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AT&T and BellSouth: Not the Old Ma Bell

Competition protects consumers better than regulation

Lynne Kiesling
March 10, 2006

High-profile mergers typically produce strong reactions, and this week's announced merger between AT&T and BellSouth is no different. AT&T's purchase of Bell South would create a single, more vertically integrated telecommunications provider; to some observers, this increased vertical integration and decreased number of firms means less competition. Importantly, the merged firm would also be multi-product: wired and wireless telephony, data transmission, business services, and ultimately video delivery. These economies of scale and scope are important for all firms to exploit if they want to survive in the modern telecommunications industry, because the economies of scale and scope provide the opportunity to innovate. Instead of reducing competition and moving toward the "old Ma Bell", this merger may actually indicate how robust multi-product and cross-platform competition actually is in telecommunications, and the merger may be an attempt to create more resources for innovation.

As with all previous telecommunications mergers, this proposal provokes concern among "consumer advocates" that the merger would lead to a reduction in the variety of Internet services, and about reduced competition between wired and wireless services because of the loss of a competitor. There's also concern about the "reconstruction of the old Ma Bell."

In 1984, when AT&T was broken up, the competition facing AT&T came from other companies (MCI and Sprint) offering a homogeneous product (long-distance service) and competing primarily on price. In 2006 AT&T and BellSouth face cross-platform competition from other phone companies, from cable companies, and from satellite companies. This cross-platform competition occurs in multiple products; today AT&T offers a wide range of products and services, and thus competes with cable companies, with standalone wireless companies, with standalone Internet providers, and with others in various parts of their product and service line. Thus the comparison between the 1984 AT&T and the 2006 AT&T are nonsensical. Unlike 1984, today's competitive environment is more complex and dynamic — competition today is truly competition for the platform that customers will choose for their voice, data, video, and mobile communications.

But what if the merged AT&T/BellSouth "wins" the competition for the platform and builds substantial market power across the portfolio of products they offer? While such an outcome is possible, it is not that likely to persist because of Schumpeter's perennial gale of creative destruction. Competitive markets reward successful competitors with higher profits, and those higher profits also provide other firms with powerful incentives to invest their capital to compete with those successful competitors. In this case one example of creative destruction is broadband over power lines (BPL). BPL will continue to develop as entrepreneurs seek opportunities to deliver data services to customers and compete head-to-head with telecommunications and cable companies. So even if AT&T can establish substantial market power in multiple data delivery services, just the fact that they can profit from that will induce BPL entrepreneurs to bring their services to market, introducing yet another platform for customers to consider for their multiple data delivery services. If AT&T "wins", it is likely to be a temporary victory, thanks to innovation in other platforms.

Similarly, we should not presume that industry consolidation is necessarily anti-competitive and bad for consumers. Consolidation in and of itself is not anti-competitive, particularly in an environment in which consumers have multiple ways to make phone calls, attach to the Internet, and send and receive data (whether files, music, or video). What matters for competition, and for consumer well-being, is rivalry, not the number of competitors. Even a market with only two firms can be competitive, if those two firms are truly rivals for consumer's business.

Furthermore, firms across these platforms are encroaching on each other's traditional products. Cable companies are offering Internet, data, and phone, and increasingly, phone companies are looking for ways to offer television and video services. Indeed, BellSouth customers would be more likely to have digital video services more quickly if the merger goes forward. This cross-platform competition sounds like a lot of rivalry to me.

In telecom as in all other industries, competition protects consumers better than regulation, because competition characterized by rivalry makes firms focus on delivering the value propositions that customers want at prices they are willing to pay.

Lynne Kiesling is senior lecturer in economics at Northwestern University and blogs at www.knowledgeproblem.com. As a former Reason scholar, many of her columns and policy studies are available here. Reason's work on the AT&T-BellSouth merger is here.



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