Telecommunications Act of 1996:
Relationships to Functional Theory
Russell H. Mouritsen
Brigham Young University
An examination of the effects of selected provisions of the Telecommunications Act of 1996 (the Act) reveals significant societal impact. These effects are discussed in the context of the telecommunications industry. This impact is also discussed relative to Robert K. Merton's views of functional theory.
The stated purpose of the Act is: "to provide for a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening up all telecommunications markets to competition" (Conference Report, Telecom Act, 1996).
Proponents of the Act asserted that it would "stimulate the rapid deployment of an advanced National Information Infrastructure and catapult the United States into a dynamic new digital information economy (Conference Announcement, 1997, introduction).
Congress, however, designed the Act to address two more basic structural issues of telecommunications, i.e., "technological convergence" and Legal balkanization." Congress assumed that technological innovation is better fostered in the environment of converging media than through to isolated innovation within particular media. Congress intended the Act to establish three policies formulated to correct these perceived structural limitations:
(1) Eliminate existing industry barriers to entry
(2) Remove FCC control over market entry
(3) Limit "harmful competition" (Krattenmaker,1966, p. 49).
From the foregoing it is clear that the intent of Congress in passing the Act was to make information technologies available to the public at reasonable costs through open markets and free competition.
Background Leading to Passage of the Act
During the early 80s many local governments were criticized for trying to obtain lucrative contracts and perks from their local cable operators. As a result, the pressure to deregulate in order to provide more competition gained substantial momentum. Consequently in 1984 Congress passed legislation to deregulate cable TV rates and limit local government control (Mouritsen, 1991).
During the late '80s spiraling cable television rates played a major role in the passage of federal laws which began to reverse deregulatory trends. Consumers and advocacy groups voiced concerns to congressional representatives. Subsequently, the Cable Television Act was passed in 1992.
In 1992 the FCC required cable operators to cut rates by an average of 7%. This move addressed loopholes in the 1992 Cable Television Act. The Act was supposed to lower rates for all cable subscribers. It didn't. In fact, since the 1984 passage of legislation deregulating cable television, rates had climbed 61%, far surpassing the rates of inflation during that period. The Cable Act of 1992 did little to bolster the confidence of consumers as the cable industry found loopholes that rendered made the act impotent.
Executives from cable and broadcast television, telecommunications and the cable operating systems spoke at a February 1994 seminar sponsored by the International Radio and Television Society and Broadcasting and Cable Magazine. The dominant theme was the need for collaboration among competing industries. It was obvious that concerns existed regarding the survival of each of the represented industries and the theme of friendly co-existence and collaboration was a predominant theme of the conference. It was apparent that mergers and buyouts would continue to accelerate (Cooper & Foisie, 1994).
Congress became aware that key issues including media mergers, rising cable rates, and a general lack of policy regarding the information superhighway would need to be addressed. Consumer groups voiced their concerns and pressure mounted to reverse de-regulatory trends which lead ultimately to the passage of the Telecommunications Act of 1996 (Mouritsen, 1994).
When Congress passed the Act in February 1996, lawmakers authorized the FCC to implement their plan to open up media markets to more competition. Since that time, however, consumers and advocacy groups have expressed concerns over several provisions of the Act which have not met expectations about more choices, lower rates and more competition.
The Act effectively subjects to its supervision the work begun by the 1984 break-up of the Bell/AT&T telephone system. The Regional Bell Operating Companies (RBOC's) may expand beyond local exchange telephony into long-distance services. The law also requires that RBOC's provide huge discounts to rival companies that wish to lease RBOC lines and resell local services (Cauley, 1996).
The opportunity for long distance carriers to enter the Baby Bell's $73 billion local calling territory was viewed as a key provision of deregulation, as nearly 40 per cent of all revenues earned by long-distance companies are derived from calls that originate and terminate within the RBOC's territory (Gautam, 1996). Initially it appeared the long-distance carriers also could reap a 35 per cent to 40 per cent discount in the local access area and further erode profits of the RBOC's. It hasn't worked out that way, however. Since the Act was passed the long distance carriers and RBOC's have been locked in a pricing standoff. It may be up to state regulators to resolve the pricing issues. The Baby Bells now appear to have the upper hand, and according to Merrill Lynch analyst Daniel Reingold, the RBOC's can protest every FCC decision, and with or without a stay can continue pursuing the long-sought authority to offer long distance to existing customers (Epstein & Galarza, 1996).
Although the Act held out the promise that local carriers could offer long-distance service, they have been continually rebuffed by the FCC. BellSouth Corporation's high stakes effort to enter the long distance business is headed for rejection by the FCC (Wilke, J., & Gruley, B., 1997). A key requirement of the Act stipulates that RBOC's must open their local markets to competitors prior to entering the long distance market. The FCC maintains that BellSouth has not met the necessary requirements.
This scenario will be repeated frequently in the coming months. Congress overestimated the willingness of the RBOC's to comply with standards set which indicate their willingness to open up their own markets to competition.
Long distance carriers face similar challenges as they attempt to get into local markets. AT&T is preparing to solve the problem of getting into the local telephone business by anticipating a possible merger with Bell giant SBC Communications Inc. AT&T president John D. Zeglis indicated that "Maybe that kind of thing can get you the skills and markets opening faster" (Keller, 1997, p. a3).
The law also allows greater latitude for mergers, since cable companies can now enter the telecommunications business and vice versa. Research has indicated that the lion's share of business will go to those firms which can offer the widest array of products and services. The Act opened the door and appeared to make mergers of mega-media corporations financially attractive. Dan Merriman of Giga Information Group, a technology research firm, indicated that the twenty large scale media enterprises will be reduced to three or four large communications superpowers within the next three to five years (Simons, 1996).
As recently as five years ago, operators were allowed to own no more than 24 stations nationally, and just two AM and two FM stations per market. The Act permits a single entity to own up to eight individual properties in a market of 45 or more and five individual properties in a market of 14 or fewer stations. Merger provisions of the Act have directly promoted purchases of smaller independent stations by larger companies and holding groups. Media brokers estimated that before 1996 ended, at least $12 billion will be spent for the purchase of stations, six times the amount that changes hands in an average year. The centerpiece was Westinghouse Electric Corporation's $3.9 billion deal with Infinity Broadcasting and its 44 major-market stations (Boelert, 1997).
Infinity Radio is an excellent example of the consolidation of radio stations. On January 9, 1999, Infinity Broadcasting sold 140 million shares of stock in an initial public offering with the intent of pursuing acquisitions in large media markets. "While the company does not believe that it needs to make acquisitions to grow its business, it intends to pursue acquisition opportunities that would enable it to continue to compete more effectively for advertising revenues and to increase its growth rate of cash flow" (Infinity Broadcasting Prospectus, 1999).
In order to compete in any particular market, radio groups must have holdings of several stations in order to allow them to generate cash flow for both their top stations as well as for their less attractive stations.
For Television, an ownership group may increase its total coverage of national TV homes from 25 per cent to 35 per cent. It also permitted common ownership of broadcast and cable operations. The law's provisions, however, prevent a single company from concentrating its station ownership in a given market by owning all the stations in either the AM or FM radio bands.
The relaxed rules have spawned a myriad of mergers and joint ventures, which have naturally concentrated ownership in larger conglomerates. It is apparent that Congress did not anticipate the magnitude of merger activity that would occur. Although larger media conglomerates have advantages available from economy of scale there are two troubling aspects emerge from such mergers: (1) They accelerate the existing trend of combining content providers with delivery systems which ultimately this leads to lack of choice of content and higher prices for consumers. and (2) Traditional new values are threatened. "As conglomerates grow, journalists find themselves bundled up with entertainment divisions. Reporters need to be wary of challenges to their news values that can come from either corporate leadership that doesn't understand the need for newsroom autonomy or that confuses reporting and show business" (Media Studies, et al., 1996, p. 6).
In anticipation of the Act, several mergers were initiated and since passage of the Act many buyouts and mergers have been completed. Several have also been challenged on the basis of anti-trust issues. The net result has been the concentration of more content providers and delivery systems among fewer entities.
Consumer groups, including the Consumer Federation of America and the Center for Media Education, have released results from a nationwide survey indicating that a majority of consumers do not expect to benefit from the increased telephone, cable and media concentration which would be permitted under telecommunications legislation currently pending before Congress. As with mergers, respondents do not see the price benefit promised by Congress from deregulation of the local telephone and cable companies. Many consumers believe deregulation will hurt them (Wright, 1995).
Newscorp and Primestar entered merger talks, which failed in part because of concerns of anti-trust abuses. Consumer advocates had expressed fears that this merger would create a media entity so powerful that it would eliminate cable competition. At the time, Echostar CEO Charlie Ergen indicated that "this is an outrageous abuse of the 1996 Telecommunications Act, Everybody who's outside of cable opposes it" (Lieberman,1997, p. 2b).
According to Neil Hickey, contributing editor for the Columbia Journalism Review, these mergers and acquisitions should raise concerns for consumers. Hickey asked the question, "How is it possible for fewer and fewer owners to generate greater and greater competition?" (Hickey, 1997)? Rupert Murdock, for example, was instrumental in increasing nationwide TV penetration for his stations from 25 per cent to 35% per cent and now owns 22 TV stations and reaches 40 per cent of all viewers nationwide. (Krantz, 1996). Much of the merger news is found in the business section of newspapers, and consumers have not been adequately informed of the effects on their lives or pocketbooks. Mark Cooper, of the Consumer Federation of America, indicated that no new entry into cable programming can be fully successful nationally without acceptance by both Time Warner, and the number one cable giant, Telecommunications Inc. which owns 9.9 percent of Time Warner, since together they control access to almost half of all cable subscribers in the U.S. Their interlocking ambitions, create a chilling concentration of common economic interests said Cooper.
The ultimate benefits to the public of merging corporations remains to be seen. However, the short-term financial effect on corporations has not been positive. Time Warner, for example, indicated that it was cutting expenses due to reduced profits and high debt (Shapiro, 1996). TCI stock dropped in value and CEO John Malone had indicated that plans to provide telephone service was premature. The Justice Department also reviewed several radio mergers as possible antitrust violations. (Gruley, 1996).
In anticipation of passage of the Act several mergers were completed and many have been concluded since passage of the Act. TCI announced merger plans with AT&T which will combine two of the nation’s largest telecommunications companies in a deal worth over $48 billion. This will allow AT&T to extend its scope to millions of customers in cable-ready homes and provide a platform for long distance and local phone service (Wall Street Journal, 1998).
Cable Rate Deregulation Provisions
A key provision of the Act is the deregulation of cable rates. Cable rates under the Act are scheduled for deregulation within three years. The intent of the Act is to encourage the competitive marketplace to work to lower prices. Direct broadcast satellite companies have attempted to make the biggest run at cable but are still hampered by their inability to easily provide local broadcast signals (Gruenwald, 1997).
Although cable rates are still regulated by the Federal Government, cable operators are allowed by the FCC to raise rates to account for inflation and or the expense of providing new channels and programming. The intent of the Act is to encourage the competitive marketplace to work to lower prices. This has clearly not occurred since passage of the bill. According to information from the Bureau of Labor Statistics, cable rates in the United States have risen an average of 10.4 per cent during 1996. This compares to 3.5 per cent for consumer prices overall (Coorsh, 1996).
Representative Edward Markey of Massachusetts said "The net result of the law will be tens and hundreds of thousands of jobs, far more than have ever existed in this economic sector, 1.5 million to 3.5 million new jobs will be created by the law" (Conference Report, et al., 1996, H1151). Representative Jack Fields of Texas also suggested that thousands of new jobs would result from passage of the Act. (Pietrucha, 1996). These and similar statements were made during the Congressional hearings which were a precursor to the Act.
Although it is too early to forecast long-range implications of the bill, the short-term effect on job growth has been negative. A typical by-product of mergers is downsizing. The telecommunications industry has not been exempt from this. For example, since the announcement of the Nynex Bell Atlantic mergers, 3000 Nynex jobs have been eliminated (Nash, 1996).
CNN Financial News reported that layoffs could reach record numbers because of "deregulation, mergers and the Asian crisis (CNN Financial News, December 28, 1998).
FCC Priorities
The key issue that confronted incoming FCC Chairman William Kennard was making good on the promise of the Telecommunications Act of 1996 for more competition and more choice for consumers. Most visible and an obvious high priority is opening up both local and long-distance phone markets to competition. Long distance carriers haven't broken into local calling, and the Baby Bells haven't launched long-distance service (Yang, 1997). Telephone rates have not dropped and most communities have yet to experience more choices in phone service.
Runaway cable rates will also be a high priority. Cable rates are a highly visible facet of the media industry and consumers have voiced their opinions to their congressional leaders about rates, particularly since passage of the Act. Outgoing FCC Chairman Hundt has justified increased cable rates on the basis of policies, which allow cable companies to raise rates based on inflation and expenses to provide new channels and programming. These reasons, however, do not justify rates that have increased at four times the rate of inflation.
The most visible effect of the new law (the Act) during the last year has been the historic, unprecedented torrent of mergers, consolidations, buyouts, partnerships, and joint ventures that has changed the face of big media in America (Hickey, 1997). Ironically, Congressional intent to encourage new technological development has in many cases led to this atmosphere of unparalleled mergers. In lieu of developing new technology, many organizations have gained a market share by merging with or acquiring companies which have expertise in areas they need (e.g., the merger of US West and Continental Cable). Others have simply merged to outdistance competitors by size advantage (e.g., the merger of Bell Atlantic with Nynex).
Congressional proponents have often stated that increased market potential would be realized by opening up new markets. A more realistic approach is to suggest that entry into existing markets would be opened up to new players. Experienced media companies realize that it is easier to grow the bottom line by increasing market share than by increasing the size of the overall market. In the telephone market, for example, subsidized local residential services are not exactly bursting with profit margins for newcomers, and even big-name providers are having trouble gaining a foothold. MCI's financial troubles in cracking the local loop has sent a chill through other potential local carriers (Higgins, 1997).
The economic implications of the Act are enormous and notwithstanding the idealistic ambition articulated in the Act, short-term effects have been both mixed and uncertain. Traditions of FCC control seem to have a life independent of the Act, and barriers to entry have not been eliminated by simply fostering open competition.
In addition, the intended results of the Act of more services at lesser cost to consumers have not yet materialized. "The fundamental situation is that the industry vastly overpromised . . . what their competitive desires were to cross into each other's markets and Congress bought that . . . .Now you find rates going up and the industry backtracking on its promises" (Gruenwald 1997, p. 2390).
Relationship of the Act to Functional Theory
One cannot underestimate the enormous impact the Act has had and will continue to have on society. Any change in public policy is significant since the Act will affect the population at large and will continue to have far-reaching implications. The national economic equilibrium has been significantly altered and the Act should be analyzed in the larger context of its impact on society.
The social impact of the Act can be overwhelming when taken as a whole. However, if we analyze the Act through a model, a definitive pattern emerges in its results to date. The model applied to the Act is based on the ideas of dysfunction, the net balance effect, and manifest and latent functions, as Robert K. Merton has explained these terms through his studies of structural functionalism. The structural-functional theory has incurred much criticism in recent years, but remains one of the most widely accepted theories in the field and is a good rudimentary model for analyzing the impact of the Act (Ritzier, 1994).
Our society is structured with many different levels, class distinctions, and social systems. The functionalist perspective assumes that these social systems have an underlying tendency to be in equilibrium or balance; any system that fails in any one part of the system affects its interrelated parts. (Poloma, p. 37). A look at the free marketplace is an excellent example of equilibrium and influence. The supply and price of a product will change according to the demand of consumers, both sides working towards the balance where people are willing to pay the amount that the suppliers ask. Economic crises in different countries affect the day-to-day economic exchanges in the United States because of the interdependence of the nations with regard to exports and imports.
Changes tend to have a ripple effect, touching areas that seem to stand by themselves. We cannot separate the different aspects of our society and expect them to be able to stand alone, indifferent to what is happening to another component. Each component, or system, performs a function in our society (Merton, 1963). For example, the Act's primary function is to provide for a pro-competitive, deregulatory framework designed to rapidly accelerate private sector deployment of advanced telecommunications and information technologies and services to all Americans, by opening up all telecommunications markets to competition. (Conference Report, Telecom Act, 1996).
In short, this means that more services should be available to more people at better prices. However, not every component within the functionalist theory has a positive effect on society, or enhances a net balance (Sztompka, 1996). Some things affect the social system positively, others negatively, and some not at all. A manifest function is an intended result that helps the social structure (Ritzier, 1994). The manifest function, or anticipated consequence, of the Act is the increase of competition and jobs within the industry, and a decrease in cable and phone rates. An unanticipated consequence is unintended and can have many different effects on a social system. One type of unanticipated consequence is a latent function. Latent functions are unintended results that help the social structure (1994, p. 252). Two other types of unanticipated consequences are nonfictions (those acts that don’t affect the structure negatively or positively) and dysfunctions (the unintended result of a function that negatively impacts the social structure). (1994, p. 250). Using Merton’s ideas of dysfunction, what may benefit one part of the social structure in our society might harm another (Merton, 1963). The Act has several examples of consequences unanticipated by lawmakers that seem to go in direct opposition to the intent of the system (Poloma 1979, p. 24). Instead of cable and phone rates decreasing, they have risen significantly relative to the inflation rate (Albiniak, 197). The effect of the Act on employment is mixed. Rather than viewing all manifest, latent, and unintended consequences as individually affecting society, weighing the positive and negative functions of a social structure against each other will illustrate the net impact on the social structure.
Conclusion
Before the Committee on the Judiciary, U.S. House of Representatives, outgoing chairman of the FCC Reed Hundt indicated that "we also must understand that 'open to competition' is not the same as 'competitive.’ Indeed, the removal of barriers to entry is just the first step toward full competition, not its achievement. When Congress broke down the legal and regulatory barriers to competition, many expected an immediate, full-out, competitive war in the marketplace. That has not happened, but will if we stay the course and stand by our commitment to a pro-competitive policy. All revolutions, even policy revolutions, take time" (Hundt, 1997). Hundt's presumption that the solution lies in a steadfast commitment to the policy is overly optimistic based on the brief history of the Act. The intentions behind the legislation were laudatory and focused at improving the average consumer’s way of life. However, the Act reveals gigantic holes and fuzzy spots. What the lawmakers did not consider was the unanticipated consequences that would appear as a result of the ambiguity of implementing the Act.
The results to date provide a way to examine the system, find cause and effects, and allow procedures to perfect the system. Already, we are seeing the need for fine-tuning. Against the intent of the Act, cable and phone rates have risen, competition has been thwarted in some areas, expanded in others and, in the short-term, consumers have not benefited to the extent promised by the initial legislation. ( Albiniak, 1997) Long-term effects of the Act, of course, remain to be determined.
Applications of Merton’s functionalist theory are relevant given the fact that manifest functions have been clearly shown and additional latent functions will be revealed. We have introduced a model to analyze societal effects of the Act and suggest that much research remains to be done. We have shown application of Merton’s functional theory to the Act and suggest that this model may be a useful tool in further analyzing societal effects of this profound piece of media legislation.
As consumers we hope that in the foreseeable future industry policies will reflect necessary changes. Such procedures will ultimately reveal the unintended consequences of the Act, and result in refinement of the legislation so as to help move the industry in the direction originally intended by Congress.
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