Changes in Industry Structure and Technological Convergence: Implications for Competition Policy and Regulation in Telecommunications

Abstract

The year 2005 began with the announcements that the two leading long-distance carriers — AT&T and MCI — were being acquired by two of the four major incumbent local exchange carriers — SBC and Verizon — and ended with regulatory approval virtually completed. Shortly thereafter, the new AT&T (SBC and the old AT&T) announced its intention to acquire BellSouth. At the same time, the industry, business, and popular press contained numerous accounts of the increasing potential of alternatives to traditional voice communications, e.g., the major push of cable television providers and the activities of internet based services such as Vonage and Skype. These developments indicate that the focus of competition is shifting from a single voice market to the “triple play” of voice, video, and high-speed data (Internet access).

These competitive developments imply a very different model of competition and industry structure than that envisioned in the 1996 Telecommunications Act and in the Federal CommunicationsCommission’s implementation of the Telecommunications Act. Rather than competition being among “dominant firms” supplying essential inputs to new entrants for traditional voice service, the industry has evolved to one in which firms with different “intermodal” networks and technologies often vie for the patronage of customers purchasing packages of services.

This paper discusses recent regulatory responses to these developments as well as possible implications for future ex ante and/or ex post regulation. In particular, a growing number of state governments have enacted legislative or regulatory changes that typically limit retail price regulation to services such as the basic residential telephone line. Similarly, the FCC has received requests for regulatory forbearance for wholesale services under Section 10 of the Telecommunications Act for incumbent operations in Omaha, Nebraska and Anchorage, Alaska. The Canadian telecommunications regulator and Cabinet ministry have also recently considered similar issues of retail regulation/deregulation. The paper also discusses approaches for assessing market power and other competitive issues, e.g., vertical integration, that account for the specific characteristics of the emerging (converging) industry. It concludes by describing the implications of the emerging nature of telecommunications competition for market power assessment, continued regulation, and antitrust analyses.