AMERICAN telephone companies are disappearing at a great rate. A year ago there were ten — now there are only six. Two companies have succumbed to takeovers this year, which may prompt others to follow suit.
The net result is likely to be a market, both in fixed and mobile, that is dominated by three or four powerful players, a far cry from the free-for-all competition expected when Al Gore, then US Vice-President, steered the Communications Act through Congress in 1996.
In the past month, SBC has swallowed AT&T and Verizon Communications won a short auction for control of MCI. With these deals the idea of a separate market for long-distance communication has died.
The deals have aroused the ire of consumer groups in the US. Are they right to be concerned? The acquisitions add to the pressure on Qwest, the smallest of the four remaining local phone companies and the only one without a mobile business. The Denver-based business looks vulnerable and the obvious move would be a tie-up between it and the number three local phone company, BellSouth.
Something similar could happen in the mobile market. Three players each have between 40 million and 50 million customers: Cingular — a 60-40 joint venture between SBC and BellSouth — Verizon Wireless and the merger of Sprint and Nextel. The runt of the litter is T-Mobile, a unit of Germany’s Deutsche Telekom.
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With 17.5 million customers, T-Mobile USA has just enough scale to survive but it too could be an attractive acquisition — perhaps for Qwest, which has no mobile arm, or Cingular, which shares its GSM technology. Given that T-Mobile has no chance of generating the returns that will be enjoyed by the top three, the Germans will have to consider whether they want to stay in the US.
Yet, the idea that competition will die because of takeovers is exaggerated. The demise of AT&T and MCI is largely owing to price competition caused by overcapacity in the market to supply business customers — although MCI’s downfall was complicated by fraudulent accounting. At some point the market will correct and the mergers will help to restore pricing power.
Meanwhile, despite the liberalisation promised by the Communications Act, the local carriers remain as almost regional monopolies. However, the latest round of mergers will not reduce competition further. Both SBC and Verizon Communications will have to offload their long-distance lines in states where they operate.
The final issue is what happens after the integrations. AT&T apart, US players traditionally have avoided expansion overseas. Now, however, they have the muscle to attack Europe at a time when its telecoms integration has stalled as politics has held back fixed-line cross-border deals, barring the Swedish-Finnish merger of Telia and Sonera.
But the most anxious of the European companies is Vodafone, which is stuck on the sidelines owning 45 per cent of Verizon Wireless. The UK company, and its American chief executive, Arun Sarin, want to own a mobile company in the US to make good on its aspiration to become the “Coca-Cola” of the mobile market.
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As the US players get bigger, Vodafone’s only option is to pursue a bigger deal. To get Verizon Wireless it might have to bid for Verizon Communications, which has an enterprise value of about $120 billion (£63 billion). Vodafone has been cautious about the idea, but as opportunities diminish it may become the only way forward.