Just who needs to be protected?

By David G. Tuerck, 07/28/98

The textbook justification for antitrust law is consumer protection: Don't let one big company dominate a market because, if it does, it will gouge the consumer. That's the argument GTE is making in federal court, where it has filed suit to block a merger between MCI and WorldCom.

GTE argues a combined MCI-WorldCom would ''unfairly'' dominate the Internet and the market for long-distance phone service. Critics of the merger charge the new company would provide more than 60 percent of the connections through which retail Internet services providers hook telephones to the Internet.

But the GTE suit is not about antitrust or consumer protection. It is about corporate sore losers using the court system to win a battle they couldn't win in the open market.

Here's the story behind the MCI-WorldCom merger: Last year GTE offered to buy MCI. GTE believed a combination would strengthen the ability of each to provide telephone and Internet service. GTE made no mention of how a merged MCI-GTE might itself be a monopoly. It talked only of how MCI-GTE would bring ''vigorous and fair competition'' to the market.

Unhappily for GTE, MCI got a better offer from WorldCom, a provider of ''backbone services'' (computers that connect the fiber optic over which Internet messages are transmitted) for retail Internet service providers. The MCI-WorldCom merger will permit the new company to combine MCI's fiber-optic transmission network with WorldCom's backbone services in providing access to the Internet.

The worry this merger poses a threat to competition is based on the fact that MCI provides a large share of the existing fiber optic lines and that WorldCom provides a large share of the existing backbone services. Combine the two and - Presto! - you have a monopoly.

But consumers should consider what has happened to the cost of telecommunications over the past several years. Long-distance rates have fallen about 70 percent thanks to the entry of companies like MCI and GTE. Two years ago consumers could pay more than $100 per month for Internet services that now cost a fifth that amount. Why has this happened?

The answer is the entry into the market of dozens of long-distance phone companies and of thousands of retail Internet providers. This influx of competition has happened because companies such as MCI and WorldCom were alert to the profits that could be made in building the infrastructure needed for long-distance and Internet service. The market MCI WorldCom would ''dominate'' is therefore largely one they created.

The area of telecommunications that is becoming a model of monopoly is the local phone market. MCI, AT&T, and other long-distance carriers have so far made only tiny inroads into that market, and mergers are reducing the number of Baby Bells that are available to compete with each other.

The MCI-WorldCom merger would change this. MCI-WorldCom is in a strong position to patch its own switches and networks into the Baby Bell infrastructure and provide a low-cost, alternative phone service.

The Baby Bells don't like this because they don't want the competition. And GTE doesn't like it because MCI-WorldCom will be able to penetrate the local market in the fashion that GTE envisioned for MCI-GTE.

Now we are to believe that other providers will stand idle as MCI-WorldCom monopolizes the wholesale Internet market. The baselessness of this worry is exposed by the fact that MCI-WorldCom already faces competition from AT&T and Sprint.

The fluidity of the Internet simply makes it inconceivable that one company could go about gouging Internet users at will. What consumers need protection from is not monopoly in telecommunications but the acrimony of spurned corporate suitors.

David G. Tuerck is executive director of the Beacon Hill Institute.

This article ran on page D04 of the Boston Globe on 07/28/98. It also appeared in the summer edition of NEWSLINK.

posted 7/28/98

Format revised on 18 August, 2004