[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
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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
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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.
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\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.
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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\
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\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
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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.
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\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).
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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\
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\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).
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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:
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\12\ See ``Merger Wave Gathers Force as Strategies Demand Buying or
Being Bought,'' Wall St. J., Feb. 26, 1997, at A1.
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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).
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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.
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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.
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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.
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\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.
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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.
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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.
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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.
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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\
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\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.
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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\
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\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.