Did AT&T Divestiture and Telecom Act of 1996 Both Fail?

“Unintended consequences” might represent the more-significant of outcomes from the last two major transformations of U.S. telecom law. One might argue that happened because, despite best efforts, U.S. telecommunications law was backward-looking, something analogous to generals planning to “fight the last war.”

In retrospect, the biggest issue was the framing of problems. The breakup of the AT&T system--a historical anomaly, as it turned out--was designed to “solve” the problem of high long distance prices. The Telecommunications Act of 1996 was intended to “solve” the problem of high prices for local telecommunications services.

The 1983 divestiture completely missed the coming role of mobile services. In fact, mobile arguably had more to do with falling long distance prices than did competition among fixed network service providers.

A good argument can be made that the last two big revamps of U.S. telecommunications law were similar in one striking way: they were based on false or incorrect assumptions, and “failed.”

The 1982 “consent decree” that broke up the AT&T system, for example, attempted to create a competitive new telecom market by splitting long distance service from local telephone service, the theory being that competition for long distance voice services would be enhanced by creating seven new firms controlling local service, plus a deregulated AT&T restricted to long distance services.

The U.S. Department of Justice concluded in 2007 that divestiture did not work as expected, and that similar outcomes (much lower prices and much higher usage) would have been produced by less-complicated measures.

In other words, the big “missed” assumption was the rise of mobility as the primary way consumers would choose to use voice services. Nor, in retrospect, did the consent decree anticipate that mobile service providers would adopt pricing policies that eliminated the difference between a “local” and a “long distance” call. That “death of distance” pricing essentially killed the long distance business as a distinct industry segment, revenue and profit source.


The 1996 Telecommunications Act, likewise, was supposed to introduce local telecom competition, in the same way the the 1983 breakup of the Bell system was intended to spur competition in long distance voice.

The Act opened competition in the “local” telecom business, initially driven by mandatory wholesale policies that allowed new competitors wholesale access to existing facilities.

When those policies failed to produce investment in new facilities, was replaced by a reliance on “facilities-based competition. That policy, in turn, lead to the rise of cable TV providers as the ubiquitous telco alternatives in most markets.

A bigger “failure” was the belief that policy to promote competition essentially meant measures to support more competition for “local voice” services. That meant allowing new contestants to deploy voice switches and gain wholesale use of local access facilities owned by the dominant local telco.

What was missed? The internet. Ironically, to the extent the Telecommunications Act of 19996 has succeeded, it is because of value created by the internet and its apps and services, not new competition for local voice services.

The point is that, however well intentioned, major efforts to revamp communications policy have succeeded (in a generous interpretation)  “despite the new policies,” as much as “because of the new policies.”

It is the two major unintended developments--mobility and internet--that have lead to higher value and lower prices for consumers, not the intended changes (breaking up AT&T, opening local telecom to competition). In the case of the divestiture, policymakers missed mobility; in the case of the Telecom Act, they missed the internet.

The point is a huge dose of humility should be brought to the whole process of shaping policy to promote investment and competition in communications facilities and services. Our track record is not very good.
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