TOM BEARDEN: San Francisco area resident Alison Ten Cate is part of a small but growing trend. She left her local phone company, and took her business elsewhere.
ANNOUNCER: AT&T has big news for California.
TOM BEARDEN: She wouldn't have had that choice a few years ago, but changes to state and federal policy now allow companies like AT&T and WorldCom-- the parent of M.C.I.-- To offer local service. They're marketing aggressively in several states to lure consumers like Ten Cate.
ALISON TEN CATE: We decided to switch carriers, and saw a special that AT&T was offering local service. We already had AT&T for long distance, so we swapped over and chose AT&T for both.
TOM BEARDEN: Ten Cate is one of ten million phone customers who have abandoned the so-called "baby bells"-- the four major carriers that are the survivors of the breakup of the original AT&T monopoly in 1984. Those companies are Verizon, Qwest, Bellsouth, and SBC. SBC is the baby bell in northern California, and one of the "NewsHour's" underwriters. The Bell rivals have captured an 11 percent market share, and that share is growing quickly. But there's debate as to whether they're playing fair, a debate that's playing out in a TV ad war.
ANNOUNCER: Ten million Americans and growing are saving millions of dollars every month...
TOM BEARDEN: The new entrants say SBC And other incumbents are trying to tilt the playing field.
ANNOUNCER: SBC Continues to pressure the government to end competition.
TOM BEARDEN: But SBC And the other bells say the current rules give the rivals an advantage.
ANNOUNCER: At SBC, We have multibillion dollar plans to develop new technologies. Most of our competitors have marketing plans.
TOM BEARDEN: They want the Federal Communications Commission, which is reviewing those rules, to change them. At issue is a key provision of the landmark 1996 Telecommunications Act. It forced the Bell companies to lease their hardware to competitors at wholesale prices. The idea was to let other companies piggyback on the existing infrastructure. Reed Hundt, who chaired the FCC when the '96 act passed, says the system is working. Hundt is now a telecom consultant.
REED HUNDT: It's because of that, that regulatory system, that it's possible to have these choices being offered now by WorldCom and AT&T against the Bells. There is a lot of choice, a lot of competition, and a lot of chaos and confusion in board rooms as people try to figure out how to deal with the new competition and the new technologies. That's creative destruction, that's ferment. That's what a competitive economy is supposed to have.
TOM BEARDEN: Under the act, each state sets the wholesale price the baby Bells are allowed to charge rivals to use their lines. Those prices are meant to reimburse the Bells for the cost of the network, plus a reasonable profit. In the last two years, several state utility commissions cut rates sharply, effectively enticing new competitors.
REED HUNDT: You could generally say that an awful lot of the state commissions would like to see competitors offer a price break to the consumers in the residential market, who traditionally have paid pretty high prices for local phone service, and that's the outcome that they are getting.
TOM BEARDEN: California's public utility commission was among the most aggressive. Last May, it lowered the rental price SBC may charge competitors from $23 a month per line to $14. AT&T, for example, then charges each customer $20, less than SBC'S retail price. Ken McNeely is president of AT&T California. His company is attracting 50,000 SBC customers a month.
KEN McNEELY: For the first time, the residents here of San Francisco, the citizens here are able to have competitive choice, competitive options. The Telecom Act of '96 is working. It's working as it was intended to work. Unfortunately, it has taken a significant amount of time for that to happen. And I think SBC, for the first time, sees a competitive threat.
TOM BEARDEN: McNeely wants state regulators to keep the wholesale price low, but SBC Says those prices amount to subsidies to competitors, and says it's getting squeezed. William Daley, former commerce secretary in the Clinton administration and campaign manager for Al Gore in 2000, is now SBC President.
WILLIAM DALEY: What we are saying is the holy grail of low price is having a serious consequence and potentially very serious consequence to the consumers and our telecommunications infrastructure to the nation.
TOM BEARDEN: SBC says the low prices could endanger the network that it's required by law to maintain. That includes everything from large switching facilities-- essentially giant digital switchboards-- to neighborhood phone poles and cables, to the wires connecting each home to the phone network.
WILLIAM DALEY: We're in a very capital- extensive business. The needs are enormous to keep a network going that's very complicated. We take for granted picking up the phone, and within seconds being connected anywhere in the world with clarity at a level that is pretty impressive, and nobody thinks twice about how that all happens.
TOM BEARDEN: This fight is just one of the new competitive challenges the Bells are facing. More and more Americans communicate by e-mail instead of the phone. Two million Americans get local phone service through their television cable companies. And an estimated 150 million people use cellular phones as supplements, or even substitutes, to home phones. Ruby LaGrandeur of San Francisco has joined the cell-phone-only club. She says it's because she's always on the move, and is hardly ever home.
RUBY LaGRANDEUR: I originally started using a cell phone for cost effectiveness. I moved down here from Seattle, and you have free night and weekends and long distance... free long distance, which was the big seller for me.
TOM BEARDEN: And that's cheaper than having a landline at home?
RUBY LaGRANDEUR: Um-hmm. Um-hmm. It really is. And I move a lot, so it's much easier for me to just put my cell phone in my pocket instead of having to, you know, disconnect the landline, and have it reconnected.
TOM BEARDEN: One result of the changing marketplace: Last fall, SBC announced it would eliminate 11,000 jobs, blaming its problems in part on state regulators. Also last year, Verizon planned to cut 8,000 jobs, and BellSouth laid off 5,000. The casualties included Kevin Neal, who repairs and upgrades phone lines for SBC His wife, Heidi, is a stay-at- home mom. Something happened to him today.
HEIDI NEAL: Yes.
TOM BEARDEN: Tell me about that.
HEIDI NEAL: He got surplused today.
TOM BEARDEN: What does that mean?
HEIDI NEAL: Surplus means he has 90 days to find a job in the company. We may have to pack up our family and move. We like the company, great health care benefits, and I have a disabled daughter, and that's something important to us.
TOM BEARDEN: So Neal began a crusade on behalf of her husband. She started a Web site, momsavesjobs.org, arguing that unfair competition was hurting SBC Neal says she's not paid by SBC
TOM BEARDEN: What's the message you want to transmit to people?
HEIDI NEAL: That 11,000 families are going to lose their jobs if unfair regulations aren't redone.
TOM BEARDEN: Neal sends letters to public officials, and updates her site almost every day. The debate over local competition is also underway in Arizona, where state regulators also slashed the prices that the incumbent, Qwest, can charge competitors. Qwest is challenging the pricing structure in federal court. In part, the providers are fighting over small business clients like Slimline in Phoenix, which makes parts for high-end model airplanes. Slimline transmits large computer design files to overseas factories, and it needs a large capacity connection to do so. The company pays a Qwest competitor, Allegiance Telecom, $270 a month for a bundled package of phone and high-speed Internet access. That's $70 less than a similar Qwest product. Allegiance leases the copper wires connecting Slimline's building to the phone system from Qwest. The arrangement provides Slimline CEO Bill Leonard with a product that's faster and cheaper than he'd ever imagined.
BILL LEAONRD: We got a completely integrated broad band, voice, and, you know, voice mail, and we have all kinds of great features that they give you with this, and we use them all, you know? And I think we're at 512 speed, I don't know, it goes fast.
TOM BEARDEN: Allegiance CEO Royce Holland says products like these are the offspring of true competition. He says preserving consumer choice is what's really at stake in this debate.
ROYCE HOLLAND: The government protected these monopolies for 80 years. Now they've opened it to competition. It's taken several years to really turn the tide to where the Bells are actually losing share. It did in long distance with AT&T as well. But now it is happening, as we saw with the long distance industry, with the railroads, other industries that have been opened up and ultimately deregulated, competition. You can't put that genie back in the bottle once it's out.
TOM BEARDEN: But from Qwest's viewpoint, the very future of the telecom industry is at stake. Since 2000, scores of telecom firms have gone under, liquidating their equipment at auctions like these. Some had accounting problems, others overbuilt their high- speed Internet lines. Ultimately, investors lost confidence in the whole sector, and 500,000 jobs disappeared. One executive likens the situation to nuclear winter. Qwest vice president Steve Davis says to revive the industry, companies like his need reasons to invest -- to buy from equipment providers like Cisco and corning. Davis took us to new home development outside Phoenix, where Qwest is required by law to connect each home. Under the current leasing system, Davis says rivals will simply piggyback on his pipes instead of installing their own.
STEVE DAVIS: The new entrant doesn't really provide anything new, just repackages what Qwest sells. And the way to do that is to charge a very, very low price for Qwest's wholesale components.
TOM BEARDEN: Is this what congress intended?
STEVE DAVIS: No, it's not. What congress intended that I receive a fair rent when I provide my facilities to someone else, and I'm happy to provide facilities, to provide services to anyone, wholesale customer, retail customer. I just want to recover my costs for doing so.
TOM BEARDEN: In recent weeks, both the Bell competitors and SBC Have aggressively made their cases on the airwaves, with ads targeting state regulators and the FCC.
ANNOUNCER: But now we find out SBC Is bragging to wall street about huge profits in the billions.
ANNOUNCER: Some people have been saying some nasty stuff about SBC What they aren't saying is that we are a company of nearly 190,000 employees who live and work here just like you.
TOM BEARDEN: The FCC will soon issue revisions to the rules of local competition. Heidi Neal of momsavesjobs.Org, flew to Washington to make her case alongside the corporate executives. Published reports suggest the commission is considering phasing out the sharing system that many Bell competitors rely on. Both sides are lobbying the FCC fiercely. The commission will announce its changes as early as Thursday.