|A GOOD CONNECTION?|
May 11, 1998
In what would be the second-largest merger in history, SBC Communications Inc. has agreed to buy Ameritech Corporation. The new company, called SBC, would control one-third of the nation's phone wires. Following a background report, Jim Lehrer and guests discuss the deal and what it means for consumers.
JIM LEHRER: More now from Gene Kimmelman, Washington co-director of Consumers Union, publisher of Consumer Reports; Howard Anderson, president of The Yankee Group, a telecommunications market analysis firm based in Boston; and Peter Temin, economic historian at MIT, author of the 1987 book The Fall of the Bell System. Mr. Anderson, why does this merger make sense for these two companies?
|Range, efficiency and reach.|
HOWARD ANDERSON, The Yankee Group: It makes sense for three reasons: It gives us joint company range from the Canadian border to the Mexican border; it gives them efficiencies in terms of lower cost; and it gives them a reach that gets to 1/3 of the U.S. telephones.
JIM LEHRER: And is there any advantage to either one of them? I mean, does one of them bring special strengths to the merger beyond reach, beyond regional reach?
HOWARD ANDERSON: Jim, no, they don't. They essentially are two companies that own a geographic area. Other than that, they look very similar.
JIM LEHRER: All right. Mr. Kimmelman, does this pose a threat, or a potential harm, to the consumer?
GENE KIMMELMAN, Consumers Union: Absolutely. These are two local telephone monopolies that rather than going after each other, or going after companies and other businesses, are joining their monopolies together in markets that were supposed to be broken open to competition, with cable companies, long distance companies coming in and offering consumers choice. That hasn't happened yet. And while we're waiting for that competition to unfold, it's possible the government may let these monopolies reinforce their existing dominance in the market. We oppose that, and we'll ask the Justice Department and the federal regulators to block this.
JIM LEHRER: If they already have dominance in each of their areas, how does merging with a company outside their area increase their dominance in the areas?
GENE KIMMELMAN: As Congress said explicitly in this new law, it wanted more competition, particularly in the local market. When no one has been able to break that stranglehold yet, getting broader geographic power, bigger customer base will deter others from even trying to enter that market. So it's contrary to the design of competition that Congress laid out for the American people.
JIM LEHRER: Mr. Anderson, do you agree with that, this is counter-competitive, to use a phrase?
HOWARD ANDERSON: Gene has opposed every merger since Ben & Jerry. The real answer is there's a hundred competitive local exchange carriers that are so far aiming at the business market that are giving them fits left and right. There's an enormous amount of competition, but Gene is right that the act was aimed at increasing local competition.
JIM LEHRER: Prof. Temin, was this inevitable by the '96 Telecommunications Act? A lot of people have said it was made inevitable. These companies were broken up as the result of break-up of AT&T, but the Telecommunication Act of '96 made it advantageous to come back together, do you agree?
|Breaking up Ma Bell.|
PETER TEMIN, MIT: Well, the telephone system was broken up in the 80's, separating long distance and local, but the break-up did not specify how many local companies there had to be. That was a choice of the old integrated AT&T. They selected seven, thinking that each one would be large enough not to be taken over. That, clearly, is not true in the 1990's. But there's nothing inconsistent with this, with the original decree. Now, the 1996 Act wanted to encourage competition. It's unlikely that we would ever have hundreds of equally sized firms competing. Rather, we should always expect to have a few dominant firms with a competitive fringe, niche players, other kinds of people, and this really affects the identity of who will come out on top, rather than how many companies will come out on top.
JIM LEHRER: There's nothing specific--your reading then of the '96 Act and the breakup of AT&T--there was no intent to prevent this kind of thing that happened today from happening, is that correct?
PETER TEMIN: No. I don't think there was any intent. Perhaps there was a vision in someone's mind that this would be competition like the competition for bread in the supermarket, but I don't think anybody who's familiar with the industry thought that that was anything that would be realistic. More realistic would be something like is happening now in airlines, where you have say half a dozen major players and a bunch of fringe operators.
JIM LEHRER: Now, you saw it differently, Mr. Kimmelman?
GENE KIMMELMAN: Well, the problem here is that, unlike the airlines, where we had some competition in multiple airline-serving communities before we deregulated, in local telephony everyone had one phone company, still has one phone company. The hundreds of fringe players are attracting 1 or 2 percent of the market so far. So we're seeing consolidation before we ever got the broad explosion of competition as we had had in airlines. We haven't opposed every merger, and we're not worried about the size of the company. The problem is the core market is a monopoly, local telephony. And most consumers have and will only have one choice. These companies have a track record of wanting to substantially increase local telephone rates. If consumers don't have a choice of another company, they face a risk of significant increases in that market.
JIM LEHRER: Do you see the risk the same, Professor, Professor Temin?
PETER TEMIN: Well, I think that, as Mr. Anderson said, that the merger may well reduce cost, but as Mr. Kimmelman said, it will also increase market power so that while prices may go down, they won't go down as far as the costs go down.
JIM LEHRER: So they're both right?
PETER TEMIN: In a sense, yes.
JIM LEHRER: Mr. Anderson, do you see more of these kinds of things happening? I don't mean mergers in the world generally, but in this particular business. Are more of these old Bell companies going to get together?
HOWARD ANDERSON: No I think we're going to stop at seven. And that seven will also include AT&T, WorldCom, and possibly Sprint. What we will see is that local phone rates will probably go up 2 or 3 percent; long distance phone rates will probably go down 5 or 6 percent; cable rates will probably go up 5 or 6 percent over the next year. The cable company may be a provider in some of these markets and offer at least one form of the local competition.
JIM LEHRER: That was the whole intent of the '96 bill, was it not, that the cable companies were supposed to get in the telephone business and the telephone companies were supposed to get in the cable business, and that would be the main competitors? That hasn't happened, right?
HOWARD ANDERSON: Starting to happen, and you're starting to see the cable companies offering, for example, Internet access at high speed. A few of them like Cox and Media One, which is owned by U.S. West, are beginning to provide, albeit small, Jim, measures of local competition.
JIM LEHRER: Prof. Temin, how do you see the future in terms of more of these kinds of--more--this particular kind of get-togethers?
PETER TEMIN: Yes. Well, I think there will be, but, as Mr. Anderson mentioned, Media One is owned by a telephone company, so that the question about how much competition there is for any person is different from the question of how many large companies there will be in the industry.
JIM LEHRER: Well, to that specific question of how much competition there is for an individual who wants to have a telephone service in his or her home, that's not going to change much, right?
|Who will benefit?|
PETER TEMIN: Well, what is going to happen is increasingly for the business customer, for the high end customer who wants lots of services, high speed, wide band access, there will be more competition. For the person just using the telephone, what we call POTS, Plain Old Telephone Service, probably going to be a long way before there's a lot of competition.
JIM LEHRER: And do you agree, Prof. Temin, that that's going to result in maybe--well, you heard what Mr. Anderson just said in terms of increased prices. Would your formula be about the same?
PETER TEMIN: Well, I think there might even be more change, but that is independent of this merger. That is a long process of what is called rate re-balancing, to try to get rates closer to costs. And, for that, local rates would have to go up; long distance rates would go down. Overall telephone bills for people would probably not change very much.
JIM LEHRER: Mr. Kimmelman, what do you see in the future?
GENE KIMMELMAN: Well, I wish the rate increases were as small as they suggest. I'm concerned the local rates will skyrocket--
JIM LEHRER: Skyrocket. Like what?
GENE KIMMELMAN: Up to doubling. That's what many of the phone companies--
JIM LEHRER: You think local phone rates will double?
GENE KIMMELMAN: If there's not ongoing, vigilant regulation, that's what the local companies have asked for, including a company like SBC over time. Long distance will come down. The distribution is the danger here. More than half the public will come out worse off because they will not make up in long distance reductions what they pay in increased local rates. Cable rates have been skyrocketing. I'm fearful that with this deregulation has gone too far before we had real competition and the consumer is being harmed across the board.
JIM LEHRER: What do you think should be done about this specific merger, Mr. Kimmelman?
GENE KIMMELMAN: We think this should be stopped, but what we really want is Congress to establish this policy of more local competition, competition across the board. We want Congress to basically take a look at this and revisit the issue. If we're going to have local phone monopolies for most consumers, Congress should say so and say they should be regulated to hold price down and ensure quality. If they really want competition, they have to go back and do surgery on their law and do more to truly break open these local monopolies, rather than allowing them to combine and possibly hold out competitors.
JIM LEHRER: Mr. Anderson, how do you see that?
HOWARD ANDERSON: I see much competition coming quickly. There is an enormous amount of capital available. We figure $50 billion to build competitive services. Now, 16 percent of the U.S. household are TAF's, Technically Advanced Families. They will benefit immediately. There's another 32 million that are near TAF's. They will benefit--
JIM LEHRER: I've never heard that phrase before. What are you saying?
HOWARD ANDERSON: Technologically Advanced Families.
JIM LEHRER: Okay. And that means what--they got a computer, and a telephone, and what else have they got, cable?
HOWARD ANDERSON: They probably cable. They may even have more than one computer. There's about 32 million that may--may have advantage if their long distance bill is $28/$29 a month, and then there's about 50 million households that are not TAF's that will make fewer phone calls and will probably be disadvantaged in terms of rate increase.
JIM LEHRER: What do you think of Mr. Kimmelman's idea, that the Congress ought to get back into this? In other words, if they're going to have monopolies, these monopolies ought to be treated as monopolies and re-regulated to some degree?
HOWARD ANDERSON: Disagree. I think that competition is coming because there is exceptional opportunity. For example, the amount of e-mail in this country will this year surpass the amount of First Class mail. New and innovative services are coming, and those services will bring about new competitors.
JIM LEHRER: Prof. Temin, you studied this issue before you wrote your book in 1987. You studied it since. What do you think all of this--do you think the government has anything to do right now? Should they watch it, or do you have a view on it?
|"I think the government can't stuff the genie back in the bottle."|
PETER TEMIN: Well, I think the government can't stuff the genie back in the bottle. Competition is here to stay. The question is what competition will look like. And it seems to me that to try to reopen the question of telecommunications with Congress is going to lead to a lot of disagreements, a lot of controversy, possibly not any benefit. It would be much better advised to use the antitrust laws to try to maintain the competition in this area.
JIM LEHRER: How do you feel about that, Mr. Kimmelman?
GENE KIMMELMAN: We're all for it. We're fearful that the antitrust people are one merger too late. They already allowed contiguous Bell Atlantic and NYNEX to join together. We're asking them to block this one. But I'm fearful the trend has already started. And as everyone has agreed, more than half the public comes out worse off with rate increases. It seems to me ultimately Congress must be responsible and accountable to the public for having promised more competition than is being delivered. Antitrust is a good stop gap measure. We're all for blocking this merger and asking for more aggressive enforcement. It hasn't been forthcoming in the communications area, but I'm afraid it's a little too little too late.
JIM LEHRER: Too little too late, Prof. Temin?
PETER TEMIN: I don't think that I was quoted as saying that half the people would be disadvantaged. I don't think that. I think that most people will benefit. Costs are going down. Services are increasing, the variety of services. But profits also will go up.
JIM LEHRER: Your final comment on this, Mr. Anderson?
HOWARD ANDERSON: I think what we need from Congress is a period of benign neglect.
JIM LEHRER: Well, we will end our attention to this subject on that point. Thank you all three very much.