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CHAPTER
1
The History of
Telecommunications
After reading this chapter and completing the questions, you will be
able to:
■
Explain how and why the telephone was invented
■
Discuss the differences between the two inventors who were actively pursuing the
development of the telephone
■
Describe the basis of the monopoly established by the government
■
Explain the reason the government wanted to break up the monopoly
■
Converse with people in the industry regarding the changes that have taken place
since the breakup of the telephone company
n 1876, an inventor named Alexander Graham Bell was awarded a
patent for one of the most significant devices in our lives—the telephone
set. Mr. Bell spent many years trying to develop a method of communicating with his wife. You see, Mrs. Bell was deaf. Alexander was looking for
a way to convert sound into some other form of communication so that his
wife could understand him. While she was in a hospital for the deaf in
Boston, Massachusetts, he was busy at work trying to solve his basic problem of communications.
Having some experience with the workings of the telegraph, by which
coded messages could be sent across a cable, Bell decided to mimic this
means of communication. Using the basic principle that communications
could be converted from sound into electricity, he would be able to speak
I
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Chapter 1
into a communications device that, in turn, would convert the sound waves
into electrical energy. Literally, what Bell wanted to achieve was the transmission of voice over the telegraph or, by today’s standard, voice over a data
network. This electrical energy could then be used to produce a coded message similar to a telegraph message. This all sounded good, but it led to long
struggles during development. Many frustrations were experienced by Bell
and his assistant, Dr. Watson. No matter how hard they tried, the success
of the transmission of voice into an electrical current seemed to elude these
two inventors.
Then one day, fate struck. While working in the lab by himself (Watson
had been there, but left for a moment), Bell spilled some acid on his worktable. This acid acted as a catalyst to produce a battery effect. Without realizing what had occurred at the time, Bell called out for Watson. His call of
“Watson, come here, I need you!” activated the experimental device they
had set up for the communicator. His voice carried across a wire to a second
room, where Watson was working. Hearing the call for help, Watson ran to
the aid of his partner.
The two researchers discovered that if a battery is applied across the
electrical circuit (the wires) while the user speaks, the sound wave produced
by the human voice could be carried across this same pair of wires to a
receiver set up to accept this electrical current and convert the electricity
back into sound. Hence, on that fateful day, the birth of a new industry
occurred. The telephone set was invented!
Bell and Watson were elated. They were the inventors of what we have
grown dependent on, the basic voice communications telephone set. This
was in light of similar activity taking place elsewhere.
Who Really Invented
the Telephone?
A race was on from the outset between Dr. Bell and a German inventor
named Dr. Elisha Gray, who had used a similar concept to Bell’s, but he
didn’t complete the necessary documentation in time. Some say Gray actually invented the telephone before Bell, but he was too late in filing at the
U.S. patent office. Gray filed suit against Bell for stealing his idea, but lost.
All this led to the birth of the telephony and telecommunications industry, which has proliferated to the point where we can’t live without it. We’ve
made the world smaller and have attached to the telephony network
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devices such as computers, fax machines, video conferencing equipment,
and even interfaces to LANs. All these inventions make users feel they can’t
live, or do their jobs, without the use of a telephone.
Since the time Bell originally invented the telephone, many events have
taken place. We examine these in closer detail to give you an appreciation
of the industry in general. Incidentally, a theory even exists that Thomas A.
Edison was the inventor of the telephone. With so many theories about the
invention of such a remarkable piece of equipment, don’t you wonder how
the telephone proliferated as much as it did?
Evolution of the
Telecommunications Industry
Historically, some of the important dates in the evolution of the telecommunications industry are shown in Table 1-1.
Table 1-1
Summary of Early
Events in
Telecommunications
Industry
Year
Event
1872 — Western Electric was formed; Bell worked for this company while developing the
telephone.
1876 — Bell was granted a patent for his invention (March 7, 1876).
1877 — Bell offered to sell his invention to Western Union Telegraph for $100,000. Western Union rejected the offer.
1877 — The Bell Telephone Company was formed.
1877–1878 — Western Union formed a subsidiary company called the American Speaking Telephone Company to market its own telephone set (speaker developed by Tom Edison, receiver developed by Elisha Gray), the first
competitor to the Bell system.
1878 — The New England Telephone Company was formed as another of the first competitors to the Bell Telephone Company.
1878 — Bell Telephone Company sued the American Speaking Telephone Company for
patent infringement.
1879 — Bell Telephone Company and New England Telephone Company merged and
formed a new entity called National Bell Telephone Co.
(continued)
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Table 1-1
Summary of Early
Events in
Telecommunications
Industry
(continued)
Chapter 1
Year
Event
1879 — The Bell and Western Union case was settled. Western Union agreed to stay out
of the telephone business, and Bell agreed to stay out of the telegraph business in
areas where Western Union operated.
1880 — American Bell Telephone Company became the new name for the Bell System.
1882 — American Bell entered into an agreement with Western Electric. WECO was the
sole manufacturer of Bell equipment.
1884 — The first long distance line was installed between Boston and New York.
1885 — AT&T was formed as a subsidiary of American Bell to provide long-distance and
telephone service for communities around the country and the world.
1887 — The Interstate Commerce Commission was formed to regulate interstate carriers.
1893 — Bell’s first patent expired, opening the door for competition without patent
infringements.
1899 — AT&T acquired the assets of American Bell.
1910 — AT&T aggressively fought the competition by acquiring controlling interest in
Western Union.
1910 — The Mann-Elkins Act was added to the Interstate Commerce Act to regulate the
activities of the telecommunications industry.
1913 — The Department of Justice (DOJ) considered antitrust actions against the Bell
System. Woodrow Wilson made this commitment to break up private monopolies.
1913-1914 — AT&T agreed to divest its Western Union stock and to stop buying up independent telephone companies, in a commitment by AT&T Vice President
Kingsbury in return for dropping antitrust action.
1918 — President Wilson placed the telephone and telegraph systems under control of
the U.S. Post Office (until 1919).
1921 — The Graham-Willis Act established the telephone company as a natural
monopoly.
1934 — The Federal Communications Commission (FCC) was created to regulate interstate, maritime, and international communications. Congress also established
“universal service” as its goal. The FCC investigated Bell System operations and
DOJ began to formulate a major antitrust action against Bell. However, World
War II postponed action because Bell was considered critical to national defense.
1935 — Public Utilities Commissions (PUCs) were formed to regulate intrastate communications and rate setting. Also, the PUCs were instrumental in formulating revenue sharing for calls using more than one carrier.
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The First Telephone
Companies Formed
Once the telephone was invented and proliferation started throughout the
country, a group of telephone companies began to form independently to
allow for interconnectivity. This technology started out with many saying
the telephone was a frivolous toy and would only be used by the affluent.
How wrong they were!
The first competitive telephone company to be formed was the American
Speaking Telephone Company (ASTC), which was funded by the Western
Union Telegraph Company, and used the pieces developed by both Gray and
Edison. Edison had developed a transmitter that improved on the performance of the set, so this transmitter was used. The receiver was an invention of Elisha Gray. The combined transmitter and receiver (Edison/Gray)
set was an enhancement over the Bell invention. Edison was also used to
assist in the distribution of the wiring to local business and residential
users. Edison’s knowledge of electricity and the use of power distribution
systems in the form of grids were applied to the telephone business. Of
course, the Bell Telephone Company was actively challenging the ASTC’s
position on the basis that the company’s use of telephony was an infringement on Bell’s patents.
The New England Telephone Company followed the development of the
two previously mentioned companies in building both telephones and network services. This was in direct competition with the Bell Telephone Company. A problem existed with this whole scenario: Any user who wanted to
connect with a local telephone company, of which there were now three,
couldn’t communicate with another neighbor or business connected to
either the other companies. Interconnectivity didn’t exist. What this meant
is, if I had needed to speak to three different businesses that used the services of the three different operating companies, I would have required
three separate telephone lines and three different telephone sets on my
desk. This is ludicrous to imagine, but true.
The Regulatory Scene
The telephone industry was rampant with suits and countersuits during
the early stages of deploying the networks. Bell was active in trying to
displace the “fake” companies on the basis of the patent infringements.
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Many of the cases had a bearing on the future of the industry, in particular
with the formation of the telephone companies as monopolies. Some of the
key events are listed in Table 1-1.
This was quite a turn of events. American Telephone & Telegraph
(AT&T) started out as a subsidiary of Bell and, ultimately, became the dominant force in the market. And all of this happened in the first 23 years of
the industry.
Many smaller companies started up building either telephones or networks. By the 1920s, nearly 9,000 independent telephone companies were in
operation. This number was reduced because AT&T (the long-distance
monopoly at the time) wouldn’t let the independents interconnect to the
AT&T network. As a result, many were financially strapped and went bankrupt. AT&T began acquiring these failing operations, causing the number of
independents to diminish (about 1,400 independent operating companies
still exist in North America). AT&T had the single largest network in place
and began to undercut prices, buying out competitors in an attempt to drive
the smaller companies out of business. This left gaps in coverage for customers served by the independents, who couldn’t connect to the major cities
where AT&T had the market. One competitor AT&T was after was the
ASTC. AT&T began to buy controlling interest in Western Union, the parent
of ASTC in an attempt to control its operation and destiny.
AT&T began to cave in to public pressure. A statement from an AT&T
vice president (Kingsbury) outlined new positions to the attorney general.
Kingsbury agreed to
■
Relinquish its holdings in Western Union
■
Stop the practice of acquiring the independents, unless authorized by
the Interstate Commerce Commission (ICC)
■
Allow the independents to interconnect to the AT&T network
Still another major event in the industry was the Graham-Willis Act,
which established the telephone system as a natural monopoly. For years,
AT&T had dominated the industry, providing all telephone equipment and
service through its normal distribution channels, the telephone companies.
The network was a sacred cow, with only AT&T products and services
allowed for interconnection to the networks. The philosophy was that any
other product might harm the network, thereby keeping a monopoly over
the products and services to be installed.
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Hush-a-Phone
In 1947, the Federal Communications Commission (FCC) permitted the
connection of customer-owned and provided recorders through special protective arrangements. These devices were used to record conversations, but
were required to sound a beep when recording took place.
In the late 1940s, other manufactured devices could be attached to the
telephone lines, so long as a protection device was used. This was an
appeasement to the telephone companies, which stated the connection of a
foreign piece of equipment on the network would disrupt the network and
decrease its efficiency, as well as jeopardize national security.
In the 1950s, an innovation known as the Hush-a-Phone, an acoustically
coupled device designed to eliminate noise and increase privacy, was tested
before the FCC. The FCC agreed with AT&T’s position and moved to prevent “foreign” devices from being connected to the telephone network. An
appeals court later overturned this decision. Because the acoustic coupler
was a nonelectrical device, the court ruled it would pose no threat to the
integrity of the network. The U.S. Naval Department was one of the users
who fought for the use of the Hush-a-Phone. After losing the battle in
court, AT&T suggested if a recording device were to be allowed on the network, then a beep should be sounded on the line periodically (every 15 seconds). This beep would alert the user at the far end that the conversation
was being recorded. The Bell system suggested if a beep were introduced
to the line, then an electrical input was required. Bell fought for the right
to install the equipment on the line that provided the beep. This was made
possible because the Hush-a-Phone decision was made based on a nonelectrical input. The Bell system was then able to charge the U.S. Naval
Department for the equipment that introduced the beep and all was
settled.
In 1956, the Department of Justice filed an antitrust suit against the
Bell System, which had been postponed because of World War II. In general,
the suit was aimed at getting AT&T to divest itself of Western Electric. This
was finally settled in what was known as the 1956 Consent Decree. The
result was that AT&T could retain ownership of Western Electric if it only
produced products for the Bell-operated companies. This decree went on to
prevent the Bell System from offering commercial data processing services,
limiting Bell to providing telecommunications services under regulation.
This still left the Bell System a regulated monopoly with no competition for
equipment and services in its operating areas.
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The Introduction of Competition
In 1968, however, the first true case was tested by a company called Carter
Electronics of Texas. Carter made a device used to interconnect mobile
radios to the telephone network via acoustic couplers. The FCC ruling was
paramount in that direct electrical connection of devices to the network was
allowed so long as a protective coupler arrangement was used. The decision
had monumental impact because, prior to the Carterphone decision, manufacturers had a limited outlet for their products. They typically sold their
products to the independent operating telephone companies. Now the floodgates were opened and these manufacturers had a whole new world of
opportunity to market their products. Even the foreign manufacturers sped
into the equipment market, offering end-user products that had previously
been totally controlled by the Bell System. The European and Japanese
marketeers were quick to enter the PBX and terminal equipment business.
However, the use of a protective device was still an area of frustration with
these equipment vendors. Rent for the Bell protective arrangements was a
recurring cost that made the purchase of other equipment less attractive.
The manufacturers continued to complain about this. These complaints
resulted in the 1975 FCC registration program for all products that could
be attached to the telephone network. As long as a manufacturer could pass
the requirements of the FCC registration (Part 68), then its products could
be attached to the network without the use of the protective devices. This
began what was called the interconnect business.
Still, additional activity took place. In the 1960s, a small microwave carrier company called MCI began constructing a microwave network
between Chicago and St. Louis. MCI’s initial intent was to provide alternate private line services in a high-volume corridor. MCI took its interconnection request to the courts and won the capability to interconnect its
network with the telephone company network. MCI further began to offer
switched services, which was immediately reported to the FCC. The legal
actions nearly put MCI into bankruptcy, but the little company prevailed
and began the “other common carrier” industry — one more nail in the
monopolistic coffin for AT&T.
The Divestiture Agreement
In 1982, the most monumental decision to be made since the inception of
the monopoly in the telecommunications business was reached. In light of
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all the computer inquiries and consent decrees taking place, the Department of Justice was still after AT&T, Western Electric, and Bell Labs. This
recent action started in early 1974 and was aimed at the complete breakup
of the Bell System. In early 1981, the suit finally made it into the courts but,
surprisingly, was brought to a halt on January 8, 1982, when an agreement
was reached to drop the suit and submit a modification of the 1956 Consent
Decree to the courts.
To achieve the goals targeted, AT&T would be relieved of the limitations
keeping it from other unregulated markets. In return for this relief, however, the courts demanded the breakup of the Bell System. Because the Bell
System operated as a monopoly and enjoyed the noncompetitive environment, it was to remain under a regulated status. The Modified Final Judgment (MFJ) considered the provisioning of local dial tone services as a
monopoly and everything else as a competitive operating environment.
Therefore, the local dial tone business provided by the local exchange
carriers (LECs) would remain regulated. AT&T could pursue and operate in
the competitive long-distance, equipment manufacturing, computer equipment/processing, and sales markets. The 23 Bell Operating Companies
(BOCs) would be divested from AT&T (which retained its Western Electric
Manufacturing, Bell Labs, and Long Lines divisions). Some of the salient
points of the MFJ include the following:
■
AT&T had to transfer sufficient personnel, assets, and access to
technical information to the BOCs, or whatever new organization was
owned by the BOCs, to enable exchange services or access to exchange
services to be provided without any ties to AT&T.
■
All long-distance services, links, personnel, and other facilities had to
be relinquished by the BOCs and turned over to AT&T.
■
All existing licensing agreements and contracts between AT&T or its
subsidiaries and the BOCs had to be terminated.
■
Equal access for all interexchange carriers into the BOCs’ switching
systems had to be provided. This broke down the special privilege
AT&T enjoyed over its competition. The equal access for all carriers
was to be provided within two years. The only exceptions were
electromechanical systems, where it was cost-prohibitive to changes or
smaller companies serving fewer than 10,000 users.
■
After the breakup, the BOCs could provide, but couldn’t manufacture,
equipment.
■
After the divestiture, the BOCs could produce and distribute
directories to subscribers.
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■
Carrying calls between and among offices was defined as local
exchange services and interexchange services. The LECs would hand
off any interexchange call to an interexchange carrier (IEC). To define
the boundaries of who carried the call and who shared in the revenue, a
number of local access and transport areas (LATAs) were created. The
calls inside a LATA were the responsibility of the LEC, and calls that
left the LATA were the responsibility of the IEC.
■
Joint ownership or participation in the network between AT&T and
the BOCs was prohibited. Although this was a common practice before
the breakup, it wasn’t supported after the breakup.
The provisions of the MFJ were strictly aimed at the Bell System. This
was a point of confusion for many people because they thought the whole
network would fall apart, which it didn’t. The greatest confusion arose
when the MFJ was decided in early 1982 with an implementation date of
January 1, 1984. Fear, uncertainty, and doubt reigned in the industry.
The business users were prepared for the breakup, but not much happened in the residential market. Although the BOCs and AT&T tried to
communicate the message to end users, they were highly unsuccessful. Fifteen years after the breakup, many residential users still didn’t know a difference existed between the suppliers. The small business and residential
users were so accustomed to the “cradle-to-grave” services offered by their
BOCs, they didn’t grasp the significance of this breakup. No longer would
one call do it all. Separate companies provided dial tone services and longdistance services.
The divestiture of the Bell system allowed advances in the industry that
might not have occurred otherwise. With the introduction of competition
and the capability of other suppliers to enter new markets, the evolution of
the network and service offerings escalated dramatically. Digital architectures rolled out to customers at a rapid pace. Further, when divestiture
took place, the costs associated with local dial tone increased by as much
as 50 to 60 percent on a monthly, recurring basis. However, long-distance
services and usage charges decreased by 60 percent or more. This might
sound like a break-even analogy, but the ratio of local to long-distance service is a 20:80 rule. Twenty percent of a customer’s actual monthly bill is
for the fixed recurring charge, whereas 80 percent of the bill is for the variable usage-sensitive costs associated with long distance. From this, you
could suggest we would gladly accept an increase of 50 to 60 percent on
20 percent of our bill, if the remaining 80 percent of our bill is reduced by
60 percent.
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To add to the confusion, whenever a customer called a provider for a service that didn’t fall within that provider’s scope, the standard answer given
was the judge didn’t allow the vendor to provide such services. This reference to Judge Harold Greene of the Federal District Court, who presided
over the suit and the MFJ rulings, was a standard escape clause used by
LECs and IECs alike. Unfortunately, the MFJ was an agreement reached
by the court and AT&T rather than an actual mandate. Thus, the burden of
setting the rules in the telecommunications industry was placed on the
shoulders of the courts.
Tariffs
Another escape clause used on a regular basis is “the tariffs don’t allow this
service,” which is a clear misrepresentation. The BOCs and the AT&T organization write tariffs and submit them to their respective judicature,
whether it’s the FCC for interstate traffic for AT&T or the Public Utilities
Commission for the BOCs. An easy way to avoid offering a service or to
delay a customer request is to suggest the tariff doesn’t allow something.
But who writes the tariff? If a service or something out of the ordinary isn’t
covered in the tariff, then the logical solution is to write a new one. For a
new tariff to be written is rare.
What is a tariff? A tariff is a description of a service that offers an appropriate rate of charge for that service and the rules under which the service
is to be provided. A tariff is the basic agreement of terms for a service
between the customer and the provider that must be submitted to the regulators for approval before any changes in service can be offered. In the
United States, 50 different regulators rule on the tariffs—one for each state.
We relegated the overseer function to the Public Utilities Commission and
the FCC. In the rest of the world, rate settings and guidelines differ,
depending on the country. Many of the telephone companies are under
direct control of the local government. The telephone service is relegated to
the post office agencies, called Post Telephone and Telegraph organizations
(PTTs). The name stands for the services provided: postal, telephony, and
telegraphy. Privatization is happening in several parts of the world. Telephone services are being removed from government control and passed on
to private organizations. It stands to reason these organizations must face
stiff competition for the services, much the same as has happened in the
United States.
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The Telecom Act of 1996
In February 1996, the Clinton Administration signed into law the Telecom
Act of 1996. This act was the culmination of several years of trying to deregulate and provide a competitive marketplace in the telecommunications
arena. This law, when enacted, opened the door to an open communications
infrastructure. Essentially, what the administration put into play was the
beginning of the concept of the information superhighway.
The Telecommunications Act of 1996 opened the way for myriad new
players to compete for the local dial tone service. In the United States, dial
tone amounts to a $115 billion per year industry. All the emerging players
want a piece of that action. What this means, however, is a group of new
players will emerge to provide dial tone services, while the local telephone
companies are unshackled and allowed to penetrate new markets that were
unavailable to them in the past.
During the beginning stages of this Telecom Act, elation and overwhelming support for the newly emerging marketplace from all players was
the name of the game. As you would expect, however, things don’t work as
smoothly as they should initially. The Telecom Act of 1996 allows the longdistance companies (IECs) to enter into new business opportunities. These
include dial tone, cable TV services, high-speed Internet access, and twoway video communications capabilities after the infrastructure is in place.
The market is quickly becoming a data centric infrastructure—dial tone is
the way the carriers get in the door.
The cable TV companies may enter into telephony and other forms of the
communications business. These providers may offer voice communications,
high-speed Internet access, two-way multimedia communications, and
cable TV services, all on a single communications platform. As the cable
companies look at their infrastructure, they already have a high-speed communications channel running either to or by everybody’s door. They must
recognize, however, that in the past, their primary service was to deliver
one-way cable services. To provide high-speed Internet access, enhanced
capabilities, and voice communications, these companies were forced to create a two-way communications cable system. This means they either had to
add new cables or provide high-speed fiber in the backbone network to the
curb, and then coax to the door. Although this sounds straightforward and
easy, it does require significant investments on the part of the cable companies. This alternative proved effective with a hybrid fiber/coax arrangement that, by the end of 1999, the cable TV companies implemented in
several cities in the United States and Canada to provide the high-speed
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access in a bundled pricing mechanism. Moreover, 1999 marked the year
when AT&T (the now-streamlined carrier) acquired two of the largest
CATV companies: TCI and Media One. Having invested over $100 billion in
acquiring these cable companies gave AT&T access to many consumers’
doors.
As the Telecommunications Act continues to be enforced, the original
telephone companies (the BOCs) break out into new markets, such as offering long distance for less and providing cable TV services, Internet access,
and videoconferencing capabilities on their local infrastructure. What the
telcos must realize, however, is the local two-wire cable facility (called the
local loop) wasn’t designed to sustain the high-speed communications we’re
discussing here. Therefore, the telcos will continue to update their cable
infrastructures. These companies are enamored with xDSL technologies
that use high-speed digital subscriber links. Using various techniques such
as asymmetrical digital subscriber link (ADSL) or very high-speed digital
subscriber link (VDSL), the telephone companies can provide high-speed
communications to the customer’s door. In the ADSL marketplace, they
envision delivering up to 9 Mbps to a customer’s door, whereas outbound
from the customer to the network the service will offer plain old telephone
service (POTS) and up to 1.544 Mbps data transmission. Two occurrences
have deviated from this scenario to start:
1. Rate-adaptive ADSL (RADSL) was introduced, allowing the telco to
deliver less than the 9 Mbps downloadable to the door. Instead, they
use a figure of 1.544 Mbps downloadable and adaptive rates of 256 to
1.024 Mbps uploadable. If the network is busy, then the consumer gets
slower-speed access, but a contracted minimum comes into play. If the
network is lightly loaded, however, the consumer can benefit from the
higher throughputs.
2. One-meg modems were developed. The ADSL Forum looked at both the
application and the need for the previously mentioned speeds. What
this forum determined, in the short term, is the average consumer only
really needs 1 Mbps downloadable and approximately 160 Kbps
uploadable asymmetrical speeds. Therefore, they developed what was
termed ADSL Lite or G.lite specification. Over time, this specification
will allow higher-speed access but, for the short term, this is sufficient.
In the ADSL marketplace, the telcos deliberately dragged their feet
implementing these services. Many reasons exist, but the most common is
they didn’t want to be forced to provide the xDSL service at a discounted
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rate, as they do the dial tone. In the VDSL marketplace, the telcos envision
up to 51 Mbps to the customer’s door with a much lower-speed communications channel outbound or a symmetrical 51 Mbps in each direction.
Regardless of the technique used, the telephone companies are in a position
to find technologies to support and sustain these speeds on their local, single twisted pair of wires to the customer’s door. Experiments are underway
in Phoenix, AZ by Qwest International (formerly US West); however, problems have been rampant because of inexperience and lack of skills. This is
their challenge. Beyond the high-speed communications, the telephone companies can also enter into manufacturing, long distance, and cable TV service. The caveat of the Telecom Act of 1996, however, is these companies
must first prove that an open competitive environment exists at the local
loop. This was one of the contention points as the newer players emerged
and attempted to get into either facilities-based or a non-facilities-based
dial tone provision.
In the facilities-based environment, the carrier provides its own cables or
wireless communications to the customer’s door. At that point, all the communications will be carried right out to the wide area network (WAN),
bypassing the local telephone companies.
In a non-facilities-based environment, the new players rent or lease facilities from the local telephone company at a discount from 17 to 28 percent
off the local telephone company’s tariffs. The telephone companies argue, by
having to rent the services to competitors at a discounted rate, they are
putting themselves in an unfair position. The resellers of dial tone merely
turn around and rent services right back to the consumer at a rate less than
what the telephone companies charge. The telephone companies contend
this is a discount that shouldn’t be provided and if competitors want to
work in this market, they should build their own capabilities or rent from
the telco at the same rates the telco charges other customers. Embroiled in
all these battles are the other players, such as the long-distance and cable
TV providers, who are equally distraught because they also have to pay for
other access fees to provide services to their consumers. They argue that the
telephone companies have been raising the rates for access because of the
potential loss of revenue because of the Telecom Act of 1996.
An interesting event occurred in 1999 when AT&T acquired the local
cable TV companies (TCI and Media One) to get access to the consumers’
doors. Shortly after acquiring these giants, AT&T was challenged to offer
the access to competitors at a reduced rate. AT&T immediately balked at
that idea and appealed to the FCC because the local utilities commissions
were ruling in favor of the competitors. AT&T is screaming about the
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unfairness of such a move, yet this worked just the opposite when they
wanted access through the telco and were asked to pay the access fees.
Throughout all this maneuvering, the consumer may or may not win.
Clearly, with competition, prices should fall to a more reasonable base and
other discounts might exist. This will work in the major NFL cities.* The
cost of dial tone and access to the long-distance network should drop. In
rural communities where services and facilities have always been limited,
however, no advantage or a slight disadvantage might exist. The consumers
in the rural areas are going to be left in the lurch because few companies
want to serve such regions. In the old days, the telephone companies had to
serve it as a last resort. Under deregulation, all of this might well change.
A couple of the Competitive Local Exchange Carriers (CLECs) have actually opened many third- and fourth-tier communities. Because they are the
prime competitor in the town, users who are willing to take a chance will do
so with the new provider. This has been a lucrative market for the new
CLECs in this area, as opposed to the results in the major metropolitan
areas.
As you might expect, several new providers entered the business. As of
1999, over 500 CLECs had jumped into the competitive local dial tone business, yet they have achieved only 3 to 5 percent penetration into the overall market. This penetration amounts to approximately $4 to $5 billion
annually. Each of the competitors entering this market offers some form of
discounts on cable services, dial tone, or long-distance access and services to
pick up a few market points. Many providers are building out high-speed
access on fiber-based networks bypassing the local telco. Newer providers
are now offering the one-stop shopping method by offering a bundle of services, including dial tone, long distance, equipment, and internal wiring all
on a single phone bill. AT&T, for example, began offering as much as a 26
percent discount overall for the bundled-service packages they now offer,
including dial tone, CATV, and long-distance services. These new players
used loss leaders to attempt to pick up their market shares. Through this
loss leader market, they won’t make any money. Consequently, the consumer may stand to gain for the short term, until these new emerging competitors realize they are making no money by offering heavily discounted
services. At that point, the carriers will have to raise their rates or offer
some other value-added services to gain new revenue.
*The reference to NFL cities is that any major city across North America with a professional
football team has all the services and benefits, whereas the smaller communities that don’t have
a football team don’t get the same level of service and accessibility.
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In the year 2000, many of these competitors got in trouble financially
and faced some serious loss of confidence from their investors. In fact, the
companies began to run out of money. This forced a couple of the CLECs to
fold; many others either merged with or were acquired by better-funded
organizations. The stock prices for these organizations were soaring to
heights never seen before, yet they all came tumbling to the ground. We can
expect 2001 won’t be kind to many of these providers. Expect that 25 percent of these CLECs will disappear in the near future.
The Canadian Marketplace
In 1994, the Canadian Regulatory Telecommunications Committee (CRTC)
endeavored to do something similar to what happened in the United States.
The goal was to deregulate or demonopolize the local dial tone provisioning
service. On May 1, 1997, the CRTC provided its interpretation of how it
would deregulate and open the market to dial tone to a competitive environment. You can expect that, one year after the Telecom Act of 1996 in the
United States, the CRTC would likely model a good many services and provisions of the law after those accomplished by the FCC. The reason was to
provide harmony throughout all of North America. While the CRTC
endeavored to break up the dial tone monopoly, the cable companies, the
long-distance providers, and a rash of emerging players, who are facilities
based or non-facilities based, already filed and petitioned for the right to
offer services. Once again, in the Canadian marketplace the influx of new
providers and new opportunities overwhelmed the consumers, even though
the implementation is ongoing.
In both the U.S. and Canadian marketplaces, all the dial tone and longdistance access services have traditionally been through the local dial tone
loop. Now, with the cable TV companies trying to get into this business, the
dial tone could be provided on either a cable or a local loop. More and more
opportunities exist for a wireless connection to the consumer, however,
whether residential or business. The wireless dial tone providers are constantly springing up around the country as they entertain the thought of
the personal communications service (PCS). Through a combination of the
dial tone, the TV services, the high-speed Internet access, and the multimedia communications capabilities to the local door, all these activities will
come to culmination. No one service alone may warrant all the new emerging players but, as a whole, this marketplace is enormous.
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The History of Telecommunications
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Therefore, as the Telecommunications Act and the CRTC deregulation
rolled out in the Canadian marketplace, you experienced dramatic changes
in the way you do business. Through the convergence of wired and wireless
communications, dial tone, and long distance, a variety of other services
emerged to create a competitive potential for you. One-stop shopping is the
way of the future.
Questions
1. Why do people still believe two different people might have invented
the phone?
2. What role did Mr. Watson play in the development of the telephone set?
3. What relationship did Elisha Gray and Thomas Edison share?
4. Who created the first telephone company?
5. What special status was afforded to the local telephone companies?
6. Why is providing interconnection between the different companies
important?
7. When AT&T realized it was getting in trouble, who figured out how to
stop the legal proceedings against the company?
8. What was Western Union Telegraph’s involvement in the telephony
business? Why was that significant?
9. What was the excuse AT&T and the Bell system used to prevent others
from attaching equipment to the Telephone Company network? List
the various reasons given.
10. How difficult do you think creating the telephone business again would
be, under new rules?
11. What is the importance of the Carterphone decision?
12. The Navy was instrumental in forcing the acceptance of what device?
13. If a new supplier wants to get into the telephone business, what services do you think it would likely want to offer? List the services and
the reasons for offering them.
14. What were the factors leading up to the breakup of the Bell System in
1982?
15. What agreement was reached, who were the players, and what is the
agreement called?
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16. The Telecommunications Act of 1996 allows the Telephone Companies
to compete in the long distance market if they do what?
17. How many different phone companies were under the Bell umbrella?
18. How many independent telephone companies are in North America
today?
19. What is the name for the new providers of dial tone?
20. What were the benefits AT&T received from the divestiture agreement?