As the two-year anniversary of the divestiture of American Telephone & Telegraph Co. rapidly approaches, Charles L. Brown, chairman of the dismembered telecommunications giant, is fonder than ever of pointing out that the break-up ”wasn`t our idea.”
Instead of working itself out, the turmoil in the telecommunications industry seems to be reaching a fever pitch. Brown`s references to the ”total disruption of the entire industry” are clearly more than sour grapes.
Long-distance rates are going down, while access costs for many of AT&T`s competitors are going up, creating a confusing shakeout as carriers disappear or merge.
At the same time, ”equal access” balloting to allow customers to choose the carrier they will get when they dial ”1” is about as popular with the public as a tax increase. Within the industry, there has been a hue and cry against ”unequal access.”
Even the Federal Communications Commission seems muddled by the effort to somehow balance its steady march toward deregulation with the shaky state of emerging competition.
”I still maintain the break-up of AT&T was a mistake,” said Sen. Barry Goldwater (R., Ariz.) at the beginning of Senate subcommittee hearings last week on competition in the long-distance industry.
After a full day of listening to witnesses discuss some of the major problems facing carriers in today`s marketplace, he opened the second day`s hearings by saying: ”I don`t see any solutions. This situation is so complex that no experts can tell us the ground rules, because they change every six months.” He added: ”The answer isn`t going to be found in legislation. I see no need for any.”
The solutions being suggested by some of the leading ”other common carriers” are pretty straightforward. They want the Senate to pressure the FCC to halt any efforts to deregulate AT&T during the ”transition period” in which its competitors are struggling to overcome what they consider the lingering advantages of AT&T`s former monopoly.
They also want the FCC to reconsider the equality of equal-access connections, claiming that they still suffer costly technical and marketing disadvantages and should be able to maintain the 55 percent discount on the access fees they pay to local telephone companies. Currently, as soon as an area is switched over to equal-access connections, other carriers lose their discount and must pay the same rates as AT&T has paid all along. These access charges account for about half of a long-distance carrier`s costs.
In addition, AT&T`s competitors have grown increasingly nervous about the FCC`s stated intention to find a way to allow ”flexible pricing” for AT&T, which it says would allow AT&T to respond to the marketplace.
It is feared that such a policy would permit AT&T to set prices without presenting cost support. That would allow the company to sell packages of services below cost in highly competitive areas; they would be subsidized by profits from other, less-competitive areas.
Theodore Brophy, chairman of GTE Corp., which owns Sprint, charged that AT&T`s recently instituted ”Reach Out America” program, which he says offers below-cost prices, was inadequately investigated by the FCC.
The other common carriers are also disturbed by the FCC`s plan to review its Computer Inquiry II regulations, which require that AT&T keep its long-distance business separate from its computer and equipment operations. There is a general feeling in the industry that the recent alliance between International Business Machines Corp. and MCI Communications Corp. may be all the encouragement the FCC needs to drop that restriction.
”Despite such evidence as the recent alliances and mergers (IBM-MCI, Allnet-Lexitel) and the fact that no other common carrier is currently earning anywhere near its cost of capital, the FCC has convinced itself that vigorus competition already exists in the long-distance marketplace,” Brophy complained.
Sprint, which has been suffering sizable losses during the last year, is the third-largest carrier after AT&T and MCI, yet has only about 3 percent of the long-distance market. He said that if AT&T is allowed more flexible pricing at this stage of what he calls ”the transition era,” Sprint might not survive.
Although in the past MCI has tried to distance itself from its unprofitable fellow competitors who have spearheaded the criticism of the FCC, MCI Chairman William McGowan aligned himself with Brophy at the hearings, in which the two were on a panel with AT&T`s Brown.
”Not only is the FCC tinkering with telecommunications policy without any real understanding for the adverse impacts on full and fair competition, but it has also caught a bad case of `deregulationitis,` ” McGowan said.
McGowan maintained that MCI can survive the deregulation of AT&T but insisted that for many of the smaller long-distance companies, ”It may already be too late.
”None will survive if AT&T is allowed flexible pricing,” he maintained. ”AT&T continues to exert monopoly power over the marketplace, with an overwhelming share of 85 to 90 percent of the long-distance business in the U.S. In practical terms, this means that AT&T continues to dominate this industry to a degree unheard of in other business sectors,” complained McGowan, who has been engaged in antitrust litigation with AT&T for more than a decade.
”This is not a truly competitive business yet. We three here represent about 99 percent of the assets of this industry,” McGowan said. ”Of the 400 companies that were in long distance nine months ago, I can`t find 50 now. Nobody is coming into this business; everybody is going out of it.”
Brown, meanwhile, maintains that AT&T has only 63 percent of the total long-distance market, when intrastate tolls as well as interstate tolls are included.
”Yet we have 100 percent of the market nobody else wants,” he emphasized repeatedly, referring to the low-profit, small-town customers AT&T is required to serve.
”We aren`t asking for deregulation,” he said flatly. ”We are only seeking pricing flexibility.” He went on to point out that if AT&T is unable to compete on equal terms in high-density, high-profit urban areas such as New York and Philadelphia, it will be unable to make enough profits to continue its geographic averaging of prices to keep rates the same in rural areas such as Carthage, Tenn.
”I`m not threatening to raise rates or abandon rural areas,” Brown assured Sen. Albert Gore (D., Tenn.). ”I`m saying that if we don`t get the right to compete in the profitable areas, we may go broke.”
Brown maintains that the only benefit AT&T has enjoyed since divestiture is the shortening of the tariff period to 45 days from 90 when it files for rate changes. ”That`s all,” he said. ”Other than that, we`re operating under the same rules as when we were a monopoly.”
He called the long-distance arena ”a rivalrous marketplace” and characterized his competitors as whiners.
”We aren`t coming to Washington to cry for help in competing against IBM, the dominant computer manufacturer,” he said at a press briefing before the hearings. ”We`re just slugging it out in the marketplace.”
He indicated that even if the FCC fails to remove the restrictions keeping AT&T`s computer and long-distance operations separate, the company won`t ask the FCC to impose the same separation on IBM and MCI.
”That`s not our idea of competition,” he said.
FCC Chairman Mark Fowler testified that the commission`s bias is toward neither AT&T nor the other common carriers but rather the consumer. He reiterated that the FCC continues to view AT&T as the dominant carrier and doesn`t see the commission`s role as propping up individual competitors that might be failing.
”I see no evidence that we`re cutting them off and letting them die,”
he said of the other common carriers. ”Their construction spending alone speaks volumes as to their belief in the competitive nature of this industry. ”We cannot and should not artificially tie down AT&T in ways that aren`t in the public interest,” he added.
”Every time AT&T proposes to lower prices, its competitors argue that AT&T`s actions are predatory. We recognize the need to prevent predatory practices,” he saide them, absent improper pricing.”
