SBC and Verizon: Judgment Day

On Monday, the Federal Communications Commission approved the merger of SBC and AT&T and of Verizon and MCI. Last week, the Department of Justice completed its parallel review process under the antitrust laws and also greenlighted the mergers, subject to a handful of modifications.

Telecommunications mergers always give me a hankering to watch the second of the Arnold Schwarzenegger Terminator movies, known to its fans as T2: Judgment Day.

The plot of the second movie is the plot of the first movie (and I assume the plot of the third movie though I haven't seen that one). But in the second movie the Terminator sent to kill John Connor is no longer the hulking Schwarzenegger, but instead a more sophisticated Terminator that can change shapes at will. Send a mortar through this Terminator and it dissolves into pools of liquid metal, only to recombine quickly to try to kill again.

With the approval of the SBC-AT&T and Verizon-MCI mergers, the pieces have recombined and the Terminator is on the loose again. Indeed, SBC plans to change its name to AT&T. But in the intervening two decades, technology and markets have shifted and we have less to fear from these Terminators.

The breakup of AT&T in 1984 created a new long-distance company and seven regional Bell operating companies. We separated local calling from long-distance calling and hoped to foster full-blown competition in long distance between AT&T, MCI, Sprint and others, while living with local telephone monopolies.

By the time of the 1996 Telecommunications Act, we hoped for more. The 1996 Act took a number of steps to foster local competition. The Act overrode state laws that might have impaired local competition. It also created a series of dealing obligations that forced the incumbent local phone companies to make parts of their networks available to new entrants.

We are now at a different point. Cell phones and broadband have emerged as the chief source of local phone competition. Consumers are switching out of landlines, using cell phones even at home and voice-over-IP to talk around the world. Verizon reported 3Q 2005 figures last week. “Switched access” lines—ordinary telephone lines—dropped 6.2% compared to 3Q 2004, but over the same period, wireline broadband connections rose 42.3% and total wireless customers increased 17.0%.

As the New York Times reported on Monday, entry costs are dropping. EarthLink will build a municipal WiFi network in Philadelphia, and the relevant costs are in the tens of millions of dollars, not the hundreds of millions that would be required with a new wired local network. Google has offered to wire San Francisco for free—I guess I should say “wireless” it for free—though the current incumbents (SBC, Verizon and Comcast) hope to block entry. Wireless broadband would create a third broadband path—in addition to cable and DSL over local phone lines—and broadband over power lines (BPL) might create a fourth.

We are inching towards meaningful local phone competition. Broadband coupled with voice-over-IP means local phone competition on the cheap, at least if the incumbents can’t block the VoIP entry by running roughshod over the notion of network neutrality. (An important topic worthy of separate discussion; see recent posts by Ed Felten (here and here) and Susan Crawford.)

We need to concentrate on facilitating entry, but there are still many local barriers. Verizon wants to go into the TV business by distributing video content over its fiber optic network. Last Friday, the Wall Street Journal reported (pay wall) on Tampa’s effort to hold up Verizon for $13 million in goodies. There was no suggestion that this amount represented costs that Verizon was somehow imposing on the city. Instead, this was classic government monopoly making: limit entry, harming consumers, and demand tribute.

That is the Terminator we should fear, the old-fashioned one, not the recombined SBC-AT&T and Verizon-MCI. Be clear on what that means: if the new companies behave anti-competitively, we should sic antitrust on them. But we should look for opportunities to expand competition as we are edging slowly towards meaningful communications competition.

Full Disclosure: The Law School has obtained grants from Verizon in the past and may or may not—I just don’t know—have a grant from Verizon now.