the at&t divestiture: was it necessary? was it a success? robert w. crandall the brookings...
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The AT&T Divestiture: Was it Necessary?Was It a Success?
Robert W. CrandallThe Brookings Institution
U.S. Department of JusticeMarch 28, 2007
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Little Empirical Evidence that Section 2 Decrees Have Improved Consumer Welfare
• In reviews of major monopolization cases, Crandall (2001) and Crandall and Winston (2003) find little evidence of consumer benefit from structural remedies.
• Similar lack of benefits found by Crandall and Elzinga (2004) in examination of injunctive relief.
• No empirical evidence of increased output or lower prices following imposition of the decrees in 18 of 19 cases studied.
• Robert W. Crandall (2001), “The Failure of Structural Remedies in Sherman Act Monopolization Cases,” Oregon Law Review, Vol. 80, Spring, pp. 109-198.
• Robert W. Crandall and Clifford Winston (2003), “Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence, Journal of Economic Perspectives, Vol. 17, Fall, pp. 3-26.
• Robert W. Crandall and Kenneth G. Elzinga (2004), “Injunctive Relief in Sherman Act Monopolization Cases,” in John B. Kirkwood (ed.), Antitrust Law and Economics, Vol. 21, pp. 277-344.
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U.S. v. AT&T (1982) Is Generally Viewed as Most Successful of Major Section 2 Cases
• The 1982 AT&T decree is the major (apparent) exception.
• The decree required vertical divestiture of Bell operating companies and equal-access obligations for divested local companies.
• Near-term result: long-distance services increased and U.S. long distance rates fell.
• But was increased long distance competition due to vertical divestiture?
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The Monopoly Bottleneck in U.S. v. AT&T
• AT&T’s local telephone monopolies accounted for 80-85% of access lines in 1982
• Section 2 case focused on use of these monopoly “bottlenecks” to extend monopoly into long-distance and terminal-equipment markets
• “Inverse Ramsey” regulatory pricing of local and long distance services created incentives for entry and for AT&T to attempt to block it.
• But was vertical divestiture, i.e., isolation of the network monopoly bottleneck, necessary to obtain competitive results in long distance and terminal equipment?
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The Decree Appears to Have Worked
Real Interstate Long Distance Rates and AT&T Market Share of Long Distance Revenues
0
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0.5
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0.9
1
1984
1986
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1982
-84$
/min
ute
Average Interstate$/Minute
AT&T Rev.Share
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Despite the Apparent Success of AT&T Decree, No Other Country Pursued Vertical Divestiture
• Following U.S. example, most countries simply required incumbents to originate and terminate entrants’ calls (“equal access”).
• Canada liberalized long distance services in 1992-93
• EU liberalized telecom services in 1998.
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Long Distance Rates Fell More Rapidly in EU and Canada without Divestiture
0
0.05
0.1
0.15
0.2
0.25
0.3
1986
1988
1990
1992
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1996
1998
2000
2002
2004
No
min
al $
/Min
ute
U.S. Interstate Ave. $/Minute
Canada Ave$/Minute
EU- 3 Min.(Euro//min)
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U.S. Long Distance Rates Fell Largely Because FCC Reduced Switched Access Rates
Interstate Long Distance Rates and Access Charges, 1992-2005
0.00
0.02
0.04
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0.12
0.14
0.16
1992
1993
1994
1995
1996
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1998
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2003
2004
2005
$/m
inu
te
Ave. Long Dist.Rev./Min. AccessCharges
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Competition in Long Distance Market Did Not Require “Isolating the Bottleneck” through
Vertical Divestiture
• Simple rule requiring origination and termination of traffic over incumbents’ switches worked well in U.S. and elsewhere, but did not require isolation of the local bottleneck.
• Ironically, but for inefficient regulatory “universal service” pricing, entry into long distance may not have begun occurred in 1970s.
• AT&T divestiture exposed the folly of the FCC’s pricing policy and forced it to reduce access charges after 1984.
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“Isolating the Bottleneck” Was Costly andDifficult to Administer
• Econometric analysis of telecom productivity suggests that adjusting to decree cost $5 billion of lost productivity in 1984-85.
• Ongoing waiver process for line-of-business restrictions is estimated to have cost another $1.4 billion.
• Changes in telecom markets and technology created increasing tensions and problems in enforcing the decree – leading to new legislation in 1996 that created further costs.
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FCC and AT&T Decree Failed to Anticipate the Role of Wireless Competition
• FCC was allocating spectrum for “cellular” telephony in year DOJ brought the AT&T suit (1974).
• Regulatory battles over assigning licenses delayed launch of cellular service until 1983.
• FCC assigned only two cellular licenses in each market, but AT&T decree allowed incumbent Bell companies to keep one of them.
• Full competition in cellular service did not begin until 1995-6 as a result of Congressional mandate to auction new spectrum in effort to narrow the federal budget deficit.
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Wireless Provided the Greatest Impetus to U.S.
Long Distance Competition Actual v. Predicted Wireline Interstate Terminating Switched Access
Minutes
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bil
lio
n m
inu
tes/
yr.
Actual Predicted
Access Diversion Begins ?
Wireless DiversionBegins
Source: FCC, Author's Estimate
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The “Price” for Ending the AT&T Decree Was the 1996 Telecommunications Act
• 1996 Act launched network sharing under an “impairment” standard, not the “essential facility” standard in antitrust.
• In other countries, sharing is confined to the local loop: acronym is LLU or “local loop unbundling.”
• But use of LLU by entrants to offer standard, voice services was not profitable; most entrants failed
• FCC then expanded sharing criteria to “UNE-Platform”– allowing entrants to lease entire platform
• Broadband entrants were allowed to lease only the upper frequencies on local loops at very low prices through “line sharing”
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Eight Years of Network Sharing Under the 1996 Act Did Not Produce Meaningful Competition
• Most entrants failed and disappeared, stranding at least $50 billion of investment.
• “Unbundling” for traditional voice services through UNE-Platform was largely a wealth transfer from incumbents to entrants –MCI and AT&T – and telemarketers.
• Broadband entrants did not develop viable businesses through network “line-sharing.”
• UNE-Platform and line-sharing for broadband have now been abolished due to DC Circuit rulings, and the 1996 Act’s experiment in forcing local competition is ending.
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After Twelve Years of the AT&T Decree and Nine Years under the 1996 Act, Telecom Is
Vertically Integrated Once Again
• Verizon bought MCI, and SBC bought AT&T in 2005.
• Independent long distance companies could not survive in the new era of wireless and VoIP competition; non-integrated local entrants failed in droves.
• Twenty-one years of court- or FCC-enforced vertical separation did not create meaningful local competition.
• Technical change, not antitrust, eroded the wireline “bottleneck.”
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The Irrelevance of the Bottleneck Today
• Cellular wireless, cable television and even fixed wireless platforms provide powerful competition to fixed-wire telephone companies today.
• Wireless and Internet telephony not only take the “monopoly” out of the “monopoly bottleneck,” but threaten to render the network obsolete.
• ILECs must now invest enormous sums in their fixed-wire telephone networks if they are to be able to compete with new players and the cable companies.
• Lesson for antitrust and telecom policy: changes in markets and technology have eliminated the need to worry about fixed-wire bottlenecks.
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The Lessons Learned
• AT&T decree may have “worked” at first, but a more limited decree would have worked just as well and at a much lower social cost.
• The decree was in force either directly or through its successor – the 1996 Telecom Act –for too long because it created political clients, the entrants and the long distance carriers.
• DOJ’s target should have been the FCC, not AT&T, because the FCC failed to establish sensible interconnection policies and delayed wireless competition for more than a decade.