Mergers may damage the Internet`s growth
By Stephen N. Brown
The Internet`s growth in the U.S. may be curtailed because the sbc merger will slow the growth of broadband services in local markets, while WorldCom`s efforts will create a near monopoly in the Internet backbone market.
The Internet is the biggest single blessing ever conferred on the telecommunications industry. But if sbc`s purchase of Ameritech and WorldCom`s acquisition of mci are approved as currently proposed, the industry will kill its golden goose.
Like all the Bell operating companies, sbc has a poor record of technical innovation regarding the Internet and digital services. Charles Ferguson, author of The Internet, Economic Growth and Telecommunications Policy, says, "Aside from Bellcore`s efforts, it is exceedingly difficult to identify any major architecture, innovation, or even [research and development] effort in digital communications for which [local exchange companies] are responsible....It is striking that the [local companies] are absent from the most important standardization efforts in networking....There is not a single [local company] representative on the board of the Internet Society, [none] on the Internet Engineering Task Force or Group...working on Internet telephony."
Instead, sbc is relying on the purveyors of digital subscriber loop (dsl) technology to meet local demands for Internet access--even though dsl has a practical limit of 6 Mbits/sec between the home and the telephone company`s central office and could degrade service quality if employed widely in local networks. sbc hopes to use dsl to offer some Internet services without making any substantial new investment in its local loops. This action contrasts with Ferguson`s prescription for economic growth: "Current Internet service depends either upon analog modems running 28.8 to 56 kbits/sec or expensive digital services for business....For the full promise of the Internet to be realized, a thousandfold improvement in communications bandwidth is needed." This amount is well beyond dsl`s capability.
The opportunity for technological improvement in local services is further hampered by federal policy. The Federal Communications Commission (fcc) has refused to give Internet service providers (isps) collocation rights in telephone companies` central offices and has refused to order subloop unbundling by the companies. Thus, even if isps wanted to enhance Internet service by improving the technological capability of the telephone company`s local loop, they are barred from doing so.
Squelching competition
Competitive markets are the usual medicine for technological stagnation, but sbc has resisted these, too. In Texas, sbc successfully lobbied the state legislature to pass laws specifically preventing at&t, mci, Sprint, and municipalities from offering telephone service. The fcc overturned the law aimed at the private-sector competitors but declined to overturn the one aimed at municipalities. The agency reasoned that because a municipality is a legal creation of the state government, the federal government has no authority to modify the scope of a municipality`s authority. The company also has made war on the Telecommunications Act of 1996, seeking to declare certain portions of it unconstitutional while also attempting to enter the long-distance market in Oklahoma. It justified its long-distance bid by saying that Brooks Fiber`s customer base of four constituted significant local competition. U.S. Rep. Edward Markey (d--ma), the minority leader of the House Subcommittee on Telecommunications, accurately described sbc as "most eager to engage in a scorched-earth litigation strategy to preserve its local telephone monopoly."
When Ameritech is enveloped by sbc, the latter`s litigious nature will spread over 12 states with a population of nearly 100 million people, 57 million local telephone lines, and 500,000 T1 lines, resulting in the highest degree of centralized decision-making in telecommunications operations, investment, and policy since the at&t divestiture. A dead hand will govern decisions to upgrade local networks, and a huge economic burden will remain on local telecommunications services. For the next 15 to 25 years the local loop will continue to be a narrowband path. Therefore, if economic growth is to continue through the Internet, the isps, enhanced service providers, and the Internet backbone providers must ally themselves with new technology that bypasses the local loop and the central office while offering voice service as just one more digital service in a broadband stream of information. In short, the Internet community has to abandon or replace the local telephone industry as soon as possible.
And if there were an explosion in local broadband services, could the backbones handle it? Maybe not. WorldCom`s purchase of mci may be a hazard not only to the Internet, as critics suggest, but also to the five companies that control the very large nationwide Internet "backbone" networks that link each other, the smaller regional networks, the long-distance carriers, and isps. The "Big 5," as they are called in the trade press, include mci, Sprint, uunet (owned by WorldCom), agis, and bbn (owned by gte). According to two reports by the Economic Policy Institute (epi) of Washington DC, 80% of the nation`s isp connections are provided by the Big 5, and the remaining 20% are spread across 30 smaller networks that may be pushed out of the market if one or more of the Big 5 gains too much control. Between 50% and 60% of the connections would fall under WorldCom-mci if the merger goes through. Therefore, critics are urging the fcc and the Department of Justice to force WorldCom and mci to divulge the details of their interconnection agreements and the amount of revenues the companies gain from the Internet. If the government`s review process goes badly for WorldCom, the Big 5 may follow the path of the cable-TV industry, which broke free from regulation in the early 1980s only to be recaptured in 1992.
Unwelcome attention
Interconnection between backbone networks is generally governed by nondisclosure agreements, meaning that no party may divulge the agreement`s details to outside parties. The appropriateness of nondisclosure is tied to the market`s environment. If the market is truly competitive, then it is taken for granted that there is enough information available for participants to make rational economic decisions, thus nondisclosure agreements protect the parties without damaging other competitors. On the other hand, if the market is not competitive, then nondisclosure agreements rob the marketplace of the comparative standard required to make rational economic decisions. In this instance the agreements amount to collusion and may call forth antitrust action or direct economic regulation by the government.
The eventual approval of the WorldCom-mci merger depends on whether the nation`s backbone-communications market is judged to be competitive or a collusive arrangement between dominant firms. mci`s participation in the long-distance market has already become a springboard for opposition to its partnering with WorldCom. The author of one epi report, Jeff Keefe, says, "Allegations about tacit collusion could be ignored in this merger if it were not for the substantial evidence of tacit collusion in the pricing of...long-distance service among at&t, mci, and Sprint. This practice could be easily replicated in the pricing of Internet backbone service by WorldCom-mci and Sprint."
It would be a national disaster if the Internet backbones colluded with each other to deflect competition while dsl technology chokes off local demand for Internet services. Dan Schiller, author of a second epi report on the WorldCom-mci merger, argues that Worldcom may have such a heavy debt load that the new combined company will have to practice predatory pricing and squeeze out smaller companies if it is to survive. Perhaps fearing this strategy, gte, the owner of bbn, filed its own antitrust case in U.S. district court to block the proposed merger. Two other local phone companies, Bell Atlantic and Bell South, also oppose the merger. Of course, it is peculiar to see local companies that have a virtual monopoly at the local level trying to prevent monopoly formation at the backbone level.
Like so many other industries that once thrived and then declined, the Internet is in danger: It is being mired down by the predictable behavior of dominant firms trying to corner the market, wherever they operate. q