Of Public Interest

Volume 2, Number 4
April 2000

High Tech Mergers Promote Competition in the Information Economy

by Richard E. Wagner

Mergers among high tech companies are continually in the news. In the telecom area alone, we have AT&T and TCI Cable, AOL and Time Warner, and MCI WorldCom and Sprint, to name just three among many. It is only natural to wonder what is going on with these mergers.

There is a long-standing view that is enshrined in our antitrust laws, which holds that mergers allow businesses to escape from competitive forces in the marketplace. This traditional view of competition and antitrust is reflected in the merger guidelines that are used by the Department of Justice and the Federal Trade Commission. These guidelines place great stress on measures of concentration in an industry. A merger among significant competitors increases concentration, and hence is rendered questionable by those guidelines.

The high tech mergers we have been hearing so much about recently, however, have nothing to do with escaping from competitive forces. To the contrary, those mergers are fundamentally about competitors trying to become more competitive. An important function of mergers and acquisitions is to enable businesses to reshape their commercial capabilities through organizational reconfiguration.

Consider, for instance, the proposed merger between MCI WorldCom and Sprint. The Department of Justice is challenging this merger on the grounds that it increases concentration within the market for long distance telephone service. AT&T has about half of the long distance market, and MCI WorldCom and Sprint have about 30 percent. After the merger the two largest firms would have 80 percent of the long distance market. What is wrong with this picture of merger as a means of monopolization is that it looks backward to where we were and not forward to where we are going. Long distance markets are becoming increasing competitive and at the very same time are actually disappearing.

Most Americans can now choose among several long distance carriers. Even more competition is on the way. Baby Bells in New York and Texas have been granted permission to enter the long distance business, and before too long all Baby Bells will be able to do so. The history of long distance service since the breakup of AT&T in 1984 has been one of a continuing expansion in the competitive offerings from which consumers can choose.

At the same time that long distance competition is increasing, the long distance phone market is disappearing. Not too long ago phones were used exclusively for talk. Now the action in tele

phony is increasingly in the transmission of data and video. The separation between local and long distance phone service is quickly becoming a thing of the past. The future will be one of all-distance service, and different firms are trying different ways to become competitive in the all-distance market.

This new market setting will be quite different from the world we have experienced to date. Regional Bells will be carrying long distance traffic. Voice traffic will continue to decline relative to data and video. Cable companies will compete with phone companies. Wireless communication will make great strides forward. In the face of these developments, long distance telephony will not survive as a stand-alone business.

Companies that aspire to play major roles in the coming telecom market will have to offer all-distance service and one-stop shopping to be successful. AT&T faces the same type of problem as MCI WorldCom and Sprint, and has adopted cable as its way to be a significant competitor as a provider of all-distance service. MCI WorldCom and Sprint have adopted a different route, one that seeks to combine some of their complementary strengths, thereby allowing the merged firm to be a stronger competitor than either firm would be on its own.

A robust competitor must have a local base, which Sprint has in 18 states. It must also have a presence in urban areas, which MCI WorldCom has but Sprint lacks, as well as in rural and suburban areas, which Sprint has and MCI WorldCom lacks. The combined company will have the ability presently to offer all-distance service to more than half the nation, and will be in a position to expand that reach. Each company has some capabilities that are considered important to future competitive success, but those capabilities are complementary to one another and are stronger when joined together. How things actually work out, of course, is something we will not know until the future arrives. We can, though, appreciate the coherence of the plan that sees the merged firm as being better able to compete as a major player in the coming telecom environment.

This proposed merger is a good example of how mergers can serve as effective vehicles of competition in a dynamic world where new product lines and commercial forms are continually replacing old ones. Consumers gain mightily from this dynamic competition. It would be a shame if those consumer benefits were lost through a misguided application of outdated, static notions of mergers as a way of consolidating past commercial triumphs.

A Publication of:
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