Ma Bells Breakup: 25 Years Later, Everything Old Is New Again

By Tara Seals

The break-up of Ma Bell in 1984 had a goal of greater efficiency, lower prices and more rapid technology development thanks to competition. It’s been 25 years since Judge Harold Green ended AT&T Inc.’s monopoly of the phone business, and while the industry has indeed seen unprecedented innovation, the state of competition continues to fail the consumer. Because after all, like the mercury-like Terminator in T2: Judgment Day, you can break Ma Bell apart, but it always seems to come back together. And it’s after you.

AT&T in 2009 looks a lot like AT&T in 1984, only bigger (motto: “local, long-distance and now introducing wireless!”). It’s also more global and more capable. In fact, Ma Bell in general is back, albeit in a three-headed form that comprises the powerful Verizon Communications Inc., Qwest Communications International Inc. and AT&T itself. It raises the question: Is there still room for competitors? And what should those competitors look like? A look at history could lead to the answers.

Regulatory Failures

The reconstitution of the Bell pseudo-monopoly has been slow and some would say insidious, aided and abetted by pro-consolidation and pro-RBOC regulatory decisions that have limited the number of local residential service providers in a given market.

Consider the Telecom Act of 1996, which created the era of non-facilities-based CLECs. The idea was admirable but the model was flawed: Force the LECs to unbundle their local loops in order to lease them at a discounted rate to competitors. The RBOCs had no interest in doing any such thing, and amid heavy lobbying and cries for the need for free market economics in the industry, the death of government-mandated UNE-P pricing came in March 2006.

Facilities-based CLECs were left standing to provide choice in the market, but to this day they’re hobbled by the need for affordable last-mile solutions outside of their coverage footprints. Microwave solutions and fiber-based carrier’s carriers can fill in some of the blanks, but viability remains an expensive business, particularly when faced with the branding and marketing machines of the incumbents. No wonder most CLECs focus on regional business niches.

Meanwhile, cable companies have become the main residential competitors, engaged in a pitched battle with the ILECs for the hearts and minds within the home. Here, too, regulators have failed consumers, by preventing the cablecos themselves from competing with each other in the same markets. One LEC, one cableco: That’s what constitutes choice for most American homes.

What about those that want to cut the home line cord and go wireless? Ma Bell wins again: AT&T and Verizon are the two largest wireless providers in the United States. The FCC attempted to create a new national wireless player with last year’s 700MHz spectrum auction; but the big winners were, you guessed it, the RBOCs.

The Consolidation Factor

In spite of all of this, you could also say that competition, ironically, is the primary reason Ma Bell is back today. The post-Telecom Act CLEC era provided fodder for the RBOCs to justify consolidation, and then there’s the long-distance factor.

Back in 1984, AT&T divested its local business in return for the ability to get into the computing game. And, as we know, it became a long-distance player. When MCI and Sprint were created by entrepreneurs to challenge AT&T in the reach-out-and-touch-someone game, no one foresaw the fact that very little differentiation in long-distance POTS service meant an inevitable price war. It was a race to zero that forced all three to find an exit strategy. Sprint fled to business services and of course became Sprint-Nextel Corp., best known as a (struggling) wireless operator. But MCI and AT&T were ripe acquisition targets.

Regulators paved the way for RBOCs to offer data, VoIP and long-distance services out-of-region, but an already-built national long-distance network was an attractive proposition. When Southwestern Bell became SBC Communications Inc. it leaped at the chance to buy AT&T the long-distance company. Then it adopted the AT&T name for itself and bought BellSouth, and putting together its wireless network while it was at it.

Verizon followed a similar path: In 1997, Bell Atlantic acquired NYNEX, then merged with GTE in 2000 to form Verizon. After a bidding war with Qwest, Verizon bought MCI, meanwhile adding to its wireless assets.

And around the same time that AT&T and Verizon were being created, Qwest, a fiber-optic long-distance company, bought the RBOC US West, making for the same DNA as the others, without wireless: Qwest partners with Verizon (who else?) to provide wireless service to consumers.

New Competitive Hope

Ma Bell 25 years later? Alive and well. Competition? Not so much. The takeaway is that despite its stated goal of supporting competition, the FCC has created a communications landscape that is dominated by a handful of providers. But technological innovation, particularly in IP services and wireless, may provide avenues for more choices.

A handful of ideas:

1) Wireless. Despite the unrelenting domination of Verizon and AT&T in the market, consumers still can choose T-Mobile USA Inc. or Sprint to substitute their home lines with wireless service; both companies have rolled out programs to encourage consumers to do just that. T-Mobile’s Hotspot@Home offering uses Wi-Fi to supercharge in-home coverage and quality; Sprint does the same with its Airave femtocell service. The rise of mobile broadband is another pro-competitive phenomenon: Clearwire Corp. is poised to become a viable national competitor once its VoIP-ready WiMAX network is deployed. There’s also still life in the MVNO model.

2) VoIP. Consumer VoIP often elicits a shudder since over-the-top competitors like Vonage Holdings Corp. have struggled financially and in some cases imploded. However PC-based services like Skype are getting smart, making mobility a central part of the strategy and wrapping in Web functionality like IM, presence and IP video to provide a compelling differentiation to traditional RBOC service. Not just for cheap calls anymore, companies like Jajah and Truphone are also capitalizing on the popularity of the iPhone and social networking to appeal to a wider cross-section of consumers with a wireless-centric application play.

3) Computing. The idea of cloud-based and Web-delivered voice and data services is becoming a dominant conversation, and new market entrants from the computing sector are accordingly hopping into the breach. Google Inc. for instance is adding new Web services into its application portfolio all the time, and offers Google Talk voice chat. Microsoft Corp. and Apple Inc. are of course wireless players. And open application server companies like Broadsoft are providing ways to embed voice in productivity and Web applications to provide voice mash-ups that in many cases could replace traditional telephony or give facilities-based CLECs a way to add revenue and pull more market share from the RBOCs.

A Look at Innovation

Ma Bell gave birth to seven regional Baby Bells in 1984, and the good news is that an era of competitive innovation began that eclipsed the sum total of the previous 108 years since Alexander Graham Bell completed the first telephone call.

Some highlights: