Baby Bell breakup movement gains ground

A movement to split apart the powerful local phone companies has bubbled to the national political scene, as critics hope to stem the giants' burgeoning influence.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
5 min read
A movement to split apart the powerful local phone companies has bubbled to the national political scene, as critics hope to stem the giants' burgeoning influence.

The so-called Baby Bell local phone companies are among the most potent forces in the telecommunications business today, shielded from the worst effects of the downturn by their control of local phone markets.

The idea of a Bell breakup has become a rallying point for rivals and critics of the giants, who allege that Verizon Communications, SBC Communications, BellSouth and Qwest Communications International have abused their control of the networks.

With a bill introduced in Congress last week, new fuel is being added to the breakup fire. Few expect the measure to pass this year, as it has become part of a tense congressional tug-of-war between Bell allies and enemies. But it is shining a light on the ongoing criticism of some of the most powerful players in the communications business.

"The reality is that (the big local phone companies) still have a monopoly on the wire into the home," said Gene Kimmelman, chief telecommunications analyst for the Consumers Union, which has not explicitly supported the proposal. "People are searching for creative ways of resolving that monopoly."

Consumers Union and other consumer groups have long lobbied for more competition at the local level, saying that the Bell's control over the markets has led to sluggish service and higher prices. Although these groups are rarely fans of AT&T and the other large long-distance companies, they say that having more competition at the local level for phone and Net service will lead to lower prices and more consistent service levels.

The breakup drive is hardly a grassroots phenomenon. In most of the dozen or so states where the issue has come up in the past two years, AT&T has helped spearhead and fund the drive. But the movement--aimed at addressing what are viewed by some as ongoing troubles in the telecommunications industry--is gaining more political momentum and credibility.

The Bell companies have been the subjects of considerable criticism over the last few years. Rivals have charged them with dragging their heels in opening their local phone markets to competition. Congress mandated in 1996 that the local phone companies share their networks as part of the landmark deregulation act that year.

see special report: Digital Darwinism Five years later, the Bells have won regulators' endorsement of their market-opening efforts in a few states, which has finally allowed them to enter the long-distance market in places like New York and Texas. But they continue to be the subject of regulatory complaints and lawsuits from rivals, and the FCC continues to levy fines ranging to tens of millions of dollars per quarter for violations of competitive restrictions.

The little breakup
The breakup of a giant is a familiar last resort in the telecommunications industry, ever since AT&T agreed to split off the local phone companies in 1984. AT&T is now going through another internal divorce, as it sheds its cable TV and wireless businesses.

The forces lobbying for "structural separation" of the big local phone companies aren't quite this ambitious, however.

Bell rivals from AT&T to the smallest local Internet service providers have complained that SBC and Verizon have unfair advantages in pricing, in adding and maintaining services, and in billing, because the giants own the networks and the retail operations that sell high-speed Net and phone service directly to most customers. Rival companies face long delays, service interruptions and onerous contracts when they try to tap into these networks, they say.

Therefore, the only way to prevent these abuses is to split these wholesale network and retail operations, either into regulated separate divisions or even into wholly different companies, critics have proposed.

The idea has gained minimal traction at the federal level in the past, when the Federal Communications Commission required Verizon and SBC to sell their high-speed Internet services through a separate division. This requirement, imposed as part of the approval of previous mergers, will soon disappear as the result of a court challenge, however.

At the state level, legislators in Illinois, Maryland, Michigan and Minnesota have taken up the issue. Regulators have considered or are looking at the issue in Florida, Georgia, Tennessee, Indiana, Virginia and Alabama.

Only in Pennsylvania have regulators actually imposed a breakup. After a court challenge and massive lobbying and advertising campaigns by both sides, the state's Public Utility Commission softened the order, requiring only that Verizon's high-speed Internet business be placed in a separate, but still wholly owned, division.

In theory, the idea "makes a lot of sense," said New Paradigm Research Group Senior Vice President Craig Clausen, a one-time staffer at the Illinois state regulators' office. "But the problem is, legislators will screw it up, and regulators lack the (courage) to do it right."

Chess game: Getting stale
The movement's appearance in Congress marks a step forward and helps breathe life into a proposal that has yet to gain substantial traction.

Most in Washington say it is for now a negotiating point, a way for opponents of the Bells to stall another pending bill that would give them more power. The earlier bill, sponsored by Reps. Billy Tauzin, R-La., and John Dingell, D-Mich., would free the Bells to carry some data transmissions across long distances in their own home regions, which they are now barred from doing.

But by the same token, it appears to be a signal that both sides of the debate are frustrated with the progress of the 1996 deregulatory laws.

"It's pretty close to a non-starter," predicted Scott Cleland, an analyst for The Precursor Group who follows regulatory action closely. "It's a fallback position, a signal of retreat that the existing Telecommunications Act has failed."

What that means is harder to say. The Bell companies and their rivals, led by AT&T, are already deep in a battle highlighting the probable evils or benefits of the breakup proposal.

"Proponents of structural separation should talk to Californians who wake up every day wondering whether they'll even have electricity, let alone what they'll pay for it," said Timothy McKone, vice president of federal relations at SBC.

Added Maureen Flood, vice president of the Competitive Telecommunications Association, a lobbying group that represents AT&T and alternative local phone companies: "We're taking this very seriously. There are a number of architects of the Telecommunications Act who are really frustrated" with the progress of local phone network competition.

Those on the sidelines are less sanguine about the bill. Kimmelman of the Consumers Union is sympathetic to the breakup idea but says it wouldn't be his group's first choice for helping phone and Internet subscribers.

"This is part of a (political) chess game," he said. And the likely outcome? "Stalemate," Kimmelman said.