Aren’t We Glad They Broke Up Bell?
The Baby Bell family seems to be ridden with incest and cannibalism. This week, the union of two Baby Bell sisters, Bell Atlantic and NYNEX, was finalized. Less than a month ago, SBC Communications cannibalized its sister Baby Bell, Pacific Telesis. These mergers make no sense strategically or synergistically. The only rationale seems to be that bigger is better, perhaps in the belief that one or a few “maxi” Bells are financially stronger to take on AT&T; in a battle over long distance. But these two mergers are only the beginning: The old Bell System seems to be rising from the ashes of the 1984 AT&T; breakup.
The telephone operations of US West would make a perfect geographic match to the new SBC formed by the acquisition of Pacific Telesis, and hence it would be no surprise if SBC and US West’s telephone operations merged to create a maxi Bell West. Bell South would seem to be a perfect partner to join the Bell Atlantic/NYNEX merger and create maxi Bell East. This would then leave Ameritech partnerless and in a quandary whether to join the West or the East, or to act as the glue combining all into a single maxi Bell. Such a gigantic combination would have the financial strength to purchase AT&T; and recreate the old Bell system, but without the old manufacturing arm, Western Electric, which AT&T; will set loose this year as Lucent Technologies.
These mergers and scenarios have been put in motion in the name of competition, under the protection of the new telecommunications legislation that was signed into law in February and supposedly is intended to stimulate increased competition. Rather than fostering competition, the new legislation seems to have unleashed the Baby Bells in a feeding frenzy on one another. When this period of cannibalism is over, I suspect they will devour either AT&T; or the cable television industry, or both.
In the old Bell System, strong central direction by AT&T; kept the local telephone companies in line. Now, the Baby Bells have become uncontrollable in their ambitions. Although AT&T; could have blocked the apparent plans of the Baby Bells to monopolize all telecommunication, it missed the real threat from the Baby Bells. AT&T; must now obtain a national presence in the provision of local telephone service to counter the moves of the Baby Bells. The only way for this to happen would be for AT&T; to acquire GTE, which offers local telephone service nationwide.
Management of the communication industry seems unable to offer anything more creative than acquisitions, mergers and divestitures as the way to shape the future. A few years ago, Bell Atlantic attempted to acquire the cable TV giant TCI, but saner financial reason prevailed and the deal fell through. Now Bell Atlantic wants to merge with NYNEX. A real question is why anybody would want to be involved with NYNEX and its problems. NYNEX has one of the lowest productivities of the seven Baby Bells because it hasn’t been able to trim its surplus employee rolls. Although Bell Atlantic reduced its number of employees by 14.5% in 1995, NYNEX cut only 6.8%. The larger number of employees at NYNEX is reflected in higher operating expenses and a lower net income compared to Bell Atlantic. Bell Atlantic’s after-tax profit margin for 1995 is about 14%; NYNEX’s is only 8%. NYNEX’s long-term debt is about 50% larger than Bell Atlantic’s. NYNEX is an unproductive, low-profit, debt-ridden operation compared to Bell Atlantic.
A single maxi Bell providing local telephone service throughout the nation is not necessarily bad. However, such an all-encompassing operation would be impossible to regulate by the individual states, and some form of federal control of local telephone service would be required. Since telephone service should be universal, perhaps such federal regulation would not be a bad idea.
Indeed, I continue to wonder whether the provision of telecommunication service is a natural monopoly. Any attempt to force competition would then only be contrived, and if left alone, the cohesive forces of natural monopoly would cause the entities to coalesce, just as seems to be starting to happen today.
Monopoly is not inherently evil. What can be evil is unregulated, unfettered monopoly, and this unfortunately is what seems to be evolving at the local Baby Bell level. Ultimately, the “bell” will go off at the Justice Department.
