U.S. GOVERNMENT PRINTING OFFICE

71–693 CC WASHINGTON : 2001

S. HRG. 106–978

THE MCI WORLDCOM/SPRINT

MERGER: A COMPETITION REVIEW

HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

ON

S. 1854

A BILL TO REFORM THE HART-SCOTT-RODINO ANTITRUST

IMPROVEMENTS ACT OF 1976

NOVEMBER 4, 1999

Serial No. J–106–59

Printed for the use of the Committee on the Judiciary

(

COMMITTEE ON THE JUDICIARY

ORRIN G. HATCH, Utah, Chairman

STROM THURMOND, South Carolina

CHARLES E. GRASSLEY, Iowa

ARLEN SPECTER, Pennsylvania

JON KYL, Arizona

MIKE DEWINE, Ohio

JOHN ASHCROFT, Missouri

SPENCER ABRAHAM, Michigan

JEFF SESSIONS, Alabama

BOB SMITH, New Hampshire

PATRICK J. LEAHY, Vermont

EDWARD M. KENNEDY, Massachusetts

JOSEPH R. BIDEN, JR., Delaware

HERBERT KOHL, Wisconsin

DIANNE FEINSTEIN, California

RUSSELL D. FEINGOLD, Wisconsin

ROBERT G. TORRICELLI, New Jersey

CHARLES E. SCHUMER, New York

MANUS COONEY, Chief Counsel and Staff Director

BRUCE A. COHEN, Minority Chief Counsel

(II)

(III)

C O N T E N T S

STATEMENTS OF COMMITTEE MEMBERS

Page

Hatch, Hon. Orrin G., U.S. Senator from the State of Utah ................................ 1

Leahy, Hon. Patrick J., U.S. Senator from the State of Vermont ....................... 66

Feingold, Hon. Russell D., U.S. Senator from the State of Wisconsin ................ 76

CHRONOLOGICAL LIST OF WITNESSES

Panel consisting of Bernard J. Ebbers, president and chief executive officer,

MCI WorldCom, Clinton, MI; William T. Esrey, chairman and chief executive officer, Sprint Corporation, Westwood, KS; James F. Rill, Collier, Shannon, Rill and Scott, Washington, DC; Gene Kimmelman, co-director, Consumers Union, Washington, DC; and Tod A. Jacobs, senior telecommunications analyst, Sanford C. Bernstein and Company, Inc., New York, NY .... 6

ALPHABETICAL LIST AND MATERIALS SUBMITTED

Ebbers, Bernard J.: Testimony ............................................................................... 6

Esrey, William T.: Testimony ................................................................................. 8

Jacobs, Tod A.:

Testimony .......................................................................................................... 27

Prepared Statement ......................................................................................... 31

Kimmelman, Gene:

Testimony .......................................................................................................... 23

Prepared Statement ......................................................................................... 24

Rill, James F.:

Testimony .......................................................................................................... 10

Prepared Statement ......................................................................................... 12

Exhibits 1–6 ............................................................................................... 17

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THE MCI WORLDCOM/SPRINT MERGER:

A COMPETITION REVIEW

WEDNESDAY, NOVEMBER 4, 1999

U.S. SENATE,

COMMITTEE ON THE JUDICIARY,

Washington, DC.

The committee met, pursuant to notice, at 11:14 a.m., in room

SD–226, Dirksen Senate Office Building, Hon. Orrin G. Hatch

(chairman of the committee) presiding.

Also present: Senators Thurmond, DeWine, Ashcroft, Leahy, and

Kohl.

OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S.

SENATOR FROM THE STATE OF UTAH

The CHAIRMAN. The committee will come to order. Good morning,

and welcome to today’s hearing examining the proposed merger of

MCI WorldCom and Sprint. I first would like to thank all of our

witnesses today for their time and cooperation, and I would ask all

witnesses to come forward. We are going to merge both panels, if

we can, in the interest of time. I understand some of you have to

catch planes and I want to accomplish that if I can.

Last month, MCI WorldCom and Sprint announced their intention to merge in a deal valued at nearly $130 billion. This is the

largest merger in history, although given how the merger wave has

been going, I don’t know how long it will last being the largest. The

resulting company, the Washington Post reported, ‘‘would be broad

by any measure, able to sell, local, long-distance and wireless service, along with high-speed Internet access. The merger would cement MCI WorldCom’s position among the handful of large players

* * * expected to dominate global communications in the future by

offering a full array of services in a ‘bundle’ to businesses and consumers.

Our hearing today will focus on the possible effects this merger

will have on competition and consumer choice in the telecommunications industry. Let me also point out that without commenting

on the merits of this particular merger, mergers of this type that

affect a significant portion of the economy is what the premerger

notification requirement under our antitrust laws were intended to

cover.

That is why today I will be introducing sensible bipartisan legislation, cosponsored by Senators DeWine and Kohl, that is designed

to update the Hart-Scott-Rodino transaction thresholds to more accurately reflect today’s economy. This will provide significant finanVerDate 11-MAY-2000 10:16 Apr 20, 2001 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 MCISPRINT SJUD4 PsN: SJUD4
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cial and regulatory relief for small businesses all across the country.

In our examination of the competitive effects of this merger, I

would hope to hear from our witnesses on the effects on the everchanging landscape of the telecommunications markets in general,

and on several specific markets in particular. These specific markets are, the market for consumer long-distance telephone services;

the provision of broadband Internet services to consumers and

businesses; and the market for the reportedly concentrated Internet backbone, which is the underlying network used to transmit

Internet traffic.

We are fortunate to have before us today two distinguished panels of witnesses, which we are going to merge in order to assist our

examination. The witnesses are Mr. Bernard J. Ebbers, the president and chief executive officer of MCI WorldCom. We are happy

to have you here, Mr. Ebbers.

Mr. William T. Esrey, the chairman and chief executive officer of

Sprint Corporation. We are certainly delighted to have you here as

well.

Mr. James F. Rill, we are always glad to get you back, Jim, with

the great job when you served as former Assistant Attorney General in charge of the Antitrust Division. And, of course, Jim is currently a partner in Collier, Shannon, Rill and Scott.

Mr. Gene Kimmelman, a respected former member of the Judiciary Committee staff, and currently Co-Director of the Consumers

Union. It is good to see you back, too.

And Tod A. Jacobs, Senior Research Analyst for Telecommunications at Sanford C. Bernstein and Company.

Again, I want to thank all of our witnesses for appearing today,

and I look forward to hearing from you.

Let me now just turn to Senator Kohl, who will represent the minority, and then I will also turn to Senator DeWine. Senator

DeWine is the chairman of the Antitrust Subcommittee, and Senator Kohl is the ranking member.

So we will turn to the Democrat side first, to Senator Kohl, and

then to Senate DeWine for any remarks they care to make.

Senator KOHL. Thank you, Mr. Chairman. Today’s hearing is important not only because we are examining the largest merger in

history, worth nearly $130 billion, but also because it would combine two of the most important competitors in the long-distance

telephone market and two key providers of Internet services. Indeed, Mr. Chairman, if there is a merger that ‘‘reaches out and

touches’’ the ‘‘friends and family’’ of every American, this one is it.

We certainly recognize the strength of both MCI WorldCom and

Sprint, and the business acumen of you, Mr. Ebbers, and you, Mr.

Esrey. You have built your respective companies from scrappy upstarts to become vigorous competitors to AT&T. Your companies

have been real American success stories, offering inexpensive and

reliable long-distance telephone services and, through dynamic

competition, leading the way to reduced prices and improved quality in a manner that has, without doubt, greatly benefited consumers over the last two decades.

But it is exactly for these reasons that many of us have serious

concerns about this merger. With respect to long-distance, three

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major companies currently control over 80 percent of the market.

One need not be a rocket scientist—or even an antitrust lawyer—

to be highly suspicious of a merger which reduces the number of

rivals in an industry from three to two. Such mergers raise the

dangerous possibilities of collusion, price coordination, cartel pricing, and reduction in quality of service.

In fact, Mr. Esrey, you might even agree. In written testimony

last year, you told our subcommittee, ‘‘Fewer larger telephone companies make innovation less likely and make it more difficult for

regulators and customers to compare relative performance.’’

Mr. Chairman, protecting robust competition in long-distance

telephone service is all the more important because it has been one

of the brightest spots in the telecommunications industry, and a

stark contrast to the lack of competition at the local level.

Despite the promise of the 1996 Telecommunications Act, residential consumers have seen few benefits. Are we now about to end

the fierce competitive battle which has prevailed in long-distance?

Will the long-distance market unhappily come to resemble the less

competitive local markets?

This merger, of course, is about much more than about long-distance telephone competition. Both MCI WorldCom and Sprint play

crucial roles with respect to Internet access, and both companies

view this merger as strengthening their ability to offer broadband.

But with the ever-growing importance of the Internet to the national economy, regulators will need to scrutinize this deal closely

to determine whether the combined entity will control too much

Internet infrastructure.

In fairness to our witnesses, let me make just a few more points.

First, in an era of converging technologies, many argue that the old

paradigm of long-distance and local no longer applies. Second, in

the last few years regulators have permitted a series of horizontal

mergers among the companies that have been most resistant to

opening their markets, which has created giant conglomerates

against which you must compete.

On that basis, it is not surprising that your two companies would

want to merge. But that doesn’t make the deal necessarily a good

one. Given the strength and size of your combined entity and the

strong competition now existing between your two companies, the

burden of proof is squarely on you, Mr. Ebbers, and you, Mr. Esrey,

to show that your merger will benefit consumers rather than create

obstacles to competition. We hope that you can convince us of that,

and we look forward to hearing your testimony today.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

We will turn to Senator DeWine now.

Senator DEWINE. Thank you very much, Mr. Chairman. The full

Judiciary Committee, as well as our Subcommittee on Antitrust,

Business Rights, and Competition, has been working hard to promote competition in the telecommunications industry ever since the

passage of the Telecommunications Act of 1996. And while many

of us are disappointed with the level of local competition the

Telecom Act has produced, I think it is fair to say that competition

has been booming in the market for long-distance service.

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In the years since AT&T was broken up, MCI and Sprint have

become strong competitors to AT&T. Consumers have benefited

from the battles among these three companies. Quality has improved, new services have been introduced and, most importantly,

prices for long-distance service have dropped dramatically.

Now, however, Mr. Chairman, MCI and Sprint have announced

that they will merge. The proposed deal between MCI and Sprint

is valued at approximately $130 billion and, if approved, it will

dramatically alter the landscape of long-distance service. The longdistance market will move from three primary competitors to two,

known in antitrust lingo as a duopoly. Most economists agree that

duopolies do not provide the same level of service and price competition as will be found in markets including three competitors.

In this instance, Mr. Chairman, economic theory may well be correct. Certainly, long-distance, with three major competitors, has

been a very competitive market. Sprint and MCI have been very

aggressive in competing with AT&T, and I think that as consumers

we have all benefited from the competition, even if we sometimes

get annoyed by those dinner time telephone calls.

So I am concerned, Mr. Chairman, about the impact of this proposed merger. If MCI WorldCom and Sprint are allowed to merge,

consumers will only have two major choices for long-distance service. Mr. Chairman, I am not convinced that any of the smaller longdistance providers currently have the name recognition or reach to

compete strongly with the major players. Further, it is unclear exactly when the regional Bell operating companies will be granted

the legal authority under section 271 of the Telecommunications

Act to compete for long-distance customers within their own regions. Until these smaller companies grow into brandname competitors and the Bell companies are allowed to provide long-distance competition throughout the Nation, AT&T and the merged

parties will dominate the long-distance market.

It is possible that broadband service can ultimately fill the void.

As a growing number of telecommunications companies are able to

provide bundled services, customers will have greater and greater

choice in the broadband market. But even though the broadband

market is growing, and it appears to be the way of the future, it

is not here yet today. Most consumers still pay separate bills for

separate services, and one of those services is simple, old-fashioned

long-distance telephone service. In that very important market,

this merger will dramatically decrease competition.

This merger does offer some significant benefits to consumers.

For example, it will allow the companies to combine their strengths

to better compete in the market for bundled services, and provide

better local and wireless service to customers. Further, there may

be ways to fix the problems of this deal, possibly by divesting certain properties. However, my primary concern, Mr. Chairman, is

the effect this deal will have in the long-distance market. So the

burden is on you, Mr. Ebbers and Mr. Esrey, to show me that longdistance customers will benefit from this deal.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

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We are going to turn to Senator Thurmond now, who has about

a minute-and-a-half statement, and then I will turn to Senator

Ashcroft, since Sprint is your State, as I understand it.

Senator THURMOND. Mr. Chairman, I am pleased that we are

holding this hearing today regarding the proposed merger between

MCI WorldCom and Sprint. The goal must always be to promote

strong competition in the telecom industry because that is the key

to keeping rates down for consumers.

I have to leave for another engagement. However, I would like

to place some questions into the record for the witnesses to answer

in writing.

Mr. Chairman, thank you very much.

The CHAIRMAN. Thank you, Senator Thurmond.

We will turn to Senator Ashcroft.

Senator ASHCROFT. Thank you, Mr. Chairman. I thank you for

holding the hearing today. Obviously, this is a matter of great interest to me and my constituents in Missouri. As you know, Sprint

is a very large employer in my State—approximately 6,800 Sprinters in the State of Missouri, and they are people who are highly

talented and very, very committed to providing the best in communications.

Sprint connected its first call about 100 years ago in Abilene, KS,

as the Brown Telephone Company. Today, the company employs a

total of 78,000 employees; 16,000 are located in the Kansas City

area. The rest of the country appreciated, I think, the plummeting

long-distance rates created when Sprint entered the market. Missourians not only benefited from lower rates, but from the job

growth that was created when this kind of capacity and integrity

and competition entered. That ever-recognizable pin drop of Sprint,

representing quality, provided the entire State and community

with a sense of pride.

Now, as we discuss the larger merger in history, I understand

that there are members of the committee who have concerns about

the impact that this will have on the competitive nature of the telecommunications industry, and I am also concerned and interested

in hearing the testimony of the witnesses on this subject.

While competitive implications should be fully examined, of

course, my largest concern is for the jobs of the hard-working and

talented people in the State of Missouri. Based on the conversations I have had with Bernie Ebbers, of MCI WorldCom, I believe

that the job growth potential of the combined companies will bring

additional workers to Kansas City and the State of Missouri. It is

those Missouri and Kansas technicians, engineers and scientists

that have brought such innovative products to the telecommunications market to help build the company into what it is today. In

fact, it is their effort that makes Sprint such an attractive company

to MCI WorldCom.

I looked at some of the other mergers with this in mind. When

the former LDS took WillTel, the Tulsa Corporation that survived

from the Williams Brothers transmission of energy services at one

time, just 3 years after being purchased by WorldCom, WillTel’s

employment grew from 2,000 to 4,500 employees in Tulsa.

I think the proposed merger fills gaps in both companies’ service

offerings, and the combined company would offer one-stop shopping

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for consumers. I think they should create efficiencies, and those efficiencies should continue to drive down prices for telecommunications services, local access, long-distance, wireless, and Internet.

I just from my own perspective note that virtually everyday I get

mail that suggests to me that I can have cheaper and cheaper longdistance service, and it is in addition to the television advertising

I see from MCI and Sprint comparing the virtues of Michael Jordan with other individuals in recommending service to me.

I noted an AP story just a month or so ago, ‘‘Little-known service

provider IDT is escalating the long-distance rate price war, undercutting the industry’s giants with charges as low as 3.5 cents per

minute.’’ I think the telecommunications framework which requires

the options and opportunities for resellers and others in the marketplace appears to be providing a basis for people to continue to

drive down costs, and drive down costs to consumers.

I must say at this point I am strongly inclined to support the

proposed merger. It promises, I think, to be a win/win situation,

winning for Missouri with more jobs and opportunity, and winning

for consumers. But I will reserve my final decision in order to examine other issues, including the effects on competition, including

long-distance and other telecommunications services.

I am delighted that these two leaders of American industry and

the industry in which America leads the world have decided to

come and be with us today, and I thank the chairman for this opportunity to make comments.

The CHAIRMAN. Well, thank you, Senator Ashcroft.

We are going to begin with Mr. Ebbers. We will go to Mr. Esrey,

then we will go to Mr. Rill, then Mr. Kimmelman, and we will wind

up with you, Mr. Jacobs. We are delighted to welcome all of you

here. We look forward to your testimony. And we understand there

is a time constraint here, so we will try and move this as quickly

as we can. We hope you can limit yourselves to 5 minutes. It is a

big deal to be limiting yourselves to 5 minutes, but I have found

people of your caliber can do that.

So we will turn to you, Mr. Ebbers.

PANEL CONSISTING OF BERNARD J. EBBERS, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, MCI WORLDCOM, CLINTON, MI;

WILLIAM T. ESREY, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, SPRINT CORPORATION, WESTWOOD, KS; JAMES F. RILL,

COLLIER, SHANNON, RILL AND SCOTT, WASHINGTON, DC;

GENE KIMMELMAN, CO-DIRECTOR, CONSUMERS UNION,

WASHINGTON, DC; AND TOD A. JACOBS, SENIOR TELECOMMUNICATIONS ANALYST, SANFORD C. BERNSTEIN AND

COMPANY, INC., NEW YORK, NY

STATEMENT OF BERNARD J. EBBERS

Mr. EBBERS. Thank you, Mr. Chairman and members of the committee. I appreciate the opportunity to come and speak to you

today.

In the changing world of the telecommunications marketplace,

the question facing us is simple: Can competitive long-distance providers survive to fight against the Bell and cable monopolies? The

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MCI WorldCom/Sprint merger is the answer to that question, and

that answer is yes.

Consider what the recent months have brought. First, a dramatic

decrease in the price of traditional long-distance service; second,

the explosive growth of wireless telephony that has eliminated the

artificial distinction between local and long-distance calling. There

is no such thing anymore as pure long-distance. Third, the megaBells are edging closer to entry into what has been known as the

long-distance market. Fourth, we see a 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 the customer’s home or business.

In other words, the telecommunications industry of the future requires that a company be able to provide a comprehensive suite of

services, broadband capabilities, and to the maximum extent possible to reach the customer directly. The broadband battle is basically about the last mile, and 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, or the now mega-Bells.

The new mega-Bells have maintained their hold over local markets, are already major wireless providers, and have moved swiftly

to leverage those local assets toward becoming providers of the full

range of voice and data services, and they are not even in long-distance yet. 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 longdistance 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 customers 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 know the choice that 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 will be able to do all of this more efficiently. Over the

next 5 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 for 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. And as you have

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observed, since our merger with MCI the bulk of that savings has

been passed through to consumers.

And that world, as we know it, is becoming smaller. 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, ours included. The combined complementary strengths of MCI WorldCom

and Sprint will make us uniquely equipped to develop and market

the communications products and services customers need and

want most—data, Internet, wireless, local, long-distance, distanceinsensitive, 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 internationally incumbent carriers. Our self-reliant, facilities-based global strategy positions us well to fully serve

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 200,000 residential customers

there with two things they have never had before—choice and low,

flat-rate 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 colocated in 1,500 central offices for DSL by the

end of this year, and 2,000 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 Sprint ION networks and local facilities, we are in a very strong position to bring

consumers, both urban and rural, the broadband they need and

most definitely want.

Some regulators have reacted to the news of an MCI WorldCom/

Sprint merger by raising a yellow flag of caution. That is their job.

We look forward to demonstrating, and we will, that this merger

is procompetitive in all markets, including what has historically

been known as long-distance. That debate will benefit everybody

because it will help government officials and consumers alike to

understand the best way to advance the cause of telecommunications competition in the next century.

Thank you very much.

The CHAIRMAN. Thank you, Mr. Ebbers.

Mr. Esrey.

STATEMENT OF WILLIAM T. ESREY

Mr. ESREY. Thank you, Mr. Chairman. I welcome this opportunity to offer you Sprint’s perspective on our merger with

WorldCom. We believe that with Sprint’s human talents and the

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physical assets combined with WorldCom’s, we will break the local

telephone monopoly that has frustrated public policymakers

throughout the 20th century. We will bring to local customers advanced technologies and lower prices, just like we did in long-distance.

In the early days of long-distance competition, Sprint and MCI

WorldCom successfully challenged the established players and offered the public new and innovative services. Now that long-distance competition has matured, our combined capabilities are

uniquely suited to meet the new competitive challenges that have

arisen. We will build on our competitive heritage to help open monopoly local markets to competition, to provide the next generation

of broadband services, and to offer packages of voice and data wireless and wireline services that consumers are increasingly demanding both domestically and worldwide.

The telecommunications industry is undergoing massive change.

One or more Bell operating companies appear on the verge of getting approval to offer in-region long-distance service, a market they

were barred from in 1984 because of their local bottlenecks. Simultaneously, AT&T, the former parent of the Bell companies, is getting back into the local service business through its acquisitions of

TCI and MediaOne.

At the same time, policymakers have made two critical decisions

that will further strengthen the local monopolies. The first was to

allow cable companies to close off access to their broadband systems, thus depriving competitors of access to the cable line to the

house for services such as high-speed Internet. The second was to

permit the first of two mega-BOC mergers that creates a single

telephone company that controls a third of the Nation’s telephone

lines.

As these policy choices were made, it became clear to us at

Sprint that our future should no longer hinge on a plan that depended upon cable companies or Bell companies to reach our customers. We looked at alternative strategies as a stand-alone company. We also explored alternatives to associate our human resources and the state-of-the-art assets with other resources and assets in ways that would complement our own and fill in our own

missing pieces. WorldCom offered us the best opportunity to meet

both shareholder and customer needs. Together, we will marshall

the necessary talents and capabilities to meet the new, larger-scale

challenges and new, larger competitors.

And let me be specific. While Sprint’s local telephone companies

serve principally residential users in rural and suburban communities throughout 18 States, we need access to local customers

throughout the remainder of the country. Our breakthrough initiative announced last year, Sprint ION, can offer customers exciting

and innovative means of communicating, but only if we can reach

those customers in their homes and offices nationwide. WorldCom’s

local facilities covering more than 100 urban centers go a long way

toward addressing this problem.

To deliver Sprint ION, we also need bandwidth to the home. At

Sprint, we believe that bandwidth is the next great leap in telecommunications services for both businesses and residential users.

Sprint’s broadband wireless assets, MMDS, which is multichannel,

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multipoint distribution services, when combined with WorldCom’s,

create a true local broadband alternative to the RBOC’s and to

AT&T.

Moreover, there is a substantial and an increasing demand by

consumers for a full range of services from their traditional providers. Many of the telecommunications mergers announced recently

echo this view, including those which have been the subject of

hearings before this very committee.

The new WorldCom will be able to provide the full range of products that consumers demand, including local, long-distance, international, Internet access, and mobile services. By supplying the

missing pieces in each other’s portfolios, the merger better positions our companies to compete in the bundled services marketplace.

Sprint and MCI WorldCom have each grown and achieved success by innovating and offering choices, as compared to the traditional, established companies. In so doing, each company has individually acquired distinctive capabilities and assets. By combining

these unique capabilities in local access and in ION and wireless

and MMDS and international infrastructure, the new WorldCom

can be a distinctive telecommunications company that has the potential to, one, achieve the objective of the 1996 Telecommunications Act by breaking open the local monopolies, and, two, by

bringing a distinctive competitor to the worldwide communications

marketplace.

Thank you.

The CHAIRMAN. Thank you.

Now, we will go to you, Mr. Rill.

STATEMENT OF JAMES F. RILL

Mr. RILL. Thank you, Mr. Chairman, members of the committee.

I think as the competition review of this transaction unfolds, it will

become apparent that it can only be perceived as a broader-scale,

aggrandized version of the WorldCom/MCI merger which was challenged last year in some respects by enforcement agencies here and

elsewhere in the world.

I have a prepared statement which I would like to summarize,

Mr. Chairman.

The CHAIRMAN. We will put all prepared statements in the

record as though fully delivered.

Mr. RILL. I would like to focus on three main points. First, in the

Internet backbone market this merger will create substantial harm

to competition which is not curable by the sort of partial divestiture that was effected last year, in 1998, in the case of the

WorldCom/MCI merger.

Second, in the long-distance market this merger creates and entrenches a very, very substantial duopoly. Third, the dynamics of

this merger underscores a necessary but not sufficient step, the

need for lifting of the Telecom Act 271 restrictions on long-distance

entry by the RBOC’s so as to further stimulate competition as envisioned under the 1996 Telecom Act in the long-distance market, as

well as other markets.

I would like to cover each of these points. First, with respect to

the Internet backbone market, we have essentially the same issues

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as last year. This fact has been acknowledged by Sprint, although

not in its prepared testimony. Here we have the number one and

two firms in the Internet backbone market merging, and as a result the bargaining power with competitors who are also customers

will be irrevocably skewed in the direction of the merging parties

and give them the opportunity to degrade the Internet connection

of rivals, which will cause their customers in turn to abandon them

and entrench the Internet backbone monopoly of these parties.

The remedy that was imposed in 1998, I respectfully submit, by

the European Commission, and accepted by the U.S. Department

of Justice, was not fully adequate. It left critical facilities, especially the Internet backbone pipeline, in the hands of the merging

parties, thus creating the capacity for anticompetitive strategies,

such as the degradation of connection, with the competitors who

are also customers.

Certain problems arose. There was no consent decree that was

entered by the Department of Justice, therefore no mechanism of

review, no opportunity for the purchaser Cable and Wireless to negotiate modifications of the transaction that would have made it a

more effective competitor. And as I understand it, there is a Cable

and Wireless lawsuit pending now challenging whether or not

WorldCom MCI has adequately even lived up to the bargain that

was presented to Cable and Wireless at the time of that partial divestiture. The point is, Mr. Chairman, it was not the divestiture of

a going business; it was the divestiture of some partial, inadequate

assets.

In the long-distance market, market shares created by this merger blast through the 1992 DOJ–FTC merger guideline levels at

which anticompetitive results are presumed. As indicated by subcommittee chairman Senator DeWine, we have a situation here

where the combined share is approximately 80 percent of the relevant long-distance market, with the next competing firm having

approximately 2 percent of the market.

The Herfindahl Index, the DOJ–FTC index which gauges concentration levels and attempts to use concentration as an initial litmus for antitrust review, presumes competitive harm when the

threshold of 1,800 and an upward change of 100 are surpassed. In

this transaction, just for example, in the consumer retail market,

the post-merger Herfindahl Index would be 4164, with a change of

concentration more than twice the 100-level of a change that the

Department and the FTC view as likely to create anticompetitive

concerns, and other markets are similarly affected.

No wonder Chairman Kennard has observed, ‘‘Competition has

produced a price war in the long-distance market. This merger,’’ referring to the one in front of us now, ‘‘appears to be a surrender.

How good can this be for consumers?’’

There are other factors in merger review than concentration.

Entry is the most important, but under the merger guidelines entry

must be timely, likely, and sufficient to deter the anticompetitive

effect of a merger transaction. Mr. Chairman, ‘‘edging closer’’ is not

an antitrust standard under the 1992 merger guidelines.

Section 271 has greatly impeded RBOC entry. It has taken 2

years to obtain PSC review in New York, and that is only one

State. Under 271, state-by-state approval is necessary, and it is

12

highly improbable that approval be forthcoming in other States

within the time frames set by the parties for the conclusion of this

merger. Finally, approval in one State—that is, New York—should

it be forthcoming under the ‘‘edging closer’’ standard, is not going

to do anything for consumers in Utah or Vermont or Ohio or Wisconsin or Missouri.

In fact, the likelihood is, with the entrenched monopoly in those

States, profits in those States will be used to subsidize what competition arises in the one State where 271 relief has been granted.

Nevertheless, 271 relief is necessary as a first step toward ensuring

the reinvigoration of competition in the long-distance market.

There have been several interpretations of 271 by the FCC, and

applications and advice by the Department of Justice that we submit have not fully realized for Congress the goals of the 1996

Telecom Act. And those restrictions and those interpretations

should be removed to facilitate competition. Mr. Chairman, section

251 of the 1996 Act is working. There has been realistic entry into

the market. The availability of entry is there. 271, if it had a purpose, has been served and needs to be relieved as a first step.

One word, if I may, about the MMDS argument—really, two

words. It is not clear that this is driving the merger or that the

merger is necessary to achieve the scale of MMDS. And even if it

is so, it doesn’t seem right under antitrust standards to justify

anticompetitive results now in two important markets for the hope

of facilitating greater entry into another market which is not yet

fully established. It is not true under the case law, it is not true

as a matter of good public policy.

I have run over time. Thank you very much for your patience,

Mr. Chairman.

The CHAIRMAN. Thank you, Mr. Rill.

[The prepared statement of Mr. Rill follows:]

PREPARED STATEMENT OF JAMES F. RILL

I appreciate the opportunity to offer my views on the merger under scrutiny by

this Committee today, and I thank Chairman Hatch, Senator Leahy and the other

members of the Committee for inviting me to appear.

The proposed merger of MCI WorldCom and Sprint is an aggravated version of

last year’s merger of MCI and WorldCom. The merger of MCI and WorldCom presented serious antitrust issues in two product markets: It would have resulted in

undue concentration in the Internet backbone market, and antitrust authorities

therefore required MCI to divest its Internet backbone operations. And it barely survived competitive review in the long-sea —distance market, where it reduced the

number of significant players from four to three. Apparently hoping that the antitrust authorities are asleep at the switch, MCI WorldCorn now seeks to consummate a merger that would again result in undue concentration in the Internet backbone market and that would create a duopoly in the long-distance market.

My testimony will address four basic points:

1. The proposed merger of MCI WorldCom and Sprint would significantly harm

competition in the Internet backbone market, for the very same reasons antitrust

enforcers required MCI last year to sell off its Internet backbone operations before

merging with WorldCom.

2. The merger would create a damaging duopoly in the long-distance market, with

AT&T and the new MCI WorldCom-Sprint controlling more than 80 percent of the

market. Indeed, even the agreement to merge is almost certain to suppress—in the

immediate future, even before closing—any further price competition of the sort that

MCI WorldCom and Sprint have been engaged in.

3. In the event that MCI WorldCom and Sprint were required to divest either of

their pre-existing Internet backbone operations, their consolidation of their long-disVerDate 11-MAY-2000 10:16 Apr 20, 2001 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 MCISPRINT SJUD4 PsN: SJUD4
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1 Comments of Sprint Corporation, In the Matter of Applications of WorldCom, Inc. and MCI

Communications Corporation for Transfer of Control of MCI Communications to WorldCom, Inc.,

CC Docket No. 97–211, at iii (FCC filed March 13, 1998). 2 Id. at 14–15. 3 Id. at 15–16. 4Press Statement of FCC Chairman William E. Kennard On Merger Of WorldCom And MCI,

Sept. 14, 1998.

tance facilities would mean that any acquirer of the Internet backbone operations

would fail to obtain the supporting facilities infrastructure needed to remain viable.

Just as with Cable & Wireless’s acquisition last year of MCI’s Internet operations,

MCI WorldCom’s real game appears to be to consolidate its and Sprint’s long-distance operations in order to entrench its dominance in the Internet backbone market.

4. An essential step toward promoting competition in all markets—local, long-distance, and Internet backbone—is to abolish the section 271 restrictions on Regional

Bell Operating Company (‘‘RBOC’’) provision of long-distance services.

1. THE INTERNET BACKBONE MARKET

The effects of an MCI WorldCom-Sprint merger on the Internet backbone market

would be profoundly negative. Indeed, this merger is nothing more than a replay

of last year’s merger between MCI and WorldCom, which would have combined the

largest Internet backbone with one of its few competitors. Fortunately, antitrust enforcers recognized that competitive parity among backbone providers is essential to

the continued success of the Internet, and they therefore required that MCI divest

its Internet backbone operations before merging with WorldCom.

It is worth noting that Sprint was among the most vocal opponents of MCI’s and

WorldCom’s attempt to consolidate their Internet backbone operations. Sprint pointed out that if WorldCom were able to add MCI’s Internet backbone to the backbone

networks that WorldCom had already amassed through its acquisitions of UUNet,

ANS, and Compuserve, WorldCom would become ‘‘the overwhelmingly dominant

provider of core Internet backbone services.’’ 1 Espousing the very points embraced

by the antitrust agencies, Sprint explained that the disparity in size between the

combined MCI WorldCom and the few other Internet backbone providers would

‘‘lead[] to asymmetries in the bargaining power of the merged WorldCom/MCI visa ́-vis its core backbone rivals.’’ 2 MCI WorldCom would then have the incentive and

ability to degrade interconnection with these backbone rivals, which would in turn

induce customers of those rivals to switch and become customers of MCI WorldCom,

which would further entrench MCI WorldCom’s dominance, which would then enable MCI WorldCom to extract monopoly prices for Internet interconnection from

Internet service providers.3 Once MCI WorldCom established such dominance in the

Internet backbone market, it would then be able to leverage that dominance

throughout adjacent Internet service markets.

Having been thwarted last year in its attempt to establish dominance in the

Internet backbone market, MCI WorldCom now seeks to achieve the same goal by

acquiring Sprint’s Internet backbone. For the reasons so well articulated by Sprint

last year, such a combination would be profoundly anticompetitive and should not

be permitted.

2. THE LONG-DISTANCE MARKET

By any measure—including the joint Department of Justice-FTC horizontal merger guidelines—the long-distance market is already highly concentrated. The Big

Three—AT&T, MCI WorldCom, and Sprint—have the only significant brand names

and control more than 80 percent of the market, widle none of the remaining small

players accounts for more than 2 percent or so. As FCC Chairman William Kennard

warned last year in discussing the merger of then-Number 2 player MCI with thenNumber 4 player WorldCom:

Once this merger is consummated, the industry will again be poised just

a merger away from undue concentration. I daresay that any subsequent

merger—of this or similar magnitude—between long distance firms in the

near future should be judged quite differently than the merger before us

today.4

Of course, the proposed merger of MCI WorldCom and Sprint is not merely of

‘‘similar magnitude’’ to last year’s merger of MCI and WorldCom. It is far larger.

Sprint has a much greater presence in long distance—especially in the retail market

segments—than did WorldCom before last year’s merger. And the combined MCIVerDate 11-MAY-2000 10:16 Apr 20, 2001 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 MCISPRINT SJUD4 PsN: SJUD4
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5Statement of FCC Chairman William E. Kennard On Proposed Merger of MCI WorldCom,

Inc. And Sprint Corp., Oct. 5, 1999.

WorldCom is, of course, larger than MCI was. It is no wonder, then, that Chairman

Kennard reacted as he did to this merger proposal:

Competition has produced a price war in the long distance market. This

merger appears to be a surrender. How can this be good for consumers? 5

The clear answer to Chairman Kennard’s question—how can this merger be good

for consumers?—is that it certainly would not be. On the contrary, the merger

would result in a duopoly in the already highly concentrated long-distance market.

Such concentration levels create a presumption that anticompetitive effects would

result from the merger. Prices would rise. The quality of customer service would

fall. And AT&T and WorldCom would extract monopoly rents from American consumers. As the lessons of a century of antitrust economics teach us, this duopolistic

market structure would invite tacit, and difficult-to-detect, collusion rather than vibrant competition.

Not surprisingly, by any accepted measure of industry concentration, this merger

would be profoundly anticompetitive. For example, the standard measure of market

concentration is the Herfindahl-Hirshman Index, or HHI, which is calculated by

summing the squares of the individual market shares of all the participants. Under

the joint Department of Justice and FTC horizontal merger guidelines, markets with

HHI’s above 1800 are regarded as highly concentrated, and a merger that produces

an increase in the HHI of more than 100 points is presumed to enhance market

power.

This merger would produce HHI numbers that are off the chart. To begin with,

the pre-merger HHI for the consumer long-distance market (see Exhibit 1, attached)

is 3945—which reflects an extraordinarily high level of concentration. Worse, the

merger would push the HHI some 219 points higher—again, an increase well above

the level that presents a threat to competition.

The effect on each of the other long-distance market segments (see Exhibits 2–

6, attached)—including the business long-distance market and the wholesale longdistance market—is similarly problematic. In each of these other segments, the

merger would take a market that is already well above the 1800 HHI threshold and

push the HHI higher by some 400 to 1000 points.

Moreover, anticompetitive effects from the MCI WorldCom/Sprint merger are likely to be experienced almost immediately, even before the merger is projected to

close. MCI WorldCom and Sprint have led the recent price declines in the long-distance market. But now that they have agreed to merge, they no longer have the

incentive to continue to translate a portion of their ongoing cost reductions into

price cuts. In other words, long-distance prices would continue to fall but for the

agreement to merge. This makes it all the more important that antitrust authorities

sound the death knell of this deal sooner rather than later.

I understand that MCI WorldCom and Sprint may claim that the potential entry

of the RBOCs into the long-distance market is somehow sufficient to dispel any concerns over the long-distance duopoly that would result from their merger. I fully

agree that actual and pervasive entry into the long-distance market by the RBOCs

would be the single most important factor in ensuring the long-term competitiveness

of the long-distance industry. But the suggestion that entry would be sufficiently

widespread, likely and imminent to counteract the manifestly anticompetitive effects

of this merger cannot survive the slightest scrutiny.

In the first place, nearly four years after the enactment into law of section 271,

all of the RBOCs remain barred by section 271 of the Communications Act from providing general long-distance services in any of their in-region States. This bar will

continue indefinitely in each State until FCC approval of a section 271 application

is obtained for that State. As of now, the FCC has not approved a single section

271 application. The only section 271 application currently pending before the FCC

is Bell Atlantic’s application for New York, where a cumbersome, exhaustive process

involving more than 400 different performance measures took well over two years

to run through the New York commission. And while industry observers expect Bell

Atlantic’s New York application to be granted by the end of this year, it is worth

noting that MCI WorldCom and Sprint have obstructed and delayed approval, and

both have filed oppositions to Bell Atlantic’s 271 application.

Second, it is farfetched to believe that section 271 approvals will have been obtained for many, much less most or all, States by the time MCI WorldCom and

Sprint intend to close their merger. Indeed, apart from Bell Atlantic, it is highly

doubtful that any RBOC will have made marked progress towards obtaining wideVerDate 11-MAY-2000 10:16 Apr 20, 2001 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6621 MCISPRINT SJUD4 PsN: SJUD4
15

spread section 271 approvals by the end of 2000. For a large number of States, 271

approval could easily be 3 to 5 years into the future—perhaps even more.

Third, even when section 271 approval has been obtained for a particular State,

such approval will not significantly alter the competitive landscape in the national

long-distance market. For starters, such approval, of course, does nothing for those

States where section 271 approval has not been obtained. The citizens of Utah or

Vermont, for example, would not receive any protection from the AT&T-WorldCom

duopoly by virtue of Bell Atlantic 271 approval in New York. Indeed, it is far more

likely that AT&T and WorldCom would further exploit their duopoly in Utah in

order to subsidize their competition against Bell Atlantic in New York. Moreover,

even as to the State for which section 271 approval has been obtained, the RBOC

will remain handicapped in certain long-distance market segments. For example,

even once Bell Atlantic obtains section 271 approval for New York, Bell Atlantic will

be at a competitive disadvantage in the large business market because it will still

have to develop the more complicated systems that large business customers require

and because (until such time as it has obtained section 271 approvals for its other

in-region States) it will be unable to offer a full package of services to a New Yorkbased business that has branch offices in, say, Boston or Washington, D.C, or Philadelphia.

In sum, there is no reason to believe that RBOC entry into the long-distance market would be so timely, likely and sufficient as to discipline the duopolistic conduct

of AT&T and the combined MCI WorldCom-Sprint in the foreseeable future. For this

reason, unless and until some other solution permits massive, widespread, and immediate entry by the RBOCs into the long-distance market, MCI WorldCom and

Sprint should not be permitted to consummate their merger.

3. REMEDIAL PROBLEMS

Short of blocking MCI WorldCom from acquiring Sprint’s long-distance operations,

it is not clear that there is any divestiture remedy that would adequately address

the problems that the merger would create in the long-distance market.

Because Sprint’s Internet backbone business shares network facilities with its

long-distance business, divestiture is also a highly dubious remedy for the undue

Internet backbone concentration that the merger would create. In particular, the experience of the MCI-WorldComn merger counsels caution in accepting divestiture of

Sprint’s Internet backbone business, severed from many of the underlying facilities,

as a workable remedy for this problem. In order to close its merger with WorldCom,

MCI last year sold its Internet business to Cable & Wireless. Antitrust authorities

permitted this supposed remedy notwithstanding warnings from Sprint and others

that Cable & Wireless was not acquiring the facilities infrastructure that it needed

in order to maintain itself as a viable competitor but would instead be critically dependent on MCI WorldCom, which would then have the incentive and ability to exploit Cable & Wireless’s vulnerability. And, indeed, these warnings appear to have

been prophetic. According to market analysts, Cable and Wireless’s market share

has fallen precipitously into the mid-single digits. In addition, Cable & Wireless has

sued MCI WorldCom for noncompliance with the terms of the divestiture agreement.

In this regard, MCI WorldCom’s and Sprint’s proposed consolidation of their longdistance facilities—which in turn are integrated with their current Internet backbone operations—should be regarded not only as leading to a duopoly in the longdistance market but also as a ploy to entrench their dominance in the Internet backbone market. For if this consolidation were to proceed, any company to whom Sprint

divested its Internet backbone operations would, like Cable & Wireless, soon discover that it lacked the facilities infrastructure that it needed to maintain its status

as a major Internet backbone provider.

4. ABOLITION OF SECTION 271 RESTRICTIONS

A necessary step toward ensuring vigorous competition in the local, long-distance,

and Internet backbone markets lies squarely within Congress’s power: abolish the

section 271 restrictions on the RBOCs’ provision of long-distance services.

Such abolition is manifestly in the public interest. It would stimulate a competitive free-for-all in both long-distance and local markets that would lead to lower

prices and higher-quality services for all Americans, and it would ensure competitive parity in the critical Internet backbone market. It would especially benefit those

Americans—in more rural areas, for example—who have so far not directly benefitted from the competition directed at business and high-value customers, since

their local providers would immediately be able to provide them an attractive and

competitive alternative for long-distance and Internet services.

16

It is time for Congress to recognize that the section 271 process has gotten badly

off track in at least three respects. First, the section 271 restrictions have been

deemed to apply to Internet (and other packet-switched) traffic, even though the

LATA architecture underlying section 271 has no sensible application to the Internet. Because of their existing customer base and brand name, the RBOCs are the

only companies well-positioned to restore vibrant competition to the Internet backbone market. The lamentable, but predictable, effect of locking out the RBOCs from

the Internet backbone market has been to lock up the market for the Big Three

long-distance companies.

Second, the section 271 process has focused too narrowly on competitors using an

RBOC’s own network elements to compete against it, and has given virtually no attention to the actual development of true facilities-based alternatives to the RBOC’s

network. This misfocus has required the incredibly costly and time-consuming development and implementation of extremely complicated laboratory tests measuring an

RBOC’s performance in providing network elements.

Third, as a result of the FCC’s approach to the section 271 approval process,

which affords undue weight to entry by the Big Three long-distance carriers (rather

than carriers generally) into the local markets, AT&T, MCI and Sprint have been

able to game the system. In order to protect their long-distance market shares for

as long as possible, AT&T, MCI, and Sprint have made the tactical decision to delay

entering local markets, all the while diverting attention by complaining that their

entry is being impeded.

Bell Atlantic’s recent experience with MCI WorldCom in New York is instructive.

Even though smaller players with fewer resources had already entered the residential local market, MCI WorldCom did not seriously undertake to compete for residential local customers until after it had become clear that Bell Atlantic was well

on the path to section 271 approval. Specifically, in the months immediately preceding Bell Atlantic’s filing of its 271 application, MCI WorldCom began serving

160,000 local lines, the vast majority of which are to residential customers. See also

P. Elstrom, AT&T’s Wireless Path to Local Service, Bus. Week, Dec. 28, 1998, at

53 (‘‘AT&T executives are seriously considering launching the commercial trial (of

AT&T’s fixed wireless approach, Project Angel) in New York. * * * The reason is

strategic: Bell Atlantic is likely to get approval in 1999 to provide long distance

service to New York residents.’’).

Moreover, section 271 no longer serves any useful purpose. Genuine facilitiesbased competition is occurring, and, in any event, the market-opening requirements

imposed on all incumbent local exchange carriers under section 251 fully ensure

that the RBOCs would not be able to leverage any local market power into the longdistance market.

The lesson is clear: Abolish section 271 and competition will flourish in the local,

long-distance, and Internet backbone markets.

17

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19

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The CHAIRMAN. We will turn to you, Mr. Kimmelman.

STATEMENT OF GENE KIMMELMAN

Mr. KIMMELMAN. Thank you, Mr. Chairman. On behalf of Consumers Union, publisher of Consumer Reports, we appreciate the

opportunity to testify, and I personally appreciate the opportunity

to come back to my alma mater.

Let me start off by saying I totally agree with Mr. Rill’s antitrust

analysis related to this merger regarding Internet backbone and

the long-distance market. There are enormous concerns for consumers in this transaction. I would like to focus on one piece of

that because while everyone is totally correct in applauding the decline in long-distance pricing that we have experienced over the

past 20 years, there is a hidden side to this that is often not visible

to the public and to policymakers. I daresay most of the people in

this room have not reflected on this because it doesn’t reflect their

usage. They are not the typical consumer long-distance user.

Five cents a minute, seven cents a minute, sounds great. When

you look at the plans, there is often more to it than that—$1.95,

$5.00 minimum, $5.95. Sprint and MCI have that. It is not just

Sprint and MCI; it is AT&T. We have gone back to look at what

the typical consumer uses in long-distance to figure out what is

really happening in this market.

Five cents a minute, seven cents a minute, often translates into

as much as effectively 20 to 35 cents a minute when you add in

all of these fees. The FCC’s own data show that people who make

less than 30 minutes of interstate long-distance calls a month are

today paying three times as much as they did 2 years ago.

Going to higher levels of usage, half of the country is paying

about $2 billion a year more than at the time you passed the Telecommunications Act, effectively for the same long-distance usage.

And as far as we can tell, you need to go up to 70, 80-percent level

before you start to see full break-even or coming out ahead. A nickel, seven cents is good for some people, but there are a lot of people

who are not getting the benefits of long-distance competition today.

And for those people, going from three carriers to two as the dominant players is a significant concern that needs to be addressed.

However, having said that, I want to agree with quite a bit of

what Mr. Ebbers and Mr. Esrey have said. They have outlined in

great detail the problem they face. We have too much concentration

of ownership in the local telephone companies, with expanding

local telephone monopolies. We have allowed what looks like the

first cross-sector entry, AT&T into cable, to expand into broader

cable horizontal concentration, dominating that wire. And they face

an enormous problem. It is understandable. The question is whether this transaction solves the problem or adds to it.

I am fearful we are at a point where merger mania has just gone

too far for consumers, not just this transaction, but the ones that

preceded it. And what you heard this morning, stated quite eloquently, boils down to this. This committee has done more to oversee these transactions than any other, and I commend you, Mr.

Chairman, and Senator DeWine and Senator Kohl, for sitting

through hours of hearings on this.

24

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.

First, we had Bell Atlantic and NYNEX saying it is not a problem to join together; we were not potential competitors; we really

weren’t going to compete against each other. Then you have, after

SBC buys Pacific Telesis, a purchase of Ameritech, and it is ‘‘don’t

look at our concentration, look at the fact that we want to go into

local phone service elsewhere.’’ Then AT&T: don’t look at our concentration in cable, look at the fact that we want to go and provide

local telephone service and broadband somewhere else.

And now we have today’s proposal. It is more of the same. Effectively, this boils down to concentration today. You justify today’s

merger by yesterday’s merger, which sets the stage for tomorrow’s

merger—concentration, more concentration, higher prices for cable,

higher prices for some in the long-distance area, and promises of

benefits, just promises. Mr. Chairman, I don’t think that is fair for

consumers. I don’t think that is enough.

We want to put an end to this merger mania. We urge you to

go back and review the Telecom Act. From Consumers Union’s perspective, we think the administration has done an abysmal job of

implementing this, both on the antitrust and the regulatory front,

and we have a mess. I think it is time to review the law to ensure

that with these consolidations, we do not end up in a world where

prices keep going up, the choice that was promised doesn’t appear,

and we end up with either a digital divide, with the majority of

consumers not benefiting, or the need to come in and regulate once

again because competition just did not thrive.

Thank you.

The CHAIRMAN. Thank you, Mr. Kimmelman.

[The prepared statement of Mr. Kimmelman follows:]

PREPARED STATEMENT OF GENE KIMMELMAN

Consumers Union 1 is concerned that an avalanche of mergers in the telecommunications and cable industries is threatening to undermine the development

of broad-based competition for local telephone, long distance, television and highspeed 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 fullservice 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

25

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– 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 Television 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.

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 percent market share) and MCI-Sprint (24 percent combined market share 3), 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

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

26

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. 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.

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.10 Unless 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. 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.

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

27

16William Safire ‘‘Clinton’s Consumer Rip-Off,’’ Essay, New York Times October 11, 1999.

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 mergermanic 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 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. Mr. Jacobs, we will take your testimony now.

STATEMENT OF TOD A. JACOBS

Mr. JACOBS. 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 am the senior

telecom analyst at Sanford Bernstein and Company.

My job is to forecast the growth and earnings and stock performance of the telecom industry, as well as the largest local, long-distance, and wireless companies that make up that industry. Our

firm is somewhat unique in that we don’t do investment banking;

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that is to say, we don’t work for the companies that we follow. I

only have one set of clients and that is institutional investors, and

I only have one mandate and that is to try to be right. Therefore,

we don’t live with fear of repercussions when we say things that

the companies don’t like, and we avoid conflicts of interest.

For the record, I am currently recommending the stocks of some

large long-distance companies, including WorldCom and Sprint, as

well as AT&T, and am currently neutral on the baby Bells.

I would like to cover three topics today: No. 1, why stories of

telecom mergers appear on the cover of the Wall Street Journal

more frequently than taxes, healthcare, or Hillary Clinton’s newfound love of the Yankees combined; No. 2, where this merger fits

into the changing Internet landscape; and, No. 3, where this merger fits into the changing long-distance landscape.

Now, first, on mergers, we have attached as an exhibit a piece

that we released in October on industry consolidation that argues

the following thesis. First off, telecom is a very high-fixed cost business, and like all high fixed-cost businesses, the way to compete

successfully is to have lots of customers and lots of traffic so that

your average cost per unit will fall.

Low-cost positions are critical, since exploding national and global competition are pushing prices down rapidly in telecom, especially in wireless and in long-distance, if not yet in local. So in each

category, there is a mad rush to get big as fast as you can. Our

Exhibit 1 with our testimony shows several examples of such scaledriven mergers.

Second, telecom companies are also attempting to get broad, that

is to assemble the assets that will enable a carrier to offer the 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 sales force, then essentially 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 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 new ones either takes too long or indeed isn’t possible, merger

and acquisition is the only real solution. Exhibit 2 shows several

examples of such scope-driven mergers. The proposed MCI/Sprint

merger fits squarely into this category and is primarily driven by

MCI’s need for wireless. We have an attached research report from

this past May that proposed this very merger as a way for

WorldCom to solve its wireless dilemma. Consumers should delight

in this because this is how they are going to continue to get lower

prices in long-distance and wireless, and eventually in local service.

On the Interest, for starters let me tell you what I have already

told my clients. Rightly or wrongly, Sprint will almost certainly

have to divest itself of its Internet backbone business prior to this

merger, just as MCI had to sell its business prior to merging with

WorldCom, and I believe the companies know it and I believe they

are prepared for it.

Despite complaints to the contrary, I would point out that Cable

and Wireless, which bought MCI’s Internet business prior to that

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merger, is a healthy Internet player despite the huge turnover that

they experienced in the very senior management that effected that

deal right after the deal was closed. So, clearly, it is a viable option, and there will be numerous interested buyers when Sprint

Internet goes on the block.

As to current competition in the Internet, as Exhibit 3 shows

with our testimony, we believe that the current 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 and Wireless are numbers 2 through 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 percent

of its market share in Internet since 1997. By 2003, we believe

they will have lost at least a quarter of that market share, especially given the entry of the baby Bells and numerous aggressive

new competitors into that space.

Point three is we have been asked to discuss the so-called

peering situation, and we have portrayed that in schematic in Exhibit 4. Now, if you will follow that schematic, suppose I am Hillary

and my Internet provider is Al’s ISP. Al, in turn, rents access to

WorldCom’s global Internet backbone. However, I, Hillary, want to

access the ACLU Web site that is sitting on Cable and Wireless’ backbone.

Now, peering allows for unfettered flow of traffic onto each other’s backbone networks, which makes all Internet service possible.

Without peering, MCI WorldCom would be out of the Internet business, and it should be noting that peering arrangements at MCI,

which currently number 72, have been rising and not falling. Put

shortly, the sale of the Internet business will address all the relevant Internet concerns.

Finally, in long-distance, this merger would create a company

that, in consumer long-distance, is something 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 nor the 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 have been highly imprudent to enter that most expensive race without substantial existing market share to justify it. Thus, this is 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 actually

now expect the development of a third broadband pipe to the home.

And we note that we expect the RBOC’s to take about a quarter,

at least, of the long-distance market and consumers within a few

years of entry.

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 approximately two times

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greater than the entire capacity of the big three players, it should

give you some sense of why business pricing is already low and getter lower, and why this 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 very much.

The CHAIRMAN. Thank you, Mr. Jacobs.

[The prepared statement of Mr. Jacobs follows:]

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The CHAIRMAN. Let’s have a few questions, and let me ask this

to Mr. Esrey and Mr. Ebbers. There are a lot of people concerned

about the merger’s effect on prices for long-distance. That has been

raised here. Should we be concerned about that, or how do you answer those worries?

Mr. EBBERS. Mr. Chairman, as Mr. Jacobs stated, the increased

capacity and the new players that are coming on board that will

continue to drive down long-distance rates, if you look at them as

long-distance rates, will continue. If you look at the difference in

pricing between at the time we announced the MCI merger and the

pricing today, you see a significant decrease in long-distance rates,

and so I would certainly expect that to continue.

But let me add for just a moment something that I think is very

fundamental to the telecom industry as a whole going forward in

what Mr. Jacobs tried to demonstrate, and that is the concept of

long-distance was created at the time of divestiture of AT&T in

order to separate two businesses, to agree to have two businesses

continue.

In the deregulation of the telecommunications market in Europe,

in Canada, and in Mexico, there is not a separation of local and

long-distance. In this country, as a result of the Telecommunications Act, where companies like Sprint and MCI are now allowed

to compete in local service, where we were not before, the definition

of a call that we have commonly called long-distance is evaporating

very rapidly.

We do not charge anymore based on distance; our rates are distance-insensitive. And so it is very critical for a company to be able

to touch the customer at the access end with local service, and that

is the way the industry is headed.

I know it has been important to talk about long-distance rates

going forward, but what is going to be the prevailing concern of

consumers going forward from this point on is not going to be the

separate nature of local versus long-distance. It is going to be how

those two are integrated and how the customer buys that as one

product.

The CHAIRMAN. I see. Mr. Esrey, do you have any comment?

Mr. ESREY. I would just agree, but then I would go on to add that

there are 600 companies today in the United States offering longdistance. There are 28 of these that currently have revenue in excess of $100 million; there are 7 in excess of $1 billion. There is

a lot of competition out there. WorldCom itself was a rather small

company a few years ago that entered the market as a competitor,

as we have these hundreds of companies today all providing competition.

I would like to add when the regional Bells get into long-distance—Mr. Kimmelman said that entering in New York won’t help

Utah or other States, and that is contrary because the FCC rules

require long-distance pricing to be equivalent around the country.

So the pricing competition in New York will immediately spread

around the country, so you have these giants about to enter longdistance.

I think people can be very comfortable with the fact that the

competition and continuing price competition will be in long-disVerDate 11-MAY-2000 10:16 Apr 20, 2001 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 MCISPRINT SJUD4 PsN: SJUD4
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tance, although the real battle ground, as Mr. Ebbers said, will be

in the bundled services and getting more efficient too the customer.

The CHAIRMAN. Thank you.

Our ranking member is here and he would like to deliver a set

of remarks, and then I have a couple more questions.

Senator LEAHY. Mr. Chairman, I appreciate that. I will put my

full statement in the record, in the interest of time.

[The prepared statement of Senator Leahy follows:]

PREPARED STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM

THE STATE OF VERMONT

I am pleased we are having this hearing today. Preserving competition in the

communications industry is an issue of crucial importance to consumers and to

America’s economic future. The proposed merger between MCI WorldCom and

Sprint raises once again questions concerning the effectiveness of the Telecommunications Act of 1996 in promoting competition rather than consolidation.

One of the major reasons I voted against the Telecommunications Act of 1996 was

my concern that its promise of real competition was illusory, and that consumers

would end up paying higher prices. We have all enjoyed the benefits of extensive

price competition in the long distance industry, as the three major carriers, led by

fierce competition between MCI WorldCom and Sprint, reduced their long-distance

rates to the lowest point in history. None of us want to see a merger between two

of these three carriers put an end to this welcome competition, as well as the benefits that long distance consumers have derived from it. This merger is certainly the

largest horizontal merger we have seen in the telecommunications industry, and it

therefore raises questions that mergers such as the SBC-Ameritech and GTE-Bell

Atlantic mergers have not. When two large and direct competitors in such an important industry merge, it is a cause for concern. That being said, I am grateful for

the opportunity to hear the thoughts of today’s witnesses on this topic, and I plan

to keep an open mind on this issue.

I do, however, continue to fear that concentration of ownership in the telecommunications industry is proceeding faster than the growth of competition. Fewer

than 20 years after AT&T’s monopoly on long distance was broken up, we are now

faced with the prospect of a long distance duopoly consisting of AT&T and

WorldCom. Meanwhile, the regional Bell operating companies continue to consolidate. I am more than ever reminded of a 1998 editorial in the Rutland Daily Herald

that observed: ‘‘It might even seem as if Ma Bell’s corpse is coming back to life.’’ This rash of consolidation was something I feared and expressed in my floor statement on the day that the 1996 Act passed:

Mega-mergers between telecommunications giants, such as the rumored

merger between NYNEX and Bell Atlantic, or the gigantic network mergers

now underway, raise obvious. concerns about concentrating control in a few

gigantic companies of both the content and means of distributing the information and entertainment American consumers receive. Competition, not

concentration, is the surest way to assure lower prices and greater choices

for consumers. Rigorous oversight and enforcement by our antitrust agencies is more important than ever to ensure that such mega-mergers do not

harm consumers.

The NYNEX-Bell Atlantic merger has been followed by numerous other megamergers, and the 12 largest long distance and local providers that existed in 1996

will be pared to six if this merger receives approval. I do not believe that bigness

by itself is bad, and I understand that mergers can produce economies of scale that

benefit consumers and shareholders alike. I also take note of the fact that the six

surviving companies offer more services today than they did when the Act was

passed, in part due to an explosion of the Internet that few predicted three short

years ago.

But mergers in this vital area of the economy still demand strict scrutiny from

regulators and from this Congress. I have a few particular concerns about this

merger that I would like to see addressed in this hearing.

First, I am concerned about the impact of this merger on long distance consumers.

FCC Chairman Kennard has pointed out in his discussions of this merger that

Americans currently pay lower long distance rates than at any time in history. If

this merger is approved, AT&T and WorldCom will control more than 80 percent

of the long distance market, with its nearest competitor, Qwest, controlling less

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than 2 percent. I understand that hundreds of companies sell long distance services,

but I also know that many of those companies are simply resellers who rely on MCI

to sell them bundles of long distance minutes. I am interested in hearing from the

witnesses whether AT&T and WorldCom will have sufficient incentives to compete

on price in the short term, instead of taking advantage of the inevitable period of

time it will take for a major, competitor to arise to maximize short-term profits at

competitors’ expense. (While some advocates of this merger have argued that dominance of the long distance industry will quickly become irrelevant due to the rising

power of the Internet and cellular and digital phones, that theory might also lead

to the conclusion that AT&T and WorldCom have an incentive to maximize long distance profits while they still can.)

I am also concerned about the effects of this merger on business long distance

users. Forrester Research has reported that corporate users will suffer as a result

of the merger, since MCI is already a market leader in that area, and since there

may be no practical third options for business users at this time.

Second, questions have been raised about the effects of this merger on the expense of Internet access. FCC Chairman Kennard recently pointed out that Americans currently pay the world’s lowest Internet rates. But MCI WorldCom and Sprint

are the two largest Internet backbone providers—in other words, they run the two

largest networks that carry Internet traffic. The two companies currently control

about two-thirds of the long-haul Internet market. I understand that the parties

have signaled a willingness to divest themselves of some portion of their Internet

backbone business, which I believe would probably be necessary to avoid antitrust

consequences, especially given the increasing importance of the Internet in our economy. But even so, consumers and businesses that rely on the Internet on a daily

basis will want assurance that disruptions would not result from the divestiture

itself.

Third, I am concerned whether this merger will produce broader anti-competitive

effects. It now seems highly likely that our communications industry will consist of

a smaller number of companies offering a wider range of services, from long distance to wireless to Internet access to cable. If that is true, our economy might be

better off if our existing communications companies—some of which already offer almost all of those services—remained in existence and developed competing services

in each of those areas. I understand that one of MCI’s major motivations in entering

into this merger was its desire to acquire Sprint’s wireless services. I am interested

in hearing from the witnesses whether the American and global economies might

not be better served if MCI developed its own wireless services so that consumer

choices would broaden, instead of remaining stagnant or decreasing.

In conclusion, I would like to thank our witnesses for coming here today to offer

their thoughts, and I look forward to this discussion of these issues.

Senator LEAHY. I have expressed concern about some of these

mergers, as you know, and one of the reasons I voted against the

Telecommunications Act was I was afraid it might go too far. On

the other hand, I have seen a number of things that have actually

helped us.

I did have a couple of questions. I wasn’t quite sure—maybe this

was cleared up before I came in. Mr. Rill, are you here representing GTE? I know that is one of your clients.

Mr. RILL. I am here representing GTE, Senator Leahy. The views

I express are, in addition, my own.

Senator LEAHY. I appreciate that. I didn’t have it in my notes

and I just wanted to clear that up.

Mr. RILL. That is correct.

Senator LEAHY. Mr. Ebbers has said that the merger is necessary

for MCI WorldCom to keep pace with AT&T and the regional Bells

in the broadband battle. Do you agree with that?

Mr. RILL. I think that would be a heavy load to carry, Senator

Leahy. I think what we have heard here is estimates and suggestions that may somewhere down the road be right as to the dynamics of this marketplace. I don’t think antitrust enforcement authorities, antitrust analysis, can be comfortable with that kind of prediction as to what may occur in the future, and therefore permit

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the going forward of a merger that creates an 80-percent market

share in an existing market, a merger between direct competitors

to occur based on those hopes and expectations for the future that

may never be realized.

I would like to just comment briefly on the notion that long-distance prices have gone down. Of course, there is a hearing today

being conducted by the Federal Trade Commission and the FCC as

to what really long-distance prices are. But the fact is that, absent

mergers of this sort which increase concentration and raise antitrust concerns in the long-distance market, prices might even go

down further if the markets were fully competitive.

Senator LEAHY. Mr. Ebbers, did you want to respond?

Mr. EBBERS. Well, there wasn’t much substance there, but the

fact of the matter is, you know, the idea of long-distance is going

away. And I know I keep saying that, and antitrust officials are required to look out 2 years to see what the marketplace is. And certainly with the mega-Bells now, most of the calling that they have

is not even out-of-region anymore; it is in-region because they have

expanded so much. But the concept of long-distance as a standalone business is just not a correct way to look at the industry.

What is occurring in our industry is that we need to provide

broadband access to users that are going to use it for a lot of different things. I would say that in the not too distant future, we are

not going to know whether a call is long-distance or local, or whether it is a call to an Internet provider. It is bits, as you well know,

Senator, and the world is changing out there.

The fact of the matter is that if there is going to be more than

two competitors for the local end of the service, which is a necessary end because you have to touch your customers, then this

merger is a very good step in the right direction to provide more

than two alternatives for local service.

Senator LEAHY. Thank you. Mr. Chairman, I will submit other

questions for the record, and I appreciate you and Senator Kohl

and Senator DeWine having this hearing.

The CHAIRMAN. Thank you, Senator.

If I could just ask one or two more, then I am going to turn to

Senator Kohl and then Senator DeWine to finish up.

MCI WorldCom and Sprint both own substantial portions of the

Internet, ‘‘backbone,’’ the systems that carry Internet data. It is reported that an MCI WorldCom/Sprint merger would give the new

WorldCom some, ‘‘choke-holds,’’ on Internet access points. According to some media reports, more than three-quarters of all Internet

traffic from Europe to the United States comes through the MCI

WorldCom network access point here in Washington, DC. Is that

right? Is that pretty close?

Mr. EBBERS. I don’t know.

Mr. ESREY. I am not sure about international.

The CHAIRMAN. OK; that is according to some media reports,

with much of the remaining Internet traffic coming through a network access point controlled by Sprint. At least that is what they

report. First, it would be helpful to some of us and many who may

be watching if you could explain to us what the Internet, ‘‘backbone,’’ is and how it relates to the Internet access that is purchased

by consumers. And then please explain what the likely effects of

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this merger will be on the Internet backbone and on consumers,

and if any of the rest of you would care to comment, I would be

happy. We will start with Mr. Ebbers first, Mr. Esrey, and then

whoever else wants to comment.

Mr. EBBERS. Bill, I am over my head technically here, so I don’t

know. I will say this, Mr. Chairman, that the allegation that the

transaction with Cable and Wireless did not work well is not sustainable by fact. Because Cable and Wireless has filed a lawsuit

against us doesn’t have anything to do with the success. They are

growing their Internet business, as Mr. Jacobs demonstrates in his

graphs, at 29 percent. They are publicly stating that this has been

a very, very successful transaction for them, whereas the remaining part of the company of ours is growing only 23 percent. So they

are outgrowing us at this point in time, and that is a successful

transaction.

The backbone is the fiber over which the traffic is carried, and

there are a substantial number of players that participate in that.

Bill, do you want to help me with that?

Mr. ESREY. Well, sure. We could spend more time than you want

in describing the Internet and I am not sure how good a job we

would do. But, basically, if you start from the consumer side, they

need a way to get onto the Internet, so they have an Internet access provider. And there are literally thousands of those people

that provide access to the backbone of the Internet, if you will.

They service the customer and they bill the customer.

The CHAIRMAN. But by backbone, you actually mean the fiber,

the transmission?

Mr. ESREY. Right, the interstate highway system, if you will.

The CHAIRMAN. Right.

Mr. ESREY. And the Internet access providers provide all the byways and the local access to the Internet, but we are talking about

the backbone traffic that goes over there, and it is because of a

number of things. It is because MCI WorldCom and Sprint’s backbone is very data-efficient and can handle this traffic very, very effectively and very, very efficiently. And so the traffic is handed

from somebody else’s customer to our backbone networks, where we

route it to wherever the customer wants to go, some computer or

some server somewhere, and hand it off.

The CHAIRMAN. OK, thank you. Does anybody else care to comment?

Mr. RILL. Yes, I would just very briefly, Mr. Chairman. I think

the notion of a superhighway metaphor for the backbone is a good

one, and if the superhighway is controlled by a dominant firm, it

is going to be able to control the entry and exit ramps. If it controls

the entry and exit ramps, it can discriminate through access derogation to its competitors, who are also its customers, and as a result develop a monopoly which will produce network tipping effects

to entrench that monopoly for the foreseeable future.

I don’t know what the market share numbers are. I think as the

antitrust investigation unfolds, we will see what the market share

numbers look like. But I think that this merger would give the superhighway-dominant firm the opportunity to derogate the connections of its competitors customers and severely and long term injure competition.

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Mr. EBBERS. Mr. Chairman, could I respond to that just real

quick?

The CHAIRMAN. Yes.

Mr. EBBERS. Let me say that those same allegations were made

by the company that Mr. Rill represents in the transaction with

MCI. At that point in time, GTE was one of our largest customers,

has grown to be an even larger customer, and they can make no

claim that there was any degradation in service or controlling of

entry points or any of the things that he is suggesting.

Mr. JACOBS. Can I make a comment, Mr. Chairman?

The CHAIRMAN. Sure.

Mr. JACOBS. The point of the Internet is that everybody has access to everybody else’s network. That is the only reason that it

works. That is the only reason that it has grown as quickly as it

has over the last few years in terms of how you have seen the explosion in the industry.

The CHAIRMAN. So you are saying this backbone is not controlled

by any one company?

Mr. JACOBS. There are approximately 72 companies at this point,

or more, who either own or lease their own backbone Internet networks. They all have to be able to interconnect with each other because no one would be able to serve their customer if their customer was going to be denied access to anybody else’s network. The

reality is if there are 72 backbone networks, some of those backbone networks hold Yahoo’s Web site information, some hold Lycos’ Web site information, some hold the hundreds of thousands of

other Web sites that are out there that people access.

The way that you get big in the Internet business is simply by

providing a good highway system and efficient connections with the

other networks, and that is the whole game. If WorldCom attempted for a minute to limit the ability of their customers, for instance, to access what was on the Cable and Wireless network,

WorldCom would be out of business because every customer would

simply go to another backbone provider. The schematic that we

drew in Exhibit 4 tried to capture that in very, very simple terms.

The CHAIRMAN. You are saying, unlike Microsoft which basically

controls the underlying operating system—that has been the big

gripe there, and their ability to force people to cooperate with

them—there is no way that MCI WorldCom could force people to

cooperate with them with regard to access to the backbone or to the

Internet or to the worldwide superhighway or whatever you want

to call it?

Mr. JACOBS. That is absolutely true, and if you look particularly

at the aggressiveness of the new carriers who are coming on with

brand new fiber which has basically no traffic on it yet, no variable

costs, which is to say the cost of building the network is done so

all they have got to do is pour more traffic on those networks—if

WorldCom tried to deny anybody access anywhere, there are numerous other competitors who have ample capacity to provide that

entranceway onto the Internet to any customer who wants it, and

the rules are pretty clearly stated.

The CHAIRMAN. Mr. Rill, you seem to disagree with that.

Mr. RILL. Substantially, and I think not only do I disagree with

it, so did the Department of the Justice and the Competition DirecVerDate 11-MAY-2000 10:16 Apr 20, 2001 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6602 MCISPRINT SJUD4 PsN: SJUD4
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torate of the European Commission when these same arguments

were raised when WorldCom acquired MCI.

While I don’t know what the market share numbers are, I am

sure the antitrust agencies and the Federal Communications Commission will, and I predict that they will find that the Internet

backbone is close to 50-percent controlled, or more, by the merging

parties. When they get that level of control, they will have a dominant position over the pipeline and over the entry and access

points to those pipelines, which will permit them to go ahead and

derogate the customers who are also their competitors based on established antitrust analysis that presents that kind of dominant

opportunity where there are network and tipping effect considerations to be taken into account. This is what the antitrust agencies

need to look at, not the speculative notions that we have heard

from the analysts here.

Mr. KIMMELMAN. Mr. Chairman, could I just add this is the sine

qua non problem of telecommunications we have had throughout

history of a bottleneck problem. Some of them have a long history

with a litany of abuses that I think MCI WorldCom probably was

best at characterizing earlier in the old AT&T monopoly. The same

concerns have been raised about AT&T’s dominance over a

broadband cable wire. This is not the national superhighway; this

is the local choke point and these concerns here.

Some of them are more future-oriented, and I think Mr. Rill has

described that appropriately, and they are significant concerns. The

other ones, based on our experience, became very real as profit motive led to favoritism, where there was inadequate competition, and

I think that is the appropriate role for antitrust oversight here to

ensure that that appropriate entrepreneurial zeal doesn’t go over

the line.

Mr. RILL. Just one sentence. I think last year—if one wants to

look at what Sprint said last year about the MCI/WorldCom merger and its effect on the Internet backbone market, that would give

you a good basis for a starting point of analysis of that market.

The CHAIRMAN. Well, I have other questions that I will submit

in writing to you.

Let me turn to Senator Kohl. I have taken enough time.

Senator KOHL. Thank you, Mr. Chairman.

Mr. Ebbers, if your merger is completed, there will only be one

major competitor for AT&T in long-distance telephone services. We

are not just talking about the abstract here. We had a member our

staff call AT&T, MCI WorldCom, and Sprint, and ask about various

long-distance plans. She is one of your typical customers, a 25-yearold single woman. She called twice, once to ask for a plan best suited for a person with above average long-distance calling, and another time to ask for a plan best for a person with below average

calling.

You will be pleased to know that each time, both of your companies beat AT&T, but one of you did not consistently beat the other

one. Each of you offered differing plans with differing features that

would be advantageous for differing types of consumers. So, gentlemen, what do you tell a consumer like this staffer from my office

that this deal will result in more rather than fewer choices, either

one, Mr. Esrey, Mr. Ebbers?

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Mr. EBBERS. I would just suggest, Senator, that there are not

only, if this merger is complete, two competitors for long-distance.

In areas where the Bell operating companies and GTE has been

able to compete in long-distance, they have taken up to 30 percent

of the market.

What we are facing in this transaction is our ability to compete

with the companies that are allowed to provide or are capable of

providing local service, in addition to long-distance. Those calling

plans in the companies that Mr. Rill represents are very effective

long-distance competitors in the markets that they choose to compete in and in the markets that the Bell operating companies will

soon be in.

Mr. ESREY. I would like to make just a couple of comments. One,

your staff representative could have called many other long-distance companies and gotten more choices, I think, that are available out there in the market today. But let’s back up and look at

what we are really talking about factually here in terms of the consumer marketplace.

If you add Sprint and MCI WorldCom on access lines, our combined market share, it is 18 percent, compared to 67 percent for

AT&T. If you prefer to take revenue and you add our combined revenue, it is about 24 percent, compared to close to 60 percent for

AT&T. That is what is happening today.

Now, let’s look at what is going to happen when the RBOC’s,

which are going to get into long-distance, whether it is imminent

or a few months or whatever—look at Southern New England Telephone Company. Within 2 years, in their local areas, they got 35-

percent market share, substantially more than the combined of

Sprint and AT&T. So this marketplace is obviously changing very

rapidly, and when the regional Bells get in—when Bell Atlantic

filed, they said that they would expect to get 25 percent market

share almost immediately. That is in excess of our combined market share in the consumer marketplace. So I think there are plenty

of choices that are going to continue to be out there.

Senator KOHL. But is it true that in the long-distance market

today your combined share is 80 percent?

Mr. ESREY. No, no.

Mr. JACOBS. With AT&T added in.

Mr. EBBERS. That is including AT&T.

Senator KOHL. The three of you, yes. Yes, I understand. So if you

just merge, you two, then along with AT&T, we have 2 companies

controlling 80 percent of the long-distance market. And you said,

well, there will be plenty of competition, but when you go down

from three to two, doesn’t that reduce enormously the level of competition?

There is a fact here, isn’t there, that when you go from three to

two and the two now control 80 percent, there is a reduction of

competition enormously, a reduction of consumer choice enormously? Now, you may cite other benefits and other things, but

that is almost uncontestable, isn’t it?

Mr. EBBERS. That fact, if that were a stand-alone fact, I think

could give you legitimate concern. But the fact of the matter is we

are not going from three to two; we are going from three to nine,

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with the Bell operating companies getting in, in addition to all of

the other competitors that are out there.

Let’s be honest about it. In the long-distance marketplace, we

saw a rate come out yesterday with a small company that is coming out with a 3.5-cent rate for long-distance service. Customers

can change service providers very, very easily, and they certainly

will take market share away from us if we don’t meet those types

of price points.

Senator KOHL. I think this particular person on my staff would

say that not having Sprint and WorldCom is a reduction in her

choice. I mean, you might have other things you would want to say

to her, but I think she would regard that pretty clearly as a reduction in her ability to choose. You wouldn’t disagree with that too

strongly, would you?

Mr. EBBERS. I wouldn’t disagree if those are the only calls she

made for choices, but there are 600 other calls she could have made

to get a long-distance service provider.

Senator KOHL. Mr. Kimmelman.

Mr. KIMMELMAN. Yes; Senator Kohl, it is correct that there are

hundreds of very small companies offering some long-distance service. It is hard to figure out who they are and what their rates are,

whereas Spring, MCI WorldCom and AT&T deluge us with advertising. Now, maybe that is good or bad. I don’t know.

Mr. Jacobs made a comment about the scale effect of combining

MCI WorldCom and Sprint to be able to challenge AT&T better. I

guess that is more advertising, or more outreach to the public.

These small companies are not in a position to do that. I think

most consumers are not aware of how to reach them.

And then there is a speculation. Mr. Ebbers, I wish there were

seven Bells left, but there are not. There are fewer; two dominant

ones, it appears. When they enter, if they enter, that may help.

They are certainly large enough. They have the capital base to go

out and do mass-market advertising. They are not there yet. Bell

Atlantic may be getting very close in one State. We have a way to

go before we get that more choice from other big players.

Senator KOHL. Well, let me ask this question, Mr. Rill and Mr.

Kimmelman. If the RBOC’s were already in long-distance, wouldn’t

this be an easier call for you?

Mr. RILL. Entry under the antitrust guidelines is certainly a very

important factor to undercut market concentration. When we designed the 1992 modifications to the horizontal merger guidelines,

we looked at entry and we said entry, in order to trump an anticompetitive merger, which this one certainly is at 80 percent of the

market being controlled by two firms, the next largest having 2 or

less—entry has to be timely, likely, and sufficient to overcome the

anticompetitive effects of the merger.

Entry, as Mr. Ebbers said, with a Bell edging toward entry in

one market, one State, is not under any analytical standard likely

to be timely, likely, or sufficient to overcome the anticompetitive effects of this transaction. If the parties are so convinced that entry

is going to happen in that magnitude, with that expedition, then

why don’t they defer the merger until the entry takes place?

Mr. KIMMELMAN. Senator Kohl, Mr. Rill is absolutely correct.

However, I fully understand the predict that Mr. Ebbers and Mr.

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Esrey are in because that is an absolutely correct analysis for the

long-distance market. However, they face an entrenched monopolist

in the local market being the ‘‘about to be, edging closer’’ entrant.

And until we have fully resolved how these long-distance companies can fully come in and fairly compete in the local market, we

are in a pickle.

Senator KOHL. So you would say, Mr. Ebbers and Mr. Esrey, you

simply want to try and stay ahead of what you see as the inevitable curve?

Mr. EBBERS. Yes; I would suggest that the Bell operating companies could have been in long-distance a long time ago had they chosen to be. The checklist is a very valid list of criteria for them to

make. They choose at which speed they meet that compliance requirement, and choose at which speed they get it. Obviously, if

they could argue that if they don’t get in long-distance and we have

to wait until they get in long-distance, they will never get in longdistance.

Mr. RILL. Let me just the point. I am not in the management

business, but as a lawyer one would even look at the Justice Department comments just made on the 271 application of Bell Atlantic, in New York, and indicate that there has been utterly no negative comment on the good faith of Bell Atlantic to undertake to

comply with the provisions of the statute, and indicating further

that it is a very complex question, one that presents difficulties. I

am not representing Bell Atlantic, but I think that the notion that

the Bells could flip a coin and get in at any time is absolutely untrue under the conditions set forth in the Act.

Senator KOHL. One other question for all of the members of the

panel. Gentlemen, what is the biggest problem facing markets

today? Is it this deal or is it the failure of the RBOC’s to open their

markets, or is it both?

Mr. Jacobs, would you like to make a comment?

Mr. JACOBS. We are now approximately approaching, what, 4

years past the—I think next February we will be 4 years past the

passage of the Telecom Act of 1996. The local monopolies, the

RBOC’s and GTE combined, have lost approximately one point of

market share in the residential markets, and they have lost approximately five to seven points of market share in the business

markets.

It is hard to count because it is a complex calculation to put together because the data is not so forthcoming from numerous companies. But that is about our best guess, and we have published

that many times and no one has ever told us it is incorrect.

The regional Bell companies basically made a decision sometime

around the end of 1996 that they didn’t like the way the Telecom

Act was being implemented by the FCC. The FCC had some up

with a plan essentially to force a very low-priced resale of the local

service to the competitors. And had the RBOC’s gone along with

that, they would have gotten into long-distance. That was basically

the way the FCC tried to implement the Telecom Act.

The RBOC’s took it to court and that whole situation was tied

up for a period for 21⁄2 years or so, and essentially that was why

the RBOC’s didn’t lose share and that is why the RBOC’s are not

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in long-distance right now. Had they decided that that bet was

worth it, they would be in long-distance at this moment.

Why didn’t they decide long-distance was worth it? Well, a couple of reasons. The local market is a $100 billion market. It has 40-

percent operating cash flow margins. It has 25-percent operating

margins. And it is growing and there is no competition, and you

can grow your earnings 10, 12 percent a year, as the RBOC’s have

done every single year, without getting into long-distance and without having to worry about it. The long-distance market is about a $60 billion, $60 to $70 billion market, with about half the margin structure of the other market. So if the RBOC’s were going to get into long-distance and lose

local, it was not, in their view, a fair trade because it was much

less profitable and much smaller, the business being offered as a

carrot than the business they were going to be losing share in.

The RBOC behavior didn’t change until AT&T bought TCI. That

was the beginning of the entire change because at that moment the

RBOC’s realized that their loss of market share was no longer in their own hands. AT&T has bet at this point over $100 billion on

the concept of coming into local, building out their own facilities

across the cable plant, and offering local service in competition.

If you look at the behavior of the RBOC’s in relation to that

merger, it was only after that merger and the subsequent AT&T

attempt to merge with MediaOne that the RBOC’s began to truly

ramp up their desire to get into the long-distance markets, as well

as to build out, by the way, broadband capabilities, known as

ADSL, in terms of their technology.

So I have to agree with Mr. Ebbers that the choice of getting into

long-distance and the timing of getting into long-distance has largely been in the RBOC’s hands. If you look at the competitive framework of the market, they still control certainly as a monopoly point

of view the local markets. The long-distance markets are very competitive at this point. Every single long-distance company saw projections for revenue growth lowered in the third quarter because of

the fact that pricing simply sort of went out of bounds beyond what

anybody was expecting. It has to do with new competition in longdistance. So I think that should more or less sum up the situation.

Senator KOHL. Mr. Esrey.

Mr. ESREY. The single policy issue, I believe, in this country and

what the Telecom Act of 1996 was designed to do is break open the

local markets to competition, and that offers a huge engine of

promise for the consumer, for business, for our economy, and for

our social fabric to give competition, give choice, and let our great

system work by giving choice, which will give better value, lower

prices, and so forth.

This merger is a lot about that issue because the capabilities

that have been assembled by MCI WorldCom in terms of local access capability, what they have done with MMDS, what we have

done with ION and MMDS, put together, make a force that we believe can go and break open that local monopoly, but do it in a way

that offers the consumers a whole different choice than they have

had before.

Rather than just local service, we give them multiple lines, highspeed Internet access. I won’t go into all the capabilities, but it is

76

a new choice. This is what competition does—better things, lower

prices. That is what this is about. Each one of us alone would have

difficulty doing that, especially due to the size of the regional Bells

and AT&T’s monopoly position in cable.

We look at the size of this merger and we say, gosh, this is huge.

If you look at what AT&T paid for TCI and MediaOne together, it

is $110 billion, to position themselves to get into the local market.

Our combined capabilities offer that same type of promise of what

we can do for the consumer.

Mr. RILL. If I may just for one moment, first, the purpose of the

Telecom Act is to open up all markets, including the long-distance

market. Second, I think the statements made by Mr. Jacobs are essentially a diversion. What is before this committee and what is

going to be before the enforcement agencies is whether or not it is

necessary to have strong anticompetitive effects in two present,

current, relevant markets, long-distance and the Internet backbone, in order for the allegations, the hopes, of more competition

in a third market might be realized. I don’t think the antitrust

analysis as it unfolds is going to justify those kinds of assertions

and that kind of damage to consumers in the long-distance and

Internet backbone markets.

Mr. KIMMELMAN. Senator Kohl, I think Mr. Rill is absolutely

right. The Telecom Act appeared to be about breaking open all

markets to competition, open entry everywhere. I think our problem is we have had enormous within-sector consolidation. We have

gone from a few dozen companies from different sectors of telecommunications that could have combined somewhat, but left us

with a dozen or more national players, many going into the local

market, offering the bundles that Mr. Ebbers and Mr. Esrey described.

We don’t have that today. We have fewer local phone companies

consolidating their control. With AT&T, we have fewer cable companies consolidating their control. And I fear this merger could be

fewer players in long-distance. Tomorrow’s market may be very different. Today’s market is a danger of price increases for consumers,

and we have an enormous problem here. The Act is way off course.

The CHAIRMAN. Let me interrupt. We are running out of time,

but let me make the point that Senator Feingold has submitted a

statement for the record.

[The prepared statement of Senator Feingold follows:]

PREPARED STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR FROM THE

STATE OF WISCONSIN

Mr. Chairman, first let me thank you and the Ranking Member for convening this

important hearing. I have my own feelings about this proposed mega-merger, but

I look forward to hearing from this panel of experts to see if, in fact, the Sprint/

MCI WorldCom merger would enhance competition in the long-distance telephone

market.

I won’t mince words, Mr. Chairman, I am disheartened by this proposed merger,

to say the least. Should this merger pass muster with the Federal Communications

Commission and the Justice Department, about 90 percent of the long-distance telephone market would be controlled by just two companies. According to the FCC, the

next largest companies possess just percent of the market each. I fail to see a benefit to consumers from combining the second and third largest long-distance companies in an already concentrated market.

Mr. Chairman, many people will be surprised to learn that according to Consumers Union, the Consumer Federation of America, and the Texas Office of Public UtilVerDate 11-MAY-2000 10:16 Apr 20, 2001 Jkt 000000 PO 00000 Frm 00080 Fmt 6633 Sfmt 6621 MCISPRINT SJUD4 PsN: SJUD4
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ity Counsel, the majority of residential long distance consumers are actually paying

more today for long distance calling than they did before the passage of the Telecommunications Act of 1996. What with nickel nights to 5 cents every day to 7 cent

‘‘one rates,’’ long-distance rates have seemed to fall precipitously in the recent

past—unfortunately, those gains for consumers on per-minute rates have been more

than offset by a host of new charges and fees. Now, these two behemoths want to

consolidate and thereby strangle some of the competition that has led at least to

falling long-distance rates. And again, consumers inevitably will take it on the chin.

Mr. Chairman, this is a step backward, not progress toward competition.

As I have discussed, there also is evidence that the benefits of competition in the

long-distance market are not all it’s cracked up to be. The long-distance companies

have more than made up for falling long-distance rates with monthly minimum

usage charges, the presubscribed interexchange carrier charge, and the universal

service fund charge, which hit low-income, low-volume callers disproportionately.

Some of the witnesses before us today may argue that this proposed merger will

increase competition in the long-distance telephone market, but I am skeptical,

given what has happened so far. Analysis by the organizations I mentioned found

that 71 percent of poor households; 64 percent of lower-middle income households;

58 percent of middle income households; 50 percent of upper-middle income households; and 43 percent of wealthy households now pay more in their long distance

bills than they did before the 1996 Telecom Act. Since the Act passed, about 70 million households are paying $2.3 billion more per year in their long-distance bills.

One-half to two-thirds of all residential consumers are paying more expensive telephone bills. This is occurring while 60 percent of the wealthiest Americans are paying less. If this is the effective competition we were promised, I won’t lose any sleep

over my vote against the Telecom Act.

Mr. Chairman, the fact that we’re even considering this merger shows, once again,

that the 1996 Telecommunications Act has not led to the vaunted growth in competition that it promised and has failed to deliver significant benefits to consumers.

In fact, just the opposite has happened.

I was one of just five senators to vote against the Telecom Act. In fact, I strongly

opposed the provisions that supporters contended would lead to greater competition

and lower rates for consumers. Those few of us in the Congress who voted against

the Telecom Act did so because it did not seem likely to lead to true competition

and benefits to consumers. We have been hoping to be proved wrong, but it doesn’t

seem to be working out that way. In fact, it is now clear that competition is dwindling before our eyes, and certainly not growing.

Mr. Chairman, I favor increased competition and deregulation of telecommunications markets because true competition benefits consumers by providing them

with more choices, lower prices and improved service. The spate of recent mergers,

including the proposed union of Sprint and MCI/WorldCom that we are discussing

today, has led and will continue to lead to fewer choices. I would wager that higher

prices and diminished service will follow hard on the heels of that merger.

Over the past few years, the biggest news in the telecommunications industry has

been the tremendous consolidation of all its facets, from local and long distance

phone service, to cable television to the Internet. The latest merger rage has highlighted the willingness of companies that traditionally have operated in one realm

to buy their way into other realms, but the only problem with that trend is that

it brings consolidation—the enemy of competition.

The most obvious example is AT&T. Over the past year and a half, AT&T has

committed $112 billion to the acquisition of cable television companies. Last year,

AT&T agreed to acquire Tele-Communications, Inc. (TCI) from Time/Warner. TCI

was the nation’s second-largest cable company. Earlier this year, AT&T reached an

agreement to acquire MediaOne, the nation’s fourth-largest cable company. Aside

from becoming the nation’s largest cable company, AT&T also is aligned with the

nation’s other two largest cable companies.

The AT&T/MediaOne deal extends AT&T’s reach into cable television and continues AT&T’s move to provide consumers with a bundled, full range of telecommunications services. The merger could allow AT&T to provide competition against Baby

Bells in local phone markets through cable connections.

Not to be outdone, the Baby Bells, have saddled up in a move toward regional

monopolies. The 1984 breakup of Ma Bell spawned seven Baby Bells that could offer

local phone service only. The 1996 Telecommunications Act allowed the Baby Bells

to provide long-distance service should they meet conditions that open their local

service to competition. There are now four remaining regional Bell operating companies. They control 98 percent of all local telephone service. I fail to see how a few

vast regional monopolies are any better than a single vast national monopoly.

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So, the statistics presented by a recent American Antitrust Institute report are

striking. This study cataloged 4,728 reportable mergers in 1998, compared to 3,087

in 1996, and 1,529 in 1991. The total value of U.S. mergers completed in 1998 was

$1.2 trillion in an economy with a gross domestic product of $8.4 trillion. Mergers

are the big story in American economic life today, and as the report shows in stark

terms, funding for the agencies on which we rely to police those mergers has not

nearly kept up.

Mr. Chairman, we now have four companies controlling 98 percent of the local

telephone market; six companies controlling more than 80 percent of the cable television market; seven firms controlling nearly 75 percent of cable channels and programming; and four companies accounting for nearly a third of the radio industry’s

annual revenue.

The speed of these mergers can make your head spin just to keep up with the

name changes. But they have real life consequences for consumers.

I look forward to hearing the testimony of the witnesses. And I look forward to

their answers to some of my concerns.

The CHAIRMAN. Senator DeWine, who has agreed to Chair these

hearings because I have to leave, has agreed to allow Senator

Ashcroft to ask his questions before Senator DeWine finishes up.

So we will turn to you.

Senator ASHCROFT. Mr. Chairman, I thank you, and I thank the

Senator from Ohio for his courtesy and his kindness to me.

Mr. Jacobs, there seems to be an implicit understanding or assumption or suspicion on the part of some members of the panel

that if this merger goes through that somehow the emerging entity

would raise prices for long-distance. What would be the business

consequence to the surviving organization if it were to raise prices

for long-distance after a merger like this?

Mr. JACOBS. They would immediately lose market share, and

most of the analysts would downgrade their stocks from ‘‘out-perform’’ to ‘‘under-perform,’’ point one. Point two is I think there is

a certain point that is being missed here altogether. Once you have

the RBOC’s coming into long-distance and once AT&T goes into

local—and those are foregone conclusions, those two things are

happening—the whole concept of long-distance is going to go away.

AT&T has already talked about what its pricing plan is going to

be. Its pricing plan is going to be a flat rate, you know, monthly

fee for all you can eat once they pull this thing together, all the

local you can eat, all the long-distance you can eat, all the highspeed data you can eat.

The RBOC’s, when they come into long-distance, are going to do

the exact same thing, and it is only sensible because costs do not

act on a per-minute basis. Costs are fixed, and therefore what you

do is you create fixed revenue streams and you give the customer

more and more and more. That is the way telecom is going to look.

Two companies are headed for that strategy, you know, irrevocably,

irretrievably, and the issue is are we only going to have two—and

by the way, two is infinitely better than one, which is what we currently have—or do you have the chance of getting a third. And I

think what is going to happen is we are going to get a third and

this concept of per-minute long-distance is going to be a relic in another 2 years.

Senator ASHCROFT. That is not the structure of long-distance

now?

Mr. JACOBS. Correct.

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Senator ASHCROFT. Let me sort of recite this carefully and see if

I can say this properly. The long-distance provider, before the call

is delivered to the consumer, has to pay a local provider.

Mr. JACOBS. Correct.

Senator ASHCROFT. That is sort of a barrier, a toll booth there,

and AT&T’s merging with the cable companies is to get them

around the toll booth so that they won’t have to pay that extra

charge.

Mr. JACOBS. Correct.

Senator ASHCROFT. Now, what percentage of a long-distance call

is that access charge now?

Mr. JACOBS. The access charge, on average—if you take all-in on

a domestic minute of long-distance, the average revenue in the industry is about 10 percent. That is, by the way, if you take the

monthly fee and you also figure that in over the number of minutes

on average, around 10, 11 cents. Depending on where you are, the

average all-in access fee that is paid to the RBOC is somewhere on

the order of magnitude of about 4 cents, something like that.

Senator ASHCROFT. So it is 40 percent of the cost of a long-distance phone call.

Mr. JACOBS. Forty percent to revenue. It is actually half of the

cash cost, half of the cash cost. It is the most significant.

Senator ASHCROFT. I just want to see if I can carry this. And

what they are proposing is a means of getting around this toll

booth, which is 40 percent. Now, there must be some costs to getting around the toll booth.

Mr. JACOBS. $100 billion in AT&T’s case.

Senator ASHCROFT. And what would that result in, though, on a

per-call basis? Can they do it cheaper, is what I am saying. Can

they provide access cheaper by going around the toll booth than by

going through the toll booth?

Mr. JACOBS. It is a simple question to answer because it is very

expensive to get that new highway. It is actually the last mile we

are talking about, you know, out to the customer—very, very ex- pensive, $100 billion for AT&T, and I think that the assets of the

RBOC’s are something like $100 billion as well. But once you are

there, access charges paid to the RBOC’s have very little to do with

actual cost. They are filled with subsidies, they are filled with overhead, they are filled with all sorts of—— Senator ASHCROFT. Are you saying, then, that the long-distance

rates—there would be every reason on a cost basis for long-distance

rates to go down?

Mr. JACOBS. Correct. The expensive thing is to create the connection with the customer. The cheap thing is to then pour the service

over that, and that is why what I tried to say in my testimony is

once you get to a point where you have bundling companies who

have numerous products to put over a single pipe sold by a single

sales force, there is every reason in the world to discount very, very

heavily, and each side will discount the other guy’s product.

Senator ASHCROFT. Let’s go quickly to something else. I think I

have heard it said that there are 600 long-distance companies.

Mr. JACOBS. I think there are actually closer to 800, but yes.

Senator ASHCROFT. And these guys don’t all own superhighways.

There are, what did you say, 70-some superhighways?

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Mr. JACOBS. Well, you have to be careful about superhighways.

There is the Internet superhighway, and since MCI has 72 different companies that they so-called peer with who are allowed free

access—and by the way, those companies meet a certain criterion

in terms of having lots of traffic—there are 72 companies of stature

on the Internet.

Senator ASHCROFT. I want to go back to this. How do we have

600 companies if it is so impossible to do this unless you own this

big infrastructure?

Mr. JACOBS. You can always get access to long-distance backbone

fiber by renting it because the reality is that in—we have to be

clear on one thing. There are local facilities, the last mile, of which

there is right now only one into the house offering telephone service. And then there is the connecting point for the whole country,

which is the long-distance backbone or the Internet backbone. At

this point, there is, in theory, almost an infinite amount of capacity

in that backbone. There is ample excess capacity.

Senator ASHCROFT. So these 600 or 800 guys—— Mr. JACOBS. You can rent it for nothing, basically.

Senator ASHCROFT [continuing]. Go and rent it very cheaply.

Mr. JACOBS. Correct.

Senator ASHCROFT. And is if someone were to try and elevate the

costs of long-distance—— Mr. JACOBS. It would be suicide.

Senator ASHCROFT [continuing]. These rent-for-nothing people

would be able to deliver to my door mimeographed flyers and

things that said you can go around these high costs by just dialing

10–10-blank-blank-blank or what have you and get 5 cents a

minute. I mean, at my house I get these flyers everyday.

Mr. Kimmelman, I think there is a certain responsibility on the

part of a consumer to be able to read, and I get this stuff everyday

and they are not big companies, but they tell me I can have 5 cents

a minute with no monthly charges. I do have to dial seven extra

digits, which a 1999 phone can program once and for all, if you

want. I don’t want to tell people how to avoid using Sprint and

MCI and paying the extra value to Michael Jordan and the other

advertisers.

So what you are saying is the potential for price reduction is always there from the other 6 or 800?

Mr. JACOBS. I would defy anyone on this panel to show me a single price in telecom that has ever gone up in the last 10 years.

Costs are falling and competition is increasing, and you cannot find

a price for anything in telecom that is falling. The only single thing

I can think of is that at one point some of the long-distance carriers

with some of the large pipes of data before some of the new guys

had brought their pipes on the marketplace were very capacity-constrained. That is about the only thing I can think of in 10 years.

Senator ASHCROFT. You would probably confess that if a person

was going to make one 5-minute call a month and opted for a service that required a $4.95 a month charge that that price to that

consumer—that is Mr. Kimmelman’s point, I think.

Mr. KIMMELMAN. It is one of my points, Senator Ashcroft. I have

got to tell you there is no way we want to condone stupidity on the

part of consumers, but today the Federal Trade Commission and

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the FCC are holding a hearing to admonish this very industry for

distorting its information it is providing in those flyers, not all of

them, but some of them because it is totally—the consumer can’t

understand it.

It is described as 5 cents a minute, but it is 99 cents for the first

minute, the second minute, all the way up to 20 minutes. We get

this all the time, and I can show you probably a dozen AT&T basic

schedule rate increases in the last decade. I mean, there are rate

increases all over the place, almost every one of which were followed by an MCI rate increase and a Sprint rate increase, a followthe-leader rate increase. There are enormous segments of this market that are not competitive. It is just totally factually inaccurate

what you are saying.

Senator ASHCROFT. Well, let me just say this. I think there are

places where you get this deal that says 99 cents for up to 20 minutes, and I guess if you have 20 seconds, you pay 99 cents, too. And

I think that is an enforcement problem; that is an FTC problem,

but that is not a merger problem, that is not a structure of the industry problem. That is an advertising problem of having truth in

advertising in communications.

But we need to look at structure here and we are asking ourselves whether a combined structure of these two companies is likely to have an increase in cost or a decrease in cost for long-distance. That has been an expressed concern, and the only thing I

have been able to hear so far, and the only thing I can figure out,

is that, they want to avoid the toll booth by getting all the way to

the consumer which would at least provide a decrease in cost, and

you seem to be nodding your head that they would do so. And the

other is that if they tried to increase their cost, they would just incredibly savage and hemorrhage in terms of market share.

And the last point is that the current landscape is not the landscape to be considered. It is a landscape where it is anticipated

that there will be another competitor in virtually every setting that

will enter the market with a 25-percent share, which is more than

either of these two individual companies now have, and will obviously avoid the toll booth because they own the toll booth.

It seems to me that when we are talking about structure, we

ought to at least try and figure that out. And I am very pleased

to hear from you, Mr. Rill, because so far if you have got a point

to make, it is not coming across to me.

Mr. RILL. Well, the point is one that is really hornbook antitrust

analysis and established in the merger guidelines enforced by the

Federal Trade Commission and the Department of Justice, and

that is in a given industry when a market structure reaches two

firms with 80-percent control and the next firm in that market

with no more than 2 percent of the market, the presumption is that

that is going to be anticompetitive market. Now, I would grant you

that——

Senator ASHCROFT. Well, wait. Let’s make it clear that when we

are talking about 80 percent of the market, we are not talking

about the surviving entity here. You are talking about—— Mr. RILL. Two firms.

Senator ASHCROFT. You are talking about 80 percent of the market being——

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Mr. RILL. Controlled by two firms.

Senator ASHCROFT. But if these each had 2 percent and AT&T

had 76 percent, you would have the same problem.

Mr. RILL. Then we would have a separate problem with the 76-

percent firm, but that is not what we have here. We don’t have

that. We have a firm with approximately 48 percent, 50 percent,

another firm with approximately 30, 32 percent. I think that is a

given. You can strip away a percent or two, but that is a given.

Under the merger guidelines, there is a presumption in that market that there is an anticompetitive effect.

Now, if there is entry such that that is either not a market or

that any anticompetitive price increase or failure, by the way, to

reduce prices to reflect declining costs—declining prices are not

necessarily good enough; prices should decline at a level dictated

by competition. The entry story that we have heard today is entirely speculative. It is not there. Mr. Ebbers set up an antitrust

standard that I haven’t heard before that if I were defending a

merger I would like to use, and that is the ‘‘edging toward entry’’ standard.

Unless entry is timely, likely, or sufficient—and this is under the

DOJ–FTC merger guidelines—to deflect, undercut an anticompetitive price increase, it will not cut the mustard. And as the antitrust

agencies look at this merger, I predict they will find that entry is

not timely, within a merger guideline timeframe, or sufficient to

permit this high level of duopoly to go forward.

Mr. KIMMELMAN. Senator Ashcroft, I was aggressively nodding in

agreement with you because I want to make it clear that on your

point of avoiding the toll booth, there is no one who wants to get

that toll booth out of the way any more than the consumer. I think

that 4 cents a minute, that 40 percent, is a bloated, vastly inflated

number. It is keeping prices way too high for connecting long-distance calls. My concern is I don’t see enough about this merger

that allows MCI WorldCom and Sprint to truly avoid that toll

booth.

I heard a description of use of some wireless equipment for

broadband that may work, may not work. It has been a problem.

Wireless cable has not worked well because of capacity and lineof-sight problems for offering an alternative to cable. Maybe it is

better here. I didn’t hear much about local phone service, which is

what that toll booth is the problem in.

And most of what I heard about was a continuation of leasing

lines from Bell companies and GTE, and it is hard for me to understand how the consumer is better off whether it is just MCI

WorldCom/Sprint leasing those lines or the two of them separately

leasing those lines.

Senator ASHCROFT. Well, the two of them, plus another 6 or 800.

And I don’t know who the next giant is, but they grow quickly and

the kinds of things they do in competition force the big guys to

change.

LCI International, I don’t know how long ago, decided they

weren’t going to play the round-up game or round-off game, or

whatever it is, with time. They said we are only going to charge

you for the amount of time you are on the phone. They are infinitesimal in the market, but they have an impact in the market.

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I think what we have to look at as policymakers—and I thank

the chairman for his indulgence and I will quit with this—we have

to look not at hornbooks. Frankly, as policymakers, we are in

charge of developing a hornbook that will make the system work,

not in respecting a hornbook that may protect the kind of industry

that might have existed or market structure that might have existed. We need to make the system work.

We need to look when we are looking at things to find ways so

that we can have competitors in the United States that stand well

among world competitors so that we can have consumers that are

served well and efficiently. And I think this Telecom Act which we

put in place provides tremendous opportunity. We have had a proliferation of companies that, with their offers of competition and

the like, have just helped this industry explode.

So I am pleased that all of you came. I think the debate has been

very productive, but I think we ought to try and find a way to do

things that results in better service and lower rates and greater

competitiveness for our players on the international scene.

I thank you, Mr. Chairman, and am grateful for this opportunity

to be with you.

Senator DEWINE [presiding]. Thank you, Senator Ashcroft, very

much.

Gentlemen, I think this has been a productive 2 hours. Let me

see if I can summarize a little bit, and also maybe get you to engage a little more. Frankly, none of you are shy and retiring, but

I sort of feel like we are talking around each other today for the

last couple of hours and let me see if I can summarize and maybe

spark a little more direct debate here.

Mr. Kimmelman and Mr. Rill, basically what you are saying is,

look, we are going from three companies to two companies who are

now going to have 80 percent of the market. Under classic analysis,

this is a problem. The lights ought to go off. The burden of proof

ought to be on the company that wants to do it.

Mr. Ebbers and Mr. Esrey, and I guess Mr. Jacobs as well, you

seem to be saying, no, no, no, you guys are all wrong, you don’t get

it. You can’t apply the normal standards, and the reason you can’t

apply the normal standards is this is a moving target. It is not

static. You can’t just look at it from a point of view of long-distance,

even though long-distance is still what people think about. What

they are saying is that is wrong. Mr. Kimmelman and Mr. Rill, you

just don’t get it.

You get into the 21st century and long-distance is over with, it

is dead. That is not how we do business anymore. It is just a different world, and what is going to happen is that AT&T is going

to get into local, the RBOC’s are going to get into long-distance,

and this whole business changes. And, in fact, it is changing and,

in fact, therefore it is a moving target. And you guys want to take

a snapshot and look at it and freeze it, and really that is just not

the way the world is working today.

Now, is that a fair summary of what I have heard over the last

2 hours?

Mr. RILL. I certainly would never suggest it is not a fair summary.

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Senator DEWINE. Well, you just tell me what is wrong about it,

then. You tell me what I am hearing that is—— Mr. RILL. I think I could put it somewhat a different way, and

I will start out with your statement that long-distance is what people think about today. And the reason they think about it today is

it is a relevant market today.

Senator DEWINE. But they are saying, yes, it may be relevant

today, but it is really not going to be relevant tomorrow.

Mr. RILL. That is speculative, Mr. Chairman. They are trading

off injury to long-distance consumers and injury to customers and

competitors on the Internet backbone, which will be a fact by this

merger of two direct competitors in those markets with overwhelming market shares, against speculation that somewhere down the

road maybe there will be more competition. And maybe there will,

but the merger analysis must show with a clear confidence that

that entry will be timely, likely and sufficient now to dissipate the

anticompetitive effects that this merger will have in two markets

that today, to put it in your terms, is what people really think

about.

Senator DEWINE. Mr. Ebbers, Mr. Esrey, let me just ask it this

way, and I want you to have the opportunity to respond. They are

basically saying you are speculative; you are talking about someplace out in the future. And that may or may not be true, but today

the analysis has to be of what the market is today, and today you

guys are going to end up with 80 percent of the long-distance market.

Now, am I right in saying that what you are really telling this

committee is that is the wrong premise to start with, that is the

wrong place to start with? It seems to me where we start, whatever

our basic assumption is, is where we end up. On one analysis, it

is very tough for you to climb that hill and show us or show the

American people that having two companies having 80 percent of

the market is not a bad thing, when there is a lot of competition

out there now with three, plus.

I mean, is that correct? You are just saying that we shouldn’t

take that as the initial analysis? That shouldn’t be our premise,

that shouldn’t be our starting place?

Mr. ESREY. Well, I agree with your basic statement and I don’t

think it is speculative.

Senator DEWINE. Which one?

Mr. ESREY. Pardon?

Senator DEWINE. Which one?

Mr. ESREY. Well, your synopsis of what was said here in the last

couple hours.

Senator DEWINE. All right.

Mr. ESREY. But I think the issue is it is not speculation. AT&T

spent $110 billion to position themselves to enter the local market.

You know, it is quite clear what they are going to do.

Senator DEWINE. When?

Mr. ESREY. Pardon?

Senator DEWINE. I guess the question is when?

Mr. ESREY. They are rolling it out now. As we speak, they are

rolling it out. It doesn’t happen overnight, obviously, but they have

already started to roll it out to offer that type of service.

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Senator DEWINE. Well, should the public policy analysis be

where we are now or where we will be in 5 years or 10 years as

far as what should be allowed now? Isn’t that the question?

Mr. ESREY. It is not 5 years or 10 years.

Senator DEWINE. OK. How many years is it?

Mr. ESREY. It is months, it is months that you see this happening. It is going on right now and, of course, it is somewhat evolutionary. You don’t wake up one morning and switch.

Senator DEWINE. I understand.

Mr. ESREY. But it is going on right now. You can see by Bell Atlantic’s own statement that they expect to get 25 percent of the

market when they get in. People are investing enormous sums of

money because the industry landscape is clearly changing.

And talking about speculation, I think Mr. Rill says injury to

consumers. What injury to consumers? That is where the speculation is. I think as Mr. Jacobs says, and it is quite clear to us, if

we sat and attempted to raise long-distance prices, there would be

injury, but it wouldn’t be to consumers. It would be to our companies.

Senator DEWINE. Mr. Kimmelman.

Mr. KIMMELMAN. I think your synopsis is correct, with a little

footnote, and that is that some of the mergers that Mr. Ebbers and

Mr. Esrey are describing as somewhat motivational or that they

have responded to are not completed. The Antitrust Division is still

reviewing the AT&T/MediaOne transaction.

Now, the Chairman of the FCC has stated very clearly that he

thinks getting AT&T to expand off-cable plant and hopefully—

again, another promise, speculation—offering local phone service

and broadband is worth them owning all that cable plant. The

Antitrust Division has not ruled on that. If that transaction does

not go forward as it was proposed, that changes the landscape.

What Mr. Jacobs described as this inexorable movement, that

there will be a Bell doing all of this and AT&T with its cable plant

doing all of this, is not anywhere near as real as what people are

paying today and receiving today for cable, local phone service, and

long-distance. I don’t dismiss it as a possibility, but it is not real.

Senator DEWINE. Mr. Ebbers, you wanted to say something.

Mr. EBBERS. Yes; I would just be real factual, if I could, about

this. The company that Mr. Rill represents, which is in the process

of merging with Bell Atlantic, determines when they want to get

in the long-distance business. He says it is not imminent or it is

not soon or it is not for sure. Why are they doing this merger,

then? They stated publicly that the reason for this merger is they

want to be part of an RBOC that has access lines that is going to

be a significant competitor in long-distance. I don’t blame them. I

think it is the right way to go.

But, you know, it is kind of foolish for us to sit here and listen

to him say that the timing isn’t imminent. The applications are

forthcoming. The PSC in Texas is supposed to vote this week and

is expected to approve the application of SBC to be in long-distance

in Texas. It only takes 4 States to have 24 percent of the market

competitive when they enter.

Senator DEWINE. Mr. Rill?

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Mr. RILL. Mr. Chairman, there is not one State yet in which

these applications have been approved. Certainly, it is an intention

of all firms in this business to compete and succeed in being competitive. The fact of the matter, under the antitrust analysis that

is going to be required of the agencies, is whether or not that entry

will be of such magnitude, speed, and likelihood to offset what is

clearly under the merger guidelines presumptively an illegal merger in two markets.

Senator DEWINE. Anyone else?

Mr. KIMMELMAN. Senator DeWine, just one more point here.

Senator DEWINE. Mr. Kimmelman.

Mr. KIMMELMAN. $110 billion is a lot of money that AT&T has

spent, and just to conclude that they are absolutely right or know

what they are doing, I think, is going a little overboard. The relevant analysis is how do they make the most money once they have

spent that, and how do the Bells once they have spent it in their

merger, and the entrepreneurs here at the table.

And what is troubling from the consumer perspective if we constantly see people entrenching and staying more in their core market and finding they can make more money there—and Mr. Jacobs

reflected on that before—than aggressively challenging others in

new markets. That is what is of greatest concern to us.

Senator DEWINE. Mr. Kimmelman, on the one hand you have

said that once horizontal power is established, it is difficult for the

remaining players to compete. But on the other hand, you have

said that two wrongs don’t make a right and we shouldn’t let these

competitors merge. Now, I have already expressed my concern

about the impact of this merger on long-distance customers. But to

be fair, as you have acknowledged, Mr. Esrey and Mr. Ebbers have

a business to run. They need to be able to anticipate market trends

and they need to be able to react to these trends.

How do we reconcile those issues? When should a deal such as

this one be allowed? How do we deal with that problem?

Mr. KIMMELMAN. We are in a pickle. I truly wish that our enforcement agencies had approached this very differently over the

last few years. Now, that is water over the dam at this point. How

do we undo the potential danger that they feel they are responding

to, which I think is real, cable concentration and consolidation in

the local market? I would suggest this merger needs to be scrutinized carefully because I think for the market we know today, it

consolidates too much power in long-distance, however saying at

the same time I believe that that should be done in conjunction

with the AT&T/MediaOne transaction, which I think—and Mr. Jacobs knows the market better than I do—will send a very, very different signal than has been sent over the last 3 years from the enforcement agencies about how companies can combine and will

need to align themselves to meet public policy standards for competition.

I think that is the way we need to go. If there is not the will

power in the enforcement agencies to do that, I would suggest that

you follow up on the logic you have presented this morning which

is extremely consumer-friendly and consider legislation to ensure

that with fewer players, whom I don’t believe you can absolutely

commit in law to living up to their promises—that these fewer

87

players do not raise prices, do not take advantage of consumers,

and ensure that they offer a fair price in the marketplace.

Senator DEWINE. As many of you know, Senator Hatch, Senator

Kohl and myself have introduced a bill that would force the FCC

to decide these mergers within 6 months so that the industry can

have some certainty. So at the conclusion of this hearing, I will put

my commercial in for that piece of legislation.

Mr. RILL. We will say that at least for our purposes we endorse

that legislation.

Senator DEWINE. Thank you very much. I appreciate that.

Any concluding comments that anyone feels they have to make?

Seeing no one feeling the desire to continue beyond 2 hours, I appreciate your testimony. I think it has been very helpful.

Mr. RILL. Thank you very much, Mr. Chairman.

[Whereupon, at 1:02 p.m., the committee was adjourned.]

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