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3/13/2006
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One More Merger And It's 1984 All Over Again

As we learned last week, the reconstitution of Ma Bell is well underway.  As it works to gain approval of the BellSouth acquisition, which reunites five of the eight post-Divestiture companies (Pacific Bell, Southwestern Bell, Ameritech, Bell South, and the remnants of the old AT&T), AT&T is arguing that there is no threat of (re)monopolization.  Virtually anyone can compete in the telecoms marketplace; new entrants such as Skype have made it possible to place calls - even video calls - halfway across the globe at no charge.  But in many markets, that is not exactly the case.

In ca. 12 months time, when the latest merger is consummated, AT&T will be the dominant telecommunications supplier to business in the U.S., with ca. $27 billion in revenue.  In local service, a category of increasing importance, given the propensity for knowledge workers to work from home and other non-Dilbertian locations, AT&T will lead the way with 71 million lines throughout 22 states.   In the mobile world, AT&T will become the dominant provider through the rebranding of Cingular, although competitors such as Verizon Wireless (only partially owned by Verizon) are nipping at its heels.  

Now, all is not 1984 here.  AT&T could lose millions of residential and small business customers to rivals such as Comcast.  But the company does have an opportunity to lock up some markets in a way that it hasn't had since the mid 1980s.

Let me repeat what I said last week: no matter what course of action is taken, things have a tendency to return to their natural form.  As my colleague Amy Wohl noted when we were discussing this last week, there are such things as natural monopolies.  Even when there is competition, I might add.

The telecoms industry swings wildly in terms of competition.  Just as we saw with DSL markets half a decade ago, what we're seeing now in terms of competition is yet another phase the industry is going through.  The next several decades may see multiple cycles of expansion and competition followed by consolidation.

And competition itself in this industry is strongly tied to capacity.  The backbone of the telecoms industry is the network.  A network itself is fairly costly to build but once it's built, the cost of adding and supporting new customers is minimal.  A telecoms company then uses aggressive pricing to fill up the network.  The problem with this is that prices eventually sink to a point where revenue does not cover cost.  That in turn deters future investment.  This can result in a lower quality of service, poorer customer service, and eventually unhappy customers.  Another strategy, consolidation, which is currently in vogue, extinguishes excess capacity and minimizes competition.  With less competition, prices can go back up to cover costs.  If prices continue to rise, that in turn may entice other companies to enter the fray, which will start off another round of price cutting.

So what does this mean for the knowledge worker and the enterprise?  One possible outcome might be the two-tier Internet we've been hearing a lot about, which ignores the fact that customers are already paying a monthly fee for Net access.  A two-tier Internet might also limit innovation, as many innovations we take for granted today came from companies that were originally outsiders, such as Hotmail and Skype.  

We'll continue this conversation next week.

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