Telecoms and Standard Oil: Unexpected Lessons

Published January 1, 2004

In November, the 7th Circuit Court of Appeals voided a law passed by the Illinois General Assembly that would have reformed the rules under which SBC leased its lines and equipment to competitors. SBC, which had fought hard for the law, nevertheless saw a silver lining in the decision, which affirmed the state’s role in rate-setting and called on the Illinois Commerce Commission to expedite its own process for updating the rules.

Critics of SBC, though, saw the court’s decision as a rebuke of a monopolist’s attempt to control and manipulate a state legislature. Typical of those with this point of view is University of Illinois emeritus law professor Ronald Rotunda, who in the November 22 issue of the Chicago Sun-Times referred to “SBC’s 19th Century-like robber baron arrogance” and claimed “SBC stole a page from the Rockefeller monopolists’ handbook.”

A correct interpretation of the history of Standard Oil and the 1911 antitrust case against it does suggest certain parallels with the SBC case, but they are quite opposite Professor Rotunda’s interpretation.

The oil industry was in its infancy in the early 20th Century, with its only refined product, kerosene, emerging as a substitute for candles and whale oil. The early oil industry showed the usual characteristics of a growing, competitive industry, namely, output increased at a rapid pace and prices declined. A monopolist, by contrast, restricts output and raises price above the competitive level.

Today’s telecommunications industry is in a similar stage, with massive investments being made in cable and wireless technologies and plummeting prices for telephone service and broadband. SBC and the other incumbent telephone companies, as the FCC has certified, are not acting like monopolists. They are fighting for their economic survival in a rapidly changing and expanding marketplace.

Antitrust laws were famously, but mistakenly, applied against Standard Oil by a court that was essentially doing the bidding of the railroad cartels. Standard Oil was one of the few railroad customers that operated nationwide, putting it in the position to negotiate lower prices from individual railroads, which threatened the cartel. The court’s decision substantially reduced the competitive discounts that some railroads offered, thereby reducing competition in the railroad industry, but did nothing to improve competition in the oil industry. Subsequently the oil industry provided its own transportation network by building a dense network of pipelines. Thus, the railroads won a hollow victory.

The railroad industry eventually experienced dramatic financial setbacks, bankruptcies, and liquidations due to rigidly regulated rates and a lack of market-based competition. If Professor Rotunda got his way, the same thing could happen to telecommunications in Illinois.

The Standard Oil case shows that courts are much less competent at picking winners than are markets. AT&T, MCI, and small resalers want to free ride on the infrastructures built and maintained by SBC and the other regional Bell operating companies. Fees up to twice as high in other states haven’t prevented AT&T from entering those markets and profiting, and lower fees have not prompted them to invest in their own infrastructure to allow real facilities-based competition to occur in the future.

Thankfully, the recent decision of the 7th Circuit Court, approving a role by the state legislature in setting policy for telecommunications and ordering the ICC to update its fee regulations, was a partial victory for SBC and Illinois consumers.

New entrants into the telecom market should be required to pay their fair share of the cost of building and maintaining infrastructure. Consumers, not regulators or law professors, ought to decide which telecom companies survive and flourish in the coming years.

Jim Johnston ([email protected]) is a policy advisor for The Heartland Institute and an economist retired from Amoco, one of the original Standard Oil companies.