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Telecommunication: Reform changed the industry, now hit by economic slowdown
Sunday, March 25, 2001 By Frank Reeves, Post-Gazette Staff Writer
Last month, telecommunications industry leaders took time to mark a milestone: the fifth anniversary of the passage of the federal Telecommunications Reform Act.
The act was supposed to usher in a new era of competition in an industry traditionally dominated by government-regulated monopolies.
Indeed, to its supporters, the act was a major step in an industrywide transformation that had begun a dozen years before when the old AT&T monopoly was broken up into eight pieces: seven "baby Bells," which provided local phone service, and a diminished AT&T, which provided long-distance service.
While the act "is not yet an unqualified success," Matthew Flanigan, president of the Telecommunications Industry Association, described the law "as a monumental breakthrough."
"Clearly, some of the act's promise has been realized as competitive upstarts and incumbent service providers race to install the latest technology for bringing advanced communications services to American businesses and consumers," said Flanigan, whose trade association represents many of the telecommunications equipment manufacturers who have benefited from deregulation.
However, C. Michael Armstrong, chairman of AT&T, offered a less upbeat assessment, purporting that the law had failed to deliver on a key promise: to break up local phone monopolies.
Critics point out that five years after the passage of the Telecommunications Reform Act, only 10 percent of consumers have any meaningful choice in local service carriers. They also contend that while long-distance rates and wireless rates have fallen over the past five years, rates for local service have increased.
Armstrong's comments aren't surprising. In Pennsylvania, AT&T and Verizon are waging a tough battle to gain access to each other's principal markets. It mirrors a nationwide struggle in which AT&T and other long-distance carriers are trying to break into local phone service, while Verizon and other local Bell companies are trying to become major providers of long-distance phone service.
Underlying much of this is the determination of telecommunications companies to be in position to provide customers a broad array of services, from local and long-distance phone service to Internet access and cable television.
Under the reform act, Verizon must prove it has opened its local market to outside competitors before it can get into the long-distance arena.
AT&T contends that so far Verizon has failed to do this. AT&T has urged the Pennsylvania Public Utility Commission to oppose Verizon's application to the Federal Communications Commission for permission to provide long-distance service. It also has urged state regulators to enforce an order, which they originally handed down in September 1999, that would require Verizon to break up into separate wholesale and retail units -- a condition that should be met before the company could enter the long-distance market.
The retail unit would market phone service to consumers. The wholesale unit would own the phone lines and lease them to Verizon and its rivals at the same price.
AT&T, MCI-WorldCom and others have argued that only structural separation will ensure that Verizon's rivals don't pay more than Verizon would charge itself for access to the phone network.
Verizon has vigorously opposed the proposal. The company argues that the plan would cost $1 billion to implement and possibly lead to the loss of jobs. Verizon also contends that a report prepared by an independent auditor hired by the PUC vindicates its claim that the company has opened its network to competitors.
In 1999, Verizon won permission to provide long-distance service in New York after the company convinced state regulators and the Federal Communications Commission that it had opened up its local phone service to competitors, such as AT&T.
Since then, Verizon has captured about 20 percent of the long-distance market in New York.
On Thursday, the PUC stopped short of ordering Verizon to break up its Pennsylvania operations into separate wholesale and retail companies. Instead, the PUC ruled that Verizon could continue to operate both units as one company. However, the PUC said Verizon's wholesale operations may not treat Verizon's retail unit any differently than any of Verizon's competitors.
In a strongly worded statement, PUC Chairman John Quain, who is expected to leave the commission later this spring, charged that Verizon had "deliberately obstructed the orderly resolution" of the dispute surrounding the possible breakup of Verizon. He also accused the company of pursing a "campaign of misinformation" during the months of hearings and litigation around the issue. Quain asked the PUC staff to investigate to determine whether the PUC should impose penalties against Verizon.
The PUC is expected to decide in June whether Verizon has met the requirements of the Telecommunications Reform Act and should be permitted to enter the state's long-distance market. Although final approval would have to come from the Federal Communications Commission, state approval is considered a critical first step.
Former President Bill Clinton signed the act into law at a time when technological changes were transforming the telecom industry. Indeed, the act, which attempted to remove many of the barriers to competition in telecom services, seemed to anticipate these changes.
In a world where telephone, cable television, video and Internet connections can be sent through a single electronic pipeline, boundaries within the telecommunications industry are eroding.
AT&T, once primarily known as a long-distance phone company, has spent $90 billion to transform itself into a major cable operator in order to provide customers a broad range of services through cable lines. Between January 2000 and early last month, Armstrong said the number of AT&T's cable customers increased from 50,000 to 600,000.
Companies continue to build and upgrade their networks in order to be in a position to provide customers with broadband services, including video, high-speed Internet access, cable television and phone services.
Companies also are pouring millions into developing wireless networks to bypass television cables and telephone lines to provide broadband connections.
Shortly after entering the wireless market in April, Verizon Wireless quickly captured the largest share of the market. AT&T Wireless dropped to third place, behind Cingular Wireless, a joint venture of SBC Communications and Bell South Corp.
Since approval of the reform act in 1996, spending in the United States on telecommunications equipment, software and services has increased 67 percent, from $365 billion to $609 billion in 2000, according to the Telecommunications Industry Association.
Not only are telecommunications companies retooling themselves, but other businesses also are spending millions on computers, printers and improving their networks to take advantage of the Internet revolution.
During the past 20 years, 78 million miles of fiber cable have been laid in the United States -- the bulk of this, about 50 million miles, during the past five years, according to KMI Corp., a Newport, R.I.-based market research firm.
Copper wire and fiber-optic cable are still the mainstays of the telecommunications industry. About 85 percent of the industry's revenue last year was derived from voice and data communication transmitted using wire-line technology. The remaining 15 percent was derived from voice and data transmitted by wireless technologies.
Someday, wireless technologies and even laser beams might make fiber obsolete. But don't expect this any time soon. Engineers are rapidly increasing the amount of data that a single fiber can carry, preserving fiber's status as the premier method for telecom companies to transmit large amounts of data.
By 2005, wireless technology is expected to account for 20 percent of telecom industry revenue, while wire-line technology is expected to account for 80 percent, analysts estimate.
Since Alexander Graham Bell invented the telephone 125 years ago, the telephone has been synonymous with voice communication. But this, too, is changing. This can be most dramatically seen in the cellular phone market.
In 1995 only 4 percent of cellular phone use was for data transmission, while voice transmission accounted for 96 percent. By 2005, about 30 percent of cellular phone use will be for voice transmission, while data transmission will account for 70 percent, according to the Cellular Telecommunications Industry Association.
But for the telecom industry, there are warning signs. Between Sept. 8, 2000, and March 1, the Nasdaq Telecommunications Index fell 50 percent -- mirroring a general slide in the tech-heavy Nasdaq index during this same period.
Slowing economic growth also has hurt the telecommunications equipment industry. Last month, for example, Nortel Networks Corp., the world's leading maker of telecommunications equipment, said it would shrink payrolls through attrition and layoffs by 10,000 jobs. Lucent, a Nortel rival, also announced it was cutting payrolls by 10,000.
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