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divestiture of the Bell System

One result of the divestiture of the Bell System, subsequent splits and spin-offs, and the entry of new types of telecommunications services providers was a much more competitive telecommunications industry. The cost — and retail price — of long-distance calls fell rapidly between 1984 (the initial divestiture) and 2004 (when carriers began offering voice over IP service broadly to consumers). Wireless telephony grew rapidly, reaching nearly 208 million accounts in the United States by the end of 2005.13 Broadband access to the Internet became widely available. Cable system operators started introducing their own local telephone services over their new digital, two-way infrastructure. Business data service prices fell steadily as well.

A consequence of increased competition at every level of the telecommunications value chain was that the industry players found themselves operating with tighter margins and lower revenues.

The 1996 Telecommunications Act and subsequent FCC decisions led to a further evolution of the regulatory environment. The impact of these developments on innovation and R & D — and on the industry more broadly — has been the subject of much debate. Some caution, for example, that such policies as unbundling and the use of total element long-run incremental costs in the regulation of incumbent local exchange carriers had the effect of dampening investment by the local exchange carriers because competitors could appropriate some of the investment made by the carriers. Others cite significant benefits of these policies to the consumer (reduced prices) and the market (lower barriers to market entry).

From about 1990 to 2000, the period of high growth in the telecommunications industry meant that there were sufficient revenues to attract many new entrants into the telecommunications market, each of which invested heavily in creating new network facilities. This time period also saw venture capital play a more prominent role in the telecommunications industry (Box 2.1). Capital expenditures by these new carriers provided significant revenue streams to equipment vendors, and it appeared that research in telecommunications was continuing at a space comparable to that of the Bell System prior to divestiture. But once this large build-out had been completed, and as the Internet bubble popped, investment declined significantly.

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