The Echoes of Forgotten Footfalls: Telecommunications Mergers at the Dawn of the Digital Millennium

Abstract:     
The Telecommunications Act of 1996 promised to promote competition and reduce regulation, secure lower prices and higher quality services . . . and encourage the rapid deployment of new telecommunications technologies. One decade later, the Act has drawn sharp criticism for having prompted a wave of mergers among incumbent carriers without having generated a corresponding increase in consumer welfare. For instance, the very sort of merger that was once considered unthinkable - a reunification of AT&T with two former Bell operating companies - is on the verge of completion.

The legal fate of these mergers is at once a historical mirror and a harbinger of American telecommunications law beyond the first decade under the 1996 Act. Mergers such as the unions of SBC and AT&T, Verizon and MCI, and Sprint and Nextel have not encountered significant legal obstacles. Since the Bell breakup, no significant telecommunications merger has failed to receive regulatory approval in the United States. The 1996 Act and its implementation have signaled that federal authorities will remain content to extract concessions in exchange for their approval of even the largest mergers within the telecommunications industry. A decade after comprehensive legislative reform of telecommunications, all segments of the industry are highly concentrated. Miniature versions of the old Bell system have emerged on each coast. The cable industry is only slightly less concentrated, and nothing stands between further consolidation and integration in that industry except provisions of the 1996 Act that had been designed to protect competition within media rather than telecommunications markets. If Voice over Internet Protocol (VOIP) overcomes every other form of terrestrial telecommunications technology, control of telecommunications will be divided between providers of broadband Internet access and wireless network operators. Firms that are most facile in integrating wireless and wireline services, for residential and business customers alike, will dominate the industry.

This article reviews the mergers that have reshaped the telecommunications industry since the Bell breakup decree and in particular since the passage of the 1996 Act. It analyzes the legal framework that has developed in response to the 1996 Act and its implementation. Much of the FCC's merger policy has grown out of its response to horizontal mergers involving incumbent telecommunications carriers. The Telecommunications Act's cable provisions and certain legal tools independent of the 1996 legislative reform have facilitated an alternative approach to merger policy. That alternative path has assumed ever greater importance as the Internet and access to it via cable-based platforms have achieved greater prominence within the market for telecommunications services.

This article also explores why the Act has accelerated rather than retarded the trend toward consolidation and concentration in telecommunications. Having devoted most of its energy toward legal issues whose technological and economic roots lay deep in the Bell breakup decree, the Act failed altogether to deal with the Internet. This oversight was merely one of several profoundly mistaken technological assumptions underlying the Telecommunications Act. It also contemplates explores possible avenues for reform that remain open under the 1996 Act should the federal government ever conclude that the anticompetitive potential of telecommunications mergers outweighs their salutary effects.

Keywords: telecommunications, mergers, FCC, Telecommunications Act, Bell operating company, cable industry, Clayton Act, actual potential competition, benchmarking, 251, 271, 652

JEL Classifications: D43, K21, K23, L13, L43, L96, O33

Working Paper Series