AT&T and the consent decree

For years AT&T has been accused of being too big, too powerful and too pervasive. Since the late 1960s, FCC decisions aimed at introducing limited competition in some areas of the telecomunications market have eroded AT&T's monopoly position. Then, in 1974, the Department of Justice filed its antitrust suit seeking to dismantle the Bell System. In January 1982, AT&T signed a Consent Decree requiring them to divest the local portions of its 22 Bell operating companies. In this comment, Charles Brown (Chairman of the Board of AT&T) describes the build-up to AT&T's decision to agree to divestiture, and outlines how AT&T os adapting to the new telecommunications environment.     

The effects of divestiture,privatization, and competition on productivity in U.S. and U.K. telecommunications

The telecommunications industries in the United States and the United Kingdom have undergone massive changes during the 1980s. This paper decomposes the total factor productivity growth of AT&T and British Telecom into their various components. It finds that while a great deal of the productivity increases apparently resulted from continuing scale economies, competition for AT&T and privatization of BT have been responsible for 17 percent and 25 percent of their respective gains in recent years. Among other variables, divestiture appears to have initially depressed AT&T's productivity growth, and competition for BT is too insignificant to yet have an impact.     

Recent developments in US wireline telecommunications

This article presents a selective survey of several recent developments in the US market for wireline telecommunications services spanning the 2003–2005 period. Specifically, the article discusses the recent decline in overall telephone penetration rates, the substitution between wireline and wireless telephony, intermodal competition issues raised in the context of the FCCs review of the Cingular/AT&T Wireless merger, and the potentially anticompetitive effects of incumbent local exchange carrier tying of voice and DSL service. The article identifies several areas for future research motivated by each one of these developments.     

Antitrust in High-Tech Industries

Recent economic growth has been led by high-technology industries (See Jorgenson, Ho & Stiroh (2005) for a summary of the research on the recent acceleration of productivity growth). Many firms in these industries have achieved a dominant market position, thereby attracting the attention of competition authorities, often resulting in major monopolization cases. Unfortunately, this attention has not resulted in improved market outcomes. In this paper, we evaluate the effect of Section 2 Sherman Act cases brought against IBM, AT&T, and Microsoft. We conclude that these cases had limited effect on consumer welfare because they did not stimulate entry or innovation. In these industries, competition authorities cannot expect to promote simply an expansion of output and lower commodity prices; rather they should focus their remedies on promoting innovation—new products that replace or compete with the dominant firm’s products.     

Convergence and unbundling of corporate R&D in telecommunications: is software taking the helm?

This paper presents a view of the changing structure of corporate R&D in telecommunications – one that is close to Adam Smith’s insightful and enduring idea of division of labor – that perhaps we are witnessing the beginnings of vertical disintegration and unbundling of important segments of the industry’s R&D activity. The paper maintains that the emergence of an independent software industry – aided by the convergence of computer, telecommunications and imaging technologies – and the rapid growth of technology-based alliances are at the heart of this trend. So extensive is the vertical disintegration of R&D that, in 1997, the top 10 independent software vendors in the US spent more on R&D than the combined spending by AT&T and Lucent whose sales were well over three times as large. It appears that the source of future innovation in the telecommunications industry lies not in its services segment but rather in telecommunications and Internet equipment firms and independent software firms. Increasingly, the fortunes of large service providers like AT&T will depend less on innovation and more on their ability to configure and market complete one-stop-shopping solutions to customers by combining internal resources with outsourced technologies, products and services.     

Dissecting divestiture: A telecommunications book review article

This paper critically reviews the regulatory history of telecommunications as rendered in four recent books: Temin'sThe Fall of the Bell System, Henck and Strassburg'sA Slippery Slope, Wender'sThe Economics of Telecommunications, and the multicontributorDisconnecting Bell. Only Wender's regulatory cartel theory seriously competes with the Government's theory inU.S. v. AT&T as an explanation for AT&T's behavior under regulation. In response to inconsistencies between Wender's view and the historical record, an historically consistent alternative hypothesis of AT&T and regulator behavior is developed from clues apparent in the form of the AT&T divestiture.     

Price convergence in contestable market structures: The impact of time and price-caps on intercity telecommunications rates

In this study, we tested if long-distance rates among AT&T, MCI, and US Sprint between New York City and six major SMSAs during 1980–91 have converged. Empirical findings show that rates have converged over time, that rate ratios or differences increased under price cap, and that distance does not have any impact on rate convergence. The variables of TIME and price cap (CAP) have greater impacts on rate convergence for AT&T/US Sprint than AT&T/MCI. Regression results based on pooled cross-section and time-series data yield better results.     

The US telecommunications industry in transition: Bypass,regulation and the public interest

Since the AT&T divestiture, the Federal Communications Commission has been attempting to introduce competition into the telecommunications industry in the USA. This article discusses the problems of the transition period, particularly the contradictions between the policy of widespread availability of affordable basic telephone service, and the short-run burdens on most subscribers as competition erodes the toll-to-local subsidy. The authors discuss welfare economics in the telecommunications industry, and propose an interim and self-terminating plan for gradual deregulation. The proposal includes an empirical test of economic or uneconomic local exchange bypass, and a social compensation option which meets the requirements of Pareto superiority.     

Bell system R&D activities: The impact of divestiture

Divestiture of the US Bell System in 1984 caused concern about the future of research and development activities conducted at Bell Labs. This article 4describes the history of R&D in the Bell System, and in the organizations which have been formed since divestiture, and looks at likely future trends in research. In terms of both staffing and funding levels, no major changes have occurred as a result of divestiture. However, competitive pressures on AT&T may cause AT&T Bell Labs to be more secretive and proprietary about its research. There is also cause for concern about the stability of funding levels. Vigilance is warranted for the future.     

Financial planning issues concerning funding, pricing and organization of corporate R&D activity: A case study

This paper is a case study of financial planning issues concerning funding, pricing, and the organization of corporate research and development (R&D) activity faced by American Telephone and Telegraph Company (AT&T) after the break up of the Bell System. The paper concludes that from the standpoint of financial planning, and in the context of firms similar to AT&T, a variant of the predivestiture model, rather than a profit centre model or a market model, appears to be the most efficient way of funding, pricing and organizing corporate R&D activity.     

Local exchange competition in early US network development: considerations for developing countries

This paper examines the claim that competition between the Bell system and independent telephone companies, and not AT&T's regulated monopoly, was responsible for the rapid growth in telephone penetration in the United States. A mathematical model is developed to test if competition contributed to network expansion, when alternative explanations such as diffusion and economic growth are also taken into account. The model is estimated with time series data on telephone penetration in the US from 1876 to 1982, using both Ordinary Least Squares (OLS) and Feasible Generalized Least Squares (FGLS). The results indicate that local exchange competition is indeed a significant influence on increase in telephone penetration, even in the early stages of network development. This has clear policy implications for the current transition to competition in developing countries.     

Impact of deregulation on marketplace diversity in the USA

The current deregulatory mood sweeping Washington has changed the policy approach from one of government enforced diversity to one of marketplace-facilitated diversity. This is evidenced in the recent bills to revise the Communications Act of 1934, and the settlement of the AT&T antitrust suit. This article explores these public policy shifts as they relate to the information industries and suggests some impacts on the concept of diversity.     

Bagging bundle benefits in broadband and media mergers: Lessons from Sky/Vodafone for antitrust analysis

The historic precedents in telecommunications antitrust findings have tended towards finding harm to competition when network operators integrate downstream and bundle the provision of applications and services. The reason for this is that market power in network provision is thought to be extended into the applications market(s). More recently however, proposed mergers have been between telecommunications and media distribution firms, both of whom have some degree of market power, already sell their own services in bundles, and who may or may not have been offering combined bundles already via contractual agreements. Examples include Sky/Vodafone in New Zealand, and Time Warner/AT&T in the United States as well as Vodafone/Unitymedia in Germany and Media Capital/Altice in Portugal. These complex proposed arrangements pose challenges to competition authorities, whose legal and procedural rules and precedents, especially those defining the relevant markets affected by the merger or vertical integration activity, have been developed from the analysis of simpler cases. These precedents may not be sufficient to analyse current cases, characterized by multiple products catering to heterogeneous consumer preferences, and consumers are not constrained to buying only one variant of the products in each of the upstream and downstream markets.We illustrate the challenges by way of a case study of the proposed merger between Sky and Vodafone, declined by the New Zealand Commerce Commission in February 2017. Limitations in existing market definition processes and the evaluation of market power where bundling already occurs risk overlooking complex demand-side interactions that influence the profitability and efficiency of various structural and contractual strategic choices. We propose that classic merger and antitrust analysis based on econometric cost-benefit analysis can be augmented by using simulation and numerical analysis of a range of bundle offers expected to be relevant in decision-making. We develop a simple model and use it to illustrate how it may be used to inform broadband and content mergers, and other complex antitrust cases, such the assessment of the effects of two-sided markets and firm pricing decisions.     

The use of picturephone service in a hospital

A Picturephone® two way visual communications system was operational from March 1973 to April 1976 at the Bethany-Garfield Hospital in Chicago, and achieved metered usage as high as 1800 calls per month. To assist the AT&T Marketing Department in its visual communications market exploration programme, interviews of Bethany-Garfield personnel who had access to the system were conducted. When asked to rate a number of individual features of the system, the high and medium users rated the fast access feature above all others. Thus the main reason for the high usage of the Picturephone system appears to have been less related to its visual communications feature than to its ‘hot-line’ capability to reach contacts quickly.     

Viewdata—a product in search of a market?

One of the classic marketing fiascos of the pasr decade was the $200 million boondoggle project hatched at the Bell Telephone Laboratories, known as Picturephone® service. Heralded as the new telephone of the 1980s, rosy sales projections suggested that as many as 1 000 000 Americans would have Picturephone® sets in their homes and offices by the mid 1980s. Wile these figures look delightfully quaint today, the shareholds of AT&T must not have felt so amused by that $200 million expenditure on engineering a system that no one wanted. Through the year 2000, MBA students at Harvard will be able to rediscover in case study form just how dangerous it can be for an organization to allow its engineering department to dictate new product development to the marketing staff. Of course in the Picturephone® case, AT&T could proffer a legitimate excuse: the Vice President of Marketing position at Bell had lain dormant and abandoned for almost a quarter of the century. After all, who needs to sell telephone service?     

Telecommunications market structure in the USA: The effects of deregulation and divestiture

AT&T divestiture of its 22 operating companies in January 1984 ended the world's largest vertically integrated channel of telecommunications distribution. At the same time, customer premise equipment sales were deregulated in the USA by the FCC. This article explores the background policies which led to the changes, and examines the marketing opportunities which have arisen, together with likely future structural changes. The author concludes that the network will become more competitive and more responsive to customers' unique equipment needs.     

On modifying the MFJ

When the Bell operating companies (BOCs) were separated from AT&T in 1984, restrictions were imposed on the BOCs' business operations. The US Department of Justice was required to report every three years on the continuing need for these restrictions. Two reports were filed in February 1987 which contain a wealth of information and analysis, and recommend a waiver of most of the restrictions. This comment examines the mechanism by which regulation has historically distorted economic efficiency, and how the two reports address the mechanisms of monopoly distortion.     

Rural telephony since divestiture

This paper determines whether local rural telephone rates have increased as well as whether rural rates have increased more or less than other telephone rates since the divestiture of AT&T. Also, examined are long distance rates, penetration levels and subsidization in rural telephone markets in an attempt to ascertain whether universal service is in jeopardy in rural areas.The author would like to thank Erwin A. Blackstone, Gerald Faulhaber and Alfred E. Kahn for their helpful comments.     

The Year in Review: Economics at the Antitrust Division: 2011

Last year, we had to defer discussion of two matters that we understood were of considerable interest, but were still ongoing. Those matters have, if anything, proven to be even more momentous than we anticipated. This year??s article will, consequently, focus on two of the most noteworthy antitrust challenges by the Antitrust Division in years??U.S. and Plaintiff States v. AT&T Inc., et?al. and U.S. v. H&R Block, Inc., et?al.??both of which were successfully challenged. The Division prevented substantial economic harm to consumers and did so with sound economic analysis.     

The Influence of Credit Union and Savings and Loan Competition on Bank Deposit Rates in Idaho and Montana

This study examines the effect of S & L and credit union competition on bank behaviorin Idaho and Montana. A structure-performance OLSmodel is used to estimate bank interest rates oncertain deposits. Two key independent variables arelocal market share of credit unions and S & Ldeposits. Overall, previous studies found littleevidence that thrift competition affects bankperformance. We found some evidence that thriftcompetition, especially from credit unions, resultsin higher interest rates for bank CDs. Theseresults have policy implications as banking groupscurrently seek to restrict credit union competition.