February 19, 2005

February 19, 2005 | Commentary on Regulation

Ma Bell's Retirement

Only a few years ago, it would have been considered the deal of the century. In 1997, then-FCC chairman Reed Hundt called it "unthinkable."

Yet, when SBC's purchase of AT&T was announced recently, it wasn't even the deal of the week. The total sale price-$16 billion-was a third of what Procter and Gamble paid for a razor-blade company only three days before. And Hundt himself called it "no big deal." Within a few days, Verizon announced its own plans to take over MCI.

While the acquisition was extensively reported in the media, the initial reaction generally was one of nostalgia rather than concern. Sure, there was scattered hand wringing about the old Bell monopoly being recreated. And the combination will make SBC the largest telecommunications company in the U.S. But, for the most part, the deal simply spurred reflection on how far we have come since telephony's monopoly days.

For those under 30 or so, it's hard to imagine what that era was like. For most of the 20th century, the Bell System, as AT&T was known, controlled all long-distance telephone service in the U.S., and the vast majority of local traffic. "Ma Bell" was the telephone company, fittingly represented by its New York stock exchange symbol: simply T.

The Bell System was broken up in 1984, when AT&T was forced to spin off its local service to seven regional "Baby Bell" companies, including what is now SBC. This makes SBC's deal a bit of a "Mother and Child" reunion, as one newspaper headline put it. But the telephone family will never again be what it was. In telecommunications, as elsewhere, you can't go home again.

The fact is that AT&T is a shadow of its former self. Rather than a returning matriarch, Ma Bell is more a frail, aging parent who no longer can take care of herself. AT&T's deterioration has been steady and remarkable: From more than 365,000 employees in 1985, it has only 47,000 today. AT&T no longer dominates long-distance calling: It has only some 20 percent of that market. The long-distance market is itself shrinking as a stand-alone industry, as consumers increasingly receive their long-distance services with other services, such as wireless, as part of a bundle. Most of AT&T's operations in more robust parts of the telecom world, notably wireless and broadband Internet access, have been sold off to others.

Nor is SBC likely to make itself into a new Ma Bell. Like the other Bell children, Verizon, BellSouth and SBC, it is facing increasing competitive challenges. The number of subscriber lines they serve is actually shrinking, as Americans move over to emerging Internet and wireless services. And cable TV firms have stolen a march on the Bells in broadband connections, with some two-thirds of the market.

So what comes next? The SBC-AT&T deal now faces a gauntlet of regulatory approvals, from the Federal Communications Commission, the Department of Justice, and dozens of state regulators. It's unlikely any will reject the deal. But the process could take a year or more-and regulators could use the process to impose their own wish lists of regulations on SBC-from subsidies for favored groups to increased investment in specified areas.

For the average American, however, the SBC deal is unlikely to mean much. Consumers may be better off if SBC can put AT&T's assets to better use than has AT&T's current management (a low hurdle). But overall, the trends in telecommunications are likely to stay the same. Today's telecom industry is becoming increasingly competitive and diverse, to the benefit of consumers. Far from threatening those trends, SBC's acquisition of AT&T underscores them.

AT&T's demise, however, does provide an important lesson for policy-makers. Despite much populist rhetoric about the power of big corporations, AT&T's massive size gave it no protection from the marketplace. In the end, AT&T had less value than a razor-blade company. Competitive markets should work that way, and do. That is the real news here.

James Gattuso is a research fellow in regulatory policy at TheĀ  Heritage Foundation, a Washington-based public policy research institute.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies

First appeared on Reason Magazine Online