Ariel Capital Management - Teaching Note p.
1.How has the Telecommunications Act of 1996 affected telecoms?Passage of the Telecommunications Act (on February 8, 1996) set up three major battlefrontswithin the industry. First, it opened the $108.3 billion (1998 revenues)
market for local phoneservice to its first serious competition. AT&T, the nation’s largest telecommunications company,was now permitted to get back into the local phone business, which it had been forced to leave 12years earlier.Second, the Act allowed the incumbent local exchange carriers (ILECs) to enter the long-distance business, both within and outside of their service region. They could offer in-region long-distanceonly after demonstrating that they had opened their local markets to competition, but they werefree immediately to offer out-of-region long distance, without any precondition.Third, the Act shifted cable companies into a new strategic position. Cable companies have wiresinto customers’ homes—the coveted “last mile.” Though the idea of cable telephony had beenaround for years, cable operators had been prohibited from offering phone service. TheTelecommunications Act gave new life to the prospect of cable-based telecommunications.However, instead of trying to compete in each others’ regions, the presumed outcome to theTelecommunications Act of 1996, RBOCs consolidated. The Act sparked a wave of mergersamong the RBOCS.2.During the period of 1996-1999, what are the key developments that have reshaped thelocal service industry? Why did these happen? What are the implications?During the timeframe of this case, ILECs underwent consolidation. As of May 1998, the RBOCsconsisted of:
Ameritech (served the upper Midwestern United States, proposed for combining withSBC Communications)
Bell Atlantic (served the northeastern United States; has taken over NYNEX)
Bell South (served the southeastern United States)
SBC Communications (formerly Southwestern Bell; served the southwestern UnitedStates; also owns Pacific Bell)
US WEST Communications (served the western United States)
Throughout the timeframe of the case, the RBOCs continued to control the physical assets of thelast mile to customers. Meanwhile, CLECs offered fully switched services, primarily to businessusers, but managed only small penetration (approximately $1.7B).
Preliminary Statistics of Common Carriers, 1998 Edition
, Federal Communications Commission, 5/99