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.
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).
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).
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).
The upcoming merger poses a real threat to the decades-old competition that has led to the establishment of a state-of-the-art internet industry. This is because the resulting IBP will have an above-average competitive advantage owing to its sheer size. The most immediate effect will be a dramatic reduction in competition in the telecommunications industry. Sprint has been a close competitor to WorldCom, and its elimination will leave virtually no meaningful competition for the resulting company. The merged firm would therefore be at liberty to raise the price of its services with little regard for service quality (Cannon, 2000).
"Monopoly risk and harm to competition"
"Obstacles preventing new Tier 1 IBP entrants"
"Rate-setting risks and economic defection concerns"
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