Did AT&T die in vain? An empirical comparison of AT&T and Bell Canada.

• Author: Noam, Eli M.
• Position: The Enduring Lessons of the Breakup of AT&T: A Twenty-Five Year Retrospective

1. INTRODUCTION II. MARKET STRUCTURE III. GROWTH IV. PRICES V. EMPLOYMENT VI. MARKET CAPITALIZATION VII. OWNERSHIP VIII. TELECOMMUNICATIONS EQUIPMENT IX. RESEARCH AND DEVELOPMENT X. CONCLUSION I. INTRODUCTION

   Did the divestiture of AT&T in 1984 achieve its purpose of greater efficiency, lower prices, and more rapid development in American telecommunications? This question is important not only for economic historians or antitrust officials, but also for current telecommunications policymakers. In Europe, in particular, a policy of structural separation is now in the process of being mandated, (1) which aims to segment dominant and vertically integrated telecommunications companies in order to enhance competition.

   Of the varieties of separation--accounting, structural, functional, geographic, and business-line--none was more radical than the AT&T divestiture. To academic economists, the divestiture was a particularly sweet moment. Their majority perspective--to create competition, if necessary, by breakup--had miraculously prevailed through the legal process against the massed political opposition of consumers, labor unions, rural folks, states, the Pentagon, Congress, and even President Ronald Reagan. (2) It suggested that the move toward competitive market structure would eventually prevail. This perspective was widespread among economists. Dissenters were either proponents of the classic public-obligation, (3) public-utility model, or advocates of theories arguing that monopoly could be efficiently contested, (4) or true laissez-faire adherents who wished competitors to enter without governmental action. (5) The first group was dismissed as behind the times, the second as beholden to AT&T, and the third as impractical purists.

   Was the full structural separation successful? Did it create innovation, efficiency, consumer benefits, and investment? In terms of theory, one could argue it three ways: (1) Positively--competition is beneficial; (2) negatively--the economies of scale of a "natural monopoly" will be lost; or (3) neutrally--it makes no difference in the end because the underlying technological and economic forces are determinative. Who was right? By now, a quarter century has passed, full of impassioned regulatory and legislative battles. We have some numbers to show for this period. But how can we measure that reality against an alternate reality so we can evaluate them?

   Fortunately, such an alternate reality exists--it is called Canada. Canada had a telecommunications structure very similar to that of the United States. In fact, the major Canadian carriers, Bell Canada (by far the largest company) and BC Telecom, were long owned by AT&T and GTE, as were the major telecommunications equipment makers. Canada had regional carriers along the U.S. model, closely associated with equipment manufacturers, plus many small, rural, independent companies, as well as several province-owned companies. (6) Its regulatory system was similar, with both a national and a provincial level of regulation. The major structural difference was the absence of a divestiture of Bell Canada.

2. MARKET STRUCTURE

   AT&T's dominant position before the breakup was astonishing. It accounted for a full 38% of the entire media and information sector. (7) The next-largest media and information sector firm, IBM, accounted for 8.3% domestically. The second-largest telecommunications firm, GTE, had 2.2%. (8) AT&T was the world's largest private company, with over 1 million employees in the United States alone. (9) However, barely twenty years later, the company ceased to exist after successively shedding major parts and was absorbed for a mere $16 billion by its own offspring, SBC (formerly Southwestern Bell Corporation). SBC promptly renamed itself AT&T Inc., as distinguished from the historic AT&T Corp.

   The gradual demise of AT&T, however, does not mean a decline of industry concentration in telecommunications. Graph 1 shows the national concentration in the overall U.S. telecommunications market. Concentration is measured by the U.S. Department of Justice (DOJ) through the so-called Herfindahl-Hirschman Index (HHI) which is the sum of the square of the percentage of market shares. The graph also depicts an alternative and more intuitive definition of market concentration, the C4 Index (C4), which is the sum of the market shares of the top four firms.

   [GRAPHIC 1 OMITTED]

   Graph 1 shows how the overall telecom industry has dropped in concentration from a C4 of almost 100% (of which AT&T accounted for 90.7%), to one of about 70% in 1984, after divestiture. However, after 1992, concentration rose again, consolidations were approved after significant struggle, and the C4 climbed to 85% in 2007. AT&T Inc. has a market share of 42%, while Verizon holds 28%. (11) In HHI terms, the telecommunications services industry has returned to high national concentration with an HHI of 2,986, significantly higher than the DOJ guideline threshold of 1,800 for a highly-concentrated industry, and much higher than the post-divestiture HHI of 2,145.

   In 2007, Bell Canada had 45.2% of the Canadian market, including its share in Aliant, while Telus held 22%. (12) The Canadian market concentration had an HHI of 2,463. In 1984, the HHI stood at about 2,220, about the same as that in the post-divestiture United States. This is a market structure very similar to that of the United States.

   Overall, the U.S. telecommunications-sector market moved, not to direct telecommunications competition, but to an oligopoly with a market structure that might be called...