Adam Thierer On Telecom Mergers

Lynne Kiesling

I don’t read or link to Technology Liberation Front frequently enough. I typically find that the authors there make arguments similar to ones I would make, and do so with more eloquence and expertise.

Take, for example, this recent post from Adam Thierer on telecom mergers, which provides some useful analysis of why we shouldn’t be getting our knickers in a twist about the SBC/ATT and the Verizon/MCI mergers and their purported anti-competitive effects. After saying that those worries arise from an outdated, 1980s-style approach to thinking about telecom as distinct local and long distance, Adam goes on to say

OK, so you might agree with all of this but say “There’s just not enough competition out there if these mergers go forward.” More than a few lawmakers on Capitol Hill are already saying as much.

The problem with this thinking is that fails to understand the nature of competition in network industries. The economics of network industries are not those of a corner lemonade stand. We’re never going to have hundreds or even dozens of companies providing the underlying backbone over which bits of information travel. There are significant sunk costs associated with providing network services. Deploying all the wires alone is a nightmare, but just the cost of every truck roll to a neighborhood to fix tiny problems can get incredibly expensive. Wireless networks help lessen some of these costs, but its still costly to deploy a sophisticated and reliable wireless architecture. Just siting all the towers, for example, can get quite expensive.

The economics of network industries is different from the allegedly “perfect competition” blackboard model of atomistic producers and consumers. You can have “anticompetitive” outcomes with very few firms, but you can also have robust competition with very few firms. The information content of observing number of firms in the telecom industry has fallen over the past two decades, because there is no longer a strong correlation between the number of firms and the ability to sustain prices above long-run average cost.

THIS IS NOT TO SAY THAT THE NETWORKING BUSINESS IS A NATURAL MONOPOLY. Indeed, from everything we know today, we can safely conclude that the communications / broadband networking business can be very competitive with 2 or 3 or even 4 major backbone providers in each region providing some mix of voice, video and data services. If you don’t believe that, I encourage you to take a look at two articles in today’s papers. Today’s Wall Street Journal features a cover story entitled “To Meet the Threat From Cable, SBC Rushes to Offer TV Service,” which outlines the significant investments telecom giant SBC is making to become a full-fledged video competitor to cable and DBS. And then on page A5 of today’s Investors Business Daily you will find an article entitled “Comcast Counting on a Phone Pickup” discussing the efforts by the cable giant to become a major player in the telephone business.

No one knows how this battle will play out, but the important point is that you now have large telco and cable giants spending significant sums of money to compete in each other’s traditional lines of business as well as new businesses, such as broadband.

Or, to put it the way I did the other day, competition is for platform dominance, beyond the traditional industry boundaries of telecom/cable/electric, and beyond the blackboard-style static competition to provide Q* at a P* equal to minimum long-run average cost. Adam concludes that we are living in exciting times, with entrepreneurial firms gearing up so that they can provide consumers with unforseen and unforeseeable value in the future as robust, healthy network firms.