out on telecom consolidation
By Edward Lotterman
St Paul Pioneer Press
Sunday, March 12, 2006
We have come full circle in telecommunications. A
half-century ago, a monolithic Bell system dominated U.S.
telephone service. Antitrust rulings in the 1980s and new
technology demolished that monopoly. After many years of
apparently freewheeling competition in telephony — and
enormous technological innovation — the real cost of
telephoning has fallen to historic lows.
The industry seems to be reconsolidating, however, as large
firms absorb one-time competitors. This week's announced
merger of AT&T with BellSouth is just the latest example of
this trend. We have substantially fewer telephone companies
than a decade ago. Will this help or harm the general
public? Opinion is mixed.
Minnesotans, served by Qwest, the smallest of the Baby
Bells, face another question: Is it better to be served by
a muscle-bound giant or by the anemic runt of the telecom
The key issue is whether reconsolidation will reduce
competition and allow the remaining few players to exact
higher rates from customers? All other things being equal,
fewer competitors usually mean higher prices.
The Justice Department will review the merger for its
antitrust implications. Skeptics may worry, quite
reasonably, that enforcing competition is not a high
priority on the Bush administration's economic agenda. But
technology ultimately may be more important in answering
this question than regulatory review.
In the days of copper lines, human operators and
electro-mechanical switches, telephone service constituted
what economists called a "natural monopoly." The most
efficient business was one that could cover the whole
market. Any existing company could drive off potential
competitors. The logical response was government regulation
of rates and service.
When microwaves replaced copper for long-distance calls,
that natural monopoly began to collapse. The breakup of
AT&T two decades ago came less from antitrust zeal than from
recognition of the fact that new long-distance companies
like MCI would cream off the Bell system's most lucrative
Telephony had become what economist Bill Baumol called a
"contestable market." Existing businesses no longer were in
an impregnable position from which to drive off potential
competitors. That probably is still true. Size confers
little technological advantage, and as IBM and General
Motors have demonstrated, corporate giants can sometimes be
clumsy and muscle-bound.
Yes, the size of the new AT&T may discourage potential
competitors. We thought the same thing about the old AT&T
40 years ago. MCI and Sprint succeeded in challenging the
old monopoly, however.
Technological change continues apace. Innovations like
voice over Internet protocol (VOIP) and digital telephony
may change the telecommunications industry even more than
did microwaves or optical fibers. Large size no longer has
the deterrent effect it once did. But the jury will be out
for quite a while on all of this.
St. Paul economist and
writer Edward Lotterman can be reached at