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A Flat Rate for Peak Profits

by Glen Emerson Morris

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With all coverage given deregulation of the media, surprisingly little debate has gone into considering what goals, if any, our national communications policy should have. The current focus is on who will own what, not how the new communications system will best benefit business and society. This is not how the issue is being handled in other countries, and American business may find itself at a serious disadvantage soon if we don't define our goal carefully. The most efficient communications system is not necessarily the most profitable, and we must decide which goal is more important.

The Japanese project to wire all of Japan with a fiber optic phone system is largely misunderstood in this country. The project is clearly of strategic importance to Japan, but not for the reasons assumed by most Western business analysts. The primary goal of the system is to provide a flat rate for all calls made in Japan, so there is no long distance charge made for any calls made within Japan. The fiber optic net is not the goal itself, just the means by which the goal can be accomplished. The Japanese believe that the overall positive effects on their economy of a flat rate system will dwarf the minor reduction in phone system profits. Once in place they will have an advantage over any phone system that doesn't use a flat rate system, even if the system is based on fiber optics. The reason is that the cost of the metering equipment must be paid for, as well as the phone lines.

The phone companies in the US evolved at a time in which real improvements in technology happened so slowly and infrequently that the concept wasn't even factored into the rate schedule system adopted by nearly all states. The basic rate structure for US phone companies guarantees the phone companies a fixed rate of return based on actual, and approved, expenses. The problem with this structure, which has been becoming increasingly obvious over the years, is that new technology has been driving the actual cost of providing service down, and as this happened, the phone companies started to make less money as they became more efficient.

To counter the resultant loss of revenue, the phone companies started offering "new" services to offset their losses. Under the guise of "pay only for what you use", the phone companies have been redefining what a "local" call was. The consumer is offered a lower basic rate for "local" calls, with a long distance charge being levied increasingly for calls that used to be local. The phone companies have had to install millions of dollars in new mainframe computers to keep track of all the new "long distance" calls, and this new investment has restored their earnings. However, it would have been cheaper for the consumer if the rate of return had simply been raised, and no additional billing equipment had been needed, or used.

Changing the telephone rate structure in fifty states would take years, and given the current political climate might even be impossible, at least any time soon. Fortunately, a flat rate communications system has been evolving in the form of the Internet, and it may be our best counter move to the Japanese communication offensive.

In many ways the Internet provides more efficient service than the phone companies, especially in the area of traffic routing. Currently, most phone systems use mechanical switches to make a physical connection between two different phone circuits. With the Internet, phone traffic is managed and directed by software, which is less expensive to produce, and far easier to upgrade. As we shift traffic off of standard phone lines and onto the Internet, we get the benefits of a flat rate system, without the politics of changing state sanctioned rate structures, and the system can be upgraded with far less effort. The Internet couldn't have come at a more opportune time.

The founders of the United States saw communication as something so critical to the national economy that they set up a cabinet level office (the Postmaster General), and were willing to subsidize the cost of mail for decades. The problem we now face is that we have a Department of Mail, rather than a Department of Communication, and while mail is becoming obsolete, communication is rapidly becoming our most important product. We need a national policy that reflects this.

Copyright 1994 - 2010 by Glen Emerson Morris All Rights Reserved

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