You've just switched from AT&T to MCI when some friends casually mention they are now customers of Sprint. You anxiously wonder whether they know something you don't, and decide that you probably should have taken the time for what has always seemed a too-overwhelming task: actually doing the math required to determine which long-distance phone company offers the best rates.
There's no need for you to continue fretting, for Professor Paul MacAvoy of the School of Management SOM has already done the figuring. Furthermore, his research concludes what you may have already suspected: Whether you subscribe to AT&T's "True USA," MCI's "Friends and Family," Sprint's "Select" plans or any of the three companies' other options, there's not going to be much of a difference in your phone bill.
And regardless of any savings, you're still paying way too much for your long-distance phone calls, argues Professor MacAvoy in his new book "The Failure of Antitrust and Regulation to Establish Competition in Long-Distance Telephone Services," published by the Massachusetts Institute of Technology MIT Press and the American Enterprise Institute AEI Press as part of AEI's Studies in Telecommunications Deregulation. The work is the first comprehensive examination of long-distance telephone prices and competition since the break-up of AT&T in 1984 in the largest antitrust proceeding in history.
In the book, Professor MacAvoy argues that the court-settled divestiture of AT&T has failed to bring about true competition in the long-distance telephone industry. Instead, higher prices for consumers have resulted from the three major long-distance carriers engaging in "tacit collusion" in their price setting, which "resembles that of the cartels the railroads operated under the Interstate Commerce Commission at the turn of the century," Professor MacAvoy contends.
"What we have had after the AT&T divestiture is not competition but rivalry in advertising among the three largest firms that has itself led to increases in price levels," he said in a recent interview. As a result, he explains, "American consumers are now spending $5 billion more than they should on long-distance phone calls each year."
For the first four to five years after divestiture, prices on long distance dropped to as much as one-fourth the pre-divestiture level as MCI and Sprint competed for shares of the national household and small business market, according to Mr. MacAvoy, the Williams Brothers Professor of Management Studies. By 1990, however, the three telecommunications companies had sorted out their market shares, and their long-distance rates began both to be more similar and to increase "significantly." Today, about 60 percent of the per- minute prices consumers pay for their service is profit for the phone companies, he maintains.
While the long-distance carriers have not actually conspired to set prices -- an activity that would violate the antitrust laws -- they have been enabled, and practically encouraged, to coordinate their prices by the regulatory process, according to Professor MacAvoy. Each company, he explains, files its proposed prices in so-called tariffs with the Federal Communications Commission FCC , so that the other carriers have a chance to review them before any changes go into effect. That prevents price cuts to increase market share, because other carriers can match such cuts before they go into effect. The standoff, and general perception that higher prices are more profitable, stopped price declines. In the last five to six years, Sprint copied the tariffs proposed by AT&T, resulting in uniform price increases, and MCI followed with small price differences, the Yale professor says.
In the meantime, the actual cost to the companies of providing long-distance service to its customers has decreased significantly, according to Professor MacAvoy, so that "the margin between price and cost, which makes up profit, is at a level as high as it was when AT&T had its regulated franchise monopoly in the 1970s," he contends. "AT&T's price levels before divestiture have been restored, and at the highest level that one finds in any industry."
To indicate just how much of a profit margin the companies realize, he says, consider a typical 500-mile, long-distance call, at a daytime rate, for which a customer pays between 22 and 24 cents per minute. "The direct cost of providing that service, including the charge paid to the local phone company for forwarding the call, is 6 or 7 cents a minute, so that 16 cents a minute is profit margin," he explains. "If anything, that margin is now increasing."
And the companies' profit on international calls is even greater, notes the SOM professor.
"If one takes as an example a call from New York to London, which is about 90 cents a minute, the cost of that call doesn't exceed 20 cents a minute, so 70 cents per minute is the profit margin on this U.S. outbound call. That is a level of profit margin I don't think I've found in any industry ever," says Professor MacAvoy, a former dean of SOM whose research has focused on regulation and strategic decision-making by firms in the energy, transportation and telecommunications industries.
In contrast, the average long-distance call within Great Britain -- where the telecommunications industry is marked by two firms that are intensely competitive -- is priced at 15 cents per minute in an equivalent call to that priced at 22 cents in the U.S., according to Professor MacAvoy. American consumers, he predicts, will have to wait a long time before they'll see rates comparable to those in Britain.
Professor MacAvoy says the remedy for consumers' high phone rates is to allow the local phone companies, the so-called "Baby Bells," into the long-distance market, which would result in a fourth large company which would promote more rate-cutting, he contends. In part, competition would likely break out because the local phone companies have different goals than the long-distance carriers, and achieving these goals requires lower prices, Professor MacAvoy believes.
"The local companies have a different view of profitability, and I think they would break the AT&T price; they would break the tacitly collusive price level, and it would be a new game," he says.
Unfortunately, however, the Telecommunications Act of 1996 set out prohibitive conditions for the entry of Baby Bells into the market -- notably that other companies have to be able to compete first in their local markets and that the FCC manage their subsequent entry into the long-distance market, according to Professor MacAvoy.
These Baby Bells won't enter the long-distance market anytime soon, he states. "Having gone so far and not done well in making long-distance markets competitive, we can only foresee that it will take the FCC 10 more years to make local markets competitive," he explains. "It looks to me as if we're building here a deregulatory engine which itself will get larger and larger and more complex and more special-interest oriented rather than vanishing as originally intended."
Impeding deregulation is the FCC itself, Professor MacAvoy asserts. "One of the expectations of the results from the AT&T break- up was that, in creating competitive long-distance markets, the FCC would disappear as an organization that controlled prices. Now, the FCC has been put in the position of overseeing its own elimination by the 1996 [Telecommunications] Act. In retrospect, we can see that it was naive to expect an agency to destroy its own activities. If we want a competitive telecommunications market, the first thing we have to do is abolish the FCC, to create a system such as that in Great Britain, where rates are kept low because the companies are engaged in price-cutting to gain market share."
Without the FCC, he maintains, conflicts in the industry could be settled in the courts or by state regulatory agencies. The result would be a telecommunications industry that resembles, for example, airline passenger service.
"There have to be no more limits on entering long-distance telephone service than there are in providing airline passenger service," says Professor MacAvoy. "We're not concerned that some airlines have computer reservations systems and others do not, in terms of the 'fairness' of entry. We should not be concerned either that some long-distance carriers have local systems while others do not. We should worry that now there are not enough long-distance carriers, and too many regulators to allow market prices to fall to competitive levels."
-- By Susan Gonzalez