The revenge of the Baby Bells

[Commentary] It was 30 years ago that lawyers from the Justice Department first went into court to ask a federal judge to break up AT&T, and much has happened since then. The breakup of the Bell system into long distance and the regional “Baby Bells.” The rush of new competition and the resulting drop in prices. The decline of wire-line service, and the explosion of voice and data over wireless broadband. The irony is that after all that entrepreneurial energy and technological innovation and fierce competition, the telephone market once again threatens to consolidate back into the hands of two national giants, AT&T and Verizon, which are direct corporate descendents of Ma Bell. That is the context to keep in mind as the Justice Department and the Federal Communications Commission consider AT&T’s proposed $39 billion acquisition of T-Mobile.

The government has two choices:
It could stick with the competitive, lightly-regulated model and try to make it work by blocking a merger of the No. 2 and No. 4 competitors that will leave 75 percent of the wireless market in the hands of AT&T and Verizon. Or it could acknowledge that, because of powerful economies of scale and limits on the amount of wireless spectrum that is available, the “telephone” market is a natural oligopoly that can support only a handful of players and limited competition — and, by implication, requires much stronger government regulation.

Which arrangement — a tightly-regulated oligopoly or a lightly-regulated market with numerous firms of varying size — is most likely to produce the next innovation that improves services while lowering costs? At different times, we've had success with both models, but surely the worst outcome would be the unregulated oligopoly that AT&T and Verizon would have us embrace.