Merging for Competition

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 couldnot possibly be approved. MCI WorldCom and Sprint are, respectively, thesecond and third largest long-distance telephone-service providers. If they merged,the combined company would hold 35 percent of the long-distance telephonemarket. With market leader AT&T at about 45 percent, the top two long-distancecompanies would hold 80 percent of the business.

Under blinkered, one-dimensional anti-trust analysis, such a big mergerin a market already so heavily concentrated could not be allowed. But thissimplistic thinking misses the real, tumultuous forces of competition atwork.

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

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

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

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

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

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

As Peter Huber writes in The Wall Street Journal on the wave of majortelecommunications mergers, "Viewed in isolation, each one of thesetransactions might raise some competitive concerns. Viewed together, none of themreally do."

Upon hearing of the MCI WorldCom-Sprint merger, FCC Chairman WilliamKennard 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 formore than 10 years. The source of the recent long-distance price declines hasbeen the competitive threat from Internet-based digital telephony, in thebroader telecommunications market. Mr. Huber again writes, "At this point, AT&Tmust 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 mergeris good for consumers.