Mergers Break True Spirit of Reform

The premise of the Telecommunications Act of 1996--the sweeping federal law that deregulated much of the telephone, wireless and cable industries--was that increased competition in the marketplace would lead to lower prices for customers.

But that is starting to look like a false promise. Instead of developing new products and services to compete in new markets, many of the biggest firms are instead choosing to buy companies that are already there.

Last week’s disclosure that AT&T; is negotiating to buy SBC Communications, the Baby Bell that recently bought Pacific Telesis Group, is the boldest example of this kind of industry consolidation--and many consumer groups, lawmakers and others say all the mergers and buyouts are ruining telecommunications reform.

For an AT&T;/SBC deal to be approved, the companies would have to convince a bevy of state and federal regulators that combining a company with 90 million long-distance customers and a company that provides 31 million local phone lines throughout most of the Southwest would not be anti-competitive.

That’s likely to be a tough sell. In California, for example, AT&T; has been selling local phone service in competition with PacTel’s Pacific Bell for half a year. Although AT&T;’s prices are essentially the same, the company has complained loudly to the state Public Utilities Commission that PacBell is trying to stifle competition in various ways. If AT&T; and SBC were to merge, PacBell’s most threatening competitor would be eliminated.

Besides, a major motivation for companies to merge is to save money for themselves, not necessarily for their customers.

“One of the reasons big companies don’t want competition is that competition puts pressure on prices,” thereby reducing profit, said Robert Wilkes, an analyst with Brown Bros. Harriman in New York.

Recent history demonstrates the simple truth that the more companies compete to provide telecommunications services, the less consumers have to pay for them. For example, in the last four years, the number of long-distance providers has grown from 796 to 1,318, and the average per-minute price for service has dropped from 15.3 cents in 1992 to 13.5 cents in 1995, according to San Jose market research firm Dataquest. Customers willing to shop around for discount plans can see their rates drop even more.

Wireless phone services have also gotten cheaper as more companies joined the market. Five years ago, most markets were served only by a pair of cellular carriers (L.A. Cellular and AirTouch Communications in Los Angeles’ case).

Even the prospect of competition from a new breed of mobile phone services known as PCS has begun to push prices down. The average monthly wireless bill fell from $56.21 at the end of 1994 to $48.84 at the end of last year, according to the Cellular Telecommunications Industry Assn. That figure should fall 10% to 15% more in Los Angeles this summer as Pacific Bell and Sprint roll out their PCS services here.

Satellite television is another market where consumers have reaped the benefit of increased competition. Five years ago, only the super-sized C-Band dishes were on the market, with price tags in the $3,000 to $4,000 range. Today, the same dishes cost between $1,000 and $2,000 and come with free access to about 100 channels, including news and international channels. Monthly subscriptions for 200 additional channels have stayed even at about $20 to $25 a month.

Much of that decline is due to the introduction of 18-inch dishes and programming services offered by DirecTV, U.S. Satellite Broadcasting, Echostar, Primestar and Alphastar. In 1994, when the service was new, the typical smaller dish cost $599 to $699, but today the typical price is $199. Customers have to pay for all programming, though, with a basic package of channels starting at about $25 to $30 a month.

Many people expected the price for cable services to drop in response to the satellite television threat, but rates went up instead. To compete, cable companies boosted the pace of technology upgrades and then merged with one another to help finance that investment, said Steve Effros, president of the Cable Telecommunications Assn. in Fairfax, Va.

Congress mandated that rates fall or stay flat between 1993 and 1995, but after that cable firms boosted prices 7% to 9% to offset the cost of upgrades. Rates are set to rise less dramatically this year. In the future, cable operators will boost revenue by offering more tiers of higher-priced services instead of raising basic rates, Effros said.

Consumer advocates had hoped that the Telecommunications Act would push cable rates down by drawing telephone companies into the business. But that has not happened except on a very limited basis.

Pricing in the local phone business, meanwhile, continues to reflect the virtual absence of competition there. PacBell raised its basic rate from $8.35 to the current $11.25 in January 1995 when the Public Utilities Commission ordered a 40% price reduction for toll calls, and GTE’s prices jumped to $17.25.

An AT&T;/SBC combination would likely snuff out the fledgling competition that could eventually do for local phone service what competition did for long-distance.

“This will not enhance competition,” says Gene Kimmelman, co-director of the Washington office of Consumers Union. “It will do the opposite.”

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Karen Kaplan covers technology, telecommunications and aerospace for The Times. She can be reached at [email protected]