equipment markets in the United States makes it clear that removal of the restriction at this time would have a significant adverse impact on competition, innovation, consumer welfare, and the competitiveness of the U.S. equipment industry in domestic and

foreign markets.

In TIA's view, the economic and social benefits arising from advances in telecommunications technologies will be fully realized in a public policy environment which encourages an open, competitive marketplace. By severing the tie between the divested RBOCS and Western Electric (now AT&T Technologies) and prohibiting RBOCS reintegration into manufacturing, the MFJ has in a relatively short period of time had a dramatic, positive impact on competition in telecommunications equipment markets in the U.S.

MFJ

on

the

The pro-competitive impact of the telecommunications equipment industry cannot be overstated. Since divestiture, the industry has undergone a remarkable

transformation.

Under the MFJ, RBOC equipment purchasing practices almost immediately began to diverge markedly from their historic pattern, as the BOCs began to purchase on the basis of price and quality, in many cases selecting products offered by suppliers other than Western Electric. The increased competition spawned by the MFJ has yielded a number of tangible benefits, most notably reductions in telecommunications equipment prices of 30 to 50%. Competition on the basis of non-price factors, such as warranty protection, delivery time, and after-sales service has intensified as well.

the MFJ has increased

the

Perhaps most significantly, technological dynamism of the U.S. equipment industry. The more competitive environment spawned by the MFJ has stimulated the development and deployment of new telecommunication technologies and quickened the pace of innovation in all sectors of the industry. As the District Court observed, at the conclusion of its exhaustive Triennial Review of the MFJ, "there has been a flowering of research, development, introduction of new products and quality assurance; new firms have entered the market; prices of equipment have declined dramatically ... and competition flourishes in a market that had seen relatively little of it before."

The

The opportunity to compete for sales to the divested BOCS, the largest purchasers of telecommunications equipment in the industry, has encouraged increased capital investment in efficient U.S. manufacturers who have at long last been afforded access to the Bell market, as well as a host of promising new "start-up" enterprises which did not even exist prior to divestiture. emergence of an intensely competitive equipment marketplace in the U.S. has forced American manufacturers to become increasingly creative and efficient in meeting the needs of their customers, and therefore, better able to compete both domestically and in overseas markets.

In assessing the validity of claims by the RBOCs that the manufacturing prohibition is no longer necessary or, conversely, that its removal would yield substantial benefits to the U.S. economy, it is important to recall the long history of antitrust

litigation and regulatory disputes which led to imposition of the decree restriction in the first instance. Entry of the MFJ ended more than 30 years of controversy focusing, to a significant extent, on the competitive problems arising from the Bell System's simultaneous involvement in monopoly telephone service and adjacent, potentially competitive telecommunications equipment markets.

The Justice Department's 1949 antitrust complaint focused almost exclusively on the Bell System's efforts to impede competition in the manufacture and sale of telecommunications equipment. In the 1949 litigation, the Justice Department advocated a structural remedy involving the divestiture of the Bell Operating Companies' manufacturing affiliate, Western Electric. However, the Department later bowed to political pressure and agreed to a settlement which allowed the Bell System to retain its manufacturing operation.

Following extensive

investigative

hearings exploring the circumstances surrounding entry of the 1956 consent decree, the House Judiciary Committee issued a report sharply criticizing the Justice Department's action.

Subsequent events demonstrated the inadequacy of the 1956 decree and the inability of regulators to prevent the continued foreclosure of competition in telecommunications equipment markets. In the 1974 litigation, in private antitrust suits, and in numerous proceedings conducted by state and federal regulators, evidence was presented detailing the Bell Operating Companies' participation in a broad range of anticompetitive conduct, including biased

equipment prices from monopoly service revenues.

Not surprisingly, the RBOCS contend that the long history of anticompetitive abuse and regulatory failure which led to imposition of the MFJ is irrelevant in the post-divestiture marketplace. Because there are seven of us, the RBOCS argue, it is unlikely that any one of us would be able to "remonopolize" the equipment industry. Even assuming the validity of the RBOCS' argument, is this a distinction that removes all risk to competition and consumers?

of

Clearly not. Even a single RBOC still has the ability as well as the incentive to foreclose 15-20% of the U.S. market for many types of equipment, through self-dealing and other forms anticompetitive behavior. The collective impact of such behavior could result in the foreclosure of more than 75% of the market. Nor can the potential for tacit cooperation or outright collusion among the regional companies be discounted, particularly in light of Bellcore's involvement in activities (e.g., standards development, product testing) which have a substantial impact on the ability of manufacturers and suppliers to design and market equipment to the BOCS.

The proponents of legislation lifting the MFJ restriction purport to address certain of these concerns by authorizing BOC entry into manufacturing subject to "safeguards" which they argue

will provide adequate protection to competition and ratepayer interests. However, virtually all of the regulatory mechanisms cited by the RBOCS and their supporters in support of such proposals existed in one form or another prior to divestiture. Aside from the bare assertions of the RBOCS and some regulators, there is nothing to indicate that the manifold problems arising from integration by the Bell Operating Companies into manufacturing can now be effectively contained through regulation.

In the

At the federal level, the FCC has removed the structural separation requirements imposed under its Computer II decisions, in favor of less stringent, "non-structural" safeguards. equipment procurement area alone, the FCC expended enormous resources in proceedings spanning several decades attempting, unsuccessfully, to ensure that independent suppliers were given full and fair opportunity to compete for sales to the BOCS. The dramatic shift in BOC purchasing patterns following divestiture clearly demonstrates the inability of federal and state regulators to prevent discrimination by the BOCS in favor of an affiliated supplier. Effective regulatory oversight is further hampered by the Communications Act's division of regulatory responsibility between the FCC and the states, uncertainties as to the extent of regulatory jurisdiction over diversification by common carriers into manufacturing, and the uneven distribution of regulatory resources and expertise at the state level in particular.

The RBOCS suggest that their entry into manufacturing will enhance competition. History and logic suggest that they are far