Telecommunication Act Of 1996 Essay, Research Paper

Telecommunications Act of 1996

In February of 1996, the U.S. Congress enacted the Telecommunications Act of 1996. The Act was one of the most substantial changes in the regulation of any industry in recent history. The Act replaced all current laws, FCC regulations, and the consent degree and subsequent court rulings under which AT&T was broken into the “baby Bells.” It also overruled all existing state laws and prohibited states from introducing new laws. Practically overnight, the telecommunications industry went from a highly regulated and legally restricted monopoly to open competition. Or almost open competition. It has been more than three years since the Act became law, and while we have seen some changes, they have not been as substantial as many analysts, law- makers, and regulators had anticipated. The Act addressed five major areas of telecommunications: 1) Local telephone service, 2) Long distance telephone service, 3) Cable television service, 4) Radio and television broadcasting, 5) Censorship of the internet.

The primary goal of the Act was to promote competition for local telephone services, long distance telephone services, and cable TV services. Inter-exchange carriers (IXC) (such as AT&T, Sprint, and MCI) and cable TV companies (such as TCI and Jones Inter-cable) are permitted to offer local telephone service. The “baby Bells” or Regional Bell Operating Companies (RBOC) (also called Local Exchange Carriers (LEC) such as BellSouth and Ameritech were permitted to offer long distance telephone services and cable TV services. The RBOC were also permitted to manufacture their own equipment and to offer online information services and electronic publishing (but under tight controls until 2000). Incidentally, electric utility companies, another traditionally highly regulated industry, were permitted to enter the local telephone market.

I believe that the Act made the most impact on Local telephone service. Local telephone service had been a regulated monopoly for almost 100 years. Local telephone services are currently controlled by a handful of RBOCs who have not been known for innovation or cost cutting. Under this new Act, local service was now open for competition. Other companies are permitted to build their own local telephone facilities and offer services to customers. However, building entirely new facilities are prohibitively expensive. Under the Act, existing RBOCs would have to offer their telephone services to other companies (e.g., AT&T) at wholesale prices. These other companies will then resell the services to consumers at retail prices in competition with the RBOC. The wholesale prices are set by state regulatory agencies and typically are around 20% under the RBOCs current retail prices (but some states have set them as low as 40% under retail).

One of the major concerns of permitting open competition were the very real fear that the profit motive would lead companies to focus on the most profitable markets and avoid the least profitable ones. For example, after deregulation of the airline industry, prices dropped dramatically for large urban centers, but steadily rose for small rural centers. Common sense suggested that the same events would occur in the telephone market. Urban customers would benefit from increased competition while rural customers would see their prices increase sharply to accurately reflect the high cost of providing services in sparsely populated areas. Many of the RBOCs proposed price increases of $10 per month in rural areas.

Therefore, the Act contained a universal service requirement, which mandated RBOCs to provide rural and other high-cost areas with similar types and quality of services and technologies that they provide to other areas and to do so at reasonable rates. RBOCs were also required to provide special, less expensive access to schools, hospitals, and libraries. RBOCs (with the exception of small RBOCs) were required to contribute to a universal service fund, which was used to partially subsidize the RBOCs providing services under the universal service requirements.

One year after the Act was passed the expected competition for local telephone service had not materialized. The RBOCs launched several court challenges and managed to delay any real changes. Several cable TV companies have test marketed local telephone service, but none have committed to providing full scale services; most have quietly terminated plans to enter the market after unsuccessful test-marketing. Similarly, most telephone companies have quietly terminated plans to provide video to their customers.

Most analysts expected the Big Three IXCs (AT&T, MCI, and Sprint) to quickly charge into the local telephone market. Sprint has made small moves also providing cellular telephone services in five urban areas. AT&T has barely begun test-marketing the reselling of RBOC services in California — although it claims it will soon begin reselling RBOC services in all 50 states (something it has been claiming since early 1996). Only MCI has begun building its own local telephone network. It has established fiber optic services (SONET) in 18 large urban centers and is actively trying to lure the largest corporate customers away from the local RBOCs.

There has been active competition in the long distance telephone market for many years, but RBOCs have been specifically prohibited from providing long distance services. The Act permitted the RBOCs to provide long distance outside the regions in which they provide local telephone services. However, they are prohibited from providing long distance services inside their region until at one viable competitor exists for local telephone services.

To date, several RBOCs (e.g., GTE and SNET) have moved aggressively into the long distance market. They have focused exclusively on out-of-region long distance by buying long distance services from IXCs and reselling them, usually to large corporate accounts. However, none have moved into the in-region long distance market because none face real local competition. All of the RBOCs claim to have plans to offer in-region long distance, but because they have been aggressively fighting court battles to keep competitors out of their local telephone markets.

While more competition in the long distance markets has occurred in recent years, it is still an open question whether most people will see competition in the long telephone market. Many analysts believe that local competition will focus on business customers, not the more common household customer. Even with competition reaching households, most analysts believe it will be another few years for all customers to have a viable option for local telephone service.

On February 15, 1997, 68 counties signed an historic agreement to deregulate or at least lessen regulation in their telecommunications markets. The countries all agreed to permit foreign firms to compete in their internal telephone markets. Major U.S. firms (e.g., AT&T, MCI, BellSouth) are now permitted to offer telephone service in most of the industrialized and emerging nations in North America, South America, Europe, and Asia. Likewise, overseas telecommunications giants (e.g., British Telecom) are permitted to enter the U.S. market. This increased competition in the U.S., but the greatest effect is likely to be felt in emerging countries.

Cable television and television broadcasting also met changes. Deregulation of the cable industry meant big changes. Rate regulation requirements were removed this year also allowing cable companies to offer long distance services. The act also mandated the use of the “V-chip”. A computer chip installed in new TVs to censor certain programs from children. The TV companies were allowed to reach 35 percent of the nation’s televisions (previously 25 percent) giving them a broader audience. The terms for the licenses to broadcast were lengthened from 5 to 8 years, and were given 6MHz of digital bandwidth, which equals to an additional channel.

The Telecommunications Act that sought Internet censorship was struck down by the Supreme Court in June 1996. It was ruled that Internet censorship was unconstitutional. The ACLU and many civil rights activists were firmly against this policy. As Thomas Jefferson put it “ Congress shall make no law respecting an establishment, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances”.

All in all, the Telecommunications Act of 1996 brought tremendous changes into the telecommunications field. Such regulatory acts are needed to insure consumer rights in this “Corporate” world we live in. The gift of choice, the freedom to revel in our options is one of the foundations of how this great country came to be. We need to cherish that fact…for eternity.

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