Competition without price reductions?

STEPHEN N. BROWN

The Communications Act of 1995, H.R. 1555, is the House of Representatives` version of telecommunications reform. The bill is being justified in the same way as all previous reform bills: It will supposedly stimulate competition in telecom munications markets, reduce prices for services and thereby improve the nation`s general welfare. It was no surprise last May when Rep. Thomas Bliley (R-VA), chairman of the House Commerce Committee, invoked the "lower prices" principle to justify his amendments to H.R. 1555. Bliley said they were meant to "hasten the day when consumers will see competition and lower prices for telephone service."

It is an accepted principle in this country that competition is good, but Bliley`s statement is wishful thinking because it ignores the telecommunications industry`s self-contradicting desire to have competition without reducing prices. The chairman`s statement, for example, does not take into account issues raised in a hearing where Rep. Edward Markey (D-MA) and the president of Comcast Corp., Brian L. Roberts, played a cat and mouse game over whether competition would mean lower prices in the cable business. Roberts would not give a definite answer: He skirted the issue by saying "I would hope so" and by suggesting that "better services at competitive prices" would be equivalent to price reductions.

The cable executive`s reluctance to link competitive markets to price reductions is not an isolated incident. Telephone executives have done the same thing. In a speech earlier this year, Bell Atlantic`s Vice Chairman James G. Cullen told the Smith Barney brokerage house of a bright future for the telephone company. Among the points Cullen emphasized was Bell Atlantic`s ability to avoid price reductions: "On the state level, we need to complete our transition to a price cap environment that gives us incentives to invest and continue to reduce our costs, without imposing onerous price reductions in the process. That`s exactly what we`ve recently achieved in Virginia." It is ironic that Cullen singled out Bliley`s home state as a place where the company can reduce its costs without passing any of the savings to consumers.

The telephone and cable industries are sending mixed signals about competition`s effect on price. Such behavior is expedient and suggests they say different things to different audiences as the situation warrants. This behavior reduces the industries` credibility with consumers, which is unfortunate because the sale of new telecommunications services is largely dependent on the public`s trust. Nothing deters sales more than the image of a service provider as a grasping opportunist. Fortunately for the industry, it appears to be aware of its declining credibility: Corrective efforts may be underway.

Gary McBee, chairman of the Alliance for Competitive Communications, a lobbying group composed of the seven regional Bell holding companies, gave an insightful speech to the National Association of State Utility Consumer Advocates. He made the usual demand that all communications markets be immediately open to competition. He also made the standard promises: "You can make the promised benefits of competition--lower rates, increased choice, greater availability of advanced new services--realities in the areas you serve." McBee cautioned his audience: "That means not looking backward to the old way of doing things and [not] struggling to protect pockets of the industry from the gale of competition but looking forward to the opportunities that real competition can bring to consumers in all areas of communications today." He then made an indirect reference to the industry`s credibility problem and to the public`s cynicism: "We work in a world that is so dominated by complex regulatory formulas and subsidies that no one laughs if someone says that when you increase competition, prices go up. ...Lesson number one is that in the real world, real competition makes prices go down, not up."

McBee`s presentation again unfortunately raises the problem of the industry saying different things to different audiences. Lesson number one, for example, contradicts other remarks made by Cullen. He told Smith Barney that if a company is already the lowest priced provider, the odds are there will not be price reductions. Focusing on short-haul long distance, he said, "We`re also prepared to defend our short-distance toll business. ...gifven taking into account a 40% discount [from competitors], Bell Atlantic`s rate for a five-minute, 15- to 20-mile daytime call is 35% lower than [competitors`]. ...Similar results are obtained for calls of varying lengths and distances. In other words, our prices already replicate the interexchange carriers` most discounted rates. Unless the interexchange carriers are prepared to see their margins compress across the board, [their]...gifntry should not result in sharp price decreases."

The industry`s political and business leaders clearly have different opinions about the effects of competition. Even if the leadership were in agreement, they would still have to deal with regulators whose job is reconciling public and private interests.

Testifying on behalf of the National Association of Regulatory Utility Commissioners, New York Commissioner Lisa Rosenblum heaped lavish praise on H.R. 1555. While not sounding exactly like a congressional cheerleader and saying "all glory to the legislative committee," she came close: The bill "provides a sound framework to accelerate robust competition in the local market [and maintains] our nation`s long-standing commitment to universal service. We applaud the committee for this intelligent legislation." In legislative hearings, praise precedes criticism and pleading. So it was with the commissioner`s testimony regarding competition`s effect on prices and vice-versa: "The National Association of Regulatory Utility Commissioners has a strong interest in the pricing flexibility...provisions of the bill. ...Without the presence of actual competition, pricing flexibility has the potential to stifle local competition." This is an oblique way of saying that current telecommunications service providers will drop their prices to preempt a would-be competitor, but without a would-be competitor there will be no price reductions. Perhaps Rosenblum, Bliley, McBee, Roberts and Cullen are all correct. Maybe the best way to qualify the "lower prices" principle is to say: "If several conditions are met, there will be lower prices." The public cannot expect across-the-board price reductions from the deregulated telecommunications industry.

Fiber and price reductions

H.R. 1555, like all other telecommunications reform bills, is a product of the deregulation movement that began in the late 1970s under President Carter. The movement`s primary justification was the promise of lower prices through competition. The first industry to be deregulated was the airlines, followed by deregulation of natural gas production and transportation, and then by the AT&T divestiture and the near-deregulation of long-distance telephone markets. Although each industry has had a slightly different experience, most people are familiar with the airlines` pricing: The price of a ticket to fly tomorrow is three to four times higher than a ticket to fly two weeks from now. The lesson is that low prices tend to be correlated not only with competition but with predictability, certainty and reliability. Business prizes these qualities because they are associated with lower costs. The more these qualities characterize a customer or a technology, the more desirable they are to the business.

This prevailing pattern may explain Bell Atlantic`s recent withdrawal of its Section 214 applications with the FCC. In June 1994, the company filed construction permits with the FCC to build video dial-tone networks using hybrid fiber/coaxial-cable technology. In May, the company dumped hybrid fiber/coaxial cable in favor of a more fiber-intensive technology--the switched-digital video network. Apparently, fiber`s cost and reliability were major factors in the decision. The company`s vice chairman, Larry Babbio, suggested that fiber networks are the most reliable and require less work to build and maintain. Babbio said: "This network will provide the most reliable voice and high-speed data communications available. ...It must be absolutely reliable." Because of its enormous bandwidth, fiber offers the greatest potential for a deregulated telecommunications industry to be competitive and profitable while still offering across-the-board price reductions. Thus, the deployment of publicly available fiber networks is vital to the self-sustaining cycle of deregulation, competition, technological progress and price reductions. Pull out the last two elements from the circle and the entire deregulation movement changes from a cause to improve the general welfare to one that lines the pockets of special interests. Thus, it is very worthwhile to follow the progress of the switched-digital video networks to see if they live up to their potential.

Skepticism surrounds Bell Atlantic`s withdrawal of its Section 214 requests. According to Multi-Channel News, Decker Anstrom, president of the National Cable Television Association, said, "We have had from the outset a series of questions about the technology that the telephone companies have said they are going to deploy....[They] got wrapped up in their own socks [and] called time out." Reed Hundt, FCC chairman, said, "What you are seeing here is the rethinking of business strategies. John Malone and others in the cable industry predicted for a long time that the telephone companies would have a hard time justifying the massive buildout of big pipes to every home in their areas, and I think that at some level, the telephone companies are trying to figure out whether he might have been right."

Bell Atlantic`s Chief Executive Officer Raymond Smith quickly dismissed the speculation and said the company "had a weird incident a couple weeks ago. We asked the FCC to put the construction permits on hold while we reconfigured the technology--a relatively minor request. The next morning, the press stated that the telephone companies were retreating...in the face of insurmountable technological difficulties. Astonishing! The technology is here and we are deploying it." Good. Are price reductions next?

Stephen N. Brown specializes in market research and public policy toward new technology in the telecommunications industry. For more information call (615) 399-1239.

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