The Hindu Business Line : US telecom sector back on mega merger mode

The US Government is reviewing one of the largest telecommunications mergers in history, the $70-billion deal between AT&T and BellSouth. The deal, most likely to be approved, will sacrifice public interest at the altar of political expediency, sSUMIT K. MAJUMDAR.

At the turn of the 20th century in the United States a competitive telecommunications industry, consisting of several firms, consolidated to eventually become Ma Bell. That monopoly was eventually broken up, in 1984, because the weight of the inherent associated negative consequences was simply too much for the American consumer.

In the 21st century the cycle has re-appeared. The new consolidation has taken the form of mega-mergers, primarily among local exchange carriers that provide the fundamental infrastructure backbone, and also among firms in the long-distance segment that have just lost the economic rationale to remain as standalone entities. The question is what will happen as the process repeats itself today.

What is Happening Today?

The US Government, via its Federal Communications Commission (FCC), is reviewing one of the largest telecommunications mergers in history, the $70-billion deal between two local operators: AT&T and BellSouth. Initially, the US had led the pack in global telecommunications sector reforms by breaking up the erstwhile AT&T monopoly. Since then, it has been exporting the reforms policy framework worldwide, extolling the virtues of dismantling old PT&T monopolies. Yet, quietly mergers have been happening in the telecom sector. In the beginning, GTE and United Telephones acquired pieces of Continental and Central Telephones. Then Sprint bought United. In the mega-deals of the mid-1990s, SBC acquired Pacific Telesis, and Ameritech merged with AT&T, the long-distance carrier, and took the AT&T name. In a third family affair, Bell Atlantic acquired NYNEX and GTE, renamed itself Verizon and then acquired the long- distance carrier MCI.

Now AT&T and BellSouth are to ostensibly merge. If the deal is approved, the combined company will have two-thirds of the US population on call. Many of these will have no other choice of provider for local telephone and Internet service.

Soon, just one company, the combined AT&T-BellSouth entity, will have the ability to control the communications facilities of consumers from the Atlantic to the Pacific and from the Canadian to the Mexican border. Among the larger cities of America, Atlanta, Chicago, Cleveland, Columbus, Dallas, Detroit, Houston, Las Vegas, Los Angeles, Kansas City, Miami, Milwaukee, New Orleans, Saint Louis, San Diego and San Francisco will all be in the territory of the combined entity. It is as if the pro-competition telecommunications reforms never happened in the USat all two decades ago.

In theory, any firm holding more than half the market enjoys the benefits of monopoly. For effective competition, there should be at least five comparable sized players, there should be no single-firm dominance, and reasonably free entry into and among all segments of the market. The AT&T-BellSouth merger will mean that the spectre of a telecommunications monopoly will raise its head once again in the US.

Why Mergers

Merger advocates claim that telecom mergers enhance efficiency and improve the technological infrastructure and, ultimately, customers gain.

For example, vis-à-vis the deal under the scanner, an AT&T spokesman, Mr Robert W. Quinn, recently told the FCC that AT&T's pending merger with BellSouth "will decidedly advance the public interest by bringing together two companies with complementary assets and strengths, thereby creating a more efficient, more innovative company capable of accelerating and expanding the delivery of high quality advanced technologies and services to all classes of customers, large and small."

The potential efficiency benefits from mergers and acquisitions include operating efficiencies that arise from economies of scale, economies of scope, improved resource allocation, moving to alternative less expensive technologies or asset configurations, improved use of expertise, focus on core skills, more effective combination of assets and reductions in transaction costs. Mergers are often the quickest, cheapest, or only way to attain these benefits. One cost-saving for communications firms is that from access charges. Access to more and better network assets, liquid resources and technical abilities is another factor for larger carriers seeking to expand their networks. Such acquisitions aim to integrate the network infrastructure and content of the merging companies besides enhancing the ability to deploye advanced technologies.

The other side of the coin is that the major reason for mergers is the acquisition of market power. In combining resources and customers, firms hope to create market power by eliminating actual or potential competition. The late Nobel Laureate, George Stigler, in 1950, argued that market expansion might have been a primary motivation for many of the mergers and acquisitions during the last quarter of the 19th century and the first half of the 20th century.

Two former doctoral student, Rabih Moussawi and Ulku Yaycicegli, at the University of Texas at Dallas, and the author carried out a systematic and comprehensive investigation of real-world data from every US local telephone company merger between 1998 and 2001, specifically to find out whether these mergers contributed to economic progress and customer welfare. Did mergers help consumers? Did the mergers have positive consequences that would further the economic progress of the US ? What was the true picture?

Contrary to the expectations of merger mongers, hard evidence failed to show efficiency gains or improved operating performance.

In fact, after mergers one found the opposite of synergy; operating efficiencies, in fact, consistently showed marked declines. Infrastructure upgrades and investment levels in new technology declined too. Post-merger sales failed to grow. Instead, the modest post-merger gains in economic performance reported by some telcos were largely due to increased market power, or, in other words, their ability to raise prices.

The analysis established that the generally espoused reasons for mergers to occur and be approved, that efficiencies would be enhanced, that the firms would become more technologically progressive and that competition would not be harmed, were not found to be valid.

Thus, all of the telecommunications mergers had actually hurt the American consumer. The mergers to date had compromised the benefits to the consumer promised by the Telecommunications Act of 1996, a legislative landmark in recent times, to the point of permanent impairment of consumer welfare.

In view of this crucial overall finding, it is recommended that the proposed merger between AT&T and BellSouth be not approved, irrespective of any conditions that might be imposed, as this merger was unlikely to endanger efficiencies, it was likely to retard technological progressiveness of the merged company, and thereby of much of the US local network, and it was also likely to harm competition. The proposed merger would not at all be in the public interest.

What Now for US?

If the merger goes through, it is highly unlikely that technology deployment will be speeded up or that productivity will rise. In fact, quite the opposite are likely to happen.

The US, once the world's leader in the reach and sophistication of its telecommunications network, is now a confirmed laggard along all critical dimensions of network deployment. Its decline in the ranks of those possessing high quality infrastructure in large quantities will be speeded up. Its eclipse as a player of any consequence in global markets is, therefore, pending since today's world economy is a well-connected and communications-rich economy.

Merger decision process

Today, despite all this hard evidence that is in circulation among all those who are interested, the merger decision process, the AT&T-BellSouth merger hangs by a single FCC Commissioner's vote. Already voting has twice resulted in a two-two tie among the FCC Commissioners.

Yet, purely for political reasons, the AT&T-BellSouth merger may eventually be approved by the FCC, even if reason and all the evidence says No! Once again, public interest will be sacrificed at the altar of political expediency in the US. Policy makers who approve the AT&T-BellSouth merger are willing to take a bet that the welfare of the American consumer will not be severely compromised in perpetuity.

(The author is Professor of Technology Strategy, University of Texas at Dallas. He can be contacted at majumdar@utdallas.edu)

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