Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, June 14, 1995 TAG: 9506150004
SECTION: EDITORIAL PAGE: A-11 EDITION: METRO
SOURCE: ROBERT COOK
DATELINE: LENGTH: Long
After a few moments of conversation, I discovered my visitor was not just curious about the issue. He was employed by AT&T, which along with MCI, Sprint and the cable companies, is trying to convince Congress to let them into the local phone business. Bell Atlantic and the other local phone companies are not his clients.
``Why is my opinion important?'' I asked.
``Because you are an economist at the University of Richmond,'' he replied. At least he did not say, ``Because I knew an economist had an opinion on everything.''
``OK,'' I said, ``so you want to associate the university with your client's lobbying effort, but I really do not know enough about the industry to be of much help and nothing I have to say reflects the university's position on any issue.''
``That is not a problem,'' he replied. And he handed me the written text of his client's position and suggested I use it as a guide.
The major argument for competition was presented in a few passages that emphasized the benefits for consumers. I read:
If the lessons from the deregulation of long-distance services a decade ago offer any guidance, innovative new local services, as well as dressed-up old services, will revolutionize the way people live, work and communicate. The payoff will be greater choice and lower prices.
For consumers, that may mean video shopping, movies on demand, access to vast storehouses of electronic knowledge, and even the ability to play video games with distant players. Business users can look forward to low-cost video conferencing and expanded collaboration through computers between colleagues at distant places.
Only vigorous competition will deliver these benefits.
All of this is true. You probably have heard of the information superhighway, but have never traveled it. You will. Remember when you were limited to three television networks? Today you ``channel surf'' across your cable network. Competition for local phone service will mean you will surf across phone companies.
Press the menu button. Local phone rates will be ranked from the least to the most expensive on the screen. Choose the company with the best rate and make your call. Press the menu button and dial a long-distance number. The long-distance rates for various long-distance companies will appear on the screen with a different rate for a voice-only or video-enhanced call. Choose the company with the best rate and place the call.
Consumers and businesses will buy and benefit from the use of these services. But consumer welfare is not why AT&T wants to break up the local phone monopoly.
The long-distance phone companies tout the price of a long-distance call as evidence of the benefits competition will bring. According to industry representatives, the cost of a long-distance call has declined by 65 percent since 1985. The same representatives predict the price of a local call will fall if they are allowed to enter the market. Did long-distance phone rates decline because AT&T wanted to help the consumer?
Suppose the average price of a long-distance call placed with AT&T was $1 in 1985. If industry figures are correct, the price of that same call is 35 cents today. Who pays the other 65 cents? AT&T must incur many costs that did not exist before deregulation. Its advertising budget surely must have soared. And what about the cost of switching all those customers back and forth from one carrier to another, which it does for free? How could AT&T pay for all those advertisements, and all those switching services, and at the same time lower the price of a phone call? Either it became more efficient and passed the savings along to the consumer, or it earned a smaller profit.
What incentive does AT&T have to accept a lower profit? Competition! The fact that MCI and Sprint are willing to offer the same long-distance service for 35 cents forced AT&T to become more efficient and to accept a lower profit. It is also the reason AT&T offers many other services at a lower price. Would AT&T, Sprint or MCI lower the price of local phone calls by 65 percent without competition?
Now why does AT&T want to provide local phone service if it will have to offer it for less than Bell Atlantic now charges? Because it knows it can offer the same services at a lower price and still earn a profit. It knows this is true because it earned excess profits when it held the monopoly on long-distance service.
AT&T, Sprint, MCI and the cable industry are not lobbying for competition because of the benefits to the consumer. They are lobbying for competition because it will increase their profits. And that's fine with me. Allowing them to compete for profits at the local level will allow me to afford the telecommunication services they will offer. Competition for profits benefits consumers and producers. A more candid presentation by AT&T would be, ``We want to enter the local phone business to earn a profit, and we can do it while providing better service to the consumer at a lower price. We are willing to make the consumer better off because our company will be more profitable. Both of us will gain from competition.''
Does this mean competition will be good for everyone? No! Some local phone companies may have to merge with other companies, offer other services or downsize. Some services will become obsolete. Some stockholders may earn smaller dividends. Some persons may even lose their jobs. Competition for local service is not going to improve everyone's life. If it did, no one would oppose it. But competition will improve most of our lives, and for this reason most of us will support it.
Now it is easy for a tenured professor to be enthusiastic about competition and sanguine about job losses. But people with jobs in the real world, especially jobs protected by a monopoly, may be less enamored with competition. Competition is not costless. The simple act of choosing a local phone company will be costly. It took me a year to understand my phone bill after deregulation, and I still do not understand my cable bill. But there is no less costly, or more certain, way to ensure prices will fall while a wide array of telecommunication services is made available.
In my opinion, competition for local phone service is a good idea. Why? For the same reason AT&T thinks it is a good idea. I am certain competition will improve my standard of living. It will probably improve yours. I am just as certain that allowing Bell Atlantic to compete with AT&T, Sprint and MCI for my long-distance service is a good idea. Surely the same arguments for competition must also apply in this market.
Robert Cook is chairman of the economics department at the University of Richmond E. Claiborne Robins School of Business.
by CNB