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Companies are jockeying for the best position in the Super Bowl of telecommunications.
The signing of the new Telecommunications Act of 1996 by President Clinton signals the beginning of a new era in competition that will by any measure dwarf the changes that the industry has seen to date. The AT&T Consent Decree, which has been the cornerstone of regulatory policy since 1984, will soon be overshadowed by the new Telecommunications Act of 1996. In virtually all respects, and over a relatively short period of time, the Consent Decree will be replaced by the new legislation. The Super Bowl of telecommunications competition is about to begin.
It would be difficult to condense all of the requirements of the new law into one article. However, it is possible to examine some of the major rule changes that will shape this new and exciting game of the future.
As a matter of reference there are seven sections to the new law. They are:
This article will focus on Title I, the Telecommunications Services portion of the law. We'll look at the segments of the industry who are in the best position to capitalize on the changes, and we'll also examine other sections of the law that relate to telecommunications.
Title I of the new law is 47 pages in length and describes the general obligations of all telecommunications carriers with regard to interconnecting with one another. It further imposes certain rules on carriers regarding the installation of network features, functions and capabilities related to interconnection and access by persons with disabilities.
LATA boundaries will erode within 36 months, leaving customers and telecommunications companies free to cross the formerly guarded borders at will. Handoffs from one company to another will be driven by market strategy and not by legal mandate.
In the new paradigm, long distance companies will be offering local service. Local telephone companies will be offering long distance service. Cable TV companies will be permitted to enter the telecommunications business, and telecommunications companies will be permitted to enter the video business.
Interconnection rules require local exchange carriers (LECs) to engage in the resale of local service and to provide unbundled access to network elements. LECs are also required to provide number portability, dialing parity, access to rights of way, collocation and reciprocal compensation.
This means that switching, transmission and local loop elements must be offered separately to the competitors of LECs. It also means that these competitors can purchase local service at wholesale rates and resell the local service at retail rates in competition with LECs.
LECs must provide competitors access to directory assistance databases, directory listings and operator services. A customer that elects to leave the LEC and accept service from a competitor will be able to retain his telephone number. This concept is known as number portability. Customers of the LEC competitors will not have to dial longer access codes to reach the competitors' networks than they do to reach the LECs' networks. This is known as dialing parity. The law imposes the requirement on LECs to establish reciprocal compensation arrangements for the transport and termination of telecommunications. In short, it opens the monopoly to competition by unbundling services, providing comparable treatment to competitors and by establishing mutual compensation for the handling of each other's traffic.
The law also imposes obligations on the incumbent LECs. (It should be noted that incumbent LECs are distinguished from other entities in the law. For example, they're separate from the competitive local exchange carriers, or CLECs.) Incumbent LECs are defined as those who are in the LEC business on the date of enactment of the law and who are members of the exchange carrier association. Specifically, these LECs must negotiate in good faith, provide interconnection that is equal in quality to what they provide themselves, and do so at rates, and on terms and conditions that are just, reasonable and non-discriminatory.
Title I also prescribes procedures for negotiation, arbitration and approval of agreements. In this regard, the state regulatory commissions can be called upon for mediation or to act as arbitrators in disputes among the parties. All negotiated agreements must be submitted to the appropriate state regulatory commission for approval. If the litigious nature of the industry prevails, as it has in the recent past, regulatory commissions could literally be swamped with competitive issues requiring resolution and the process of open market entry could be delayed.
Because of the new law, the Federal Communications Commission (FCC) is undertaking as many as 80 proceedings, some of which are transpiring concurrently. Within 15 months of enactment, the FCC is to complete a proceeding to identify and remove market entry barriers to entrepreneurs and other small businesses for the provision and ownership of telecommunications services and information services. The FCC will determine how the "I's" will be dotted and the "T's" will be crossed in the implementation of the Telecom Act of 1996. Therefore, early musings about the law are subject to the specific rules adopted by the FCC.
This subdivision of the law describes the conditions under which Bell operating companies may enter the interLATA (i.e. long distance) business through separate affiliates. Several types of interLATA services are discussed. They are:
The state regulatory commission and the Department of Justice will provide input to the FCC regarding certification that the checklist has been met. The FCC is required to give "substantial weight" to the recommendations of the Department of Justice.
The law also prohibits a BOC from joint marketing local and long distance services until it has been authorized to provide interLATA service, or for 36 months from the date of enactment of the law (whichever is earlier). A reciprocal prohibition exists for long distance carriers; it prevents the carriers from joint marketing local and long distance until a BOC in the specific region has been authorized to offer interLATA services or for 36 months (whichever is earlier). However, if a BOC affiliate markets or sells local exchange services, the same local exchange services must be made available to the competitors of the Bell affiliate so the competitor may sell them as well.
A BOC may engage in manufacturing as soon as it receives approval to enter the in-region interLATA business. Except for grandfathered arrangements, no BOC may engage in the business of alarm monitoring services within five years of enactment of the law.
Payphone service provided by Bell operating companies is subject to new separations and non-discrimination rules. Since this subject is covered in detail in a companion article, it will not be addressed here except in passing. It is interesting to note that all payphone providers will now have to pay similar rates and charges and will be subject to similar access compensation for the first time in the history of the competitive industry. This should be regarded as good news for the competitive payphone providers. It should also be viewed as a positive step for the payphone divisions of the LECs and BOCs, since they will be able to measure more closely their profitability and return on investment. The new payphone rules are due from the FCC by Nov. 8, 1996.
The law provides that telephone companies can provide video services. A new video category is established in the law called "Open Video Systems." Operators of these systems must meet certain non- discriminatory certification requirements, but can reserve up to one-third of the capacity of the cable systems for one programmer under certain conditions. Analysts find this attractive since Open Video Systems providers could attract an "anchor programmer," similar to an "anchor store" in a shopping center, to enhance the attractiveness of the system. The law frees CATV and telecommunications companies to compete for the delivery of telecommunications and video services to consumers.
Mobile communications providers are no longer prohibited from offering long distance service with cellular service. This also applies to BOC-owned cellular systems. In recent days, the Bell Atlantic/NYNEX mobile joint venture has announced its intention to resell the long distance services of LCI International. The mobile companies of Ameritech and Southwestern Bell have announced their intention to resell the long distance services of Worldcom.
There are many other sections of the law that address broadcast services, obscenity and violence, regulatory reform, and the provision of telecommunications by electric utilities. These subjects are beyond the scope of this article.
In the novel environment created by the Telecommunications Act of 1996, distinctions among customers and competitors are expected to decrease over time. Full service providers of voice, data and video services are expected to emerge. A world of allocated business will give way to a world of grind-it-out market share conquests. This will not be an industry for the faint of heart or the short of breath.
The telecommunications market is likely to become fiercely competitive with the opportunity for small companies to rise to power and large companies to fail miserably. The industry winners and losers will be determined in much the same way that other Super Bowls are won or lost. Winners are most often characterized by highly capable and experienced personnel, formulation of an exceptional strategy, intense preparation and flawless execution. Losers can be characterized by any one or more of the following attributes: inferior personnel, lack of experience, a flawed strategy, inadequate preparation or mistakes in execution.
There are at least five types of entities that will be vying for the title of "market share winner." They are local exchange carriers (LECs), interexchange carriers (IXCs), cable TV companies (CATVs), competitive access providers (CAPs) and competitive local exchange carriers (CLECs). It is probable that there will be consolidation among these entities.
At this early point in the newly competitive season, it is perceived that the LECs have an infrastructure advantage. Reportedly two-thirds of all long distance revenues are generated from calls that begin and end within a LEC's own territory. The last mile to the customer is also owned by the LEC. It should be relatively easier, technically, for the LECs to enter what has been the $70 billion IXC business than it is for the IXCs to enter what has been the $90 billion LEC business.
CATV providers pass 90 million homes. The ability of CATV technologies, i.e. coaxial cable and hybrid coax/fiber systems, to provide bandwidth for the introduction of new and fast-growing services like the Internet appears to be a significant advantage over the LECs' twisted pair embedded plant. Once the remaining technology issues are solved, the CATV providers can become a serious threat to LECs. These issues involve turning one-way cable systems into two-way interactive systems. Within the next 12 to 24 months, a combination of CATV companies and IXCs could seriously erode any infrastructure imbalance or even more favorably tilt the table toward the IXCs.
Wireless technologies provide the IXCs and CATV companies another supplemental infrastructure opportunity to bypass the LECs and introduce facilities-based competition. Included in wireless technologies are not only cellular, Personal Communications Services (PCS) and Enhanced Specialized Mobile Radio (ESMR), but also satellite communications and other voice, data and video distribution technologies.
The IXCs are the experienced players in this competitive game. They are, for the most part, lean and mean organizations who have been slugging it out in the competitive arena for more than a decade. Some are becoming even leaner and more focused through downsizing and spinoffs as this article is being written.
IXCs have learned the lessons of competitive physics - every action brings with it an equal and sometimes formidable reaction. IXCs have playbooks that incorporate hundreds of product options for their customers. They are adept at formulating offensive and defensive strategies. They have also become adept at execution. AT&T's True Rewards, MCI's Friends and Family and Sprint Sense are examples of highly successful programs IXCs have implemented. 1-800-COLLECT, and 1-0-A-T-T have also been highly successful marketing coups. So the big question is: What will be the winning combination - advantage infrastructure or advantage marketing agility?
The complexity of the Telecommunications Act of 1996 can be summed up in one word - change. The new law will provide the impetus for dramatic deregulation of historic proportions in the U.S. telecommunications industry. Ironically, regulators are likely to play a larger role in the next few years as the industry moves deliberately toward an open market.
Caution is recommended in evaluating particular aspects of the law since the FCC must still determine the specific rules under which the law will be implemented. The dexterity of companies to adapt, to build a competitive infrastructure, to develop an appropriate cost structure, to be able to make swift changes in direction, and to differentiate themselves from their competitors will become more crucial as intraLATA and interLATA barriers erode and as CATV providers, LECs and IXCs begin to offer a similar array of services.
The kickoff has occurred and the fury of competition will require that executives make timely decisions without the luxury of having all the information they may deem necessary. Managerial judgments will become weightier. New frontiers will undoubtedly open. Every company will have to reassess the assumptions on which its business plans have been formulated.
The 21st century is likely to reflect a new world order in telecommunications resulting from the bold action of the United States in opening the huge telecommunications market to competition. It promises to be an exciting period of novel services, augmented opportunities and striking risks. It's a great time to be in the telecommunications industry!
John Gammino is a telecommunications consultant and market analyst with John Richard Associates Inc. in Hazlet, NJ. You can visit JRA's home page at http://users.aol.com/JRAConsult.