Teletruth News Analysis:

PART ONE: November 15th, 2007

NOTE: This is the first in a series examining how the FCC's brand of deregulation harmed American's economy and digital future.

• 56% Drop in Competitive Local Exchange Carrier Lines: Loss of 10 Million Competitive Lines Since 2004 -- and Falling.
• Lack of Competitive Choices Led to Massive Local and Long Distance Price Increases; Billions in Investor Losses.
• FCC's Deregulation Picked Winners and Losers -- The Duopoly -- Creating Economic Harms to Wireline-Competition, Favoring Cable Companies.

DROP 10,330,000 lines -56%

Only 7.1% competitive lines.

When the Telecommunications Act of 1996 was passed, the goal was to open the America's wireline utility, the PSTN (Public Switched Telephone Network) to competition. In exchange, the local phone monopolies would be allowed to offer long distance service. They had been restricted because the court realized that they would gain undue market power owning local and long distance. (In fact, in 1984, AT&T was broken up because of this issue.)

New data now shows that the FCC illegally failed to protect the rights of competitors on the PSTN networks, directly in contradiction to the Telecommunications Act. Instead, the FCC gave regulatory preferences and new financial economic regulations to move towards a duopoly, where the cable and telco wire-owners control telecom, broadband, cable and Internet service.

New data, highlighted in Exhibit 1, shows that there has been a massive 56% drop in competition on the wireline networks since 2004 primarily caused by the FCC's policies to remove wholesale rates (known as 'UNE-P' and 'Resale'.) This was the primary reason AT&T and MCI were put out of the local phone business and put up for sale.

Today, there are about 8.3 million total competitive lines as compared to 18.6 million in 2004 for the three largest incumbents, AT&T, Verizon and Qwest. The phone companies have 118 million lines, thus, only 7.1% of competition for both business and residential services, which means that they are still monopolies of the wireline networks.

Meanwhile, the cable association claims that only 12 million customers have phone service via their cable provider ---a bit over 10% of homes. Thus, competition is essentially flat as one favored group takes market share from the group being 'deregulated' out of business. More to the point, there is no competition.

Less Choice and Strengthening the Duopoly.

The Telecom Act was not set up to let the owners of the wires take control of local, long distance, cable, connectivity to the Internet and broadband (DSL). This is clearly excessive market power. It is also rife with anti-trust violations because these companies used their market position to get the FCC to favor the wire owners over the independent companies. These arguments were strengthened, not by independent research conducted by the regulatory agencies, but relied on corporate-funded-think tanks, and the company's astroturf and lobbying groups.

Consequences and Ironies

Regulatory Favoritism: When comparing the drop in competitive lines with the increases in cable-telephony, we are faced with a fact that the FCC manipulated the entire competitive process to help the owners of the wires, not the competitors.

One competitor, IDT, wrote: "The declines, particularly in our bundled offering, are reflective of our decision to stop marketing these services following the FCC's termination of the UNE-P pricing regime in calendar 2005, which has resulted in an increased cost structure and inferior economics for this business."

o Less Choices: There are greatly reduced choices, as the two largest competitors, AT&T, and MCI are no longer selling services, and hundreds of competitors were put out of business.

o Merger Ironies: During the previous mergers of SBC-Ameritech and Verizon-GTE, each company claimed it would be entering each others' markets using the wholesale regime and these mergers were essential to give these companies the size to compete. By 2002, SBC was to have 30 cities outside their own regions and Verizon 21 cities. This was all smoke and mirrors as neither AT&T or Verizon compete outside their own regions with wireline services.

Moreover, this competition was to be created by using the same wholesale rate regime that the Bell companies (now AT&T and Verizon) sued over so that other companies couldn't use their networks -- directly after the ink had dried on the previous merger conditions.

o Merger Ironies: AT&T and MCI were put up for sale because the FCC no longer required the phone companies to open their wireline networks to competitors. SBC bought AT&T and Verizon bought MCI and no one of these companies compete for wireline services.

o Investor harms: The market was never a fair 'competitive' market but was manipulated by the FCC's policies to favor the duopoly. Thus, it was not through competition, but through bad regulation, that many of these competitors were put out of business. Every investor who put money into a competitive company that was supposed to be able to use these networks at fair and reasonable prices essentially had their investment strip-mined of value by the FCC.

o Final Insult: Long Distance Takeover: The FCC should consider terminating the right of AT&T (SBC) and Verizon to offer long distance services in their own region. The Telecom Act of 1996 allowed the companies to offer long distance only after it was proved that their networks were open to competition. They were not allowed previously because they would have undue market power.

As is clear, the opening of the networks generated competition. The FCC allowed the Bell companies into Long distance, only to have the FCC close the competitors' rights to use the networks. However, the FCC did not close the right of the companies to offer long distance and so these companies have been able to essentially take over both local and long distance.

o Price increases are the consequences of these actions. As documented since there is no competition, AT&T and MCI have been able to raise rates to "harvest" customers - I.e., continuously raise rates to force customers to leave for more expensive packages. The price for AT&T basic rate long distance service went to $.42 a minute, not counting all of the new bogus charges.

Local Service has also had major increases throughout the US. Since 1980, local service in New York City has increased 472% because there are no competitive alternatives for "local" service.

Mini-Report: Some basics about price increases of Verizon and AT&T.

http://www.newnetworks.com/VerizonATTincreases.htm

o Competitors who are still left and have "contractual' arrangements with the companies are still being put at a disadvantage because their wholesale rates continue to increase or can be more expensive than retail rates.

Next in this Series:

• Part Two: "Reregulation" of the Internet Service Provider (ISP) Market Caused Net Neutrality Harms.
• Part Three: FCC's flawed data created flawed policies.
• Part Four: The Loss of Lines Myth: Counting the copper wiring is no longer valid in examining growth.
• Part Five: The Competition Myth. Packages and price increases show there is no real competition to lower prices.
• Part Six: Free Market Garbage: How the phone companies hijacked the PSTN, Public Switched Telephone Networks. The phone companies' and their think tanks keep telling people they for 'free markets', but what they mean is - owned by AT&T and Verizon.
• Part Seven: A Plan for US Broadband: Get the $240 Billion Back.
• Part Eight: A plan to remove the control of corporate funded "stink- tanks, astroturf and co-opted groups that control the telecom and broadband agenda.
• Part Nine: Divestiture II: Connecting the Dots: Opening the Networks and Upgrading America to Ubiquitous Very High Speed Broadband.

  Bruce Kushnick, Teletruth

Teletruth is an independent, non-funded, volunteer organization that works to protect the rights of all customers pertaining to broadband and telecom issues:

http://www.teletruth.org