Commentary

Merging for Competition

By Peter J. Ferrara
This article appeared in the Washington Times, November 8, 1999.
The biggest merger deal in world history was announced last October, with MCI WorldCom agreeing to purchase Sprint for $129 billion. Before consummation, however, the deal must receive regulatory approvals and avoid an antitrust challenge.

Industrial Age minds are already insisting that such a megamerger could not possibly be approved. MCI WorldCom and Sprint are, respectively, the second and third largest long-distance telephone-service providers. If they merged, the combined company would hold 35 percent of the long-distance telephone market. With market leader AT&T at about 45 percent, the top two long-distance companies would hold 80 percent of the business.

Under blinkered, one-dimensional anti-trust analysis, such a big merger in a market already so heavily concentrated could not be allowed. But this simplistic thinking misses the real, tumultuous forces of competition at work.

First of all, even with the MCI WorldCom-Sprint merger, the long-distance telephone business would remain fiercely competitive. More than 400 companies still compete to provide such service. While these companies are small now compared to the market leaders, they provide competitive pressure, forcing the bigger companies to keep driving prices down and improving service. If the bigger companies slip, these smaller competitors are ready to bite into their customer base.

Then there is the huge potential competition from other large companies in the telecommunications industry. The four remaining Baby Bells that provide local phone service after the breakup of AT&T in the early 1980s are clamoring for regulatory approval to get into the long-distance business. Instead of harassing the MCI WorldCom-Sprint merger, regulators worried about long-distance competition should push the local phone monopolies to open their markets and lower access charges, which would remove artificial cost barriers to potential local phone providers, big and small.

In addition, foreign giants like Deutsche Telecom are also maneuvering to get into the U.S. long-distance market. Under new international rules administered by the World Trade Organization, these companies must now be allowed into the United States if they desire.

But even this is only a small part of the big picture. The truth is there is no long-distance telephone market today for any one or two companies to monopolize. What is emerging now is a global telecommunications market covering the full range of communications services - local phone, long-distance phone, wireless phone, Internet and cable. The larger companies are now organizing themselves to be able to each provide this full range of services in fierce competition with each other.

This explains the recent wave of megamergers in the telecommunications market and why those mergers are pro-competitive. SBC Communications has recently bought two other former Baby Bells - Pacific Bell and Ameritech. Bell Atlantic merged with former Baby Bell Nynex, and is now merging with GTE. GTE in turn recently acquired long-distance Internet provider BBN Corp. AT&T, meanwhile, purchased cable giant TCI and is now merging with Media One. Another Baby Bell, U.S. West, recently merged with Qwest to be able to provide long-distance and Internet services.

With these mergers, all of these companies are crossing over into each other’s markets and competing across the whole spectrum of telecommunications, nationally or at least in broad geographic areas. The MCI WorldCom/Sprint merger simply creates another major competitor able to go head to head with these other big boys, and large foreign giants as well, in the global telecommunications market. In particular, MCI WorldCom-Sprint would be able to compete effectively with AT&T and the emerging Baby Bells across the board. That is why the merger is really pro-competitive, not anti-competitive.

As Peter Huber writes in The Wall Street Journal on the wave of major telecommunications mergers, “Viewed in isolation, each one of these transactions might raise some competitive concerns. Viewed together, none of them really do.”

Upon hearing of the MCI WorldCom-Sprint merger, FCC Chairman William Kennard opined, “Competition has produced a price war in the long-distance market. This merger appears to be a surrender. How can this be good for consumers?”

But the competition that produced the price war was not between AT&T, MCI WorldCom and Sprint. The battle between those three has been going on for more than 10 years. The source of the recent long-distance price declines has been the competitive threat from Internet-based digital telephony, in the broader telecommunications market. Mr. Huber again writes, “At this point, AT&T must fear Internet-based companies like Qwest and BBN a lot more than it fears companies like Sprint.”

With this merger, MCI WorldCom and Sprint are retooling to provide more effective competition in this broader marketplace. That is why the merger is good for consumers.

Peter J. Ferrara is an associate policy analyst at Cato and general counsel and chief economist at Americans for Tax Reform.