Scramble Is On for Local Phone Market--to the Benefit of Callers

The battle for local telephone markets in California has begun. And the immediate effect should be slightly lower rates for residential customers in Los Angeles, San Diego and San Francisco starting early next year, though it will take four to five years for maximum competition to reach consumers.

MCI announced Tuesday that it will offer business customers fully integrated local and long-distance service early in 1997. It will also resell Pacific Bell and GTE service to residential customers at a small discount (less than 10% on retail phone bills).

AT&T; will start similar resale service in major cities throughout California this fall and may bring fully integrated local services for business to the state next year.

Meanwhile, 70 companies have registered with the California Public Utilities Commission for the right to resell discount phone service.

And that’s not to mention local, long-distance and Internet services for business that will be offered by MFS WorldCom, the company to be created by the $12-billion merger announced Monday between those local and long-distance phone companies.

What does all this activity mean for you? Lower-priced phone services and greater choice of providers. Ultimately, ordinary consumers will enjoy the variety of voice, data and video communications now available to business. But that day awaits technological, legal and commercial developments.

It’s important to understand that once the discounting begins, it will quickly become a free-for-all. Companies will crowd into the market, making deals and packaging a variety of local, long-distance, Internet and wireless services, mostly for business--especially at first--but for many residential customers too.

They’ll be able to do this because there is an abundance of spare telephone lines that Pacific Bell, GTE and others are happy to lease out for resale.

In Southern California, some communities own fiber-optic lines and are calling for bidders to help develop telephone systems. Anaheim put out a call last year and attracted MFS to create a telecommunications loop for use by local businesses.

In Los Angeles, City Councilman Marvin Braude called Tuesday for phone companies to help develop 120 miles of city-owned fiber network that extends from downtown to the San Fernando Valley. The aim is to take advantage of fiber optics--filaments that move information at the equivalent of 125,000 pages per second--for the benefit of the local economy.

It’s a good idea. Telecommunications capability often can make the difference in business these days. GTE’s fiber capacity, allowing the transmission of computer-generated images and videos, helped persuade DreamWorks SKG to set up shop in Playa Vista.

But if capacity is so abundant, why must residential customers wait years for the full benefits of deregulation? For several reasons. First, laying phone lines to individual homes is so expensive that no competitor is likely to take on that task.

There are some other lines into homes that could be used for phone service--the cable television line, for example, or even the electric cable, but it will take a long time for the companies that own those lines to gear up for phone service. Similarly, new wireless networks that could bypass cables entirely will take time to build and grow cheap enough to be realistic rivals.

So local phone competition for the moment really involves the resale of existing facilities. And the immensely complicated rules and regulations over what the local phone monopolies must resell, and at what price, have only begun to take shape.

Phone networks have a number of components: the lines to the house; the expensive telecommunications computers, or switches, that route your call; and the fiber-optic transmission lines that carry thousands of calls between those switches.

When AT&T;, MCI and others negotiate with PacBell or GTE to resell residential service, they are essentially negotiating the use of various components of the system. Under interim PUC rules, local competitors can buy use of the whole system at a 10% discount for basic residential resale. But what they really want is not only a bigger discount, but the ability to lease smaller pieces of the service--just the line to the house, for example--so they can provide the rest themselves.

Established long-distance companies like MCI already have their own switches, and they intend to use them to offer local services to business.

That way, MCI gets to handle the whole local and long-distance transmission and can tailor services and pricing to the customer. As it stands, whenever MCI passes a long-distance call along to be completed by the local phone company, it must pay “access charges” that consume 30 cents to 40 cents of every dollar.

What lies ahead for local companies PacBell and GTE? Competition. They will lower rates and find ways to hold on to local customers while entering long-distance competition themselves.

They will suffer and benefit much as AT&T; has done over the last dozen years. AT&T; retains about a 60% share of long-distance traffic, but it has been transformed--its employee rolls have been reduced by half, and the company itself is split into separate service and manufacturing firms.

Local phone companies have already slimmed down substantially since the days of the Bell System as they have faced limited competition in some of their businesses. But over the next few years they’ll face real, broad-based competition for the first time--and customers should benefit, even if employees don’t.