Thoughts On An SBC/AT&T Merger

Lynne Kiesling

When I saw the front-page article in the Wall Street Journal yesterday about merger talks between SBC and AT&T, my first thought was, well, we are far, far away from 1984! Who’d a thunk 20 years ago that this would happen?

SBC Communications Inc. is in talks to acquire AT &T Corp., a combination that could create the nation’s largest telephone company and join a flurry of industry deals as telecom companies try to build muscle to keep pace with new technologies and competitors.

The last part of that sentence is what caught my eye: “… keep pace with new technologies and competitors.” I felt Joseph Schumpeter hovering over my shoulder, and it made me feel all warm and cozy!

Apparently, and not surprisingly, it made Ray Gifford feel all warm and cozy too:

The interesting policy point here is how dramatically our definition of markets has changed. This once would have been a vertical merger for SBC into the long distance market, but that market is rapidly disappearing altogether. Instead, for antitrust purposes, it appears to be a simple horizontal merger in the enterprise market — and this is a market with multiple players and even more potential players as VoIP gains a foothold.

Another Wall Street Journal article from Thursday addresses that point, discussing how the definition of “market” affects the policy interpretation of the possible merger:

Whether regulatory approval for a merger between SBC Communications Inc. (SBC ) and AT &T Corp. (T) would be easy or difficult depends on what you consider “the market” to be, and whom you ask.

“If ‘the market’ is you, sitting in an SBC territory, and you say, ‘Boy, they’ve got your local access locked up and they’ve got the long-distance locked up,'” then regulatory approval might be difficult, said Gerald Adolph, a mergers and acquisitions expert at Booz Allen Hamilton.

But if the market is viewed as full of competition, with lots of choice for consumers because of the proliferation of services such as wired, wireless and the Internet, regulatory approval might not be difficult, Adolph said.

With all respect to Mr. Adolph, I think his concerns for locked SBC customers is misplaced, and that Ray’s got a better line on the true contestability in this now-horizontal transaction. From everything I’ve read, the core market here is now the enterprise market.

A CBS Marketwatch article also discusses the antitrust implications:

In the last five years, however, the phone industry underwent a big makeover. AT&T has lost millions of customers, and last year it stopped marketing long-distance service to consumers.

At the same time, the remaining local Bell phone companies — SBC, BellSouth, Verizon and Qwest Communications — have scooped up millions of former long-distance customers of AT&T. Hundreds of small, obscure providers also sell cheap long-distance service.

Over the next few years, meanwhile, cable companies plan to make a big push in the U.S. phone market, offering local and long distance to go along with their high-speed Internet services.

Still, the sale of AT&T would eliminate a major long-distance competitor in the 13 states served by SBC, including Texas and California.

Jessica Zufolo, a former lobbyist for the National Association of Regulatory Utility Commissioners, told clients Thursday that regulators in those 13 states would pose plenty of tough questions. …

The potential merger could land like a hot potato in the lap of whoever replaces the departing Michael Powell as chairman of FCC later this year. The new chairman will be under heavy political pressure to take a firm stand.

Big corporations, which have benefited from intense competition in the long-distance market, might also express concern. They see SBC as another potential competitor in that space.

I do think it’s interesting that so few of the articles I’ve read that discuss this possible transaction have mentioned the contestability value of VoIP.

That CBS Marketwatch article also said something that I think is realistic, but that I find deeply disturbing:

Analysts say Sen. Ted Stevens, R-Alaska, the new chairman of the Senate Commerce Committee, would probably launch hearings on any merger, most likely to wring out major concessions.

“I think the price could be very large,” said analyst Paul Wright of the Loomis Sayles mutual funds firm.

Where do politicians get off behaving like mafiosi? Am I incredibly naive to aks that question? I think it’s pathetic.