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Basic Biittner : Haven't We Been Here Before?

Thursday, April 14, 2011

For much of its history, AT&T and its Bell System functioned as a legally sanctioned, regulated monopoly.

The changes in telecommunications during the 1960s and 1970s eventually led to an antitrust suit by the U.S. government against AT&T. The suit began in 1974, and was settled in January 1982, when AT&T agreed to divest itself of the wholly - owned Bell operating companies that provided local exchange service. This would, the government believed, separate those parts of AT&T (the local exchanges), where the natural monopoly argument was still seen as valid, from those parts (long distance, manufacturing, research and development), where competition was appropriate. Divestiture took place on January 1, 1984, and the Bell System was dead. In its place was a new AT&T and seven regional Bell operating companies (collectively, the RBOCs.)

Long distance telephone service became an intensely competitive business. Having started from a monopoly business, it was perhaps inevitable that AT&T's market share would fall. And it did - from over ninety percent in 1984 to around fifty per cent a dozen years later. Between competitive pressure, new technologies (primarily fiber optic transmission) and the shift of some fixed costs to elsewhere, prices plummeted, dropping by an average of forty percent by the end of the 1980s. Volume exploded. In 1984, AT&T carried an average of 37.5 million calls per average business day; in 1989, the equivalent volume was 105.9 million, and in 1999 270 million. In the 1990s, the growth of computers, and then the internet, led to an increasing percentage of what customers sent over the network taking the form of data rather than conversation.

AT&T's continued financial strength helped underwrite growth and improvement, from the multi-billion-dollar digitalization of its entire network into the international market to major mergers and acquisitions.

The new AT&T began evolving from a long distance company to an integrated voice and data communications company, as an ever - increasing percentage of the traffic on its network was data - and to a lesser extent video - rather than voice.

AT&T took many actions to succeed in the changing environment. The company invested over $35 billion in acquisitions and upgrades to its infrastructure, acquiring a leading provider of local telephone service to business customers, a leading provider of global data networking services, and merging with two large cable companies and, operating as AT&T Broadband, becoming the largest cable company in the United States.

In 2000, the volume of data traffic for the first time exceeded the volume of voice traffic on the AT&T network.

And now for the latest - In March of this year, AT&T announced its intention to buy T-Mobile, for a cool $39 billion. The deal would concentrate 80 percent of U.S. wireless contract customers in just two companies - AT & T and Verizon Wireless. AT&T stressed that it was making the deal to acquire spectrum, which is in high demand as technology becomes more mobile.

The Federal Communications Commission must sign off on the transaction for it to go forward, and most antitrust experts have said it will be tough to convince regulators that the deal will allow a competitive wireless marketplace to thrive, without significant asset sales by AT&T.

This is especially true since the government itself has raised doubts about competition in the wireless industry before the deal was announced.

The industry leader is Verizon Wireless, with about 31.5 of the market. AT&T follows with 28.5, trailed by T-Mobile and struggling Sprint Nextel, according to an FCC report issued last May. While the four big companies have national reach, smaller companies do not.

The merger may produce significant benefits for the public, as AT&T has promised to blanket 95 percent of the U.S. population with high-speed, fourth-generation wireless Internet access, also known as 4G. That goes to the heart of a top telecom policy goal for both the FCC and the Obama administration, which have pledged to bring high-speed Internet access to all Americans. They see wireless as critical to meeting that goal, particularly in rural areas, where they say it does not make economic sense to build landline networks.

Officials at the Justice Department and the Federal Communications Commission could spend a year or more scrutinizing the deal before deciding whether to block it or allow it to proceed, most likely with substantial conditions attached. Regulators will conduct a thorough market-by-market analysis to determine how many wireless choices consumers would have in communities across the country. And even if they allow the deal to go through, government officials would probably require the combined company to sell off some assets, - including wireless spectrum, cell towers and customers - in particular markets that are too concentrated.

The bigger question facing federal officials is whether the enormous cost of building a nationwide wireless network means that a market dominated by only two companies is the best they can hope for.

And if that's the case, what kinds of merger conditions should the government impose on AT&T to prevent it from abusing its power?

Bar AT&T from engaging in common industry practices such as charging consumers large fees for text messaging and for ending contracts before they expire? Imposing stronger "network neutrality" rules on AT&T's wireless system, to ensure that subscribers can access apps and other online applications without carrier interference?

If government officials do eventually sign off on AT&T's proposed acquisition of T-Mobile, they will likely require the combined company to sell off wireless spectrum in certain markets. The hope would be that these airwaves - which are in scarce supply - would wind up in the hands of smaller players such as Sprint and Leap, possibly restoring some competition. For its part, AT&T rejects the notion that the wireless industry is too concentrated.

I just have one question - If the AT & T - T-Mobile merger finally gets approved, how long do you think it will be before we again start hearing cries to "Break Up AT & T?"

Dan Whitney
Basic Biittner