Mergers in the communications industries

Fewer and fewer people are controlling larger and larger percentages of each communications medium, from traditional newspapers and radio stations to new digital technologies. If the FCC relaxes its restrictions on the amount of spectrum a wireless phone company can own, more mergers and consolidation are expected in that industry too.

The FCC provides documents about current telecom mergers. A page by the Consumer Project on Technology summarizes events and opposition to the merger consumated between WorldCom and MCI. After making the significant concession of selling MCI’s existing Internet business and consummating the merger, the combined company tried to buy another key competitor in the long-distance market, Sprint, in search of a wireless component. This fell through, largely because of opposition from the European Union on the grounds that the two companies cumulatively control a large number of the cables carrying Internet traffic between Europe and the U.S. Now Worldcom may sell finish the vision it had for consolidating the industry by selling off MCI. It will make a clean division between the two companies—concentrating the lucrative business services in Worldcom while leaving the low-end comsumer services to MCI—and transfer many of MCI's assets to Worldcom to help it grow the business side faster.

These mergers are just examples of a trend that includes local telephone service (the original seven Baby Bells created by the AT&T break-up have been reduced to four); GTE buying BBN (a major Internet provider) and then merging with another “incumbent,” Bell Atlantic, to form Verizon; Microsoft investing in numerous wireless communications and cable TV companies; and U.S. West is about to merge with fast-growing backbone provider Qwest. The purchase of CBS by Viacom (or perhaps it should be a called a recombination, since the two companies sprang from the same one decades ago), took place in September 1999. The combined company would own too many stations according to current law, so Viacom is seeking an exemption from the FCC.

Media giant Time Warner (itself the result of a major merger, as it’s name shows), which was partnering for some time with Turner Broadcasting and CNN, merged with America Online. Significantly, America Online, the Internet term in the equation, seemed to be regarded as the senior partner even though it was only one-fifth the size of Time Warner—in short, AOL was where the stockholders expect more future growth to lie. So America Online was the purchaser, its members gt a better deal on stock, its chair Steven Case split the senior positions with the head of Time Warner, and its name came first in the new company name, AOL Time Warner (how many more names can one add?). Numerous controversies accompanied the merger, including the fear that the combined company will favor its own content within its multiple channels, worries that competing ISPs will be excluded from cable modem service, and calls for opening AOL Instant Messaging to competitors like Microsoft.

In approving the merger, the Federal Trade Commission imposed conditions in the areas of content and cable modems; the Federal Communications Commission reinforced these and added a requirement that AOL allow other companies to connect to its Instant Messaging users. As an indicator of the future direction of the FCC and the modus operandi of the new White House administration, however, it's worth noting that George W. Bush's newly appointed commissioner, Michael K. Powell, dissented because he wanted no conditions placed on the merger, and that Colin Powell, Secretary of State nominee and Michael K. Powell's father, sits on the board of AOL.

While most mega-mergers have been American affairs (encouraged by the 1996 Telecom Act and the junk-bond environment that emerged in the 1980s) the phenomenon is not limited to the U.S. In a hostile action that commentators regard as a sign of a new corporate vulnerability in Europe, the largest merger in history (179 billion dollars) is the purchase of the German wireless company Mannesmann by the British phone company Vodafone. Purchases of U.S. wireless phone companies by Deutsche Telekom have aroused a rare but significant nationalistic reaction as high up as the U.S. Congress. Mergers keep reducing the number of Internet service providers in Europe (just four now dominate the market).

International activities also include talks between AT&T and British Telecom, which collectively bought 30% of Japan Telecom in April 1999 and are now considering a complete merger. Nor should we forget the significant takeover of Cable and Wireless HKT, a major East Asian telephone company, by Internet start-up Pacific Century CyberWorks for 35 billion dollars.

An urgent rush to grab market share leads old media to merge too. In March 2000, the Tribune Co. purchased Times Mirror, combining many of the U.S.'s biggest newspapers and radio stations under one owner.

The telecommunications industry is unusual in that major mergers have to go through an extra approval process. After review by the Justice Department and the Federal Trade Commission, the Federal Communications Commission must determine whether the merger is in the public interest. Since FCC review always delays mergers, and sometimes quashes mergers that were otherwise approved, conservative congressmen are trying to remove its authority in that area. A Web page by Illinois Partnership for Fair Telecommunications Policy, an initiative of long-distance companies and ISPs, examines the proposed merger between the local telephone companies SBC Communications and Ameritech. The latter was approved by the FCC in a deal meant to offset the weight of the new company (the largest local phone company now in the country) by making it easier for its competitors to enter its local markets and by splitting off its high-bandwidth Internet service into a different company (described in the accompanying High bandwidth page).

Cable TV service in most areas is a monopoly, so mergers there deserve special scrutiny. If Comcast succeeds in buying AT&T's Broadband division, it will create a company twice the size of any other with perhaps 40% of all U.S. cable viewers and a staggering ability to determine what channels succeed and what channels fail in the cable market. The march toward industry concentration was not a sudden one. The AT&T merger with cable provider TCI at the end of 1998—and another AT&T purchase of a cable company, MediaOne, shortly thereafter—were explicitly justified as ways to let AT&T to compete in the local telephone market (by transmitting voice over TCI’s and MediaOne’s cable lines), which would be a welcome addition to competition. But the move has been marked mainly by controversy, because a coalition of ISPs called the OpenNET Coalition wanted to offer services over the cable modems, while AT&T claimed it must give its own provider (@Home) sole control in order to justify its investment. And indeed, upgrading TCI lines and adding switches for digital transmission will require several years and over two billion dollars. As described on the CPSR High bandwidth page, many ISPs and legal experts think the OpenNET campaign is legally flawed (because cable is regulated differently from phone lines) and a distraction from the goal of getting access by ISPs to local phone lines for ADSL (high-speed Internet dial-up). The FCC approved the purchase of MediaOne by AT&T, but required the joint company to give up significant assets.

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Last updated: July 10, 2001

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