IT Industry There are many changes that occurred in the industrial organization of interexchange telecommunication services in the United States during the 1985-1995 period. Lets look at the general idea of Telecommunications. It is the two-way exchange of info in the form of voice or data messages between tow users at distinct geographic locations” (5, 7). The two-way exchange is now a numerous way exchange through the use of computers and the Internet. There are four important areas of the telecommunication industry in the United States.
Technology plays a major role in telecommunications. Before technology, there was no such thing as telecommunications. During the ten year period there are some key advances in telecommunications due to technology. With growing technology, more companies want a piece of the action. There is a significant increase in long distance carriers and an increase in the size of these carriers. There is also a large influx in pricing and competition during this period. Another key factor in the success of the telecommunication industry is the regulations established for individual carriers and the industry as a whole.
With the increasing size of the industry and the major technological advances, stricter regulations must be present to keep the structure of the industry. Lastly, there are some differences between local and long distance carriers that must be looked at to fully understand the industry. There is also a fifth major aspect that defines Telecommunications, that is the American Telephone &Telegraph Company (AT&T) and the history behind it. Technology is a key aspect in the growth of telecommunications. If one had to point to the single most important reason for the new competition in local telephone markets.
It is the advance of technology. Digitalization has reduced barriers between voice telephone, data, and media services (9, 29). Microprocessors are the principal component of digital switches. So as their performance increases and their price falls, switching costs fall and scale and scope economies increase (9, 13). Scope economies mean that a few companies produce many services. The adoption of digital technology in all aspects of the network has improved performance and lowered costs. Digital transmission, whether over copper of fiber cables or over the airwaves, is cleaner and more secure due to more durable cables(9, 16).
Technological advances such as fiber optics and wireless transmission have paved the way for competition in the local exchange. But, new technology alone could not bring competition to the local exchange (9, 10). It takes innovations in communications technology and new service offerings pressure both suppliers and industry regulators to change (9, 2). In 1984, there was a large growth in the size of the industry and of its respective business. Teleport offered competitive local business services in New York City (9, 9). Competition is met with aggressive responses, including price cuts and improved service offerings.
The new competitiveness effected rates and offerings of local exchange carriers in years to come. In particular, the integration of local, long distance, cellular and cable services establishes the groundwork for offering innovative service packages at Bundled Rates (9, 11). Two factors are most important for the relative advantages of the various new competitors: The incremental costs of building local telephone networks and the pre-existing goodwill with potential subscribers (9, 37). There were gains and mistakes made by several competitive firms during this period. Instead of divesting itself, Ameritech proposed to interconnect with competitors and unbundled its network services selling services at nondiscriminatory cost-based rates (9, 11). They were trying to be competitive in a world of monopoly.
In 1994, MCI decided on a strategy to build its own local networks in selected cities for selected customers. Problems struck when they could not reach households. It proved to be very expensive and MCI quietly scaled back its plans. MCI then decided to grow internally by creating its MCImetro division (9, 11). These firms were trying different approaches to compete with AT&T after the divesture. The cost wars during the period also had an affect on companies entering the market.
Since average costs are everywhere declining, strong scale economies prevail. Scope economies occur when a single firm can provide an entire array of services more cheaply than a collection of firms who specialize in just a few of those services. Scope economies stem from the joint use of facilities by several services without substantial congestion problems. Costs of local exchange service is “sub additive” which requires the cost of a given level of local services when supplied by a single firm is less than when parceled out to two or more firms. If production experiences scale economies, then costs are sub additive (9, 14).
In 1985, the traditional common carriers recorded about 106.2 billion dollars in operating revenues from domestic and international telephone and telegraph services. Operating revenues increased to 113.6 billion dollars in 1986. This does not include specialized common carriers, domestic satellite companies, or interconnect companies (2, 132). In 1991 AT&T produced 34,384 million dollars in operating revenues and 38,069 million dollars in 1995. MCI produced 8,266 million dollars in 1991 and 14,617 million dollars in 1995. Sprint produced 5,378 million dollars in 1991 and 7,277 million dollars in 1995.
( 7 ) Rate regulation reforms began in the late 1980s. At that time, all states and the FCC regulated telephone rates to ensure the firm did not earn more than its allowed rate of return on invested capital. In 1990, the FCC adopted the new regulatory scheme of “price caps” with profit sharing for the Local Exchange Carriers (LECs). A price- cap scheme places a ceiling on the average revenue a firm can charge on all services, with appropriate adjustments over time for inflation and the rate of productivity improvement that comes form technical change (9, 44). Price-caps are increasingly replacing rate-of-return as the form of regulation in the telecommunications industry.
Profit sharing mechanisms could also be implicit in the FCC form of price-cap regulation. High profits could induce the FCC to set lower price caps, thus allowing consumers to”share” what was formerly profit (10, 8). With time and the pressure form courts and lawmakers, regulators have gradually opened communication markets to competition and realized the benefits of lower prices and improved service (9, 3). Between the AT&T divesture in 1984 and the passage of the Telecom Act in 1996, more and more states started to allow and encourage competition in interexchange markets (9, 46). The interest in local competition really began in the late 1980s, through proceedings on “Open Network Architecture” (ONA) that were intended to give service providers access to unbundled parts of the ILEC networks (9, 39). Procompetitive collaboration between carriers was initiated by FCC decisions on interstate access by information services providers and Interexchange Carriers (IXCs) (9, 47).
States regulate prices for intrastate services, and the FCC regulates interstate services (10, 8). In order to keep local residential rates low, regulators allowed business and long-distance access rates to increase (9, 39). Today, rate-of-return regulation and price-cap regulation are commonly used in seeking to protect telephone customers from exces …