Baby Bells Still Dominate Local Market 1996 Act Hasn’t Done Much To Loosen Monopolies’ Grip On Phone Service

Sixteen months after the government opened the $100 billion local phone market to competition, a new study has found that fewer than half of 1 percent of Americans receive their residential phone service from a competitor to the monopoly provider.

Moreover, the most likely rivals to the local monopolies - AT&T, MCI and other long-distance carriers - are entering the residential market only grudgingly, according to the study, which was compiled by the Yankee Group, a telecommunications research firm in Boston.

The report, released late last month, is sure to stoke the anger of consumer advocates who argue that the Telecommunications Act of 1996 has failed to deliver on its central promise of fostering competition in the local phone business.

It may also be used as a cudgel by the long-distance carriers in their lobbying battle to delay the Bell companies from getting into the $70 billion long-distance market.

Ten days ago, Ameritech Corp. reapplied to the Federal Communications Commission for permission to offer long-distance service in Michigan - three months after it withdrew its first application in the face of an almost certain rejection by the commission.

Within minutes of that announcement, AT&T issued a statement urging the commission to rebuff Ameritech yet again because there was no discernible competition in Michigan.

That contention is bolstered by the Yankee Group report. Of the 97 million households in the United States with a telephone, the study estimates that fewer than 500,000 are getting the service from a company other than their local monopoly. Even in three years, the study predicts, the incumbent carriers will retain 90 percent of the market.

“Long-distance companies are the last, best hope for competition,” said Boyd Peterson, an analyst with the Yankee Group. “The problem is, this is not a market they want.”

Some of the reasons for the dearth of competition are well documented, such as the retreat of cable operators from the phone business. But the study, which included a survey of 20 local and long-distance companies, found that even more promising avenues of competition were running dry.

For example, Peterson said AT&T, MCI Communications and other carriers were resisting the practice of “resale,” in which they lease facilities from the Baby Bells and resell the service under their brand names.

MCI used resale in the 1980s to break AT&T’s monopoly on long-distance service. But it is proving less effective as a wedge to get into local service. Simple procedures, such as transferring a customer’s billing records from the Bell company to the new carrier, are taking days to complete as the Bell companies struggle to upgrade their systems.

AT&T plans a more ambitious assault on the local market, by installing its own facilities and combining them with parts of the existing Bell networks. Robert Allen, the chairman of AT&T, said at the company’s annual meeting in Secaucus, N.J., last month that the company was still on track to offer local service in 15 cities by the end of 1997.

But analysts said AT&T would probably go after lucrative business customers, and affluent customers in densely populated urban areas, rather than a broad swath of the residential market.

The low level of competition belies a flurry of agreements between the local and long-distance carriers to share their networks. In New York state, Nynex and AT&T recently announced such an agreement. But currently the only significant competitor to Nynex is RCN Corp., a pocket-size company with 5,000 local customers in New York City.

Consumer advocates said the slow development of competition would make consumers vulnerable to rising rates. And some said the government had jumped the gun by lifting restrictions before the free market had a chance to nurture alternatives to the monopoly providers.

“The zeal to deregulate telecommunications is not being supported by market conditions,” said Gene Kimmelman, the co-director of Consumers Union, a consumer lobbying group in Washington.

The long-distance carriers are leaning heavily on this argument in urging the FCC to keep the Baby Bells out of their market. Executives at AT&T point out, for example, that local competition in Michigan consists of one company, Brooks Fiber Properties, offering service to fewer than 20,000 customers, most of them businesses, in one city, Grand Rapids.

The Justice Department entered the fray a week ago when it recommended that the FCC reject an application from SBC Communications to enter the long-distance market in Oklahoma. While the recommendation is not binding, the department said it would not be in the public interest to unshackle SBC until Oklahoma was “irreversibly opened to competition.”

The Baby Bells complain that the Justice Department has created a nebulous standard of competition that goes beyond the checklist of conditions they must already meet under the telecommunications act.

“They’ve adopted a ‘we’ll know it when we see it’ approach to deciding when the local market is open to competition,” said Randy New, a vice president for legislative affairs at BellSouth Corp.