Telecommunications Reform in the United States: Promises and Pitfalls

The United States Congress recently enacted sweeping legislation to overhaul the rules governing competition in telecommunications services. The Telecommunications Act of 1996 (see Congressional Record, 1996) is the first major rewrite of the Communications Act of 1934. It also supersedes the 1982 antitrust consent decree that broke up AT&T and barred the seven new regional Bell operating companies ("Bells") from manufacturing equipment and offering long-distance service. The stakes are high, as telecommunications ("telecom") are a critical element of a modern economy's backbone. The U.S. telecom sector's revenue in 1994 exceeded $200 billion: $150 billion in telephone service, $42 billion in broadcasting, and $28 billion in cable television (Economic Report of the President, 1996, chapter 6). The importance of the regulatory reforms in the 1996 Act as perceived by those in the best position to know--market participants--is reflected in the frenetic lobbying leading up to the Act (especially on its telephone provisions), and in the recent wave of corporate restructuring and shifting alliances reportedly driven by expectations of a new competitive environment. Regulatory reform enjoys broad support, but there is less agreement about its appropriate pace and nature. The road to reform holds both promises and pitfalls. This paper discusses the underlying economic issues, the progress made by the Act, and the challenges lying ahead as we move from regulated monopoly to competition. Although the U.S. is starting with regulated private monopolies, some of the discussion will be pertinent also for a transition to competition when starting with state monopolies.