Commentary

Investor's Business Daily
March 13, 2006

AT&T's Offer for BellSouth Makes Sense
A lot has changed since Ma Bell was broken up
By Steven Titch

On the surface, AT&T's $67 billion offer for BellSouth appears to be rebuilding Ma Bell, the very company antitrust litigation dismantled in 1984. With the latest merger news coming on the heels of SBC's acquisition of AT&T and Verizon's purchase of MCI, you can't blame the public for feeling that regulators can't keep up with the frenetic pace of the telecom business. Throw in the harsh reality that around 10,000 jobs will be lost in the AT&T-BellSouth consolidation, many through attrition over the next three years, and you can hear the drumbeat for regulation or to block the deal.

But a lot has changed in 22 years. Today's AT&T is hardly recognizable from its forebear. Nor is BellSouth.

Unlike pre-merger AT&T or MCI, BellSouth is a relatively healthy company, giving the prospective merger a "big-get-bigger" glint. A closer look, however, reveals why consolidation makes business sense. Recently, BellSouth has seen revenue growth and a sound cash flow, even as it faces the task of replacing lost and damaged infrastructure from Hurricane Katrina. But about 40 percent of BellSouth's $34 million in revenues last year actually came from its stake in Cingular Wireless. Telephone access lines – BellSouth's "monopoly" service, were down 6 percent, and those revenues were made up from growth in long distance and broadband revenues – competitive segments of the business.

These numbers reflect fundamental shifts in consumer behavior that opponents of the merger miss. Even though BellSouth has the lion's share of telephone access lines in Atlanta and its nine-state territory, these revenues are drying up. BellSouth dominates a segment of phone service that is rapidly losing appeal. Moreover, dominance in dial-tone does not automatically translate into dominance in broadband Internet. If that were true, cable modems would not outnumber DSL lines by two to one.

BellSouth's survival as an employer and service provider depends on how well it can compete with cable companies and a host of new broadband entrants who are packaging services – Internet access, phone and long-distance, and cable TV - together. These competitors are bundling services and cutting prices to ensure they are the sole provider, meeting all of a customer's needs.

So if regulators prevent this acquisition, it would actually hurt consumers by preventing local entry of a financially strong, well-capitalized company with the scale and scope to challenge the prices and match the resources of Comcast and Cox Communications, the two companies that dominate much of BellSouth's territory.

Still, opponents of the AT&T-BellSouth merger continue to raise the same fears they have raised in the past: the deal will lead to higher prices, poor service and an end to competition. None of this has come to pass. Despite the considerable consolidation among cable and phone companies over the past 10 years, the cost of DSL has dropped from $50 to less than $30 a month in many places, broadband Internet usage continues to grow and gaps between rural and urban penetration are narrowing.

Then there's the whole new sector that the Internet and broadband has spawned. Google, a company that did not exist when Ma Bell was broken up, today has a bigger market cap –$107 billion - than any of the Baby Bells created at the time of divesture. Vonage has revolutionized the cost of phone service by moving it to the Internet. Apple is bringing out a combined iPod and cell phone. New technologies like WiMax and Internet Protocol (IP) video put constant pressure on complacent business models.

These are signs of a healthy, dynamic market that's attracting investment, creating jobs and fueling growth, not a stagnant industry controlled by a cabal of monopolists.

It's important to see the market as it is, not as it was. In 2006, a combined AT&T-BellSouth is the market's way of responding to the need for faster rollout of broadband to more areas of the country and lower prices for consumers through greater economies of scale. It's the right way to go.

Steven Titch is a policy analyst at Reason Foundation. This column originally appeared in Investor's Business Daily. An archive of Titch's work is here and Reason's telecom policy research and commentary is here.