history of the U.S. long-distance telephone business

In 1982, a court order broke up AT&T, then by far the largest U.S. telephone company.  The order began:

Plaintiff, United States of America, having filed its complaint herein on January 14, 1949,…the parties, by their attorneys, having severally consented to a Final Judgment which was entered by the Court on January 24, 1956, … [that Final Judgment] is hereby vacated in its entirety and replaced by the following items and provisions…

The 1982 court order is known as the Modified Final Judgment.  Final judgments don’t really occur in this world.[1]

The Modified Final Judgment separated AT&T’s long-distance telephone network from its local telephone networks.  AT&T become a long-distance telephone service provider.  AT&T’s regional Bell operating companies became seven independent local telephone companies (BOCs or “baby Bells”).  The BOCs were forbidden to provide long-distance service (technically, interLATA service). Companies could compete in providing long-distance telephone service by interconnecting with the BOCs.  The origination and termination of long-distance calls from and to local operating companies’ networks was called access services.  Local telephone companies’ provision of access services has been regulated to insure that rates (prices) are reasonable and non-discriminatory.[2]

The separate long-distance telephone service that the MFJ promoted has largely vanished.  Most mobile (wireless) service plans no longer distinguish between local and long-distance calls.  Under a process set up in the Communications Act of 1996, the BOCs have received authorization to provide long-distance service.  BOCs have acquired the largest long-distance telephone companies.[3]  Residential long-distance telephone service  generated about $26 billion in billed U.S. revenue in 1997.[4] Long-distance telephone service within the U.S. now is hardly promoted and sold as a separate product.

BOC switched access minutes from 1993 to 2008 show major change in the long-distance telephone business.  Switched access minutes are a measure of long-distance telephone minutes entering and exiting the BOCs’ local networks. From 1993 to 2000, BOC switched access minutes increased an estimated 48%.  From 2000 to 2008, switched access minutes declined 49%.  The best explanation for the decline in switched access minutes seems to be the growth of wireless long-distance calls.[5]  Wireless long-distance calls do not generate originating wireline access minutes.  To the extent that those calls are to other wireless phones, they also do not generate wireline terminating access minutes.  Wireless services early on provided long-distance service at the same rate as local service.  Assuming that long-distance calling continued to grow from 2000 to 2008 like switched access minutes did from 1993 to 2000 suggests that about two-thirds of long-distance calling minutes have shifted to wireless phones.

Use of BOC network connectivity has also changed greatly.  Telephone companies purchase from BOCs circuits to deliver and receive public switched voice traffic to and from BOC networks and to move such traffic between BOC-network access points and BOC-network end offices.  That network connectivity is called trunking, which is associated with switched-access services.  Telephone companies and other companies also purchase from BOCs circuits to move any type of traffic (data, voice, video) from point to point, with the traffic never being switched through a BOC end office to a public telephone service customer.  Such network connectivity is called special access.  DS1 and DS3 circuits can be used for either trunking (switched access services) or special access, but they are often named differently depending on their use.[6]

The ratio of BOC special access revenue to switched access revenue for DS1 and DS3 circuits increased more than fourfold from 1993 to 2008. For 1993, Ameritech rate detail suggests that the special access to switched access revenue ratio for DS1 and DS3 connectivity was about 3.  In 1999, all the BOCs aggregated had a ratio about 7.  By 2008, that ratio had risen to roughly 25.  By this measure, switched voice connectivity revenue  in 2008 amounted to about 4% of all DS1 and DS3 network connectivity revenue.[7] A more comprehensive account of network connectivity that included higher bandwidth, more advanced circuits than DS1s and DS3s would show an even lower share for switched voice.

Local network access services developed along with competing long-distance telephone service providers.  The long-distance telephone business has largely vanished.  Local network access services are now primarily used for point-to-point local network connectivity. The largest uses for local network connectivity now are probably Internet connectivity, backhaul from wireless network cell sites, and links in private data and video networks.

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Data: Online spreadsheet showing switched access minutes, DS1 and DS3 switched access and special access revenues, and Section 271 authorizations (Excel version).

Notes:

[1] The Modified Final Judgment (MFJ) is also known as the AT&T Consent Decree.

[2] The court’s MFJ established, in addition to state Public Utility Commission and Federal Communication Commission regulation of telephone service, a court-centric mode of telephone regulation. Section 7 of the MFJ states:

Jurisdiction is retained by this Court for the purpose of enabling any of the parties to this Modification of Final Judgment, or, after the reorganization specified in Section I, a BOC [separated Bell Operating Company] to apply to this Court at any time for such further orders or directions as may be necessary or appropriate for the construction or carrying out of this Modification of Final Judgment, for the modification of any of the provisions hereof,  for the enforcement of compliance herewith, and for the punishment of any violation hereof.

Section 8 of the MFJ added:

The Court may act sua sponte to issue orders or directions for the construction or carrying out of this decree, for the enforcement of compliance therewith, and for the punishment of any violation thereof.

Section Section 601(a)(1) of the Communications Act of 1996 explicitly removed any requirements under the MFJ. Federal legislative bodies thus asserted their legislative and regulatory interests.

[3] In the mid-1990s, AT&T and MCI together collected about 70% of long-distance service revenue (see Trends in Telephone Service, 2000, Table 11.3). SBC (a combination of Southwestern Bell, Pacific Bell, and BellSouth) purchased AT&T, closing the acquisition on Nov. 18, 2005. SBC then assumed the AT&T name.  Verizon (a combination of Bell-Atlantic, Nynex, and GTE Telephone) purchased MCI.  That deal closed on July 7, 2006.

[4] Galbi, Douglas (1999), “Regulating Prices for Shifting Between Service Providers,” p. 14.  This figure excludes revenue from prepaid calling cards.

[5] From December 1999 through December 2003, the BOCs received authorization to provide long-distance telephone service to their local telephone service customers.  However, BOCs were required to report their own use of long-distance switched access minutes in the same way that they report other customers’ use of switched access minutes.  See Communications Act of 1996, Section 272; and FCC (2007), Order on BOC Separate Affiliate and Related Requirements, Sec. III.A.4.b(ii).  Pricing-flexibility orders removed some special access and trunking services from price cap regulation.  Pricing-flexibility orders did not, however, apply to switched access (switch) minutes.

[6]  DS1 and DS3 circuits used for switched access are often called entrance facilities and direct-trunked transport, or just trunked transport.  The DS1/DS3 circuit called an entrance facility when used for switched access is typically called a channel termination or local distribution channel when used for special access.  In its rate detail, Ameritech labels DS1 and DS3 circuits used for switched access as LT-1 and LT-3 circuits.

[7] Pricing flexibility orders removed a large amount of special access and trunking (switched access) revenue from price caps after 1999.  To the extent that the ratio of special/switched access DS1 and DS3 revenue removed is different from the ratio of revenue remaining, the price cap revenue ratios do not accurately indicate the over-all network revenue ratios. However, the data show some indication of a raising ratio from 1993 to 1999.  Moreover, the geographic circumstances relevant to removing revenue from price caps are similar for special access and switched access. Hence price cap revenue removal probably doesn’t affect significantly the over-all shape of the special access/switched access revenue trend.