March 1, 1996

The Telecommunications Act of 1996 Goes To Market

7 min

The Telecommunications Act of 1996 was passed on February 1, and signed into law by President Clinton a week later, with two pens -- one conventional that was originally used by President Eisenhower to sign the Interstate Highway Bill and a second, digital pen sent the message into Cyberspace.

Legislative Overhaul

The new Act, which is the first major overhaul of telecommunications law in over 60 years, guts the Communications Act of 1934. The old law assumed that communications was a natural monopoly. The new law infuses competition into all parts of the communications marketplace. The debate over rewriting telecommunications law has been underway for twenty years. Significant issues have been considered regularly by Congress, and there have been many amendments to the 1934 Act over the years. But until now, attempts at comprehensive legislation have been unsuccessful. The overall thrust of the new law is straightforward: increase competition and reduce regulation.

The new law deliberately blurs lines between formerly discreet sectors of the telecommunications industry. Each icon on the telecommunications landscape will be dramatically changed as a result of this law offering consumers a tempting smorgasbord of services. The Act issues 21 proposals to reinvent the Federal Communications Commission (“FCC”), and the FCC has unveiled a preliminary schedule for implementing over 80 required rulemakings on topics ranging from television ratings to digital spectrum allocation.

Stripped down to its core, the Act will to work in three stages. First, the government will tear down existing barriers to entry, reducing inherent advantages for incumbent telecommunications providers. Next, the government will monitor how competition is faring, and tailor regulation as needed to accelerate competition. Finally, the government will step back and let the market work, using regulation only when necessary. This deregulatory outline is based on the premise that with competition, regulation is unnecessary to ensure reasonable rates or to protect consumers.

Blueprint for Competitive Video Programming

The Act establishes a blueprint for telephone companies to offer video programming. In response, many cable companies, faced with new rivals for their video business, are poised to enter the local telephone business. Cable companies’ coaxial wire, with its broadband transmission capacity, already passes more than 90% of the nation’s homes. However, the cost of upgrading these cables for telephone requires heavy investment. In recognition of growing video competition, the new law removes restrictions upon cable television subscription prices.

The Act removes probably the most significant barrier to facilities-based video distribution competition, which was the telephone company/cable television cross-ownership ban in the 1984 Cable Act. Now telephone and cable television companies have the choice of operating within several different regulatory frameworks. Telephone companies may offer video services under a cable television regulatory model, a common carrier model, or the newly created “open video system.” As an operator of an open video system, a telephone company must make at least two-thirds of its channel capacity available to unaffiliated programmers without discrimination. Open video systems must comply with the same network non- duplication, syndicated exclusivity, must-carry and retransmission consent rules that cable systems do. However, they are not subject to other federal cable regulations and need not obtain local franchises. Telephone companies may avoid common carrier and cable television regulations by providing multichannel multipoint distribution service (“MMDS”), also known as “wireless cable.”

The Telecommunications Act and the U.S. Supreme Court are also ensuring that cable television operators and programmers have an equal opportunity to provide video programming. In late February, the Supreme Court agreed to rehear the cable television industry’s challenge of the 1992 Cable Act’s must-carry requirements (Turner Broadcasting Systems, Inc. v. Federal Communications Commission). The 1992 Cable Act’s must-carry rules force cable television operators to offer carriage to all broadcasters within a specified local area or ADI. The outcome of this Supreme Court case also will affect telephone companies that offer video services under the Act’s open video system provisions, which contain certain broadcast station carrier requirements. Must-carry requirements in the 1992 Act were unchanged by the 1996 legislation.

Clearly, the variety of outlets for all types of programming has increased. Electronic retailers now have the opportunity to test these new distribution channels with their marketing expertise and merchandise by offering original content through new conduits. Electronic retailers can expect to see sophisticated advertising campaigns that will advance through more than one form of media. In addition, retailers should plan to produce combined campaigns with more forms of distribution complementing the changes in video programming, the Internet, and interactive services.

A Change For The Better

Meanwhile, there will be other major changes. Electric utilities may seek to enter communications businesses, capitalizing on their valuable rights-of-way. Wireless companies will be anxious to build up their systems, having spent billions of dollars in the wireless telecommunications auctions.

For the broadcast industry, this new law offers even more ownership freedom. A single television broadcast group will be allowed to own stations reaching as much as 35% of the national audience, up from the current 25%. Radio operators may purchase an unlimited number of stations nationally, and more stations in single markets. In addition, a broadcast network may own cable systems, and vice versa.

Consolidation will not be limited to broadcast companies. Throughout the industry, companies that previously focused on a single market sector will expand their horizons. Electronic retailers can expect to see a growing number of vertically integrated companies that provide content, distribution, software, and equipment. Some may seek to provide one-stop shopping by bundling local and long distance telephone, video, and Internet access services.

Although the one wire into the home concept -- meaning video by telephone or voice transmission by cable -- has received much attention, it is still years away from implementation. What is more likely to happen in the short term is the increase of alliances between cable and telephone companies.

Foreign interests attracted by the lucrative and newly-open U.S. telecommunications markets will seek ways to enter new global alliances with U.S. companies, just as U.S. companies will continue to expand their holdings abroad. See Jeffrey D. Knowles, “Americans Eye New Opportunities in Europe,” Electronic Retailing, p. 47 (September/October 1995).

Potential Downside

Despite all of the excitement about the new law, there is a potential downside. In the near term, consumers may see their cable rates go up, particularly in small towns and rural areas. Competition in the video programming and local telephone markets is likely to create some of the same consumer confusion that accompanied the introduction of competition in long distance service in the 1980’s. Increased media concentration is likely, raising concerns that information distribution will be dominated by a small group of very large players. Smaller businesses may find themselves unable to compete with media giants.

The gears are already in motion. Many of the biggest recent deals have involved telecommunications. The Walt Disney Company merged with Capital Cities/ABC, Westinghouse acquired CBS. AT& T engulfed McCaw Cellular. Gannett purchased Multimedia. US West corralled Continental Cablevision. And Bell Atlantic and NYNEX are reported to be in merger negotiations. These corporate giants will clash and compete for market share. Along the battle lines of this new frontier, the Telecommunications Act works as a double-edged sword. On one side, it will effectively slash service costs for subscribers in the long term. On the other, it is already carving out new niches for entrepreneurs to enter.

The new law allows for enormous change and opportunities for diversification in the industry. The evolutionary process has begun. With the quick stroke of a digital pen signing the bill into law, the image symbolizes the rapid pace of change in computer and communications technology, the growing variety of services, and the creative business and political strategies today. But will these technological dreams come to fruition? Will competition and entrepreneurship flourish or will deregulation simply result in larger companies and strangle the competitive market? For now, it’s too early to tell. Telecommunications companies simply cannot solidify their strategies until the FCC drafts specific rules based on the Act’s broad definitions and guidelines. Stay tuned.