The Bells Still Need Baby Sitting

One of the last of the great monopolies, your local telephone company, is starting to show cracks. Market forces and new technologies are opening fissures in the venerable local franchises of companies such as New York Telephone, Pacific Bell, and Illinois Bell. Large businesses are clamoring for more options in local phone service. Fiber optics and wireless phones are gradually confounding the logic of having a single company hold sway over all the customers in its franchise area. Free-market philosophy among regulators plays a part, too. But all this doesn't mean that regulators of telecommunications can hang up and go to sleep. If anything, coping with the impact of the new competitors will require more effort--and more foresight--than regulators and lawmakers generally demonstrate. Plenty could still go wrong. If regulators throw open the local phone business to newcomers without giving rate-setting flexibility to the established phone companies, the Bells and their independent kin could suffer a mass defection of their best customers. The big losers from that would be residential and rural customers: They would be stranded on a steadily decaying network that lacks the revenue from business to stay fit.

The opposite danger is just as alarming: If the established phone companies are given too much pricing flexibility too soon, they could price predatorily against their tender new competitors and drive them out of business. Then they would be free to return to their monopolistic ways of setting prices too high and rolling out new services and technologies too slowly. Clearly, competition is coming. But it will still take regulation to make it come out right.

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