Merger between Sprint Corporation and WorldCom

Merger between WorldCom and Sprint Corporation
The past few years have been characterized by trends such as privatization, liberalization and deregulation in industries once managed by the government. Take the telecommunications sector as an example: In the early 1990s, over 129 countries set up privately owned regulatory agencies, and another 100 countries privatized the government-controlled telecom companies. The Federal Communication Commission (FCC) of the US telecom Industry strives to control competition, standardize prizes and inspect foreign communication. The same issues licenses to various service providers under their jurisdiction. The institution also helps telecom services across the country to establish themselves and get running. Protection of consumer rights is also part of their mandate. They are also the ones behind the National Broadband Plan (National Research Council, 1995).
The debate on the government policy on the information industry has been on for quite some time now. As a matter of fact, the telecommunications sector is a major requisite for the growth of the economy. The existence of the telecommunications sector dates back to the years when the Bell system achieved high quality communication over long distances. That was the turn of the 20th century. Since then, the telecommunications sector has been under the watch of both state and national governments. The policy on two issues has particularly been of concern to many. These are: the necessity of nationwide inter-exchange traffic for the benefit of the consumers, and the long-term economic advancement of the country (National Research Council, 1995).
For this reason, and many others, any upcoming initiative related to the countrywide telecommunications infrastructure must be well thought and, in a position, to challenge the comprehensive regulatory superstructure that has been in operation for over 20 years and still has a say on the actions of key players in the telecommunications sector, in things such as prices, technology, system integration and infrastructural development (Baye & Prince, 2017). Even in the mid-1990s, the proposals that were put forward to improve the telecommunications industry remained as recommended changes (National Research Council, 1995).
Narrowing down to our area of focus, MCI WorldCom Inc. and Sprint Corporation, which are the country’s number two and number three long distance carriers, have been contemplating a merger. If the Clinton based MCI WorldCom buys the Sprint, they will gain a lot from its countrywide wireless network and therefore increase its profits. AT & T leads the American long-distance communication industry, followed closely by WorldCom and Sprint in that order. These three combined serves almost 80% of the population. For this reason, regulators are foreseeing a situation where the merger of WorldCom and Sprint will result in a kind of a monopoly which can set prohibitive prices for its products as they wish (Blumenstein, 1999).
WorldCom has over the years heavily invested in infrastructure and is now the second biggest company in the US for long distance communication services. Better still, it is the number one provider of private voice and data connected through the US. WorldCom provides its services to nearly 70 countries in the world. Their voice and data income in 1999 from the US only were around $ 6.6 billion. Their widespread international infrastructure, including 100 submarine cables, and 213 carriers in 157 countries, make WorldCom lead the US market by a great margin (Blumenstein, 1999).
UUNET is fully owned by WorldCom. It is the biggest Tier 1 IBP and is quickly heading to dominate the Internet backbone market. A survey was conducted in February 2000 to determine the share of internet traffic among the top service providers in the US. UUNET led by a whopping 37%, while Sprint trailed behind at 16%. The survey covered the top 15 internet backbones in the US, which represents 95% of all internet users. Combining UUNET and Sprint brings their internet share to 53%. This is more than five times the share of the next-biggest IBP (Cannon, 2000).
Going by the Herfindahl-Hirschman Index (“HHI”), the US internet market is quite saturated. The current HHI for traffic is about 1850. After the two organizations merge, the HHI is set to increase by 1150 points to make the combined total 3000. It is worth noting that these HHIs have not been rounded off, so as to preserve the accuracy of the figures (Cannon, 2000).
The upcoming merger is a real threat to the decades old competition that has led to establishment of a state-of-art internet industry. This is because the resulting IBP will have a more than average competitive advantage owing to its size. The most immediate effect will be lack of competition in the telecommunications industry. Sprint has been a close competitor for WorldCom, and thus when it is eliminated, there will be virtually no competition for the resulting company. The resulting firm will therefore be at liberty to increase the price of its services without much thought on the quality of services it provides (Cannon, 2000).
The resulting firm will also be in a position to strangle its competitors by either compromising the quality of its interconnections to its competitors or increasing their costs. The competitors will have to rely on the resulting firm for connection, and the WorldCom/Sprint duo may use this loophole to their advantage. This is surely a monopoly in the making (Baye & Prince, 2017).
It would not be possible at this juncture for any interested firm to crumble the merger’s anti-competitive harm. Getting into the Tier 1 Internet backbone league is quite difficult for a start-up. The setbacks are already too many, and the merger will even increase the setbacks. It would take ages for a beginner to penetrate the Internet market (Cannon, 2000). The interested IBP must first collaborate with other Tier 1 IBPs, before buying any valuable amount of Internet connectivity. Tier 1 IBPs are known to allow private peering to other IBPs only after they accumulate enough customers, which will ensure they get enough positive network externalities by connecting with the IBP (Cannon, 2000).
The combined WorldCom-Sprint entity is most likely to prevent successful entry into the internet market by withholding its connections to fresh entrants. There is also a possibility that they will compromise the connection quality for their competitors, just so to stay ahead in the market (Baye & Prince, 2017). In addition, the combined WorldCom-Sprint entity may refuse to upgrade the public interconnection facilities. Any firm intending to satisfy their customers must really consider its financial viability. Telecom firms should generally be allowed pass the investment costs to the end consumer. The regulators however do not assure the investors that they will make profit (Berg & Weisman, 1991). As competition increases, the regulators may think of controlling the prices of various services. This is seen by many as an unjustifiable confiscation of property, and is against the provisions of the 14th amendment (Baye & Prince, 2017).
Baye and Prince (2017) remind us of the fact that inefficient rate levels are a sure recipe for unsustainability. Lowering the prices beyond some point will lead to much less revenue that can’t recover the costs of production. On the other hand, raising the prices above some certain maximum will be burdensome to the consumers, and this may lead to boycott of the firm’s products. Economic defections may arise in the event that cheaper suppliers win the customers. Uneconomic defections involve tactics such as cream skimming on the part of the service providers (Ber & Weisman, 1991).


References
Baye, M., & Prince, J. (2017). Managerial Economics & Business Strategy (9th ed.). New York, NY: McGraw-Hill Education.
Berg, S. V., & Weisman, D. L. (1991). Berg Costing Principles. Costing Principles in The Telecommunications Industry, 8-15.
Blumenstein, R. (1999, September 24). MCI WorldCom, Sprint talking merger. Retrieved December 8, 2018, from https://www.zdnet.com/article/mci-worldcom-sprint-talking-merger-5000103331/
Cannon, R. (2000, January 26). MCI / Sprint Merger. Retrieved December 8, 2018, from http://www.cybertelecom.org/industry/mci_sprint.html
National Research Council. (1995). The Changing nature of telecommunications/information infrastructure. National Academies Press.