Until the 1980s in the United States, the term "telephone company" was synonymous with American Telephone & Telegraph. AT&T controlled nearly all aspects of the telephone business. Its regional subsidiaries, known as "Baby Bells," were regulated monopolies, holding exclusive rights to operate in specific areas. The Federal Communications Commission regulated rates on long-distance calls between states, while state regulators had to approve rates for local and in-state long-distance calls.
Government regulation was justified on the theory that telephone companies, like electric utilities, were natural monopolies. Competition, which was assumed to require stringing multiple wires across the countryside, was seen as wasteful and inefficient. That thinking changed beginning around the 1970s, as sweeping technological developments promised rapid advances in telecommunications. Independent companies asserted that they could, indeed, compete with AT&T. But they said the telephone monopoly effectively shut them out by refusing to allow them to interconnect with its massive network.
The First Stage of Deregulation
Telecommunications deregulation came in two sweeping stages. In 1984, a court effectively ended AT&T's telephone monopoly, forcing the giant to spin off its regional subsidiaries. AT&T continued to hold a substantial share of the long-distance telephone business, but vigorous competitors such as MCI Communications and Sprint Communications won some of the business, showing in the process that competition could bring lower prices and improved service.
A decade later, pressure grew to break up the Baby Bells' monopoly over local telephone service. New technologies-including cable television, cellular (or wireless) service, the Internet, and possibly others-offered alternatives to local telephone companies. But economists said the enormous power of the regional monopolies inhibited the development of these alternatives. In particular, they said, competitors would have no chance of surviving unless they could connect, at least temporarily, to the established companies' networks-something the Baby Bells resisted in numerous ways.
Telecommunications Act of 1996
In 1996, Congress responded by passing the Telecommunications Act of 1996. The law allowed long-distance telephone companies such as AT&T, as well as cable television and other start-up companies, to begin entering the local telephone business. It said the regional monopolies had to allow new competitors to link with their networks. To encourage the regional firms to welcome competition, the law said they could enter the long-distance business once the new competition was established in their domains.
At the end of the 1990s, it was still too early to assess the impact of the new law. There were some positive signs. Numerous smaller companies had begun offering local telephone service, especially in urban areas where they could reach large numbers of customers at low cost. The number of cellular telephone subscribers soared. Countless Internet service providers sprung up to link households to the Internet. But there also were developments that Congress had not anticipated or intended. A great number of telephone companies merged, and the Baby Bells mounted numerous barriers to thwart competition. The regional firms, accordingly, were slow to expand into long-distance service. Meanwhile, for some consumers-especially residential telephone users and people in rural areas whose service previously had been subsidized by business and urban customers-deregulation was bringing higher, not lower, prices.
This article is adapted from the book Outline of the U.S. Economy by Conte and Carr and has been adapted with permission from the U.S. Department of State.