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S. HRG. 106–1083

MERGERS IN THE TELECOMMUNICATIONS

INDUSTRY

HEARING

BEFORE THE

COMMITTEE ON COMMERCE,

SCIENCE, AND TRANSPORTATION

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

NOVEMBER 8, 1999

Printed for the use of the Committee on Commerce, Science, and Transportation

(

(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

JOHN MCCAIN, Arizona, Chairman

TED STEVENS, Alaska

CONRAD BURNS, Montana

SLADE GORTON, Washington

TRENT LOTT, Mississippi

KAY BAILEY HUTCHISON, Texas

OLYMPIA J. SNOWE, Maine

JOHN ASHCROFT, Missouri

BILL FRIST, Tennessee

SPENCER ABRAHAM, Michigan

SAM BROWNBACK, Kansas

ERNEST F. HOLLINGS, South Carolina

DANIEL K. INOUYE, Hawaii

JOHN D. ROCKEFELLER IV, West Virginia

JOHN F. KERRY, Massachusetts

JOHN B. BREAUX, Louisiana

RICHARD H. BRYAN, Nevada

BYRON L. DORGAN, North Dakota

RON WYDEN, Oregon

MAX CLELAND, Georgia

MARK BUSE, Staff Director

MARTHA P. ALLBRIGHT, General Counsel

IVAN A. SCHLAGER, Democratic Chief Counsel and Staff Director

KEVIN D. KAYES, Democratic General Counsel

(III)

C O N T E N T S

Page

Hearing held November 8, 1999 ............................................................................. 1

Statement of Senator Brownback ........................................................................... 25

Statement of Senator Bryan ................................................................................... 5

Statement of Senator Dorgan ................................................................................. 30

Statement of Senator Gorton .................................................................................. 5

Statement of Senator McCain ................................................................................. 1

Statement of Senator Wyden .................................................................................. 3

WITNESSES

Cleland, Scott C., managing director, Legg Mason Precursor Group ............... 34

Prepared statement .......................................................................................... 35

Glenchur, Paul, director, Schwab Washington Research Group .......................... 47

Prepared statement .......................................................................................... 48

Jacobs, Tod A., senior telecommunications analyst, Sanford C. Bernstein &

Company, prepared statement ............................................................................ 40

Kennard, Hon. William E., chairman, Federal Communications Commission ... 14

Prepared statement .......................................................................................... 17

Kimmelman, Gene, co-director, Consumers Union ............................................... 49

Prepared statement .......................................................................................... 52

Initial Comments of the Consumer Federation of America, Consumers

Union, and the Texas Office of Public Utility Counsel before the FCC

(Excerpt) ........................................................................................................ 69

McTighe, Mike, chief executive officer, Cable & Wireless, Global Operations ... 55

Prepared statement and additional material ................................................. 57

Pitofsky, Hon. Robert, chairman, Federal Trade Commission ............................. 6

Prepared statement .......................................................................................... 8

Sidgmore, John W., vice chairman, MCI/WorldCom ............................................. 44

Prepared statement .......................................................................................... 45

APPENDIX

Mays, Lowry, Clear Channel Communications, Inc., testimony .......................... 81

Tichenor, McHenry, president and chief executive officer, Hispanic Broadcasting Corporation (HBC) .................................................................................. 82

(1)

MERGERS IN THE TELECOMMUNICATIONS

INDUSTRY

MONDAY, NOVEMBER 8, 1999

U.S. SENATE, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, Washington, DC.

The committee met, pursuant to notice, at 9:35 a.m. in room SR– 253, Russell Senate Office Building, Hon. John McCain, chairman

of the committee, presiding.

Staff members assigned to this hearing: Lauren Belvin, Republican senior counsel; Paula Ford, Democratic senior counsel; and Al

Mottur, Democratic counsel.

OPENING STATEMENT OF HON. JOHN McCAIN,

U.S. SENATOR FROM ARIZONA

The CHAIRMAN. Good morning. Today, the Commerce Committee

is going to examine the implications of megamergers in the telecommunications industry. Let me thank our witnesses for agreeing

to share their perspective with us this morning.

Our first panel consists of our Government witnesses, William

Kennard, chairman of the Federal Communications Commission,

and Robert Pitofsky, chairman of the Federal Trade Commission,

both of whom are well-known to this committee, very well-respected and highly regarded, and we are grateful that they would

take the time to be with us this morning.

Following their testimony, a second panel will present the views

of a cross-section of non-Government interests. Representing the

telecommunications interests are Mike McTighe, chief executive officer, Global Operations, Cable & Wireless, and John Sidgmore,

vice chairman of MCI/WorldCom, Scott Cleland, managing director

of Legg Mason Precursor Group, and Paul Glenchur, director

Charles Schwab Washington Research Group, who will represent

the investment community on the second panel, and Gene

Kimmelman, codirector, Consumers Union, will testify to the interests and concerns of consumers, as he has so capably done in virtually every telecommunications hearing I have held since I have

become chairman of this committee. Some allege that he is a member of this committee.

[Laughter.]

I stoutly reject such allegation. Welcome to you all. I look forward to your views and responses to our questions.

Let me briefly set the stage for why we are meeting today. Anybody who pays attention to the headlines can reel off a list of recent telecommunications industry megamergers. SBC/Ameritech,

2

BellAtlantic/NYNEX, GTE/USWest/Qwest, MCI/WorldCom—excuse

me, USWest/Qwest, MCI/WorldCom and MCI/Worldcom Sprint,

Time Warner/Turner and, of course, AT&T/TCI/Media 1.

Huge as these deals are, they represent only a fraction of the

consolidation that is taking place in the telecommunications industry. As Chairman Pitofsky notes in his written testimony, since

1995 the number of telecom mergers filed for governmental approval has increased almost 50 percent, and their combined dollar

value has increased eightfold.

Why this sudden urge to merge? Part of the credit goes to the

1996 Telecommunications Act. By redrawing the ownership and

competition rules that govern the industry, it has created incentives, both intended and unintended, for companies to merge. Also

empowering these mergers are the growing globalization of commerce, the advent of digital convergence, and the general state of

the American economy.

As a result of all these factors, telecommunications companies

are restructuring to align themselves to better compete using one

of two alternative business strategies. Some are focusing on

strengthening their positions in one specific core market, while others are expanding to compete in new markets.

Either way, most Americans tend to view increased concentration

of control as a negative and, unfortunately, this is often the case,

at least for the average consumer. For while merging industries

enjoy the cost-saving benefits of increased efficiency, the average

consumer doesn’t always reap the benefits of lower prices and better service. These worries are already apparent in the context of

telecommunications mergers. We worry whether increasing consolidation in the radio broadcasting industry will homogenize radio

programming. We worry whether Bell Company mergers will ultimately create only two surviving companies, Bell East and Bell

West, and we worry whether AT&T will be reincarnated as Ma

Cable, dominating the markets for voice, video, and high speed

data services.

There is another valid reason why we disfavor undue industry

concentration. The more industry becomes consolidated, the harder

it is for new companies to enter the market, or for small companies

already in the market to survive. This challenge is a bedrock principle of our free enterprise system, that every business should have

a fair opportunity to enter the market and to succeed or fail based

on initiative and hard work, and if small businesses cannot compete in the telecom market in the information age, what stake will

small businesses have in our economy as a whole?

Unfortunately, these valid concerns sometimes prompt the wrong

responses. For example, Government sometimes confuses the notion of leveling the playing field with reconstructing the stadium.

That is, instead of making sure that incumbent firms cannot exercise the power to eliminate competition, Government sometimes

tries to deprive incumbent firms of virtually any advantage of incumbency.

Similarly, in an attempt to preserve ownership opportunities,

Government tends to retain outmoded ownership restrictions or

adopts regulations creating new services that the market does not

need and will not support.

3

Have we reached the point at which further industry mergers

should be regarded as unthinkable? If not, what different standards, if any, should apply to telecom industry mergers in the year

2002 and beyond, as the industry becomes more concentrated? Who

should apply these standards and do they become harder or easier

to articulate and enforce?

Finally, of course, there is the most important question of all.

Who is being benefited by these mergers, and what more must we

do to assure that all Americans can enjoy these benefits?

So the Commerce Committee meets today to examine where the

current trend of telecom mergers is taking the industry, what it all

means for small businesses and for the average consumer, and

what Government’s response should and should not be?

This may not be the last hearing we have on this issue, but I

thought it was very important as we are winding down here to at

least start in our proper and appropriate oversight responsibilities

of this committee.

These are very, very interesting, exciting, stimulating, and incredibly unusual activities that are taking place, the likes of which

have probably not been seen in history, or at the time of the early

stages of the industrial revolution, therefore I view this hearing as

one of education and information, and I believe that in the future

we need to have additional hearings to determine what, if any, actions the Congress, or what involvement the Congress of the

United States should have.

I would like thank Senator Wyden and Senator Bryan for being

here.

Senator Wyden.

STATEMENT OF HON. RON WYDEN,

U.S. SENATOR FROM OREGON

Senator WYDEN. Thank you, Mr. Chairman, and let me begin by

commending you for taking on a series of issues that is especially

important to consumers.

I will tell you, Mr. Chairman, I hope that this will be just the

beginning of an effort by this committee to examine the impact of

mergers on our economy. Among our responsibilities on this committee is jurisdiction over the Federal Trade Commission, which reviews mergers in a wide variety of industries providing goods and

services that affect millions of Americans each day, not just telecommunications but oil and gas and pharmaceuticals and a wide

variety of areas. It is not just telecommunications, but it is Barnes

and Noble threatening small bookstores, Mobil and Exxon, BP and

Arco, Alcoa and Reynolds Aluminum, Phelps Dodge and others.

I hope that we will on this committee examine these questions

more generally. My gut feeling is that a fair number of these mergers do not threaten the interest of consumers. They are more likely

to be responses to global competition, technology, and productivity.

But I do think a relatively small percentage of these mergers are

truly serious for consumer interests, and of those that represent a

problem, a disproportionate percentage are in the telecommunications sector. It is becoming clear to me from the merger surge in

telecommunications that what is needed are some rules of the road

for the information superhighway.

4

In the past, for example, regulators tended to find problems

mostly in cases where merging companies were direct head-to-head

competitors. For example, the proposed deal between MCI/

WorldCom and Sprint is the kind of merger that is always brought

antitrust scrutiny, but especially with high tech and new economy

industries the old approach to merger review does not cut it any

more.

BellAtlantic and NYNEX were never direct competitors because

for years they were regulated monopoly utilities, but after deregulation, they could have been competitors if the merger had not gone

forward.

Now, it is hard to measure this loss of potential competition from

the marketplace, and that makes it hard for regulators to hold up

mergers that only reduce potential, not actual competition, yet

these same regulators are willing to allow mergers between U.S.

companies to go forward when the merging companies can point to

potential overseas competition that might come into U.S. markets.

So I want to wrap up with a few theories that we might examine.

First, if potential overseas competition is a valid reason to let these

mergers of U.S. telecommunications firms go forward, then the loss

of potential domestic competition also should be an equally valid

reason to hold up mergers in some other cases.

One theory I would like to examine is exploring whether a more

consistent standard should be applied when evaluating the impact

of mergers both pro and con and potential competition.

A second concern, besides losing potential competition, is that

combinations like BellAtlantic and NYNEX can also mean the loss

of critical information necessary to protect consumers.

For example, one way regulators can implement regulations is to

compare local exchange companies in different parts of the country

to see if one is overcharging customers. If they all merge, you cannot do that any more.

In some cases, regulators have required divestitures or imposed

conditions on particular mergers to address these concerns, but it

has been ad hoc. For example, in the SBC/Ameritech merger, regulators imposed conditions for providing broadband access to low income areas. That is a laudable goal, but these conditions raise

other questions. Is this approach the best way to achieve universal

broadband access, and how does it affect competition with

unmerged companies that have no similar requirement, and what

is going to happen to the customers of unmerged companies in low

income areas?

Third, in the past, regulators generally have been favorable toward vertical combinations that involve companies at different levels of the same industry, such as a manufacturer and a retailer

merging together. In general, when both companies are in unregulated and competitive markets, these types of combinations make

for efficient competition in the industry, but when these types of

mergers involve regulated companies, or companies with tremendous market power, as is the case in telecommunications, the merger may need special scrutiny to ensure that benefits of greater efficiency outweigh the potential for unfair competition.

When a company that already dominates one market merges

with a company in a competitive market, then that combined comVerDate 11-MAY-2000 11:36 Apr 25, 2002 Jkt 077325 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 77325.TXT SCOM1 PsN: SCOM1
5

pany may be able to dominate both markets, and a possible example there is TCI and AT&T. In evaluating these mergers, how do

we make sure that the merged company cannot leverage its market

power to compete unfairly in other sectors?

Finally, when evaluating the type of megamergers we are seeing

today, should the regulators take a broader view that considers not

only the immediate merger proposal but how competitors in the industry are likely to respond? Even if the particular deal looks OK,

another merger in the industry may go over the top in terms of too

much market concentration and not enough competition. Regulators do not have to be soothsayers to be able to anticipate that

one megadeal will prompt others to follow.

In certain cases, it should be fairly obvious that once the door is

open with one megamerger, others will follow. For example, the

clear channel AM/FM merger can be seen as an effort to remain

competitive with the merged CBS/Viacom Company.

Mr. Chairman, the merger surge may in fact be contagious, but

I am not prepared at this point to impose a quarantine on all mergers. I think it is time to look at some of the distinctions between

what constitutes a merger that is in the consumer’s interest and

a set of factors that may constitute mergers that hurt consumers.

So we want to look at these issues. I appreciate your holding this

hearing, and I hope that this will, in fact, begin a series of hearings

so that we can, in fact, look at the enormous ramifications that

mergers do have on our society.

I thank you.

The CHAIRMAN. Senator Gorton.

Senator GORTON. No statement.

The CHAIRMAN. Senator Bryan.

STATEMENT OF HON. RICHARD H. BRYAN,

U.S. SENATOR FROM NEVADA

Senator BRYAN. Thank you very much, Mr. Chairman. Let me

join with my colleagues in commending you for your leadership in

having this hearing. We will hear shortly from the chairman of the

Federal Trade Commission, but I think in his prepared statement

there is an interesting statistic that I think underscores, Mr.

Chairman, both what you have said as well as what Senator

Wyden has said, and that is, he goes on to point out that there has

been an unprecedented merger wave in this country. In fiscal year

1999, we received almost 4,700 Hart-Scott-Rodino filings. That is

nearly three times the number that we received only 4 years ago.

Mr. Chairman, we had a similar situation, at least in terms of

the numbers of mergers and combinations that occurred in the last

century that led to a whole regulatory structure that protected consumers from unfair combinations, the Sherman Act, the Clayton

Antitrust Act. I am not suggesting that the merger wave that we

have seen in the last decade suggests that we need some type of

new regulatory model or constraint, but I think it does raise some

serious questions, and hopefully we can get some of the answers

this morning.

There is no question, at least if you follow the television ads, that

it appears that long distance carriers are highly competitive. Ad

after ad after ad have one company competing against another.

6

Less clear, Mr. Chairman, in my judgment is the situation with respect to local service.

We are fortunate in Southern Nevada. Sprint does a fine job in

terms of the technology and the quality of the service they provide,

but I must say I have some questions in terms of what are the

long-term implications of these mergers. Does the consumer benefit? Are there some things we ought to be concerned about down

the road? I would hope we might get some of those answers this

morning.

You know, the Congress, in its enactment of the 1996 Telecom

Act I think expected a number of things to occur, but its underlying

premise was to generate more competition. I think that has occurred in some aspects of the telecommunications industry. Regrettably, I think that has not been the case with respect to local service generally, and so it is not without precedent that our legislative

enactments create the doctrine of unintended consequences.

I do not know whether that is true in this case, but our first two

witnesses I think can provide us considerable insight into these

questions, and I look forward to hearing their testimony and again,

Mr. Chairman, I thank you for your leadership in providing us

with this hearing.

The CHAIRMAN. I thank my colleagues for being here. I thank the

witnesses for being here. I do not know who is senior here, but if

we go by age, Mr. Pitofsky, I think we would start with you.

[Laughter.]

STATEMENT OF HON. ROBERT PITOFSKY, CHAIRMAN,

FEDERAL TRADE COMMISSION

Mr. PITOFSKY. Thank you, Senator.

Mr. Chairman, Members of the Committee—— The CHAIRMAN. Somehow I have become more and more cognizant of that.

[Laughter.]

Mr. PITOFSKY. It seems to happen to all of us.

I am delighted to be here, and to present testimony of the Federal Trade Commission on this extremely important subject of

mergers, and especially mergers in the telecommunications industry.

As each of your opening statements pointed out, there is a remarkable merger wave going on in this country. It is the most active in terms of the percentage of national assets acquired since the

end of the 19th Century.

In each of the last 2 years, the Department of Justice and the

Federal Trade Commission reviewed roughly 4,700 mergers. In

1998, $1.6 trillion in assets were scooped up in merger activity.

When I say 4,700 mergers, by the way, we only look at mergers

where the acquired asset is valued at $15 million, so we’re talking

about fairly substantial deals.

Nevertheless, I do not believe that the merger wave—that is the

4,700 merges is the problem. Rather, I think it is a symptom of a

successful, unusually dynamic economy.

Many of these mergers are reactions to global competition, firms

trying to position themselves to compete in an increasingly global

market. Many of them involve high tech firms where there is a lot

7

of moving around, a lot of changing, a lot of restructuring and, of

course, many of these mergers are a response to deregulation, including the wave of mergers in the telecommunications field.

The Department and the FTC challenge about 2 percent of all

the mergers that are filed. That is a good deal more than the

1980’s, but not too different from averages over recent decades. The

problem I think is not the 4,700 mergers, it is the increasing number of megamergers involving very large firms, usually often direct

competitors, at the top of their markets. We find mergers proposed

among firms that are numbers 1 and 2 in the market, 1 and 3, 2

and 3, and that is a little different than in past decades. I think

that is a change from what we saw 10 and 20 years ago, and I

think some of that is going on in telecommunications as well.

Now, I should say that most telecommunications mergers are

handled by the Department of Justice, certainly the long distance

instances, mergers among the RBOC’s and so on. We have traditionally taken the lead with respect to cable, and I thought I would

talk about that today.

We have challenged several instances in which there were cable

overlaps, although in most regions of the country there is only one

cable company, but if there are two and they try to merge, we have

successfully challenged those transactions.

The most important and complicated case that we handled in

this area had to do with the proposed TCI/Time Warner/Turner

merger. It was a very complicated transaction, but reduced to essentials the merger would have produced at the programming

level—i.e. firms that create programming for cable and TV—a 40

percent market share, and at the distribution level, 44 percent

market shares. Those are very high. It was essentially a vertical

merger, but those are still very high market shares.

We settled the case with an elaborate order. Step 1 was to assure

that TCI essentially stepped out of the deal, and they did that by

giving up voting rights in the stock that they would have owned

in Time Warner.

Step 2 was slightly unusual for us, and that was a regulatory

order which dealt with the possibility of discrimination against the

smaller companies that were trying to get into this market. The

programmers were fearful of discrimination, that they would not

have a fair opportunity to compete for space on the Time Warner

cable systems if they were competing against Turner materials.

Possible competitors of cable—direct broadcast was the most obvious example—were very concerned, were fearful that they would

not have access to programming.

We negotiated with the consent of the parties, an order which

provided that there should be no discrimination, and that parties

would be treated no differently whether they were part of that

Time Warner/Turner corporate family or not.

I do not usually like orders like that. They are difficult to monitor, they are difficult to administer. In this case, however, I think

this probably worked out rather well. We have not received a complaint in the 21⁄2 years since we entered that order by any programmer or by any cable competitor that they have been denied

fair access to materials.

8

1This written statement represents the views of the Federal Trade Commission. My oral presentation and response to questions are my own, and do not necessarily represent the views of

the Commission or any other Commissioner.

Finally, let me say a word about the standards that ought to be

applied to telemarketing mergers. In one sense, it is not appropriate to have different standards for the oil industry, the steel industry, and communications industries. The Clayton Act does not

draw any distinctions.

On the other hand, I have always felt that the history of antitrust, the policy of antitrust, should involve more than economics.

It is more than dollars and cents. It is more than supply curves

and demand curves. Therefore, when we are talking about telecommunications and cable networks, we are talking about competition that affects the marketplace of ideas. We are talking about elements that impact on the First Amendment.

When we look at a merger involving two firms in the defense industry, we take national security into account. Judges have said:

of course if we need this merger for national security purposes that

is a factor that we would consider.

Again, I do not think the legal standards can be different, but

certainly we can give close scrutiny to mergers that impact on the

First Amendment and the marketplace of ideas.

Finally, let me just join the comments of Senator Wyden that

there is no more important issue on the economic side of domestic

policy, certainly on the antitrust side, than this wave of mergers

and the introduction in just the last few years of megamergers. We never saw $60 billion and $80 billion and $120 billion mergers until quite recently. Now we see them every several months.

We thought we had the record merger at the FTC when Exxon and

Mobil proposed a merger of $80-something billion. That record

lasted for about 4 months.

Telecommunications mergers touch upon important issues, and it

deserves and merits the attention of this committee, and I compliment the committee on taking the time and effort to address

these problems.

Thank you.

[The prepared statement of Mr. Pitofsky follows:]

PREPARED STATEMENT OF HON. ROBERT PITOFSKY, CHAIRMAN,

FEDERAL TRADE COMMISSION

I. Introduction

Mr. Chairman and members of the Committee, I 1 am pleased to appear before

you today to present the testimony of the Federal Trade Commission concerning the

important topic of mergers in the telecommunications industry. This is an industry

experiencing rapid technological and regulatory change leading to new products and

services not only in telecommunications, but also in industries that use telecommunications products as inputs, such as computers, data retrieval and transmission, and the defense industry. Anyone whose business depends on faster and

more reliable data movement is benefitting from these kinds of changes in the telecommunications industry.

At the same time, we have seen a growing number of significant structural reorganizations, both in telecommunications and in other industries. Such reorganizations may be a legitimate response to economic needs, but may in other instances

threaten competition and the rights of consumers. A vigilant merger policy is particularly important so that the forces pushing consolidation do not result in unilateral or collusive anticompetitive effects, which would result in a lost opportunity to

9

2SeePub. L. No. 94-435, 90 Stat. 1383 (1976) (codified as amended in scattered sections of 15

U.S.C.). 3See Economic Report of the President 39 (1999), available at http://www.gpo.ucop.edu/catalog/erp99.html 4Time Warner, Inc., 123 F.T.C. 171 (1997) (consent order). 5Tele-communications, Inc. and Liberty Media Corp., FTC File No. 941 0008, 58 Fed. Reg.

63167, 5 Trade Reg. Rep. (CCH) ¶ 23,497 (Nov. 15, 1993) (consent order accepted for public comment). The transaction was subsequently abandoned and the consent agreement was withdrawn. 6 United States v. Primestar, Inc., Civ. No. 1:98CV01193 (JLG) (D.D.C. May 12, 1998) (complaint). The transaction was abandoned. 7 United States v. Bell Atlantic Corp., Civ. No. 1:99CV01119 (D.D.C. May 7, 1999) (consent

decree). 8 United States v. Concert PLC, Civ. Ac. No. 94-1317 (TFH) (D.D.C. June 14, 1994) (consent

decree). 9 12 F. Supp. 2d 34 (D.D.C. 1998).

10 Id. Cardinal Health and McKesson were joint actions by the FTC to enjoin two related, but

separate, mergers of prescription drug wholesalers. 11 17 F. Supp. 2d 937 (E.D. Mo. 1997), rev’d, No. 98-2123, 1999 WL 512108 (8th Cir. July 21,

1999). 12See ‘‘Merger Wave Gathers Force as Strategies Demand Buying or Being Bought,’’ Wall St.

J., Feb. 26, 1997, at A1.

strengthen competition in this vital industry and would defeat the purpose of your

recent legislative efforts at deregulation.

II. The Merger Wave

Our country is clearly in the midst of an unprecedented merger wave. In fiscal

year 1999, we received almost 4700 Hart-Scott-Rodino 2 filings. That number is approximately at the level of the record number of filings from the previous fiscal year,

and is almost three times the number we received only four years ago. The total

dollar value of mergers announced in 1998 was over $1.6 trillion, an increase by a

factor of 10 since 1992. 3

The telecommunications industry has been swept up in the merger wave. The

telephone, cable, entertainment, data transmission, and other industry or market

segments have recently experienced both fast growth and significant consolidation.

Some flavor of the increase in telecommunications transactions can be gleaned from

the number of HSR filings. The number of transactions filed under the Standard

Industrial Code classification for communications has increased by almost 50 percent since 1995, while the total dollar value has increased eightfold to more than

$266 billion.

The antitrust agencies have been actively monitoring these areas. Since 1995, the

FTC has investigated or brought cases in video programming and cable distribution, 4 several cable overbuild matters, and the acquisition of a movie studio by a

cable company. 5 The Department of Justice has been similarly active, challenging

acquisitions in satellite communications and broadcasting, 6 cellular and PCS telephone service,±7 and Internet backbone service. 8 Although the Commission has

been active in cable and entertainment industries, most of the mergers involving

telephones and commercial satellite services have been analyzed by the DOJ pursuant to the two agencies’ clearance agreement, which divides matters on the basis

of recent expertise. Moreover, the Commission is barred by Section 11 of the Clayton

Act and Section 5 of the FTC Act from exercising jurisdiction over common carriers.

Despite little growth in resources since 1992, the Commission has established a

strong track record of promptly identifying and remedying problematic mergers. In

1999, the Bureau of Competition issued 43 requests for additional information from

potentially merging parties and brought 17 enforcement actions. In another 12

cases, the parties abandoned their proposed transactions based on concerns raised

by Bureau staff. In 1998, the Commission litigated three merger cases: FTC v. Cardinal Health, Inc., 9 FTC v. McKesson Corp., 10 and Tenet Healthcare Corp. 11

Why do merger waves occur, and what are the forces behind the current one? This

is not the first time the United States has experienced a period of rapid consolidation. In the 1980s many larger acquisitions were fueled largely by junk bond financing, corporate raiders, and management-led leveraged buy-outs. Many companies

were acquired for their financial break-up value. 12 Current consolidations are more

likely to be motivated by strategic goals and to involve competitors, suppliers, purchasers, or manufacturers of complementary goods. They are therefore more likely

to raise competitive issues and to require more resource-intensive scrutiny. Among

the current factors behind the current merger wave are:

Increasing Global Competition

10

13See FTC, Anticipating the 21st Century: Competition Policy in the New High-Tech, Global

Marketplace (May 1996). 14See CMS Energy Corp., Dkt. No. C-3877 (June 10, 1999) (consent order); Arkla, Inc., 112

F.T.C. 509 (1989) (consent order).

In 1995, the Commission held hearings on Competition Policy in the New HighTech, Global Marketplace. During those hearings, many witnesses commented on

the substantial increase in competition from foreign corporations. 13 In many of the

most important product markets for consumers, international competitors have captured substantial market share. Automobiles, commercial aircraft, and financial

services are now sold in world markets. The Commission’s international workload

component has grown accordingly. Approximately 25 percent of all mergers reported

to the FTC and DOJ involve parties from two or more countries, and 50 percent of

the FTC’s full merger investigations involve a foreign party, or assets or information

located abroad.

This increased international competitiveness is reflected in the telecommunications industry as well. With the erosion of trade restrictions and other regulatory

barriers, the amount of telecommunications services flowing across borders, such as

telephony, data transmission, and entertainment, has grown, as have the number

of mergers and joint ventures among firms headquartered in different countries.

Deregulation

A significant part of the merger wave is taking place in industries that are either

undergoing or anticipating deregulation. In the past few years, deregulation has occurred in the natural gas industry and the airline industry, leading to a number

of mergers in each. 14 Deregulation is now occurring in other industries, including

electricity, financial services, and telecommunications, and we are beginning to see

merger activity increasing in these industries also.

Deregulation of an industry often results in structural change and increased competition. Firms can take advantage of economies of scale and scope that were previously denied them. Mergers are often a way for these firms to acquire quickly the

assets and other capabilities needed to expand into new product or geographic markets. They can also facilitate market entry across traditional industry lines. Firms

in deregulated industries frequently seek to provide a bundle of products and services. We see all of these factors at work in telecommunications, particularly in the

technological convergence of the cable and telephone industries.

Not all mergers that occur in response to deregulation are necessarily procompetitive, however. The lessons from the airline industry teach us that merger scrutiny in industries undergoing deregulation is necessary to prevent consolidations

that are harmful to consumers. In the airline industry, the Transportation Department, which, at that time, had final merger authority, approved a number of mergers over the objection of the DOJ. Some antitrust experts believe that the result was

higher fares, less service, and the domination of a number of major airports by a

single carrier. Moreover, firms may react to deregulation by attempting to combine

with other firms that threaten to enter historically protected product and geographic

markets.

Technological Change

Technology is often an important factor in analyzing a merger. Rapid technological development may help a market self-correct any competitive problems. Now,

technology also has become increasingly important as a catalyst for merger activity.

We are increasingly certain that technological progress is vital to long-term economic growth. Increased merger activity in telecommunications is clearly a response

to new technologies. For example, the extension of broadband access into consumers’

homes is a key factor behind many telecommunications mergers. Once again, however, incumbent firms threatened by technological change may attempt to acquire

new competitors instead of developing their own technologies, which may deprive

consumers of the technological horse races that we see in many high-tech industries

today.

Strategic Mergers

More recent mergers have involved strategic considerations. Firms have become

more interested in pursuing leadership or dominance in their industries or market

segments. There are several reasons for this trend. Concern about the large size of

foreign competitors that dominate their home markets may lead to the conclusion

that bigger is better. Anxiety about technological change may lead companies to

hedge their bets through acquisitions or equity investments in a variety of firms.

Firms may believe that efficiency continues to increase with size, or that profits will

11

inevitably accrue from the acquisition of large market shares. These kinds of mergers may have serious competitive consequences by increasing a firm’s unilateral

ability to increase prices or reduce output.

Financial Market Conditions

Mergers need financing, and current financial conditions are ideal for an expansive supply of capital—low inflation, low interest rates, and a booming stock market.

These conditions have led to an increasing number of deals financed through exchanges of stock. To the extent that mergers are strategic, and that is reflected in

stock prices, the mergers will more likely be financed through exchanges of equity.

III. Competitive Concerns in Deregulating Industries

The elimination or substantial reduction of regulation is a laudable goal. As a believer in the efficiency of markets and of market-based incentives, the Commission

applauds movement in these deregulating industries to more competitive marketplaces. During such a transition, effective antitrust oversight is critical to prevent

private accumulation of control over important sectors of the national economy and

to forestall abuses of market power. As the telecommunications industry is deregulated, we must be aware of a few general principles applicable to deregulating industries.

First, participants in an industry undergoing deregulation, accustomed to coordinated action among themselves or to the protection of regulators who guarantee a

monopoly franchise, often seek to maintain or extend their market power after deregulation occurs. This effectively substitutes private regulation for public regulation, depriving consumers of efficiency without public accountability or supervision.

Cartel behavior in place of government price restrictions is a classic example. This

has not been a problem with respect to broadcast networks, cable distribution and

cable programming. But there can be strong incentives for incumbents to keep new

entrants out of what used to be a market protected by regulatory barriers. We can

see aspects of this problem as the long distance telephone companies attempt to

enter local markets through local exchange networks that are supposed to be, but

may not effectively be, non-discriminatory. This can be a serious anticompetitive

problem.

Second, transition out of a regulatory regime is almost never complete and immediate. Rather, a patchwork of state, federal and international rules continues to

apply even as parts of a market are opened to competition. In the telecommunications area, Congress is still wrestling with the issue of direct broadcast satellites

and the transmission of local stations. Serious regulatory problems may arise where

some players in an industry are regulated and others are not. It is difficult and

often unfair to try to maintain a system where direct competitors are subject to substantially different regulatory rules. For example, many believe that a principal reason truck transportation was regulated for a time in the United States was to level

the competitive playing field between trucking and the heavily regulated railroad

industry. But if deregulation is to succeed, the more consistent strategy is to aim

to equalize treatment by reducing regulatory burdens for all rather than by increasing them for new unregulated competitors.

Third, some policy goals that can be handled comfortably in a regulatory regime

are difficult to achieve through antitrust enforcement. During a transition, some

regulation may continue to be necessary—for example, caps on cable rates or mandated access to local markets—to assist during the period before full competition

emerges. While antitrust agencies can employ such remedies, we have been more

successful with structural remedies than with behavioral relief. For example, we almost never use rate regulation remedies, and mandatory access remedies are seldom

used.

Fourth, as a result of the factors discussed above, application of the antitrust laws

to newly deregulated industries often raises difficult and unconventional issues from

the point of view of traditional antitrust policy. The very fact that an industrial sector was regulated suggests the possibility of some past actual or perceived market

failure, or at least some competitive peculiarities, and therefore calls for a special

sensitivity in applying conventional antitrust rules.

IV. Competitive Concerns in Telecommunications Industries

A number of competitive concerns may be raised by the kinds of telecommunications mergers that we are seeing. A horizontal combination of competitors through

merger, joint venture or other agreement can result in a direct loss of competition.

An acquisition of a potential competitor might have significant current or future

competitive effects. And a vertical merger of complementary but non-competing

businesses might have foreclosure or bottleneck effects. Some mergers might have

12

15Time Warner, supra n. 4.

several of these effects. Several of these potential anticompetitive effects are illustrated by the Commission’s enforcement action in the Time Warner/Turner Broadcasting/TCI merger.15This transaction involved the proposal by Time Warner to acquire Turner Broadcasting to create the world’s largest media company. These were

two of the leading firms selling video programming to multichannel distributors,

which in turn sell that programming to subscribers. Time Warner held a majority

interest in HBO and Cinemax, two premium cable networks, and Turner Broadcasting owned several ‘‘marquee’’ or ‘‘crown jewel’’ cable networks such as CNN,

Turner Network Television (‘‘TNT’’), and TBS SuperStation, as well as several other

cable networks. Together, the two companies accounted for about 40 percent of all

cable programming in the United States.

In addition, both firms were already linked with large cable operations, and the

merger would have increased the level of vertical integration, and potentially foreclosed competitors in both the programming production and multichannel distribution levels. Time Warner was already the second largest distributor of cable television in the United States, with about 17 percent of all cable households. Turner

Broadcasting already had strong ties to TCI, the largest operator of cable television

systems in the United States, with about 27 percent of all cable television households.

As a result of the proposed transaction, over 40 percent of programming would

have been integrated by full or partial ownership with two cable companies that collectively controlled over 40 percent of cable distribution in the United States. In addition, as another part of the deal, TCI would have entered into a mandatory carriage agreement with Time Warner, which would have required TCI to carry four

of Turner’s top cable channels for 20 years, but at preferential prices. In effect, this

was a form of partial integration by contract, and it would have further affected

TCI’s incentives to carry non-affiliated programming.

Both horizontal and vertical competitive issues were present in this case. The key

horizontal issue was defining the relevant market when the merger combined different kinds of programming. In this case, Time Warner owned HBO and Turner

owned CNN. For most customers, they might not be direct substitutes. However,

from the point of view of the direct buyers of video programming—the multichannel

distributors—a program like CNN can constrain anticompetitive pricing of other

channels. Before the merger, a cable system operator could go without HBO as long

as another marquee program such as CNN was available for packaging with other

programs into a network that consumers would be willing to buy. That gave cable

operators some leverage to resist anticompetitive pricing on HBO. However, if HBO

and CNN were available to cable operators only as a bundle, cable operators would

lose that leverage.

The key vertical issue in this case was access. By that, we mean not only access

in absolute terms, but also the relative cost of access among competing firms. This

transaction raised those concerns at two levels. The first was upstream access to

video programming by firms that distribute multichannel video programming to

households and other subscribers. Upstream access was a concern because a merged

Time Warner and TCI could block entry into their distribution markets or raise

their rivals’ costs through their control of a large portion of video programming. Potential entrants into local cable markets could be impeded from entering if they

could not gain access to those ‘‘must have’’ channels at non-discriminatory prices.

Other firms, such as a direct broadcast satellite service, could have their input costs

raised to noncompetitive levels. In sum, increased vertical integration could create

an incentive for the merged entity to use market power over programming to eliminate competition or potential competition at the distribution level.

The second concern was downstream access to multichannel distribution by producers of video programming. At the downstream distribution level, the acquisition

was likely to make it more difficult for other producers of video programming to

gain access to the distribution market. Time Warner’s cable systems, and TCI

through its financial interest in Time Warner, were likely to favor Time Warner and

Turner programming over a competitor’s. And since Time Warner and TCI together

controlled such a large percentage of the distribution market, a competing video programmer would have found it difficult to achieve sufficient distribution to realize

economies of scale.

Development of alternative programming also would have been discouraged by

TCI’s long-term carriage arrangement with Time Warner. That carriage agreement

would have lessened TCI’s incentives to sign up better or less expensive alternatives

to the existing Time Warner programming that is already committed under contract. The mandatory carriage commitment also would have reduced TCI’s ability

13

16For instance, cable overbuild mergers are usually defended by pointing to the efficiencies

of consolidating two competing systems, as well as the necessity of preparing for impending competition from the telephone companies. However, the consolidation that creates these efficiencies

simultaneously eliminates competition that may benefit consumers through lower prices, a higher number of channels, and better service. As for telephone company entry into cable, most of

that so far has been by purchase, rather than de novo entry. See ‘‘Amid All the Bets, One Stands

Out: AT&T Ventures Into Cable,’’ Wall St. J., Nov. 5, 1999, at A1. The Commission investigated

a cable overbuild merger in Anne Arundel County, Maryland that raised all of these concerns.

In addition, the merger raised potential competition problems since one of the systems had

plans for expansion into parts of the county currently occupied only by the other system. The

parties abandoned the transaction in the face of opposition from FTC staff and antitrust officials

from the State of Maryland.

to carry alternative services, because current cable distribution is capacity-constrained to a large extent.

We dealt with both the horizontal and vertical concerns in this case by imposing

a number of conditions on the transaction that were designed to control the specific

mechanism by which competitive harm could occur. The FTC consent order included

both structural relief and other provisions designed to prevent the exercise of market power resulting from the merger.

First, the order required TCI and Liberty Media to divest all of their ownership

interests in Time Warner. Alternatively, the order would cap TCI’s ownership of

Time Warner stock and deny TCI and its controlling shareholders the right to vote

the Time Warner stock. This divestiture provision addressed the concern that TCI’s financial interest in Time Warner would make it difficult for competing producers

of video programming to gain sufficient distribution to be competitively viable.

Second, the order required the parties to cancel the 20-year programming service

agreement between Time Warner and TCI. The order permitted renegotiation of a

carriage agreement after a six-month ‘‘cooling off’’ period, to ensure that negotiations are conducted at arm’s length and are not influenced by considerations related

to the merger. Any new carriage agreement is limited to five years.

Third, the order prohibited Time Warner from bundling HBO with any Turner

networks, and it prohibited the bundling of Turner’s CNN, TNT, and WTBS with

any Time Warner networks. This provision addressed the concern that the acquisition could have enabled Time Warner to exercise market power through leveraging

tactics by bundling ‘‘marquee’’ channels, either together or with less attractive channels.

Fourth, the order prohibited Time Warner from discriminating against rival service providers at the distribution level in the provision of Turner programming. This

ensures that new entrants at the distribution level would not be unfairly disadvantaged in the pricing of Turner programming. It thus preserved reasonable access to

programming for new services such as direct broadcast satellite services, wireless

systems, and telephone company entrants.

Fifth, the order prohibited Time Warner from discriminating against rival video

programmers that seek carriage on Time Warner distribution systems.

Sixth, the order required Time Warner to carry a 24-hour all news channel that

would compete with Turner’s CNN. This provision was included because the allnews segment is the one with the fewest close substitutes, and the one for which

access to Time Warner distribution is most critical.

Time Warner was a large and complex transaction. Many of the concerns we had

in that case may also be present in other telecommunications mergers.16We see several common characteristics in many recent mergers, all of which have implications

in the telecommunications industry.

First, many transactions involve a consolidation between firms at different functional levels. Economic theory teaches that most vertical mergers are more likely

to have procompetitive aspects and less likely to have anticompetitive effects, but

that this is not necessarily true in any given case. Moreover, both effects can be

present in the same merger. Our task is to sort out those effects and correct the

problems, while allowing companies to achieve efficiencies that will benefit consumers.

Second, some transactions threaten to create or tighten a potential bottleneck

somewhere in the chain of production or distribution. A bottleneck transaction can

have adverse effects at two levels. First, the acquisition can exacerbate competitive

conditions at the downstream level by raising the costs of current rivals or by blocking potential entry. That is, the transaction can create or increase market power of

the merged firm through control over upstream inputs that are essential or important to competitors or potential competitors. Second, a bottleneck acquisition can

disadvantage competitors or potential competitors at the upstream level by impeding their access to customers. Therefore, the transaction can enable the parties at

14

both levels to increase their market power and protect their turf against new competitors.

Third, many transactions occur in rapidly changing marketplaces. We frequently

hear the argument that rapid technological change will prevent a firm from exercising market power, because a new competitor with a new technology will soon take

its place. But that is not necessarily the case. In some situations, a merger can create a roadblock to technological change and prevent a new technology from reaching

the market. Of course, a necessary condition for adverse effects to occur is that the

bottleneck really must be a constraint, i.e., it cannot be easily expanded or circumvented. For example, we would not be concerned about foreclosure of new entry

if an entrant could enter easily at both the upstream and downstream levels. But

sometimes that may not be so easy.

In sum, acquisitions that raise bottleneck concerns are difficult to analyze,

present difficult problems of proof, and raise difficult issues of relief. But it is important that we take a hard look at such acquisitions because a bottleneck can be an

effective barrier to entry, and it can be used strategically to disadvantage rivals.

Further, it can raise competitive concerns at both the upstream and downstream

levels of the merging firms’ operations. The key policy objective is to ensure that

access to inputs and markets will not be eliminated by mergers and acquisitions.

V. Conclusion

Mergers and acquisitions in the telecommunications industry are occurring at a

record pace, caused by technological change, deregulation, and other market forces.

Many of these transactions have been good for the economy and consumers, bringing

the ferment of innovation and new efficiencies to vital industries. Some transactions, however, may be an attempt to stifle new forms of competition. Sensible

antitrust enforcement remains necessary so that the consumers may begin to enjoy

the promise of deregulation—whether it be lower prices, greater choices, or new and

innovative products and services.

The CHAIRMAN. Thank you very much, Mr. Pitofsky.

Chairman Kennard.

STATEMENT OF HON. WILLIAM E. KENNARD, CHAIRMAN,

FEDERAL COMMUNICATIONS COMMISSION

Mr. KENNARD. Thank you, Mr. Chairman, members of the committee. I, too, appreciate the opportunity to testify before the committee today on this important issue. It is also an honor to testify

with Chairman Bob Pitofsky, someone who has been a leading

thinker on these issues, and someone whom I have admired for

many years.

As you said at the outset, Mr. Chairman, these are extraordinary

times for consumers in telecommunications. We are seeing glimpses of a future where phone lines will deliver movies, cable lines will

deliver phone calls, and the airwaves will carry both.

Economic indicators are up across the board for the industry.

Over the past 3 years alone, revenues in the communications sector

have grown by $140 billion, climbing to a level of $500 billion in

1998, and creating over 160 billion jobs during that period.

In the wireless industry, capital investment has more than quadrupled since 1993, for a cumulative total of over $60 billion, and

now over 80 million Americans have a mobile phone.

As we see more competition developing in some of these sectors,

we are seeing consumer gains, particularly in the long distance

marketplace. By the end of 1997, there were over 600 long distance

providers competing for customers. We have seen prices for interstate long distance calls drop dramatically by 35 percent since

1992, while prices for international calls have fallen by around 50

percent.

15

Although we would like to see more competition in the local

phone sector, we are also seeing some encouraging signs. Wall

Street is pouring money into the CLEC community. At the time

that the 1996 Act was passed, there were only about six competitive local exchange carriers with a market cap collectively of $1.3

billion. Today, there are over 20 publicly traded CLEC’s with a

market cap of over $35 billion.

We also are seeing a lot of investment pour into the cable sector,

as that sector tries to compete in new market areas. Operators in

the cable field have invested nearly $8 billion per year since 1996

to upgrade their systems. By the end of the year, it is estimated

that 65 percent of homes passed by cable will have been upgraded,

bringing in more channels and enabling more services, such as

high speed Internet access and cable telephony.

The cable industry also is driving residential broadband deployment, with the number of households connected expected to triple

in 1999 to more than 1.5 million.

Now, as we see these investments pouring into the industry, and

with communications firms scrambling to provide services, these

firms are looking for ways to take advantage of economies of scale,

which can lead to lower prices and higher quality services. They

see mergers as an important way to take advantage of changes in

technology and changes in the marketplace and changes in the law.

As has been pointed out, some mergers are beneficial to consumers, but it is the FCC’s job to make sure that no transfer of

control creates a conglomerate so large and so dominant that it

kills competition and undermines the intent of the Telecommunications Act of 1996.

The worries that were outlined by Chairman McCain in his opening statement are exactly true. We must make sure that this consolidation does not undermine consumer welfare, and it is the

FCC’s job to make sure that the promises that these merging parties make when they come before the FCC and argue that their

merger is in the public interest are kept. We must hold these merging parties to their promises—promises to the American consumer.

Now, the Department of Justice and the FTC are, of course,

charged with ensuring that the public reaps the benefits of a competitive communications marketplace, but those agencies are governed by different laws. They apply differently in practice in the

marketplace.

The FTC and DOJ administer the antitrust laws. The FCC is

charged with ensuring that license transfers serve the public interest. Now, the FCC’s review of these transactions is not an antitrust

analysis cloaked in public interest rhetoric. It is a fundamentally

different approach to viewing these transactions.

DOJ and the FTC do not duplicate the role of the FCC under the

Communications Act, nor are they charged, like the FCC, with creating more competition. Their mandate is to protect existing competition from well-defined abuses, including mergers that substantially lessen competition and mergers that tend to create monopolies.

The FCC, by contrast, has the responsibility to make sure that

no transaction will subvert the goals of the Communications Act.

So we at the FCC have a statutory obligation to ensure the mergVerDate 11-MAY-2000 11:36 Apr 25, 2002 Jkt 077325 PO 00000 Frm 00019 Fmt 6633 Sfmt 6601 77325.TXT SCOM1 PsN: SCOM1
16

ers will result in tangible benefits for American consumers, namely, more choices, lower prices, better services, benefits for all American consumers.

When the FCC considers license transfers, it is acting like a

court in its quasi-judicial role. In this capacity, the FCC follows

procedures that are well-defined. In the Administrative Procedures

Act, the process is open. The FCC develops a public record. The

FCC explains its decisions in writing, and the FCC’s decisions are

subject to judicial review.

During my tenure as chairman, the FCC has been presented

with mergers of breathtaking size and scope that will affect consumers for many years to come. I have insisted that the public

have a role in these decisions. It is not possible to define the public

interest without public participation, and so I have insisted on an

open process.

I have insisted on a process in which we hold public hearings;

a process that allows many people who are affected by our decisionmaking but who do not always have a voice in our decisionmaking

to be heard—like state regulators and national and state consumer

groups, and small businesses. I think it is important to put this

process in context.

Since the passage of the 1996 Act, the number of mergers presented to the Commission has increased to historic proportions.

Never before have we been faced with this number and complexity

of transactions to review. And, we have had to handle these responsibilities with no increase in resources.

Frankly, I believe that much of the current controversy concerning the FCC’s merger review role is a result primarily of one

transaction: the FCC’s review of the SBC/Ameritech merger. That

transaction involved a proposal by one company seeking to acquire

fully one-third of the telephone lines in the United States, onethird of all telephone lines in this country.

That merger has profound implications for the future structure

of the telecommunications industry and the ability of the FCC to

fulfill its mandate to bring competition to telephone consumers, as

required by the act that you passed.

In reviewing that merger, we designed a process to ensure the

public would be heard, and that the pro-competitive benefits that

the parties came forward and promised would be delivered and

would actually be realized by the public. In thinking about our review of that particular transaction, I was going over the points that

Senator Wyden made, the four points that he outlined that should

be considered in review of a merger. Clearly the FCC looked hard

at three of the four of those issues in the context of that merger.

The fourth one, leveraging market power into another area, did

not directly apply. But I assure you, Senator Wyden, that in the

context of that transaction, your concerns that you stated earlier

were, indeed, addressed.

Now, having dealt with a number of mergers since the 1996 Act

was passed, including mergers like SBC/Ameritech, we have

learned much about the process of handling these huge

megamergers. We have listened to the concerns of the Congress,

particularly the concerns of Senator McCain and others, and we

are in the process of developing procedures to ensure that the apVerDate 11-MAY-2000 11:36 Apr 25, 2002 Jkt 077325 PO 00000 Frm 00020 Fmt 6633 Sfmt 6601 77325.TXT SCOM1 PsN: SCOM1
17

plication of our public interest standard is even more clear and predictable.

I have charged our general counsel, Chris Wright, to organize an

intra-agency transaction team to streamline and accelerate the

transaction review process, the primary goal being to bring more

clarity to better explicate our own case law on mergers with written guidelines. We also will look at ways to leverage the specialized

skills of the staff and to minimize the resources needed for processing the most complicated transactions. The team also will work

to make the process even more transparent.

In conclusion, Mr. Chairman, these are indeed extraordinary

times in the telecommunications industry. No one can predict with

precision how this marketplace will develop, but of one thing I am

certain: unbridled consolidation in this field will subvert the aims

of the communications laws to bring competition and deregulation

to this marketplace, and unbridled consolidation will reverse the

progress we have made thus far toward competition and more consumer welfare.

So I respectfully suggest, Mr. Chairman, that now is not the time

to strip away the FCC’s historic authority to protect consumers.

Now is the time, more than ever before, to ensure that any merger

approved will serve the public interest.

Finally, on a somewhat related topic, I wanted to commend you,

Mr. Chairman, for your leadership in introducing the Telecommunications Ownership Diversity Act. In this era of consolidation, we must continue to look for ways to ensure that small businesses, particularly those owned by minorities and women, have an

opportunity to participate in this exciting marketplace, and I commend you and your colleague, Senator Burns, for recognizing that

and introducing this historic legislation.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Kennard follows:]

PREPARED STATEMENT OF HON. WILLIAM E. KENNARD, CHAIRMAN, FEDERAL COMMUNICATIONS COMMISSION

Thank you Chairman McCain, Ranking Member Hollings, and Members of the

Committee. I appreciate the opportunity to testify before the Committee this morning.

As we enter the Information Age, the Department of Justice (DOJ), the Federal

Trade Commission (FTC), and the Federal Communications Commission (FCC) are

working to gether to ensure that the American public reaps the benefits of a robust

and dynamic communications marketplace. Each agency has a distinct and vital role

to play in this process.

As you know, the Telecommunications Act of 1996 charges the FCC with the critical function of creating competition in markets where it did not exist before. We

have a statutory obligation to follow the pro-competitive and de-regulatory framework of the Act, and to ensure that markets move from monopoly markets to competitive ones and that all Americans have access to the digital tools of the next century.

The Department of Justice and the Federal Trade Commission administer the

antitrust laws. They do not duplicate the statutes laid out by the Communications

Act, nor do they create more competition. Instead, they protect existing competition

from a few well-defined abuses, including mergers that ′′substantially lessen

competition′′ and mergers that ′′tend to create a monopoly.′′

We have different laws for different agencies, and each of the three agencies has

an important role to play in this process. And together the three agencies are working on behalf of consumers and Americans nationwide. The public spends billions

of dollars on communications and entertainment services every year, and as such

the public has a huge stake in the development of our nation’s communications inVerDate 11-MAY-2000 11:36 Apr 25, 2002 Jkt 077325 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 77325.TXT SCOM1 PsN: SCOM1
18

frastructure. Congress understood this vital interest when it passed the 1996 Act

and charged the Federal Communications Commission with ensuring that competition develops in all communications markets.

In the less than four years since passage of the Act, competition and growth in

communications markets have grown more rapidly than anyone could have imagined. Companies are investing billions of dollars in advanced telecommunications

networks in our urban and rural areas. And consumers are reaping the benefits of

this competition and growth. Grandparents are now able to talk to their grandchildren hundreds of miles away at a rate of seven cents per minute. Husbands and

wives enjoy the increased security that comes from travelling with a wireless telephone. And millions of Americans are discovering the convenience of doing their holiday shopping over the Internet.

This rapid growth of technology and services has taken place far more rapidly

than anyone could have expected. Even greater progress would have been possible

had the monopoly carriers put their energy into complying with the Act’s marketopening provisions instead of challenging nearly every part of the Act and nearly

every decision implementing the Act in nearly every court in the country.

As a result of these legal and technological changes, communications firms ae understandably looking for ways to take advantage of increased economies of scale,

which can lead to lower prices and higher quality services. They are also seeking

to combine services into packages or bundles, which can benefit consumers through

the convenience of ‘‘one-stop shopping.’’ Communications firms see mergers as an

important way to take advantage of changes in technology and changes in the marketplace. ‘‘Good’’ mergers can spur competition by creating merged entities that can compete more aggressively and that can move more quickly into previously monopolized

markets. If such competition develops, we can substantially deregulate the formerly

monopolized markets, just as strong competition justified the substantial deregulation of the long distance and wireless markets. Thus, the focus must remain on

eliminating bottlenecks and ensuring that consumers have adequate choices to ensure meaningful competition.

As Adam Smith pointed out, however, there will be no competition (and no invisible hand) if business owners are left to their own inclinations. Instead, they will

quickly decide that cartels and monopolies are far better for their interests. ‘‘Bad’’ mergers are likely to slow the development of competition. ‘‘Bad mergers’’ have

many anti-competitive harms, such as: eliminating firms that would have entered

markets; raising barriers to entry; discouraging investment; increasing the ability

of the merged entity to engage in anti-competitive conduct; and making it more difficult for the Commission and State Public Utility Commissions to monitor and implement pro-competitive policies. Accordingly, the public interest demands constraints on the ability of a handful of large communications to consolidate communications assets that our vital to our nation’s economy.

Discussion of ‘‘the public interest’’ in merger cases too often focuses on the ‘‘interest’’ side of the equation—industry interests, shareholder interests and economic interests. The FCC, on the other hand, has a unique statutory responsibility to keep

the ‘‘public’’ side of the equation—consumers—in sharp focus. The FCC is in many

ways the last defense for consumers, and we have a statutory obligation to ensure

that mergers will result in tangible benefits for American consumers, namely, more

choices, lower prices, and new and better services.

Although many mergers may be beneficial to the public, it is the FCC’s job to

make sure that no transfers of control create a conglomerate so large and so dominant that it kills competition and undermines the intent of the Telecommunications

Act of 1996.

If the Commission did not review mergers under the ‘‘public interest’’ standard,

it would be possible under traditional antitrust analysis for all the regional Bells

and GTE Corp. to merge into a single, national local phone company. The country

might be taken back to the days of Ma Bell and her helpings of higher prices, poorer

service and stifled innovation. And American consumers would suffer as a result.

In response to assertions that have been made in the press, I’d like to be clear

that the Commission is not engaging in any ‘‘shakedowns’’ of companies who have

merger applications pending before it. The Commission is standing up for American

consumers by eliminating the harms that will be caused by transfers of control and

ensuring that the benefits reach communications consumers. The Commission does

this by working with the companies and consumers to arrive at conditions that preserve the benefits of mergers while eliminating or adequately mitigating their harmful effects. Particularly where markets are changing rapidly (as with new technologies), conditions like those adopted in the SBC-Ameritech case are the most effective way to ensured the development of competition and protect consumers.

19

The Commission clearly is following, and has long been following, adequate procedures and adhering to consistent, well-defined legal standards as set forth in the

Administrative Procedure Act. As required by the APA, the applicants, opponents,

and the public have the opportunity to make known their views and have their perspectives taken into account. The process is open, the Commission explains its decisions in writing, and all decisions are subject to judicial review. If the Commission

were not already following adequate procedures and adhering to consistent legal

standards, its decisions would have been reversed by the courts.

Like the common law—the law of property or contracts—the public interest test

proceeds on a case-by-case basis. This is more efficient, and much less regulatory,

than writing extensive rules attempting to anticipate every way in which any possible transaction might violate any part of the Communications Act or the FCC’s rules. The public interest is a fundamental legal concept, akin to ‘‘good faith,’’ ‘‘reliance,’’ ‘‘negligence,’’ and ‘‘compensation.’’ As such, its meaning is inherently fact specific and can only be defined based on the circumstances of each individual case.

This is particularly true in rapidly changing times. Accordingly, case-by-case analysis is often superior to writing volumes of rules attempting to explain the application of a legal standard to every conceivable fact pattern.

In the future, the application of the public interest test will be even more clear

and predictable than today. I have asked our General Counsel, Chris Wright, to organize an intra-agency transaction team that will be in place by January 3, 2000

to streamline and accelerate the transaction review process. A primary goal is to

supplement the case law explicating the application of the public interest test with

written guidelines. In addition, we will be looking at ways to leverage the specialized skills of the staff involved in reviewing transactions to reduce the effort needed

to ensure consistency between decisions and to minimize the resources needed for

processing even the most complicated transactions.

The new intra-agency transaction review team will establish deadlines for rapid

processing of transfers of control associated with transactions. The goal will be to

complete even the most difficult transactions within 180 days after the parties have

filed all of the necessary information and public notice of the petitions has been

issued. Finally, the new team will also work to make the transaction review process

even more predictable and transparent, so that applicants know what is expected

of them, what will happen when, and the current status of their application. This

is consistent with the focus of the restructuring of the FCC to operate in a flatter,

faster, and more functional manner.

The CHAIRMAN. Thank you very much, Chairman, Kennard, and

thank you for your endorsement of the recent legislation that Senator Burns and I introduced. I hope we can move on it.

I think it is very clear that one of the unintended consequences

I referred to in my opening statement has to do with fewer and

fewer minority owned businesses, and involvement in the telecommunications industry. That is not appropriate, and we ought to

give a level playing field to every American.

Chairman Pitofsky, because of its recent acquisition of TCI and

other cable companies, according to Mr. Kimmelman AT&T now

serves 60 percent of all cable customers.

Notwithstanding this, AT&T/TCI is now attempting to acquire

Media I, which owns 25.5 percent of Time Warner. How is this acquisition not at odds with the FTC’s Time Warner/Turner decision,

the point of which was to separate these cable conglomerates?

Mr. PITOFSKY. That is a good question, but I have not really

looked into the more recent proposals. The market shares at the

level you described certainly are matters of concern, and while I

have not looked at these particular facts, I do know that our goal

was to keep access open. If there is one shorthand way of looking

at what we did in TCI/Turner/Time Warner, it was access, access,

access, and I would want to look very carefully at the impact on

access of these new proposals.

The CHAIRMAN. Well, as you know, in the Time Warner/Turner

you were concerned that the combined company would leverage its

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programming market power to kill competition and distribution by

denying competitors must-have cable channels at nondiscriminatory prices. Does this bring into play again your concerns?

Mr. PITOFSKY. Yes. You would want to look at these new proposed mergers very carefully.

The CHAIRMAN. In your testimony, you refer to the local telephone companies’ cartel behavior in insulating themselves from

competition by maintaining local exchange networks that are supposed to be but may not effectively be nondiscriminatory, and you

state that this could be a serious anticompetitive problem.

Based on these views, could you analyze the competitive impact

of the cable industry’s attempts to bundle their high speed Internet

service with their proprietary ISP and insulate this arrangement

from any type of open access requirement?

Mr. PITOFSKY. I am not sure that I fully understood the question,

Senator.

The CHAIRMAN. Well, in your testimony you referred to local telephone companies’ cartel behavior in insulating themselves from

competition by maintaining local exchange networks that are supposed to be but may not effectively be nondiscriminatory. That is

in your statement.

Then what is the competitive impact of the cable industry’s attempts to bundle their high speed Internet service with their proprietary ISP and insulate this arrangement from any type of open

access requirement? Do you believe that is the case?

Mr. PITOFSKY. Again, we have not had an opportunity to look at

that issue, because those cases are at DOJ and not at the FTC. If,

in fact, a consequence of these transactions is to raise barriers to

entry, deny access, then we have taken the position in this industry that access is critical, and I would expect the Department

would take a very careful look at that issue.

The CHAIRMAN. I thank you, Mr. Chairman.

Mr. Kennard, in your statement you characterize a good merger

as one in which the combined company can, quote, move more

quickly into monopolized markets.

You have already approved the AT&T/TCI merger last February.

You stated, and I quote, I am optimistic because the combined resources of AT&T and TCI surely will generate a very substantial

effort to expand the choices now available to residential phone subscribers in TCI territory. I am especially pleased by the commitment of AT&T chairman Michael Armstrong that AT&T will offer

service uniformly in all neighborhoods in every city it serves.

Did you impose any conditions on this merger to assure that

AT&T does, in fact, move quickly to roll out residential telephone

service, and did you impose any conditions on the merger to assure

that AT&T does, in fact, offer this service in virtually all neighborhoods in every city it serves?

Mr. KENNARD. Actually, Mr. Chairman, AT&T did make representations in the record that they would roll out telephone service and broadband services ubiquitously. We did rely on those representations when they, in fact, filed their transaction and we

issued an order granting it.

The CHAIRMAN. Have they so far complied, lived up to your optimism?

21

Mr. KENNARD. I think it is too early to tell. We are watching

carefully, and we will continue to monitor the roll-out. I know that

they are investing heavily in upgrading their systems, and it is my

hope that they will be able to bring consumers new telephone services, in particular to compete against the incumbents in that market.

The CHAIRMAN. Can you tell us what they are doing to comply

with its commitment to give TCI subscribers direct nondiscriminatory access to the Internet service provider of their choice?

Mr. KENNARD. Well, we did not impose a condition in the merger

that they provide nondiscriminatory access to ISP’s. That was an

issue that was raised in the merger, but the FCC decided ultimately not to impose that particular condition.

The CHAIRMAN. Chairman Kennard, it takes the FTC an average

of about 4 months to issue decisions on merger cases. How long has

it taken the FCC recently?

Mr. KENNARD. Well, it takes different amounts of time, depending upon the size and complexity of the transaction. We sort of

have to look at this question in terms of the type of transaction involved. We deal with license transfers and approvals of that nature. The small ones go forward very quickly, in a matter of days

or a couple of months. The more complex transactions, the

megamergers, if you will, take us longer, on average.

If you look at the category of large mergers, they go through in

about 6 months. We have taken a lot longer in cases where we

have these megamergers of huge size and scope involving many

issues of first impression and the public interest standard as I stated earlier, I have made sure that we open up the process so that

States’ Attorneys General and State regulators, consumer representatives and others have an opportunity to be heard, and that

takes longer.

The CHAIRMAN. Finally, Chairman Kennard, in his testimony Mr.

Kimmelman states that the number of regional Bell Operating

Companies has shrunk from seven to four. MCI and WorldCom

have merged. Now MCI/WorldCom is attempting to acquire Sprint,

together representing the majority of long distance revenues. A majority of cable TV companies are either owned or operated by AT&T

or in the process of being owned or operated by AT&T, and the rest

are busy making nice with each other in order to consolidate their

service territories. Do you agree with Mr. Kimmelman’s testimony?

Mr. KENNARD. I agree with Mr. Kimmelman that we should be

quite concerned about the pace and the scope of consolidation that

we are seeing in these markets. If you look just at the history of

Bell Operating Company mergers since the Act was passed, beginning with SBC/PacTel and then BellAtlantic/NYNEX and then

SBC/Ameritech, you can see in our decisions an increasing level of

concern about the pace of this consolidation and also an increase

in the nature and enforceability of the conditions that we have imposed to make sure that this consolidation does not subvert the

goals of the Communications Act.

The CHAIRMAN. This is a tough question for both of you to answer. How concerned should the Congress be?

Mr. KENNARD. I think Congress should be very concerned. This

is an area that represents fully about one-third of our economy. It

22

is producing a lot of economic growth and jobs, and that is a function primarily of competition, companies being able to move into

new markets. The last thing we want to see is for that engine of

competition to be somehow just squelched by monopoly power and

consolidation, so I think we have to be very, very watchful in this

area.

The CHAIRMAN. Chairman Pitofsky, how concerned should we be?

Mr. PITOFSKY. Very concerned. I agree with everything Chairman

Kennard has said, and I would just add this dimension. It is not

just the question of where we are now, it is where we are going,

and that is the hardest question for regulators looking at mergers

and antitrust generally. You look at the first deal, you say, well,

that one is OK, we can live with that. Then the next proposal

comes along and its sponsors say, well, you cleared that deal, what

about ours, and then the third and the fourth and the fifth.

One must ask the question, particularly in this sector of the

economy, where is it all going to end, and I think Congress should

be very concerned with that question.

The CHAIRMAN. Senator Wyden.

Senator WYDEN. Thank you, Mr. Chairman. Both of you have

been excellent, and Bob Pitofsky’s last point raises a question that

is central to me in this communications area, and I think that

when you look at some of these deals in the communications area

you are talking about what is potentially a threat to the First

Amendment. I think we are going to have to start factoring in the

First Amendment in a very specific way as we look at these deals.

Time Warner/Turner, 40 percent of cable programming is being

merged. As you know, the reason I pushed you all so hard on the

Barnes and Noble/Ingram merger is, I was very troubled about

what would happen if a retailer and a wholesaler merged, and I

thought we would lose a lot of the diversity of ideas in our country.

So my first question to you, Mr. Pitofsky, would be, how should

antitrust regulators incorporate First Amendment concerns in decisionmaking, given where we are headed?

Mr. PITOFSKY. Unless Congress wants to direct us otherwise, I

think it is through close scrutiny. I think one should simply pay

more attention when communications, news and so forth is involved. I thought we did that in Barnes and Noble.

Incidentally, we did that in Time Warner. One of the conditions

of the order was that there would be a second 24-hour news service

introduced, because we were concerned that a combination of CNN

and Time Warner would produce such a dominant player that others would not be able to compete. In fact, a second and then a third

news service came into play.

Is that because a wholly different set of rules apply to networks

and cable? No, I do not think that is fair, but we should be more

alert, more sensitive, and give more careful consideration.

Senator WYDEN. I obviously do not want to get you into the area

of nonpublic information, but what can you tell us simply from a

theoretical standpoint about the proposed CBS/Viacom merger,

which would give the combined company control over broadcast television stations that reach more than 40 percent of the national

audience, and in addition what they would get through cable interest?

23

Set aside the matters of nonpublic information and, if you can,

touch on it in theory.

Mr. PITOFSKY. An answer to that question is awkward for me.

Not only is it an ongoing investigation, but it is not our ongoing

investigation. That merger is under review at the Department of

Justice, and so I think I probably should limit myself to the sort

of thing I have said so far this morning, and that is, those are very

large companies, very significant market power at both levels, and

therefore it deserves the most careful and thorough review.

Senator WYDEN. The next area I wanted to touch on are copycat

mergers, which I think are getting to be an increasing problem as

well.

What is your sense about what antitrust regulators ought to do

if they foresee imposing conditions on a merger are going to cure

an immediate antitrust problem with that merger, but that the

likely effect will be that other companies in the industry followup

with copycats, and we end up with more consolidation and less

competition?

What I am trying to do, in addition to the points I made earlier,

and I appreciate Mr. Kennard’s statement, is to try to set out what

I think are some key new problems. The First Amendment is one

that we touched on in the last minute or so, but copycat mergers

strike me as another very serious one, and what is your sense

about how this committee and the Senate ought to look at those?

Mr. PITOFSKY. Let me take the first shot at it, and then I will

ask Bill to direct an answer to that.

I think everything considered, it is the toughest call we have to

make, and part of that is, there are two reasons why copycat mergers could be occurring. One is, everybody in the industry recognizes

that the first merger was very efficient and sensible and pro-consume, and therefore the trend toward concentration is really energized by the fact that the first merger was a good idea.

On the other hand, you have other copycat mergers in which the

first firm achieved substantial market power and then the second

pair and the third pair come to the conclusion that they have to

be the same size as the first pair in order to compete in global markets, or even in a domestic market.

One of the things that they teach in the business schools these

days, and I am not sure it is such a great idea, is that you cannot

really be successful in a market unless you are number 1 or number 2. I worry that the trend toward mergers, the trend toward

consolidation in some industries, is motivated simply by a concern

to have as much market power as anybody else in that industry.

Playing those two things off against each other is exceptionally

difficult, especially when the first merger is one that the courts are

very unlikely to strike down, and it is only because it will lead to

the second, third, and fourth that you are concerned.

Senator WYDEN. Let me see if I can touch on one involving the

Microsoft decision. Some of the analysts have been arguing in the

last couple of days that the Microsoft decision has set some limits

for when a company can use marketplace power to compete in what

amounts to another marketplace sector.

Again, without forcing you into areas that are sensitive, if that

is the case, how would you foresee it applying to cable companies,

24

or local telephone service companies with marketplace power in one

area seeking to compete in other markets?

Mr. PITOFSKY. I beleive these are conventional antitrust rules,

and they will apply regardless of the industry involved.

I have seen the reports from Silicon Valley and elsewhere that

we are changing the rules of the game in the way in which we regulate large firms. The Federal Trade Commission sued and then

settled with Intel. The Department of Justice has this long-running

antitrust controversy with Microsoft.

I want to fundamentally disagree with people who say we are

changing the rules of the game. On the contrary, I think what

these cases are doing is reestablishing what fundamental rules

under the Sherman Act really are, and I think in the long run they

will help us encourage innovation rather than discourage innovation in high tech markets. That is true across the markets you

mentioned.

Senator WYDEN. Mr. Kennard, let me ask you one about that

noncontroversial matter in my home town involving AT&T and TCI

and broadband. The Legg Mason analyst who is going to testify, I

guess this morning, states, and I quote, it’s clear that the market

doesn’t demand a closed network in order to justify broadband investment, and AT&T/TCI argued that open access to their cable

network is going to dry up investment needed to upgrade the network.

Now, WorldCom and Sprint and some of the local carriers have

invested heavily in upgrades so their networks can carry

broadband, and they all have open access requirements. Given that

my constituents feel so strongly about this, what is it about AT&T

that it cannot attract investment without closed networks?

Mr. KENNARD. Well, we have had many conversations, you and

I, about this topic over this past several months, and I think it is

fair to say that we agree on what the end game should be here.

I certainly want to see broadband deployed not only by the cable

industry, but by many players in an open environment, in a competitive environment, and we need to get those broadband pipes

built quickly.

It is important for the country, it is important for electronic commerce, it is important for us to maintain world dominance in the

Internet community, and I would not dispute the fact that companies like AT&T I think would go ahead and deploy broadband even

if you had some sort of open access regime.

But I think the fundamental question is, is regulation necessary

at this time, particularly when we have a very nascent industry,

the broadband industry, and you have the prospect, the hope that

multiple players are going to deploy it, not only on the DSL platform but also on wireless platforms.

As Chairman Pitofsky stated, I thought very eloquently in his

testimony, when you are transitioning from a monopoly environment to a competitive environment there is always the urge to impose more regulation on the new competitors, the new entrants in

those markets, but I think that our goal as policymakers should be

to try to promote competition and ease regulation on all of the

players, and that is why I have advocated consistently that that is

25

the approach we should take with respect to broadband deployment

on cable, at least at this juncture.

If we find that consumer welfare is being undermined in some

way, or consumers lack choice, we will have opportunities to step

into that marketplace and intervene, but I just do not think now

is the time.

Senator WYDEN. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Brownback.

STATEMENT OF HON. SAM BROWNBACK,

U.S. SENATOR FROM KANSAS

Senator BROWNBACK. Thank you, Mr. Chairman, and thanks for

holding this hearing. I think it is a very timely and very important

hearing to hold, and I thank the two chairmen for coming up to testify and to meet with us.

I am listening and gaining input on the last merger that took

place involving—Sprint is headquartered in Kansas and has a lot

of direct impact on constituents of mine, so I have a concern not

only for the impact it is having across the marketplace and legalities, but the impact it is having on constituents and job dislocation

that could potentially happen there.

I would like to ask Chairman Kennard, if I could, a year ago we

had MCI, WorldCom, and Sprint, two, three, and four all competing in this long distance marketplace, and here we are a year

later, and all three of them are together. As you look at that fast

year that took place, what levels of concern does that raise in your

mind for the public interest of having those three major competitors in that long distance market merging together here in a short,

fast year?

Mr. KENNARD. Well, Senators, as you know, that merger will

soon be before the FCC, so I do not think it would be appropriate

for me to forecast what the decision will be there. I will say that,

as I have said before, I think that we should be concerned when

the number 2 and 3 competitors in residential long distance marketplace propose a combination like this before us, so we will be

looking very carefully at that question.

Senator BROWNBACK. I would think, as we look forward, we

would be deeply concerned. If I could ask, actually, both of you, in

looking forward, if we were to project out in 3 years, how many national, full service THATcommunications providers do you anticipate that there will be, and how many do you think to provide adequate, aggressive competition that there should be?

Mr. KENNARD. It is hard to predict at this point. We do know

that companies are scrambling to gain economies of scale and provide national footprints so they can roll out bundled packages of

telecommunications services.

In many cases, that is a good thing, and that maximizes consumer welfare, and I think that trend will continue. We are working hard at the FCC to accomplish a situation where you have a

number of national players, but also lots of niche players that are

able to serve discrete market needs. That is why we have worked

hard at the FCC to assist companies, smaller companies that want

to get in and compete head-to-head against the large incumbent

historic monopolies.

26

But I think the best way to answer your question is from a consumer point of view, what is best for the consumer. The consumer

should be able to have a range of product choices, three, preferably

four or more in each product sector, and so what we strive to do

is make sure consumers have choice in all of these different sectors,

be it wireless, local, long distance, high speed Internet access or

video. And we have accomplished that in some areas, long distance

and wireless being probably the best examples, but we have a ways

to go in the other areas.

Senator BROWNBACK. So you would look for an optimal situation

to be three or four competitors?

Mr. KENNARD. I would say optimal would be four or more in each

product sector.

Senator BROWNBACK. Is that something you will be pressing for

as you look and put forward these orders and rulings that will be

shaping much of this landscape?

Mr. KENNARD. As a very general matter, yes, sir.

Senator BROWNBACK. Mr. Pitofsky, do you have a comment regarding that question of looking down the road, where we would

anticipate being and where we should be?

Mr. PITOFSKY. I share Chairman Kennard’s sense—let me just

say that one of the things we have learned compared to 30 and 40

years ago is, you ought not to do this analysis on the numbers

alone. There will be sectors where two or three are enough. There

are others where you need five or six in order to be assured that

there is vigorous competition and consumers will not be taken advantage of.

But certainly it is true in virtually every sector of the economy

that when you see monopolies and duopolies, where you get just

one or two firms, it is very unlikely that they are going to compete

at a level that is optimum, that is going to serve consumers well,

and therefore it is a rare case in which you do not try to prevent

mergers that concentrate a market to the point where there are

only two firms or maybe three left.

Senator BROWNBACK. So you look at it as more of a rolling—you

would not put a hard and fast three or four competitors in each

place, but would look at it in differing standards and different

parts of the industry?

Mr. PITOFSKY. Very much so. It depends on barriers to entry,

whether homogenous products are involved, what is the level of

communication between the players and so forth. There are about

half a dozen, or more factors you look at in addition to market

slaves. But I have always said that while numbers are not dispositive, as they may have been thought to be 30 years ago, it is the

ramp that leads you into the analysis, and one must not forget how

many players are left after this string of mergers takes place.

Senator BROWNBACK. Well, I think we need to look at, I would

say the level of competition and the ability of consumers to be able

to get some choices in their services, but we are obviously concerned about what impact it has on places, and to constituents of

Sprint and other facilities around the country that have built up

large groups, and I have not stated one way or another where I am

on the merger, but I just have a deep concern when people contact

and call and they are wondering what is going to happen to them

27

in the future. That is something that you folks need to watch clearly as well.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you. Senator Bryan.

Senator BRYAN. Thank you very much, Mr. Chairman.

Chairman McCain asked each of you a question, how concerned

should we be about these trends that we have been discussing, and

Mr. Kennard, your response was very concerned. Mr. Pitofsky, you

said you joined in that.

If you are very concerned, I suspect we ought to be very concerned, and the American public ought to be very concerned about

this. Are you recommending any course of action that we should

consider in the Congress that we have not done, either a review of

the basic legislation that gives you the power to review, or any

other changes in law? What should we make of your very concerned, and what should our response be to that?

Mr. KENNARD. Well, Senator, I would not presume to suggest any

legislation to you at this time. All I would ask is that you continue

to support agencies like the FCC, the FTC, and the Department of

Justice that are on the front lines making sure that there is a

strong counterforce in Government against this consolidation that

has the threat of undermining the gains that we have made in creating competition in these markets.

Senator BRYAN. When you say support, I take it you are talking

about resources, financial support in terms of appropriation level.

Any other kinds of support?

Mr. KENNARD. Well, certainly just an affirmation that when the

FCC goes out and seeks to protect the public interest in the context

of these mergers, that you are supportive of our efforts and understand that what we are trying to do here is not undermine the ability of these businesses to grow, or to hamper their prospects, but

fundamentally to support the competition that we have in consumer markets and ensure that consumers have the choice that we

have been talking about today.

Senator BRYAN. Chairman Pitofsky, your thoughts.

Mr. PITOFSKY. I would urge that legislation is not the right way

to go here. For over 100 years, we have had an unusual regulatory

situation in this country. We have a Sherman Act that is roughly

two paragraphs long, and a relatively short Clayton Act. Most of

antitrust is judge-made law, and I think the courts have done well

in this field.

I must say now, and I have not said it in the past, our resources

are being terribly stretched by this merger wave, including mergers

that are of such enormous size that frankly we have never dealt

with mergers like this before.

The members of this committee have been very supportive of us,

and the Commission has done reasonably well. It is not that we

will not look at the mergers. It is that virtually all of the other responsibilities of antitrust that we have are being pushed to the side

by this merger wave.

We spend over two-thirds of all of our antitrust resources doing

merger review, and I suspect in the present year that figure may

be even higher because of the frequency and the size of the mergers

we are seeing.

28

Senator BRYAN. I take it, Mr. Chairman, you are suggesting we

need to be much more attentive to your request in terms of levels

of appropriation to carry out these functions.

Mr. PITOFSKY. That would help.

Senator BRYAN. I suspect it would, although this is not the committee that does that, as you know.

Mr. PITOFSKY. But you have been supportive of us throughout,

and we really appreciate it.

Senator BRYAN. Well, I think your point is well-taken. If we are

concerned, as all of us have shared these concerns about what the

implications are for us with all of these mergers that are occurring,

it is incumbent upon the Congress to provide each of you the necessary resources to conduct that oversight function.

Let me followup with a process question, and that is, we have

the two of you and the Department of Justice involved in these decisions. Does the process itself, and I am not talking about the substance of the decision but the process, is it working? Do we need

to revisit the process, or are you comfortable with the process, and

maybe we will start with you, Chairman Pitofsky, first this time.

Mr. PITOFSKY. Maybe I am not the most objective about this. I

think the process between the DOJ and the FTC has never been

better. We never investigate the same transaction at the same

time. We clear transactions to each other much more promptly

than we did in the past. We finish our investigations more quickly

than we have in the past. This is not a system that is ‘‘broke.’’

I am sure we can do even better, but things are going very well

in terms of that division of responsibility.

Senator BRYAN. Chairman Kennard.

Mr. KENNARD. Yes, thank you, Senator. I think the process is

working reasonably well under a very difficult strain. We at the

FCC have continued to process the many thousands of proposals

that come before us. I think we have learned a lot in the past year

or two on how to deal with these megamergers that present us

with difficult questions of first impression, and we are working internally to come up with ways to handle the megamergers better.

We also have dealt with huge records in these mergers. In the

SBC/Ameritech transaction we had tens of thousands of pages of

public comment. Our role, which is somewhat different from the

antitrust agencies, is to develop a record and distill all of these

facts into an order that will withstand judicial scrutiny. So these

mergers are putting a tremendous strain on our resources, but we

are coming up with better ways to do more with less, because that

is all we can do at this time.

Senator BRYAN. Well, later on this morning we are going to hear

testimony that points out that SBC and BellAtlantic have about

two-thirds of the local phone lines in the country, that with AT&T’s

proposed acquisition, that they will own about 60 percent of the

customers in their field of endeavor, all of which tends to suggest

that there is a real threat to continued competition, and an incentive for more consolidation. Is that a concern that you have and,

if so, what actions should be taken?

Mr. KENNARD. It is a concern that we have had. I guess fundamentally what we are dealing with here is a marketplace that

was historically governed by the monopoly regulation that kept all

29

of these companies in neat little regulatory boxes. A lot of those restrictions were taken away by the 1996 Act.

Now, many of these companies, including the largest companies

in our country, want to leverage their economies of scale to compete in new markets. Sometimes that is a good thing. If a cable

company is able to aggregate its resources and capital and compete

in rolling out broadband in competition with incumbent Bell Companies, that is a good thing.

The question is, are consumers going to be harmed by historic

monopolies that are allowed to get bigger, and that has really been

the question we have asked in all of these major proceedings, and

that is why we have imposed conditions when we felt them appropriate.

Senator BRYAN. The last question I would have, after every Sunday you see some plays that are called in which the quarterback

would say, you know, I wish I had the ball back. Now, you all make

some very, very tough decisions, and I think both of you are doing

a very good job.

I have been very pleased with the working relationship we have

had with each of you, but you are making these decisions and you

are trying to make the judgment as best you can, looking ahead at

what the implications are, but none of us have a Promethean vision. What happens at the end of the day if you say, based upon

the experience in a year or two, whoops, I wish I had the ball back,

I did not fully understand?

That is not to offer any pejorative observation. None of us can

fully anticipate what the future will be. What do you do?

Mr. KENNARD. That is what the court of appeals is for, Senator.

[Laughter.]

Senator BRYAN. What can you do Chairman Pitofsky? I mean,

you have made the approval, and all of a sudden it does not work

out like you thought it would.

Mr. PITOFSKY. Well, if we bring a case and we are wrong, then

the courts will tell us so very promptly. Suppose we let one go

by——

Senator BRYAN. Yes, and you are doing it for what you think are

all the right reasons, but a year, 2 or 3 years down the road it is

clear that in retrospect you should never have done that.

Mr. PITOFSKY. Well, technically we can go back and challenge the

mistakes we have made. We could do that under Supreme Court

law. You can bring an enforcement action based on the circumstances at the time of the action, and that could be 3 years

later. That is technically true. As a practical matter, it is not fair

to the parties. They have to plan. They need what is called repose,

and therefore if we make a mistake we most likely will live with

it, and I am not aware of a situation in which we cleared a deal

and then we went back 3, 4, 5 years later and challenged it unless,

of course, we were misled on some important facts by the parties.

Senator BRYAN. Chairman Kennard.

Mr. KENNARD. I would agree with Chairman Pitofsky, it is not

really practical to go back later. You do the best you can, and you

try to develop as comprehensive a record, and hear from as many

people as you can, and make your best decision.

30

Unlike some of the antitrust authorities, we have imposed conditions that give us some ability to maintain continuing oversight, so

if promises made are not kept in the context of these mergers, we

do have the ability to go in with our enforcement powers and try

to rectify things. Fundamentally I think you are left with the challenge of just not making mistakes in the first place.

The CHAIRMAN. Senator Dorgan.

STATEMENT OF HON. BYRON L. DORGAN,

U.S. SENATOR FROM NORTH DAKOTA

Senator DORGAN. Mr. Chairman, thank you very much.

You have been quizzed about a number of very important issues,

and some of the headline mergers obviously are important, and

there will be other discussion about them today.

I want to talk to you for just a moment and ask you a question

about some things that are happening beneath the headlines.

There are about 1,200 television stations in our country today. 25

owner groups now own about 400 of those television stations. The

top 10 radio groups in 1994, top 10 radio group ownership in 1994

owned 195 radio stations. They now own 1,647.

Let me say that again. I think this is important. 1994, the top

10 radio ownership groups owned about 195 radio stations. Now

they own 1,647.

Now, when the Telecommunications Act came to the floor of the

Senate I attempted to offer an amendment to scale back the ownership limits, and I actually won the amendment by about 3 or 4

votes. That was about 4 in the afternoon.

Then dinner intervened, and several Senators had some sort of

epiphany over dinner, and we had another vote on it because someone had changed their vote and wanted to have it reconsidered, as

is certainly legitimate in the Senate, and there was, as I said, this

epiphany, and I lost by 3 or 4 votes about 4 hours later.

I was convinced then and I am convinced now that the lifting of

the ownership limits was not in this country’s interest.

Andy Anderson died last week. He was 80 years old. He owned

a country western station in Bismarck, North Dakota, for many,

many, many years, wonderful guy. He could climb up the antennas

and fix it all. He did everything. Andy was a great guy.

But people like Andy are not going to be around any more. With

the concentration in ownerships that is occurring and the death of

localism in broadcasting, the narrow economic calculus of value is

in terms of income streams, as some owners that have never visited the area where they own the station. Are we losing something

there?

It seems to me we are losing something very significant, and are

you concerned. Let me ask you, are you concerned about 10 radio

groups holding 195 stations, 5 years later they hold 1,647 stations?

Does that concern you, and if so, what do you think we should do

about that?

Mr. KENNARD. Senator, I am concerned about that. As you know,

the 1996 Act lifted the cap on national radio ownership. It is a statutory right now that these companies may own as many stations

as they can nationwide. Notwithstanding that, I think we should

be very alert to the amount of consolidation in local markets, and

31

in some of the major markets where you have lots of competing

voices it is not as much of a problem. When you get in some of the

smaller communities, I believe it is a problem, and I think that we

should be very cautious about that.

But I also believe we have got to find ways to bring new voices

and new entrants into this field. That is why I think Senator

McCain’s legislation to reinstitute the tax certificate is so important, because it will create incentives for the creation of whole new

radio groups that are now being denied entry into this marketplace. I also think we ought to continue to look for ways to license

spectrum more efficiently so we can bring more entrants onto the

radio band and the TV band.

Mr. PITOFSKY. Senator, you mentioned TV and radio, but it is

happening across the economy. It is banks, it is supermarkets, it

is retailing generally. You asked the question, are we losing something, and my answer is, probably we are, especially in areas involving communications.

Now, if the reason these mergers are happening is because they

are vastly more efficient, and the combined firm does a better job,

then I think we should not get in the way. But if the reason these

mergers are happening is just to produce larger firms with more

market power, more ability to push their suppliers around and so

forth, then I think it is a matter of concern, and it cuts across the

entire economy.

Senator DORGAN. But Mr. Pitofsky, your answer seems to suggest the only calculus here is a narrow financial calculus, and with

respect to broadcasting I submit to you there is another calculus

that you must and Mr. Kennard must consider, and that is public

interest.

Mr. PITOFSKY. I completely agree. When you are talking about

matters that affect the First Amendment, then if antitrust is just

dollars and cents, then we have missed the boat on what antitrust

is about in this country.

Senator DORGAN. Well, let me just stick with this for a moment.

If we have 10 radio groups owning 647 radio stations and the top

25 radio, or television station owners owning 500 of the 1,200 television stations in the country, and that is where we are, let me ask

you to project where we are heading.

Without some restraint, or some kind of restraint that is exhibited somewhere in public policy, either legislative or administrative, are we likely to see continued galloping concentration in both

of those areas. Have you studied that, or can you make some projections about it?

Mr. PITOFSKY. We have not studied that. I think that if that is

the way things are going—it is what I said earlier, it is not just

where we are now, it is where we are going, and if, in fact, by

clearing mergers now we open the door to more and more and more

concentration, then we have to draw the line somewhere, and

maybe this is the place to draw it.

Senator DORGAN. It is true we have cleared mom and pop out of

the grocery. The grocery is still there, but it is owned in Texas, and

they own thousands of them, and we have cleared out most of the

lumber yards, I understand that, and the community loses something from that as well.

32

But with respect to broadcasting there is a different standard

and a different set of interests. Broadcasting includes, and has always included, some feeling that there needs to be localism in

broadcasting to contribute to the community, and what I worry

about here is limits. Let me ask the question.

The question is, should there be some limits applied to radio station ownership? If the top 10 groups own 1,600 and some radio stations at this point, and it is galloping off in a manner that I think

no one could have predicted, should there be some limits attached

to radio station owners?

Mr. KENNARD. Well, Senator, there are some limits. The 1996 Act

did place limits on the number of stations that any single owner

can control in a local market area, but what we are seeing in some

of these transactions is that one owner will acquire a number of

stations that does not exceed the statutory, the numerical limit,

but nevertheless controls so much revenue in that market that it

does have an impact on the ability of other smaller businesses to

compete. That is how you see the small market, single station owners being, and even large market single station owners being driven out in particular marketplaces, and I think that that is a serious concern.

Senator DORGAN. Would you recommend any additional ownership limits on either television or radio based upon your policy experience at this point?

Mr. KENNARD. Well, I think Congress has spoken in the 1996

Act, but I do believe that under the public interest standard we do

have some authority to look at, and certainly the FTC and the Department of Justice have authority to look at, aggregations of market power in a specific marketplace, even if they do not violate the

numerical caps in the act.

Senator DORGAN. Congress has spoken, but Congress always has

the opportunity to speak again. Would you believe what has happened since Congress spoke should persuade us to review this once

again and consider some changes?

Mr. KENNARD. I think it is always appropriate for Congress to be

thinking carefully about developments in this market.

Senator Dorgan. That is a careful answer. That is a very careful

answer, but I wanted to raise the issue because I know there will

be a lot of discussion about the large mergers, but under the headlines these other things are happening in concentrations that are

alarming. I appreciate your responses, and would like to communicate more with both of you. Thank you.

The CHAIRMAN. The chief interrogator has one more question.

Senator Wyden.

Senator WYDEN. Thank you, Mr. Chairman. I will be brief.

My question for you, Mr. Pitofsky, is how do you believe the Senate ought to look at the short-term versus the long-term ramifications of these mergers? And, let me tell you the example that

comes to mind is airlines.

The U.S. Congress deregulated the airlines in 1978. Short-term,

everybody thinks this is going to be good. More competitors, things

look good. Long-term, we have seen some consolidations that have

been very anticonsumer in my view. We have got some places that

have little or no coverage now in terms of air service.

33

How would you recommend, as we look at these mergers in telecommunications specifically, but also with ramifications in other

areas, how do we factor in the short-term, which may look good for

the consumer, with the longer term?

Mr. PITOFSKY. We have to look at both. Let us use airlines for

a minute, because it is a classic example. I think deregulation of

airlines was a very good idea, and competition thrived for a while.

But then there were 24 airline mergers in the 1980’s. This was a

period in which DOT had control of airline mergers. Some of these

mergers took place over the objection of the Department of Justice.

24 proposed mergers, not one was challenged.

I think airline passengers today are paying the price for that inactivity on the antitrust front.

The CHAIRMAN. Alfred Kahn agrees with you, by the way.

Mr. PITOFSKY. If you look back at some of them—or example

Ozark-TWA—how could that have been cleared? Those were two

horizontal, direct competitors in the same hub market.

You want to be sure when deregulation occurs—and Mr.

Kennard said the same thing earlier—you want to make sure the

regulatory regime that we decided as a country that we did not

want any more, is not replaced by monopoly and duopoly pricing

through mergers.

When deregulation occurs, we should be more, not less, attentive

to restructuring in those markets, and I think you have got to take

into account both short-term and long-term effects. Short-term is

really what the courts look at. They will look at 2, 3, 4 years out,

but I think as a matter of prosecutorial discretion you have to look

beyond the 2, 3, 4 years to where that sector of the industry is

going.

Senator WYDEN. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much. I want to thank you both.

We have had you here for a long time. I just want to say that I

believe that the Committee needs to look at this situation further.

We will probably be going out of session here in the next few

days, or at least that is the hope that many have. In the intervening time I am going to ask for some studies, including from the

General Accounting Office, from the consumer viewpoint of this entire situation so that the Committee will have a better understanding, and other studies, if we can find those people who are objective and informed, so that the Committee can have a better understanding.

We may ask you to come back to another hearing, because I

think from your testimony some of the ramifications of these mergers have not been -- or prospective mergers have not been fully appreciated or understood.

I appreciate your comments that we should be concerned. I view

it as our responsibility, and we look forward to working with you,

and as you both pointed out, this is an incredibly extraordinary

time in the history of this country. I do not know of another time

like it, as we were talking about, and so I think we have to be extremely vigilant to make sure that things go well, given the incredible impact that what is taking place now will have on the future

of the country in the next millennium.

I thank you both for being with us.

34

Mr. KENNARD. Thank you, Mr. Chairman.

Mr. PITOFSKY. Thank you, Mr. Chairman.

The CHAIRMAN. Our next panel is Mr. Scott Cleland, managing

director, Legg Mason Precursor Group, Mr. Paul Glenchur, director, Charles Schwab Washington Research Group, Mr. Gene

Kimmelman, codirector, Consumers Union, Mr. Mike McTighe,

CEO, Global Operations, Cable & Wireless, Mr. John Sidgmore,

vice chairman of MCI/WorldCom.

While the witnesses are seating themselves, I would like to make

one additional comment. If there is any individuals or organizations who felt they were not allowed to speak today, we obviously

would appreciate their written testimony, and we would be glad to

consider them for inclusion in further hearings on this very important issue, and I would appreciate it if we could keep the noise

down so we can hear from our first witness, Mr. Cleland.

Welcome, Mr. Cleland.

STATEMENT OF MR. SCOTT C. CLELAND, MANAGING

DIRECTOR, LEGG MASON PRECURSOR GROUP 

Mr. CLELAND. Mr. Chairman, Thank you for the honor of testifying before your committee. The views expressed here are mine,

and mine alone. I offer four insights and a conclusion in hopes that

they will be useful to the Committee.

My first point is, telecommunications consolidation is a natural

market development. It is a natural, given that this is a highly capital-intensive business requiring economic scale, and both regulation and technologies have been greatly expanding the scale required both globally and across industries.

My second point. Big is not necessarily bad. The pending mergers

are not necessarily bad developments for competition and consumers as long as there are two preconditions that are met: number 1, that there is vigilant antitrust enforcement, and it continues

to ensure that individual service markets remain competitive, and

number 2, the communications networks continue to be public, i.e.,

open to competition.

That needs to be open to competition on a facilities basis between

different broadband pipes and resale competition on each of the

local broadband access points to the customer. Open access is essentially what keeps vertical markets competitive going forward.

My third point, companies do not need a closed network to deploy

broadband. Other than AT&T and cable, open access is a fact of

life, and investors implicitly factor in open access into their business models.

It is clear from the billions being spent in broadband systems,

which are open, that the market does not demand a closed network

in order to justify broadband investment.

My fourth point is that market forces do not necessarily open

networks. I think it is naive to believe that market forces alone will

eventually open the cable network to competition. It simply does

not square with past experience or market reality.

So my brief conclusion is, broadband access is the bundle platform of the future, and if that bundle platform is not open, then

that competition cannot flourish, because the future of communications is broadband, and we want to have a successful, robust comVerDate 11-MAY-2000 11:36 Apr 25, 2002 Jkt 077325 PO 00000 Frm 00038 Fmt 6633 Sfmt 6601 77325.TXT SCOM1 PsN: SCOM1
35

petition which depends on open access to those rare broadband access facilities, at least for an initial transition period, so that

broadband competition can develop.

Now, other than requiring open and competitive local broadband

access to the customer, I think that the Internet and data networks

should continue to develop free of intrusive regulation, assuming

that we have vigilant antitrust enforcement.

Now, many appear right now to hope that a handful of facilitiesbased broadband competitors is sufficient to create a competitive

broadband market. However, they ignore the reality that there is

very little switching or competitive churn, as we call it, in

broadband access. One analyst recently quipped that the

broadband churn rate is less than moving or death rates.

Unlike long distance competition, people do not switch carriers

just by calling up their carrier over the phone, and it is done.

Broadband access switching is much more difficult. You have to

buy new, expensive equipment, and you have to have somebody

come out to your home to professionally install it.

So the competitive reality is, once someone signs up for

broadband access, they tend to be a very sticky customer, or they

tend to be effectively locked in. Hence, that is the rush right now,

to lock customers up through the first mover advantage.

So without cable resale, once cable locks in a local broadband

customer, and then bundles them vertically, prices can drift higher

on the vertically tied services in their broadband bundle. Furthermore, no competitor can offer the customer a better deal with its

alternative bundle, which resells the underlying cable platform.

Now, referring back why I am making such a big point of this

on consolidation, the chart we have here talks about—and it is also

a chart in my testimony—is that when you have open access you

have vertical markets that can become competitive. Through the

1996 Act, through the 1934 Act, through FCC policies in the past,

essentially the local teleco’s cannot leverage their market power

vertically.

Essentially, you have a facility access competitive market, and

an Internet access horizontal competitive market. Internet long distance is competitive, and the customer equipment is competitive.

However, if you do not have open access, and you have market

power at the local level, as cable does, then you can vertically take

that market power all the way through those horizontal markets

that are competitive when it is open and walk your way all the way

up into e-commerce, and essentially the new economy. That is why

this issue is so important. Local broadband access is a rare commodity, and it is the one part of this new economy that requires

openness more than anything else.

Thank you for the time, Mr. Chairman.

[The prepared statement of Mr. Cleland follows:]

PREPARED STATEMENT OF SCOTT C. CLELAND, MANAGING DIRECTOR,

LEGG MASON PRECURSOR GROUP 

Mr. Chairman, on behalf of the Legg Mason Precursor Group, thank you for the

honor of testifying before your Committee on the topic of mergers in the telecommunications industry.

The views expressed here are mine alone. I request that my full written testimony

be printed in its entirety in the hearing record.

36

By way of introduction, I am not a traditional Wall Street sell-side analyst who analyzes companies or recommends the purchase of stocks. For Legg Mason, I run an

investment research group that tracks regulatory, technological, and competitive developments in the communications, technology, and e-commerce sectors for large institutional investors. We focus on trying to anticipate major investment-relevant

change coming in the next three to 18 months.

In that context, I offer the following insights and observations in hopes that they

will be useful to the Committee.

(1) Telecommunications Consolidation Is a Natural Market Development

The current wave of telecom consolidation is a natural and expected market development in a highly capital-intensive business, which demands economic scale.

This natural tendency toward consolidation has been accelerated by: pro-competitive

regulatory and trade policies that have created a much larger global marketplace;

and, Internet and digital technology that enable competition between previously

separate analog industries. Economic scale through consolidation makes deployment

of broadband infrastructure less expensive, faster and less risky. This can be procompetitive, pro-deployment and pro-consumer.

Big Is Not Necessarily Bad

Communications consolidation is not necessarily a bad development for competition

and consumers, as long as: vigilant antitrust enforcement continues to ensure individual service markets remain competitive; and, communications networks continue

to be ‘‘public’’—i.e., open to competition with: facilities-based competition between

different broadband ‘pipes,’’ and resale competition of each and every local

broadband access point to the customer. If these pro-competitive preconditions are

met, telecom consolidation is not a problem for competition or consumers, because

broadband ‘‘bundle’’ competition can flourish. However, any breakdown of competition in the critical component of local broadband access to the customer can have

serious anticompetitive implications, because the integrated nature of broadband—

i.e., bundling—is like a chain and, like a chain, it is only as strong as its weakest

link.

(3) Big Is Not a Problem If Networks Remain ‘‘Public,’’ i.e., Open to Competition

Despite confusing rhetoric to the contrary, Congress already has decided overwhelmingly that telecom networks should be ‘‘public’’ — i.e., open to competition. In the

1996 Telecom Act, Congress overwhelmingly voted that market forces alone

are not enough to develop or sustain competition in telecommunications,

given the history of monopolization and the presence of economies of scale.

Congress voted overwhelmingly:

(a) to ‘‘force access’’ (a.k.a. mandate interconnection and resale) on all local exchange carriers (which includes cable when offering telecommunications), so

competition could develop; and,

(b) to require ‘‘interconnectivity...to promote nondiscriminatory accessibility by

the broadest number of users...to public telecommunications networks.’’(emphasis added)

In 1998, the FCC legally required that local broadband access (advanced services)

is a form of telecommunications subject to the market-opening provisions of the

1996 Telecom Act.

Meanwhile, the cable industry has been aggressively converting its broadcast oneway cable network in which it chooses the content and sends it to all cable customers, into what now appears to be a two-way telecom network in which the

user chooses the content and sends it to the person(s) of the user’s choice.

In other words, to benefit from the Internet and data growth, cable is reengineering

its one-way cable network into a two-way telecom network — at least for voice and

data. Despite the transformed physical network, cable maintains that it should not

be subject to any of the open-access obligations that every other similarly situated

local telecom broadband access provider must comply with.

WorldCom-Sprint, Bell Atlantic-GTE, Quest-USWest, the already-approved SBCAmeritech, all incumbent local exchange carriers, all competitive local exchange carriers (wireline and wireless), and all long-distance carriers (including AT&T) are

‘‘public’’ networks legally required to be open to both facilities-based and resale competition. All are common carrier public network providers that, by law, have obligations to interconnect and wholesale their service, e.g., ‘‘forced access,’’ in order to

maintain interconnectivity and universal service, and to promote competition and innovation.

37

AT&T and the cable industry are seeking special government protection from standard resale competition that all of their competitors have accepted. The cable industry’s position is bold: cable will agree to deploy broadband and compete on a facilities basis in the local phone market only if the government protects cable’s core cable, ISP and long-distance businesses from ‘‘regulation,’’ i.e., resale competition.

(4) Don’t Need a Closed Network to Deploy Broadband

Other than cable, open-access is a fact of life and investors implicitly factor ‘‘public’’ open-access obligations into their business models. It is clear that the market does

not demand a closed network in order to justify broadband investment. The competitive local exchange carriers (CLECs), both wireline and wireless, have raised tens

of billions of dollars in capital with ‘‘public’’ open-access obligations. WorldCom and

Sprint independently have invested heavily in deployment of broadband wireless despite their ‘‘public’’ open-access obligations. SBC recently committed $6 billion to deploy broadband capability to 80% of its customers in three years despite its ‘‘public’’ open-access obligations. RCN is not having difficulty raising capital to overbuild

both the telcos and the cable plant despite its ‘‘public’’ open-access obligations.

(5) Market Forces Don’t Necessarily Open Networks

It is naive to believe that market forces alone will eventually open the cable network to competition. It does not square with past experience or market reality.

The relative market advantage of being closed when all of your competitors are open

is just too powerful to give up ‘‘voluntarily.’’ Why is it not in cable’s continuing selfinterest to be able to sell to its competitors’ customers while preventing its competitors from selling to cable’s customers?

When AT&T was a regulated monopoly not subject to market forces, AT&T fought

hard to continue as a closed network, but the government broke up the company

and opened AT&T’s network to competition by mandating ‘‘public’’ open-access obligations, with resulting consumer benefits. Now that AT&T is no longer a regulated

monopoly in voice telephony, AT&T still seeks a closed network and is opposing

open-access just as strenuously as it did when it was not subject to market forces.

If market forces alone open networks, why did Congress require that 15% of cable

channels be available for ‘‘commercial use’’ (leased access) in 1984?

If market forces alone open networks, why did AT&T-TCI deny Internet Ventures,

Inc. (IVI) the ability to lease a channel under leased access to offer competitive

Internet video programming? And why is IVI having to petition the FCC to gain

access? (When will the FCC clarify this fundamental market-opening access issue?)

If market forces alone open networks, why did Congress in the 1996 Telecom Act

mandate interconnection and resale, and make state commissions the arbitrator of

interconnection and resale negotiation disputes?

CONCLUSION: BROADBAND ACCESS IS THE BUNDLE PLATFORM OF

THE FUTURE—IT NEEDS TO BE OPEN IN ORDER FOR COMPETITION

TO FLOURISH

The future of communications is broadband. The success of robust broadband competition depends on required open-access to broadband access platforms (last-mile

access facilities) — at least for an initial transition period, so that broadband competition can develop. A fully competitive broadband market depends on the combination of both facilities-based competition between broadband pipes and resale competition on all local broadband access pipes.

Other than requiring open competitive local broadband access to the customer, Internet and data networks should continue to develop free of intrusive regulatory intervention, assuming vigilant antitrust oversight and enforcement.

While many appear to hope that the handful of facilities-based broadband competitors is sufficient to create a competitive broadband market, they ignore the reality

that there is very little switching or ‘‘competitive churn’’ in broadband access. One

analyst recently quipped that the broadband churn rate is less than moving or

death rates.

Unlike long-distance competition that only requires a phone call to switch carriers,

switching broadband providers is much more difficult. One has to buy new, expensive equipment and have it professionally installed to reconfigure the system, which

can take more than one visit to the home. The competitive reality is that once a

provider signs up local broadband customers, they are very ‘‘sticky’’ customers,

hence the current rush for ‘‘first-mover’’ advantage. In other words, customers are

practically ‘‘locked in’’ to a local broadband access provider, because of the high cost

and ‘‘hassle’’ associated with switching.

Once a customer effectively is locked into a local broadband access provider, if there

is no resale of that underlying last-mile access platform, then there is no competitor

38

that can keep that provider’s broadband bundle truly competitive. Once cable locks

in a local broadband access customer, then the prices can drift higher on the

vertically ‘‘tied’’ services in their broadband bundle. Furthermore, no competitor can

offer the customer a better deal with its alternative bundle, which resells the underlying cable local broadband access platform.

Without required open-access of local broadband access platforms in the increasingly

complex market for broadband bundles, competitive forces won’t develop sufficiently

or rapidly enough to ensure that consumers are offered maximum choice and protection from anticompetitive pricing of broadband vertical services.

The attached chart shows how telecom open-access policies have promoted competition in vertical communications markets, preventing anticompetitive leveraging of

last-mile access market power. The chart also shows how a closed cable network

contributes to less competition in vertical communications markets and allows lastmile access market power to be leveraged all the way into e-commerce.

Attachment: ‘‘How Open or Closed Internet Access Affects Competition in E-Commerce’’

39

The CHAIRMAN. Thank you very much, Mr. Cleland. I found your

chart to be very interesting and informative.

Senator Ashcroft could not be here today. He asked to be allowed

to submit written testimony of Tod Jacobs from last week’s Judiciary hearing on the proposed MCI/WorldCom/Sprint merger. Without objection.

[The prepared statement of Mr. Jacobs follows:]

40

PREPARED STATEMENT OF TOD JACOBS, SENIOR TELECOMMUNICATIONS ANALYST,

SANFORD C. BERNSTEIN & COMPANY

Mr. Chairman...Members of the Committee. Thank you for inviting me here to discuss the proposed merger of MCI WorldCom and Sprint. My name is Tod Jacobs,

and I’m senior telecommunications analyst at Sanford C. Bernstein & Company. My

job is to forecast the growth and earnings and stock performance of the telecom industry as well as its largest local, long distance and wireless companies. Our firm

is somewhat unique among brokerage firms in that we do not engage in investment

banking; that is, we don’t work for any of the companies we cover as analysts. We

therefore avoid conflicts of interest, and have the ability to speak our minds without

fear of repercussion. My only clients are institutional investors, and my only mandate is to be right. And for the record, I’m currently favoring long distance companies such as WorldCom, Sprint and AT&T, and have neutral ratings on the baby

bells.

I’d like to cover three areas today:

1. Why stories of telecom mergers appear on the cover of the Wall St. Journal more

frequently than taxes, health care or Hillary Clinton’s newfound love of the Yankees

combined

2. Where this merger fits into the changing Internet landscape

3. Where this merger fits into the changing long distance landscape

First, On Mergers...

We’ve attached as an exhibit a piece we released in October on industry consolidation that argues the following thesis: first off, telecom is a high fixed cost business.

And like all high fixed cost businesses, the way to compete successfully is to have

lots of customers and traffic, so that average cost per unit will fall. Low-cost positions are critical since exploding national and global competition is pushing prices

down rapidly, especially in long distance and wireless, if not yet local. So in each

category, there’s a mad rush to get big fast. Exhibit 1 shows examples of scale-driven mergers.

Second, telecom companies are also attempting to get broad. That is, to assemble

the assets that will enable a carrier to offer a full slate of products and services to

all the major customer segments. And once anybody can offer multiple products

across a single network and a single salesforce, then everybody will have to create

the same capability. Why? Because the more products you offer to a given customer,

the more you can discount the products and still make money. Thus anyone who

remains a single-product company risks seeing their product become someone else’s

loss leader. And since no single telecom company was born with all the necessary

limbs—and growing them takes too long—mergers and acquisitions are the only real

solution, as Exhibit 2 shows. The proposed MCI—Sprint merger fits squarely into

this category, and is driven by MCI’s need for wireless. (See our attached research

report from May proposing this very merger as the WorldCorn wireless solution.)

41

Consumers will delight, because this is how they’re going to continue to get lower

prices in long distance and wireless and eventually local service.

Second, on the Internet...

For starters, let me tell you what I’ve already told my clients. Rightly or wrongly,

Sprint will almost certainly have to divest itself of its Internet backbone business

prior to the merger, just as MCI had to sell its business prior to merging with

WorldCom. And I believe the companies know it and are prepared for it. Second,

despite complaints to the contrary, I’d point out that Cable & Wireless, which

bought MCI’s Internet business, is a healthy Internet player despite huge turnover

in the very senior management that effected the deal shortly after the deal closed.

So clearly it’s a viable option, and there will be numerous interested buyers when

Sprint internet goes on the block.

As to current competition: as Exhibit 3 shows, we believe the domestic Internet

backbone market is about $8 billion. Here, MCI WorldCom leads the pack, with

more than $3 billion in revenue. GTE, AT&T, Sprint and Cable & Wireless are numbers 2-5, respectively, so clearly market share has more to do with investment and

marketing than with how big your overall company is. Competition has caused MCI

WorldCom to lose about 11 % of its share since 1997; by 2003 it will have lost at

least a quarter—especially given the entry of the baby bells and numerous new carriers into the space.

42

Point three, we’ve been asked to discuss so-called peering, which we’ve portrayed

in Exhibit 4. Following the schematic, suppose I’m Hillary, and my Internet service

provider is Al’s ISP. Al in turn rents access to WorldCom’s global Internet backbone.

However, 1, Hillary, want to access the ACLU website that is sitting on the Cable

& Wireless backbone. Peering allows for unfettered flow of traffic onto each other’s

backbone networks that makes all Internet service possible. Without peering,

WorldCom would be out of the Internet business. And it should be noted that

peering arrangements at MCI, which currently number 72, have been rising, not

falling.

43

Put shortly, the sale of the Sprint business will address all relevant Internet concerns.

Finally, in Long Distance...

The merger would create a company that in consumer long distance is a bit more

than half the size of AT&T, as Exhibit 5 shows. While both Sprint and MCI have

done a good job competing against AT&T in consumer long distance, the reality is

that neither has the size and scale to compete with what is otherwise becoming a

two-horse race between AT&T and the baby bells to offer a full bundle of products

to consumers. Indeed, either stand-alone company would be highly imprudent to

enter that most expensive race without substantial existing market share to justify

it. Thus a clear case where the creation of larger scale in consumer long distance

will actually motivate further investment and competition. And given the companies’ recent complementary investments in a new wireless technology called MMDS

as a high-speed data solution, we now expect the development of a third broadband

pipe to the home.

As to business long distance, the short story is that on a combined basis the company will be about the size of AT&T. And when you consider that the amount of

new capacity being activated by new carriers over the next 12 months is at nearly

2x greater than the entire capacity of the big three players, it should give you some

sense for why business pricing is already low and getting lower and why the company will be very lucky indeed to make our long-term share forecast. To the contrary, if the MCI merger is a guide, the cost savings generated by the merger will

in large measure be given back to customers in the form of lower prices.

Thank you for your time.

[Note: Bernstein Research Call, Telecommunications Service,

‘‘Presentation to the Senate Judiciary Committee on the MCI

World Com-Sprint Merger; Both Rated Outperforming’’ is maintained in the Committee’s files.]

The CHAIRMAN. Mr. Sidgmore, welcome.

44

STATEMENT OF MR. JOHN SIDGMORE, VICE CHAIRMAN,

MCI/WORLDCOM

Mr. SIDGMORE. Thank you, Mr. Chairman. I appreciate the opportunity to share with the committee our vision of how MCI and

WorldCom/Sprint will continue to bring increased competition and

new technology to the changing world of telecommunications.

I want to say up-front that Bernie Evers, our CEO, sends his regrets. He had a longstanding commitment outside the State today.

The CHAIRMAN. We regret he could not be here, but we fully understand, and we will want to continue our communications with

him and with you as we go through this process.

Mr. SIDGMORE. Thank you very much. The question facing us

today we think is simple. It is whether or not a competitive long

distance provider can survive to fight against the mega-Bell and

cable monopolies on a nation-wide basis. We think the answer is

yes, and our merger is the pathway to meet that challenge.

Consider the changes we have seen the last couple of years in

telecommunications: (1) dramatic decreases in the price of traditional long distance service, (2) explosive growth of wireless telephony, (3) consolidation of the seven Bells into two mega-Bells and

two other Bells, (4) their imminent entry into long distance, in traditional long distance, and (5) the growing demand for broadband

capacity.

Our conclusion from all of this is that the separate market for

long distance that was created by the divestiture of AT&T is eroding, and that successful competitors like ourselves need to be able

to fulfill all of the customer’s needs for wireless and wire line, and

to effectively bring broadband Internet access all the way to a customer’s home or business.

In other words, the communications industry of the future requires that our company be able to provide one-stop shopping for

economical packages of services and to the maximum extent possible to be able to deliver those services to the customer directly.

The broadband battle is basically about the last mile. It is not

about the Internet backbone, which is already open and competitive, despite what some of our competitors have said. In the real

world of the last mile there are really two Titans emerging. One

is the old Titan reborn through local cable facilities, AT&T, the

other is the Bell Operating Companies. The new mega-Bells have

maintained their hold over local markets. They are already major

wireless providers. They moved swiftly to becoming providers of a

full range of communication services.

AT&T, on the other hand, has chosen to buy up the other last

mile, which is cable, and is seeking to dominate the provision of

high speed Internet access and bundle it with its own wireless local

and long distance services.

Faced with these trends, MCI/WorldCom had a tough choice to

make. We could have left residential customers to the big Bells and

to the big cable company, but that would have been bad for consumers and bad for us. We could have merged with a Bell in order

to gain the advantage of controlling the critical last mile into every

home, or we could get stronger and even more competitive, and you

now know what choice we made.

45

MCI/WorldCom and Sprint decided to join forces as what we

think is the single best hope for a strong and effective alternative

to the mega-Bells and emerging AT&T cable monopoly, and we will

be able to do -- we know how to do this, and we will be able to do

this more efficiently.

Over the next 5 years, the merged company will realize cost savings of almost $10 billion in operating costs, $5 billion in capital

expenditures, and these cost savings not only allow the new company to compete aggressively in both business and consumer markets, but will also enable us to aggressively invest in new technologies such as broadband access and next generation wireless.

Hopefully, we will have all the piece parts to be a strong competitor

to AT&T and the mega-Bells.

Our competitors overseas, who are spurred by mounting competition on their home turf, are making acquisitions and aggressive

moves and international investments in key markets around the

world. The combined complementary strengths of MCI/WorldCom

and Spring we think will make us uniquely equipped to market

communications products consumers need and want most, including international, and that together we will have the capital and

the proven marketing strength and end-to-end networks to compete

effectively against the international incumbents.

Here in the U.S., we can already see hints that this combination

is accelerating broadband deployment in competition with the

Bells. We, both MCI/WorldCom and Sprint have invested heavily in

new broadband technologies over the past year, both DSL and in

fixed wireless technology known as MMDS that will allow us to get

to customers or even beyond the reach of DSL, often into rural

areas, and with these new broadband local assets together we

think we are in a strong position to bring consumers, both urban

and rural, the broadband access that they need and want.

Now, we know that as we heard this morning that any major

merger in this industry is going to be viewed skeptically at this

point, but it is important to remember that not all mergers are the

same. This is not a merger of monopoly providers. This merger is

being done so we can become large enough in scope to compete

with the monopoly powers. We think that is a critical difference.

Some regulators have reacted to the news of this potential merger by raising the yellow flag of caution, and we understand that

that is their job. We look forward to demonstrating, and we will,

that this merger is procompetitive in all markets. The debate we

think will benefit everybody, because it will help Government officials and consumers alike to understand how to advance the cause

of communications competition in the next century.

Thank you.

[The prepared statement of Mr. Sidgmore follows:]

PREPARED STATEMENT OF JOHN W. SIDGMORE, VICE CHAIRMAN, MCI WORLDCOM

Good morning. I appreciate the opportunity to share with the Committee our vision of how MCI WorldCom and Sprint together will continue to bring competition

and innovative technology to the changing world of telecommunications. Mr. Ebbers,

our President and CEO would have liked to be here, but had a longstanding commitment in a western state today.

46

The question facing us is simple: Can competitive long distance providers survive

to fight against the mega-Bell and cable monopolies on a nationwide basis? The answer is yes, and our merger is the pathway to meet that challenge.

Consider the changes of the last two years: (1) dramatic decreases in the price

of traditional long distance service, (2) explosive growth of wireless telephony that

has led to a demand for ‘‘all distance’’ pricing, (3) consolidation of the seven Bells

into two mega-Bells and two other Bells, (4) imminent entry into the long distance

market by the mega-Bells, and (5) growing demand for broadband capacity from

both residential and business customers.

Our conclusion is that the separate market for long distance created by the divestiture of AT&T is eroding; that successful competitors like ourselves need to be able

to fulfill all of a customer’s needs for wireless and wireline; and that strong competitors must be able to effectively bring broadband Internet access and services all the

way to a customer’s home or business.

In other words, the telecommunications industry of the future requires that a

company be able to provide one-stop shopping for economical packages of services,

and to the maximum extent possible, to reach the customer directly.

The broadband battle is basically about the last mile—not about the Internet

backbone—which is already open and competitive with thousands of competitors

and several major players—despite what some of our competitors say.

In the world of the last mile, two titans are emerging. One is an old titan reborn

through local cable facilities—AT&T. The other, ironically, is the offspring of that

company—the Bell Operating Companies. The new mega-Bells have maintained

their hold over local markets, are already major wireless providers, and have moved

swiftly to leverage those assets towards becoming providers of the full range of voice

and data services. AT&T, meanwhile, has chosen to buy up the other last-mile— cable—and is seeking to dominate the provision of high-speed Internet access and

bundle it with its own wireless, local and long distance services.

Faced with these trends, MCI WorldCom had a tough choice to make. We could

have left residential customers to the Bells and big cable, but that would have been

bad for those consumers and bad for us. We could have merged with a Bell in order

to gain the advantage of controlling the critical last mile of copper wire into every

home. Or, we could get stronger, and even more competitive. You now know what

choice we made. MCI WorldCom and Sprint decided to join forces as the single best

hope for a strong and effective alternative to the mega-Bells and the emerging

AT&T cable monopoly.

We know how to do this. Both MCI WorldCom and Sprint were born outside of

the Bell system and share an entrepreneurial spirit that has contributed to rapid

growth and success. Dedicated to opening markets to competition, both our companies have focused on delivering benefits to customers: lower prices, innovation and

higher quality services.

And we’ll be able to do all of this more efficiently. Over the next five years, the

merged company will realize cost savings of $9.7 billion in operating costs and $5.2

billion in capital expenditures. These cost savings not only allow the new company

to compete aggressively in both the business and consumer markets, but also will

enable us to aggressively invest in new technologies such as broadband access and

next generation wireless. We’ll be serving 44 million customers and growing; we’ll

have local network facilities in more than 2500 markets nationwide; we’ll have more

than 4 million PCS subscribers and 1.7 million paging and advanced messaging customers. Hopefully, we’ll have all the piece parts we need to be a strong competitor

to AT&T and the mega-Bells.

Our competitors overseas, spurred by mounting competition on their home turf,

are making acquisitions, joint ventures and aggressive international investments in

key markets around the world—The U.S. included. The combined, complementary

strengths of MCI WorldCom and Sprint will make us uniquely equipped to develop

and market the communication products and services consumers need and want

most: data, Internet, wireless, local, long distance, and international.

Together, we will have the capital, proven marketing strength and end-to-end,

state-of-the-art networks to compete more effectively against the international incumbent carriers. Our self-reliant, facilities-based global strategy positions us well

to fully service the rapidly growing global telecom market—a market valued at $1

trillion by the year 2002. Our new company will have the people and the technology

required to bring innovative services and the benefits of competition to residential

and business consumers across America and around the world.

Here in the United States, we can already see hints that this combination will

accelerate broadband deployment in competition with Bell DSL and AT&T cable

modems. MCI WorldCom is breaking through in local markets in New York State,

already providing over 160,000 residential customers there with two things they’ve

47

never had before: choice and low cost, flat-rated service. Sprint is going forward

with the introduction of its Integrated On-Demand Network (ION) in Kansas City,

Seattle, Denver, and eventually, in local markets across the country. MCI

WorldCom will be collocated in 1500 central offices for DSL by the end of this year

and 2000 by next year. We have both invested heavily in a fixed wireless technology

known as MMDS that will allow us to get to customers who are beyond the reach

of DSL, usually in predominantly rural areas. With these MMDS and DSL assets,

combined with the Sprint ION networks and local facilities; we’re in a very strong

position to bring consumers—urban and rural—the broadband access that they need

and want.

We know that any major merger in our industry will be viewed skeptically at this

point—but it’s important to remember that not all mergers are the same. This is

not a merger of monopoly providers—this merger is being done so we can become

large enough in scope to compete with the monopoly powers.

Some regulators have reacted to the news of a MCI WorldCom—Sprint merger by

raising a yellow flag of caution. That’s their job. We look forward to demonstrating,

and we will, that this merger is pro-competitive in all markets. That debate will

benefit everybody, because it will help government officials and consumers alike to

understand the best ways to advance the cause of telecommunications competition

in the next century.

Thank You.

The Chairman: Thank you very much, Mr. Sidgmore.

Mr. Glenchur.

STATEMENT OF PAUL GLENCHUR, DIRECTOR,

SCHWAB WASHINGTON RESEARCH GROUP

Mr. GLENCHUR. Thank you, Mr. Chairman, members of the Committee. I thank you for the opportunity to appear before you today.

My statement has been submitted for the record, and I would just

like to take a brief moment to summarize it.

At the Schwab Washington Research Group, we examine legal,

policy and regulatory trends of significance to institutional investors. We cut across several industry sectors, including telecommunications, health care and financial services. And we have

looked at the telecom industry’s trend toward consolidation. The

statements I make today are my own views, however.

I agree with other panelists today as to the reasons for consolidation: greater scale reduces the unit cost of serving customers in

what could become an increasingly commoditized business. It also

adds capabilities to offer new and better services.

The consolidation trend has emerged against the regulatory

backdrop of the Telecom Act of 1996. It articulated a policy objective of creating competition in the local loop and established a process to achieve it, including resale, the leasing of network facilities,

and, ultimately, a preference for facilities-based competition. The

incentive structure established in the Act promised long distance

entry for the Baby Bells if their markets were deemed open to competition under Section 271 of the Act.

The technological and global trends today, however, have expedited the push to consolidate. Cable lines can offer broadband services, digital subscriber lines can offer similar service over phones,

and eventually will be adapted to offer voice over DSL service. The

need to make huge capital investment in response to this competitive climate should not be surprising. But the rush to consolidate

has implications for enforcement policies behind the Telecom Act.

The FCC has pointed to a lack of benchmarking as an example

of a possible impairment of its ability to promote competition under

the Act. Similarly, the acquisition of long distance backbone netVerDate 11-MAY-2000 11:36 Apr 25, 2002 Jkt 077325 PO 00000 Frm 00051 Fmt 6633 Sfmt 6601 77325.TXT SCOM1 PsN: SCOM1
48

works by the Baby Bells has implications for enforcement of the

long distance restrictions of the Act.

The FCC has attempted to sort through situations where the economic and business objectives of mergers collide with the Telecom

Act policies of promoting competition in the local loop. Questions

have arisen regarding the FCC’s time for making decisions regarding license transfers and the standards applied to define the public

interest, and the implementation of conditions that may not bear

directly on the original public interest concerns that generated public interest scrutiny.

The FCC has announced measures to enhance the predictability

of the process and to allow more efficient resolution of license

transfer applications. Progress in this regard would prove helpful

to investors. When mergers are announced, the investment community understands that regulatory risk is part of the analysis. Primarily, however, they hope to focus on the fundamental, strategic

and financial aspects of a given deal. They would welcome greater

predictability in the overall process.

Thank you for the opportunity to appear before you. I would be

happy to answer any questions you may have.

[The prepared statement of Mr. Glenchur follows:]

PREPARED STATEMENT OF PAUL GLENCHUR, DIRECTOR,

SCHWAB WASHINGTON RESEARCH GROUP

Thank you for the opportunity to appear before you this morning. As a director

of the Schwab Washington Research Group, I examine regulatory and legal issues

affecting the investment decisions of institutional investors. Schwab does not make

specific stock recommendations and does not engage in investment banking. Our

goal is to provide objective advice to our institutional client base. Obviously, the investment community has a major interest in telecom mergers. They speculate about

possible combinations, they react to news of proposed deals, and they monitor the

progress of these mergers as they work their way through the regulatory review

process.

As a consequence of technological change, deregulation and the emphasis on global market opportunities, the telecommunications industry has experienced significant consolidation, particularly among the top tier players. Seven Regional Bell Operating Companies (RBOCs) have merged into four; significant mergers have also

occurred in the long distance and cable industries. Ten years ago, the top seven

cable operators served about 25 million subscribers. Today, the top seven multiple

system operators (MSOs), including proposed deals, serve about 60 million subscribers, almost 90 percent of all cable subscribers.

We’re seeing consolidation in the wireless business as well. Wireless providers

have combined to broaden their reach to more subscribers. Consolidation is occurring among wireless providers using the GSM (Global System for Mobile Communications) standard, a development that may encourage integration with a major

landline carrier or a possible arrangement with foreign carriers that rely on the

GSM standard.

Why is consolidation happening? Telecommunications is a capital-intensive business with very high fixed costs and increasing demands for the integration of new

technology. Greater scale allows these costs to be spread over a wide customer base,

ultimately reducing the cost of serving each individual customer. With deregulation,

providers envision a world in which they offer a package of telecom services over

digital, packet-switched networks on a global basis at affordable rates. Carriers are

acquiring assets to become end-to-end providers of telecom services, maintaining

sufficient control over their networks to enable customer access, ensure timing of

service deployments and guarantee network reliability. Greater scale and a more expansive customer reach, in turn, enhance a provider’s attractiveness as a potential

global partner.

In this environment, we should not be surprised to see rapid consolidation. Looking years ahead, business leaders in the telecom world envision a multi-service

broadband environment on a global scale. They’re making big bets to prepare themVerDate 11-MAY-2000 11:36 Apr 25, 2002 Jkt 077325 PO 00000 Frm 00052 Fmt 6633 Sfmt 6621 77325.TXT SCOM1 PsN: SCOM1
49

selves for that future. We may reach a point where consolidation will yield a small

number of very large industry players.

At the same time, each industry player must pursue its vision in a regulatory climate governed by the Telecommunications Act of 1996. The Act was designed primarily to open the local market to competition. Rather than depend on benevolent

compliance with rigid statutory demands, the Act created an incentive structure

that would encourage local incumbents to meet the market-opening requirements of

the Act. The incentive for local incumbents was entry into the in-region long distance market. The Act offered a legislative judgment that ending the monopoly over

local phone service was in the public interest. The Act also recognized that competition was superior to government regulation, including provisions that allow regulatory forbearance where telecom regulation is unnecessary to protect the public interest.

At times, the visions of telecom carriers may collide with the vision of the Telecom

Act. This is inevitable if the Telecom Act failed to contemplate the extent of technological change and convergence. Businesses are merging to broaden their reach into

new services and to obtain scale in a market where service providers can bring all

services over the same pipes. The growth market now and in the future is the data

services market. A broader reach means efficiencies that can lower costs for consumers. Yet the FCC must administer an Act that has imposed on the FCC an obligation to ensure competition emerges, particularly in the local service market. Anything that threatens that vision raises public interest concerns as they are expressed through the Telecom Act.

Accordingly, the FCC, in considering license transfers essential to the completion

of mergers, examines the impact of a merger on its statutory obligations and its

rules. The public interest embodied in the Telecom Act will not necessarily coincide

with the business objectives of merging parties. But both sets of objectives are legitimate and, in most cases, the FCC approves license transfers with little fanfare.

Where large mergers have sparked public interest concern, the FCC has worked out

conditions with the merging entities to allow such deals to move ahead.

Nevertheless, the FCC has been criticized for taking too long to approve license

transfers. It has also received criticism for imposing merger conditions that address

policy concerns that may not bear directly on the principal competitive concerns that

generated initial public interest scrutiny of a particular merger proposal. The FCC

has announced efforts to deal with these concerns, and progress in this regard

would be useful to the financial community. Investors need as much regulatory certainty as possible as they focus on the strategic and financial merits of particular

transactions. Uncertainty about regulatory timing or the potential regulatory consequences attached to a specific deal can muddy the environment in which fundamental analysis takes place. Investors would welcome improvements in the predictability of the overall merger review process.

Thank you again for the opportunity to appear before the Committee.

The CHAIRMAN. Thank you.

Mr. Kimmelman.

STATEMENT OF GENE KIMMELMAN, CO-DIRECTOR,

CONSUMERS UNION

Mr. Kimmelman: Thank you, Mr. Chairman, members of the

Committee. On behalf of Consumers Union, publisher of Consumer

Reports, we once again appreciate the opportunity to testify before

you.

Mr. Chairman, I am a little baffled this morning as I listen to

the Chairman of the FTC and the Chairman of the FCC. I have

great respect for them. They described a world in which there are

tremendous concerns, and yet they said, do not do anything. And

they described a world in which they said that, of course, if you

make a mistake, you have to live with it. And then they told you

about the airlines’ mistakes. And I think if we go back and review

the facts here, we will see that we are beyond just a little concern.

And if you apply their own reasoning, we are in a big, big mess.

The CHAIRMAN. In deference to them, Mr. Kimmelman, they did

say ‘‘very concerned.’’

50

Mr. Kimmelman: Very concerned.

The CHAIRMAN. They did not say ‘‘a little concerned.’’

[Laughter.]

Mr. KIMMELMAN. I am sorry, Mr. Chairman. You are absolutely

right, very concerned.

I feel like I see policymakers in this Administration staring at a

bulldozer, barrelling down the road at them. And they are just

caught staring at it. And, frankly, consumers are getting mowed

down right and left. Cable rates are up three times inflation, 23

percent since passage of the Telecom Act. Under the leadership of

the FCC, we have $4 billion in new fees on consumers’ phone bills,

a $2 billion net increase for the majority of consumers for long distance service, mostly low-volume customers. We have heard a lot

about how wonderful things are but no one in the Clinton Administration mentions these rate increases.

The CHAIRMAN. How much of that is because of the wiring of the

schools and libraries to the Internet?

Mr. KIMMELMAN. It is hard to break it apart, Mr. Chairman. But

I can tell you that it breaks down to a $1.50 Federal access fee that

was not there 2 years ago. From AT&T, they use a flat charge of

$1.38 now for universal service, which includes that program and

others. One program has a $1.95 fee. One has $4.95. One has a $3

minimum. Another, a $5 minimum. The FCC’s numbers show that

if you make less than 30 minutes of long distance calls, today you

are paying three times, three times as much as 2 years ago. It does

not sound like a really robust competitive market.

The Chairman of the FCC said we ideally should have four or

more choices for each customer service. I totally agree with him. I

do not know how we get from here to there.

What has happened under the 1996 Act, which was supposed to

bring us cross-market competition, cable/telephone? The law has,

instead, brought us within-sector consolidation. The Bells: twothirds of the country are controlled by two dominant Bells now.

Cable: AT&T crossed over, appropriately, into the cable sector,

but its MediaOne merger is predominantly a cable consolidation

transaction now, where the logic applied by the Chairman of the

FTC in his review of the Time Warner/Turner transaction would

never allow AT&T/MediaOne to go forward. And yet the Chairman

of the FCC, who says he wants four or more choices, creates a road

map for AT&T, through its horizontal rules, to acquire all these

new properties. It makes no sense.

WorldComm with MCI, now with Sprint. We have more and

more within-sector consolidation, not cross-market competition.

The theme is today’s merger should be justified, as we sort of

heard already, by yesterday’s merger. And then, of course, tomorrow’s merger is justified by the one we allow to go through today.

We have mega-merger mania, and it needs to be stopped.

Unfortunately, it is too late at this juncture to get from here to

there, the three or four competitors in each product line as the

Chairman of the FCC said. Consumers are getting the short end

of the stick—higher fees, higher prices—unless you are in the high

end of the market, you are a high-volume customer. Then you get

choices.

51

But the Chairman of the FCC says we have promises that are

now memorialized through an oversight process, promises of competition tomorrow, promises of entry into the sector that these very

companies told you in 1995 they were ready to enter then if you

just passed the law. No, it did not happen. They consolidated. Consolidation today, monopolies growing, consumers not getting more

choice for local service, seeing new fees on their bills, but promises,

promises that tomorrow, some day they will enter.

And there are opportunities for the FCC to enforce. The FCC did

the very same thing when it looked at the Bell Atlantic/Nynex

merger. It said, we are not sure any more of these mergers is OK.

We are going to impose strict conditions for opening up networks,

for making competition come. If you go down to the FCC, Mr.

Chairman, you will see those conditions have not been met. Maybe

they are starting to meet them in New York, one State, but not

across the region.

There were penalties that could have been imposed. There were

penalties that had been suggested. The FCC has done nothing to

enforce those conditions. I do not know how consumers can or

should rely on those kind of promises.

Mr. Chairman, I think the 1996 Act had numerous weaknesses,

as you know. But, more importantly, with this wave of mergers,

there is no way it can bring you the goal that you and Congress

hoped for: broad-based competition across all communications markets. I think you have to open it up. I think you have to review

this law. You have to step in.

There is one critical question that arises over and over again, implicit in what you heard this morning from the chairmen of the

FTC and the FCC. And that is, as companies enter new markets,

should they be allowed to increase a monopoly in an existing market, increase their monopoly power to raise prices because they

plan, promise, hope to enter a new market, or is that inappropriate? I think the antitrust laws should take care of it, but they

have not. I think the FCC should take care of it, but it has not.

And so I leave it for you, Mr. Chairman. Should Congress allow

consumers to be ripped off in a core market that has monopoly attributes because that monopoly says, I want to go somewhere else

and compete? I do not think that is fair. I hope the reports that

you are requesting will address these issues and we will see swift

action next year to reopen the law and make it truly consumer

friendly.

Thank you.

[The prepared statement of Mr. Kimmelman follows:]

52

1 Consumers Union is a nonprofit membership organization chartered in 1936 under the laws

of the State of New York to provide consumers with information, education and counsel about

good, services, health, and personal finance; and to initiate and cooperate with individual and

group efforts to maintain and enhance the quality of life for consumers. Consumers Union’s income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union’s own product testing, Consumer Reports with approximately 4.5 million paid circulation, regularly,

carries articles on health, product safety, marketplace economics and legislative, judicial and

regulatory actions which affect consumer welfare. Consumers Union’s publications carry no advertising and receive no commercial support. 2 John Sidgmore, ‘‘More Choices for Telecom Consumers,’’ letter to editor, Washington Post,

October 20, 1999. 3Trends in Telephone Service, Federal Communications Commission, September 1999, p. 11.

4Statement of William T. Esrey, CEO Sprint, before the Antitrust, Business Rights, and Competition Subcommittee of the U.S. Senate Committee on the Judiciary, September 15, 1998. 5Testimony of Gene Kimmelman on behalf of Consumers Union, before the Antitrust, Business Rights, and Competition Subcommittee of the U.S. Senate Committee on the Judiciary,

September 15, 1998. 6 Comments of Consumers Union, Consumer Federation of America, and Media Access Project

Before the Federal Communications Commission In the Matter of Implementation of Section

11(c) of the Cable Television Consumer Protection and Competition Act of 1992, Horizontal Ownership Limits, MM Docket No. 92-264 and in the Matter of Implementation of the Cable TelePREPARED STATEMENT OF GENE KIMMELMAN, CO-DIRECTOR, CONSUMERS UNION

Consumers Union1 is concerned that an avalanche of mergers in the telecommunications and cable industries is threatening to undermine the development of broadbased competition for local telephone, long distance, television and high-speed

broadband Internet services. The Clinton Administration—including its antitrust

and regulatory enforcers—and the Congress appear frozen in place as today’s mergers are justified on the basis of yesterday’s mergers, and then used to justify even

further consolidation in the future. This merger-mania is already so out of hand

that the most popular services most consumers want and need may be available

from only one or two players in the market.

The proposed merger between the second and third largest long distance companies, MCI WorldCom and Sprint, illustrate this pattern. In defending its proposed

merger MCI WorldCom-Sprint argue that:

. . . the Bell operating companies have consolidated their local operations

through a series of mergers and are moving toward becoming full-service providers of voice, wireless and data services. AT&T, meanwhile, will dominate the

provision of broadband services over cable while operating its own nationwide

wireless network. MCI WorldCom’s merger with Sprint would offer consumers

a strong and effective alternative—especially in local markets, where neither

company can compete as effectively alone against entrenched monopolies.2

In other words, MCI WorldCom-Sprint claim that consumers have nothing to fear

from a merger that dramatically concentrates control of the residential long distance

market (in apparent violation of the Justice Department’s merger guidelines) between AT&T (58% market share) and MCI-Sprint (24% combined market share3),

and consolidates substantial Internet backbone capacity, because the merger will

improve chances for these combined companies to compete in the local telephone

and broadband Internet markets. Will this competition materialize? Here is an example of what the merging companies said about the likelihood of anyone being able

to compete against the consolidated Bell companies:

The pending mergers of Bell Atlantic and GTE, and SBC and Ameritech, are

over the line and must be blocked. The mergers would create two mega Bells

owning and controlling two-thirds of the local telephone access lines in this

country. The situation is now critical and Federal policymakers must stop the

local telephone industry from transforming itself into basically a Bell West and

a Bell East monopoly.

* * * * *

The conduct of these companies in the two-and-a-half years since the Telecom

Act became law has been to fight competition in both local central office and

the courts, which causes us to believe that the purpose of these mergers is to

fortify against competition and not to embrace it. The result is that local telephone consumers on an even wider scale will continue to be denied the benefits

of choice, price, products, quality and service.4

While we agree with Mr. Esrey’s assessment of these Bell mergers,5 and have

raised similar concerns about AT&T’s even more enormous consolidation of cable

companies serving almost 60 percent of cable consumers,6 it is hard to understand

53

vision Consumer Protection and Competition Act of 1992, Review of the Commission’s Cable Attribution Rules, CS Docket No. 98-82, August 17, 1999. 7Public Law 104-104

8Testimony of Gene Kimmelman op. cit.

9 Comments of Consumers Union, op. cit.

10David Lieberman, ‘‘On the Wrong Side of The Wires,’’ USA Today, October 11, 1999. 11 Cooper, Mark and Gene Kimmelman, The Digital Divide Confronts the Telecommunications

Act of 1996: Economic Reality vs. Public Policy, Consumer Federation of America and Consumers Union, February 1999. 12Lieberman, op. cit.

how a merger of MCI WorldCom with Sprint will undo the harm caused by the

mergers that have preceded it. The logic appears to be two wrongs—Bell mergers

and AT&T/cable mergers—justify a third wrong!

Just consider where this wave of consolidation leaves American consumers. At the

time Congress passed the 1996 Telecommunications Act,7 there were eight large

local telephone monopolies (seven Bell companies and GTE); three large long distance companies and a handful of small-but-growing competitors; a comparable

number of large cable monopolies; four satellite ventures, and electric companies

and independent wireless firms were beginning to show interest in expanding more

broadly into telecommunications. With markets and technology converging, the Telecommunications Act’s goal of promoting broad-based competition could have yielded

industry combinations (e.g., local phone/long distance/satellite, cable/long distance)

that would have offered consumers a dozen national firms, with as many as half

of them attempting to offer a full package of telecom and television services in each

local market.

Instead, merger-mania is shrinking the competitive field: SBC and Bell Atlantic

have each gobbled up two other regional companies to control about two-thirds of

local phone lines, and are partnering with mid-size long distance companies and one

of the two remaining satellite firms.8 AT&T purchased TCI and is in the process

of merging with MediaOne (which has a substantial stake in Time Warner’s cable

systems,) giving AT&T an ownership stake in cable wires reaching about 60 percent

of consumers, plus arrangements to provide local telephone services through other

cable companies.9 Once this degree of horizontal power is established in these entrenched monopoly markets, it becomes more difficult for the few remaining players

to challenge the dominant local phone and cable players, increasing incentives for

further consolidation and partnership.

And even these two giant consolidated groups are not well positioned to take each

other on in most local markets with a full package of services. For example, AT&T’s

cable empire has not wired businesses, but can offer consumers a high-speed TVquality Internet service that local phone companies cannot technically compete

against.10Unless the price of satellite TV hookups and equipment keep falling and

local broadcast channels become readily available from satellite TV providers, the

Bell companies will not be able to compete against AT&T and other cable companies. As a result, two giants may not be enough to ensure consumer choice for local

phone, cable or TV-quality high-speed Internet services. And the ‘‘silent majority’’

of consumers who are modest users of these services are likely to find themselves

on the wrong side of a ‘‘digital divide’’ with rising monthly bills.11

Of course the consolidating companies have proposed a host of promises designed

to alleviate antitrust and competitive concerns about their mergers. SBC and Bell

Atlantic promise to invade other territories, AT&T promises to make its cable systems into local telephone competitors, and now MCI WorldCom-Sprint promises to

take a hodge-podge of wireless licenses (MMDS which has significant capacity and

line-of-sight limitations)12 added to limited local wireline infrastructure and become

‘‘a third’’ full service provider into the home. Will these promises be kept? Unfortunately, there is no way of knowing, and probably no way of mandating competitive

behaviors that would be sustainable in unknown, future market conditions.

For example, recent efforts by the FCC to ‘‘require’’ pro-competitive behavior have

proven woefully inadequate. Detailed performance requirements in the Bell Atlantic/

Nynex merger, designed to jump-start local telephone competition, have not been

achieved and no enforcement actions have been taken to mandate compliance. As

a result, it is hard to believe that the Commission’s ‘‘threat’’ of penalties which could

be imposed on SBC for failure to compete in new markets will effectively promote

competitive behavior.

So the tradeoff is simple: allow enormous within-sector consolidation of local telephone companies, then cable companies, and then long distance companies, in the

hope that they will then cross sectors and challenge each other for a full package

of telecom, Internet and television services.

54

13 Bureau of Labor Statistic cable and ‘‘all items’’ consumer price indexes 14 Comments of Consumer Federation of America, Consumers Union, and The Texas Office of

Public Utility Counsel, Before the Federal Communications Commission, In the Matter of LowVolume Long-Distance Users, CC Docket No. 99-249, September 22, 1999. 15 Rebecca Blumenstein, ‘‘MCI’s Revenue, Operating Profit Surges,’’ Wall Street Journal, October 29, 1999.

The dangers of allowing entrenched monopolies (local phone and cable) to expand

their core markets, or actual competitors (MCI WorldCom and Sprint) to merge are

obvious. With cable rates continuing to rise about three-times faster than inflation

(23 percent rate increases since passage of the Telecom Act)13 and local phone rates

restrained only by regulation, the fact that little competition is emerging casts significant doubt about recent consolidation in these markets. And long distance competition is not nearly as robust as advertisements for new calling plans would lead

you to believe.

A careful analysis of consumers’ long distance bills reveals that since passage of

the Act, the majority of consumers are paying a net increase of about $2 billion a

year on their long distance bills. This results from new monthly fees and line-item

charges (e.g., federal access, universal service, monthly minimum charges, monthly

service charge) added to the lower per-minute rates.14 These net price hikes are

most alarming because they come during a period when the Federal Communications Commission (FCC) reduced the cost of connecting long distance calls by more

than $4 billion a year. Apparently, even as costs decline and usage increases, the

long distance companies do not feel competitive pressure to pass along savings to

a large segment of the consumer market:

How did the telecom companies maintain their profit margins? The secret is

that many consumers are paying monthly fees of about $4.95 in return for the

lowest rates. AT&T officials on Monday said revenue per minute has actually

increased in part because of these monthly fees. Also, people are talking more

because they think their long-distance costs are lower.

One other significant but little noticed factor is that the long-distance companies are now paying less to the regional Bell operating companies to originate

and terminate calls.15

With inadequate competitive pressure in today’s market to hold down long distance prices for the majority of consumers who are modest users of long distance

services, it is difficult to understand how a merger of the number two and number

three companies will benefit consumers. Speculation that some day, the few remaining Bell companies will open their local networks to competition, in compliance with

the 1996 Act, and offer long distance service nationwide, is not enough to justify

reduced competition for today’s long distance consumers.

CONCLUSION

It is time for policymakers to put an end to the telecommunications and cable consolidation that is threatening the growth of broad-based competition. We offer excerpts from a recent ‘‘Essay’’ by William Safire as a wake-up call to reverse course

on telecommunications policy:

Why are we going from four giants in telecommunications down to two? Because, the voice with the corporate-government smile tells us, that will help

competition. Now each giant will be able to hedge its bets in cable, phone line

and wireless, not knowing which form will win out. The merger-manic mantra:

In conglomeration there is strength.

That’s what they said a long generation ago when business empire-builders

boosted their egos by boosting their stock to buy the earnings of unrelated companies. A good manager could manage anything, they said, achieving vast

economies of scale. As stockholders discovered to their loss, that turned out to

be baloney.

Ah, but now, say the biggest-is-best philosophers, we’re merging within the field

we know best. And if we don’t combine quickly, the Europeans and Asians will,

stealing world business domination from us. The urgency of ‘‘globalization,’’ say

today’s merger-maniacs, destroys all notions of diverse competition, and only

the huge, heavily capitalized multinational can survive.

* * * * *

Here are two startling, counterintuitive thoughts: The fewer companies there are

to compete, the less competition there is. And as competition shrinks, prices go

55

16William Safire ‘‘Clinton’s Consumer Rip-Off,’’ Essay, New York Times October 11, 1999.

up and service declines for the consumer. (Say these reactionary words at the

annual World Economic Forum in Davos, and listen to the global wheeler-dealers guffaw.)

Who is supposed to protect business and the consumer from the power of trusts?

Republican Teddy Roosevelt believed it to be the Federal Government, but the

antitrust division of Janet Reno’s Justice Department is so transfixed by its

cases against Microsoft and overseas vitamin companies that it has little time

to enforce antitrust law in dozens of other combinations that restrain free trade.

Our other great protector of the public interest in diverse sources is supposed

to be the F.C.C. When MCI merged with Worldcom last year, the chairman appointed by President Clinton, William Kennard, took no action but direly

warned that the industry was ‘‘just a merger away from undue concentration.’’ Now that is happening.

Why will the F.C.C. after asking for some minor divestiture, ultimately welcome

a two-giant waltz? For the same reason that the broadcasters’ lobby was able

to steal tens of billions in the public’s bandwidth assets over the past few years:

Mr. Clinton wants no part of a communication consumer’s ‘‘bill of rights.’’

Candidates Bradley, Bush and Gore look shyly away lest trust-luster contributions dry up. . .16

The CHAIRMAN. I want to thank you for your usual reserved, noncontroversial testimony before this committee, Mr. Kimmelman.

[Laughter.]

The CHAIRMAN. Mr. McTighe.

STATEMENT OF MIKE MCTIGHE, CHIEF EXECUTIVE OFFICER,

CABLE & WIRELESS, GLOBAL OPERATIONS

Mr. MCTIGHE. Thank you, Mr. Chairman. I would like to thank

you for the opportunity for Cable & Wireless to provide its perspective on mergers in the telecommunications industry.

I would also like to thank you personally, because it is the first

time that I have had the opportunity to go through this kind of

process, being a British citizen. I have to commend you on the

transparency of this process. I wish that we had these kind of processes in other parts of the world.

The CHAIRMAN. Well, we wish we had the question period for the

leader of the country that you have in the British Parliament.

[Laughter.]

Mr. MCTIGHE. Touche. Thank you.

Cable & Wireless is here this morning to make three points to

you. First, the government must address the threat to competition

in the Internet backbone market posed by the merger of MCI/

WorldCom and Sprint. To prevent UUNet from dominating the

Internet, it is essential that the divestiture of one of the merging

company’s Internet backbones, preferable UUNet, be a condition of

the merger.

Second, we wish to share our recent experience with the divestiture of an integrated Internet business. We have found that, absent

extreme good faith on the part of the seller and strict continuing

oversight by the responsible regulatory agencies, the competitiveness of the divested business will be compromised.

Third, it follows that unless there are assurances that the merging parties will act in good faith and that the regulators will hold

them strictly accountable, such mergers should not be allowed to

proceed.

56

I would like to go through each point in a little more detail.

Internet backbone competition: The Internet backbone is to the

21st century what the railways were to the 19th. The highway created by the Internet backbone will be the transport mechanism for

the new e-commerce model of the future. How is it competitively

structured is essential to the development of e-commerce over the

next two or three decades.

I would like, if I may, to use an analogy to describe the issue

that we feel is confronting us. We all are familiar with the highway

system. We have highways that are local, national and regional.

The Internet is the same. We have highways on the Internet, each

of them owned and operated by a number of different companies.

These highways intersect, or, to use our jargon for the industry,

they peer with one another. The peering process is essential if we

are to enable traffic and data to move from one end of the Internet

to the other, from one end of the globe to the other.

However, we have a new phenomenon that is emerging. We have

a number of four or five global superhighways being provided by

companies like Cable & Wireless, MCI/WorldCom, Sprint, GTE,

and AT&T/BT. These global superhighways allow more traffic to

flow more quickly and with less accidents, if I can continue the

analogy. It is essential for the local highways to be able to intersect

with these superhighways if they are to truly have access to the

content and to the consumers that exist around the globe for this

new e-commerce phenomenon.

In addition, these superhighways have on-ramps and off-ramps.

And basically, today we have people on the on-ramps, like Yahoo,

like Barnes&Noble.com and these other e-commerce companies,

and we also have people on the off-ramp, the Internet service providers around the world that we all support. Access to these highways is critical.

Today’s situation is relatively straightforward. Largely, these superhighways, these peering arrangements, are toll free, if I can use

that analogy. And using the off-ramps and the on-ramps is actually

very, very competitive today. The problem that we have is that the

combination of MCI/WorldCom and Sprint leads to the creation of

a dominant Internet backbone supplier. Many analysts predict that

they would have somewhere in excess of 60 percent of the Internet

backbone globally.

It is very possible that this dominant position could be used to

discriminate in terms of cost and service levels against the other

highway providers and in favor of the new combined entity. And

therefore, the question for us, in terms of Internet backbone capacity, is a very simple one: Do we want the essentially toll-free environment of a competitive market or the prospect of a tollbooth environment of a de facto monopoly?

And now I would like to touch on the Cable & Wireless experience. What we are confronting today with the MCI/WorldComSprint proposed merger is deja vu. One year ago today we saw exactly the same discussion over MCI and WorldCom. At that time,

the European Union, endorsed by the Department of Justice here

in the United States, required MCI to divest its highly integrated

Internet business.

57

Cable & Wireless purchased the MCI Internet business, relying

on the binding undertakings that MCI had made to the European

Union; i.e., that MCI would deliver an operating entity. However,

if I can just summarize our experience, the take-away for us is very

simple. The bottom line is that successful divestiture of an integrated business requires the seller to disrupt its own business to

support the creation of a new competitor.

In this situation, MCI/WorldCom failed to carry this out. And,

frankly, I can illustrate that with a number of points that we might

want to get to in questions.

That leads me, frankly, to my final point, of enforcement. Cable

& Wireless fundamentally believes that it is possible to divest an

integrated business. But it is only possible with a high level of

oversight and compliance monitoring. If the various regulatory authorities around the world feel that such oversight and such monitoring is inappropriate or they just do not want to do it, then let

us not kid ourselves—these kinds of forced divestments are not

going to work. So let us not do them.

In summary, Mr. Chairman, the Internet backbone is a key component of tomorrow’s global business model. We believe very

strongly in the powers of the market. This is not, for us, a question

of regulation or deregulation. This is about creating the competitive

landscape on which we can allow the market to have full rein. It

is, for us, about having a toll-free environment or a tollbooth.

I would like to thank you for this opportunity to provide you with

our perspective, and I would be happy to address any questions you

may have.

[The prepared statement of Mr. McTighe follows:]

PREPARED STATEMENT OF MIKE MCTIGHE, CHIEF EXECUTIVE OFFICER,

CABLE & WIRELESS, GLOBAL OPERATIONS

Mr. Chairman, thank you for this opportunity to provide the perspective of Cable

and Wireless on mergers in the telecommunications industry. I joined Cable & Wireless in the spring of 1999 as Chief Executive Officer of Cable & Wireless Global Operations. Cable & Wireless is an international leader in integrated communications,

operating in 70 countries worldwide. With its global reach and ownership of one of

the largest and fastest Internet networks worldwide, Cable & Wireless is a premier

provider of domestic and international data and Internet solutions to business customers. Cable & Wireless headquarters its North American operations in the

Tyson’s Corner high-tech corridor in Virginia.

I have nearly 20 years of experience in the high technology industry. My career

in international telecommunications has encompassed senior positions in Europe

and the USA, and has included roles in sales, marketing and operations for General

Electric, Motorola, Phillips Electronics and Siemans AG.

Cable & Wireless is here this morning to discuss several public policy issues surrounding mergers in the telecommunications industry. The company offers a unique

perspective on this topic, as we are a recent purchaser of assets required to be divested in a merger that, at its inception, was the largest telecommunications merger

of all time involving approximately $40 billion. The divestiture of the MCI Internet

backbone assets acquired by Cable & Wireless was the largest divestiture of an integrated business in U.S merger history. This experience provides Cable & Wireless

with highly relevant expertise in three areas: competition issues; the need for enforcement of conditions placed on mergers; and the efficacy of divestitures of integrated businesses.

I’d like to start my testimony with a story to illustrate our concerns in these areas

before speaking more in depth of its relevance to your policy-making goals.

In July 1998, as a condition of their proposed merger, MCI and WorldCom made

commitments to the European Commission and the U.S. Department of Justice to

divest MCI’s Internet backbone business. Internet backbones are the largest naVerDate 11-MAY-2000 11:36 Apr 25, 2002 Jkt 077325 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 77325.TXT SCOM1 PsN: SCOM1
58

tional or global networks that carry Internet traffic between smaller networks and

consumers.

In its investigation of the merger of MCI and WorldCom, the European Commission had found that MCI and WorldCom competed in a global market for top level

networks—those that can reach anywhere on the Internet through their own

peering arrangements, without having to pay anyone for transit. The Commission

noted that WorldCom’s Internet subsidiary, UUNet, already had ‘‘very substantial

size by comparison with its competitors’’ and was, by itself, ‘‘close to achieving dominance.’’ Thus, ‘‘[t]he combination of the Internet backbone networks of WorldCom

and MCI would create a network of such absolute and relative size that the combined entity could behave to an appreciable extent independently of its competitors

and customers.’’ Such an entity could disadvantage its competitors by ‘‘oblig[ing]

them to pay for access to its network’’ or ‘‘leverage its position to gain a dominant

position downstream.’’ Furthermore, ‘‘[b]ecause of the specific features of network

competition and the existence of network externalities which make it valuable for

customers to have access to the largest network, MCI WorldCom’s position can

hardly be challenged once it has obtained a dominant position.’’

Based on these findings, the Commission concluded that the merger of MCI and

WorldCom, if unaltered, ‘‘would lead to the creation of a dominant position in the

market for the provision of top level or universal Internet connectivity.’’ In order to

overcome these competition concerns, MCI and WorldCom entered into ‘‘Undertakings’’ that required MCI to divest its Internet business ‘‘as an operating entity.’’

The Commission approved the merger of MCI and WorldCom ‘‘subject to the condition of full compliance with the Undertakings. . . .’’

The U.S. Department of Justice specifically relied on the commitments reflected

in the Undertakings when it cleared the merger a week later. The Justice Department had assisted the European Commission ‘‘in evaluating and implementing the

divestiture proposal, which had been submitted to both the Commission and the Department of Justice.’’ In announcing the merger clearance, Assistant Attorney General Joel Klein highlighted the benefits of the divestiture:

This divestiture benefits anyone who relies on the Internet because it preserves

competition among major Internet service providers. Consumers will benefit

with lower prices, higher quality, and greater innovation in this dynamic and

emerging industry.

Thus, in order to obtain approval of their merger, MCI and WorldCom agreed to

detailed conditions embodied in the Undertakings. These conditions required MCI

WorldCom, among other things:

to transfer ‘‘all necessary employees to support the iMCI Business being transferred’’;

to transfer ‘‘all MCI’s contracts with wholesale and retail customers for the provision of Internet access’’;

to ‘‘make available all other necessary support arrangements to fulfill existing

contractual obligations of the iMCI Business—and to accommodate growth of

that business’’;

to provide support services ‘‘at favourable rates’’; and

to refrain from soliciting or contracting to provide dedicated Internet access

services to the former MCI Internet customers for specified periods.

One year after the divestiture, we are sorry to report that MCI WorldCom has

not honored its commitments to the European Commission and the Justice Department. MCI WorldCom’s material violations of the Undertakings include:

Failure to transfer all personnel necessary for the operation of the former MCI

Internet business at prior performance and service level standards. For example, MCI transferred only 43 sales and sales support representatives to support

more than 3,300 business customers.

Failure to provide contract documentation and other key customer information

to Cable & Wireless at closing. For example, MCI WorldCom withheld 2,000

written customer contracts—half of the contracts provided to date—until at

least seven months after closing.

Failure to provide necessary services, systems and support, such as competent

customer billing services.

Failure to provide services at favorable rates.

Failure to conduct business in the ordinary course, including the reasonable retention and solicitation of customers, prior to closing.

Solicitation of transferred customers, in violation of the non-compete provisions

of the Undertakings.

59

MCI WorldCom’s material breaches of the Undertakings threaten to impair Cable

& Wireless’s competitiveness. The lack of essential personnel, information and services have compromised Cable & Wireless’s ability to retain and expand business

with existing customers or to secure new customers. Thus, despite the 50 to 100 percent growth rates experienced by MCI prior to the divestiture, and the continued

rapid growth of the industry as a whole, Cable & Wireless’s Internet revenues have

not kept pace. Unless this trend is reversed, Cable & Wireless will, by definition,

lose market share and will eventually be unable to provide effective competition in

the market. Cable & Wireless has spent a year recruiting and training employees

and has announced a nearly $700 million investment into the network to make up

for the setbacks caused by MCI WorldCom’s refusal to honor their commitments.

We believe that Cable & Wireless’s experience as the purchaser of the MCI Internet business should weigh heavily in any antitrust review of the MCI WorldCom/

Sprint acquisition, and should be instructive for other telecommunications mergers.

COMPETITION ISSUES

If our collective goal is competition in the marketplace, we must adequately assess

the threat to competition.

MCI WorldCom now proposes to acquire Sprint, another major competitor in the

market for top level Internet connectivity. MCI WorldCom’s UUNet division is the

largest Internet backbone, estimated to carry 50% of the world’s traffic. The European Commission found last year that UUNet was nearly dominant by itself, and

it has only grown in marketshare since. The European Commission also identified

Sprint among the ‘‘big four’’ backbone providers, along with WorldCom, MCI (now

Cable & Wireless) and GTE. Sprint’s share of traffic in 1998 was estimated at 18

percent, second only to UUNet. UUNet continues to grow at dramatic rates; its executives have been repeatedly quoted as stating that demand for capacity is growing

at 1,000 percent per year.

Further, the Internet backbone market is highly susceptible to domination by a

large network. Because the nature of network competition makes it advantageous

for customers to have access to the largest network, having a large network is a

high barrier to entry by competitors. As the European Commission concluded last

year, a dominant network could impose costs on or reduce the quality of service to

competing backbone networks. A dominant backbone provider could leverage its position to gain a dominant position in downstream market—for example, retail Internet Service Providers.

MCI WorldCom’s acquisition of Sprint would constitute the same serious threat

to competition in the Internet backbone as MCI’s merger with WorldCom just one

year ago. Further, a commitment to divest UUNet or Sprint’s Internet assets may

not adequately protect competition and consumers if our experience with MCI

WorldCom and its agreement to divest MCI’s Internet backbone to Cable & Wireless

is any indication. Absent clear indications that MCI WorldCom would honor such

commitments and that the regulators would enforce the agreement, Congress should

be concerned about what a combined MCI WorldCom-Sprint would mean for competition and the flow of Internet traffic.

ENFORCEMENT ISSUES

Efforts by the European Commission and Justice Department to ensure competition in telecommunications markets will not be effective if left unenforced. However,

little has been done to ensure the ‘‘Undertakings’’ imposed by these agencies are adhered to. If the European Commission and Justice Department do not enforce MCI

WorldCom’s commitment to divest the MCI Internet business fully, it may conclude

that it can breach any commitment made to U.S. or European officials to divest the

UUNet or Sprint Internet business without adverse consequences. Lack of enforcement may also compromise the effectiveness of divestiture as a remedy for other

mergers in the telecommunications industry and elsewhere.

Failure to enforce MCI WorldCom’s commitment to fully divest the MCI Internet

business raises additional questions as to the effectiveness of cooperation with the

European Commission. The European Commission took the lead in investigating the

merger of MCI and WorldCom, entering into the ‘‘Undertakings,’’ which laid out the

commitment to divest. The Justice Department cleared the merger one week after

the European Commission, expressly relying on those divestiture commitments. The

Justice Department should not defer to the European Commission and rely on merging parties’ commitments to the European Commission absent assurances that the

European Commission will demand full compliance with those commitments and/or

the Justice Department can and will enforce such commitments independently, if

necessary to protect the interests of U.S. consumers.

60

EFFICACY OF DIVESTITURE OF INTEGRATED BUSINESSES

Another question is whether divestiture in a market containing highly integrated

services is doomed to failure. Cable & Wireless believes these divestitures can work,

but the complexity of the situation should not be taken lightly. At a minimum, they

call for a level of involvement and enforcement by regulators that other mergers

may not require.

Divestiture of a fully integrated business is much more complicated than simply

selling off a separate operating division or wholly-owned subsidiary. MCI’s Internet

business was highly integrated with its other telecommunications services. The MCI

Internet assets were not organized into a separate, free standing division, as is the

case with UUNet, for example. Personnel have knowledge about and responsibility

for both Internet and non-Internet businesses. The same engineers, sales force, billing mechanism and databases all serve the same customers for a variety of products

such as long-distance, wireless, pre-paid calling cards, messaging services and Internet backbone products. Any costs or disruptions resulting from the transfer of these

multiple purpose assets must be borne by the seller, which, after all, receives the

benefit of merger clearance. Moreover, the seller will likely need to provide additional services to purchaser while it makes a transition to its own systems.

However, this allows the divesting party to hold some very important keys to

interfacing with customers. In fact, it gives the divesting party an incentive to degrade service while providing it in the name of another company. Any problems are

likely to cause former customers to migrate back to the original service provider.

The European Commission, recognizing this complexity, first suggested that

WorldCom should divest the more separate UUNet asset as a way to alleviate some

of these concerns. The parties refused and offered MCI’s highly integrated Internet

business instead. Cable & Wireless’s experience demonstrates that it is difficult to

adequately divest such integrated businesses. With the knowledge gained from that

experience, we suggest that, in the context of the MCI WorldCom/Sprint merger, it

is more appropriate to require the divestiture of UUNET rather than again try to

effectively quantify the assets of Sprint’s integrated Internet backbone business.

CONCLUSION

Policy makers must inquire, if the right choices for divestiture are not made, the

conditions are not fully enforced, and companies refuse to live up to their commitments, can we hope to maintain competitive markets?

The Internet is a revolutionary technology that offers enormous benefits to consumers in the next century. It has given rise to countless new information, education and entertainment products while reducing the cost of communication on a

global basis. Electronic commerce on the Internet has the potential to lower transaction costs, to give consumers access to better information about available products

and services, and to provide producers with more information about the markets

they serve. By facilitating the exchange of technical, cultural and commercial knowledge, the Internet encourages product innovation and efficiency in product design,

manufacture and distribution. Competition among the backbone networks at the

heart of the Internet must be preserved to ensure that the full potential of this critically important technology is realized.

Companies with dominance in the market should not be able to simply hobble

their primary competition by agreeing to conditions they never intend to fulfill or

by maintaining control over critical elements of service delivery due to integration

which allow them to degrade service while acting in a competitor’s name. This

thwarts the goal of competition. Policy makers must not allow such bad actors to

succeed with this strategy in the marketplace.

Cable & Wireless remains committed to being a major competitive force in the

Internet market. We have made substantial investments to expand our network and

improve our service to customers. In addition, we have pursued every available option to compel or persuade MCI WorldCom to meet its obligations and, thereby, to

ensure Cable & Wireless’s future competitiveness.

The recent experience of Cable & Wireless, in perhaps the most critical of the

marketplaces you are examining today, brings to the fore issues of serious import

to your review of merger policy. Congress and regulators must ensure competition.

The tools they use to accomplish that goal must include adequate enforcement

mechanisms. They also must fully address the complexities of integrated markets.

If more scrutiny can not be given, U.S. consumers must be protected by the refusal

to allow such mergers.

Again, thank you for this opportunity to provide Cable & Wireless’s perspective

on telecommunications mergers. I would be happy to address any questions from

members of the Committee.

61

Reuters

Cable & Wireless Takes MCI Complaint To Congress

November 8, 1999

4:04 PM ET

WASHINGTON—British telecommunications and Internet carrier Cable & Wireless

Plc complained to U.S. lawmakers Monday that MCI WorldCom Inc. <<http://

quicken.excite.com/investments/quotes/?symbol=WCOM>> had sabotaged its $1.75

billion Internet asset purchase.

MCI WorldCom officials responded by distributing a Cable & Wireless presentation

to securities analysts that touted the British firm’s Internet presence and 30 percent

share of the U.S. Internet backbone market.

Cable & Wireless last year bought the former MCI’s Internet business after antitrust regulators ordered the sale as part of MCI’s merger with WorldCom. In March,

Cable & Wireless filed suit against MCI WorldCom alleging that MCI had not delivered what was promised, including key personnel and customer information.

Mike McTighe, Cable & Wireless chief executive officer of global operations, told a

hearing of the Senate Commerce Committee that MCI WorldCom’’s proposed merger

with Sprint Corp. <<http//quicken.excite.com/investments/quotes/?symbol=FON>>

could create a ‘‘deja vu’’ situation if regulators again required an Internet asset sale.

He urged stronger enforcement and monitoring by regulators.

‘‘These divestitures can work, but the complexity of the situation should not be

taken lightly,’’ McTighe said. ‘‘At a minimum, they call for a level of involvement

and enforcement by regulators that other mergers may not require.’’ Should regulators be unwilling to remain involved after a sale, ‘‘these forced divestments are not going to work, so let’s not do them,’’ he added.

MCI WorldCom vice chairman John Sidgmore said he could not directly respond to

some of McTighe’s charges, given the ongoing litigation.

But, he said, Cable & Wireless told ‘‘a very very different story when they’re telling

their story to analysts.’’ ‘‘We think it was one of the more successful divestitures,’’ Sidgmore added.

At a hearing last week, MCI WorldCom President Bernard Ebbers told the Senate

Judiciary Committee that the Cable & Wireless charges were ‘‘not sustainable by

the facts.’’ McTighe said some of the problems Cable & Wireless faced were due to the fact that

MCI’s Internet business was highly integrated with its other businesses.

If MCI WorldCom and Sprint were allowed to merge and an Internet divestiture

was required, McTighe said the parties should be forced to spin off MCI WorldCom’s

UUNet Internet unit.

Bloomberg News

FCC, FTC Warn U.S. Congress of Concerns About Phone Mergers

November 8, 1999

Washington—Federal regulators and antitrust authorities warned a Senate panel

that recent multibillion-dollar telecommunications mergers are cause for concern,

and that Congress should watch the industry closely.

‘‘I think Congress should be very concerned’’ by the ‘‘pace and scope of consolidation

in the telecommunications marketplace,’’ U.S. Federal Communications Commission

Chairman William Kennard told the Senate Commerce Committee, which oversees

telecommunications policy.

Congress rewrote the nation’s telecommunications laws in 1996, setting the stage

for local, long-distance and cable companies to compete in each other’s markets.

While some competition has occurred, the industry also has seen multibillion dollar

mergers among companies in the same line of business, reducing the number of

competitors.

For instance, the second- and third-largest long-distance companies combined last

year to form MCI WorldCom Inc., and that company plans to buy No. 3 long-distance company Sprint Corp. for $128 billion—the largest corporate takeover in history.

The seven regional phone companies formed in the 1984 break-up of American Telephone & Telegraph Co. have become four through mergers since the 1996 Telecommunications Act. In October, SBC Communications Inc. completed its $80.6 billion purchase of Ameritech Corp., creating the largest U.S. local phone company

with control of one-third of all U.S. phone lines.

‘‘One must ask the question where it is all going to end, and I think Congress

should be very concerned,’’ Federal Trade Commission Chairman Robert Pitofsky

said.

62

MCI WorldCom share fell 3⁄16 to 86 3⁄8 and Sprint fell 5⁄16 to 72 13⁄16 in late trading.

SBC shares fell 3⁄16 to 51 1⁄6, and AT&T shares fell 3⁄8 to 46 5⁄8.

Mergers Defended

The FTC and the Justice Department look at possible antitrust violations while the

FCC reviews whether a communications license transfer is in the ‘‘public interest.’’

Senate Commerce Committee Chairman John McCain, who is seeking the Republican presidential nomination, said his committee will hold hearings next year to examine what action, if any, Congress should take.

‘‘While merging industries enjoy the cost-saving benefits of increased efficiency, the

average consumer doesn’t always reap the benefits of lower prices and better services,’’ McCain said.

MCI WorldCom Vice Chairman John Sidgmore defended his company’s proposed

purchase of Sprint, saying it’ll allow it to better compete as customers demand onestop-shopping for all of their telecommunications services—local and long-distance

phone, wireless phone, and Internet.

Divestiture Urged

Cable & Wireless PLC’s chief executive of global operations, Mike McTighe, told the

panel that it should be concerned about the MCI WorldCom-Sprint transaction because the new company will dominate the Internet backbone market. When

WorldCom purchased MCI last year, it was required by U.S. and European antitrust

officials to sell MCI’s Internet backbone business. Cable & Wireless purchased it for

$1 .75 billion, and in March the company sued MCI WorldCom, accusing it of failing

to transfer its Internet customer base and not living up to the agreement.

McTighe said the company should be forced to divest MCI WorldCom’s UUNet Technologies unit as a requirement for winning approval of the Sprint purchase.

‘‘We believe that Cable & Wireless’s experience as the purchaser of the MCI Internet business should weigh heavily in any antitrust review of the MCI WorldCom

Sprint acquisition,’’ said McTighe.

Sprint takeover faces opposition

By Gareth Vaughan,<<mailto:qvaughan@marketwatch.com>>

CBS MarketWatch Last Update: 2:21 PM ET Nov 8,1999 NewsWatch

</news/current/newswatch.htx?source=blq/yhoo>

The British telecom group Cable & Wireless PLC outlined its opposition Monday to

MCI WorldCom Inc.’s planned $129 billion acquisition of Sprint Corp., saying the

merged group would control the flow of worldwide Internet traffic. Mike McTighe,

C&W’s chief of global operations, told a U.S. Senate panel that Congress and regulators should be concerned about how the proposed MCI WorldCom merger would

create a dominant player in the Internet backbone market. If the deal goes ahead

it would harm consumer and business customers seeking to maintain low Internet

access prices and innovative services from the Net backbone industry, C&W’s

McTighe said. ‘‘Congress should be concerned about what a combined MCI

WorldCom-Sprint would mean for competition and the flow of Internet traffic.’’

Cable & Wireless is a competitor of the two U.S. groups.

Reuters

C&W urges UUnet sale in WorldCom/Sprint deal

Monday November 8, 12:55 pm Eastern Time

LONDON, Nov 8—British based telecoms group Cable and Wireless PLC on Monday urged a powerful U.S. congressional committee to help curb the muscle of MCI

WorldCom (NasdaqNM:WCOM <<http://finance.yahoo.com/q?s=wcom&d=t>>—

news </n/w/wcom.html>) by making the U.S. carrier sell its prized UUNet Internet

arm.

C&W’s Chief Executive Officer of Global Operations Mike McTighe told America’s

Senate Commerce Committee that MCI WorldCom’s record $115 billion bid for peer

Sprint Corp (NYSE:FON <<http://finance.yahoo.com/q?s=fon&d=t>> —news </n/f/

fon.html>) would otherwise create a dominant force that controlled the flow of Internet traffic around the globe.

‘‘The proposed merger would harm consumer and business customers seeking to

maintain low Internet access prices and innovative services from the Internet backbone industry, and create a company that would control the flow of Internet traffic

around the world,’’ McTighe said.

‘‘We suggest that...it is more appropriate to require the divestiture of UUNet rather

than again try to effectively quantify the assets of Sprint’s integrated Internet backbone business,’’ he added.

63

C&W thought it had bought itself a leading position in servicing the Internet in

May 1998 after it snapped up MCI’s Internet backbone business, which pipes vast amounts of data through a fibre optic network, for $625 million.

But the UK-based group sued MCI last March for not fulfilling certain terms of the

deal, accusing the U.S. group of failing to effectively transfer MCI’s Internet customer base, of impeding C&W’s ability to operate the business and of targeting

former MCI customers for marketing purposes.

WorldCom was forced by regulators to sell MCI’s Internet business, which is second

in size only to UUNet—which is estimated to carry 50 percent of the world’s Internet traffic—in return for regulatory approval for its MCI acquisition.

Sen. McCain: Telecom Mergers Often Bad For Consumers

Dow Jones News Service

November 8, 1999

WASHINGTON—Mergers in the telecommunications industry were once again the

topic of a hearing on Capitol Hill, the second time in two weeks.

This time, the hearing was chaired by Sen. John McCain, R-Ariz., chairman of the

Senate Commerce Committee and contender for the GOP presidential nomination.

Most Americans, McCain asserted ‘‘tend to view increased concentration of control

as a negative.’’ Unfortunately for the average consumer, he added, ‘‘this is often the case.’’ But worries about concentration ‘‘sometimes prompt the wrong responses,’’ said

McCain. Government ‘‘tends to rely on outmoded ownership restrictions’’ to solve the

problem. McCain has questioned the Federal Communications Commission’s rules

keeping local telephone companies out of high-speed data markets until they open

local markets to competition. He has also introduced legislation further lifting limits

on broadcast station ownership. McCain said he plans to hold a series of hearings

on the issue, and has ordered a congressional study of the merger wave from a consumer point of view.

According to the Federal Trade Commission, the number of communications mergers has increased by 50% since 1995 to a value of over $266 billion. That compares

to a threefold increase in corporate mergers overall McCain questioned whether the

proposed merger between AT&T Corp. (T) and cable provider MediaOne Group Inc.

(UMG) would raise red flags from antitrust officials, given AT&T’s level of ownership in the cable industry. He noted that the FTC imposed strict conditions on Time

Warner Inc.’s (TWX) purchase of Turner Broadcasting, a deal that also involved

cable, so that Time Warner wouldn’t exert undue impact over programming.

AT&T’s market share ‘‘is certainly a concern,’’ said FTC Chairman Robert Pitofsky.

He noted that the Justice Department and not the FTC will be reviewing the AT&T

merger. McCain also asked about AT&T’s plans to provide high-speed cable Internet

solely through Excite@Home (ATHM), a company in which AT&T has a stake.

Pitofsky said that while he hasn’t examined the deal, it would bear scrutiny if found

to impede competition.

The panel continued a debate begun last week between MCI WorldCom Inc.

(WCOM) and Cable & Wireless Communications PLC (CWZ), sparked by MCI

WorldCom’s offer to buy Sprint Corp. (FON). Cable & Wireless purchased Internet

‘‘backbone’’ assets that MCI was ordered to sell last year when it merged with

WorldCom. But one year after the divestiture, MCI WorldCom ‘‘has not honored its

commitments’’ to transfer a working asset to Cable & Wireless, said company executive Mike McTighe. That should be a warning to Congress and regulators if MCI

WorldCom and Sprint are forced to get rid of some Internet assets, McTighe said.

MCI WorldCom’s vice chairman, John Sidgemore, said Cable & Wireless’ performance shows that the divestiture was successful.

C&W claims Sprint deal will stifle competition

NEWS DIGEST:

By ALAN CANE

11/09/1999

Cable and Wireless, the UK-based telecommunications group, yesterday told a senate committee the Dollars 130bn merger of MCI WorldCom and Sprint would create

a dominant internet force that could inhibit competition for private and business

customers. The merger has already attracted criticism from the Republican Senator,

Mike DeWine, chairman of the Senate anti-trust committee.

Mike McTighe, C&W’s head of global operations, told a senate commerce committee

hearing on consolidation in the telecoms business: ‘‘MCI WorldCom’s acquisition of

64

Sprint would constitute the same serious threat to competition in the internet backbone as MCI’s merger with WorldCom just one year ago,’’ he said, proposing that

UUNet Technologies should be divested. Wholly owned by MCI WorldCom, UUNet

is a large provider of internet services to the business sector. According to C&W,

UUNet owns the world’s largest internet backbone (principal transmission channel),

carrying about 50 percent of the world’s internet traffic.

C&W benefitted from the merger of MCI and WorldCom, buying MCI’s internet assets for Dollars 1.75bn after regulators demanded their disposal as the price for approval of the deal.

Copyright (c) 1999 Financial Times Limited

Telecommunications Reports (TR Daily)

11/8/99

McCain TO SEEK GAO STUDY, MORE HEARINGS ON MERGERS

Concerned about further telecom industry consolidation, Senate Commerce, Science,

and Transportation Committee Chairman John McCain (R., Ariz.) intends to ask the

General Accounting Office to conduct a study examining the impact of telecom mergers ‘‘from a consumer’s standpoint.’’ Sen. McCain also announced during a hearing

this morning on telecom mergers that he intends to increase his committee’s oversight of the issue by holding more telecom merger hearings next year.

Sen. McCain said lawmakers are worried future mergers involving Bell companies

could result in formation of a ‘‘Bell East and Bell West.’’ And he wondered whether

AT&T Corp.’s aggressive move into the cable TV industry will reposition that company as ‘‘Ma Cable, dominating the markets for voice, video, and high-speed data

services.’’

Sen. Ron Wyden (D., Ore.) described this morning’s hearing as the ‘‘beginning of an

effort. . .to examine thoroughly the impact of all mergers, not just’’ telecom-related

transactions. Sen. Wyden said his ‘‘gut feeling’’ is that a ‘‘fair number of these mergers do not harm the interest of consumers.’’ But he noted that ‘‘of those that represent a problem, a disproportionate number are in the telecom sector.’’ Sen. Wyden

suggested that additional mergers among communications industry players might

become ‘‘First Amendment concerns.’’

FCC Chairman William E. Kennard reprised his role as defender of the Commission’s public interest test for reviewing proposed license transfers. He described the

FCC as ‘‘the last defense for consumers’’ and told the Senate panel that ‘‘if the Commission did not review mergers under the public interest standard, it would be possible under traditional antitrust analysis for all the regional Bells and GTE Corp.

to merge into a single, national local phone company.’’

Federal Trade Commission Chairman Robert Pitofsky reported that the number of

communications transactions seeking government approval have increased by about

50% since 1995, with the total dollar value increasing eightfold to $266 billion. Mr.

Pitofsky said he was limited in his remarks about telecom consolidation because

most of the antitrust work in that area is being carried out by the Department of

Justice.

‘‘Although the FTC has been active in cable [TV] and entertainment industries, most

of the mergers involving telephones and commercial satellite services have been

analyzed by the DOJ pursuant to the two agencies’ clearance agreement, which divides matters on the basis of recent expertise,’’ Mr. Pitofsky explained. And the FTC

is barred by section 11 of the Clayton Act and section 5 of the FTC Act from exercising jurisdiction over common carriers, he noted.

Messrs. Pitofsky and Kennard agreed that Congress should be ‘‘very concerned’’

about the recent outbreak of telecom megamergers but advised against passing federal legislation to address that concern.

Their stance drew criticism from Consumers Union co-director Gene Kimmelman.

‘‘I’m a little baffled,’’ Mr. Kimmelman said after the regulators’ testimony. ‘‘They describe a world of concern, and then they say don’t do anything about it.’’

An industry witness, Mike McTighe, chief executive officer of Cable & Wireless

PLC’s global operations, suggested that antitrust officials reviewing the proposed

merger of MCI WorldCom, Inc., and Sprint Corp. require MCI WorldCom to divest

its Internet backbone unit. ‘‘It is more appropriate to require the divestiture of

UUNet, rather than again try to effectively quantify the assets of Sprint’s integrated

Internet backbone business,’’ he said.

C&W acquired MCI Communications Corp.’s Internet backbone business in a divestiture sale framed to satisfy regulators’ concerns about combining MCI’s asset with

WorldCom, Inc.’s UUNet subsidiary.

65

From Wired News, available online at:

http://www.wired.com/news/print/0,1294,32407.00. html

C&W Brings MCI Beef to US

Reuters

12:35 p.m. 8 Nov 1999 PST

WASHINGTON—Cable & Wireless PLC, the British telecommunications and Internet carrier, complained to US lawmakers Monday that MCI WorldCom Inc. had sabotaged its US$1.75 billion Internet asset purchase.

MCI WorldCom officials responded by distributing a Cable & Wireless presentation

to securities analysts that touted the British firm’s Internet presence and 30 percent

share of the US Internet backbone market.

Last year, Cable & Wireless bought the former MCI’s Internet business after antitrust regulators ordered the sale as part of MCI’s merger with WorldCom. In March,

Cable & Wireless filed suit against MCI WorldCam, alleging that MCI had not delivered what was promised, including key personnel and customer information.

Mike McTighe, Cable & Wireless chief executive officer of global operations, told a

hearing of the Senate Commerce Committee that MCI WorldCom’s proposed merger

with Sprint Corp. could create a ‘‘deja vu’’ situation if regulators again required an

Internet asset sale. He urged stronger enforcement and monitoring by regulators.

‘‘These divestitures can work, but the complexity of the situation should not be

taken lightly,’’ McTighe said ‘‘At a minimum, they call for a level of involvement

and enforcement by regulators that other mergers may not require.’’ Should regulators be unwilling to remain involved after a sale, ‘‘these forced divestments are not going to work, so let’s not do them,’’ he added.

MCI WorldCom vice chairman John Sidgmore said he could not directly respond to

some of McTighe’s charges, given the ongoing litigation.

But, he said, Cable & Wireless told ‘‘a very, very different story when they’re telling

their story to analysts.’’ ‘‘We think it was one of the more successful divestitures’’ Sidgmore added.

At a hearing last week, MCI WorldCom President Bernard Ebbers told the Senate

Judiciary Committee that the Cable & Wireless charges were ‘‘not sustainable by

the facts.’’ McTighe said some of the problems Cable & Wireless faced were due to the fact that

MCI’s Internet business was highly integrated with its other businesses.

If MCI WorldCom and Sprint were allowed to merge and an Internet divestiture

was required, McTighe said the parties should be forced to spin off MCI WorldCom’s UUNet Internet unit.

Copyright 1999 Reuters Limited.

CNET

British carrier claims MCI sabotage in Net buy

By Reuters

November 8, 1999, 3:20 p.m. PT

http://home.cnet.com/category/0-1004-200-1431967.html

WASHINGTON—British telecommunications and Internet carrier Cable & Wireless

complained to U.S lawmakers today that MCI WorldCom sabotaged its $1.75 billion

Internet asset purchase.

MCI WorldCom officials responded by distributing a Cable & Wireless presentation

to securities analysts that touted the British firm’s Internet presence and 30 percent

share of the U.S. Internet backbone market.

Cable & Wireless last year bought the former MCI’s Internet business after antitrust regulators ordered the sale as part of MCI’s merger with WorldCom. In March,

Cable & Wireless filed suit against MCI WorldCom, alleging that MCI had not delivered what was promised, including keypersonnel and customer information.

Mike McTighe, Cable & Wireless chief executive officer of global operations, told a

hearing of the Senate Commerce Committee that MCI WorldCom’s proposed merger

with Sprint could create a deja vu situation if regulators again require an Internet

asset sale. He urged stronger enforcement and monitoring by regulators.

‘‘These divestitures can work, but the complexity of the situation should not be

taken lightly,’’ McTighe said. ‘‘At a minimum, they call for a level of involvement

and enforcement by regulators that other mergers may not require.’’ At a hearing

last week, MCI WorldCom president Bernard Ebbers told the Senate Judiciary Committee that the Cable & Wireless charges were ‘‘not sustainable by the facts.’’

McTighe said some of the problems Cable & Wireless faced were due to MCI’s Internet business being so highly integrated with its other businesses.

66

If MCI WorldCom and Sprint are allowed to merge and an Internet divestiture is

required, McTighe said the parties should be forced to spin off MCI WorldCom’s

UUNet Internet unit.

Story Copyright 1999 Reuters Limited.

November 16, 1999

The Honorable John McCain

Chairman, Senate Commerce, Science &

Transportation Committee

253 Russell Senate Office Building

U.S. Senate

Washington, D.C. 20510

Dear Chairman McCain:

In follow-up to your November 8th hearing on mergers, I would like to respectively

request that the attached document be included in the formal hearing record. As

you know, Mike McTighe of Cable & Wireless was a witness at this hearing.

Senator Ashcroft submitted for the record the testimony of Tod Jacobs of Sanford

C. Bernstein and Company from the Senate Judiciary Committee hearing on mergers held on November 4. Cable & Wireless strongly disputes information contained

in the study specifically regarding Cable & Wireless. The attached analysis indicates

that Mr. Jacobs study relies on underlying assumptions which are false, as well as

makes predictions about growth in the backbone industry which have no relation

to historical precedent for the companies involved.

We very much appreciate your indulgence in hearing the views of our company in

this matter.

Sincerely

Rachel J. Rothstein

Sr. Vice President, Regulatory and Government Affairs

Cable & Wireless Global Operations

Attachment

Attachment

RESPONSE TO TESTIMONY OF TOD JACOBS,

SANFORD C. BERNSTEIN & COMPANY

In testimony before the Senate Judiciary Committee on November 4, 1999, MCI

WorldCom CEO Bernie Ebbers cited a forecast by Tod Jacobs, an analyst at Sanford

C. Bernstein & Co., predicting that, from 1999 to 2003, Cable & Wireless’ Internet

backbone revenues will grow faster than MCI WorldCom’s revenues. The speculation of this one analyst is unreliable for the following reasons:

• Mr. Jacobs’ estimate of Cable & Wireless’ 1999 Internet revenues is grossly

inaccurate. Rather than $459 million, as Mr. Jacobs suggests, actual revenues

will be approximately $341 million. Mr. Jacobs seems to have relied on outdated

Cable & Wireless projections made around the time of the divestiture, before

the deficiencies in MCI WorldCom’s performance had become apparent.

• The suggestion that Cable & Wireless’ Internet revenues grew by 40 percent

from 1997 to 1999 is similarly inaccurate and misleading. Any growth in ‘‘Cable

& Wireless’’ business from 1997 to 1998 occurred before the failed transfer of

the iMCI business to Cable & Wireless. Since the divestiture, Cable & Wireless’

Internet revenues have been flat or declining.

• In sharp contrast to Mr. Jacobs’ contention that Cable & Wireless’ business

would grow faster than MCI WorldCom’s, MCI WorldCom Vice Chairman Jon

Sidgmore was recently reported in the financial press as saying that ‘‘MCI

WorldCom still has the fastest growth rate in the industry on the Internet.’’

(Barrons 9/20/99. ‘‘Changing the Net: Forget Long Distance’’.) (Exhibit 1)

• Mr. Jacobs’ estimate that MCI WorldCom’s Internet revenues would grow at

an average of 23 percent per year conflicts with Mr. Sidgmore’s testimony before the Senate Commerce Committee on November 8, 1999, that MCI

WorldCom was projecting 40-50 percent growth for the next several years.

• Peter Van Camp, UUNet’s President of Internet Markets, was recently quoted

as saying ‘‘[Our Internet Bandwidth growth rate in 1999] will be ten times on

67

the previous year and we see no signs of it slowing down.’’ (Bloomberg News.

9/1/99,‘‘MCI WorldCom Internet Unit to have Global Coverage in 18 Months’’.)

(Exhibit 2)

• For the first six months of the current fiscal year, MCI WorldCom reported

60 percent growth in Internet revenues.

• Mr. Jacobs’ predictions about MCI WorldCom’s future growth cannot be reconciled with his own estimate of historical performance for the last two years—

when MCI WorldCom’s revenues purportedly grew at 64 percent per year.

In sum, Mr. Jacobs’ forecast, which appears to have been prepared specifically to

support his testimony in favor of MCI WorldCom’s acquisition of Sprint, is pure fiction.

Mr. Jacobs’ analysis does confirm that, during the period from 1997 though

1999—the critical period in for the transfer of the MCI Internet business to Cable

& Wireless—the revenue growth of that business lagged that of all other competitors. While Cable & Wireless disputes the specific market share figures included in

the report, it is clear that Cable & Wireless lost share during that period due to

MCI WorldCom’s failure to provide all of the assets, personnel and services it had

committed to provide. As a result, the market is one step closer to domination by

MCI WorldCom.

The CHAIRMAN. I would like to depart from the usual procedures

here for a second and allow Mr. Sidgmore to respond, in any way

that he wants to, to the previous two witnesses.

Mr. SIDGMORE. Well, if it is any way I want to, this could take

2 or 3 hours, but I will try and keep it brief.

I think many of you are aware that we have a commercial dispute in litigation right now with Cable & Wireless, so it is probably

not appropriate to respond to the detailed points. But I have to say,

from my perspective, this is kind of an old story. The Department

of Justice and the European Union, last year, sought to create an

effective competitor to UUNet when we divested InternetMCI. And

I think, by virtually any measure, that has taken place.

I must say to Mr. McTighe here that the Cable & Wireless people, including the CEO, Mr. Wallace, and Mr. McTighe, regularly

brag to their analysts about how robust their Internet business is.

And, in fact, have made statements, which we can make available,

that the Internet business and the revenues and so forth are

roughly in line with what they expected when they bought the

business. They also claim to have 30 percent market share today

on the Internet backbone.

So I guess I would just say that they tell a very, very difficult

story to their analysts when they are selling their case for why

they are strong in Internet than they make here today.

I think, at the end of the day, when you look at the Internet

backbone, this is a very robustly competitive environment today,

despite what some of the competitors say. I would also say that,

with respect to peering, which has received a lot of notoriety, we

have more peers every year than the year before. Just to put it in

perspective, we have over 70 today. Over 70 other backbones have

equal status with MCI/WorldCom’s backbone, UUNet, today.

That, to me, does not sound like a very restrictive situation. And

each year the number of those peers increases. So if we were really

trying to use our market power to stop competition, I think you

would see those number of peers go down over time.

Just, in closing, I would like to say that we believe that the

Internet MCI disposition, although there were some problems that

we are discussing today, was largely as advertised. And we think

it was one of the more successful divestitures around. Again, a 30

68

percent market share by industry analysts and by their own recognition, robust growth in the business, and basically in line with

the initial expectations.

Thank you.

The CHAIRMAN. The purpose of this hearing is not to specifically

address your pending merger. It is the general issue, and I kind

of would like to keep us on that. But I do understand that, obviously, because of recent events. And I hope that our other members

of the committee will allow you to respond as we go through this.

Mr. McTighe, I need to ask Mr. Kimmelman a question here.

Mr. Kimmelman, as you know, this week, Congress is expected

to vote on legislation intended to help satellite TV compete effectively with cable television. Yet the conference committee’s draft

satellite TV bill has been criticized as not terribly pro-competitive

or pro-consumer. As a spokesman for competition and consumers

who represent no special interests, please give me your opinion on

what provisions the Satellite Home Viewer Act legislation must

contain in order to be truly pro-consumer and pro-competitive.

Mr. KIMMELMAN. Mr. Chairman, we have been very critical of a

number of the suggestions. I do not know that it has been resolved

yet in the conference committee. We asked for as much parity as

possible between satellite and cable companies for the ability to obtain broadcast programming.

As you and everyone else knows, one of the biggest problems satellite providers have in reaching consumers is they are not able to

offer the local broadcast channels with the broader package of cable

service. We wanted to make sure that for consumers to have more

choice and the lowest possible prices that those channels would be

available under the same terms and conditions that cable receives

them.

Unfortunately, my understanding is there are a number of provisions being discussed that still give advantages to cable in how

they may negotiate with broadcasters as opposed to satellite. What

all this will do, Mr. Chairman, unfortunately, is slow down the development of competition, creating other barriers to competition

that are inappropriate and unnecessary.

And so at a time when we have now no regulation of cable prices,

and they are going up three times inflation, we want to see as

much competition as quickly as possible. And from what I have

seen—I know it is still under negotiation—a number of provisions

just do not promote as much competition as is necessary.

The CHAIRMAN. Well, obviously, I have heard the same and know

of the same. And that is why I asked this question. This will be

terribly disappointing. Good legislation was passed by the House.

And it would be terribly disappointing if we, again, stiff these people all over America who have seen their screens go blank and not

allow them to have access to the service of their choice.

Chairman Kennard consistently states that long distance rates

are going down. You state just as consistently that a majority of

consumers are paying $2 billion a year more on their long distance

bills since the passage of the Telecom Act. Can you explain why the

same industry statistics lead you and Chairman Kennard to mutually inconsistent conclusions?

69

1 Consumer Federation of America is the nation’s larest consumer advocacy group, founded in

1968. Composed of over 250 state and local affiliates representing consumer, senior citizen, lowincome, labor, farm, and public power, and cooperative organizations, CFA’s purpose is to represent consumer interests before the Congress and the federal agencies and to assist its state

and local members in their activities in their local jurisdictions. 2 Consumers Union is a nonprofit membership organization chartered in 1936 under the laws

of the State of New York to provide consumers with information, education and counsel about

good, services, health, and personal finance: and to initiate and cooperate with individual and

group efforts to maintain and enhance the quality of life for consumers. Consumers Union’s income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union’s own product testing, Consumer Reports with approximately 4.5 million paid circulation, regularly,

carries articles on health, product safety, marketplace economics and legislative, judicial and

regulatory actions which affect consumer welfare. Consumers Union’s publications carry...no advertising and receive no commercial support. 3The Texas Office of Public Utility Counsel is the Texas state consumer agency designated

by law to represent residential and small business consumer interests of the State. The agency

represents over 8 million residential customers and advocates consumer interests before Texas

and Federal regulatory agencies as well as the courts. 4Federal Communications Commission, in the Matter of Low-Volume Long-Distance Users,

CC Docket No.99-249, July 20, 1999 (herein after, ‘‘NOI’’).

Mr. KIMMELMAN. I wish I could fully explain it. We are using the

chairman’s own data from his agency. The easiest way I can explain it is when you aggregate everyone together, people who are

on the phone for hours and hours, and they are getting 5 cents a

minute, 4 cents a minute, special deals, they have phone companies

knocking off the $1.50 charge, the $1.95 charge, offering them an

even lower price if they will buy Internet access and something

else, there is no doubt in my mind they are saving money and their

prices are coming down.

You combine those people with the majority of consumers—and

these are just FCC numbers—the majority of consumers who are

on the phone for less than an hour for their interstate long distance

calling, and you look at the new fees that have been added to their

bill, before they ever pick up the phone and get a dial tone, you

can homogenize all that and say there are some benefits. But when

you pull out that majority of people and say, what have they gotten, it is absolutely clear they have gotten a price hike. There is

just no question about it. It is unnecessary and inappropriate.

We believe if the FCC had just done its job effectively—there

were more than $4 billion in savings during this period of time we

are discussing to long distance companies through access charge reductions for connecting long distance calls to the local phone companies—all consumers would be paying less for long distance.

Somebody is getting the benefit of those cost reductions. Unfortunately, it is not the majority of consumers.

The CHAIRMAN. Well, I would appreciate if you would submit for

the record corroborating information to your statement.

Mr. KIMMELMAN. We would be happy to.

[The information referred to follows:]

INITIAL COMMENTS OF CONSUMER FEDERATION OF AMERICA, CONSUMERS UNION, AND

THE TEXAS OFFICE OF PUBLIC UTILITY COUNSEL BEFORE THE FEDERAL COMMUNICATIONS COMMISSION, CC DOCKET NO. 99-249, SEPTEMBER 22, 1999 (EXCERPT)

EXECUTIVE SUMMARY: LOW VOLUME CONSUMERS HAVE SUFFERED SUBSTANTIAL

RATE INCREASES

The Consumer Federation of America,1 Consumers Union,2/ and the Texas Office

of Public Utility Counsel3/ (hereafter Joint Commenters) respectfully submit these

comments in response to the Notice of Inquiry on low volume long-distance users.4

70

5 Cindy Skrzycki. ‘‘When the Meek Inherit. . . a Surcharge,’’ Washington Post. August 13.

1999, E1.

The Commission, despite adopting this NOI, has failed to ensure that falling long

distance costs are translated into fair prices and continues to postpone relief to over

half of all residential long-distance consumers, especially those who make fewer

than 50 minutes of interstate long distance calls in a month. While the Commission

has acted to reduce access charges for the long distance carriers by over $4 billion

since 1997—and by additional billions from earlier rounds of regulatory reductions

in these charges—it has passively watched the average per minute rates for lowvolume callers rise time and time again.

We estimate that those households making less than 50 minutes of calls have

been burdened with a net annual increase in lone distance charges of about $2 billion. The majority of those increases have fallen on the backs of consumers who are

least able to pay—lower income households.

The Commission’s cost recovery formula for the loop has disproportionately increased costs for the end-user. In effect, the consumer bears the cost of the loop

while IXCs get a free ride. The Commission requires consumers to pay for part of

the loop costs directly though the Subscriber Line Charge (SLC) and long distance

carriers are charged for the remainder of the costs through the Presubscribed Interexchange Carrier Charge (PICC). However, the Commission permitted long distance

carriers to pass through their charges onto the consumer as a line-item fee. This

loading of all loop costs onto the end user violates principles of joint and common

cost allocation pursuant to the Telecommunications Act of 1996.

The Commission, in its regulatory proceedings to reduce access charges to the

benefit of long distance carriers, had the opportunity to offset the impact of cost increases from the long distance carriers’ pass through of the PICC and the federal

universal service charges by requiring a dollar-for-dollar or pro rata pass-through

of saving from access charge reductions. Instead, the Commission chose to rely on

presumed ‘‘market forces’’ to compete these charges away. Unfortunately, those

‘‘market forces’’ are nonexistent in the low volume market segment. The major long

distance carriers have chosen to play follow the leader by raising prices for consumers by the equivalent of their PICC and their universal services costs. Those

making few long distance calls have been the hardest hit by these growing line-item

charges.

Making matters much worse is the recent imposition of monthly minimum

charges by the major carriers (see Exhibit 1). Now consumers are being billed even

when they do not place a single long distance call during the billing cycle. This

agency’s own calculations estimate that up to 20 million consumers could be faced

with monthly charges without ever placing a long distance call).5 These minimum

charges have substantially increased the cost of long distance for low-volume

users—especially for low-income consumers. Recent data from a large survey of consumers in Florida shows that over half of all respondents who reported no calls in

a given month had incomes below $20,000 and 75 percent had incomes below

$30,000. These respondents represented about one quarter of the total. Thus, the

burden of rising prices for low volume calling is falling disproportionately on lower

income households.

The Commission’s own data show that the average per minute rate for those making under 30 minutes of calls a month has skyrocketed to triple what they were in

the fall of 1997. This is a distress flare in the sky to the Commission that low-volume users are being crushed by an avalanche of line-item charges and unfair pricing policies. To ensure that all consumers received their fair share of recent long

distance cost reductions, the Commission must act expeditiously to remedy the pricing inequity in the bottom-half of the marketplace by reducing or eliminating the

Subscriber Line Charge. The Commission could move quickly to provide this bottomof-the-bill relief because it regulates this end-user charge. The Commission should

also prohibit minimum monthly charges, which greatly exacerbate the cost recovery

burden of low volume customers.

[Included for reference are Exhibits 1 and 4-7, which follow:]

71

72

73

74

75

The CHAIRMAN. And I would appreciate it if representatives of

the phone companies, and we will try and get something from the

FCC, so perhaps we can match them up. I guess it is one of those

examples about liars and statistics, but we will find out about it.

I have exceeded my time. Senator Wyden.

Senator WYDEN. Thank you, Mr. Chairman.

All of you have been helpful. The last question I asked Mr.

Pitofsky was very much on my mind today. The question of looking

short term versus long term as these matters of deregulation are

approached of course leads you to the airline example. It was before I was in the U.S. Congress, but the ballyhooed claim was we

are going to have more entrants, we are going to have more competition, and this is going to be the greatest thing since night baseball for the consumer. And what, in effect, we have had is very significant consolidation, a lot of areas with one carrier and some not

even that.

I would like to just kind of go down the row, we can start with

Mr. Kimmelman, and ask you to give us your vision of what things

would look like in the communications sector 20 years from now if

we essentially stayed in this mode that we are in. What concerns

me, of course, because Portland was really in the eye of the storm

with respect to broadband, is whether or not 20 years from now we

are just going to have a handful of broadband barons, sort of like

the airline hubs that control access and basically let the prices go

up and harm the consumers.

So, let us let each of you have a crack at sort of what it looks

like 20 years from now. And we will start with you, Mr.

Kimmelman.

Mr. KIMMELMAN. I do not think anyone can predict accurately.

I will give you my concerns based on the market consolidation we

have seen.

Everyone is moving to offering a package of services for consumers: local phone, long distance, Internet access, a variety of entertainment and communications services. The difficulty appears to

be that no one player can offer everything exactly as some other

player because of technological and other barriers at this point in

time. What we are seeing is a consolidation of local phone companies offering a package of services with some Internet that is not

nearly as fast and cannot offer the video quality that a cable company can offer.

But simultaneous consolidation, through AT&T’s transactions involving cable wires around the country, perpetudes monopoly dominance over high-speed Internet and video services. We have an opportunity for more mergers or consolidation here, with two satellite

companies left—there used to be four—but they could begin to

challenge cable. But that has limitations in terms of two-way Internet, as well. And so you have packages where certain sets of services from the cable wire will be more attractive to consumers and

more attractive to businesses from the telephone wire.

If we do not have head-to-head competition across all services we

are in danger of either having an unregulated monopoly or a need

for a lot more regulation down the road. It includes broadband. It

includes video services. And it may include some business services

for Internet and data transmission.

76

So, I am very fearful that the strong concern that has been

raised is not enough, that we need more aggressive intervention

now to have more players. Finally, I will say that, looking 20 years

ahead, I just look back. We made an enormous mistake in 1984,

deregulating cable before there was real competition. And Congress

came back in and re-regulated in 1992. Whatever one thinks of

that, I think everyone concurs that it was an enormous mess coming back in and trying to undo what was perceived as a mistake.

And as much as Chairman Kennard says we can look at

broadband down the road, I am fearful that that ‘‘down the road’’

is such a big mess that you cannot undo the mistake.

Senator WYDEN. I am going to let Mr. McTighe answer, but I

think your point is critical with respect to the need for preventive

kind of action. However you feel about a particular area, you do not

want to get to the point where you have to run a lawyers full employment program to resolve some of these areas. And that is also

an issue with Microsoft, is that you do not want these questions

to reach that kind of threshold. And it is one of the reasons why—

and I think you heard several of us say—we are going to try to

think anew about this whole area.

I am one who thinks, for example, that a great many of these

mergers are not going to have dire consequences for consumers.

But I think a fairly small percentage are going to be very, very bad

news for consumers. They are really going to threaten the first

amendment. And that is why I raised that question earlier.

So, rest assured that this is not going to be something that is

going to vanish into vapor. And that is one of the reasons why I

have spent the last few hours here and will be pursuing it very vigorously in the days ahead.

Mr. McTighe.

Mr. MCTIGHE. Senator Wyden, I do not think I am particularly

qualified to give you a detailed U.S. sense, but perhaps I could give

you more of a broader perspective. We believe fundamentally that

what is required is to open up all aspects of the value chain. In

other words, from the delivery of international services through

long distance, through local access, into content, and to ensure that

you have a competitive framework in every one of those discrete

areas. And if we can do that, then we would allow the free market

forces to decide exactly what degree of competition is delivered.

As an observation, the U.S. tends to be one of the most regulated

environments that we come across. And it seems to me that more

of a holistic view needs to be taken of this, more consideration of

all access mediums. So we tend to have discussions about local access in terms of wireline, and then I see local access discussions on

wireless, and then I see cable discussed -- these are all mediums.

Senator WYDEN. My time is short. Are any of you interested in

commenting on what it is going to look like in 20 years? Yes.

Mr. SIDGMORE. Well, not in 20 years. I just wanted to make the

point that with respect to the analog to the airline industry, I think

it is very different. If you look at that industry, you wound up with

a route-by-route competition model where you really only had two

or three potential competitors in the first place, and so any consolidation was bad.

77

I really do believe, to the points before, that in the communications industry, in the not too distant future, just a couple of years

out, you are going to have at least five or six major people competing in all aspects of the market. We can easily name them on

one hand or two hands. It is AT&T, MCI/WorldCom, SBC, Bell Atlantic, USWest/Qwest. I think you are going to have at least those

and a number of niche players. So I think it is very, very different

because the market characteristics are different.

The other thing I would say just briefly is I do not often agree

with Scott, and I very rarely agree with Mike, but I would say that

I agree on this question of open access. I think we are absolutely

pro open access. And I think that is absolutely critical to ensuring

that the effects of broadband technology get moved all the way out

to the consumer population in the rural areas in the United States,

not just the major cities.

Mr. CLELAND. I would like to echo that. If we look 20 years out,

what we should be seeing is the future is bundle competition. We

see competition in electricity, in gas, in telecommunications. I

imagine there will be more competition in cable. And so what you

want in the future is everybody competing for the customer in putting together their bundle. One person may say I think the customer wants cable, telecommunications and gas. Somebody else

will throw in electricity. Somebody else will do autos. We do not

want to limit the bundle capacity that anybody can offer. Let the

market, let the consumer choose what they want.

The only way that vision will happen, though, is if we encouraged facilities-based competition for all those with market power

and we have resale of all the underlying assets.

Senator WYDEN. Before we move on, you would then share my

view that if you have only one provider of broadband Internet access, bundling proprietary information essentially with access in a

given area, that would certainly be a free speech and First Amendment question, would it not?

Mr. CLELAND. I am not a First Amendment expert, but it certainly would be economic power being leveraged into vertical markets. Because what you are concerned about is, on broadband, almost all of these different services can be bundled together, because it is one pipe.

Senator WYDEN. Mr. Glenchur.

Mr. GLENCHUR. Thank you.

I think a point to keep in mind in terms of predicting where this

all goes is telecommunications is very unique and perhaps very different from the airline industry in this regard: And that is it is at

the intersection of communications and technology. We may get to

the point where third generation wireless and satellites and other

alternatives create options and choices that we really cannot get

our arms around at this point. And so it is hard to predict where

it goes.

The key thing is to make sure that there are enough players out

there to have incentives to innovate and make investments in new

technology.

Senator BROWNBACK. I want to thank the panel members for

being here today.

78

Mr. Sidgmore, I have a couple of questions to ask you, if I could.

As you look to the future on the merger that you had, the MCI/

WorldCom, and then adding into it the one you are projecting in,

to bring Sprint into the fold of that, where do you see your major

growth coming from in the next year or two? Where are you really

projecting to try to grow this business the most?

Mr. SIDGMORE. I do not know whether you are talking geographically or functionally.

Senator BROWNBACK. Functional.

Mr. SIDGMORE. From a market point of view, and we have been

very public with this, we think the two biggest growth markets

over the next several years will be wireless and Internet. And of

course wireless is right at the heart of our acquisition strategy with

respect to Sprint.

Senator BROWNBACK. If I could focus just in on the Internet area

of that, what do you anticipate your growth to be in that field?

What are you anticipating the growth in the next couple of years

in that Internet arena and the Internet backbone services, data

services, that you have?

Mr. SIDGMORE. Well, we have talked publicly about growth rates

in the high 40 to 50 percent range. We are growing today a little

over 50 percent per year.

We do think that one of the biggest drivers for growth over the

next few years on the Internet will be wireless data. If you can

imagine, a number of new devices proliferating, like Palm Pilots,

personal digital assistants and so forth, which we believe is going

to happen, you can easily see the growth of wireless data sort of

skyrocketing over the next few years, particularly when everyday

devices like cars will all have Internet interfaces, as well.

So wireless data we think is actually going to be the most significant piece of the growth of the Internet. And, again, this gets back

to why we have been so aggressive in attempting to find a wireless

solution and why Sprint is right at the center of what we have

been thinking about.

Senator BROWNBACK. Does the merger with Sprint, the proposed

merger there, work if you do not achieve that rate of growth you

are projecting in the Internet backbone business that you were

talking about?

Mr. SIDGMORE. Yes, let me just clarify something. We did not

count a single dollar of synergy from merging the Internet backbones. And when I am talking about growth and what we were

after with Sprint had nothing to do whatsoever with the Internet

backbone. It had to do with getting access to the wireless business

of Sprint, which we believe will be an important part, as an interface, into the Internet backbone space.

And to the extent that will the merger work without the wireless

Internet piece, virtually all of the financial synergies inherent in

the deal are based on the non-Internet and non-wireless businesses.

Senator BROWNBACK. What role do you see Sprint’s current operations playing in that growth that you are projecting for the overall

company over the next few years?

Mr. SIDGMORE. Well, I think if you look at it in pieces, obviously

we do not have a wireless business, so it is very highly likely that

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Sprint people and the Sprint operations that exist today will actually operate the wireless business for the combined company. I

think there is very little question about that.

I think, considering the size, I think the MCI/WorldCom people

will probably manage the Internet backbone piece. In terms of traditional local operations, which MCI/WorldCom has none, I think

that is going to be virtually 100 percent Sprint. And then you get

down to the merging of long distance networks and where we will

put people to run that.

I think it is highly like that the concentrations of people around

the country will stay largely the same. I do not want to speculate

today, because it is way too early, as to which manager will run

which division and so forth. I think it is highly likely that the general concentrations of people as they exist today will stay the same.

We have made over 60 acquisitions in the last 4 years. And that

has been true just about universally. We have largely kept the operations in the place where they have been before the merger.

Senator BROWNBACK. I believe Mr. Ebbers was in last week in

the Judiciary Committee, and he was projecting merger savings of

$9.7 billion in operating cost savings. That is what he was projecting last week over the next 5 years. And that is some of what

you have elaborated and testified on a little bit. Could you elaborate any further about where you anticipate those operating cost

savings coming from over the next 5 years?

Mr. SIDGMORE. There are really three sources. I mean simplistically there are really three sources. First is network synergies,

which result from (a) our avoiding access fees by using local facilities or bypass facilities that one of us have.

For example, MCI/WorldCom has significant CLEC facilities

which we can then use to originate and terminate Sprint customers. We can terminate Sprint traffic internationally on our,

MCI/WorldCom’s, own local facilities in Europe, as an example.

That is a significant source of the savings. So there are a number

of network savings we get as a result of using each other’s facilities, including the Sprint local facilities.

Second is advertising. And I doubt anyone will miss a few advertisements from TV at night. And that is—I do not want to get into

exactly how much that is—we have some internal debates about

this, as you might imagine—but that is a very significant amount

of money. It costs a lot to put Michael Jordan on television regularly.

And then, finally, there will be savings from projections of personnel growth over the next few years. And I want to be careful

on this, because I just want to make the statement that of all the

mergers we have done, we have always had, a year after the merger, more employees in total than the individual companies had

combined before the merger. So while there may be some dislocations in certain areas and in certain functions, in our judgment,

this merger is about growth. We fully expect to have more people

a year after the merger, in the combined company, than we had before.

Senator BROWNBACK. If I could take you right down to that point,

how many, though, do you anticipate jobs will be eliminated iniVerDate 11-MAY-2000 11:36 Apr 25, 2002 Jkt 077325 PO 00000 Frm 00083 Fmt 6633 Sfmt 6601 77325.TXT SCOM1 PsN: SCOM1
80

tially because of duplicative jobs with the proposed, if the merger

is approved, on the Sprint with the MCI/WorldCom?

Mr. SIDGMORE. We do not actually have that number today. We

have numbers that are based on sort of longer-term projections.

But we have not gotten down into the bowels of each operating unit

and sorted through which unit does what, how much overlap there

is, et cetera. We know there will be some. I am not saying there

will not be any. There will be certainly in accounting and functions

like that. There will be some. But we do not have a detailed road

map yet that would project that out.

Senator BROWNBACK. I thank you. I am sorry to be so detailed

and focused in on you, but it is not only the broader, bigger concern, but it is also a narrow concern for a number of constituents

and so on to have a chance to be able to ask you those questions.

And I hope we have the chance to have your chairman, Mr. Ebbers,

in some time, as well, to visit more thoroughly about this.

Thank you all, panelists, for being here today. We appreciate it.

I think it was a very illuminating testimony.

The hearing is adjourned.

[Whereupon, at 11:55 a.m., the hearing was adjourned.]

81

A P P E N D I X

PREPARED STATEMENT OF LOWRY MAYS, CLEAR CHANNEL COMMUNICATIONS, INC.

I would like to thank the Committee for inviting me to submit written testimony

concerning the major mergers taking place in telecommunications industry and the

proposed implementation of a small business tax incentive program. The heightened

merger activity in the radio industry is the result of years of pent up demand, frustrated by the artificial constraints placed on radio operators by an outmoded, outdated, and counter productive regulatory atmosphere which existed until the Telecommunications Act of 1996.

As competition was increasing for all forms of advertising, and as every other

form of communication grew stronger; as newspapers consolidated to the point

where most cities had only one major daily newspaper, where most cities were

served by very few major cable television providers, where the magazine industry

had been consolidating to a few group owners, and even the television programming

industry had been consolidating, radio groups could not grow with these competitive

threats. By the late 1980’s and into the early 1990’s, radio had been strangled by

a regulatory framework which allowed only 12 AMS and 12 FMs to be owned nationwide by a single entity. Radio values were down, innovation was rare and radio

was in danger of being left behind in the growth the rest of the communications

world was enjoying. Then, as Congress and the FCC began to loosen its regulatory

grip, vitality began to move back into the Industry. In the early and mid 1990’s,

the FCC relaxed the ownership restrictions to allow up to 20 AM’s and 20 FM’s nationwide and finally in 1996, Congress removed the national limit and increased the

number of stations we could own in individual markets. With these changes, the industry has rebounded and is financially vibrant again.

Curbing the trend towards consolidation which has brought the radio industry

back to financial life, will not result in an increase in diversity of owriership or diversity of programming. In fact, it may well hamper these efforts. A consolidated

company will have the financial wherewithal to take programming risks and try different formats, as it knows that a failure will not destroy the company’s balance

sheet. The smaller companies of the late 80’s and early 90’s had to be programmed

in well established formats, as experimental programming that went awry could

devastate a smaller company. Bigger companies can afford to take more risks. Further as companies own more than two stations in a market, they can look to program in more specialized formats with their additional signals. In fact, studies by

both the FCC and NAB have confirmed that format diversity in most markets has

steadily increased since consolidation began in 1996. Also, larger companies can afford to pay for better quality programming up to date equipment, and provide more

community service. For instance, in Memphis our stations employees and their families worked together with Habitat For Humanity to build a house for a family in

need. In San Antonio our radio stations responded to the community needy children

and families through the Elf Louise Project, which helps 35,000 people annually, by

sponsoring a radiothon and silent auction which raised over a quarter of a million

dollars in the last few years.

Also, consolidation, due to the safeguards that surround all media mergers from

the twin government watchdogs of the FCC and the DOJ, has resulted in a multitude of stations that must be sold that otherwise would not ever have become

available. Some of these stations will likely be purchased by minority-controlled

companies or new entrants into the industry. These purchasers will bring more diversity of ownership. Without consolidation, this diversity most likely would not

have been possible. The stations now being sold simply would never have been put

up for sale, and would have remained in their current, non diverse ownership structure.

It is important to understand the role current regulations play in preventing a

company from dominating a radio market or the radio industry in general. Radio

is principally a local medium, and ownership in a station in one city will not effect

an advertiser out of listening range of that city. The rules governing ownership are

therefore rightfully based on a local area, on the coverage of each radio station’s signal. Currently, the FCC limits the number of stations each company can own on

an absolute basis, to a maximum of 8 stations in a market, and the Justice Department limits the amount of revenue a new combination may extract from the total

revenue of that market. This duality of concerns will result in the divestiture of

roughly 100 radio stations from the Clear Channel merger with AMFM. Clearly, the

safeguards that exist currently are more than adequate to assure continued competition.

82

Once any stations are put up for sale, public companies have a fiduciary duty to

their shareholders to maximize the return on their investments. While it is in the

public interest to sell to diverse voices, each company must balance this interest

with its fiduciary obligations. In the past, these competing obligations have often

made it difficult to sell to minority companies that have historically been underfunded. The tax initiative program may solve this dilemma. Senator McCain’s tax

initiative program is therefore both worthwhile, as the number of new entrants has

dwindled over the years since the repeal of the old tax certificate law, and timely,

as the number of stations about to be available for sale, as a result divestitures related to the merger of Clear Channel Communications, Inc. with AMFM, Inc. will

be abnormally high. An underfunded company that provides a diverse new voice

might provide a seller with an acceptable offer even though the offer cannot hope

to match, dollar for dollar, that of a better funded competitor. The underfunded but

diverse company’s bid can be equal to or perhaps more attractive than its competitor, if accompanied by a tax incentive. The seller can then meet its fiduciary obligations, the sellers’ shareholders will have had its fiduciary obligations met, and the

public’s interest will also have been served.

The tax incentive program also has the potential to solve the other regulatory

issues presented by the Department of Justice and the FCC. The Department of

Justice has had a policy against Seller Financing of stations and the FCC has recently added a new ‘‘equity debt plus’’ rule making it difficult from the FCC side

as well to find creative ways to help finance the acquisition of stations by historically underfunded companies. Clear Channel has taken the lead in helping establish

a fund to finance minority and female broadcasters. Here Congress can take another, well needed step with the tax incentive program.

Clear Channel supports Senator McCain’s tax incentive program, and applauds

the Committee for having the courage to review the policy in this overtly political

time.

PREPARED STATEMENT OF MCHENRY TICHENOR, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, HISPANIC BROADCASTING CORPORATION (HBC)

Mr. Chairman and members of the Committee, I am pleased to offer you my written

comments pertaining to the recent hearing on mergers in the telecommunications

industry. As you know, I am the President and Chief Executive Officer of the Hispanic Broadcasting Corporation (HBC). We are leading Spanish language radio

broadcaster in the United States. Specifically, the HBC owns or programs 42 radio

stations in 13 markets. In early 1999, we launched the HBC Radio Network.

Through the combination of our owned stations and affiliate agreements with other

Spanish radio broadcasters, our network reaches approximately 75 percent of Hispanics in the United States. As the largest Spanish language radio broadcasting

company in the United States we have a definitive interest in seeing that mergers,

which the Federal Communications Commission approves, now and in the future

continue to promote the needs of underserved and underrepresented segments of the

population.

Today, I will briefly review the status of broadcast mergers in the radio industry,

discuss the positive implications of these mergers and offer my support for the Telecommunications Ownership Diversification Act of 1999.

In the last five years the number of mergers in the telecommunications industry has

sky rocketed. In 1995, we saw the joining of Disney and Capital Cities/ABC, Turner

and Time Warner, and Westinghouse and CBS. In 1997, we saw the proposed merger of US West and Continental Cablevision, Pacific Telesis and SBC, and Nynex and

Bell Atlantic. In 1999, we have been witnesses to proposed joint ventures that further consolidate parts of the industry like those between MCI and Sprint, CBS and

Viacom, and most recently, in the radio industry, Clear Channel and AM/FM, Inc.

These mergers, far from being anti-competitive, are just the beginning of a new era

of economic growth that will allow for additional capital investment, the emergence

of new entrants into the telecommunications industry and greater benefits to the

consumer.

The imposition of mergers, resulting in a more competitive marketplace, creates a

scenario for individual station owners and ownership groups to re-evaluate how they

do business while focusing programming more specific to the needs of the targeted

audience. Those stations with a small audience basis will not be pushed out of the

market but will be strengthened by quality programming and further enhance advanced technological services to the consumer.

While some may argue that fewer owners in a market results in consolidation of

choices available to consumers, the public in the case of telecommunications mergers

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is destined to realize all of the advantages that accompany heightened competition

and a greater diversity of voices in the marketplace.

When consolidation in radio occurs the variety of programming available to the public begins to diversify because new stations emerge which are attempting to find a

unique segment of the listening audience. Then greater variety of programming

evolves because the format for each station in a group’s lineup within a market is

usually clearly differentiated from its co-owned stations. In many markets, this has

resulted in the introduction of innovative or ‘‘fringe taste’’ formats that were not

previously viable because single-station owners could not absorb the startup costs,

and often went after a small piece of a ‘‘mainstream’’ format because they could not

afford to experiment and fail with their only property.

Similarly, minority targeted station groups also provide an economic advantage to

advertisers and result in better technological service to the consumer. Given the

wider range of options presented by a portfolio of formats and their respective demographics, advertisers are able to more precisely target their advertising messages

to a specific audience. Many of the stations acquired by group owners, which previously suffered from inattention to their technical facilities, have been upgraded to

provide a better class of service to the public. Group owners have used their centralized engineering expertise and greater financial resources to refurbish transmitting

and antenna facilities and replace aging audio equipment with state-of-the-art digital facilities. This has resulted in expanded coverage areas and better signal quality.

The primary rationale for regulation has been the need to compensate for the imbalance of power between monopoly suppliers and small users. However, in an environment where full choice is available, the imbalance will change and the problems of

price, quality, security, privacy and content diversity will disappear.

Why do we need to look at these consolidations as a prime opportunity to promote

the entrance of new diverse ownership? Quite simply, because the demographic

make-up of the audience is changing.

For HBC, our goal has always been to provide the most effective programming to

educate, enlighten and entertain our listening audiences. As several recent studies

indicate the Hispanic population in this country is expected to grow from an estimated 27.2 million people (approximately 10.4 percent of the total US population)

from the end of 1995 to an estimated 30.4 million (approximately 11.2 percent of

the total US population) by the end of 2000. These estimates imply a growth rate

of approximately three times the total US population during the same period.

From a broadcasting perspective this translates into approximately 71.0 percent, or

21.6 million people, of all US Hispanics, live in areas reached by only fifteen markets. The US Hispanic population in these top fifteen markets, as a percentage of

the total population in such markets, has increased from approximately 17.0 percent

in 1980 to approximately 27.0 percent in 1999.

Even more striking than the increase in the U.S. Hispanic population, however, is

that the increase in the top 15 U.S. Hispanic markets grew 29 percent. During that

same period, in those same markets, Spanish—language radio listening has grown

an astounding 83 percent, with most of that increase coming during the consolidation phase of the industry. So, the facts demonstrate that consolidation has in fact

improved the product available to our audience.

Still, we at HBC believe that diversity of broadcast ownership, particularly small

business and minority ownership is in the best interests of our country.

Beginning in 1943, with the help of the U.S. Supreme Court, the Federal Communications Commission initiated the first attempt to control radio industry consolidation. The court ruled that consolidation of the Radio Corporation of America (RCA)

was monopolistic in nature and thus must be split into two distinct radio networks.

The court was attempting to prevent the over monopolization of the industry and

promote fair competition. In response to the Court’s decision, Congress implemented

the first tax certificate program allowing the owners of the RCA to divest and defer

any capital gain tax realized from the ‘‘involuntary’’ sale of their properties. This

program promoted increased regulation by the FCC and the establishment of measures to ensure better compliance with mandated regulations.

Historically, the impact of tax certificate programs has brought about several economic advantages to private parties and the government. In 1978, a new and revised tax certificate program was initiated to promote minority ownership of a variety of communications properties. Unfortunately, due to several large loopholes in

the law, many media sales previously approved by the FCC were in reality part of

a shell game by a few owners to assist in realizing a tax advantage. However, these

types of programs—when accurately monitored and implemented—are very successful as regulatory tools that spur definite economic benefits. From a purely statistical

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dustry has been enhanced by tax incentive programs. For example, in 1978 minorities owned only 40 broadcast holdings. With the imposition of the tax certificate program, this number jumped to 350 by 1995. However, present day marketplace circumstances present challenges. Competing tax-free methods of selling stations detract from the attractiveness of tax certificates as an option for sellers. In addition,

increasing station prices makes it economically difficult to own stations in large

markets except for well-capitalized broadcasters. If the percentages of small and minority broadcasters are to increase in the present radio marketplace, there must be

regulatory intervention that will afford them the ability to acquire additional stations.

Thus, consideration should be given to the concerns that resulted in the repeal of

the tax certificate program in 1995. As you are aware, the repeal of the tax certificate program was linked to a proposed sale by Viacom of a multi-million dollar cable

television system to a minority buyer. This particular merger, coupled with declining tax revenues and complaints about the fact that the tax certificate program was

an affirmative action program, helped to heighten the arguments for repeal.

The most recent proposal, offered by Chairman McCain, provides a sound starting

point for renewing this vital investment incentive program. Under the Chairman’s

proposal, mechanisms are proposed to safeguard against of the abuses of the earlier

program. Specifically, the implementation of the program would be a joint effort between the Secretaries of Commerce and Treasury. Each agency will establish specific limits on net worth; gross revenues, total assets, and personal net worth for

eligible purchasers that were absent from the previous program. However, we believe that it would be prudent to give more specific guidance regarding these safeguards.

Finally, the legislation offers a limit upon the amount of gain that can be deferred

under the program. Specifically, a three-prong test is established for new buyers

that would provide a safeguard against phantom owners seeking only to reap the

benefits of the tax advantage.

The former tax certificate programs, whose goals were laudable, did little to establish a concrete safeguard for ensuring that underrepresented parties would engage

in long term ownership agreements. The McCain proposal requires that the seller

reinvest the proceeds from the sale of the telecommunications business into another

telecommunications business within three years of the date of sale. Moreover, the

legislation also requires that the new buyer maintain ownership of the property for

at least three years in order to be able to be able to defer a future gain from selling

the property.

Realizing the impact of long-term mergers within the telecommunications industry

requires that we look at who the parties are that will be most affected. Given the

large role that the Hispanic community will have in the coming years in effecting

public policy, I strongly urge this committee to encourage diversity in broadcast

ownership within a framework of safeguards that will avoid the abuses of the past.

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