Cingular-AT&T Deal Is Good for Consumers, Economy

Published July 6, 2004

Cingular, the country’s second largest wireless phone company, promises its pending buyout of AT&T Wireless will improve consumer choice, increase investment in telecommunications, and provide a boost to the economy. Foes of the buyout, however, want government to delay, modify, or even reject the deal. They fear consolidation will reduce competition and hurt consumers.

Who is right? Consolidation is a feature of all industries created by new technology, so one way to study its consequences is to look at the histories of other industries that have already gone through the consolidation phase. Auto manufacturing is one such industry.

Early in the development of the auto industry, there were scores of manufacturers, some with names still familiar today. Olds, Winton, Studebaker, Duryea, and Packard are just a few of the many early car companies that were absorbed by bigger, more successful manufacturers or went out of business.

This early consolidation allowed economies of scale, better access to capital, stronger brands, and more uniformity of parts and service needs. All these things were necessary for the new industry to take off, and take off it did. The volume of cars produced and sold exploded and prices plummeted.

Consolidation in the auto industry did not stifle consumer choice. The big car companies competed fiercely with each other (and still do) and produced a blizzard of different styles and features to choose from. Competition emerged from companies in other countries: Volkswagen, Daimler, Toyota, and many others grew up in other countries, each exploiting the economies of scale, access to capital, etc. that enabled the Big Three to thrive in the U.S.

The growth of automobile industries in other countries shows no sign of abating. In 10 years, DongFeng (China), Tata (India), and JVA (Argentina) could all be competing fiercely with U.S. car manufacturers for a piece of the U.S. market.

The same thing is happening in the wireless phone industry. The declining number of major competitors in the U.S. has made it easier for the remaining firms to expand and cut prices. Most analysts say the Cingular-AT&T partnership will unleash a wave of new products taking advantage of the spread of broadband, helping to close an unseemly gap (given our higher standard of living) between the availability of such services in many European and Asian countries and the U.S.

New challengers will emerge to the new industry leader. For example, AT&T, which three years ago spun off the wireless company Cingular is buying today, has already announced plans to return to the wireless business. More than 50 local, regional, and smaller nationwide wireless companies currently operate in the U.S. All will be looking to expand in the future.

With voice over the Internet Protocol (VoIP) expected to expand dramatically in the coming months, Cignular will have to compete with cable, wireline, and satellite providers … and even electric utilities. Imagine being able to choose telephone and Internet access services from five or more different providers, all operating from different technology platforms, as well as competitors within each industry! That’s the reality just around the corner.

Allowing the buyout to proceed without unnecessary delay will encourage investment in telecommunications research and the development of infrastructure. Regulatory uncertainty has left billions of dollars in needed investments in broadband networks and services on the sidelines. Speedy approval of the Cingular purchase of AT&T will send a strong signal to investors that telecommunications is ready to grow again.

Dividends to stockholders, higher pay to workers, increased investment in technology, new broadband services, lower bills for consumers … all these things will provide a boost to the economy. Self-described consumer advocates who argue against this consolidation are essentially saying consumers don’t benefit from lower prices, greater competition in telecom, and a growing economy.

Actual consumers are likely to disagree.

Sean Parnell is vice president for external affairs for The Heartland Institute, a Chicago-based nonprofit research organization. His email address is [email protected].