Deregulation and Fragmentation of the Market

On August 13, 1969, the FCC allowed Microwave Communications Inc. (MCI) to set up a series of microwave stations from Chicago to St. Louis, Missouri in order to provide to third parties telecommunications services along Route 66.24 It was only a small experiment on the provision of a fringe specialized service. However, the company grew more ambitious and set its objective to compete with the Bell System in the provision of data services, and later on also voice services.25 A decade of legal battles (its president called the company “a law firm with an antenna on top”) gave MCI the right to compete with the Bell System and would end up with the deregulation of the industry.

In 1975, MCI initiated the provision of a new service, Execunet, which substantially competed with the common long-distance activities of the Bell System. The FCC ordered MCI to eliminate such a non-licensed service; however, the Court of Appeals reversed this order,26 thus allowing MCI and the other specialized carriers to compete in all the longdistance telecommunications market.

In the meanwhile, the aggressive response of the Bell System to the new competition had led the Department of Justice to file an antitrust lawsuit in 1974 against AT&T, related to the vertical integration of the telephony service provider, and against Western Electric, the producer of telecommunications equipment.

The case was not settled until 1982, with a Consent Decree divesting the Bell System into seven regional monopolies for the provision of local telecommunication services, the “Baby Bells,” unbundled from AT&T, which remained the provider of long-distance services. Long-distance telephone services would now be provided in competition with other carriers, such as MCI.27

Deregulation was finally introduced in the US with the adoption of the 1996 Telecommunications Act.28 The Baby Bells consolidated around two groups, which would later acquire the leading long-distance providers AT&T and MCI, to form the companies that remain the leaders in the US telecommunications market: AT&T and Verizon.

The process in the European Union was led by the European Commission. Liberalization started with terminal equipment and value-added services, to be extended to all telecommunications services in 1998. No divestiture of the former national monopolies took place, but market entry was allowed for any interested carrier.

Liberalization put an end to decades of exclusive rights. Newcomers entered the market to compete in the provision of the old fixed telephony service, as well as in new services such as mobile telephony, broadband access to the internet, and data transmission services.

With a view to fostering competition, sector-specific regulation about network access was introduced in most of the world. Firstly, interconnection was required from all operators to ensure the interoperability of the telephone networks. In this way, the direct network effects were shared among all market players. Secondly, incumbents were forced to share their infrastructure with newcomers. Special access for competitors under regulated conditions was imposed on the incumbents on their old fixed-telephony networks, but also in the new broadband networks (unbundling of the local loop, access to fiber, etc.) and sometimes even in the mobile telephony networks (Mobile Virtual Network Operators, or MVNOs). In this way, a newcomer with a limited investment in infrastructures (or with no investment at all) would be able to enter the market and provide telecommunications services in competition with the incumbent.

Telecommunications had traditionally been a single product, a single network and a single company in each country. National monopolies harvested the network effects in telephony by benefiting from an exclusive right to deploy telephone infrastructure and provide the telephone service, according to Vail’s view.

This model was unsustainable as digitalization multiplied not only the number connection points (computers), but also the number of transmission technologies and services. The traditional twisted copper pair had to compete with cable, optic-fiber, and wireless cellular networks. Traditional fixed telephony services had to compete with mobile cellular telephony and new data services. Traditional national monopolists had to compete with a full array of companies developing alternative infrastructures and providing new services.

Telecommunications became a fragmented industry, a puzzle of competing networks interacting under different rules. Regulated interconnection would apply to telephony services, both fixed and mobile. But new data networks and services would work under the distributed model, designed for networks and services in the internet arena, with no regulations on interconnection.

The evolution of the communications industries, postal services, media, and telecommunications was determined by the network effects created by the internet. The ultimate network effects empowered by the internet, as they were made effective by digital platforms, ended up disrupting all of the communications industries.

 
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