Resurrecting Ma Bell?

Some of you have probably seen Stephen Colbert's rant about the recent AT&T-BellSouth merger. This $67 billion acquisition of BellSouth by AT&T comes close on the heels of last year's $6.7 billion Verizon-MCI and $16 billion AT&T-SBC mergers, and it would seem that the telecommunication industry is indeed returning to the old days of Ma Bell's phone monopoly. There are now only 3 remaining competitors: AT&T, Verizon, and Qwest - all of which consist of at least one Baby Bell. A more realistic picture of what things look like:

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A quick history lesson for those that aren't familiar with it: Beginning in 1972, and taking effect in 1984, the Department of Justice undertook antitrust proceedings that led to the breakup of telecom monopolist AT&T ("Ma Bell"), which owned both local and long-distance telephone service throughout the US. AT&T lost all local service rights, relegated to long-distance only, but was also allowed to diversify into the computer industry (a venture which failed quickly). AT&T's local service was split into seven Regional Bell Operating Companies ("Baby Bells"), though they continued to hold local monopolies. Competition in the long-distance market, however, grew strongly as Sprint, MCI, etc. quickly entered the market. The immediate effect was a dramatic raise in the cost of local calls as the long-distance revenues from the previously coupled service provider could no longer underwrite the more costly local networks. On the bright side, long-distance rates did fall, but only to be driven back up by government regulations that transferred profits from long-distance to local companies (since it was the local companies that owned and operated the infrastructure).

Now, of the original seven bells, one remains free-standing (Qwest), two have been incorporated into Verizon, and four are in the newly constructed AT&T, seemingly bringing the market ever-closer to one large entity once again. This has gotten many consumer rights and industry watchdog groups up in arms, as they view this as an end to the idea of a Bell vs. Bell competitive utopia of sorts. Yet many economists think that this is not a bad thing at all and claim that it will actually help the consumer. The most obvious advantage of such mergers is the return of the consolidation that had originally allowed AT&T to defray costs between sectors of their company. The Bell breakup separated service providers from infrastructure owners, a situation that encourages advantages to be taken. But this is not the only reason why this deal isn't bad, the main one being that the market is a different place now than it was 20 years ago, with vastly changed technology. Plain old telephone systems (or POTS, as they are known) are becoming outdated as they are replaced by cell phones and Voice-over-IP (VOIP) systems. This is especially true in population centers, where technology takes off fast, but also where telecom companies stand to make the most profit (as they have the lowest installed infrastructure to users ratio). Continuing to provide service to rural areas becomes increasingly expensive as companies are forced to maintain "legacy" systems, and it makes sense to incorporate their service into consolidated vertical ownership so that none of these consumers are forced to pay egregious amounts for their small portion of total service - a return to the old cost-underwriting-for-public-service that was present under the old AT&T.

Another large argument for the mergers stems from the emerges of these new technologies. As POTS are phased out (in favor of cell phones currently), consumers' expectations from telecom companies are also changing drastically. Internet users want increasingly faster broadband connections to the web, and many previously distinct industries are converging towards this demand. Cable companies offer internet over their high-speed coaxial lines, phone companies continuously upgrade DSL/ADSL services, satellite companies improve their technology towards "spot beams" and other high tech names, and cellular/wireless companies promise impending high-speed access whereever their is cellular reception. With the internet poised to eliminate POTS forever with VOIP, all of these newly-competing companies are greatly enlarging the market for telecom services. The biggest craze today is for the lying of fiber optic lines to every consumer's house, an ultra-high speed link that would could replace all other connections (delivering voice, video, internet, etc. all over one huge capacity line). With so many companies rushing to give this to the consumer, competition is not suffering.

One valid concern about this merger is that AT&T will now own 100% of Cingular Wireles, the nation's largest (by a good margin) cellular provider. Once again, though, there are still plenty options for consumers currently, and the cellular market is one that has low enough entry costs (see Helio mobile, for example, which sprung out of nowhere), especially with the emergence of mobile virtual network operators who can coexist with current infrastructure owners. This is still the one aspect of AT&T's that needs the most attention, but it is not a situation of impending doom. It should also be noted that the US is behind other parts of the world in cell phone technology, and overseas service providers have been looking for opportunities to gain a foothold here as well - and in today's world, such globalization is another great protective device against unfair monopolistic practices.

Economists Robert Crandall and Clifford Winston threw down the one of the first gauntlets in favor of this merger back when it was intially announced, but they also provide an interesting critique of government antitrust regulation in general.


--posted by Risto Keravuori, Joseph Saunders, and Cheryl Kong