Method to Telecom Merger Madness

Method to Telecom Merger Madness

November 23, 1999

The telecommunications world was rocked in October with news of the merger between MCI-WorldCom and Sprint–in dollar terms the largest merger in US history. This merger comes on the heels of a series of other jaw-dropping mega-deals in telecommunications over the past two years, including SBC’s acquisition of fellow Bell company Ameritech, Bell Atlantic’s purchase of GTE, and a shopping spree by AT&T in which it acquired cable giants TCI and MediaOne.

What on earth is going on here? After each of these mergers, of course, the doomsayers were out in force. The sky is falling, we were told. The old Bell system monopoly is being recreated, and hopes for competition in telecom are being dashed.

These telephony Chicken Littles, however, miss the point. Yes, there is something big happening, but it’s not a return to the “We don’t care, we don’t have to” days of Ma Bell’s monopoly. Instead of signaling the death of competition, the restructuring now going on seems instead a response to competition, and preparation for even more.

Think about it. Up until now, the structure of the telecommunications industry has remained basically the same as it was in 1984. That’s when Judge Harold Greene drew lines neatly dividing the US into seven regions for each of the Bell companies, and separated long-distance from local telephone service. That was before the Internet and other new technologies changed the face of the industry, and before regulatory changes made competition possible.

For some time, it’s been clear that this artificial division of the industry into carefully delineated regions and circumscribed lines of business no longer makes sense. Far from being a regional business, telecommunications is national, even global in scope. While small start-ups can still thrive, size does matter–especially when consumers demand big investments in new technology. And with technology blurring lines between different types of services, and more consumers demanding simple one-stop shopping, multi-service firms are more attractive.

A regulated, monopolistic industry could safely ignore these factors, of course. In fact, if we didn’t see industry restructuring that would be cause for concern. Instead, telecom firms are changing, and changing rapidly. They see competition coming and are preparing for it. As former Federal Communications Commission Chairman Reed Hundt put it, “They’re beefing to go after each other big time.”

The ultimate result looks to be more choice for consumers, not less. Under one plausible scenario, the present restructuring may result in the creation of a vigorous “Big Four” of telecommunications players–Bell Atlantic, SBC, AT&T, and WorldCom. Instead of being separated geographically or by product line, each would have the reach and resources to compete against each other on a variety of fronts. SBC already has plans to compete with other Bells for local service in 30 markets. AT&T will be using its new cable lines to compete against Bell companies for local service. WorldCom will be offering strong competition to AT&T, while Bell Atlantic plans to enter the long-distance fray in competition with both of them.

No one knows how this prospective free-for-all will play out. Despite all the confident sound-bites, no one knows which mergers will deliver the consumer benefits that have been projected. And many past mergers have failed spectacularly. In 1991, for instance, AT&T acquired NCR–intending to put itself at the head of the computer pack–and failed famously. Similarly MediaOne had previously been eaten by Bell company USWest, then was spit back out.

In any dynamic industry, however, there is uncertainty and possibility of failure. Different competitive theories will be tested in the market. This is part of the natural discovery process and the sign of a healthy marketplace.

Critics say telecom mergers are bad for consumers. According to ads run by one anti-merger coalition, restructuring means “the electronic frontier is closed.” Nonsense. The electronic–and telecommunications–frontier is just now being opened. It’s a virtual Buffalo Bill Wild West Show. Consumers should benefit, as long as policymakers don’t stand in the way.

James L. Gattuso (jgattuso@cei.org) is CEI’s Vice President for Policy and Management.