Federal Communications Commission

“ Our action today is only another in a series of steps to isolate terminal from transmission offerings, increase consumer choice, and to open equipment markets to full and fair competition. By striking down carrier-imposed restrictions on requiring equipment interconnection over a decade ago, we foreclosed carriers from offering only the single option of end-to-end communications service. ”

“ A separate subsidiary requirement, from a purely structural perspective, does not guarantee a competitive marketplace because it does not significantly change the incentives of a firm upon which it is imposed. The requirement does not impart an incentive to operate the subsidiary in a manner that would detract from the overall profitability of the parent corporation. Thus, in general, if the parent has an incentive to exercise its market power to the disadvantage of consumers and competitors in the absence of a separate subsidiary, it has the same incentive to do so after one is required. ”

“ We are faced with the reality that technology and consumer demand have combined to so overrun the definitions and regulatory scheme of the First Computer Inquiry that today no comparable, minimally enduring line of demarcation can be drawn. In enhanced services, communications and data processing technologies have become intertwined so thoroughly as to produce a form different from any explicitly recognized in the Communications Act. ”

“ Thus the rapid pace of technological evolution would quickly render obsolete any attempt to draw distinctions among customer-premises equipment based on processing functions. We concluded that classifying CPE as either communications or data processing could impede a vendor's ability to refine and adapt its equipment offerings to user requirements through various processing applications accomplished by simple "software" or "hardware" changes to existing equipment. Implicit in this is the recognition that the uses to which CPE may be put are under the user's, not the carrier's, control. ”

“ We proposed to address the structure under which competitive computer processing services are provided. In so doing we recognized that the confluence of communications and data processing renders unlimited the possible combinations and permutations of services which can be offered to the consumer. Moreover, we noted that the nature of these services are determined not by the transmission facilities but, rather, by the specific processing applications offered through electronic equipment attached to the channel of communication. ”

“ When used in conjunction with the separate subsidiary concept, accounting serves as a useful regulatory tool for identifying certain abuses. We view separation and accounting as part and parcel of a single regulatory mechanism. At a minimum, a carrier with market power and control over communications facilities essential to the provision of enhanced services could distort the competitive evolution of the enhanced services markets at the expense of the communications ratepayer through cross-subsidization and other anticompetitive behavior. ”

“ The supply of communications products and services will be limited only by the ingenuity of businessmen and scientists. Government will no longer be a barrier that prevents or delays the introduction of innovations in technology.
We have all read a great deal about the marvelous inventions that the convergence of computer and communications technology will make possible. Consumers and businessmen will have highly intelligent communications products and services in their homes and offices that will increase productivity, save energy and improve the quality of life. ”

“ IBM recommends that the Commission deregulate all customer-premises equipment and not permit carriers to offer any such equipment under tariff as part of a basic transmission service or otherwise. To permit such an offering as part of basic service would, it states, undermine the ability to prevent cross-subsidization. According to CBEMA, the lack of competition with respect to "basic" customer-premises equipment, such as the telephone, has been attributable not to inherent monopoly characteristics but to artificial constraints imposed by carrier tariff restrictions. ”

“ Providers of enhanced services are afforded tremendous flexibility because there is no restriction on the types of services they may provide, except those imposed by the demands of their customers. The boundary between basic and enhanced services raises no such barrier since we believe we have identified a common necessary element in our definition of basic services. The trend in technology is toward new and innovative enhancements that build upon basic services. For computer vendors and entrepreneurs the momentum is away from basic communications services, rather than toward it. ”

“ In view of the many changes that have occurred in the telecommunications industry in recent years the validity of permitting carriers to bundle terminal equipment and transmission service charges at any level is highly questionable. In general, bundling of goods and services may restrict the freedom of choice of consumers and restrains their ability to engage in product substitution. [51] Unless the goods and services in the bundle exactly match the preferences of consumers, consumer satisfaction may be reduced by bundling. ”

“ However, I believe that it would be far wiser policy for the Commission to balance the potential for cross-subsidization and the potential benefits of vertical integration in favor of cost-accounting systems and continuing Commission surveillance, rather than in favor of the rigid and total separation approach adopted by the decision. Our primary purpose here should be to reconcile the competing policy values in such a way as to maximize the ultimate benefits accruing to the consumer public from both competition and vertical integration. ”

“ The argument is advanced that a requirement that enhanced services or CPE be provided through a separate corporate entity is not necessary and that reliance on accounting tools is sufficient to satisfy regulatory concerns. While accounting has always been a fundamental regulatory tool utilized by this Commission in the exercise of our statutory responsibilities, its use has by no means been recognized as a substitute for structural separation. ”

“ For its universality, its versatility and its economy, our telecommunications network is unmatched by any in the world. I believe it would ill-serve the public interest if AT&T, GT&E or any other participant in the network were denied the opportunity and the challenge of bringing their financial resources, their tradition of universal service and importantly their in-place research capabilities to the rich new compunications field. ”

“ Traditionally, transmission capacity has been offered for discrete services, such as telephone service. With the incorporation of digital technology into the telephone network and the inclusion of computer processing capabilities into both terminal equipment located in the customer's premises and the equipment making up a firm's "network," this is no longer the case. Telecommunications service is no longer just "plain old telephone service" to the user. A subscriber may use telephone service to transmit voice or data. ”

“ In regulated markets characterized by dominant firms, there may be an incentive, however, to use bundling as an anti-competitive marketing strategy, e.g., to cross-subsidize competitive by monopoly services, that restricts both consumer freedom of choice as well as the evolution of a competitive marketplace. Restricting bundling practices in such markets reduces these impediments to improve consumer welfare. ”

“ Where a carrier has the incentive and ability to engage in sustained cross-subsidization, or predatory pricing, accounting may be employed to assist in the identification of such practices, but it cannot prevent the misallocation of joint and common costs associated with the provision of basic and enhanced services if provided by the same entity. ”

“ Given the actuality of competition as it exists today and the potential for much greater competition in the future, there is no longer a reason for the Commission to permit the joint tariffing of services and equipment, especially considering the risks of cross-subsidization that such joint tariffing entails. Under our interpretation of the 1956 Consent Decree, AT&T gains authority to compete for any enhanced equipment customer. But, importantly, consumers will be in a better position than they are today to determine what equipment offerings will best serve their needs. ”

“ We disagree with the first argument that an artificial distinction is made between voice and data services, or that we are imposing such a separation. The incorporation of voice and data transmission capabilities into the network is inherent in the basic service category. ”

“ Unbundling in and of itself may not disassociate all costs of providing basic services from the provision of CPE. To the extent that such equipment is tariffed in a fashion that allows the carriers to earn a regulated return on their investment there is the potential for joint and common costs to distort either the price for the CPE or the basic service. ”

“ A telephone company serving a relatively small proportion of the nation's homes and businesses is perhaps less likely to pursue such activities independently. For the most part, long-term profitable entry into the enhanced services field will probably require penetration of the market on a national scale, and it is unlikely that such a national operation could be effectively subsidized from a small pool of monopoly revenues, or that it could gain any significant competitive advantage by restricting the access of its competitors to a very limited network of underlying facilities. ”

“ The public costs of a contrary interpretation of the Decree, requiring us to regulate these markets, and extending the government's reach into the data processing field, is far too high.
The Final Order in the Second Computer Inquiry is a giant step forward for consumers and for the industry. Faced with the choice of solving a problem by either extending or reducing government regulation, we have chosen to reduce regulation. ”

“ The question of whether customer-premises equipment should be tariffed drew an equally mixed reaction. Divergent entities, such as AT&T and NATA, took the position that the Communications Act required that the provision of customer-premises equipment by underlying carriers be subject to tariff regulation. Without such regulation NATA saw no hope for the development of a genuinely competitive equipment market. Other parties contended that no CPE of any type should be subjected to tariff regulation, asserting that the CPE market was competitive and that regulation would be unduly burdensome. ”

“ To the extent services must be so structured there is a corresponding inability to fully tailor services to consumer needs. This has the result of artificially restricting the supply of services provided over the telecommunications network. In the final analysis both individual consumers and society in general bear unnecessary costs where such limitations exist. This becomes even more troublesome as new markets for enhanced services open and new services open up. ”

“ While research and development purchased from an affiliated entity by the separate subsidiary need not be shared with other competitive service or equipment vendors, information which finds a principal use in marketing, such as customer proprietary information, must be disclosed to other competitive vendors at the same time the subsidiary receives the information and under the same terms and conditions if it is shared with the subsidiary. ”

“ Alfred Kahn's treatise on The Economics of Regulation in support of the propositions that "... while AT&T has mounted a significant defense of vertical integration, it does not take into account the likely contributions which competition can bring, and has brought, to innovation," and that "the generalized case for vertical integration by a monopolist is not without serious dangers, particularly where the company is rate-regulated and seeking to engage in unregulated activity." ”

“ Many different types of CPE are offered in the marketplace and it is virtually impossible for a single supplier to satisfy all the various equipment needs of a user. The number of suppliers in the marketplace and the variety of products they offer is evidence of the severability of CPE from a carrier's transmission service. Moreover, to a large extent, the technological revolution in terminal equipment has occurred independent of common carrier transmission services. ”