The seven Bell regional operating companies stand to lose billions of dollars of revenue from their biggest and best customers at the hands of their old parent: American Telephone & Telegraph Co.
In the wake of the Bell System breakup, AT&T -- which handles 85 percent of the nation's long-distance calling -- is now preparing to bypass the local telephone networks by connecting the largest business customers directly to its network, say company officials, industry observers and analysts.
That could mean a doubling of local telephone rates for everyone else within two years, said Walter Bolter, an economist and director of the Bethesda Research Institute, a telecommunications consulting firm, and other telephone experts.
AT&T's strategy would save large customers money by eliminating billions of dollars of fees they pay to the local operating companies, leaving the operating companies no choice but to hike local rates, observers say. Fearing the worst, the regional Bell operating companies want to be freed of regulation so they can generate other sources of revenue from new services, say analysts.
"The mother will feed on the children," said Bolter. "That is why the Bell operating companies are screaming to get loose from regulation on Capitol Hill -- it's all being pushed by AT&T's strategy to go after them.
"People will be screaming too when it translates back into local rates to a significant degree," Bolter added.
AT&T already has the authority it needs to bypass the local companies. However, the remaining questions are whether the FCC will allow AT&T to further enhance this ability -- which seems likely -- and how much of AT&T's current long-distance volume would be shifted from the local companies.
Rep. Timothy Wirth (D-Colo.), chairman of the House telecommunications subcommittee, in a recent interview said, "What is at stake is affordable local telephone service, long-distance competition and the financial viability of the local Bell operating companies."
The effort to bypass the local phone system has been driven by changing economics. In the past, large-volume users were captives of the telephone network and paid rates that subsidized local services. New technology allows large customers to construct their own telephone systems and bypass the local phone company -- with AT&T there to fit the technological bill as other long-distance companies scramble for more customers.
While the technology is available to all firms that can afford it, AT&T's domination of the market means that a switch away from the local firms could have a major impact on their revenues.
"AT&T is losing market share, and they will continue to lose market share," said Mark S. Fowler, chairman of the Federal Communications Commission. "They are engaged in competitive responses, and that is what competition is all about."
Regional companies, which have told the FCC about the growing threat from AT&T, see AT&T competing for their main business by essentially constructing another telephone network.
"It is a strategy of reintegrating all the piece parts that made up the old Bell System," said one regional Bell operating company executive.
AT&T is accomplishing its goal with the tacit assistance of the FCC, some observers contend.
The FCC already has allowed AT&T broader powers to compete aggressively against its long-distance competitors, MCI Communications Corp., GTE/Sprint and others. In addition, AT&T has applied to offer two more new services for its largest customers. The applications will go into effect by Nov. 4, unless the FCC takes action to block them.
David Aylward, a partner in National Strategies and Marketing Group, a Washington consulting firm, said, "What's needed here is a transition, where the FCC doesn't allow AT&T to radically alter the communications marketplace in a very short period of time."
But, he said, "The regulators aren't doing anything about it."
Wirth said, "I am extremely concerned that the FCC may well be encouraging bypass of the local operating companies through its decisions . . . . The FCC should instead be taking genuine steps to avoid this problem from occurring by assuring there is an adequate transition period."
Wirth said he plans to hold hearings on the FCC's handling of bypass issues in November.
FCC's Fowler said, "I think we have done a very responsible job in maintaining this transition to full and fair competition." The FCC is convinced AT&T will not "engage in wholesale bypass" of the local network in the next few years, he said.
But, AT&T is not waiting for approval of new services by the FCC. Instead, it already is selling the long-distance and private-network services to its largest customers.
"AT&T has informed customers the new services will be available," said Woody Kerkeslager, director of marketing services for AT&T Communications, the company's long-distance arm.
"We are targeting both large and small businesses through these offerings," Kerkeslager said. The businesses that could use the services include "a General Motors, a Sears catalogue store, it could be an L. L. Bean," he said. In short, any firm that generates long-distance bills of $50 or more might benefit.
"It's a matter of being able to offer these services or losing the customers and the revenue," Kerkeslager said. "If customers decide they want to bypass the local phone company , they will -- and AT&T will work with them."
Right now, the long-distance companies pay the local Bell companies fees to initiate and complete long-distance calls. The fees include "access" charges, which are used to maintain the local network between a user's phone and the point of connection to a long-distance company.
Long-distance companies, which pass the charges on to customers, pay the fees according to how much time is used. The greater the number of high-volume customers using a long-distance company, the higher the fees that company must pay the local company.
AT&T is the single largest user of the local telephone network by virtue of its 85 percent share of the long-distance market. Last year, the local phone companies earned $20.6 billion from AT&T in access charges -- or 94 percent of all the access charges collected. The access charges represented about 30 percent of the local companies' revenue last year, Bolter said.
AT&T's strategy involves cutting out the local charges for upkeep of the network, either by constructing ways around the local network; by letting customers provide their own connections to AT&T, or by asking local companies to provide connections to their networks that do not include the fees.
The idea of skipping local phone companies is nothing new, but AT&T's size is what is tipping the balance, said Jerome Lucas, president of a Virginia consulting firm, TeleStrategies Inc.
"Thirty percent of the Fortune 500 are actively bypassing now, and an additional 40 percent . . . have plans to do so within the next two years," he said.
The impact on local rates could be staggering if AT&T chooses to avoid the fees on a wide scale. "Of the $20 billion that AT&T contributes to the upkeep of the local network , at least half is at risk in the next two years," Bolter said. "It could have the impact of doubling local rates."
AT&T has already taken these steps to reach customers:
*Constructing more facilities closer to customers so direct connections can be made more easily.
*Introducing new digital microwave systems that can be used to skip the local phone company.
*Building private communications networks for large businesses that connect directly to AT&T. This service, which would require no regulation, was granted to AT&T by the FCC earlier this year. AT&T has provided the service to New York's Merrill Lynch.
AT&T also plans to capitalize on the two applications now awaiting FCC approval. The FCC is on the verge of granting AT&T the right to offer a new service that would charge a lower rate to very high-volume long-distance customers and bypass local phone companies.
AT&T has also informed the FCC that it wants to implement a new service, known as a "software-defined network." This would let companies computerize their private networks to keep use of regular telephone lines to a minimum. The FCC has suspended this offering and is investigating it, but unless it disallows the tariff, it will go into effect early next month.
AT&T's Kerkeslager contends his company has no desire to bypass the local operating companies, but will do so because of the problems he said were created by the pricing structure mandated by state and federal regulators.
Many consultants and consumer advocates agree that the problem must be settled with the help of state and federal regulators, who could allow local phone companies to charge less for business connections to the network, while charging more for other services. The arrangement, which would entail an entirely new pricing scheme for local service, would keep large businesses on the local network to everyone's net benefit, they say.
Fowler agrees the pricing structure is a problem. The FCC, together with state regulators, is planning to study the problem beginning in the middle of 1986, he said.