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Did AT&T Die in Vain?

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Did AT&T Die in Vain? Federal Communications Law Journal Volume 61 Issue 1 Article 8 12-2008 Did AT&T Die in Vain? An Empirical Comparison of AT&T and Bell Canada Eli M. Noam Columbia University Follow this and additional works at: https://www.repository.law.indiana.edu/fclj Part of the Administrative Law Commons, Antitrust and Trade Regulation Commons, Communications Law Commons, and the Legislation Commons Recommended Citation Noam, Eli M. (2008) "Did AT&T Die in Vain? An Empirical Comparison of AT&T and Bell Canada," Federal Communications Law Journal: Vol. 61 : Iss. 1 , Article 8. Available at: https://www.repository.law.indiana.edu/fclj/vol61/iss1/8 This Symposium is brought to you for free and open access by the Law School Journals at Digital Repository @ Maurer Law. It has been accepted for inclusion in Federal Communications Law Journal by an authorized editor of Digital Repository @ Maurer Law. For more information, please contact [email protected]. Did AT&T Die in Vain? An Empirical Comparison of AT&T and Bell Canada Eli M. Noam* I. INTRODUCTION ......................................................................... 119 II. MARKET STRUCTURE ............................................................... 121 III. G ROW TH ................................................................................... 124 IV . PRICES ...................................................................................... 124 V . EMPLOYM ENT ........................................................................... 125 VI. MARKET CAPITALIZATION ....................................................... 125 V II. O W NERSHIP .............................................................................. 126 VIII. TELECOMMUNICATIONS EQUIPMENT ....................................... 126 IX. RESEARCH AND DEVELOPMENT ............................................... 129 X . C ON CLU SION ............................................................................ 131 I. INTRODUCTION Did the divestiture of AT&T in 1984 achieve its purpose of greater efficiency, lower prices, and more rapid development in American telecommunications? This question is important not only for economic historians or antitrust officials, but also for current telecommunications policymakers. In Europe, in particular, a policy of structural separation is now in the process of being mandated,' which aims to segment dominant * Columbia University, September 2008. Special thanks go to John Heywood, Namwoo Kim, Dominik Lembke, Arian Rivera, Manuela Schauer and Joost van Dreunen for research assistance. 1. See Viviane Reding, Commissioner for Information Society and Media, European Union, The EU Telecoms Reform 2007: Better, More Consistent Rules for Effective FEDERAL COMMUNICATIONS LAW JOURNAL [Vol. 61 and vertically integrated telecommunications companies in order to enhance competition. Of the varieties of separation-accounting, structural, functional, geographic, and business-line-none was more radical than the AT&T divestiture. To academic economists, the divestiture was a particularly sweet moment. Their majority perspective-to create competition, if necessary, by breakup-had miraculously prevailed through the legal process against the massed political opposition of consumers, labor unions, rural folks, states, the Pentagon, Congress, and even President Ronald Reagan.2 It suggested that the move toward competitive market structure would eventually prevail. This perspective was widespread among economists. Dissenters were either proponents of the classic public- obligation, 3 public-utility model, or advocates of theories arguing that monopoly could be efficiently contested, 4 or true laissez-faire adherents who wished competitors to enter without governmental action.5 The first group was dismissed as behind the times, the second as beholden to AT&T, and the third as impractical purists. Was the full structural separation successful? Did it create innovation, efficiency, consumer benefits, and investment? In terms of theory, one could argue it three ways: (1) Positively-competition is beneficial; (2) negatively-the economies of scale of a "natural monopoly" will be lost; or (3) neutrally-it makes no difference in the end because the underlying technological and economic forces are determinative. Who was right? By now, a quarter century has passed, full of impassioned regulatory and legislative battles. We have some numbers to show for this period. But how can we measure that reality against an alternate reality so we can evaluate them? Fortunately, such an alternate reality exists-it is called Canada. Canada had a telecommunications structure very similar to that of the United States. In fact, the major Canadian carriers, Bell Canada (by far the largest company) and BC Telecom, were long owned by AT&T and GTE, as were the major telecommunications equipment makers. Canada had Competition and Sustainable Investment, Address at the 8th Annual European Competitive Telecommunications Association Regulatory Conference (Nov. 28, 2007), available at http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/07/765&format=-HTML. 2. See PETER TEMIN & Louis GALAMBOS, THE FALL OF THE BELL SYSTEM (Cambridge University Press 1987). 3. See Harry M. Trebing, A Critique of Structure Regulation in Common Carrier Telecommunications, in TELECOMMUNICATIONS REGULATION TODAY AND TOMORROW, 125- 167 (Eli Noam ed., 1983). 4. See WILLIAM J. BAUMOL, JOHN C. PANZAR & ROBERT D. WILLIG, CONTESTABLE MARKETS AND THE THEORY OF INDUSTRY STRUCTURE (1982). 5. See PAUL MAcAvoY, THE FAILURE OF ANTITRUST AND REGULATION TO ESTABLISH COMPETITION IN LONG-DISTANCE TELEPHONE SERVICE (1996). Number 1] AN EMPIRICAL COMPARISON regional carriers along the U.S. model, closely associated with equipment manufacturers, plus many small, rural, independent companies, as well as several province-owned companies.6 Its regulatory system was similar, with both a national and a provincial level of regulation. The major structural difference was the absence of a divestiture of Bell Canada. II. MARKET STRUCTURE AT&T's dominant position before the breakup was astonishing. It accounted for a full 38% of the entire media and information sector. The next-largest media and information sector firm, IBM, accounted for 8.3% domestically. The second-largest telecommunications firm, GTE, had 2.2%.8 AT&T was the world's largest private company, with over 1 million employees in the United States alone.9 However, barely twenty years later, the company ceased to exist after successively shedding major parts and was absorbed for a mere $16 billion by its own offspring, SBC (formerly Southwestern Bell Corporation). SBC promptly renamed itself AT&T Inc., as distinguished from the historic AT&T Corp. The gradual demise of AT&T, however, does not mean a decline of industry concentration in telecommunications. Graph 1 shows the national concentration in the overall U.S. telecommunications market. Concentration is measured by the U.S. Department of Justice (DOJ) through the so-called Herfindahl-Hirschman Index (HHI) which is the sum of the square of the percentage of market shares. The graph also depicts an alternative and more intuitive definition of market concentration, the C4 Index (C4), which is the sum of the market shares of the top four firms. 6. One difference: Bell Canada did not fully own the monopoly long-distance carrier Stentor but was the dominant partner in this consortium with the other regional carriers. Competition was introduced in 1992. 7. ELI NoAm, MEDIA OWNERSHIP AND CONCENTRATION IN AMERICA (forthcoming, Jan. 2009) (manuscript at 258, on file with author). 8. Id. (manuscript at 358, on file with author). 9. SONNY KLEINFIELD, THE BIGGEST COMPANY ON EARTH: A PROFILE OF AT&T 3 (1981). 122 FEDERAL COMMUNICATIONS LA WJOURNAL [Vol. 61 Graph 1: Pooled Telecom Services Concentration 10 1000 8000 70) - 6000 60J0 60D - 5000 50D 4000 400 3000 300 0200 10.0- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --------------- 1000 -C4 -HHI Graph 1 shows how the overall telecom industry has dropped in concentration from a C4 of almost 100% (of which AT&T accounted for 90.7%), to one of about 70% in 1984, after divestiture. However, after 1992, concentration rose again, consolidations were approved after significant struggle, and the C4 climbed to 85% in 2007. AT&T Inc. has a market share of 42%, while Verizon holds 28%." In HHI terms, the telecommunications services industry has returned to high national concentration with an HHI of 2,986, significantly higher than the DOJ guideline threshold of 1,800 for a highly-concentrated industry, and much higher than the post-divestiture HHI of 2,145. In 2007, Bell Canada had 45.2% of the Canadian market, including its share in Aliant, while Telus held 22%. 12 The Canadian market concentration had an HHI of 2,463. In 1984, the HHI stood at about 2,220, about the same as that in the post-divestiture United States. This is a market structure very similar to that of the United States. Overall, the U.S. telecommunications-sector market moved, not to direct telecommunications competition, but to an oligopoly with a market structure that might be called "2.5" (two major firms, and several small 10. Noam, supra note 7 (manuscript at 232, on file with author). 11. Verizon is credited here only with its 55% share of Verizon Wireless (Vodafone owns the remainder). If one counts all of Verizon Wireless as Verizon's, the latter's national overall share would rise by another 6% to 34%. 12. Press Release, TELUS Corp.,
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