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Nicholas Johnson

Can Australia Learn from the

US Experience?

What can Australia learn from the US when it comes to telecommunications privatisation, is a question that I'm often asked when I visit or talk to Australians. But the real question is: can Australia learn anything from the US experience? From my perspective, there are enough troubling consequences of the American experience -- enough evidence that we have not learned from our own experience -- that I am hesitant to encourage others to follow our lead. One specific difference between our two countries is that the US never had a nationalised telecommunications system to privatise. We may offer you analogies and warnings, but no perfect parallels.

Today we can make the phone connections ourselves, directly, from the US to Australia or any other spot on earth, in a few seconds, with near-perfect signal quality. With home computers we can send faxes or e-mail anywhere, or browse the world's computers, connected to the World Wide Web. Yet, as a boy, visiting my uncle's farm in northwest Iowa, I well remember his first wall phone, with the crank and the multi-party line. No-one we knew had ever talked over the telephone to a foreign country. The Phone Company, as AT&T was then called, was an institution; almost a part of the environment. It was our Mother, 'Ma Bell'; a big mother, one might note, and AT&T's nearly one million employees made it the nation's largest private employer. But the phones worked, end to end. And if anything ever did go wrong you knew whose fault it was. You might have to borrow the neighbor's phone to report the difficulty, but you knew whom to call.

And so it had been, more or less, for over 100 years. It wasn't until 1982 that a federal judge, Harold H. Greene, ordered the company to be broken up. But there were some changes along the way. For some reason my fellow citizens have an irrational fear of anything that might be labeled 'nationalised' or 'socialistic'. They sort of overlook the fact that they really do like their socialist highways, schools, libraries and parks. Since nationalization is out of the question in the US, our only alternative is to pretend that such enterprises are privately owned and controlled and then turn over to government officials all of the most significant management decisions. This thereby insures that we will get the worst of all possible private and nationalised worlds. And so it was with AT&T. While every civilized nation on earth recognized the obvious need to nationalise its telecommunications infrastructure, Americans persisted in the belief that it was possible to 'regulate' one of the country's biggest corporations with one of its smallest government agencies.

My seven-year tour as a Commissioner of the Federal Communications Commission (FCC) began in 1965. The FCC then had responsibility for all forms of communication: under-ocean cables, communications satellites, radios in taxi cabs, citizen band and amateur radio, commercial and educational radio and television stations, telegraphy and 'The Phone Company'. As the youngest and newest of the FCC Commissioners, it was obvious to me that I could not comprehend every area of FCC responsibility at once, so I decided to focus first on telephone regulation. It seemed the most difficult and arcane subject of all, and I felt that if I didn't learn about the telephone business first, I might never get around to it. The more I learned the more I didn't like.

To me, the relationship between AT&T and the FCC seemed a little too cozy. In 1968, I wrote a couple of majority decisions for the Commission. The first was the Carterphone decision, which was effectively the birth of the open telecommunications equipment market. Customers could, the FCC said, tie their own equipment into the Bell system as long as that equipment could not harm AT&T's network. The second involved a fly-by-night microwave outfit that had the temerity to compete with AT&T. My opinion that some competition in telecommunications might be good was supported by my colleagues and the FCC decision was handed down in favour of Microwave Communications Inc., later to become MCI.

The lead for reform was then taken up by the Justice Department which filed an anti-trust suit in 1974. This was the suit which was decided by Judge Greene eight years later, in 1982, called the Modification of Final Judgement (MFJ). Under the terms of this agreement, on January 1, 1984, AT&T divested its local telephone monopolies, which then became the Regional Bell Operating Companies, 'RBOCs', or 'Baby Bells'. There would also be competition in the long distance business. This was the closest the US came to today's privitisation rush by many nations around the world.

So who benefited? Executive compensation has never been higher, and clearly AT&T shareholders have done very well. There's still a lot of money around. Unfortunately, excessive cash flows have too often been used to invest in unrelated enterprises for which telephone executives have little expertise, rather than being used to modernise their domestic telecommunications infrastructure. Corporate phone customers have cut their telecommunications costs dramatically since 1982 some by as much as 50%. On the other hand, citizen customers individuals who use their phones primarily for local service have seen their rates go up 56%.

Have these price increases affected universal service? Not for the rich. Telephone penetration has actually increased from the low 90 percent range to a mid-90 percent range. But for the poorest Americans, especially the poor minorities, the percentage penetration has dropped into the 70 to 80-percent range. Moreover, to the extent that anyone has benefitted from lower prices (or lower rates of increase in prices), it is not at all clear that divestiture should be credited as the reason.

Professor Michael Noll of the University of Southern California has done a study which suggests that long distance costs have been declining at a relatively steady rate of 4% a year for the past 80 years. He, and many others, believe that it has been the trend in technological advances, not the degree of competition, that produces reductions. And he points out that innovations like digital multiplexing, computer-controlled switching, and optical fibre were all invented before, not after, divestiture. To the extent there have been any price reductions from competition, Professor Noll believes they may have been more than swallowed by increased advertising and marketing costs one of the biggest cost components of competitive long distance carriers. AT&T's marketing costs increased three-fold in the first eight years after divestiture, and both MCI and Sprint tried to match it. In effect, we have traded an AT&T monopoly for an AT&T, MCI and Sprint oligopoly. Between them they have 87% of the long distance market.

Professor Eli Noam of Columbia University has tracked the consequences of divestiture. Service, Noam says, is also a mixed bag. For instance, the speed and quality of handling residential orders has declined, while technological improvements, such as optic fibre, have improved sound quality and call completion rates. Rates of system modernization are inconclusive. On balance, it's not clear that one can make the case that the US is either better or worse off as a result of divestiture and competition. The poor and working class, who take the brunt of most changes in political and economic policy, have, not surprisingly, taken the brunt of this change as well. Big corporations and the rich are better off. It seems to me that another class that has benefitted, are hobbyists like myself. As an amateur radio operator, and a computer and telecommunications hobbyist, the more new technology the better I like it. The economic justice issue, of course, is whether those who would be quite content with rotary dial phones and crossbar switches should be made to take a substantial hike in their monthly phone bill to pay for my hobbies.

Divestiture and Competition

But the greatest adverse consequence of divestiture and competition, in my view, also happens to be the greatest threat to American democracy in this century. It is the merger of content and conduit.

By content I mean what is flowing through the wires, fibre and satellite channels: voice, email, radio and television programs. By conduit I mean the telecommunications pipes, and the firms that own them.

The problem now is that the US Supreme Court has been interpreting the First Amendment to mean that not only do large media corporations have the right to speak, they also have the right to silence others who disagree with their views. Censorship is seldom a problem for those who wish to buy advertising space for commercial products, or messages acceptable to owners and major advertisers..

But given the Supreme Court's interpretation, for Americans with unpopular views the only uncensored communications media currently available to all are the Postal Service and the telephone (including faxes and Internet email). And now free speech via the telephone may be threatened. The Telecommunications Act, 1966, now barely five months old, makes it easier for phone companies to get into video programming and other information services. Its terms are not clear: including the extent to which they must accept all comers. But if the Supreme Court holds to its view that the First Amendment provides a constitutional right to censor others (and there is no reason to believe that it won't) the American people may soon lose their First Amendment rights of access to the telephone, regardless of the Act. For these reasons I have long advocated on principle that those who own and control the conduits should be totally separate and independent of those who provide the content.

Our 1982 divestiture decision may be the closest the US has come to the Australian interpretation of privatisation. But our Telecommunications Act, 1966 is what really threw open the door. Competition is usually the last thing on earth that an American business executive really wants. Most of the ones I dealt with in Washington were coming for subsidies, approval of anti-competitive mergers, restrictions on competitive imports anything but competition. So you will understand my skepticism when this year's Telecommunications Act was rushed through Congress and signed by the President, in the name of 'competition, lower prices and better service'. If you believed what you read, it was almost a Consumer Betterment Bill! And if true, it would have been the first time in history that business had come to Washington to plead for more competition, lower prices and higher quality for consumers.

You will also understand my lack of surprise when, a mere two months later, Nynex and Bell Atlantic decided to merge. As Bradley Stillman, of the Consumer Federation of America put it, "It's only the monopolist who has the gall to say that merging two monopolies creates more competition." these two had already merged their cellular properties (creating 40% profit margins), and entered into a joint venture to produce television programming. The merger, needless to say, was opposed by those in the Communications Workers union who remembered what happened to the one million members they used to have working for AT&T. Overnight the new Bell Atlantic would become the nation's second largest telephone company (after AT&T) with $US27 billion in annual sales, 128,000 employees, and 36 million customers in the 12 most lucrative states in the country: the Eastern Corridor that generates 30 percent of all long distance calls in the USA.

Nor was I surprised when USWest, the Baby Bell with the most land area, bought the nation's third largest cable company with $US10 billion in spare pocket change. Nor when the southern Bell company, SBC, bought the California Bell: Pacific Telesis which had somehow come up with $US700 million to invest in personal communications services. They were seemingly intent on reconstructing the AT&T from which they had been divested a mere 14 years earlier. As if the $US90 billion in local phone revenues weren't enough to live on, the Baby Bells have investments all around the world. The Bells have diversified into cable television, cellular, computers, directory assistance, interactive television, Internet access, network management, personal communications networks, paging services, real estate, software, under-ocean and trans-Russian optic fibre projects. They have even formed a consortium with the Walt Disney Company.

There was only one dissenting voice among the former Baby Bells. Ameritech maverick CEO W. Patrick Campbell says: "We have a hard time understanding how you create financial value by merging with another company." It's no accident that some of the most profitable RBOCs are the least diversified. Nynex's venture in retail computer sales cost its customers a $US210 million write-off, and both USWest's losses in real estate and AT&T's abandonment of its $US100 million Personalink service, are illustrative of the problem. If further evidence is needed that management may not be as all-knowing as its seven-figure salaries might suggest, consider AT&T. It spent $US300 million in legal fees fighting divestiture; then, given the choice, it chose to sell off its local telephone companies and get into the computer business. Now it is going through a second, voluntary, breakup; and this time it wants to sell off its computer business and get back into the local telephone business. No-one has begun to calculate how many billions of dollars this has cost shareholders and subscribers. Nor are the phone companies the only ones playing this game with less than a full deck. The technologies are converging. It's not clear whether tomorrow's video entertainment is going to enter our homes through a satellite dish, wireless cable, a coax from the cable TV company, optic fibre from the phone company or whether Bill Gates will control it all through Microsoft.

So the cable industry thinks it ought to get into the telephone business. This is an industry that has been selling someone else's programming by sending it down a coax. The closest it's been to telephony is the technological equivalent of one paper cup and a string. They've never seen a switch, and they haven't a clue how to get enough power to a phone to make it ring. Yet, the phone companies are scrambling to acquire cable companies. They are trying to buy up what they see as potential competitors; competitors who are currently taking in $US25 billion a year from 63 million homes.


Professor Nicholas Johnson is a former Commissioner of the US Federal Communications Commission (FCC). He currently teaches constitutional and communications law at the University of Iowa, USA.

[This article is reprinted, with permission, from Australian Communications, December/January 1996-97, p. 55. It is copyright 1996 by Nicholas Johnson and Australian Communications., Steven Fear, Editor. Subscriptions $A54/year. Inquire:]

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