February 7, 2005

February 7, 2005 | WebMemo on Regulation

Ma Bell's Retirement: No Big Deal

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."[1] Yet, when SBC's purchase of AT&T was announced January 31, it wasn't even the deal of the week. The total sale price-$16 billion-was a third of what Proctor & Gamble paid for razor blade maker Gillette only three days before. And Hundt himself called the AT&T purchase "no big deal."


The deal says a lot about how far the telecommunications industry has come since the days of monopoly. 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 change in telecommunications began in the 1970s, when MCI and others were first allowed to compete in long-distance markets. Then in 1984, AT&T, under the terms of a consent decree with the Department of Justice, spun off its local service operations to seven regional "Baby Bell" companies-including what is now SBC. That makes SBC's deal a bit of a "mother and child" reunion, as one newspaper headline put it. But reunion or not, the telephone family will never again be what it was.


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 over 365,000 employees in 1985, it has only 47,000 today.[2] AT&T no longer dominates long-distance calling: She only has only some 20 percent of that market. And the standalone long-distance market is itself shrinking, 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 areas of the telecom world, notably wireless and broadband Internet access, have already 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 faces increasing competitive challenges. The number of subscriber lines the Bells serve is actually shrinking, as Americans move over to wireless phone service and emerging Internet telephone 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 is unlikely that any will reject the deal outright. 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 to favored groups to increased investment in specified areas. Other deals may also be coming in the next year: MCI is already rumored to be looking for a merger partner.


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 AT&T's current management has (a low hurdle). But overall, the trends in telecommunications are likely to stay the same. Today's telecom industry is 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 policymakers. 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 was worth less than a razor blade company. Competitive markets should work that way, and do.


James L. Gattuso is Research Fellow in Regulatory Policy in the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation.

[2]From Fortune.com, Fortune 500 archive, 1985, and SBC-AT&T fact sheet "SBC/AT&T At a Glance," undated.

About the Author

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