Telephone Regulation I

Week Eleven: Telephone Regulation I
a. Telephone regulation
i. National Broadband Plan
b. Telephone system basics
i. Early history / monopolization – was meant to eliminate competition
1. The justification was that all citizens had universal right to telephone services and that one unified carrier could provide these services better and more accurately than multiple competing services.
2. The monopoly was controlled by the federal government by regulating the rates charged by the phone company.
3. The Bell Patent Monopoly (1876 – 1894)
ii. The Era of Competition (1894 – 1913)
1. Natural Monopoly Model (1894 – 1913)
a. The major incentive for the Bell System to monopolize is the economies of scale that results. Economies of Scale are cost advantages that result from expansion. By expanding, a producer’s cost per unit can fall as the scale, or size of the corporation, increases.
b. Barrier to Entry - Furthermore, stemming from the Bell Patent Monopoly, the infrastructure laid by the Bell System created an advantage in that the cost to enter any Market – to lay such infrastructure – is high. So the monopoly was maintained a bit by this natural obstacle.
c. However, the same principle of barrier to Entry also impacted the Bell System in that small regional/rural providers sprang up after the patents wore off and provided services in areas that the Bell System did not have full deployment.
2. The Vail Strategy (1913 – 1921)
a. Named after the AT&T/Bell System President – Theodore Vail. Was president from 1885 – 1889 and then again (when the strategy was implemented) from 1907-1919.
b. Elimination of competition through mergers and buy-outs.
c. Manipulating the regulation through relationships with policymakers and the regulators
d. Bribed with the idea of expanding telephone service to all in an efficient manner – “One Policy, One System, Universal Service”

3. The Kingsbury Commitment
a. To avoid Government intrusion, Vail brokered an agreement where:
i. AT&T sold its $30 million in Western Union stock
ii. Agreed not to swallow any more smaller companies
iii. Allowed competitors to link with the Bell System.
b. In actuality the agreement did not prevent AT&T from buying further companies, but instead forced them to sell one independent system for every one acquired.
c. Essentially the Kingsbury agreement created a “monopoly-swapping” situation instead of a new context for competition.
c. Federal v. state competition
i. Affects regulation
ii. The Communications Act, though, did not arrogate exclusive control to the FCC. Rather, it divided authority between the national government and the states: It assigned the FCC authority over interstate communication, but left to the states regulation of intrastate communications. Even before the passage of the 1934 Act, it became clear that this dividing line between federal and state jurisdictions was problematic.44 A long- distance call, after all, passes over the network of the local telephone company serving the caller, and that of the long-distance company, and that of the local telephony company serving the called party. What does such a call do to the Act’s jurisdictional boundaries?
iii. In a 1930 case called Smith v. Illinois Bell Telephone Co., the Supreme Court provided an answer: To the extent that local plant is used for interstate calling, the Court stated, it is beyond the reach of the state regulator. Its costs relate to “property used in the interstate service,” and must be included in the interstate rate base, under federal control.45 The cost of local telephone company plant must thus be allocated between the intrastate and interstate jurisdictions.
d. Telephone as monopoly
i. Network effects
1. The value of some goods and services depends on the number of people who use them.
ii. Separations and settlements
1. The sharing of long-distance revenues with local operating companies.
iii. Telephone and terminals
1. Hush-A-Phone Corporation marketed a small, cup-like device which mounted on the speaking party's phone, reducing the risk of conversations being overheard and increasing sound fidelity for the listening party. AT&T, citing the Communications Act of 1934, which stated in part that the company had the right to make charges and dictate "the classifications, practices, and regulations affecting such charges," claimed the right to "forbid attachment to the telephone of any device 'not furnished by the telephone company.'" During this era, the phones were leased from the phone company, not owned by the consumer.
a. The FCC Originally found for AT&T but the courts disagreed.
2. Carterfone Decision. Tom Carter had invented a device that tied mobile phones onto the telephone network, but was denied access. He filed with the FCC and won. The resulting decision forced the Bell System to alter their tariff structure to make individual device attachment possible, but more importantly the decision firmly established the FCC’s commitment to seeking competition in the telecommunications industry.
a. It opened the door to an interconnection industry where companies could build their own end devices, market them, and gain access to the telephone networks of the Bell System.
iv. What the Regulators/Govt got from this version of a monopoly?
1. Prices below historical costs for monthly service.
2. Prices below historical costs for rural customers.
3. Steady, controlled technological innovation.
4. High-quality, reliable service.
v. What the Bell system got out of this monopoly
1. Complete protection from competitive entry in all markets.
2. Ability to control the rate of technological innovation, thus protecting the value of current assets.
3. A return on capital and growth rate that made AT&T the glamour stock of the postwar era.

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