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January 28, 1994
"Right Number - Rather Than the Price of Telephone Service Increasing Sharply, It is Actually About 20 Percent Cheaper than 10 Years Ago, Adjusted for Inflation"
San Jose Mercury News
By Timothy Taylor
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TEN YEARS ago this month, under pressure from federal antitrust regulators, AT&T started to break itself up. The $150 billion company spun off seven so- called Baby Bells (like Pacific Telesis in California and Nevada) as separate companies, and focused on the long-distance and equipment business.

Around that time, dire predictions abounded. For nearly a century, AT&T had acted as a monopoly, offering telephone equipment and installation, plus local, intrastate and interstate service, to most of America. Left to the ravages of market forces, without kindly, thoughtful Ma Bell, what would become of us?

"It's like taking apart a 747 in midair and making sure it keeps flying," said one executive. Pundits wrote of how the "breakup of AT&T will further divide the haves and the have-nots in America." Congressmen fulminated about how the country could end up divided between a "communications aristocracy" and a corresponding "underclass."

A September 1983 headline in U.S. News and World Report stated as fact: "Why Your Phone Bills Will Soar." The article cited predictions that the breakup would increase phone bills by 50 percent in just two years -- and predicted that the cost of phone service would actually triple in some areas. An "expert" testified before Congress that as many as one in seven Americans might have to give up phone service because of the rate increases.

For a time, it was almost conventional wisdom that phone service was about to become enormously inconvenient. Remember the fear of how confusing it would be to receive separate bills for local and long distance? The problem of dialing handfuls of access numbers before making a call? The fear of being "forced" to accept a long-distance company not of your choosing?

Some saw the AT&T breakup as a disaster for American competitiveness. I remember the head-shaking and concern that while Japan was pursuing a coordinated national industrial policy to support telecommunications for the 21st century, the United States was letting a federal judge and a few government regulators destroy its phone system.

Pundit William Greider wrote in the fall of 1983:

"Whatever its faults, AT&T as a regulated monopoly did deliver an extraordinarily efficient phone system over the years, and I am not sure we will be better off without it. In any case, most European governments are maintaining direct control over telecommunications, supervising new technologies and subsidizing their introduction in the interest of equity. A generation from now, we will see which approach was correct."

Although only a decade has passed, rather than a full generation, the extremely positive legacy of breaking up AT&T is already clear. The transition between AT&T and the Baby Bells back in 1984 wasn't seamless, but it was about as smooth as the breakup of a 12-figure business will ever be.

Rather than the price of telephone service increasing sharply, it is actually about 20 percent cheaper than 10 years ago, adjusted for inflation. Deregulation has saved consumers between $730 million and $1.6 billion on their phone service, according to a recent survey of the economic studies by Robert Crandall of the Brookings Institution.

It's true that the cost of local service has increased since deregulation, by about 15 percent. Some increase was expected, since AT&T had for years overcharged on long-distance service, and used the money to subsidize local service. But as competition heated up, the real cost of long-distance calls has fallen by about half since 1984.

The new competition in the telecommunications industry also raised the incentives for an explosion of innovations, which have ranged from basic items like new kinds of telephones, to services like call-waiting and voice-mail, to high-tech items like switching systems and the much-ballyhooed information superhighway itself.

On the issue of global competitiveness, the breakup of AT&T forced U.S. telecommunications companies to get into shape, and they are now ready and eager to take on the world. Meanwhile, as Business Week wrote last month, "Europe's anachronistic state-owned telephone companies are under siege.... What is needed is wholesale reconstruction of these state-owned dinosaurs." Business Week reports that low-quality telephone service is hindering the competitiveness of European business.

The breakup of AT&T illustrates an old lesson about the public relations battle between market forces and government regulation. Market competition can seem fraught with inequality and uncertainty, accountable only to the greed of the profit motive. In contrast, government-regulated monopolies like AT&T may appear to offer fairness, predictability and accountability.

As Al Gore and the Clinton administration discuss how the information superhighway will offer universal service and open access, these themes are certain to arise repeatedly.

To be sure, government has a role to play in the telecommunications industry -- setting technical standards, assuring that the poor receive basic service, encouraging research and development, and so on -- but it would be bureaucratic overkill of the most counterproductive sort to believe that full- scale government regulation of the emerging information superhighway is the best way to accomplish these goals. Instead, encouraging market competition wherever possible is the best-proven method of holding down prices, stimulating innovation, and ensuring long-run competitiveness.

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