Federal Communications Commission

“ 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. ”

“ Because enhanced services are dependent upon the common carrier offering of basic services, a basic service is the building block upon which enhanced services are offered. Thus those carriers that own common carrier transmission facilities and provide enhanced services, but are not subject to the separate subsidiary requirement, must acquire transmission capacity pursuant to the same prices, terms, and conditions reflected in their tariffs when their own facilities are utilized. ”

“ 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. ”

“ One of our country's leading authorities in regulatory economics has noted 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. ”

“ 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. ”

“ As we evolve into more of an information society, the access/bottleneck nature of the telephone local loop will take on greater significance. Although technological trends suggest that hard-wire access provided by a telephone company will not be the only alternative, its existing ubiquity and the amount of underlying investment suggest that whatever changes do occur will be implemented gradually. Moreover the monopoly rent that a company can extract from such bottleneck facilities is likely to bear some relation to the number of subscribers served. ”

“ As we stated in the Tentative Decision:
[this] structure flows from a recognition that computer processing technology has substantial benefits for communications users and the desire to minimize regulatory obstacles to the full development of its market applications, and not solely from a concerted effort to force competition per se into the telecommunications market; It so happens that the potential for a competitive environment to evolve is very real, and such a possibility should be viewed as a positive contribution. ”

“ Kahn also notes 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. With the effect of vertical integration on innovation rates within the Bell System unestablished, we are unwilling to forego the likely stimulus to innovation that a "competitive" structure will yield. ”

“ 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. ”

“ In its reply, NTIA contends that the best measure of a carrier's potential for anti-competitive activity is its "total revenue generated from monopoly services--the sources of funds for the cross-subsidization of competitive services." ”

“ In undertaking the task of identifying the possible advantages and disadvantages and fashioning conditions to deal with each, we take as a starting point the hypothesis that vertical integration normally represents a benign, efficiency - producing method of organizing production insofar as it permits avoidance of production and transaction costs. ”

“ On the other hand, a carrier like Continental, with most of its resources concentrated in rural distribution plant, would not be able to deny competitive access to any significant portion of the potential customers for enhanced services. The diminished likelihood of success in such attempts also serves to diminish the incentive to try. ”

“ The examples provided by AT&T generally fall into the latter category. If there truly are economies of scale, nothing in our separation requirements would preclude a non-related entity from providing services to both the underlying carrier and its separate subsidiary. If the unaffiliated entity can attract additional customers for the same service (e.g., payroll accounting and check preparation) , it may be able to offer greater economies than those available to the telephone company alone. ”

“ But it is abundantly clear to us that the burdens of working out the transition must be borne in the largest measure by the affected carriers. They much more than any other entities involved have the ability to implement the transition in a timely and efficient manner or to retard its achievement and raise the costs of attaining it for all concerned. We hope that they share our view that society's interest in efficient communications will be well served by proceeding as rapidly as possible to the arrangements described here. ”

“ The opportunities for undetected cross-subsidization that prevail in the absence of a separation requirement are so substantial that, at a minimum, protection from such abuses is very important to the telephone ratepayer. The general public would realize benefits equally substantial, if less immediate. ”

“ We concluded that the public interest would best be served if customer-premises equipment that performed more than a basic media conversion function was offered separate from the basic services of the underlying carriers and marketed through a separate resale or other subsidiary. This structure, we believed, would ensure that basic communications services were not burdened by improper subsidization to sophisticated terminal offerings while at the same time providing flexibility and incentives for new and efficient terminal offerings. ”

“ In discussing the marginal operating costs it is important to keep three additional points in mind. First, the regulated market will continue to interact with the competitive market; commerce will remain between the two, permitting regulated carriers to continue providing transmission and distribution facilities to carriers in the competitive market, and protecting any scale economies that presently exist in underlying facility production. Second, the separated entities will be providing services unique to the competitive market, relying, for the most part, on highly specialized facilities. ”

“ Moreover, if sharing of computer capacity by the subsidiary were allowed, any structural mechanism for ensuring nondiscriminatory access to the network would be negated. It should also be remembered that computers are not as large or expensive as they once were, and they almost certainly will be even smaller and less expensive in the future. Therefore, the size of any inefficiencies resulting from the maximum separation policy is not likely to be large. ”

“ Should experience show it is necessary, we are prepared, for example, to prohibit all information flows, to require some measure of third party equity financing for the separate subsidiary, or, in the extreme case, to ban dominant common carriers from the provision of some enhanced services or CPE altogether. ”

“ Thus, the general learning on vertical integration counsels an effort to find some acceptable middle ground between potential economies of integration derived from more efficient production and lowered transaction costs and potential diseconomies stemming from abuses of special positions made possible by integration. ”

“ Non-telephone carriers do not have the kind of market power we are concerned with here. Specialized carriers, such as MCI and SPCC, lack local distribution facilities entirely, and have no reservoir of monopoly ratepayers from which to extract the excess profits necessary to cross-subsidize other services. ”

“ In contrast, the rural telephone companies would be hard pressed to attempt to bankrupt competitors in their local areas where such competitors may flourish in the major metropolitan areas, or throughout the nation generally. Again, we believe that the unlikely prospects of their success will in turn diminish their incentives to attempt predation, leaving the local ratepayer at much less risk than those captive to AT&T and GTE local services. ”

“ In addition, our existing separation rules require that unregulated services be provided through computer facilities separate from those of the carrier. Various parties have argued that sharing of computer capacity should be allowed. In its Response to the Tentative Decision, NTIA contends that, "most carriers ... will need computer facilities capable of performing data processing functions to assist them in providing the basic communication services, and a separate entity with separate computer facilities will be pure duplication. ”

“ The primary concern in allowing joint research and development rests in the fact that, through such mechanisms as the Bell System license contract arrangements with the operating companies, monopoly derived revenues are used to fund research and development. ”

“ In selecting only certain carriers to whom the structural requirements apply we are not unaware of the risks associated with exempting other carriers. However, potential abuses not safeguarded by structural requirements can currently be safeguarded by our broad authority to regulate the conduct of these carriers. All of the entities offering basic services, of course, remain subject to the dictates of the full range of Title II regulation. Moreover, we remain free to re-examine our current approach should such potentials for abuse actualize, or as circumstances change generally. ”

“ By the same token, AT&T and GTE will not be prevented from realizing any mass production economies that may presently exist. AT&T and GTE will presumably be active participants in a competitive technology market with a growing demand for telecommunications products, and any separated subsidiary would have the option of creating its own research and development facilities. ”

“ More specifically, the separation of regulated and unregulated activities and associated costs requires that the subsidiary have its own operating, marketing, installation and maintenance personnel for the services and equipment it offers. This means that the unregulated subsidiary must do its own marketing, including all advertising related to the offering of any service or equipment it offers. Affiliated entities may not advertise on behalf of the subsidiary. We are cognizant of AT&T's assertions that maintenance and training costs will be increased by a separation requirement. ”

“ Further, any advantages that the operating companies now enjoy from their access to the innovative research of AT&T or GTE will also be enjoyed by a separated subsidiary providing enhanced service and CPE. As explained, infra, except as to software development the only restriction being applied at this time is that the subsidiary, if it shares the research and development product of its parent corporation, must do so on a fully compensatory basis. ”

“ The regulated services would be carrying the burden of an unnecessarily high unit cost to their subscribers' disadvantage, while the risks of failure facing the non-Bell and non-GTE entrants in the competitive market would be increased, along with all the costs associated with higher risk. ”