The Empire Strikes Back

Someone pointed out recently that the AT&T symbol -- that circle with the lines running through it -- reminded them of the Death Star, which was later explained to us by a 14-year-old as "a kind of headquarters or spaceship or man-made planet army base or something that belonged to the Dark Side" in the Star Wars trilogy. "And what exactly is the Dark Side?""The bad guys. Why?""Well, there's this big corporation that's trying to join up with another big corporation, even though they used to be one big corporation that had to be spilt up because they were too big of a corporation. I'm trying to tie that in with the Death Star thing.""Yeah, well, the bad guys used to be part of the good guys and then they broke off from some emperor and created the Death Star and then started invading and attacking everyone around them ..."Good enough. Sounds almost like a parallel universe: pop science fiction and the current telecommunications wars, which really aren't wars but a series of intergalactic hookups. On Wall Street, they call them mergers. AT&T Corp. wants to merge with SBC Corp., owner of Southwestern Bell Telephone Co., which just bought Pacific Telesis in order to compete with MCI Communications Corp., which is about to be taken over by British Telecommunications, and with Sprint, which is partly owned by the German and French national carriers, which may be taken over by Bell Atlantic Corp. Which is about to merge with Nynex Corp. The long and short of it is that the Telecommunications Act of 1996, designed, among other things, to open competition in local telephone markets, has inadvertently paved a slick new way for the creation of telecommunications monopolies. The talks between AT&T and SBC, for example, could end up in a $50 billion union between the nation's largest long-distance provider and the largest local provider, and would be the biggest corporate merger in the country's history.Though the federal law stipulates that local providers such as Southwestern Bell cannot enter long-distance markets until they give up their local monopolies, that doesn't mean that Southwestern Bell won't try to have its cake and eat it, too. Interestingly enough, when Congress began debating the proposal to deregulate phone companies back in 1995, the Consumer Federation of America (CFA) spoke out against it, because the whole reason Ma Bell was broken up in 1984 was to release the stranglehold it had on telephone markets. The CFA feared that the new act, allowing the Baby Bells and other telecommunications companies into each other's markets, would lead to less competition and higher consumer costs. Supporters of the bill tried to humiliate consumer groups such as the CFA into backing off. James R. Young, vice president and general counsel for Bell Atlantic, for instance, called the CFA's warnings "scare tactics" and posted the following statement: "As Congress prepares to complete the first major overhaul of telecommunications law in 60 years, the Chicken Little of consumer activists, the Consumer Federation of America, is claiming that the sky is falling. The plain fact is that the new telecom bill will lead to more competitors in more markets -- and that means lower prices for consumers." Since Young's prediction looks rather, well, inaccurate now, the [Riverfront Times] thought it would give the CFA a call to get an update on their "scare tactics." Following is an excerpt from a conversation last week with Mark Cooper, CFA's research director, whose concern now is not so much that there will be less competition, but that there will be virtually no competition if mergers such as the one proposed by AT&T and SBC are approved. RFT: Can a merger of this size actually be approved, given the antitrust issues involved?Mark Cooper: It's hard for me to imagine that the antitrust authorities would approve it, but that's what I said about the Bell Atlantic/Nynex merger, so what do I know? You live in Missouri, and AT&T ran around swearing they were going to come in and compete against SBC, and they won't. You've lost local competition. SBC has been swearing they want to get into long distance and compete against AT&T, and they won't. You've lost long-distance competition. SBC represents about a third of the country in the local monopoly, and you've let them merge with the biggest member of the long-distance cartel. How does that promote competition? I don't think it's good for consumers, and I don't think antitrust officials should approve it.What about the argument that they need to be that size in order to compete with the international conglomerates?If they say they need to be that size, that means the largest telecommunications market in the world will be made up of no more than three companies, because if SBC and AT&T merge, then Bell Atlantic/Nynex has to buy MCI, and the other two or three remaining Bells have to join up and buy Sprint, and the second two companies will be too small by their standards. You made a remark to the Wall Street Journal about "the forces of evil unleashed" by the telecom act. What did you mean? Actually the analogy I use -- and it's more and more appropriate the more they try to justify themselves -- is that it's Prussian capitalism a la Bismarck and then later Hitler, too. They looked at the economy and they said we really don't need competition, we just want a cartel made up of two or three huge, integrated companies who will decide what's good for our economy. So you have a flagship company, which AT&T wants to be, and they say we're better off letting the big companies organize the economy and decide what's good for economics. And you know what? That doesn't work. Real competition is better than this kind of little cartel.Why? Won't they need to be that big in order to survive? The problem is not only economic but also political. When you concentrate that much economic power, you create entities that suddenly don't respond to the democratic will of the people. And this is the information superhighway. You look at the telecom act; you know, half of the bill has nothing to do with economics and a great deal to do with universal service and access to the information superhighway. But if we're not going to have local competition, if SBC is going to be the local monopoly for its 30 million lines and then have one long-distance company, and then Bell/Atlantic Nynex will be the monopoly for its local companies, they have much too much economic and political power, and they don't ultimately compete very effectively. Now, the foreign companies, they can't come over. Do you think Nippon telecom is going to build a redundant network here in the U.S. to compete for SBC's local business? No way. So there's no competition to be had and gained domestically by letting them merge. Were you concerned about the SBC/Pacific Telesis merger when it happened? We worry about all of the concentration in the industry. And the PacTel deal was even less of a concern than the Bell Atlantic/Nynex, because there you clearly had the potential for competition. But basically we're losing the people who are most likely to go in and compete for local telephone service. They're disappearing. And the telecom act was supposed to give us more competition, not less.What is your prediction? Will the Justice Department allow the merger? I didn't think they would approve Bell Atlantic/Nynex. I'm not going to make any predictions. I've given you my analysis, and I would hope that they would see it that way, too.


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