[Senate Hearing 109-34]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 109-34

   SBC/AT&T AND VERIZON/MCI MERGERS--REMAKING THE TELECOMMUNICATIONS 
                                INDUSTRY

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

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 15, 2005

                               __________

                           Serial No. J-109-8

                               __________

         Printed for the use of the Committee on the Judiciary


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                       COMMITTEE ON THE JUDICIARY

                 ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas                   CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas                RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
                       David Brog, Staff Director
                     Michael O'Neill, Chief Counsel
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Brownback, Hon. Sam, a U.S. Senator from the State of Kansas, 
  prepared statement.............................................    52
Cornyn, Hon. John, a U.S. Senator from the State of Texas........     5
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio.........     3
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     4
    prepared statement...........................................    81
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................    83
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     1

                               WITNESSES

Capellas, Michael D., Chairman and Chief Executive Officer, MCI, 
  Inc., Ashburn, Virginia........................................    11
Dorman, David, Chairman and Chief Executive Officer, AT&T Corp., 
  Bedminster, New Jersey.........................................     9
Seidenberg, Ivan, Chairman and Chief Executive Officer, Verizon 
  Communications, Inc., New York, New York.......................     8
Whitacre, Edward E., Jr., Chairman and Chief Executive Officer, 
  SBC Communications, Inc., San Antonio, Texas...................     6

                         QUESTIONS AND ANSWERS

Responses of Michael Capellas to questions submitted by Senator 
  Kohl...........................................................    26
Responses of David Dorman to questions submitted by Senator Kohl.    30
Responses of Ivan Seidenberg to questions submitted by Senator 
  Kohl...........................................................    33
Responses of Edward Whitacre to questions submitted by Senators 
  Coburn, Schumer, and Kohl......................................    41

                       SUBMISSIONS FOR THE RECORD

Capellas, Michael D., Chairman and Chief Executive Officer, MCI, 
  Inc., Ashburn, Virginia, prepared statement....................    55
Dorman, David, Chairman and Chief Executive Officer, AT&T Corp., 
  Bedminster, New Jersey, prepared statement.....................    66
Office of the Ohio Consumers' Counsel, Janine L. Migden-
  Ostrander, Consumers Counsel, Columbus, Ohio, letter...........    85
Seidenberg, Ivan, Chairman and Chief Executive Officer, Verizon 
  Communications, Inc., New York, New York, prepared statement...    89
Whitacre, Edward E., Jr., Chairman and Chief Executive Officer, 
  SBC Communications, Inc., San Antonio, Texas, prepared 
  statement and attachments......................................    93

 
   SBC/AT&T AND VERIZON/MCI MERGERS--REMAKING THE TELECOMMUNICATIONS 
                                INDUSTRY

                              ----------                              


                        TUESDAY, MARCH 15, 2005

                              United States Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:30 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Arlen 
Specter, Chairman of the Committee, presiding.
    Present: Senators Specter, Hatch, DeWine, Cornyn, Coburn, 
and Kohl.

 OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM 
                   THE STATE OF PENNSYLVANIA

    Chairman Specter. The hearing on the telecommunications 
industry by the Judiciary Committee will now commence, the hour 
of 2:30 having arrived.
    Today, like virtually everyday in the Senate, is 
complicated because we are taking up the budget, a scheduling 
turn which was not known when this hearing was set. There are 
five votes scheduled at three o'clock, so we will proceed as 
best we can and have to recess during the course of the votes. 
It is not a very unusual problem for our hearings and we will 
just do the best we can.
    This full Committee hearing was set in order to give all of 
the members of the Judiciary Committee an opportunity to 
participate and raise questions about this very, very important 
subject. Customarily, it is a matter left in the hands of the 
Subcommittee on Antitrust, and after making an opening 
statement I will turn the gavel over to Senator DeWine, who is 
the Chairman of the Subcommittee on Antitrust, and to the 
ranking member, Senator Kohl. But I did want to begin the 
session because of the importance of the subject.
    There is no doubt that mergers and acquisitions are 
sweeping America in so many, many industries. The 
communications mergers are vitally affecting very basic service 
for almost all American consumers, and the question which we 
have to answer is whether there will be sufficient competition 
for consumer protection.
    A very lengthy statement which I have will be made a part 
of the record without being read in order to economize on time 
and I will make just a few brief introductory comments.
    In January, SBC Communications, one of the Baby Bells, 
announced plans to acquire AT&T. Shortly thereafter, Verizon 
Communications, a successor to three Baby Bells, announced 
plans to acquire MCI. Another Baby Bell, Qwest, also is bidding 
to acquire MCI. SBC, Verizon and Qwest all provide local wire 
line phone service to primarily residential and small 
businesses. Verizon and SBC also have become major wireless 
providers. MCI and AT&T continue to provide long-distance 
services.
    These mergers will reunite local phone service providers 
and long-distance companies. In the meantime, new competitors--
cable companies, wireless providers, voice over Internet 
providers--have come to compete without distinguishing between 
local and long-distance service.
    There are a number of important questions which the 
Committee and Subcommittee will want to address. Are the other 
modes of communication sufficient to put competitive pressure 
on the merged companies? Second, will the merged companies and 
other wireless companies be able to use their infrastructure to 
prevent cable and voice over Internet companies from competing? 
Even if they have access to the infrastructure, will cable 
companies, independent wireless and voice over Internet 
providers be strong enough to keep prices of residential and 
small businesses low?
    There has always been a concern since the founding days of 
the Republic about the size of corporate America. Justice 
Brandeis expressed it succinctly in Liggett v. Lee way back in 
1933 when he said, quote, ``The general laws which have long 
embodied severe restrictions upon size and upon the scope of 
corporate activity were in part an expression for the desire 
for equality of opportunity.'' A little later in the opinion he 
really gets tough, saying, quote, ``Such is the Frankenstein 
monster which has been created by their corporation laws.'' 
Going back to Jefferson, the warning was about, quote, ``banks 
and corporations will grow up around the people and will 
deprive them of their property.''
    We do not live in the time of Jefferson and we do not even 
live in the time of Brandeis, but we have to be concerned about 
the tremendous acquisition of power and be sure that consumers 
are adequately protected.
    Shortly after I was elected to the Senate in 1980, the 
Antitrust Subcommittee held a hearing and Assistant Attorney 
General Baxter came in. And as is the way with Senate hearings, 
soon there was just a witness and a Senator, and I had a 
fascinating experience, fascinating for me, to be able to 
question the Assistant Attorney General on Antitrust for about 
two hours. Nobody else was interested. I think it is a record 
which was unlistened to and unread.
    But that was in the era when AT&T and Ma Bell and all the 
Baby Bells were dismantled, a decision that gave me a lot of 
qualms when it happened. And now we are here back with a 
reconfiguration of a lot of moving parts. So these are big, big 
issues and we want to take a look at them to see if they make 
sense for America, for continued growth and opportunity and 
jobs, and if they adequately protect the American consumer.
    Let me yield at this time to my distinguished colleague, 
Senator DeWine, who is Chairman of the Subcommittee.

STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE STATE OF 
                              OHIO

    Senator DeWine. Mr. Chairman, thank you very much for your 
good statement and for holding this hearing to examine these 
mergers. These deals have received really an unusual reception 
in the press and within the industry, an unusually friendly 
reception and one that I am not really sure is wholly deserved. 
In fact, one might normally expect that mergers worth $23 
billion, combining four of the country's leading phone 
companies, would raise great concern among those who follow the 
industry.
    But recent changes in the telecommunications industry have 
given an air of inevitability to these deals. Market pressures 
and regulatory changes have significantly limited the options 
of the long-distance carriers, so that AT&T has already 
announced that it is exiting the market for residential 
service, and MCI appears headed in the same direction. Under 
these circumstances, it is not surprising that many have done a 
quick analysis and concluded that these deals do not pose any 
significant antitrust concerns.
    However, Mr. Chairman, a quick analysis, whatever the 
outcome, is really not enough and is not adequate. In fact, I 
think that certainly there are some antitrust issues that 
require more thorough examination. Perhaps the most obvious 
area of concern is the so-called enterprise market, that sector 
of the market comprised of large businesses with sophisticated 
telecommunications needs. In this market sector, all four of 
the merging parties currently compete, and so competition there 
will be affected by these deals. There are also questions 
regarding the impact of these deals on the markets for long-
haul capacity and the market for Internet backbone. These are 
all areas that we should explore today.
    Even beyond these specific market evaluations, however, is 
the larger competition issue. Certainly, these mergers 
represent a loss of competition among the phone companies, but 
the remaining players will tell us that competition is 
flourishing via different platforms, specifically that we will 
have cable companies, wireless companies and companies that 
provide voice over IP services. In other words, so-called 
intermodal competition will protect competition in these 
markets. This, I believe, is the key issue--the broader 
competition issue that this Committee must examine most 
thoroughly and must consider as the most obvious candidate for 
Committee action.
    For one thing, we must keep in mind that intermodal 
competition, by definition, does not always provide the type of 
direct competition that we are used to seeing. Wire line, 
wireless, cable--these services are inherently different, much 
like planes, trains and automobiles, all of which provide a 
similar service, but in different ways, with different pluses 
and minuses. Not all will always provide sufficient competitive 
benefits for all consumers.
    Further, in this context, we must discuss today whether or 
not conditions are required in order to ensure that multiple 
modes of competition are, in fact, available. For example, 
voice over IP is a very promising product, but is not in and of 
itself a separate facilities-based form of competition. 
Instead, it is a type of service that is only available to a 
consumer if he or she has broadband access, and currently that 
access is only available from the phone company or the cable 
company. In order for voice over IP to be a legitimate 
competitor to the merged companies, must we require the phone 
companies to sell DSL separately? These are important questions 
and we must begin asking them today.
    On a final note, Mr. Chairman, as you know, only the four 
merging companies are represented here today. While we 
anticipate that this hearing will provide the Committee with a 
good base of knowledge regarding the deals, we all agree that 
we cannot responsibly conclude our examination without hearing 
directly from those who are critical of these deals.
    Accordingly, with the consent of the Chairman and the full 
Committee, on April 19 Senator Kohl and I are planning to hold 
a follow-up hearing in the Antitrust Subcommittee with a panel 
of non-company witnesses who have expressed concerns about 
these mergers. That hearing, which will be essentially part two 
of today's hearing, will help us to more fully examine these 
mergers and explore the competitive impacts.
    I thank the Chair.
    Chairman Specter. Thank you very much, Senator DeWine.
    Senator Kohl.

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

    Senator Kohl. Thank you, Senator Specter.
    We are witnessing the most fundamental reshaping of the 
telecom industry in decades. In the space of a generation, we 
have gone from the breakup of Ma Bell to what some fear may be 
its re-creation, at least on a regional level. The breakup of 
AT&T two decades ago unleashed an explosion of competition and 
innovation. The competitive forces freed by the ending of the 
phone monopoly led directly to the introduction of previously 
unheard of technologies, ranging from the fax machine, the 
cellular phone, e-mail, to the Internet itself.
    Consumers benefitted from a blossoming of new choices and 
services. Prices for phone services declined so dramatically 
that what was once an unusual and expensive event--placing a 
long-distance telephone call--became routine and almost cost-
free. The cost to American business of telecom services dropped 
considerably, helping spur greater efficiencies and growth 
throughout the economy.
    We are now entering a brave new world of telecom 
competition. The acquisition of AT&T by one of its Baby Bell 
progeny, SBC, and the likely of acquisition of MCI by Verizon 
will create two telecom giants, each dominating many services 
throughout their regions. Should these mergers be consummated, 
SBC and Verizon will have a market share of about 90 percent of 
local residential consumers in their regions, 70 percent in 
long distance, and about 40 to 50 percent in wireless.
    These figures give us pause, but we live in an exciting 
time in the telecom world where the pace of consolidation is 
matched by the speed of innovation. AT&T and MCI are both 
declining companies and have already withdrawn from marketing 
most services to residential consumers. As a result, with the 
important exception of the business market, there are few 
remaining areas where SBC competes with AT&T or Verizon 
competes with MCI.
    In addition, new technologies are emerging--services such 
as Internet-based telephone service and wireless connections to 
the Internet which may challenge SBC and Verizon, if given a 
chance. It is our responsibility to ensure that these emerging 
new technologies have a real chance to succeed. The possible 
benefits of new competition will drive growth throughout the 
economy for decades to come.
    We must insist that the promise of tomorrow's technology is 
not stifled in its infancy by today's consolidation, and we 
must seek to avoid the creation of a world where consumers are 
left with only two choices for a bundle of telecom services--
the Baby Bell phone company and the cable company.
    So we have two concerns with these mergers. First, will 
this consolidation decrease the choices and increase the cost 
to consumers and to business customers, both large and small? 
And, second, how can we ensure that new technologies and new 
services can get access to the SBC and Verizon networks?
    A good place to start would be to require that the Baby 
Bells offer consumers the choice of buying Internet access 
without also requiring them to buy phone service. We expect to 
recommend additional specific pro-competitive merger conditions 
to the Justice Department and the FCC in the coming weeks. 
Securing merger conditions such as these will help ensure that 
the tremendous gains in telecom competition over the last 20 
years are not lost in the midst of this industry consolidation.
    One more comment. As the Senator from Ohio said, I believe 
it is essential that our Committee hear from competitors and 
consumers affected by these mergers. We are disappointed that 
we will not hear any voices besides those of the merging 
companies today, but instead we will need to return to this 
topic in a few weeks so that all voices will be able to be 
represented.
    Thank you again, Mr. Chairman, and we look forward to 
hearing the testimony today.
    [The prepared statement of Senator Kohl appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Senator Kohl. That 
sets the overall parameters.
    Senator Cornyn, would you like to make an opening comment?

STATEMENT OF HON. JOHN CORNYN, A U.S. SENATOR FROM THE STATE OF 
                             TEXAS

    Senator Cornyn. Thank you, Mr. Chairman. Just briefly, of 
course, I would like to welcome all the witnesses here today. 
Mr. Whitacre is a constituent of mine and operates his 
headquarters out of San Antonio, Texas, my hometown, so I 
wanted to greet him, and all of you, and thank you for being 
here today.
    We understand that this is going to be the beginning of an 
awfully long process which is primarily going to reside in the 
FCC and the Department of Justice. So as I understand it, the 
purpose of this hearing is to be able to understand from the 
parties involved generally what the impact of these 
consolidations are going to be on competition, which we 
understand benefits consumers by keeping prices low, but also 
on innovation, and I will have a few questions in that regard. 
I will reserve the rest for my questions.
    Thank you, Mr. Chairman.
    Chairman Specter. Thank you very much, Senator Cornyn.
    Without objection, Senator Leahy's statement will be made a 
part of the record, and I will now transfer the gavel to 
Senator DeWine.
    Senator DeWine. [Presiding] Mr. Chairman, thank you very 
much.
    Well, we welcome our panel. Let me briefly introduce our 
panel. Edward Whitacre is the Chairman of the Board and CEO of 
SBC Communications. He has led SBC through the acquisitions of 
Pac Bell, Southern New England Telephone, Comcast and 
Ameritech. He began his career in 1963 as an engineer with SBC.
    Ivan Seidenberg is Chairman of the Board and CEO of Verizon 
Communications. He previously served as CEO of both Bell 
Atlantic and NYNEX.
    David Dorman is Chairman of the Board and CEO of AT&T. He 
began his career as the 55th employee of then-fledgling long-
distance carrier Sprint, where he rose to become president.
    Michael Capellas is the President and CEO of MCI. When he 
joined MCI in 2002, he had previously served as president of 
Hewlett-Packard and as Chairman and CEO of Compaq Computers.
    We welcome all of you. Mr. Whitacre, you may start. Thank 
you very much. We are going to go by five-minute rule. Let me 
just say, gentlemen, that we have votes scheduled at three 
o'clock. We have five votes scheduled at three o'clock. That 
means that there will be a halftime at this hearing, so we will 
have to take a break, but we are going to go as far as we can 
go.
    Mr. Whitacre.

   STATEMENT OF EDWARD E. WHITACRE, JR., CHAIRMAN AND CHIEF 
EXECUTIVE OFFICER, SBC COMMUNICATIONS, INC., SAN ANTONIO, TEXAS

    Mr. Whitacre. Thank you, Senator DeWine. The title of this 
hearing--``Remaking the Telecommunications Industry''--is 
appropriate, as demonstrated by the SBC/AT&T merger. Our merger 
is a positive development for our customers, competition, and 
for America's leadership in global communications.
    We plan to bring together modern networks, innovative, 
advanced products and services, talent and expertise, and a 
rich tradition of customer service and reliability. And we are 
going to ensure that the company which started it all more than 
a hundred years ago will be part of it for many years to come.
    Our merger comes as the U.S. telecommunications industry is 
trying to get up off the mat. For the first time in a long 
time, we see some light at the end of the tunnel, but the 
journey through that tunnel has been pretty hard. Since 2000, 
telecommunications service providers and equipment 
manufacturers have lost more than 700,000 jobs. Annual capital 
investment has declined by more than $70 billion. Companies 
have lost more than $2 trillion in market capitalization.
    Until just recently, SBC was losing 60,000 access lines 
every week. And in all honesty, adverse regulation has 
contributed to this downward spiral. So I think the natural 
result is Wall Street is investing less and less in telecom, 
telecom is investing less and less in its products and 
services, and we can see some of the consequences. Today, the 
U.S. is 11th in the world in broadband deployment. In short, 
this industry is in turmoil, and that is why we decided to do 
the SBC/AT&T merger.
    The reasons for combining these two companies are clear. 
First, while SBC has a strong presence in many local markets, 
we do not have a global network or a national network of our 
own. We lease one of those networks. AT&T has those assets and 
they are very good.
    Second, the next big thing in communications technology is 
voice over Internet protocol, or voice over IP. It has already 
opened the door to a host of new competitors. Dozens upon 
dozens of cable companies and others are using voice over IP to 
provide telephone service and they are winning a lot of 
customers. SBC does not have a consumer voice over IP service, 
but AT&T does. The combined company will have the resources and 
incentives to compete with voice over IP in our region, outside 
our region, and for business customers around the world.
    The third reason for our merger is the opportunity it 
creates for enhanced competition in the large-business customer 
segment. While we at SBC have made some progress in this 
market, it has been very slow going for us. AT&T will give us 
the ability to compete more effectively nationally and 
globally.
    For these reasons, the SBC/AT&T merger will enhance 
competition and should be viewed positively from an antitrust 
perspective. For the most part, SBC and AT&T do not compete 
head to head. This is certainly true in the mass market. Where 
we do compete in the mid- to large-business space, customers, 
will still have numerous choices from such diverse providers as 
systems integrators, equipment manufacturers, and other phone 
companies such as Verizon and Qwest.
    When you assess this market without bias, it is clear that 
no two companies can control this competitive and crowded space 
even after these mergers as currently contemplated. The same 
holds for access to the Internet by rural carriers. Our ability 
and willingness to connect rural companies to SBC's IP backbone 
will not change, and we anticipate no change in pricing to 
these customers.
    This merger is a logical step in the evolution of a 
competitive industry that is light years removed from when the 
last telecom law was enacted in 1996. Today, there are more 
wireless subscribers in the U.S. than there are traditional 
phone lines. Data traffic now exceeds voice traffic by a margin 
of 11 to 1.
    Cable companies will offer phone service to two-thirds of 
American homes this year, and other competitors using IP-based 
services continue to grow. On March 9, the Wall Street Journal 
reported that America Online, AOL, will soon offer voice over 
IP service to its 22 million U.S. subscribers. In that same 
day's paper, Cox Communications said in a letter to the editor 
that in some markets, including Orange County, California, 40 
percent of consumers subscribe to Cox digital telephone and 82 
percent of their phone customers use Cox for their long-
distance service.
    None of this was envisioned when the Act was passed, which 
is why we need the laws to catch up. We need rules to treat new 
technologies with the lightest touch possible and which allow 
the competitive marketplace to discipline retail prices. Such 
reforms would spur much-needed innovation, investment and 
growth--goals that I hope and believe this Committee shares.
    Thank you, Senator.
    [The prepared statement of Mr. Whitacre appears as a 
submission for the record.]
    Senator DeWine. Mr. Whitacre, thank you very much.
    Mr. Seidenberg.

  STATEMENT OF IVAN SEIDENBERG, CHAIRMAN AND CHIEF EXECUTIVE 
   OFFICER, VERIZON COMMUNICATIONS, INC., NEW YORK, NEW YORK

    Mr. Seidenberg. Good afternoon, Mr. Chairman and Members of 
the Committee. Thank you for the opportunity to be part of this 
discussion on the state of competition in the restructuring 
communications industry.
    As you are aware, Verizon has announced its intention to 
acquire MCI. This is a response to the dramatically different 
competitive landscape we have in communications as the industry 
restructures around new technologies and new markets.
    Competing technologies now offer consumers a wide range of 
choices for voice, data, and increasingly video services. 
Likewise, large business customers can now choose a much wider 
range of services from a growing universe of suppliers, 
including telephone companies, systems integrators, software 
providers, equipment makers and wireless companies. In fact, 
earlier this month Microsoft announced a major foray into the 
enterprise business with a software platform that embeds voice 
as a free application, much like instant messaging today.
    To compete in this dynamic environment, Verizon has sought 
to differentiate our wireless and wire line services by 
investing in spectrum, digital capabilities and broadband 
technologies. Now, by acquiring MCI, we are taking the next 
natural step by transforming ourselves around the evolving 
needs of large business customers, a segment in which Verizon 
has a negligible share today.
    MCI and Verizon have complementary assets and capabilities. 
Verizon has strong local assets and a solid presence among 
local and regional customers. MCI has strong IP networks and 
products, and a solid base of national and global customers. 
Together, we will create a strong, new competitor with the 
products, network reach and capital capacity required to 
succeed in this part of the business.
    This acquisition does not alter the dynamics that are 
reshaping the consumer business, nor does it alter the current 
universal service program or its funding. Long-distance and 
local as stand-alone businesses are on the way to obsolescence 
with or without these transactions.
    However, is we look at this in terms of the future, it is 
apparent that customers in all segments of the communications 
market will benefit. Consumers will benefit because we will 
have an advanced broadband platform capable of delivering next-
generation services in markets across the entire U.S. 
Businesses will benefit because we will be a strong, stable and 
secure supplier of advanced communications services. Federal 
and state government customers will benefit because we will be 
able to invest in the networks that are critical to their 
public mission.
    National security will benefit because we will continue to 
strengthen the infrastructure that is a critical component of 
government communications systems, including those used by the 
Departments of Defense and Homeland Security. And, of course, 
the U.S. economy overall will benefit because we will invest in 
the new technologies so critical to job creation and leadership 
in the global marketplace.
    This transaction is about the future. Verizon and MCI will 
be a national full-service company with the technology and 
financial strength to deliver the broadband future and create 
economic growth in our industry.
    Thank you. I look forward to your questions.
    [The prepared statement of Mr. Seidenberg appears as a 
submission for the record.]
    Senator DeWine. Mr. Dorman.

    STATEMENT OF DAVID DORMAN, CHAIRMAN AND CHIEF EXECUTIVE 
          OFFICER, AT&T CORP., BEDMINSTER, NEW JERSEY

    Mr. Dorman. Mr. Chairman and Members of the Committee, 
thank you for inviting me to speak with you today about the 
merger of SBC and AT&T.
    There is much to look forward to and nothing to fear from 
joining together these two companies. Together, we intend to 
set the global standard for communications for years to come. 
We will be able to bring advanced IP-based broadband services 
to market more rapidly and to a wider range of customers than 
either company could alone, heightening competition for voice, 
data, wireless and video services.
    The rapidly evolving telecom market has changed both 
companies. SBC today is focused on broadband, video and 
wireless, while AT&T is now focused on business enterprises, 
government and wholesale customers. Most of you and your 
parents and grandparents have known AT&T primarily as your 
phone company serving residential consumers. That is not the 
AT&T of today. The AT&T of today is a global networking 
provider that enables large businesses, state and Federal 
agencies and other customers to deliver voice, data, video and 
Internet applications securely and reliably.
    The reasons for this transformation are, I think, well 
known to you. The telecom industry has experienced a very 
difficult environment. Over-investment by many carriers, 
tremendous over-supply, a wave of new technologies, an ever-
shifting regulatory environment, and even criminal behavior 
have been experienced.
    AT&T's traditional wireline services are being rapidly 
supplanted by wireless services and Internet-based applications 
such as voice over IP, and mass market customers are 
increasingly demanding bundles of services that we are not well 
positioned to provide. As a result, we determined last year 
that we would no longer actively compete in the traditional 
mass market, which includes residential customers and small 
businesses, and that we would focus virtually all of our 
attention on large-business, government and wholesale 
customers.
    Last summer, we aggressively and irreversibly implemented 
our new plan, radically scaling back the operation of our 
consumer unit and small business units, substantially reducing 
head count, dismantling marketing and sales functions, retiring 
support infrastructure and applications, and preserving only 
those functions necessary to care for our declining number of 
mass market customers.
    The combination with SBC is thus largely a combination of 
two companies with complementary assets, businesses and skills. 
Bringing both together should provide a range of benefits. It 
will create a world leader in advanced communications services 
as the new company uses its increased efficiencies and 
expertise in local, broadband, wireless and global networking 
services to speed the transformation of the legacy networks 
both at AT&T and SBC to a new integrated IP-based network.
    It will reduce our costs and enhance our operations, 
allowing us to offer better services and better value to all of 
our customers. It will provide our government customers with 
more reliable, more resilient and more efficient network 
capabilities, and it will spur innovation, increasing the pace 
and breadth of the work of our renowned AT&T Labs, with 
benefits for all types of customers.
    The merger, moreover, will not lessen competition; it will 
enhance it. The improved ability of the combined company to 
bring innovative and advanced services will spur others, 
including cable, wireless and VoIP providers, to enhance their 
own offers as well. The transaction will lead to greater 
competition between the Bell companies themselves, and will 
produce a leading global competitor.
    The transaction will not harm competition in any market. In 
the mass market, SBC is a leading provider of service in its 
13-State region, but AT&T is no longer an active mass market 
competitor in those States. The merger will also not impair 
competition in the provision of services to business customers, 
given the large number and diversity of competitors for 
businesses, the sophistication of those customers and the 
purchasing power and practices that they employ.
    Nor is there any serious argument that the merger will 
diminish competition in wireless, where AT&T is not currently a 
provider, international, where SBC has a very limited share, or 
in Internet backbone services, where many large providers 
compete. Rather, the merger is a step forward in the evolution 
of this industry, creating a healthy, competitive and 
innovative American communications company.
    In conclusion, I would like to thank you again for the 
invitation to speak with you about the very significant 
consumer and public benefits this merger will produce.
    [The prepared statement of Mr. Dorman appears as a 
submission for the record.]
    Senator DeWine. Mr. Dorman, thank you very much.
    Mr. Capellas.

STATEMENT OF MICHAEL D. CAPELLAS, PRESIDENT AND CHIEF EXECUTIVE 
             OFFICER, MCI, INC., ASHBURN, VIRGINIA

    Mr. Capellas. Thank you, Mr. Chairman. My name is Michael 
Capellas and I am the President and CEO of MCI. Obviously, over 
the past 5 years, our industry has undergone a series of 
fundamental changes in technology, in the market, in the 
regulatory environment, and that technology will continue to 
accelerate and the incredible potential of the Internet alone 
guarantees even greater changes in the future.
    I have been CEO of MCI for roughly two-and-a-half years. I 
spent the prior 25 years in the computing industry as a 
customer of telecommunications services and as a developer who 
used the power of global networks to fuel innovations in the 
software industry. I do believe in the power of this technology 
and in the future of innovation. I have always liked to say 
there has been a computer on the end of a network for a very, 
very long time.
    Many of the changes in the telecom industry are actually 
being driven by broader movements in information technology. 
First of all, there is a movement toward standardization. Basic 
building blocks such as servers, storage and microprocessors 
are simply now standard devices that are addresses on a network 
and can reside anywhere.
    Second, the rise of Internet commerce has accelerated the 
adoption of software standards that enable different systems to 
talk to each other. At the same time, new tools like Web 
services allow developers to write applications across 
different platforms.
    Today's communications travel the networks in packets. 
There is no difference between a voice or a data packet. 
Whether you are making a phone call or purchasing an MP3 music 
file, it is all the same. A packet is a packet is a packet.
    The Internet-driven standards that allow these systems to 
talk to each other have redefined network requirements. 
Formerly, local, long distance and data traveled along separate 
network paths. Now, there is the need for integrated 
intelligent paths that can carry voice, data and streamed video 
without the developer or end user needing to know or care how 
the path is developed.
    And one doesn't need to be a computer scientist to sort of 
see this in everyday life. A Blackberry is a great example of a 
device that can instant-message, make a phone call, get news or 
sports, or stream a video, and this is integrated 
communications at work.
    MCI has been a global provider of communications. We 
operate one of the industry's most expansive global IP backbone 
and serve many of the most demanding applications in the world. 
We serve major financial institutions, complex engineering and 
manufacturing centers, and provide complex solutions for more 
than 75 government agencies.
    Many of these customers are the early adopters of this new 
computing infrastructure and are led by some of the best and 
brightest technologists. These customers have some common 
requirements--high-end reliability and security, and then 
global delivery, ease of adapting new technologies and new 
applications, and low-cost infrastructures.
    At the heart of all these requirements is the need to mesh 
local access with wireless capabilities and the backbone 
network. Much of today's network architecture was incubated at 
MCI, in part due to the vision of Internet pioneer Vint Cerf. 
It is know as the Internet Protocol, or IP. In its simplest 
terms, IP allows applications, from wireless e-mail to video 
streaming, to be rolled out without understanding or changing 
the core network elements underneath it.
    New technologies and new delivery methods are reshaping the 
market. In addition, recent regulatory and legal decisions have 
made a significant impact, particularly on the consumer 
segment. The underlying economics have been fundamentally 
altered. So where is MCI in this perfect storm of IP 
convergence, market evolution and regulatory change?
    Our plan is to leverage our IP network by refocusing on 
large-business and government customers and deemphasizing our 
consumer business. It would be virtually impossible to sustain 
our traditional voice business based on circuit switch 
technology.
    MCI has also entered into an agreement with Verizon to 
combine our strength. MCI owns a state-of-the-art IP backbone 
network, but no significant first-mile facilities or wireless. 
Verizon has extensive first-mile facilities and state-of-the-
art broadband. MCI has a large-enterprise and government 
customer base which has remained loyal because we provide 
world-class products and service quality. Verizon provides 
local access to many of those same customers.
    Some have asked how this merger will affect competition. In 
my view, the combined company will benefit both consumers and 
business users. It will deliver end-to-end network capability 
and will provide innovation and next-generation applications.
    Technology has changed the landscape. Significant 
competition for consumers will come from alternate technologies 
the merger will not affect, like cable and wireless. And the 
same is true for business and Internet service markets. 
Wireless and other technologies are redefining competition. In 
addition, we are seeing the increased presence of broad-based 
technology companies like IBM entering the traditional telco 
market. This is the natural evolution of changing competition 
as technologies converge.
    In conclusion, Mr. Chairman, technological, marketplace and 
regulatory changes are driving the forces behind the industry 
restructuring. Traditional notions of long-distance companies 
have become obsolete. The merger of MCI and Verizon is a 
reflection of these fundamental changes. The merger will not 
have an adverse effect on competition in any line of business. 
On the contrary, it will strengthen MCI's ability to compete 
and continue to innovate. Technology will, in fact, move on.
    [The prepared statement of Mr. Capellas appears as a 
submission for the record.]
    Senator DeWine. Well, we thank you all very much. We have a 
vote. We are now ten minutes into the vote, so we are going to 
have to leave. If it is five votes, we are going to be a while, 
so we will be back.
    [The Committee stood in recess from 3:10 p.m. to 4:45 p.m.]
    Senator DeWine. Well, let me call the hearing to order. 
Thank you all for your patience. We apologize. We had five 
votes and we are back.
    Let me now turn to Senator Kohl for his questions.
    Senator Kohl. Thank you, and likewise we apologize for the 
delay.
    For Whitacre and Mr. Seidenberg, we have heard a lot of 
testimony today about the competition your companies will face 
in the years ahead from new technologies. One important new way 
for consumers to make phone calls is through a technology known 
as VoIP, as you know--voice over Internet protocol. Making 
phone calls using VoIP requires a high-speed Internet 
connection--a service many consumers obtain from their 
telephone company--but neither SBC nor Verizon will sell 
consumers high-speed Internet service without also requiring 
that the consumer also buy local phone service. This destroys 
the incentive of the consumer to purchase VoIP phone service 
and is therefore a significant obstacle to the deployment of 
this technology. Would you be willing to commit as a condition 
of approval of your merger to sell separate Internet service to 
consumers without also requiring them to buy phone service?
    Mr. Seidenberg, you will have the opportunity to respond 
first, and then you, Mr. Whitacre. The question is would you be 
willing to commit as a condition of approval of the merger to 
sell separate Internet service to consumers without also 
requiring them to buy phone service.
    Mr. Seidenberg. Senator, I think we have already indicated 
that on this question we would be providing to the market a 
service. If I understand the question, in our industry we call 
it, quote, ``naked DSL.'' So I think in the past we have always 
provided DSL with a phone number. That is the way we provide 
service. In the future, we are in the process of working 
through the mechanics of offering a DSL line without a phone 
number.
    Now, your specific question is would I agree to a 
condition. At this point in the process, sir, I would prefer 
not to agree to any conditions, but I think on the point you 
raise we are going to do exactly what you said.
    I would also make one other point. You don't need a 
broadband line to get voice over IP. There are companies today 
that put adapters on that do that. So I think voice over IP 
comes in a lot of flavors, one of which is over a broadband 
line.
    Senator Kohl. So you are saying you wouldn't want to be 
quoted as agreeing to the merger based on that condition, but 
you are moving in that direction?
    Mr. Seidenberg. Yes, that is correct.
    Senator Kohl. Mr. Whitacre.
    Mr. Whitacre. Well, we are working the same way. There are 
companies out now buying loops and they put their own equipment 
and resell it. So, in essence, what you are suggesting is being 
done. Now, would SBC do it? Of course, SBC would do it, but SBC 
is not going to do it under the price of what it costs us to 
provide it. We have been there and done that with something 
called UNIP, which was very bad for this industry. We would be 
willing to do that under the circumstances that it is not 
underwater and there is a profit to be made for SBC 
shareholders, too. So the answer is yes.
    Senator Kohl. The answer is, yes, you would be willing to 
condition the merger on that?
    Mr. Whitacre. No, I wouldn't be willing to condition the 
merger on that. But would we be willing to sell it? Of course, 
and we are working toward doing just that.
    Senator Kohl. All right. Mr. Seidenberg and Mr. Whitacre, 
on February 17 the Washington Post reported that the FCC was 
investigating complaints by a company called Vonage that local 
phone companies were blocking or disrupting access to their 
VoIP Internet phone service.
    Has either of your companies ever intentionally done this? 
Will you commit as a condition to approval of your merger not 
to interfere with your customers' Internet connections so as to 
degrade or block access to competing VoIP phone service?
    Mr. Seidenberg. Senator, I got this question at the House 
hearing and checked it out. I know of no case in which we are 
blocking any traffic from Vonage, and as a normal course of 
practice, we pass all this Internet traffic through. And just 
to give you some comfort, we also buy access to AT&T and Ed's 
network to put our Internet traffic over it. So we would have 
no reason to block anybody else's traffic, when we are putting 
our own on other people's network.
    Senator Kohl. So you would approve as a condition of the 
merger?
    Mr. Seidenberg. Well, I don't like conditions. I guess at 
this point in the process, we need to see the whole picture. 
But as a matter of practice, sir, we are not doing anything 
that would suggest we are blocking anybody's traffic.
    Senator Kohl. Mr. Whitacre.
    Mr. Whitacre. SBC would not block any Vonage traffic or 
anybody else's, and has never done that, would not do that. 
That is not the way we do business and it is just not going to 
happen.
    Senator Kohl. So you would agree to that as a condition of 
the merger?
    Mr. Whitacre. Well, you say ``condition.'' We are not going 
to block anybody's traffic, Senator.
    Senator Kohl. Okay, a last question and then we will turn 
it over to Mr. DeWine.
    Mr. Seidenberg and Whitacre, as you know, one important 
possible alternative for consumers will be wireless connections 
to the Internet. Using these connections, consumers can access 
alternative phone providers such as VoIP and avoid the Bell 
companies' connection to their homes. Cities and municipalities 
such as Philadelphia have begun to build such wireless networks 
and plan to offer it to their residents as a municipal service.
    In your testimony today, you have spoken at length about 
the promise of new technologies and how we should not worry 
about these mergers because the deployment of these 
technologies will create an abundance of new telecom 
competition.
    Yet, at the same time, we have noticed your companies 
lobbying State legislatures around the country to stop cities 
from building these new networks to deploy these very 
technologies. Pennsylvania recently adopted such a law and 
other States considering such laws include Illinois, Texas and 
Florida.
    So why have your companies been actively lobbying for such 
State laws to ban the deployment of municipal wireless? Will 
you commit to cease your efforts, should your mergers be 
approved?
    Mr. Seidenberg, we will give you the opportunity, of 
course, which you so much desire, to answer first.
    Mr. Seidenberg. Actually, I would like to go before Ed just 
to make sure I get it in before whatever he says. I don't know 
what he is going to say.
    Look, we have squabbled a little bit with a few 
municipalities and let me tell you why. First of all, we can't 
stop anybody from putting any technology they put in. But, 
generally, we find it unfair that municipalities that regulate 
us, set our taxes, set our franchise fees, participate in 
running our company in some fashion, also now want to compete 
with us under a different set of rules. So every time we see 
that happening, we point it out.
    We would also make the point that in all these places where 
municipalities want to get into this, with all due respect, 
they don't do a very good job either, which then impacts us 
because the cities usually come back to us and we need to spend 
money to fix the things that have occurred. So we are not in 
the business of stopping anybody from doing it, but where we 
think the rules are unfair, we are going to point it out.
    Senator Kohl. In Pennsylvania, the law was adopted at the 
behest of your company's lobbying, is that correct?
    Mr. Seidenberg. I am sorry?
    Senator Kohl. In Pennsylvania, the Pennsylvania law was 
adopted, as I understand it, as--
    Mr. Seidenberg. But it didn't prohibit the municipality 
from providing the service.
    Senator Kohl. Right.
    Mr. Seidenberg. It gave us a chance to jaw-bone about it, 
but it didn't prohibit it from doing it.
    Senator Kohl. Mr. Whitacre, where do you come from on this?
    Mr. Whitacre. Mr. Seidenberg answered that as I would. They 
are the ones that make the laws, the rules, charge franchise 
fees, et cetera, et cetera, and then to compete against us 
makes it an unfair competition. From a taxpayer's standpoint, I 
really don't want my tax dollars to be used by a municipality 
or a local government to build something in competition where 
many other businesses already are. But as Ivan said, we can't 
stop anybody from putting any technology out there.
    Senator Kohl. So the lobbying of State legislatures around 
the country to stop cities from building new networks to deploy 
these new technologies is not an activity that you all engage 
in, or you do engage in that?
    Mr. Whitacre. Oh, we have engaged in that.
    Senator Kohl. You do engage in that?
    Mr. Whitacre. You bet.
    Senator Kohl. Yes.
    Mr. Whitacre. You bet we will. I mean, again, those 
municipalities, those governing bodies regulate us and at the 
same time they are competing with us. That makes no sense, so 
we are certainly going to lobby against that. But can we stop 
them? No, we can't. They can put one out there if they want.
    Senator Kohl. Sure. They can do whatever they wish.
    Mr. Whitacre. Sure.
    Senator Kohl. Mr. Seidenberg, were you clear in your 
response to that?
    Mr. Seidenberg. I think so. I would like to clarify this. 
My understanding is this is not a programmable activity on our 
part. If we see something egregious, we go after it, but this 
is not something that at every single place in the country we 
have a policy that argues about it. It is only where we think 
there is a big duplication of effort and it is unfair. So, yes, 
we do it, but it is much more episodic.
    Senator Kohl. Mike?
    Senator DeWine. Mr. Whitacre and Mr. Seidenberg, the 
biggest antitrust issue presented by these mergers appears to 
be in the so called enterprise market. I would like to examine 
the impact of these deals on small and mid-size businesses, the 
companies served really most often by AT&T, MCI and their own 
regional Bell.
    It makes sense that you have so far focused on medium and 
smaller accounts within your region. It also makes sense that, 
post-merger, you will have a great deal of incentive to pursue 
the major accounts even if they are out of your home region. 
But what about pursuing the smaller and mid-sized business 
accounts out of your region? Doesn't it make more sense to 
leave those to the other regional Bell which already has a 
relationship with them and the local facilities to serve them?
    Why attempt to compete out of your region, where you would 
need access to your competitor's network? And if that is the 
case, aren't we moving from a situation where we have three 
major competitors--AT&T, MCI and the local Bell--down to only 
one? Isn't that a clear antitrust problem?
    Mr. Seidenberg. Does Ed get this one first? Mr. Chairman, 
do you want me to do this one first?
    Senator DeWine. Well, you know, you went first last time.
    Mr. Seidenberg. I think he should go first.
    Senator DeWine. Do you think it is his turn?
    Mr. Seidenberg. I think so.
    [Laughter.]
    Mr. Whitacre. You keep talking and I will forget the 
question.
    Doesn't it make more sense? There are many, many 
competitors in that space that you are talking about. We 
compete now against Verizon, as an example, against AT&T, 
against MCI across the country in some medium, some small and 
some enterprise businesses. There are many other people or 
other companies in that business, though, that people don't 
think about everyday. You can think of Cisco, you can think of 
IBM, you can think of many manufacturers, you can think of 
Qwest. You can go on and on, so the competition in that space 
is not three; it is three times maybe, I don't know how many, 
but it is many, many competitors in that space.
    So it is not going down to three. There are many 
competitors in that space and I think it makes sense on a 
business case basis--on a case-by-case basis, you would have to 
decide where you would compete, but certainly we would 
anticipate doing that.
    Senator DeWine. Mr. Seidenberg.
    Mr. Seidenberg. Yes, Senator, I would just add this. I 
think the way we would see it is the market is globalizing. So 
a small-business customer in Pittsburgh or in Milwaukee or in 
Nashville want a choice of suppliers, and I think Ed said it. 
Small-business customers get services from cable companies in 
the form of modems. They get service from wireless companies.
    And with our combination with MCI--MCI has a network that 
extends into many of these cities, so we would have the 
capability of being a third or a fourth or a fifth supplier to 
these accounts. Actually, I think it is just the opposite. With 
our heft, muscle, brand, our operations focus and the assets 
that MCI brings to the table, I think we are in a better 
position to provide more choice for the small and medium 
customer across the country. So I think we are just following 
the natural evolution of the market.
    Senator DeWine. Mr. Whitacre, the three I mentioned are the 
three biggest, though, are they not?
    Mr. Whitacre. You know, Senator, I don't know. We certainly 
would be up there, but I think we often overlook the impact 
these other companies have had. I mean, we are not talking 
small companies. We are talking about companies that have 
thousands and thousands of customers that are, I guess, below 
this radar screen.
    As far as the enterprise business goes, SBC is a small 
player, a very small player. Mr. Dorman would have to answer 
for AT&T, but we are quite small in the enterprise space. In 
medium and small business, we are stronger in our region, but 
we certainly have a lot of competition.
    Senator DeWine. Does anybody else want to jump in here?
    Mr. Seidenberg. If I might--I am sorry, guys, but I just 
want to address something you said in your opening remarks. If 
the nature of the question goes to how many telcos will provide 
these services, then your point is fair that you can look at 
one, two or three that do that. But the customer's dollar is 
green and they don't care who they buy these services from.
    So the fact is the market now has five, six, seven 
different places to buy the services they used to buy just from 
the telco. So as we move into these markets, we are dealing 
with a very different base of competitive activity in these 
areas.
    Senator DeWine. Anybody else? Mr. Dorman.
    Mr. Dorman. What we have found that happens on a local 
basis is smaller companies that compete locally do a very good 
job of serving small businesses in their home areas. Examples 
of that are people like McLeod Communications up in the upper 
Midwest has done a very good job and built a business of almost 
$1 billion of revenue.
    You have Broadwing, XO, Global Crossing, Level 3. Cox Cable 
just announced that they had just passed 300,000 business 
customers, and they just started selling to business customers 
about two-and-a-half years ago. Time Warner Telecom is another 
cable-affiliated company which has done very well in the 
medium-business market.
    So what we find competing nationally is, yes, we do see the 
Bell company certainly competing in the region, but typically 
there are at least five to seven other providers besides MCI 
and ourselves. We didn't mention Sprint. Sprint is still a $7 
billion-plus company in the long-distance and communications 
space, and more than half of that comes from business 
customers, about $4.5 billion, in fact.
    So my perspective is that there is an abundance of choice 
for business customers. Certainly, in the context of medium and 
small customers there is even more. Large customers typically 
buy more sophisticated things, but even there, there are five 
to six competing providers. I think Ed mentioned IBM. In almost 
every one of our large-customer bids these days, we see IBM, 
EDS, CSC, even Lockheed as systems integrators offering 
communications and IT services as a bundle. Recently, we lost 
Bristol Myers Squibb to BT, British Telecom. So there are a 
number of different competing players across the market.
    Senator DeWine. Mr. Capellas and Mr. Dorman, as part of 
your efforts to compete with the Bell companies in serving 
enterprise customers, both of your companies purchase local 
access facilities that would allow you to provide facilities-
based service to many business customers. Now that you are 
planning to merge with Verizon and SBC, respectively, wouldn't 
competition be best served by a divestiture of any of those 
overlapping assets to other CLECs who could use them to compete 
against the newly-merged entities?
    Mr. Capellas. I think first, to put it in perspective, 
about 52 cents on every dollar we spend has traditionally gone 
for local access. In fact, we actually have very few facilities 
which are local. That, in fact, is part of the reason for the 
merger, but right now we have very, very limited local access 
capabilities. So while no decision has been made on how we deal 
with those, it is a very, very small part of our business.
    Senator DeWine. Mr. Dorman.
    Mr. Dorman. In the case of our direct overlap with SBC, we 
do business in SBC's 13 States, as I recall, in over 100,000 
different establishments or buildings. We have facilities 
overlap with them in something like 2 percent of the cases 
where we have a fiber into a building that they have service 
into.
    In most mergers, redundant facilities like that end up 
becoming synergies anyway. So while not committing anything for 
SBC looking into the future, I think that on a case-by-case 
basis the major thing I would be concerned about is disrupting 
customers. If you have a major data network for an American 
Express and five of the locations happen to be in buildings 
where you had fiber and SBC didn't and you had to convert them 
over, I would just simply be wary of the impact on customers. 
But rejecting that out of hand, I don't think is necessary. In 
other words, it should be something that we would look at.
    Senator DeWine. Let me move to another ramification of 
these proposed mergers. Ever since the break-up of AT&T in 
1984, we always could count on AT&T and MCI to be on the 
opposite side of the fence from the Bells on public policy 
disputes in front of Congress or at the FCC or in the courts. 
Now, while many of those issues are now resolved, there are 
many that will no doubt arise in the near future as we consider 
possibly rewriting the Telecom Act and as we attempt to 
navigate our way into an era of enhanced services.
    Who is going to take the place of AT&T and MCI? As 
policymakers, who will we look to for an alternative view now 
if this takes place? And really to get into the crass business 
and political reality of all of this, what if one or both of 
the merged entities decides they don't like a decision at the 
FCC or of the Congress? Really, there is no one else who has 
the nationwide resources, the political heft or the large 
constituencies in each State. Who is going to have the 
resources to fight the merged entities in court or at the FCC? 
Isn't that a practical problem?
    Mr. Capellas. I think like lots of things, you can look at 
it as an opportunity. If you look at where the innovation and 
technology has been and the movement particularly in customer 
requirements, the goal has become how do we take these what 
should be complementary, seamless technologies and put them 
together.
    If you are a customer and you sort of look at local access, 
wireless bundling, IP, the software access to reside it, the 
customer's goal is to actually bring it together to a common 
goal, and then to set standards across the industry which allow 
that to happen, to allow these networks to talk to each other.
    So maybe the new construct is how do we actually get an 
industry consortium that drives standards that gains for 
productivity so all these devices could talk to each other. So 
as a practical matter, maybe the nature of the beast is no 
longer in an open warfare, but actually in a set of 
collaborative sort of efforts and consortia that allow these 
standards to develop so we can actually take it to the next 
level.
    Senator DeWine. Herb.
    Senator Kohl. Mr. Whitacre and Mr. Seidenberg, many 
analysts see one of the biggest dangers to competition from 
these deals is their effect on the business market. AT&T and 
MCI are today vigorous competitors for the telecom business of 
large and small enterprises throughout the Nation. The mergers' 
critics are concerned that once the mergers are completed, the 
combined SBC/AT&T and Verizon/MCI will prefer to concentrate 
their marketing efforts on their respective regions and the 
competition now offered by AT&T int the Verizon region and MCI 
in the SBC region may well be lost.
    Mr. Whitacre and Mr. Seidenberg, after these mergers will 
SBC and Verizon continue MCI's and AT&T's efforts throughout 
the Nation, or are the critics correct in fearing that your two 
companies will engage in a divide-and-conquer strategy and that 
the enterprise market will lose a strong competitor?
    Mr. Whitacre. Well, Senator, SBC will continue to engage in 
that kind of competitive activity across the United States. In 
other words, where AT&T is, we will continue to compete. So the 
critics are wrong in that case. I think it is a good thing for 
the Nation. We will be able, from a stronger company, to do 
more in that arena, not less, and the technology is going to 
enable that. So from an SBC standpoint, of course, we will be 
competitive all over the Nation.
    Senator DeWine. Mr. Seidenberg.
    Mr. Seidenberg. Senator, I agree exactly, and I think the 
critics misunderstand something. If you take wireless, we have 
built facilities across the country. We compete everyplace. 
With respect to enterprise, we didn't have the physical 
capabilities to go to every city in the country. With a 
combination with MCI, it gives us access to the top 125, 150 
MSOs across the country, and we will use the facilities of MCI 
to compete aggressively in all those markets. Many of them are 
not in what you would call our home market.
    Senator Kohl. Although we have heard a lot about cable as 
an alternative provider of phone services, isn't it true that 
thousands of small businesses--supermarkets, gas stations, dry 
cleaners--do not have cable service? So what alternatives will 
these small businesses have after these mergers?
    Mr. Whitacre. Senator, I would like to invite you to San 
Antonio and take you down a few streets where those kinds of 
businesses that you are talking about exist. I think the cable 
companies have a plan; I think they have a business plan to 
serve those kinds of people. I would like to show you what they 
done. So, clearly, they are after that kind of customer. They 
are doing it, and these businesses you talk about are going to 
have alternatives. They have got many alternatives now; they 
are going to have even more with cable. It is not just SBC 
serving those. It is many other companies.
    Senator Kohl. What do you think, Mr. Seidenberg?
    Mr. Seidenberg. I agree with that, sir. It is the same 
thing. Again, it is a question of how you define the market, 
and as Michael Capellas said a minute ago, there is a very fine 
line. If there is any distinction between a computer and a 
phone network, you can hardly determine it anymore. A packet is 
a packet.
    So if you buy AOL service, you can buy a very cheap line 
from Ed and then put all of your data over that AOL service and 
Ed gets no revenue for it. So there is direct competition for 
the lines. There is substitutable competition for the services. 
These small-business customers, because of the explosion of 
technology, have choices today they never had before.
    Senator Kohl. Thank you.
    Senator DeWine. I have a statement for the record from 
Senator Sam Brownback which I would ask unanimous consent to be 
made part of the record. Without objection, it will be made a 
part of the record.
    Mr. Whitacre, let me ask you a question about the SBC 
consumer market. First, with regard to the consumer market and 
SBC's territory, take a State like Texas. My understanding is 
that in the State of Texas, the consumer long-distance market 
share held by SBC is about 70 percent. Is that correct?
    Mr. Whitacre. I don't know exactly, Senator, but that is in 
the ball park.
    Senator DeWine. That is in the ball park?
    Mr. Whitacre. Yes.
    Senator DeWine. How long has SBC been able to offer long-
distance service to its customers in Texas? Do you know?
    Mr. Whitacre. I think about 3 years. I would have to check, 
but it has been several years.
    Senator DeWine. My understanding also is that AT&T holds 
about 15 to 20 percent of the consumer long-distance market in 
Texas. Does that sound about right?
    Mr. Whitacre. I don't know, Senator. You would have to ask 
Mr. Dorman.
    Senator DeWine. Mr. Dorman, is that about right?
    Mr. Dorman. I am not sure. It would be less than 20 
percent, would be my expectation.
    Senator DeWine. More than 10?
    Mr. Dorman. Yes.
    Senator DeWine. So if the merger were approved, the 
combined companies would account for 80, 90 percent of consumer 
long distance in Texas. Would that be right?
    Mr. Dorman. Well, if you don't count wireless and you don't 
count cable, if you talk traditional wireline long distance, 
that fact might be true. But I suspect on the basis of actual 
usage, if you included all the long distance originated on cell 
phones, I don't think the number holds up as a percentage.
    Senator DeWine. I want to be fair about this. What do you 
think the percentage would be if you included those?
    Mr. Dorman. I would bet that wireless originates about as 
much long distance in Texas as wireline, maybe more.
    Senator DeWine. So you would put it, then, at 45 percent, 
approximately?
    Mr. Dorman. That would be my guess.
    Senator DeWine. Of that universe?
    Mr. Dorman. Yes.
    Senator DeWine. Let me ask an additional question, Mr. 
Whitacre. What are SBC's market share goals for consumer long 
distance in California?
    Mr. Whitacre. I guess broadly put, we want to serve all our 
customers. We are not the only company operating in California. 
For example, Verizon is there. There are many competitors 
there. The cable companies are quite strong and have recently 
put out that they probably have a bigger share than we do where 
we traditionally operated.
    I think any business person who is truthful would like to 
have as much share as they can get. As a practical matter, that 
is a function of a lot of things--price, what you do. But 
certainly we are trying to serve the consumers we have in 
California with our long-distance service. That is a goal of 
ours. We would like for all our customers to have SBC long 
distance. They do not now.
    Senator DeWine. What about in the Midwest, former Ameritech 
States?
    Mr. Whitacre. Senator, I can't recall the percentages. As 
you know, we got in long distance much later, so our 
percentages would be considerably smaller there. I would just 
have to get you the correct number, but it would be much 
smaller.
    Senator DeWine. All right. When you do that, could you also 
get Missouri, Oklahoma and Kansas?
    Mr. Whitacre. Sure. I would be happy to do that.
    Senator DeWine. Mr. Capellas, there is a great deal of 
interest in the sale of your company. As we all know, there is 
still a certain degree of uncertainty as to whether or not 
Verizon or Qwest will be successful in their efforts to 
purchase MCI. We certainly don't want you to disclose any 
corporate secrets or anything you don't feel you can tell us 
about, but can you tell us what the status is of MCI's 
deliberations and when we might expect to see a decision?
    Mr. Capellas. Well, we do have a signed merger agreement 
with Verizon, and so that is the first order of business.
    Senator DeWine. Right.
    Mr. Capellas. There has been a process undertaken with 
which, with the consent of Verizon, there could be some 
additional discussions. That is a time period that ends on 
Thursday, this coming Thursday, and so at this point there are 
some deliberations between the teams. But we do have a signed 
merger agreement and if there is any reason to reevaluate, if 
the situation warrants, we will, but at this point we have a 
signed merger agreement.
    Senator DeWine. There was one report--and I may have read 
it very quickly, but one report that Qwest's offer was a bigger 
offer. Could you comment on that? That was a published report, 
and again I may have not read all the fine points and there may 
be fine points you would like to elaborate on.
    Mr. Capellas. Every economic decision, no matter what it 
is, has a balance of risk and reward and a balance of short 
term and long term. So the real question here is when we 
entered into our agreement with Verizon, the thing we were 
looking for was the ability to compete in a market which was 
changing--wireless capabilities, access economics, financial 
strength. And, you know, it is the fiduciary responsibility to 
take in all the considerations, and so again all those 
considerations were taken in and our deal with Verizon was 
really based on long-term ability to go to market.
    Senator DeWine. Do you want to comment on Qwest?
    Mr. Capellas. No. I don't think it would--there has been a 
period open in which some conversations could take place, but I 
would have nothing to add at this point.
    Senator DeWine. Fair enough.
    Mr. Whitacre, let me talk for a minute about jobs, and I 
will put my hat on as U.S. Senator from Ohio for a moment, if I 
could. There has been some discussion about job losses for your 
company overall, and I wonder if you could comment on that and 
also comment on what impact this might have for the State of 
Ohio.
    Mr. Whitacre. Well, Senator, for the past several years 
SBC's workforce has decreased in size. It has decreased because 
our revenues have been falling, our earnings have been falling. 
That is part of the problem I addressed in my remarks with this 
industry. It is an industry that has lost a lot of jobs because 
of declining revenues.
    Specifically, with the AT&T merger, we have said generally 
about, it looks like, 13,000 jobs would be impacted across both 
companies. But you have to remember SBC would normally lose by 
attrition 12,000 a year; that is retirements, et cetera. So I 
suspect with normal attrition, there is probably not much 
change.
    We are not doing this merger to continue to shrink. This is 
about changing something in this industry and making these two 
companies viable and being able to grow again. This is an 
environment in which you would hope you could increase jobs if 
it is successful, and you do something exciting for a business 
that has been in the doldrums for quite some time.
    As it impacts Ohio, I can't tell you specifically this 
early in the talks because I don't know what AT&T has located 
there. I know what SBC has, and I doubt if our workforce is 
impacted significantly, if at all, in Ohio.
    Senator DeWine. Let me take advantage of the fact that we 
have the CEOs of four of the biggest phone companies in the 
country here to ask a question that may not really have a 
direct relationship to the merger, but I do have you here and I 
think it is an important issue.
    As we move and see more and more innovation in the 
telecommunications arena and develop greater broadband 
capability, I think it is extremely important that we work hard 
to ensure that the disabled are not left behind. As we make 
broadband and improve Internet applications, we should be able 
to come up with better mechanisms to include the disabled in 
the communications revolution.
    Let me ask each one of you if you could address this 
question, and that is what are you doing and what can we all do 
as policymakers to take steps toward this specific goal? How 
can we use all this technology to serve constituencies with 
different needs and help customized products so that many 
different people can use them?
    Mr. Whitacre?
    Mr. Whitacre. Well, I think the new technology is going to 
enable us to do that, Senator. I can't speak to all the 
specific ways, but certainly voice over IP lends itself much 
more than circuit-switching does to uses of all people of the 
United States, be it disabled, be it whatever.
    I don't know some of the new uses. Perhaps some of the 
other participants do, but I think it does give us the ability 
to move things around, change things, switch things, have 
broadband access, wireless broadband access, which certainly in 
itself might be a terrific way for the disabled, and that is 
right around the corner. So I think the era we are moving into 
lends itself very much to do more in that, and SBC has always 
been a greater supporter of that.
    Senator DeWine. Mr. Seidenberg.
    Mr. Seidenberg. Yes, sir, just two points. We have a good 
record in this area. We have a disabilities center that we have 
in the East. We opened one in the West, so we serve customers 
directly out of these centers.
    I would make the point that a company of our size and scale 
has the financial capacity to address these markets. These 
markets are important to us. People believe that, given our 
brand and our position, that we should address these markets. 
We have the financial capability to do so.
    For the past 22 years, chasing all these new entrants in 
the business, I don't ever remember a new company coming into 
the marketplace and saying we are going to compete in the 
disabled market. So I think that one of the things that we want 
to do is to the extent that we can continue to create the 
financial capacity to address the markets, the disabled market 
is one we will always keep our eye on.
    Senator DeWine. Mr. Dorman.
    Mr. Dorman. I think the promise of being able to fungibly 
take text and speech and voice and interact them is an 
important attribute for various disabilities, the point being 
if you can type, you can communicate. If you can speak, but not 
see, you can be able to communicate your words and have them 
translated into text for other people. So the mixing of media 
between e-mail and voice is going on right now.
    This so-called unified messaging capability, as Ed 
suggests, comes together with voice over IP very nicely because 
the interface is typically something as simple as a Web page, 
where you can listen to your e-mail, you can listen to a voice 
mail and you can translate. So we are moving that ahead. AT&T 
actually holds a significant amount of intellectual property on 
speech processing, which is a very important part of this.
    Mr. Capellas. Just to echo Dave's point, we also have a 
center in California which is for the hearing-impaired which 
actually will take speech to text and text to speech. So if you 
have a call that you can't hear, you will send it in, it will 
be translated and go back.
    I think there is tremendous progress being made in the area 
of linguistics. Particularly for those who have English as a 
second language, it can be deployed over networks and you see 
that happening. There is voice activation and all the voice 
activation that goes with it.
    There is a new thing that is being deployed over networks 
which is called pace-based training for those people who may 
not have the same skills educationally to be able to actually 
have educational programs at a different pace, which is 
actually starting to revolutionize some things in education.
    There is another one I think we can all do. When you create 
an environment of a diverse workforce, you will find that those 
attitudes actually create environments where people will think 
of things that are not normal to them. I think just promotion 
of diversity in your workplace probably does more to let the 
creativity out than probably anything we can do, because 
creative people will come up with creative ideas.
    Senator DeWine. Good. Well, I appreciate your statements, 
all four of you. This is something that this Subcommittee will 
continue to look at. To state the obvious, the new technology 
that you all are engaged in and what your business is all about 
provides just wonderful opportunities for people today that we 
couldn't have envisioned 10, 15 years ago, maybe even 5 years 
ago. It presents just tremendous opportunities for people to 
improve the quality of life, and we would encourage you to 
continue to make that part of what you do and part of your 
mission. Mr. Seidenberg, I think, speaks very well of looking 
at that as part of the mission, being big enough to do it and 
carry it out, and we appreciate it very much.
    Senator Kohl.
    Senator Kohl. Well, I think you guys have done a really 
good job here. It has been informative. I think about the 
National Press Club, which is an organization here in 
Washington that has influential and important people like 
yourselves to speak before the group. After the speech and the 
questions, which are all quite serious, there is a final 
question which is serious but somewhat humorous.
    I would like to ask all four of you, in the event that this 
merger goes through, which of you gets the dinner and the gold 
watch and which of you gets the corner office?
    [Laughter.]
    Senator Kohl. I appreciate your answer.
    [Laughter.]
    Senator DeWine. We appreciate your answers very much. Thank 
you very much. Well, we appreciate you being here. I think this 
hearing has given us a good opportunity to examine some of the 
important antitrust and competition issues raised by these 
mergers.
    As we have discussed, most of the antitrust issues really 
appear to be in the enterprise market, and I anticipate that 
the Antitrust Division will examine those and other antitrust 
issues as it looks at these deals. Further, this hearing has 
been useful in exploring some of the larger competition issues 
regarding intermodal competition and whether that is going to 
be sufficient to protect consumers and competition in the 
future.
    Clearly, this Committee is going to need to consider how we 
can play a role in making sure that intermodal competition is a 
part of the competitive landscape in the years ahead. Along 
those lines, as I mentioned in my opening statement, the 
Antitrust Subcommittee will hold a follow-up hearing on April 
19. We will at that time hear from some of those who have 
expressed concerns about the mergers. I hope that after hearing 
from them, we will have a fuller understanding of some of these 
complicated technical and telecommunications issues, and can 
decide what steps to take moving forward.
    Before I close this hearing today, I would like to thank 
each of our witnesses for their patience. We were trying their 
patience and everyone in the audience's patience here today, 
and the press corps. We thank them. It has been a long day and 
the hearing certainly did not proceed as smoothly as we would 
have liked, but all of our witnesses have been very gracious, 
very professional in their testimony, and really have greatly 
contributed to this Committee and to this Congress' 
understanding of the mergers and of the marketplace and how it 
exists today. So we thank them for their time.
    This hearing is adjourned, and we look forward to 
continuing to explore the issues on April 19. Thank you.
    [Whereupon, at 5:27 p.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]
    [Additional material is being retained in the Committee 
files.] 

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