[Senate Hearing 106-1083]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 106-1083

               MERGERS IN THE TELECOMMUNICATIONS INDUSTRY

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 8, 1999

                               __________

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


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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                       Mark Buse, Staff Director
                  Martha P. Allbright, General Counsel
     Ivan A. Schlager, Democratic Chief Counsel and Staff Director
               Kevin D. Kayes, Democratic General Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held November 8, 1999....................................     1
Statement of Senator Brownback...................................    25
Statement of Senator Bryan.......................................     5
Statement of Senator Dorgan......................................    30
Statement of Senator Gorton......................................     5
Statement of Senator McCain......................................     1
Statement of Senator Wyden.......................................     3

                               Witnesses

Cleland, Scott C., managing director, Legg Mason Precursor 
  Group'..............................................    34
    Prepared statement...........................................    35
Glenchur, Paul, director, Schwab Washington Research Group.......    47
    Prepared statement...........................................    48
Jacobs, Tod A., senior telecommunications analyst, Sanford C. 
  Bernstein & Company, prepared statement........................    40
Kennard, Hon. William E., chairman, Federal Communications 
  Commission.....................................................    14
    Prepared statement...........................................    17
Kimmelman, Gene, co-director, Consumers Union....................    49
    Prepared statement...........................................    52
    Initial Comments of the Consumer Federation of America, 
      Consumers Union, and the Texas Office of Public Utility 
      Counsel before the FCC (Excerpt)...........................    69
McTighe, Mike, chief executive officer, Cable & Wireless, Global 
  Operations.....................................................    55
    Prepared statement and additional material...................    57
Pitofsky, Hon. Robert, chairman, Federal Trade Commission........     6
    Prepared statement...........................................     8
Sidgmore, John W., vice chairman, MCI/WorldCom...................    44
    Prepared statement...........................................    45

                                Appendix

Mays, Lowry, Clear Channel Communications, Inc., testimony.......    81
Tichenor, McHenry, president and chief executive officer, 
  Hispanic Broadcasting Corporation (HBC)........................    82

 
               MERGERS IN THE TELECOMMUNICATIONS INDUSTRY

                              ----------                              


                        MONDAY, NOVEMBER 8, 1999

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:35 a.m. in room 
SR-253, Russell Senate Office Building, Hon. John McCain, 
chairman of the committee, presiding.
    Staff members assigned to this hearing: Lauren Belvin, 
Republican senior counsel; Paula Ford, Democratic senior 
counsel; and Al Mottur, Democratic counsel.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. Good morning. Today, the Commerce Committee 
is going to examine the implications of megamergers in the 
telecommunications industry. Let me thank our witnesses for 
agreeing to share their perspective with us this morning.
    Our first panel consists of our Government witnesses, 
William Kennard, chairman of the Federal Communications 
Commission, and Robert Pitofsky, chairman of the Federal Trade 
Commission, both of whom are well-known to this committee, very 
well-respected and highly regarded, and we are grateful that 
they would take the time to be with us this morning.
    Following their testimony, a second panel will present the 
views of a cross-section of non-Government interests. 
Representing the telecommunications interests are Mike McTighe, 
chief executive officer, Global Operations, Cable & Wireless, 
and John Sidgmore, vice chairman of MCI/WorldCom, Scott 
Cleland, managing director of Legg Mason Precursor Group, and 
Paul Glenchur, director Charles Schwab Washington Research 
Group, who will represent the investment community on the 
second panel, and Gene Kimmelman, codirector, Consumers Union, 
will testify to the interests and concerns of consumers, as he 
has so capably done in virtually every telecommunications 
hearing I have held since I have become chairman of this 
committee. Some allege that he is a member of this committee.
    [Laughter.]
    I stoutly reject such allegation. Welcome to you all. I 
look forward to your views and responses to our questions.
    Let me briefly set the stage for why we are meeting today. 
Anybody who pays attention to the headlines can reel off a list 
of recent telecommunications industry megamergers. SBC/
Ameritech, BellAtlantic/NYNEX, GTE/USWest/Qwest, MCI/WorldCom--
excuse me, USWest/Qwest, MCI/WorldCom and MCI/Worldcom Sprint, 
Time Warner/Turner and, of course, AT&T/TCI/Media 1.
    Huge as these deals are, they represent only a fraction of 
the consolidation that is taking place in the 
telecommunications industry. As Chairman Pitofsky notes in his 
written testimony, since 1995 the number of telecom mergers 
filed for governmental approval has increased almost 50 
percent, and their combined dollar value has increased 
eightfold.
    Why this sudden urge to merge? Part of the credit goes to 
the 1996 Telecommunications Act. By redrawing the ownership and 
competition rules that govern the industry, it has created 
incentives, both intended and unintended, for companies to 
merge. Also empowering these mergers are the growing 
globalization of commerce, the advent of digital convergence, 
and the general state of the American economy.
    As a result of all these factors, telecommunications 
companies are restructuring to align themselves to better 
compete using one of two alternative business strategies. Some 
are focusing on strengthening their positions in one specific 
core market, while others are expanding to compete in new 
markets.
    Either way, most Americans tend to view increased 
concentration of control as a negative and, unfortunately, this 
is often the case, at least for the average consumer. For while 
merging industries enjoy the cost-saving benefits of increased 
efficiency, the average consumer doesn't always reap the 
benefits of lower prices and better service. These worries are 
already apparent in the context of telecommunications mergers. 
We worry whether increasing consolidation in the radio 
broadcasting industry will homogenize radio programming. We 
worry whether Bell Company mergers will ultimately create only 
two surviving companies, Bell East and Bell West, and we worry 
whether AT&T will be reincarnated as Ma Cable, dominating the 
markets for voice, video, and high speed data services.
    There is another valid reason why we disfavor undue 
industry concentration. The more industry becomes consolidated, 
the harder it is for new companies to enter the market, or for 
small companies already in the market to survive. This 
challenge is a bedrock principle of our free enterprise system, 
that every business should have a fair opportunity to enter the 
market and to succeed or fail based on initiative and hard 
work, and if small businesses cannot compete in the telecom 
market in the information age, what stake will small businesses 
have in our economy as a whole?
    Unfortunately, these valid concerns sometimes prompt the 
wrong responses. For example, Government sometimes confuses the 
notion of leveling the playing field with reconstructing the 
stadium. That is, instead of making sure that incumbent firms 
cannot exercise the power to eliminate competition, Government 
sometimes tries to deprive incumbent firms of virtually any 
advantage of incumbency.
    Similarly, in an attempt to preserve ownership 
opportunities, Government tends to retain outmoded ownership 
restrictions or adopts regulations creating new services that 
the market does not need and will not support.
    Have we reached the point at which further industry mergers 
should be regarded as unthinkable? If not, what different 
standards, if any, should apply to telecom industry mergers in 
the year 2002 and beyond, as the industry becomes more 
concentrated? Who should apply these standards and do they 
become harder or easier to articulate and enforce?
    Finally, of course, there is the most important question of 
all. Who is being benefited by these mergers, and what more 
must we do to assure that all Americans can enjoy these 
benefits?
    So the Commerce Committee meets today to examine where the 
current trend of telecom mergers is taking the industry, what 
it all means for small businesses and for the average consumer, 
and what Government's response should and should not be?
    This may not be the last hearing we have on this issue, but 
I thought it was very important as we are winding down here to 
at least start in our proper and appropriate oversight 
responsibilities of this committee.
    These are very, very interesting, exciting, stimulating, 
and incredibly unusual activities that are taking place, the 
likes of which have probably not been seen in history, or at 
the time of the early stages of the industrial revolution, 
therefore I view this hearing as one of education and 
information, and I believe that in the future we need to have 
additional hearings to determine what, if any, actions the 
Congress, or what involvement the Congress of the United States 
should have.
    I would like thank Senator Wyden and Senator Bryan for 
being here.
    Senator Wyden.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, Mr. Chairman, and let me begin by 
commending you for taking on a series of issues that is 
especially important to consumers.
    I will tell you, Mr. Chairman, I hope that this will be 
just the beginning of an effort by this committee to examine 
the impact of mergers on our economy. Among our 
responsibilities on this committee is jurisdiction over the 
Federal Trade Commission, which reviews mergers in a wide 
variety of industries providing goods and services that affect 
millions of Americans each day, not just telecommunications but 
oil and gas and pharmaceuticals and a wide variety of areas. It 
is not just telecommunications, but it is Barnes and Noble 
threatening small bookstores, Mobil and Exxon, BP and Arco, 
Alcoa and Reynolds Aluminum, Phelps Dodge and others.
    I hope that we will on this committee examine these 
questions more generally. My gut feeling is that a fair number 
of these mergers do not threaten the interest of consumers. 
They are more likely to be responses to global competition, 
technology, and productivity.
    But I do think a relatively small percentage of these 
mergers are truly serious for consumer interests, and of those 
that represent a problem, a disproportionate percentage are in 
the telecommunications sector. It is becoming clear to me from 
the merger surge in telecommunications that what is needed are 
some rules of the road for the information superhighway.
    In the past, for example, regulators tended to find 
problems mostly in cases where merging companies were direct 
head-to-head competitors. For example, the proposed deal 
between MCI/WorldCom and Sprint is the kind of merger that is 
always brought antitrust scrutiny, but especially with high 
tech and new economy industries the old approach to merger 
review does not cut it any more.
    BellAtlantic and NYNEX were never direct competitors 
because for years they were regulated monopoly utilities, but 
after deregulation, they could have been competitors if the 
merger had not gone forward.
    Now, it is hard to measure this loss of potential 
competition from the marketplace, and that makes it hard for 
regulators to hold up mergers that only reduce potential, not 
actual competition, yet these same regulators are willing to 
allow mergers between U.S. companies to go forward when the 
merging companies can point to potential overseas competition 
that might come into U.S. markets.
    So I want to wrap up with a few theories that we might 
examine. First, if potential overseas competition is a valid 
reason to let these mergers of U.S. telecommunications firms go 
forward, then the loss of potential domestic competition also 
should be an equally valid reason to hold up mergers in some 
other cases.
    One theory I would like to examine is exploring whether a 
more consistent standard should be applied when evaluating the 
impact of mergers both pro and con and potential competition.
    A second concern, besides losing potential competition, is 
that combinations like BellAtlantic and NYNEX can also mean the 
loss of critical information necessary to protect consumers.
    For example, one way regulators can implement regulations 
is to compare local exchange companies in different parts of 
the country to see if one is overcharging customers. If they 
all merge, you cannot do that any more.
    In some cases, regulators have required divestitures or 
imposed conditions on particular mergers to address these 
concerns, but it has been ad hoc. For example, in the SBC/
Ameritech merger, regulators imposed conditions for providing 
broadband access to low income areas. That is a laudable goal, 
but these conditions raise other questions. Is this approach 
the best way to achieve universal broadband access, and how 
does it affect competition with unmerged companies that have no 
similar requirement, and what is going to happen to the 
customers of unmerged companies in low income areas?
    Third, in the past, regulators generally have been 
favorable toward vertical combinations that involve companies 
at different levels of the same industry, such as a 
manufacturer and a retailer merging together. In general, when 
both companies are in unregulated and competitive markets, 
these types of combinations make for efficient competition in 
the industry, but when these types of mergers involve regulated 
companies, or companies with tremendous market power, as is the 
case in telecommunications, the merger may need special 
scrutiny to ensure that benefits of greater efficiency outweigh 
the potential for unfair competition.
    When a company that already dominates one market merges 
with a company in a competitive market, then that combined 
company may be able to dominate both markets, and a possible 
example there is TCI and AT&T. In evaluating these mergers, how 
do we make sure that the merged company cannot leverage its 
market power to compete unfairly in other sectors?
    Finally, when evaluating the type of megamergers we are 
seeing today, should the regulators take a broader view that 
considers not only the immediate merger proposal but how 
competitors in the industry are likely to respond? Even if the 
particular deal looks OK, another merger in the industry may go 
over the top in terms of too much market concentration and not 
enough competition. Regulators do not have to be soothsayers to 
be able to anticipate that one megadeal will prompt others to 
follow.
    In certain cases, it should be fairly obvious that once the 
door is open with one megamerger, others will follow. For 
example, the clear channel AM/FM merger can be seen as an 
effort to remain competitive with the merged CBS/Viacom 
Company.
    Mr. Chairman, the merger surge may in fact be contagious, 
but I am not prepared at this point to impose a quarantine on 
all mergers. I think it is time to look at some of the 
distinctions between what constitutes a merger that is in the 
consumer's interest and a set of factors that may constitute 
mergers that hurt consumers.
    So we want to look at these issues. I appreciate your 
holding this hearing, and I hope that this will, in fact, begin 
a series of hearings so that we can, in fact, look at the 
enormous ramifications that mergers do have on our society.
    I thank you.
    The Chairman. Senator Gorton.
    Senator Gorton. No statement.
    The Chairman. Senator Bryan.

              STATEMENT OF HON. RICHARD H. BRYAN, 
                    U.S. SENATOR FROM NEVADA

    Senator Bryan. Thank you very much, Mr. Chairman. Let me 
join with my colleagues in commending you for your leadership 
in having this hearing. We will hear shortly from the chairman 
of the Federal Trade Commission, but I think in his prepared 
statement there is an interesting statistic that I think 
underscores, Mr. Chairman, both what you have said as well as 
what Senator Wyden has said, and that is, he goes on to point 
out that there has been an unprecedented merger wave in this 
country. In fiscal year 1999, we received almost 4,700 Hart-
Scott-Rodino filings. That is nearly three times the number 
that we received only 4 years ago.
    Mr. Chairman, we had a similar situation, at least in terms 
of the numbers of mergers and combinations that occurred in the 
last century that led to a whole regulatory structure that 
protected consumers from unfair combinations, the Sherman Act, 
the Clayton Antitrust Act. I am not suggesting that the merger 
wave that we have seen in the last decade suggests that we need 
some type of new regulatory model or constraint, but I think it 
does raise some serious questions, and hopefully we can get 
some of the answers this morning.
    There is no question, at least if you follow the television 
ads, that it appears that long distance carriers are highly 
competitive. Ad after ad after ad have one company competing 
against another. Less clear, Mr. Chairman, in my judgment is 
the situation with respect to local service.
    We are fortunate in Southern Nevada. Sprint does a fine job 
in terms of the technology and the quality of the service they 
provide, but I must say I have some questions in terms of what 
are the long-term implications of these mergers. Does the 
consumer benefit? Are there some things we ought to be 
concerned about down the road? I would hope we might get some 
of those answers this morning.
    You know, the Congress, in its enactment of the 1996 
Telecom Act I think expected a number of things to occur, but 
its underlying premise was to generate more competition. I 
think that has occurred in some aspects of the 
telecommunications industry. Regrettably, I think that has not 
been the case with respect to local service generally, and so 
it is not without precedent that our legislative enactments 
create the doctrine of unintended consequences.
    I do not know whether that is true in this case, but our 
first two witnesses I think can provide us considerable insight 
into these questions, and I look forward to hearing their 
testimony and again, Mr. Chairman, I thank you for your 
leadership in providing us with this hearing.
    The Chairman. I thank my colleagues for being here. I thank 
the witnesses for being here. I do not know who is senior here, 
but if we go by age, Mr. Pitofsky, I think we would start with 
you.
    [Laughter.]

  STATEMENT OF HON. ROBERT PITOFSKY, CHAIRMAN, FEDERAL TRADE 
                           COMMISSION

    Mr. Pitofsky. Thank you, Senator.
    Mr. Chairman, Members of the Committee----
    The Chairman. Somehow I have become more and more cognizant 
of that.
    [Laughter.]
    Mr. Pitofsky. It seems to happen to all of us.
    I am delighted to be here, and to present testimony of the 
Federal Trade Commission on this extremely important subject of 
mergers, and especially mergers in the telecommunications 
industry.
    As each of your opening statements pointed out, there is a 
remarkable merger wave going on in this country. It is the most 
active in terms of the percentage of national assets acquired 
since the end of the 19th Century.
    In each of the last 2 years, the Department of Justice and 
the Federal Trade Commission reviewed roughly 4,700 mergers. In 
1998, $1.6 trillion in assets were scooped up in merger 
activity. When I say 4,700 mergers, by the way, we only look at 
mergers where the acquired asset is valued at $15 million, so 
we're talking about fairly substantial deals.
    Nevertheless, I do not believe that the merger wave--that 
is the 4,700 merges is the problem. Rather, I think it is a 
symptom of a successful, unusually dynamic economy.
    Many of these mergers are reactions to global competition, 
firms trying to position themselves to compete in an 
increasingly global market. Many of them involve high tech 
firms where there is a lot of moving around, a lot of changing, 
a lot of restructuring and, of course, many of these mergers 
are a response to deregulation, including the wave of mergers 
in the telecommunications field.
    The Department and the FTC challenge about 2 percent of all 
the mergers that are filed. That is a good deal more than the 
1980's, but not too different from averages over recent 
decades. The problem I think is not the 4,700 mergers, it is 
the increasing number of megamergers involving very large 
firms, usually often direct competitors, at the top of their 
markets. We find mergers proposed among firms that are numbers 
1 and 2 in the market, 1 and 3, 2 and 3, and that is a little 
different than in past decades. I think that is a change from 
what we saw 10 and 20 years ago, and I think some of that is 
going on in telecommunications as well.
    Now, I should say that most telecommunications mergers are 
handled by the Department of Justice, certainly the long 
distance instances, mergers among the RBOC's and so on. We have 
traditionally taken the lead with respect to cable, and I 
thought I would talk about that today.
    We have challenged several instances in which there were 
cable overlaps, although in most regions of the country there 
is only one cable company, but if there are two and they try to 
merge, we have successfully challenged those transactions.
    The most important and complicated case that we handled in 
this area had to do with the proposed TCI/Time Warner/Turner 
merger. It was a very complicated transaction, but reduced to 
essentials the merger would have produced at the programming 
level--i.e. firms that create programming for cable and TV--a 
40 percent market share, and at the distribution level, 44 
percent market shares. Those are very high. It was essentially 
a vertical merger, but those are still very high market shares.
    We settled the case with an elaborate order. Step 1 was to 
assure that TCI essentially stepped out of the deal, and they 
did that by giving up voting rights in the stock that they 
would have owned in Time Warner.
    Step 2 was slightly unusual for us, and that was a 
regulatory order which dealt with the possibility of 
discrimination against the smaller companies that were trying 
to get into this market. The programmers were fearful of 
discrimination, that they would not have a fair opportunity to 
compete for space on the Time Warner cable systems if they were 
competing against Turner materials. Possible competitors of 
cable--direct broadcast was the most obvious example--were very 
concerned, were fearful that they would not have access to 
programming.
    We negotiated with the consent of the parties, an order 
which provided that there should be no discrimination, and that 
parties would be treated no differently whether they were part 
of that Time Warner/Turner corporate family or not.
    I do not usually like orders like that. They are difficult 
to monitor, they are difficult to administer. In this case, 
however, I think this probably worked out rather well. We have 
not received a complaint in the 2\1/2\ years since we entered 
that order by any programmer or by any cable competitor that 
they have been denied fair access to materials.
    Finally, let me say a word about the standards that ought 
to be applied to telemarketing mergers. In one sense, it is not 
appropriate to have different standards for the oil industry, 
the steel industry, and communications industries. The Clayton 
Act does not draw any distinctions.
    On the other hand, I have always felt that the history of 
antitrust, the policy of antitrust, should involve more than 
economics. It is more than dollars and cents. It is more than 
supply curves and demand curves. Therefore, when we are talking 
about telecommunications and cable networks, we are talking 
about competition that affects the marketplace of ideas. We are 
talking about elements that impact on the First Amendment.
    When we look at a merger involving two firms in the defense 
industry, we take national security into account. Judges have 
said: of course if we need this merger for national security 
purposes that is a factor that we would consider.
    Again, I do not think the legal standards can be different, 
but certainly we can give close scrutiny to mergers that impact 
on the First Amendment and the marketplace of ideas.
    Finally, let me just join the comments of Senator Wyden 
that there is no more important issue on the economic side of 
domestic policy, certainly on the antitrust side, than this 
wave of mergers and the introduction in just the last few years 
of megamergers.
    We never saw $60 billion and $80 billion and $120 billion 
mergers until quite recently. Now we see them every several 
months. We thought we had the record merger at the FTC when 
Exxon and Mobil proposed a merger of $80-something billion. 
That record lasted for about 4 months.
    Telecommunications mergers touch upon important issues, and 
it deserves and merits the attention of this committee, and I 
compliment the committee on taking the time and effort to 
address these problems.
    Thank you.
    [The prepared statement of Mr. Pitofsky follows:]

         Prepared Statement of Hon. Robert Pitofsky, Chairman, 
                        Federal Trade Commission
I. Introduction

    Mr. Chairman and members of the Committee, I \1\ am pleased to 
appear before you today to present the testimony of the Federal Trade 
Commission concerning the important topic of mergers in the 
telecommunications industry. This is an industry experiencing rapid 
technological and regulatory change leading to new products and 
services not only in telecommunications, but also in industries that 
use telecommunications products as inputs, such as computers, data 
retrieval and transmission, and the defense industry. Anyone whose 
business depends on faster and more reliable data movement is 
benefitting from these kinds of changes in the telecommunications 
industry.
---------------------------------------------------------------------------
    \1\ This written statement represents the views of the Federal 
Trade Commission. My oral presentation and response to questions are my 
own, and do not necessarily represent the views of the Commission or 
any other Commissioner.
---------------------------------------------------------------------------
    At the same time, we have seen a growing number of significant 
structural reorganizations, both in telecommunications and in other 
industries. Such reorganizations may be a legitimate response to 
economic needs, but may in other instances threaten competition and the 
rights of consumers. A vigilant merger policy is particularly important 
so that the forces pushing consolidation do not result in unilateral or 
collusive anticompetitive effects, which would result in a lost 
opportunity to strengthen competition in this vital industry and would 
defeat the purpose of your recent legislative efforts at deregulation.

II. The Merger Wave

    Our country is clearly in the midst of an unprecedented merger 
wave. In fiscal year 1999, we received almost 4700 Hart-Scott-Rodino 
\2\ filings. That number is approximately at the level of the record 
number of filings from the previous fiscal year, and is almost three 
times the number we received only four years ago. The total dollar 
value of mergers announced in 1998 was over $1.6 trillion, an increase 
by a factor of 10 since 1992. \3\
---------------------------------------------------------------------------
    \2\ SeePub. L. No. 94-435, 90 Stat. 1383 (1976) (codified as 
amended in scattered sections of 15 U.S.C.).
    \3\ See Economic Report of the President 39 (1999), available at 
http://www.gpo.ucop.edu/catalog/erp99.html
---------------------------------------------------------------------------
    The telecommunications industry has been swept up in the merger 
wave. The telephone, cable, entertainment, data transmission, and other 
industry or market segments have recently experienced both fast growth 
and significant consolidation. Some flavor of the increase in 
telecommunications transactions can be gleaned from the number of HSR 
filings. The number of transactions filed under the Standard Industrial 
Code classification for communications has increased by almost 50 
percent since 1995, while the total dollar value has increased 
eightfold to more than $266 billion.
    The antitrust agencies have been actively monitoring these areas. 
Since 1995, the FTC has investigated or brought cases in video 
programming and cable distribution, \4\ several cable overbuild 
matters, and the acquisition of a movie studio by a cable company. \5\ 
The Department of Justice has been similarly active, challenging 
acquisitions in satellite communications and broadcasting, \6\ cellular 
and PCS telephone service,\7\ and Internet backbone 
service. \8\ Although the Commission has been active in cable and 
entertainment industries, most of the mergers involving telephones and 
commercial satellite services have been analyzed by the DOJ pursuant to 
the two agencies' clearance agreement, which divides matters on the 
basis of recent expertise. Moreover, the Commission is barred by 
Section 11 of the Clayton Act and Section 5 of the FTC Act from 
exercising jurisdiction over common carriers.
---------------------------------------------------------------------------
    \4\ Time Warner, Inc., 123 F.T.C. 171 (1997) (consent order).
    \5\ Tele-communications, Inc. and Liberty Media Corp., FTC File No. 
941 0008, 58 Fed. Reg. 63167, 5 Trade Reg. Rep. (CCH) para. 23,497 
(Nov. 15, 1993) (consent order accepted for public comment). The 
transaction was subsequently abandoned and the consent agreement was 
withdrawn.
    \6\ United States v. Primestar, Inc., Civ. No. 1:98CV01193 (JLG) 
(D.D.C. May 12, 1998) (complaint). The transaction was abandoned.
    \7\ United States v. Bell Atlantic Corp., Civ. No. 1:99CV01119 
(D.D.C. May 7, 1999) (consent decree).
    \8\ United States v. Concert PLC, Civ. Ac. No. 94-1317 (TFH) 
(D.D.C. June 14, 1994) (consent decree).
---------------------------------------------------------------------------
    Despite little growth in resources since 1992, the Commission has 
established a strong track record of promptly identifying and remedying 
problematic mergers. In 1999, the Bureau of Competition issued 43 
requests for additional information from potentially merging parties 
and brought 17 enforcement actions. In another 12 cases, the parties 
abandoned their proposed transactions based on concerns raised by 
Bureau staff. In 1998, the Commission litigated three merger cases: FTC 
v. Cardinal Health, Inc., \9\ FTC v. McKesson Corp., \10\ and Tenet 
Healthcare Corp. \11\
---------------------------------------------------------------------------
    \9\ 12 F. Supp. 2d 34 (D.D.C. 1998).
    \10\ Id. Cardinal Health and McKesson were joint actions by the FTC 
to enjoin two related, but separate, mergers of prescription drug 
wholesalers.
    \11\ 17 F. Supp. 2d 937 (E.D. Mo. 1997), rev'd, No. 98-2123, 1999 
WL 512108 (8th Cir. July 21, 1999).
---------------------------------------------------------------------------
    Why do merger waves occur, and what are the forces behind the 
current one? This is not the first time the United States has 
experienced a period of rapid consolidation. In the 1980s many larger 
acquisitions were fueled largely by junk bond financing, corporate 
raiders, and management-led leveraged buy-outs. Many companies were 
acquired for their financial break-up value. \12\ Current 
consolidations are more likely to be motivated by strategic goals and 
to involve competitors, suppliers, purchasers, or manufacturers of 
complementary goods. They are therefore more likely to raise 
competitive issues and to require more resource-intensive scrutiny. 
Among the current factors behind the current merger wave are:
---------------------------------------------------------------------------
    \12\ See ``Merger Wave Gathers Force as Strategies Demand Buying or 
Being Bought,'' Wall St. J., Feb. 26, 1997, at A1.

---------------------------------------------------------------------------
Increasing Global Competition

    In 1995, the Commission held hearings on Competition Policy in the 
New High-Tech, Global Marketplace. During those hearings, many 
witnesses commented on the substantial increase in competition from 
foreign corporations. \13\ In many of the most important product 
markets for consumers, international competitors have captured 
substantial market share. Automobiles, commercial aircraft, and 
financial services are now sold in world markets. The Commission's 
international workload component has grown accordingly. Approximately 
25 percent of all mergers reported to the FTC and DOJ involve parties 
from two or more countries, and 50 percent of the FTC's full merger 
investigations involve a foreign party, or assets or information 
located abroad.
---------------------------------------------------------------------------
    \13\ See FTC, Anticipating the 21st Century: Competition Policy in 
the New High-Tech, Global Marketplace (May 1996).
---------------------------------------------------------------------------
    This increased international competitiveness is reflected in the 
telecommunications industry as well. With the erosion of trade 
restrictions and other regulatory barriers, the amount of 
telecommunications services flowing across borders, such as telephony, 
data transmission, and entertainment, has grown, as have the number of 
mergers and joint ventures among firms headquartered in different 
countries.

Deregulation

    A significant part of the merger wave is taking place in industries 
that are either undergoing or anticipating deregulation. In the past 
few years, deregulation has occurred in the natural gas industry and 
the airline industry, leading to a number of mergers in each. \14\ 
Deregulation is now occurring in other industries, including 
electricity, financial services, and telecommunications, and we are 
beginning to see merger activity increasing in these industries also.
---------------------------------------------------------------------------
    \14\ See CMS Energy Corp., Dkt. No. C-3877 (June 10, 1999) (consent 
order); Arkla, Inc., 112 F.T.C. 509 (1989) (consent order).
---------------------------------------------------------------------------
    Deregulation of an industry often results in structural change and 
increased competition. Firms can take advantage of economies of scale 
and scope that were previously denied them. Mergers are often a way for 
these firms to acquire quickly the assets and other capabilities needed 
to expand into new product or geographic markets. They can also 
facilitate market entry across traditional industry lines. Firms in 
deregulated industries frequently seek to provide a bundle of products 
and services. We see all of these factors at work in 
telecommunications, particularly in the technological convergence of 
the cable and telephone industries.
    Not all mergers that occur in response to deregulation are 
necessarily procompetitive, however. The lessons from the airline 
industry teach us that merger scrutiny in industries undergoing 
deregulation is necessary to prevent consolidations that are harmful to 
consumers. In the airline industry, the Transportation Department, 
which, at that time, had final merger authority, approved a number of 
mergers over the objection of the DOJ. Some antitrust experts believe 
that the result was higher fares, less service, and the domination of a 
number of major airports by a single carrier. Moreover, firms may react 
to deregulation by attempting to combine with other firms that threaten 
to enter historically protected product and geographic markets.

Technological Change

    Technology is often an important factor in analyzing a merger. 
Rapid technological development may help a market self-correct any 
competitive problems. Now, technology also has become increasingly 
important as a catalyst for merger activity. We are increasingly 
certain that technological progress is vital to long-term economic 
growth. Increased merger activity in telecommunications is clearly a 
response to new technologies. For example, the extension of broadband 
access into consumers' homes is a key factor behind many 
telecommunications mergers. Once again, however, incumbent firms 
threatened by technological change may attempt to acquire new 
competitors instead of developing their own technologies, which may 
deprive consumers of the technological horse races that we see in many 
high-tech industries today.

Strategic Mergers

    More recent mergers have involved strategic considerations. Firms 
have become more interested in pursuing leadership or dominance in 
their industries or market segments. There are several reasons for this 
trend. Concern about the large size of foreign competitors that 
dominate their home markets may lead to the conclusion that bigger is 
better. Anxiety about technological change may lead companies to hedge 
their bets through acquisitions or equity investments in a variety of 
firms. Firms may believe that efficiency continues to increase with 
size, or that profits will inevitably accrue from the acquisition of 
large market shares. These kinds of mergers may have serious 
competitive consequences by increasing a firm's unilateral ability to 
increase prices or reduce output.

Financial Market Conditions

    Mergers need financing, and current financial conditions are ideal 
for an expansive supply of capital--low inflation, low interest rates, 
and a booming stock market. These conditions have led to an increasing 
number of deals financed through exchanges of stock. To the extent that 
mergers are strategic, and that is reflected in stock prices, the 
mergers will more likely be financed through exchanges of equity.

III. Competitive Concerns in Deregulating Industries

    The elimination or substantial reduction of regulation is a 
laudable goal. As a believer in the efficiency of markets and of 
market-based incentives, the Commission applauds movement in these 
deregulating industries to more competitive marketplaces. During such a 
transition, effective antitrust oversight is critical to prevent 
private accumulation of control over important sectors of the national 
economy and to forestall abuses of market power. As the 
telecommunications industry is deregulated, we must be aware of a few 
general principles applicable to deregulating industries.
    First, participants in an industry undergoing deregulation, 
accustomed to coordinated action among themselves or to the protection 
of regulators who guarantee a monopoly franchise, often seek to 
maintain or extend their market power after deregulation occurs. This 
effectively substitutes private regulation for public regulation, 
depriving consumers of efficiency without public accountability or 
supervision. Cartel behavior in place of government price restrictions 
is a classic example. This has not been a problem with respect to 
broadcast networks, cable distribution and cable programming. But there 
can be strong incentives for incumbents to keep new entrants out of 
what used to be a market protected by regulatory barriers. We can see 
aspects of this problem as the long distance telephone companies 
attempt to enter local markets through local exchange networks that are 
supposed to be, but may not effectively be, non-discriminatory. This 
can be a serious anticompetitive problem.
    Second, transition out of a regulatory regime is almost never 
complete and immediate. Rather, a patchwork of state, federal and 
international rules continues to apply even as parts of a market are 
opened to competition. In the telecommunications area, Congress is 
still wrestling with the issue of direct broadcast satellites and the 
transmission of local stations. Serious regulatory problems may arise 
where some players in an industry are regulated and others are not. It 
is difficult and often unfair to try to maintain a system where direct 
competitors are subject to substantially different regulatory rules. 
For example, many believe that a principal reason truck transportation 
was regulated for a time in the United States was to level the 
competitive playing field between trucking and the heavily regulated 
railroad industry. But if deregulation is to succeed, the more 
consistent strategy is to aim to equalize treatment by reducing 
regulatory burdens for all rather than by increasing them for new 
unregulated competitors.
    Third, some policy goals that can be handled comfortably in a 
regulatory regime are difficult to achieve through antitrust 
enforcement. During a transition, some regulation may continue to be 
necessary--for example, caps on cable rates or mandated access to local 
markets--to assist during the period before full competition emerges. 
While antitrust agencies can employ such remedies, we have been more 
successful with structural remedies than with behavioral relief. For 
example, we almost never use rate regulation remedies, and mandatory 
access remedies are seldom used.
    Fourth, as a result of the factors discussed above, application of 
the antitrust laws to newly deregulated industries often raises 
difficult and unconventional issues from the point of view of 
traditional antitrust policy. The very fact that an industrial sector 
was regulated suggests the possibility of some past actual or perceived 
market failure, or at least some competitive peculiarities, and 
therefore calls for a special sensitivity in applying conventional 
antitrust rules.

IV. Competitive Concerns in Telecommunications Industries

    A number of competitive concerns may be raised by the kinds of 
telecommunications mergers that we are seeing. A horizontal combination 
of competitors through merger, joint venture or other agreement can 
result in a direct loss of competition. An acquisition of a potential 
competitor might have significant current or future competitive 
effects. And a vertical merger of complementary but non-competing 
businesses might have foreclosure or bottleneck effects. Some mergers 
might have several of these effects. Several of these potential 
anticompetitive effects are illustrated by the Commission's enforcement 
action in the Time Warner/Turner Broadcasting/TCI merger.\15\ This 
transaction involved the proposal by Time Warner to acquire Turner 
Broadcasting to create the world's largest media company. These were 
two of the leading firms selling video programming to multichannel 
distributors, which in turn sell that programming to subscribers. Time 
Warner held a majority interest in HBO and Cinemax, two premium cable 
networks, and Turner Broadcasting owned several ``marquee'' or ``crown 
jewel'' cable networks such as CNN, Turner Network Television 
(``TNT''), and TBS SuperStation, as well as several other cable 
networks. Together, the two companies accounted for about 40 percent of 
all cable programming in the United States.
---------------------------------------------------------------------------
    \15\ Time Warner, supra n. 4.
---------------------------------------------------------------------------
    In addition, both firms were already linked with large cable 
operations, and the merger would have increased the level of vertical 
integration, and potentially foreclosed competitors in both the 
programming production and multichannel distribution levels. Time 
Warner was already the second largest distributor of cable television 
in the United States, with about 17 percent of all cable households. 
Turner Broadcasting already had strong ties to TCI, the largest 
operator of cable television systems in the United States, with about 
27 percent of all cable television households.
    As a result of the proposed transaction, over 40 percent of 
programming would have been integrated by full or partial ownership 
with two cable companies that collectively controlled over 40 percent 
of cable distribution in the United States. In addition, as another 
part of the deal, TCI would have entered into a mandatory carriage 
agreement with Time Warner, which would have required TCI to carry four 
of Turner's top cable channels for 20 years, but at preferential 
prices. In effect, this was a form of partial integration by contract, 
and it would have further affected TCI's incentives to carry non-
affiliated programming.
    Both horizontal and vertical competitive issues were present in 
this case. The key horizontal issue was defining the relevant market 
when the merger combined different kinds of programming. In this case, 
Time Warner owned HBO and Turner owned CNN. For most customers, they 
might not be direct substitutes. However, from the point of view of the 
direct buyers of video programming--the multichannel distributors--a 
program like CNN can constrain anticompetitive pricing of other 
channels. Before the merger, a cable system operator could go without 
HBO as long as another marquee program such as CNN was available for 
packaging with other programs into a network that consumers would be 
willing to buy. That gave cable operators some leverage to resist 
anticompetitive pricing on HBO. However, if HBO and CNN were available 
to cable operators only as a bundle, cable operators would lose that 
leverage.
    The key vertical issue in this case was access. By that, we mean 
not only access in absolute terms, but also the relative cost of access 
among competing firms. This transaction raised those concerns at two 
levels. The first was upstream access to video programming by firms 
that distribute multichannel video programming to households and other 
subscribers. Upstream access was a concern because a merged Time Warner 
and TCI could block entry into their distribution markets or raise 
their rivals' costs through their control of a large portion of video 
programming. Potential entrants into local cable markets could be 
impeded from entering if they could not gain access to those ``must 
have'' channels at non-discriminatory prices. Other firms, such as a 
direct broadcast satellite service, could have their input costs raised 
to noncompetitive levels. In sum, increased vertical integration could 
create an incentive for the merged entity to use market power over 
programming to eliminate competition or potential competition at the 
distribution level.
    The second concern was downstream access to multichannel 
distribution by producers of video programming. At the downstream 
distribution level, the acquisition was likely to make it more 
difficult for other producers of video programming to gain access to 
the distribution market. Time Warner's cable systems, and TCI through 
its financial interest in Time Warner, were likely to favor Time Warner 
and Turner programming over a competitor's. And since Time Warner and 
TCI together controlled such a large percentage of the distribution 
market, a competing video programmer would have found it difficult to 
achieve sufficient distribution to realize economies of scale.
    Development of alternative programming also would have been 
discouraged by TCI's long-term carriage arrangement with Time Warner. 
That carriage agreement would have lessened TCI's incentives to sign up 
better or less expensive alternatives to the existing Time Warner 
programming that is already committed under contract. The mandatory 
carriage commitment also would have reduced TCI's ability to carry 
alternative services, because current cable distribution is capacity-
constrained to a large extent.
    We dealt with both the horizontal and vertical concerns in this 
case by imposing a number of conditions on the transaction that were 
designed to control the specific mechanism by which competitive harm 
could occur. The FTC consent order included both structural relief and 
other provisions designed to prevent the exercise of market power 
resulting from the merger.
    First, the order required TCI and Liberty Media to divest all of 
their ownership interests in Time Warner. Alternatively, the order 
would cap TCI's ownership of Time Warner stock and deny TCI and its 
controlling shareholders the right to vote the Time Warner stock. This 
divestiture provision addressed the concern that TCI's financial 
interest in Time Warner would make it difficult for competing producers 
of video programming to gain sufficient distribution to be 
competitively viable.
    Second, the order required the parties to cancel the 20-year 
programming service agreement between Time Warner and TCI. The order 
permitted renegotiation of a carriage agreement after a six-month 
``cooling off'' period, to ensure that negotiations are conducted at 
arm's length and are not influenced by considerations related to the 
merger. Any new carriage agreement is limited to five years.
    Third, the order prohibited Time Warner from bundling HBO with any 
Turner networks, and it prohibited the bundling of Turner's CNN, TNT, 
and WTBS with any Time Warner networks. This provision addressed the 
concern that the acquisition could have enabled Time Warner to exercise 
market power through leveraging tactics by bundling ``marquee'' 
channels, either together or with less attractive channels.
    Fourth, the order prohibited Time Warner from discriminating 
against rival service providers at the distribution level in the 
provision of Turner programming. This ensures that new entrants at the 
distribution level would not be unfairly disadvantaged in the pricing 
of Turner programming. It thus preserved reasonable access to 
programming for new services such as direct broadcast satellite 
services, wireless systems, and telephone company entrants.
    Fifth, the order prohibited Time Warner from discriminating against 
rival video programmers that seek carriage on Time Warner distribution 
systems.
    Sixth, the order required Time Warner to carry a 24-hour all news 
channel that would compete with Turner's CNN. This provision was 
included because the all-news segment is the one with the fewest close 
substitutes, and the one for which access to Time Warner distribution 
is most critical.
    Time Warner was a large and complex transaction. Many of the 
concerns we had in that case may also be present in other 
telecommunications mergers.\16\ We see several common characteristics 
in many recent mergers, all of which have implications in the 
telecommunications industry.
---------------------------------------------------------------------------
    \16\ For instance, cable overbuild mergers are usually defended by 
pointing to the efficiencies of consolidating two competing systems, as 
well as the necessity of preparing for impending competition from the 
telephone companies. However, the consolidation that creates these 
efficiencies simultaneously eliminates competition that may benefit 
consumers through lower prices, a higher number of channels, and better 
service. As for telephone company entry into cable, most of that so far 
has been by purchase, rather than de novo entry. See ``Amid All the 
Bets, One Stands Out: AT&T Ventures Into Cable,'' Wall St. J., Nov. 5, 
1999, at A1. The Commission investigated a cable overbuild merger in 
Anne Arundel County, Maryland that raised all of these concerns. In 
addition, the merger raised potential competition problems since one of 
the systems had plans for expansion into parts of the county currently 
occupied only by the other system. The parties abandoned the 
transaction in the face of opposition from FTC staff and antitrust 
officials from the State of Maryland.
---------------------------------------------------------------------------
    First, many transactions involve a consolidation between firms at 
different functional levels. Economic theory teaches that most vertical 
mergers are more likely to have procompetitive aspects and less likely 
to have anticompetitive effects, but that this is not necessarily true 
in any given case. Moreover, both effects can be present in the same 
merger. Our task is to sort out those effects and correct the problems, 
while allowing companies to achieve efficiencies that will benefit 
consumers.
    Second, some transactions threaten to create or tighten a potential 
bottleneck somewhere in the chain of production or distribution. A 
bottleneck transaction can have adverse effects at two levels. First, 
the acquisition can exacerbate competitive conditions at the downstream 
level by raising the costs of current rivals or by blocking potential 
entry. That is, the transaction can create or increase market power of 
the merged firm through control over upstream inputs that are essential 
or important to competitors or potential competitors. Second, a 
bottleneck acquisition can disadvantage competitors or potential 
competitors at the upstream level by impeding their access to 
customers. Therefore, the transaction can enable the parties at both 
levels to increase their market power and protect their turf against 
new competitors.
    Third, many transactions occur in rapidly changing marketplaces. We 
frequently hear the argument that rapid technological change will 
prevent a firm from exercising market power, because a new competitor 
with a new technology will soon take its place. But that is not 
necessarily the case. In some situations, a merger can create a 
roadblock to technological change and prevent a new technology from 
reaching the market. Of course, a necessary condition for adverse 
effects to occur is that the bottleneck really must be a constraint, 
i.e., it cannot be easily expanded or circumvented. For example, we 
would not be concerned about foreclosure of new entry if an entrant 
could enter easily at both the upstream and downstream levels. But 
sometimes that may not be so easy.
    In sum, acquisitions that raise bottleneck concerns are difficult 
to analyze, present difficult problems of proof, and raise difficult 
issues of relief. But it is important that we take a hard look at such 
acquisitions because a bottleneck can be an effective barrier to entry, 
and it can be used strategically to disadvantage rivals. Further, it 
can raise competitive concerns at both the upstream and downstream 
levels of the merging firms' operations. The key policy objective is to 
ensure that access to inputs and markets will not be eliminated by 
mergers and acquisitions.

V. Conclusion

    Mergers and acquisitions in the telecommunications industry are 
occurring at a record pace, caused by technological change, 
deregulation, and other market forces. Many of these transactions have 
been good for the economy and consumers, bringing the ferment of 
innovation and new efficiencies to vital industries. Some transactions, 
however, may be an attempt to stifle new forms of competition. Sensible 
antitrust enforcement remains necessary so that the consumers may begin 
to enjoy the promise of deregulation--whether it be lower prices, 
greater choices, or new and innovative products and services.

    The Chairman. Thank you very much, Mr. Pitofsky.
    Chairman Kennard.

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

    Mr. Kennard. Thank you, Mr. Chairman, members of the 
committee. I, too, appreciate the opportunity to testify before 
the committee today on this important issue. It is also an 
honor to testify with Chairman Bob Pitofsky, someone who has 
been a leading thinker on these issues, and someone whom I have 
admired for many years.
    As you said at the outset, Mr. Chairman, these are 
extraordinary times for consumers in telecommunications. We are 
seeing glimpses of a future where phone lines will deliver 
movies, cable lines will deliver phone calls, and the airwaves 
will carry both.
    Economic indicators are up across the board for the 
industry. Over the past 3 years alone, revenues in the 
communications sector have grown by $140 billion, climbing to a 
level of $500 billion in 1998, and creating over 160 billion 
jobs during that period.
    In the wireless industry, capital investment has more than 
quadrupled since 1993, for a cumulative total of over $60 
billion, and now over 80 million Americans have a mobile phone.
    As we see more competition developing in some of these 
sectors, we are seeing consumer gains, particularly in the long 
distance marketplace. By the end of 1997, there were over 600 
long distance providers competing for customers. We have seen 
prices for interstate long distance calls drop dramatically by 
35 percent since 1992, while prices for international calls 
have fallen by around 50 percent.
    Although we would like to see more competition in the local 
phone sector, we are also seeing some encouraging signs. Wall 
Street is pouring money into the CLEC community. At the time 
that the 1996 Act was passed, there were only about six 
competitive local exchange carriers with a market cap 
collectively of $1.3 billion. Today, there are over 20 publicly 
traded CLEC's with a market cap of over $35 billion.
    We also are seeing a lot of investment pour into the cable 
sector, as that sector tries to compete in new market areas. 
Operators in the cable field have invested nearly $8 billion 
per year since 1996 to upgrade their systems. By the end of the 
year, it is estimated that 65 percent of homes passed by cable 
will have been upgraded, bringing in more channels and enabling 
more services, such as high speed Internet access and cable 
telephony.
    The cable industry also is driving residential broadband 
deployment, with the number of households connected expected to 
triple in 1999 to more than 1.5 million.
    Now, as we see these investments pouring into the industry, 
and with communications firms scrambling to provide services, 
these firms are looking for ways to take advantage of economies 
of scale, which can lead to lower prices and higher quality 
services. They see mergers as an important way to take 
advantage of changes in technology and changes in the 
marketplace and changes in the law.
    As has been pointed out, some mergers are beneficial to 
consumers, but it is the FCC's job to make sure that no 
transfer of control creates a conglomerate so large and so 
dominant that it kills competition and undermines the intent of 
the Telecommunications Act of 1996.
    The worries that were outlined by Chairman McCain in his 
opening statement are exactly true. We must make sure that this 
consolidation does not undermine consumer welfare, and it is 
the FCC's job to make sure that the promises that these merging 
parties make when they come before the FCC and argue that their 
merger is in the public interest are kept. We must hold these 
merging parties to their promises--promises to the American 
consumer.
    Now, the Department of Justice and the FTC are, of course, 
charged with ensuring that the public reaps the benefits of a 
competitive communications marketplace, but those agencies are 
governed by different laws. They apply differently in practice 
in the marketplace.
    The FTC and DOJ administer the antitrust laws. The FCC is 
charged with ensuring that license transfers serve the public 
interest. Now, the FCC's review of these transactions is not an 
antitrust analysis cloaked in public interest rhetoric. It is a 
fundamentally different approach to viewing these transactions.
    DOJ and the FTC do not duplicate the role of the FCC under 
the Communications Act, nor are they charged, like the FCC, 
with creating more competition. Their mandate is to protect 
existing competition from well-defined abuses, including 
mergers that substantially lessen competition and mergers that 
tend to create monopolies.
    The FCC, by contrast, has the responsibility to make sure 
that no transaction will subvert the goals of the 
Communications Act. So we at the FCC have a statutory 
obligation to ensure the mergers will result in tangible 
benefits for American consumers, namely, more choices, lower 
prices, better services, benefits for all American consumers.
    When the FCC considers license transfers, it is acting like 
a court in its quasi-judicial role. In this capacity, the FCC 
follows procedures that are well-defined. In the Administrative 
Procedures Act, the process is open. The FCC develops a public 
record. The FCC explains its decisions in writing, and the 
FCC's decisions are subject to judicial review.
    During my tenure as chairman, the FCC has been presented 
with mergers of breathtaking size and scope that will affect 
consumers for many years to come. I have insisted that the 
public have a role in these decisions. It is not possible to 
define the public interest without public participation, and so 
I have insisted on an open process.
    I have insisted on a process in which we hold public 
hearings; a process that allows many people who are affected by 
our decisionmaking but who do not always have a voice in our 
decisionmaking to be heard--like state regulators and national 
and state consumer groups, and small businesses. I think it is 
important to put this process in context.
    Since the passage of the 1996 Act, the number of mergers 
presented to the Commission has increased to historic 
proportions. Never before have we been faced with this number 
and complexity of transactions to review. And, we have had to 
handle these responsibilities with no increase in resources.
    Frankly, I believe that much of the current controversy 
concerning the FCC's merger review role is a result primarily 
of one transaction: the FCC's review of the SBC/Ameritech 
merger. That transaction involved a proposal by one company 
seeking to acquire fully one-third of the telephone lines in 
the United States, one-third of all telephone lines in this 
country.
    That merger has profound implications for the future 
structure of the telecommunications industry and the ability of 
the FCC to fulfill its mandate to bring competition to 
telephone consumers, as required by the act that you passed.
    In reviewing that merger, we designed a process to ensure 
the public would be heard, and that the pro-competitive 
benefits that the parties came forward and promised would be 
delivered and would actually be realized by the public. In 
thinking about our review of that particular transaction, I was 
going over the points that Senator Wyden made, the four points 
that he outlined that should be considered in review of a 
merger. Clearly the FCC looked hard at three of the four of 
those issues in the context of that merger.
    The fourth one, leveraging market power into another area, 
did not directly apply. But I assure you, Senator Wyden, that 
in the context of that transaction, your concerns that you 
stated earlier were, indeed, addressed.
    Now, having dealt with a number of mergers since the 1996 
Act was passed, including mergers like SBC/Ameritech, we have 
learned much about the process of handling these huge 
megamergers. We have listened to the concerns of the Congress, 
particularly the concerns of Senator McCain and others, and we 
are in the process of developing procedures to ensure that the 
application of our public interest standard is even more clear 
and predictable.
    I have charged our general counsel, Chris Wright, to 
organize an intra-agency transaction team to streamline and 
accelerate the transaction review process, the primary goal 
being to bring more clarity to better explicate our own case 
law on mergers with written guidelines. We also will look at 
ways to leverage the specialized skills of the staff and to 
minimize the resources needed for processing the most 
complicated transactions. The team also will work to make the 
process even more transparent.
    In conclusion, Mr. Chairman, these are indeed extraordinary 
times in the telecommunications industry. No one can predict 
with precision how this marketplace will develop, but of one 
thing I am certain: unbridled consolidation in this field will 
subvert the aims of the communications laws to bring 
competition and deregulation to this marketplace, and unbridled 
consolidation will reverse the progress we have made thus far 
toward competition and more consumer welfare.
    So I respectfully suggest, Mr. Chairman, that now is not 
the time to strip away the FCC's historic authority to protect 
consumers. Now is the time, more than ever before, to ensure 
that any merger approved will serve the public interest.
    Finally, on a somewhat related topic, I wanted to commend 
you, Mr. Chairman, for your leadership in introducing the 
Telecommunications Ownership Diversity Act. In this era of 
consolidation, we must continue to look for ways to ensure that 
small businesses, particularly those owned by minorities and 
women, have an opportunity to participate in this exciting 
marketplace, and I commend you and your colleague, Senator 
Burns, for recognizing that and introducing this historic 
legislation.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Kennard follows:]

       Prepared Statement of Hon. William E. Kennard, Chairman, 
                   Federal Communications Commission

    Thank you Chairman McCain, Ranking Member Hollings, and Members of 
the Committee. I appreciate the opportunity to testify before the 
Committee this morning.
    As we enter the Information Age, the Department of Justice (DOJ), 
the Federal Trade Commission (FTC), and the Federal Communications 
Commission (FCC) are working to gether to ensure that the American 
public reaps the benefits of a robust and dynamic communications 
marketplace. Each agency has a distinct and vital role to play in this 
process.
    As you know, the Telecommunications Act of 1996 charges the FCC 
with the critical function of creating competition in markets where it 
did not exist before. We have a statutory obligation to follow the pro-
competitive and de-regulatory framework of the Act, and to ensure that 
markets move from monopoly markets to competitive ones and that all 
Americans have access to the digital tools of the next century.
    The Department of Justice and the Federal Trade Commission 
administer the antitrust laws. They do not duplicate the statutes laid 
out by the Communications Act, nor do they create more competition. 
Instead, they protect existing competition from a few well-defined 
abuses, including mergers that "substantially lessen competition" and 
mergers that "tend to create a monopoly."
    We have different laws for different agencies, and each of the 
three agencies has an important role to play in this process. And 
together the three agencies are working on behalf of consumers and 
Americans nationwide. The public spends billions of dollars on 
communications and entertainment services every year, and as such the 
public has a huge stake in the development of our nation's 
communications infrastructure. Congress understood this vital interest 
when it passed the 1996 Act and charged the Federal Communications 
Commission with ensuring that competition develops in all 
communications markets.
    In the less than four years since passage of the Act, competition 
and growth in communications markets have grown more rapidly than 
anyone could have imagined. Companies are investing billions of dollars 
in advanced telecommunications networks in our urban and rural areas. 
And consumers are reaping the benefits of this competition and growth. 
Grandparents are now able to talk to their grandchildren hundreds of 
miles away at a rate of seven cents per minute. Husbands and wives 
enjoy the increased security that comes from travelling with a wireless 
telephone. And millions of Americans are discovering the convenience of 
doing their holiday shopping over the Internet.
    This rapid growth of technology and services has taken place far 
more rapidly than anyone could have expected. Even greater progress 
would have been possible had the monopoly carriers put their energy 
into complying with the Act's market-opening provisions instead of 
challenging nearly every part of the Act and nearly every decision 
implementing the Act in nearly every court in the country.
    As a result of these legal and technological changes, 
communications firms ae understandably looking for ways to take 
advantage of increased economies of scale, which can lead to lower 
prices and higher quality services. They are also seeking to combine 
services into packages or bundles, which can benefit consumers through 
the convenience of ``one-stop shopping.'' Communications firms see 
mergers as an important way to take advantage of changes in technology 
and changes in the marketplace.
    ``Good'' mergers can spur competition by creating merged entities 
that can compete more aggressively and that can move more quickly into 
previously monopolized markets. If such competition develops, we can 
substantially deregulate the formerly monopolized markets, just as 
strong competition justified the substantial deregulation of the long 
distance and wireless markets. Thus, the focus must remain on 
eliminating bottlenecks and ensuring that consumers have adequate 
choices to ensure meaningful competition.
    As Adam Smith pointed out, however, there will be no competition 
(and no invisible hand) if business owners are left to their own 
inclinations. Instead, they will quickly decide that cartels and 
monopolies are far better for their interests. ``Bad'' mergers are 
likely to slow the development of competition. ``Bad mergers'' have 
many anti-competitive harms, such as: eliminating firms that would have 
entered markets; raising barriers to entry; discouraging investment; 
increasing the ability of the merged entity to engage in anti-
competitive conduct; and making it more difficult for the Commission 
and State Public Utility Commissions to monitor and implement pro-
competitive policies. Accordingly, the public interest demands 
constraints on the ability of a handful of large communications to 
consolidate communications assets that our vital to our nation's 
economy.
    Discussion of ``the public interest'' in merger cases too often 
focuses on the ``interest'' side of the equation--industry interests, 
shareholder interests and economic interests. The FCC, on the other 
hand, has a unique statutory responsibility to keep the ``public'' side 
of the equation--consumers--in sharp focus. The FCC is in many ways the 
last defense for consumers, and we have a statutory obligation to 
ensure that mergers will result in tangible benefits for American 
consumers, namely, more choices, lower prices, and new and better 
services.
    Although many mergers may be beneficial to the public, it is the 
FCC's job to make sure that no transfers of control create a 
conglomerate so large and so dominant that it kills competition and 
undermines the intent of the Telecommunications Act of 1996.
    If the Commission did not review mergers under the ``public 
interest'' standard, it would be possible under traditional antitrust 
analysis for all the regional Bells and GTE Corp. to merge into a 
single, national local phone company. The country might be taken back 
to the days of Ma Bell and her helpings of higher prices, poorer 
service and stifled innovation. And American consumers would suffer as 
a result.
    In response to assertions that have been made in the press, I'd 
like to be clear that the Commission is not engaging in any 
``shakedowns'' of companies who have merger applications pending before 
it. The Commission is standing up for American consumers by eliminating 
the harms that will be caused by transfers of control and ensuring that 
the benefits reach communications consumers. The Commission does this 
by working with the companies and consumers to arrive at conditions 
that preserve the benefits of mergers while eliminating or adequately 
mitigating their harmful effects. Particularly where markets are 
changing rapidly (as with new technologies), conditions like those 
adopted in the SBC-Ameritech case are the most effective way to ensured 
the development of competition and protect consumers.
    The Commission clearly is following, and has long been following, 
adequate procedures and adhering to consistent, well-defined legal 
standards as set forth in the Administrative Procedure Act. As required 
by the APA, the applicants, opponents, and the public have the 
opportunity to make known their views and have their perspectives taken 
into account. The process is open, the Commission explains its 
decisions in writing, and all decisions are subject to judicial review. 
If the Commission were not already following adequate procedures and 
adhering to consistent legal standards, its decisions would have been 
reversed by the courts.
    Like the common law--the law of property or contracts--the public 
interest test proceeds on a case-by-case basis. This is more efficient, 
and much less regulatory, than writing extensive rules attempting to 
anticipate every way in which any possible transaction might violate 
any part of the Communications Act or the FCC's rules. The public 
interest is a fundamental legal concept, akin to ``good faith,'' 
``reliance,'' ``negligence,'' and ``compensation.'' As such, its 
meaning is inherently fact specific and can only be defined based on 
the circumstances of each individual case. This is particularly true in 
rapidly changing times. Accordingly, case-by-case analysis is often 
superior to writing volumes of rules attempting to explain the 
application of a legal standard to every conceivable fact pattern.
    In the future, the application of the public interest test will be 
even more clear and predictable than today. I have asked our General 
Counsel, Chris Wright, to organize an intra-agency transaction team 
that will be in place by January 3, 2000 to streamline and accelerate 
the transaction review process. A primary goal is to supplement the 
case law explicating the application of the public interest test with 
written guidelines. In addition, we will be looking at ways to leverage 
the specialized skills of the staff involved in reviewing transactions 
to reduce the effort needed to ensure consistency between decisions and 
to minimize the resources needed for processing even the most 
complicated transactions.
    The new intra-agency transaction review team will establish 
deadlines for rapid processing of transfers of control associated with 
transactions. The goal will be to complete even the most difficult 
transactions within 180 days after the parties have filed all of the 
necessary information and public notice of the petitions has been 
issued. Finally, the new team will also work to make the transaction 
review process even more predictable and transparent, so that 
applicants know what is expected of them, what will happen when, and 
the current status of their application. This is consistent with the 
focus of the restructuring of the FCC to operate in a flatter, faster, 
and more functional manner.

    The Chairman. Thank you very much, Chairman, Kennard, and 
thank you for your endorsement of the recent legislation that 
Senator Burns and I introduced. I hope we can move on it.
    I think it is very clear that one of the unintended 
consequences I referred to in my opening statement has to do 
with fewer and fewer minority owned businesses, and involvement 
in the telecommunications industry. That is not appropriate, 
and we ought to give a level playing field to every American.
    Chairman Pitofsky, because of its recent acquisition of TCI 
and other cable companies, according to Mr. Kimmelman AT&T now 
serves 60 percent of all cable customers.
    Notwithstanding this, AT&T/TCI is now attempting to acquire 
Media I, which owns 25.5 percent of Time Warner. How is this 
acquisition not at odds with the FTC's Time Warner/Turner 
decision, the point of which was to separate these cable 
conglomerates?
    Mr. Pitofsky. That is a good question, but I have not 
really looked into the more recent proposals. The market shares 
at the level you described certainly are matters of concern, 
and while I have not looked at these particular facts, I do 
know that our goal was to keep access open. If there is one 
shorthand way of looking at what we did in TCI/Turner/Time 
Warner, it was access, access, access, and I would want to look 
very carefully at the impact on access of these new proposals.
    The Chairman. Well, as you know, in the Time Warner/Turner 
you were concerned that the combined company would leverage its 
programming market power to kill competition and distribution 
by denying competitors must-have cable channels at 
nondiscriminatory prices. Does this bring into play again your 
concerns?
    Mr. Pitofsky. Yes. You would want to look at these new 
proposed mergers very carefully.
    The Chairman. In your testimony, you refer to the local 
telephone companies' cartel behavior in insulating themselves 
from competition by maintaining local exchange networks that 
are supposed to be but may not effectively be 
nondiscriminatory, and you state that this could be a serious 
anticompetitive problem.
    Based on these views, could you analyze the competitive 
impact of the cable industry's attempts to bundle their high 
speed Internet service with their proprietary ISP and insulate 
this arrangement from any type of open access requirement?
    Mr. Pitofsky. I am not sure that I fully understood the 
question, Senator.
    The Chairman. Well, in your testimony you referred to local 
telephone companies' cartel behavior in insulating themselves 
from competition by maintaining local exchange networks that 
are supposed to be but may not effectively be 
nondiscriminatory. That is in your statement.
    Then what is the competitive impact of the cable industry's 
attempts to bundle their high speed Internet service with their 
proprietary ISP and insulate this arrangement from any type of 
open access requirement? Do you believe that is the case?
    Mr. Pitofsky. Again, we have not had an opportunity to look 
at that issue, because those cases are at DOJ and not at the 
FTC. If, in fact, a consequence of these transactions is to 
raise barriers to entry, deny access, then we have taken the 
position in this industry that access is critical, and I would 
expect the Department would take a very careful look at that 
issue.
    The Chairman. I thank you, Mr. Chairman.
    Mr. Kennard, in your statement you characterize a good 
merger as one in which the combined company can, quote, move 
more quickly into monopolized markets.
    You have already approved the AT&T/TCI merger last 
February. You stated, and I quote, I am optimistic because the 
combined resources of AT&T and TCI surely will generate a very 
substantial effort to expand the choices now available to 
residential phone subscribers in TCI territory. I am especially 
pleased by the commitment of AT&T chairman Michael Armstrong 
that AT&T will offer service uniformly in all neighborhoods in 
every city it serves.
    Did you impose any conditions on this merger to assure that 
AT&T does, in fact, move quickly to roll out residential 
telephone service, and did you impose any conditions on the 
merger to assure that AT&T does, in fact, offer this service in 
virtually all neighborhoods in every city it serves?
    Mr. Kennard. Actually, Mr. Chairman, AT&T did make 
representations in the record that they would roll out 
telephone service and broadband services ubiquitously. We did 
rely on those representations when they, in fact, filed their 
transaction and we issued an order granting it.
    The Chairman. Have they so far complied, lived up to your 
optimism?
    Mr. Kennard. I think it is too early to tell. We are 
watching carefully, and we will continue to monitor the roll-
out. I know that they are investing heavily in upgrading their 
systems, and it is my hope that they will be able to bring 
consumers new telephone services, in particular to compete 
against the incumbents in that market.
    The Chairman. Can you tell us what they are doing to comply 
with its commitment to give TCI subscribers direct 
nondiscriminatory access to the Internet service provider of 
their choice?
    Mr. Kennard. Well, we did not impose a condition in the 
merger that they provide nondiscriminatory access to ISP's. 
That was an issue that was raised in the merger, but the FCC 
decided ultimately not to impose that particular condition.
    The Chairman. Chairman Kennard, it takes the FTC an average 
of about 4 months to issue decisions on merger cases. How long 
has it taken the FCC recently?
    Mr. Kennard. Well, it takes different amounts of time, 
depending upon the size and complexity of the transaction. We 
sort of have to look at this question in terms of the type of 
transaction involved. We deal with license transfers and 
approvals of that nature. The small ones go forward very 
quickly, in a matter of days or a couple of months. The more 
complex transactions, the megamergers, if you will, take us 
longer, on average.
    If you look at the category of large mergers, they go 
through in about 6 months. We have taken a lot longer in cases 
where we have these megamergers of huge size and scope 
involving many issues of first impression and the public 
interest standard as I stated earlier, I have made sure that we 
open up the process so that States' Attorneys General and State 
regulators, consumer representatives and others have an 
opportunity to be heard, and that takes longer.
    The Chairman. Finally, Chairman Kennard, in his testimony 
Mr. Kimmelman states that the number of regional Bell Operating 
Companies has shrunk from seven to four. MCI and WorldCom have 
merged. Now MCI/WorldCom is attempting to acquire Sprint, 
together representing the majority of long distance revenues. A 
majority of cable TV companies are either owned or operated by 
AT&T or in the process of being owned or operated by AT&T, and 
the rest are busy making nice with each other in order to 
consolidate their service territories. Do you agree with Mr. 
Kimmelman's testimony?
    Mr. Kennard. I agree with Mr. Kimmelman that we should be 
quite concerned about the pace and the scope of consolidation 
that we are seeing in these markets. If you look just at the 
history of Bell Operating Company mergers since the Act was 
passed, beginning with SBC/PacTel and then BellAtlantic/NYNEX 
and then SBC/Ameritech, you can see in our decisions an 
increasing level of concern about the pace of this 
consolidation and also an increase in the nature and 
enforceability of the conditions that we have imposed to make 
sure that this consolidation does not subvert the goals of the 
Communications Act.
    The Chairman. This is a tough question for both of you to 
answer. How concerned should the Congress be?
    Mr. Kennard. I think Congress should be very concerned. 
This is an area that represents fully about one-third of our 
economy. It is producing a lot of economic growth and jobs, and 
that is a function primarily of competition, companies being 
able to move into new markets. The last thing we want to see is 
for that engine of competition to be somehow just squelched by 
monopoly power and consolidation, so I think we have to be 
very, very watchful in this area.
    The Chairman. Chairman Pitofsky, how concerned should we 
be?
    Mr. Pitofsky. Very concerned. I agree with everything 
Chairman Kennard has said, and I would just add this dimension. 
It is not just the question of where we are now, it is where we 
are going, and that is the hardest question for regulators 
looking at mergers and antitrust generally. You look at the 
first deal, you say, well, that one is OK, we can live with 
that. Then the next proposal comes along and its sponsors say, 
well, you cleared that deal, what about ours, and then the 
third and the fourth and the fifth.
    One must ask the question, particularly in this sector of 
the economy, where is it all going to end, and I think Congress 
should be very concerned with that question.
    The Chairman. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. Both of you have 
been excellent, and Bob Pitofsky's last point raises a question 
that is central to me in this communications area, and I think 
that when you look at some of these deals in the communications 
area you are talking about what is potentially a threat to the 
First Amendment. I think we are going to have to start 
factoring in the First Amendment in a very specific way as we 
look at these deals.
    Time Warner/Turner, 40 percent of cable programming is 
being merged. As you know, the reason I pushed you all so hard 
on the Barnes and Noble/Ingram merger is, I was very troubled 
about what would happen if a retailer and a wholesaler merged, 
and I thought we would lose a lot of the diversity of ideas in 
our country. So my first question to you, Mr. Pitofsky, would 
be, how should antitrust regulators incorporate First Amendment 
concerns in decisionmaking, given where we are headed?
    Mr. Pitofsky. Unless Congress wants to direct us otherwise, 
I think it is through close scrutiny. I think one should simply 
pay more attention when communications, news and so forth is 
involved. I thought we did that in Barnes and Noble.
    Incidentally, we did that in Time Warner. One of the 
conditions of the order was that there would be a second 24-
hour news service introduced, because we were concerned that a 
combination of CNN and Time Warner would produce such a 
dominant player that others would not be able to compete. In 
fact, a second and then a third news service came into play.
    Is that because a wholly different set of rules apply to 
networks and cable? No, I do not think that is fair, but we 
should be more alert, more sensitive, and give more careful 
consideration.
    Senator Wyden. I obviously do not want to get you into the 
area of nonpublic information, but what can you tell us simply 
from a theoretical standpoint about the proposed CBS/Viacom 
merger, which would give the combined company control over 
broadcast television stations that reach more than 40 percent 
of the national audience, and in addition what they would get 
through cable interest?
    Set aside the matters of nonpublic information and, if you 
can, touch on it in theory.
    Mr. Pitofsky. An answer to that question is awkward for me. 
Not only is it an ongoing investigation, but it is not our 
ongoing investigation. That merger is under review at the 
Department of Justice, and so I think I probably should limit 
myself to the sort of thing I have said so far this morning, 
and that is, those are very large companies, very significant 
market power at both levels, and therefore it deserves the most 
careful and thorough review.
    Senator Wyden. The next area I wanted to touch on are 
copycat mergers, which I think are getting to be an increasing 
problem as well.
    What is your sense about what antitrust regulators ought to 
do if they foresee imposing conditions on a merger are going to 
cure an immediate antitrust problem with that merger, but that 
the likely effect will be that other companies in the industry 
followup with copycats, and we end up with more consolidation 
and less competition?
    What I am trying to do, in addition to the points I made 
earlier, and I appreciate Mr. Kennard's statement, is to try to 
set out what I think are some key new problems. The First 
Amendment is one that we touched on in the last minute or so, 
but copycat mergers strike me as another very serious one, and 
what is your sense about how this committee and the Senate 
ought to look at those?
    Mr. Pitofsky. Let me take the first shot at it, and then I 
will ask Bill to direct an answer to that.
    I think everything considered, it is the toughest call we 
have to make, and part of that is, there are two reasons why 
copycat mergers could be occurring. One is, everybody in the 
industry recognizes that the first merger was very efficient 
and sensible and pro-consume, and therefore the trend toward 
concentration is really energized by the fact that the first 
merger was a good idea.
    On the other hand, you have other copycat mergers in which 
the first firm achieved substantial market power and then the 
second pair and the third pair come to the conclusion that they 
have to be the same size as the first pair in order to compete 
in global markets, or even in a domestic market.
    One of the things that they teach in the business schools 
these days, and I am not sure it is such a great idea, is that 
you cannot really be successful in a market unless you are 
number 1 or number 2. I worry that the trend toward mergers, 
the trend toward consolidation in some industries, is motivated 
simply by a concern to have as much market power as anybody 
else in that industry.
    Playing those two things off against each other is 
exceptionally difficult, especially when the first merger is 
one that the courts are very unlikely to strike down, and it is 
only because it will lead to the second, third, and fourth that 
you are concerned.
    Senator Wyden. Let me see if I can touch on one involving 
the Microsoft decision. Some of the analysts have been arguing 
in the last couple of days that the Microsoft decision has set 
some limits for when a company can use marketplace power to 
compete in what amounts to another marketplace sector.
    Again, without forcing you into areas that are sensitive, 
if that is the case, how would you foresee it applying to cable 
companies, or local telephone service companies with 
marketplace power in one area seeking to compete in other 
markets?
    Mr. Pitofsky. I beleive these are conventional antitrust 
rules, and they will apply regardless of the industry involved.
    I have seen the reports from Silicon Valley and elsewhere 
that we are changing the rules of the game in the way in which 
we regulate large firms. The Federal Trade Commission sued and 
then settled with Intel. The Department of Justice has this 
long-running antitrust controversy with Microsoft.
    I want to fundamentally disagree with people who say we are 
changing the rules of the game. On the contrary, I think what 
these cases are doing is reestablishing what fundamental rules 
under the Sherman Act really are, and I think in the long run 
they will help us encourage innovation rather than discourage 
innovation in high tech markets. That is true across the 
markets you mentioned.
    Senator Wyden. Mr. Kennard, let me ask you one about that 
noncontroversial matter in my home town involving AT&T and TCI 
and broadband. The Legg Mason analyst who is going to testify, 
I guess this morning, states, and I quote, it's clear that the 
market doesn't demand a closed network in order to justify 
broadband investment, and AT&T/TCI argued that open access to 
their cable network is going to dry up investment needed to 
upgrade the network.
    Now, WorldCom and Sprint and some of the local carriers 
have invested heavily in upgrades so their networks can carry 
broadband, and they all have open access requirements. Given 
that my constituents feel so strongly about this, what is it 
about AT&T that it cannot attract investment without closed 
networks?
    Mr. Kennard. Well, we have had many conversations, you and 
I, about this topic over this past several months, and I think 
it is fair to say that we agree on what the end game should be 
here. I certainly want to see broadband deployed not only by 
the cable industry, but by many players in an open environment, 
in a competitive environment, and we need to get those 
broadband pipes built quickly.
    It is important for the country, it is important for 
electronic commerce, it is important for us to maintain world 
dominance in the Internet community, and I would not dispute 
the fact that companies like AT&T I think would go ahead and 
deploy broadband even if you had some sort of open access 
regime.
    But I think the fundamental question is, is regulation 
necessary at this time, particularly when we have a very 
nascent industry, the broadband industry, and you have the 
prospect, the hope that multiple players are going to deploy 
it, not only on the DSL platform but also on wireless 
platforms.
    As Chairman Pitofsky stated, I thought very eloquently in 
his testimony, when you are transitioning from a monopoly 
environment to a competitive environment there is always the 
urge to impose more regulation on the new competitors, the new 
entrants in those markets, but I think that our goal as 
policymakers should be to try to promote competition and ease 
regulation on all of the players, and that is why I have 
advocated consistently that that is the approach we should take 
with respect to broadband deployment on cable, at least at this 
juncture.
    If we find that consumer welfare is being undermined in 
some way, or consumers lack choice, we will have opportunities 
to step into that marketplace and intervene, but I just do not 
think now is the time.
    Senator Wyden. Thank you, Mr. Chairman.
    The Chairman. Senator Brownback.

               STATEMENT OF HON. SAM BROWNBACK, 
                    U.S. SENATOR FROM KANSAS

    Senator Brownback. Thank you, Mr. Chairman, and thanks for 
holding this hearing. I think it is a very timely and very 
important hearing to hold, and I thank the two chairmen for 
coming up to testify and to meet with us.
    I am listening and gaining input on the last merger that 
took place involving--Sprint is headquartered in Kansas and has 
a lot of direct impact on constituents of mine, so I have a 
concern not only for the impact it is having across the 
marketplace and legalities, but the impact it is having on 
constituents and job dislocation that could potentially happen 
there.
    I would like to ask Chairman Kennard, if I could, a year 
ago we had MCI, WorldCom, and Sprint, two, three, and four all 
competing in this long distance marketplace, and here we are a 
year later, and all three of them are together. As you look at 
that fast year that took place, what levels of concern does 
that raise in your mind for the public interest of having those 
three major competitors in that long distance market merging 
together here in a short, fast year?
    Mr. Kennard. Well, Senators, as you know, that merger will 
soon be before the FCC, so I do not think it would be 
appropriate for me to forecast what the decision will be there. 
I will say that, as I have said before, I think that we should 
be concerned when the number 2 and 3 competitors in residential 
long distance marketplace propose a combination like this 
before us, so we will be looking very carefully at that 
question.
    Senator Brownback. I would think, as we look forward, we 
would be deeply concerned. If I could ask, actually, both of 
you, in looking forward, if we were to project out in 3 years, 
how many national, full service THATcommunications providers do 
you anticipate that there will be, and how many do you think to 
provide adequate, aggressive competition that there should be?
    Mr. Kennard. It is hard to predict at this point. We do 
know that companies are scrambling to gain economies of scale 
and provide national footprints so they can roll out bundled 
packages of telecommunications services.
    In many cases, that is a good thing, and that maximizes 
consumer welfare, and I think that trend will continue. We are 
working hard at the FCC to accomplish a situation where you 
have a number of national players, but also lots of niche 
players that are able to serve discrete market needs. That is 
why we have worked hard at the FCC to assist companies, smaller 
companies that want to get in and compete head-to-head against 
the large incumbent historic monopolies.
    But I think the best way to answer your question is from a 
consumer point of view, what is best for the consumer. The 
consumer should be able to have a range of product choices, 
three, preferably four or more in each product sector, and so 
what we strive to do is make sure consumers have choice in all 
of these different sectors, be it wireless, local, long 
distance, high speed Internet access or video. And we have 
accomplished that in some areas, long distance and wireless 
being probably the best examples, but we have a ways to go in 
the other areas.
    Senator Brownback. So you would look for an optimal 
situation to be three or four competitors?
    Mr. Kennard. I would say optimal would be four or more in 
each product sector.
    Senator Brownback. Is that something you will be pressing 
for as you look and put forward these orders and rulings that 
will be shaping much of this landscape?
    Mr. Kennard. As a very general matter, yes, sir.
    Senator Brownback. Mr. Pitofsky, do you have a comment 
regarding that question of looking down the road, where we 
would anticipate being and where we should be?
    Mr. Pitofsky. I share Chairman Kennard's sense--let me just 
say that one of the things we have learned compared to 30 and 
40 years ago is, you ought not to do this analysis on the 
numbers alone. There will be sectors where two or three are 
enough. There are others where you need five or six in order to 
be assured that there is vigorous competition and consumers 
will not be taken advantage of.
    But certainly it is true in virtually every sector of the 
economy that when you see monopolies and duopolies, where you 
get just one or two firms, it is very unlikely that they are 
going to compete at a level that is optimum, that is going to 
serve consumers well, and therefore it is a rare case in which 
you do not try to prevent mergers that concentrate a market to 
the point where there are only two firms or maybe three left.
    Senator Brownback. So you look at it as more of a rolling--
you would not put a hard and fast three or four competitors in 
each place, but would look at it in differing standards and 
different parts of the industry?
    Mr. Pitofsky. Very much so. It depends on barriers to 
entry, whether homogenous products are involved, what is the 
level of communication between the players and so forth. There 
are about half a dozen, or more factors you look at in addition 
to market slaves. But I have always said that while numbers are 
not dispositive, as they may have been thought to be 30 years 
ago, it is the ramp that leads you into the analysis, and one 
must not forget how many players are left after this string of 
mergers takes place.
    Senator Brownback. Well, I think we need to look at, I 
would say the level of competition and the ability of consumers 
to be able to get some choices in their services, but we are 
obviously concerned about what impact it has on places, and to 
constituents of Sprint and other facilities around the country 
that have built up large groups, and I have not stated one way 
or another where I am on the merger, but I just have a deep 
concern when people contact and call and they are wondering 
what is going to happen to them in the future. That is 
something that you folks need to watch clearly as well.
    Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Bryan.
    Senator Bryan. Thank you very much, Mr. Chairman.
    Chairman McCain asked each of you a question, how concerned 
should we be about these trends that we have been discussing, 
and Mr. Kennard, your response was very concerned. Mr. 
Pitofsky, you said you joined in that.
    If you are very concerned, I suspect we ought to be very 
concerned, and the American public ought to be very concerned 
about this. Are you recommending any course of action that we 
should consider in the Congress that we have not done, either a 
review of the basic legislation that gives you the power to 
review, or any other changes in law? What should we make of 
your very concerned, and what should our response be to that?
    Mr. Kennard. Well, Senator, I would not presume to suggest 
any legislation to you at this time. All I would ask is that 
you continue to support agencies like the FCC, the FTC, and the 
Department of Justice that are on the front lines making sure 
that there is a strong counterforce in Government against this 
consolidation that has the threat of undermining the gains that 
we have made in creating competition in these markets.
    Senator Bryan. When you say support, I take it you are 
talking about resources, financial support in terms of 
appropriation level. Any other kinds of support?
    Mr. Kennard. Well, certainly just an affirmation that when 
the FCC goes out and seeks to protect the public interest in 
the context of these mergers, that you are supportive of our 
efforts and understand that what we are trying to do here is 
not undermine the ability of these businesses to grow, or to 
hamper their prospects, but fundamentally to support the 
competition that we have in consumer markets and ensure that 
consumers have the choice that we have been talking about 
today.
    Senator Bryan. Chairman Pitofsky, your thoughts.
    Mr. Pitofsky. I would urge that legislation is not the 
right way to go here. For over 100 years, we have had an 
unusual regulatory situation in this country. We have a Sherman 
Act that is roughly two paragraphs long, and a relatively short 
Clayton Act. Most of antitrust is judge-made law, and I think 
the courts have done well in this field.
    I must say now, and I have not said it in the past, our 
resources are being terribly stretched by this merger wave, 
including mergers that are of such enormous size that frankly 
we have never dealt with mergers like this before.
    The members of this committee have been very supportive of 
us, and the Commission has done reasonably well. It is not that 
we will not look at the mergers. It is that virtually all of 
the other responsibilities of antitrust that we have are being 
pushed to the side by this merger wave.
    We spend over two-thirds of all of our antitrust resources 
doing merger review, and I suspect in the present year that 
figure may be even higher because of the frequency and the size 
of the mergers we are seeing.
    Senator Bryan. I take it, Mr. Chairman, you are suggesting 
we need to be much more attentive to your request in terms of 
levels of appropriation to carry out these functions.
    Mr. Pitofsky. That would help.
    Senator Bryan. I suspect it would, although this is not the 
committee that does that, as you know.
    Mr. Pitofsky. But you have been supportive of us 
throughout, and we really appreciate it.
    Senator Bryan. Well, I think your point is well-taken. If 
we are concerned, as all of us have shared these concerns about 
what the implications are for us with all of these mergers that 
are occurring, it is incumbent upon the Congress to provide 
each of you the necessary resources to conduct that oversight 
function.
    Let me followup with a process question, and that is, we 
have the two of you and the Department of Justice involved in 
these decisions. Does the process itself, and I am not talking 
about the substance of the decision but the process, is it 
working? Do we need to revisit the process, or are you 
comfortable with the process, and maybe we will start with you, 
Chairman Pitofsky, first this time.
    Mr. Pitofsky. Maybe I am not the most objective about this. 
I think the process between the DOJ and the FTC has never been 
better. We never investigate the same transaction at the same 
time. We clear transactions to each other much more promptly 
than we did in the past. We finish our investigations more 
quickly than we have in the past. This is not a system that is 
``broke.''
    I am sure we can do even better, but things are going very 
well in terms of that division of responsibility.
    Senator Bryan. Chairman Kennard.
    Mr. Kennard. Yes, thank you, Senator. I think the process 
is working reasonably well under a very difficult strain. We at 
the FCC have continued to process the many thousands of 
proposals that come before us. I think we have learned a lot in 
the past year or two on how to deal with these megamergers that 
present us with difficult questions of first impression, and we 
are working internally to come up with ways to handle the 
megamergers better.
    We also have dealt with huge records in these mergers. In 
the SBC/Ameritech transaction we had tens of thousands of pages 
of public comment. Our role, which is somewhat different from 
the antitrust agencies, is to develop a record and distill all 
of these facts into an order that will withstand judicial 
scrutiny. So these mergers are putting a tremendous strain on 
our resources, but we are coming up with better ways to do more 
with less, because that is all we can do at this time.
    Senator Bryan. Well, later on this morning we are going to 
hear testimony that points out that SBC and BellAtlantic have 
about two-thirds of the local phone lines in the country, that 
with AT&T's proposed acquisition, that they will own about 60 
percent of the customers in their field of endeavor, all of 
which tends to suggest that there is a real threat to continued 
competition, and an incentive for more consolidation. Is that a 
concern that you have and, if so, what actions should be taken?
    Mr. Kennard. It is a concern that we have had. I guess 
fundamentally what we are dealing with here is a marketplace 
that was historically governed by the monopoly regulation that 
kept all of these companies in neat little regulatory boxes. A 
lot of those restrictions were taken away by the 1996 Act.
    Now, many of these companies, including the largest 
companies in our country, want to leverage their economies of 
scale to compete in new markets. Sometimes that is a good 
thing. If a cable company is able to aggregate its resources 
and capital and compete in rolling out broadband in competition 
with incumbent Bell Companies, that is a good thing.
    The question is, are consumers going to be harmed by 
historic monopolies that are allowed to get bigger, and that 
has really been the question we have asked in all of these 
major proceedings, and that is why we have imposed conditions 
when we felt them appropriate.
    Senator Bryan. The last question I would have, after every 
Sunday you see some plays that are called in which the 
quarterback would say, you know, I wish I had the ball back. 
Now, you all make some very, very tough decisions, and I think 
both of you are doing a very good job.
    I have been very pleased with the working relationship we 
have had with each of you, but you are making these decisions 
and you are trying to make the judgment as best you can, 
looking ahead at what the implications are, but none of us have 
a Promethean vision. What happens at the end of the day if you 
say, based upon the experience in a year or two, whoops, I wish 
I had the ball back, I did not fully understand?
    That is not to offer any pejorative observation. None of us 
can fully anticipate what the future will be. What do you do?
    Mr. Kennard. That is what the court of appeals is for, 
Senator.
    [Laughter.]
    Senator Bryan. What can you do Chairman Pitofsky? I mean, 
you have made the approval, and all of a sudden it does not 
work out like you thought it would.
    Mr. Pitofsky. Well, if we bring a case and we are wrong, 
then the courts will tell us so very promptly. Suppose we let 
one go by----
    Senator Bryan. Yes, and you are doing it for what you think 
are all the right reasons, but a year, 2 or 3 years down the 
road it is clear that in retrospect you should never have done 
that.
    Mr. Pitofsky. Well, technically we can go back and 
challenge the mistakes we have made. We could do that under 
Supreme Court law. You can bring an enforcement action based on 
the circumstances at the time of the action, and that could be 
3 years later. That is technically true. As a practical matter, 
it is not fair to the parties. They have to plan. They need 
what is called repose, and therefore if we make a mistake we 
most likely will live with it, and I am not aware of a 
situation in which we cleared a deal and then we went back 3, 
4, 5 years later and challenged it unless, of course, we were 
misled on some important facts by the parties.
    Senator Bryan. Chairman Kennard.
    Mr. Kennard. I would agree with Chairman Pitofsky, it is 
not really practical to go back later. You do the best you can, 
and you try to develop as comprehensive a record, and hear from 
as many people as you can, and make your best decision.
    Unlike some of the antitrust authorities, we have imposed 
conditions that give us some ability to maintain continuing 
oversight, so if promises made are not kept in the context of 
these mergers, we do have the ability to go in with our 
enforcement powers and try to rectify things. Fundamentally I 
think you are left with the challenge of just not making 
mistakes in the first place.
    The Chairman. Senator Dorgan.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much.
    You have been quizzed about a number of very important 
issues, and some of the headline mergers obviously are 
important, and there will be other discussion about them today.
    I want to talk to you for just a moment and ask you a 
question about some things that are happening beneath the 
headlines. There are about 1,200 television stations in our 
country today. 25 owner groups now own about 400 of those 
television stations. The top 10 radio groups in 1994, top 10 
radio group ownership in 1994 owned 195 radio stations. They 
now own 1,647.
    Let me say that again. I think this is important. 1994, the 
top 10 radio ownership groups owned about 195 radio stations. 
Now they own 1,647.
    Now, when the Telecommunications Act came to the floor of 
the Senate I attempted to offer an amendment to scale back the 
ownership limits, and I actually won the amendment by about 3 
or 4 votes. That was about 4 in the afternoon.
    Then dinner intervened, and several Senators had some sort 
of epiphany over dinner, and we had another vote on it because 
someone had changed their vote and wanted to have it 
reconsidered, as is certainly legitimate in the Senate, and 
there was, as I said, this epiphany, and I lost by 3 or 4 votes 
about 4 hours later.
    I was convinced then and I am convinced now that the 
lifting of the ownership limits was not in this country's 
interest.
    Andy Anderson died last week. He was 80 years old. He owned 
a country western station in Bismarck, North Dakota, for many, 
many, many years, wonderful guy. He could climb up the antennas 
and fix it all. He did everything. Andy was a great guy.
    But people like Andy are not going to be around any more. 
With the concentration in ownerships that is occurring and the 
death of localism in broadcasting, the narrow economic calculus 
of value is in terms of income streams, as some owners that 
have never visited the area where they own the station. Are we 
losing something there?
    It seems to me we are losing something very significant, 
and are you concerned. Let me ask you, are you concerned about 
10 radio groups holding 195 stations, 5 years later they hold 
1,647 stations? Does that concern you, and if so, what do you 
think we should do about that?
    Mr. Kennard. Senator, I am concerned about that. As you 
know, the 1996 Act lifted the cap on national radio ownership. 
It is a statutory right now that these companies may own as 
many stations as they can nationwide. Notwithstanding that, I 
think we should be very alert to the amount of consolidation in 
local markets, and in some of the major markets where you have 
lots of competing voices it is not as much of a problem. When 
you get in some of the smaller communities, I believe it is a 
problem, and I think that we should be very cautious about 
that.
    But I also believe we have got to find ways to bring new 
voices and new entrants into this field. That is why I think 
Senator McCain's legislation to reinstitute the tax certificate 
is so important, because it will create incentives for the 
creation of whole new radio groups that are now being denied 
entry into this marketplace. I also think we ought to continue 
to look for ways to license spectrum more efficiently so we can 
bring more entrants onto the radio band and the TV band.
    Mr. Pitofsky. Senator, you mentioned TV and radio, but it 
is happening across the economy. It is banks, it is 
supermarkets, it is retailing generally. You asked the 
question, are we losing something, and my answer is, probably 
we are, especially in areas involving communications.
    Now, if the reason these mergers are happening is because 
they are vastly more efficient, and the combined firm does a 
better job, then I think we should not get in the way. But if 
the reason these mergers are happening is just to produce 
larger firms with more market power, more ability to push their 
suppliers around and so forth, then I think it is a matter of 
concern, and it cuts across the entire economy.
    Senator Dorgan. But Mr. Pitofsky, your answer seems to 
suggest the only calculus here is a narrow financial calculus, 
and with respect to broadcasting I submit to you there is 
another calculus that you must and Mr. Kennard must consider, 
and that is public interest.
    Mr. Pitofsky. I completely agree. When you are talking 
about matters that affect the First Amendment, then if 
antitrust is just dollars and cents, then we have missed the 
boat on what antitrust is about in this country.
    Senator Dorgan. Well, let me just stick with this for a 
moment. If we have 10 radio groups owning 647 radio stations 
and the top 25 radio, or television station owners owning 500 
of the 1,200 television stations in the country, and that is 
where we are, let me ask you to project where we are heading.
    Without some restraint, or some kind of restraint that is 
exhibited somewhere in public policy, either legislative or 
administrative, are we likely to see continued galloping 
concentration in both of those areas. Have you studied that, or 
can you make some projections about it?
    Mr. Pitofsky. We have not studied that. I think that if 
that is the way things are going--it is what I said earlier, it 
is not just where we are now, it is where we are going, and if, 
in fact, by clearing mergers now we open the door to more and 
more and more concentration, then we have to draw the line 
somewhere, and maybe this is the place to draw it.
    Senator Dorgan. It is true we have cleared mom and pop out 
of the grocery. The grocery is still there, but it is owned in 
Texas, and they own thousands of them, and we have cleared out 
most of the lumber yards, I understand that, and the community 
loses something from that as well.
    But with respect to broadcasting there is a different 
standard and a different set of interests. Broadcasting 
includes, and has always included, some feeling that there 
needs to be localism in broadcasting to contribute to the 
community, and what I worry about here is limits. Let me ask 
the question.
    The question is, should there be some limits applied to 
radio station ownership? If the top 10 groups own 1,600 and 
some radio stations at this point, and it is galloping off in a 
manner that I think no one could have predicted, should there 
be some limits attached to radio station owners?
    Mr. Kennard. Well, Senator, there are some limits. The 1996 
Act did place limits on the number of stations that any single 
owner can control in a local market area, but what we are 
seeing in some of these transactions is that one owner will 
acquire a number of stations that does not exceed the 
statutory, the numerical limit, but nevertheless controls so 
much revenue in that market that it does have an impact on the 
ability of other smaller businesses to compete. That is how you 
see the small market, single station owners being, and even 
large market single station owners being driven out in 
particular marketplaces, and I think that that is a serious 
concern.
    Senator Dorgan. Would you recommend any additional 
ownership limits on either television or radio based upon your 
policy experience at this point?
    Mr. Kennard. Well, I think Congress has spoken in the 1996 
Act, but I do believe that under the public interest standard 
we do have some authority to look at, and certainly the FTC and 
the Department of Justice have authority to look at, 
aggregations of market power in a specific marketplace, even if 
they do not violate the numerical caps in the act.
    Senator Dorgan. Congress has spoken, but Congress always 
has the opportunity to speak again. Would you believe what has 
happened since Congress spoke should persuade us to review this 
once again and consider some changes?
    Mr. Kennard. I think it is always appropriate for Congress 
to be thinking carefully about developments in this market.
    Senator Dorgan. That is a careful answer. That is a very 
careful answer, but I wanted to raise the issue because I know 
there will be a lot of discussion about the large mergers, but 
under the headlines these other things are happening in 
concentrations that are alarming. I appreciate your responses, 
and would like to communicate more with both of you. Thank you.
    The Chairman. The chief interrogator has one more question. 
Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. I will be brief.
    My question for you, Mr. Pitofsky, is how do you believe 
the Senate ought to look at the short-term versus the long-term 
ramifications of these mergers? And, let me tell you the 
example that comes to mind is airlines.
    The U.S. Congress deregulated the airlines in 1978. Short-
term, everybody thinks this is going to be good. More 
competitors, things look good. Long-term, we have seen some 
consolidations that have been very anticonsumer in my view. We 
have got some places that have little or no coverage now in 
terms of air service.
    How would you recommend, as we look at these mergers in 
telecommunications specifically, but also with ramifications in 
other areas, how do we factor in the short-term, which may look 
good for the consumer, with the longer term?
    Mr. Pitofsky. We have to look at both. Let us use airlines 
for a minute, because it is a classic example. I think 
deregulation of airlines was a very good idea, and competition 
thrived for a while. But then there were 24 airline mergers in 
the 1980's. This was a period in which DOT had control of 
airline mergers. Some of these mergers took place over the 
objection of the Department of Justice. 24 proposed mergers, 
not one was challenged.
    I think airline passengers today are paying the price for 
that inactivity on the antitrust front.
    The Chairman. Alfred Kahn agrees with you, by the way.
    Mr. Pitofsky. If you look back at some of them--or example 
Ozark-TWA--how could that have been cleared? Those were two 
horizontal, direct competitors in the same hub market.
    You want to be sure when deregulation occurs--and Mr. 
Kennard said the same thing earlier--you want to make sure the 
regulatory regime that we decided as a country that we did not 
want any more, is not replaced by monopoly and duopoly pricing 
through mergers.
    When deregulation occurs, we should be more, not less, 
attentive to restructuring in those markets, and I think you 
have got to take into account both short-term and long-term 
effects. Short-term is really what the courts look at. They 
will look at 2, 3, 4 years out, but I think as a matter of 
prosecutorial discretion you have to look beyond the 2, 3, 4 
years to where that sector of the industry is going.
    Senator Wyden. Thank you, Mr. Chairman.
    The Chairman. Thank you very much. I want to thank you 
both. We have had you here for a long time. I just want to say 
that I believe that the Committee needs to look at this 
situation further.
    We will probably be going out of session here in the next 
few days, or at least that is the hope that many have. In the 
intervening time I am going to ask for some studies, including 
from the General Accounting Office, from the consumer viewpoint 
of this entire situation so that the Committee will have a 
better understanding, and other studies, if we can find those 
people who are objective and informed, so that the Committee 
can have a better understanding.
    We may ask you to come back to another hearing, because I 
think from your testimony some of the ramifications of these 
mergers have not been -- or prospective mergers have not been 
fully appreciated or understood.
    I appreciate your comments that we should be concerned. I 
view it as our responsibility, and we look forward to working 
with you, and as you both pointed out, this is an incredibly 
extraordinary time in the history of this country. I do not 
know of another time like it, as we were talking about, and so 
I think we have to be extremely vigilant to make sure that 
things go well, given the incredible impact that what is taking 
place now will have on the future of the country in the next 
millennium.
    I thank you both for being with us.
    Mr. Kennard. Thank you, Mr. Chairman.
    Mr. Pitofsky. Thank you, Mr. Chairman.
    The Chairman. Our next panel is Mr. Scott Cleland, managing 
director, Legg Mason Precursor Group, Mr. Paul Glenchur, 
director, Charles Schwab Washington Research Group, Mr. Gene 
Kimmelman, codirector, Consumers Union, Mr. Mike McTighe, CEO, 
Global Operations, Cable & Wireless, Mr. John Sidgmore, vice 
chairman of MCI/WorldCom.
    While the witnesses are seating themselves, I would like to 
make one additional comment. If there is any individuals or 
organizations who felt they were not allowed to speak today, we 
obviously would appreciate their written testimony, and we 
would be glad to consider them for inclusion in further 
hearings on this very important issue, and I would appreciate 
it if we could keep the noise down so we can hear from our 
first witness, Mr. Cleland.
    Welcome, Mr. Cleland.

  STATEMENT OF MR. SCOTT C. CLELAND, MANAGING DIRECTOR, LEGG 
                MASON PRECURSOR GROUP 

    Mr. Cleland. Mr. Chairman, Thank you for the honor of 
testifying before your committee. The views expressed here are 
mine, and mine alone. I offer four insights and a conclusion in 
hopes that they will be useful to the Committee.
    My first point is, telecommunications consolidation is a 
natural market development. It is a natural, given that this is 
a highly capital-intensive business requiring economic scale, 
and both regulation and technologies have been greatly 
expanding the scale required both globally and across 
industries.
    My second point. Big is not necessarily bad. The pending 
mergers are not necessarily bad developments for competition 
and consumers as long as there are two preconditions that are 
met: number 1, that there is vigilant antitrust enforcement, 
and it continues to ensure that individual service markets 
remain competitive, and number 2, the communications networks 
continue to be public, i.e., open to competition.
    That needs to be open to competition on a facilities basis 
between different broadband pipes and resale competition on 
each of the local broadband access points to the customer. Open 
access is essentially what keeps vertical markets competitive 
going forward.
    My third point, companies do not need a closed network to 
deploy broadband. Other than AT&T and cable, open access is a 
fact of life, and investors implicitly factor in open access 
into their business models.
    It is clear from the billions being spent in broadband 
systems, which are open, that the market does not demand a 
closed network in order to justify broadband investment.
    My fourth point is that market forces do not necessarily 
open networks. I think it is naive to believe that market 
forces alone will eventually open the cable network to 
competition. It simply does not square with past experience or 
market reality.
    So my brief conclusion is, broadband access is the bundle 
platform of the future, and if that bundle platform is not 
open, then that competition cannot flourish, because the future 
of communications is broadband, and we want to have a 
successful, robust competition which depends on open access to 
those rare broadband access facilities, at least for an initial 
transition period, so that broadband competition can develop.
    Now, other than requiring open and competitive local 
broadband access to the customer, I think that the Internet and 
data networks should continue to develop free of intrusive 
regulation, assuming that we have vigilant antitrust 
enforcement.
    Now, many appear right now to hope that a handful of 
facilities-based broadband competitors is sufficient to create 
a competitive broadband market. However, they ignore the 
reality that there is very little switching or competitive 
churn, as we call it, in broadband access. One analyst recently 
quipped that the broadband churn rate is less than moving or 
death rates.
    Unlike long distance competition, people do not switch 
carriers just by calling up their carrier over the phone, and 
it is done. Broadband access switching is much more difficult. 
You have to buy new, expensive equipment, and you have to have 
somebody come out to your home to professionally install it.
    So the competitive reality is, once someone signs up for 
broadband access, they tend to be a very sticky customer, or 
they tend to be effectively locked in. Hence, that is the rush 
right now, to lock customers up through the first mover 
advantage.
    So without cable resale, once cable locks in a local 
broadband customer, and then bundles them vertically, prices 
can drift higher on the vertically tied services in their 
broadband bundle. Furthermore, no competitor can offer the 
customer a better deal with its alternative bundle, which 
resells the underlying cable platform.
    Now, referring back why I am making such a big point of 
this on consolidation, the chart we have here talks about--and 
it is also a chart in my testimony--is that when you have open 
access you have vertical markets that can become competitive. 
Through the 1996 Act, through the 1934 Act, through FCC 
policies in the past, essentially the local teleco's cannot 
leverage their market power vertically.
    Essentially, you have a facility access competitive market, 
and an Internet access horizontal competitive market. Internet 
long distance is competitive, and the customer equipment is 
competitive.
    However, if you do not have open access, and you have 
market power at the local level, as cable does, then you can 
vertically take that market power all the way through those 
horizontal markets that are competitive when it is open and 
walk your way all the way up into e-commerce, and essentially 
the new economy. That is why this issue is so important. Local 
broadband access is a rare commodity, and it is the one part of 
this new economy that requires openness more than anything 
else.
    Thank you for the time, Mr. Chairman.
    [The prepared statement of Mr. Cleland follows:]

      Prepared Statement of Scott C. Cleland, Managing Director, 
                Legg Mason Precursor Group '

Mr. Chairman, on behalf of the Legg Mason Precursor Group, thank you 
for the honor of testifying before your Committee on the topic of 
mergers in the telecommunications industry.
The views expressed here are mine alone. I request that my full written 
testimony be printed in its entirety in the hearing record.
By way of introduction, I am not a traditional Wall Street sell-side 
analyst who analyzes companies or recommends the purchase of stocks. 
For Legg Mason, I run an investment research group that tracks 
regulatory, technological, and competitive developments in the 
communications, technology, and e-commerce sectors for large 
institutional investors. We focus on trying to anticipate major 
investment-relevant change coming in the next three to 18 months.
In that context, I offer the following insights and observations in 
hopes that they will be useful to the Committee.

(1) Telecommunications Consolidation Is a Natural Market Development

The current wave of telecom consolidation is a natural and expected 
market development in a highly capital-intensive business, which 
demands economic scale.
This natural tendency toward consolidation has been accelerated by: 
pro-competitive regulatory and trade policies that have created a much 
larger global marketplace; and, Internet and digital technology that 
enable competition between previously separate analog industries. 
Economic scale through consolidation makes deployment of broadband 
infrastructure less expensive, faster and less risky. This can be pro-
competitive, pro-deployment and pro-consumer.

Big Is Not Necessarily Bad

Communications consolidation is not necessarily a bad development for 
competition and consumers, as long as: vigilant antitrust enforcement 
continues to ensure individual service markets remain competitive; and, 
communications networks continue to be ``public''--i.e., open to 
competition with: facilities-based competition between different 
broadband `pipes,'' and resale competition of each and every local 
broadband access point to the customer. If these pro-competitive 
preconditions are met, telecom consolidation is not a problem for 
competition or consumers, because broadband ``bundle'' competition can 
flourish. However, any breakdown of competition in the critical 
component of local broadband access to the customer can have serious 
anticompetitive implications, because the integrated nature of 
broadband--i.e., bundling--is like a chain and, like a chain, it is 
only as strong as its weakest link.

(3) Big Is Not a Problem If Networks Remain ``Public,'' i.e., Open to 
Competition

Despite confusing rhetoric to the contrary, Congress already has 
decided overwhelmingly that telecom networks should be ``public'' -- 
i.e., open to competition. In the 1996 Telecom Act, Congress 
overwhelmingly voted that market forces alone are not enough to develop 
or sustain competition in telecommunications, given the history of 
monopolization and the presence of economies of scale.
Congress voted overwhelmingly:
        (a) to ``force access'' (a.k.a. mandate interconnection and 
        resale) on all local exchange carriers (which includes cable 
        when offering telecommunications), so competition could 
        develop; and,
        (b) to require ``interconnectivity...to promote 
        nondiscriminatory accessibility by the broadest number of 
        users...to public telecommunications networks.''(emphasis 
        added)
In 1998, the FCC legally required that local broadband access (advanced 
services) is a form of telecommunications subject to the market-opening 
provisions of the 1996 Telecom Act.
Meanwhile, the cable industry has been aggressively converting its 
broadcast one-way cable network in which it chooses the content and 
sends it to all cable customers, into what now appears to be a two-way 
telecom network in which the user chooses the content and sends it to 
the person(s) of the user's choice.
In other words, to benefit from the Internet and data growth, cable is 
reengineering its one-way cable network into a two-way telecom network 
-- at least for voice and data. Despite the transformed physical 
network, cable maintains that it should not be subject to any of the 
open-access obligations that every other similarly situated local 
telecom broadband access provider must comply with.
WorldCom-Sprint, Bell Atlantic-GTE, Quest-USWest, the already-approved 
SBC-Ameritech, all incumbent local exchange carriers, all competitive 
local exchange carriers (wireline and wireless), and all long-distance 
carriers (including AT&T) are ``public'' networks legally required to 
be open to both facilities-based and resale competition. All are common 
carrier public network providers that, by law, have obligations to 
interconnect and wholesale their service, e.g., ``forced access,'' in 
order to maintain interconnectivity and universal service, and to 
promote competition and innovation.
AT&T and the cable industry are seeking special government protection 
from standard resale competition that all of their competitors have 
accepted. The cable industry's position is bold: cable will agree to 
deploy broadband and compete on a facilities basis in the local phone 
market only if the government protects cable's core cable, ISP and 
long-distance businesses from ``regulation,'' i.e., resale competition.

(4) Don't Need a Closed Network to Deploy Broadband

Other than cable, open-access is a fact of life and investors 
implicitly factor ``public'' open-access obligations into their 
business models. It is clear that the market does not demand a closed 
network in order to justify broadband investment. The competitive local 
exchange carriers (CLECs), both wireline and wireless, have raised tens 
of billions of dollars in capital with ``public'' open-access 
obligations. WorldCom and Sprint independently have invested heavily in 
deployment of broadband wireless despite their ``public'' open-access 
obligations. SBC recently committed $6 billion to deploy broadband 
capability to 80% of its customers in three years despite its 
``public'' open-access obligations. RCN is not having difficulty 
raising capital to overbuild both the telcos and the cable plant 
despite its ``public'' open-access obligations.

(5) Market Forces Don't Necessarily Open Networks

It is naive to believe that market forces alone will eventually open 
the cable network to competition. It does not square with past 
experience or market reality.
The relative market advantage of being closed when all of your 
competitors are open is just too powerful to give up ``voluntarily.'' 
Why is it not in cable's continuing self-interest to be able to sell to 
its competitors' customers while preventing its competitors from 
selling to cable's customers?
When AT&T was a regulated monopoly not subject to market forces, AT&T 
fought hard to continue as a closed network, but the government broke 
up the company and opened AT&T's network to competition by mandating 
``public'' open-access obligations, with resulting consumer benefits. 
Now that AT&T is no longer a regulated monopoly in voice telephony, 
AT&T still seeks a closed network and is opposing open-access just as 
strenuously as it did when it was not subject to market forces.
If market forces alone open networks, why did Congress require that 15% 
of cable channels be available for ``commercial use'' (leased access) 
in 1984?
If market forces alone open networks, why did AT&T-TCI deny Internet 
Ventures, Inc. (IVI) the ability to lease a channel under leased access 
to offer competitive Internet video programming? And why is IVI having 
to petition the FCC to gain access? (When will the FCC clarify this 
fundamental market-opening access issue?)
If market forces alone open networks, why did Congress in the 1996 
Telecom Act mandate interconnection and resale, and make state 
commissions the arbitrator of interconnection and resale negotiation 
disputes?

CONCLUSION: BROADBAND ACCESS IS THE BUNDLE PLATFORM OF THE FUTURE--IT 
NEEDS TO BE OPEN IN ORDER FOR COMPETITION TO FLOURISH

The future of communications is broadband. The success of robust 
broadband competition depends on required open-access to broadband 
access platforms (last-mile access facilities) -- at least for an 
initial transition period, so that broadband competition can develop. A 
fully competitive broadband market depends on the combination of both 
facilities-based competition between broadband pipes and resale 
competition on all local broadband access pipes.
Other than requiring open competitive local broadband access to the 
customer, Internet and data networks should continue to develop free of 
intrusive regulatory intervention, assuming vigilant antitrust 
oversight and enforcement.
While many appear to hope that the handful of facilities-based 
broadband competitors is sufficient to create a competitive broadband 
market, they ignore the reality that there is very little switching or 
``competitive churn'' in broadband access. One analyst recently quipped 
that the broadband churn rate is less than moving or death rates.
Unlike long-distance competition that only requires a phone call to 
switch carriers, switching broadband providers is much more difficult. 
One has to buy new, expensive equipment and have it professionally 
installed to reconfigure the system, which can take more than one visit 
to the home. The competitive reality is that once a provider signs up 
local broadband customers, they are very ``sticky'' customers, hence 
the current rush for ``first-mover'' advantage. In other words, 
customers are practically ``locked in'' to a local broadband access 
provider, because of the high cost and ``hassle'' associated with 
switching.
Once a customer effectively is locked into a local broadband access 
provider, if there is no resale of that underlying last-mile access 
platform, then there is no competitor that can keep that provider's 
broadband bundle truly competitive. Once cable locks in a local 
broadband access customer, then the prices can drift higher on the 
vertically ``tied'' services in their broadband bundle. Furthermore, no 
competitor can offer the customer a better deal with its alternative 
bundle, which resells the underlying cable local broadband access 
platform.
Without required open-access of local broadband access platforms in the 
increasingly complex market for broadband bundles, competitive forces 
won't develop sufficiently or rapidly enough to ensure that consumers 
are offered maximum choice and protection from anticompetitive pricing 
of broadband vertical services.

                               __________

The attached chart shows how telecom open-access policies have promoted 
competition in vertical communications markets, preventing 
anticompetitive leveraging of last-mile access market power. The chart 
also shows how a closed cable network contributes to less competition 
in vertical communications markets and allows last-mile access market 
power to be leveraged all the way into e-commerce.
Attachment: ``How Open or Closed Internet Access Affects Competition in 
E-Commerce''




    The Chairman. Thank you very much, Mr. Cleland. I found 
your chart to be very interesting and informative.
    Senator Ashcroft could not be here today. He asked to be 
allowed to submit written testimony of Tod Jacobs from last 
week's Judiciary hearing on the proposed MCI/WorldCom/Sprint 
merger. Without objection.
    [The prepared statement of Mr. Jacobs follows:]

 Prepared Statement of Tod Jacobs, Senior Telecommunications Analyst, 
                     Sanford C. Bernstein & Company
Mr. Chairman...Members of the Committee. Thank you for inviting me here 
to discuss the proposed merger of MCI WorldCom and Sprint. My name is 
Tod Jacobs, and I'm senior telecommunications analyst at Sanford C. 
Bernstein & Company. My job is to forecast the growth and earnings and 
stock performance of the telecom industry as well as its largest local, 
long distance and wireless companies. Our firm is somewhat unique among 
brokerage firms in that we do not engage in investment banking; that 
is, we don't work for any of the companies we cover as analysts. We 
therefore avoid conflicts of interest, and have the ability to speak 
our minds without fear of repercussion. My only clients are 
institutional investors, and my only mandate is to be right. And for 
the record, I'm currently favoring long distance companies such as 
WorldCom, Sprint and AT&T, and have neutral ratings on the baby bells.

I'd like to cover three areas today:

1. Why stories of telecom mergers appear on the cover of the Wall St. 
Journal more frequently than taxes, health care or Hillary Clinton's 
newfound love of the Yankees combined
2. Where this merger fits into the changing Internet landscape
3. Where this merger fits into the changing long distance landscape

First, On Mergers...

We've attached as an exhibit a piece we released in October on industry 
consolidation that argues the following thesis: first off, telecom is a 
high fixed cost business. And like all high fixed cost businesses, the 
way to compete successfully is to have lots of customers and traffic, 
so that average cost per unit will fall. Low-cost positions are 
critical since exploding national and global competition is pushing 
prices down rapidly, especially in long distance and wireless, if not 
yet local. So in each category, there's a mad rush to get big fast. 
Exhibit 1 shows examples of scale-driven mergers.




Second, telecom companies are also attempting to get broad. That is, to 
assemble the assets that will enable a carrier to offer a full slate of 
products and services to all the major customer segments. And once 
anybody can offer multiple products across a single network and a 
single salesforce, then everybody will have to create the same 
capability. Why? Because the more products you offer to a given 
customer, the more you can discount the products and still make money. 
Thus anyone who remains a single-product company risks seeing their 
product become someone else's loss leader. And since no single telecom 
company was born with all the necessary limbs--and growing them takes 
too long--mergers and acquisitions are the only real solution, as 
Exhibit 2 shows. The proposed MCI--Sprint merger fits squarely into 
this category, and is driven by MCI's need for wireless. (See our 
attached research report from May proposing this very merger as the 
WorldCorn wireless solution.)




Consumers will delight, because this is how they're going to continue 
to get lower prices in long distance and wireless and eventually local 
service.

Second, on the Internet...

For starters, let me tell you what I've already told my clients. 
Rightly or wrongly, Sprint will almost certainly have to divest itself 
of its Internet backbone business prior to the merger, just as MCI had 
to sell its business prior to merging with WorldCom. And I believe the 
companies know it and are prepared for it. Second, despite complaints 
to the contrary, I'd point out that Cable & Wireless, which bought 
MCI's Internet business, is a healthy Internet player despite huge 
turnover in the very senior management that effected the deal shortly 
after the deal closed. So clearly it's a viable option, and there will 
be numerous interested buyers when Sprint internet goes on the block.
As to current competition: as Exhibit 3 shows, we believe the domestic 
Internet backbone market is about $8 billion. Here, MCI WorldCom leads 
the pack, with more than $3 billion in revenue. GTE, AT&T, Sprint and 
Cable & Wireless are numbers 2-5, respectively, so clearly market share 
has more to do with investment and marketing than with how big your 
overall company is. Competition has caused MCI WorldCom to lose about 
11 % of its share since 1997; by 2003 it will have lost at least a 
quarter--especially given the entry of the baby bells and numerous new 
carriers into the space.




Point three, we've been asked to discuss so-called peering, which we've 
portrayed in Exhibit 4. Following the schematic, suppose I'm Hillary, 
and my Internet service provider is Al's ISP. Al in turn rents access 
to WorldCom's global Internet backbone. However, 1, Hillary, want to 
access the ACLU website that is sitting on the Cable & Wireless 
backbone. Peering allows for unfettered flow of traffic onto each 
other's backbone networks that makes all Internet service possible. 
Without peering, WorldCom would be out of the Internet business. And it 
should be noted that peering arrangements at MCI, which currently 
number 72, have been rising, not falling.




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

Finally, in Long Distance...

The merger would create a company that in consumer long distance is a 
bit more than half the size of AT&T, as Exhibit 5 shows. While both 
Sprint and MCI have done a good job competing against AT&T in consumer 
long distance, the reality is that neither has the size and scale to 
compete with what is otherwise becoming a two-horse race between AT&T 
and the baby bells to offer a full bundle of products to consumers. 
Indeed, either stand-alone company would be highly imprudent to enter 
that most expensive race without substantial existing market share to 
justify it. Thus a clear case where the creation of larger scale in 
consumer long distance will actually motivate further investment and 
competition. And given the companies' recent complementary investments 
in a new wireless technology called MMDS as a high-speed data solution, 
we now expect the development of a third broadband pipe to the home.




 As to business long distance, the short story is that on a combined 
basis the company will be about the size of AT&T. And when you consider 
that the amount of new capacity being activated by new carriers over 
the next 12 months is at nearly 2x greater than the entire capacity of 
the big three players, it should give you some sense for why business 
pricing is already low and getting lower and why the company will be 
very lucky indeed to make our long-term share forecast. To the 
contrary, if the MCI merger is a guide, the cost savings generated by 
the merger will in large measure be given back to customers in the form 
of lower prices.

Thank you for your time.

    [Note: Bernstein Research Call, Telecommunications Service, 
``Presentation to the Senate Judiciary Committee on the MCI 
World Com-Sprint Merger; Both Rated Outperforming'' is 
maintained in the Committee's files.]

    The Chairman. Mr. Sidgmore, welcome.

        STATEMENT OF MR. JOHN SIDGMORE, VICE CHAIRMAN, 
                          MCI/WORLDCOM

    Mr. Sidgmore. Thank you, Mr. Chairman. I appreciate the 
opportunity to share with the committee our vision of how MCI 
and WorldCom/Sprint will continue to bring increased 
competition and new technology to the changing world of 
telecommunications.
    I want to say up-front that Bernie Evers, our CEO, sends 
his regrets. He had a longstanding commitment outside the State 
today.
    The Chairman. We regret he could not be here, but we fully 
understand, and we will want to continue our communications 
with him and with you as we go through this process.
    Mr. Sidgmore. Thank you very much. The question facing us 
today we think is simple. It is whether or not a competitive 
long distance provider can survive to fight against the mega-
Bell and cable monopolies on a nation-wide basis. We think the 
answer is yes, and our merger is the pathway to meet that 
challenge.
    Consider the changes we have seen the last couple of years 
in telecommunications: (1) dramatic decreases in the price of 
traditional long distance service, (2) explosive growth of 
wireless telephony, (3) consolidation of the seven Bells into 
two mega-Bells and two other Bells, (4) their imminent entry 
into long distance, in traditional long distance, and (5) the 
growing demand for broadband capacity.
    Our conclusion from all of this is that the separate market 
for long distance that was created by the divestiture of AT&T 
is eroding, and that successful competitors like ourselves need 
to be able to fulfill all of the customer's needs for wireless 
and wire line, and to effectively bring broadband Internet 
access all the way to a customer's home or business.
    In other words, the communications industry of the future 
requires that our company be able to provide one-stop shopping 
for economical packages of services and to the maximum extent 
possible to be able to deliver those services to the customer 
directly.
    The broadband battle is basically about the last mile. It 
is not about the Internet backbone, which is already open and 
competitive, despite what some of our competitors have said. In 
the real world of the last mile there are really two Titans 
emerging. One is the old Titan reborn through local cable 
facilities, AT&T, the other is the Bell Operating Companies. 
The new mega-Bells have maintained their hold over local 
markets. They are already major wireless providers. They moved 
swiftly to becoming providers of a full range of communication 
services.
    AT&T, on the other hand, has chosen to buy up the other 
last mile, which is cable, and is seeking to dominate the 
provision of high speed Internet access and bundle it with its 
own wireless local and long distance services.
    Faced with these trends, MCI/WorldCom had a tough choice to 
make. We could have left residential customers to the big Bells 
and to the big cable company, but that would have been bad for 
consumers and bad for us. We could have merged with a Bell in 
order to gain the advantage of controlling the critical last 
mile into every home, or we could get stronger and even more 
competitive, and you now know what choice we made.
    MCI/WorldCom and Sprint decided to join forces as what we 
think is the single best hope for a strong and effective 
alternative to the mega-Bells and emerging AT&T cable monopoly, 
and we will be able to do -- we know how to do this, and we 
will be able to do this more efficiently.
    Over the next 5 years, the merged company will realize cost 
savings of almost $10 billion in operating costs, $5 billion in 
capital expenditures, and these cost savings not only allow the 
new company to compete aggressively in both business and 
consumer markets, but will also enable us to aggressively 
invest in new technologies such as broadband access and next 
generation wireless. Hopefully, we will have all the piece 
parts to be a strong competitor to AT&T and the mega-Bells.
    Our competitors overseas, who are spurred by mounting 
competition on their home turf, are making acquisitions and 
aggressive moves and international investments in key markets 
around the world. The combined complementary strengths of MCI/
WorldCom and Spring we think will make us uniquely equipped to 
market communications products consumers need and want most, 
including international, and that together we will have the 
capital and the proven marketing strength and end-to-end 
networks to compete effectively against the international 
incumbents.
    Here in the U.S., we can already see hints that this 
combination is accelerating broadband deployment in competition 
with the Bells. We, both MCI/WorldCom and Sprint have invested 
heavily in new broadband technologies over the past year, both 
DSL and in fixed wireless technology known as MMDS that will 
allow us to get to customers or even beyond the reach of DSL, 
often into rural areas, and with these new broadband local 
assets together we think we are in a strong position to bring 
consumers, both urban and rural, the broadband access that they 
need and want.
    Now, we know that as we heard this morning that any major 
merger in this industry is going to be viewed skeptically at 
this point, but it is important to remember that not all 
mergers are the same. This is not a merger of monopoly 
providers. This merger is being done so we can become large 
enough in scope to compete with the monopoly powers. We think 
that is a critical difference.
    Some regulators have reacted to the news of this potential 
merger by raising the yellow flag of caution, and we understand 
that that is their job. We look forward to demonstrating, and 
we will, that this merger is procompetitive in all markets. The 
debate we think will benefit everybody, because it will help 
Government officials and consumers alike to understand how to 
advance the cause of communications competition in the next 
century.
    Thank you.
    [The prepared statement of Mr. Sidgmore follows:]

  Prepared Statement of John W. Sidgmore, Vice Chairman, MCI WorldCom

    Good morning. I appreciate the opportunity to share with the 
Committee our vision of how MCI WorldCom and Sprint together will 
continue to bring competition and innovative technology to the changing 
world of telecommunications. Mr. Ebbers, our President and CEO would 
have liked to be here, but had a longstanding commitment in a western 
state today.
    The question facing us is simple: Can competitive long distance 
providers survive to fight against the mega-Bell and cable monopolies 
on a nationwide basis? The answer is yes, and our merger is the pathway 
to meet that challenge.
    Consider the changes of the last two years: (1) dramatic decreases 
in the price of traditional long distance service, (2) explosive growth 
of wireless telephony that has led to a demand for ``all distance'' 
pricing, (3) consolidation of the seven Bells into two mega-Bells and 
two other Bells, (4) imminent entry into the long distance market by 
the mega-Bells, and (5) growing demand for broadband capacity from both 
residential and business customers.
    Our conclusion is that the separate market for long distance 
created by the divestiture of AT&T is eroding; that successful 
competitors like ourselves need to be able to fulfill all of a 
customer's needs for wireless and wireline; and that strong competitors 
must be able to effectively bring broadband Internet access and 
services all the way to a customer's home or business.
    In other words, the telecommunications industry of the future 
requires that a company be able to provide one-stop shopping for 
economical packages of services, and to the maximum extent possible, to 
reach the customer directly.
    The broadband battle is basically about the last mile--not about 
the Internet backbone--which is already open and competitive with 
thousands of competitors and several major players--despite what some 
of our competitors say.
    In the world of the last mile, two titans are emerging. One is an 
old titan reborn through local cable facilities--AT&T. The other, 
ironically, is the offspring of that company--the Bell Operating 
Companies. The new mega-Bells have maintained their hold over local 
markets, are already major wireless providers, and have moved swiftly 
to leverage those assets towards becoming providers of the full range 
of voice and data services. AT&T, meanwhile, has chosen to buy up the 
other last-mile--cable--and is seeking to dominate the provision of 
high-speed Internet access and bundle it with its own wireless, local 
and long distance services.
    Faced with these trends, MCI WorldCom had a tough choice to make. 
We could have left residential customers to the Bells and big cable, 
but that would have been bad for those consumers and bad for us. We 
could have merged with a Bell in order to gain the advantage of 
controlling the critical last mile of copper wire into every home. Or, 
we could get stronger, and even more competitive. You now know what 
choice we made. MCI WorldCom and Sprint decided to join forces as the 
single best hope for a strong and effective alternative to the mega-
Bells and the emerging AT&T cable monopoly.
    We know how to do this. Both MCI WorldCom and Sprint were born 
outside of the Bell system and share an entrepreneurial spirit that has 
contributed to rapid growth and success. Dedicated to opening markets 
to competition, both our companies have focused on delivering benefits 
to customers: lower prices, innovation and higher quality services.
    And we'll be able to do all of this more efficiently. Over the next 
five years, the merged company will realize cost savings of $9.7 
billion in operating costs and $5.2 billion in capital expenditures. 
These cost savings not only allow the new company to compete 
aggressively in both the business and consumer markets, but also will 
enable us to aggressively invest in new technologies such as broadband 
access and next generation wireless. We'll be serving 44 million 
customers and growing; we'll have local network facilities in more than 
2500 markets nationwide; we'll have more than 4 million PCS subscribers 
and 1.7 million paging and advanced messaging customers. Hopefully, 
we'll have all the piece parts we need to be a strong competitor to 
AT&T and the mega-Bells.
    Our competitors overseas, spurred by mounting competition on their 
home turf, are making acquisitions, joint ventures and aggressive 
international investments in key markets around the world--The U.S. 
included. The combined, complementary strengths of MCI WorldCom and 
Sprint will make us uniquely equipped to develop and market the 
communication products and services consumers need and want most: data, 
Internet, wireless, local, long distance, and international.
    Together, we will have the capital, proven marketing strength and 
end-to-end, state-of-the-art networks to compete more effectively 
against the international incumbent carriers. Our self-reliant, 
facilities-based global strategy positions us well to fully service the 
rapidly growing global telecom market--a market valued at $1 trillion 
by the year 2002. Our new company will have the people and the 
technology required to bring innovative services and the benefits of 
competition to residential and business consumers across America and 
around the world.
    Here in the United States, we can already see hints that this 
combination will accelerate broadband deployment in competition with 
Bell DSL and AT&T cable modems. MCI WorldCom is breaking through in 
local markets in New York State, already providing over 160,000 
residential customers there with two things they've never had before: 
choice and low cost, flat-rated service. Sprint is going forward with 
the introduction of its Integrated On-Demand Network (ION) in Kansas 
City, Seattle, Denver, and eventually, in local markets across the 
country. MCI WorldCom will be collocated in 1500 central offices for 
DSL by the end of this year and 2000 by next year. We have both 
invested heavily in a fixed wireless technology known as MMDS that will 
allow us to get to customers who are beyond the reach of DSL, usually 
in predominantly rural areas. With these MMDS and DSL assets, combined 
with the Sprint ION networks and local facilities; we're in a very 
strong position to bring consumers--urban and rural--the broadband 
access that they need and want.
    We know that any major merger in our industry will be viewed 
skeptically at this point--but it's important to remember that not all 
mergers are the same. This is not a merger of monopoly providers--this 
merger is being done so we can become large enough in scope to compete 
with the monopoly powers.
    Some regulators have reacted to the news of a MCI WorldCom--Sprint 
merger by raising a yellow flag of caution. That's their job. We look 
forward to demonstrating, and we will, that this merger is pro-
competitive in all markets. That debate will benefit everybody, because 
it will help government officials and consumers alike to understand the 
best ways to advance the cause of telecommunications competition in the 
next century.
Thank You.

    The Chairman: Thank you very much, Mr. Sidgmore.
    Mr. Glenchur.

             STATEMENT OF PAUL GLENCHUR, DIRECTOR, 
                SCHWAB WASHINGTON RESEARCH GROUP

    Mr. Glenchur. Thank you, Mr. Chairman, members of the 
Committee. I thank you for the opportunity to appear before you 
today. My statement has been submitted for the record, and I 
would just like to take a brief moment to summarize it.
    At the Schwab Washington Research Group, we examine legal, 
policy and regulatory trends of significance to institutional 
investors. We cut across several industry sectors, including 
telecommunications, health care and financial services. And we 
have looked at the telecom industry's trend toward 
consolidation. The statements I make today are my own views, 
however.
    I agree with other panelists today as to the reasons for 
consolidation: greater scale reduces the unit cost of serving 
customers in what could become an increasingly commoditized 
business. It also adds capabilities to offer new and better 
services.
    The consolidation trend has emerged against the regulatory 
backdrop of the Telecom Act of 1996. It articulated a policy 
objective of creating competition in the local loop and 
established a process to achieve it, including resale, the 
leasing of network facilities, and, ultimately, a preference 
for facilities-based competition. The incentive structure 
established in the Act promised long distance entry for the 
Baby Bells if their markets were deemed open to competition 
under Section 271 of the Act.
    The technological and global trends today, however, have 
expedited the push to consolidate. Cable lines can offer 
broadband services, digital subscriber lines can offer similar 
service over phones, and eventually will be adapted to offer 
voice over DSL service. The need to make huge capital 
investment in response to this competitive climate should not 
be surprising. But the rush to consolidate has implications for 
enforcement policies behind the Telecom Act.
    The FCC has pointed to a lack of benchmarking as an example 
of a possible impairment of its ability to promote competition 
under the Act. Similarly, the acquisition of long distance 
backbone networks by the Baby Bells has implications for 
enforcement of the long distance restrictions of the Act.
    The FCC has attempted to sort through situations where the 
economic and business objectives of mergers collide with the 
Telecom Act policies of promoting competition in the local 
loop. Questions have arisen regarding the FCC's time for making 
decisions regarding license transfers and the standards applied 
to define the public interest, and the implementation of 
conditions that may not bear directly on the original public 
interest concerns that generated public interest scrutiny.
    The FCC has announced measures to enhance the 
predictability of the process and to allow more efficient 
resolution of license transfer applications. Progress in this 
regard would prove helpful to investors. When mergers are 
announced, the investment community understands that regulatory 
risk is part of the analysis. Primarily, however, they hope to 
focus on the fundamental, strategic and financial aspects of a 
given deal. They would welcome greater predictability in the 
overall process.
    Thank you for the opportunity to appear before you. I would 
be happy to answer any questions you may have.
    [The prepared statement of Mr. Glenchur follows:]

            Prepared Statement of Paul Glenchur, Director, 
                    Schwab Washington Research Group

    Thank you for the opportunity to appear before you this morning. As 
a director of the Schwab Washington Research Group, I examine 
regulatory and legal issues affecting the investment decisions of 
institutional investors. Schwab does not make specific stock 
recommendations and does not engage in investment banking. Our goal is 
to provide objective advice to our institutional client base. 
Obviously, the investment community has a major interest in telecom 
mergers. They speculate about possible combinations, they react to news 
of proposed deals, and they monitor the progress of these mergers as 
they work their way through the regulatory review process.
    As a consequence of technological change, deregulation and the 
emphasis on global market opportunities, the telecommunications 
industry has experienced significant consolidation, particularly among 
the top tier players. Seven Regional Bell Operating Companies (RBOCs) 
have merged into four; significant mergers have also occurred in the 
long distance and cable industries. Ten years ago, the top seven cable 
operators served about 25 million subscribers. Today, the top seven 
multiple system operators (MSOs), including proposed deals, serve about 
60 million subscribers, almost 90 percent of all cable subscribers.
    We're seeing consolidation in the wireless business as well. 
Wireless providers have combined to broaden their reach to more 
subscribers. Consolidation is occurring among wireless providers using 
the GSM (Global System for Mobile Communications) standard, a 
development that may encourage integration with a major landline 
carrier or a possible arrangement with foreign carriers that rely on 
the GSM standard.
    Why is consolidation happening? Telecommunications is a capital-
intensive business with very high fixed costs and increasing demands 
for the integration of new technology. Greater scale allows these costs 
to be spread over a wide customer base, ultimately reducing the cost of 
serving each individual customer. With deregulation, providers envision 
a world in which they offer a package of telecom services over digital, 
packet-switched networks on a global basis at affordable rates. 
Carriers are acquiring assets to become end-to-end providers of telecom 
services, maintaining sufficient control over their networks to enable 
customer access, ensure timing of service deployments and guarantee 
network reliability. Greater scale and a more expansive customer reach, 
in turn, enhance a provider's attractiveness as a potential global 
partner.
    In this environment, we should not be surprised to see rapid 
consolidation. Looking years ahead, business leaders in the telecom 
world envision a multi-service broadband environment on a global scale. 
They're making big bets to prepare themselves for that future. We may 
reach a point where consolidation will yield a small number of very 
large industry players.
    At the same time, each industry player must pursue its vision in a 
regulatory climate governed by the Telecommunications Act of 1996. The 
Act was designed primarily to open the local market to competition. 
Rather than depend on benevolent compliance with rigid statutory 
demands, the Act created an incentive structure that would encourage 
local incumbents to meet the market-opening requirements of the Act. 
The incentive for local incumbents was entry into the in-region long 
distance market. The Act offered a legislative judgment that ending the 
monopoly over local phone service was in the public interest. The Act 
also recognized that competition was superior to government regulation, 
including provisions that allow regulatory forbearance where telecom 
regulation is unnecessary to protect the public interest.
    At times, the visions of telecom carriers may collide with the 
vision of the Telecom Act. This is inevitable if the Telecom Act failed 
to contemplate the extent of technological change and convergence. 
Businesses are merging to broaden their reach into new services and to 
obtain scale in a market where service providers can bring all services 
over the same pipes. The growth market now and in the future is the 
data services market. A broader reach means efficiencies that can lower 
costs for consumers. Yet the FCC must administer an Act that has 
imposed on the FCC an obligation to ensure competition emerges, 
particularly in the local service market. Anything that threatens that 
vision raises public interest concerns as they are expressed through 
the Telecom Act.
    Accordingly, the FCC, in considering license transfers essential to 
the completion of mergers, examines the impact of a merger on its 
statutory obligations and its rules. The public interest embodied in 
the Telecom Act will not necessarily coincide with the business 
objectives of merging parties. But both sets of objectives are 
legitimate and, in most cases, the FCC approves license transfers with 
little fanfare. Where large mergers have sparked public interest 
concern, the FCC has worked out conditions with the merging entities to 
allow such deals to move ahead.
    Nevertheless, the FCC has been criticized for taking too long to 
approve license transfers. It has also received criticism for imposing 
merger conditions that address policy concerns that may not bear 
directly on the principal competitive concerns that generated initial 
public interest scrutiny of a particular merger proposal. The FCC has 
announced efforts to deal with these concerns, and progress in this 
regard would be useful to the financial community. Investors need as 
much regulatory certainty as possible as they focus on the strategic 
and financial merits of particular transactions. Uncertainty about 
regulatory timing or the potential regulatory consequences attached to 
a specific deal can muddy the environment in which fundamental analysis 
takes place. Investors would welcome improvements in the predictability 
of the overall merger review process.
    Thank you again for the opportunity to appear before the Committee.

    The Chairman. Thank you.
    Mr. Kimmelman.

   STATEMENT OF GENE KIMMELMAN, CO-DIRECTOR, CONSUMERS UNION

    Mr. Kimmelman: Thank you, Mr. Chairman, members of the 
Committee. On behalf of Consumers Union, publisher of Consumer 
Reports, we once again appreciate the opportunity to testify 
before you.
    Mr. Chairman, I am a little baffled this morning as I 
listen to the Chairman of the FTC and the Chairman of the FCC. 
I have great respect for them. They described a world in which 
there are tremendous concerns, and yet they said, do not do 
anything. And they described a world in which they said that, 
of course, if you make a mistake, you have to live with it. And 
then they told you about the airlines' mistakes. And I think if 
we go back and review the facts here, we will see that we are 
beyond just a little concern. And if you apply their own 
reasoning, we are in a big, big mess.
    The Chairman. In deference to them, Mr. Kimmelman, they did 
say ``very concerned.''
    Mr. Kimmelman: Very concerned.
    The Chairman. They did not say ``a little concerned.''
    [Laughter.]
    Mr. Kimmelman. I am sorry, Mr. Chairman. You are absolutely 
right, very concerned.
    I feel like I see policymakers in this Administration 
staring at a bulldozer, barrelling down the road at them. And 
they are just caught staring at it. And, frankly, consumers are 
getting mowed down right and left. Cable rates are up three 
times inflation, 23 percent since passage of the Telecom Act. 
Under the leadership of the FCC, we have $4 billion in new fees 
on consumers' phone bills, a $2 billion net increase for the 
majority of consumers for long distance service, mostly low-
volume customers. We have heard a lot about how wonderful 
things are but no one in the Clinton Administration mentions 
these rate increases.
    The Chairman.  How much of that is because of the wiring of 
the schools and libraries to the Internet?
    Mr. Kimmelman. It is hard to break it apart, Mr. Chairman. 
But I can tell you that it breaks down to a $1.50 Federal 
access fee that was not there 2 years ago. From AT&T, they use 
a flat charge of $1.38 now for universal service, which 
includes that program and others. One program has a $1.95 fee. 
One has $4.95. One has a $3 minimum. Another, a $5 minimum. The 
FCC's numbers show that if you make less than 30 minutes of 
long distance calls, today you are paying three times, three 
times as much as 2 years ago. It does not sound like a really 
robust competitive market.
    The Chairman of the FCC said we ideally should have four or 
more choices for each customer service. I totally agree with 
him. I do not know how we get from here to there.
    What has happened under the 1996 Act, which was supposed to 
bring us cross-market competition, cable/telephone? The law 
has, instead, brought us within-sector consolidation. The 
Bells: two-thirds of the country are controlled by two dominant 
Bells now.
    Cable: AT&T crossed over, appropriately, into the cable 
sector, but its MediaOne merger is predominantly a cable 
consolidation transaction now, where the logic applied by the 
Chairman of the FTC in his review of the Time Warner/Turner 
transaction would never allow AT&T/MediaOne to go forward. And 
yet the Chairman of the FCC, who says he wants four or more 
choices, creates a road map for AT&T, through its horizontal 
rules, to acquire all these new properties. It makes no sense.
    WorldComm with MCI, now with Sprint. We have more and more 
within-sector consolidation, not cross-market competition.
    The theme is today's merger should be justified, as we sort 
of heard already, by yesterday's merger. And then, of course, 
tomorrow's merger is justified by the one we allow to go 
through today. We have mega-merger mania, and it needs to be 
stopped.
    Unfortunately, it is too late at this juncture to get from 
here to there, the three or four competitors in each product 
line as the Chairman of the FCC said. Consumers are getting the 
short end of the stick--higher fees, higher prices--unless you 
are in the high end of the market, you are a high-volume 
customer. Then you get choices.
    But the Chairman of the FCC says we have promises that are 
now memorialized through an oversight process, promises of 
competition tomorrow, promises of entry into the sector that 
these very companies told you in 1995 they were ready to enter 
then if you just passed the law. No, it did not happen. They 
consolidated. Consolidation today, monopolies growing, 
consumers not getting more choice for local service, seeing new 
fees on their bills, but promises, promises that tomorrow, some 
day they will enter.
    And there are opportunities for the FCC to enforce. The FCC 
did the very same thing when it looked at the Bell Atlantic/
Nynex merger. It said, we are not sure any more of these 
mergers is OK. We are going to impose strict conditions for 
opening up networks, for making competition come. If you go 
down to the FCC, Mr. Chairman, you will see those conditions 
have not been met. Maybe they are starting to meet them in New 
York, one State, but not across the region.
    There were penalties that could have been imposed. There 
were penalties that had been suggested. The FCC has done 
nothing to enforce those conditions. I do not know how 
consumers can or should rely on those kind of promises.
    Mr. Chairman, I think the 1996 Act had numerous weaknesses, 
as you know. But, more importantly, with this wave of mergers, 
there is no way it can bring you the goal that you and Congress 
hoped for: broad-based competition across all communications 
markets. I think you have to open it up. I think you have to 
review this law. You have to step in.
    There is one critical question that arises over and over 
again, implicit in what you heard this morning from the 
chairmen of the FTC and the FCC. And that is, as companies 
enter new markets, should they be allowed to increase a 
monopoly in an existing market, increase their monopoly power 
to raise prices because they plan, promise, hope to enter a new 
market, or is that inappropriate? I think the antitrust laws 
should take care of it, but they have not. I think the FCC 
should take care of it, but it has not.
    And so I leave it for you, Mr. Chairman. Should Congress 
allow consumers to be ripped off in a core market that has 
monopoly attributes because that monopoly says, I want to go 
somewhere else and compete? I do not think that is fair. I hope 
the reports that you are requesting will address these issues 
and we will see swift action next year to reopen the law and 
make it truly consumer friendly.
    Thank you.
    [The prepared statement of Mr. Kimmelman follows:]

   Prepared Statement of Gene Kimmelman, Co-Director, Consumers Union

    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 high-speed broadband Internet services. The 
Clinton Administration--including its antitrust and regulatory 
enforcers--and the Congress appear frozen in place as today's mergers 
are justified on the basis of yesterday's mergers, and then used to 
justify even further consolidation in the future. This merger-mania is 
already so out of hand that the most popular services most consumers 
want and need may be available from only one or two players in the 
market.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    The proposed merger between the second and third largest long 
distance companies, MCI WorldCom and Sprint, illustrate this pattern. 
In defending its proposed merger MCI WorldCom-Sprint argue that:

        . . . the Bell operating companies have consolidated their 
        local operations through a series of mergers and are moving 
        toward becoming full-service providers of voice, wireless and 
        data services. AT&T, meanwhile, will dominate the provision of 
        broadband services over cable while operating its own 
        nationwide wireless network. MCI WorldCom's merger with Sprint 
        would offer consumers a strong and effective alternative--
        especially in local markets, where neither company can compete 
        as effectively alone against entrenched monopolies.\2\
---------------------------------------------------------------------------
    \2\ John Sidgmore, ``More Choices for Telecom Consumers,'' letter 
to editor, Washington Post, October 20, 1999.
---------------------------------------------------------------------------
    In other words, MCI WorldCom-Sprint claim that consumers have 
nothing to fear from a merger that dramatically concentrates control of 
the residential long distance market (in apparent violation of the 
Justice Department's merger guidelines) between AT&T (58% market share) 
and MCI-Sprint (24% combined market 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:
---------------------------------------------------------------------------
    \3\ Trends in Telephone Service, Federal Communications Commission, 
September 1999, p. 11.
---------------------------------------------------------------------------
        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\
---------------------------------------------------------------------------
    \4\ Statement 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.
---------------------------------------------------------------------------
    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!
---------------------------------------------------------------------------
    \5\ Testimony 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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \7\ Public Law 104-104
---------------------------------------------------------------------------
    Instead, merger-mania is shrinking the competitive field: SBC and 
Bell Atlantic have each gobbled up two other regional companies to 
control about two-thirds of local phone lines, and are partnering with 
mid-size long distance companies and one of the two remaining satellite 
firms.\8\ AT&T purchased TCI and is in the process of merging with 
MediaOne (which has a substantial stake in Time Warner's cable 
systems,) giving AT&T an ownership stake in cable wires reaching about 
60 percent of consumers, plus arrangements to provide local telephone 
services through other cable companies.\9\ Once this degree of 
horizontal power is established in these entrenched monopoly markets, 
it becomes more difficult for the few remaining players to challenge 
the dominant local phone and cable players, increasing incentives for 
further consolidation and partnership.
---------------------------------------------------------------------------
    \8\ Testimony of Gene Kimmelman op. cit.
    \9\ Comments of Consumers Union, op. cit.
---------------------------------------------------------------------------
    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 TV-quality 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\
---------------------------------------------------------------------------
    \10\ David 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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \12\ Lieberman, op. cit.
---------------------------------------------------------------------------
    For example, recent efforts by the FCC to ``require'' pro-
competitive behavior have proven woefully inadequate. Detailed 
performance requirements in the Bell Atlantic/Nynex merger, designed to 
jump-start local telephone competition, have not been achieved and no 
enforcement actions have been taken to mandate compliance. As a result, 
it is hard to believe that the Commission's ``threat'' of penalties 
which could be imposed on SBC for failure to compete in new markets 
will effectively promote competitive behavior.
    So the tradeoff is simple: allow enormous within-sector 
consolidation of local telephone companies, then cable companies, and 
then long distance companies, in the hope that they will then cross 
sectors and challenge each other for a full package of telecom, 
Internet and television services.
    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.
---------------------------------------------------------------------------
    \13\ Bureau of Labor Statistic cable and ``all items'' consumer 
price indexes
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
    \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 Low-Volume Long-Distance 
Users, CC Docket No. 99-249, September 22, 1999.

        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\
---------------------------------------------------------------------------
    \15\ Rebecca Blumenstein, ``MCI's Revenue, Operating Profit 
Surges,'' Wall Street Journal, October 29, 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 merger-manic mantra: In 
        conglomeration there is strength.

        That's what they said a long generation ago when business 
        empire-builders boosted their egos by boosting their stock to 
        buy the earnings of unrelated companies. A good manager could 
        manage anything, they said, achieving vast economies of scale. 
        As stockholders discovered to their loss, that turned out to be 
        baloney.

        Ah, but now, say the biggest-is-best philosophers, we're 
        merging within the field we know best. And if we don't combine 
        quickly, the Europeans and Asians will, stealing world business 
        domination from us. The urgency of ``globalization,'' say 
        today's merger-maniacs, destroys all notions of diverse 
        competition, and only the huge, heavily capitalized 
        multinational can survive.
          * * * * *
        Here are two startling, counterintuitive thoughts: The fewer 
        companies there are to compete, the less competition there is. 
        And as competition shrinks, prices go 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\
---------------------------------------------------------------------------
    \16\ William Safire ``Clinton's Consumer Rip-Off,'' Essay, New York 
Times October 11, 1999.

    The Chairman. I want to thank you for your usual reserved, 
noncontroversial testimony before this committee, Mr. 
Kimmelman.
    [Laughter.]
    The Chairman. Mr. McTighe.

  STATEMENT OF MIKE MCTIGHE, CHIEF EXECUTIVE OFFICER, CABLE & 
                  WIRELESS, GLOBAL OPERATIONS

    Mr. McTighe. Thank you, Mr. Chairman. I would like to thank 
you for the opportunity for Cable & Wireless to provide its 
perspective on mergers in the telecommunications industry.
    I would also like to thank you personally, because it is 
the first time that I have had the opportunity to go through 
this kind of process, being a British citizen. I have to 
commend you on the transparency of this process. I wish that we 
had these kind of processes in other parts of the world.
    The Chairman. Well, we wish we had the question period for 
the leader of the country that you have in the British 
Parliament.
    [Laughter.]
    Mr. McTighe. Touche. Thank you.
    Cable & Wireless is here this morning to make three points 
to you. First, the government must address the threat to 
competition in the Internet backbone market posed by the merger 
of MCI/WorldCom and Sprint. To prevent UUNet from dominating 
the Internet, it is essential that the divestiture of one of 
the merging company's Internet backbones, preferable UUNet, be 
a condition of the merger.
    Second, we wish to share our recent experience with the 
divestiture of an integrated Internet business. We have found 
that, absent extreme good faith on the part of the seller and 
strict continuing oversight by the responsible regulatory 
agencies, the competitiveness of the divested business will be 
compromised.
    Third, it follows that unless there are assurances that the 
merging parties will act in good faith and that the regulators 
will hold them strictly accountable, such mergers should not be 
allowed to proceed.
    I would like to go through each point in a little more 
detail.
    Internet backbone competition: The Internet backbone is to 
the 21st century what the railways were to the 19th. The 
highway created by the Internet backbone will be the transport 
mechanism for the new e-commerce model of the future. How is it 
competitively structured is essential to the development of e-
commerce over the next two or three decades.
    I would like, if I may, to use an analogy to describe the 
issue that we feel is confronting us. We all are familiar with 
the highway system. We have highways that are local, national 
and regional. The Internet is the same. We have highways on the 
Internet, each of them owned and operated by a number of 
different companies. These highways intersect, or, to use our 
jargon for the industry, they peer with one another. The 
peering process is essential if we are to enable traffic and 
data to move from one end of the Internet to the other, from 
one end of the globe to the other.
    However, we have a new phenomenon that is emerging. We have 
a number of four or five global superhighways being provided by 
companies like Cable & Wireless, MCI/WorldCom, Sprint, GTE, and 
AT&T/BT. These global superhighways allow more traffic to flow 
more quickly and with less accidents, if I can continue the 
analogy. It is essential for the local highways to be able to 
intersect with these superhighways if they are to truly have 
access to the content and to the consumers that exist around 
the globe for this new e-commerce phenomenon.
    In addition, these superhighways have on-ramps and off-
ramps. And basically, today we have people on the on-ramps, 
like Yahoo, like Barnes&Noble.com and these other e-commerce 
companies, and we also have people on the off-ramp, the 
Internet service providers around the world that we all 
support. Access to these highways is critical.
    Today's situation is relatively straightforward. Largely, 
these superhighways, these peering arrangements, are toll free, 
if I can use that analogy. And using the off-ramps and the on-
ramps is actually very, very competitive today. The problem 
that we have is that the combination of MCI/WorldCom and Sprint 
leads to the creation of a dominant Internet backbone supplier. 
Many analysts predict that they would have somewhere in excess 
of 60 percent of the Internet backbone globally.
    It is very possible that this dominant position could be 
used to discriminate in terms of cost and service levels 
against the other highway providers and in favor of the new 
combined entity. And therefore, the question for us, in terms 
of Internet backbone capacity, is a very simple one: Do we want 
the essentially toll-free environment of a competitive market 
or the prospect of a tollbooth environment of a de facto 
monopoly?
    And now I would like to touch on the Cable & Wireless 
experience. What we are confronting today with the MCI/
WorldCom-Sprint proposed merger is deja vu. One year ago today 
we saw exactly the same discussion over MCI and WorldCom. At 
that time, the European Union, endorsed by the Department of 
Justice here in the United States, required MCI to divest its 
highly integrated Internet business.
    Cable & Wireless purchased the MCI Internet business, 
relying on the binding undertakings that MCI had made to the 
European Union; i.e., that MCI would deliver an operating 
entity. However, if I can just summarize our experience, the 
take-away for us is very simple. The bottom line is that 
successful divestiture of an integrated business requires the 
seller to disrupt its own business to support the creation of a 
new competitor.
    In this situation, MCI/WorldCom failed to carry this out. 
And, frankly, I can illustrate that with a number of points 
that we might want to get to in questions.
    That leads me, frankly, to my final point, of enforcement. 
Cable & Wireless fundamentally believes that it is possible to 
divest an integrated business. But it is only possible with a 
high level of oversight and compliance monitoring. If the 
various regulatory authorities around the world feel that such 
oversight and such monitoring is inappropriate or they just do 
not want to do it, then let us not kid ourselves--these kinds 
of forced divestments are not going to work. So let us not do 
them.
    In summary, Mr. Chairman, the Internet backbone is a key 
component of tomorrow's global business model. We believe very 
strongly in the powers of the market. This is not, for us, a 
question of regulation or deregulation. This is about creating 
the competitive landscape on which we can allow the market to 
have full rein. It is, for us, about having a toll-free 
environment or a tollbooth.
    I would like to thank you for this opportunity to provide 
you with our perspective, and I would be happy to address any 
questions you may have.
    [The prepared statement of Mr. McTighe follows:]

     Prepared Statement of Mike McTighe, Chief Executive Officer, 
                  Cable & Wireless, Global Operations

    Mr. Chairman, thank you for this opportunity to provide the 
perspective of Cable and Wireless on mergers in the telecommunications 
industry. I joined Cable & Wireless in the spring of 1999 as Chief 
Executive Officer of Cable & Wireless Global Operations. Cable & 
Wireless is an international leader in integrated communications, 
operating in 70 countries worldwide. With its global reach and 
ownership of one of the largest and fastest Internet networks 
worldwide, Cable & Wireless is a premier provider of domestic and 
international data and Internet solutions to business customers. Cable 
& Wireless headquarters its North American operations in the Tyson's 
Corner high-tech corridor in Virginia.
    I have nearly 20 years of experience in the high technology 
industry. My career in international telecommunications has encompassed 
senior positions in Europe and the USA, and has included roles in 
sales, marketing and operations for General Electric, Motorola, 
Phillips Electronics and Siemans AG.
    Cable & Wireless is here this morning to discuss several public 
policy issues surrounding mergers in the telecommunications industry. 
The company offers a unique perspective on this topic, as we are a 
recent purchaser of assets required to be divested in a merger that, at 
its inception, was the largest telecommunications merger of all time 
involving approximately $40 billion. The divestiture of the MCI 
Internet backbone assets acquired by Cable & Wireless was the largest 
divestiture of an integrated business in U.S merger history. This 
experience provides Cable & Wireless with highly relevant expertise in 
three areas: competition issues; the need for enforcement of conditions 
placed on mergers; and the efficacy of divestitures of integrated 
businesses.
    I'd like to start my testimony with a story to illustrate our 
concerns in these areas before speaking more in depth of its relevance 
to your policy-making goals.
    In July 1998, as a condition of their proposed merger, MCI and 
WorldCom made commitments to the European Commission and the U.S. 
Department of Justice to divest MCI's Internet backbone business. 
Internet backbones are the largest national or global networks that 
carry Internet traffic between smaller networks and consumers.
    In its investigation of the merger of MCI and WorldCom, the 
European Commission had found that MCI and WorldCom competed in a 
global market for top level networks--those that can reach anywhere on 
the Internet through their own peering arrangements, without having to 
pay anyone for transit. The Commission noted that WorldCom's Internet 
subsidiary, UUNet, already had ``very substantial size by comparison 
with its competitors'' and was, by itself, ``close to achieving 
dominance.'' Thus, ``[t]he combination of the Internet backbone 
networks of WorldCom and MCI would create a network of such absolute 
and relative size that the combined entity could behave to an 
appreciable extent independently of its competitors and customers.'' 
Such an entity could disadvantage its competitors by ``oblig[ing] them 
to pay for access to its network'' or ``leverage its position to gain a 
dominant position downstream.'' Furthermore, ``[b]ecause of the 
specific features of network competition and the existence of network 
externalities which make it valuable for customers to have access to 
the largest network, MCI WorldCom's position can hardly be challenged 
once it has obtained a dominant position.''
    Based on these findings, the Commission concluded that the merger 
of MCI and WorldCom, if unaltered, ``would lead to the creation of a 
dominant position in the market for the provision of top level or 
universal Internet connectivity.'' In order to overcome these 
competition concerns, MCI and WorldCom entered into ``Undertakings'' 
that required MCI to divest its Internet business ``as an operating 
entity.'' The Commission approved the merger of MCI and WorldCom 
``subject to the condition of full compliance with the Undertakings. . 
. .''
    The U.S. Department of Justice specifically relied on the 
commitments reflected in the Undertakings when it cleared the merger a 
week later. The Justice Department had assisted the European Commission 
``in evaluating and implementing the divestiture proposal, which had 
been submitted to both the Commission and the Department of Justice.'' 
In announcing the merger clearance, Assistant Attorney General Joel 
Klein highlighted the benefits of the divestiture:

        This divestiture benefits anyone who relies on the Internet 
        because it preserves competition among major Internet service 
        providers. Consumers will benefit with lower prices, higher 
        quality, and greater innovation in this dynamic and emerging 
        industry.

    Thus, in order to obtain approval of their merger, MCI and WorldCom 
agreed to detailed conditions embodied in the Undertakings. These 
conditions required MCI WorldCom, among other things:

        to transfer ``all necessary employees to support the iMCI 
        Business being transferred'';
        to transfer ``all MCI's contracts with wholesale and retail 
        customers for the provision of Internet access'';
        to ``make available all other necessary support arrangements to 
        fulfill existing contractual obligations of the iMCI Business--
        and to accommodate growth of that business'';
        to provide support services ``at favourable rates''; and
        to refrain from soliciting or contracting to provide dedicated 
        Internet access services to the former MCI Internet customers 
        for specified periods.

    One year after the divestiture, we are sorry to report that MCI 
WorldCom has not honored its commitments to the European Commission and 
the Justice Department. MCI WorldCom's material violations of the 
Undertakings include:

        Failure to transfer all personnel necessary for the operation 
        of the former MCI Internet business at prior performance and 
        service level standards. For example, MCI transferred only 43 
        sales and sales support representatives to support more than 
        3,300 business customers.
        Failure to provide contract documentation and other key 
        customer information to Cable & Wireless at closing. For 
        example, MCI WorldCom withheld 2,000 written customer 
        contracts--half of the contracts provided to date--until at 
        least seven months after closing.
        Failure to provide necessary services, systems and support, 
        such as competent customer billing services.
        Failure to provide services at favorable rates.
        Failure to conduct business in the ordinary course, including 
        the reasonable retention and solicitation of customers, prior 
        to closing.
        Solicitation of transferred customers, in violation of the non-
        compete provisions of the Undertakings.

    MCI WorldCom's material breaches of the Undertakings threaten to 
impair Cable & Wireless's competitiveness. The lack of essential 
personnel, information and services have compromised Cable & Wireless's 
ability to retain and expand business with existing customers or to 
secure new customers. Thus, despite the 50 to 100 percent growth rates 
experienced by MCI prior to the divestiture, and the continued rapid 
growth of the industry as a whole, Cable & Wireless's Internet revenues 
have not kept pace. Unless this trend is reversed, Cable & Wireless 
will, by definition, lose market share and will eventually be unable to 
provide effective competition in the market. Cable & Wireless has spent 
a year recruiting and training employees and has announced a nearly 
$700 million investment into the network to make up for the setbacks 
caused by MCI WorldCom's refusal to honor their commitments.
    We believe that Cable & Wireless's experience as the purchaser of 
the MCI Internet business should weigh heavily in any antitrust review 
of the MCI WorldCom/Sprint acquisition, and should be instructive for 
other telecommunications mergers.

COMPETITION ISSUES

    If our collective goal is competition in the marketplace, we must 
adequately assess the threat to competition.
    MCI WorldCom now proposes to acquire Sprint, another major 
competitor in the market for top level Internet connectivity. MCI 
WorldCom's UUNet division is the largest Internet backbone, estimated 
to carry 50% of the world's traffic. The European Commission found last 
year that UUNet was nearly dominant by itself, and it has only grown in 
marketshare since. The European Commission also identified Sprint among 
the ``big four'' backbone providers, along with WorldCom, MCI (now 
Cable & Wireless) and GTE. Sprint's share of traffic in 1998 was 
estimated at 18 percent, second only to UUNet. UUNet continues to grow 
at dramatic rates; its executives have been repeatedly quoted as 
stating that demand for capacity is growing at 1,000 percent per year.
    Further, the Internet backbone market is highly susceptible to 
domination by a large network. Because the nature of network 
competition makes it advantageous for customers to have access to the 
largest network, having a large network is a high barrier to entry by 
competitors. As the European Commission concluded last year, a dominant 
network could impose costs on or reduce the quality of service to 
competing backbone networks. A dominant backbone provider could 
leverage its position to gain a dominant position in downstream 
market--for example, retail Internet Service Providers.
    MCI WorldCom's acquisition of Sprint would constitute the same 
serious threat to competition in the Internet backbone as MCI's merger 
with WorldCom just one year ago. Further, a commitment to divest UUNet 
or Sprint's Internet assets may not adequately protect competition and 
consumers if our experience with MCI WorldCom and its agreement to 
divest MCI's Internet backbone to Cable & Wireless is any indication. 
Absent clear indications that MCI WorldCom would honor such commitments 
and that the regulators would enforce the agreement, Congress should be 
concerned about what a combined MCI WorldCom-Sprint would mean for 
competition and the flow of Internet traffic.

ENFORCEMENT ISSUES

    Efforts by the European Commission and Justice Department to ensure 
competition in telecommunications markets will not be effective if left 
unenforced. However, little has been done to ensure the 
``Undertakings'' imposed by these agencies are adhered to. If the 
European Commission and Justice Department do not enforce MCI 
WorldCom's commitment to divest the MCI Internet business fully, it may 
conclude that it can breach any commitment made to U.S. or European 
officials to divest the UUNet or Sprint Internet business without 
adverse consequences. Lack of enforcement may also compromise the 
effectiveness of divestiture as a remedy for other mergers in the 
telecommunications industry and elsewhere.
    Failure to enforce MCI WorldCom's commitment to fully divest the 
MCI Internet business raises additional questions as to the 
effectiveness of cooperation with the European Commission. The European 
Commission took the lead in investigating the merger of MCI and 
WorldCom, entering into the ``Undertakings,'' which laid out the 
commitment to divest. The Justice Department cleared the merger one 
week after the European Commission, expressly relying on those 
divestiture commitments. The Justice Department should not defer to the 
European Commission and rely on merging parties' commitments to the 
European Commission absent assurances that the European Commission will 
demand full compliance with those commitments and/or the Justice 
Department can and will enforce such commitments independently, if 
necessary to protect the interests of U.S. consumers.

EFFICACY OF DIVESTITURE OF INTEGRATED BUSINESSES

    Another question is whether divestiture in a market containing 
highly integrated services is doomed to failure. Cable & Wireless 
believes these divestitures can work, but the complexity of the 
situation should not be taken lightly. At a minimum, they call for a 
level of involvement and enforcement by regulators that other mergers 
may not require.
    Divestiture of a fully integrated business is much more complicated 
than simply selling off a separate operating division or wholly-owned 
subsidiary. MCI's Internet business was highly integrated with its 
other telecommunications services. The MCI Internet assets were not 
organized into a separate, free standing division, as is the case with 
UUNet, for example. Personnel have knowledge about and responsibility 
for both Internet and non-Internet businesses. The same engineers, 
sales force, billing mechanism and databases all serve the same 
customers for a variety of products such as long-distance, wireless, 
pre-paid calling cards, messaging services and Internet backbone 
products. Any costs or disruptions resulting from the transfer of these 
multiple purpose assets must be borne by the seller, which, after all, 
receives the benefit of merger clearance. Moreover, the seller will 
likely need to provide additional services to purchaser while it makes 
a transition to its own systems.
    However, this allows the divesting party to hold some very 
important keys to interfacing with customers. In fact, it gives the 
divesting party an incentive to degrade service while providing it in 
the name of another company. Any problems are likely to cause former 
customers to migrate back to the original service provider.
    The European Commission, recognizing this complexity, first 
suggested that WorldCom should divest the more separate UUNet asset as 
a way to alleviate some of these concerns. The parties refused and 
offered MCI's highly integrated Internet business instead. Cable & 
Wireless's experience demonstrates that it is difficult to adequately 
divest such integrated businesses. With the knowledge gained from that 
experience, we suggest that, in the context of the MCI WorldCom/Sprint 
merger, it is more appropriate to require the divestiture of UUNET 
rather than again try to effectively quantify the assets of Sprint's 
integrated Internet backbone business.

CONCLUSION

    Policy makers must inquire, if the right choices for divestiture 
are not made, the conditions are not fully enforced, and companies 
refuse to live up to their commitments, can we hope to maintain 
competitive markets?
    The Internet is a revolutionary technology that offers enormous 
benefits to consumers in the next century. It has given rise to 
countless new information, education and entertainment products while 
reducing the cost of communication on a global basis. Electronic 
commerce on the Internet has the potential to lower transaction costs, 
to give consumers access to better information about available products 
and services, and to provide producers with more information about the 
markets they serve. By facilitating the exchange of technical, cultural 
and commercial knowledge, the Internet encourages product innovation 
and efficiency in product design, manufacture and distribution. 
Competition among the backbone networks at the heart of the Internet 
must be preserved to ensure that the full potential of this critically 
important technology is realized.
    Companies with dominance in the market should not be able to simply 
hobble their primary competition by agreeing to conditions they never 
intend to fulfill or by maintaining control over critical elements of 
service delivery due to integration which allow them to degrade service 
while acting in a competitor's name. This thwarts the goal of 
competition. Policy makers must not allow such bad actors to succeed 
with this strategy in the marketplace.
    Cable & Wireless remains committed to being a major competitive 
force in the Internet market. We have made substantial investments to 
expand our network and improve our service to customers. In addition, 
we have pursued every available option to compel or persuade MCI 
WorldCom to meet its obligations and, thereby, to ensure Cable & 
Wireless's future competitiveness.
    The recent experience of Cable & Wireless, in perhaps the most 
critical of the marketplaces you are examining today, brings to the 
fore issues of serious import to your review of merger policy. Congress 
and regulators must ensure competition. The tools they use to 
accomplish that goal must include adequate enforcement mechanisms. They 
also must fully address the complexities of integrated markets. If more 
scrutiny can not be given, U.S. consumers must be protected by the 
refusal to allow such mergers.
    Again, thank you for this opportunity to provide Cable & Wireless's 
perspective on telecommunications mergers. I would be happy to address 
any questions from members of the Committee.
                                 ______
                                 
Reuters
Cable & Wireless Takes MCI Complaint To Congress
November 8, 1999
4:04 PM ET

WASHINGTON--British telecommunications and Internet carrier Cable & 
Wireless Plc complained to U.S. lawmakers Monday that MCI WorldCom Inc. 
<> had 
sabotaged its $1.75 billion Internet asset purchase.
MCI WorldCom officials responded by distributing a Cable & Wireless 
presentation to securities analysts that touted the British firm's 
Internet presence and 30 percent share of the U.S. Internet backbone 
market.
Cable & Wireless last year bought the former MCI's Internet business 
after antitrust regulators ordered the sale as part of MCI's merger 
with WorldCom. In March, Cable & Wireless filed suit against MCI 
WorldCom alleging that MCI had not delivered what was promised, 
including key personnel and customer information.
Mike McTighe, Cable & Wireless chief executive officer of global 
operations, told a hearing of the Senate Commerce Committee that MCI 
WorldCom''s proposed merger with Sprint Corp. <> could create a 
``deja vu'' situation if regulators again required an Internet asset 
sale. He urged stronger enforcement and monitoring by regulators.
``These divestitures can work, but the complexity of the situation 
should not be taken lightly,'' McTighe said. ``At a minimum, they call 
for a level of involvement and enforcement by regulators that other 
mergers may not require.''
Should regulators be unwilling to remain involved after a sale, ``these 
forced divestments are not going to work, so let's not do them,'' he 
added.
MCI WorldCom vice chairman John Sidgmore said he could not directly 
respond to some of McTighe's charges, given the ongoing litigation.
But, he said, Cable & Wireless told ``a very very different story when 
they're telling their story to analysts.'' ``We think it was one of the 
more successful divestitures,'' Sidgmore added.
At a hearing last week, MCI WorldCom President Bernard Ebbers told the 
Senate Judiciary Committee that the Cable & Wireless charges were ``not 
sustainable by the facts.''
McTighe said some of the problems Cable & Wireless faced were due to 
the fact that MCI's Internet business was highly integrated with its 
other businesses.
If MCI WorldCom and Sprint were allowed to merge and an Internet 
divestiture was required, McTighe said the parties should be forced to 
spin off MCI WorldCom's UUNet Internet unit.
                                 ______
                                 
Bloomberg News
FCC, FTC Warn U.S. Congress of Concerns About Phone Mergers
November 8, 1999

Washington--Federal regulators and antitrust authorities warned a 
Senate panel that recent multibillion-dollar telecommunications mergers 
are cause for concern, and that Congress should watch the industry 
closely.
``I think Congress should be very concerned'' by the ``pace and scope 
of consolidation in the telecommunications marketplace,'' U.S. Federal 
Communications Commission Chairman William Kennard told the Senate 
Commerce Committee, which oversees telecommunications policy.
Congress rewrote the nation's telecommunications laws in 1996, setting 
the stage for local, long-distance and cable companies to compete in 
each other's markets. While some competition has occurred, the industry 
also has seen multibillion dollar mergers among companies in the same 
line of business, reducing the number of competitors.
For instance, the second- and third-largest long-distance companies 
combined last year to form MCI WorldCom Inc., and that company plans to 
buy No. 3 long-distance company Sprint Corp. for $128 billion--the 
largest corporate takeover in history.
The seven regional phone companies formed in the 1984 break-up of 
American Telephone & Telegraph Co. have become four through mergers 
since the 1996 Telecommunications Act. In October, SBC Communications 
Inc. completed its $80.6 billion purchase of Ameritech Corp., creating 
the largest U.S. local phone company with control of one-third of all 
U.S. phone lines.
``One must ask the question where it is all going to end, and I think 
Congress should be very concerned,'' Federal Trade Commission Chairman 
Robert Pitofsky said.
MCI WorldCom share fell \3/16\ to 86 \3/8\ and Sprint fell \5/16\ to 72 
\13/16\ in late trading. SBC shares fell \3/16\ to 51 \1/6\, and AT&T 
shares fell \3/8\ to 46 \5/8\.

Mergers Defended
The FTC and the Justice Department look at possible antitrust 
violations while the FCC reviews whether a communications license 
transfer is in the ``public interest.''
Senate Commerce Committee Chairman John McCain, who is seeking the 
Republican presidential nomination, said his committee will hold 
hearings next year to examine what action, if any, Congress should 
take.
``While merging industries enjoy the cost-saving benefits of increased 
efficiency, the average consumer doesn't always reap the benefits of 
lower prices and better services,'' McCain said.
MCI WorldCom Vice Chairman John Sidgmore defended his company's 
proposed purchase of Sprint, saying it'll allow it to better compete as 
customers demand one-stop-shopping for all of their telecommunications 
services--local and long-distance phone, wireless phone, and Internet.

Divestiture Urged
Cable & Wireless PLC's chief executive of global operations, Mike 
McTighe, told the panel that it should be concerned about the MCI 
WorldCom-Sprint transaction because the new company will dominate the 
Internet backbone market. When WorldCom purchased MCI last year, it was 
required by U.S. and European antitrust officials to sell MCI's 
Internet backbone business. Cable & Wireless purchased it for $1 .75 
billion, and in March the company sued MCI WorldCom, accusing it of 
failing to transfer its Internet customer base and not living up to the 
agreement.
McTighe said the company should be forced to divest MCI WorldCom's 
UUNet Technologies unit as a requirement for winning approval of the 
Sprint purchase.
``We believe that Cable & Wireless's experience as the purchaser of the 
MCI Internet business should weigh heavily in any antitrust review of 
the MCI WorldCom Sprint acquisition,'' said McTighe.

Sprint takeover faces opposition
By Gareth Vaughan,<>
CBS MarketWatch Last Update: 2:21 PM ET Nov 8,1999 NewsWatch


The British telecom group Cable & Wireless PLC outlined its opposition 
Monday to MCI WorldCom Inc.'s planned $129 billion acquisition of 
Sprint Corp., saying the merged group would control the flow of 
worldwide Internet traffic. Mike McTighe, C&W's chief of global 
operations, told a U.S. Senate panel that Congress and regulators 
should be concerned about how the proposed MCI WorldCom merger would 
create a dominant player in the Internet backbone market. If the deal 
goes ahead it would harm consumer and business customers seeking to 
maintain low Internet access prices and innovative services from the 
Net backbone industry, C&W's McTighe said. ``Congress should be 
concerned about what a combined MCI WorldCom-Sprint would mean for 
competition and the flow of Internet traffic.'' Cable & Wireless is a 
competitor of the two U.S. groups.
                                 ______
                                 
Reuters
C&W urges UUnet sale in WorldCom/Sprint deal
Monday November 8, 12:55 pm Eastern Time

LONDON, Nov 8--British based telecoms group Cable and Wireless PLC on 
Monday urged a powerful U.S. congressional committee to help curb the 
muscle of MCI WorldCom (NasdaqNM:WCOM <>--news ) by making the U.S. carrier sell 
its prized UUNet Internet arm.
C&W's Chief Executive Officer of Global Operations Mike McTighe told 
America's Senate Commerce Committee that MCI WorldCom's record $115 
billion bid for peer Sprint Corp (NYSE:FON <> --news ) would otherwise create a dominant 
force that controlled the flow of Internet traffic around the globe.
``The proposed merger would harm consumer and business customers 
seeking to maintain low Internet access prices and innovative services 
from the Internet backbone industry, and create a company that would 
control the flow of Internet traffic around the world,'' McTighe said.
``We suggest that...it is more appropriate to require the divestiture 
of UUNet rather than again try to effectively quantify the assets of 
Sprint's integrated Internet backbone business,'' he added.
C&W thought it had bought itself a leading position in servicing the 
Internet in May 1998 after it snapped up MCI's Internet backbone 
business, which pipes vast amounts of data through a fibre optic 
network, for $625 million.
But the UK-based group sued MCI last March for not fulfilling certain 
terms of the deal, accusing the U.S. group of failing to effectively 
transfer MCI's Internet customer base, of impeding C&W's ability to 
operate the business and of targeting former MCI customers for 
marketing purposes.
WorldCom was forced by regulators to sell MCI's Internet business, 
which is second in size only to UUNet--which is estimated to carry 50 
percent of the world's Internet traffic--in return for regulatory 
approval for its MCI acquisition.
                                 ______
                                 
Sen. McCain: Telecom Mergers Often Bad For Consumers
Dow Jones News Service
November 8, 1999

WASHINGTON--Mergers in the telecommunications industry were once again 
the topic of a hearing on Capitol Hill, the second time in two weeks.
This time, the hearing was chaired by Sen. John McCain, R-Ariz., 
chairman of the Senate Commerce Committee and contender for the GOP 
presidential nomination. Most Americans, McCain asserted ``tend to view 
increased concentration of control as a negative.'' Unfortunately for 
the average consumer, he added, ``this is often the case.''
But worries about concentration ``sometimes prompt the wrong 
responses,'' said McCain. Government ``tends to rely on outmoded 
ownership restrictions'' to solve the problem. McCain has questioned 
the Federal Communications Commission's rules keeping local telephone 
companies out of high-speed data markets until they open local markets 
to competition. He has also introduced legislation further lifting 
limits on broadcast station ownership. McCain said he plans to hold a 
series of hearings on the issue, and has ordered a congressional study 
of the merger wave from a consumer point of view.
According to the Federal Trade Commission, the number of communications 
mergers has increased by 50% since 1995 to a value of over $266 
billion. That compares to a threefold increase in corporate mergers 
overall McCain questioned whether the proposed merger between AT&T 
Corp. (T) and cable provider MediaOne Group Inc. (UMG) would raise red 
flags from antitrust officials, given AT&T's level of ownership in the 
cable industry. He noted that the FTC imposed strict conditions on Time 
Warner Inc.'s (TWX) purchase of Turner Broadcasting, a deal that also 
involved cable, so that Time Warner wouldn't exert undue impact over 
programming.
AT&T's market share ``is certainly a concern,'' said FTC Chairman 
Robert Pitofsky. He noted that the Justice Department and not the FTC 
will be reviewing the AT&T merger. McCain also asked about AT&T's plans 
to provide high-speed cable Internet solely through Excite@Home (ATHM), 
a company in which AT&T has a stake. Pitofsky said that while he hasn't 
examined the deal, it would bear scrutiny if found to impede 
competition.
The panel continued a debate begun last week between MCI WorldCom Inc. 
(WCOM) and Cable & Wireless Communications PLC (CWZ), sparked by MCI 
WorldCom's offer to buy Sprint Corp. (FON). Cable & Wireless purchased 
Internet ``backbone'' assets that MCI was ordered to sell last year 
when it merged with WorldCom. But one year after the divestiture, MCI 
WorldCom ``has not honored its commitments'' to transfer a working 
asset to Cable & Wireless, said company executive Mike McTighe. That 
should be a warning to Congress and regulators if MCI WorldCom and 
Sprint are forced to get rid of some Internet assets, McTighe said. MCI 
WorldCom's vice chairman, John Sidgemore, said Cable & Wireless' 
performance shows that the divestiture was successful.
                                 ______
                                 
C&W claims Sprint deal will stifle competition
NEWS DIGEST:
By ALAN CANE
11/09/1999

Cable and Wireless, the UK-based telecommunications group, yesterday 
told a senate committee the Dollars 130bn merger of MCI WorldCom and 
Sprint would create a dominant internet force that could inhibit 
competition for private and business customers. The merger has already 
attracted criticism from the Republican Senator, Mike DeWine, chairman 
of the Senate anti-trust committee.
Mike McTighe, C&W's head of global operations, told a senate commerce 
committee hearing on consolidation in the telecoms business: ``MCI 
WorldCom's acquisition of Sprint would constitute the same serious 
threat to competition in the internet backbone as MCI's merger with 
WorldCom just one year ago,'' he said, proposing that UUNet 
Technologies should be divested. Wholly owned by MCI WorldCom, UUNet is 
a large provider of internet services to the business sector. According 
to C&W, UUNet owns the world's largest internet backbone (principal 
transmission channel), carrying about 50 percent of the world's 
internet traffic.
C&W benefitted from the merger of MCI and WorldCom, buying MCI's 
internet assets for Dollars 1.75bn after regulators demanded their 
disposal as the price for approval of the deal.

Copyright (c) 1999 Financial Times Limited
                                 ______
                                 
Telecommunications Reports (TR Daily)
11/8/99

McCain TO SEEK GAO STUDY, MORE HEARINGS ON MERGERS

Concerned about further telecom industry consolidation, Senate 
Commerce, Science, and Transportation Committee Chairman John McCain 
(R., Ariz.) intends to ask the General Accounting Office to conduct a 
study examining the impact of telecom mergers ``from a consumer's 
standpoint.'' Sen. McCain also announced during a hearing this morning 
on telecom mergers that he intends to increase his committee's 
oversight of the issue by holding more telecom merger hearings next 
year.
Sen. McCain said lawmakers are worried future mergers involving Bell 
companies could result in formation of a ``Bell East and Bell West.'' 
And he wondered whether AT&T Corp.'s aggressive move into the cable TV 
industry will reposition that company as ``Ma Cable, dominating the 
markets for voice, video, and high-speed data services.''
Sen. Ron Wyden (D., Ore.) described this morning's hearing as the 
``beginning of an effort. . .to examine thoroughly the impact of all 
mergers, not just'' telecom-related transactions. Sen. Wyden said his 
``gut feeling'' is that a ``fair number of these mergers do not harm 
the interest of consumers.'' But he noted that ``of those that 
represent a problem, a disproportionate number are in the telecom 
sector.'' Sen. Wyden suggested that additional mergers among 
communications industry players might become ``First Amendment 
concerns.''
FCC Chairman William E. Kennard reprised his role as defender of the 
Commission's public interest test for reviewing proposed license 
transfers. He described the FCC as ``the last defense for consumers'' 
and told the Senate panel that ``if the Commission did not review 
mergers under the public interest standard, it would be possible under 
traditional antitrust analysis for all the regional Bells and GTE Corp. 
to merge into a single, national local phone company.''
Federal Trade Commission Chairman Robert Pitofsky reported that the 
number of communications transactions seeking government approval have 
increased by about 50% since 1995, with the total dollar value 
increasing eightfold to $266 billion. Mr. Pitofsky said he was limited 
in his remarks about telecom consolidation because most of the 
antitrust work in that area is being carried out by the Department of 
Justice.
``Although the FTC has been active in cable [TV] and entertainment 
industries, most of the mergers involving telephones and commercial 
satellite services have been analyzed by the DOJ pursuant to the two 
agencies' clearance agreement, which divides matters on the basis of 
recent expertise,'' Mr. Pitofsky explained. And the FTC is barred by 
section 11 of the Clayton Act and section 5 of the FTC Act from 
exercising jurisdiction over common carriers, he noted.
Messrs. Pitofsky and Kennard agreed that Congress should be ``very 
concerned'' about the recent outbreak of telecom megamergers but 
advised against passing federal legislation to address that concern.
Their stance drew criticism from Consumers Union co-director Gene 
Kimmelman. ``I'm a little baffled,'' Mr. Kimmelman said after the 
regulators' testimony. ``They describe a world of concern, and then 
they say don't do anything about it.''
An industry witness, Mike McTighe, chief executive officer of Cable & 
Wireless PLC's global operations, suggested that antitrust officials 
reviewing the proposed merger of MCI WorldCom, Inc., and Sprint Corp. 
require MCI WorldCom to divest its Internet backbone unit. ``It is more 
appropriate to require the divestiture of UUNet, rather than again try 
to effectively quantify the assets of Sprint's integrated Internet 
backbone business,'' he said.
C&W acquired MCI Communications Corp.'s Internet backbone business in a 
divestiture sale framed to satisfy regulators' concerns about combining 
MCI's asset with WorldCom, Inc.'s UUNet subsidiary.
From Wired News, available online at:
http://www.wired.com/news/print/0,1294,32407.00. html
C&W Brings MCI Beef to US
Reuters

12:35 p.m. 8 Nov 1999 PST

WASHINGTON--Cable & Wireless PLC, the British telecommunications and 
Internet carrier, complained to US lawmakers Monday that MCI WorldCom 
Inc. had sabotaged its US$1.75 billion Internet asset purchase.
MCI WorldCom officials responded by distributing a Cable & Wireless 
presentation to securities analysts that touted the British firm's 
Internet presence and 30 percent share of the US Internet backbone 
market.
Last year, Cable & Wireless bought the former MCI's Internet business 
after antitrust regulators ordered the sale as part of MCI's merger 
with WorldCom. In March, Cable & Wireless filed suit against MCI 
WorldCam, alleging that MCI had not delivered what was promised, 
including key personnel and customer information.
Mike McTighe, Cable & Wireless chief executive officer of global 
operations, told a hearing of the Senate Commerce Committee that MCI 
WorldCom's proposed merger with Sprint Corp. could create a ``deja vu'' 
situation if regulators again required an Internet asset sale. He urged 
stronger enforcement and monitoring by regulators.
``These divestitures can work, but the complexity of the situation 
should not be taken lightly,'' McTighe said ``At a minimum, they call 
for a level of involvement and enforcement by regulators that other 
mergers may not require.''
Should regulators be unwilling to remain involved after a sale, ``these 
forced divestments are not going to work, so let's not do them,'' he 
added.
MCI WorldCom vice chairman John Sidgmore said he could not directly 
respond to some of McTighe's charges, given the ongoing litigation.
But, he said, Cable & Wireless told ``a very, very different story when 
they're telling their story to analysts.''
``We think it was one of the more successful divestitures'' Sidgmore 
added.
At a hearing last week, MCI WorldCom President Bernard Ebbers told the 
Senate Judiciary Committee that the Cable & Wireless charges were ``not 
sustainable by the facts.''
McTighe said some of the problems Cable & Wireless faced were due to 
the fact that MCI's Internet business was highly integrated with its 
other businesses.
If MCI WorldCom and Sprint were allowed to merge and an Internet 
divestiture was required, McTighe said the parties should be forced to 
spin off MCI WorldCom's UUNet Internet unit.

Copyright 1999 Reuters Limited.
                                 ______
                                 
CNET
British carrier claims MCI sabotage in Net buy
By Reuters
November 8, 1999, 3:20 p.m. PT
http://home.cnet.com/category/0-1004-200-1431967.html

WASHINGTON--British telecommunications and Internet carrier Cable & 
Wireless complained to U.S lawmakers today that MCI WorldCom sabotaged 
its $1.75 billion Internet asset purchase.
MCI WorldCom officials responded by distributing a Cable & Wireless 
presentation to securities analysts that touted the British firm's 
Internet presence and 30 percent share of the U.S. Internet backbone 
market.
Cable & Wireless last year bought the former MCI's Internet business 
after antitrust regulators ordered the sale as part of MCI's merger 
with WorldCom. In March, Cable & Wireless filed suit against MCI 
WorldCom, alleging that MCI had not delivered what was promised, 
including keypersonnel and customer information.
Mike McTighe, Cable & Wireless chief executive officer of global 
operations, told a hearing of the Senate Commerce Committee that MCI 
WorldCom's proposed merger with Sprint could create a deja vu situation 
if regulators again require an Internet asset sale. He urged stronger 
enforcement and monitoring by regulators.
``These divestitures can work, but the complexity of the situation 
should not be taken lightly,'' McTighe said. ``At a minimum, they call 
for a level of involvement and enforcement by regulators that other 
mergers may not require.'' At a hearing last week, MCI WorldCom 
president Bernard Ebbers told the Senate Judiciary Committee that the 
Cable & Wireless charges were ``not sustainable by the facts.''
McTighe said some of the problems Cable & Wireless faced were due to 
MCI's Internet business being so highly integrated with its other 
businesses.
If MCI WorldCom and Sprint are allowed to merge and an Internet 
divestiture is required, McTighe said the parties should be forced to 
spin off MCI WorldCom's UUNet Internet unit.

Story Copyright 1999 Reuters Limited.
                                 ______
                                 
                                          November 16, 1999
The Honorable John McCain
Chairman, Senate Commerce, Science &
Transportation Committee
253 Russell Senate Office Building
U.S. Senate
Washington, D.C. 20510

Dear Chairman McCain:

In follow-up to your November 8th hearing on mergers, I would like to 
respectively request that the attached document be included in the 
formal hearing record. As you know, Mike McTighe of Cable & Wireless 
was a witness at this hearing.

Senator Ashcroft submitted for the record the testimony of Tod Jacobs 
of Sanford C. Bernstein and Company from the Senate Judiciary Committee 
hearing on mergers held on November 4. Cable & Wireless strongly 
disputes information contained in the study specifically regarding 
Cable & Wireless. The attached analysis indicates that Mr. Jacobs study 
relies on underlying assumptions which are false, as well as makes 
predictions about growth in the backbone industry which have no 
relation to historical precedent for the companies involved.

We very much appreciate your indulgence in hearing the views of our 
company in this matter.
Sincerely

Rachel J. Rothstein
Sr. Vice President, Regulatory and Government Affairs
Cable & Wireless Global Operations

Attachment
                                 ______
                                 
                                                 Attachment
                 RESPONSE TO TESTIMONY OF TOD JACOBS, 
                     SANFORD C. BERNSTEIN & COMPANY

    In testimony before the Senate Judiciary Committee on November 4, 
1999, MCI WorldCom CEO Bernie Ebbers cited a forecast by Tod Jacobs, an 
analyst at Sanford C. Bernstein & Co., predicting that, from 1999 to 
2003, Cable & Wireless' Internet backbone revenues will grow faster 
than MCI WorldCom's revenues. The speculation of this one analyst is 
unreliable for the following reasons:

         Mr. Jacobs' estimate of Cable & Wireless' 1999 
        Internet revenues is grossly inaccurate. Rather than $459 
        million, as Mr. Jacobs suggests, actual revenues will be 
        approximately $341 million. Mr. Jacobs seems to have relied on 
        outdated Cable & Wireless projections made around the time of 
        the divestiture, before the deficiencies in MCI WorldCom's 
        performance had become apparent.
         The suggestion that Cable & Wireless' Internet 
        revenues grew by 40 percent from 1997 to 1999 is similarly 
        inaccurate and misleading. Any growth in ``Cable & Wireless'' 
        business from 1997 to 1998 occurred before the failed transfer 
        of the iMCI business to Cable & Wireless. Since the 
        divestiture, Cable & Wireless' Internet revenues have been flat 
        or declining.
         In sharp contrast to Mr. Jacobs' contention that Cable 
        & Wireless' business would grow faster than MCI WorldCom's, MCI 
        WorldCom Vice Chairman Jon Sidgmore was recently reported in 
        the financial press as saying that ``MCI WorldCom still has the 
        fastest growth rate in the industry on the Internet.'' (Barrons 
        9/20/99. ``Changing the Net: Forget Long Distance''.) (Exhibit 
        1)
         Mr. Jacobs' estimate that MCI WorldCom's Internet 
        revenues would grow at an average of 23 percent per year 
        conflicts with Mr. Sidgmore's testimony before the Senate 
        Commerce Committee on November 8, 1999, that MCI WorldCom was 
        projecting 40-50 percent growth for the next several years.
         Peter Van Camp, UUNet's President of Internet Markets, 
        was recently quoted as saying ``[Our Internet Bandwidth growth 
        rate in 1999] will be ten times on the previous year and we see 
        no signs of it slowing down.'' (Bloomberg News. 9/1/99,``MCI 
        WorldCom Internet Unit to have Global Coverage in 18 Months''.) 
        (Exhibit 2)
         For the first six months of the current fiscal year, 
        MCI WorldCom reported 60 percent growth in Internet revenues.
         Mr. Jacobs' predictions about MCI WorldCom's future 
        growth cannot be reconciled with his own estimate of historical 
        performance for the last two years--when MCI WorldCom's 
        revenues purportedly grew at 64 percent per year.

    In sum, Mr. Jacobs' forecast, which appears to have been prepared 
specifically to support his testimony in favor of MCI WorldCom's 
acquisition of Sprint, is pure fiction.
    Mr. Jacobs' analysis does confirm that, during the period from 1997 
though 1999--the critical period in for the transfer of the MCI 
Internet business to Cable & Wireless--the revenue growth of that 
business lagged that of all other competitors. While Cable & Wireless 
disputes the specific market share figures included in the report, it 
is clear that Cable & Wireless lost share during that period due to MCI 
WorldCom's failure to provide all of the assets, personnel and services 
it had committed to provide. As a result, the market is one step closer 
to domination by MCI WorldCom.

    The Chairman. I would like to depart from the usual 
procedures here for a second and allow Mr. Sidgmore to respond, 
in any way that he wants to, to the previous two witnesses.
    Mr. Sidgmore. Well, if it is any way I want to, this could 
take 2 or 3 hours, but I will try and keep it brief.
    I think many of you are aware that we have a commercial 
dispute in litigation right now with Cable & Wireless, so it is 
probably not appropriate to respond to the detailed points. But 
I have to say, from my perspective, this is kind of an old 
story. The Department of Justice and the European Union, last 
year, sought to create an effective competitor to UUNet when we 
divested InternetMCI. And I think, by virtually any measure, 
that has taken place.
    I must say to Mr. McTighe here that the Cable & Wireless 
people, including the CEO, Mr. Wallace, and Mr. McTighe, 
regularly brag to their analysts about how robust their 
Internet business is. And, in fact, have made statements, which 
we can make available, that the Internet business and the 
revenues and so forth are roughly in line with what they 
expected when they bought the business. They also claim to have 
30 percent market share today on the Internet backbone.
    So I guess I would just say that they tell a very, very 
difficult story to their analysts when they are selling their 
case for why they are strong in Internet than they make here 
today.
    I think, at the end of the day, when you look at the 
Internet backbone, this is a very robustly competitive 
environment today, despite what some of the competitors say. I 
would also say that, with respect to peering, which has 
received a lot of notoriety, we have more peers every year than 
the year before. Just to put it in perspective, we have over 70 
today. Over 70 other backbones have equal status with MCI/
WorldCom's backbone, UUNet, today.
    That, to me, does not sound like a very restrictive 
situation. And each year the number of those peers increases. 
So if we were really trying to use our market power to stop 
competition, I think you would see those number of peers go 
down over time.
    Just, in closing, I would like to say that we believe that 
the Internet MCI disposition, although there were some problems 
that we are discussing today, was largely as advertised. And we 
think it was one of the more successful divestitures around. 
Again, a 30 percent market share by industry analysts and by 
their own recognition, robust growth in the business, and 
basically in line with the initial expectations.
    Thank you.
    The Chairman. The purpose of this hearing is not to 
specifically address your pending merger. It is the general 
issue, and I kind of would like to keep us on that. But I do 
understand that, obviously, because of recent events. And I 
hope that our other members of the committee will allow you to 
respond as we go through this.
    Mr. McTighe, I need to ask Mr. Kimmelman a question here.
    Mr. Kimmelman, as you know, this week, Congress is expected 
to vote on legislation intended to help satellite TV compete 
effectively with cable television. Yet the conference 
committee's draft satellite TV bill has been criticized as not 
terribly pro-competitive or pro-consumer. As a spokesman for 
competition and consumers who represent no special interests, 
please give me your opinion on what provisions the Satellite 
Home Viewer Act legislation must contain in order to be truly 
pro-consumer and pro-competitive.
    Mr. Kimmelman. Mr. Chairman, we have been very critical of 
a number of the suggestions. I do not know that it has been 
resolved yet in the conference committee. We asked for as much 
parity as possible between satellite and cable companies for 
the ability to obtain broadcast programming.
    As you and everyone else knows, one of the biggest problems 
satellite providers have in reaching consumers is they are not 
able to offer the local broadcast channels with the broader 
package of cable service. We wanted to make sure that for 
consumers to have more choice and the lowest possible prices 
that those channels would be available under the same terms and 
conditions that cable receives them.
    Unfortunately, my understanding is there are a number of 
provisions being discussed that still give advantages to cable 
in how they may negotiate with broadcasters as opposed to 
satellite. What all this will do, Mr. Chairman, unfortunately, 
is slow down the development of competition, creating other 
barriers to competition that are inappropriate and unnecessary.
    And so at a time when we have now no regulation of cable 
prices, and they are going up three times inflation, we want to 
see as much competition as quickly as possible. And from what I 
have seen--I know it is still under negotiation--a number of 
provisions just do not promote as much competition as is 
necessary.
    The Chairman. Well, obviously, I have heard the same and 
know of the same. And that is why I asked this question. This 
will be terribly disappointing. Good legislation was passed by 
the House. And it would be terribly disappointing if we, again, 
stiff these people all over America who have seen their screens 
go blank and not allow them to have access to the service of 
their choice.
    Chairman Kennard consistently states that long distance 
rates are going down. You state just as consistently that a 
majority of consumers are paying $2 billion a year more on 
their long distance bills since the passage of the Telecom Act. 
Can you explain why the same industry statistics lead you and 
Chairman Kennard to mutually inconsistent conclusions?
    Mr. Kimmelman. I wish I could fully explain it. We are 
using the chairman's own data from his agency. The easiest way 
I can explain it is when you aggregate everyone together, 
people who are on the phone for hours and hours, and they are 
getting 5 cents a minute, 4 cents a minute, special deals, they 
have phone companies knocking off the $1.50 charge, the $1.95 
charge, offering them an even lower price if they will buy 
Internet access and something else, there is no doubt in my 
mind they are saving money and their prices are coming down.
    You combine those people with the majority of consumers--
and these are just FCC numbers--the majority of consumers who 
are on the phone for less than an hour for their interstate 
long distance calling, and you look at the new fees that have 
been added to their bill, before they ever pick up the phone 
and get a dial tone, you can homogenize all that and say there 
are some benefits. But when you pull out that majority of 
people and say, what have they gotten, it is absolutely clear 
they have gotten a price hike. There is just no question about 
it. It is unnecessary and inappropriate.
    We believe if the FCC had just done its job effectively--
there were more than $4 billion in savings during this period 
of time we are discussing to long distance companies through 
access charge reductions for connecting long distance calls to 
the local phone companies--all consumers would be paying less 
for long distance. Somebody is getting the benefit of those 
cost reductions. Unfortunately, it is not the majority of 
consumers.
    The Chairman. Well, I would appreciate if you would submit 
for the record corroborating information to your statement.
    Mr. Kimmelman. We would be happy to.
    [The information referred to follows:]

 Initial Comments of Consumer Federation of America, Consumers Union, 
   and the Texas Office of Public Utility Counsel before the Federal 
  Communications Commission, CC Docket No. 99-249, September 22, 1999 
                               (Excerpt)
Executive Summary: Low Volume Consumers Have Suffered Substantial Rate 
                               Increases
    The Consumer Federation of America,\1\ Consumers Union,\2\/ and the 
Texas Office of Public Utility Counsel\3\/ (hereafter Joint Commenters) 
respectfully submit these comments in response to the Notice of Inquiry 
on low volume long-distance users.\4\
---------------------------------------------------------------------------
    \1\ Consumer Federation of America is the nation's larest consumer 
advocacy group, founded in 1968. Composed of over 250 state and local 
affiliates representing consumer, senior citizen, low-income, labor, 
farm, and public power, and cooperative organizations, CFA's purpose is 
to represent consumer interests before the Congress and the federal 
agencies and to assist its state and local members in their activities 
in their local jurisdictions.
    \2\ Consumers Union is a nonprofit membership organization 
chartered in 1936 under the laws of the State of New York to provide 
consumers with information, education and counsel about good, services, 
health, and personal finance: and to initiate and cooperate with 
individual and group efforts to maintain and enhance the quality of 
life for consumers. Consumers Union's income is solely derived from the 
sale of Consumer Reports, its other publications and from noncommercial 
contributions, grants and fees. In addition to reports on Consumers 
Union's own product testing, Consumer Reports with approximately 4.5 
million paid circulation, regularly, carries articles on health, 
product safety, marketplace economics and legislative, judicial and 
regulatory actions which affect consumer welfare. Consumers Union's 
publications carry...no advertising and receive no commercial support.
    \3\ The Texas Office of Public Utility Counsel is the Texas state 
consumer agency designated by law to represent residential and small 
business consumer interests of the State. The agency represents over 8 
million residential customers and advocates consumer interests before 
Texas and Federal regulatory agencies as well as the courts.
    \4\ Federal Communications Commission, in the Matter of Low-Volume 
Long-Distance Users, CC Docket No.99-249, July 20, 1999 (herein after, 
``NOI'').
---------------------------------------------------------------------------
    The Commission, despite adopting this NOI, has failed to ensure 
that falling long distance costs are translated into fair prices and 
continues to postpone relief to over half of all residential long-
distance consumers, especially those who make fewer than 50 minutes of 
interstate long distance calls in a month. While the Commission has 
acted to reduce access charges for the long distance carriers by over 
$4 billion since 1997--and by additional billions from earlier rounds 
of regulatory reductions in these charges--it has passively watched the 
average per minute rates for low-volume callers rise time and time 
again.
    We estimate that those households making less than 50 minutes of 
calls have been burdened with a net annual increase in lone distance 
charges of about $2 billion. The majority of those increases have 
fallen on the backs of consumers who are least able to pay--lower 
income households.
    The Commission's cost recovery formula for the loop has 
disproportionately increased costs for the end-user. In effect, the 
consumer bears the cost of the loop while IXCs get a free ride. The 
Commission requires consumers to pay for part of the loop costs 
directly though the Subscriber Line Charge (SLC) and long distance 
carriers are charged for the remainder of the costs through the 
Presubscribed Interexchange Carrier Charge (PICC). However, the 
Commission permitted long distance carriers to pass through their 
charges onto the consumer as a line-item fee. This loading of all loop 
costs onto the end user violates principles of joint and common cost 
allocation pursuant to the Telecommunications Act of 1996.
    The Commission, in its regulatory proceedings to reduce access 
charges to the benefit of long distance carriers, had the opportunity 
to offset the impact of cost increases from the long distance carriers' 
pass through of the PICC and the federal universal service charges by 
requiring a dollar-for-dollar or pro rata pass-through of saving from 
access charge reductions. Instead, the Commission chose to rely on 
presumed ``market forces'' to compete these charges away. 
Unfortunately, those ``market forces'' are nonexistent in the low 
volume market segment. The major long distance carriers have chosen to 
play follow the leader by raising prices for consumers by the 
equivalent of their PICC and their universal services costs. Those 
making few long distance calls have been the hardest hit by these 
growing line-item charges.
    Making matters much worse is the recent imposition of monthly 
minimum charges by the major carriers (see Exhibit 1). Now consumers 
are being billed even when they do not place a single long distance 
call during the billing cycle. This agency's own calculations estimate 
that up to 20 million consumers could be faced with monthly charges 
without ever placing a long distance call).\5\ These minimum charges 
have substantially increased the cost of long distance for low-volume 
users--especially for low-income consumers. Recent data from a large 
survey of consumers in Florida shows that over half of all respondents 
who reported no calls in a given month had incomes below $20,000 and 75 
percent had incomes below $30,000. These respondents represented about 
one quarter of the total. Thus, the burden of rising prices for low 
volume calling is falling disproportionately on lower income 
households.
---------------------------------------------------------------------------
    \5\ Cindy Skrzycki. ``When the Meek Inherit. . . a Surcharge,'' 
Washington Post. August 13. 1999, E1.
---------------------------------------------------------------------------
    The Commission's own data show that the average per minute rate for 
those making under 30 minutes of calls a month has skyrocketed to 
triple what they were in the fall of 1997. This is a distress flare in 
the sky to the Commission that low-volume users are being crushed by an 
avalanche of line-item charges and unfair pricing policies. To ensure 
that all consumers received their fair share of recent long distance 
cost reductions, the Commission must act expeditiously to remedy the 
pricing inequity in the bottom-half of the marketplace by reducing or 
eliminating the Subscriber Line Charge. The Commission could move 
quickly to provide this bottom-of-the-bill relief because it regulates 
this end-user charge. The Commission should also prohibit minimum 
monthly charges, which greatly exacerbate the cost recovery burden of 
low volume customers.

    [Included for reference are Exhibits 1 and 4-7, which follow:]

    
    
    
    
    
    
    
    

    
    

    The Chairman. And I would appreciate it if representatives 
of the phone companies, and we will try and get something from 
the FCC, so perhaps we can match them up. I guess it is one of 
those examples about liars and statistics, but we will find out 
about it.
    I have exceeded my time. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    All of you have been helpful. The last question I asked Mr. 
Pitofsky was very much on my mind today. The question of 
looking short term versus long term as these matters of 
deregulation are approached of course leads you to the airline 
example. It was before I was in the U.S. Congress, but the 
ballyhooed claim was we are going to have more entrants, we are 
going to have more competition, and this is going to be the 
greatest thing since night baseball for the consumer. And what, 
in effect, we have had is very significant consolidation, a lot 
of areas with one carrier and some not even that.
    I would like to just kind of go down the row, we can start 
with Mr. Kimmelman, and ask you to give us your vision of what 
things would look like in the communications sector 20 years 
from now if we essentially stayed in this mode that we are in. 
What concerns me, of course, because Portland was really in the 
eye of the storm with respect to broadband, is whether or not 
20 years from now we are just going to have a handful of 
broadband barons, sort of like the airline hubs that control 
access and basically let the prices go up and harm the 
consumers.
    So, let us let each of you have a crack at sort of what it 
looks like 20 years from now. And we will start with you, Mr. 
Kimmelman.
    Mr. Kimmelman. I do not think anyone can predict 
accurately. I will give you my concerns based on the market 
consolidation we have seen.
    Everyone is moving to offering a package of services for 
consumers: local phone, long distance, Internet access, a 
variety of entertainment and communications services. The 
difficulty appears to be that no one player can offer 
everything exactly as some other player because of 
technological and other barriers at this point in time. What we 
are seeing is a consolidation of local phone companies offering 
a package of services with some Internet that is not nearly as 
fast and cannot offer the video quality that a cable company 
can offer.
    But simultaneous consolidation, through AT&T's transactions 
involving cable wires around the country, perpetudes monopoly 
dominance over high-speed Internet and video services. We have 
an opportunity for more mergers or consolidation here, with two 
satellite companies left--there used to be four--but they could 
begin to challenge cable. But that has limitations in terms of 
two-way Internet, as well. And so you have packages where 
certain sets of services from the cable wire will be more 
attractive to consumers and more attractive to businesses from 
the telephone wire.
    If we do not have head-to-head competition across all 
services we are in danger of either having an unregulated 
monopoly or a need for a lot more regulation down the road. It 
includes broadband. It includes video services. And it may 
include some business services for Internet and data 
transmission.
    So, I am very fearful that the strong concern that has been 
raised is not enough, that we need more aggressive intervention 
now to have more players. Finally, I will say that, looking 20 
years ahead, I just look back. We made an enormous mistake in 
1984, deregulating cable before there was real competition. And 
Congress came back in and re-regulated in 1992. Whatever one 
thinks of that, I think everyone concurs that it was an 
enormous mess coming back in and trying to undo what was 
perceived as a mistake.
    And as much as Chairman Kennard says we can look at 
broadband down the road, I am fearful that that ``down the 
road'' is such a big mess that you cannot undo the mistake.
    Senator Wyden. I am going to let Mr. McTighe answer, but I 
think your point is critical with respect to the need for 
preventive kind of action. However you feel about a particular 
area, you do not want to get to the point where you have to run 
a lawyers full employment program to resolve some of these 
areas. And that is also an issue with Microsoft, is that you do 
not want these questions to reach that kind of threshold. And 
it is one of the reasons why--and I think you heard several of 
us say--we are going to try to think anew about this whole 
area.
    I am one who thinks, for example, that a great many of 
these mergers are not going to have dire consequences for 
consumers. But I think a fairly small percentage are going to 
be very, very bad news for consumers. They are really going to 
threaten the first amendment. And that is why I raised that 
question earlier.
    So, rest assured that this is not going to be something 
that is going to vanish into vapor. And that is one of the 
reasons why I have spent the last few hours here and will be 
pursuing it very vigorously in the days ahead.
    Mr. McTighe.
    Mr. McTighe. Senator Wyden, I do not think I am 
particularly qualified to give you a detailed U.S. sense, but 
perhaps I could give you more of a broader perspective. We 
believe fundamentally that what is required is to open up all 
aspects of the value chain. In other words, from the delivery 
of international services through long distance, through local 
access, into content, and to ensure that you have a competitive 
framework in every one of those discrete areas. And if we can 
do that, then we would allow the free market forces to decide 
exactly what degree of competition is delivered.
    As an observation, the U.S. tends to be one of the most 
regulated environments that we come across. And it seems to me 
that more of a holistic view needs to be taken of this, more 
consideration of all access mediums. So we tend to have 
discussions about local access in terms of wireline, and then I 
see local access discussions on wireless, and then I see cable 
discussed -- these are all mediums.
    Senator Wyden. My time is short. Are any of you interested 
in commenting on what it is going to look like in 20 years? 
Yes.
    Mr. Sidgmore. Well, not in 20 years. I just wanted to make 
the point that with respect to the analog to the airline 
industry, I think it is very different. If you look at that 
industry, you wound up with a route-by-route competition model 
where you really only had two or three potential competitors in 
the first place, and so any consolidation was bad.
    I really do believe, to the points before, that in the 
communications industry, in the not too distant future, just a 
couple of years out, you are going to have at least five or six 
major people competing in all aspects of the market. We can 
easily name them on one hand or two hands. It is AT&T, MCI/
WorldCom, SBC, Bell Atlantic, USWest/Qwest. I think you are 
going to have at least those and a number of niche players. So 
I think it is very, very different because the market 
characteristics are different.
    The other thing I would say just briefly is I do not often 
agree with Scott, and I very rarely agree with Mike, but I 
would say that I agree on this question of open access. I think 
we are absolutely pro open access. And I think that is 
absolutely critical to ensuring that the effects of broadband 
technology get moved all the way out to the consumer population 
in the rural areas in the United States, not just the major 
cities.
    Mr. Cleland. I would like to echo that. If we look 20 years 
out, what we should be seeing is the future is bundle 
competition. We see competition in electricity, in gas, in 
telecommunications. I imagine there will be more competition in 
cable. And so what you want in the future is everybody 
competing for the customer in putting together their bundle. 
One person may say I think the customer wants cable, 
telecommunications and gas. Somebody else will throw in 
electricity. Somebody else will do autos. We do not want to 
limit the bundle capacity that anybody can offer. Let the 
market, let the consumer choose what they want.
    The only way that vision will happen, though, is if we 
encouraged facilities-based competition for all those with 
market power and we have resale of all the underlying assets.
    Senator Wyden. Before we move on, you would then share my 
view that if you have only one provider of broadband Internet 
access, bundling proprietary information essentially with 
access in a given area, that would certainly be a free speech 
and First Amendment question, would it not?
    Mr. Cleland. I am not a First Amendment expert, but it 
certainly would be economic power being leveraged into vertical 
markets. Because what you are concerned about is, on broadband, 
almost all of these different services can be bundled together, 
because it is one pipe.
    Senator Wyden. Mr. Glenchur.
    Mr. Glenchur. Thank you.
    I think a point to keep in mind in terms of predicting 
where this all goes is telecommunications is very unique and 
perhaps very different from the airline industry in this 
regard: And that is it is at the intersection of communications 
and technology. We may get to the point where third generation 
wireless and satellites and other alternatives create options 
and choices that we really cannot get our arms around at this 
point. And so it is hard to predict where it goes.
    The key thing is to make sure that there are enough players 
out there to have incentives to innovate and make investments 
in new technology.
    Senator Brownback. I want to thank the panel members for 
being here today.
    Mr. Sidgmore, I have a couple of questions to ask you, if I 
could. As you look to the future on the merger that you had, 
the MCI/WorldCom, and then adding into it the one you are 
projecting in, to bring Sprint into the fold of that, where do 
you see your major growth coming from in the next year or two? 
Where are you really projecting to try to grow this business 
the most?
    Mr. Sidgmore. I do not know whether you are talking 
geographically or functionally.
    Senator Brownback. Functional.
    Mr. Sidgmore. From a market point of view, and we have been 
very public with this, we think the two biggest growth markets 
over the next several years will be wireless and Internet. And 
of course wireless is right at the heart of our acquisition 
strategy with respect to Sprint.
    Senator Brownback. If I could focus just in on the Internet 
area of that, what do you anticipate your growth to be in that 
field? What are you anticipating the growth in the next couple 
of years in that Internet arena and the Internet backbone 
services, data services, that you have?
    Mr. Sidgmore. Well, we have talked publicly about growth 
rates in the high 40 to 50 percent range. We are growing today 
a little over 50 percent per year.
    We do think that one of the biggest drivers for growth over 
the next few years on the Internet will be wireless data. If 
you can imagine, a number of new devices proliferating, like 
Palm Pilots, personal digital assistants and so forth, which we 
believe is going to happen, you can easily see the growth of 
wireless data sort of skyrocketing over the next few years, 
particularly when everyday devices like cars will all have 
Internet interfaces, as well.
    So wireless data we think is actually going to be the most 
significant piece of the growth of the Internet. And, again, 
this gets back to why we have been so aggressive in attempting 
to find a wireless solution and why Sprint is right at the 
center of what we have been thinking about.
    Senator Brownback. Does the merger with Sprint, the 
proposed merger there, work if you do not achieve that rate of 
growth you are projecting in the Internet backbone business 
that you were talking about?
    Mr. Sidgmore. Yes, let me just clarify something. We did 
not count a single dollar of synergy from merging the Internet 
backbones. And when I am talking about growth and what we were 
after with Sprint had nothing to do whatsoever with the 
Internet backbone. It had to do with getting access to the 
wireless business of Sprint, which we believe will be an 
important part, as an interface, into the Internet backbone 
space.
    And to the extent that will the merger work without the 
wireless Internet piece, virtually all of the financial 
synergies inherent in the deal are based on the non-Internet 
and non-wireless businesses.
    Senator Brownback. What role do you see Sprint's current 
operations playing in that growth that you are projecting for 
the overall company over the next few years?
    Mr. Sidgmore. Well, I think if you look at it in pieces, 
obviously we do not have a wireless business, so it is very 
highly likely that Sprint people and the Sprint operations that 
exist today will actually operate the wireless business for the 
combined company. I think there is very little question about 
that.
    I think, considering the size, I think the MCI/WorldCom 
people will probably manage the Internet backbone piece. In 
terms of traditional local operations, which MCI/WorldCom has 
none, I think that is going to be virtually 100 percent Sprint. 
And then you get down to the merging of long distance networks 
and where we will put people to run that.
    I think it is highly like that the concentrations of people 
around the country will stay largely the same. I do not want to 
speculate today, because it is way too early, as to which 
manager will run which division and so forth. I think it is 
highly likely that the general concentrations of people as they 
exist today will stay the same.
    We have made over 60 acquisitions in the last 4 years. And 
that has been true just about universally. We have largely kept 
the operations in the place where they have been before the 
merger.
    Senator Brownback. I believe Mr. Ebbers was in last week in 
the Judiciary Committee, and he was projecting merger savings 
of $9.7 billion in operating cost savings. That is what he was 
projecting last week over the next 5 years. And that is some of 
what you have elaborated and testified on a little bit. Could 
you elaborate any further about where you anticipate those 
operating cost savings coming from over the next 5 years?
    Mr. Sidgmore. There are really three sources. I mean 
simplistically there are really three sources. First is network 
synergies, which result from (a) our avoiding access fees by 
using local facilities or bypass facilities that one of us 
have.
    For example, MCI/WorldCom has significant CLEC facilities 
which we can then use to originate and terminate Sprint 
customers. We can terminate Sprint traffic internationally on 
our, MCI/WorldCom's, own local facilities in Europe, as an 
example. That is a significant source of the savings. So there 
are a number of network savings we get as a result of using 
each other's facilities, including the Sprint local facilities.
    Second is advertising. And I doubt anyone will miss a few 
advertisements from TV at night. And that is--I do not want to 
get into exactly how much that is--we have some internal 
debates about this, as you might imagine--but that is a very 
significant amount of money. It costs a lot to put Michael 
Jordan on television regularly.
    And then, finally, there will be savings from projections 
of personnel growth over the next few years. And I want to be 
careful on this, because I just want to make the statement that 
of all the mergers we have done, we have always had, a year 
after the merger, more employees in total than the individual 
companies had combined before the merger. So while there may be 
some dislocations in certain areas and in certain functions, in 
our judgment, this merger is about growth. We fully expect to 
have more people a year after the merger, in the combined 
company, than we had before.
    Senator Brownback. If I could take you right down to that 
point, how many, though, do you anticipate jobs will be 
eliminated initially because of duplicative jobs with the 
proposed, if the merger is approved, on the Sprint with the 
MCI/WorldCom?
    Mr. Sidgmore. We do not actually have that number today. We 
have numbers that are based on sort of longer-term projections. 
But we have not gotten down into the bowels of each operating 
unit and sorted through which unit does what, how much overlap 
there is, et cetera. We know there will be some. I am not 
saying there will not be any. There will be certainly in 
accounting and functions like that. There will be some. But we 
do not have a detailed road map yet that would project that 
out.
    Senator Brownback. I thank you. I am sorry to be so 
detailed and focused in on you, but it is not only the broader, 
bigger concern, but it is also a narrow concern for a number of 
constituents and so on to have a chance to be able to ask you 
those questions. And I hope we have the chance to have your 
chairman, Mr. Ebbers, in some time, as well, to visit more 
thoroughly about this.
    Thank you all, panelists, for being here today. We 
appreciate it. I think it was a very illuminating testimony.
    The hearing is adjourned.
    [Whereupon, at 11:55 a.m., the hearing was adjourned.]


                            A P P E N D I X

  Prepared Statement of Lowry Mays, Clear Channel Communications, Inc.
    I would like to thank the Committee for inviting me to submit 
written testimony concerning the major mergers taking place in 
telecommunications industry and the proposed implementation of a small 
business tax incentive program. The heightened merger activity in the 
radio industry is the result of years of pent up demand, frustrated by 
the artificial constraints placed on radio operators by an outmoded, 
outdated, and counter productive regulatory atmosphere which existed 
until the Telecommunications Act of 1996.
    As competition was increasing for all forms of advertising, and as 
every other form of communication grew stronger; as newspapers 
consolidated to the point where most cities had only one major daily 
newspaper, where most cities were served by very few major cable 
television providers, where the magazine industry had been 
consolidating to a few group owners, and even the television 
programming industry had been consolidating, radio groups could not 
grow with these competitive threats. By the late 1980's and into the 
early 1990's, radio had been strangled by a regulatory framework which 
allowed only 12 AMS and 12 FMs to be owned nationwide by a single 
entity. Radio values were down, innovation was rare and radio was in 
danger of being left behind in the growth the rest of the 
communications world was enjoying. Then, as Congress and the FCC began 
to loosen its regulatory grip, vitality began to move back into the 
Industry. In the early and mid 1990's, the FCC relaxed the ownership 
restrictions to allow up to 20 AM's and 20 FM's nationwide and finally 
in 1996, Congress removed the national limit and increased the number 
of stations we could own in individual markets. With these changes, the 
industry has rebounded and is financially vibrant again.
    Curbing the trend towards consolidation which has brought the radio 
industry back to financial life, will not result in an increase in 
diversity of owriership or diversity of programming. In fact, it may 
well hamper these efforts. A consolidated company will have the 
financial wherewithal to take programming risks and try different 
formats, as it knows that a failure will not destroy the company's 
balance sheet. The smaller companies of the late 80's and early 90's 
had to be programmed in well established formats, as experimental 
programming that went awry could devastate a smaller company. Bigger 
companies can afford to take more risks. Further as companies own more 
than two stations in a market, they can look to program in more 
specialized formats with their additional signals. In fact, studies by 
both the FCC and NAB have confirmed that format diversity in most 
markets has steadily increased since consolidation began in 1996. Also, 
larger companies can afford to pay for better quality programming up to 
date equipment, and provide more community service. For instance, in 
Memphis our stations employees and their families worked together with 
Habitat For Humanity to build a house for a family in need. In San 
Antonio our radio stations responded to the community needy children 
and families through the Elf Louise Project, which helps 35,000 people 
annually, by sponsoring a radiothon and silent auction which raised 
over a quarter of a million dollars in the last few years.
    Also, consolidation, due to the safeguards that surround all media 
mergers from the twin government watchdogs of the FCC and the DOJ, has 
resulted in a multitude of stations that must be sold that otherwise 
would not ever have become available. Some of these stations will 
likely be purchased by minority-controlled companies or new entrants 
into the industry. These purchasers will bring more diversity of 
ownership. Without consolidation, this diversity most likely would not 
have been possible. The stations now being sold simply would never have 
been put up for sale, and would have remained in their current, non 
diverse ownership structure.
    It is important to understand the role current regulations play in 
preventing a company from dominating a radio market or the radio 
industry in general. Radio is principally a local medium, and ownership 
in a station in one city will not effect an advertiser out of listening 
range of that city. The rules governing ownership are therefore 
rightfully based on a local area, on the coverage of each radio 
station's signal. Currently, the FCC limits the number of stations each 
company can own on an absolute basis, to a maximum of 8 stations in a 
market, and the Justice Department limits the amount of revenue a new 
combination may extract from the total revenue of that market. This 
duality of concerns will result in the divestiture of roughly 100 radio 
stations from the Clear Channel merger with AMFM. Clearly, the 
safeguards that exist currently are more than adequate to assure 
continued competition.
    Once any stations are put up for sale, public companies have a 
fiduciary duty to their shareholders to maximize the return on their 
investments. While it is in the public interest to sell to diverse 
voices, each company must balance this interest with its fiduciary 
obligations. In the past, these competing obligations have often made 
it difficult to sell to minority companies that have historically been 
underfunded. The tax initiative program may solve this dilemma. Senator 
McCain's tax initiative program is therefore both worthwhile, as the 
number of new entrants has dwindled over the years since the repeal of 
the old tax certificate law, and timely, as the number of stations 
about to be available for sale, as a result divestitures related to the 
merger of Clear Channel Communications, Inc. with AMFM, Inc. will be 
abnormally high. An underfunded company that provides a diverse new 
voice might provide a seller with an acceptable offer even though the 
offer cannot hope to match, dollar for dollar, that of a better funded 
competitor. The underfunded but diverse company's bid can be equal to 
or perhaps more attractive than its competitor, if accompanied by a tax 
incentive. The seller can then meet its fiduciary obligations, the 
sellers' shareholders will have had its fiduciary obligations met, and 
the public's interest will also have been served.
    The tax incentive program also has the potential to solve the other 
regulatory issues presented by the Department of Justice and the FCC. 
The Department of Justice has had a policy against Seller Financing of 
stations and the FCC has recently added a new ``equity debt plus'' rule 
making it difficult from the FCC side as well to find creative ways to 
help finance the acquisition of stations by historically underfunded 
companies. Clear Channel has taken the lead in helping establish a fund 
to finance minority and female broadcasters. Here Congress can take 
another, well needed step with the tax incentive program.
    Clear Channel supports Senator McCain's tax incentive program, and 
applauds the Committee for having the courage to review the policy in 
this overtly political time.
                                 ______
                                 
 Prepared Statement of McHenry Tichenor, President and Chief Executive 
            Officer, Hispanic Broadcasting Corporation (HBC)

Mr. Chairman and members of the Committee, I am pleased to offer you my 
written comments pertaining to the recent hearing on mergers in the 
telecommunications industry. As you know, I am the President and Chief 
Executive Officer of the Hispanic Broadcasting Corporation (HBC). We 
are leading Spanish language radio broadcaster in the United States. 
Specifically, the HBC owns or programs 42 radio stations in 13 markets. 
In early 1999, we launched the HBC Radio Network. Through the 
combination of our owned stations and affiliate agreements with other 
Spanish radio broadcasters, our network reaches approximately 75 
percent of Hispanics in the United States. As the largest Spanish 
language radio broadcasting company in the United States we have a 
definitive interest in seeing that mergers, which the Federal 
Communications Commission approves, now and in the future continue to 
promote the needs of underserved and underrepresented segments of the 
population.
Today, I will briefly review the status of broadcast mergers in the 
radio industry, discuss the positive implications of these mergers and 
offer my support for the Telecommunications Ownership Diversification 
Act of 1999.
In the last five years the number of mergers in the telecommunications 
industry has sky rocketed. In 1995, we saw the joining of Disney and 
Capital Cities/ABC, Turner and Time Warner, and Westinghouse and CBS. 
In 1997, we saw the proposed merger of US West and Continental 
Cablevision, Pacific Telesis and SBC, and Nynex and Bell Atlantic. In 
1999, we have been witnesses to proposed joint ventures that further 
consolidate parts of the industry like those between MCI and Sprint, 
CBS and Viacom, and most recently, in the radio industry, Clear Channel 
and AM/FM, Inc. These mergers, far from being anti-competitive, are 
just the beginning of a new era of economic growth that will allow for 
additional capital investment, the emergence of new entrants into the 
telecommunications industry and greater benefits to the consumer.
The imposition of mergers, resulting in a more competitive marketplace, 
creates a scenario for individual station owners and ownership groups 
to re-evaluate how they do business while focusing programming more 
specific to the needs of the targeted audience. Those stations with a 
small audience basis will not be pushed out of the market but will be 
strengthened by quality programming and further enhance advanced 
technological services to the consumer.
While some may argue that fewer owners in a market results in 
consolidation of choices available to consumers, the public in the case 
of telecommunications mergers is destined to realize all of the 
advantages that accompany heightened competition and a greater 
diversity of voices in the marketplace.
When consolidation in radio occurs the variety of programming available 
to the public begins to diversify because new stations emerge which are 
attempting to find a unique segment of the listening audience. Then 
greater variety of programming evolves because the format for each 
station in a group's lineup within a market is usually clearly 
differentiated from its co-owned stations. In many markets, this has 
resulted in the introduction of innovative or ``fringe taste'' formats 
that were not previously viable because single-station owners could not 
absorb the startup costs, and often went after a small piece of a 
``mainstream'' format because they could not afford to experiment and 
fail with their only property.
Similarly, minority targeted station groups also provide an economic 
advantage to advertisers and result in better technological service to 
the consumer. Given the wider range of options presented by a portfolio 
of formats and their respective demographics, advertisers are able to 
more precisely target their advertising messages to a specific 
audience. Many of the stations acquired by group owners, which 
previously suffered from inattention to their technical facilities, 
have been upgraded to provide a better class of service to the public. 
Group owners have used their centralized engineering expertise and 
greater financial resources to refurbish transmitting and antenna 
facilities and replace aging audio equipment with state-of-the-art 
digital facilities. This has resulted in expanded coverage areas and 
better signal quality.
The primary rationale for regulation has been the need to compensate 
for the imbalance of power between monopoly suppliers and small users. 
However, in an environment where full choice is available, the 
imbalance will change and the problems of price, quality, security, 
privacy and content diversity will disappear.
Why do we need to look at these consolidations as a prime opportunity 
to promote the entrance of new diverse ownership? Quite simply, because 
the demographic make-up of the audience is changing.
For HBC, our goal has always been to provide the most effective 
programming to educate, enlighten and entertain our listening 
audiences. As several recent studies indicate the Hispanic population 
in this country is expected to grow from an estimated 27.2 million 
people (approximately 10.4 percent of the total US population) from the 
end of 1995 to an estimated 30.4 million (approximately 11.2 percent of 
the total US population) by the end of 2000. These estimates imply a 
growth rate of approximately three times the total US population during 
the same period.
From a broadcasting perspective this translates into approximately 71.0 
percent, or 21.6 million people, of all US Hispanics, live in areas 
reached by only fifteen markets. The US Hispanic population in these 
top fifteen markets, as a percentage of the total population in such 
markets, has increased from approximately 17.0 percent in 1980 to 
approximately 27.0 percent in 1999.
Even more striking than the increase in the U.S. Hispanic population, 
however, is that the increase in the top 15 U.S. Hispanic markets grew 
29 percent. During that same period, in those same markets, Spanish--
language radio listening has grown an astounding 83 percent, with most 
of that increase coming during the consolidation phase of the industry. 
So, the facts demonstrate that consolidation has in fact improved the 
product available to our audience.
Still, we at HBC believe that diversity of broadcast ownership, 
particularly small business and minority ownership is in the best 
interests of our country.
Beginning in 1943, with the help of the U.S. Supreme Court, the Federal 
Communications Commission initiated the first attempt to control radio 
industry consolidation. The court ruled that consolidation of the Radio 
Corporation of America (RCA) was monopolistic in nature and thus must 
be split into two distinct radio networks. The court was attempting to 
prevent the over monopolization of the industry and promote fair 
competition. In response to the Court's decision, Congress implemented 
the first tax certificate program allowing the owners of the RCA to 
divest and defer any capital gain tax realized from the ``involuntary'' 
sale of their properties. This program promoted increased regulation by 
the FCC and the establishment of measures to ensure better compliance 
with mandated regulations.
Historically, the impact of tax certificate programs has brought about 
several economic advantages to private parties and the government. In 
1978, a new and revised tax certificate program was initiated to 
promote minority ownership of a variety of communications properties. 
Unfortunately, due to several large loopholes in the law, many media 
sales previously approved by the FCC were in reality part of a shell 
game by a few owners to assist in realizing a tax advantage. However, 
these types of programs--when accurately monitored and implemented--are 
very successful as regulatory tools that spur definite economic 
benefits. From a purely statistical perspective the ability of 
minorities to acquire access to the telecommunications industry has 
been enhanced by tax incentive programs. For example, in 1978 
minorities owned only 40 broadcast holdings. With the imposition of the 
tax certificate program, this number jumped to 350 by 1995. However, 
present day marketplace circumstances present challenges. Competing 
tax-free methods of selling stations detract from the attractiveness of 
tax certificates as an option for sellers. In addition, increasing 
station prices makes it economically difficult to own stations in large 
markets except for well-capitalized broadcasters. If the percentages of 
small and minority broadcasters are to increase in the present radio 
marketplace, there must be regulatory intervention that will afford 
them the ability to acquire additional stations.
Thus, consideration should be given to the concerns that resulted in 
the repeal of the tax certificate program in 1995. As you are aware, 
the repeal of the tax certificate program was linked to a proposed sale 
by Viacom of a multi-million dollar cable television system to a 
minority buyer. This particular merger, coupled with declining tax 
revenues and complaints about the fact that the tax certificate program 
was an affirmative action program, helped to heighten the arguments for 
repeal.
The most recent proposal, offered by Chairman McCain, provides a sound 
starting point for renewing this vital investment incentive program. 
Under the Chairman's proposal, mechanisms are proposed to safeguard 
against of the abuses of the earlier program. Specifically, the 
implementation of the program would be a joint effort between the 
Secretaries of Commerce and Treasury. Each agency will establish 
specific limits on net worth; gross revenues, total assets, and 
personal net worth for eligible purchasers that were absent from the 
previous program. However, we believe that it would be prudent to give 
more specific guidance regarding these safeguards.
Finally, the legislation offers a limit upon the amount of gain that 
can be deferred under the program. Specifically, a three-prong test is 
established for new buyers that would provide a safeguard against 
phantom owners seeking only to reap the benefits of the tax advantage.
The former tax certificate programs, whose goals were laudable, did 
little to establish a concrete safeguard for ensuring that 
underrepresented parties would engage in long term ownership 
agreements. The McCain proposal requires that the seller reinvest the 
proceeds from the sale of the telecommunications business into another 
telecommunications business within three years of the date of sale. 
Moreover, the legislation also requires that the new buyer maintain 
ownership of the property for at least three years in order to be able 
to be able to defer a future gain from selling the property.
Realizing the impact of long-term mergers within the telecommunications 
industry requires that we look at who the parties are that will be most 
affected. Given the large role that the Hispanic community will have in 
the coming years in effecting public policy, I strongly urge this 
committee to encourage diversity in broadcast ownership within a 
framework of safeguards that will avoid the abuses of the past.

                                
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