To change with the times, they must learn to fight

When U.S. District Court Judge Harold Greene signed the consent decree breaking up the Bell Telephone System, it was with the express intention of improving phone service by fostering competition. He forbade the Regional Bell Operating Companies (RBOCs) from becoming computer service providers so that they would be evenhanded in their role as common carriers for the information services.

A RASH OF RESTRICTIONS

Ever since, the Bells have chafed under his restrictions. They have suggested that they would install high-bandwidth fibers to homes and offices much sooner if they had some financial incentives, such as the right to sell digital information services on those fibers, or even to invest in information providers’ stock. This strikes some observers as a disingenuous bid for monopoly power (see Cathleen Black’s comments in Vol. 1, No. 7, p. 9), while others see it as simply leveling the playing fields between the telcos and the unregulated cable companies that face no restrictions on providing the content that they distribute.

The U.S. Federal Communications Commission — as well as the higher courts — have sided with the telcos, and it now appears certain that they will be permitted to provide information services. Even so, Digital World speakers and panelists at the session “The Telephone Company: Public Network or Information Provider” were far from certain that this will spur the kind of investment required to accelerate significantly the conversion of home and business phone services to high-bandwidth fiber.

No longer a single network. Robert Pepper, chief of the Office of Plans and Policy at the FCC, put the discussion in perspective by stressing the fact that the United States no longer has a single telecommunications network. It has, rather, an interconnected web of nets that includes the local phone exchanges, the interexchange carriers such as Sprint and AT&T, cellular and satellite radio companies, the alternative or “bypass” carriers and the cable companies. Each of these services forms part of a larger whole, and each can be evaluated in terms of ubiquity, bandwidth and cost.

True ubiquity. The various phone companies are truly ubiquitous. Not only do they serve every business and home, but they are highly reliable; outages are rare and usually involve some physical catastrophe to the lines. But when it comes to bandwidth, the current phone system falls short. The copper pairs from the pole and running throughout the home are generally limited to 1.5 megabits per second.

That’s a bit more than the data rate coming off a CD-ROM, so it could be used to deliver one channel of highly compressed video. But there are wide variations in capability among the local exchanges; some could begin offering wide-band digital service tomorrow, but most would need expensive upgrades to the switches.

WILL CABLE SUPPLANT TELEPHONE?

The cable companies are the most obvious direct competitor. They can deliver the bandwidth. And being in 90 percent of U.S. homes, they are partially ubiquitous, if there is such a thing. But businesses are a different story; as yet, cable companies have no reason to string wires in business districts.

Reliability is also another story; because coaxial cable needs an amplifier every mile or so to maintain signal strength, each amplifier in the distribution network is a failure waiting to happen. Not to mention that most of the installed amplifiers have another limitation: they are one-way devices. That’s fine for distribution of TV shows, but it is a serious barrier to the person-to-person, custom connection served so well by the phone company.

Even so, cable is positioned to do to the phone companies what it did to broadcast television. Cable operators can make incremental investments in infrastructure as a business decision, independent of regulatory oversight. Cable operators are risk takers, while telco managers have been risk-adverse care takers. But, be careful: unlike the telcos, cable is not required by law to provide network access, and cable operators can be (and often are) information providers as well as carriers.

Pepper is concerned with pushing the telcos to move more rapidly on deployment of fiber to the home. Permitting them to be information providers may help move things along, but it is not a panacea. Remember that only the ex-Bell operating companies were ever prevented from being information providers, and all telcos are already permitted to carry (as opposed to originate) every kind of information. On a purely economic basis, allowing the phone companies to replace perfectly good copper wire with fiber (and pass the expense on to their customers) would help even more. Only the state regulatory commissions can do this.

What happens in the end will depend both upon what government bodies (especially Congress and the various state regulatory agencies) do, and what the phone companies stir themselves to do. We may, in the end, continue to evolve a diverse (and increasingly competitive) web of interconnected telecommunications services and providers.

STRUGGLING WITH A COMPETITIVE ENVIRONMENT

Pepper’s view of the challenges facing the phone companies was reinforced by Ken Thomson, a 20-year Bell veteran (both pre- and post-breakup). He described the struggle that phone companies are going through as they try to fit into this new, competitive environment.

In the past, Ma Bell provided voice service to horizontal markets in which they held monopoly franchises. The advent of new data and video services has fragmented the market into many specialized vertical slices. In many of these markets, the Baby Bells face serious competition, yet they themselves are constrained by federal regulation — by Congress, the FCC and Judge Greene — and 50 state public utility commissions.

Repricing as business strategy. Consider these facts: A typical RBOC’s revenue stream includes 40 percent from local services, 20 percent from connections to long-distance carriers and 20 percent from “enhanced,” phone-related services. It can expect to see its main product, network usage, grow by 1 to 3 percent per year, yet as a publicly held corporation it needs annual profit growth of 6 to 8 percent.

The first conclusion you might draw, then, is that repricing is going to be an RBOC’s primary business strategy. Even the smallest RBOC has at least 10 million customers; additional revenue of even 50 cents per month from every home would be most interesting. By contrast, no conceivable information service is likely to generate — in the short-to-medium term at least — the kind of revenue that will have real impact on an RBOC’s bottom line. This is especially true if you remember that the RBOCs are, after all, regional companies. None has access to a nationwide market. Yet, if the phone companies are going to get the revenue growth they need, they will have to move beyond their current services.

Thomson believes that the demand for high-band-width services is there. The biggest problem, he believes, is conservative phone company management.

Panelists Stephen Case, president of the Vienna, VA-based America Online information service, Harry Morris, a scientist for Cambridge, MA-based Thinking Machines’ Wide Area Information Server (WAIS) Project, and David Knight, associate vice president of marketing and sales of Isocor, a start-up data communications software developer and manufacturer in Brentwood, CA, then joined the fray. Their consensus was that, for perhaps the next five years, the phone companies will offer high reliability and a flexible point-to-point switching network, while the cable companies will deliver very high bandwidth, albeit just one way and with considerably lower reliability. However, if you look forward 10 years, the phone companies will have added high-bandwidth service, while the cable companies will develop switching networks of their own.

In the more immediate future, the panel also noted that a lack of common interface standards among the regional phone companies had been the last obstacle to universal ISDN service. Recently, though, the regional phone companies settled their differences and finalized a standard. As a result, we can expect to see ISDN available in every city east of the Mississippi within a year and a half, at a cost roughly 50 percent greater than the current basic flat rate for analog voice lines. This will not provide cable-grade video to the home, but it should open up the market for a wide range of high data-rate applications.

Peter Dyson, Jonathan Seybold

STRENGTHS AND WEAKNESSES OF THE PHONE COMPANY
(Courtesy of 20-year Bell veteran Ken Thomson)

STRENGTHS
• Customer relationships are strong
• More than 10 million customers/region
• Operate 24 hours/day and 365 days/year
• Billing systems are reasonably accurate
• Financial strength
• Skilled and loyal employees

WEAKNESSES
• Inbred management
• Lack of strategic thinking
• Regulatory mindset
• Entrepreneurship is discouraged
• Lack of market savvy
• Turf orientation
• MFJ (Judge Greene’s modified final judgment)
• restrictions