The merger or the market?

For the third time in less than a decade, AT&T is merging again. In the wake of the announcement, there is rampant speculation on whether it’s unconscionable or inevitable. However, whether or not the $85B merger rises to the level of an outright rejection or just strong conditions, there is still a far more profound problem, which is not the merger, but the market itself.

Four massive firms (AT&T, Verizon, Comcast and Charter) now totally dominate the digital communications landscape. These four firms constitute what is known as a tight oligopoly, presenting a deeply troubling policy problem for U.S. regulators. The markets are highly concentrated and, combined, the top four firms alone have more than a 60% share. Worse,  those same four firms constitute a tight oligopoly across all four communications markets (video, broadband, wireless and business data services), further entrenching their control.

{mosads}This fundamental flaw in the underlying U.S. communications market structure has developed over a decade and a half as a result lax antitrust policy and premature deregulation of dominant incumbents. And unfortunately, the typical regulatory response to mergers as well as the Federal Communication Commission rules of general applicability will have little effect.

In fact, the market power of the Big Four the tight oligopoly is now on steroids. Twenty years ago, when the landmark Telecommunications Act of 1996 was passed, each had local franchise monopolies but refused to enter new markets to compete head-to-head with their sister companies. Rather than compete, they bought each other out. This oligopoly, reinforced by geographic separation, technological specialization and product segmentation has made it easy to cooperate and engage in reciprocal reinforcing conduct, rather than compete, allowed their market power to reach an almost unsurpassable degree.

Preventing any further consolidation of distribution is a no brainer, but that will still not address the underlying problem. Public policy cannot force firms to compete and the prospects of a new distribution network entering the market are slim to none. Breaking up the dominant firms requires decades of litigation and may not succeed. Our only option is to ensure these mammoth network operators cannot use their power over the pipes to stymie competition for the content and applications that ride over them. However, the FCC has four active and nearly complete proceedings that will further that goal and the proposed AT&T Time Warner transaction makes completing them all the more critical:

Set Top Boxes: The set top box is the device that controls the connection to the video network. Although the 1996 Act required the market to be open to competition, the FCC never set conditions that would make that competition possible. As a result, cable companies charge consumers almost $10 billion more per year than the cost of the boxes themselves and prevent others from connecting devices that would enable them to provide enhanced services and combine Internet access with video access.

Zero rating: In this case, the network operator gives its affiliate a pricing advantage by not counting the use of that affiliate’s content against the usage cap the operator imposes. Since the usage of other, competing services is counted, those services would effectively cost more.

Privacy: Network operators have a unique advantage with respect to customer information because they can see everywhere the consumer goes on their networks.  This information can be combined with other information to create uniquely powerful profiles of individual customers, which can then be transferred to the content/applications affiliates for exploitation, giving the affiliate a substantial advantage.

Business data services: All high volume, high speed transmission needs to move large quantities of data to consumers. The ubiquitous telephone network is still the only way to reach the overwhelming majority of customers and the network operators totally dominate this big pipe service. They can charge competing services more for the “special” access to the network than they charge their own services. Overcharges in this market have been estimated at $50 billion per year. They impose contract conditions on BDS customers that lock out competitors, leaving customers no choice but to pass these costs onto consumers.

Stopping dangerous mergers is often not enough to open the market to effective competition. Regulatory action must go hand in hand with tough antitrust enforcement to deliver the innovation and lower prices that consumers deserve. 

Dr. Mark Cooper is the Director of Research at the Consumer Federation of America.

The views expressed by authors are their own and not the views of The Hill.