Telecom Mergers Are Dynamic Competition in Action

Published July 26, 2005

Two major telecom mergers are now underway. SBC is seeking to acquire AT&T, while Verizon is seeking to acquire MCI.

These proposed mergers have provoked a good deal of opposition, on the ground that they would restore regional versions of the nationwide monopoly AT&T possessed prior to its being broken up in 1984.

SBC and Verizon each hold more than 80 percent of the wire-based connections in their regions. Facing a regional monopoly is no different from facing a nationwide monopoly. In both cases, if you want to place a call using a conventional landline telephone, you have no choice but to use the monopolists’ wire.

Should we therefore oppose these mergers? No. Even if SBC and Verizon were to hold 100 percent of the wire-based connections in their regions after the mergers (which they wouldn’t), they would hold nothing resembling the old AT&T monopoly. Sweeping changes in the telecom marketplace that have occurred during the past 20 years make such a monopoly impossible these days.

Prior to AT&T’s breakup in 1984, if you wanted to speak with someone without having to visit her, you could do so only over wire owned by AT&T. That was a pretty strong monopoly position for a company to hold … but it’s no longer the case.

Various forms of wireless service have emerged to compete with landline service. The number of wireless connections now exceeds the number of wire-based connections in the U.S. The majority of long-distance calls travel through air and not over wire. A full one-third of local calls now travel over air as well.

The emergence of cable television is another technological development that is changing the telecom marketplace. Thanks to billions of dollars of private investment, cable wire is nearly as prevalent as phone wire. Where cable began simply by offering better TV reception, it now offers Internet access and a growing range of other video and data services. Cable companies generally out-competed phone companies in offering high-speed Internet access. More recently, cable TV companies have been offering phone service through the new VoIP technology.

So cable companies are becoming phone companies thanks to the advance of technology. At the same time, phone companies have found ways to offer television programming over telephone lines. This very summer, for instance, Verizon has received permission to offer television service in Herndon, Virginia.

The standard distinctions among phone, cable, and computer companies are crumbling away. Sprint, a traditional phone company, and Motorola, a traditional TV company, and Intel, a traditional computer company, are engaged in a cooperative endeavor to pursue wireless technologies and services. To which industry does this new hybrid belong?

The static notion of competition would have us think SBC and Verizon are competing only against the likes of Qwest, Sprint, and Level 3, all traditional phone companies. While they are clearly doing this, they also are competing against the likes of Comcast, Time Warner, Intel, and Microsoft.

Technology is revolutionizing the telecom landscape, and all kinds of companies are competing to offer services that customers value. Mergers allow companies to respond quickly to these rapidly changing commercial opportunities created by new technologies.

In the preface to his epochal General Theory of Employment, Interest, and Money in 1936, British economist John Maynard Keynes lamented the difficulty of “escaping from habitual modes of thought and expression.” This difficulty is exhibited in spades when people refer to telecom mergers as diminishing competition.

To the contrary, these mergers are signs of vigorous competition. Competition is fundamentally about seizing future commercial opportunities. Much of the regulation advocated and passed in the name of encouraging or protecting competition actually protects competitors instead. Little surprise, then, that most of the complaints against the telecom mergers have been filed by competitors to SBC and Verizon. They realize the market would become more competitive, not less, as a result of these mergers.

To claim these mergers would promote monopoly is a claim that could be made only by someone who has been sleepwalking through the past 20 years. They need to wake up and see how the telecom landscape has changed.

Richard E. Wagner
Department of Economics, 3G4
George Mason University
Fairfax, VA 22030
Daytime Phone: 703/993-1132
Email: [email protected]

Richard E. Wagner ([email protected]) is the Holbart Harris Professor of Economics at George Mason University.