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RESEARCH PAPER 99-C-2

System growth in the US telecom industry

Analysis of the technical, industrial
and regulatory process in the US telecom industry

Olivier Bomsel & Gilles Le Blanc

Paper presented at:

1. Center for Research in Regulated Industries (Rutgers University)

‘Advanced Workshop in Regulation and Competition’,
Newport, USA, May 26-28, 1999
&
2. The American Telecommuniations Systems Management Association (ATSMA)
‘7th International Conference on Telecommunications Systems, Modelling and Analysis’,
Nashville, March 18-21, 1999.
O. Bomsel & G. Le Blanc 99-C-2

Abstract

Beyond the case of the US telecom industry, this analysis suggests that economic regulations are not
only attached to static considerations upon market structures and perfect competition. They also reflect
various specific deals through which some long term objectives can be shared between the industry and
the State. This paper shows how, in the telecom industry, this was achieved through a specific mode of
growth of the firms based on their exclusive ability to sell services on their own support. After an
introduction of the concepts (I), the paper successively explores the system growth of the US telecom
firms under the Bell System and the Communication Act (II), under the unlocking of the long distance
segment following the divestiture of AT&T (III), and through the competition for high speed access after
the Telecom Act (IV).

Keywords: telecommunications, regulation, systemness, local competition

JEL codes: L2, L5, L96

This research has been supported by Afopt, the French association of private telcos. Its goal is to provide
the European debate with a vision of the deregulation of the US telecom industry based on an analysis of
the telecom firms.

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I. Approach and vocabulary

1.1 Natural monopoly and system firm

The debate on industry regulation usually focuses on issues about costs and benefits of
market competition and the various ways to promote it. In the case of telecoms, the
development of national networks supported by the natural monopoly theory has
"naturally" drawn the debate on this track. In this paper, we would like to start a discussion
based on an assessment of the economic rationale of the telecom firms: what are their
assets, how they view markets and regulations. We will then enter into regulatory
considerations from the policy maker standpoint. For that purpose, we will refer to the
concepts of "system firm" and "mode of growth". Those concepts, to be precised in the
following, will help us to use the firms' logic as an analyzer of the US regulatory frame and
of the surge of new industrial dynamics in this sector.

More than any other, the telecom industry is infrastructure-based. Nathan Rosenberg [8]
convincingly insists on its systemness, i.e. its systemic dimension strongest than in any
other industry. This systemness, based on the technical link between the support and the
signal, was already present in the industrial vision of Alexander Graham Bell. Since that
time and until the 1980's, the telecom industry has rooted its development in the
preservation of the copper network as the exclusive vehicle of the voice signal. To get
closer to the logic underlying this process, it is preferable to pay attention to firms rather
than to the industry as a whole. We will call "system firm" a firm whose main asset is a
support (an infrastructure) and whose revenues come from the exclusiveness of selling
services on this support. In the telecoms, the support refers to a network of physical
infrastructure, but one can extend it to a distribution network (operated through a
trademark) or a standard interface giving access to consumers (computer operating system).
A key issue for the system firm is what we call the locking mechanism, the process by
which a support allows the exclusiveness of selling the service.

In the regulatory economic literature, our "support" concept is commonly referred to as a

"complementary segment", an "essential facility" or a "bottleneck". These concepts usually
shape the academic debate on the introduction of competition in telecoms markets [5, 7].
The aim of this literature is to provide policy makers with instruments bringing
contestability on markets where bottlenecks raise entry barriers. The abundant research
dealing with interconnection pricing [2, 7] is based on this vision. Our approach is different.
We would like to demonstrate that the bottlenecks apply to the system firms whose
"support" is the vital asset and the locking mechanism the basic way to secure rents as to
upgrade the support and increase the sales. In other words, we will take into account the fact

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that a bottleneck is not solely a static obstacle to market, but a living piece of asset,
essential to the mode of growth of the system firm.

We will actually assume that a firm can be characterized by a mode of growth, i.e. a specific
dynamics maintaining its capacity to generate rents or quasi-rents (due to temporary
monopolies). As a matter of fact, in a competitive environment, any firm should evaluate
the factors helping it to capture rents, and implement strategies in order to achieve it.
Thus, for instance, a commodity producer - a firm selling undifferentiated products - has no
choice but to permanently seek for cost reduction or to reach and keep a sufficient market
share as to control prices and dissuade new entrants. In the latter case we suggest to talk of
an oligopolistic mode of growth [4]. A mode of growth also induces a vision of the firm on
itself and on its competitive environment.

The mode of growth of a system firm relies on the growth in volume or in value of the
services sold on the support. When this can be obtained through the continuous expansion
of the support, it requires the control of the locking mechanism, the entry barrier to the
support. The system rents arise from the fact that the firm is the only one to offer the
customer the service. If the locking mechanism fails, then contestation may occur (giving
way for instance to "hit and run" behaviors), inducing the end of the system rent. On the
contrary, if the locking mechanism works and the building of a competing infrastructure is
unprofitable - which suggests an efficient exploitation of the support and price caps - the
system firm is considered as a "natural" monopoly. Moreover, system firms controlling a
physical support are able to stack on it an exclusive sale network providing some more
system rents. It is the case of France Telecom who values its selling network through the
yellow pages directory1. The locking of the physical support is at the heart of the system
firm's capacity to capture rents. From an economic point of view, the locking mechanism
has the dimension of a dynamic entry barrier which can be technical, symbolic, financial or
regulatory.

1.2 System firm and regulation in telecom: a dynamic interaction

Our starting point will be that incumbent telcos are system firms: the physical support has
always been their main asset, source of rents and transfers. The dynamic control of the
network - exploitation, development and locking-in - has provided those firms huge
incentives to carry technical (and even fundamental) research, as illustrated by the
invention of the transistor (1947) and the findings on semi-conductors achieved in the US
by the Bell Labs. As a matter of fact, in the two-way communication, the control of
emission-reception protocols, the compatibility of equipment, the supervision of the

1
with an annual turnover exceeding 3,5 billion francs (~ 600 M$)

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switched network have obliged the telcos to explore a wide range of technical options and
to select those favorable to both the efficiency and the locking-in of their networks. What
has been called the Bell System, combining AT&T, the operator, and the Bell Labs.,
represents in our view the paradigm of the system firm2.

In each country, the regulation of telecoms can be understood as the historical process
combining the two different logics: that, money driven, of the system firms, and that,
political, of the State. The telecom regulation affects the management of the support (as an
asset) and the locking mechanism of the system firm. The natural monopoly regulation
imposes to the firm some service and pricing conditions (universal service, cross-subsidies)
in exchange of additional entry barriers (exclusiveness, technical standards...). In the case of
the US, we will show how the regulations set up under the natural monopoly paradigm have
been captured by the system firm and how the regulatory inertia has been an additional
element of the Bell's locking-in strategy. We will then analyze the divestiture of the Bell
System resulting from the 1982 Modification of Final Judgment (MFJ), as the loss of the
locking-in capacity of AT&T, and show how the Baby Bells, through the universal service
and interconnection practices, have managed to restore it at the local level. Finally, we will
use the systemness concept to evaluate the stakes of the industrial competition under the
Telecom Act regulation.

II. Rosenberg's historical analysis of the telecom system

Rosenberg shows that as soon as 1876, e.g. before the first phone conversation between Bell
and Watson (1877), the idea of an "universal service" was shaping the industrial vision of
Alexander Graham Bell3. After a start up financed through point to point communications,
Theodore Vail, the CEO of AT&T, promoted over the 1920s' the expansion of the
switched network with the explicit objective of connecting all American homes. The
telecom system then became a piece of the geographic and social unification of the USA.
The size of the country, the spread of population between cities and rural areas, the
impoverishment of the rural households during the crisis of the 1930's gave to the
"universal service" a key political importance. Under the Communication Act of 1934, the
telecom industry became regulated so the economic rationality of the Bell System formally
met the political agenda of the State. In 1945, AT&T was owning more than 80% of the

2
the other exemplary case discussed by Rosenberg [8] is IBM. Today, the most spectacular and discussed example would
probably be Microsoft.
3
Graham Bell anticipated in 1876 the development of a wide-area telephone network, comparable with a sewerage or irrigation
system, connecting all the houses and providing universal service. Rosenberg [8, pp. 210-211] shows how much, at the end of
19th century, such a vision can seem utopian and underlines that in fact, the network started expanding on the initiative of firms
providing point-to-point connections for solvent consumers, and this, until the use of switching machines allowing scale economies
in network operation. He nevertheless argues that the technical choices carried out in the 1880s conditioned the later adoption of
the interconnection and switching systems of the unified network.

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lines and equipment used in the US, leaving to 1500 small companies the handling of the
last mile connection in remote areas. The LATA grid was set up ruling the universal service
through a flat rate for local calls. The different components of the system were the long
distance lines, the switching and phone terminal protocols, the equipment standards, and the
universal service to subsidize the last mile.

During the 70's, the digitalization technologies combined with the development of satellites
and fiber optic transportation increased the competitive pressure on the telecom networks.
The voice could then be transmitted on non-copper wires. Besides, non-voice data started
flowing through the copper networks. Attacks from consumers and competitors (MCI)
became more intense. Although it was not possible to forecast which technologies would be
adopted in the future, the Administration then got conscious of the risk that the Bell
System could block the surge of new technologies just for keeping its system rent. As a
matter of fact, since 1956, four judgments had already obliged AT&T to accept non AT&T
equipment on its support and to offer interconnection. Rosenberg's thesis is that in 1982,
the Administration decided to jump into a window of opportunity as to unlock what was
perceived as a threat for the adoption of new technologies. It then declared, in its own
words, the end of the state barrier protecting the Bell System. The key point for Rosenberg
is that beyond the traditional argument about economic competition, the MFJ and the
divestiture expressed a political will to enhance the development of new technologies.

To support this view, Rosenberg demonstrates how, since 1925 - creation of the Bell Labs. -
, AT&T has developed an intensive research policy, closely linked to the University
(MIT). The Bell Labs. have introduced the Systems Engineering which quickly expanded
after the Second World War. This policy, reinforced by fundamental works in physics of
the solid, led to major discoveries which pulled the US semiconductor industry. The
economic incentive was the expansion of the long distance switched network which required
new processes of signal amplification, switch automatization, routing, securization,
involving more and more interfaces and system compatibility. An interesting point is that,
in the same way than in the 1880s', Western Union had refused to buy the Bell's license, the
Bell Labs. refused in the 1960s' Charles Townes's (future Nobel prize) pattern on laser
amplifier because "optic waves have never been of any use for communications and
therefore, this invention is of little impact on the Bell System's interests" [10]. This decision
shows that since the mid 1960s', as soon as the long distance network of AT&T is set up,
any radical innovation regarding transmission is viewed as a threat for the key asset of the
company: its locked-in support. This approach would also explain why the wireless phone
has been blocked for so long (in fact since the 1920s') by the wire owners. The choice of
the already obsolete analogic standard in the US might have been influenced by the
defensive strategy of the wire system.

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III. From one system to seven

3.1 The divestiture rationale

The MFJ has been an attempt to remove the state barrier from the telecom industry by
unlocking the long distance communication segment. The state took then the opportunity
to change its deal with the industry while not renouncing to the universal service rule. In
fact, with the conservation of the universal service, the natural monopoly based regulation
remained, allowing new system firms to set up. In 1983, the divestiture of AT&T led to the
creation of seven local telcos, the RBOCs (Regional Bell Operating Companies), of one
long distance company AT&T, and later on, following an adaptation and a deep
restructuring, to the spin off of the Bell Labs. into three entities: the R&D department of
AT&T, the system engineer Bellcore, and the equipment manufacturer Lucent. Long
distance calls became then competitive but the cross subsidization mechanism financing the
flat rate for local calls was kept. The system firms did reborn at the local level: the RBOCs
kept control on the last mile which gave them the exclusive access to the final customer.
The geographical spread of the customers combined to the flat rate for local calls did not
allow the duplication of the infrastructure at this level. The RBOCs then concentrated on
managing their asset, the old local copper networks, by paying attention to the locking
mechanism and notably the Congress lobbies protecting the universal service.

Satellites and fiber optic digital transmission had started offering huge productivity gains in
long distance communications. Over the eighties, the same dollar invested in infrastructure
has been able to carry ten to one hundred more calls while demand for long distance calls
was growing exponentially. The competition on the open long distance market has become
based on the obsolescence of the former lines and the new opportunities to build high
capacity infrastructures. The technical progress in this matter has been so fast that long
distance carriers like the new AT&T have had to rebuild several time their backbone
infrastructure in order to reach capacity and reliability standards. However, this rebuilding
strategy has proved highly capital-intensive and could not be implemented within a
systemic mode of growth. The first reason was that, as a result of the divestiture, the long
distance carriers had no direct access to the final customer. The second reason is that the
increase in transport capacity was such that, once they had invested in a pipe, the
companies had to compete for traffic in order to fill it up. This competition led to a
disintegrated mode of growth into which the facility-based carriers massively invested in low
profitability infrastructures while, besides the RBOCs, hundreds of resellers developed
specialized marketing and billing services in order to capture traffic. Those resellers, playing

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on price distortions and additional services, progressively acquired 20% of the market4. The
need for market of the Big Three (AT&T, MCI and Sprint) combined with the nature of the
competition for the final consumer requiring to control local switches5, have allowed some
resellers like Worldcom to get a large share of the margins of the long distance business and
to reinvest it in upstream integration. The key point is that after a disintegration phase due
to the rebuilding of the infrastructure on new technological standards, there is now a trend
for new systems to emerge with carriers purchasing resellers (Qwest/Phoenix Network) and
resellers getting integrated upstream (Worldcom / MCI).

3.2 The system inheritage: the local loop dilemma and the RBOCs

In other words, the one-system firm organization (Bell System) has been broken up by the
surge of huge productivity gains on some segments of the support, motivating new entrants
and ruining the system strategy of the national monopoly. In retrospect, the MFJ can be
understood as the way to allow those gains to be achieved while keeping the universal
service rule and therefore, splitting the national natural monopoly in seven local ones. The
gains were achieved through a commodity production logic (the oligopolistic mode of
growth of the Big Three), financed through external money (project finance, junk bonds)
and marketed through trading and reselling. This was made possible because the demand for
communications was expanding nearly as fast as the infrastructure capacity. However, once
this infrastructure is built up and productivity gains saturated, entry barriers should reappear,
as well as room for new systemness.

Until 1996, the productivity gains have been massively transferred to the RBOCs to which
the long distance carriers have paid up to 50% of the calling charges through
interconnection. Interconnection fees have been very quickly used by the RBOCs as a way
to enhance competition on the long distance market. By offering low fees to the resellers,
the RBOCs were able to decrease the profitability of new infrastructures while increasing
traffic and revenues. So the growth of the long distance traffic has benefited in priority to
the RBOCs6 who did even manage to raise their rates on local calls. Moreover, they have
been able to use the economic interests linked to the universal service as a means to
reinforce their local monopoly position. In effect, when driving on the country roads where
timber masts carry up to ten copper wires knitted together every quarter of mile, one
understands how expensive could be the maintenance cost of such a network and the
resulting cost of a call in a remote area 7. In 1997, the financing of the flat rate universal

4
Between 1992 et 1997, AT&T main competitors were not MCI or Sprint, which market shares stagnated but the new resellers
(including Worldcom), which long distance market share grew from 12,9 to 25,9 %.
5
80% of the resellers turnover corresponds to the residential and low-volume business markets, i.e. customers whose telecoms
expenses do not exceed 5 000$/month.
6
In 1997, the RBOCs profitability exceeds by 70% the national industrial average results (Business Week, 30 March, 1998).
7
The relative cost of the last mile is roughly estimated to 60 % of communications costs. It largely corresponds to labor expenses

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service amounted US$ 20 billion. This money was collected by the RBOCs ($ 15 billion
through long distance calls, 5 billion through federal and local subsidies) and partly repaid to
the small last mile companies. The multiplicity of the transfers and communities involved
in the process makes local lobbying the strategic skill of the RBOC. By blocking the
regulatory system thanks to the universal service subsidy, the RBOCs ensure their
exclusiveness on their support.

So the effect of the MFJ has been on the one side, to allow the settling of new telecom
infrastructures providing efficient backbones to long distance telcos, and on the other, to let
the RBOCs benefit from the traffic growth and to activate entry barriers on the local loop
so to keep their ability to catch rents. The major risk was then that the RBOCs would use
their rents for expanding their control on some other markets. While some RBOCs were
negotiating with cable TV8 companies (US West and TCI) in order to merge their systems,
the Cable telco ban (1993) has been aimed at preventing the RBOCs to reinforce their local
monopoly. With the Telco Ban, the RBOCs have got stuck on their system and rents with
no way to escape but paying dividends. In 1996, the Telecom Act has generalized this
principle.

IV. The Telecommunication Act: the way to alternative system

competitive growth?

4.1 A first assessment

The development of long distance infrastructures with nearly infinite capacity and nil
marginal cost for incremental traffic has enhanced the growth of the internet and of the
related services. In return, the development of internet permanently requires more high
speed infrastructures on the local loop segment. In 1995, the convergence between
information, video and communication technologies has been understood by the
Government as the major industrial challenge for the years to come [9]. The development
of information highways or high speed internet networks has been clearly termed as a
national priority. The tensions with the RBOCs, their lack of incentive for upgrading their
networks and their dissuasion power for alternative investment were conflicting with this
objective. Their high profits showed that they might jeopardize investment by getting the
profits of the monies spent by others. This perception has led to the 1996 issuing of the
Telecom Act. The core idea of the Act was to systematically refuse any expansion of the
RBOCs out of their zone and business line as long as they had not proved that their network

(repair & maintenance of the network).

8
When they had merged with TV programs companies (TCI Warner), the cable TV companies had also become system firms.

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was open to competition9.

This regulation has been frequently criticized for being a "model of ambiguity" 10. As a
matter of fact, a number of points in the Act have been misleading. Interconnection at
"real cost", for instance, is somewhat confusing as the link between the signal and the
support being the core of the system firms, such costs were never calculated before. They
did not exist when there was no need for interconnection. When someone wants now to
make those costs appear, it is for negotiation purpose. Therefore, there cannot be any
objective truth about those costs. They are just a competition tool for the firms in the
arena11. The assessment of the competition at the local level is not easier to make: the 271
section of the Act lists 14 criteria, so at least 14 potential objections for a competitor. The
legal organization underlying the implementation of the Act makes it uneasy to apply:
while the FCC (Federal Communication Commission) is in charge of implementing the text
voted by the Congress, 75% of the networks are under the jurisdiction of the local States.
This is, of course, a bargain for the RBOCs: in case of a conflict, there is always a local
group ready to support the RBOC through a judge, a PUC (Public Utility Commission) or a
municipality. The reason for this confusion is that the legislator of the Telecom Act has not
been able to get rid of the "universal service" which can always be agitated as a red flag by
the RBOCs. But probably, this task was politically impossible.

Nevertheless, the innovative aspect of the Telecom Act is that it looks for incentives in
developing infrastructures by blocking the mode of growth of the RBOCs. In effect, if there
were no constraints, the natural logic of a RBOC would be to keep barriers on its local
network, while reinvesting its rents in activities bringing additional traffic to its system12.
All the RBOCs would then have interest in raising prices and entry barriers on their old
copper network. In setting up the choice "competition, upgrading or profit waste" the
Telecom Act provides the RBOCs with incentives whether for opening their network to
competition (unbundling), whether to upgrade their network by themselves so to increase
the long term value of their asset. The first case corresponds to Ameritech CFP strategy.
The second one to Atlantic Bell introducing ADSL and high speed internet on its lines. The
efficiency of this process relies on the patterns of the competition on the local loop.

4.2 The local loop issue: alternative network and unbundling

In city centers where the density of information intensive businesses (banks, services)

9
This idea was already suggested by Ameritech (the Big Lakes RBOC) who offer spontaneously in 1995 to unbundle its network
(CFP) to give access to its competitors in exchange of being allowed to reinvest elsewhere. See [9].
10
See the January 1999 decision of the Supreme Court regarding the conflict between the Bell's, local authorities and the FCC.
11
So there is now a market for interconnection models provided by telecom engineering companies.
12
e.g. last May 98, the agreement between US West and Qwest, a long distance operator also based in Denver (Co) for providing
long distance services to local customers. The offer was legally stopped after a claim from MCI but within ten days, about
140 000 people had already subscribed.

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justify the building of greenfield fiber loops, some new companies have emerged as CLECs
(Competitive Local Exchange Carriers). CLECs like RCN13, Covad, Level 3, Intermedia,
target the datacom market of the large companies and manage to feed quickly their
infrastructure with high value-added services (data back-up, mirroring, financial data
flows...). They pass agreements with municipalities and real estate companies (Level 3) to
access the final consumers. Their paybacks are short (about 1 year) and can be financed on
the New York bond market 14. Therefore the CLECs efficiently compete with the RBOCs
which they deprive from the cream of their market. After the resellers, the CLECs become
targets for long distance carriers willing to get closer to the consumer (Worldcom/Brooks
Fibers and MFS, Sprint/Paranet, AT&T/TCG, Qwest/LCI). However, the CLEC expansion
will not be sufficient to duplicate the infrastructure of the RBOCs in medium and low
density areas.

In those areas where the duplication of the historical infrastructure is not profitable, the
barriers on the local loop cannot be overcome unless the local carrier accepts to unbundle
its network at a low price. If the voice traffic was the only stake of this competition, the
situation would be only static and conflictual. However, the extraordinary boom of the
Internet is permanently increasing the industrial and residential demand for bandwidth. This
new demand transforms the patterns of the competition on the local loop.

Thus, cable TV companies, threatened by the competition with direct broadcasting systems,
have understood they have no choice but selling additional services through high speed
access and local telephony. They have started to adapt their network to internet uses and
now provide high speed access. Some of them (TCI) are merging their support with long
distance carriers (AT&T) in order to build up new systems providing local access and
internet services.

In parallel, the introduction of xDSL modems and digital terminals on the old copper lines
makes the unbundling of the historical network highly attractive for new entrants [9]. The
possibility to offer high speed access through unbundled lines radically changes the patterns
of the competition. The CLECs can then enter the lower density areas and by that means,
enforce the RBOCs whether to modernize their network, whether to lose it. There is a
decapitalization process going on. In this context, if the RBOCs just stand on their wires
and wait until their rent has vanished, they might, rather soon, be purchased by CLECs.

4.3 The new competitive system growth

13
RCN is an example of CLEC located in Princeton (NJ) offering local and long distance telephony services, cable TV as well as
Internet access, along the dense Boston-Washington corridor. It now develops a similar network in California to provide high
speed, high quality connections between the two coasts.
14
The financial resources risen for telecoms investments amounts to $ 20 bn since the 1996 Act.

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The development of internet has radically changed the competition in the telecom
industry. On the long run 15, it is no more the voice which will shape the link between the
support and the services but data and internet services. In that field, IT companies like
Cisco, Microsoft or Sun Microsystems are also competing to impose their standards. The
long distance carriers and the CLECs have shaped their new systems on paquet switches and
SDH technologies enabling them to sell access and related services instead of minutes.
Having first targeted16 business customers in large cities where they could by-pass the
RBOCs, they offer their clients high speed, securization and reliability. But those new
systems are now competing for growth and access to the local loop. The situation is highly
dynamic and open. The high speed infrastructure will probably expand under their pressure
for growth, while the "universal service" resulting from the settling of the first telecom
infrastructure will slowly deperish.

The future patterns of the telecommunications industry will largely depend on the
regulatory, juridical and economic decisions regarding the local loop competition. As a
matter of fact, this issue enforces every player to reshape its global telecom strategy, as the
case of AT&T and the battle for Internet access in Denver (Co) and Portland (Or) clearly
illustrate. After much hesitation, AT&T finally chose to enter the final consumer market
through partnerships with cable TV operators (TCI, Time Warner, Comcast) in 1998.
Given the growth of Internet-based communications, this strategy is a direct threat, non
only to the local RBOCs, but also to the other long distance companies, the CLECs and the
Internet access providers (ISP). In Denver, the latter asked for the "unbundling" and direct
access to the high-speed network, that TCI and AT&T are building for providing fast
Internet services. This request has been rejected by the FCC at the end of January 1999.
The economic argument beyond this decision clearly refers to what we called the "system
growth", that is the exclusive link between the network and the services as the condition for
new investments, innovations and the development of a high-speed Internet access
industry.

V. In conclusion

Beyond the case of the US telecom industry, this analysis suggests that economic
regulations are not only attached to static considerations about market structures and
perfect competition. They also reflect various specific deals through which some long term

15
This is no more futurist prospective since British Telecom officially announced by the end of 1998 that data communications
exceeded voice conversations on its domestic network, as a result of the growth of internet, electronic mail and e-commerce
(Financial Times, 05/11/1998).
16
This link between market segmentation and network development choices is decisive in the telecoms firms strategies. For
example, AT&T international network expansion closely follows the international orientations of its large "global" industrial
customers.

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objectives can be shared between the industry and the State. The deal is achieved when the
mode of growth of the firms involved in the industry can help the State in reaching an
objective. The Communication Act of 1934 can then be understood as a deal between the
State and the Bell, locking-in the mode of growth of the system firm to ensure a telecom
universal service.

However, it is common that a deal should be adapted when technical changes threatening
the mode of growth of the regulated firm obliges the State to reassess its objectives. The
irreversibility of the cross-subsidy regulatory mechanisms may require from the State some
institutional innovation. In this matter, the MFJ should be regarded as a very unique
decision by which the State has pragmatically used the judiciary power to circumvent an
obsolete regulatory frame.

By unlocking the long distance segment, the MFJ has allowed new fiber infrastructures to be
developed across the country (and the world) opening the way to the development of the
internet. It has also allowed new firms to acquire system expertise. By blocking the mode of
growth of the RBOCs, the Telecom Act might now open the way to high speed networks
run by new system firms.

The unexpected result would be that what had been reached through monopoly under the
Communication Act (e.g. the universal access to infrastructure), would then be obtained
through competition.

References

[1] Alleman J. (1998) "Interconnect and access pricing: a summary and critique", University of Boulder, mimeo.
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