Free the Baby Bell 7! Let Them Compete--With Conditions

In love, war and telecommunications, turnabout is fair play. Now that AT&T;’s multibillion-dollar marriage to McCaw Cellular Communications brilliantly positions it to bypass the Baby Bells, it’s only fair that America’s telecom policy-makers also make The Right Choice: Free the Baby Bell 7! Let them compete in the long-distance market.

The reasons are simple and compelling: New technologies, new services and emerging markets have erased the once-sensible rationale for barring the Baby Bells from this $55-billion annual market.

Businesses and consumers can’t help but benefit from the price wars and service innovations that inevitably occur when new competition cuts into a too-cozy marketplace. The telephone business--both long-distance and local--is ripe for just this sort of industrial policy.

When the old Bell System was broken up by the Justice Department in 1984, there was a certain logic to splitting telecommunications services into local vs. long-distance. It was easy to anticipate competition between AT&T;, MCI, Sprint and other carriers in the long-distance market. Indeed, long-distance prices have dropped roughly 40% since the Bell System break-up. People are making more calls for less money.

By contrast, the trust-busters back then didn’t see market forces or new technologies redefining local telephone service and so left that to be a monopoly in the hands of the Baby Bells.

But to guarantee that the Baby Bells would focus on quality local service and not exploit their local monopolies, the antitrust agreement explicitly prohibited them from offering long-distance services. The Regional Bell Operating Companies would be just that--regional. However, the long-distance companies all pay the Baby Bells billions of dollars each year in “access fees” to hook into those local networks.

Foolishly and shortsightedly, regulators actually reinforced the local Baby Bell monopolies by automatically granting them, at no cost, the right to develop local cellular phone franchises in their regions. For the last decade, then, national telecommunications policy has been predicated on this legal divorce between local and long-distance service.

Today, of course, the telecommunications landscape is radically different. Just last month, AT&T; announced that for the first time since divestiture, it would raise long-distance rates. Despite what appears to be murderous competition, MCI and Sprint are also doing handsomely. The long-distance market has gotten comfortable. Too comfortable.

What’s more, the cable giants, from Tele-Communications to Time Warner have publicly declared their desire to turn their local cable franchises into local telephone networks. And the Federal Communications Commission has allocated frequencies for yet another class of cellular communications called PCS that would also bypass the traditional local phone network.

AT&T;’s proposed acquisition of McCaw Cellular is merely the clearest, costliest and cleverest signal that technology is blurring the line between local and long-distance communications, turning the distinction into an arbitrary regulatory irrelevance.

AT&T; could just as easily have invested in a TCI or Time Warner and bypassed the Baby Bells via cable instead of cellular. MCI or Sprint could do the same.

In other words, the local telephone monopolies now face the threat of genuine competition.

Now, the Baby Bells have wanted to offer long-distance service ever since the Bell system break-up and have relentlessly whined and petitioned Congress, the courts and the FCC for the right to do so. The AT&T;/McCaw deal--and the specter of comparable long-distance/local alliances--finally gives them both a business and a policy rationale.

If the Baby Bells really want to compete, let them. But let’s insist on a couple of conditions.

First, make the Baby Bells divest their local cellular holdings. Local phone companies shouldn’t own both the wires and the frequencies. Competition, right? So Pactel, Nynex and the rest have to get out of their local cellular markets. To prevent “understandings” of the kind that let the Baby Bells get around a similar local cable prohibition, they should be prohibited from swapping cellular franchises with one another.

Second, a Baby Bell shouldn’t be allowed to enter the long-distance market until a cellular, cable or PCS franchise has achieved a certain level of local market penetration.

In other words, the Baby Bells don’t get to compete outside until they’re facing a minimum threshold of competition inside. The sooner you have local competition, the quicker you can be a long-distance competitor. Fair is fair.

Think how much more competitive and innovative such a telecommunications market might be. Maybe Bell South buys a piece of MCI; Bell Atlantic merges with Nynex; Ameritech invests in Sprint. Maybe US West specializes in national 800 and 900 numbers, while Southwestern Bell offers special long-distance deals to personal computer networkers.

Instead of two or three powerful long-distance carriers, consumers could choose from five or six. Isn’t more competition, more choice and more innovation a sensible goal for a telecommunications policy?