Once there was just one giant phone company. Then the Justice Department broke up the most far-reaching monopoly in U.S. history: American Telephone & Telegraph Co. That set the stage for years of chaotic competition between dozens of little and large players.
But now, after a series of megadeals, the phone industry is coalescing into a quartet of supercarriers -- AT&T Corp., MCI WorldCom Inc., SBC Communications Inc., and Bell Atlantic Corp. The pendulum swung from monopoly to fragmentation and is now settling in between, at oligopoly.In numerous other industries, from airlines to tobacco, oligopoly is a time-honored business arrangement. But with phones, the arrangement raises special concerns, particularly as the industry pushes into areas that aren't regulated.
Wireless carriers, for example, aren't obliged to serve everyone who wants a cellular phone, so people with poor credit can be denied service. Similarly, the burgeoning megacarriers won't be required to serve everyone as they branch into new markets and services. As the industry titans battle for the choicest customers, some people -- and some communities -- may find themselves left on the sidelines.
None other than AT&T is leading the way in industry consolidation. The long-distance provider expects to soon close its $44 billion deal to buy one of the country's largest cable players, Tele-Communications Inc. AT&T intends to use the cable operator to bypass the Baby Bells and deliver local-telephone service, high-speed Internet access and entertainment to millions of residential customers.
AT&T has also formed an alliance with Time Warner Inc.'s cable unit, a move that should allow AT&T to offer local phone service to about 40 percent of the country.
AT&T is also moving fast in the hot field of cellular telephones. After buying enough cell-phone companies and licenses to give it nationwide reach, AT&T launched a hugely popular flat-rate, nationwide calling plan that has sharply reduced the cost of wireless calls. Rivals are now scrambling to offer their own versions.
Two of the former Baby Bells have also emerged as giants. SBC, based in San Antonio, has been involved in a whirlwind of pricey acquisitions, including its purchase of sister Bell Pacific Telesis Group in 1997. It is currently waiting for regulators to give a green light to buy Ameritech Corp. for $75 billion, a move that extends its reach into the Midwest. SBC has promised it will offer services to businesses and ultimately consumers in 30 new markets outside SBC's and Ameritech's local-service territories if regulators approve the deal.
SBC's growth has been matched by Bell Atlantic, which has already swallowed Nynex Corp., another Baby Bell. Earlier this year, Bell Atlantic, based in New York, made a daring play in the cellular field by trying to scoop up AirTouch Communications Inc., only to be outgunned by London-based Vodafone Group PLC. Bell Atlantic's $65 billion merger with GTE Corp., which needs government approval, is pending.
Meanwhile, MCI WorldCom has completed more than 50 acquisitions in recent years. Its strategy is to build a huge international network and concentrate on serving big multinational business customers, where the profit margins are high. Sprint Corp. and local carriers BellSouth Corp. and U.S. West Inc. have stayed out of the merger fray, arguing that they can serve their customers without major acquisitions. But analysts say that the companies will need to get bigger to compete on a national scale.
Reed Hundt, former chairman of the Federal Communications Commission and a senior adviser with consultants McKinsey & Co., says consumers will be better off with the new oligopoly. "There will be multiple national carriers, a handful of local regional operators and great variety and tremendous creativity in marketing," he predicts.
But rural home owners, low-spending phone users, and small businesses may not enjoy the choice and lower prices that this competition will bring to corporations and big-spending consumers. "There is a large percentage of telephone customers that nobody wants to serve," acknowledges Royce S. Caldwell, president of operations at SBC. "It is unrealistic to think that every customer is attractive to the marketplace."
Fred Peralta, mayor of Taos, N.M., would love to see competition for the town's 5,000 residential customers with local carrier U S West Inc. But he worries that companies can't justify spending millions to build new phone networks in rural towns with the hope of winning a handful of customers. "It's just not going to happen," says Mr. Peralta.
Indeed, Taos isn't on SBC's list of 30 new markets it plans to serve initially if its Ameritech purchase wins approval. And TCI doesn't serve Taos, making it an unlikely candidate for AT&T to serve immediately.
Even some urban areas may have to wait to see new choices and new services. Dallas appears to have the potential to be a hotbed of competition: It is served by SBC's Southwestern Bell unit and TCI. And since GTE provides local service in the Dallas suburbs and to a small number of consumers in Dallas itself, it too is a potential rival.
But the lack of competition in Dallas so far underscores the difficulty of delivering competing local-telephone services in a business with a unique combination of heavy capital equipment and a crazy-quilt of regulators. TCI, for example, first must upgrade its cable to add more capacity and two-way capability -- a project that won't be completed until the end of next year, AT&T has said. "This vision cannot happen overnight," C. Michael Armstrong, AT&T's chairman, said in recent testimony before the FCC.
Local phone service, as long as it depends on a wire running into a customer's home, is a natural monopoly. It is also a vital service. The local phone market thus continues to be heavily regulated. Residential telephone rates are held artificially low by state and federal regulators -- and federal subsidies help compensate the Bells and GTE for serving rural areas.
In Patoka, Ind., for example, GTE charges customers $6.20 a month for basic service. Yet the company says it costs $103.22 to serve residential customers there. That makes it impossible for firms not receiving subsidies to compete in the area. "Companies will go where they can make money," says William Barr, GTE's general counsel.