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21–757 PDF 2005

S. HRG. 109–48

SBC/ATT AND VERIZON/MCI MERGERS: REMAKING

THE TELECOMMUNICATIONS INDUSTRY, PART

II—ANOTHER VIEW

HEARING

BEFORE THE

SUBCOMMITTEE ON ANTITRUST, 

COMPETITION POLICY AND CONSUMER RIGHTS

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

APRIL 19, 2005

Serial No. J–109–8A

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

ARLEN SPECTER, Pennsylvania, Chairman 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

SAM BROWNBACK, Kansas 

TOM COBURN, Oklahoma 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

DAVID BROG, Staff Director 

MICHAEL O’NEILL, Chief Counsel 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND CONSUMER RIGHTS

MIKE DEWINE, Ohio, Chairman 

ARLEN SPECTER, Pennsylvania 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

LINDSEY O. GRAHAM, South Carolina 

SAM BROWNBACK, Kansas 

HERBERT KOHL, Wisconsin 

PATRICK J. LEAHY, Vermont 

JOSEPH R. BIDEN, JR., Delaware 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

PETER LEVITAS, Majority Chief Counsel and Staff Director 

JEFFREY MILLER, Democratic Chief Counsel 

(III)

C O N T E N T S

STATEMENTS OF COMMITTEE MEMBERS

Page 

DeWine, Hon. Mike, a U.S. Senator from the State of Ohio ................................ 1

prepared statement .......................................................................................... 49

Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin ....................... 3

prepared statement .......................................................................................... 64

WITNESSES 

Citron, Jeffrey, Chief Executive Officer, Vonage Holdings Corporation, Edison, 

New Jersey ........................................................................................................... 7

Cleland, Scott, Founder and Chief Executive Officer, Precursor Group, Washington, D.C. ........................................................................................................... 9

Grivner, Carl, Chief Executive Officer, XO Communications, Reston, Virginia 5

Kimmelman, Gene, Senior Director for Public Policy and Advocacy, Consumers Union, Washington, D.C. ........................................................................ 11

SUBMISSIONS FOR THE RECORD 

Citron, Jeffrey, Chief Executive Officer, Vonage Holdings Corporation, Edison, 

New Jersey, prepared statement ........................................................................ 25

Cleland, Scott, Founder and Chief Executive Officer, Precursor Group, Washington, D.C., prepared statement ....................................................................... 38

Grivner, Carl, Chief Executive Officer, XO Communications, Reston, Virginia, 

prepared statement .............................................................................................. 52

Kimmelman, Gene, Senior Director for Public Policy and Advocacy, Consumers Union, Washington, D.C., prepared statement .................................... 66

(1)

SBC/ATT AND VERIZON/MCI MERGERS: REMAKING THE TELECOMMUNICATIONS INDUSTRY, PART II—ANOTHER VIEW 

TUESDAY, APRIL 19, 2005

UNITED STATES SENATE, 

SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND

CONSUMER RIGHTS, OF THE COMMITTEE ON THE JUDICIARY, 

Washington, D.C. 

The Subcommittee met, pursuant to notice, at 3:04 p.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Mike DeWine, 

Chairman of the Subcommittee, presiding. 

Present: Senators DeWine, Brownback and Kohl. 

OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR 

FROM THE STATE OF OHIO 

Chairman DEWINE. Good afternoon. We apologize for being late. 

We had two consecutive votes on the Senate floor, but we are here. 

The good news is the Senate is now in recess for a while, so we 

will not be interrupted. 

Let me welcome all of you to the Antitrust Subcommittee hearing 

examining the proposed mergers between SBC/ATT and Verizon/

MCI. As promised, this is a continuation of the examination that 

we began last month with the full Judiciary Committee. The difference today is that rather than hear from the CEOs of the merging parties, we will hear from witnesses who take a somewhat different view. 

As you all know, at that time I expressed some reservations 

about these mergers. Not surprisingly, the CEOs of the four respective companies acquitted themselves quite well at the hearing and 

emphasized very clearly that ATT is already leaving the residential 

market and MCI is likely to follow. In other words, they made the 

important point that in some ways these mergers don’t change the 

competitive landscape for consumer services. 

They also emphasized the impact of intermodal competition, 

meaning competition from other forms of service such as wireless 

cable and voice over Internet protocol. These are important arguments and the companies made them very effectively. But, frankly, 

I am still worried. I think there is still a lot more to it. In my mind 

at least, it is still an open question between the SBC/ATT merger 

and the Verizon/MCI merger are good for competition and for consumers. That, of course, is what we are here today to discuss and 

to look at. 

2

As we began to explore last month, there are a range of issues 

that raise concerns. Perhaps the one which has received the most 

traditional antitrust scrutiny so far is the so-called enterprise market, the sector of the market comprised of large businesses with sophisticated telecommunications needs. All four of the merging parties currently compete in this market sector. So large business customers will likely be affected by the deals. This area will require 

close scrutiny. 

There are also questions regarding the impact of these deals on 

the markets for long-haul capacity and in the market for Internet 

backbone that today’s witnesses are particularly well-suited to answer. We are looking forward to these discussions. 

As we discussed in our last hearing, however, the critical issue 

here is intermodal competition. According to the testimony we 

heard from the company CEOs, they are facing competition on numerous different technological platforms, specifically, as mentioned, 

cable companies, wireless companies and companies that provide 

voice over IP services. 

Once again, we must keep in mind that intermodal competition, 

by definition, does not always provide the type of direct competition 

we are used to seeing. Wire line, wireless, cable—these services are 

inherently different and provide similar services in different ways 

with different pluses and different minuses. Not all will always 

provide sufficient and competitive benefits for all consumers. In 

fact, there are a number of concerns that have been raised about 

each which I know we will explore today. 

But most important in this context, we must discuss whether or 

not merger conditions are required to ensure that these multiple 

modes of competition are, in fact, available. For example, voice over 

IP is often held up as the poster child for intermodal competition. 

In fact, Vonage, one of our witnesses today, is a voice over IP provider. 

It is certainly a very promising product, but our witness himself 

will testify today that voice over IP is a type of service that is 

available to the consumer only if he or she has broadband access, 

and currently that access is widely available only from the phone 

company or the cable company. Think about it. Voice over IP providers must rely on their competitors to get access to their customers. Clearly, that is a somewhat tenuous situation and we will 

need to consider if the mergers change it at all. 

There are several other issues to explore. In most places, residential consumers currently face duopoly choice—buy an expensive 

bundle of local, long-distance, Internet and wireless service from 

the phone company or buy an expensive bundle of similar services 

from the cable company. What impact will the purchase of ATT 

and MCI have in this situation? Will it allow the phone companies 

to provide better products and services, or will it remove two of the 

few potential existing market entrants? 

Another important point is that high-speed and wireless 

broadband will clearly be required for the next generation of services and will certainly help competitors such as voice over IP and 

cable telephone service. ATT and MCI, as independent competitors, 

had a big stake in promoting the development of broadband. How 

will these mergers impact the development of those broadband caVerDate 0ct 09 2002 14:14 Jun 20, 2005 Jkt 021757 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\21757.TXT SJUD4 PsN: CMORC
3

pabilities? Similarly, how will the mergers impact the availability 

of new wireless spectrum? 

Finally, I hope that the panelists will share their thoughts about 

what we in Congress can do more broadly to help promote competition and innovation in the telecommunications industry. Many 

have noted the need for a rewrite of the 1996 Telecommunications 

Act, and it is time to start thinking about what such a rewrite 

would entail. 

Certainly, it seems that there is a need to free up the spectrum 

necessary to enhance wireless broadband development. Another 

issue is the need for the FCC to expeditiously rule on their own 

proceedings on inter-carrier compensation, special access pricing 

and the regulation of IP-enabled services. 

These proceedings have been going on for an extended period of 

time and the industry is to some extent in limbo awaiting the rulings. Outdated legislation and incomplete regulations can only 

hinder the type of aggression competition that leads to innovation, 

better products and lower prices. So with that in mind, we look forward to hearing from our panelists today on a wide range of issues. 

Before I turn to Senator Kohl, I would just to acknowledge some 

news that we all heard this morning. Verizon has announced that 

it will be making stand-alone DSL service available to some of its 

customers in certain regions. This is an issue that we discussed at 

some length in our last hearing, and I think we all agree that to 

the extent that stand-alone DSL is available, it makes voice over 

IP a stronger and more valuable competitor and provides more 

choices for consumers. So I applaud Verizon’s actions in this regard, and we will be watching to see if Verizon and others within 

the industry are able to continue down this path. 

Let me now turn to my colleague and my friend, Senator Kohl. 

STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE 

STATE OF WISCONSIN 

Senator KOHL. Thank you, Senator DeWine. 

Today, we return to the topic we began considering a month ago 

at the full Committee’s hearing on consolidation in the telecom industry. As we noted then, the mergers we are examining and the 

technological changes we are witnessing will fundamentally change 

how Americans communicate and what we pay for these services. 

At our Committee’s hearing last month, we heard from the four 

CEOs of the merging companies explain why they believe these 

deals are in the consumer’s best interests, and we agree that today’s telecom market is very different from the market that existed 

when the ATT phone monopoly was broken up 21 years ago, and 

that there is the great potential for many consumers to benefit 

from new forms of competition and new choices. 

But the sheer magnitude of these mergers and a potential to concentrate market power in the hands of two large telecom companies 

requires us to carefully examine the competitive consequences of 

these deals. Today’s hearing will be an important opportunity to 

hear the views of consumer representatives, competitors and independent experts as to whether the mergers will be good for competition and for consumers. 

4

The Bell companies and their merger partners have testified that 

new technologies and innovation should allay any concerns we have 

about the size and market power of the companies that will emerge 

once these mergers are completed, and we hope they are proved 

correct. 

Our first responsibility therefore must be to ensure that the development and deployment of these new technologies are not stifled 

in their infancy by today’s consolidation. We must seek to avoid the 

creation of a world where consumers are left with only two choices 

for a bundle of telecom services—the Baby Bell phone company and 

the cable company. 

Our witness from the Internet telephone company Vonage is an 

example of one exciting new way consumers can make telephone 

calls without using traditional phone lines controlled by the companies involved in these mergers. However, in order to access 

Vonage’s service, consumers still need to obtain high-speed access 

to the Internet. And, today, the only provider of such high-speed 

Internet connection for most consumers is either the Bell phone 

company or the cable company. 

We need to ensure that these Internet connections come without 

strings attached and that consumers are free to buy Internet connections without also being required to buy conventional phone 

service. We need to make sure that the phone or the cable company 

providing the Internet connection does not attempt to block or degrade the consumer’s access to these Internet-based telephone services. 

So our concerns remain the same as we stated them last month. 

First, how can we ensure that this consolidation will not decrease 

the choices and increase the cost to consumers and business customers, both large and small? Second, how can we ensure that new 

technologies and new services can get access to the Bell company 

networks? 

Our goal must be the nurturing of a truly competitive telecom 

marketplace with a maximum of choice for consumers, a market 

that will not be controlled by a few dominant players. We must insist that the Justice Department and the FCC scrutinize these 

mergers properly so that the tremendous gains in telecom competition over the last 20 years are not lost in the midst of this industry 

consolidation. 

We thank our witnesses for coming to testify today and we look 

forward to hearing their views. 

Thank you, Mr. Chairman. 

[The prepared statement of Senator Kohl appears as a submission for the record.] 

Chairman DEWINE. Senator, thank you very much. 

Let me briefly introduce our panelists, and thank you all for 

being here. 

Carl Grivner is CEO of XO Communications, the largest independent competitive local exchange carrier. Prior to his tenure at 

XO, he served as CEO of Global Crossing. He has worked in the 

telecommunications industry for the past 25 years. Thank you for 

joining us. 

Jeffrey Citron is the Chairman and CEO of Vonage. In 1999, he 

co-founded the company. In addition to his work in the teleVerDate 0ct 09 2002 14:14 Jun 20, 2005 Jkt 021757 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\21757.TXT SJUD4 PsN: CMORC
5

communications industry, he has worked extensively in the financial services industry and founded both Island ECN and Daytech 

Online Holdings. 

Mr. Scott Cleland is the founder and CEO of Precursor, and also 

serves as the chairman of the Investor Side Research Association. 

He has testified before the Subcommittee on prior occasions and we 

certainly welcome him back. 

Gene Kimmelman is the Director of the Washington, D.C. office 

of Consumers Union, certainly no stranger to this Subcommittee or 

to the full Committee. 

Gene, thank you for joining us again. 

Mr. Grivner, thank you. We will start with you. We will go from 

my left to right. Each one of you will have five minutes and we 

would ask you to kind of keep your eye on the clock and that will 

give us the opportunity to have plenty of questions for you. Thank 

you. 

STATEMENT OF CARL GRIVNER, CHIEF EXECUTIVE OFFICER, 

XO COMMUNICATIONS, RESTON, VIRGINIA 

Mr. GRIVNER. Good afternoon. My name is Carl Grivner and I am 

CEO of XO Communications, one of the Nation’s largest facilitiesbased providers of telecommunication and broadband services to 

business. XO is headquartered in Reston, Virginia. We have nearly 

5,000 employees nationwide. We were formed in 1996, and since 

then XO has expanded telecommunications offerings from its original four small markets to more than 70 area markets in 26 States 

today. Our company provides a comprehensive array of voice and 

data telecommunications services to small, medium and large businesses serving nearly 200,000 customers. 

I want to thank Senator DeWine and Senator Kohl for inviting 

me to testify before the Subcommittee on the competitive ramifications of the SBC acquisition of ATT and the Verizon acquisition of 

MCI. 

I believe a number of questions were left unanswered following 

the previous hearings held on these mergers, and I hope that our 

testimony today will provide you with additional information needed to properly analyze the effects of these mergers. 

These mergers are truly monumental in scope, as they seek to 

join the largest telephone monopolies with their largest competitors. There is no doubt that these mergers will reduce the amount 

of competitive choices for your individual constituents and businesses. 

With the loss of ATT and MCI, future competition between the 

incumbents and the remaining competitors will look much like a 

match between the Green Bay Packers and a Pop Warner team. 

And I didn’t mean that as a partisan comment. I have been a Packer fan for 40-plus years. 

My written testimony addresses a number of our concerns in detail. However, I would like to highlight a number of specific points 

that we hope the members of the Committee will consider. 

First, the SBC/ATT merger and the proposed Verizon/MCI deal 

will fundamentally reshape this industry, marrying the two largest 

local telecommunications providers with their two largest competitors. Only the breakup of ATT in 1984 and the 1996 TelecommuniVerDate 0ct 09 2002 14:14 Jun 20, 2005 Jkt 021757 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\21757.TXT SJUD4 PsN: CMORC
6

cations Act can compare to the massive industry restructuring that 

will result from these mergers. 

Second, these mergers are particularly harmful to business customers, both retail and wholesale, in local markets. We have gathered for the Subcommittee preliminary high-level data that demonstrate the substantial injury that occurs. The charts here that we 

are showing, which use the same data employed by the RBOCs in 

the FCC’s triennial review process, provide a sobering look at what 

these mergers can do to local competition. 

The first set of charts shows the current status of competition in 

Cleveland, Ohio, and Milwaukee—no coincidence. 

Chairman DEWINE. We thought that looked familiar. 

Mr. GRIVNER. Yes, okay. I hope so. 

Chairman DEWINE. The shoreline looked a little familiar to us, 

yes. 

Mr. GRIVNER. As measured by the presence of competitors in 

commercial buildings, ATT is in red, while all other CLECs are in 

green. Indeed, competitors have made some headway in these local 

markets as a result of the 1996 Act. 

The second chart shows what these markets will look like after 

the mergers with the removal of ATT. You will notice that these 

markets are significantly altered. The presence of competitive providers drops by a staggering 53.6 percent for Cleveland and 64 percent in Milwaukee. In other words, the competitive injury to customers from ATT exiting the market will be real and substantial. 

And don’t expect alternative providers to make up this competitive gap. ATT is unique. It entered local markets with an enormous 

advantage. It had tens of millions of long-distance customers, including relationships with top business customers throughout the 

country. It had tremendous financial resources, $11 billion of which 

it spent to acquire the largest local provider, Teleport, and then it 

continued to expand its local network. 

The only other local competitor with similar resources is MCI. 

And as I am about to demonstrate, post-merger, it too will not fill 

this gap. The next set of charts depict the effect of MCI’s departure 

from the market. You can see that the competitive presence declines even further, a total of 61 percent for Cleveland and 69 percent for Milwaukee. 

The reason we took MCI out of the market leads me to my third 

point regarding these mergers. No one should expect that SBC and 

Verizon will compete head-on. Today, SBC and Verizon are the 

number one and number two local telephone providers. In the 

hand-outs that we provided you, you will see that in the Los Angeles market SBC and Verizon share a common geography. Yet, neither is competing in the other’s territory. So why should we assume 

they will compete if these mergers are approved? 

SBC and Verizon operate under that old Cold War principle of 

mutually-assured destruction. Each company is a mirror of the 

other, and each knows the other has an overwhelming competitive 

advantage in its home territory. So why attack and face annihilation? Better to operate under a strategy of containment. 

Fourth, these mergers will reduce, not encourage the innovation 

that has flourished in the competitive environment. It was competitive companies that brought your constituents DSL, and now voice 

7

over IP. It was companies like XO that incurred the enormous expense of laying much of the fiber that is now used for advanced 

telecommunications services, and it is competitive companies that 

are continuing to innovate to find solutions to the so-called lastmile access. 

The basic fundamentals of antitrust law demand a thorough examination of these mergers. It is not consolidation, per se, that is 

the paramount concern. It is the massive concentration and the injury to customers that ensues. 

It is important that Congress understand that if these mergers 

are approved, SBC and Verizon will control nearly 80 percent of 

the business wire line market, more than 63 percent of ILEC lines 

and more than half of all wireless subscribers nationwide. We hope 

that the members of the Subcommittee will resolve to fully examine the competitive impacts of these proposed mergers we are discussing today. 

I thank you for the opportunity to testify today. 

[The prepared statement of Mr. Grivner appears as a submission 

for the record.] 

Chairman DEWINE. Thank you very much. 

Mr. Citron.

STATEMENT OF JEFFREY CITRON, CHIEF EXECUTIVE 

OFFICER, VONAGE HOLDINGS CORP., EDISON, NEW JERSEY 

Mr. CITRON. Good afternoon, Chairman DeWine, Senator Kohl 

and members of the Subcommittee. Thank you for the opportunity 

to appear today. I am Jeffrey Citron, the CEO of Vonage Holdings 

Corp. We are the largest provider of consumer and small business 

voice over IP service, as we refer to the industry, with over 600,000 

subscriber lines. 

For once, the entire telecommunications industry can all agree 

that today’s phone service market is highly competitive. Consumers 

have many choices, from plain old telephone service, to wireless 

service, to new and exciting offerings from voice over IP providers 

like Vonage. But no matter what kind of competitive phone service 

you choose, all providers need access to certain critical facilities. 

These facilities are network bottlenecks where there is little or no 

competition. 

Vonage would like to express our concern that the proposed 

mergers of SBC and ATT or Verizon and MCI would diminish existing competition by further consolidating the ownership and control over the critical building blocks upon which all communications 

service rely. 

A good example of this critical infrastructure is the 911 emergency service network. There is only one 911 network for every 

market, which is typically owned and operated by the local phone 

company. There is no competitive marketplace for 911 services. All 

calls to 911 must go through this unique system. 

Vonage has requested access to the Bell’s 911 network and to 

date has been denied by all but one of the major phone companies. 

In an attempt to resolve this issue, Vonage has built a basic 911 

solution, but it has limited functionality. Since there is no alternative to the Bell 911 network, Vonage cannot offer true 911 service if not guaranteed access to this public trust. At this critical 

8

juncture, we are crippled from meeting our collective social policy 

goals to deploy 911 for all. These mergers cannot be approved without conditions guaranteeing consumers with Internet phones direct 

access to 911 service. 

Another good example of critical telephone network infrastructure are the Bells’ network tandems. Tandems are where competing providers of phone service meet to link their networks together. The core of the public telephone network is made up of 

these tandems. These tandems are essential because they enable 

customers from one phone network to talk to customers of all other 

phone networks, and vice versa. 

To be clear, this is not about reselling the Bells’ network, as it 

has been debated to death. I don’t want to resell plain old telephone service. I just want my customers to be able to call grandma. 

In an effort to link Vonage’s network to the public telephone network, we have requested direct access to the tandems that are controlled by the major phone companies and all these requests have 

been rebuffed. 

This has forced Vonage to seek other alternatives such as purchasing these services from third parties like MCI and ATT. Now, 

the combination of MCI with Verizon and ATT with SBC puts two 

of the largest competitive carriers and long-distance companies 

under the control of the two largest Bells, giving them additional 

ability and incentive to deny competitors access. Congress must ensure that voice over IP providers have the right to directly interconnect with the merged companies that comprise the public telephone network to prevent the collapse of the competitive phone 

market. 

Another essential piece of many new communications services is 

the Internet itself. In order for us to offer our service, Vonage must 

have access to both the Internet and the traditional telephone network. MCI and ATT are two major providers of access to the public 

Internet backbone. Post-merger, the Internet would largely be controlled by the Bells, all of whom have the incentive, ability and history of denying Vonage access in order to gain a competitive advantage in the retail market. Congress must ensure that the merged 

entities provide their competitors nondiscriminatory access to the 

Internet backbone. 

Furthermore, wireless spectrum has slowly been consolidated 

into the hands of the powerful local phone companies. As the spectrum caps and resell requirements for these services have eroded, 

to accommodate our increasingly mobile customers Vonage must 

have access to this critical infrastructure in order to compete with 

local phone companies. Recent industry analysis indicates that 

when these mergers are complete, SBC and Verizon will control 

more than half of the wireless market. These mergers leave the 

interconnection rights of yet another essential facility at the discretion of the Bells. 

The final concern I would like to raise today is that the consolidation of retail services and broadband network providers will continue to put pressure on consumers’ rights to switch their phone 

service to a provider like Vonage. Today’s consumers are prevented 

from moving their phone service to Vonage if they have DSL. If a 

customer wants to transfer their number to Vonage or to another 

9

competitive service, SBC and Verizon will cancel their DSL service. 

This practice slows broadband adoption and reinforces anti-competitive practices. 

DSL tying also holds consumers hostage by controlling which 

services they can and can’t use their phone number with. Less than 

20 percent of our customers use Vonage over DSL. Stand-alone 

broadband is a critical driver for this emerging competitive market. 

Therefore, Congress should ensure that the merged companies 

allow existing customers to switch their phone service and keep 

their stand-alone DSL. 

In light of all these concerns, we respectfully submit that these 

mergers cannot be approved by the FCC and the DOJ without appropriate conditions to remedy these problems. Policymakers must 

ensure that retail providers like Vonage have fair and equal access 

to the essential facilities, the 911 network, the tandems and the 

Internet backbone. These conditions are necessary in order to protect retail customers and to allow for the continued innovation of 

voice over IP and other Internet-based applications. 

I look forward to answering any questions that you might have. 

Thank you. 

[The prepared statement of Mr. Citron appears as a submission 

for the record.] 

Chairman DEWINE. Thank you very much. 

Mr. Cleland.

STATEMENT OF SCOTT CLELAND, FOUNDER AND CHIEF 

EXECUTIVE OFFICER, PRECURSOR GROUP, WASHINGTON, D.C. 

Mr. CLELAND. Yes, thank you, Mr. Chairman and Senator Kohl 

and Senator Brownback, for letting me share my views today. I will 

take a little different tack today. What I want to do is emphasize 

kind of a forward-looking view to the extent that I can. 

I think antitrust is very relevant to these transactions, but in a 

traditional way I am not one that believes that these mergers pose 

a potential antitrust threat that warrants disapproval. On the condition issue, I think these mergers are subject to a tremendous 

amount of existing regulation that can be adapted and modified to 

address many of the concerns that people have in this merger context. 

Now, that being said, that does not mean that I don’t think that 

there are serious antitrust and enforcement issues here. I want to 

respectfully suggest how I think antitrust needs to adapt to what 

we call a techcom future. What is really going on here is we are 

seeing the convergence of tech and telecom. It is becoming a new 

industry which we call techcom. In my testimony, we have a piece 

that summarizes it and explains kind of where that is going. 

The one point on a going-forward basis that is absolutely critical 

to get right is there is, I think, in the United States a core constant, unshakable principle that is embedded in the 1934, the 1996 

Act and in the Internet, and that is the national value of free and 

unfettered access of every American to every other American. That 

is critical for our social and political cohesion as a Nation, our economic growth and innovative society, and for national security and 

homeland security. 

10

Let’s remember the 1934 Act basically required interconnection 

because ATT successfully monopolized the market by denying 

interconnection to small players. The 1996 Act in this respect got 

it dead right—a mandated duty to interconnect and be interoperable. Then the Internet is the ultimate example of this principle, 

where it is what connects everybody as simply, broadly and universally as possible. 

So I think the biggest anti-competitive threat that faces the 

techcom world is not pricing power that many may discuss here. 

Pricing in this market is plummeting because of Internet protocol 

substitution. Prices are plummeting. Now, that does not mean 

there aren’t antitrust issues here. What it means is you all should 

be concerned about subtle and naked attempts to gain market 

power by impeding or denying interconnection or network access 

for the purpose of competitive gain. It is going to require, I think, 

some real vigilance among the Congress, the Department of Justice 

and the FCC. But I think with market forces and with that vigilance, I think it will turn out to the benefit of all. 

What I want to do is list four anti-competitive concerns on a 

going-forward basis that are very important to focus on. The first 

is bit interference. That is basically trying to impede, sabotage, 

block, slow down somebody else’s traffic that is going over your network. And we know from the recent Madison River case that affected Mr. Citron’s company that this exposed potentially the most 

lethal risk to emerging techcom competition. If companies are allowed to technologically sort, block, impede or sabotage bit transmissions, competition cannot develop or flourish. 

Another one that you should be looking at very closely is the 

rather innocuous term of ‘‘quality of service.’’ That can be used to 

discriminate where, say, a large network says I am going to allow 

my customers to get premium passage and fast traffic and anybody 

that doesn’t use my service gets put in second-class or the slow 

lane. And the fastest way for an incumbent to win and shut everybody else out is to create two tiers of discriminatory quality of service. That has to be watched very, very closely. It could also be lethal to competition. 

The most insidious form of anti-competitive behavior that I have 

seen is the non-cooperation on 911. It is absolutely unacceptable 

that people are denying or impeding or not cooperating as incumbents with any competitor that is trying to promote what we all 

agree is a national goal of 911. Every American expects that that 

is there and it needs to be. That is very insidious. 

Another one that people don’t think about as being insidious is 

muni broadbands, the opposition to municipal networks, and I 

want to characterize that in a little different way. These are technological and equipment companies that are trying to sell to the 

single largest market, which is municipal broadband buyers. If 

they are banned by the government, that is probably singularly the 

most anti-competitive thing that can go and prevent most Americans from enjoying the benefit of alternative competitive sources. 

So with, I believe my time is up, but thank you for the opportunity to talk about this in front of the Subcommittee. 

[The prepared statement of Mr. Cleland appears as a submission 

for the record.] 

11

Chairman DEWINE. Mr. Kimmelman. 

STATEMENT OF GENE KIMMELMAN, SENIOR DIRECTOR FOR 

PUBLIC POLICY AND ADVOCACY, CONSUMERS UNION, WASHINGTON, D.C. 

Mr. KIMMELMAN. Thank you, Mr. Chairman, Senator Kohl, Senator Brownback. On behalf of Consumers Union, the print and online publisher of Consumer Reports, it is a pleasure to be here 

again to discuss with you these mergers. 

I want to take all the points that Mr. Cleland makes and put 

them into a consumer context, because I believe he is right on the 

mark and I believe all the conditions that XO and Vonage have requested are on point. 

Enormous technological explosion leaves us at a juncture now 

where consumers ought to be in the near future receiving 

broadband service, local telephone and unlimited long distance for 

as little as $40 a month. If you put together the prices that the 

muni wireless broadband networks can offer with the $25 package 

like Vonage offers for unlimited local and long distance, that is the 

average phone bill today for local and long distance for more than 

50 percent of consumers, but that would have broadband included 

in it. It would be a marvelous innovation. 

But the companies that are merging are charging $75, $80 for it, 

as are the cable companies, and they have every incentive to prevent that from happening. That is what is the fundamental danger 

for consumers in these mergers. They may not see the day of these 

price declines that Mr. Cleland pointed out we have had in the past 

and that we ought to have in the future. 

Let’s look at the world of intermodal competition that could have 

and should have brought us this with these mergers. Who are the 

biggest players out there to challenge the Bells? ATT, MCI, gone, 

part of the almost total dominance in the SBC territory for local 

and long distance, and in the Verizon territory as well. 

Wireless is out there, someday may be price-competitive, may improve its quality, but it is still twice to three times as expensive 

as wire line service for the average consumer use package. And 

who owns wireless? Verizon wireless is dominant in the Verizon region; Cingular, owned by SBC and Bell South, dominant in the 

SBC territory. It doesn’t solve the problem. 

Voice over Internet offered by cable. Well, if you are going to pay 

the high price, you might be able to get it. Only 30 percent or less 

of consumers right now have it. It is not clear how many can afford 

it at those price levels. And what you heard from these witnesses 

is the underlying Internet backbone that needs to be there with the 

adequate resources available to support competition may decline, 

may diminish, because ATT will pick up a lot of the traffic they 

were carrying, as will MCI. We may not have that service fully 

available to consumers. 

The final opportunity for meaningful intermodal competition is 

municipal wireless. You have companies like Verizon and SBC 

leading the charge to prevent communities from building out these 

networks. Whether it is not the community and a public entity, the 

critical point there is that, looking at the actual costs of providing 

wireless broadband, Philadelphia has found they could offer it at 

12

wholesale for $9 a month to Internet service providers, who claim 

at that price they could turn it around for as little as $15 a month 

for residential consumers. I don’t care if it is municipality or if it 

is a start-up company. That is where the market ought to be moving. These companies are trying to block that innovation, block that 

competition. 

So we believe from a consumer perspective that these mergers 

need to be substantially revamped. The conditions that Mr. Cleland 

were not that big a deal—quality of service, bit interference—yes, 

there are regulatory tools for them. But, boy, are they hard to police. That has been the Achilles heel in getting competition in telecommunications for 35 years. They are very important. We need 

the right incentives. They are not just a regulatory police force. So 

conditions are very significant here. 

I am not even sure that is enough. Even if you have DSL standalone, naked DSL, what is the price? How much control of the customer information, the quality of service, the bits, is there still 

going to be in these dominant Bell companies? 

Mr. Chairman, members of the Committee, we think it is really 

time for Congress to step in beyond the merger and look at whether your goals of competition in the 1996 Act are really being delivered to consumers, whether we are going to be able to sustain it 

in this environment, mergers conditions or not, and reopen the Act 

and think about what really needs to be done. Do you really want 

competition? Do you really want a $40 package for all these wonderful services? If you do, I suggest it is going to take some reworking by Congress. 

Thank you. 

[The prepared statement of Mr. Kimmelman appears as a submission for the record.] 

Chairman DEWINE. Senator Kohl. 

Senator KOHL. Thank you, Mr. Chairman. 

Mr. Citron, Mr. Kimmelman, one important new way for consumers to make phone calls is through the technology, as we know, 

voice over Internet protocol. This allows consumers to make phone 

calls over the Internet rather than over conventional phone lines. 

Making phone calls using voice over Internet requires a high-speed 

Internet connection, a service many consumers obtain from their 

phone company. 

With the exception of Qwest, until now none of the regional Bell 

companies will sell consumers high-speed Internet service without 

also requiring that the consumer also buy local phone service. This 

clearly eliminates any incentive for the consumer to purchase voice 

over Internet phone service and is therefore a significant obstacle 

to the deployment of this technology. 

At our last hearing, we asked the Bell companies whether they 

would be willing to sell high-speed Internet DSL service without 

also requiring that the consumer buy phone service. The Bell companies answered that they would do so only if they could make a 

profit on stand-alone DSL service. 

Mr. Citron, what is your reaction to this statement? Can you 

market your voice over Internet service to consumers who use DSL 

Internet connections if these consumers are also required to buy 

phone service? 

13

Mr. Kimmelman, I am interested in your view, and what do you 

think of Verizon’s plan announced today to offer limited standalone DSL to their existing customers in the Northeast? 

Mr. CITRON. Senator Kohl, Vonage has found it incredibly difficult for our ability to sell voice over IP services to customers who 

have DSL. We find the problem in two forms. First, in order to go 

ahead and get the DSL, most customers are required to buy phone 

service. So buying voice over IP and then being required to keep 

a phone service you don’t want makes it, of course, too cost-prohibitive to go out and get the service. 

Even in examples where people are able to go ahead and purchase stand-alone DSL, the ability does not exist yet for people to 

transfer their phone service, when tied with DSL, over to Vonage’s 

service, the ability for them to keep their phone number and move 

the service seamlessly over. Both are enormous barriers to competition and for people to switch. 

Senator KOHL. Mr. Kimmelman. 

Mr. KIMMELMAN. From the consumer perspective, you pay $25 for your local phone service and then you can get, for about $30, 

DSL. But they have told us up until now you have to buy both. 

Well, why go out and then pay extra money to get the same service 

you have already paid for? It undermines competition, as Mr. Citron says. 

Is what Verizon is offering a real stand-alone DSL? Boy, I hope 

it is. It doesn’t look like it. At least from what I saw from press 

accounts, they are offering it to existing DSL customers. Well, that 

leaves out more than 90 percent of their current customers. 

Why can’t somebody who is interested in getting a high-speed 

connection tomorrow call Verizon and say all I want is high-speed? 

Why can’t they get the same thing that they have just offered 

someone else? I don’t understand it. I mean, limited is better than 

nothing. I don’t want to criticize it in that respect. 

Once you get past technical barriers, which clearly Qwest has 

shown there are not—they offer this on a stand-alone basis—I don’t 

understand why Verizon is offering so little. It is really very little 

for very few people. Hard to understand. 

Senator KOHL. Mr. Citron, on February 17 the Washington Post 

reported that the FCC was investigating complaints by your company that local phone companies were blocking or disrupting access 

to your voice over Internet service. Has your company’s service 

been the victim of such actions by telephone companies, and are 

you concerned that this will occur in the future? Will these mergers 

make it easier for phone companies to have increased capabilities 

to block or to degrade access to your phone service in the future? 

Mr. CITRON. Well, yes, it is true, Senator. A company known as 

Madison River, a small ILEC, went out and started blocking 

Vonage’s service. Of course, we did go to the FCC and the FCC 

under its Title II authority was able to investigate the matter and 

ultimately a censure and a fine against this company. 

Vonage is highly concerned about this problem. We see the effects of what we call port blocking or disruption of the service occurring in a number of different sectors. We are seeing it occur 

right now with a wireless Internet service provider. We are seeing 

it with a very, very, small cable company that is also blocking 

14

Vonage’s service. So we find this to be problematic and we find this 

to be a growing trend. 

But beyond the last mile, we are also concerned about being able 

to purchase that Internet backbone. As I have already mentioned 

in my testimony, we buy a lot of capacity from MCI and ATT and 

others, and with the majority of the Internet backbone controlled 

by the Bells post this merger, we are concerned that not only do 

we have to worry about tampering in the last mile, but potential 

tampering inside the core of the network with, quite frankly, the 

inability to purchase services at the core of the network level. 

Senator KOHL. Are there remedies that the regulators can enforce that will prevent this from happening? 

Mr. CITRON. Well, in the case of a phone company DSL provider, 

yes, under the Title II authority the FCC did find that capability. 

But there are a lot of concerns about whether or not you can enforce this on other providers or players. So this is something that 

we take issue with. 

Senator KOHL. Mr. Kimmelman and Mr. Cleland, as you know, 

one important possible alternative to traditional phone service for 

consumers will be wireless connections to the Internet. Using these 

connections, consumers can access alternative phone providers such 

as voice over Internet and provide the Bell companies connections 

to their homes. 

Cities and municipalities such as Philadelphia have begun to 

build such wireless networks and plan to offer it to their residents 

as a municipal service. At our hearing last month, the Bell companies admitted that they were actively lobbying State legislatures 

around the country to pass laws forbidding cities from building 

these new networks to deploy these technologies. Pennsylvania recently adopted such a law and other States considering such laws 

include Illinois, Texas and Florida. 

What are we to make of such lobbying efforts? Do these municipal networks offer competitive alternatives? What do you make of 

the Bell companies’ claim that it is unfair to ask them to compete 

with a municipal system? 

Mr. Cleland? 

Mr. CLELAND. I think it is patently anti-competitive, and what 

they have done is they have framed the debate that it is a municipality that is trying to compete directly with them and it is a fundamental misunderstanding of the technology and how they service 

is provided. 

Essentially, the WiFi phenomenon emerged because Intel decided 

without telling anybody that people wanted wireless access and 

they put it in a chip. And then people bought for less than $50 a 

WiFi stick and they put it in their home or in Starbucks or wherever it was. It is a form of a gorilla network. It doesn’t require an 

operator or a service provider like we know that a Bell is. Somebody can put up a WiFi stick for virtually no cost and you can replicate not everything that a DSL can have, but you can replicate 

a lot of it. 

Why it is anti-competitive is incumbents don’t fear the municipalities as competitors. What they fear is the massive price deflation of people realizing that there is an extremely cheap technology 

that replicates what they do that can be put up very, very simply. 

15

You can put up WiFi sticks on light poles, on mailboxes, or whatever. You put them around extremely cheaply and it can be a tech 

company supplier who is in this instance is a competitor to the incumbent. By getting it banned, what they are doing is they are basically shutting down the greatest competitor potentially to an incumbent, which is technology companies selling new technology 

that really doesn’t require a traditional operator. 

So the last analogy that I will leave you with here that I think 

is a powerful one is would you have thought it was good public policy in the past when railroad companies came and said I don’t 

think municipalities should be in the road-building business, they 

shouldn’t build highways and they shouldn’t build an airport because that would be an unfair subsidy to the automobile companies 

and the plane companies? Of course not. It is patently absurd in 

the sense that municipal broadband networks are much like what 

it was to build roads and to build airports in the past. 

Mr. KIMMELMAN. I couldn’t agree more with Mr. Cleland. This is 

patently anti-competitive, it is unfair. It is embarrassing to come 

in and talk about innovation and competition and then to be out 

there actively blocking competition. It takes a lot of gall. 

This ought to be one of the first conditions I would urge the Committee to look at both for the antitrust officials and communications policy in general, the notion of barring entry in a world in 

which we have seen SBC swallow up two other Bell companies—

former Bell Atlantic, now Verizon, swallow up two of its equi-sized 

colleagues. They all swallow them up. 

How many times did they tell you that was going to be the merger that was going to get you the competition? And, oops, it never 

is; it is always the next one. And here they are blocking competitors. It ought to be stopped. 

Senator KOHL. Thank you, Mr. Chairman. 

Chairman DEWINE. Senator Brownback. 

Senator BROWNBACK. Thanks, Mr. Chairman. Thank you for 

holding the hearing. I have a written opening statement I would 

like to submit for the record, if I could, too. 

Chairman DEWINE. That will be fine. 

[The prepared statement of Senator Brownback appears as a submission for the record.] 

Senator BROWNBACK. Gentlemen, I was on the Commerce Committee before and so I have been around this issue for the years 

I have been in the U.S. Senate. It does strike that, for whatever 

reason—and it was partially, I think, the 1996 Act, but it also is 

just a lot of technology—competition is very robust now. 

We sought to create that in 1996. We sought to be able to take 

advantage of some of the competition in the marketplace that we 

thought could be there with that Act. We got it partially right, 

probably got a lot of it wrong. But at the end of the day, we are 

at a point now where there is robust competition, there is a declining price structure, there is good quality of service on a lot of different platforms, to the point that I can’t keep up with my latest 

device. They change it on me about every six months and it is 

something new and it is better. 

So I commend you as a group and as a field for that taking place. 

I think that has just really been a great innovation and I think it 

16

has been a great competitive advantage for the United States and 

I think it has been a great efficiency factor for us, increasing productivity across the United States, plus I can keep track of kids a 

lot better now than my parents could keep track of me, which is 

good for both of us. 

I am curious, though. Mr. Cleland—and I want some of the others to comment on this—you seem to look at this merger and say, 

okay, this is going to really stifle this continuation, and I guess I 

just don’t have the degree of fear of this taking place, given all of 

the competition that is coming into this field right now, whether 

it is in Internet protocols or whether it is happening in cable or 

other places. I think you are going to have robust competition, it 

seems like, because of the technological factors and the number of 

ports that people can get into the phone service. 

Mr. Cleland, let me put the question, though, in reverse to you. 

What happens to these large companies that are merging if the 

merger does not go through? What would be the likely impact on 

them and on competition if it doesn’t go through? 

Mr. CLELAND. Well, to answer that specific question, I am an analyst for the investment community and so while I have one position—when I analyze these under antitrust law, I don’t think that 

they warrant disapproval or necessarily heavy conditions. However, 

if you are asking my opinion on what would these companies do if 

they didn’t merge, I think they would be a lot better off. 

I think in SBC buying ATT and Verizon buying MCI, they are 

changing their risk profile and their growth profile and they will 

become negative growth companies. So I am scratching my head 

about why they are wanting to do it. This is a free country. They 

have chosen to do it. 

I think that whether they are merged or not, that is not the competitive dynamic that is the real concern. I am a believer in intermodal competition and deregulation and in market forces, and I believe it is increasingly competitive. Right now, you have DSL, you 

have cable modems, you have three 3G networks coming on board 

nationally this year from Sprint, from Verizon, from Cingular. You 

have companies like Clear Wire doing WiMax. You have broadband 

over power lines that is very promising; it is not right now, but it 

is coming down the pike. You have WiMax that is very promising. 

And so I personally believe that these companies, whether they 

merge or whether they don’t, are dinosaurs and they are going to 

be affected very negatively by competition. Their prices are going 

down. They offer services that are on the wrong side of technology, 

the wrong side of history. And you can provide techcom services, 

services like Mr. Citron is, for anywhere between 20 and 90 percent 

less than what the incumbents offer. So competition is coming more 

furiously, but it is coming from technology. 

Senator BROWNBACK. I understand. So regardless of the merger, 

the competition is going to be furious for the consumer out there. 

Mr. CLELAND. Increasingly, if—and there is a big ‘‘if’’—as a 

strong proponent of deregulation and of market forces, I also believe that deregulation does not mean a state of lawlessness or 

obligationlessness. Just like there is 911, CALEA, consumer protection, disability access, universal service, antitrust—all of those are 

social and national obligations we all agree should be on there—

17

in addition to that, the critical one is protecting the duty to interconnect and making sure that people don’t mess with the freedom 

to access any content, to access any application or attach any device. That is critical. Competition without those protections is really going to collapse. 

Senator BROWNBACK. I appreciate you mentioning that because 

coming from a rural State, a number of these services and needs 

are things that are built into the law that we need to be able to 

maintain a set of infrastructure support that can be cost-competitive. I actually think that is a far bigger issue than these mergers 

as to what we need to do to be able to maintain those services and 

the funding streams to be able to do that, because I think those 

funding streams are going to have to be altered, it looks like to me, 

to collect the new people that are coming into the field and make 

sure everybody is sharing in this. 

Mr. Citron, I am not sure maybe if you would be the right one 

to ask this or not, so I will apologize ahead of time if you are the 

wrong to ask. But when you hear Mr. Cleland say that there is 

going to be robust competition, regardless, and we shouldn’t have 

a state of lawlessness, but there is going to be robust competition, 

don’t you agree with that as you look at the overall factors? Regardless of the merger, this is going to be a robust field? 

Mr. CITRON. Well, I think I would agree in a sense. I believe already that there is robust competition for consumers’ business. I 

think that has led to obviously pricing declines. We think that is 

a very positive trend. I think one thing that people sometimes miss 

is that all providers of communications services still rely on critical 

infrastructure and if access to that critical infrastructure is not 

provided, then all of a sudden you will not have competition. 

Vonage is already facing problems in getting access to many systems that are critical, like the 911 infrastructure, and that is problematic. In addition, I notice that Mr. Cleland did mention wireless 

broadband opportunities. One of the new wireless broadband providers in this country actually is disrupting and blocking Vonage’s 

access to its customers. They literally stop our packets from flowing 

over the wireless links to the consumers to provide them voice over 

IP service. So what good is voice over IP competition if the 

broadband provider that is delivering those packets interferes with 

them for their own benefit? That is the problem that we see. 

Senator BROWNBACK. Now, Vonage, as I understand it, is the 

largest VoIP provider. Is that correct? 

Mr. CITRON. That is correct. 

Senator BROWNBACK. Much larger than ATT on that type of service? 

Mr. CITRON. That is correct as well. 

Senator BROWNBACK. And it doesn’t seem to be that you have 

had problems providing that sort of service to date, or competing 

with the large telephone incumbents to date. I mean, you are identifying other fields where there are blockages and not particularly 

this one? 

Mr. CITRON. No. Actually, if you look at our problem, say, with 

interconnecting to 911, we have asked all four Bell companies for 

direct access to the E911 system so that we can provide an E911 

solution that is on parity with the regular wire lines—something 

18

that everyone in this room should be very concerned about. Only 

one of those four Bell companies has granted us access to date. The 

other three Bell companies still refuse to give us access. Some are 

talking to us about it. 

Senator BROWNBACK. On what basis? What do they articulate to 

you? 

Mr. CITRON. They don’t have to. 

Senator BROWNBACK. And they have not? 

Mr. CITRON. They have not. Now, I will add one more point to 

that just related to these mergers. Today, Vonage wants to go 

ahead and access the PSTN network, the core tandems, to be able 

to take our customer calls and have them communicate with other 

networks, basically for my mom to call her friend who is not on the 

Vonage service. 

To make that happen, we need to interconnect at the tandems. 

These are critical core network elements. Vonage has asked for access to these tandems. The incumbent Bell operating companies 

have told us no. Why? They can. 

Senator BROWNBACK. Let me ask Mr. Cleland kind of a tight 

question, if I can, on this. Mr. Grivner’s testimony states that the 

DOJ, upon close scrutiny of the geographic markets, will find that 

the SBC/ATT merger will fail to meet legal standards. 

Would you agree with that assertion? Do you feel in a position 

to be able to make any statement regarding that assertion today? 

Mr. CLELAND. Well, if they drill down and look at individual 

markets like that, there may be some difficulties. I think what I 

expect DOJ to do is to draw back a little bit bigger in the markets. 

Remember, each one of these markets has been declared in a congressional act and through all the painful, ad nauseam regulation 

to be irreversibly open to competition. 

So the regulators have deemed that local and long distance integration is now allowable. There is a lot of competition and potential 

competition. I think it would be very difficult for the Department 

of Justice to go to court and say that these mergers were anti-competitive. 

Mr. KIMMELMAN. Senator Brownback, can I just say here is the 

interesting conundrum: the irreversibility was based upon a set of 

regulations that enabled ATT and MCI to come in aggressively and 

offer local phone service that have now been obliterated, where 

those companies will now be part of the companies they were competing against. So I think there is an open question as to how irreversibly open any of these markets are, given these changed circumstances. 

Senator BROWNBACK. Thank you, Mr. Chairman. 

Chairman DEWINE. Mr. Grivner, let’s get back to that map you 

put up there. I found that kind of interesting. Isn’t it true that ATT 

actually had announced its withdrawal from providing these services before the decision to merge, and isn’t the lack of competition 

in the local market really the result of a court decision that made 

it difficult for ATT to compete rather than a product of these mergers? In other words, would blocking the mergers change anything? 

Mr. GRIVNER. I think, Senator, it is part of, to give kudos to 

where they are, a very comprehensive overall strategy. ATT specifically withdrew from the consumer business when the writing was 

19

on the wall that they were going to have to charge more to their 

consumers and not be able to compete with the local Bell operating 

companies when UNEP went away. They were two of the largest 

users of UNEP. 

So if you look at it from a regulatory perspective, the regional 

Bells have been very successful in lobbying the FCC. When you go 

to the courts, you have got the Trinko decision. You have the issue 

now that they are fighting through relative to the municipalities. 

So they have put their two biggest competitors on their backs in 

the consumer market and then decided to buy them. I think it is 

a very remarkable overall cohesive strategy on their part, so failing 

perhaps in those particular markets, but still very, very strong in 

the business market, where they will still control 80 percent of the 

wire line business market between Verizon and SBC. 

Chairman DEWINE. So your answer to my question is what? You 

are telling me that blocking the mergers will change this reality. 

Is that what you are telling me? 

Mr. GRIVNER. I am saying that what the FCC and the Department of Justice need to do is they need to exhaustively examine 

both of these mergers to understand the impact to consumers, 

which will be substantial, as well as to business customers. These 

companies are not failing. They are Fortune 100 companies with 

$30 billion and $20 billion, respectively, in revenue, and producing 

significant cash flow as businesses as well. 

Chairman DEWINE. But the specific question I asked you had to 

do with this market, though. ATT had announced it was withdrawing from providing their services. That is correct. I am not 

wrong on my facts, am I? 

Mr. GRIVNER. You are not wrong on your facts. It is how they got 

to that point. They got to that point because they were pressured 

out of the market. 

Mr. KIMMELMAN. Mr. Chairman, could I add one thing there? 

Chairman DEWINE. Mr. Kimmelman. 

Mr. KIMMELMAN. Even as they announced they were withdrawing, ATT still has more than 25 million consumer accounts. 

That is a big chunk of the consumer population there. 

Chairman DEWINE. Consumer accounts? 

Mr. KIMMELMAN. Yes, consumer accounts. They were withdrawing from marketing to new customers to offer this package of 

services as the regulations were wiped out. On the business side, 

what this reminds me of is the 1970s. Do you remember the old 

MCI? MCI started out not offering the kind of services consumers 

now know. They offered services to businesses, and the way competition developed was from a new upstart coming in serving businesses and expanding out to the residential market. 

That is where we are again here with the new technologies and 

a new set of players. We need companies that can serve the business market independent of the Bells and then expand out to consumers. 

Chairman DEWINE. Mr. Cleland, let me turn to you, but also Mr. 

Grivner. Both of you have staked out somewhat divergent views on 

how we should react to these mergers. Mr. Cleland, you said these 

mergers will not really pose a serious risk unless the Government 

fails to be vigilant in deterring anti-competitive behavior and urges 

20

Congress, the DOJ and FCC to apply vigorous antitrust oversight 

after the fact. 

Mr. Grivner, on the other hand, has stated his concern that the 

current Government oversight scheme cannot be counted upon to 

correct abuses post-merger. is Mr. Grivner correct to be concerned 

that our current oversight scheme is inadequate to the task of policing this industry post-merger? 

Mr. CLELAND. Well, where I come from is I believe that in the 

totality when you look at this thing that it won’t be blocked and 

that it is best for competition going forward not to block it. Does 

that mean that I don’t think there is going to be any anti-competitive effect in certain markets? Of course not, but I think competition is rough and tumble. 

The old CLEC model is one that was built upon the Telecom Act 

of essentially interconnecting in a certain way with an overbuilding 

of the Bell network. And now what we have is a whole new set of 

technologies that are able to break the bottleneck and don’t have 

to lean on it and I think those will cure many of the ills that Mr. 

Grivner is talking about. 

Will it be a totally pretty transition? No. I think we should expect that there will be probably some market power exerted in 

some localities in some places for a certain period of time. However, 

if we had that fear, we would never get from here to there. So I 

think a competitive transition and intermodal transition takes time 

and will be a bumpy road. 

Chairman DEWINE. Mr. Grivner, do you want to comment? 

Mr. GRIVNER. Senator, there were conditions placed on the SBC/

Ameritech merger back in 1998, and post that merger SBC has 

paid $1.2 billion in fines in non-compliance for those conditions. 

Now, in most States that is a lot of money. That would be a lot 

of additional revenue, $1.2 billion. But apparently to SBC it is not; 

it was cost of doing business. So I think those conditions need to 

be very, very carefully analyzed and I don’t think we are at that 

point yet. 

Chairman DEWINE. Let me ask all of you this question. The testimony we have heard and seen had a great deal of emphasis on 

the idea that access to the local network may be the most important factor in allowing other market entrants to compete. However, 

this certainly may be easier said than done. 

When we tried to implement the unbundled network elements 

method as a way to assure that the long-distance companies had 

access to Bell company networks after the 1996 Telecommunications Act, we saw years of fighting and litigation. How exactly do 

all of you suggest ensuring access to the local network? 

Mr. Kimmelman, do you want to start? 

Mr. KIMMELMAN. Well, I think there are some straightforward 

conditions that have been mentioned. Unbundling DSL and making 

sure it is offered at a reasonable price in its terms and conditions 

would be helpful. Let’s push Verizon to go much further than they 

have here and get SBC to the table on that. That would certainly 

be helpful. The variety of non-discrimination requirements that 

have been mentioned could be helpful. 

I believe, given that history, I believe you are absolutely right, 

Mr. Chairman. It was a tough row to hoe and it didn’t really work. 

21

Really, the best thing we could do is back these companies off of 

blocking new entrants, whether they be power companies, whether 

they be municipalities, find a way to make this a merger condition 

or enact it into law, if Congress has to, because the best way to ensure there is new availability of competition for consumers is to 

have a wireless broadband network offered by somebody else. 

Chairman DEWINE. Mr. Cleland. 

Mr. CLELAND. Yes. I really want to hammer home the point that 

in a deregulatory environment I think the incumbents have basically gone to the extreme of saying in a marketplace there are no 

obligations, there are no requirements. I think that is way overreaching and very anti-competitive and a problem. 

Price deregulation didn’t work. I think it is a failed policy and 

a lot of the reason we had the legal fights that we had was I think 

the FCC was overly aggressive in price regulation and less concerned about making sure that there was good interconnection and 

good access. 

So I think that the emphasis should be very, very strong toward 

enforcing and policing interconnection, and whenever there are 

people that are impeding or denying access to 911 or other networks, tandem networks, that is the thing that should raise the ire 

of regulators and antitrust enforcers, and they should back off of 

trying to micromanage the prices and the economics of the market. 

Mr. CITRON. Clearly, we already have a framework for allowing 

for interconnection, and clearly that framework doesn’t work because that framework does not currently extend beyond the current 

providers. It doesn’t encompass voice over IP, it doesn’t encompass 

our company. That is why we are having such difficulty in gaining 

access. 

I think there are a couple of prescribed approaches to this problem. One, of course, is as a condition of these mergers you can force 

the emerging entities to make sure they provide that their network 

is open and available to us on a competitive basis and to similarly 

situated companies. 

Another way is to actually look at the current laws and the constructs and to expand those laws on interconnection to allow players like ourselves to go ahead and compete and gain access to services. 

Mr. GRIVNER. While competition exists in the market today, it is 

extremely fragile. We all depend on that last-mile access. We have 

talked about some very innovative technologies—broadband, wireless and some new things. But those things are years away, and 

in the meantime the current FCC rules need to be enforced and 

they need to be innovative enough to allow new entrants into the 

market as well. 

Chairman DEWINE. Mr. Kimmelman, in his written testimony 

Mr. Cleland has mentioned a number of technologies—wireless, 

cable modem, WiFi, WiMax, broadband over power lines—all as 

likely competitors against traditional wire line service. 

First of all, do you agree with this, and are these technologies 

ready for prime time do you think? 

Mr. KIMMELMAN. I agree with all them being potentially out 

there. Some of them have been potentially out there for 5, 10, 15, 

maybe 20 years. 

22

Chairman DEWINE. Emphasis on the potential. 

Mr. KIMMELMAN. Yes, a lot of potential. He mentioned 3G networks and he mentioned Cingular, Verizon and Sprint. Well, two 

of those are the merging parties here with their most likely competitors. The problem is not just the technology. You have to look 

at the market power they have in using the new technologies bundled with the old technologies. 

I do believe there is potential here. I really do urge you to look 

at this like the 1970s when old Ma Bell was being broken up, when 

MCI was challenging it. It took some hefty intervention to open up 

that market to more competition, and I think all the technologies 

Mr. Cleland is talking about are there. They are ripe for consideration in the marketplace. It is rough and tumble, but there needs 

to be some non-interference from public officials in order to make 

that happen. Otherwise, it won’t happen. 

Chairman DEWINE. Mr. Cleland? 

Mr. CLELAND. Yes, thank you, Mr. Chairman. There is a lot 

going on right now. We call this dynamic techcom, and why these 

technologies, broadband over power lines? I followed it for nine 

years and was yawning and saying when is it going to come? Well, 

it finally has come. 

The reason why many of these technologies that we are talking 

about—they are not pie-in-the-sky; they are real and they are coming on now for several reasons. We have a critical mass of wireless 

access. We have a critical mass of processing power. Essentially, 

Moore’s law. Silicon chips have gotten so fast and so cheap that 

they are solving problems that before were barriers to competition. 

Storage is getting dramatically cheaper and dramatically smaller. We now have 185 million people with cell phones, so there is 

mass penetration there. We have broadband access all through the 

enterprise market, 90 percent. Thirty percent of the consumer market has broadband access. That is 60 percent of the buying power, 

so broadband access has been critical. Deregulation—we have displays, foreign factors. 

There is a confluence of things that are coming together, and we 

call it the techcom dynamic, where the things that we have all 

been talking about in pieces are finally starting to come together. 

What we call the techcom dynamic is mobility times convergence 

times the any-to-any connectivity of IP. 

What you have is a very, very dynamic, innovative marketplace 

that really was kind of started in the last year. VoIP is just one 

dimension of the exciting changes that are going on. People have 

been talking about convergence for a long time. What they are 

going to see is in the next two to three to four years it is going to 

happen much faster than people anticipate. 

Chairman DEWINE. Mr. Cleland and Mr. Kimmelman, some have 

raised concerns that after the merger SBC and Verizon are not 

likely to compete in one another’s territory even for enterprise customers, since they have not very aggressively competed in the past. 

However, a large part of the motivation for this merger on the part 

of SBC and Verizon is to gain access to the large enterprise clients 

currently served by ATT and MCI. 

23

Why would SBC and Verizon spend all this money to acquire 

ATT and MCI if they did not intend to compete head-to-head to get 

these big business clients? 

Mr. KIMMELMAN. I will start. Well, they clearly are spending 

money because they think they can make money here, and Mr. 

Cleland has made some good points about why it may not make 

total sense. 

The enterprise market is not where I focus, but there are very 

few competitors today in the enterprise market. They may be willing to challenge each other somewhat, but the real problem there 

is there are deregulatory pricing rules for a two-player market involving what is called special access that are leaving very high 

prices for business customers. This will not solve any of that problem and it will create the political environment that makes it impossible to solve that problem. There will be nobody else out there 

who is well-positioned to serve the enterprise market. 

I will just go back to my earlier point. While we don’t focus on 

business customers, the history of telecommunications has been 

that many players coming in servicing business markets first end 

up in residential markets. So the danger here is that this just locks 

in a very tight oligopoly even further. 

Chairman DEWINE. Mr. Cleland. 

Mr. CLELAND. Well, the problem with the enterprise market—

and SBC and Verizon are going to learn it quickly—is you tend to 

covet and want what you don’t have, and the Bells don’t have those 

large enterprise customers. When SBC and Verizon buy them, they 

will realize that that customer segment is rapidly moving away 

from them and ATT and MCI. 

What is happening in that marketplace is essentially enterprises 

are in-sourcing. They used to have to out-source and they needed 

ATT and MCI. They are now moving most of their voice traffic and 

their data traffic onto their own networks. They just don’t need 

telecommunications providers anywhere near as much as they did 

in the past. 

So that market, we believe, is going to be a steadily declining 

market for several years. I don’t think in that marketplace that 

SBC/ATT and Verizon/MCI are going to be able to exert market 

power. They are going to have to do their best just to hold their 

own. 

Mr. KIMMELMAN. Mr. Chairman, what I hear Mr. Cleland saying 

is there really is no competition and big businesses ultimately will 

spend on their own if the prices are too high from the commercial 

market. That is not a very good set of policies, I believe. 

Mr. CLELAND. Well, once again it is very important. You have to 

understand techcom competition is different than telecom competition. In the techcom world, large enterprises already have networks. They are Microsoft, they are IBM. They have their own networks. They don’t need ATT, MCI, Verizon and these companies 

like they did in the past. So that is what technology is allowing 

them to do. Technology is allowing these enterprises to totally bypass or do without what they used to absolutely have to have. 

Chairman DEWINE. I want to thank all of you very much. I think 

it has been a very helpful hearing. I think we can safely say we 

have heard just about all sides of the many issues raised now by 

24

these mergers. This panel has done a great job of balancing out the 

testimony that we heard last month from the merging parties 

themselves and really, I think, given our Subcommittee a lot to 

think about, which we will. As we have said, there are a wide 

range of issues raised by these deals. 

So we again thank our witnesses. I want to thank Senator Kohl 

for his great work, and we thank all of you. Thank you. 

[Whereupon, at 4:15 p.m., the Subcommittee was adjourned.] 

[Submissions for the record follow.]

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