Internet Backbone Competition and the SBC/AT&T Merger

Published September 1, 2005

Five years ago, U.S. and European antitrust watchdogs blocked the merger of MCI and Sprint for fear their combined backbone would have such a dominant share of Internet traffic that it could force most or all rivals to start paying it for interconnection with its large user base. Opponents of the pending SBC-AT&T merger have argued the deal similarly threatens Internet backbone competition.

At the time, MCI and Sprint were indisputably the top backbones, together handling more than 50 percent of all U.S. Internet traffic. Today, AT&T has only about 12 percent and it faces strong rivals, such as Level 3, Global Crossing, NTT Verio, Qwest, and Sprint, to name but a few. All of these carriers qualify to interconnect with AT&T at no charge, while SBC–though a major regional phone company–does not. Moreover, SBC would add only about 7 percent to AT&T’s share of traffic.

Critics have claimed the merger should be analyzed jointly with that of Verizon/MCI and that the two merged entities should be presumed to act as a colluding pair, interconnecting with each other at no charge but making competitors pay. Does the grim scenario hold water? It does not.

Setting aside the assertion of potential collusion, Verizon’s backbone operations are smaller than SBC’s, and MCI is a shadow of its former self. A merged Verizon-MCI would have a traffic share of less than 10 percent. SBC-AT&T and Verizon-MCI together would handle less than 30 percent of Internet traffic.

To put this in context, at the time of the Sprint merger, MCI by itself had a larger share … but it still was unable to impose interconnection charges on fully 11 competitors!

Critics also have singled out Verizon and SBC as large Internet service providers (ISPs) to residential and small business customers that use DSL for broadband Internet access, stressing they could guarantee this traffic to their backbone merger partners. However, most of this traffic is already reflected in the above market shares. Moreover, the spotlight on large broadband ISPs brings out a key point: Nationally, Verizon and SBC together provide less than 28 percent of residential and small business broadband lines. The rest is in the hands of cable giants Comcast and Time Warner and a handful of other large broadband ISPs. These large ISPs have a keen interest in maintaining competitive backbone prices and can prevent any backbone from becoming dominant by steering their considerable traffic to other networks.

Sound competition policy in a market economy permits private transactions unless there is a good reason to oppose them. No such reason has been presented for the Internet backbone. The pending mergers pose no threat to Internet interconnection or prices.

Marius Schwartz ([email protected]) is professor of economics at Georgetown University and has served as acting chief economist at the Antitrust Division of the U.S. Department of Justice. He has consulted for SBC on the Internet aspects of its merger.