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Jury is 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 litter?

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 customers.

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 elotterman@pioneerpress.com.

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