Session Four:
Wireline Carriers--Policy and Law II

Lecture Notes

The Era of the MFJ

The Bell System decision to accept Baxter’s formula for a restructuring of the telecommunications industry led to substantial changes and more than a little controversy. The essential of the agreement, embodied in the Modification of Final Judgement (MFJ), was to split the –at least nominally—competitive parts of the industry from the "monopoly" parts. The former, consisting of long distance, equipment, and "information services", a phrase generally understood at the time to mean some form of electronic yellow pages, were considered competitive. AT&T would be allowed to maintain its corporate activities in these segments, while the "monopoly" local exchange service would be granted to seven new entities. Formally called Regional Holding Companies, or RHC’s, the more common terms RBOC [pronounced "are-bock"] for Regional Bell Operating Company, or "Baby Bell" were commonly used to describe the seven companies which would be the prime shareholders in the local Bell operating companies.

Each side of the business, competitive and monopoly, would have certain obligations and opportunities. For AT&T, divestiture was seen as an opportunity to compete freely with new entrants such as MCI which threatened, from the AT&T viewpoint, the future of the company. AT&T was also allowed to enter the computing field, though, as things turned out, became more liability than benefit.

 

More important, the regulatory framework for the industry was significantly changed. And the economics of the industry changed as well.

The regulatory changes attempted to reduce the likelihood of monopoly abuse. The Bell Operating Companies were required to provide equal access for all interexchange carriers. Equal access meant on the same terms and conditions as AT&T enjoyed. This was major breakthrough for the other interexchange carriers, who had been thwarted by the Bell System’s internal loyalties under the earlier process. The maintenance of network standards, a role previously played by the Bell Laboratories, would be doen by a similar, but new entity, the Bell Central Organization for Research, or Bellcore. The 7 RBOCs would jointly fund and administer Bellcore.

 

 

RBOCs would not be allowed to enter long distance, manufacturing, or information services. They were, however, allowed to resell equipment manufactured by others. On January 1, 1984, customer premise equipment was deregulated by the FCC under the Computer Inquiry II decision. [Since that was the same day as the effective date of the MFJ implementation, many people have tended to confuse divestiture with deregulation, but long distance was not "deregulated."]

Administrative oversight for the antitrust agreement resided—as all such antitrust settlements do—under the trial judge. In this case, the presiding judge, Harold Greene, took on enormous importance both economically and politically;. His first goals were to create a procedures and precedents for the transition to this newly structured industry, and to develop guidelines for all the players in the industry who were parties to the case to use to implement it.

One major issue was the economic viability of the RBOCs. It was widely believed that AT&T was trying to pull a fast one by divesting the RBOCs. With analog switches and a stable—some said stagnant—customer base, the potential for market growth in the local exchange business was expected to be flat or even to decline. Worse, the cross subsidies from long distance to local service which had been an integral part of telecom regulation for the preceding forty years, would end.

At the time of divestiture, technology had made long distance calling relatively cheap. But prices were maintained artificially high, in order to provide revenue to maintain inexpensive residential service. In 1984, the COST of basic dial tone service in a residence was about $28. But the price to the customer was about $6. The difference was made up by pricing long distance service much higher than cost in order to hold the price down. It was done for the best of political reasons. Regulators and legislators could charge higher rates to corporate users—those who used long distance—with impunity at the polls. Raising local customer residential rates was sure to spark a firestorm of controversy. And higher utility rates had just occurred for gasoline, fuel oil, and electricity because of the oil embargo.

One way to provide additional revenues for the RBOCs was to retain control of the Yellow Pages, a lucrative business originally assigned to the "competitive" AT&T.

Competition in long distance grew exponentially. In 1985, Judge Greene ordered "Carrier Selection", a process whereby every customer in the U.S. was to choose a long distance carrier. This meant that AT&T would no longer automatically retain customers, but would have to compete to retain them. MCI and Sprint aggressively—and successfully—marketed their own wares. Where AT&T had held 98+% of the long distance market on 1-1-84, after carrier selection, the market share was reduced to about 2/3ds or 66%.

The MFJ stimulated new entrants into local exchange businesses, as well.

"CAPs", Competitive Access Providers, such as Metro Fiber Systems and Teleport, were enabled by regulators to create choices for high volume, high end users such as the New York Stock Exchange. These carriers essentially carried traffic between the local user and the Point of Presence, or POP. The effect of these new entrants was to spur the RBOCs to become competitive in attitude and to spur efficiencies.

 

The effect of the MFJ was to provide a transition between the regulated monopoly supplier model which dominated the Bell System days and a fully competitive market model, with neither cutthroat practices nor degradation of the public switched network. The outcome was a hybrid of regulatory and judicial oversight which had positive effects for the public, stimulated substantial competition in some kinds of services, and stimulated a continuing political debate about when and how to get to the next phase.

||  Contact Dr. Cohen  || Back to Lesson Guide  ||
||  Library Services  ||  Graduate School HomePage  ||  E-Mail Directory  ||
||  Back toTycho Login  ||
© 1999-2000 University of Maryland University College.