The telephone system in the United States, unlike many other countries around the world, was not developed under government ownership, but by private companies. The telephone system was viewed as a natural monopoly -– it was considered most efficient to have only one set of telephone poles and wires in a community. In exchange for being granted the exclusive right to provide telephone service, a telephone company was subject to quality standards and rates were regulated to ensure consumers were not overcharged.
1984 — Breaking up "Ma Bell"
Until the mid-1980's, AT&T, commonly known as "Ma Bell", owned the nation's long distance phone lines as well as most of the local "Bell" telephone companies around the country. Eventually, other companies such as MCI figured out how to offer long distance calling at lower costs. The federal government pursued various ways to promote competition, including pushing an anti-trust lawsuit to break up AT&T. Under this court-ordered break-up, which occurred over twenty years ago, AT&T was allowed to provide long distance service while seven separate regional Bell operating companies, or "Baby Bells," were permitted to provide only local telephone service.
The break-up of AT&T has had mixed results. Few would argue about the major successes: competition for long distance service took root and made long distance calls less expensive, and innovations such as the Internet flourished. On the other hand, much of the price savings in long distance calling were accomplished by shifting a greater portion of network costs on to local phone bills. Further, since 1984, mergers actually reduced the number of Bell companies from seven to four.
1996 — Deregulating Local Markets
By the early 1990's entrepreneurs were eager to take on local phone markets as well, especially for the lucrative business customers. As would-be competitors stepped up their campaign for opening local phone markets, the regional Bells began demanding deregulation of their local service, and access to profitable long distance customers.
The result was the passage of the Telecommunications Act of 1996, intended to foster local phone competition. That law required local phone companies to allow competitors to access their local lines at wholesale rates. In return, the local companies would be allowed to offer long distance service if they proved to regulators that their local networks were open to competitors.
Once the regional Bell companies won permission to market long distance service, they did an about-face, challenging every rule that required them to open their local markets to competitors. To date, phone companies have been successful in blocking enforcement of the 1996 law and convincing regulators to increase the price competitors pay for network access. The result has been that new entrants have folded or stopped serving local residential phone markets.
