[**] Mitsubishi Bank Professor, Haas School of Business, University of California, Berkeley. The author would like to acknowledge useful discussions with Robert G. Harris and Greggory L. Rosston, who have been co-authors on related work.
 

[1] United States v. Western Elec. Co. (American Tele. & Tele. Co.), 552 F. Supp. 131, (D.D.C. 1982) aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983) [hereinafter U.S. v. AT&T]. Although the case is commonly referred to as the MFJ, the decision actually modified and approved the MFJ which is appended to the opinion at 552 F. Supp. at 226.

[2] 2 IACOCCA INSTITUTE, LEHIGH UNIVERSITY, 21ST CENTURY MANUFACTURING ENTERPRISE STRATEGY, at Foreword (1991) (concluding that an organizational model in which companies and industries learn to work together to build an infrastructure even while competing in products and services is the key component to America's future success in the global economy).

[3] The model in the United States from 1913, when AT&T promulgated the "Kingsbury Commitment" to, inter alia, interconnect the independent telephone companies with AT&T, until the late 1970s was one that relied essentially on regulated monopoly. See Gerald W. Brock, THE TELECOMMUNICATIONS INDUSTRY 155-56 (1981); See generally HERITAGE FOUNDATION, ISSUE BULLETIN NO. 191, A GUIDE TO TELECOMMUNICATIONS DEREGULATION LEGISLATION, (June 3, 1993).

[4] G. Noll, Telecommunications Regulation in the 1990s, in NEW DIRECTIONS IN TELECOMMUNICATION POLICY, 11, 47 (P. Newberg ed., 1989).

[5] The MFJ spawned seven regional Bell Operating Companies: Ameritech, Bell Atlantic, Bell South, Nynex, Pacific Telesis, SBC Communications (previously Southwestern Bell), and US West. See United States v. Western Elec. Co., 990 F. 2d 283, 290 n.3 (per curiam), cert. denied, 111 S. Ct. 283 (1990).

[6] InterLATA restrictions prohibit the RBOCs from providing long-distance transmissions between Local Access Transport Areas. See U.S. v. AT&T supra note 1, at 141 n.39.

[7] See, e.g., Robert W. Crandall, AFTER THE BREAKUP: U.S. TELECOMMUNICATIONS IN A MORE COMPETITIVE ERA (1991).

[8] See generally L. Evans et al., Economy-Wide Reform: The Case of New Zeland, J. ECON. LITERATURE (forthcoming 1996).

[9] Fiber is generally considered to have nearly unlimited bandwidth potential. Larry Lannon, Is Short-haul Microwave's Future, Well, Short?, TELEPHONY, Oct. 1993, at 67.

[10] Reduced Instruction Set Chips (RISC) represent an advance in microprocessing. Conventional Instruction Set Chips (CISC) will have hundreds of instructions that are directly recognized. RISC microprocessors recognize only the 20-30% of these instructions that are used most often. A smaller instruction set means the RISC microprocessors can do "less" but much faster than CISC microprocessors. Mark Alpert, Why It's a RISC Worth Taking, FORTUNE, Oct. 10, 1988, at 112.

[11] Robert L. Fike, Analog or Digital--The Debate Continues, Transport Facilities, TELEPHONY, Oct. 17, 1994, at 35.

[12] A trunked system is one in which a central computer assigns the first available channel to the user. See, e.g., Motorola May Finance California Comms System, NEWS BYTE NEWS NETWORK, Dec. 14, 1995.

[13] Personal Communications Servers are "microcells" on microwave frequencies with low power, digital transmitters that provide mobile service over small areas, such as an office building or a neighborhood. MICHAEL K. KELLOGG ET AL., FEDERAL COMMUNICATIONS LAW, 860-61 (1992).

[14] Enhanced SMR stands for Enhanced Specialized Mobile Radio which is digital radio service capable of providing mobile telephone service. Communications analysts believe enhanced SMR telephone service may be competitive with cellular telephone service within a few years. Andrew Ramirez A Challenge to Cellular's Foothold, N.Y. TIMES, April 1, 1993, at D1.

[15] Open network architecture policies of the Federal Communications Commission encourage the RBOCs to deploy technologies that give outside communications companies the same access to their switching networks as the RBOCs themselves enjoy. Edmund Andrews, Business Technology: Opening Nation's Phone Networks, N.Y. TIMES, Jan. 16, 1991, at D5. A similar policy already governs long-distance phone service, where customers can select AT&T or any of its competitors to handle their long distance calls without having to press a score of numbers on their phones. Bruce Keppel, FCC Lets Phone Companies Offer Wide Range of Services, L.A. TIMES, Nov. 18, 1988, at 4.2. The FCC first proposed open network architecture in 1985. Edmund Andrews, FCC Moves to Expand Phone Service Choices, N.Y. TIMES, Nov. 22, 1991, at D2.

[16] United States v. Western Elec. Co., 714 F. Supp. 1 (D.D.C. 1988), aff'd, 900 F. 2d 283 (2d Cir. 1990).

[17] Telephone Co.-Cable Television Cross Ownership Rules, 7 F.C.C.R. 5781 (1992) (second report and order, recommendation to Congress and second further notice of proposed rulemaking).

[18] Aziz Lakhani, Video Dialtone, (1992) (unpublished manuscript, on file with author). Another observer notes that "the U.S. already lags [behind] many countries in digitization, SS7 implementation, and fiber deployment." W. Davidson et al., Telecommunications Infrastructure Policy and Performance: A Global Perspective 5-38 (Jan. 6, 1993) (on file with Center for Telecommunications Management, University of Southern California).

[19] Larry J. Yokell, Cable TV Moves Into Telecom Markets, BUS. COMM. REV., Nov. 1994, at 43.

[20] Id.

[21] Id.

[22] JOHN MAYNARD KEYNES, THE GENERAL THEORY OF EMPLOYMENT, INTEREST, AND MONEY 384 (First Harvest/HBJ ed. 1964) (1936).

[23] R. SCHMANLENSEE, THE CONTROL OF NATURAL MONOPOLIES 143 (1979).

[24] Id.

[25] See, e.g., F.M. SCHERER, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE (1980).

[26] See, e.g., W. J. BAUMOL ET AL., CONTESTABLE MARKETS AND THE THEORY OF INDUSTRIAL STRUCTURE, (2nd ed. 1988).

[27] Id.

[28] Interexchange service is the carriage of voice or data traffic across LATA boundaries, the connection between "exchanges." Intraexchange service remains within a LATA. KELLOGG ET AL., supra note 13, at 856.

[29] T.R. Reid, 21st Century Promises Marriage of Telephone, Computer, WASH. POST, Sept. 15, 1986, at F23.

[30] A variety of authors have investigated the impact of alternative technology. E.g., D. REED, RESIDENTIAL FIBER OPTIC NETWORKS: AN ENGINEERING AND ECONOMIC ANALYSIS (1992); G. CALHOUN, WIRELESS ACCESS AND THE LOCAL TELEPHONE NETWORK (1992); P. HUBER ET AL., THE GEODESIC NETWORK II: 1993 REPORT ON COMPETITION IN THE TELEPHONE INDUSTRY (1992); D. Reed, Putting it all Together: The Cost Structure of Personal Communications Services, FCC Office of Plans and Policy Working Paper No. 28 (Nov. 1992); E. DeSurvire, Lightwave Communications: The Fifth Generation, SCIENTIFIC AMERICAN, Jan. 1992, at 114; B. EGAN, INFORMATION SUPERHIGHWAYS: THE ECONOMICS OF ADVANCED PUBLIC COMMUNICATION NETWORKS (1991).

[31] Andrew Adonis, Survey of Mobile Communications, FINANCIAL TIMES, Sept. 5, 1994, at 1.

[32] Sarah Curtis, Beyond Cellular, MACLEAN'S, Jan. 23, 1995, at 46.

[33] Nextel Installs All Digital Integrated Wireless Communications in Los Angeles, RBOC UPDATE, Sept. 1994.

[34] Id.

[35] Mike Holderness, Computer: And Thou Beside Me in the Wilderness, THE GUARDIAN, Aug. 19, 1993, at 19.

[36] Note that both technologies have been experiencing significant decreases in cost, but if transmission costs decrease more rapidly than switching costs, system designers will substitute transmission for switching at the margin. See Huber, supra note 30, at 3.37.

[37] CPE is used on the customer's premises "to originate, route, or terminate telecommunications." U.S. v. AT&T, supra note 1, at 228. Examples of CPE are telephone sets and answering machines.

[38] R. HARTMAN ET AL., Assessing Market Power in Regimes of Rapid Technological Change, in INDUSTRIAL AND CORPORATE CHANGE, 318, 321 (1993) (discussion of the impacts of competition on a variety of features in addition to price).

[39] A Private Branch Exchange (PBX) is a customer provided switch that automatically transfers, or switches calls between the customer's private telephone station and other locations. Carolyn Whitman Malanga, Note, California v. Federal Communications Commision: Continuing the Struggle Between ß 151 and 152 of the Communications Act, 40 CATH. U.L. REV. 893, 918 (1991).

[40] Centrex provides remote switching service with customer-tailored capabilities such as four digit dialing for business and institutional customers. See KELLOGG ET AL., supra note 13, at 852.

[41] An unbundled network, in theory, provides independent information service providers with more complete information about network features and allows them to choose the specific features they need. See, e.g., United States v. Western Electric Co, Inc., 767 F. Supp. 308, 319 (D.D.C. 1991).

[42] Ameritech filed its Customer First Plan with the FCC in 1993 and also filed a request with the Department of Justice for a long distance waiver in Illinois. Jim Dilorenzo, AT&T Challenges Ameritech in Opening Local Competition, TELEPHONY, Apr. 18, 1994, at 6. Since the presentation of this article, the Department of Justice had filed a motion in support of Ameritech's CFP. See infra notes 104-107 and accompanying text.

[43] Carriers offer switching service by allowing users to change the end point of a circuit in a similar fashion to how individuals do when dialing a voice phone number. A Wan Communications Glossary, NETWORK COMPUTING, January 1, 1993, at 76.

[44] According to TCI's President and CEO, Dr. John Malone, in 1992 TCI became the largest single buyer of fiber in the world, based on mileage. Charles F. Mason, AT&T Takes Center Stage at National Cable T.V. Convention, TELEPHONY, May 11, 1992, at 6. Time Warner already offers local connections to long-distance carriers in Indianapolis and Kansas City. Time Warner, Baby Bell May Compete in San Diego, WALL ST. J., June 24, 1993, at B7.

[45] US West Bets on Cable with Time Warner, TELEPHONE WEEK, May 24, 1993.

[46] Id.

[47] Randall M. Sukow & Rich Brown, Time Warner Unveils "Full Service" TV, BROADCASTING, Feb. 1, 1993, at 6. Time Warner is also seeking regulatory approval to offer telecommunications services in San Diego. The services, which are scheduled to begin in 1995, would compete directly with Pacific Bell for business customers. Time Warner plans to connect local businesses with long-distance carriers and link the offices of area companies by building a fiber-optic network. Time Warner, Baby Bell May Compete in San Diego, supra note 44, at B7.

[48] Don Clark, New Visions of Communications: 'Data Highways' Lure Billions in Investment, S.F. CHRON., Nov. 23, 1992, at B1.

[49] Id.

[50] Anthony Ramirez, Head Start on Data Superhighway, N.Y TIMES, Sept. 8, 1993, at D13. Comcast is not only the third largest cable company but also the fifth largest independent cellular telephone provider, giving them a significant presence as a local service provider. Id.

[51] Id.

[52] Id.

[53] Id.

[54] Cable and Wireless, 1993 Report and Accounts 12 (1994).

[55] Edmond L. Andrews, The AT&T Deal's Big Losers, N.Y. TIMES, Aug. 25, 1993, at C1.

[56] See discussion of Telular Inc.'s "magic box" in John J. Keller, Telecommunications: A 'Magic Box' Turns Wired into Wireless, WALL ST. J., Oct. 1, 1993, at B1.

[57] Telecommunications Expected to Grow Steadily in 1992, Commerce Says, COMMON CARRIER WEEK, Jan. 6, 1992, at 1.

[58] E.g., Yokell, supra note 19.

[59] See US West Bets on Cable with Time Warner, supra note 44.

[60] Daniel W. Edwards et al., Telecommunications Services, U.S. INDUSTRIAL OUTLOOK, Jan. 1994, at 29.

[61] Sprint has formed an alliance with TCI, Cox, and Comcast to target local markets. Edmund Andrews, Ameritech Forcefully Stays Home, N.Y. TIMES, Nov. 22, 1994, at D1. AT&T, despite its protestations to the contrary, will also enter the local service business with its imminent acquisition of McCaw Cellular. Jerry A. Goldstone, Wireless Market Nears Boiling Point, BUS. COMM. REV., Nov. 1994, at 4.

[62] Gregory F. Borton & Fred S. Knight, Seeds of Change in CTI, BUS. COMM. REV., Mar. 1994, at 35.

[63] For example, Bob Stanzione, AT&T Vice President of transmission systems, recently acknowledged that for AT&T to compete in the delivery of multimedia communications services, the company will "have to have alliances of some sort with the companies that provide the last-mile access to the home." John Eckhouse, Cable Television's Growing Pains, S.F. CHRON., June 7, 1993, at E1. These statements diminish the credibility of AT&T's public pronouncements that its acquisition of McCaw does not make it a local phone company. Earlier this year, Arno Penzias, vice president of research at AT&T's Bell Laboratories, touted AT&T's vertical integration as being "a far greater asset than it's ever been in the past." The article went on to say that the "ability to merge all the elements - the fiber, the chips and the software to run them - is what makes [a] network valuable" in today's marketplace. Gary Slutsker, The Tortoise and The Hare, FORBES, Feb. 1, 1993, at 67.

[64] States Meander Toward Rules to Foster CAP Competition, TELCO BUS. REP., July 5, 1994, at 1.

[65] New Visions of Communications, supra note 48, at B1.

[66] Local Competition by CAPS Still Embryonic in Western States, ST. TELEPHONE REG. REP., June 8, 1992.

[67] MCI has purchased a significant amount of right-of-way from Western Union. Telecommunications Alert, May 1, 1992, at 1. MCI has also recently filed for state certification as a CAP in Indiana. See States Meander Toward Rules to Foster CAP Competition, supra note 64, at 1.

[68] According to an MCI expert economist, Kenneth Baseman, "the marginal activation costs and marginal operating costs for new circuits activated on facilities already in place are generally quite low and do not differ significantly depending on whether the IXC is co-located or the IXC's POP is several miles away." In the Matter of Expanded Interconnection with Local Telephone Company Facilities; Amendment of Part 69 Allocation of General Support Facility Costs, 7 F.C.C.R. 7369, (Oct. 19, 1992) (citing Affidavit of Kenneth Baseman at 23-24).

[69] MFS Communications Co.: Unit Tries to Win Customers from New York Telephone, WALL ST. J, Oct. 6, 1993, at A4.

[70] Local Service Resellers Target Small Businesses in 41 States, ST. TELEPHONE REG. REP., Oct. 21, 1993, at 1.

[71] See MFS Communications Co., supra note 69.

[72] Id.

[73] Id. at B7.

[74] Continental and Comcast Each Acquire 20% Share of Teleport, FIBER OPTIC NEWS, Dec. 28, 1992.

[75] GOLDMAN SACHS, COMMUNICOPIA: A DIGITAL COMMUNICATION BOUNTY 20 (1992).

[76] Id. at 21.

[77] Although the New Zealand government completely deregulated the industry with far less apparent competition. See generally L. Evans et al., supra note 8; See also Intervention and Openness and Economic Performance: New Zealand, OECD ECONOMIC SURVEYS, Oct. 1994.

[78] R. Harris and D. Teece, Telecommunications in Transition: Innovation, Unbundling, and Reintegration, (forthcoming 1995) (manuscript on file with author).

[79] Vince Vittore, Rochester Tel: Blueprint for Change, AMERICA'S NETWORK, Jan. 15, 1995, at 24.

[80] Signaling System Seven is an out-of-band network over-laid on the public telephone network to provide network management. A SS7 signal is a request to any number of facilities that switches down the line to open up circuits, engage billing systems, and otherwise prepare to carry, process, bill, answer, block, screen, record, or respond to a call. KELLOGG ET AL., supra note 13, at 863.

[81] NXX codes are any three-digit code. In telephone convention, "N" is any number from two to nine; "X" is any number from zero to nine. Id. at 860.

[82] PAOLO SYLOS-LABINI, OLIGOPOLIO E PROGRESSO TECHNICO (1956).

[83] JOSEPH A. SCHUMPETER, CAPITALISM, SOCIALISM AND DEMOCRACY (3rd. ed. 1950).

[84] W. J. BAUMOL ET AL., supra note 26.

[85] W. J. Baumol, On the Ameritech Proposal for Entry into interLATA Services 12 (February 1994) (unpublished manuscript, on file with author).

[86] Id. at 10.

[87] Id. at 11.

[88] Id. at 3.

[89] These tariffs are no higher than those which Professor Baumol advances under his Efficient Component Pricing rule. William J. Baumol & J. Gregory Sidak, Toward Competition in Local Telephony (1994).

[90] Elizabeth E. Bailey & William. J. Baumol, Deregulation and the Theory of Contestable Markets, 1 YALE J. ON REG., 111, 123 (1984).

[91] See U.S. v. AT&T, supra note 1, at 194-95.

[92] InterLATA entry would involve integration by Ameritech of local and long distance service.

[93] OLIVER. E. WILLIAMSON, MARKETS AND HIERARCHIES 115 (1975).

[94] See U.S. v. AT&T, supra note 1, at 194-95.

[95] Id. at 231.

[96] See Bailey & Baumol, supra note 90, at 135.

[97] Id.

[98] Id. at 131.

[99] The thrust of telecommunications innovation has been to erase the confines of geography. Wireless technologies can make a phone as mobile as its users. New fiber optic transmission and satellite technologies are greatly reducing the significance of distance as a factor in cost, and new providers are modeling their networks and their equipment to serve a pattern based not on geography but on communities of interest: educational institutions, hospitals, financial markets, corporations, etc.

[100] Integrated Services Digital Network (ISDN) is a standardized, all-digital network that integrates voice and data communications through existing copper wiring. See KELLOGG ET AL., supra note 13, at 856.

[101] See U.S. v. AT&T, supra note 1, at 141.

[102] Ameritech eventually sold Ticon to Octel Corp. Long Distance Ban Forces Ameritech to Sell Tigon to Octel, ENHANCED SERVICES OUTLOOK, Oct. 1992, at 1.

[103] Id.; See also Robert S. Vinton, Can the RHCs Get A Slice of The Enhanced Services Pie?, TELEPHONY, APR. 16, 1990, at 104.

[104] Long Distance Ban Forces Ameritech to Sell Tigon to Octel, supra note 102, at 1; Vinto, supra note 103, at 104.

[105] See, e.g., Edmund L. Andrews, Bill to Revamp Communications Dies in Congress, N.Y. TIMES, Sept. 24, 1994, at 1.

[***] Written April 10, 1995.

[106] Local Phone Wars Just One Call Away, CHI. TRIB., Apr. 4, 1995, at 1.

[107] Id.

[108] Opening the Local Market, CHI. TRIB., Apr. 10, 1995, at 12.

[109] Communications, Justice Department Approves Plan To Allow Bell Company Into Long-Distance, DAILY REP. FOR EXECUTIVES, Apr. 4, 1995, at A64.

[110] Edmund L. Andrews, MCI Maps Plan for Local Phone Services, N.Y. TIMES, Mar. 6, 1995, at D1. See also Frederick H. Lowe, Phone Service on Cable Lines to Be Tested in Arlington Hts., CHI. SUN-TIMES, Oct. 13, 1994, at 57.

[111] Major Players in Valley Fiber Optics Competition, THE ARIZ. REPUBLIC, Nov. 14, 1993, at H1.

[112] Jon Van, MCI's New Front in Phone Wars: Local Service; Ameritech Rival Says It Will Offer Discount Rates, CHI. TRIB., Jan. 5, 1994, at 1.

[113] Phone Service on Cable Lines to Be Tested in Arlington Hts., supra note 110, at 57.

[114] Communications, Justice Department Approves Plan To Allow Bell Company Into Long-Distance, supra note 109, at 65.