The recent Department of Justice objection to--and subsequent disintegration of--the proposed SprintWorldCom merger got me thinking about the future of the telecommunications industry. Mention the word "merger" these days and you're liable to have the DOJ asking tough questions and threatening law-suits. But are such telecom mergers necessarily bad for consumers, as the DOJ states, and, conversely, good for shareholders, as the companies claim?
With a few exceptions, it seems like the days of developing important new technology in-house, introducing it to the marketplace, and letting consumers note with their wallets have passed. Today, companies would rather use cash or stock to simply purchase companies with promising technology or significant marketshare. Mergers and acquisitions are nothing new, of course; one might say that the largest players in the computer industry are nothing but an evolving series of buy-outs (with the possible exception of IBM). A recent study by Thomson Financial indicates that corporate mergers during the Clinton administration have outstripped those during the Reagan era by a 3 to 1 margin.
Today's level of assimilation among the major telecoms is astounding. Just as Sprint and WorldCom called it quits, Deutsche Telekom stepped up to the altar and announced interest in Sprint. Then, DT said it would spend $32 billion to snatch VoiceStream Wireless. Meanwhile, Bell Atlantic Mobile and GTE have become Verizon wireless which, by the time you read this, will be on the verge of completing the largest public offering in U.S. history (the primary beneficiaries of which will be the offering's underwriters).
As these markets continue to consolidate, one is left to wonder how long it will be before the DOJ begins to investigate the wireless industry. Considered by many to be the next communications revolution, wireless technology in the U.S. is not especially conducive to multiple networks: SLAs among carriers mean that users can talk anywhere, as long as they don't mind exorbi-tant roaming fees. Since smaller carriers have smaller networks, their users pay more roaming fees; this makes the bigger carriers more attractive (i.e. cheaper), and it makes small carriers good buyout targets. Hence, the wireless market in the U.S. will naturally gravitate to a few huge service providers. We are already seeing evidence of this shakeout: AT&T, Verizon, and Sprint already control the lion's share of customers, with bit players like Nextel filling the niches.
As wireless providers roll out advanced data services and higher-speed networks, we can expect more of the same, because small companies simply don't have the resources to provide such services cost-effectively. Of course, a few competitors are better than none at all. But competition does not necessarily correlate to lower prices; the agribusiness giant ADM colluded with as many as three competitors to fix prices in the agriculture industry a few years back.
No one in the industry believes that the Department of Justice should be empowered to decide which technologies are best for consumers. But the telecommunications sector, and particularly the wireless industry, bear acute observation. The Baby Bells are growing up.