The history of ILECs is a complicated saga of corporate mergers, government regulation and anti-trust lawsuits.
It started with the telephone's founding by Alexander Graham Bell in 1876. Soon after he patented his invention, Bell formed the Bell Telephone Company. In 1885, the Bell Telephone Company split off to form the American Telephone and Telegraph Company (AT&T) to build the first long-distance telephone network. Then, in a corporate switcheroo, AT&T bought out Bell Telephone Company and became the owner of the Bell System.
The Bell System was a government-sanctioned monopoly that operated without any serious competition from 1913 to 1982. It ran over a nationwide landline network with service at the local exchange provided by seven regional holding companies.
Through a series of early anti-trust lawsuits, AT&T was limited to controlling no more than 85 percent of the American telephone market. Within this market, consumers had no choice but to use the service and hardware offered by AT&T. Until 1975, it was extremely difficult to even buy a phone from anyone other than "Ma Bell" [source: Bell System Memorial].
In 1974, the U.S. Department of Justice filed an anti-trust suit against AT&T that was eventually settled in 1982. The lawsuit resulted in the divestiture of AT&T of its seven regional holding companies, creating seven independent local exchange telephone companies and leaving AT&T with its long-distance business. These new local phone companies were called Regional Bell Operating Companies (RBOCs). Also known as Baby Bells, they are:
- Bell Atlantic
- Pacific Telesis
- Southwestern Bell
- U.S. West
But even this new arrangement wasn't enough to satisfy increasing corporate and consumer demand for greater competition in the telecommunications market. By the 1990s, it was clear that computers and data networks represented the next big financial opportunity in telecommunications. The Baby Bells wanted to expand their businesses to offer long-distance and Internet service along with local service. And more entrepreneurs wanted to start new businesses offering similar services at better prices. These market pressures led to the sweeping Telecommunications Act of 1996.
In this landmark piece of legislation by the Federal Communications Commission (FCC), the Baby Bells were allowed to offer long-distance and Internet access in exchange for sharing their networks with new competition. The Telecommunications Act of 1996 says that Baby Bells have to sell space on their existing landline telephone networks at a fair price to anyone who requests it.
In this arrangement, the Baby Bells became known as Incumbent Local Exchange Carriers (ILECs) and anyone who rented network space from them was called a Competitive Local Exchange Carrier (CLEC).
To make things even more confusing, over the years several of the Baby Bells have either merged, been bought by outside companies, or have changed their names. For example, Southwestern Bell changed its name to SBC in 1995. In the wake of the 1996 legislation, it bought fellow Baby Bells Pacific Telesis in 1996 and Ameritech in 1998. Then it bought AT&T in 2005, but kept the name AT&T. Then, this new AT&T (formerly SBC) bought BellSouth in 2006. That effectively put four of the seven Baby Bells plus AT&T back under one roof. Feels like 1982 all over again…
Now let's take a closer look at how ILECs operate under the Telecommunications Act of 1996.