In The Beginning…

For over 100 years, Ma Bell, sometimes called the “Bell System”, sometimes called “AT&T”, controlled almost all telecommunications in the US. Once the largest company in the world with over one million employees, the company consisted of 22 local Bell companies, AT&T Long Lines, (the long distance division) as well as Western Electric, (the subsidiary that manufactured telephone equipment) and Bell Labs, one of the premier research organizations. Then in 1984, because of the exclusive control the company had over phone service, the company was broken-up by the government.

The local Bell phone companies were divvied up among seven, artificially created, very large companies called “Regional Bell Operating Companies” (RBOCs, pronounced “R-BOKS”). The original seven RBOCs were:

• Ameritech
• Bell Atlantic
• Bell South
• Southwestern Bell
• New York Telephone
• Pacific Telesis
• US West

Each RBOC now presided over an allocated area of the country and it’s accompanying phone companies. For example, Bell Atlantic was now in charge of Bell New Jersey, Bell of Pennsylvania, Chesapeake and Potomac.

AT+T was also allowed to continue to operate, however it would operate as a long distance company only. (As an interesting side note, AT&T would retain Bell Labs, which in 1997 became a separate company known as “Lucent Technologies”.) The field then became narrower when four of the Bells became two. Nynex and Bell Atlantic joined to become “Bell Atlantic” and South Western Bell and Pacific Telesis merged to become what is known today as “SBC”.

The Regional Bells would initially be restricted to supplying local telephone service and were prohibited from supplying “any product or service that is not a natural monopoly service actually regulated by tariff.” In other words, this translates into not being being allowed to offer:

• Long distance service
• Manufacturing telecommunications products or customer premises equipment
• Information services
• Cable services

These restrictions were created because of the potential that the company could use its monopoly advantage to keep out competitors. Then with the Telecommunications Act of 1996, Long Distance Service was the only restriction left on the Bells at that time.

According to Judge Greene, restrictions were supposed to be lifted when the RBOCs could no longer use their monopoly powers to block competitors or unfairly leverage their powers unfairly:

“It is probable that over time, the Operating companies will lose the ability to leverage their monopoly power into the competitive markets from which they must now be barred. This change could occur as a result of technological developments which eliminate the Operating Companies’ local exchange monopoly or from changes in the structures of the competitive markets. In either event, the need for the restrictions upheld will disappear, and the decree should therefore contain a mechanism by which they may be removed.”

The legal mechanism that the judge was referring to are “Waivers”. RBOCs could petition the court for Waivers that would allow them into services when they could justify that their behavior would not be anti-competitive.

Equal Access For All 

Prior to the divestiture (this is a word you often hear when referring to the Bell break-up which simply means a break-up or a separation) MCI had serious problems in being able to connect its services to the AT&T network, and in many cases, MCI was supplied with inferior connectivity compared to the service provided to AT&T Long Lines. Therefore, one of the stipulations of the break-up was that all of the RBOCs had to offer equal access for long distance to their competitors (The operative term is long distance. Remember this because it will be important later). Doing so would not be cheap, and the FCC and AT+T estimated it would cost the RBOCs approximately $2.5 billion dollars to provide the network.

To pay for this network, the FCC instituted access fees. Long distance companies pay this fee to the RBOC in order to access the network, and customers pay it as well. We see it on a phone bill as being a Subscriber Line Charge. Currently, all consumers pay a $3.50 FCC Subscriber Line Charge (sometimes called “End User Common Line”), while the long-distance companies pay approximately over 40% of their entire long-distance revenue back to the local operating companies in access fees and related charges.

Another outcome of the dissolution was that the RBOCs were limited to a rate of return of 11%. Anything else that was earned above that was to be reinvested back into company.

Although it will not be presented again in this report, another interesting development was jurisdiction over a phone call. Was it a long distance call? Was it local call? Was it a Toll call? So the government created small geographic areas and dubbed them LATAs for Local Access Transport Areas. Latas were about the size of the historical area codes and they determined who owned the call.

This created a very large mess. For example, a Toll call, a call within a LATA, but not in the “local calling area,” had a different price and was handled differently from the point of view of everything from staffing and pricing to technological access. The Baby Bells were only allowed to handle calls that were “IntraLATA” (calls that started and terminated within a specific boundary) while a long distance call was one that crossed LATA lines, even within a specific state. Long distance calls are also known as “InterLATA” and “Interstate” calls, because they cross both LATA lines as well as state lines. Because of these artificial creations, a call from New York to Montauk, which is only 75 miles away but within the same LATA, and only handled by NYNEX in 1992, cost 90% more than a call to California, 3,000 miles away, handled by ATT!

Before continuing, let me say that up to this point it has been a very straightforward presentation. What follows next is the deciphering of events, decisions and strategies that have led us to where we are today. I will keep the language as simple as possible and the story as concise as I can without losing crucial data.

After the split, the Bells immediately began to go to work on easing the restriction of no profits above 11%. Was 11% too low? Looking at what they earned annually back at that time, you decide:

Ameritech – $8,378,000,000
Bell Atlantic – $8,090,000,000
Bell South – $9,631,000,000
Nynex – $9,573,000,000
Source: RBOC annual reports ’84

Nevertheless, in their mind it was too low.

They then proceeded to “cut a deal” with the states. This deal entailed giving the Bells a profit of 14% instead of 11%, and in return, the Bells would build out the much vaunted “Information Super Highway”. Not to be confused with the Internet, this network consisted of connecting everyone via a fiberoptic network of ISDN lines. (I have no doubt that the first challenge to this report you are reading will occur regarding this information. Although I could clutter this page with the numerous quotes of Senior Bell personnel to substantiate the information, I will instead place this and any future comments inside links that say *further information* . Click on them throughout the report if you would like greater detail.)

After this was arranged, statements delivered and promises made, there was only one problem. The Bells received their 14%. The states never received their networks.

Earlier I mentioned remembering that the RBOCs had to open their networks in order for long distance providers to compete. Who were these long distance providers competing with? They were setting up to compete with the recently converted long distance carrier, AT+T. Who were the RBOCs competing with? No one. They were given exclusive control of their own territories for local service, and no one offered any alternative at the time.

The RBOCs were intentionally given a monopoly on the local markets to ensure their stability now that they were separated from the mother hen. As was determined later, this was a grave mistake.

First of all, the RBOCs realized that they had no competition and they possessed a product that was in high demand. This guaranteed them a substantial rate of return which meant they had quite a bit of financial power to use. They immediately petitioned for Waivers allowing them into other investment markets: real estate, software, foreign ventures, etc. and those Waivers were granted.

Believing that they could achieve greater profits outside of their field, all of the RBOCs were busy purchasing a number of these other financial instruments. All of them learned a very expensive lesson too, as NYNEX stated:

“An additional pretax charge of approximately $278 million was recorded in 1991 primarily for business restructuring. NYNEX has commenced its plans to exit the real estate development and management business and streamline other operating primarily related to Other Diversified operations.” *further information*

Virtually all of the Bells had sustained punishing losses as a result of investing outside of their specialty.

The Infobahn…Round 2

By the early 90’s, none of the promises to build the “Information Super Highway” by the Bells had been delivered, yet these companies had retained the profits that were allocated for the project. What was done about it? Nothing. In fact, it was forgotten about. The entire negotiation was utterly forgotten about, yet the Bells were allowed to gain additional profits from this “memory.”

Seeing how easily they were able to effect change in their “restrictions”, it was during this early period in the ’90’s that they sought to do exactly the same thing again. That is just what they did.

The Bells submitted proposals to the individual states asking, “Allow us to retain more profits, and we will build your high-speed infrastructure.” The Bells claimed the highway would be a technological revolution, and it would be done with the simplest of compromises. *further information*

What did the states say after they had already eased restrictions a first time, made the Bells more profitable and never received an ounce of the first promise? The states agreed. Yes, you read this correctly…the states agreed to the proposal…again.

What was the incentive this time? The language was slightly different in each case, however the common denominator was the same. The Bells had worked out arrangements whereby their basic services had price caps, profits were no longer fixed, and in some cases, other services were no longer regulated. What did this mean exactly?

Price caps are a ceiling on the amount that you can be charged for a service. In theory it’s a great concept, however it made life miserable for a great, many people. If you are asking yourself why, then you have demonstrated why it was a great tactic for the phone companies to use on the public.

Remember, a very important part of the arrangement was to allow the Bells to profit as much as they wanted. If they could not profit further by raising rates, can you think of another way that they could increase their profit margins? They did it by cutting jobs. Those of you who were in a Nynex/Bell Atlantic area know this all too well.

These companies were already vastly profitable. They out performed most fortune 500 organizations, yet after this agreement was established, they suddenly began cutting their staff numbers. What happens when you do not have adequate staffing? According to an LA Times article, (6/18/95) the Ohio’s PUC received 10 times the number of complaints in 1994 than the previous year, while NYNEX missed 142,000 appointments in the last three months of 1994 alone. In fact, according to NYNEX’s 1996 3rd quarter report:

“New York Telephone will be required to issue rebates to customers of at least $102 million for not maintaining adequate service standards.”

As a New York Post columnist, Irwin Stelzer, put it:,

2/26/97 “NYNEX fails to show up at about 1,000 repair appointments every business day.”

Additionally, although the domain is now defunct, www.nynexsucks.com was registered and became a popular catch-phrase that described the situation at that time.

At this point, the Bells had it good. Every, local customer in the country belonged to them, profits were sky high *further information* and complaints about service mattered little because there was no competition for anyone to turn to.

Finally regulators stepped in. They came up with a bill that ultimately gave the Bells an incentive to open up their local markets to competitors called the Telecommunications Act. It was also hoped that this bill would foster deregulation and allow market forces to control prices of Bell companies. The bill sets forth 14 various checkpoints, that when fulfilled, will allow the Bells to compete in other markets that they have been excluded from. Many argue that it has not been enforced, while others feel that it should be removed completely.

Whatever Happened To…?

Ah yes…before we continue, we should answer the question of whatever happened to all of the Bell companies who promised a fiberoptic information super highway? It still has not been delivered…and it will never be delivered. Why? *further information* Because in the phone company’s eyes, it does not need to be. The Bells have received exactly what they have petitioned for, and without having to do anything for it.

Through this tumultuous period of fighting for local phone competition, enforcing telecom regulations and a failed ISDN deployment, there was an emerging technology which held great promise for the future. It’s name was Digital Subscriber Line or “DSL”.

This situation alone could fill volumes of reports, however it will be described here via a case example that occurred with Pac Bell, and then briefly discussed afterwards:

Count Ted Olson, cofounder and CEO of Oacys (pronounced like oasis) Technology, among the skeptics of the RBOCs’ version of events. Mr. Olson’s low-key demeanor belies his past as a military and commercial helicopter pilot. After he and his wife, Asih (pronounced like Aussie), started Oacys as a computer dealership in the early ’80s, it became Porterville’s first ISP in 1995.

Mr. Olson says that in late 1999, when Oacys owned about 85 percent of the local dial-up market, his customers began asking about DSL. At that time, he says, his Pac Bell account manager assured him Pac Bell wouldn’t offer DSL in Porterville because of its relatively weak demographics (a small population and little industry). One week later, he discovered by accident that Pac Bell, in fact, would begin selling DSL in Porterville within a month. Unoffended, he ordered DSL line provisioning for Oacys. “They gave me some price quotes verbally that they later backed out on,” he says.

Thus began a 15-month ordeal that left Mr. Olson sworn off DSL forever. Pac Bell originally claimed it would have the Oacys DSLAM running within a month but didn’t deliver service until November 2000, one year after Oacys filed its application. The delays included everything from simple stonewalling to technicians hooking up the DSLAM to the wrong power panel, according to Mr. Olson. The Keystone Kops quality of the situation might have been amusing had Oacys not begun losing customers during the delay. “It was definitely an ‘egg on our face’ situation,” Mr. Olson says.

After Pac Bell finally got the service running, Mr. Olson used himself as a guinea pig, ordering DSL for his home through Oacys. This triggered another fiasco, one that included inexplicably closed work orders, buck-passing by Pac Bell engineers, and attempts by various technicians to get the service running. One technician finally told the Olsons — three months after they placed their order — that the telephone lines in their neighborhood were unfit to carry DSL.

By this time, with the loyalty of its remaining customers stretched thin — many of its small business accounts had switched to Pac Bell’s DSL service — Oacys abandoned DSL. The company now offers a fixed wireless broadband service for $40 per month, plus a $600 setup and equipment fee. Mr. Olson says because of the ongoing business he might have had, it’s impossible to estimate how much overall money the DSL debacle cost Oacys, but he figures the 2000-2001 shortfall to be about 25 percent of the company’s approximately $1 million in revenue. “All we wanted was a level playing field, but instead we got a death by a thousand cuts,” he says.

 Tauzin-Dingell

There were two state representatives by the name of Billy Tauzin and John Dingell who were at the forefront of a very heated debate. Both were firmly convinced by the Bells that if broadband were to be deployed rapidly and on an even playing field with cable providers, then the Bells should no longer be forced to open up their networks to competitors for broadband service. Hence, they submitted a bill (The Tauzin-Dingell Bill) some time ago that was barely taken seriously at first, however with the Bells and a few key politicians behind it, this bill actually made it through the House of Representatives and moved forward to the Senate.

In no uncertain terms, if this bill had passed, it would have without question wiped out any ISP that offered DSL service. Neither side argued that point; so the question became, was is it fair?

Thankfully the bill was ultimately defeated, however it was a great demonstration of how corporate money intermingled in politics can make almost anything possible. An MIT associate did an in-depth examination of what that bill would have meant for all of us and you can find it here.

From their inception to the current landscape, you now know an almost 20 year Bell history encapsulated in about 15 minutes of reading.

What will become of the never-deployed ISDN network? The lack of local competition? The future of ISPs? Time will tell.

I have done my utmost to keep this report as free from my own views and feelings as possible, however if you have an interest in seeing where I stand, you can click onto the above link which will take you to my “Public Statement” that I have posted on this site.

If you have questions regarding the veracity of any of the information presented in this report, or you would like a more complete answer, feel free to contact me.