Development of the Telecommunications Industry

1
Development of the Telecommunications Industry
2
Early History

• initial telephone service
• Alexander Graham Bell

3
In 1878, telephone exchanges established in major
cities

• provided lines, switches and phones - isolated
  from other cities
• no service in smaller towns or rural areas.

4
ATT Parent Co.

• held patent rights
• franchised individual cities.

5
LD lines

• Started slowly
• expensive

6
1893-1894, patents ran out

• Local competitors came in
• Bell System network refused to connect
  competitors
• Competitors threatened antitrust action
• Kingsbury Commitment in 1913. Agreed to
  interconnect.
• Bell Companies and Independents exchanged
  territories

7
Bell vs. Independents

• By 1982, 25 Bell Cos. 81 lines, 41 of
  geography 1432 independent, 19 lines, 59
  geography
• Regulated monopoly at the local level with
  unregulated monopoly at interstate level until
  1934 Communications Act.

8
The Communications Act of 1934

• Established FCC to regulate communications see
  overhead

9
Common Carrier provisions of the Act (partial
list)

• Obligation to serve all who request service.
• Right of commission to require interconnection
  with other carriers
• Rate to be just and reasonable
• Unreasonable discrimination prohibited.

10
Common Carrier Provisions (contd)

• Publicly available tariffs for all communications
  charges must be filed and followed in a
  non-discriminatory manner.

11
Structure of FCC

• 7 members appointed by President for 7 years. No
  more than 4 of the seven from one political
  party.
• In 1983, reduced to 5 for 5 years. President
  designates chairman.

12
Separation of local and LD costs

• Suppose the local loop has the following cost and
  demand characteristics

Avg Cost Per Line Per Month Avg Usage Per Month (Min.)
Only Local Calls 20 400
Only LD Calls 16 100
Both 24 500
13
What Share does each service pay?

• There are economies of scope. Producing them
  separately costs 24 which is much less than 36.
• How to you allocate costs between services?
• Each should at least cover its incremental cost.
  Local (24-168) LD (24-204).

14
Smith v. Illinois Bell

• Supreme Court ruled that local telephone network
  was jointly used for local and LD and some of the
  cost of local must be allocated to LD.
• This was the legal foundation for separations.

15
Other Landmarks

• 1951, Charleston Plan
• 1970, Ozark Plan

16
Local vs. Long Distance

• Settlements -dividing up the revenues was not fee
  for service but based on specified portion of
  costs.
• The effective price per minute was higher for
  high-cost independents and lower for low-cost
  urban cos.
• LD rates still based on geographically-averaged
  rates.

17
1956 Consent Decree

• Western Electric subsidiary of the then ATT-Bell
  System provided telephone equipment to local
  telephone cos.
• Incentive to overcharge local cos. for equipment
  and make excess profits in the unregulated
  Western Electric.

18
1956 Consent Decree (contd)

• Gov't wanted divestiture of Western Electric
• ATT won.