Creative Destruction Hits Telecom

AT&T’s purchase of Bell South would create a single, more vertically integrated telecommunications provider. The merged firm would be multi-product: wired and wireless telephony, data transmission, business services, and ultimately video delivery. These economies of scale and scope are important for all firms to exploit if they want to survive in the modern telecommunications industry, because the economies of scale and scope provide the opportunity to innovate.

AT&T offers a wide range of products and services, and thus competes with cable companies, with satellite companies, with wireless companies, with standalone Internet providers, and with others in various parts of their product and service line.

But what if the merged AT&T/BellSouth “wins” the competition for the platform and builds substantial market power across the portfolio of products they offer? While such an outcome is possible, it is not likely to persist because of Schumpeter’s perennial gale of creative destruction. Competitive markets reward successful competitors with higher profits, and those higher profits also provide other firms with powerful incentives to invest their capital to compete with those successful competitors. In this case one example of creative destruction is broadband over power lines (BPL). BPL will continue to develop as entrepreneurs seek opportunities to deliver data services to customers and compete head-to-head with telecommunications and cable companies.

Firms across these platforms are encroaching on each other’s traditional products. Cable companies are offering Internet, data, and phone, and increasingly, phone companies are looking for ways to offer television and video services. Indeed, BellSouth customers would be more likely to have digital video services more quickly if the merger goes forward. This cross-platform competition sounds like a lot of rivalry to me.

In telecom as in all other industries, competition protects consumers better than regulation, because competition characterized by rivalry makes firms focus on delivering the value propositions that customers want at prices they are willing to pay.– — Lynne Kiesling senior lecturer economics at Northwestern University. Lynne@knowledgeproblem.com. This excerpt appears in the forthcoming book Advanced Telecom Marketing Strategies by Arthur Middleton Hughes to be published by RACOM Communications, summer 2007.

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