The revenge of the Baby Bells

It was 30 years ago that lawyers from the Justice Department first went into court to ask a federal judge to break up AT&T, and much has happened since then. The breakup of the Bell system into long distance and the regional “Baby Bells.” The rush of new competition and the resulting drop in prices. The decline of wire-line service, and the explosion of voice and data over wireless broadband.

The irony is that after all that entrepreneurial energy and technological innovation and fierce competition, the telephone market once again threatens to consolidate back into the hands of two national giants, AT&T and Verizon, which are direct corporate descendents of Ma Bell.

Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.

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That is the context to keep in mind as the Justice Department and the Federal Communications Commission consider AT&T’s proposed $39 billion acquisition of T-Mobile.

The government has two choices.

It could stick with the competitive, lightly-regulated model and try to make it work by blocking a merger of the No. 2 and No. 4 competitors that will leave 75 percent of the wireless market in the hands of AT&T and Verizon.

Or it could acknowledge that, because of powerful economies of scale and limits on the amount of wireless spectrum that is available, the “telephone” market is a natural oligopoly that can support only a handful of players and limited competition — and, by implication, requires much stronger government regulation.

The best support for my formulation is to be found in the filing by AT&T and T-Mobile seeking FCC approval of their deal. In it, the companies make clear that, with the advent of handheld devices that can be used for downloading videos and exchanging e-mails and browsing the Web, the name of the competitive game is spectrum. The companies that have the most of it, and have the capital and the economies of scale to take the greatest advantage of it, will be the survivors in the coming competition. Only they will be able to offer the nifty new applications on a national basis, and by doing so grab market share from those who do not.

Because it has neither the spectrum nor the willingness to invest the needed capital, T-Mobile is not viable — or so the companies claim — while even AT&T now finds itself running out of spectrum in key markets because of the explosive growth in spectrum-hogging applications. A merger magically solves the problem for them while hastening the rollout of a national, next-generation wireless broadband.

The unstated implication of the AT&T filing is that in a world of iPhones and iPads, the limit on spectrum forces a tradeoff between the number of firms that can compete and the level of service that those companies can provide. With fewer companies and less competition, there will be enough spectrum for all of them to offer 4G-type service across the country. With more firms and more competition, by contrast, there won’t be enough spectrum for many, if any, to offer the latest broadband applications.

AT&T, of course, doesn’t want anyone to draw such implication, because if you take it to its logical conclusion, it means its merger with T-Mobile must be deemed bad for competition. After all, if T-Mobile, as the fourth-largest player in the industry, is too small and has too little spectrum to be viable, then how can it turn around and say that much smaller players such as Leapfrog, Cellular South and LightSquared will provide all the competition that is necessary to keep AT&T honest? The answer, of course, is that before very long they won’t, which is why on standard antitrust grounds, this merger ought to be a non-starter.