Competition versus regulation: "mediating between right and right" in the wireless and wireline telephone industries.

• Author: Arden, Benjamin Douglas

1. INTRODUCTION II. THE RISE AND FALL OF AT&T THROUGH GOVERNMENT REGULATION A. The Growth of AT&T in the Telecommunications Industry as a "Natural Monopoly" B. The Beginning of the End: The Breakup of AT&T C. Post-Divestiture Developments in the Long-Distance Market III. COMPETITION, DEREGULATION, AND THE WIRELESS MARKET A. The Development of the Regulatory Scheme in the Wireless Phone Industry B. Wireless Number Portability: The Last Piece of the Puzzle. 1. The Seven-Year Struggle over the Implementation of Number Portability 2. Possible Effects of WLNP IV. WIRELINE REGULATION V. WIRELESS COMPETITION A. The Methods of Control: A Brief Overview of the Regulatory' Approaches Taken in the Wireless and Wireline Industries B. Different, but Why? An Analysis of the Regulatory Approaches Taken in the Wireless and Wireline Industries. 1. Policy Goals behind the Development of the Wireline Regulatory Framework 2. A Shift in Focus: A Different Scheme Emerges 3. Regulation Sets the Stage for Competition V. THE NEW ROLE OF THE FCC VI. CONCLUSION I. INTRODUCTION

   In November 2003, wireless telephone providers in the 100 largest Metropolitan Statistical Areas ("MSAs") began allowing customers to transfer, or "port," their telephone numbers to different companies when switching providers. Though wireline telephone providers began offering number portability in 1998, the new wireless portability has met with much fanfare, as many believed that the last barrier to wireless phone competition had finally been lifted. (1)

   Wireless local number portability ("WLNP") is one of many provisions stemming from the Telecommunications Act of 1996 ("Telecommunications Act"), (2) a bill that by its own description was designed to "provide for a pro-competitive, de-regulatory national policy framework ... by opening all telecommunications markets to competition, and for other purposes" (3) The Telecommunications Act ended over sixty years of regulatory policy and introduced sweeping changes to both the telecommunications and broadcasting industries. (4) Where regulation had once been seen as the best way for these industries to flourish, competition and an open market were now gaining favor among politicians and others inside the telecommunications industry. When the Telecommunications Act was passed, the wireless industry had already evolved into a competitive market, though the traditional telephone industry had been heavily regulated for nearly 100 years. (5) While this regulation created arguably the most sophisticated and complete telephone system in the world, many felt that regulation had been a failure and the only way to "fix" the situation was through increased competition. (6)

   This Note argues that differing policy concerns are responsible for the different regulatory approaches taken in each industry. Furthermore, regulation and lack of competition were beneficial to the creation of the wireline telephone industry. Had the wireline industry been open to direct competition from its inception, as the wireless industry essentially has, the wireline industry would not be as strong as it is today. As a result of this weakness, the growth and success of the wireless industry, as well as many other peripheral industries, would have suffered. Part II details the history of regulation in the wireline telephone industry. It begins by noting the telephone industry's early status as a "natural monopoly," it continues through the breakup of AT&T in 1984, and concludes with an analysis of the post-breakup period. Part III provides background information on the wireless industry, with a brief discussion of the implications of the number portability requirement. Part IV analyzes the different regulatory approaches used in these two industries, and illustrates the reasons for and benefits of treating the two industries differently. Part V looks at the new role of the Federal Communications Commission ("FCC") in telecommunications regulation as illustrated by the recent WLNP implementation.

2. THE RISE AND FALL OF AT&T THROUGH GOVERNMENT REGULATION

   1. The Growth of AT&T in the Telecommunications Industry as a "Natural Monopoly"

      From its invention in 1876 until the original Bell patents expired in 1894, the telephone system operated as a monopoly. (7) As the technology became available, competition grew quickly and by 1907, Bell's share of the marketplace fell below 50 percent. (8) Competition, however, came with a price. The telephone system was in a state of disarray. Customers were frequently unable to call people on competing networks because there was no network interconnection, due in part by lack of attempts to connect the networks and in part by a lack of technology. (9) Competition also led multiple companies to build duplicate infrastructures in the same localities. (10)

      Due to mounting dissatisfaction with the service provided by local telephone companies, as well as high service prices, there was growing public sentiment that some type of reform must take place in the telephone industry. (11) Eager to create a dominant phone company, Theodore Vail, president of AT&T, embarked on a bold mission to buy up all existing telephone-related patents, and to then deny his competitors access to AT&T's long-distance network. (12) As a result, AT&T lured many customers away from competing networks and bankrupted a large number of competitors. (13)

      Though AT&T's marketing plan was very successful, American society was becoming very distrustful of monopolistic corporations. (14) Sensing the public's concern, Vail pushed the idea that telephone service was a "natural monopoly" that could best be provided by a single phone company. (15) The concept of a natural monopoly emerged from Progressive Era economic principles that had found favor in the American public during the early years of the Industrial Revolution. (16) Vail's strategy was successful: Congress passed the Willis-Graham Act in 1921 granting the Interstate Commerce Committee ("ICC") the power to consolidate local telephone systems. (17) By the time the Communications Act of 1934 ("Communications Act") created the FCC, (18) regulatory policy in the telephone industry was well established. (19)

      AT&T flourished as a regulated monopoly, with its grasp on the telephone industry remaining practically unchecked until the mid-1950s. (20) In that time, AT&T had cornered the market on telephone technology, and through the process of cross-subsidization (21) had been able to keep the cost of local service artificially low by overcharging for long-distance service. (22) This practice was in line with the social goals of the Progressive Era economists, who believed the telephone industry's aim should be universal service, something that could not be guaranteed in a free market. (23) However, with the goal of universal service coming closer to completion and a growing number of competitors encroaching on AT&T's market, the sanctioning of these less-than-ethical business practices would not last forever.

      While attitudes regarding the effectiveness of regulation slowly soured, advances in technology created additional problems for AT&T's regulated monopoly status. The development of microwave technology as a means of communication during World War II, as well as the advances in computer technology, brought on a fresh batch of competitors, all seeking a share of AT&T's market. (24) While the FCC had previously protected AT&T from outside competitors, the Commission began creating special exceptions allowing new companies to compete in areas once thought to be the lone province of the telecommunications giant. (25)

   2. The Beginning of the End: The Breakup of AT&T

      In 1974, the influence of Chicago School economics, favoring free market competition over government regulation, as well as pressure from the growing number of competitors, led the Department of Justice ("DOJ") to file an antitrust action against AT&T. (26) The complaint alleged that AT&T had discriminated against other long-distance carriers and telecommunication equipment manufacturers through its monopoly control of local telephone service, and that AT&T had engaged in pricing without regard to cost. (27) These charges directly mirrored the accepted business practices that AT&T had relied on for over seventy years. It was the feeling of those in the DOJ that regulation was a failure and was responsible for the anticompetitive business practices of AT&T. (28) The DOJ felt that if the competitive long-distance carrier (AT&T) could be separated from the noncompetitive monopoly (Bell), then the ability and desire to engage in these anticompetitive practices would disappear. (29)

      Though AT&T expended great effort to maintain its status, it eventually succumbed to divestiture on January 1, 1984. (30) AT&T was to maintain service in the competitive long-distance market, and the Bell Corporation was split into seven Regional Bell Operating Companies ("RBOCs"), which would maintain monopoly control over local telephone service. (31) While the end of AT&T in its traditional form did not mean the end of regulation in the telephone industry, it was certainly a large step in that direction. The challenge then became how to ensure that access to the market was truly unencumbered so that the newly created free market in telecommunications could thrive, as those in the DOJ and FCC had envisioned. (32)

   3. Post-Divestiture Developments in the Long-Distance Market

      The years directly following divestiture saw an incredible restructuring of the long-distance market. Where once AT&T was essentially the lone player in the field, hundreds of new long-distance providers have come into existence in a matter of a few years. (33) This increase in competition spurred immediate reduction of long-distance rates, as AT&T dropped its rates by 6.4 percent in 1984, a small amount compared to the overall 40 percent drop in rates by 1990. (34) Furthermore, even though...