TELECOM Digest OnLine - Sorted: Re: The Coming Tug of War Over the Internet -- Wash Post

Re: The Coming Tug of War Over the Internet -- Wash Post
26 Jan 2006 10:52:19 -0800

William Warren wrote:

> The old line telecom providers have always relied on a tiered-service
> pricing model: relatively cheap basic services, such as local POTS
> "lifeline" service, subsidized by higher-priced and higher-profit
> premium offerings.

That description is only part of the old pricing model. The other
very critical part of that model was that the old-line providers were
forbidden to charge high rates or engage in high profit external
value-added services. They were not allowed to engage in lines of
business that would be profitable. Their research and inventions,
which they paid for, would be in the public domain.

Normal businesses may expand into new areas that are highly
profitable. For example, accountants branch into information systems
consulting which is more profitable.

In other words, the Bell System theoretically could've had its own TV
studio or made TV broadcast equipment, and made a lot of money doing
so. But it was forbidden, and other companies made a heck of a lot of
money instead.

Further, the premium services, while generating more profits, were not
"high" profits, they just paid a little better than the basic services
(in some cases covered the basic service losses). The Bell System's
profit rate was far lower than say IBM. AT&T stock appreciated only
slightly over the years.

> The reason SBC-AT&T and the other "Baby Bells" are whining is because
> the Internet has drawn the premium services out from under the Bell
> umbrella, and left the RBOC's with only a basic service -- the pipes --
> to make their profits.

And it's perfectly justified for the Bells to complain. Another issue
is that the other companies are cutting into the Bell's business, so
not only are the Bell's losing their more profitable businesses,
they're losing their basic business too.

It was the same regulatory attitude that killed off the railroad
industry in the U.S. in the 1960s and 1970s and left us with very
expensive clogged highways and airports. We put a strait-jacket
around the railroads, artificially held their rates down, wouldn't let
them enter new businesses, etc. Cars and planes -- capitalized by
taxes -- took their business away.

> In short, the RBOC's are trying to convince the Congress that they
> should enjoy a share of the profit made on the Internet because they
> are involved with providing the basic service that makes it possible:
> it's an old argument, but the RBOCs are old companies and they think
> that old scams work best.

It is neither a scam nor an old argument, and you are not expressing
their argument correctly. It is simply reflecting business in today's
conditions. The RBOCs no longer have the monopoly they once had.
Further, they, like any other business, have a right to participate in
new markets and technologies, especially as their old markets are
shrinking. They might do well, or they might not (as happened to

> Since the Internet, by its very nature, concentrates power at the
> endpoints, the former monopolists are floating trial balloons to see
> if the public will stand for them finding a new way to gouge the
> consumer.

What exactly constitutes "gouging"? How do we know other companies
participating in the Internet are "gouging"? Microsoft has a virutal
monopoly on PC operating systems and some applications and is a very
profitable company. Does that constitute "gouging"? Some cable
companies are very profitable. wrote:

> that they're already being paid to provide the basic service that
> makes it possible.

That is not the issue.

The issue is that: (1) that basic service market is shrinking, and (2)
new markets are opening up.

Say for example a long-time wedding photographer is frequently asked
about planning the wedding. The photographer sets up a planning
service. Maybe the photographer will go into bridal gowns and tuxedo
rentals. Maybe even into catering and music.

Under your argument, this photographer would be limited to photography
and that's it, even though others can become photographers and other
service providers. It's not in the economic interest to deny a
provider from the market place.

Western Electric and Bell Labs were excellent organizations, but
limited to telephone and defense. I wonder if consumers and industry
would've been better service if they would've been allowed to develop
and sell other products. Maybe they would've beaten RCA in television
sets and broadcast gear, or spurred RCA to develop stuff faster and
cheaper. Maybe they would've beaten IBM at computer development.

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