TCS Daily

Convergence, Consolidation and Competition

By Duane D. Freese - February 18, 2004 12:00 AM

A lot of talk has gone into the idea of convergence in communications technologies, and how it would bring about inter-platform competition to serve consumers.

Well, there's a convergence going on all right. Cingular wireless' $41 billion bid at $15 a share for AT&T Wireless proves that. But while this particular consolidation in an overcrowded wireless field could actually enhance competition there, it provides a warning to federal and state regulators as well -- Keep your eyes on the prize; competition in the local phone arena remains the key to competition throughout telecommunications.

Why? Just look who is spending the money here. It's not from a cellular company's little piggy bank, as would have been the case if Vodafone of the United Kingdom had bought independent AT&T Wireless. (While created by old Ma Bell, AT&T Wireless was spun off a couple years ago to go it alone.)

Instead, the money is coming from two regional Bell operating companies -- No. 2 SBC and No. 3 BellSouth. And where did they get the cash? Why, surprise good guess -- from the money they've made in local phone service.

No one should doubt that they are making a smart move. While the AT&T Wireless stock price has suffered since its initial public offering in 2000 (falling from $31 a share to as low as $3.15 a share), wireless has been a booming market. It's grown from around $18.8 billion in 1996 -- when the Telecommunications Act of 1996 meant to foment competition in all telecommunication arenas was enacted -- to around $74.7 billion in 2001, the last year for which the Federal Communications Commission has figures. During that same period, revenues in the highly-competitive long distance arena declined -- from around $99.7 billion to $99.3. As for local revenues that the Bells plead such poverty about? They went up, too -- from about $96.5 billion to $127.8 billion. And the bulk of that money -- more than 80 percent -- remained in the hands of the Bells and the other local phone monopolies that existed before 1996.

That's the big difference between cellular services and the local arena.

Cellular is competitive, and that's helped push down prices and increase quality of service. The merger of Cingular and AT&T Wireless could enhance that competition by creating a company with enough spectrum to serve the entire nation, and thus compete with Verizon Wireless (another Bell-owned company) as well Sprint Wireless and Mobile One, among other wireless carriers.

In the local arena, though, competition is just gaining a foothold. After false starts created by Bell foot-dragging in opening their monopolized local loops to other carriers -- in return for which they were promised and have been granted entry into long distance -- competitors are now attracting millions of customers in states. But with 26.9 million end-user switched access lines, competitive local exchange carriers (CLECs) still have less than 15 percent of the market. Compare that with long distance or wireless where no one has more than 35 percent of the market.

The fact that SBC and BellSouth have $41 billion to spend to buy another cellular company demonstrates why they didn't put more of their money into broadband. It had nothing to do with the FCC ruling in its triennial review last spring that they had to still lease their platforms to CLECs at forward looking prices, much as the old AT&T provisioned Sprint and MCI so they could gain a footprint in long distance. They were hoarding the money for this purchase.

This purchase puts both federal and state regulators on notice, though, that the Bells aren't poor. They shouldn't be allowed to "kill those little suckers," as Verizon Vice Chairman Larry Bibbio Jr. called UNE-P rules by which 19.4 million customers now have an alternative to the local Bell monopolists. It also suggests that access charge reform is vital. Long distance and cellular competitors to the Bells should not subsidize their buyouts of other telecom platforms. Such reform also would remove a cloud hanging over the promising technology of voice over Internet Protocol that could truly transform the telecom landscape, if the Bells don't kill it by being allowed to charge VoIP carriers for reaching customers on the Bells' local loops.

Consolidation in the telecommunications industry is inevitable. But the framework vital for it to work for consumers is competition, and competition at the local level is the place to keep an eye on.


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