The Benefits of Carrier Consolidation

Published March 1, 2005

Speculation and debate have started on the ramifications of the proposed merger of SBC Communications and AT&T. Much of the early reaction acknowledges that the market has changed significantly and both players are substantially different companies than they were at the time of the 1984 AT&T divestiture.

Still, some regulators and consumer advocates have questioned whether the deal is in the public interest, openly wondering whether it will consolidate too much market power in the hands of one company and lead to higher prices and less choice.

They need to calm down. There are clear reasons why this merger would probably be good for consumers and investors alike. Regulators and elected officials ought to stay as far away from this development as the law allows.

Not Your Father’s Bell

An SBC-AT&T merger will not reconstitute the old Bell System. People who say otherwise forget that at the time of its 1984 divestiture, AT&T owned local phone companies in almost every primary and secondary U.S. market; controlled 90 percent of all U.S. long-distance traffic; was positioned to be the only national provider of cellular service; and researched, developed, manufactured, certified, specified, and owned every piece of equipment it used in its network–from the biggest switch to the smallest line card, right down to the phone in your home.

No amount of consolidation can bring that monolithic entity back … and no one wants to.

The SBC-AT&T merger is about responding effectively to just about everything that has happened since that monumental break-up. Look into American homes today and you’ll find a truckload of cable, computers, wireless and wireline phones, PDAs, DVD players, cable boxes, and game systems. Consumers want to manage these devices and applications simply and centrally.

Legislators and antitrust officials should carefully consider the impact that blocking mergers like this would have on progress toward networked applications in the home. They also should ask whether it makes sense to block this merger on the basis of distinctions between local, long distance, wireline, wireless, voice, and data transmission that, from a consumer perspective, are now obsolete. They should look beyond the history of each company, and forward to how a combined company can offer consumers what they want today.

Consumers in Charge

Consumers are growing increasingly frustrated with what they see as arbitrary rules that force them to deal with multiple providers, keep track of multiple remotes, and, most of all, spread household funds among several providers rather than save money by integrating with one.

Legislators who insist on blocking this deal risk a backlash from overcabled, overconnected and, bottom line, overpaying voters. At the end of the day, those voters will demand to know what, exactly, they are being protected from.

If we look at the consumer technology market as a whole, we start to see the value carriers can deliver if allowed to completely integrate their infrastructure and services. Because it addresses true market gaps, the trend toward consolidation will continue.

Even though consolidation will mean fewer companies, it will fuel greater investment in the supply chain for consumer entertainment and information technology. That chain includes companies like Texas Instruments in chips, Dell in PCs, Cisco in routers, Sony in home audio and video, EA in games, and Real in Internet video. Carrier consolidation bolsters the performance and value these companies deliver by creating a larger market for their technology.

An integrated SBC-AT&T will still be only part of an increasingly networked and fast-growing supply chain. It will face fierce competition from other consolidated companies (others will surely follow SBC-AT&T) and partnerships formed by rivals to network and integrate other products and technology.

SBC-AT&T will not control the market, as many opponents of the merger fear. Sony, TI, Dell, and Cisco are huge global companies. All are influential, but none of them “controls” the supply chain. Even Microsoft, which has a lock on desktop OS, nevertheless could not leverage that strength into cell phones, PDAs, and Internet servers.

Allowing the SBC-AT&T merger to go forward will benefit consumers and the entire American technology industry.

Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute and managing editor of IT&T News