The same year Merian Cooper’s epic King Kong was
produced (1933) he issued a sequel, Son of Kong. Little
Kong was smaller, kinder, gentler, and like his pop did not survive
the end of the movie. Ma Bell, like the original Kong, was
captured, exhibited for public amusement, and ultimately destroyed.
The son escaped capture, but perished when his island universe
exploded like Krakatoa. Ma Bell’s kids, in a world inhabited by
corporate behemoths like Google, Microsoft, and media mega-firms,
may well perish in a market ka-boom.
The lesson of the ape films is to beware of messing around with
Mother Nature’s creations, as the Law of Unintended Consequences
takes over. There is a lesson, too, in the generation-long saga of
Ma Bell — the siege, her surrender, and her imminent
reincarnation: Beware of messing around with market structures.
Just as with Mother Nature, the Law of Unintended Consequences
takes over.
Forty years ago an upstart known as MCI was in the midst of a
struggle to enter the private-line long distance market versus
AT&T; other upstarts soon followed. Thirty years ago, with the
aid of a complaisant federal appeals judge and a deregulatory wind
from the White House and Congress, MCI was allowed to enter the
public-switched long distance telephone market. Twenty-plus years
ago (1984), MCI’s nemesis, AT&T, was sundered by another
federal judge (the storied Harold Greene), at the behest of a
fanatical crusader (William Baxter, Reagan’s first antitrust chief)
who believed that the scale economies of segmenting long distance
(LD) terrestrial microwave would exceed scope economies derived
from integrating LD with local copper wire. On his hunch and little
more, the deed was done. But imminent advances in fiber-optics
would rapidly make LD microwave obsolete and in 15 years end LD as
a stand-alone business.
Ma Bell’s seven offspring were encased in the handcuffs Ma Bell
had worn. Newly freed AT&T, promised deregulation in 1984, was
stiffed. Protected and nurtured every step of the way, MCI, Sprint,
and what became WorldCom fared well — for a while. Ten years ago
came passage of the Telecom Act, letting everyone enter any
business — except that the Federal Communications Commission (FCC)
did not implement the Act that way. Rather, per what baseball sage
Yogi Berra called “deja vu all over again,” the agency extracted
vast subsidies for the so-called competitive local exchange
carriers (CLECs) to erode Bell local market shares.
But the FCC’s designated David vanished in the post-2000 Telecom
Meltdown that vaporized some $2 trillion of the industry’s apogee
value of $2.7 trillion. Three market shifts doomed local carriage
profitability. First, cellular traffic exploded with nationwide
pricing (after the 1994 AT&T-McCaw Cellular merger), siphoning
voice traffic from the wireline carriers. This reversed an FCC
absurdity Europe avoided: the 1981 decision to establish hundreds
of distinct cellular markets to prevent big-firm wireless
dominance. Second, the explosion of online Internet access (per the
confluence of the Pentium PC, the fast dial-up modem and consumer
browser software) siphoned off voice traffic to electronic text
(e-mail), cheaper and more convenient for non-urgent messages.
Third, cable entered via its own facilities, instead of, as before,
via accessing Bell networks.
It is regulatory hubris for regulators to micro-manage complex
market structures to handicap big firms and aid small fry, in equal
parts conceit (we can do it) and sympathy (we should do it). NBA’s
Wilt “the Stilt” Chamberlain once explained his unpopularity:
“Nobody loves Goliath.” Thus the calamitous 1995 Next Wave “C”
Block auction, which tied up wireless spectrum, enabled
undercapitalized firms to buy licenses, go bankrupt, and then get
bought out by large firms that were denied the spectrum at the
outset. The result: a massive windfall for folks who never put up a
single cell tower — billions of consumer welfare sacrificed while
non-producers reaped enough buy-out capital to buy private
jets.
What if AT&T buys Bell South? Assume that after payment of
appropriate givebacks to regulators — in effect, bribes paid in
the form of pre-emptively surrendering certain potential benefits
of the deal — it wins regulatory approval. We’ll see a market with
the original seven offspring of Ma Bell reduced to three, with the
eighth largest local firm (once GTE) and the two largest long
distance firms (AT&T & MCI WorldCom) combined with six
Bells into AT&T & Verizon. The past decade’s musical-chairs
coupling reads like a session at Hef’s Playboy pad: Bell Atlantic
buys Nynex, GTE and MCI WorldCom to form Verizon; SBC buys Pacific
Telesis, Ameritech, AT&T and now (in AT&T’s name) bids for
Bell South. Cellular? Myriad property swaps were mandated as part
of Bell mergers.
While allowing these mostly horizontal local mergers, when did
the feds kill a deal? Twice: Clinton FCC Chairman Reed Hundt killed
the vertical merger proposed in 1997 for AT&T and
then-SBC/Telesis; Hundt successor William Kennard killed the 2000
deal between MCI WorldCom and local/LD carrier Sprint. While the
FCC vigorously policed Bell company conduct and various mergers it
entirely missed WorldCom’s record fraud, including its inflation of
Internet traffic numbers, which was the prime cause of the Internet
market-value bubble.
Should the government now block further telecom consolidation?
With landline usage in irreversible decline, more young customers
choosing a wireless phone as their default connection, and
broadband demand exploding, let regulators exhibit a quality all
too rare among governing elites: modesty. There is no reason to
believe they can guess right this time. Telecommunications
consumption is driven, as with all commodities, by cost. With three
nationwide networks today — landline, cable, and wireless, the
first two of which are broadband (albeit far less “broad” than in
Asia) — regulators should let markets work. This is a big-firm
core business with peripheral niches. Whether Ma Bell’s Kiddie Kong
twins prosper should be left to the market, just as Kong’s kid had
to fend for himself. Little Kong wasn’t fast enough. Ma Bell’s kids
had better be.
