Rural America Needs Advanced Services & Competition – Part 1

The above title is by no means an original thought; this belief has been documented in policy statements and legislation at the Federal and individual state level many times over the years.  Technology and other social factors have resulted in many changes to telecommunications policy for the common good of our country.  A significant number of the social goals and policy revisions were initiated to ensure that people, communities and economic development in Rural America were not left behind and to ensure that all Americans would realize the benefits from advancements in technology.  Today, our government, via laws, rules and policies have stipulated that open & fair competition is right for all of America.  But before we discuss the current landscape, a brief review of how we got here would be helpful.

Bell System hires 1921 logo
Image courtesy of Wikimedia Commons

Alexander Graham Bell patented the telephone in 1876; American Telephone & Telegraph (AT&T) and the associated Bell companies were formed and became known as the Bell System.  Generally speaking the local Bell companies provided the local connections in mostly larger cities and AT&T provided the long distance lines.  In addition to the Bell System, various non-bell telephone companies (independent or cooperative companies) were created to offer local service where the Bell companies were not currently offering service; these mostly rural areas were in some cases farms, ranches, very small towns and even resort communities.

[Because there was some concern that it was not an attractive economic decision to build facilities to serve rural areas, the government stepped in to offer financial assistance to ensure quality service was offered in rural America.  The Rural Electrification Administration (REA), now the Rural Utilities Service (RUS), was created to assist the interests of consumers and communities in areas where adequate service was not provided.  Because this requirement for financial assistance in rural areas continues today, the RUS remains a vital part of economic development in rural America.

FelicityStreetTelephonePoles1909
Lots of Wires, Image courtesy of Wikimedia Commons
One of the earliest involvements of the government in the provision of telephone service was a determination that the American common good would be best served by determining that the telephone service marketplace should not be open to all competitors in all areas.  Telephone service at that time was provided by above ground wire and poles; policy makers were concerned about safety, economic and environmental impacts of numerous above ground facilities in urban areas and very little service in less populated areas.

This concern was highlighted by the strong belief that many companies would flock to more densely populated areas creating havoc for consumers; but few, if any, companies would want to offer serve in less populated more costly rural areas.

For these and other reasons, it was determined that the common good would be best served by replacing open “competition” for the provision of telephone service with “regulation” and by establishing local monopoly franchised service areas.  One company was given the right to be the only company in a designated franchised area to offer telephone service in exchange for operating under the rules and regulations (including the rates for services) of a regulatory organization; a federal agency for the services between the states and state agencies operating in each state jurisdiction.

This “regulated one-company monopoly” model appeared to satisfy consumers for a number of years; but advancements in technology (i.e., new products and services) were extremely slow.  Only the limited products and services offered by the company providing telephone service in that area were available to those consumers.                        

Another major development in government involvement was a policy that became known as “Universal Service”; which was an understanding that the common good for all America was best served when more telephones were on the network.  The idea…every new telephone line added to the network increased the value of every other telephone line on the network (the Network Effect).  This proposition resulted in revised rate structures, revenue sharing between companies and subsidies between services.  It led the way to subsidies between toll & local service, business & residential services and urban & rural services.  These defined subsidies, along with government financial assistance, fostered the expanded economic growth and consumer satisfaction in rural areas throughout America.  Telephone service penetration grew substantially throughout the country.

Throughout the earliest stages of the development of telephone service in this country, policy makers continued to believe that a regulated monopoly with no or limited competition was beneficial for the American consumers.  However, some consumers and other groups began to believe that this type of structure or model was stifling the development of new products and services.  These groups started to expound on the idea that, as long as a company was “guaranteed” all customers in a given area, that company would do very little to satisfy customer demand in that area.  It was clear that consumers wanted new products and services…they wanted choice and competitors wanted to enter the market.  These underlying beliefs brought about a national interest in revisiting the real benefits of a regulated monopoly for telephone service.

Carterfone cradle at CHM.agr
Carterfone adaptor made land-wireless communications possible. Image Courtesy of Wikimedia Commons
It began in the consumer product arena.  The regulated companies had stipulated that only their company provided equipment could be connected to the public switched network.  However, many new products (such as The Hush-a-Phone and, Carterfone) were being introduced into the market and consumer demand appeared to be growing.

The regulated companies argued that the newer products would harm the public network…the use of one of these products by one customer could have an adverse impact on the service of another customer.  After many court and regulatory battles, “customer provided equipment” was permitted, connection rules (including jacks) were established and telephone service went on with little or no problems.  The fear that competition would denigrate the network was unfounded and the consumers began to enjoy a plethora of many new end-user type products.

The interests of all American consumers started to become the primary measuring stick utilized by policy makers & regulators when discussing issues and making decisions affecting the provision of telecommunications.

The next area ripe for the introduction of competition was the long distance segment of the telecommunications marketplace; but it proved to be much more complex, requiring more time to implement.  It started slow, in the specialized services arena.  Some new companies (such as MCI, SBS, etc.) were offering private services to companies with large communications needs.

These companies wanted to offer any spare capacity to the general public.  The regulated monopolies objected; they believed that the public offering of this type of communications service was their exclusively their business and these upstart companies should cease offering these competitive services.  Again, numerous court and regulatory battles ensued and the policy makers wrestled with the balance of competition versus regulation.

It was clear that the true benefits (economic and quality) of technological advancements could only be realized if these new market entrants with alternative products and services were permitted to participate in the marketplace….for all consumers…in all areas.

One particular court battle was a very long antitrust action against AT&T and the Bell companies.  After extensive arguments, the parties agreed to an unprecedented settlement of monumental proportions for the telecommunications world.  It was announced on January 8, 1982 and scheduled to become effective January 1, 1984.  It would take almost two years to carry out the stipulated agreement, which was outlined in a “Plan of Reorganization” which outlined the corporate separation; distribution of assets; defining service areas, interconnection arrangements; assignment of personnel; establish contracts; etc.

An image depicting the 7 Baby Bells that were formed with the divestiture of AT&T.
AT&T Splits Into Long Distance and the “Baby Bells” Image Courtesy of Cellstream

In summary, it separated this enormous American corporate giant along the lines of what was perceived as competitive activities (AT&T long distance) and what activities that, at that time, were not considered to be competitive (the local Bell operating companies).  AT&T with a few subsidiaries. such as Bell Labs, Western Electric, etc. (that were more aligned with a competitive activity) went in one direction.  And the twenty-two local bell Operating companies were separated and reorganized into seven Regional Bell Companies providing local telephone exchange service in specific areas.

AT&T was immediately thrown into a competitive world, having to formally “interconnect” with its earlier corporate subsidiaries and others.  The Bell Operating companies would continue their local regulated monopoly services with all the requirements (Carrier of Last Resort, etc.) associated with that position.  But the handwriting was on the wall…..the word of the day was competition and even the individual Regional Bell Companies soon looked at the other regions (and everyone else in the marketplace) as competitors.

Bottom line; the telecommunications world was turned upside down.  Local Access and Tandem Areas (LATAs) were designed….“Access Charges” was added to the industry glossary of terms… Organizations were created, such as NECA, ECSA, etc., to assist in the management of interconnecting carriers.  The complexity of this event was compounded due to the number of other participating carriers & companies, such as the 1,000+ non-Bell independent and cooperative exchange companies, the new long-distance carriers, wireless providers and the equipment manufacturers.

This far-reaching action was another step in what was an obvious movement to a competitive operating environment for the entire telecommunications landscape.  Now that the Bell companies could control their own destiny, they began to venture into other areas and test their freedoms; i.e., they could not offer competitive services in their territory; but they could offer competitive services outside their individual region territory.  Wireless or cellular service was of particular interest and the bell companies were successful in grasping a major foothold in that arena.

[Click here to read part 2 of Mr. South’s article which discusses the post 1984 world and its implications, particularly on rural America.]

 Author:

This picture is a very nice one of independent broadband industry icon, Gene South.
Gene South

Gene R. South Sr. is a telecommunications and broadband professional with 45 years of experience including positions as EVP for Panhandle Telephone Cooperative in Guymon, OK; CEO / GM of Lakedale Communications in Annandale, MN and currently the V.P. & Director of Governmental Affairs for Lake Communications in Two Harbors, MN.  Mr. South served as Chairman of the Board of USTA, RTFC and MART; he also has held Board memberships for OPASTCO and MTA.  In addition, he has testified before congress and state legislatures.  

0 thoughts on “Rural America Needs Advanced Services & Competition – Part 1

  1. Gene, thanks for the insightful part 1 to this two-part article. This provides a good foundation for the 2nd part and for this still unfolding story. This is an especially timely article as the FCC deals with Net Neutrality and other issues that could stifle or continue to allow innovation.

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