# Presentation: 688500

## The AT&T Divestiture: Was it Necessary?Was It a Success?

- Robert W. CrandallThe Brookings Institution
- U.S. Department of Justice
- March 28, 2007

## 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*.*

## 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?**

## 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?**

## The Decree Appears to Have Worked

## 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.**

## Long Distance Rates Fell More Rapidly in EU and Canada without Divestiture

## U.S. Long Distance Rates Fell Largely Because FCC Reduced Switched Access Rates

## 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.**

## “Isolating the Bottleneck” Was Costly andDifficult 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.  **

## 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. **

## Wireless Provided the Greatest Impetus to U.S. Long Distance Competition 

## 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”**
** **

## 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.**

## 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.” **

##  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. **

## 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.**