For the Sake of Consumers, Allow AT&T/MediaOne Merger to Proceed at Once

Published March 9, 2000

Several consumer organizations recently filed a formal request with the FCC and the Justice Department’s Antitrust Division to block the acquisition of MediaOne by AT&T Corp. The consumer groups believe the merger violates both antitrust laws and market concentration limits mandated by Congress and administered by the FCC.

At the heart of this action is the fear that AT&T will monopolize cable and Internet services, inflate prices for both, and stifle competition for broadband access. But the consumer organizations are wrong on all counts. Following their advice could cost consumers millions of dollars in lost productivity.

First, on the matter of pricing, it should be observed that competing broadband technologies have led to cuts of 50 percent or more in DSL prices in just the past several months. Companies offering broadband access are aggressively cutting their prices in order to compete, and industry experts predict more price-cutting in the future, not less.

According to a policy study written for The Heartland Institute by David Kopel and released late last year, companies with large cable holdings, such as AT&T, face fierce competition from conventional phone companies, wireless ground-based, and satellite-based broadcast technologies for the phone, television, and Internet access business of customers. Competition among these technologies is expected to keep prices falling.

But aren’t mergers ultimately anti-competitive? Doesn’t “bigger” sooner or later mean “bad”? The answer to both questions is no. The dramatic expansion of free trade and spread of market institutions worldwide following the collapse of communism during the past decade has changed forever the relationship between corporate size and competitiveness.

At the start of the twenty-first century, in industries requiring significant capital investment and characterized by network dependencies and rising economies of scale, firms need to be huge in order to penetrate and remain competitive in global markets.

In the United States, international trade and deregulation of domestic public utilities has created new markets for telecommunications services where only strictly regulated regional monopolies existed previously. These new market opportunities combined with new technologies are making possible economies of scale – and benefits to consumers – that were once unthinkable.

Mergers can create new corporate entities large enough to enter new markets and compete with local and regional monopolies. The recent SBC/Ameritech merger, for example, permitted SBC to enter 30 markets beyond its previous 13-state region, enabling it to offer local, long-distance, Internet, and high-speed data services to some 180 million people and to compete in markets previously dominated by regional monopolies.

The economies of scale that are helping SBC increase consumer options and promote, rather than reduce, competition are no different from those that will arise from the AT&T/MediaOne merger. This is how the game will be played in the coming years. Consumer groups cannot stop this tide of global corporate reorganization, try as hard as they might.

Regretfully, consumer groups can delay individual mergers, though, and this is where the potential for real harm to consumers arises.

In a 1999 study produced for The Heartland Institute, Dr. Robert Ekelund and Mark Thornton, both professors of economics at Auburn University, found that federal, state, and local authorities delay corporate mergers in unregulated industries by an average of 94 days. The delay is typically twice as long in regulated industries such as telephone, electricity, and banking.

By giving competitors a chance to bid up the stock price of the acquired firm and take other counter-strategies, regulatory delays deprive consumers of much of the value the mergers would have created. That value goes instead to stockholders of the acquired firm or is lost entirely when the merger fails to create value. Ekelund and Thornton found that merger delays in regulated industries alone cost society over $12 billion in 1996.

Although groups like Consumers Union and Consumer Federation of America espouse the laudable goals of increasing competition and innovation in the telecommunications industry, their proposed solution would have the opposite effect. The undelayed merger of AT&T and MediaOne would lead to more competition, lower prices, and more value to consumers than the alternative. This merger should be approved at once.

Joseph L. Bast is president of The Heartland Institute, an independent think tank based in Chicago, Illinois.