Tele-Mergers: Rhetoric No Substitute for Reality

One of the vexing problems journalists face in covering merger-mania in the telecommunications business is that we’re supposed to answer pesky questions like, “Why are they doing this?” and “What does this all mean for the reader?”

Dutifully, we report the companies’ explanations. WorldCom, in offering $30 billion in stock for MCI Communications a few weeks ago, answered the “why” question with lots of numbers relating to operating efficiencies and economies of scale.

GTE, in countering WorldCom with a $28-billion all-cash offer for MCI last Wednesday, spoke of “bundled service offers” and “the wherewithal to make the investments in infrastructure necessary to foster innovation.”

Similar talk accompanied the combination of Bell Atlantic and Nynex, and of Pacific Telesis and SBC Communications. More is surely just around the corner--especially now that AT&T;, which is expected to announce the appointment of C. Michael Armstrong as its new chairman today, is ready to join the fray.

Granted, corporate news releases are not generally repositories of unvarnished truth, but in the case of these mergers and prospective mergers--all among the biggest in history--the verbiage is especially obfuscating.

For the truth of the matter, I’m now convinced, is that there are no clear answers to these questions. Or, more precisely, the key to the first question is that businessmen like to do deals and run big companies and always hold out the hope that in doing so they can gain the kind of market power that regulators are supposed to forbid. Although they pay lip service to their deals being “pro-competitive,” the real goal is to reduce competition by eliminating rivals.

As far as what this means for the average reader, the answer is “not much.”

OK, I know this sounds unduly cynical. Surely, to take the most logical deal first, combining MCI and WorldCom, the nation’s second- and fourth-largest long-distance carriers, would yield some economies of scale. WorldCom says the companies could save $2.4 billion in 1999 and $4.5 billion a year by 2002.

But look at those numbers closely. For starters, they’re certainly overstated: It’s in WorldCom’s interest to claim as much savings as possible in order to persuade investors to back the deal.

Further, a big chunk of the savings is accounted for by money that MCI would otherwise have spent to get into the local phone business. Now maybe WorldCom can offer everything that MCI was going to offer without spending the money, but it seems unlikely.

There are certainly scale economies in building phone networks, but both companies are sufficiently large that they already benefit from many of them, buying the highest-capacity equipment in large quantities at the best discounts vendors have to offer.

Moreover, the prospective savings don’t take into account the dis-economies inherent in the loss of agility that comes from getting so large and in the enormous disruption involved for both organizations.

Perhaps the combined companies would hold enough of certain markets--such as the Internet “backbone” service business--that they could extract higher prices. But if that’s the case, antitrust regulators would be required to block the merger or at least force the sale of some assets.

The economies-of-scale argument is even weaker in the other cases. When local telephone operators merge with each other (PacTel-SBC and Bell Atlantic-Nynex), they can’t combine their networks since they serve different geographic areas.

While it seems that controlling bigger territories would give them an edge when they’re allowed into the long-distance business, as they probably will be soon, that’s mostly illusory: Regulators will prevent them from giving their own long-distance operations any advantages not available to competitors.

Similarly, the proposed GTE-MCI combination offers less than meets the eye in this regard. Seamless integration of local services and long-distance operations would clearly bring important efficiencies, but it won’t be permitted lest it stifle competition and customer choice.

All the companies like to talk about how mergers would enable them to provide a full range of local, long-distance, wireless and Internet services and thus give customers “one-stop shopping.” That’s fine, but there’s no reason that a company needs to own the networks in order to sell the services.

Certainly, size confers marketing advantages in terms of building a brand. There are a few dollars to be saved in combining corporate staff operations. And being big might, at the margin, help companies get into some foreign markets.

But the idea that a phone company needs to have $30 billion in revenue--as opposed to, say, $15 billion--in order to compete on the global stage is nonesense. Communications markets in all the major industrial countries except the U.S. and Britain remain highly regulated and inhospitable to foreign entrants; there isn’t going to be a real global market for communications services--in the way there is for cars or personal computers--within any corporation’s conceivable planning horizons.

The profound irony behind all this, of course, is that the arguments advanced in favor of mega-mergers are ones that applied in spades to the old Bell System. Economies of scale? That’s why AT&T; was legally sanctioned as a “natural monopoly.” One-stop shopping? Seamless integration of services? Ma Bell practically invented the concepts.

Many expect that AT&T;, newly energized under Armstrong and with the wiley lawyer John Zeglis negotiating the regulatory shoals as chief operating officer, will now start putting it all back together again by trying to buy a regional Bell operating company or two.

Yet with the benefit of hindsight, few would argue that breaking up AT&T; was a bad idea. It unleashed competition and entrepreneurial dynamism whose benefits far outweighed the efficiencies that were lost. Investors who held on to the piece-parts of AT&T; were handsomely rewarded, and most customers benefited too.

Now I agree that the process of agglomeration and integration, followed by breakup, is a natural part of the capitalist dynamic. Shaking things up from time to time seems to be good for the system--at least in terms of profits and efficiency.

Like sharks, corporations need to keep moving forward to survive, and at least in buying rivals, or prospective rivals, the phone companies are sticking with businesses they understand.

In fact, the best argument for some of these mergers is that the buyer might be the smarter shark. Bernie Ebbers of WorldCom has done a stellar job building his company, and maybe he and his team really can run a phone network better then others.

If you’re not an investor or an employee or otherwise interested, though, most of this is so much noise. None of these deals will have a direct impact on the range of services available to most customers, or their cost, at least not for quite a while.

Despite what they say, the merged companies are not likely to use their newfound size to enter markets they would not have entered otherwise. GTE, for example, will have no more incentive to invade PacBell territory in L.A. if it owns MCI than if it doesn’t.

SBC, since buying PacTel, hasn’t shown any inclination to make big new investments in California.

Phone company executives--and the investment bankers who are egging them on and taking down hundreds of millions of dollars in fees--are doing what they’ve been trained to do in seeking as much market power as possible. Regulators need to do their part in assuring that any deals don’t diminish competition so much that customers are hurt.

And readers should regard the justifications for all this with a jaundiced eye. We have to report the rhetoric, but you don’t have to believe it.

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Jonathan Weber (jonathan.weber@latimes.com) is editor of The Cutting Edge.