Telecommunications merger may put competition on hold

By Alan Deans

New York view

If ever proof was needed that competition is good for consumers and for business, look no further than the United States telecommunications industry.

Judicious moves in Washington over many years have busted up the old Ma Bell monopoly and helped spawn a plethora of newcomers that are making big profits while aggressively seeking sales.

This ensures that leading-edge technologies are quickly available at reasonable cost from a variety of sources. Businesses get lower prices, better communications and new opportunities. This is fuelling the internet boom and the dot com company madness.

Many citizens can now afford to make frequent long-distance calls, own a mobile phone, have a home fax machine and an internet account. The same generation can remember the inconvenience of party lines.

The telephony free-for-all has sparked a revolution with far-reaching effects on American society.

Now, two of the fiercest competitors, MCI Worldcom and Sprint, want to tie the knot in a record $US115 billion ($220 billion) merger that does not impress industry regulators.

Worldcom's Bernie Ebbers and Sprint's Bill Esrey have built their operations thanks, in part, to the regulatory clamps applied to long-distance giant AT&T Corp and the regional Baby Bells. Now they are accused of acting as monopolists.

The Federal Communications Commission wants to know how the merger will benefit consumers, because it will bring together the second and third-largest long-distance operators. The new Worldcom will rank below AT&T, but will leave other competitors in its wake.

On one level it looks like Mr Ebbers and Mr Esrey are acting to save their skins during a vicious pricing war that has turned long-distance service into a commodity. MCI until recently was offering 5c a minute calls on Sundays, using basketball ace Michael Jordan and cartoon character Wiley Coyote of Roadrunner fame to promote the product.

Then Sprint came along with its Nickel Nights offer, offering discounts for the entire week. Now, AT&T is offering 7c calls anytime.

It is hard to make money at these rates, unless the companies use them to entice customers to a package of services including internet, mobile and local calls. Even with mobile, AT&T last year started a price war that has sharply cut charges and rapidly expanded the market.

The trouble is that MCI does not have a mobile business, and has yet to gain national local access. It is no secret that it had to buy a mobile operator, something Sprint brings, along with its long-distance service. Now, Mr Ebbers might be forced to sell large parts of the toll-call network to win regulatory approval.

Mr Ebbers got into the business in the mid-80s when he backed two Mississippi businessmen who had started a telephony resale company called Long Distance Discount Service.

He has since made numerous takeovers, including the 1995 deal for a long-distance fibre-optic network built along gas pipelines owned by the Williams Companies. He stunned the market two years ago by beating local calls major GTE to MCI in what was then a world-record takeover.

Mr Esrey has a similar history, although his Kansas City-based United Telecommunications dates back 100 years. It ran local companies until the 1970s, when it started laying long-distance wires.

It extended its reach in 1986 after buying Sprint from Southern Pacific Railroad, which laid a network along its tracks for private use.

Through all these years, AT&T was the Goliath both men sought to beat. This was often done by cutting prices to attract business, such as when United Telecom used Sprint to undercut AT&T on data transmission rates.

Newcomers are often forced to do this because they need to build traffic quickly to cover high fixed costs. On the other hand, industry leaders such as AT&T risk losing plenty of revenue if they cut prices simply to match smaller competitors.

Like it or not, however, MCI Worldcom and Sprint are now so large and established that they have become industry leaders. They can afford to ignore many smaller long-distance and mobile rivals, but they must match any serious moves made by AT&T or risk losing out.

The trouble is, AT&T has become very aggressive under new boss Michael Armstrong.

He has spent $US109 billion in the past year to buy cable companies TCI and Media One, giving him direct access to homes and the local call market. Once he upgrades the cable networks to handle telephone calls, AT&T will be the first carrier to offer large groups of customers a full suite of services.

It is an edge that neither Mr Ebbers nor Mr Esrey can afford to let Mr Armstrong hold for too long

* Alan Deans is New York correspondent for the Ausralian Financial Review.