Commentary

A Call That Needs To Go Through… MCI WorldCom-Sprint

By Solveig Singleton
This article was originally published by Bridge News.
On Oct. 5, William Kennard, chairman of the Federal Communications Commission, greeted the news of the planned $115 billion merger of MCI WorldCom and Sprint with skepticism.

“Competition has produced a price war in the long distance market,” Kennard said. “This merger appears to be a surrender. How can this be good for consumers?”

Regulators and consumer groups can relax. Mergers let companies cut costs and offer new services in the United States and around the world. Regulatory restrictions on telecom mergers protect the status quo, not consumers.

Why have there been so many telecommunication mergers in the last five years?

The Telecommunications Act, passed by Congress in 1996, broke down some of the obsolete legal barriers between local phone service, long distance phone service and cable television.

Regulation had frozen the industry as it was in 1984, after the breakup of Ma Bell, the old AT&T before it was dismantled by court order. The pace of competition and innovation was glacial. It’s only natural that a regulatory thaw would bring big changes.

U.S. companies are competing in a global marketplace with giants like Germany’s Deutsche Telekom and Japan’s NTT.

Until the recent spate of mergers, AT&T was almost alone among U.S. companies as top global players. Now that Bell Atlantic and GTE have merged, the newly formed company ranks among the largest global players. So will the just-approved merger of SBC Communications and Ameritech. So will MCI and Sprint.

These companies are now big enough to begin to invest the trillions of dollars it will take to build global communication networks.

Why should we want to preserve a world of limited competition among the largest players? Mergers mean one company where before there were two. Does that harm competition? Not necessarily. Competition can work even among just a few companies in a market.

Early in the history of the automobile, there were many small car companies. Over time, the industry consolidated.

Yet competition in the auto industry is hardly suffering, even though there are few new entrants in the car business compared to telecommunications. Ford, General Motors and Chrysler compete vigorously with Toyota, Isuzu, Nissan and others.

The greatest threat to competition came from regulators, who tried for years to protect domestic automakers from foreign competitors. The outlook for competition in long distance phone service is even more promising than in the automobile industry.

Some commentators believe MCI and Sprint alone were never really big enough to challenge AT&T’s large market share in the long distance business. Perhaps only now will we see real competition.

Better yet, former Bell companies are poised to enter long distance markets, as intended by the telecommunications legislation. The only holdup is the FCC review process.

The Internet continues to exert downward pressure on phone prices. John Chambers, chief executive of Cisco Systems in San Jose, Calif., is fond of predicting that eventually “voice will be free,” meaning that companies will kick in free telephone service when you buy Internet or data services.

Meanwhile, the old wire-based networks of copper and cable are being shaken up by the new wireless entrants.

Over the past few years, many old-fashioned wire-based companies have grown on average only very slowly, with rates of growth ranging from zero to 7 percent.

Meanwhile, wireless technology is growing by leaps and bounds. Through wireless and mergers, the tidy geographic territories carved out by regulators for local phone monopolies are breaking down. Every surprise merger shakes up those monopolies a little more.

So what do mergers mean for prices? Merged companies can take their cost savings and invest them in new services or networks, benefiting consumers in the long run. Or they can hold prices the same and increase service quality.

No one knows if a merged MCI WorldCom-Sprint would lower prices in the immediate future, but given the competitive picture, they’ll hardly be able to raise them.

The FCC’s ponderous and uncertain merger review process should be abandoned. Forcing U.S. phone companies to stay small hurts global competition.

The best route to healthy national competition is to free local phone companies to compete in long distance. Regulatory uncertainty, like the sort displayed by the FCC, chills investment and adds risk to long-term business plans.

Consumers do not need protection from mergers, the economic benefits of which are well-recognized. Holding back such changes simply hold back the ongoing telecommunications revolution.

Solveig Singleton is the director of information studies at the Cato Institute and the co-editor ofRegulators’ Revenge.