The Wall Street Journal is full of goodies today. Although I am tempted to write about the front-page article on “Two-Buck Chuck” entrepreneur Fred Franzia, I will confine my enthusiasm to discussing lead editorial entitled “Telecom Shootout” (subscription required). This editorial coincides with a lot of my thinking on the current merger activity in the industry. It starts with, in my opinion, some well-deserved ascerbity directed at Reed Hundt:
What we do know, however, is that the mergers signal the end of the Al Gore-Reed Hundt “managed competition” model for telecommunications. And that’s good news for consumers. …
Recall that shortly after the passage of the 1996 Telecom Act, SBC wanted to hook up with Ma Bell, only to be told by Mr. Hundt, Al Gore’s hand-picked head of the Federal Communications Commission at the time, that such a deal was “unthinkable.” Mr. Hundt knew that an SBC-AT&T pairing would have ended his grand vision of MCI and AT&T as Baby Bell competitors, efficiencies be damned.
The result of Mr. Hundt getting his way has been eight years of uncertainty and cross-subsidy nonsense in the telecom sector. Long after technology had eliminated any meaningful distinction between local and long-distance phone calls — let alone the need for separate companies to handle them — telecom regulation kept artificial barriers in place. So the Bells’ absorption of MCI and AT&T is a useful market corrective, come what may. With these regulatory artifacts no longer in the mix, we’ll have real companies with real networks competing on a more level playing field.
The editorial then goes on to point out what I think is the most important thing to remember in this issue: competition now is for platform dominance, not for market share among telephone companies. Those companies are merging to gird themselves to compete with cable and with other Internet providers who will increasingly offer telephony services. And, as the editorial also notes, we have the prospect of BPL (broadband over power lines) in the future to roil the mix.
The Wall Street Journal is right to label these changes “an overdue wave of creative consolidation” and to recognize in these moves the dynamics of true competition.
Old business models are crumbling. The Bells have lost nearly 30 million traditional phone lines in the past five years alone as more and more cellular users move to better alternatives or even “cut the cord” altogether. As usual, young people are leading the trend. Some colleges no longer even provide phones in the dorms.
Also look for more developments in packaging wireless and wireline services. We wouldn’t be surprised to see a cable company buy one of the remaining national cellular networks and package cable service with wireless phone service — something talked about at least since the early 1990s.
Let’s hope that the FCC, FTC, DOJ and Congress don’t cave to static conceptions of consumer surplus in evaluating the net effects of these changes and crush this creativity.