Statement on SBC/AT&T and Verizon/MCI Mergers

Published April 20, 2005

(April 20, 2005 — Chicago, IL) Recent announcements of plans by SBC to merge with AT&T and Verizon to merge with MCI have generated objections from consumer activists and competitors, including Carl Grivner, CEO of XO Communications, who testified before a Senate Judiciary Committee yesterday.

The following statement in defense of these mergers can be attributed to Joseph Bast, president of The Heartland Institute, a 21-year-old nonprofit research organization based in Chicago:

Concern over the negative effect on competition that the SBC/AT&T and Verizon/MCI mergers might have seems reasonable on its face, but it doesn’t stand up to scrutiny.

  • A common mistake in antitrust debates is to misdefine the market: Sure, Kellog’s and General Mills dominate the breakfast cereal market, but not the breakfast foods market, and certainly not the food market …. and they are losing market share to producers of other products such as breakfast bars, waffles etc. etc. In telecom, most critics of consolidation overlook competing technological platforms–satellite, cable, wireline phone, wireless phone, Wi-Fi, and coming soon, Wi-Max and whoknowswhat. If you define the market correctly (larger), SBC and Verizon will remain small players even after the mergers.
  • The telecom industry is changing because of “convergence”–formerly separate technologies and services are now coming together, providing benefits for consumers. Cable companies now offer telephone, and telephone offers television, and both offer broadband in competition with satellite companies, and so on. Convergence explains the urge to merge in the telecom industry. It’s a good thing, not a bad thing.
  • Has antitrust law ever worked in practice the way we hope/want it to in theory? Some excellent historical accounts say the answer is no: It is invariably used by competitors to handicap other players, and appears in markets where prices are falling and supply is rising, which by definition is not a market in which monopoly or cartel are problems. This aptly describes the telecom market today … so why use antitrust here, now?
  • Yale Brozen, the late great economist at the University of Chicago, used to say “only government can create monopolies.” His point was that high prices and profits prompt competitors to enter markets until prices and profits return to lower levels. Governments stop this from happening by erecting barriers to entry, often in the form of price controls, licensing laws, and heavy regulations that incumbents are either exempted from or can afford to comply with. Government regulations in telecom are largely responsible for most of the ills that affect the industry. Why should we think those ills justify another round of regulation in the form of antitrust?

The Heartland Institute published a policy study on the subject of mergers, with a focus on the telecommunications industry, in 1999 by Robert B. Ekelund Jr., Ph.D. and Mark Thornton, Ph.D. Their reasoning and findings are very much applicable to the current debate. Here’s the link:

Dr. Thornton is available to comment on the SBC/AT&T and Verizon/MCI mergers. He can be contacted at 334/321-2100, email [email protected].