Competition In Local Telephony: A Look At The Facts, A Plan For The Future

Study Shows Residential Customers Being "Redlined" By So-Called Competitors

Washington, District of Columbia, November 4, 1997

Note: This news release was issued Nov. 4, 1997, in conjunction with a major study of telecommunications markets by Peter Huber, a leading telecommunications consultant. The study was commissioned by SBC Communications Inc. and BellSouth Corp. The full report may be downloaded from Huber's Web site at http://www.phuber.com/huber/index.html.

The first comprehensive look at competition in local telephony since passage of the 1996 Telecommunications Act has found that there is substantial competition in the local telephone market, but it is all aimed at business customers, because competitors have decided to redline residential customers.

That's the primary conclusion of a major study of telecommunications markets by Peter Huber, one of the nation's leading industry consultants. The study documents redlining of residential customers by competing local exchange carriers.

"There's a ton of competition," Huber said, "but it's aimed at 30 percent of the market - that is, high-end business customers."

Huber, author of the landmark 1987 Department of Justice "Triennial Review" of the state of telecommunications competition which bears his name, finds that there is "one final - and decisive - obstacle to local competition in residential markets."

The FCC and Department of Justice have made it clear that potential long-distance competitors "can keep Bell Companies caged" from offering packages customers prefer "by not competing in local residential markets."

Competitors know that by focusing on the lucrative parts of the business and long distance markets - and by staying out of the less profitable residential market - they can keep Bell Companies from competing against them in long distance. This perverse incentive allows the long distance companies to shield their markets by staying out of the less profitable residential market.

The public policy prescription to cure this problem is to allow Bell companies to offer bundled packages of local and long-distance service. "You're going to have to let the Bells lead the other competitors into the marketplace, as has happened in Connecticut," Huber said.

Otherwise, "every actual or potential rival of the Bell Companies benefits from this perverse regulatory policy," Huber concludes. Consumers, on the other hand, lose.

Consumers in Connecticut, the only state where the major local telephone company competes in long-distance markets, have been rewarded with aggressive long-distance company entry into local telephone markets, and resulting lower overall prices for consumers.

The 69-page study, the result of months of research, points out:

• As of July, almost 300 companies nationwide, including long-distance companies, cable companies, wireless and PCS services, were providing competitive local exchange service of some kind;
• Capital investment in competitive local telephone networks is skyrocketing. In 1993, counting AT&T, MCI and Sprint, companies currently competing for local exchange customers, spent $2 billion less than the Bell companies. By 1997, capital spending by the same group surpassed Bell company spending by $4 billion.

However, the study shows, the new entrants have chosen to enter the local market to compete only where it makes economic and strategic sense - the high-end business market. This serves their economic self interest and effectively keeps the Bell Companies out of long-distance.

Huber concludes that the only way to bring full competition to telecommunications and make sure that network investment continues and increases is to let the Bell Companies enter the long-distance market.

Once the Bell Companies are free to offer packages of local, long distance and other telecommunications services to all customers - both residential and business - the competing local exchange carriers will have no choice but to offer competing packages.

The FCC simply needs to stand back and let market forces dictate the future of telecom prices and network investment, Huber said. That will result in the competition Congress envisioned when it passed the Telecommunications Act of 1996.

The report was commissioned by SBC Communications, Inc. and BellSouth Corp.