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GREATEST COMCAST DEAL EVER 79.99 for cable and internet

Today, i was looking on craigslist and happened upon a great deal for comcast services.  The poster said for 89.99, you can get 240 channels, hd dvr for free, hbo, starz, and 20 mb internet, and unlimited nationwide calling US/CA  all with free installation.  Further, if you are using Dish or some other cable provider, they will give you 100 bucks credit on your first months bill.  The deal was listed for “over 3 years” while usually comcast promotions only last 6 months.  I was skeptical and decided to call the guy.  I got his independent comcast contractor rep number, called comcast, and they told me who the reference number referred to.   I then googled the representative, called him, and asked if the deal was legitimate.

I was assured the deal was legitimate, but that you can only get this deal by purchasing through a direct sales representative.  So, these direct sales reps, who are supposed to be going door to door selling comcast at unbelievably cheap prices have started just putting up craigslist ads instead; luck us.  I did order the service after being called back by a direct sales rep dealing with my area.  I received the following package.

For 79.99 I received as follows:                                               

Digital premier package w/240 channels for 2 years

HD DVR for 2 years

HBO/STARZ free for 2 years.

BLAST internet 20 mb and 4 mb upload speed for 2 years

100 dollar credit on first months bill

No installation charges

an extra box for 2nd tv — 5.99 month

sports package including football and tennis channel 7.99 month.

Altogether, I will be paying 90.00 a month for almost all the cable channels accept cinemax and showtime (which i never watch anyway) and i’m getting blast internet speeds.  The retail price of this package would be about 179.99, but if you call comcast they’ll probably offer it to you for 139.99 a month for 6 months.  I’m getting it for 90.00 a month for 2 years.  I decided to forgo the telephone service b/c I use vonage and end up paying half what comcast would charge for international calls.  I get 1500 minutes a month for 15 bucks a month and that’s more than enough when considering I pay 2 cents a minute to call international.  Also, I don’t like the old ATT monopoly mentality of having to lease the emta box in order to get phone service.  If I remember correctly, that’s why ATT got sued by the DOJ for antitrust violations in the first place.  They forced you to lease a telephone in order to use their phone service, just like comcast is forcing you to LEASE an EMTA box to get their phone service.  Not to mention, the phone service is just VOIP anyway, its no different than vonage yet you must lease their special box.

Word to the wise, to get the best deal, find a direct sales rep.  If you’re already a comcast customer, this deal isn’t going to apply to you.  You have to have been off of Comcast services for at least 6 months.

Congress Shall Not Drop the Public Option and Expand Medicare

Under What Authority Does Congress Think it May Drop the Public Option?

Today, it was announced that Congress has struck a closed door deal to drop the public option from the health care bill and replace it with lowering the buy-in age in MediCare from 65 to 55.  How this deal becomes tenable at this point astonishes me for several reasons.  It is a blatant deprivation of wealth to the detriment of the public and leads logically to a deprivation of civil rights as well.

Consider the essential claim here.  In the interest of providing more affordable healthcare to more “elderly,” we will mandate a deprivation of property (financial resources) from all other uninsured Americans to transfer to existing inefficient health care providing institutions (insurance co., private hospitals, etc.).  In return for your complacency, we will provide you with the poor healthcare that sparked the entire movement for a single-payer public option in the first place.  And if you don’t like it, you will be punished.  Sure, there will be clauses prohibiting refusal of insurance for preexisting conditions, but no prohibition against discrimination by other means such as exorbitant premiums.  Essentially, the health care “providers” give up very little; but, they gain an entire population of uninsured, with less risk factors than the elderly being switched to government healthcare thus decreasing risk and increasing profits for the private health care companies, while increasing risk and decreasing sustainability for the public healthcare system currently in place.

On its face, this shifting of high risk individuals to the public sector (cost) and lower risk individuals to the private companies (benefit) is against the interest of the public.  However, another problem is the unchecked deprivation of personal financial resources (property) and its unabashed transfer to another private source.  Under what authority may the government mandate the public to pay or buy from a private entity.  Traditionally, any levying or mandate of fees by the government has been to a government entity or administrative agency that is directly accountable to the representatives of the people.  Then, when/if the governments proxy apportions some of the levied funds on private companies in furtherance of a legitimate public goal (healthcare) it is less egregious, because at the very least, there is accountability to the public via elections and votes.

Currently, I see no discussion about how the healthcare insurance industry will be accountable to the public and its representatives.  In the alternative, it appears abundantly clear that the public’s representatives are accountable to the healthcare and insurance industry.  Suppose there is a “task force” or agency or committee created to oversee the implementation of an egregious deprivation of wealth for the benefit of the insurance companies.  Suppose further that the agency will allow quick resolution of denials and other curtailments of the supposed service the health care industry is to provide the public.  I submit that such a policy serves not only to deprive the public of property in the form of public wealth in violation of due process, but that it is also an attempt to minimize risk of judicial interference when the insurance industry goes rampant on the unsuspecting public thrust into its grips.

An administrative agency does not have a constitutional command to allow jury trials.  Thus, you will no longer have issues disposed of through your public peers’ perspective on the matters, but a single judge may be the arbiter of your claim.  This will not be any judge, this will be an adminstrative judge, often a lawyer who practiced in the relevant field.  In this case, you’ll see health care and insurance lawyers being appointed to administrative judgeships to arbitor the claims against their former and possibly future employers.  As if we have not already concluded that arbitration generally favors the corporate client.

As a result of trying to maintain oversight of the activities of the health care industry, a proven inefficient industry, congress would be creating a safe haven from any meaningful accountability and depriving the public of historically safeguarded fundamental rights.  If such a slippery slope to deprivation of the right to a jury trial comes to pass, then truly we could say this was a major victory for the insurance and health care industry and a devastating blow to the the wealth of the public and civil/constitutional rights held so sacred by Americans.

Has Ma’ Bell Returned? An analysis of recent RBOC mergers

INTRODUCTION

To consumers, regulators, and economists, monopolization represents a threat the result of which harms everyone save for perhaps the company monopolizing. A monopoly is a firm who is the sole seller of a good or service to a particular set of consumers in a geographical region. Without competition, this firm can produce at a quantity where their marginal costs equal marginal revenues and it can charge a price that coincides with the demand given the output. In a competitive market, firms will produce a quantity where marginal costs equal the price people are willing to pay for a quantity (demand). The price is determined by the intersection of the marginal cost curve and the consumer demand curve. Because the marginal revenue curve is steeper than the consumer demand curve, the monopoly firm can charge a higher price while providing a smaller output. The loss of output and the increased price result in a deadweight loss.

Figure 1

Consumers cry out against unfair prices, regulators take “heat” from consumers, and economists cringe when they have to calculate the inefficient dead weight losses being observed. Recent mergers of former Regional Bell Operating Companies (RBOC) have raised many such concerns about monopolization in the telecommunications industry. A common observation being made is that the old AT&T monopoly is rebuilding itself. After analyzing the SBC/Bellsouth joint wireless venture, the SBC/AT&T merger, the AT&T/Bellsouth merger, current pricing for AT&T services compared to other providers, the possibilities of economies of scope and scale in telecom, and the economic atmosphere of the telecommunications industry, it is unlikely that AT&T can monopolize the telephone industry again. The telecommunications industry is strictly monitored and government agencies have adequately prevented its monopolization.

REGULATING AUTHORITIES

To protect consumers, the telecommunications industry is regulated by the Federal Communication Commission (FCC) and the competitive effects of mergers are overseen by the Department of Justice’s Antitrust Division (DOJ). Specifically, the DOJ concerns itself with enforcing provisions of the Sherman Antitrust Act of 1890 and the Clayton Act of 1914, while the FCC oversees the execution of the Telecommunications Acts of 1934 and 1996. The Sherman Antitrust Act makes illegal to monopolize, attempt to monopolize, or conspire to monopolize.

The Clayton Act prohibits corporations from acquiring, in whole or in part, another corporation when it would substantially lessen competition. The Telecommunications Act of 1934 establishes the FCC and grants it authority to regulate the telecommunications industry in order to ensure efficient and reasonably priced services are available throughout the country. The FCC is given authority to grant licenses for telecommunications companies operating over wire or radio. The act makes illegal any act that would substantially lessen competition or restrain trade. The 1996 act amends the 1934 act and relaxes restrictions placed on competition and cross ownership within the industry. The act mandates that telecom carriers must be able to interconnect with other carriers and that incumbent local exchange carriers must make their facilities available to competitors. It allows some RBOCs to enter the local long distance market under certain conditions. The act allows telephone companies to offer video services. The DOJ investigates mergers between companies and decides whether there are likely to be anticompetitive effects, whether the behavior of the firm (s) is likely to lead to a monopoly, and/or whether such behavior is an act of monopolization. If the DOJ challenges the merger or acquisition, they file suit and a court makes a determination, though typically a consent decree is agreed to and the court analyzes that.
The court, however, is limited by the Tunney Act of 1974 as to what it can consider. It does not decide whether the DOJ has agreed to the best solution, only a reasonable one and whether it benefits the public. While the FCC can also analyze the effects on competition, its main concern is whether such a merger is in the public interest.

The DOJ Guidelines for mergers outline what is considered with respect to a proposed merger. The DOJ states that the guidelines provide a structure for analyzing proposed mergers, but not how they will litigate cases they choose to bring against merging companies. The DOJ is specifically concerned with gains through mergers that result from market power. The analysis, for the purposes of whether AT&T is becoming a telephone market monopoly, will consider horizontal mergers.

HORIZONTAL MERGER GUIDELINES

The DOJ takes a five-pronged approach to analyzing mergers. The department analyzes what the resulting market concentration will be, whether the market concentration raises competitive concerns, whether entry into the market is timely and substantial enough to counteract the competitive concerns, what the competitive gains are that could not otherwise be achieved, and whether, without the merger, either party’s business would fail.

The DOJ states, “A merger is unlikely to create or enhance market power or to facilitate its exercise unless it significantly increases concentration and results in a concentrated market, properly defined and measured.” A market is defined as a substitutable product sold in a particular geographical area where a profit-maximizing firm, being the only seller of the product, would likely raise prices. The DOJ considers a relevant market for purposes of merger analysis. The relevant market is simply the smallest market that will satisfy the market definition. When determining the products within the market, the DOJ determines the substitutability of the merging firm’s products with other firms’ products individually, and chooses those products that, if a hypothetical monopolist would be present, the monopolist firm would impose a “small but significant and nontransitory” price increase. The geographical market is delineated by determining whether given such a price increase, consumers could substitute the product only by going outside the geographical area. The participating firms are those that currently sell the relevant products, and those that given a ’small but significant and nontransitory” price increase, would enter the market within one year and not incur significant sunk costs. With the definition of a market set out, the DOJ describes how the concentration of a market is measured.

The DOJ uses the Herfindahl-Hirschman Index HHI to calculate market concentration. The HHI is calculated by squaring and summing the participating firms’ market shares. There is a three tiered standard for determining likely challenge of a merger by the DOJ based in the HHI. A post-merger HHI below 1000 is considered unconcentrated and of little concern. A post-merger HHI between 1000 and 1800 is considered moderately concentrated and an increase of more than 100 points raise significant competitive concerns. A post-merger HHI above 1800 is considered highly concentrated and ant increase of more than fifty points raises significant competitive concerns. An important consideration the DOJ makes is that of changes in technology. Such changes can either understate or overestimate market concentration. Specific to the AT&T mergers, changes in technology such as cell phone technology and voice over internet protocol play a large part in determining whether AT&T is becoming a monopoly again and will be discussed further in later sections. The anti-competitive effects of merging firms involves restricting output and creating stable market shares, engaging in customer or territorial restrictions, or agreeing on a common price or fixed price differentials. The DOJ considers efficiency gains inasmuch as they apply to the merging firms and can be substantiated. “Efficiency claims will not be considered if they are vague or speculative or otherwise cannot be verified by reasonable means.” While verified efficiencies can counteract some anti-competitive harms resulting from a merger, “[e]fficiencies almost never justify a merger to monopoly or near-monopoly.”

FCC FOUR PRONGED TEST FOR DETERMINING PUBLIC BENEFIT

The FCC, as stated by General Counsel Christopher J. Wright, uses a four pronged test when deciding whether to grant a transfer of licenses in a merger case. The test rises from the FCCs duty to ensure that a merger be in the public benefit, convenience, and necessity. First, the FCC determines whether the merger violates any statutes. Next, the FCC determines whether the transfer would violate a regulation. Third, it considers whether the merger would “frustrate” either the regulation or statutes’ purposes. Finally, the FCC determines if the merger would deviate from the pro-competitive goals of the Telecommunications Act and the Clayton Act.

SBC/BELLSOUTH JOINT VENTURE

In 2000, SBC and Bellsouth announced their intent to combine their wireless communications services. SBC and Bellsouth are the largest and third largest of the four remaining RBOCs. Both SBC and Bellsouth provide local exchange lines, but in distinct markets. However, in many areas, SBC and Bellsouth are direct and significant competitors in the wireless communications market. In fact, in the cellular overlap regions described by the DOJ, SBC and Bellsouth are the only two licensed cellular providers.

The DOJ challenged SBC and Bellsouth’s joint venture. The issue was that because in many cellular/pcs overlap areas SBC and Bellsouth were two major competitors among very few others and because in the cellular overlap areas SBC and Bellsouth were the only competition present, combining their wireless businesses through a joint venture would “substantially lessen competition.” Cellular areas are where service is provided on an 800 Mhz frequency and PCS areas are where service is provided on just under a 2 Ghz frequency. The DOJ argues that since the HHI for these markets is “already in excess of 2600″ and since after the joint venture the index will rise “in excess of 4800″, allowing the merger would harmfully concentrate an already highly concentrated market. Also, in the pcs/cellular overlap areas, the HHI already “exceeds 2000.”
[a]s a result of the loss in competition between the SBC and BellSouth wireless mobile telephone services, there will be an increased likelihood both of unilateral actions by the combined firm in these markets to increase prices, diminish the quality or quantity of service provided, or refrain from making investments in network improvements, and of coordinated interaction among the limited number of remaining competitors that could lead to similar anticompetitive results.
The final judgment required either SBC or Bellsouth to divest their wireless service interests in each of the overlapping markets. This ensures that despite losing a competitor in these markets, a third party can take their place. The court approved the final judgment stating that it is in the public interest.

The FCC agreed with the DOJ’s assessment. The FCC found that the consent decree remedies cross-ownership problems in states of concern, and that the joint venture will not substantially lessen competition. Since the divestitures provide for a means of maintaining competition in highly concentrated markets, and since new wireless carriers are expected to continue entering the markets, harm to competition is unlikely. Also, since the combining of SBC and Bellsouth’s wireless operations will streamline their business, cut the costs of providing service, and allow the company’s to provide competitive nationwide service, there is a verifiable benefit to the public. The FCC therefore approved the joint venture.

SBC/AT&T MERGER

In 2005, SBC Communications inc., sought to merge with AT&T. The department of justice filed a complaint alleging competitive harms resulting from the merger. The problem, the DOJ argued, was that SBC and AT&T were, in many cases, the only two providers of “last mile” connections to commercial buildings in SBC’s geographical territory and that the merger would “significantly lessen competition” by bringing the number of providers from two to one. These “last mile” connections are the wiring that connects the building to the service providers’ network. If SBC were allowed to merge, these “last mile” private line connections would be controlled by one company and the result would be a substantial lessening of competition in the sale of private lines, the sale of voice and data service over the private lines, and the price of these would increase above pre-merger levels.

When competition decreases from two providers to just one, a market is monopolized unless a new entrant enters the market. Initially, the competition, though still very concentrated, ensures that neither firm chooses to arbitrarily raise prices. If one firm chooses to do so, the other will likely gain their market share by attracting the consumers willing to substitute. If the merger does take place and considering the substantial investment necessary to build “last mile” connections, the threat of monopolization is significant because entrants are unlikely to enter due to high costs and irreversibilities. Once the investment is made, it is difficult to back out. The post-merger company could raise prices enough to profit, but keep them low enough to deter would-be-competitors.

On its face, the SBC/AT&T merger seems headed exactly towards monopolization. But because these concerns are valid and obvious, SBC and AT&T agreed to divest the assets of concern to third party buyers. In areas where the two companies were the only third providers of “last mile” connections, they had to either enter into agreements with a party who could use their unused fiber connections, or give up their right of use of the greater of eight fibers or half of the unused fiber to a third party who could provide telecommunications services. This would, theoretically, result in another party, or more than one other party taking the place of the lost competition resulting from the merger. Therefore, if the merged company tried to raise prices, there still would be another provider who could attract the effected consumers and thereby deter monopolistic behavior. The court agreed that the DOJ did a reasonable analysis and that the consent decree reasonably remedies the anticompetitive concerns.36

The FCC also agreed that the divestitures would sufficiently remedy the anti-competitive concerns alleged by the DOJ. They cited that in many cases, a significant number of competitors will remain post-merger with excess capacity. Also, the rise of wireless communications and VoIP services are likely to put increasing competitive pressure on the merged company. In fact, from 1988 to 2005, while the percentage of total consumer expenditures on telephone services decreased from 100% to 57%, the percentage spent on wireless services increased from 0% to 43%. Since the amount consumers spent on telephone services as a percentage of all goods and services has remained approximately the same throughout this time, clearly consumers are treating wireless services as substitutes for wireline services. The FCC stated that customers would benefit from the increased economies of scale and the efficiency gains that would result from the merger. Therefore, the FCC chose to approve the merger with divestitures.

IMPORTANCE OF VoIP FOR COMPETITION

In considering the significance of voice over internet protocol in deterring anti-competitive behavior, an AT&T bundle is compared to separate firms’ components providing similar services. Specifically, the AT&T triple pack is compared to Dish Network Cable, Verizon DSL, and Vonage telephone service.

Figure 2 AT&T Bundle Compared to Vonage telephone, Dish Cable, & Verizon DSL

With an AT&T bundle priced at $107.99, a consumer experiences cost savings of $13.02 by utilizing the components from different firms. Though this set of products provides cost reductions and increases competitive pricing by placing pressure on telephone services to decrease prices, VoIP is not as widely accepted by consumers as a perfect substitute for traditional phone service. Concerns about reliability in emergencies, functionality of hardware, quality of customer service from a new firm, and long term sustainability of the firm in the market hinder free substitution between traditional phone service and voice over internet services. Nevertheless, VoIP market is expected to grow “at a compound annual rate of 20 percent over the next four years”. As a result, increased consumption of lower cost alternatives to traditional telephone services will maintain strong pressure on telecom companies to lower costs of telephone services or enter the voice over internet telephone market.

SBC/BELLSOUTH MERGER

In 2006, AT&T announced its intent to merge with Bellsouth. While the deal disquieted many consumers and even some members of Congress, the DOJ decided not to challenge the acquisition. After the SBC/AT&T merger, the two companies were required to divest certain assets in areas where their services overlapped. The divestitures brought in third party competition in those areas. The DOJ had done a careful analysis of the mergers affect on local private lines, residential local and long distance service, internet service, wireless broadband service, and other telecomm services provided to business customers. The DOJ stated that as a result of those divestitures, not requiring divestitures in the AT&T/Bellsouth merger “is not likely to lessen competition substantially.”

The DOJ stated that post-merger, AT&T would still face significant competition in the provision of voice and data communication services in AT&T/Bellsouth overlap areas. In regards to local and long distance services, the DOJ stated that because of emerging regulatory requirements, the merger is unlikely to harm competition. In the internet service market, the DOJ conceded that AT&T’s customer base would significantly increase, but the market concentration would not significantly increase. Furthermore, the merger would not give AT&T enough spectrum in any geographical area to raise competitive concerns in the provision of wireless broadband services. In regards to other services provided to business customers, the DOJ stated that because there is significant existing competition, new technologies are emerging in the market, and AT&T and Bellsouth’s services are largely complementary, the merger does not raise competitive concerns.

Unlike the DOJ, the FCC had doubts about the harms that might come out of the AT&T/Bellsouth merger. The most significant concerns were regarding internet provisioning and wireless broadband services. AT&T agreed to make certain promises in regards to these concerns. The company agreed to divest its 2.5 GHz spectrum license to help spur ‘third pipe’ options for competitive wireless broadband services. Additionally, AT&T agreed to maintain network neutrality for three years, and to provide additional options for internet services to customers. AT&T offered to provide stand-alone internet service, provide service to 100% of its customers in the 22 state region, and to provide a low cost basic broadband option for $10.00 including a free modem to dial-up
customers. While the internet aspect seems to fall outside of the scope of telephone communications, the premise that VoIP is an emergent competitor to AT&T’s telephone services makes these concessions integral in preserving competition. If AT&T decided to force bundling of land line and internet services, then they would be deterring VoIP competition similar to how United Shoe deterred repair service competition by bundling it with the lease of their product. Finally, AT&T’s rates were capped by the FCC to ensure that business access service prices are not raised for those needing special access service.

The FCC found that significant public benefits would be realized through the merger. These benefits mainly encompass AT&T’s intent to quickly increase its broadband deployment. The FCC states that AT&T would enhance competition among multichannel video programming distributors, increase national security and disaster recovery, benefit government services, unify Cingular ownership (the joint venture between SBC/Bellsouth), and provide cost savings through economies of scope and scale. The FCC found that the merger is in the public interest, competitive harms were addressed through concessions, and therefore, the merger was approved.

ECONOMIES OF SCOPE

In the case of AT&T mergers, the prevailing rational made by the telecom company is that merging will allow it to experience efficiency gains through economies of scope and scale. Economies of scope occur when “it is less costly to combine two or more product lines in one firm than to produce them separately”. Specifically, when it is cheaper to share an input between two or more products or services, than the total cost if the input used on each product separately, economies of scope exist. Additionally, scope economies can come from cost complementarities and/or where fixed costs exist. Cost complementarities exist when raising the output of one product does not raise the marginal cost of the other product, and may decrease the marginal cost with higher outputs. Spreading fixed costs across more than one product line may allow for economies of scope as well. This occurs when the fixed cost of producing two or more products is less than the fixed costs of producing those products separately. Providing telecommunication services is a capital intensive industry with high fixed costs that require significant initial investments. In order to reach households and businesses, telecom firms must have access to the locations through “last mile lines.” Additionally, telecom companies must have the infrastructure to relay signals and packets of information from the initial user to the end user. However, once the initial fixed costs are “shouldered,” the marginal costs of providing services to an additional consumer drop significantly. As digitalized media becomes the standard, the “last mile” problem lessens because various data services can be transmitted through existing copper, fiber optic, and coaxial lines. The result is an industry that has large fixed costs, cost complementarities among services, and small marginal costs for providing services. These elements seem, intuitively, to support economy of scope possibilities resulting from the AT&T mergers.

In order to determine whether economies of scope are apparent and benefiting consumers, current advertised bundle prices for telephone, cable, and internet prices will be compared to standalone costs provided, where available, by specialized firms. Promotional rates will be avoided to the exception of bundle pricing. Generally, if economies of scope are present, the bundled services price should be less than the total cost of services purchased individually.
Figure 3 AT&T Triple pack bundle vs. Component pricing for like services

Figure 3 visually demonstrates how an AT&T three product bundle provides consumer savings over purchasing the components individually from separate firms. The difference between the bundle and components amounts to 1.8%. Based on current advertised pricing, services comparable to AT&T’s triple pack can be purchased from Sage Communications at $39.99, Dish Network for $39.99, and Verizon for $29.99. Bought separately, the total cost is $109.97 compared to a bundle price of $107.99. If AT&T is engaged in mixed bundling in a monopoly-like manner, we would expect AT&T’s component prices to rise in order to extract surpluses from consumers with extreme tastes, while using a high bundle price to attract consumers who place positive valuation among the products. Instead, the data suggests that AT&T bundling is more competitive than monopolistic. Since the bundle price is less than the component pricing, AT&T does not appear to be pricing it like a monopoly. Considering the competitors’ pricing in the market, it would be difficult to raise component prices without forcing consumers to substitute service providers. In fact, there is little difference between competitors’ pricing of components and AT&T’s. The difference arises where a bundle is compared to separate component packaging by separate firms. Furthermore, the fact that many competitors within the telecommunications market offer telephone service, high-speed internet, and, in some cases, cable suggests that specialization is not possible due to high cost complementarities and the “spreadability” of fixed costs across different products. For example, both Wide Open West and Comcast offer telephone, cable, and high speed internet bundles. Verizon offers landline, high speed, and wireless services. Earthlink offers both high speed internet and landline telephone services. The only telecommunications provider who specializes, with the exception of Vonage, is Sage Communications. Though, Sage provides dial-up internet access as well. This forcefully suggests that claims of economies of scope do indeed have merit. Therefore, since AT&T’s bundle and component pricing appears competitive and many firms rely on providing several telecommunications products besides landline telephone service, monopolistic mixed bundling is not present in this market and economies of scope seem likely.

ECONOMIES OF SCOPE AND SCALE AND THE EFFICIENT FIRM SIZE

It is unlikely that economy of scope and scale claims are likely to result in natural monopoly claims as well. Because of advances in technology, such as microwave transmission and fiber optics, the telecommunications market experiences a smaller efficient firm size. Microwave transmissions decrease the fixed costs associated with providing data transmission and fiber optics allow for a greater quantity and type of data to be sent at once. Additionally, since the advent of the personal computer and its widespread adoption by the public, as well as the ability to use telecommunications technology for various purposes other than telephone data transmission, the demand for these services experienced a large increase. So, where once a firm like AT&T might have made the claim that it is more efficient for one firm to provide all services instead of a series of competing firms providing them, with a smaller efficient firm size and greater market demand, it makes economic sense that there is room for many smaller efficient firms within the telecommunications market. As fixed costs to entry decrease, it is more difficult for an incumbent firm to exercise market power to raise prices and decrease output. The threat of entry is too great for the incumbent firm. In figure 4, a firm experiences economies of scale which allow for a sustained natural monopoly only at demand curve D. However, If the demand shifts outward to D’, the same price level can sustain two firms. It would be inefficient for a single firm to produce quantity Q’. It is likely that this is the scenario in telecommunications today, rather than one in which subadditivity allows for a natural monopoly. The smaller efficient size of firms in the market allow for many firms to produce the quantity demanded rather than one large firm. This scenario is furthered by FCC data stating that the market share for AT&T’s long distance operations has declined. Furthermore, AT&T’s revenues from long distance service have been declining from 1999 to 2004. This suggests that the efficient firm size for long distance service is decreasing.

Figure 4 Efficient Firm Size

THE GLOBAL MARKET AND DEREGULATION

In an increasingly globalized economy, telecommunication companies rely on economies of scale and scope to remain competitive internationally and domestically. The Telecommunications act of 1996 lifted restrictions on foreign ownership of domestic telecommunication providers and domestic ownership of foreign providers. This, in part, may explain why the 1990’s and the early to mid 2000’s have seen a “flurry” of telecom mergers. The threat of increased foreign competition from firms that may not have reciprocal market deregulation in their domestic countries, leads U.S. telecom companies to merge in search of economies of scale, economies of scope, and stable market share. If a foreign telecom is granted a monopoly in its domestic market, it faces no threat from outside companies encroaching on its market share. However, that company does pose a threat to U.S. telecoms that do not benefit from government sanctioned monopoly status. As a result, U.S. telecoms are trying to ensure survival by increasing their scope of services and scale of production by consolidating domestically and entering foreign markets. By entering foreign markets via mergers or acquisitions, telecom companies can benefit from economies of scale by increasing the use of their unused bandwidth. Additionally, combining these systems allows for more efficient network optimization leading to output-side scale economies. Furthermore, telecom clients with international needs require telecommunication services which are stable and reliable across international lines. As a result, telecom companies must enter foreign markets to keep those clients. Therefore, while it may appear the domestic telecommunications market is becoming more concentrated, in fact, a driving force is the intense international competition U.S. telecoms face from foreign providers. This can be mutually beneficial to both consumers and firms. While firms such as AT&T merge to gain from economies of scale and scope to become more competitive internationally, consumers gain by having more services available, more conveniently, at lower costs.

OLIGOPOLY CONCERNS

With increased consolidation among telecom companies to provide a greater scope of services on a larger scale for the purpose of competing more effectively on an international level comes an increased concern of collusive behavior. As fewer firms gain greater market share, the ability to coordinate increases without external monitoring and regulation. In a competitive market, any firm trying to raise prices above marginal cost will be punished by consumers who switch to “honest dealers.” The competitive market includes many sellers and many buyers. Therefore, consumers have a wide variety of service providers to choose from. Suppose the sellers have coordinated to decrease output and increase prices. Potential entrants, observing potential profits, will enter the market and bring the price back to a competitive equilibrium. However, the telecommunications industry does not have many sellers. Even so, it is highly regulated and strictly supervised. An attempt to coordinate anti-competitive behaviors among firms has a strong chance of being discovered. Additionally, the penalties for price fixing are severe and include fines and treble damages. There is a strong deterrent, especially in a highly regulated, strictly monitored, and highly concentrated market, not to attempt engaging in collusive behavior. Not only does government observation deter collusion, but coordination problems do so as well. Consider the issue in a typical prisoner’s dilemma framework. Two competing firms can realize greater profits by deviating from their dominant strategy and restricting output. However if one firm deviates from the agreement, not only does the deviating firm realize greater profits than those available colluding, but the firm honoring the agreement suffers greater losses than difference between collusive profits and the dominant strategy profits. Since there is a strong incentive to deviate, coordinating output restrictions is risky. As the number of firms increases, coordination becomes even more difficult since monitoring participants and punishing deviant firms becomes less feasible. Therefore, because the industry is strictly monitored and regulated, the penalties for colluding are severe, the incentives to deviate from collusive agreements are strong, and enforceability of collusive agreements becomes more difficult as more firms participate, the likelihood of collusive behavior in the U.S. telecom industry is small.

CONCLUSION

While the various mergers taking place over the past decade have raised many concerns among business and private consumers, as well as regulators, the DOJ and FCC attempted to strike a fine balance between the public benefit of these mergers and their anticompetitive effects. Notably, each of the mergers mentioned above raise a significant concern over lessening of competition because of the size of the companies and the high concentration within markets. Specifically, the DOJ and FCC did not have significant concerns where the two companies operated in differing geographical territories. The logic being that there was already competition in these areas and the merger would simply create an entity that served a wider geographical area and competed with existing competitors in the various regions. The concerns related to areas where the two merging entities were actively competing against each other. Because divestitures were required in almost all cases where the merging entities’ services overlapped, the threat of unilateral or coordinated anticompetitive behavior was addressed. Additionally, because the companies would enjoy increased economies of scale, customers would benefit from cost reduction.

Perhaps most importantly, as the mergers take place over the span of seven years, emerging technologies decreased the likelihood of anticompetitive behavior. Initially, when the SBC/Bellsouth joint venture raised concerns, the Wireless communications market was itself the relevant market. Over the years, this market broadened to include wireline markets. Commissioner Michael J. Copps stated regarding the AT&T/Bellsouth merger of 2006 that
[T]his should prove an enormous boon to customers who are happy with their wireless service and seek to “cut the cord” on wireline telephone service, or who want to take advantage of competing VoIP services that have the potential to lower consumer phone bills.
No longer is the wireless market limited to wireless services such as cellular communications, but the technology has become a means of providing competition in traditional wireline telephone service markets as well. As the cost of purchasing a cellular phone service has decreased over time and cellular phone companies have increased coverage areas, cellular telephones have become a viable alternative to landlines. Additionally, VoIP continues to be cited more frequently as a low cost competitor to traditional telephone services. Today, business and private customers have various choices for VoIP services such as Vonage, AT&T’s Callvantage, and Skype. This viable alternative is limited only by access to broadband internet, concerns about which were raised in the AT&T/Bellsouth merger. It is encouraging to note that the FCC recognized the need for increased broadband deployment and has required merger approval to be conditioned upon increased broadband accessibility to customers. Perhaps twenty or even fifteen years ago, concerns over the flurry of RBOC mergers recreating the Ma’ Bell monopoly would have been valid. However, competition has increased since the original break up and new technologies make it even more difficult to create a monopoly in the telecommunications industry.

There are a couple of issues that threaten wireless and voice over internet competition. First, there is a limited amount of spectrum available to wireless carriers. The FCC regulates the availability of spectrum and any new carriers wishing to enter the market must invest a substantial amount of dollars to purchase spectrum licenses. These barriers to entry limit competition and the deployment of new broadband services by existing carriers. Second, network neutrality is not guaranteed in the future. Broadband companies seek to gain the right to charge web content providers a fee for using their bandwidth. Currently, such companies must allow their customers unfettered access to all websites. But if the FCC or Congress do not require it in the future, VoIP competition could lessen. Broadband companies could restrict voice over internet companies’ access to customers by charging fees for faster “lanes.” In fact, CEO Chairman Whitacre voiced such an opinion in a Business Week article.
Now what they would like to do is use my pipes free, but I ain’t going to let them do that because we have spent this capital and we have to have a return on it. So there’s going to have to be some mechanism for these people who use these pipes
to pay for the portion they’re using.

The fee based access broadband companies seek to implement is a common concern of consumer advocates.
The other potential competitor — voice-over-internet phone service (VOIP) — that relies on broadband connections, is threatened by the ability of the Bells and cable companies with broadband wires to disrupt VOIP transmissions, the groups say.
Despite these future concerns, it is clear that AT&T is not becoming a monopoly. The telephone services industry still has robust competition in place. As evidenced by current pricing and bundle options, AT&T is providing consumer savings by utilizing economies of scope and scale. Sheer size alone should not elicit cries of monopoly, but attention must be focused on whether the company can single handedly or through coordination “rip off” customers or block out competition causing inefficiencies that profit only the company. New technologies have changed the landscape of telecommunications. The efficient telecom firm is no longer a natural monopoly. Significant increases in the demand for telecommunications “opens the door” to many smaller efficient firms. Innovative internet services such as VoIP put pressure on existing telephone service providers to lower prices. Competing firms create a more elastic demand curve causing significant losses for any firm attempting to raise telephone prices. Close government supervision deters collusion and stiff penalties for price fixing make such agreements unlikely. Finally, international competition forces existing domestic telecom firms to seek efficiency and, as a result, provide better services at lower costs to the consumer. For all of these reasons, the reemergence of Ma’ Bell is highly unlikely. To the contrary, there is strong competition being observed in the telephone service provider industry. Viewing the merger trend from a bird’s eye perspective, monopoly concerns can be a tempting observation. But once the substance of the mergers is analyzed more closely, one comes to the conclusion that it is highly unlikely the “new AT&T” can exert enough influence to “jack up” prices on its customers and block out competition that would keep the company honest. Not only does the economic intuition suggest monopolizing by AT&T is highly unlikely, but the FCC and DOJ have closely scrutinized each of the mergers discussed and, in each instance, anticompetitive concerns were alleviated by requiring divestitures, price caps, additional products, network neutrality, and promises to increase service availability. Therefore, an analysis of the recent AT&T/Bellsouth/SBC mergers concludes that Ma’ Bell is not lurking in the shadows.

DATA

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