Watch This Hookup Closely

Without strong limits, the AT&T-BellSouth merger will be bad for consumers

By Leo Hindery Jr.

Who says you can't put Humpty Dumpty together again? With AT&T's (T ) acquisition of BellSouth (BLS ), Ma Bell will (almost) be back. The stated justifications for this huge new merger are to save $2 billion a year in expenses on a $120 billion combined revenue base and, says Chief Executive Edward E. Whitacre Jr., to enable the combined company to "have more products, better services, and better prices."

Unfortunately, neither justification is likely to pan out, and there is not one product or service that AT&T will have with BellSouth that it could not have had without it. Not one. So the only real advantages from this merger for AT&T shareholders are a clarified management structure at the two companies' Cingular cellular joint venture and probably slightly faster rollout of wireless Internet calling. Those two changes are certainly important, but they're not nearly desirable enough to allow this merger to proceed without regulators imposing some very tough conditions.

I'm so skeptical because every time a major cable-systems merger was proposed in the past, the justifications were essentially the same: modest cost savings that would fuel more services and better prices for consumers. But those never materialized. Why not? Once a telco or major cable company has achieved scale, and they all have by now, these purported justifications become ludicrous, especially when (as with AT&T and BellSouth) there is little or no preexisting overlap of their service areas.

AS A BUSINESSMAN and former cable operator, I can appreciate Mr. Whitacre's desire to bulk up to better compete in both traditional telephony and newer growth areas like broadband video distribution. Not only is he battling stiff competition in voice-over-Internet telephony from the likes of Vonage, Google (GOOG ), and Skype, but he also faces an array of newer delivery technologies such as Wi-Fi, WiMAX, and broadband over power lines. Then there are the major cable companies, which are deeply entrenched in video distribution and have the huge advantage of vertically owning much (in fact, way too much) of the nation's programming.

But the telcos and cable already have virtual strangleholds over wire-line access. (A combined AT&T and BellSouth would control 71 million local phone customers in 22 states.) So this proposed megamerger will be devastating for consumers unless some strong limitations are put on the merged company in two areas: bundling and pricing practices and "Internet neutrality."

Indeed, with broadband soon to be AT&T's (and all other significant distributors') major offering, the Bush Administration and the Federal Communications Commission must stand up for consumers and insist that AT&T, Verizon (VZ ), Qwest (Q ), and cable operators not layer on to their broadband services unreasonable user surcharges and "speed controls" that favor one service provider over another. Such acts would crimp consumers' access to the Net and give distributors unwarranted monopoly-like profits and controls. Likewise, regulators must restrict discriminatory bundling and predatory pricing, which limit consumer choice, in both services and content.

That's not to say that regulators should crack down only on telcos. Washington should give AT&T, Verizon, and Qwest nationwide video-transmission rights so they can compete sooner and better with cable in video distribution. And it must end the vice grip of vertical integration that allows programming owned by a distributor (especially cable operators) to be treated more favorably than independent programming. Such vertical integration, when abused, is a fraud on consumers and an impediment to competition. It needs to be restrained, and Mr. Whitacre should demand that as a quid pro quo for the limits that are sure to be imposed on his proposed deal.

So let Mr. Whitacre have his merger -- heck, the Administration and the FCC let Comcast (CMCSA ) acquire AT&T Broadband in 2002 without blinking an eye. But let's hold him to his promise of "more products, better services, and better prices." Given the grave potential for abuse to consumers by those with quasi-monopoly power, the Administration, the FCC, and Congress must impose appropriate restrictions on the AT&T-BellSouth merger.

Views expressed in Outside Shot are solely those of contributors.

Leo Hindery Jr., managing partner of InterMedia Partners, is former CEO of Tele-Communications Inc. (TCI), its successor, AT&T Broadband, and the YES Network

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