WorldCom and Sprint Merger: Antitrust and Telecom Impact
This paper analyzes the proposed merger between MCI WorldCom Inc. and Sprint Corporation, the second and third largest long-distance carriers in the United States. Drawing on the Herfindahl-Hirschman Index and principles of managerial economics, the paper examines how the combined entity would dominate both the long-distance telephony and internet backbone markets. It discusses the regulatory environment governing U.S. telecommunications, the competitive threat posed by eliminating Sprint as a rival, and the barriers to market entry that would prevent new competitors from offsetting the merger's anti-competitive effects. The paper concludes that the merger poses a serious monopoly risk to consumers and the broader telecommunications industry.
- Introduction to Telecommunications Regulation: FCC role and U.S. telecom regulatory history
- WorldCom and Sprint: Market Positions: Market rankings and revenue of both carriers
- Internet Backbone Dominance and the HHI Analysis: UUNET traffic share and HHI concentration data
- Anti-Competitive Effects of the Merger: Monopoly risk and harm to competition
- Barriers to Market Entry: Obstacles preventing new Tier 1 IBP entrants
- Price Regulation and Economic Sustainability: Rate-setting risks and economic defection concerns
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What makes this paper effective
- The paper grounds its argument in a concrete quantitative measure — the Herfindahl-Hirschman Index — giving the monopoly concern empirical weight rather than relying solely on qualitative claims.
- It moves logically from broad regulatory context to specific market data, showing how historical deregulation trends set the stage for the merger's risks.
- The paper consistently ties economic theory (rate levels, network externalities, cream skimming) to real-world consequences for consumers and competitors.
Key academic technique demonstrated
The paper demonstrates effective use of an industry-standard concentration metric (HHI) to support a policy argument. By citing specific pre- and post-merger HHI values (1850 rising to 3000), the author shows how abstract antitrust thresholds translate into tangible market dominance, a technique central to managerial economics and regulatory analysis.
Structure breakdown
The paper opens with a macro-level overview of telecommunications regulation and the FCC's role, then narrows to the specific competitive positions of WorldCom and Sprint. It pivots to internet backbone market data (UUNET share, HHI calculations), analyzes anti-competitive harms, addresses barriers to new entry, and closes with a discussion of price regulation and economic sustainability. This funnel structure — broad context to specific harm — is well-suited to policy analysis essays.
Introduction to Telecommunications Regulation
The past few years have been characterized by trends such as privatization, liberalization, and deregulation in industries once managed by the government. The telecommunications sector offers a clear example: in the early 1990s, over 129 countries established privately owned regulatory agencies, and another 100 countries privatized their government-controlled telecom companies. The Federal Communications Commission (FCC) of the U.S. telecom industry strives to control competition, standardize prices, and oversee foreign communications. The FCC also issues licenses to various service providers under its jurisdiction, helps telecom services across the country establish themselves, and protects consumer rights. It is also the agency behind the National Broadband Plan (National Research Council, 1995).
The debate on government policy in the information industry has been ongoing for quite some time. The telecommunications sector is a major requisite for economic growth. Its history dates back to the era when the Bell system achieved high-quality communication over long distances at the turn of the 20th century. Since then, the sector has been under the watch of both state and federal governments. Two policy issues have been of particular concern: the necessity of nationwide inter-exchange traffic for the benefit of consumers, and the long-term economic advancement of the country (National Research Council, 1995).
For these reasons, any upcoming initiative related to the nationwide telecommunications infrastructure must be carefully considered and capable of challenging the comprehensive regulatory superstructure that has been in operation for over 20 years. This superstructure still governs the actions of key players in the telecommunications sector with respect to prices, technology, system integration, and infrastructural development (Baye & Prince, 2017). Even in the mid-1990s, proposals put forward to improve the telecommunications industry remained only as recommended changes (National Research Council, 1995).
WorldCom and Sprint: Market Positions
MCI WorldCom Inc. and Sprint Corporation — the country's second and third largest long-distance carriers — have been contemplating a merger. If Clinton-based MCI WorldCom acquires Sprint, it will gain significantly from Sprint's nationwide wireless network and thereby increase its profits. AT&T leads the American long-distance communications industry, followed closely by WorldCom and Sprint in that order. These three companies combined serve almost 80% of the population. For this reason, regulators foresee a situation in which the merger of WorldCom and Sprint would result in a near-monopoly capable of setting prohibitive prices at will (Blumenstein, 1999).
WorldCom has over the years heavily invested in infrastructure and is now the second largest company in the U.S. for long-distance communication services. It is also the number one provider of private voice and data services across the United States, providing services to nearly 70 countries worldwide. WorldCom's voice and data revenue from the U.S. alone in 1999 was approximately $6.6 billion. Its widespread international infrastructure — including 100 submarine cables and relationships with 213 carriers in 157 countries — gives WorldCom a commanding lead in the U.S. market (Blumenstein, 1999).
Internet Backbone Dominance and the HHI Analysis
UUNET is wholly owned by WorldCom. It is the largest Tier 1 Internet backbone provider (IBP) and is rapidly moving toward dominating the internet backbone market. A survey conducted in February 2000 to determine the share of internet traffic among the top service providers in the U.S. found that UUNET led with 37%, while Sprint trailed at 16%. The survey covered the top 15 internet backbones in the U.S., representing 95% of all internet users. Combining UUNET and Sprint would bring their combined internet traffic share to 53% — more than five times the share of the next-largest IBP (Cannon, 2000).
According to the Herfindahl-Hirschman Index (HHI), the U.S. internet market is already quite concentrated. The current HHI for traffic stands at approximately 1,850. After the two organizations merge, the HHI is projected to increase by 1,150 points, bringing the combined total to 3,000. These figures have not been rounded in order to preserve accuracy (Cannon, 2000).
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). Costing principles in the telecommunications industry. Costing Principles in The Telecommunications Industry, 8–15.
Blumenstein, R. (1999, September 24). MCI WorldCom, Sprint talking merger. ZDNet.
Cannon, R. (2000, January 26). MCI / Sprint merger. Cybertelecom.
National Research Council. (1995). The changing nature of telecommunications/information infrastructure. National Academies Press.
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