As AT&T; Bulks Up, Regulators Shrink From Task

When last we heard from AT&T; Chairman Ed Whitacre, he was ridiculing the notion that his company, as an Internet carrier, should provide all websites with equal access to his subscribers, as opposed to charging them extra for preferential treatment.

“For a Google or a Yahoo or a Vonage to expect to use these pipes for free is nuts!” was the quote attributed to him in BusinessWeek.

That was in November. This week, we heard Whitacre singing the praises of his own deal to acquire BellSouth, one of the last remaining Baby Bells formed by the 1984 breakup of the original AT&T;, for $67 billion. The combination would create the nation’s largest phone company. The idea, Whitacre said, is to “benefit customers through new services and expanded service capabilities.” He promised to offer “innovative, competitively priced products for consumers and businesses” nationwide.

Is that really his goal? Whitacre’s last big deal, the 2005 acquisition of the old AT&T; Corp. by his SBC Communications Inc. (which assumed the acquiree’s historic moniker), was promptly followed by his outbursts about how he intended to exploit his company’s potent position in the Internet service market. Somewhere behind his back, Whitacre is holding a set of shearing clippers.


Should we be concerned about Whitacre’s voracity? Yes, but not for the obvious reasons. Although it looks like Whitacre is reassembling the old Ma Bell, that monopoly, like Humpty Dumpty, can’t be put back together again. There’s no single communications market left for it to dominate, as there was before 1984, and no single technology standard for it to own.

On the other hand, we shouldn’t allow history to make us complacent. Some commentators have compared Whitacre to Michael Armstrong, the AT&T; chairman who tried to remake the company in the 1990s by moving into cable television and broadband Internet services. On the surface, that strategy indeed resembles Whitacre’s. But Armstrong misjudged what he was buying. He didn’t understand how much it would cost to upgrade the cable network of Tele-Communications Inc., his key acquisition in 1999, to the standard for broadband transmission. Nor could he manage the collapse of long-distance phone revenue. AT&T; sold its broadband unit, including what was left of TCI, to Comcast in 2002.

The new AT&T; is no longer focused narrowly on traditional telephony markets, where an old-style antitrust analysis would begin and end. The company has a nationwide reach in traditional local and long-distance calling, wireless phones and Internet services, including Internet telephony. It’s also plotting to get into the television business. (This week, the company won approval from Anaheim to install an Internet-video infrastructure.)

Taken one by one, these are all markets with competitors, although in some markets the rivals are becoming fewer and weaker. Taken together, they constitute what looks like a highly variegated and competitive environment.

But for a big company like AT&T;, such an environment can yield power in obscure ways, so that what looks like genuine competition really isn’t. For example, AT&T;'s control of an important data pipeline into the home -- whether by phone line or fiber -- gives it the ability to charge Web service providers a vigorish so they can reach their own customers. (This is what Whitacre is plotting: to tilt the Internet playing field in favor

of one team or another, for a fee.)

The issue becomes more complicated when the service is one that AT&T; itself wishes to provide -- Internet phone calling, online video, etc. Will it disadvantage its rivals in one business by exploiting its stranglehold on another?

In this emerging technological world, vigilant and aggressive regulators are crucial. That’s what we don’t have. Moreover, as anti-regulation firebrands like Whitacre become more powerful, they become more truculent and regulators become more wimpoid.


The diversity of the telecommunications market has already become a pretext for federal and state regulators to schedule extended, possibly permanent, vacations from their duties. The Federal Communications Commission has vastly liberalized the rules governing how phone companies operate their broadband services, or DSL.

Then there’s the big, wet kiss the California Public Utilities Commission delivered to the phone industry this month in the form of a telephone consumers’ “bill of rights.” This measure was cooked up by PUC Chairman Michael Peevey, a former utility executive, with the help of ex-commissioner Susan Kennedy before she departed for Gov. Arnold Schwarzenegger’s office.

As my colleague James S. Granelli reported after its enactment March 2, the bill of rights, which supplanted a tougher version enacted in 2004, removed such earlier provisions as a consumer right to sue phone companies for violations and passed the burden of proof in complaint cases from the company to the consumer. PUC Commissioner Geoffrey F. Brown, trying to hold the line against his increasingly pro-business colleagues, called the new version “a deception, designed to give political cover to an attack on consumer interests.”

Peevey, however, firmly believes that competition will vanquish all attempts to chisel the consumer. In a statement congratulating himself for passing the bill of rights, Peevey dismissed the need for stronger regulations. “Complaint data, survey data, enforcement actions, and anecdotal evidence all suffer from serious infirmities and thus do not satisfy the burden of proof to cause the creation of a new rule,” he said.


I think I see where he’s going with this. Once you declare customer complaints, PUC actions and staff investigations, and the evidence of your own eyes to be insufficient grounds to issue a regulation, then as a regulator there’s scarcely any point to your coming to work in the morning.

In its guise as SBC, AT&T; has been operating in a competitive world for a long time, and its consumer service isn’t by any means perfect. On occasion it’s been horrid. If the BellSouth deal goes through, it will be bigger, more demanding and less responsive. Is this really the time for regulators to be giving Ed Whitacre a free ride?

Golden State appears every Monday and Thursday. You

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