Issue Brief: A communications oligopoly on steroids

Strong antitrust enforcement and regulatory oversight is needed now more than ever

In a new paper for the Washington Center for Equitable Growth, “A communications oligopoly on steroids: Why antitrust enforcement and regulatory oversight in digital communications matter,” antitrust experts Gene Kimmelman and Mark Cooper use the telecommunications industry as a case study for the consequences for consumers of industry concentration and lax antitrust enforcement. They examine the effects of the 1996 Telecommunications Act and recent antitrust enforcement actions and find that strong and ongoing antitrust enforcement and regulatory oversight are necessary to ensure that anti-competitive business practices don’t become a drag on our nation’s economic growth, causing consumers to overspend on these services far beyond what is necessary to induce any increased productive investments by firms.

Key findings

• The lack of competition in telecommunications costs the typical U.S. household more than $45 per month, or $540 per year. In aggregate, this costs U.S. consumers almost $60 billion per year, or about 25 percent of the average consumer’s monthly bill.
• The four main U.S. telecommunications companies earn profits of between 50 percent and 90 percent, compared with a national average for all industries of just under 15 percent, on a standard financial measure of profitability.
• The four main U.S. telecommunications companies have market concentration scores of between 2,800 and 6,600. The accepted definition of market concentration is a score of 2,500.
• When rigorous antitrust enforcement takes place, consumers benefit: Consumers saved more than $11 billion per year as a result of the 2011 proposed merger between AT&T and T-Mobile being blocked by antitrust authorities.

Key takeaways

• The argument that technological change and innovation have lessened the need for strong antitrust enforcement is incorrect: The same market characteristics that led the government to regulate communications firms more than a century ago are more relevant today than ever. The telecommunications industry benefits from immense economies of scale and scope that encourage concentration in the industry, making it more likely that firms will overcharge consumers. The underestimation of the persistence of these fundamental market characteristics was key to the failure of the Telecommunications Act of 1996, which opened the door to lax regulation and antitrust enforcement and in turn led to the market concentration and high consumer prices that characterize the telecommunications market today.
• Antitrust enforcement is not enough—regulatory oversight is also necessary. Antitrust enforcement tends to be backward-looking, triggered only when abuses can be demonstrated, whereas regulation tends to be forward-looking. Regulatory action is necessary to ensure that other economic goals are met, such as ensuring equitable access to the internet, particularly in rural or low-income areas where it may not be as profitable for a private company to operate. Ensuring this equitable access is more critical than ever in our hyper-connected world.
• Antitrust enforcement actions since 2009 show that it is possible to push back against market concentration with positive results for consumers. The U.S. Department of Justice and the Federal Communications Commission blocked two mergers, AT&T and T-Mobile and Comcast and Time Warner; jawboned the merger of Sprint and T-Mobile out of existence; and imposed extensive conditions on several mergers they did approve, including the one between Comcast and NBCUniversal. These actions broke some of the price-inflating cycle, unleashed substantial innovation in the video streaming market, and started the policing of new potential abuses of dominance in data and transmission bottlenecks.

Next steps

Ongoing antitrust enforcement and regulation will be necessary to continue to guard against market concentration and consumer price inflation in this key industry, as well as to address emerging policy issues in the telecommunications industry. One of those issues stems from the enormous growth of the technology firms that drive today’s social networks and digital platforms. Lead author Gene Kimmelman outlined several ways forward in his statement upon the release of the paper, including the below:

We need Congress to strengthen antitrust to prevent today’s small group of internet, telecommunications, and media giants from slowing down or eliminating the growing potential competition from new internet video streaming services. By shifting the burden of proof … from the government to the parties seeking to merge, effectively creating a presumption that mergers in the most concentrated markets are harmful to competition unless the merging parties can prove otherwise, it would be possible to guarantee that emerging competition to today’s cable and broadband monopolistic markets has a better chance to survive, innovate, and drive down prices for consumers.

For more information

Please see: “A communications oligopoly on steroids: Why antitrust enforcement and regulatory oversight in digital communications matter,” by Gene Kimmelman and Mark Cooper for the Washington Center for Equitable Growth.