AT&T, BellSouth Merger Boosts Cable TV Competition

Customers want cheap, bundled Internet, phone and cable services

The predictable uproar about the proposed $67-billion AT&T-BellSouth merger has begun.

“The bottom line for consumers is that you can kiss goodbye the declining cell phone and long distance prices that people have become used to,” said Gene Kimmelman, the vice president for federal policy at the Consumers Union, who, has been making the same end-is-near prediction about competition and low prices for the past 10 years.

The fallacy is that consumer advocates like Kimmelman and their pro-regulatory allies in Congress and the state houses want us to believe that the phone companies are foisting consolidation on an unwilling public, when actually it’s the other way around. Consumer behavior is stubbornly resisting the compartmentalized regime that regulators want to foist on the industry.

Their trust-busting argument is that an AT&T-BellSouth tie-up puts control of too many services – local, long-distance, wireless, Internet – in too few hands. This and the dominance the incumbent phone companies have in single-line dial tone, they say, are reasons to block the merger.

But policies that compartmentalize services obstruct a key aspect of broadband competition consumers clearly want: services that have greater value because they are integrated. With its narrow focus on individual service silos of local, long distance and wireless, the anti-merger side is looking for competition in all the wrong places.

Consumers have shown a preference for bundled local and long distance, as evidenced by their embrace of flat rate such plans offered by the wireless companies. Likewise, the flat-rate approach adopted by the Voice over Internet Protocol companies such as Vonage was far from an obstacle to sales. AT&T and Verizon are finding success, not resistance, with plans that combine wireline, wireless and Internet services, so much so that business analysts fault cable companies for their lack of a wireless play.

Meanwhile, conventional dial tone service is a declining market. AT&T’s and BellSouth’s landline customer bases declined by six percent last year, part of five-year-old trend that has seen millions of residential users hang up their wireline phones for good.

A merged AT&T-BellSouth can’t corner this market because there’s no market to exploit. Even combined, they could not stem local and long distance revenue shrinkage. Concern over consolidation of dial tone lines is no reason to block this merger. It’s like getting all worked up about someone getting a monopoly on the manufacture of manual typewriters.

On the contrary, instead of being anticompetitive, the AT&T-BellSouth merger stands to boost competition exactly where it’s needed-in multi-channel video services, commonly known as cable TV.

For all the fear-mongering about re-creating a monopoly phone service, it is cable TV that remains the most monopolistic service in most of our communities. The anti-merger side cries that phone company consolidation will leave only two integrated broadband service providers in each local market. Well right now, most places have just one.

Cable monopolies are legally protected by local franchise agreements. It is much more difficult for a phone company to enter the cable business than for a cable company to enter launch phone service. Cable companies need no permission. In many cases, they aren’t even assessed the sizable taxes and fees phone companies must pay. Phone companies, on the other hand, under the current regime, must go from town to town, negotiating franchise approvals that take an average of 12 to 18 months.

For various reasons, some of their own making, the phone companies have been late to video services. Nonetheless, for the first time in their history, maybe because they’ve realized their future lies in broadband, they have taken the offensive.

Verizon and AT&T have begun to roll out triple play services – phone, Internet and video. Wherever the phone companies have entered the market with a video service, the competing cable company has dropped its prices.

After Verizon began its FiOS multi-channel video services in Keller, Tex., in late 2005, for as low as $43.95 a month, Charter Communications, the Keller cable franchisee, announced a cable-Internet package for $50 a month, It had previously charged $68.99 a month for the TV package alone.

Elsewhere, competition sparked service improvements and greater customer value. In June, as Verizon was rolling out FiOS some of Comcast’s markets, Comcast boosted the download speed of its Internet service again from 4 to 6 megabits per second (Mb/s) for its basic plan and from 6 to 8 Mb/s for its premium service without raising the price.

With the acquisition, AT&T brings BellSouth, which had no video strategy, into its broadband services picture. In BellSouth’s region, this means that cable competition will arrive that much sooner. For all of AT&T’s customers, it means more price and service competition because, with its larger footprint, the company can negotiate better deals on equipment, software and programming.

With new technology and tighter integration of video, phone and Internet services, they stand to give the cable companies their biggest competitive challenge in terms of pricing and value. This is where consumers – in spite of two decades of counterproductive policy – are pushing the market. Regulators would serve us all if they would allow these market trends to move forward without interfering.

Steven Titch is a policy analyst at Reason Foundation. His March 13, 2006 op-ed on the AT&T-BellSouth merger for Investor’s Business Daily is here. An archive of Titch’s work is here and Reason’s telecom policy research and commentary is here.