by Peter Huber
The term electronic mail is usually used to refer to a computer-based method of transmitting information that involves composing messages on a computer terminal, transmitting them electronically, and storing them in computer storage for later retrieval by a recipient. The storage function differentiates electronic mail from other forms of electronic text transmission. Electronic mail functions much like voice storage and retrieval, except that the messages originate at a computer terminal rather than a telephone and are provided in written form, either on a computer screen or in hard copy. We focus here on computer-based messaging because it is an information service under the MFJ and appears to provide a target for BOC entry.
The architecture of a typical electronic mail system is shown in Figure EM.1 [omitted]. In an automated office environment terminals are connected to each other, and to a computer Central Processing Unit (CPU) by a Local Area Network (LAN). In systems with "smart" terminals, the messages may be composed off-line, thus saving connect time; in other systems the messages are composed on-line, using the CPU. Usually electronic mail systems use a single CPU and can transmit messages only among users of that CPU, usually at a single location. Occasionally a company will connect electronic mail systems at separate locations, making possible transmission of messages between the locations. Electronic messaging services are also frequently provided by remotely located independent service bureaus. Long-distance message transmission usually uses packet-switched networks, which may be reached through the local telephone network, either on a dial-up basis as shown in Figure EM.2. [omitted] or with several terminals multiplexed on a single line.
The two primary means of acquiring electronic mail services are purchase of equipment or subscription to a service bureau. Office automation systems frequently offer electronic mail functions as a standard feature, as do shared-tenant systems in so-called "smart" buildings. In-house electronic mail capability is not marketed independently but as an additional feature of a whole system. Buyers and sellers appear to consider it a commodity; customers have little choice in the features available. In-house electronic mail systems usually only communicate within a firm or plant. The capability is provided by computer vendors, who sell equipment, and by independent software houses, who sell software for adding electronic mail features to existing systems. While entering the office automation market would require heavy capital expenditures, adding software to provide an electronic mail capability in existing computer products would require only modest expenditures. In fact, large companies frequently write their own software for adding electronic mail capability to their computer systems. Thus all firms producing office automation systems, and many other computer firms as well, appear to belong in the market as potential producers of electronic mail hardware and software.
Service bureaus provide two major forms of service: public computer-based messaging systems, which provide terminal-to-terminal messaging through a central host computer, and mixed-mode services, which transmit messages electronically but then produce paper copy and physically deliver it either by courier or through the U.S. Postal Service. The latter procedure replaces physical movement of documents with electronic transmission, which is less expensive and faster, particularly over long distances, but still allows communication with persons not having access to electronic mail systems.
Service bureaus offer electronic mail to customers who do not have the equipment to provide it themselves or who require transmission over long distances or to non-members of their system. They are attractive to firms that are too small to be able to justify purchasing their own equipment or that are experimenting with the service. Firms now offering the service include computer timesharing companies, value added networks (VAN's), and various voice and record carriers. Existing computer or transmission capabilities appear to offer an advantage in providing the service, but neither by itself appears to be essential. Experience in measuring and billing usage of computer or transmission systems appears extremely useful. The service bureau market is the market the BOCs would be most likely to enter, since it would provide a natural extension of their current functions.
To establish the boundaries of the market we must examine the substitutes in both consumption and production. From the point of view of users, electronic mail is similar to conventional telephone service in that it provides instantaneous service directly from one participant to another, but it provides a written message and both parties do not need to participate at the same time. Voice mail services are similar to electronic mail in that they permit storage of a message for later delivery at the convenience of the recipient, but again they do not provide a written message. Some observers, however, appear to consider electronic mail and voice mail complements rather than substitutes, pointing out that voice messages are sometimes used to announce the presence of a text message. In their current forms voice mail is far more user friendly than electronic mail; its use resembles using a telephone rather than programming a computer.
Various electronic delivery methods, including Telex, Teletex, and facsimile services, provide close substitutes for computer-based electronic mail in that they transport written messages quickly over long distances and do not require simultaneous participation of sender and receiver. Like electronic mail, they require specialized equipment, but they do not permit individuals to compose and send messages from their desks. The U.S. Postal Service and other delivery services provide physical delivery of documents and do not require special equipment, but they are relatively slow and expensive for time-sensitive delivery. The options that provide written messages differ primarily in speed of delivery and faithfulness to the original document. They would appear to belong in the same market, since choice among them will depend to a great extent on relative prices.
According to EMMS, electronic mail is most frequently used for short messages, and the closest substitute is the telephone. EMMS estimates that 55 percent of electronic mail traffic is diverted from the telephone, 10 percent from Telex, and 5 percent each from first class mail, courier services, and other electronic transmission techniques. The remaining 20 percent is new traffic.(1) If so, voice mail may prove superior for short messages in the long run, while electronic mail may be used for long messages and messages where precision is important. In future, though not at present, it may be possible to provide the two services through the same equipment. At the moment we can only speculate about the relative usefulness of the two services, since voice storage is too new to have come into direct competition with electronic mail.
The geographic market for electronic mail equipment appears to be at least national, since transportation costs have little importance for computer hardware and software. For service bureaus the market is also national, since a large portion of it involves the ability to deliver messages long distances and to many population centers.
The FCC's Computer II rules and the MFJ both restrict provision of electronic mail by the BOCs. Because it involves storage and retrieval of information, electronic mail is classified as an enhanced service under the FCC's Computer II rules.(2) Consequently, the FCC has required until recently that if AT&T offered electronic mail it do so on an unregulated basis and only through a separate subsidiary. The Computer II rules were applied in modified form to the BOCs after divestiture. No BOC has set up a separate subsidiary for the provision of electronic mail.
In 1986 the Computer III decision removed the structural separation requirements for enhanced services and replaced them with accounting requirements to prevent cross-subsidy and with requirements for comparably efficient interconnection to prevent discrimination in provision of network services.(3) The details of these requirements have yet to be worked out.
Under the MFJ electronic mail is classified as an information service because it includes data storage. Thus the BOCs are prohibited from offering it at all, regardless of the FCC's requirements.
Since its inception in 1978 electronic mail has been touted as a major innovation, but the market has grown slowly and has not met the industry's predictions. Recently, however, growth has accelerated. In 1984, 85,000 computer systems with electronic mail capability were shipped.(4) The dollar value of this market is unclear since it is difficult to allocate the cost of a computer system among electronic mail and other functions. The market for electronic mail provided by service bureaus amounted to about $80 million in 1983 and between $180 and $200 million in 1984.(5) The market has variously been predicted to grow to $1.5 billion in 1990 and to $2.1 billion by 1988.(6) The entire market for electronic message delivery, including Telex and facsimile, was estimated at $1.5 billion in 1984.(7)
Growth of the electronic mail market has been hindered by lack of compatibility among computer systems. Commonly locations that need to communicate with each other, even within a single firm, have incompatible computer systems. If only some of the locations to which messages need to be sent can receive them the usefulness of electronic mail diminishes greatly, since often messages will still need to be sent by conventional means, and many will need to be prepared twice.
The industry appears to be moving toward compatibility. In 1984 the CCITT adopted a set of protocols governing computer-based message handling, which is expected to establish a standardized worldwide framework.(8) Several years may elapse, however, before the standards are incorporated in most equipment. In the meantime, products have been developed that achieve compatibility among some existing systems. Messages can now be sent between MCI Mail and Compuserve's Infoplex and Easyplex systems, for instance. Ultimately the CCITT intends to develop protocols that incorporate voice mail. This would allow both voice and other transmissions to be transmitted with the same equipment.
Electronic mail is currently used predominantly by large corporations. A recent survey by Venture Development Corporation showed that use of electronic mail increased with corporate size. In companies with less than $1 million in revenues, 17 percent of respondents used computer based message systems, while in corporations of greater than $1 billion in revenues, 59 percent used electronic mail.(9) A wide range of organizations used electronic mail: 25 percent were in manufacturing, 13 percent in government and public service, 11 percent in wholesale and retail trade, 10 percent in education, and smaller percentages in a variety of other fields.(10) Fifty percent of electronic mail services were used within a building, 30 percent were intra-corporation, and 20 percent involved communications outside the corporation.(11) If compatibility problems were solved, the volume of communications beyond the building and the corporation could be expected to increase.
In a survey of 5000 organizations, 60 percent of non-users of electronic mail intended to begin using it. The share of customer-owned equipment in the market is expected to increase. Owners of hardware are expected to increase from 50 percent of new users in 1984 to 70 percent in 1990.(12)
In addition to organizational users, however, some individuals use personal computers for electronic mail, and some widely-used database services, including The Source, CompuServe, and Dow Jones, automatically include electronic mail capability. Many of these accounts remain inactive, however. Growth of electronic mail would be enormous if a consumer market developed, but most observers doubt that home use of electronic mail will extend beyond a small core of computer buffs.
Computer equipment with electronic mail capability is manufactured by several firms. As shown in Figure EM.3. [omitted], in 1984 IBM and Wang between them held 52 percent of the market, as measured by systems shipped, and the top four firms held 70 percent of the market.(13) These numbers make the equipment market appear fairly concentrated. As noted above, however, many firms producing computers could probably fairly easily produce systems with electronic mail capability, and the ease of entry makes the market more competitive than the shares of current participants would suggest.
Software to add an electronic mail feature to existing computers is also produced by several companies. In 1984 1080 electronic mail software packages for were shipped for mainframes and 35,000 were shipped for minicomputers, as compared with 85,000 computer systems offering electronic mail.(14) In the market for software for mainframe computers, the top two firms, IBM and ADR, held a 50 percent share in 1984 and the top four held a 70 percent share, as measured in units shipped.(15) By this measure the market appears fairly concentrated. But in 1986 at least ten firms produced electronic mail software for mainframe computers and at least sixteen produced software for minicomputers, only two of which also produced it for mainframes.(16) And with the exception of IBM, the leading firms offering software are different from those offering hardware, providing a wider range of sources of electronic mail. Capital requirements for producing software are much less than those for producing hardware, making this segment of the market easier to enter. We noted above that many large firms write their own electronic mail software.
Market shares of electronic mail service bureaus, by subscriber, are shown in Figure EM.4 [omitted]. Of 75,000 subscribers in 1984, MCI and Western Union between them held 70 percent. The top four firms had 87 percent of the market.(17) This chart probably considerably overestimates the shares of MCI and Western Union.(18) By various other measures the top four firms hold between 53 and 72 percent of the market.(19) The market for subscription electronic mail service continues to appear somewhat concentrated. The concentration in the market may lead to an exaggerated view of market power in the industry, however, since small-scale entry appears quite easy through resale of excess capacity on existing in-house systems, and many computer time-sharing firms and common carriers appear to be in a good position to enter the market. Whether economies of scale are great enough to lead to concentration in the market in the long run is not clear.
By conventional structural measures the electronic mail hardware and parts of the software market appear fairly concentrated. But the ease of entry in both these markets, and the fact that large firms have the option of self-supply, given that they own some computer equipment, lead us to believe that these markets are fairly competitive. In addition, firms in these markets compete not only against each other but against service bureaus and the other forms of message delivery mentioned above. Since user-owned electronic mail service is ordinarily provided entirely through equipment that is internal to the organization using it, and has no necessary connection to the telephone network, user-owned electronic mail services provide a source of service over which the BOCs have no potential control. For many large users it is independent of any outside supplier. The service bureau market also appears concentrated by structural measures, though again the potential for entry makes the market more competitive than it might appear otherwise. The level of competition in the service bureau market may depend on the extent to which alternative forms of message delivery are true substitutes for electronic mail for firms with requirements that cannot be met with in-house systems. . . .
If the BOCs participated in the electronic mail market they would have an incentive, as in any other information service market, to try to harm competitors by denying them access or giving them inferior access to the telephone network. They would also have an incentive to cross-subsidize competitive ventures by shifting costs from unregulated to regulated accounts, possibly allowing anticompetitive pricing practices. In this section we examine the BOCs' ability to engage in either of these activities in the electronic mail market.
Discriminatory Access
To determine the BOCs' ability to discriminate against competing electronic mail vendors in providing access to the telephone network, we examine first the kinds of network services required for electronic mail and then the magnitude of telephone company inputs into electronic mail service. As noted above, in-house electronic mail systems ordinarily depend exclusively on equipment owned and operated by the user, with no inputs at all supplied by telephone companies. Thus for intra-building communications in organizations large enough to afford their own systems, the most commonly used option provides no opportunity at all for discrimination by the BOCs.
For message transport between systems, however, some communications link is necessary. The kind of link used appears to depend on distance and volume. For short distances, between adjacent buildings, for instance, a company may install its own lines. For longer distances within a local area the local telephone network may be used, either on a dial-up basis for low-volume use or through leased lines for higher-volume users. For dedicated lines, substitutes for the local telco may be used. Again, firms may construct their own lines or use the services of an OCC. In some jurisdictions, AT&T is permitted to offer intraLATA data transport. Thus only low-volume users are necessarily dependent on a telco for transmission of electronic mail at these distances.
For long-distance transmission packet-switched networks are usually used, though satellite transmission and other alternatives are also feasible. Service bureaus either use their own networks or some combination of VANs and their own networks. The major value-added carriers also offer electronic mail. Low-volume subscribers reach the packet network through dial-up access on ordinary telephone lines, and the calls are charged to the subscriber. If the packet node is in the subscriber's local calling area he pays no toll charge, though business users in most areas pay per-minute charges for telephone usage. If the packet node is not in the local calling area the user pays a toll charge. Since the call would be billed to the subscriber and would terminate at the packet node, not the electronic mail provider, the BOC would have no way of knowing it was used for electronic mail and no way of discriminating against the electronic mail provider. If the packet node is located a long distance from the subscriber, the network operator may furnish an 800 number and bill the subscriber for its use. In this case the BOC might have some ability to discriminate against the packet network operator, but not specifically against electronic mail traffic.
For high-volume users, dedicated access lines may prove less expensive than standard telephone lines. Dedicated lines could terminate either at a packet switch or at an electronic mail processor. Apparently, however, electronic mail alone is unlikely to provide enough volume to justify private lines; users would need to have other traffic as well. For these large volume users service is available from sources other than the BOCs, including AT&T and private ownership of the transmission system.
An electronic mail provider would have to lease terminating access lines from the local telco to receive incoming calls. These lines constitute the only input purchased directly from a BOC by an electronic mail provider. Walter Ulrich Consulting estimates the cost of these lines at 2 to 5 percent of a service bureaus's total costs.(20)
Costs
If the BOCs could compete in the electronic mail market, they would have an incentive to shift costs from that market into their regulated markets in order to inflate their regulated rates. Such cost-shifting would reduce the apparent cost of providing service in the unregulated market and might lead to anticompetitive pricing in that market. In this section we consider the likelihood of a BOC being able to shift costs of various sorts from electronic mail into its regulated accounts, and attempt to estimate the magnitude of the potential cost shifting.
Information on the cost structure of an electronic mail service bureau, provided to Pacific Telesis by Walter Ulrich Consultants, is shown in Table EM.6 [omitted]. Costs in various categories are presented as percentages of total costs; data on absolute costs were not available. The data are provided for a system operating at 25 percent of capacity, the current norm, and at 100 percent of capacity.
The first category in Table EM.6., computer hardware, also includes computer maintenance. The maintenance portion could be shared between regulated and unregulated activities. As for the equipment itself, actual practice differs among service bureaus. Some companies, particularly those like GEISCO that began as computer time-sharing firms, use the same hardware for electronic mail and other services. Others, such as AT&T Mail and MCI Mail, started from scratch to offer electronic mail and use computer equipment dedicated to electronic mail. Since the possibility of cost-shifting exists, we shall consider the whole computer hardware category to be potentially shared. If the other services using the computer were also information services, however, cost shifting would not be an issue. Software, on the other hand, would be specific to the electronic mail function and will be considered unshared. Of the other cost categories shown in EM.6, those for transmission, both packet network and local access, would clearly be specific to the electronic mail service. Sales and marketing and support personnel, on the other hand, could probably be shared between the regulated and unregulated services. If the equipment were operated at 25 percent of capacity, 72 percent of costs would be potentially shared; at full capacity, 68 percent would be potentially shared. If the electronic mail provider's apparent costs were decreased by 10 percent in each potentially shared category, the apparent costs of electronic mail service would fall by about 7 percent, enough to have a considerable effect on the firm's profits and, conceivably, on its pricing practices.
Table EM.7. [omitted] compares the cost categories for an electronic mail service bureau with those for a BOC, using data from Illinois Bell's regulated accounts.(21) We assume that the equipment is used at full capacity. We cannot compare the sizes of the electronic mail and telco operations because we do not have absolute numbers for electronic mail, and in any case we do not know how large an electronic mail business might grow relative to the regulated telephone service. But we can see that the total of Illinois Bell's costs in potentially shared categories amounts to $200 million, about 11 percent of its total costs. These are large numbers in absolute terms, and suggest the possibility of large effects on the costs of the electronic mail service provider. But if Illinois Bell's costs in every shiftable category were increased by 10 percent, the effect on Illinois Bell's total costs in its regulated business would only be 1 percent. So the likely effects on regulated rates would remain small.
Electronic mail is a messaging technique using computer equipment, and is primarily used in an office environment, particularly by larger firms. The service can be acquired either by purchase of equipment and software, usually as part of an office automation system, or through subscription to a service bureau. The market for hardware and software appears somewhat concentrated by conventional structural measures, but entry appears easy enough to make the market competitive. For software, in particular, self-supply is an option for many firms. The service bureau market also apppears concentrated, but again entry is possible, and service bureaus also face competition from in-house systems and other technologies, including voice storage, facsimile, and possibly teletex.
For high-volume users, equipment ownership is the least expensive option, if only within-office transmission is needed. VSR systems offer a similarly priced option for short messages. Service bureaus appear less expensive at low volumes and provide long-distance transmission and communication with outside organizations. Some provide delivery service to recipients without electronic mail capability. Voice storage service bureaus, for short voice messages, and facsimile equipment, for paper documents, provide substitutes in the same price range. Teletex may also prove to be a substitute, but Telex is technically obsolete and is being phased out. Express couriers offer a less similar service. They deliver original documents but are slower and more expensive.
In-house systems have no necessary connection to the telephone system, so they provide no opportunity for discriminatory access on the part of local telephone companies. Low-volume users usually obtain access to service bureaus through conventional switched telephone lines, either directly to the service bureau if it is local, or through a packet network if it is distant. Since the customer pays for the telephone call, and in most cases the call terminates at a packet node, not an electronic mail vendor, the call provides no opportunity for discrimination against the electronic mail provider. Occasionally 800 service is used, but it usually is purchased by the packet network provider, not the service bureau (though they may be the same). Higher volume users may use leased lines, but for these several non-telco alternatives exist, including building a private system. Telco inputs into electronic mail service amount to only 2 to 5 percent of total costs, providing very little opportunity for a BOC to harm providers through discrimination in access.
If a BOC offered electronic mail service, about 70 percent of the costs of the service bureau would be potentially shiftable to the the BOC's regulated accounts, if computer hardware were shared with the regulated business. If 10 percent of costs could be shifted in each category, they would decrease the service bureau's apparent costs by 7 percent. While the amounts that might be shifted might be large in dollar terms, and might have a major effect on the apparent costs of the electronic mail service, they would be a small percentage of the BOC's regulated accounts and would have a negligible effect on regulated rates.
1. EMMS: Electronic Mail and Micro Systems Vol. 10, No. 5, March 3, 1986, p. 3.
2. Computer Inquiry II Reconsideration Order, 84 F.C.C.2d 50, 58-59 (1980).
3. Third Computer Inquiry, 50 Fed. Reg. 33581 (Aug. 20, 1985).
4. Venture Development Corporation, Computer Based Message Systems: A Strategic Analysis 120 (1985), cited in Pacific Telesis Group, Information Services: Electronic Mail Chart II.2 (June 27, 1986).
5. Pacific Telesis, E-Mail 25; Robert Moran, Business Communications Co., Inc., The Electronic Mail Revolution: Implications for Users and Suppliers 63 (May 1985).
6. Pacific Telesis, Voice Storage and Retrieval (VSR) Information Services 66 (July 11, 1986).
7. Robert Moran, Business Communications Co., Inc., The Electronic Mail Revolution: Implications for Users and Suppliers 63 (May 1985).
8. Pacific Telesis, E-Mail 39.
9. Id. at Chart I.3.
10. Id. at Chart I.4.
11. Id. at 17.
12. Id. at 36.
13. Id. at Chart II. 2.
14. Id. at 73.
15. Id. at Chart II.3.
16. EMMS Electronic Mail & Micro Systems, Vol. 10, No. 11, June 2, 1986, pp. 2-3.
17. Pacific Telesis, E-Mail Chart II.4.
18. Measures of market share in the service bureau market all pose difficulties. Firms may be ranked by numbers of mailboxes, but more than one person can use a single mailbox. For some firms, electronic mail service is bundled with database services, news services, and the like. In some cases, internal use cannot be separated from that of paying customers. In the case of Western Union some Telex and courier-delivered messages are included. And in the case of MCI, almost half the subscribers are subscribers to Dow Jones News Retrieval service, who automatically receive MCI Mail accounts, most of which remain inactive.
19. LINK Resources Corporation, Electronic Mail Systems 11-13 (October 1984).
20. Letter from Kathy Hackmann, Esq., Pacific Telesis, to Dr. Florence Setzer, Office of Plans and Policy, Federal Communications Commission (September 15, 1986), Attachment 1.
21. Ameritech, Transactional Services: Credit Card Transactions 44 (May 1, 1986).