Merger Memories

R. Hewitt Pate, head of the Justice Department’s antitrust division, said this week that he is leaving his post. This gives the Bush administration an opportunity to appoint someone who will ignore empty political grandstanding and make forward-looking decisions on two recent telecom mergers.

Both the SBC/AT&T and Verizon/MCI mergers will need a nod of approval from the Department of Justice (DOJ) before being finalized, but already consumer groups are objecting. For instance, in a press release this week, both Consumers Union (CU) and the Consumer Federation of America (CFA) said they opposed the Verizon/MCI merger because of predicted harm to competition and prices for consumers.

Errant Predictions

“If not rejected or dramatically altered, these mergers could set the marketplace back to a world more akin to deregulated monopoly than competition,” said Gene Kimmelman, CU Senior Director of Public Policy. While this type of rhetoric is meant to be dramatic, it is clearly knee-jerk, recycled, and wrong.

Indeed, these groups have a long history of making predictions that haven’t come true, and if their advice had been followed, it could have been disastrous for consumers — the very constituency they claim to represent. In 1998, when Bell Atlantic and GTE proposed their merger, both CU and CFA opposed the marriage.

In a joint filing on November 23, 1998, the two groups said “The Telecom Act’s fundamental premise that breaking down legal barriers to market entry would unleash a barrage of facilities-based competition in which cable companies used their plant to attack the local phone market and local phone companies used their networks to attack cable has proven wrong.”

Perhaps in 1998 it was difficult for professional activists to see how the market was rapidly evolving, but those in the industry knew, and it is obvious today that cable and telecom companies are fiercely competing in both the telecom and television spaces.Another example involves the AOL Time Warner merger.

Competitive Moves

On April 26, 2000, CU and CFA filed a petition with two other groups opposing the AOL/Time Warner merger. “By focusing the attention of the largest narrowband ISP on cable modem service as the delivery medium for the broadband Internet, [the merger] dramatically reduces the chance that telephone based DSL service will become a significant competitor for high-speed Internet service in the residential sector,” they said.Fast forward a few years, and see how that prediction also failed to come true.

While cable holds slightly more of the market than DSL today, DSL providers have undercut cable providers on pricing, and telco companies like Verizon are pushing hard to deploy fiber all over the country so that they can offer customers speeds that are far faster than either cable or DSL. But Verizon can only make these competitive moves if it is allowed to make investments unhindered by government regulations and conditions. Groups like CU and CFA seem to like government restrictions.

In 1999, when AT&T and MediaOne were merging, CU argued that if the marriage were to go through it “would create a telecommunications behemoth that would dominate cable, video programming, and broadband markets.” Of course, this prediction couldn’t have been further off. Indeed, the flailing AT&T is currently hopeful that regulators will allow it to be merged with the stronger SBC.

CU also warned that the “entity could use its massive market power to deprive the public of its First Amendment right to express, and to receive, political, social, and artistic expression.”

Choosing Wisely

Such fevered rhetoric perhaps makes for good theater, but if regulators had taken it seriously consumers would have suffered because of artificially created inflexibility and inefficiencies. The marketplace is difficult to predict, making central planning impossible and government dictates harmful. Consider another 1998 prediction from CU and CFA that the merger of SBC and Ameritech would squash cell phone competition.

“Cellular competition will be eliminated,” the groups wrote in reply comments to the FCC on November 16, 1998. It’s hard to keep a straight face when reading that prediction. But it is precisely this track record that regulators and the public should examine when it comes to these groups’ comments on the SBC/AT&T and Verizon/MCI mergers.

Competition in the communications space is hot. And until it cools down, regulators have a duty to stand back and let entrepreneurs duke it out to see who can offer the best services at the best price in the best combination and in the best aesthetic manner. To act any differently would be to rob Americans of the creativity, energy, and benefits of a dynamic marketplace.

President Bush, meanwhile, should choose Mr. Pate’s replacement at the DOJ based on his or her ability for sound economic thinking. A good memory would also help.

Sonia Arrison, a TechNewsWorld columnist, is director of Technology Studies at the California-based Pacific Research Institute.

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