Ralph Nader
P.O. Box 19312
Washington, DC 20036
Ralph@essential.org
James Love
Consumer Project on Technology
P.O. Box 19367
Washington, DC 20036
202.387.8030; fax 202.234.5176
http://www.cptech.org
love@cptech.org
June 29, 1998
William E. Kennard
Chairman
Federal Communications Commission
1919 M Street N.W.
Washington DC 20554
Dear Chairman Kennard:
We were surprised to read that you have already issued
several positive comments on the proposed merger between the
largest long distance Company and the largest cable
monopoly. Given the fact that the FCC has yet to officially
stop any of the giant telecom mergers, including those such
as Bell Atlantic/Nynex, which greatly reduced prospects for
competition in New York and and New Jersey, and the pending
Worldcom/MCI merger, which will significantly reduce
competition for long distance calling, our expectations for
the vigor of a regulatory review were appropriately modest.
That said, we are concerned that in a rush to join the army
of industry "experts" who have applauded this action as pro-
competitive, you may have not had sufficient time to
consider important aspects of the merger, and you may have
overlooked some key issues.
In this letter we will examine two simple issues.
I. IS ONE STOP SHOPPING PRO-CONSUMER?
All the news reports of the merger indicate the major
consumer benefit will be the availability of "one stop
shopping" for services. Some have focused on those services
which involve telecommunications, but John Malone, who will
be a key figure in AT&T's future, indicated the plan was for
AT&T to be involved in a much broader array of consumer
purchases, including, Mr. Malone said, such products as
Viagra, through a planned "front end" interface to the
Internet and electronic commerce. This will use in part
technology licensed from Microsoft.
AT&T sees some obvious benefits in consumers buying
everything they need from AT&T, but is this really best for
consumers? Consider the following model. Suppose AT&T
sells a vector of products for which it has market power,
such as cable television, and for these products, given
elasticities of demand, the profit maximizing price for AT&T
is p*, but in an unregulated environment, AT&T can charge
even more than its profit maximizing price, say p**> p*.
Suppose further that AT&T is selling a vector of services
for which competition exists, such as PCS wireless services
or Internet connectivity, to which AT&T must deal with
competitors who face roughly the same or even lower costs
than AT&T. For these, the best AT&T can do while earning a
profit is to price the services at z*.
By bundling, AT&T can offer its consumers the following
options. Buy each service separately at a higher price, or
qualify for discounts by purchasing services in a bundle.
For example, suppose the options were:
1. The opportunity to buy the monopoly services at
p**, and/or competitive services from anyone, which are sold
by AT&T at z*, or
2. A bundle which includes the monopoly services at
p', and the competitive services at z',
Where
p' < p**
z' < z*
For the consumer, the "product" being bought now is a
bundle, and the price p' or z' is meaningless, except in the
context of access to the bundle. For consumers who wanted
both services, AT&T could choose prices p' and z' which make
the bundle irresistible, and in the competitive services
markets z, AT&T could under price other firms, while
obtaining significant economic rents from the monopoly
services. (Since the bundle of p' + z' is priced less than
the separate purchases of p** and z*).
In this example, the fact that a company can require
the purchase of the bundle to get the best price p* for the
monopoly good, has the effect of binding the consumer to the
monopolist for several goods. Moreover, if this permits the
firm to extend its monopoly in one market to others, there
will be a continual increase in entry barriers for any
market that can become part of the bundle. This ultimately
limits competitors to those, if any, that can provide a very
broad product line.
There is a complex economics literature which asks
whether or not such problems are likely to occur or harm
consumers, and on theoretical grounds alone one can argue
several different positions. However, one can also observe
in the real world examples that are consistent with the
example given above.
For example, in 1996, PacBell (now owned by SBC, the
firm trying to buy Ameritech) offered residential consumers
seven months of free Internet service if consumers would buy
a second telephone line from PacBell. One did not observe
any examples of ISPs in the competitive market offering
similar promotions.
Most cable operators offering cable modems price the
service so that consumers are required to buy their standard
cable TV product, which basically removes DBS as a viable
competitor.
Today both AT&T and MCI offer significant discounts on
Internet services if customers choose AT&T or MCI as their
long distance companies. There is no a priori reason to
believe that there are significant economies of scope in the
two services. AT&T and MCI control a huge market share in
the residential long distance market, and they price
services to residential consumers far above that charged to
their large business customers.
One can also see considerable bundling strategies by
Microsoft in products such as browsers, personal information
managers, fax programs and presentation graphics, to mention
a few. Many in the software industry believe that the
bundling of Microsoft Office is far more important than
product integration in explaining Microsoft's 90 percent
market share in office productivity applications.
One important element of the examples given above is
the dynamic nature of the market, the need to defend older
monopolies from new entrants, the use of bundling to
discipline and weaken rivals, and the fact that market
leaders for these new technologies can manipulate and bias
market standards.
Given AT&Ts history in anticompetitive actions, and
TCI's enormous reputation for anticompetitive actions in the
cable television market, it is prudent to expect bundling
strategies to be used an anticompetitive ways against
rivals.
We think this deserves real debate and consideration.
II. Does concentration narrow the political debate and
strengthen cartels or monopolies?
It is a fact of life that monopolies and large firms
are politically active, and politically powerful. If there
are several different firms with distinctive different
economic interests, one can hope that this will create
situations where different sides of issues can be forcefully
advocated, exposing policy makers to real alternatives. But
as the number of firms dwindles and firms become entangled
in alliances, joint ventures or mergers, debate narrows.
Compaq Computer could not participate in Bell Atlantic ISDN
rate case because a Bell Atlantic official served on the
Compaq board of directors. PacBell told Intel to get out
of the California ISDN tariff proceeding or PacBell would
refuse to sell Intel ISDN video conferencing equipment. TCI
and Time-Warner are in so many joint ventures together is
hard to imagine them as head to head competitors.
At a certain point of inbreeding, the genetic stock
begins to suffer, along with the vigor of competition and
innovation. And at a certain point, a giant company or
oligopoly has so much power that it is unduly risky for
firms or even government officials to risk challenges of
core economic interests. These issues, which we believe are
both real and obvious, and which are certainly on the minds
of alert consumers, should be addressed by the Commission.
We ask that the Commission schedule public hearings to
discuss and debate these and other aspects of the proposed
merger.
Sincerely,
Ralph Nader James Love
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