TELECOM Digest OnLine - Sorted: Re: Bell Divestiture

Re: Bell Divestiture

Michael D. Sullivan (userid@camsul.example.invalid)
Mon, 20 Jun 2005 06:56:59 GMT wrote:

>> Home computers didn't *exist* until the mid 1970s. The Altair 8800
>> plans ran in PE's Jan 1975 issue. The APPLE-II didn't exist until
>> late 1977.

> But businesses and schools were heavy users of time sharing by the mid
> 1960s -- using dial-up Teletypes. Businesses were also getting dial
> up dataphone services between computers.

Very large businesses were moderate users of time sharing by the mid
1960s, and smaller and midsize businesses were not. Schools were not.
Commercial time sharing only got started in the 1962-64 time frame.
Dartmouth began its time sharing system -- the first academic TSS, the
first step into TSS for its vendor, GE, and the first broadbased TSS
-- in 1964. I used it starting in 1965, when my high school got a
single TTY connected to it, either the only or one of a very few high
schools connected to time sharing in the mid 1960s. (Dartmouth
professors Kemeny and Kurtz invented BASIC (Beginner's All-purpose
Symbolic Instruction Code) for the Dartmouth TSS in 1964; it initially
allowed only 26 variables (A-Z), and no string variables. By 1965, it
allowed A-Z and A0-Z9, or 286 variables, as well as matrices, so it
became a bit more useful.)

By the late 1960s, time-sharing was much more widespread and was heavily
used. But not in the mid-60s.

>> The Bell system, like any regulated monopoly was _guaranteed_ a
>> certain minimum rate-of-return on investments.

> Regulated monopolies were NOT _guaranteed_ a minimum rate of return.
> If they were Western Union would not have gone broke nor would the
> railroads. In some locations of the Bell System and even today,
> regulators mandate below-cost services for social reasons or deny rate
> increases.

They are not, and have not been, guaranteed anything strictly
speaking. They are allowed a "reasonable" rate of return for
purposes of ratemaking, which has traditionally meant they have been
permitted to set a target of X% return on used-and-useful investment
in plant, where X is based on cost of capital plus a kicker. The
standard ratemaking formula is that R, the "revenue requirement,"
equals X times the used-and-useful investment in plant (after
depreciation) plus reasonable expenses plus depreciation. That
revenue requirement is then used as the target in setting rates for
a plethora of services, some of which are priced below "cost" for
many reasons and others are priced above "cost" to offset them. So
if the PUC says that rural residential subscribers pay the same as
urban, residential service is below "cost" (i.e., doesn't pay the
required return), and other services are priced to make it up --
i.e., business and long-distance services.

The problem for regulators and regulated telcos comes when the
services that are providing the subsidy for below-cost residential
service are subject to competition. If you were MCI in the late
1960s, you would have targeted your service (after getting into the
business by saying you'd be providing specialized microwave service
for truck lines) to businesses paying phone bills providing the
highest subsidies for residential service. This was referred to as
cream-skimming. It only makes sense. The problem is, it upset all of
the factors on which the traditional ratemaking scheme depended. MCI
could offer long-distance service for half the price of AT&T because
AT&T was using the excess revenues of long-distance service to keep
residential and rural service prices low to please regulators. When
MCI came along, AT&T had to lower the prices of its most profitable
services, but it couldn't raise the price of residential service due
to those darn regulators. As a result, AT&T earned below its
regulatorily-established rate of return. It wasn't guaranteed, after
all. Of course, AT&T then got the FCC to move the subsidies around by
creating access charges, and then there was the divestiture, which
changed everything. Now AT&T was in the same position as MCI with
respect to subsidies.

>> Very, *very* rarely was 'how' that money was spent questioned.
> *NO*, <that> is _not_ true.

> As Pat pointed out, Ma Bell was under constant scrutiny by the news
> media and govt and advocates. Shareholder gadflies made a point of
> disrupting stockholders' meetings every year. Activists filed
> constant lawsuits against the system.

I can't speak to the issues raised by shareholders, or activists'
suits. There were, however, many regulatory inquiries into the
"costs" incurred by the telcos and the pricing of their services.
The FCC was very diligent in trying to prevent abuse of the telcos'
ability to classify costs. Unfortunately, cost is a very complex
concept in the area of regulated telephone service, because a given
expense is used to support many different services. How the cost is
allocated is a can of worms: in the old days, AT&T had an incentive
to allocate costs to long-distance, to keep that price as high as
possible within its rate of return and keep local residential
service low, but with competition, telcos have an incentive to
allocate costs to the services least subject to competitition,
keeping those prices as high as possible. Back in the old days
before MCI, when there was no real long-distance competition, the
FCC conducted an inquiry into the below-cost pricing of TELPAK
service (a high-volume long-distance service used by large
businesses and the government) and was unable to come to any
definitive conclusions after ten years because the costs were as
slippery as eels, so it defused the issue by allowing resale and
shared use of long-distance circuits, including TELPAK, and AT&T
responded by discontinuing TELPAK, which it had to do because
otherwise resale of TELPAK would have eliminated its captive retail
long-distance traffic. And AT&T's TELPAK tariff was, in turn, a
response to the FCC's 1959 "Above 890" decision that allowed private
entities to set up private microwave networks instead of having to
use AT&T for long-distance service.

The Above 890 and Resale and Shared Use decisions presaged the end of
the traditional Bell System and set the stage for our current
competitive telecom arena. I can't think of a single shareholder
gadfly or consumer lawsuit that had a comparable effect. There were
much more significant cost allowance and allocation issues in other
regulated industries, such as whether to allow electric utilities to
charge consumers for the humongous cost of constructing nuclear power
plants before they were producing electricity.

>> Can you name a feature/capability introduced by the Bell System after
>> 1970 that was not present in third-party-provided, customer-owned, PBX
>> equipment first? The only one I can think of is the "picturephone".

Your one example is off. AT&T introduced the picturephone at the NY
World's Fair in 1964 and the Bell System never introduced it into
service at all, as far as I can tell. Does your phone show pictures?

Michael D. Sullivan
Bethesda, MD (USA)
(Replace "example.invalid" with "com" in my address.)

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