Kagan’s Column: An Unsent, Yellowed Letter to Ma Bell

By Paul Kagan

So, with the benefit of hindsight, here's what the federal government could have said to Ma Bell 21 years ago:

"Look, you've got more power than we like to see in an old lady, so, even though we're Republicans, we're going to bust up your house, send your Baby Bells off to fend for themselves, keep you out of their local business, but give you favorable interconnect rates so you can continue to make long-distance calls for your remaining customers. You'll be OK, Ma. You can try some new recipes. In about 14 years you'll adopt a new boy, named Mike, and he'll help you bake some cable TV into your billing. Meanwhile, you won't have to worry about your offspring. We're going to let them adopt the other telco kids in the neighborhood, and then we'll let them eventually marry one another. Yes, Ma, it's incest, but we can't help ourselves; it's 1984. It makes us think of Big Brother, and that leads to Big Mother and so on.

"One thing you should know: After we get voted out in 1992, the Democrats are going to say we didn't go far enough. They're going to urge kids from other neighborhoods to move in on your Baby Bells because they want lower prices for consumers worse than we do. But don't worry, they're going to finance them with funny money, and a lot of them will go under in the stock market crash of 2002. Meanwhile, even though prices will plummet and some customers will jump ship, your Babies still will be hooked into plenty of homes--especially after all of their adoptions. Forget the big independents, Ma. GTE? Continental? Even Cincinnati? Your kids are gonna swallow them alive. And that'll make your babies huge! We're telling you this to help you understand what's going to happen to you 21 years from now.

"You're not going to believe this, Ma, but MCI--your worst enemy--is going to be adopted by a company that's cooking its books. It will throw them into bankruptcy, but they'll come out of it with a new lease on life. Only by that time--2005--neither one of you will want to rent the house anymore.

"You'll both still be big, but losing customers to something called the Internet (don't ask what that is). And cable, which your boy Mike will have to sell, will start competing with your Babies. Now Ma, please sit down for this: The cable guys are going to force your Baby Bells to get into the video business. And even though your Babies will have to spend billions on their toys to do it, two of them (Bell Atlantic and Nynex) are going to adopt MCI. And that's not all, Ma. Three of them (Southwestern, Midwestern and Pacific) are going to adopt you. The other two? Your Southern Belle will be OK, and she'll try to stay a spinster. But she may end up moving in with one of her siblings. What's that? Mountain Bell? Ma, you don't want to know. He'll try to grab MCI first, but he'll be up to here in debt, and MCI will take less to go with Bell Atlantic/Nynex/GTE.

"So there it is, Ma. Basically, the best-laid plans of mice and men... All of us in Washington--Republican and Democrat--will succeed in getting the public better telephone pricing. But we'll do it the hard way. We'll promise a lot of young start-ups a rose garden, but we'll never guarantee anyone profits, except you and your Babies. And even if you're going to end up depending on your Babes for a living, you'll still be healthier than most of the wannabes. It's possible Southwest/Midwest/Pacific might even name themselves after you. Yes Ma, after 21 years, we're going to come around full circle. All we ever had to do was work with the states to control your pricing power, while preserving your great service record. It would have been a hell of a lot easier on the American people. But it will sure keep a lot of bureaucrats busy."

For the record, outgoing FCC Chairman Michael Powell accomplished his goal of reunifying local and long-distance telephone. Regulatory, technological, political and market forces drove Nextel to Sprint 12/15/04 for $44 billion, AT&T to SBC 1/31/05 for $23 billion and MCI to Verizon 2/14/05 for $10 billion. When the dust of digestion finally clears, in two years or so, this telco merger mania will have strengthened one wall of the Great Telecom Divide. Cable mergers will have bulked up the other side, and Ma Direct might even have married Pa Dish. The valley of subscribers eventually will shake with the thunder of bigger bundles dropping. The public will beg for relief. Future bureaucrats will frown, packages will be rent asunder and new orphans will be spun off. But not yet. It's the circle of telecom life.

Analyst/investor Paul Kagan is chairman/CEO of Kagan Capital Management, Inc. in Carmel, Calif. Information in his columns is not intended to be a recommendation to buy or sell securities.