1968, the year that Yale University decided to admit women, a landmark regulatory decision by the FCC permitted the Carterfone (shown below) and other communication devices to be connected directly to AT&T's phone network. The decision helped spawn a consumer market for consumer-owned devices like answering machines and fax machines. The Carterfone was a simple device that enabled two-way mobile radio to connect to the AT&T telephone network--much to the monopolist's vexation--and the device became a symbol for legislation known as the "Carterfone regulations," the FCC rules which govern the attachment of such devices. More importantly, and as Columbia legal scholar, Tim Wu, points out in his book, The Master Switch, the FCC's decision made it possible for inventors and entrepreneurs like Dennis Hayes and Dale Heatherington to mass-market their invention, the Hayes modem (a device that connects personal computers through a telephone network). The modem was an important innovation that contributed to the evolution of the Internet.
So what makes this historical tid-bit relevant today? AT&T's planned $39 billion takeover of T-Mobile leads some experts to believe the move would help restore AT&T to its former throne, and together with Verizon, control approximately 80% of the mobile market. Considering that AT&T currently (Nov 2010) controls 38% of the Smartphone Network, the experts have good reason to be concerned. Why would the FCC consider such a merger? And what does the 1968 Carterfone legislation teach us about the potential for stifled innovation in the communications industries?
Consider this: Before the AT&T monopoly was dismantled in 1984 (the same year Apple's Macintosh computer was introduced) the firm was in command of more than 90% of the market. The initial break-up, which was designed to segregate AT&T from local carriers, did little to prevent the firm from reorganizing by digitizing its entire network, moving into the international market and engaging in merger activity that resulted in the acquisition of computer makers and cellular phone companies. By 2007, the newly reconstituted Bell system (which included Pacific Telesis, Cingular, Bell South, and a half dozen Baby Bells) dubbed itself the "New AT&T" and was positioned to become the most dominant player in the wireless services industry. It's no surprise then that many have lately been calling for stiffer regulation in the wireless industry, fearing that mergers like the latest one proposed between AT&T and T-Mobile, will do little to enhance competition and will only serve to reinstate AT&T's monopolistic control.
Wu argues for greater restrictions (Carterfone regulations among them) on AT&T and the mobile wireless industry in general, citing firms' anticompetitive and parallel behavior. The issue of whether parallel behavior alone can be relied upon to evaluate a firm's anticompetitive conduct lies at the heart of a counterargument written by Marius Schwartz, Professor of Economics, Georgetown University, and Federico Mini, a senior consultant with Bates White. In their paper the authors claim the wireless industry (as of 2007) is "so distanced from monopolistic conduct and poor performance that it is presumptively not a candidate for regulation," and that parallel behavior and concentration indicators alone do not necessarily reveal the degree of an industry's anticompetitive behavior. Schwartz makes his case by demonstrating evidence of ongoing technological competition, heavy comparative advertising, and pricing diversity, among the largest carriers; and he asserts the industry is therefore not a candidate for "intrusive regulation."
Nevertheless, the potential for a merger to create monopoly power, particularly if such a merger involves the largest two firms vying for a combined share of more than half the market, becomes a serious issue in the horizontal case. Naturally such agreements are generally disfavored under anti-trust laws, but without the additional evidence (the "plus factors") to support any sort of conspiracy, parallel behavior can be seen as ambiguous and can be readily defended, with reasonable explanations, on the grounds that firms are simply acting in their economic best interests.
Should we be concerned with the proposed AT&T-T-Mobile merger? It might be helpful to resolve whether a carrier like AT&T can be considered anything more than a wireless data provider. Notwithstanding the economic wisdom provided by Schwartz, the question of whether a carrier like AT&T (exhibiting conscious parallelism or not) should have complete discretion to restrict access to its wireless network from competing wireless service providers like Skype also speaks to the bigger issue of net neutrality. Recall it was the Carterfone device that the FCC allowed to be connected to AT&T's phone network more than 40 years ago. The decision, some would argue, made possible the innovative development of consumer devices that ultimately contributed to the development of the Internet. Interestingly, the recent debate over Skype's "device" connectivity to the AT&T network bares striking resemblance to that of the Carterfone's, except that the network (which now transmits data, not just conversation) is being used to connect a present-day wireless web application rather than a 1968 mobile radio system.
So while some economists may support horizontal mergers or deregulation on the basis of competitively proper conduct, legal scholars and consumer advocates may argue that such conduct (whether competitive or not) results in anticompetitive outcomes.
