Telecommunications executives, antitrust experts and financial analysts yesterday began debating just what impact the newly formed business alliance between International Business Machines and MCI Communications Corp. would have on competition in the long-distance telephone business.
On one hand, some antitrust officials and industry executives argued that IBM's alliance with MCI will create a more powerful competitor in the long-distance market, guaranteeing at least one formidable rival to the dominant American Telephone & Telegraph Co.
"Two carriers is infinitely better than one," said one antitrust expert who declined to be named.
"AT&T's strength is so overpowering that unless there is substantial strength behind a competitor," it may be difficult for any of the long-distance carriers to be a true rival to AT&T, noted Steven G. Chrust, a financial analyst with Sanford C. Bernstein & Co.
However, Chrust and other analysts quickly noted that IBM's alliance may give MCI enough strength to make it more difficult for the other long-distance companies, such as GTE/Sprint and Allnet Communications Services Inc., to compete.
"This may set MCI so far above the rest of the pack that others may have a hard time succeeding," Chrust said. Already, MCI's share of the long-distance market is about twice that of its smaller competitors, he noted. The new alliance "may force the others to sell or go out of business, so ultimately there will be only three or four long-distance companies in the marketplace," he added.
Under the alliance announced Tuesday, IBM initally will acquire a 16 percent stake in MCI, with an option to increase it up to 30 percent over the next three years. In return, IBM will give MCI the bulk of the assets and operations of Satellite Business Systems, the nation's fourth-largest long-distance carrier, behind AT&T, MCI and GTE/Sprint.
"The number one competitor to AT&T -- and the one with the second-highest rates, next to AT&T -- is gobbling up SBS, which on most comparisons turns up to be one of the least expensive companies for consumers," said Sam Simon, president of Telecommunications Research and Action Center. "It's hard from a consumer's perspective to cheer this as the strengthening of competition. This seems to be the beginnings of concentration in the industry. We will go from a fully regulated monopoly to a totally unregulated oligopoly [where a few big firms jointly control the market]," Simon added.
"The . . . consumer does not win out," echoed John Bain, of Shearson Lehman Brothers. "If anything, this action could tend to lessen competition rather than to increase it," he said, arguing that it was in IBM's interest not to cut prices in the long-distance business because it would force AT&T to engage in a price war in the computer business.
GTE, however, does not believe that IBM's involvement will radically alter the long-distance market. A $1 billion investment "isn't the full force of IBM," whose sales were near $46 billion last year, noted James L. Broadhead, president of GTE's Communications Services Group.
"From our point of view, the agreement doesn't affect the fact that GTE has the financial strength, stability of earnings and technical skills to be successful. We intend to be the major competitor to AT&T in the future."
The disagreement over the competitive meaning of the IBM-MCI deal makes it clear that the alliance has rekindled a heated debate that died down after the court-ordered breakup of AT&T in 1984. One of the arguments for the breakup was that it would increase the long-distance choices for consumers while lowering prices.
With the IBM-MCI announcement yesterday, all industry executives and financial analysts contacted agreed that the debate, now rekindled, would be around for some time as AT&T uses the alliance to argue for less and less government regulation. Today, AT&T is the only long-distance carrier that needs prior approval from the Federal Communications Commission to change its rates or build new network construction.
"The big players like IBM, GTE and others are all in the game," said AT&T spokesman Herb Linnen yesterday. "But only AT&T is subject to pervasive regulation," he contended.
For a long time, AT&T has wanted to get rid of these restraints. Tuesday, minutes after the IBM-MCI deal was announced, AT&T made it clear that it would use the alliance to once again press for deregulation, arguing that the industry is now truly competitive.
Many FCC observers predict that the commission will agree with AT&T. "Given the most recent deregulatory philosophical predilections of the FCC, deregulation is a most likely outcome," predicted Washington attorney Philip L. Verveer.
"That would have highly negative consequences for the genuinely competitive [long-distance] environment," Verveer said.
Verveer and others argued that deregulation could permit AT&T to immediately and drastically drop its prices so low that competitors wouldn't have a chance to compete and would be forced out of the business.