Of Public Interest

Volume 4, Number 7
April, 2002

We have all witnessed the economic wonders of competition in long distance telephony since the breakup of AT&T. We have not, however, seen great progress for local phone service. Competition is coming, but slowly. The continued development of wireless telephony will bring increasing competition for local service in the future. With respect to wire-based telephony, however, few people face any alternative to one of the Baby Bells.

People point to the wonders of the airline competition that developed after airline transportation was opened to free competition and wonder why the same thing doesn’t happen for local telephone service. The Federal Communications Commission is still involved in regulating telephone service. The Civil Aeronautics Board, which regulated the airlines, was abolished. Perhaps the FCC should just take a cue from the CAB and withdraw from local phone regulation. Should this actually happen, it’s unlikely that local telecom service will come to resemble air passenger service. Some modest but judicious regulation offers a more promising route to local telecom competition.

There is one huge difference between airline competition and telecom competition. This difference is commonly referred to as the "last mile" problem. Telecom and air travel are both examples of what are called network industries. In such industries, the value of the service any single producer can offer depends on the number of connections its customers can make. If a new phone company or airline connects with only a few thousand people, its value will be puny in comparison with what it would be if it allowed you to connect with people throughout the nation and even the world.

For airlines, simple deregulation offered the customers of new carriers full connectivity throughout the world, even if that new carrier offered direct service between only two or three cities. A customer might still choose to fly on an established carrier for any of a number of reasons. In no way, however, could one of those reasons be an inability to get to the desired destination by virtue of using the new carrier.

The situation is totally different for local phone service, and this difference is due to the last mile problem. Back when AT&T was broken up into eight regional Baby Bells, the Bells gained ownership over the phone lines that ran into individual homes and businesses. A potential competitor to one of these Bells would have to duplicate the wire that runs into these individual habitats. This is expensive, risky, and generally not warranted commercially, except in densely populated commercial districts.

Just imagine what would have happened had the airlines been given ownership over the roads that connect airports with individual homes and places of business. There can be no doubt that robust airline competition would never have developed in such an environment. It would have made no commercial sense for potential competitors to build their own roads to connect airports to individual homes.

There was no last mile problem for airlines because access to airports was public property and open to all. Airlines compete among themselves to carry you from one airport to another. How you get between the airport and your final destination is likewise determined through open competition. You might rent a car. You might take a bus or limousine. Regardless of the method you use, the last mile problem is abated because highways are open to all.

Back when the Baby Bells were created, the last mile problem could have been handled in the same way it was for highways. But it wasn’t. What was established instead was a regulatory requirement, implemented by the FCC, that the Baby Bells allow competitors access to their networks at prices regulated by the FCC.

This continued regulation has proven contentious, and understandably so. Among other things, the Bells think the prices they are allowed charge are too low and force them to subsidize their competitive challengers. This claim cannot be rejected out of hand. Just imagine the conflicts that would arise if a local monopoly airline owned access to the road that goes to your home, operated the only limousine service in town, and then was petitioned by a potential taxi competitor for access to its local network. Regulatory processes are inherently contentious. What can be rejected out of hand, however, is any claim that local phone competition will come quickly to resemble airline competition if only the FCC would desist entirely from phone regulation. Given where we now are, local telecom competition requires some limited regulation to promote open access to overcome the last mile problem.

A Publication of:
Public Interest Institute at Iowa Wesleyan College
600 North Jackson Street
Mt. Pleasant, Iowa 52641-1328
Phone: 319-385-3462 Fax: 319-385-3799
E-Mail: public.interest.institute@limitedgovernment.org Web Site: www.limitedgovernment.org