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Missed Phone Connections
Published on Wednesday, August 28, 2002 in the Boston Globe
Missed Phone Connections
by Robert Kuttner

OUR LONG-DISTANCE telephone service stopped functioning yesterday.

For the magazine I edit, it was a pretty big inconvenience. For several hours we pooled cellphones.

My first call was to our bookkeeper. Were we current on our bills? We were.

My second call was to Qwest, the offending long-distance company. Its lines were jammed. A company spokeswoman said she didn't know how many customers had lost service, but Qwest's own filing with the Federal Communications Commission yesterday, as required by law, indicated that 500,000 calls per hour didn't get through.

The gullible public has been trained to live with the fact that Internet providers can go down for a time, but telephone service?

Expect more of this. Thanks to deregulation, long-distance is becoming less like an essential service and more like just another commodity.

The problem is that telephone service is not an ordinary consumer product. It is a public utility. It is also what economists used to call a natural monopoly.

In the late 19th century, after Alexander Graham Bell's original patents expired, competing phone companies sprang up and strung miles of wires. Rival telephone companies refused to connect customers to each other's switchboards. Bell, the dominant company, gobbled up as many competitors as it could and then raised rates.

Eventually, the government wisely concluded that this wild oscillation between ruinous competition and efficient price-gouging made no sense, and the first great telephone market experiment ended.

The solution was to recognize that telephone service was a natural monopoly and then to regulate it in the public interest.

That way the public would be guaranteed universal, reliable service at a fair price, and AT&T would be guaranteed a reasonable rate of return. It all worked well enough until the 1970s, when AT&T was charged with suppressing competition - not of basic phone service but of the many embellishments that could be usefully connected to a phone line.

AT&T took the position that handy devices like answering machines were foreign equipment. It tried to squash anyone who tried to connect a non-Bell device to its lines.

This was a company, after all, whose major consumer innovation in three decades was the Princess phone (It's little, it's lovely, it lights!)

AT&T did plenty of innovating in that era, but the engineering advances were mainly in automating its switching systems so that fewer and fewer human operators would be needed to handle its increasing volume of calls.

Still, the antitrust authorities concluded that AT&T was abusing its monopoly, and the remedy was to break it and let anyone into the phone business. A new generation of economists, who hadn't read much history, concluded that telecommunications was naturally competitive after all.

By 1996, Congress finally legislated a whole new arrangement in which local and long-distance companies could compete with each other as long as they sort of played fair. This new reliance on market forces promised miracles of innovation and bargain rates.

As my colleague Paul Starr has written, the Internet was supposed to be a technological miracle. Service would be free and companies could make billions providing it. A miracle, Starr wrote, is exactly what it would have taken to realize both expectations.

The telephone industry is now a shambles. The pattern of the late 19th century is repeating itself.

In an industry like telephones, where the initial expenses are large, companies try to grab as much market share as possible. They do this by underpricing their competitors. Pretty soon there is far too much capacity and not enough customers to pay off its costs.

The telephone industry collectively has lost about $2 trillion of investors' money. MCI, the original upstart challenger to AT&T, was gobbled up by WorldCom, now a basket case. Qwest, the provider that left many Boston customers without service yesterday, is teetering. Even relatively well-run companies like Verizon face the effects of ruinous competition from desperate rivals.

In this environment, nearly everyone is stinting on service. Directory assistance operators make more mistakes, it takes longer to get a line installed, technicians are overworked.

The old regulated system had its problems, but it was reliable, simple, and you didn't have to resort to bargaining every time you tried to fathom your phone bill. Long-distance prices dropped at a rapid rate without competition thanks to technology and regulation.

At times we railed at Ma Bell, but she looks pretty good compared with some of her children.

Robert Kuttner is coeditor of The American Prospect. His column appear regularly in the Globe.

Copyright 2002 Boston Globe Company


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