Heartland Statement on the Speculation of a Merger between MCI and Qwest

Published February 3, 2005

February 3, 2005 — (Chicago, IL) Earlier today, Qwest Communications International Inc. made an acquisition offer to MCI Inc. This news comes after last week’s proposal for SBC Communications Inc. to acquire long-distance rival AT&T.

Steven Titch, senior fellow for technology policy for The Heartland Institute and managing editor of Heartland’s monthly newsletter, Information Technology & Telecommunication News, had the following to say on the Qwest-MCI proposal:

For most of the years after divestiture, AT&T, MCI, and other long-distance companies remained viable only by the grace of regulation. After divestiture, the government guaranteed them customers and cash flow by requiring consumers to choose separate local and long distance companies.

Even when technology began to challenge the logic of defining “local” and “long-distance” as separate services, the Telecom Act of 1996 required local telephone companies to share their facilities with long-distance carriers at a discount, further tying the profitability of these companies to the largesse of mandated subsidies.

The regulatory structure, however, was double-edged: While it restricted the way incumbents could package and sell services, in a counterproductive trade-off, it allowed them to sustain inefficient business models that insulated them from changing consumer habits. Meanwhile, unregulated services, such as wireless and voice over IP, created an opportunity for consumers and new telecom entrepreneurs to escape the regulatory structure that was failing the incumbents.

In the end, the reality of regulatory escape hit the long-distance companies the hardest. They lacked a large base of consumer accounts as well as a local infrastructure that could have helped them compete better through differentiated services and networks, including the ability to control the timing of broadband rollout.

To see this series of mergers as a reassembly of the old Bell System monopoly misunderstands the evolution occurring before our eyes. A combined SBC-AT&T, or Qwest-MCI, are in no position to dominate the industry–not when VoIP companies like Vonage and Net2Phone have national footprints and are growing at triple-digit rates, or when cable companies can package TV, Internet, and phone services in bundles.

The Baby Bells and the one-time long-distance companies are struggling to create a role for themselves in a much different market for telecommunications services. At the same time, market forces have undone long-held regulatory suppositions. The overall health of the industry, and the interest of consumers, is best served if these companies are allowed the freedom to adjust to evolving market conditions.

Steven Titch is senior fellow for information technology and telecom issues for The Heartland Institute, a 20-year-old nonprofit research organization based in Chicago. He also is managing editor if IT&T News, a Heartland publication. He can be reached at [email protected].