The transition to a competitive long distance telephone system -- a primary rationale for the breakup of the American Telephone & Telegraph Co. -- is not working and if the government does not step in to ease the birthpangs, competition may be dead before it takes its first real breath.
So claim MCI Communications Corp., GTE Sprint, Satellite Business Systems (SBS) and other long-distance rivals of AT&T, all of which are lining up to recite a litany of complaints to the Federal Communications Commission and Congress.
AT&T's competitors will have to spend an additional $6 billion over the next five years to create long distance networks of sufficient size to compete with AT&T, according to a recent study Booz Allen & Hamilton Inc., commissioned by GTE Sprint.
But the costs of building the networks -- under the rules prescribed by the FCC -- are sqeezing profit margins so tightly some companies may not survive, AT&T's rivals protest.
"You have the cost pressure coming up underneath you at a very substantial rate plus the burden of expanding immature networks," said William D. English, general counsel of SBS. "The government has got to give you certain advantages and incentives as to why you are spending all that money," he added.
"The ground rules that have been established make it questionable whether that competition can prosper," said Theodore Brophy, chairman of GTE Corp. "If not, the breakup of AT&T was an unnecessary act."
"Companies are going to go belly up," said one MCI official. Industry sources say many long-distance companies would not mind finding buyers, among them ITT-United States Transmission Systems Inc., Lexitel Inc., Allnet Communications Service Inc., and TDX Systems Inc. Many regional companies may be merging in the near future, they say.
Some policy makers are wondering whether the breakup of AT&T was a fruitless experiment, say long-distance companies. "I see no indication the government is ready to unscramble the egg, but that is what government is beginning to conclude," contends Edward C. Schmults, general counsel for GTE Corp. "There are people at policy levels who . . . said to us maybe this is a natural monopoly after all."
AT&T sees a different picture. According to Alfred Partoll, executive vice president for external affairs at AT&T Communications Corp., the long distance arm of AT&T, MCI and other competitors are getting exactly what they asked for -- the chance to compete on an equal footing with AT&T.
Now competitors are crying wolf. "The process that is currently in place is precisely the way MCI wanted it and Judge Harold Greene who presided over the breakup of the Bell System wanted it," said Partoll. "And now our competitors are unhappy; we are never going to finish the list."
The FCC thinks it is high time AT&T's competitors faced up to facts. "They are Fortune 500 people -- this is a process of competition, business winners and business losers," said one high-ranking FCC official, who declined to be identified.
At the heart of the dispute is a complex issue involving the connections between long distance companies and local phone companies that permit long distance calls to go through.
Prior to the breakup of the Bell System, MCI and the other small competitors had complained before the FCC and the courts that the close tie-in between AT&T's long distance and local companies was an unfair and anticompetitive advantage.
The customers of AT&T's competitors had to dial lengthy access codes to make long distance calls, a handicap AT&T's long distance customers didn't face. But to offset that disadvantage, the FCC permitted the competitors to pay less to the local companies for the connection than AT&T paid. This discount gave AT&T's rivals their foothold in the long distance market.
With the breakup, in January 1984, AT&T's local companies were broken away. AT&T kept the long distance business and the FCC established a plan to give AT&T and its rivals equal access to the local companies at an equal cost. Equal access would be phased in by 1987.
But now the rivals say they can't handle the rapid phase-in of equal access, under rules that they say favor AT&T. "The regulators don't know where they are going . . . no one has a plan and we are talking about something fundamental to the welfare of this country," said GTE's Schmults.
Sprint, SBS, MCI and other long-distance competitors are appealing to Congress, which will hold exploratory hearings on the issue in June. In terms of the process, we are talking to the National Telecommunications Information Administration, to the Department of Justice and the Hill urging them to urge the FCC to take an updated look," said SBS's English.
The particular rules that grieve AT&T's rivals center on the conversion of individual telephone exchanges to equal access, which requires a change in local telephone company switching equipment. When conversion is accomplished, customers can chose their long distance company. At that point, AT&T's rivals lose the benefit of a discount on payments to the local companies.
One third of all telephone lines are expected to be converted to the service by the end of 1985 and all lines by the end of 1986, so costs are rising rapidly.
Adding to the pressure, AT&T will drop its long-distance rates another 5.6 percent in June, forcing long distance competitors to follow suit and pushing some companies further into the red.
AT&T's competitors need further discounts, they say, even where equal access has been attained. "Maybe an additional discount or phased-in discount is the best way to go," said Donald G. Prigmore, president of Sprint. "We should pay like amount for like services, but we are not getting like services."
The equal access process is not merely the technical provision of convenient "Dial 1" service to customers, said MCI President V. Orville Wright. Rather, the FCC must make sure competition takes hold and that no predatory pricing is allowed on AT&T's part so competition is nurtured. AT&T must be closely watched because it still dominates the $51.6 billion long-distance market, he said.
So far, the FCC has "failed miserably in actually accomplishing those responsibilities -- they are essentially favoring AT&T and not encouraging a competitive interest," he said.
The list of problems includes a process in which virtually all customers who don't chose a long distance company when equal access is offered are automatically assigned to AT&T. "That is a travesty, it's totally unfair," said Wright.
Marketing efforts of long-distance companies are seriously impeded because they cannot get customer lists from local telephone companies, while AT&T has the lists, he said. Because equal access is being phased in telephone exchange by telephone exchange rather than by whole local calling areas, it is not cost effective to use the media to advertise a service when too few people can actually get it.
But AT&T believes its competitors can take the heat. "Competition in the industry is working; there are active, viable competitors in the marketplace," said Partoll.
The FCC is becoming the ham on the sandwich.
"From our point of view, the FCC is heading in the right direction but not going far enough, fast enough," says AT&T's Partoll.
"The FCC has tried to move us into a deregulated environment more quickly than they ought to have," said Michael Richer, chairman of Allnet Communications Service Inc. "We staunchly agree with deregulation; it's just how fast we get there."
Analysts say the squeeze is on and the long-distance future is not a cheery one. "Our general outlook is that it is not that attractive a business," said Marianne G. Bye, a telecommunications analyst with Prudential Bache Securities Inc. "We don't think the regulatory environment is that supportive for the competitors of AT&T.
"Sprint will lose money this year and MCI's earnings are still going to be crippled by the shift in costs as they continue to pay high access charges," Bye predicts. "We just think the cost differential will narrow and many small competitors will lose out."
Both Sprint and MCI invested $1 billion each in expanding their networks last year and likely will spend the same amounts next year -- despite the squeeze. But GTE's Theodore Brophy for one is not convinced the investment will be worth it. "I still have some faith in the system still, but that faith has yet to be justified," he said.
Financial survival of the companies depends on FCC actions, said Jennifer Proga, a telecommunications analyst with Shearson Lehman Bros. Inc. "How big do the competitors have to get before they let AT&T loose?," she said "Considerably larger than they are now . . . AT&T is not interested in giving up market share, and anyone who thought otherwise was foolish."
MCI's profits plummeted last year to $59.2 million from $155.7 million in 1983 because of increased competition and rising costs for connections to the local networks.
In the first quarter of this year, MCI reported income of $40.45 million, which includes an out-of-court settlement with U S West for an antitrust case against the Bell operating companies. In reality, profits are only one cent per share greater this last quarter than they were last quarter, said Wright, and pressure will continue on profits.
GTE Corp. hit the red for the first time this year in its communications services group, of which Sprint comprises the lion's share. GTE lost $27 million in the first quarter of 1985 in that area because of increased costs associated with equal access, said a company spokesman. Profits sank from $82 million in 1983 to $67 million in 1984, with revenue more than halved from $1.3 billion to $578 million in 1984.
AT&T, on the other hand, has started turning around. While in 1984, AT&T earned $1.4 billion, trailing its predictions of $2.1 billion, its long distance business is going strong, say analysts. In the first quarter of 1985, the long-distance giant reeled in a 34 percent increase in first-quarter earnings of $354 million, compared with $226 million for the first quarter a year ago.
The natural consequence of competition is a shakeout in the form of mergers, acquisitions and outright deaths, say FCC officials, and no more subsidies can be handed out to the long-distance companies because ultimately the American consuming public will suffer.
The agency has twice already rejected the idea of giving long-distance competitors a break on equal access line charges. "There is no reason to ask the customers of one company to subsidize the customers of another company -- in particular because there are many areas where only AT&T is available and to mark up prices to those customers is just not fair," he said.
According to Capitol Hill aides, the long-distance companies are not going to get an entirely sympathetic ear and no legislative agendas are in the works to change the situation.
"No one is going to sit by and once again let AT&T be the only show in town," said one aide. But talking subsidies just will not wash. "They have some legitimate complaints but the form their complaints have taken has been bad -- the idea they need a handout for five years is . . . just not a very politically savvy way to go about making the case," said another aide who follows the issue closely.