Telecommunications Industry & Deregulation

The Telecommunications Act removed regulatory barriers to entry, opening up the market to new competitors. Deregulation led to a large number of new players. The third factor having a great influence on the modern telecommunication industry is deregulation. This article will discuss some thoughts on the impact of deregulation and unfettered competition on industry and a brief debate on deregulation versus some new form of regulatory intervention.

Deregulation has changed the telecommunications industry by transforming local and long-distance monopolies into highly competitive suppliers of communications offerings. The Telecommunications Act of 1996 in the United States coincided with decreased regulations in countries around the world. The Telecommunications Act removed regulatory barriers to entry, opening up the market to new competitors. Deregulation led to a large number of new companies entering the market, which in turn, led to increased competition. Cable and Internet companies began offering telephone service while traditional fixed-line providers began offering Internet and television services.

Regulated Monopolies:

Telecom markets have been regulated to achieve public interest objectives (such as widespread service availability) and to avoid abuse of market power by incumbents through price discrimination, cross-subsidization, and re-monopolization. In a regulated environment, network owners having considerable market power are obliged to provide access to other market players (non-discriminating and based on regulated prices).

Prior to this act, AT&T was the only major telecommunications provider in the country. 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.

Justification for this regime was based on the theory that telephone companies, like electric utilities, were natural monopolies. The telecommunications industry, however, was originally regulated to assure that a standard level of telephone service was available at a reasonable cost. It was regulated, as all monopolies are, to serve everyone equally.

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.

What is Deregulation?

Deregulation is the process of lowering the level of imposed regulation to promote liberalization and competition among market players. Deregulation is a logical step to sustain the further development of the industry by enabling a lasting competitive market environment. The rationale for deregulation is that less regulation will lead to higher competitive intensity, an increase in related investments, more innovation, and higher customer benefits.

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.

Secondly, The Federal Telecommunications Act of 1996 offered a decrease in government regulation as a response to the uncertainties of technological innovation. Under the new law, anyone was allowed to enter any communications business and compete with others. Under Section 251 of the Telecommunications Act, local telephone companies were required to share their lines with competitors under certain conditions and at set rates to encourage a competitive market.

In exchange, the local telephone companies were then allowed to enter other telecommunications markets, such as wireless and Internet. Many companies expanded and began offering services in several branches of telecommunications.

Companies could now offer consumers bundled service packages that combined home phone, wireless, Internet, and cable television services. The opening of the industry has led to rapid growth and the formation of new companies, leading to a surplus of available service. Prices dropped, encouraging competition between suppliers.

To stay competitive, struggling companies consolidated and adopted market strategies aimed at consumers. As a result of increased competition, consumers now have greater power to demand more options and choices. Companies need to meet those demands or risk losing their customers to another provider.

Impact of Deregulation:

Deregulation induced technology-Based Competition and technology-induced proliferation of new suppliers at all stages of domestic and international communications.

Under this scenario, the role of government would change from regulator to surveillance, mandating full access or interconnection so that there are as many suppliers as possible, and preventing collusive behavior. There will exist always, a very limited type of regulation, such as price caps when circumstances demand them.

A new paradigm is emerging for international trade in telecommunications. The last five years have witnessed historic changes in the realm of communications technology. Government policymakers have struggled to keep up with rapidly evolving Internet, telephone, and cable television technology, trying to generate an effective regulatory balance that ensures consumer protection and facilitates the efficient deployment of new technology by eager companies.