service operation.
ii. Competition in Long Distance Telephony
1. Brought about by a new technology – microwave transmission – b/c it reduced entrant barriers.
2. The first competition was private line service in 1959 via the Above 890 Decision. Corporations could privately interconnect in order to specialize their services.
3. In 1974 the FCC required Bell to allow these private interstate services to interconnect with their local services. Bell resisted and this was the basis of the Antitrust Cases
iii. Communications and Computer Convergence
1. The 1949 Anti-Trust Suits were based on Bells using its product patents to monopolize almost the entire telephone operating and manufacturing fields.
2. This case was settled by the 1956 decree and in which AT&T could not participate in the industry created by its transistor invention – the computing world.
3. Also, b/c computers were so expensive, resources were pooled and one large computer was shared via the use of a telephone system
4. Two large questions facing the FCC were whether or not Bell could market date processing services when they intersected with communications services and if such services should be regulated.
a. They answered Yes and No, respectively.
b. However when the question was not services but devices that were only data processing and not communications services – then Bell could not participate and so the defining of services and devices became an important regulatory task.
b. Breaking up Bell: The 1984 Divestiture
i. The MFJ
1. The 1974 Anti-trust lawsuit was resolved when it came to trial in 1981 and to avoid complete divestiture with no control over the terms, they negotiated a consent decree that later was reviewed and abrogated by a judge resulting in the Modified Final Judgement
2. The MFJ broke up the Bell system into 7 LECs
a. LECs were required to provide the services to interexchange carriers equal to the former AT&T ones.
b. They could not discriminate between AT&T and other companies.
c. They could not:
i. manufacture or market telecommunications products
ii. provide interexchange service
iii. provide directory advertising
iv. provide information services
v. provide any other product or service that is not a natural monopoly service that could be regulated by tariff.
ii. Notes on the Gov’ts. Theory
1. Predatory cross-subsidization – Since Bell Systems were not controlled by price regulation, their monopoly profits were exceptionally large, and they could use, or threaten to use, these large profits to subsidize below-cost pricing in other markets.
a. This allowed them to either drive out competition or to prevent competition from entering a market
b. In actuality – Bell did not sell service at below cost, but rather shifted costs around their many sectors (computer phones, local service, interexchange service, etc.) so that costs could be recovered while maintaining a competitive edge.
c. This theory of how the Bell Monopoly was against anti-trust concerns has many holes.
2. Discriminatory Interconnection
a. Bell used its monopoly over local exchange services to deny competitors in other markets necessary access to the local exchange
b. This raised rival costs and allowed Bell to sell computer phones more cheaply b/c its costs of interconnection were lower.
c. Discriminatory interconnection is relevant only in instances where access to the monopolized telecommunications service (here the local loop) is crucial to success in some otherwise-competitive market.

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