CHAPTER 2 THE DEVELOPMENT OF COMPETITION IN DOMESTIC COMMON CARRIER TELECOMMUNICATIONS Domestic common carrier telecommunications is in the midst of an evolution--from a highly monopolized structure to a competitive structure. Technology has been the driving force behind this change, reducing the barriers to entry into the industry and creating market opportunities for a variety of firms. FCC and the courts have reacted to the impact of technological change by removing regulatory restrictions on entry and, as a result, numerous firms have sought to enter the industry. Despite these changes the structure of the industry remains highly concentrated and dominated by one firm. Having established a policy in favor of competition, FCC must be in a position to monitor competitive development so that regulation may be relaxed in markets where workable competition has been established and maintained in markets where monopoly conditions still exist. FCC currently has no ongoing analysis of the state of competition. We believe FCC needs to establish such an industry analysis function, and use information this function develops in its regulatory decisionmaking. If the Congress wishes to endorse the trend toward competition it needs to amend title I of the Communications Act to direct FCC to rely on competition to the maximum extent possible to achieve the overall goals of the act. To assist in deregulating nondominant carriers, the Congress needs to give FCC authority to relax title II regulation of carriers when it finds it in the public interest. THE DOMESTIC COMMON CARRIER The largest, and most prominent, firm in the common carrier industry is AT&T or the Bell System. AT&T is defined as the parent company, which includes AT&T Long Lines Department (provider of interstate long-distance services); its principal domestic telephone operating companies; the Western Electric Company (the system's manufacturing arm); and Bell Telephone Laboratories (the system's research and development arm). AT&T is both a holding and an operating company. It owns 100 percent of Western Electric's stock and 50 percent of Bell Laboratories' stock (Western Electric owns the other 50 percent). In addition, AT&T owns controlling interest in 23 of its 25 operating companies and minority interest in 2 others. AT&T is the largest nonfinancial corporation in the world. AT&T's operating revenues in 1979 were over $46 billion and its gross plant totaled almost $124 billion. 1/ AT&T provides 85 percent of the Nation's local exchange service. 2/ It also provides 81 percent of the long-distance interexchange service-Message Toll Telephone Service (MTS) and Wide Area Telephone Service (WATS). 3/ In addition, AT&T is engaged in virtually all other aspects of the common carrier telecommunications industry. For example, it is the major private line voice and data services supplier 4/ and provides the bulk of the facilities used in transmitting radio and television programs. The so-called independent telephone companies provide most of the remainder of the Nation's telephone service. There are about 1,500 small telephone companies many of which are cooperative and municipal systems. The exception to this are the few mediumsized systems which are the subsidiaries of five independent holding companies. Table I compares these firms to AT&T on the basis of revenues and telephones served. General Telephone and Electronics Corporation (GTE) is by far the largest of the major independents. Like AT&T it operates local exchanges, provides a variety of interstate services, and manufactures communications equipment. Overall, the independent telephone companies provide about 19 percent of domestic telephone service, while serving about one-half the U.S. land area. 1/1979 data is used in this section for the purpose of consistency since more recent data was not available in all cases. 2/Local exchange service provides users with the ability to originate and receive calls within a defined local calling area, and to access the long-distance interexchange services network. 3/MTS/WATS is long-distance telephone service. It is provided on a switched basis which means a user can reach potentially any telephone subscriber in the United States. MTS/WATS is used by both residential and business customers, and it is the largest form of interexchange telecommunications service. 4/Private line telecommunications services are provided between or among two or more points over facilities dedicated to a particular customer's use. Various types of services are available on a private line basis, including voice, data, facsimile and audio/video programing transmission. The demand for private line services consists entirely of business traffic. The primary established carrier providing domestic telegraph communications services is the Western Union Telegraph Company. Western Union, until January 1979, provided public message telegram service as a de jure monopoly; however, FCC has relaxed the legal barrier to entry into this service. In addition, Western Union has virtually no domestic competition in the area of switched public record telex/TWX services. 1/ Western Union 1/Telex/TWX is a service where written messages are originated and terminated directly at a customer's premises in teletypewriter machines provided as part of the service. also provides some private line and other services which compete with similar services by other carriers. Western Union's operating revenues in 1979 were $636 million, and its gross plant totaled $2 billion. The most recent additions to the common carrier industry are the so-called other common carriers (OCCs). These carriers have developed primarily in response to FCC and court decisions allowing entry into the common carrier industry discussed in Chapter 1. The OCCs are usually grouped into four categories--Specialized Common Carriers, Domestic Satellite Carriers, Resale (including value added) Carriers, and Miscellaneous Common Carriers. Specialized Common Carriers provide terrestrial point-topoint private line voice and data communications primarily via their own intercity microwave transmission facilities. The connection between the user's premises and the carrier's network is usually leased from the local telephone company. Most of these carriers have also recently expanded their offerings to include public switched services--in particular MTS/WATS equivalents. There are six specialized carriers, and their operating revenues for 1979 totaled about $247 million. MCI Telecommunications Corporation and Southern Pacific Communications Co. are among the largest specialized carriers. The Domestic Satellite Carriers offer essentially the same services as the specialized carriers but they use satellites instead of microwave for transmission. Because of the costliness of developing and launching satellites, initial costs are higher than those for a microwave system; however, satellite transmission costs are insensitive to distance, generally giving satellite carriers a cost advantage over long distances. There are three satellite carriers operating--RCA American Communications Inc., Western Union and American Satellite Corporation. The Resale Carriers lease circuits from other carriers, primarily AT&T, and use these circuits to provide service to the final user. Those resale carriers which add specialized services to existing services are more specifically referred to as valueadded carriers. Services which they offer might include specialized data processing capabilities which permit different computer terminals to communicate with one another. The major value added carriers are GTE-Telenet; Tymnet, Inc.; and Graphnet Systems Inc. Included among the pure Resale Carriers are those entities that lease satellite transmission capacity from the underlying satellite carriers and resell the transmission of television signals to cable television networks. Because they do not construct facilities networks, investment costs and construction delays for Resale Carriers are less than for the Specialized or Domestic Satellite Carriers thus tending to lower the barriers to entry in this industry group. The 48 Miscellaneous Common Carriers, like the Specialized Common Carriers, own their own microwave relay facilities. Their |