Faster Phone Networks? Any Decade Now...

Cover Story: Information Technology Annual Report

It's amazing what you can do with a corporate network these days. Fiber-optic cables and state-of-the-art digital switches can whiz data, video, and voice transmissions around an office in any combination. Everything works great--until an employee wants to reach somebody beyond the building. That's the moment when the Information Superhighway turns into a two-lane back road--otherwise known as the public phone system.

On many local lines, transmission speed drops from 10 million bits per second to 56,000 bits. You can increase that only if you're prepared to drop a bundle for leased private lines. Either way, your transmission costs go up. Public networks are not only slow, they're often expensive, too.

OBSTRUCTIONIST. This is one problem you can truly blame on Washington, where political in-fighting has gummed up efforts to deregulate the communications industry for years. If you doubt that deregulation will make a difference, consider the gulf between the U.S. long-distance market, where competition is fierce, and the tightly regulated local calling monopolies. AT&T, MCI Communications, and Sprint all offer state-of-the-art asynchronous transfer mode (ATM) switching, fiber networks, and high-speed Sonet transmission. Sprint has just completed a network upgrade and now guarantees all-digital service without interruption, even if a cable is cut.

Then, look at what local phone companies are doing. Of the seven Baby Bells, only U S West Inc. offers ATM service--to business customers only--throughout its 14-state region. Pacific Telesis Group is seeking regulatory approval to offer a similar service in California. But none of the seven plans widespread ATM deployment. They cite the morass of regulatory approvals and the heavy investment and reengineering of aging networks required as reasons for not pushing the new technology.

This is no time to go slow, however. "Technology is changing rapidly," says Daniel J. Miglio, CEO of Southern New England Telephone Co. "Public policy is trying its hardest to keep up with all this, but increasingly, public policy is becoming outmoded."

Worse than outmoded, telecom regulations can be downright obstructionist. Take the efforts by two local phone companies to upgrade their networks to carry video signals over phone lines--so-called video dial tone--enabling them to offer videoconferencing as well as compete in cable TV. This requires spending billions of dollars to replace copper networks with some sort of broadband technology. But before the Bells can even build a trial network to test the technology, they need approval from the Federal Communications Commission. In 1992, both Bell Atlantic Corp. and U S West applied for permission to build small trial networks combining fiber optics and coaxial cable. This April, with no decision in sight, the companies suspended their applications, saying the technology had advanced so much that they wanted to reconsider their options.

DISTANT GLEAM. But any new approach will have to go through the same application process, starting from scratch. "We've had these permit proceedings held up literally for years," says Bell Atlantic General Counsel James R. Young. "And getting the construction permit is only the first step in the process." Even after they built a video-capable network, the Bells would still have to win approval for the channels they would offer and the rates they could charge.

With the Information Superhighway still just a distant gleam in the eyes of media moguls, some critics say the FCC may have kept carriers from making a technology mistake. But most analysts figure the Bells and their customers would be better off if they could just go ahead, take a risk, and build something--the way unregulated companies do. "The video dial-tone process at the FCC is a total mess," says Scott Cleland, an analyst at Washington Research Group. "If the Bells could get out from under all this, they would be willing to invest much more."

This could be the year that happens. Congressional leaders pledged in January that they would overhaul the nation's 60-year-old telecommunications laws by July 4. Right now, Washington-watchers give such a bill a 60%-to-70% chance of passing this year. Of course, that's what they said in 1994--and legislation that seemed certain to pass last summer died in the Senate in October over differences between long-distance and local phone companies.

This time around, with the antiregulation Republicans in charge, the Senate is expected to pass a bill this month. A draft is slated to reach the House floor for a vote by late June or early July. If it passes, and if differences between the Senate and House versions can be ironed out in a joint committee, President Clinton is almost sure to sign it. But those are big ifs: This legislation affects long-distance and local carriers, cable-TV operators, broadcasters, and cellular-phone companies--industries representing one-sixth of the U.S. economy. With that kind of money at stake, it is one of the most heavily lobbied bills Washington has ever debated.

FREE-FOR-ALL? For corporate customers, the proposed legislation offers what they want most: choice. If the bill passes, local phone companies will suddenly face competition from cable companies and long-distance carriers. Corporations in both those industries are planning or have already started building state-of-the-art local networks in key cities. With the FCC's powers greatly reduced, however, the Bells would find it far easier to fight back with new technology of their own.

What deregulation won't do for local companies is erase decades of monopoly thinking. Bell Atlantic's Young acknowledges that the phone companies deserve some of the blame for not introducing better services sooner. "I don't want to give the impression that, if it weren't for [the regulatory hurdles], we would have done all this three years ago." The Bells dragged their feet for years, for instance, on the rollout of integrated services digital network (ISDN) lines, which can transmit voice and data 27 times as fast as regular phone lines. After all, why roll out new technology when customers have no choice but to keep buying the old? It still takes months to get ISDN installed in some regions, but the Bells are moving to meet rising demand from home-based workers and Internet cruisers.

But nothing is easy in public phone land. In March, the FCC decided that ISDN subscribers must be charged for each channel within the service as though it were a separate line. Since ISDN can have anywhere from 3 to 24 channels, the ruling could have raised ISDN costs by 40% or more. The Bells protested, and the FCC tabled the idea, but it's still looking at the issue.

If Congress passes the proposed legislation, the Bells will be freed from such oversight. Federal law would require that rates everywhere be pegged to actual costs rather than capped at a predetermined profit level, as about half the states do now. Not that callers need worry about prices soaring--the competition will see to that. Just look at California, where intrastate toll calling was thrown open to competition on Jan. 1. PacTel immediately cut its rates by 40%. "There is no question that the unit cost is going to come down," says Nynex Chairman Ivan G. Seidenberg. "That has been the case in all segments of the communications business." Such sentiments must be music to American industry's ears.

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