TABLE IV

MARKET SHARES AS MEASURED BY REVENUES FOR MTS/WATS,

PRIVATE LINE SERVICES, AND PUBLIC SWITCHED RECORD SERVICES SECTORS

1/Other common carriers for Public Switched Record Services consists almost solely of Western Union.

Source: FCC, U.S. Independent Telephone Association, Department of Justice, and Southern Pacific Communications Co.

100.0%

As measured by market share, AT&T is a dominant firm in the telecommunications service market, maintaining an overwhelming share in virtually every submarket and sector. 1/ This dominance is further reinforced by two additional factors. First, AT&T dwarfs its competitors in size (for example, revenues, net plant, and net operating income). None of the competitors, we believe, are large enough to perceptibly influence the price of overall telecommunications services by their decisions regarding supplying telecommunications services. Second, AT&T controls access to an overwhelming portion of the local services submarket by virtue of its franchised local monopolies. Competitors in the interexchange services submarket depend on these facilities to provide their services.

Consequently, viewed strictly from a structural perspective, we believe the overall services market cannot be considered competitive. Further, as noted in chapter 1, regulation has been imposed in the telecommunications industry because of the concern that a firm holding a monopoly position would abuse its monopoly power. Because AT&T continues as a dominant firm in this industry and because it has considerable monopoly power we believe, continuation of price/earnings regulation is needed.

At the opposite end of the spectrum from AT&T are most of the other common carriers. These firms are relatively small-both in absolute revenue and in market share--and possess no real market power in any of the markets, submarkets, or sectors in which they operate. Because of their lack of market power, we believe these firms do not require the price/earnings regulation which would be applied to dominant carriers. FCC has recognized this fact in its Docket 79-252 proceeding begun in May 1979 and is attempting to relax regulatory requirements for competitive carriers. This effort will be discussed in a subsequent section. In between these two extremes lie several firms which may or may not be considered dominant in particular markets or submarkets. For example, Western Union, as measured by market share, is a dominant provider of services in the public switched record services sector. The potential exists for Western Union to use this position to behave anticompetitively in other sectors where it faces competition. FCC has removed the legal barriers to entry into this sector and at least one firm, Graphnet Systems Inc., has shown a desire to enter this sector. Further, facsimile equipment combined with the MTS/WATS services may provide a substitute which may mitigate Western Union's market power in this

sector.

1/Economists have traditionally considered a firm dominant if it controls at least 40 percent of the total market.

Another firm for which dominance is an open issue is GTE. As noted previously, GTE is the largest independent telephone company and has about 8 percent of the total services market as measured by revenues. GTE also controls bottleneck facilities through its local monopolies in several major cities and occupies a major position in the enhanced services sub-submarket through its ownership of GTE Telenet Corporation.

Whether these and other carriers are dominant and possess such market power that price/earnings regulation or regulation in some form should be applied, requires additional analysis. Such a determination can only be made after FCC has made a detailed study of such factors as the relevant markets in which these firms operate and the extent to which other services may act as substitutes for the services in the dominated markets. As will be discussed in a subsequent section, we believe this detailed analysis is the responsibility of the regulatory agency.

Telecommunications

equipment market

The telecommunications equipment market involves electronic and electromechanical devices used to originate, transmit, switch, and terminate messages. We divided this market into three submarkets--central office switching equipment, transmission equipment, and terminal or customer premises equipment. Major providers of a broad line of telecommunications equipment include Western Electric, the GTE subsidiaries of Automatic Electric Company and Lenkurt Electric Co., Stromberg Carlson, Inc., and the International Telephone and Telegraph Co.

Analysis of this market and its relevant submarkets is hampered by a lack of comprehensive data. For example, conclusions which other organizations, in particular FCC, have reached regarding the terminal equipment submarket have been largely based on less than complete evidence.

Of the three submarkets the one which has received the most attention has been the terminal equipment submarket. As a result of Commission decisions directed at removing tariff provisions that restricted noncarrier provided terminal equipment from being attached to the telephone network, this submarket has been subject to an increasing amount of competition as new and innovative types of equipment have been introduced into the marketplace. Terminal equipment manufacturers are not subject to economic regulation by . FCC, and therefore, are not required to file reports with the Commisssion as are common carriers. Their equipment, however, must be registered with FCC. FCC statistics, compiled during its registration program, indicate that over 600 firms are manufacturing a wide range of terminal equipment.

Data developed by the Office of Technology Assessment as part of its study of Telecommunication Technology and Public Policy indicates that various types of terminal equipment are

subject to different levels of competition. 1/ For example, the manufacturers captive to the telephone operating companies dominate the key telephone and dial in handset telephone sectors. On the other hand, new market entrants have made significant gains at the expense of the captive manufacturers in certain other sectors like private branch exchange, 2/ although the captive manufacturers still have over 50 percent of this sector. In other sectors, like decorator telephone sets and facsimile machines, the new entrants and manufacturers not captive to the telephone companies have the major share.

Because of the lack of reliable data on the telecommuncations equipment market, we have not drawn any conclusions regarding the competitiveness of the market's structure. We note that FCC has decided to relax price/earnings regulation for AT&T's equipment offerings while still subjecting them to regulation under a separate subsidiary approach. This approach is discussed in chapter 6.

WILL THE COMMON CARRIER INDUSTRY
BECOME WORKABLY COMPETITIVE?

Our analysis of the structure of the telecommunications service market, indicates that a competitive market does not now exist. The status of the equipment market is less clear. Both markets are experiencing the impact of rapid technological changes which has reduced economies of scale and expanded markets beyond the traditional telephone and telegraph services and the black dial telephone. These changes strongly suggest that a competitive market will continue to develop and raise the question of when particular markets and submarkets will be competitive enough that regulation of dominant carriers can be modified or relaxed.

We have attempted to develop some prognosis for future competitive developments through talks with officials at FCC, the Office of Technology Assessment, and the Department of Commerce's National Telecommunications and Information Administration, consultants in the telecommunications industry, and officials of the

1/The data developed by the Office of Technology Assessment is based on shipments of terminal equipment units rather than revenues, as was used in our services market discussion. This data is divided into four broad supplier categories--manufacturers captive to telephone operating companies; long-term U.S. manufacturers not associated with a telephone operating company; new U.S. based terminal equipment entrants; and firms importing foreign equipment for sale in the United States.

2/Private branch exchanges are terminal equipment which allow for communications within a particular location. A typical exchange would be a switchboard used by a business or apartment building for handling communications on the premises.

established and other common carriers. These talks focused primarily on the services market. We discussed barriers to entry, expected merger activity, and potential new entrants. On balance, none of these factors will preclude the development of a competitive environment although they do suggest that competitive developments will not be rapid and the number of firms in the industry will probably never be large.

Barriers to entry

Apart from the legal restriction on entry, which FCC and the courts have relaxed for interstate communications, a major barrier to entry is the amount of capital required to construct a viable communications network. This barrier was cited by several officials we contacted. Its significance can be seen in the range of annual expenditures of the existing carriers. For example, AT&T spent about $11.3 billion in 1980 to maintain and improve its network. New entrants like MCI and Satellite Business Systems have reportedly spent about $350 million and $500 million, respectively, for their facilities. These high costs of entry have led many observers to suggest that the number of carriers who own their own facilities would never be very large and that it would take a considerable period of time before effective competition develops.

One former FCC official expressed the view that the amount of capital needed to get started might be reduced if carriers constructed regional rather than nationwide networks. This would increase the number of entrants owning their facilities. State Public Utility Commissions regulate entry into their States; therefore, to build a regional network, the carriers must overcome the legal entry barriers provided by State regulation. Further, other officials we spoke with expressed doubt regarding the viability of regional carriers because they felt only a nationwide network could attract sufficient customers to meet the costs of constructing a network. Concern was also expressed by several officials that increasing crowding of frequency spectrum for both terrestrial microwave and satellite facilities might limit the number of carriers owning their facilities.

The required amount of captial to provide resale (including value-added) services was generally viewed as considerably lower. Rapid growth and vigorous competition is anticipated among value-added carriers in the enhanced services submarket. The outlook for pure resale carriers--those carriers not adding value to communications services they offer but just taking advantage of discounts offered by carriers who own their facilities--was more guarded. Many observers felt resale carriers' dependence primarily on other carriers' facilities and pricing strategies for existence would make them something of a transitory presence in the market.