A Brief Note on Mergers in the Telecommunications Industry

Successes and Failures of the 1996 Telecommunications Act

Part One

Part Two

Part Three

Afterword

Does the Digital Divide Still Exist?

Appendix

A Brief Note on Mergers in the Telecommunications Industry

by Mark Lloyd

There can be little doubt that the 1996 Telecommunications Act had an effect on the telecommunications industry, but it was not, by and large, the effect either the legislators, the industry, or their economists promised the public, or as they like to call us -- the consumers. As stated by others in this collection of essays, the promise was that by tweaking "regulation" the industries would com-pete freely and would, in their competitive frenzy, reduce prices and provide greater services. Some mistakenly call this "deregulation" -- something no one, except perhaps a few ideologues, really wants. There was never any substantial evidence to support the argument that policies such as "interconnection," "unbundling," or the removal of certain barriers to cross-industry markets would create competi-tion. Five years later, there is still no substantial evidence to support these highly questionable theories. 1

What we know is that the competition has not, for the most part, been to provide better services to the public, but to convince Wall Street about who was in a better position than their competitor to control the terms of a leveraged merger. The competition was to get bigger first and to remain in control as bigness occurred. The evidence for merg-er frenzy is indisputable (see the chart listing the mergers since 1996 Act attached to the end of this note): where once there were eight local telephone companies, now there are only four. I do not intend to argue here that giantism in the telecommunications industry is bad. Janine Jacquet makes a persuasive argument that giantism in the media industry is bad. Nor do I intend to bludgeon regulators (local or federal) or the industry because prices have not gone down and services have not improved. See "Lessons From the 1996 Telecommunications Act," 2 by the Consumer Federation of America and the Consumer's Union, if you are in search of a public flogging. Nor will I focus on the death of competition (the roughly 300 competitive local exchange carriers established shortly after the Act have all but vanished five years later), though clearly that was a core promise of the Act. My focus here is confined to whether large telecommunications and cable companies are more or less responsive to the mechanisms of public consent, such as local public utility commissions and local cable franchise authorities.

Are Local Regulators Responsive?

Our article on rural America describing the actions of the Missouri Public Utility Commission to eliminate the requirement to provide calling area discounts to phone customers making frequent calls to nearby calling areas is perhaps one example of a local regulatory authority more attuned to the wishes of the local telephone companies than the citizens they are supposed to represent. The emergence of both aggressive telemarketing, and practices such as slamming and cramming, 3 well detailed by both the General Accounting Office and the Federal Communications Commission, in addition to the phenomena of complaint web sites with special and growing sections on telecommunications service problems, 4 suggest at a minimum that citizens are fairly distant from the local regulators paid to look after their interests. If those regulators are not simply invisible, perhaps they are not responsive due to either incapacity, exhaustion, or too close a sympathy with the companies they are supposed to regulate.

We also know that some state and local regulators do continue to protect members of their community from the market abuses of the large telephone companies. Gloria Tristani was one such regulator in New Mexico before she was appointed to the Federal Communications Commission. There are others. In their paper focusing on the Telecommunications Act, the Consumer Federation of America and the Consumer's Union note that a very active group of public consumer advocates has been effective in keeping the pressure on local regulators in places like Texas and New York. Responsive regulators in New York forced Verizon in New York (formerly NYNEX) to open its local markets. A competitive telecommunications market in New York occurred only after state regulators slapped a $13 million dollar fine on Verizon when, after winning approval to enter the New York long distance market, it misplaced 250,000 orders to change subscriptions to rivals. According to the CFA report, "The prices state regulators set for using the piece parts of the incumbent telephone network were at levels that would allow local competition and the operating systems necessary to switch customers was improved to allow rapid and seamless transfer of customers between local companies. As a result, new entrants offered statewide local rates at a substantial discount." Clearly, the invisible hand of the market is not enough.

If the Telecommunications Act presents a problem regarding citizen participation, it is Section 271, which forces states to coordinate some regulatory action regarding a telecommunications company that provides service across state lines. State regulators may be reluctant to take on the burden of negotiating with both local citizens and neighbors. But, according to Mark Cooper, a policy analyst with CFA who has testified at more than 75 state and municipal hearings on telecom issues, "state regulators have by and large been able to overcome the problems of Section 271, and they've resisted the lobbying pressures of telecom companies."

Federal laws preempting local authority over cable rates limit the ability of local regulators to respond to local consumer complaints. These preemption laws, favoring the business interests of a national industry over the economic needs of local communities, are highly undemocratic and should be changed. 5 But federal laws are not the only problem regarding cable regulation. The District of Columbia is an example of the all too typical problems faced by citizens in relationship to local cable franchise authorities and the local cable companies they are supposed to regulate on behalf of the citizen.

At the DC contract signing in 1985, the head of District Cablevision, Robert Johnson, a long-time associate of then Mayor Marion Barry, produced a shiny red apple and said that cable "is something that I think is going to be fruit for the business community, fruit for the entertainment community, fruit for the social services community and I think fruit for the employment opportunities for all the people of this city." 6

Within months Johnson reneged on his agreement to build a 32 million dollar institutional network (citing racism as the cause of the lack of would be investors). Later, when his company, District Cablevision, was sold to Telecommunications, Inc. (TCI) the contract stipulation that the District franchisee be 50 percent minority-owned also went out the window. The franchise shifted again when AT& T bought out TCI in 1998. In December 2000, AT& T settled with the city for five million dollars because of its "failure to complete a system upgrade; failure to construct the institutional network; noncompliance with minority hiring; and multiple customer service violations." 7

The legacy of this city incompetence and string of broken promises has left the residents of Washington with a cable network so inferior that cable penetration is only about 35%. In some parts of town, District residents have complained that unshielded cables act as antennas and pick up broadcast signals from nearby transmitters. In an exclusive gated community within city limits, Hillandale, the community cable manager, Scott Anderson, said they had to replace entire blocks of unshielded, improperly spliced cable.

Stacy Richardson Burnette, the Mayor's counsel for the cable and telecommunications, agrees that there are problems. "It's true that everybody doesn't get the same signal quality. The system wasn't maintained and it wasn't upgraded. A system upgrade is part of the negotiations we're having now," Burnette said. "We've based our requests on the perceived needs of the residents of DC: better reception, better customer service and more channel capacity." Note that better quality public access, and increased access opportunities for local community and civil rights organizations is not part of the equation.

As a result of Comcast's buyout of the AT& T/ TCI DC cable monopoly, DC entered into negotiations over a new agreement with Comcast. All cable contract negotiations are conducted by delegates of the Mayor, and ratified by the city council. Representatives from the school district, which runs the educational channel, and the local public access group, are brought in only at the discretion of the Mayor's representatives, and are paid little heed. It's hardly surprising to discover that the yearly budget of the governmental access station is three million dollars, while public access runs on $600,000.

Jane Lawton, cable administrator for Montgomery County, Maryland insists that tough local government negotiators can and should pay attention to the needs of local citizens, and that they can succeed in improving public access channels if they know what to demand. "We're the ones with the stick," she says.

Maintaining democratic mechanisms of accountability over local telephone and cable operations remains a political challenge. Those who hold expectations that the "invisible hand" of the market will solve problems of historic inequities and the historic, if only occasional, neglect of local regulatory bodies, rest their assumptions on phantoms. Social justice has never been achieved by tinkering (but only a little) with markets and trusting in monopolies. That's what ballots (not butterfly) are for.

Endnotes

1. James K. Glassman, "Death of Telecom Competition," Washington Times, Dec. 27, 2000.

2. Lessons From the 1996 Telecommunications Act, Consumer's Union/ Consumer Federation of America, at http://www.consumersunion.org/telecom/lessondc201.htm.

3. http://www.civilrightsforum.org/connection990915.html#GAO. 4. See complaint. com, and planetfeedback. com, there are also sites specific to the companies themselves, such as http://www.verizoneatspoop.com/.

5. Donna Greene, Towns Find Little Leeway in Controlling Cable Rates, New York Times, July 12, 1998.

6. Marcia Slacum Greene, "D. C. Cable System Contract Is Signed," The Washington Post, Feb. 26, 1985.

7. Office of Cable Television & Telecommunications (OCTT), Compliance Report, May, 24, 2001.

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