Summary

The Telecommunications Act of 1996 sought to spur competition in local telephone and other telecommunications markets. GAO found that little competition has emerged in local phone markets so far, but new competing carriers are pursing several different market strategies. Incumbent local telephone service providers controlled all but about three percent of the traditional wireline local telephone service market as of December 1998. The number of lines that competing carriers serve, however, has increased rapidly, approximately tripling in 1998 alone. Although competing carriers have focused on serving relatively profitable urban business communities, some of the competing carriers GAO interviewed in five states were serving other markets, such as residential customers and customers outside the largest cities. An important competitive strategy being undertaken by both competing and incumbent carriers is the simultaneous marketing and sale of a package of various telecommunications services, including local and long-distance telephone service, Internet access, wireless telephone services, and video services. More competition in local phone markets will depend, in part, on how several key issues are resolved. For example, the act required incumbent carriers to provide competing carriers with access to elements of their telephone networks, such as equipment and facilities, to enable those competing carriers to order and provide service to their own customers. GAO's discussions with competing and incumbent carriers in five states, however, suggest that providing this access has been difficult because these incumbents' systems were not designed to be accessible to external users. Competing carriers in the five states also said that the act and accompanying rules need better enforcement. Despite the minimal competition that has emerged in the market so far, GAO believes that more competition is likely in the local telephone markets because competing carriers continue to expand their market share, these carriers are using all entry modes envisioned by the act, legal and regulatory issues are increasingly being clarified, and the packaging of telecommunications services may allow firms to compete effectively for local telephone customers. The Federal Communications Commission and state regulators are taking steps that suggest greater enforcement efforts in the future.

GAO noted that: (1) little competition has emerged in local telephone markets, but new competing carriers are pursuing several different market strategies; (2) according to Federal Communications Commission data, incumbent local telephone service providers controlled all but about 3 percent of the traditional wireline local telephone service market as of December 1998; (3) while competing companies have concentrated on serving relatively profitable urban business communities, some of the competing companies were serving residential customers and customers outside of the largest cities; (4) the number of lines competing carriers serve has, however, approximately tripled in 1998 alone; (5) the competing carriers were delivering services through all of the methods envisioned by the 1996 act: reselling incumbents' services, leasing parts of incumbents' networks, or constructing their own facilities; (6) an important competitive strategy being undertaken by both types of carriers is the simultaneous marketing and sale of a package of varied telecommunications services; (7) the act requires incumbent carriers to provide competing carriers with access to elements of their telephone networks to enable those carriers to order and provide service to their customers; (8) this has been difficult because the incumbents' systems were not originally designed to be accessible to users external to the incumbent carrier; (9) negotiating the necessary agreements between an incumbent and competing carriers can take a significant amount of time and delay their market entry, as can negotiating the placement of competing carriers' equipment in an incumbent's facilities; (10) incumbent carriers invested money and other resources to make elements of their telephone network accessible to competing carriers, had signed interconnection agreements, and had allowed competing carriers to place their equipment inside their own facilities; (11) competing carriers said the act and accompanying rules needed better enforcement; (12) state and federal regulators recognize their role is changing to focus more on mediating disputes among carriers and enforcing laws and regulations; and (13) further competition seems likely to develop in local telephone markets because competing carriers continue to expand their market share using all entry modes envisioned by the act, legal and regulatory issues are becoming clarified, and the packaging of varied telecommunications services may enable firms providing other communications services to effectively compete for local telephone customers.