Competition Law and the Telecommunications Market: What Will the Big Three Alliances Mean?

II. THE TELECOMMUNICATIONS MARKET IN THE US AND EU

The telecommunications markets in the US and EU had one

thing in common for most of the past century. Both markets were dominated by monopolies. In the EU, the monopolies were state owned while in the US, a private corporation monopolized the telecommunications sector of the economy. Since its founding during the late nineteenth century, AT&T has been the dominant force in the US telecommunications market. Originally a subsidiary of the American Bell Company, AT&T was designed to develop long distance service for its parent company.⁵ Following a turn of the century stock purchase, AT&T became the parent company of the Bell system.⁶ At the time, there was plenty of competition in the long-distance service market.⁷ However, long-distance and local service remained separated, thus creating a dual service system.⁸ AT&T devised a plan to eliminate the two levels of service by providing one company that could serve customers with both local and long-distance service. Its goal, however, remained to do so by forming “a nationally interconnected monopoly administered by Bell but supervised by regulators." ⁹ This introduced not only AT&T’s position as a monopoly but also the important role regulations would play in the US telecommunications field.

Through sublicensing to independent operators and buyouts of competing companies, AT&T managed to achieve its goal rather quickly.¹⁰ The sublicensing and buyouts effectively destroyed competition because they worked to “isolate and eventually squeeze out the remaining competitive telephone systems.”¹¹ This led to the first government backed antitrust lawsuits against AT&T, both at the state and federal levels.¹² AT&T, in an attempt to avoid litigation, agreed to a number of conditions including ending its acquisition of companies that directly competed with the Bell System.¹³ However, any effectiveness resulting from this compromise was stopped by the passing of the Willis-Graham Act by Congress in 1921.¹⁴ This act exempted telephone company mergers from any antitrust review and firmly established AT&T as the sole owner and operator of nearly all long distance and local telephone service.¹⁵

Prior to the divestiture, AT&T controlled 80-90% of all US domestic and international outbound long-distance service.¹⁶ Furthermore, an AT&T subsidiary, Western Electric, supplied nearly all installation for the entire Bell telephone system.¹⁷ Western Electric was also the largest producer of telephone equipment in the United States.¹⁸ Finally, AT&T and Western Electric jointly owned the research facility which developed much of the new domestic telecommunications technology.¹⁹ During the time of its dominance, AT&T managed to maintain its monopoly due to US policy. The US government continued to grant the deference awarded to AT&T in the Willis-Graham Act by balancing it with federal and state telecommunication regulations. By the time the Federal Communications Commission (“FCC”) was formed in 1934, the federal government had decided that regulation, not the courts, would control the telecommunications market.

Regulation has always been a key component to US telecommunications policy. Later, when the US decided to inject competition in the market, it would do so through regulation of the AT&T restructuring.²⁰ Prior to the AT&T divestiture, the government turned to regulation administered by the FCC to continue to balance the monopolistic nature of the market with consumer welfare. One of the earliest examples involves a petition filed with the FCC challenging AT&T’s control over private telephone lines. The FCC’s decision to allow non telecommunication companies to provide microwave services wherever an existing provider would not provide such a service opened the way for Microwave Communications Inc. (“MCI”) to join the market.²¹ Other FCC decisions followed which continued to open the market to competition, particularly with regard to telephone equipment.²² Regardless, AT&T continued its monopoly of at least standard telephone equipment and private lines. It was becoming increasingly clear to the FCC that although its piecemeal regulatory work was introducing some competition into the market, so long as AT&T remained the monopoly, true competition could not exist. Still, the government remained hesitant in applying its antitrust laws to AT&T practices. However, US antitrust laws allow suits to be brought by private parties. More companies looking to enter the telecommunications market found the government to be inadequate in handling AT&T’s monopoly. Therefore, they decided to take action themselves.

In 1974, the year the DOJ filed its antitrust suit against AT&T, thirty-five antitrust suits had been filed by private parties against AT&T and its subsidiaries.²³ The DOJ then joined many of these cases and filed a new suit accusing AT&T of leveraging its dominant position in several markets to “monopolize the entire domestic telecommunications industry.”²⁴ The DOJ believed that AT&T needed to be recreated as three separate companies, one for each of the markets it held a

dominant position in.²⁵ Instead, AT&T agreed to a settlement that required it to divest itself of all operating companies which would become independent and provide local services only.²⁶ This would effectively end the dual service benefit that allowed AT&T to become a monopoly in the first place. As a result of the divestiture, the monopoly held by AT&T in the

US telecommunications market ended.²⁷

Although the end of the AT&T monopoly injected more competition into the market, it did not result in full competition. As soon as AT&T divested, the entire process began to be questioned and the effectiveness of US antitrust law doubted. Regulation continued to play a key role in the telecommunications market. In 1996, Congress enacted the Telecommunications Act²⁸ with the goal of finally introducing full competition to the market. The most comprehensive reform of US telecommunications law in sixty years, the Act moved barriers to new long-distance market competition.²⁹ The Act served two purposes. First, it took over where antitrust law had thus far failed. Second, and just as important, is the fact that the Act showed that federal regulation is an absolutely necessary component of open and competitive markets in US telecommunications.

In Europe, all the activity surrounding the US telecommunications market was watched very closely. As in the US, the telecommunications market in Europe was dominated by monopolies although state owned rather than private. And like the US, the EU was looking to inject competition in its rapidly growing telecommunications market, as well as in other sectors where state monopolies retained control.³⁰ Beginning in the late 1980s, the European Commission (“Commission”), encouraged by the AT&T divestiture, turned its attention to the telecommunications market.

Europe’s telecommunications monopolies controlled quite a bit more than AT&T did in the United States. Prior to liberalization, state monopolies controlled the post, telegraph and telephone services (“PTT”), effectively extending the state’s power to all areas of telecommunications.³¹ Unlike the heavily regulated US market, the state owned monopolies decided factors such as the price to be charged to end-users based on politics rather than any related market concerns.³² This despite the existence of the International Telecommunications Union (“ITU”). The role of the ITU was to prevent state monopolies from “overreaching.”³³ Although the Member States participated in the ITU, it was completely ineffective because it was unable to enforce compliance or develop operational services of its own.³⁴ The ITU’s precarious position was due to the fact that its goals contradicted the Member States domestic interests. Each Member State had its own standards for the various aspects of the telecommunications market and they refused to compromise.³⁵

The failure of the ITU to create a united interest in the telecommunications market notwithstanding, the Commission believed that the key to competition in the market would require “a common approach to telecommunications . . . both in its economic goals and world market position.”³⁶ The 1984 AT&T divestiture only confirmed this belief. The United States had shown that by presenting a united front, it could use its antitrust laws to eliminate current monopolies and change the entry barriers to the telecommunications market. Thus, 1984 marked the beginning of the creation of a uniform European telecommunications policy. The Commission’s first step was to determine the role of the Treaty in promoting competition in the telecommunications market.³⁷