In competitive markets, we are used to seeing the largest three or four competitors fighting each other over customers. However, we don't see that behavior in the local telephone market. The four biggest local companies are giving each other a free ride. Why?
Verizon Communications Inc., SBC Communications Inc., BellSouth Corp. and Qwest Communications International Inc. are strangely silent in each other's territory. Even in metropolitan Los Angeles, where SBC and Verizon occupy many contiguous exchanges and where they both own several large switches and have the necessary back-room systems to serve each other's customers, they don't compete with each other in any significant way. I haven't seen any television ads where SBC claims its service is better or cheaper than Verizon's, nor has Verizon urged customers to leave SBC. Why not?
There are many similar examples of the big local companies -- the Bells -- avoiding competition with each other. Each example begs the same question, "Why won't the Bells compete with each other?" Let me share three more examples.
A little discussed fact: In 1996, the Telecom Act gave the big local companies the right to compete in each other's territory for both local and long-distance service.
Let me be clear, in 1996, SBC, Verizon or BellSouth could have competed for customers in Pacific Bell's territory in California, but didn't. In particular, SBC could have offered local and long-distance service to Californians on exactly the same footing as every other CLEC and long-distance carrier -- in 1996. Talk about level playing fields. However, SBC chose not to do that. Think about it, SBC could have been winning local and long-distance customers in California for more than six years, gaining share and profits, but didn't.
Instead, SBC chose to take over Pacific Bell and its ownership of the local monopoly and delay its entry to the California long-distance market. SBC chose to forego the chance to compete with AT&T Corp., MCI/WorldCom Inc. and Sprint Corp. in the long distance market in California. Evidently owning the local monopoly in California is worth more to SBC than the value of six years of long-distance competition. The other Bells simply stayed out of the game in California.
Another example of the Bells ducking competition with each other is the saga of "merger conditions" imposed by the Federal Communications Commission. Since 1996, the Bells have shown a great enthusiasm for merging rather than competing with each other. The FCC and Department of Justice (DOJ) went along for a while, allowing the Bells to eliminate each other as potential competitors, until the government finally imposed competition requirements on Verizon and SBC as conditions for approving the latest mergers. The FCC required SBC and Verizon to compete with each other and with BellSouth and Qwest. This seems reasonable, yet SBC and Verizon have ignored these conditions, and to this day none of the Bells are competing with each other in any significant way.
Finally, the leaders of the Bells are, through their own public statements, confirming what we observe (and perhaps signal to each other). In a speech denouncing the UNE-P, the new CEO of Qwest recently made clear his firm would not be competing with his Bell brethren. He telegraphed that his firm would not use a lawful method to compete with other Bells. His message triggered a letter of concern from Congress to the DoJ, but the Bell's behavior has been so consistent that another question is, "Why isn't the DoJ all over the Bells?" But that's another topic.
The kicker is the Bells swear (as in "under oath") the local market is irreversibly open to competition (see any of their 271 applications), and the FCC and DoJ apparently agree in the cases they have approved. OK, if the local market is open, that means there are no barriers to entry and no reason why the four biggest local companies should not be competing directly with each other. Who else would you expect to compete with SBC in California or Texas -- two of the biggest communications markets in the world -- except Verizon, BellSouth or Qwest? The four Bells have the "core competencies" to provide local service to a greater degree than anyone else. They have the experience, the systems, the buying power -- everything needed -- to compete, but they aren't. Why? You and I can easily see beer companies fighting each other, car manufacturers, magazines, hardware stores, airlines. Look at any market in America and you will see a flat-out battle for customers and profits. The biggest fights are between the biggest companies, except for the biggest local telephone companies.
It seems to me there are only two possible reasons why they are not competing. First, maybe the local market is not open to competition, despite the Bells' compliance with the Telecom Act's 14-point checklist in many states. The second possible reason is the Bells have decided not to compete with each other. They have divided the market among them. Of course, it is possible for both reasons to be true at the same time.
Why aren't the Bells competing? My bet is the "last mile" is still a natural monopoly necessary to provide local service and the Bells are cooperating to maintain control of that monopoly. But, as they say, that's just an opinion.
John Sumpter is the vice president of regulatory at Pac-West Telecomm Inc. and chairman of the California Association of Competitive Telecommunications Companies. He can be reached at jsumpter@pacwest.com.
Editor's Note: The FCC says SBC has complied with terms of its commitment to launch facilities-based local voice services in 30 markets by the second quarter of 2002. See the September 2002 issue of xchange.
