PROSPERITY:
Economic Policy | March 6, 2006
ONE
LESS
BELL
TO
ANSWER
By
Douglas Drenkow, Editor of "Progressive
Thinking"
A
Posting in DailyKos,
OpEdNews,
Comments
From Left Field, & BarryTalk
The
problem with unfettered capitalism is that it puts itself out of
business.
Big
fish eat little fish, until there's only one fish. And that's
called monopoly, which is not only the opposite of competition
-- the "invisible hand" of a truly free marketplace,
keeping companies honest and innovative -- but also a dire
circumstance for consumers and workers (as if workers weren't
consumers as well): If there is only one store selling and
hiring, then they can set prices as high and wages as low as
they darn well please.
That
"take it or leave it" situation might be acceptable
for luxury items or frivolous wants; but when it comes to
providing services vital to the rest of the economy, a monopoly
amounts to a stranglehold on the nation. Even in the most
innocent of scenarios, a lack of competition flirts with
extortion.
And
no sector of the economy is more vital to our Information Age
than the communications industry. The announcement this weekend
that AT&T Corp. has agreed to buy BellSouth Corp. is, thus,
not only newsworthy but also historic, in terms not only of its
sheer size (At $67 billion it is one
of the largest deals ever) but also of its social impact: If
the merger is approved by the shareholders -- those of BellSouth
are being offered a premium price by AT&T -- and regulators
-- and the Bush Administration (very much like the Clinton
Administration) never
met a trust it wanted to bust -- then this union of the
nation's largest and third-largest phone companies would reduce
the seven regional "Baby Bells," which the government
created in 1984 by carving up the original AT&T monopoly, to
just three telecom giants: the new AT&T (incorporating
BellSouth as well as the current AT&T, itself the product of
SBC just recently acquiring the previous AT&T), Verizon
Communications (which recently bought MCI), and -- smallest by
far -- Qwest (in the west, probably now targeted for acquisition
by Verizon, trying to consolidate its uneasy second-place
position).
The
final word in this alphabet soup is that just two companies -- the
new AT&T and Verizon, a "duopoly" -- would
control almost all of the local residential wireline service,
most of the long-distance telephone service, most of the
cellphone and other wireless service, and most of the DSL wires
-- as used by competitors to carry Internet phone calls and
broadband TV -- across the USA. That's a lot of power in a very
few hands ... with some 10,000 fewer pairs of hands actually
doing the telephone work, as the consolidation of companies
would result in the "cost efficiencies" of massive
layoffs.
But
the telecom environment is far more complex than in the days of
the old AT&T monopoly, as any web-surfing, music-streaming,
video-downloading, Voice-over-Internet-Protocol-calling teenager
could testify.
We
find ourselves caught not just in some big-fish-eats-small-fish
food chain but in an elaborate food web, if you will, of
intricately competing and supporting relationships, which if
thrown out of balance can threaten the economic existence of any
or all concerned. Consider the interests involved:
Major
(Wireline) Telephone Companies
The
major telephone companies may be stifling competition from
smaller telecom companies, but they are facing stiff competition
from cable companies. The telecoms claim that this will
stimulate innovation and keep prices low; although it can be
argued that if such benefits do indeed accrue, it will be in
spite of, not because of, the monopolization now taking place
within the telecom industry itself.
It
is also worth noting that merged companies often succumb to "unrealized
synergies": failures to realize proposed efficiencies
and other goals because of problems encountered when trying to
integrate two different corporate cultures and structures, in an
ever-changing market.
Bundling
phone, Internet, and video services, telephone companies are
trying to become "one-stop shops" for all our
communications needs.
Because
such services as live video feeds are clearer if their bits of
digital information are transmitted rapidly and together, the
telephone companies want to charge Internet content providers
(See below) a premium for delivering videos with "routing
priority" over generally less time-sensitive transmissions,
such as e-mail. The telecoms claim that they are simply
providing consumers with additional choices and recouping some
of the billions of dollars they have invested in their networks,
as for fiber-optic lines, even as they have cut the price of
their broadband service, in competition with cable providers. As
John Chambers, CEO of Cisco, recently told analysts, "very
soon, all TV will be broadcast over the Internet."
The
big telephone companies are lobbying Congress to rewrite the
landmark Telecommunications Act of 1996, which deregulated the
communications industry, allowing telephone and cable companies
to directly compete. In particular, they want to make it easier
to provide television service without
having to negotiate a new agreement with each city they wish
to serve (An indirect but inevitable consequence of this would
undoubtedly be the end of funding for uniquely, locally valuable
community access television).
Wireless
Telephone Companies
Owned
jointly by AT&T and BellSouth -- and, thus, having
helped to pull the two corporations together -- Cingular,
the largest cellphone company in the country, competes directly
with Verizon Wireless, the second-largest (jointly owned by
Verizon and a British telecom), and Sprint, the third-largest
wireless company, which recently bought Nextel; and wireless
telephone companies in general compete at least indirectly with
wireline telephone companies (See also Cable and Satellite
Companies, below).
To
support the new technology of high-speed wireless
communications, and to thus make wireless providers more
competitive, there are calls for more government auctions of
unused portions of the wireless spectrum and for the release of
other frequencies for unlicensed utilization.
Internet
(VoIP) Telephone Companies
Internet
phone services ("Voice over Internet Protocol," or
VoIP) are growing rapidly in popularity. However, because they
are often offered by smaller telephone companies, such as Skype
or Vonage (CallVantage, from AT&T, is an exception), they
are often at a competitive disadvantage to more traditional
telephony. Sensitive to that, the FCC last year ceased Madison
River Communications, a telecom company, from blocking their
consumers' access to Vonage.
Cable
and Satellite Companies
Facing
stiff competition from telephone companies, cable and satellite
companies are bundling phone and Internet services with their
video services. Typically having infrastructure already in
place, cable companies can often undercut the price that
telecoms need to deliver video profitably.
Efforts
by telephone companies to promote congressional legislation that
would allow the telecoms to bypass local regulations and, thus,
build into communities more quickly, have provoked some
coordinated resistance by cable companies, each protective
of its "turf."
Actively
competing with the major telephone companies, Comcast, Time
Warner Cable, and some other cable companies are selling phone
lines into homes; and they are also partnering with
Sprint-Nextel to provide mobile phone services, in competition
with Cingular (from AT&T-BellSouth) and Verizon Wireless. In
addition, Sprint is providing its long-distance network to carry
phone calls for cable companies, which are thus less
dependent upon AT&T and Verizon.
Although
the telephone companies have been pursuing the idea of a
"tiered" pricing structure for Internet content
providers (See below), cable companies have generally not
embraced this controversial position, although they can be
expected to side with the telecoms, as it would bring in more
revenue.
Other
Hi-Tech Companies
Telephone equipment companies,
like Lucent (spun off from AT&T in 1995) and Nortel, may
find themselves in a more difficult bargaining position, having
fewer telephone companies with which to negotiate.
Even
electric companies may become involved in the communications
market, by offering a new technology of broadband service
delivered over their power lines.
Internet
Content Providers: "Network Neutrality" vs.
"Tiered Service"
Perhaps
the greatest debate in the field of telecommunications these
days involves the plan by telephone companies and cable
companies, normally at odds, to establish "tiered"
levels of service on their systems: "fast lanes" and
"slow lanes" on the "information
superhighway," if you will.
The
telecom companies argue that as Internet content providers, like
Google, Yahoo!, Amazon, eBay, or Microsoft, increasingly
download video and other transmissions that consume enormous
amounts of bandwidth (capacity), they should be required to pay
a fee -- in addition to the standard access fee paid by
end-users -- to the telephone or cable companies, which supply
the costly, typically fiber-optic lines.
Moreover,
by giving a video transmission priority treatment -- by
routing its digital bits together through the system, ahead of
less time-sensitive transmissions (such as e-mails) -- the
quality of the video will not be degraded, even during periods
of heavy Internet traffic.
In
the press and before committees in Congress, which are
considering and drafting legislation, the telephone companies
and, less vocally, the cable companies are promoting tiered
levels of service -- a "pay to play" system, if you
will -- as a reasonable way for them to recoup their sizable
investments and a method by which higher-quality sites can
deliver higher-quality content to their users.
Not
surprisingly, the Internet content providers -- and most
consumers and many legislators -- feel otherwise.
Google,
in particular, has termed this practice "cyberextortion."
Less
inflammatory, but no less damning, critics have accused the
telecoms of wanting to be "gatekeepers" of the
Internet, or "toll booths" on the "information
superhighway," impeding the free flow of ideas and
innovations.
How,
they ask, could a start-up company ever hope to compete with,
say, a Google, which could afford to spend far more on getting
priority service on the Internet? Who would use a new search
engine, no matter how good, that took ten seconds to return a
result that took only a second on Google?
In
effect, the critics contend, the telecoms -- and not a
competitively free market of ideas -- would
be picking the winners and losers on the Internet, the
winners being not only those who paid the most but also those
with whom the telecoms had a working relationship (such as a
subsidiary or sister company within a conglomerate). Internet
phone companies would be particularly vulnerable to
"discrimination," as some have called it, by rival
telephone companies being allowed by law to charge more for some
than for others to use their systems.
The
fundamental question is, shall the Internet be turned into a
system like that of cable television, in which the content
producers must pay to have their content transmitted, in
addition to the fees paid by the end-users to have the content
received? Or will the dissemination of information on the
Internet continue to be free? And how would all that impact personal
websites and blogs? The implications -- for society at large
as well as for the economy in particular -- are as staggering as
the power of the Internet itself.
Currently,
the popular demand is for continuing "network
neutrality" -- perhaps with some accommodations for
extraordinarily large transmissions -- but telecom companies,
and perhaps cable companies, are thought by some to already be
working out deals behind the scenes for preferential treatment
of various content providers.
Consumers
& Workers
Both
residential and business consumers of telecom services can
expect to be bombarded with press releases, advertising, and
other corporate communications from the new AT&T regarding
the BellSouth merger -- perhaps in addition to the half billion
dollars AT&T is spending this year acclimating its customers
to the recent acquisition of AT&T by SBC, which took the
more famous brand name of its purchase.
Just
as the SBC-AT&T deal was by almost all accounts a "good
fit" -- AT&T bringing with it long-distance; SBC, local
-- the AT&T-BellSouth merger also makes sense on paper --
the two systems compete very little for local or Internet
customers, and they own Cingular Wireless together: At least
initially, customers of AT&T, BellSouth, and Cingular should
experience little
if any change from the deal.
It
is in the long run that the impact is more debatable.
Speaking
on behalf of the combined AT&T and BellSouth, for which he
would serve as chairman and CEO, current
AT&T Chairman Edward E. Whitacre Jr. has said, "The
merger ... will benefit customers through new services and
expanded service capabilities." The plan is for the
company's increased size to help hold down costs -- as with
those layoffs mentioned above and other economies of scale, saving
some $2 billion to $3 billion a year -- which may allow the
new AT&T to undercut the prices of the cable and satellite
companies, particularly for the television programming AT&T
is beginning to deliver.
Speaking
on behalf of consumers, Gene
Kimmelman, policy director at Consumers Union, publisher of
Consumer Reports magazine, has been quoted as saying that the
merger "will lead to the end of the era of falling prices
for telephone and cellphone service." In addition, fees for
Internet service may rise, particularly in areas with limited
high-speed choices and perhaps with the introduction of a
"tiered" system of fees for content providers (as
discussed above), probably ultimately passed on to consumers.
Regulators
and Legislators
Mark
Cooper, research director of the Consumer Federation of America,
has been reported as saying, "Telecommunications has now
gone from a regulated monopoly to an unregulated duopoly with
just two major players. Consumers know that is not enough
competition to lower their prices and drive innovation."
Moreover,
Janee Briesemeister, a senior policy analyst of the Consumers
Union, has said, "The track record of the baby Bells since
the passage of the Telecommunications Act of 1996 shows a
persistent pattern of bad acts, broken promises, and a failure
to compete."
And
it doesn't help at least the image of the telecom and cable
companies to have so many of their members in regulatory
positions: In 2003 to 2004, for example, about
a third of the Consumer Advisory Committee of the FCC was
composed of lawyers for AT&T,
BellSouth, Cingular, Verizon, MCI, Cellular Telecommunications
and Internet Association, National Association of Broadcasters,
Telecommunications Industry Association, and the National Cable
Telecommunications Association.
Regardless,
despite all the lobbying by phone companies and by those who
oppose a tiered system of fees on the Internet, Congress will
probably not pass telecom reform legislation this year: it is
probably too complex and time-consuming to debate in an election
year. But as mentioned above, supporters of "net
neutrality" fear that secret deals are already being done
between phone companies and certain content providers for
preferential treatment on the Internet.
And
it is widely anticipated that the merger of AT&T and
BellSouth will be approved by both shareholders and regulators
within a year, particularly because the business environment in
which the new AT&T will operate bears
little resemblance to that which existed when the old
"Ma Bell" was broken up: Back in 1984, cable companies
were far smaller and less competitive, cellphones were a
novelty, and the Internet was mostly a scholarly dream.
In
Conclusion
The
original Bell Telephone Company was founded in 1877 by Alexander
Graham Bell. This inventor of the telephone captured the spirit
of our Information Age when he said: "Great discoveries and
improvements invariably involve the cooperation of many
minds."
That is precisely
the reason we must so jealously guard the freedom of all our
communications.
Return to
Archive of PROSPERITY: Economic Policy
Home
| Editor | Values
& Issues
| Feedback
| Legal | Links |