Phone Mergers Set Off Alarm Bells

WASHINGTON -- When the U.S. Congress enacted a sweeping telecommunications reform law in February, one of its central objectives was to spur the kind of competition in local telephone service that, in the long-distance arena, has slashed rates by 40 percent and boosted the number of carriers to about 500 since the 1984 breakup of the old AT&T monopoly.

But instead of a free-for-all in which phone carriers, broadcasters, cable television operators and media companies would invade each others' markets, the clock has headed backward, critics say -- at least in the local phone business.

There, two massive proposed mergers -- SBC Communications Inc.'s $17 billion bid for Pacific Telesis Group and Bell Atlantic Corp.'s announcement Monday of a $22 billion deal with Nynex Corp. -- are driving a consolidation wave that could leave the industry looking suspiciously like the old Ma Bell.

Because of the two planned mergers, the seven regional Bell telephone companies are poised to dwindle to five by next year. Speculation is bubbling about whether the three remaining Baby Bells also will merge with one another or perhaps with cable TV operators or long-distance companies.

Already, executives at companies that could face a tougher time after the mergers are beginning to protest.

"It's hard to see how new competition promised by the Telecommunications Act can be attained if existing monopolies simply combine into larger ones," said Mark Rosenblum, vice president of law and public policy for AT&T. "The concern is especially great when these two companies otherwise would have had powerful incentive to compete against each other."

The mergers are happening little more than a decade after a government antitrust suit against AT&T resulted in the local-phone monopoly being split into seven regional Bells. The breakup spurred a wave of new competition in long-distance service and communications equipment.

But entering the local telephone business is a bigger economic challenge than entering long distance, where companies like MCI started with little more than office space, marketing savvy and a line of credit to buy and resell long-distance lines from AT&T.

Local telephone resale is promoted in the new telecommunications law -- under terms that experts say are more favorable than they were in long distance -- but some antitrust experts say the combination of likely competitors such as Bell Atlantic and Nynex will make it harder to challenge the entrenched monopolies.

"The Bell Atlantic-Nynex deal doesn't really exacerbate the local telephone monopoly, but what these deals do is re-introduce some concerns about diminished competition," said Phil Verveer, a Washington communications lawyer and former Federal Communications Commission official who once led the Justice Department's investigation of the old AT&T monopoly. "If one company controls too much of the local marketplace there can be serious effects."

But even pro-consumer lawmakers, many of whom dislike most mergers, now say the burgeoning telecommunications business has enough big players -- including AT&T and cable giants such as Time Warner Inc. and Tele-communications Inc. -- to go up against two or more Baby Bells at a time.

"Without the introduction of vigorous competition in the Baby Bells' local telephone market, (the) merger between Bell Atlantic and Nynex could lead to a disturbing stifling of competitive energies," said Representative Edward Markey, ranking minority member of the telecommunications subcommittee.

A different view is expected to emerge among at least some state regulators in the nearly two dozen states that are now poring over the deals.

While many state regulators are concerned about competition, they are focusing on how that it might directly affect the economies of their states.

In New York, where Bell Atlantic plans to move its headquarters after it merges with Nynex, regulators reacted as if the deal were a fait accompli.

"Locating the headquarters of the new company in New York City is great news for the city in particular and New York State in general," said John O'Mara, chairman of the New York State Public Service Commission. "I have instructed the department staff to immediately begin reviewing all of the merger to ensure that New York's consumers get the best telecommunications services for the most reasonable rates."

On the federal level, the Justice Department has indicated it will review the SBC-PacTel deal. No agreement has yet been reached between Justice and the Federal Trade Commission as to which will review the Bell Atlantic-Nynex deal.