[Federal Register Volume 60, Number 187 (Wednesday, September 27, 1995)]
[Notices]
[Pages 49861-49920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23636]



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DEPARTMENT OF JUSTICE

Antitrust Division
[Civil Action No. 94-01555 (HHG), D.D.C.]


United States v. AT&T Corporation and McCaw Cellular 
Communications, Inc.; Public Comments and Response on Proposed Final 
Judgment

    Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 
16 (b)-(h), the United States publishes below the comments received on 
the proposed Final Judgment in United States v. AT&T Corporation and 
McCaw Cellular Communications, Inc., Civil Action 94-01555 (HHG), 
United States District Court for the District of Columbia, together 
with the response of the United States to the comments.
    Copies of the response and the public comments are available on 
request for inspection and copying in Room 200 of the U.S. Department 
of Justice, Antitrust Division, 325 7th Street, NW., Washington, DC 
20530, and for inspection at the Office of the Clerk of the United 
States District Court for the District of Columbia, United States 
Courthouse, Third Street and Constitution Avenue, NW., Washington, DC 
20001.
Constance Robinson,
Director of Operations, Antitrust Division.

United States District Court for the District of Columbia

    In the Matter of: United States of America, Plaintiff, v. AT&T 
Corp. and McCaw Cellular Communications, Inc., Defendants. Civil 
Action No. 94-01555 (HHG). Received July 25, 1995.

Response to Public Comments to the Proposed Final Judgment

    Pursuant to the requirements of the Antitrust Procedures and 
Penalties Act, 15 U.S.C. 16 (b)-(h) (1994) (``APPA''), the United 
States of America hereby files its Response to Public Comments to the 
proposed Final Judgment in this civil antitrust proceeding. The United 
States has reviewed the comments on the proposed Final Judgment and 
remains convinced that its entry is in the public interest.
    A proposed Final Judgment, Stipulation and Competitive Impact 
Statement have been filed with this Court.\1\ The proposed Final 
Judgment is subject to approval by the Court after the expiration of 
the statutory sixty-day public comment period and compliance with the 
Antitrust Procedures and Penalties Act, 15 U.S.C. 16 (b)-(h).

    \1\ See 59 FR 44,158 (1994).
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I. Compliance with the APPA

    The APPA requires a sixty-day period for the submission of public 
comments on the proposed Final Judgment, 15 U.S.C. 16(b). The United 
States has received four comments\2\ and a response 

[[Page 49862]]
to those comments from AT&T,\3\ all of which are filed with this 
response. Upon publication of the comments and this response in the 
Federal Register, pursuant to 15 U.S.C. 16(d) of the APPA, the 
procedures required by the APPA will be completed. The United States 
will then move the Court for entry of the proposed Final Judgment, and 
the Court may then enter it.

    \2\ Comments objecting to the proposed decree were submitted to 
the Department by Bell Atlantic and NYNEX (jointly), SBC 
Communications Inc. (``SBC''), BellSouth Corp. (``BellSouth'') and 
the Ad Hoc Association Long Distance Carriers (``Ad Hoc IXCs''). SBC 
requested permission from the Court to file supplemental comments on 
January 17, 1995; however, that request has not been granted by the 
Court. SBC's supplemental comments request that the decree be 
clarified and modified to provide that pending conversion of the 
McCaw systems to equal access, AT&T is prohibited from (1) expanding 
its calling areas, and (2) advertising its existing interLATA 
calling areas so as to disadvantage cellular systems that are 
competing with the McCaw systems. SBC also believes that AT&T should 
be required to restrict the scope of such calling areas pending 
conversion to equal access. AT&T's response to these comments 
asserts that it has not expanded the McCaw calling areas, and that 
the purpose of the proposed decree is not to establish identical 
calling areas with those of the Bell Operating Companies (BOCs). 
Further, AT&T maintains that to impose additional requirements 
pending the completion of its conversion to equal access this fall 
would simply encourage additional frivolous complaints with no 
competitive benefit and could delay the conversion of its cellular 
systems to equal access. The Department believes that the changes 
proposed by SBC are inappropriate, and that the scheduled conversion 
of the McCaw systems will achieve the competitive benefits sought by 
the proposed decree.
    \3\ Defendant's Response to the Public Comments on the Proposed 
Final Judgment, submitted to the Department of Justice on March 15, 
1995.
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    Under the APPA, the primary responsibility for enforcing the 
antitrust laws and protecting the public interest in competitive 
markets rests with the Department of Justice.\4\ In carrying out its 
responsibilities, the Department has very broad discretion in 
prosecuting alleged antitrust violations and determining appropriate 
relief for the settlement of cases.\5\ Before entering a proposed 
consent decree, the Court must determine that the decree is in the 
public interest, 15 U.S.C. 16(e).\6\ That test, however, is limited to 
ensuring that the government has met its public interest 
responsibilities--that is, determining that the proposed Final Judgment 
falls within the range of the government's antitrust enforcement 
discretion.\7\

    \4\ United States v. Waste Management, Inc., 1985-2 Trade Cas. 
(CCH) para. 66,651 at page 63,045 (D.D.C. June 6, 1985).
    \5\ United States v. Microsoft, Nos. 95-5037, 95-5039, slip op. 
(D.C.Cir. June 16, 1995); United States v. Mid-America Dairymen, 
Inc., 1977-1 Trade Cas. (CCH) para. 61,508 at page 71,980 (W.D. Mo. 
May 17, 1977) (citing Sam Fox Publishing Co. v. United States, 366 
U.S. 683, 689 (1961) and Swift & Co. v. United States, 276 U.S. 311, 
331-32 (1928)).
    \6\ This determination can be properly made on the basis of the 
Competitive Impact Statement and this Response. The additional 
procedures of 15 U.S.C. 16(f) are discretionary, and a court need 
not invoke any of them unless it believes that the comments have 
raised significant issues, and that further proceedings would aid 
the court in resolving those issues. See H.R. Rep. 93-1463, 93d 
Cong. 2d Sess. 8-9 reprinted in 1974 U.S.C.C.A.N. 6535, 6538.
    \7\ United States v. Microsoft, Nos. 95-5037, 95-5039 slip op. 
(D.C.Cir. June 16, 1995); United States v. Western Electric Co., 993 
F.2d 1572, 1577 (D.C. Cir. 1993).
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II. Background

    The transaction giving rise to the government's complaint was the 
acquisition by AT&T Corp. (``AT&T'') of the stock of McCaw Cellular 
Communications Inc. (``McCaw'') in exchange for AT&T stock valued at 
$12.6 billion. The transaction was the largest acquisition in the 
history of the telecommunications industry. Immediately upon the 
announcement of the transaction, the Department received complaints 
from competitors of McCaw and cellular equipment customers of AT&T 
expressing concerns as to the possible anticompetitive effects of the 
proposed transaction.
    The Department commenced an extensive investigation of the 
acquisition during which these complaints were thoroughly examined. The 
Department received more than one million pages of documents from AT&T, 
McCaw, other cellular service providers including the BOCs, and AT&T's 
cellular equipment competitors. In addition, the Department conducted 
more than a dozen on the record interviews with employees and officers 
of AT&T and McCaw and interviewed dozens of persons in various 
positions in the wireless industry.\8\

    \8\ In order to complete the transaction, AT&T needed the 
approval of the FCC for the transfer to it of McCaw's radio 
licenses. After the Department completed its investigation of the 
transaction and filed the proposed consent decree with the district 
court, the FCC approved the license transfers. Applications of Craig 
O. McCaw and AT&T, File No. ENF-93-44, Memorandum Opinion and Order, 
FCC 94-238 (Sept. 19, 1994). The Court of Appeals recently affirmed 
the FCC action after considering some of the same issues that were 
raised by the commenters in this proceeding. SBC Communications Inc. 
v. FCC, Nos. 94-1637, 94-1639, slip op. (D.C. Cir. June 23, 1995).
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    AT&T is the largest domestic long distance provider with about 60% 
of the overall interexchange market and a higher percentage of the 
cellular long distance market.\9\ McCaw is one of the largest cellular 
mobile telephone providers and owns interests in systems that provide 
service to about 17% of cellular customers.\10\ McCaw's systems all 
operate in the ``A Block'' of the cellular spectrum that was originally 
assigned by the FCC to non-local exchange carriers.\11\

    \9\ AT&T Response at 57.
    \10\ AT&T Response at 9.
    \11\ The ``B Block'' spectrum was awarded to the local telephone 
companies serving the areas covered by the cellular licenses. After 
these licenses were issued, the local exchange carriers were 
permitted to purchase the systems of the nonwireline carriers in 
areas where they did not have the wireline licenses, and the BOCs 
and GTE then acquired a substantial portion of these licenses as 
well. See Cellular Communications Systems, 86 FCC 2d 469, 493-95 
(1981); 47 C.F.R. Sec. 22.901(d) (1994).
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    Cellular carriers provide mobile telephone service using 
transmitters that are located in multiple ``cell sites'' to establish 
radio connections with the customers' terminal equipment. These cell 
sites are linked to centralized mobile telephone switching offices 
(``MTSO's'') by either fixed microwave radio links or landline 
transmission facilities. In general, calls to telephones within the 
service area of the cellular system are completed over connections from 
the MTSO to the local landline telephone company that are arranged for 
by the cellular provider.
    Calls originating on the cellular system to telephones outside the 
cellular service area, with some exceptions, are transported from the 
MTSO to an interexchange carrier either through direct trunks or 
through the switched network of the local telephone company. These long 
distance calls are generally charged to the customer separately from 
the cellular service and are provided either as a service rendered to 
the customers directly by the interexchange carriers or as a resold 
service provided by the cellular carrier. Prior to its acquisition by 
AT&T McCaw mostly provided long distance service by reselling AT&T 
services, which it procured at wholesale rates. McCaw also did not 
offer its customers their choice of interexchange carriers, except in 
those systems which it jointly owned with a BOC.
    Under the Modification of Final Judgment entered in United States 
v. Western Electric Co. (``MFJ''),\12\ the BOCs are required to provide 
equal access to all interexchange carriers for the origination and 
termination of interexchange calls. Interexchange calls under the MFJ 
are those which transit the boundary of an exchange area or ``LATA.'' 
The LATAs applicable to the BOC's cellular systems have been modified 
by numerous waivers granted by the Court. Pursuant to a request made by 
the BOCs, the District Court has recently ruled on a waiver request for 
the BOCs to provide interexchange services from cellular systems.\13\

    \12\ United States v. American Tel. and Tel. Co., 552 F. Supp. 
131 (D.D.C. 1982), aff'd mem. sub nom. Maryland v. United States, 
460 U.S. 1001 (1983).
    \13\ United States v. Western Electric Co., Civ. No. 82-0192 
(D.D.C. April 28, 1985) (``April 28 Order'').
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III. The Complaint and Proposed Final Judgment

    The Complaint alleges that the proposed acquisition by AT&T of 
McCaw violates Section 7 of the Clayton Act, as amended, 15 U.S.C. 
Sec. 18, in the markets for cellular service, cellular infrastructure 
equipment, and interexchange service to cellular subscribers. On the 
same day that the complaint was filed, the Department also filed a 
proposed Final Judgment that would mitigate the anticompetitive 
consequences of the transaction in each of these markets.
    First, the proposed Final Judgment contains provisions that 
substantially mitigate the incentive and ability of the merged AT&T-
McCaw to disadvantage other cellular companies which compete against 
McCaw. It requires that 

[[Page 49863]]
McCaw's wireless systems be maintained in a separate subsidiary from 
AT&T and restricts the flow of certain confidential information between 
these entities and within the AT&T unit that sells cellular 
infrastructure equipment. It obligates AT&T to continue to deal with 
unaffiliated cellular equipment customers on terms established prior to 
the acquisition, and on terms not less favorable than those offered to 
McCaw after the acquisition. In addition AT&T is required to assist, 
and not to interfere with, an incumbent customer's decision to change 
infrastructure suppliers, and to buy back network equipment sold to a 
competitor/customer if AT&T fails to comply with its obligations to 
that customer under Section V of the judgment. The decree does not, 
however, prohibit AT&T from using information relating to its own 
interexchange customers to market cellular services.
    Second, to mitigate the anticompetitive concerns in the cellular 
interexchange market, the proposed Final Judgment requires McCaw 
cellular systems to provide equal access to interexchange competitors 
of AT&T, which McCaw did not provide prior to the acquisition in its 
systems (other than systems jointly owned by McCaw and a BOC). The 
provisions of equal access on these systems will increase competition 
in interexchange services to cellular customers. Finally, the proposed 
Final Judgment restrains McCaw from providing certain confidential 
information related to its cellular infrastructure equipment suppliers 
to AT&T's manufacturing division to prevent anticompetitive harm to the 
cellular infrastructure equipment market.

IV. Comments on the Proposed Decree

A. Concerns That the Vertical Relationship Created by Merging AT&T's 
Manufacturing Business With McCaw Will Have Anticompetitive Effects on 
McCaw's Cellular Competitors

    The Joint Bell Atlantic and NYNEX Comments (``Joint Comments'') 
argue that the merger of the manufacturing business of AT&T with the 
McCaw cellular operations will have anticompetitive effects on cellular 
markets that are not sufficiently mitigated by the terms of the 
proposed decree. These alleged effects are primarily the result of the 
``lock-in'' that occurs when a cellular system operator purchases a 
cellular switch and associated radio equipment from a manufacturer. 
Once a cellular operator selects a manufacturer, it must purchase 
upgrades and additional equipment from the same manufacturer, as other 
manufacturers' equipment will not function with the existing equipment. 
The interfaces between the switches, radios, and software are today 
generally proprietary. Thus, the cellular operator cannot change 
equipment vendors without replacing most or all of the system's 
equipment, and is to an extent ``locked-in'' to the manufacturer for 
further purchases of radio equipment to expand or enhance its 
services.\14\

    \14\ To a somewhat lesser degree, the cellular operator may also 
face a ``lock-in'' effect with regard to the purchase of additional 
switches within a cellular operating area, since there are 
proprietary interfaces between switches that are more efficient than 
the open interfaces that have been standardized by the industry.
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    The Joint Comments allege that the injunctive provisions of the 
proposed decree intended to remedy the lock-in problem are not 
sufficient, and that in order to prevent anticompetitive harm the 
government should either (1) require the divestiture of McCaw, (2) 
require the divestiture of AT&T's cellular equipment business, or (3) 
require AT&T, along with other injunctive relief, to build switches and 
other equipment pursuant to publicly available standards and to license 
the use of any necessary intellectual property so that third parties 
could manufacture and sell equipment fully compatible with AT&T 
equipment.\15\ The provisions of the proposed Final Judgment are 
insufficient, according to Bell Atlantic and NYNEX, because AT&T can 
engage in certain anticompetitive activities that would be difficult to 
police and punish. They state ``AT&T can raise equipment prices in a 
disparate fashion without an appearance of discrimination.'' \16\ and 
``AT&T can restrict or delay equipment customers' access to important 
new features or technologies without detection.'' \17\ Finally, 
although the decree prohibits the transfer of commercial information of 
AT&T's equipment customers to McCaw, NYNEX and Bell Atlantic maintain 
that the prohibitions are inadequate because they allow such 
information to go to senior officers of AT&T's manufacturing unit, who 
may use that information for the benefit of McCaw.\18\

    \15\ Joint Comments at 2. The Joint Comments argue that such 
relief is appropriate because evidence exists that AT&T has engaged 
in efforts to thwart the development of open standards for cellular 
equipment sponsored by other industry manufacturers. Joint Comments 
at 3. In order to comply with such a requirement, AT&T would 
presumably have to design and implement an additional open interface 
which would allow other manufacturers' radio equipment to work with 
its switches, and possibly would also need to disclose proprietary 
engineering data about its current system design. The imposition of 
such a requirement would necessarily involve the Department and the 
Court in determinations of numerous technical and controversial 
issues of system design and is unnecessary in light of the ability 
of the proposed decree to alleviate the potential problems 
associated with the acquisition.
    \16\ Joint Comments at 4. Apparently, the concern is that AT&T 
will be able to selectively alter prices of cellular infrastructure 
equipment so as to disadvantage the cellular systems it competes 
with in a manner that would not violate the proposed decree or would 
not be detectable by the parties or the Department.
    \17\ Joint Comments at 5.
    \18\ Joint Comments at 6.
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    AT&T has responded to the Joint Comments largely by contending that 
the ``lock-in'' effect is much less significant than alleged by McCaw's 
cellular competitors. In fact, AT&T claims to face intense competition 
for its cellular equipment business, even where it is the incumbent 
supplier.\19\ In addition, AT&T argues that courts have rejected 
``lock-in'' as a basis for establishing market power and, therefore, 
additional relief cannot be predicated on its alleged impact.\20\ AT&T 
maintains that the telecommunications equipment market is very 
competitive and that because it is a significant market for AT&T,\21\ 
it has very incentive to bend over backwards to satisfy its customers. 
Finally, AT&T contends that the proposed decree adequately protects 
competing cellular systems from anticompetitive conduct since it 
expressly enjoins each type of anticompetitive activity of concern to 
the Department, and also contains provisions that reduce the alleged 
``lock-in'' effect and that increase AT&T's incentives to abide by the 
restrictions contained in the decree.

    \19\ AT&T notes that there have been several ``swap-outs'' of 
recently installed infrastructure equipment in the last few years 
and that progress in the development of open standards for 
interconnecting different manufacturers' equipment is lessening 
whatever barriers currently exist to switching between different 
vendors' products. AT&T Response at 19-23.
    \20\ AT&T Response at 5, 35-40.
    \21\ AT&T maintains that its $10 billion manufacturing business 
is too important to it to risk engaging in predatory conduct against 
its customers. AT&T Response at 5.
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    The Department concluded that certain competitors of McCaw were 
``locked-in'' to AT&T cellular equipment and, therefore, disagrees with 
AT&T's attempts to minimize this problem. However, the Department has 
concluded that the provisions contained in the proposed Final Judgments 
combined with other market factors would constrain AT&T's ability to 
impede competition in cellular markets. As described in the CIS, the 
proposed decree contains provisions aimed specifically at preventing 
anticompetitive abuse by AT&T of 

[[Page 49864]]
cellular systems which use AT&T equipment and which compete against 
McCaw systems. Misuse of nonpublic information is prohibited by section 
V.A of the decree to prevent McCaw from gaining access to information 
AT&T obtains as an equipment vendor to its wireless competitors. The 
details of how these provisions will be implemented are to be set forth 
in the implementation plan required by Section VII.A to be filed with 
the Department. Section V.A.4.b assures that nonpublic information of 
unaffiliated wireless infrastructure equipment customers is not misused 
by AT&T as a result of any proprietary development work it performs for 
these customers.
    The proposed Final Judgment also contains provisions that will 
prevent AT&T from raising the costs of McCaw's wireless competitors 
that are currently using AT&T equipment. Section V.B.1 requires AT&T to 
provide its unaffiliated cellular infrastructure equipment customers 
with the following products and services, in accordance with the same 
pricing and business practices that prevailed prior to August 1, 1993: 
(a) Technical support and maintenance; (b) installation, engineering, 
repair and maintenance services; (c) additional switching and cell site 
equipment to be deployed in that system; (d) upgrades and other AT&T 
cellular infrastructure equipment developed for use with these systems; 
and (e) spare, repair or replacement parts. AT&T also may not 
discriminate in favor of McCaw cellular systems or McCaw minority owned 
cellular systems in the way in which such products or services are made 
available to cellular systems that compete with McCaw or McCaw minority 
owned cellular systems. If AT&T discontinues offering any cellular 
infrastructure equipment service, part or product, it must either 
arrange an alternative source of supply for the product or, if 
unsuccessful, provide any affected cellular carrier with the licenses 
to use (and rights to sublicense) whatever technical information is 
necessary to provide such services, parts or products (to the extent 
AT&T is able to do so), so that the carrier can obtain the service, 
part or product from another source.
    The proposed decree will also prevent AT&T from discriminating 
against McCaw wireless competitors that are using AT&T equipment by 
failing to provide or develop new products and features. If AT&T 
engages in the development of new features or functions for use with 
AT&T equipped cellular systems that are not intended for a single 
customer, AT&T shall disclose such enhancements to unaffiliated 
carriers at the same time it discloses them to McCaw or McCaw minority 
owned cellular systems, and shall make them available to unaffiliated 
customers at the same time it makes them available to McCaw.
    Section V.D contains provisions that would make it easier for 
customers that desire to replace AT&T equipment to do so. In the event 
that a customer has deployed or contracted to deploy an AT&T equipped 
cellular system prior to the entry of the judgment, and the customer 
wishes to redeploy the AT&T equipment (e.g., to facilitate its 
replacement) or to replace or supplement it with another manufacturer's 
equipment, AT&T is required to provide reasonably necessary technical 
assistance and cooperation to allow the customer to accomplish such 
replacement or redeployment and to permit inter-operation of the AT&T 
equipment with the new manufacturer's equipment.
    To provide additional assurance that AT&T will abide by these 
requirements, Section V.E provides that AT&T will be required to buy 
back the cellular infrastructure equipment it has sold to an 
unaffiliated customer that competes with McCaw if the Department 
determines that it has violated any of its duties under Section V of 
the decree.
    Finally, Section III requires that, so long as the judgment is in 
effect, McCaw and McCaw affiliates that are involved in the operation 
of wireless systems and the provision of local wireless services shall 
be maintained as corporations or partnerships separate from AT&T, and a 
structural separation plan is to be filed for approval by the United 
States pursuant to section VII.A. McCaw and McCaw affiliates are to 
maintain their own officers and personnel, and books, financial or 
operating records, and to retain all wireless service licenses and 
title and control of the wireless infrastructure equipment used by its 
systems, and the responsibility for the operation of their wireless 
services. It may not delegate substantial responsibility for such 
business activities to AT&T.
    Although the Department recognizes that some forms of 
discrimination feared by the BOCs may be hard to detect and prove, 
McCaw's cellular competitors are very sophisticated customers of 
infrastructure equipment and are well informed about the quality and 
prices of equipment provided to the industry. They therefore are able 
to identify and report any conduct that might violate the decree. In 
view of the likelihood of detection and the severe sanctions that would 
befall AT&T's manufacturing business if an investigation were to 
determine that it had discriminated against its equipment customers to 
advantage its affiliate wireless services business, the Department 
considers the likelihood of such conduct by AT&T to be minimal.\22\ If 
prohibited conduct should occur, the proposed decree provides adequate 
authority to correct such abuses so that any substantial damage to 
competition would be punished.

    \22\ It is also not in AT&T's business interest to treat its 
existing equipment customers unfairly as AT&T must compete against 
other equipment manufacturers for new business (including the sale 
of PCS equipment) to these same customers.
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    The proposed final judgment contains substantial constraints on the 
operation of AT&T's equipment business. These constraints were 
formulated after extensive consultation with, among others, the firms 
that are now objecting to the settlement. Other constraints suggested 
by the commenters were considered and rejected, such as development of 
an open interface, which the Department believed would not be feasible 
in the short term, would require the cooperation of other equipment 
suppliers not parties to this transaction, and in any event would not 
alleviate the ``lock-in'' of customers who had already installed AT&T 
equipment.
    The Department believes that the constraints contained in the 
proposed decree are sufficient to alleviate the potential harms to 
McCaw's cellular competitors from this acquisition and, therefore, 
additional relief is unwarranted.

B. The Effect on Competition From the Combination of McCaw's and AT&T's 
Cellular Long Distance Businesses

    As stated in the CIS, the merger will ``foreclose competition 
between the two largest providers of interexchange service in the 
highly concentrated markets in which McCaw currently provides 
interexchange service to its cellular customers.'' 59 FR 44,169 (1994). 
NYNEX and Bell Atlantic argue that the antitrust violation resulting 
from the acquisition of AT&T's strongest competitor for cellular long 
distance is not cured by the proposed decree because the decree's equal 
access provisions cannot make up for the loss of McCaw itself as an 
independent long distance provider. Although McCaw provided long 
distance services to its cellular customers primarily by reselling 
services procured from interexchange carriers (mainly AT&T), it also 
deployed some of its own interexchange facilities. The Joint Comments 
state that ``McCaw's long distance network was already significantly 
completed at the state and regional levels * * * 

[[Page 49865]]
particularly the Pacific Northwest and Florida.'' \23\ The Joint 
Comments also allege that the evidence developed in their private case 
showed that AT&T regarded McCaw as a potentially powerful interexchange 
competitor.\24\

    \23\ Joint Comments at 7.
    \24\ Bell Atlantic and NYNEX filed a private suit against AT&T 
that raised issues common to the Department's action. They suggest 
that the Justice Department should review the record in their case. 
Although the Department has reviewed selected materials from that 
case, it was not necessary, in light of the extensive investigation 
that the government conducted in connection with this transaction, 
that the entire record of the private litigation be reviewed. 
Subsequent to filing their comments, Bell Atlantic and NYNEX reached 
a settlement with AT&T and dismissed their action.
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    AT&T responds to the concerns raised in the Joint Comments by 
maintaining that there really is not a cellular long distance market 
separate from the overall long distance market, and that in an overall 
long distance market, McCaw is not a significant competitor. AT&T 
argues that, in any event, the proposed decree mitigates the effect of 
the acquisition on long distance competition by imposing on McCaw's 
cellular systems equal access requirements that are more stringent than 
those to which AT&T stated publicly it would commit and assures that 
the acquisition will create competition for the first time in the 
provision of long distance services used by McCaw's customers.\25\

    \25\ AT&T Response at 6-7.
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    The Department agrees with the comments of BellSouth and NYNEX that 
the acquisition of McCaw by AT&T without the proposed decree would have 
substantially reduced cellular long distance competition. Although 
McCaw resold AT&T long distance service, it was free to use another 
interexchange carrier, or to build its own facilities, and, thus, was 
in competition with AT&T just as other resellers compete with AT&T. The 
Department investigation showed that McCaw has insisted that its 
customers for cellular services use its long distance services, and has 
refused customers' requests to use alternative long distance providers' 
services, thereby preventing the customer from establishing a separate 
relationship with an interexchange carrier. McCaw's customers in 
geographic areas where the other cellular carrier was not providing 
equal access were only able to choose between McCaw's cellular service 
combined with its interexchange service or the competing cellular 
carrier and the long distance services offered by that system. Where 
the competing cellular carrier offered equal access to long distance 
carriers, its customers were able to choose among a number of 
interexchange carriers including AT&T. In such markets, AT&T held a 
predominant share of the long distance business and was clearly 
competing at the retail level with McCaw's package of cellular and long 
distance services.
    The Department found that in areas where both McCaw and AT&T long 
distance services were offered, McCaw's long distance service differed 
in rates and calling areas from AT&T's. Particularly in the case of 
large business customers, AT&T offered discounts for cellular long 
distance services that were not available to McCaw's customers. In some 
instances, AT&T encouraged corporate customers to purchase cellular 
services from an equal access carrier in order to obtain AT&T long 
distance offerings which included the ability of employees to access 
the corporations's private network services from their cellular phones, 
a feature not available from McCaw. If after AT&T and McCaw merged 
their operations, and McCaw had been permitted to continue its refusal 
to allow equal access to other interexchange carriers, there would have 
been many areas in which competition would have been lessened, as 
customers would have had fewer alternatives and AT&T-McCaw would have 
had less incentive to offer competitive long distance services to 
cellular customers.
    The Department disagrees with Bell Atlantic and NYNEX, however, on 
whether the stringent equal access conditions contained in the decree 
are sufficient to remove the adverse effect on long distance 
competition from the AT&T-McCaw acquisition. The Department believes 
that the decree, on balance, will enhance competition in long distance 
services. By giving the other interexchange carriers access to McCaw's 
cellular exchange customers for the first time, the Department expects 
the proposed decree to offer substantial new opportunities for reducing 
the concentration in the provision of long distance cellular service. 
Many of McCaw's ``captive'' customers are presumably customers of other 
long distance carriers who will now have the option of using the same 
carrier for cellular and wireline interexchange calling.
    The equal access requirement also removes a possible impediment to 
competition in the overall long distance market by assuring that AT&T 
will not be the only interexchange carrier able to offer its customers 
the ability to combine its cellular long distance service with its 
landline long distance services to obtain volume discounts or to offer 
additional services to employees using cellular phones, such as private 
network services. Thus, the Department believes that subject to the 
terms of the proposed decree, the acquisition will not adversely affect 
competition for long distance cellular services.

C. Concerns Relating to Use of Competitively Sensitive Information 
About AT&T's Customers

    The Joint Comments and SBC Comments contend that allowing McCaw to 
use information regarding AT&T's cellular long distance customers in 
marketing cellular services will cause serious anticompetitive harm. 
Use of this information allegedly will permit McCaw to target its 
marketing effort on the BOCs' customers that have the most attractive 
usage patterns.\26\ AT&T strenuously defends its right to use 
information regarding its own cellular long distance customers for 
marketing other services, including wireless services. AT&T maintains 
this is consistent with the FCC's policies on the use of customer 
information.\27\

    \26\ SBC comments at 9-10, 14.
    \27\ AT&T Response at 50-58.
---------------------------------------------------------------------------

    The Department believes that interexchange carriers preselected by 
a customer in an equal access process should be able to use the 
interexchange usage information they obtain from serving those 
customers to market other services or equipment. All the interexchange 
carriers (not just AT&T) providing services to customers of the BOCs' 
and McCaw's wireless exchange systems will naturally accumulate 
information about their customers' interexchange usage patterns.

D. The Application of the Decree to Cellular Properties Where McCaw Has 
Only 50% Ownership

    BellSouth comments on the provision that imposes obligations on 
systems in which McCaw is a 50-50 partner with BellSouth and in which 
McCaw has only ``negative control,'' i.e., the ability to veto actions 
with which it disagrees. BellSouth argues that the proposed decree 
should not be construed to apply to such systems, arguing that in such 
situations, McCaw ``would lack `the power to direct or to cause the 
direction of the management and policies' of the cellular system.''\28\

    \28\ BellSouth Comments at 13.
---------------------------------------------------------------------------

    The Department rejects this suggested clarification from BellSouth. 
The purpose of the decree language applying the equal access 
requirements to systems with ``negative control'' was in part intended 
to avoid a situation where the BOCs and AT&T are 50-50 partners in a 
system and both claim that they do 

[[Page 49866]]
not have the authority to implement equal access and nondiscrimination 
requirements. BellSouth's proposal would create exactly this situation, 
where both parties could seek to avoid responsibility for such conduct.

E. Concerns Regarding Alleged Disparities Between the Terms of the 
Proposed AT&T-McCaw Decree and the MFJ

    BellSouth argues that the Court should not consider the entry of 
the proposed AT&T-McCaw decree until after it has acted on the generic 
wireless waiver and determined whether the BOCs wireless operations are 
subject to the interexchange prohibition of the MFJ.\29\ Since the 
Court has denied BellSouth's motion seeking to have the Court find that 
the MFJ is not applicable to wireless, and ruled on the BOCs' motion 
for an interexchange wireless waiver,\30\ this point is now moot.

    \29\ BellSouth Comments at 2.
    \30\ April 28 Order.
---------------------------------------------------------------------------

    BellSouth also contends that the proposed decree is deficient by 
not covering possible future AT&T wireless ventures in the PCS spectrum 
band. It argues that PCS and cellular services will be competitive with 
each other and that there is no justification for applying the equal 
access obligations only to McCaw's cellular systems. The basis for 
BellSouth's concern is that the MFJ waiver under which it would be 
permitted to provide interexchange services from wireless exchange 
systems requires that such systems provide equal access regardless of 
whether they operate on the cellular or PCS spectrum band.
    The Department believes that it was correct in not extending the 
proposed decree's equal access obligations to include possible PCS 
operations of AT&T. The equal access provisions of the proposed decree 
are intended to remedy the effects of the acquisition on cellular long 
distance competition in the geographic markets where McCaw and AT&T 
competed prior to the acquisition. Absent this provision, AT&T would 
have been able to control the use of McCaw's exchange access facilities 
which constituted about half of the spectrum available for mobile 
services in those markets. Under the FCC regulations, McCaw's use of 
one of the cellular frequency blocks in those markets substantially 
restricts the ability of AT&T to acquire PCS spectrum in those 
geographic markets. If AT&T were to acquire any PCS spectrum for use in 
the McCaw markets, it would not be as a result of this acquisition. In 
addition, it is not possible at this time, to predict if the services 
to be offered using the smaller PCS spectrum bands will be directly 
competitive with the services of the cellular carriers.
    Both the Joint Comments and SBC Comments complain the McCaw is not 
prohibited from providing interexchange routing from its cellular 
switches while the waiver that would permit the BOCs to provide 
interexchange services from wireless systems prohibits such a function. 
SBC maintains that because it would be limited under the wireless 
interexchange waiver to the resale of switched services, they would be 
effectively prohibited from obtaining the efficiencies from the 
implementation of MTSO to MTSO trunking of interexchange calls.\31\ 
Although the Department agreed to permit McCaw to provide interexchange 
routing, the proposed decree would only permit such a function if it 
could be offered to all interexchange carriers on a nondiscriminatory 
basis. It is our understanding that this function cannot presently be 
implemented so that it would be equally available to all interexchange 
carriers, and AT&T equal access plan for its wireless systems contains 
no indication that AT&T intends to provide interexchange routing. If 
McCaw, in the future, develops such a capability, the Department will 
determine in its review of changes to the equal access plan whether it 
will in fact be nondiscriminatory.

    \31\ SBC Comments at 20-22.
---------------------------------------------------------------------------

    The Joint Comments and SBC also maintain that the AT&T-McCaw decree 
is inappropriate as it does not impose the same requirement for a 
separate sales force as is required under the BOCs' 
wirelessinterexchange waiver of the MFJ.\32\ The complaint seems to 
substantially misread the requirements of the proposed decree. The 
decree requires that AT&T maintain the McCaw cellular operations in a 
separate subsidiary, which will have responsibility for the marketing 
of cellular services. It does permit certain joint marketing of 
cellular and interexchange services, as long as the services are not 
offered as packages with interdependent pricing of the two services. 
Essentially the same approach was incorporated in the BOCs' wireless 
interexchange waiver, except that the BOCs were not required to put 
their interexchange operations in a separate subsidiary from their 
cellular businesses.

    \32\ Joint Comment at 13; SBC Comments at 23-25.
---------------------------------------------------------------------------

    BellSouth argues that the proposed decree permits the provision of 
``local cellular service in 19 areas that are larger than those 
available to the BOCs'' cellular system under the MFJ.\33\ The Joint 
Comments specifically complain that the AT&T McCaw decree permits a 
broader calling area in the Pittsburgh, PA-West Virginia region than 
Bell Atlantic is permitted to serve under the MFJ.\34\ The BellSouth 
and Joint Comments also assert that while AT&T-McCaw is automatically 
given the benefit of any waiver expanding the calling areas under the 
MFJ, the BOCs have not been given equal treatment regard to the 
expanded calling areas provided for in the proposed AT&T-McCaw 
decree.\35\ Finally, the Joint Comments complain that Section IV(G) of 
the AT&T-McCaw decree provides a procedure whereby AT&T can apply for 
relief from the Department if there is not sufficient demand for 
interexchange access from any of its cellular systems.\36\ Under this 
procedure, the provision of access could be centralized to encompass 
more than a single LATA.

    \33\ BellSouth Comments at 10.
    \34\ Joint Comments at 13.
    \35\ BellSouth Comments at 11-12.
    \36\ Joint Comments at 14-15.
---------------------------------------------------------------------------

    AT&T maintains that the BOCs are in a fundamentally different 
position than McCaw, in light of their control of the wireline 
bottleneck facilities that are used in connection with most cellular 
calls, and, therefore, terms of the AT&T/McCaw decree need not be the 
same as the MFJ.\37\ Since the BOCs and AT&T submitted their comments, 
the Court has acted on the BOC's request for an MFJ waiver to permit 
them to provide interexchange services from wireless exchange systems. 
In that proceeding the Court denied the broader relief sought by the 
BOCs which they had argued, in part, should be granted based on the 
impending competition they would be facing after the merger of AT&T and 
McCaw. In view of this development the BOCs' ``disparity'' complaints 
have already been addressed.

    \37\ AT&T Response at 8-9.
---------------------------------------------------------------------------

    The purpose of this proceeding is to decide whether the proposed 
Final Judgment is in the public interest in alleviating concerns raised 
by the AT&T/McCaw transaction, not whether the MFJ places the BOCs at a 
competitive disadvantage vis-a-vis a non-BOC cellular provide. 
Therefore, the Department believes that the complaints raised by 
BellSouth and SBC are irrelevant. In any event, BellSouth and SBC 
remain free under the provisions of the MFJ to Requests appropriate 
waivers modifying the cellular exchange areas.

[[Page 49867]]


F. Concerns Raised by AD Hoc Interexchange Carriers.

    The comments of the Ad Hoc IXCs relate to alleged past 
anticompetitive conduct at AT&T and, thus, do not raise any issues 
germane to the competitive effects of the transaction that was the 
subject of the government's complaint. Therefore, we will not respond 
to those comments here, although we will consider the statements 
contained therein in connection with our other responsibilities for 
enforcing the antitrust laws.

V. Conclusion

    After careful consideration of the comments, the United States 
continues to believe that, for the reasons stated herein and in the 
Competitive Impact Statement, the proposed Final Judgment is adequate 
to remedy the antitrust violations alleged in the Complaint. There has 
been no showing that the proposed settlement constitutes an abuse of 
discretion by the United States or that it is not within the zone of 
settlements consistent with the public interest. Therefore, entry of 
the proposed Final Judgment should be found to be in the public 
interest and it should be entered.

    Respectfully submitted,
    Dated: July 25, 1995.
Anne K. Bingaman,
Assistant Attorney General.
Constance K. Robinson,
Director of Operations.
Donald J. Russell,
Chief, Telecommunications Task Force.
Nancy Goodman,
Assistant Chief.
Luin P. Fitch,
Patrick J. Pascarella,
Attorneys.
U.S. Department of Justice, Antitrust Division, 555 4th Street, 
N.W., Washington, D.C. 20002, (202) 514-5621.

Attachments

    1. Defendants' Response to the Public Comments on the Proposed 
Final Judgment.
    2. Comments of Bell Atlantic Corporation and NYNEX Corporation 
on Proposed Final Judgment in United States v. AT&T Corp. and McCaw 
Cellular Communications, Inc.
    3. Comments of BellSouth Corporation on Proposed Final Judgment.
    4. Comments of SBC Communications Inc. on Proposed Final 
Judgment.
    5. Comments and Objections of the Ad Hoc IXCs to the Proposed 
Final Judgment Between the United States, AT&T Corp. and McCaw 
Cellular Communications, Inc.

United States District Court for the District of Columbia

    In the matter of: UNITED STATES OF AMERICA, Plaintiff, v. AT&T 
CORP. and McCAW CELLULAR COMMUNICATIONS, INC., Defendants. Civil 
Action No. 94-01555 (HHG).

TO: THE JUSTICE DEPARTMENT

Defendants' Response to the Public Comments on the Proposed Final 
Judgment

    At the Justice Department's request, defendants AT&T Corp. 
(``AT&T'') and McCaw Cellular Communications, Inc. (``McCaw'') 
respectfully submit their joint response to the public comments on the 
Proposed Final Judgment (``Proposed Decree'') \1\--for inclusion in the 
response that the United States files hereafter.

    \1\ Pursuant to 15 U.S.C. Sec. 16(d), comments have been filed 
by SBC Communication Corporation (``SBC''), by BellSouth Corporation 
(``BellSouth''), by Bell Atlantic Corporation and NYNEX Corporation 
(``Bell Atlantic/NYNEX''), and by the Ad Hoc Interexchange Carriers 
(``Ad Hoc IXCs'').
---------------------------------------------------------------------------

Introduction and Summary

    This Tunney Act proceeding presents an antitrust issue that is both 
very narrow and very straightforward. The Proposed Decree settles the 
challenges to the AT&T-McCaw merger that are raised in the Complaint 
that the Justice Department simultaneously filed under Section 7 of the 
Clayton Act. In determining whether this Proposed Decree is in the 
``public interest,'' the question is whether the Proposed Decree is 
virtually certain to harm competition or whether the Justice Department 
otherwise acted irrationally, in bad faith, or contrary to its duties 
to the public in settling its claims on these terms. See United States 
v. Western Electric Co., 993 F.2d 1572, 1577 (D.C. Cir. 1993). As 
explained in detail below, it is patent that no such determinations 
could be made and that the Proposed Decree can now be approved 
summarily, especially given the extensive public records that already 
exist on the competitive effects of this merger.
    The overriding fact is that the Department agreed to the Proposed 
Decree because the Department concluded that the AT&T-McCaw merger can 
produce substantial procompetitive benefits and that the provisions of 
the Proposed Decree are adequate to prevent each of the threats to 
competition that the Department believed might otherwise result from 
the merger. These conclusions are rational. Indeed, they are 
unassailable.
    Foremost, the AT&T-McCaw merger will promote competition and 
benefit consumers in many significant respects. The Justice Department, 
the FCC, and the California and New York state utility commissions 
previously found--and no commentor here disputes--that the merger will 
foster competition in cellular and other local telecommunications 
markets which the divested Regional Bell Operating Companies 
(``RBOCs'') and other local exchange carriers (``LECs'') 
``traditionally have provided on a monopoly basis.'' \2\ For example, 
the merger will offset some of the RBOCs' immense advantages in 
providing cellular services and enable the debt-laden McCaw to 
``compete more vigorously with the BOCs'' by strengthening McCaw 
financially, by giving it a strong brand name, by enhancing its 
customer support, technological, and marketing capabilities, and by 
enabling AT&T-McCaw efficiently to offer one-stop-shopping and engage 
in ``cross-selling.'' \3\ As the Department stated, the merger, as 
conditioned by the Proposed Decree, will bring the ``benefits of 
competition to millions of consumers of cellular telephone service'' by 
leading to ``lower prices'' and ``better service.'' DOJ Press Release, 
pp. 1-2 (July 15, 1994). In addition, the preservation of McCaw as an 
independent firm with no affiliation with landline monopolies will 
further foster the development of cellular alternatives to landline 
bottleneck monopolies if and when that becomes economically and 
technologically feasible.\4\

    \2\ Applications of Craig O. McCaw and AT&T, File No. ENF-93-44 
(``AT&T-McCaw FCC Proceeding''), Memorandum Opinion and Order (``FCC 
Order''), para. 60, FCC 94-238 (Sept. 19, 1994), appeals pending sub 
nom. Southwestern Bell Corp. v. FCC, Nos. 94-1637, 94-1639 (D.C. 
Cir.); see Joint Application of the American Telephone & Telegraph 
Company, et al., Decision 94-04-042, pp. 30-31 (Cal. Pub. Utils. 
Comm'n Apr. 6, 1994) (``California PUB Decision''); Joint Petition 
of AT&T, Ridge Merger Corporation, and McCaw Cellular 
Communications, Inc., Case 93-C-0777, Order Asserting Jurisdiction 
and Approving Transaction, p. 6 (N.Y. Pub. Serv. Comm's Dec. 31, 
1993) (``N.Y.P.S.C. Order'').
    \3\ FCC Order, Paras. 57-60, see California PUC Decision, pp. 
30-33.
    \4\ FCC Order, para. 60; accord N.Y.P.S.C. Order, p. 6.
---------------------------------------------------------------------------

    Those are all the reasons that the Department had argued in 1982, 
and Judge Greene then found, that it would be ``antithetical to the 
purposes of the antitrust laws'' and detrimental to the public interest 
to prohibit AT&T from participating in local cellular markets through 
alliances with firms like McCaw or otherwise.\5\ Conversely, as was 
also recognized in 1982, there is no realistic possibility that such a 
merger could otherwise harm competition. AT&T and McCaw do not directly 
compete in any market, and neither controls a bottleneck monopoly that 

[[Page 49868]]
could be leveraged into an adjacent market. To the contrary, AT&T's 
long distance and manufacturing businesses and McCaw's cellular 
business each depend on access to different sides (or aspects) of the 
LECs' local exchange monopolies.

    \5\ United States v. AT&T, 552 F. Supp. 131, 175-76 (D.D.C. 
1982) (``MFJ Opinion''), aff'd sub nom. Maryland v. United States, 
460 U.S. 1001 (1983).
---------------------------------------------------------------------------

    In this regard, while the Department's Complaint raised two basic 
challenges to the merger, defendants believe--as Professors Lawrence 
Sullivan, Robert Willig, and Douglas Bernheim previously testified 
before the FCC--that each of these theories is unsound as a matter of 
law, fact, and economics, and that the merger could not be found to 
violate Section 7 of the Clayton Act if there were a trial in this 
case. In all events, because the provisions of the Proposed Decree 
enjoin even these theoretical threats to competition, it patently was 
reasonable for the Department to settle each of its challenges to the 
merger under the terms of the Proposed Decree.
    First, the Department's complaint alleges that the merger could 
lead AT&T to use its position as a telecommunications equipment 
manufacturer to harm competition in those cellular services markets 
where McCaw's rival (an RBOC or GTE) uses AT&T cellular equipment. In 
particular, while the manufacture of telecommunications equipment is an 
intensely competitive business, the Department's Compliant alleges that 
the RBOCs and GTE will nonetheless be ``locked-in'' to AT&T for the 
purchase of certain types of cellular equipment during an interim 
period and that the merger would give AT&T an incentive to raise the 
costs, or degrade the services, of the RBOCs and GTE during this 
interim ``lock-in'' period.
    However, there is substantial, indeed overwhelming, evidence that 
there in fact is no ``lock-in.'' Further, even if there were, it would 
be suicidal for AT&T to engage in the hypothesized predatory conduct. 
That would cause the customers (GTE and the RBOCs) on whom AT&T's $10 
billion manufacturing business depends to, in the Second Circuit's 
words, ``retaliat[e]'' by ``shifting'' present and future purchases of 
cellular and landline equipment alike to AT&T's competitors--which is 
why courts have rejected indistinguishable ``lock-in'' claims when they 
were raised in prior case. See Fruehauf Corp. v. FTC, 603 F.2d 345, 355 
(2d Cir. 1979).
    In any case, the Proposed Decree removes any possible doubt on this 
issue and precludes any claim that it is likely, much less virtually 
certain, that the merger would lead AT&T's manufacturing unit to engage 
in the predatory conduct that the Department had feared. The Proposed 
Decree not only expressly enjoins each type of predatory conduct that 
the Department has hypothesized, but also contains other provisions 
that both further reduce the alleged ``lock'in'' and otherwise 
dramatically reinforce AT&T's overwhelming incentives to treat all its 
equipment customers equally and to satisfy their needs.
    Second, the Department's Complaint also alleges that the merger 
would cause McCaw to use market power over local cellular radio service 
to favor AT&T's putatively ``dominant'' long distance service and 
thereby reduce horizontal competition in a purported ``market'' for the 
provision of ``cellular long distance service.'' \6\ However, there is 
overwhelming evidence that there is no such competition between AT&T 
and McCaw today and no such market. McCaw now provides all the long 
distance services that originate on its cellular systems (which 
represent less than 0.1% of national long distance usage), and it does 
so by reselling the same AT&T long distance services that are provided 
to landline customers. Because AT&T had further independently committed 
that McCaw will begin offering presubscription and other basic features 
of equal access to all long distance carriers following the merger, the 
merger would have promoted competition in long distance markets, and 
reduced AT&T's role, even if there had been no decree.

    \6\ The Department similarly raised the concern that McCaw's 
market power as a cellular equipment buyer might enable it to impede 
``upstream'' equipment manufacturing competition by sharing 
nonpublic information of AT&T's cellular equipment competitors with 
AT&T. The Proposed Decree contains structural and injunctive 
provisions to bar any such conduct as well.
---------------------------------------------------------------------------

    In any case, here, too, the Proposed Decree removes any doubt on 
this score. It imposes equal access obligations on McCaw cellular 
systems that go far beyond those to which AT&T had voluntarily 
committed, and assures that the merger will create competition for the 
first time in the provision of long distance services used by McCaw's 
customer.
    Indeed, that the Department acted reasonably in settling its two 
challenges on these grounds is vividly confirmed by the conduct of the 
only two commentors who discuss the adequacy of the Proposed Decree to 
address the Department's concerns: Bell Atlantic and NYNEX. As their 
joint comments note, they had filed a private antitrust suit that 
sought to enjoin the merger on each of the two grounds alleged in the 
Department's Complaint. However, Bell Atlantic and NYNEX thereafter 
abandoned their horizontal long distance claim, and then (on the eve of 
trial) they dismissed the vertical manufacturing claim with prejudice 
after AT&T and these RBOCs entered into a settlement agreement.
    Finally, none of the other comments even challenge the sufficiency 
of the Proposed Decree to prevent either of the potential competitive 
harms addressed in the Department's Complaint. Rather, they seek to use 
this proceeding collaterally to attack the 1982 Decree that broke up 
the Bell System (``MFJ'') and otherwise to challenge Procompetitive 
features of the AT&T-McCaw merger that the Department appropriately did 
not challenge.
    Most prominently, three of the RBOCs (SBC, NYNEX, and Bell 
Atlantic) claim that the Decree will not be in the public interest 
unless a provision is added that bars AT&T-McCaw from directly 
marketing cellular service to AT&T long distance customers who are 
existing cellular customers of RBOCs. The RBOCs recognize that AT&T has 
many satisfied customers, and the RBOCs fear that the ``power of the 
AT&T-McCaw brand'' and the ability to offer attractive services may 
cause cellular customers who have presubscribed to AT&T's long distance 
service to choose to obtain cellular service from AT&T if it engages in 
this direct marketing.
    However, extending these choices benefits consumers, and courts 
have thus uniformly held that it is procompetitive for integrated firms 
to be free to offer new services to customers of their existing 
offerings and that this is a legitimate efficiency that all multi-
product firms enjoy. The RBOCs overlook that the antitrust laws protect 
competition, not the RBOC's selfish interests as competitors. Further, 
the RBOCs' claims are hypocritical because the ability of AT&T-McCaw to 
make such offers could only marginally offset some of the immense other 
advantages that the RBOCs enjoy by reason of their bottleneck 
monopolies and these RBOCs are seeking to preserve advantages for 
themselves, not create ``parity.''
    In addition, despite Judge Greene's prior rejections of these 
claims, the RBOCs also continue to argue that the approval of the 
Proposed Decree should be conditioned on removal of the MFJ's ban on 
their provision of interexchange services to wireless customers, and 
they claim that a series of additional ``equal access'' restrictions 
should be imposed on AT&T-McCaw in the interest of ``parity'' unless 
the Court removes the MFJ's restriction. While some of the RBOCs' 
individual claims here rest on misunderstandings of the Proposed 

[[Page 49869]]
Decree, the short answer to the RBOCs is that they are properly subject 
to different restrictions from AT&T-McCaw because the RBOCs have 
bottleneck landline monopolies and AT&T-McCaw to not--as Judge Greene 
and now the FCC have repeatedly held.

Background

    This is an unusual Tunney Act proceeding in that the AT&T-McCaw 
merger has been the subject of extensive prior proceedings before the 
FCC, the New York Public Service Commission, the California Public 
Utilities Commission, judge Greene (in the MFJ section I(D) waiver 
proceeding), and a federal court in Brooklyn. These proceedings created 
extensive records regarding the competitive effects of the merger, and 
it is thus possible to highlight the salient facts about the cellular 
service, equipment manufacturing, and long distance markets--with 
citations to affidavits and other filings from the prior proceedings.

1. McCaw's Cellular Service and the Reasons for the Merger

    McCaw Cellular Communications, Inc., its wholly-owned subsidiaries, 
and its 52%-owned LIN Broadcasting subsidiary (collectively referred to 
as ``McCaw'') have interests in a number of cellular radio, paging, 
air-to-ground, and other mobile radio services. In particular, McCaw 
has interests in cellular systems that collectively serve about 17% of 
the nation's cellular subscribers. McCaw has small minority interests 
in a number of these systems (e.g., St. Louis), has what could loosely 
be referred to as joint control with an RBOC or successor to an RBOC in 
others (San Francisco Bay, Kansas City, Los Angeles, Houston, and 
Galveston), and has a majority and unilateral controlling interest in a 
number of others (e.g., Seattle, Portland, Denver, Las Vegas, 
Minneapolis, Miami, Tampa, Jacksonville, Dallas, Oklahoma City, 
Pittsburgh, and New York City). The systems in which McCaw has 
``unilateral'' control serve about 13% of the nation's cellular 
subscribers.
    All of McCaw's interests are in ``A'' Block cellular systems that 
were initially reserved for ``nonwireline carriers.'' Each system 
further competes with the RBOC or other LEC with the local telephone 
monopoly in that area. As shown in the Appendix to this filing, the 
dispersed nature of McCaw's systems means that it competes with only a 
fraction of the systems of any one RBOC or LEC (and with an even 
smaller fraction of any one AT&T-equipped cellular system that 
individual RBOCs or LECs have).
    Because McCaw entered this business as a start-up company, it 
inherently faced severe disadvantages in competing with the well-known, 
well-financed, and technologically adept affiliates of RBOCs and other 
LECs. In this regard, while the FCC imposed separate subsidiary 
requirements on RBOC cellular systems, the FCC's regulations place no 
significant restrictions on the RBOCs' financing of their cellular 
operations, and these regulations further allow the RBOCs to use their 
well-known trade names in marketing cellular services and jointly to 
advertise cellular and monopoly landline service. See Cellular 
Communications Services, 86 FCC 2d 469, 493-95 (1981); 47 C.F.R. 
Sec. 22.901(d)(1).
    One disadvantage arises because cellular systems require 
interconnections with landline exchange monopolies, and substantial 
portions of the revenues of cellular systems are remitted to local 
telephone monopolies to compensate them for terminating cellular-
originated calls. RBOCs previously used this monopoly power to 
frustrate cellular competitors (see United States v. Western Elec. Co., 
673 F. Supp. 525, 551 (D.D.C. 1987)), and McCaw had to expend time and 
resources obtaining appropriate interconnections.\7\

    \7\ See AT&T-McCaw FCC Proceeding, AT&T's and McCaw's Opposition 
to Petitions to Deny and Reply to Comments (``AT&T-McCaw FCC Opp.'') 
(Dec. 2, 1993), Affidavit of James L. Barksdale, para. 15 
(``Barksdale FCC Aff.''); United States v. Western Elec. Co., Civ. 
No. 82-0192 (D.D.C.), Memorandum in Support of AT&T's Motion for a 
Waiver of Section I(D) of the Decree Insofar as It Bars the Proposed 
AT&T-McCaw Merger (May 31, 1994) (``AT&T's Section I(D) Mem.''), 
Affidavit of James Barksdale and Wayne Perry, para. 7 (``Barksdale/
Perry Section I(D) Aff.'').
---------------------------------------------------------------------------

    These disadvantages, in turn, were radically compounded by the 
regulatory preferences that the RBOCs and other LECs received. Whereas 
McCaw generally had to pay fair market value for initial licenses in 
each licensing area, the FCC reserved one of the two cellular licenses 
(the ``B'' Block license) for an affiliate of the RBOC or other LEC 
that had the landline monopoly in the Metropolitan Statistical Area 
(``MSA'') or Rural Service Area (``RSA'') in question, such that the 
RBOCs generally acquired ``B'' Block cellular licenses at no cost.\8\ 
Second, because RBOCs provide landline exchange services in contiguous 
areas throughout their regions, the FCC's regulations also meant that 
RBOCs automatically received licenses in the contiguous MSAs and RSAs 
that comprise natural mobile markets. By contrast, McCaw and other 
nonwireless carriers had to incur large amounts of debt to acquire 
their licenses and consolidate them in contiguous areas.\9\ Even today, 
there are many areas in which RBOCs have established cellular systems 
that serve areas that are larger than McCaw or their other ``A'' Block 
competitors.\10\

    \8\ See Barksdale FCC Aff., para. 15; Barksdale/Perry Section 
I(D) Aff., para. 16.
    \9\ See Barksdale FCC Aff., Paras. 16-17; Barksdale/Perry 
Section I(D) Aff., para. 17.
    \10\ See Barksdale FCC Aff., Paras. 15-17; Barksdale/Perry 
Section I(D) Aff., Paras. 16-18.
---------------------------------------------------------------------------

    Third, the FCC gave the RBOCs and other ``B'' Block carriers 
substantial headstarts--of one to three years--over their ``A'' Block 
competitors. In particular, the FCC granted the RBOCs these headstarts 
in face of claims by ``A'' Block competitors that the RBOCs would 
thereby have an initial monopoly over the customers with the greatest 
demand for cellular service, thereby both allowing the RBOCs to earn 
monopoly profits during the headstart period and forcing their 
nonwireline competitors to seek to dislodge existing customers of an 
incumbent monopolist when the ``A'' Block systems became 
operational.\11\

    \11\ See Barksdale FCC Aff., Paras. 15, 17; Barksdale/Perry 
Section I(D) Aff., Paras. 16-18.
---------------------------------------------------------------------------

    The net result of these disadvantages is that McCaw (as well as 
other nonwireline carriers) had to borrow heavily to acquire and 
consolidate its licenses, to construct its systems, and to finance each 
system's operations for a period of many years after it commenced 
operations. One reflection of the significance of these disadvantages 
is that every significant nonwireline carrier other than McCaw ended up 
selling its ``A'' Block licenses to RBOCs or other LECs, which 
eliminated the ``independent'' cellular systems that the FCC sought to 
create and meant that RBOCs and GTE control ``A'' Block systems serving 
some 60% of the nation's population.\12\ In the case of McCaw, it 
became a highly-leveraged firm with some $5.7 billion in debt and a 
debt ratio of over 70%.\13\ Further, McCaw is saddled with an 
additional, unique obligation. It cannot retain some of its most 
significant properties--the New York City, Houston, Los Angeles, and 
Dallas interests of McCaw's 52%-owned LIN subsidiary--unless McCaw can 
raise what is likely to be in excess of $3 billion required to purchase 
the remaining 48% of LIN in 1995.\14\

    \12\ See  Barksdale FCC Aff., para. 17; Barksdale/Perry Section 
I(D) Aff., para. 18.
    \13\ See  Barksdale FCC Aff., Paras. 13, 19; Barksdale/Perry 
Section I(D) Aff., para. 14.
    \14\ See United States v. Western Elec. Co., Civ. No. 82-0192 
(D.D.C.), AT&T's Reply in Support of Its Motion for a Waiver of 
Section I(D) of the Decree Insofar As It Bars the Proposed AT&T-
McCaw Merger (July 18, 1994), Supplemental Affidavit of Wayne Perry, 
Paras. 2-4; AT&T Section I(D) Mem., Affidavit of Alex J. Mandl, 
Paras. 3, 25 (``Mandl Section I(D) Aff.'').

[[Page 49870]]

---------------------------------------------------------------------------

    Against this background, McCaw determined that just as other ``A'' 
Block nonwireline carriers had exited the business, it could not be an 
effective competitor with RBOCs, other LECs, and other participants in 
emerging wireless businesses unless it formed an alliance with a 
financially strong firm like AT&T.\15\ In particular, McCaw had 
concluded that it could not obtain the billions of dollars that it 
needed to maintain and enhance its cellular and other mobile systems at 
an acceptable cost in traditional debt and equity markets.\16\ McCaw 
further determined that an alliance with AT&T would otherwise 
strengthen McCaw. It would provide technological strengths that McCaw 
lacks, and McCaw identified a number of service improvements that an 
alliance with AT&T would permit. AT&T has a strong brand and 
relationships with satisfied customers of other AT&T offerings, Phone 
Stores, and other marketing resources that would enable McCaw to market 
its services more efficiently and effectively. AT&T further has unique 
customer care and support resources (and standards of quality)--as 
reflected in the Baldridge Award that AT&T's Universal Card received 
and its revolution of the credit card business.\17\

    \15\ See Mandl Section I(D) Aff., Paras. 17-21.
    \16\ See Barksdale/Perry Section I(D) Aff., Paras. 19-20; Mandl 
Section I(D) Aff., para. 18.
    \17\ See Barksdale FCC Aff., Paras. 12, 25; Barksdale/Perry 
Section I(D) Aff., para. 24; Mandl Section I(D) Aff., para. 20.
---------------------------------------------------------------------------

    AT&T found the merger with McCaw attractive for these, and other, 
reasons.\18\ AT&T determined that the quality of the cellular service 
provided by McCaw and its competitors alike had been poor, and 
transmission quality (as well as blockage rates) is not what it could 
be.\19\ Customer education, care, and satisfaction had been low--as 
reflected in the higher industry churn rates. Fraud is such as serious 
problem that it absorbs some 8% of industry revenues. AT&T perceived an 
immense opportunity to improve the quality of McCaw's service and to 
offer cellular services that adhere to the high quality standards that 
the use of the AT&T name warrants. In this regard, AT&T believed that 
satisfied customers of other AT&T services (e.g., long distance, CPE, 
the Universal Card) would find an AT&T cellular service very 
attractive, and that AT&T's relationship with these customers would 
enable AT&T-McCaw to market cellular service them at a lower cost. 
Further, while cellular today is not a substitute for the landline 
exchanges, it could conceivably develop into a substitute hereafter, 
and AT&T believed that an alliance with McCaw could cause that to 
happen more rapidly.\20\

    \18\ See Mandl Section I(D) Aff., para. 20.
    \19\ See Mandl Section I(D) Aff., Paras. 20-24, 26.
    \20\ See Mandl Section I(D) Aff., Paras. 21-24.
---------------------------------------------------------------------------

    Entry in cellular was also attractive to AT&T in light of the 
unrelenting efforts of the RBOCs to obtain (through legislation or 
otherwise) premature removals of the MFJ's core long distance 
restriction: i.e., before the RBOCs lose the ability to leverage local 
bottleneck monopolies. While premature removal of the restriction would 
allow RBOCs to use their local monopolies to capture large percentages 
of the long distance business, AT&T believed that these harms could be 
somewhat reduced if AT&T were providing cellular service.
    While there are today only two cellular service licensees in each 
market, the FCC is now in the process of licensing an additional five 
carriers to provide ``personal communications services'' or PCS 
services.

2. Long Distance Service

    Since it commenced its operations, McCaw has provided the ``long 
distance'' as well as the ``local'' services of its cellular 
subscribers. In particular, with the exception of the McCaw cellular 
systems that are ``BOCs'' within the meaning of the MFJ, no cellular 
system in which McCaw has an interest has provided equal access, and 
its customers generally have been unable to reach other interexchange 
carriers on 1+ or a 10XXX basis. Rather, subscribers have used a 
``McCaw'' long distance service, which McCaw has offered by reselling 
long distance services obtained from AT&T under a long-term service 
contract.\21\ As RBOCs have correctly stated in proceedings under the 
MFJ, the long distance rates that McCaw has generally charged are the 
same ``retail'' MTS rates that AT&T charges.\22\

    \21\ McCaw owns private microwave facilities that are used for 
certain connections of cell sites and cellular switches (``MTSOs'') 
or between MTSOs serving contiguous areas. These facilities are 
overwhelmingly intraLATA, and the few facilities that cross LATA 
boundaries provide connections within systems or between contiguous 
systems and generally serve the same functions as interLATA 
facilities that RBOC cellular systems are permitted to lease in 
areas where they are authorized to provide cellular services on a 
multiLATA basis pursuant to MFJ waivers.
    \22\ See Barksdale/Perry Section I(D) Aff., Paras.  10-11.
---------------------------------------------------------------------------

    The RBOCs have emphasized in their marketing literature and 
activities that they offer presubscription and the ability to 
presubscribe not only to the interexchange carrier of the customers 
choice, but also to particular services (e.g., AT&T's SDN or MCI's 
VNET).\23\ AT&T believes that McCaw's failure to offer presubscription 
makes McCaw's cellular services less attractive. Shortly after the 
August 16, 1993 announcement of the merger, AT&T committed to Congress 
and to the FCC that McCaw would offer presubscription after the merger 
is consummated.\24\

    \23\ See AT&T's Further Opposition to RBOC's Motion to Exempt 
``Wireless'' Services from Section II of the Decree, pp. 19-23 (May 
3, 1993).
    \24\ See Transcript of Hearing of U.S. Senate Committee on 
Commerce and Transportation, p. 102 (Sept. 8, 1993) (testimony of 
AT&T Chairman Robert Allen) (``It would be our intent to give all of 
our cellular subscribers equal access to any interexchange carrier 
they wish''); AT&T McCaw FCC Opp., pp. 54-55; FCC Order, para. 64.
---------------------------------------------------------------------------

    There are several hundred firms that resell long distance services 
of AT&T, Sprint, MCI, WilTel, and other facilities-based interexchange 
carriers. There are numerous such firms whose long distance revenues 
from resale are substantially in excess of the approximately $38 
million in long distance revenues that McCaw had in 1993.\25\

    \25\ See AT&T-McCaw FCC Opp., p. 52.
---------------------------------------------------------------------------

3. The Competitive Telecommunications and Wireless Equipment 
Manufacturing Markets

    Following AT&T's January 1, 1984 divestiture of the RBOCs, 
competition in the manufacture of telecommunications equipment 
intensified, and the divested RBOCs established relationships with 
multiple suppliers and played them off against one another. AT&T's 
share of the RBOCs' purchases of ``landline'' switching products, 
transmission equipment, transmission media, and other 
telecommunications products thus has dropped from over 90% before 
divestiture to less than 40% today. AT&T competes for these sales in a 
global market with Northern Telecom (of Canada), Siemens (of Germany), 
Alcatel (of France), Ericsson (of Sweden), NEC (of Japan), and many 
other firms.
    AT&T Network Systems, and each of its business units, critically 
depend on sales to the seven RBOCs and GTE. Of AT&T Network Systems' 
approximately $10 billion in 1994 external sales, roughly $6 billion 
were to the seven RBOCs and GTE and roughly $5 billion were to the 
seven RBOCs. The seven RBOCs regularly use their leverage as purchasers 
of landline equipment to seek to affect AT&T's behavior in other areas.
    Cellular and other wireless infrastructure equipment is a critical 
and rapidly growing segment of 

[[Page 49871]]
telecommunications equipment manufacturing. Of AT&T's approximately 
$1.25 billion in anticipated 1994 sales, approximately $650 million was 
to the seven RBOCs and GTE; nearly $500 million was to the seven RBOCs, 
and over $130 million was to Bell Atlantic and NYNEX.\26\ In addition 
to cellular infrastructure equipment, AT&T's wireless infrastructure 
unit is actively developing equipment for use in providing PCS. Total 
domestic PCS equipment sales are estimated to amount to billions of 
dollars by 1997.

    \26\ By contrast, McCaw's principal supplier of cellular 
infrastructure equipment is Ericsson.
---------------------------------------------------------------------------

    Cellular infrastructure equipment (which includes cell sites and 
MTSOs) is manufactured and sold in a worldwide market in which AT&T 
competes with Ericsson, Motorola, Northern Telecom (NTI), Nokia, 
Siemens, Hughes, and others. The competitiveness of the markets is 
reflected in shifts in market positions from year to year, with 
Motorola having lost share (until it rebounded in 1994), and AT&T and a 
recent new entrant (Nokia) having gained. AT&T has estimated worldwide 
shares of cellular infrastructure equipment sales between 1988 and 1993 
as follows:

----------------------------------------------------------------------------------------------------------------
                                      Ericsson     Motorola       AT&T         NTI         Nokia        Other   
               Year                  (percent)    (percent)    (percent)    (percent)    (percent)    (percent) 
----------------------------------------------------------------------------------------------------------------
1988..............................         33.0         25.0          7.9          6.0          0.0         28.1
1989..............................         33.0         25.0          9.9          6.0          0.0         26.1
1990..............................         33.0         25.0         10.5          6.0          2.0         23.5
1991..............................         33.0         25.0         17.1          6.0          5.0         13.9
1992..............................         34.2         19.0         14.1          6.9          7.8         18.0
1993..............................         34.7         18.5         14.3          6.1          8.6         17.8
----------------------------------------------------------------------------------------------------------------

    Percentages of sales of the specific cellular equipment 
manufactured to the U.S. AMPS and related standards used in North 
America, South America, and certain Asian countries have been estimated 
by AT&T as follows:

----------------------------------------------------------------------------------------------------------------
                                                   Ericsson     Motorola       AT&T         NTI         Other   
                      Year                        (percent)    (percent)    (percent)    (percent)    (percent) 
----------------------------------------------------------------------------------------------------------------
1988...........................................         20.0         35.0         24.2          5.0         15.8
1989...........................................         21.0         33.0         26.1          5.0         14.9
1990...........................................         23.0         29.0         24.3          5.0         18.7
1991...........................................         25.0         26.0         35.0          5.0          9.0
1992...........................................         28.8         20.0         29.9          5.0         16.3
1993...........................................         28.2         19.5         34.3          5.0         13.0
----------------------------------------------------------------------------------------------------------------

    Swap-Outs of Equipment. A cellular carrier typically will make 
procurement decisions in a cycle in which it requests bids and 
proposals to meet its needs over a period of years. A cellular carrier 
will issue a request for proposals and purchase an initial integrated 
system of MTSOs and associated cell sites from the successful vendor. 
Thereafter, the carrier buys new cell sites and upgrades and 
supplemental equipment from that vendor until (1) the vendor's 
equipment or support fails to be satisfactory to the cellular carrier, 
or (2) new technological developments provide a basis for a substantial 
overhaul of the existing network system. In either instance, a ``swap-
out'' can result. In fact, there have been a large number of instances 
in which cellular carriers have replaced, in whole or in part, the cell 
sites and other cellular infrastructure equipment of their incumbent 
vendors with those of another manufacturer.
    In particular, cellular carriers have ``swapped out'' one vendor's 
cell sites and MTSOs and replaced them with another's long before the 
equipment was obsolete when the carrier was not satisfied with the 
original vendor's performance. For example:

--In 1988, McCaw swapped out recently-installed AT&T cellular equipment 
in Florida. It relocated the AT&T cell sites and switches to other 
markets.
--U S West is in the process now of replacing AT&T Series II equipment 
in Phoenix and four other markets in Arizona with Motorola equipment.
--Ameritech recently swapped out a system in St. Louis.
--GTE has swapped out Motorola equipment and replace it with AT&T 
equipment in a number of markets.
--In 1993, McCaw swapped out Motorola equipment in Dallas and replaced 
it with Ericsson equipment.
--In 1994, McCaw swapped out Northern Telecom equipment in Minneapolis 
and replaced it with AT&T equipment.
--Southwestern Bell is in the process of swapping out Motorola 
equipment in Boston.
--BellSouth recently announced that Hughes will replace its existing 
vendors in many systems.

Notably, while the Department is correct (Competitive Impact Statement, 
p. 8) that the rapid growth in cellular services has meant that 
aggregate investment in cellular equipment in each market is greater 
today than it was previously, the costs per subscriber of a swap-out 
have remained constant, or even declined. Moreover, carriers who ``swap 
out'' existing equipment can recover all or most of the current value 
of that equipment by relocating the equipment to other markets, by 
selling the equipment themselves, or, most frequently, by negotiating 
substantial buy-back or credit arrangements with the new supplier.
    Further, in addition to these complete ``swap-outs,'' a cellular 
carrier can replace an existing supplier's equipment in part by 
purchasing new equipment to serve part of an existing service area or 
certain customers in an area. These ``partial'' swap-outs are made 
increasingly possible by developments that have allowed calls to be 
handed off between switches of different manufacturers. In particular, 
a standard (IS-41) was developed for an interface between two different 
manufacturers' MTSOs. While initial versions of IS-41 (Rev. O and Rev. 
A) did not allow all calling features to follow the call, the current 
version of IS-41 (Rev. B) allows key features to do so, and the 

[[Page 49872]]
subsequent version approved in 1994 (Rev. C) would allow for transfer 
of nearly all existing features.
    Manufacturers are further constantly making proposals to replace 
incumbent vendors in whole or in part. Indeed, this is a significant 
aspect of ongoing competition between manufacturers in the equipment 
market. Consequently, even when swap-outs end up not occurring, 
carriers have used the threat of complete or partial swap-outs to 
obtain more favorable pricing and other commitments from AT&T and other 
suppliers. For example, in 1993 (after the AT&T-McCaw merger was 
announced), a large AT&T cellular infrastructure customer negotiated 
new contracts in which it would obtain additional price discounts and 
other valuable rights if it continued to purchase cell sites from AT&T 
in markets that already had AT&T MTSOs and cell sites. Similarly, other 
price protection clauses have been demanded by customers, and agreed to 
by AT&T, since the AT&T-McCaw merger was announced.
    In this regard, one RBOC recently requested proposals that would 
cap its purchase of AT&T's equipment in a major market. It sought 
proposals from Motorola and others to provide cell sites and MTSOs that 
would be used to provide digital cellular service in portions of the 
cellular service area and that would rely on IS-41 connections for 
handoffs with AT&T MTSOs in that area. AT&T then made a counterproposal 
to provide the digital capability by upgrading the already-installed 
AT&T equipment to digital.
    Other pending or impending developments will make swap-outs even 
easier for cellular carriers. The imminent improvements in IS-41 will 
make partial swap-outs easier, especially as more and more features are 
offered through centrally located advanced intelligent network 
(``AIN'') computers, not MTSOs. Finally, because RBOCs and other AT&T 
equipment customers have increasingly requested an ``open'' interface 
between cell sites and MTSOs, AT&T is proposing an industry standard 
interface for these connections and will, once any such standard is 
adopted, manufacture equipment that will enable customers to mix and 
match different vendors' cell sites and MTSOs. While these efforts were 
underway previously, this undertaking was a publicly-announced feature 
of AT&T's settlement with Bell Atlantic and NYNEX.\27\

    \27\ See Joint Press Release of AT&T, Bell Atlantic, and NYNEX 
(Nov. 7, 1994).
---------------------------------------------------------------------------

    In AT&T's internal assessment of the merger with McCaw, AT&T 
recognized that the merger could have a severe negative effect on its 
manufacturing businesses unless AT&T demonstrated its continued 
reliability as a supplier. In particular, AT&T personnel believed that 
some RBOCs might have strong adverse reactions to an AT&T alliance with 
McCaw and retaliate by swapping out AT&T in some cellular markets and 
by buying less landline and wireless equipment. Accordingly, AT&T 
personnel launched elaborate programs both to bend over backwards to 
preclude any RBOC concerns about unfair treatment and to communicate 
the conviction and assurance that the McCaw alliance would not affect 
AT&T Network Systems' commitment to meet all its customers' needs.\28\

    \28\ AT&T's manufacturing subsidiary strengthened AT&T's already 
rigorous existing procedures for safeguarding any information that 
cellular (and other) purchasers' equipment have designated as 
confidential or proprietary. When RBOCs responded adversely to the 
merger announcement by threatening to swap out AT&T's cellular 
infrastructure equipment, AT&T negotiated more favorable 
arrangements with them.
---------------------------------------------------------------------------

4. The Prior Proceedings

    The AT&T-McCaw merger could not be consummated until it received 
the prior approvals of the FCC and the state utility commissions in 
California, New York, and other states, and a waiver of Section I(D) of 
the MFJ. In these proceedings, RBOCs not only raised the same 
challenges to the merger that are resolved by the Proposed Decree, but 
also sought to use the proceedings to force modifications of the MFJ's 
restrictions on the RBOCs or to obtain conditions that would nullify 
procompetitive features of the merger in order to achieve ``parity'' 
for RBOCs. Each body rejected these claims.
    Each regulatory body found that the merger would serve the public 
interest by promoting competition in wireless and other local 
telecommunications services that are offered by RBOCs and other local 
telephone monopolists (and Judge Greene granted the Section I(D) waiver 
because the Rufo standard for modifying consent decrees \29\ was met). 
Each regulatory body further found that the merger, as conditioned, can 
realistically have no adverse effects on competition in any market, 
that the merger would otherwise benefit the public in a number of ways, 
and that there was no basis to impose conditions that nullify these 
benefits to create ``parity for parity's sake.'' \30\ Similarly, Judge 
Greene rejected RBOC efforts to consolidate the Section I(D) waiver and 
Proposed Decree with the RBOCs' pending request for MFJ relief.\31\

    \29\ See Rufo v. Inmates of Suffolk County Jail, 112 S. Ct. 748 
(1992).
    \30\ See, e.g., FCC Order, Paras. 32, 57-61, 68-70, 90, 97-100, 
104-05; California PUC Decision, pp. 12-16, 37; N.Y.P.S.C. Decision, 
pp. 6-7.
    \31\ See United States v. Western Elec. Co., Civ. No. 82-0192, 
Opinion, pp. 22-26 (D.D.C. Aug. 25, 1994) (``Section I(D) Waiver 
Opinion''), aff'd, No. 94-5252 (D.C. Cir. Feb. 17, 1995).
---------------------------------------------------------------------------

Argument

    While four sets of comments have been filed on the Proposed Decree, 
only one (Bell Atlantic/NYNEX) even suggests that the Decree does not 
reasonably address the competitive concerns raised in the Department's 
Complaint. Otherwise, the commentors challenge the Decree because it 
does not address other concerns that they have. Part I will demonstrate 
that the Proposed Decree's provisions are palpably in the public 
interest. Part II will demonstrate that the extraneous other claims are 
out of order and challenge procompetitive features of the merger.

I. The Provisions of the Proposed Decree Are in the Public Interest

    No commentor has claimed that the Proposed Decree is itself 
virtually certain to harm competition.\32\ Nor has any commentor 
claimed that the Proposed Decree is not a reasonable settlement of the 
two claims that the Department raised in its Complaint. Indeed, the 
only comments that even address these issues are those of Bell 
Atlantic/NYNEX. Yet they make no attempt to show that the Proposed 
Decree is outside `` `the reaches of the public interest.' '' United 
States v. Western Elec. Co., 900 F.2d 283, 306 (D.C. Cir. 1990) 
(quoting United States v. Bechtel Corp., 648 F.2d 600, 666 (9th Cir. 
1981)). Indeed, Bell Atlantic/NYNEX's comments here merely summarize 
the arguments that these commentors had intended to advance in a 
private antitrust suit that they brought against the AT&T-McCaw merger 
in federal court in Brooklyn. However, in 

[[Page 49873]]
that private suit, Bell Atlantic/NYNEX first abandoned their horizontal 
long distance claims (after the district court in Brooklyn criticized 
them) \33\ and then (on the eve of trial) dismissed their manufacturing 
claims with prejudice after settling them with AT&T-McCaw--which 
vividly confirms that the Justice Department acted reasonably in 
settling its claims rather than litigating the lawfulness of the 
proposed merger.

    \32\ BellSouth has used its comments here to repeat its claims 
(from the Generic Wireless proceeding under the MFJ) that the 
imposition of equal access requirements on cellular systems is 
contrary to the public interest. Quite apart from the fact that 
these claims have been previously rejected by the Department, Judge 
Greene, and now also the FCC (FCC Order, para. 68), BellSouth 
ignores that the Proposed Decree would impose no such provisions or 
obligations in the unlikely event that BellSouth's claims were 
accepted in the pending MFJ proceeding. In that event, just as RBOCs 
could provide cellular-originated calls to anyone in the world with 
no equal access duty under the MFJ, McCaw cellular systems would 
have that same right under Section X(A) of the Proposed Decree.
    \33\ See Bell Atlantic Corp. v. AT&T Corp., No. 94-CV-3682 
(ERK), Transcript of Cause for Civil Hearing, pp. 27-28, 45-46 
(Sept. 13, 1994).
---------------------------------------------------------------------------

    However, because Bell Atlantic and NYNEX have not withdrawn these 
aspects of their comments, AT&T-McCaw will briefly reiterate why the 
Department's settlement is reasonable. In reality, each of the 
antitrust challenges to the merger rests on legal theories that are 
novel, that have been rejected in other indistinguishable contexts, and 
that would prevent procompetitive benefits of the merger--which is why 
the Department and Judge Greene previously stated that restriction on 
AT&T's entry into cellular radio would be detrimental to the public 
interest.\34\ In any event, while the merger, in AT&T's view, could not 
have been found to violate Section 7 of the Clayton Act if there were a 
trial, the Proposed Decree specifically enjoins each of the 
hypothetical threats to competition raised in the Department's 
Complaint.

    \34\ See MFJ Opinion, 552 F. Supp. at 175-76; United States v. 
Western Elec. Co., Civ. No. 82-0192 (D.D.C.), Response of the United 
States to Public Comments on Proposed Modification of Final 
Judgment, pp. 72-73 (May 20, 1982); id., Brief of the United States 
in Response to the Court's Memorandum of May 25, 1982, p. 49 (June 
14, 1982).
---------------------------------------------------------------------------

A. The Justice Department Reasonably Settled Its Challenges to the 
Putative ``Horizontal'' Combination of AT&T's and McCaw's Long Distance 
Businesses
    One of the two claims raised in the complaint is that the merger 
would enable McCaw to use its alleged market power as one of two 
cellular carriers (and its undisputed ability to program its cellular 
switches to prevent long distance carriers from reaching McCaw's 
customers) to favor AT&T and reduce competition in competitive long 
distance markets. In this regard, the Department also alleged that the 
merger would eliminate competition between the two largest participants 
in various ``cellular long distance markets'' and that the merger would 
lead to increased long distance prices or reduced output.
    However, while the provision of equal access by McCaw and other 
cellular carriers is indisputably in the public interest, AT&T submits 
that the horizontal allegations in the Department's Complaint could not 
have been proven at trial and that it plainly was reasonable for the 
Department to settle these claims under the provisions of the Proposed 
Decree.
    First, contrary to the Department's allegation, the merger does not 
eliminate long distance competition between AT&T and McCaw. There has 
never been any such competition. AT&T has been unable to offer 
interexchange services to McCaw cellular customers, for McCaw has not 
provided equal access, but has provided the interexchange services used 
by its customers (by reselling AT&T services). Conversely, McCaw has 
not offered long distance service to any other customers, for it has 
not competed with AT&T in providing interexchange service to any 
cellular customers (or landline customers) of RBOCs or any other 
carriers. In short, no cellular or other customers today can choose 
between AT&T and McCaw for their long distance service.\35\

    \35\ The Department and Bell Atlantic/NYNEX suggest that there 
is ``indirect'' competition between AT&T and McCaw long distance 
services in the sense that any cellular customer who subscribes to 
McCaw cannot obtain retail interexchange services from AT&T. But 
there is no evidence that the existence of this attenuated and 
indirect alleged ``competition'' had any effect on the price of long 
distance services offered by McCaw, and, by affording McCaw 
customers equal access to the carrier of their choice, the merger 
allows McCaw customers a choice of long distance carriers for the 
first time.
---------------------------------------------------------------------------

    In this regard, rather than eliminate existing competition, it was 
clear long before this suit was filed that the AT&T-McCaw merger would 
create competition for McCaw cellular customers for the fist time by 
enabling them to choose long distance services other than the AT&T long 
distance services that McCaw resold under its own name. In particular, 
shortly after the August 16, 1993 announcement of the merger, AT&T 
committed to Congress and to the FCC that McCaw cellular systems would 
offer each customer the ability to presubscribe to the interexchange 
carrier of his or her choice and that the McCaw cellular systems would 
be reconfigured so that local cellular service is provided, on an 
unbundled basis, in geographic areas that are always comparable, and 
generally identical, to those applicable to the RBOCs under the MFJ. 
See p. 17 & n.24, supra. In this regard, in approving the merger, the 
FCC stated that it expected AT&T to comply with these commitments,\36\ 
and the FCC relied on the increased choices that McCaw cellular 
customers would thereby receive in finding that the public interest 
would be ``served'' by the merger.\37\

    \36\ See FCC Order, para. 70.
    \37\ See FCC Order, para. 57.
---------------------------------------------------------------------------

    Second, even if AT&T and McCaw had previously competed, AT&T 
submits that the Department could not have proven at trial that the 
merger could lessen long distance competition in a ``cellular long 
distance service market'' or otherwise. The reality is that AT&T and 
other long distance carriers provide the same long distance services at 
the same price to landline and cellular long distance customers. 
Because McCaw provides less than 0.1% of long distance services 
nationally and does so by reselling AT&T service, there is no 
possibility that the AT&T-McCaw merger would increase the price or 
reduce the output of long distance services used by cellular or other 
customers. In particular, even if AT&T could attempt to increase long 
distance prices to cellular customers alone, those customers could 
readily turn to other long distance carriers, including carriers that 
today serve only landline customers. These facts both show that there 
is no ``cellular long distance market'' and establish, in all events, 
that there is no threat to competition.
    The Department's suggestion that there is a separate ``cellular 
long distance market'' rests on the ground that cellular customers pay 
a premium for mobility--an airtime charge of up to 40 cents per minute 
for use of the cellular system, which is incurred whenever the customer 
places or receives any call, be it long distance or local. However, 
that is the charge imposed on the customer by the cellular system, and 
the long distance rates charged by long distance carriers for long 
distance service are the same, regardless of whether the customer 
accesses a long distance network from a cellular phone or from a 
landline phone. Thus, the Department's suggestion ultimately rests on 
the ground that the demand of cellular customers is less elastic than 
that of landline customers: i.e., that even though cellular customers 
do not pay higher rates for long distance calls than do landline 
customers, cellular customers may well be willing to do so.
    However, even if true, that does not establish that the cellular 
subclass of all long distance customers is a separate market. All 
services and products (be they corn flakes or long distance) are used 
by subclasses of customers who would be willing to pay more than the 
market rate, but these subclasses of customers do not constitute 
separate 

[[Page 49874]]
antitrust markets unless suppliers could in fact single them out to 
charge higher prices.\38\ There has been no allegation that long 
distance carriers could charge higher prices for calls originating on 
cellular telephones, and the fact that none do (despite the less 
elastic demand of these customers) is potent evidence that charging 
them higher rates is infeasible for regulatory, practical, and other 
reasons.\39\

    \38\ See Department of Justice Federal Trade Commission 
Horizontal Merger Guidelines, 4 Trade Reg. Rep. (CCH) para. 13,104, 
Sec. 1.12 at 20,573 (1992) (``Merger Guidelines'').
    \39\ See AT&T-McCaw FCC Proceeding, AT&T's and McCaw's Response 
to Comments on Hart-Scott-Rodino Materials (July 1, 1994), Affidavit 
of Robert D. Willig and B. Douglas Bernheim: An Analysis of the 
Alleged Anticompetitive Effects of the AT&T-McCaw Combination, pp. 
12-13.
---------------------------------------------------------------------------

    More fundamentally, such price increases could not be maintained 
because cellular customers receive the same long distance services 
provided to landline customers. Even if AT&T had a monopoly on long 
distance calling by cellular customers, it could not impose even a 
``small but significant and nontransitory increase in price,'' for 
cellular customers (or carriers) could then subscribe to the long 
distance services used by landline customers. The reality is that 
because the same long distance services are used by landline and 
cellular carriers alike, any long distance carrier can easily supply 
interexchange services to cellular systems, and would do so if 
incumbent long distance providers sought to raise prices above 
competitive levels. In turn, because McCaw represents less than 0.1% of 
total long distance calling and was indistinguishable from hundreds of 
other resale long distance carriers,\40\ the merger of AT&T and McCaw 
would not have any effect on competition in long distance markets or on 
the price or output of long distance services used by cellular or any 
other customers even if AT&T and McCaw had competed, as they had not. 
Indeed, in this circumstance, the Department's Merger Guidelines,\41\ 
the nation's antitrust authorities,\42\ and judicial decisions \43\ all 
agree that a merger threatens no harm to competition.

    \40\ Indeed, as the FCC found, McCaw was far less likely to 
develop into a major facilities-based long distance carrier than 
other resellers. McCaw's current debt of $5.7 billion (and debt 
ratio of over 70%), its need to raise over $3 billion in 1995 merely 
to retain some of its most important properties, and its need to 
raise additional untold billions to acquire PCS licenses all made it 
improbable in the extreme that McCaw ``would be able to embark on 
any large-scale investment in interexchange facilities in the 
foreseeable future.'' FCC Order, para. 30 & n.73.
    \41\ See Merger Guidelines, Sec. 3.0 at 20,573 (where entry is 
easy, ``the merger raises no antitrust concern and ordinarily 
requires no further analysis'').
    \42\ See, e.g., Phillip E. Areeda, Herbert Hovenkamp & John L. 
Solow, IIA Antitrust Law 257 (1995) (``Of course, whichever market 
definition is employed, relative ease of entry by other firms should 
always be taken into account. The one course that would be clearly 
wrong would be to define the market as A alone while ignoring the 
ease of entry from B producers'').
    \43\ See, e.g., Rothery Storage & Van Co. v. Atlas Van Lines, 
Inc., 792 F.2d 210, 218 (D.C. Cir. 1986) (``Because the ability of 
consumers to turn to other suppliers restrains a firm from raising 
prices above the competitive level, the definition of the `relevant 
market' rests on a determination of available substitutes''); 
Vollrath Co. v. Samni Corp., 9 F.3d 1455, 1461-62 (9th Cir. 1993) 
(``No matter how the market is defined * * * the ease of entry into 
it and the number of potential participants on every level of it 
abundantly demonstrates that [market power] would never be 
possible'').
---------------------------------------------------------------------------

    Finally, in all events, the provisions of the Proposed Decree 
constitute a palpably reasonable settlement of the Department's claims 
and are in the public interest. They impose equal access, 
nondiscrimination, and antibundling requirements that go considerably 
beyond the voluntary commitments that AT&T made. They require the 
balloting of all existing customers; they prohibit any wide area 
calling plans in which discounted rates are offered only when local and 
long distance services are ``bundled'' through wide area calling plans 
or otherwise; and they contain detailed other provisions designed to 
afford all interexchange carriers an equal opportunity to serve McCaw 
customers. These provisions reasonably assure that McCaw customers will 
hereafter have choices other than the AT&T long distance services that 
McCaw has resold these customers and that all interexchange carriers 
will have access to McCaw's cellular customers.
B. The Proposed Decree Represents a Reasonable Settlement of the 
Department's Vertical Manufacturing Allegations
    The other allegation advanced in the Department's Complaint is that 
the merger could lead AT&T to use its position as a cellular equipment 
supplier to engage in predatory conduct that could impede competition 
in certain local cellular service markets: i.e., those in which McCaw 
competes with a cellular carrier that uses AT&T cellular equipment. In 
advancing this claim, the Justice Department acknowledged that 
telecommunications manufacturing generally, and cellular equipment 
manufacturing in particular, are intensely competitive businesses in 
which AT&T and other manufacturers are dependent on the RBOCs, GTE, and 
other LECs, and in which a carrier has a choice of multiple vendors 
when it is installing or replacing (``swapping out'') a system. See pp. 
17-23, supra.
    However, the Department claims there is a short-term interim period 
in which individual LECs are nonetheless dependent on AT&T's 
manufacturing unit for certain essential inputs to their cellular 
service and that the merger would give AT&T-McCaw the ability and 
incentive to exploit this short term ``monopoly power'' to disadvantage 
these companies in those markets where they compete with McCaw. In 
particular, the Department alleged that (1) those RBOCs and GTE that 
purchased AT&T cellular systems (i.e., MTSOs and cell sites) in fairly 
recent years would incur such substantial costs if they sought to 
replace this AT&T equipment in whole or in part that they are ``locked-
in'' to AT&T for upgrades to these systems during an interim period, 
and (2) the merger would give AT&T the incentive to exploit this lock-
in by charging RBOCs inflated prices for the new cell sites and 
switching software needed to expand or enhance their systems, by 
providing them inferior service, by sharing their confidential 
information with McCaw, or by discriminating in favor of McCaw.
    It was patently reasonable for the Department to settle these 
claims under the provisions of the Proposed Decree. The competitive 
theories are exceedingly tenuous ones, and the Department, in AT&T's 
view, could not have proven a violation of Section 7 of the Clayton Act 
at trial. In all events, the Proposed Decree contains prophylactic 
injunctions--backed by unusual and severe sanctions--that would 
prohibit each of the kinds of predatory misconduct that the Department 
fears, that further would reduce the alleged lock-in, and that thus 
reduce even the tenuous risks of predatory conduct that harms 
competition.
    The Risks of Competition Harm Were Virtually Nonexistent Even in 
the Absence of a Decree. Foremost, the Department's allegations 
represent an exceedingly novel theory for challenging a vertical 
merger. The theory is not supported by the Department's merger 
guidelines.\44\ 

[[Page 49875]]
Professors Lawrence Sullivan, Robert Willig, and Douglas Bernheim 
submitted testimony that rejected the hypothesized harms to 
competition.\45\ Further, this basic theory was rejected as a matter of 
law in the only case in which it has been raised under Section 7 of the 
Clayton Act: Fruehauf Corp. v. FTC, 603 F.2d 345 (2d Cir. 1979).

    \44\ The Department's guidelines provide for challenges to 
vertical mergers in only three narrow circumstances, none of which 
is present here. The first is when the vertical merger would 
substantially raise entry barriers because two markets would (as a 
consequence of the merger) be so integrated that entrants to one 
market would also have to enter the other market simultaneously. See 
U.S. Dept. of Justice 1984 Merger Guidelines Sec. 4.21 (reprinted in 
4 Trade Reg. Rep. (CCH) para. 13,103 (1984)). The second is where 
the vertical merger would facilitate collusion in an upstream market 
either by permitting vertically integrated manufacturers more easily 
to monitor price in retail markets or by eliminating a particularly 
disruptive buyer in a downstream market. See id., Sec. 4.22. The 
third is where the vertical merger involves a regulated monopoly 
utility and would enable it to evade rate regulation. See id., 
Sec. 4.23.
    \45\ See AT&T-McCaw FCC Proceeding, AT&T-McCaw Opp., Affidavit 
of Lawrence A. Sullivan, pp. 2-3, 6-11, 17-19, 22-24; id., Affidavit 
of Robert D. Willig & B. Douglas Bernheim: An Analysis of the 
Alleged Anticompetitive Effects of the AT&T-McCaw Combination, pp. 
36-55.
---------------------------------------------------------------------------

    Fruehauf concluded that even if a manufacturer in an otherwise 
competitive market will have market power over the supply of particular 
essential products during a short time period (there due to an assumed 
shortage), a vertical merger cannot be found to create a ``reasonable 
probability'' of harm to competition in violation of Section 7 of the 
Clayton Act \46\ based merely on the theory that the merger gives the 
manufacturer an incentive to use that power to discriminate in favor of 
a merger partner and against its competitors. 603 F.2d at 355. To the 
contrary, the Second Circuit held that it was ``highly unlikely'' that 
the manufacturer would then engage in such opportunistic misconduct, 
for it would recognize that (1) The other customers could thereafter 
``retaliat[e]'' and ``could cause it greater economic harm'' by 
``shifting to competing suppliers not only their [future] purchases of 
the [allegedly `locked-in' product] but of other products presently 
bought from [the manufacturer],'' and (2) such predatory conduct 
``would invite antitrust damage actions.'' Id. at 355. In this regard, 
AT&T is aware of no case that supports challenging a vertical merger on 
such grounds.\47\

    \46\ It is well settled that a merger cannot violate Section 7 
unless there is a ``reasonable probability'' that it will ``lessen 
competition'' (i.e., harm consumers) in a relevant market and that a 
``mere possibility'' of these harms is insufficient. See, e.g., 
Brown Shoe Co. v. United States, 370 U.S. 294, 323 & n.39 (1962).
    \47\ In prior challenges to the merger, RBOCs have relied on the 
Supreme Court's decision in Eastman Kodak Co. v. Image Technical 
Services, Inc., 112 S. Ct. 2072 (1992). But Kodak was not a case to 
enjoin a merger under Section 7 of the Clayton Act on the theory it 
was likely to lead to harm to competition. Rather, it was a case 
under Sections 1 and 2 of the Sherman Act in which an independent 
photocopy repair service firm challenged a tie-in in which Kodak had 
concededly in fact excluded independent firms from the equipment 
repair market by refusing to supply them spare parts for Kodak 
copying machines. The RBOCs ironically have relied on the Supreme 
Court's rejection (by a vote of 6-3) of Kodak's attempt to defend 
against otherwise unlawful exclusionary conduct by arguing that, as 
a matter of law, no consumer could be harmed by Kodak's conduct. 
Kodak had contended that the market for original sales of 
photocopiers was competitive, and that interbrand competition in 
this market meant, as a matter of law, that Kodak could not have 
market power in a separate ``aftermarket'' for repair of machines 
and could thus not use that power to exploit consumers. The Supreme 
Court held that while this latter claim might be correct as a matter 
of fact, it could not be sustained purely as a matter of law ``in 
the absence of any evidentiary support.'' Id. at 2087. The Supreme 
Court reasoned that while ``large-volume, sophisticated purchasers'' 
could be presumed to take steps to protect themselves from 
exploitative behavior in the ``aftermarket,'' smaller, 
unsophisticated consumers might lack the necessary information and 
buying power to take protective steps before they need repairs and 
will ``tolerate some level of service-price increases before 
changing equipment brands'' ``[i]f the cost of switching is high.'' 
Id. at 2086-87.
    Here, the only relevance of Kodak is that it undercuts any 
``lock-in'' claims. RBOCs epitomize the large sophisticated 
customers who can, under Kodak, be presumed to protect themselves 
from exercises of ``market power'' after initial purchases are made. 
Indeed, RBOCs vigorously negotiate supply contracts prior to large 
purchases and use threats of complete or partial swap-outs to 
renegotiate those supply contracts both before and after the AT&T-
McCaw merger was announced.
---------------------------------------------------------------------------

    In this case, AT&T's manufacturing subsidiary has far less ability 
to engage in the hypothesized misconduct than did the firm in Fruehauf 
and radically greater competitive economic and legal incentives not to 
do so. Indeed, this case is a much clearer one than Fruehauf in that 
the provisions of the Proposed Decree preclude any reasonable risk of 
the competitive harms that the Department initially feared and palpably 
are within the broad reaches of the public interest.
    The Claimed ``Lock-In'' Is Tenuous, and, in AT&T's View, 
Nonexistent. First, while AT&T would have overwhelming economic and 
legal incentives not to engage in the hypothesized conduct even if it 
could, AT&T will not have anything remotely approaching ``monopoly'' 
power over ``essential inputs'' required by RBOCs or other LECs even in 
the immediate future. In this respect, RBOCs epitomize large 
sophisticated purchasers who can and do protect themselves against 
exploitative behavior in ``aftermarket'' transactions and who have done 
so since the merger. Eastman Kodak, 112 S. Ct. at 2086-87.
    Further, the assertions that RBOCs and other cellular equipment 
customers are ``locked-in'' to AT&T is, in AT&T's view, unsustainable 
and could not have been proven at trial. It is true that some RBOCs 
(and GTE) acquired AT&T cellular equipment in the past and that they 
will need to purchase more cellular equipment to expand and improve 
their systems in the future. However, there is no basis for any 
allegation that the costs of switching cellular infrastructure 
equipment suppliers are so prohibitive that these customers are 
absolutely locked-in to AT&T and have no choice except to buy new cell 
sites, MTSOs, and upgrades from it in existing markets.
    The short answer to this allegation is that cellular carriers can, 
and regularly do, swap out an incumbent equipment supplier when they 
are dissatisfied with its performance, even when the equipment had been 
recently purchased. See pp. 19-21, supra. RBOCs and other LECs use 
threats of complete swap-outs or partial swap-outs (through use of IS-
41 interface) to extract more favorable terms from AT&T and other 
independent suppliers. See pp. 21-22, supra. This practical experience 
refutes any theoretical claim that switching costs are ``prohibitive'' 
or that it is harmful to competition for cellular carriers to incur 
those costs. These are grounds on which the FCC rejected the RBOC's 
lock-in claims.\48\

    \48\ The FCC stated as follows:
    [W]e are unpersuaded by the BOCs' arguments about ``lock-in'', 
which occurs when a cellular service provider is unable to switch to 
the equipment of a different manufacturer for technical or financial 
reasons. As an initial matter, we find the argument unpersuasive 
because, at the same time the BOCs complain of the technical and 
financial impediments to switching equipment suppliers in their 
systems, they allege that AT&T/McCaw will replace McCaw's Ericsson 
equipment with AT&T equipment. If the difficulties of switching are 
so great, we doubt that AT&T/McCaw will be able to rush to switch 
equipment. On the other hand, if AT&T/McCaw could switch so readily, 
we find it difficult to believe that the BOCs would have much 
greater difficulty in switching their systems if AT&T/McCaw product 
or product servicing quality dropped. More importantly, the advent 
of the recently-adopted IS-41 standard of the Telecommunications 
Industry Association, which facilitates the use of different 
suppliers' equipment within the same cellular system, should reduce 
the cost of switching cellular equipment providers and, 
consequently, any potential ``lock-in'' effect. Finally, affiants on 
both sides of the debate agree that the merger of AT&T and McCaw 
will not enhance AT&T's ability to discriminate or exploit ``lock-
in.''
    FCC Order, para. 98 (footnotes omitted).
---------------------------------------------------------------------------

    In addition, the facts on which a lock-in is claimed will 
themselves dissipate rapidly over time. Industry efforts are underway 
to establish an open and satisfactory cell-site-to-MTSO interface that 
will enable cellular customers to obtain cell sites and switches from 
different vendors (see pp. 22-23, supra), and the IS-41 interface 
(allowing incompatible switches in a single market) has recently been 
improved so that virtually all existing features can be handed off with 
calls. See p. 21, supra. Further, with each passing day, recently-
purchased cellular systems are further depreciated, and the other 

[[Page 49876]]
provisions of the Proposed Decree (facilitating re-location and sales 
of a carrier's cell site equipment and requiring AT&T's cooperation in 
a partial swap-out) will further reduce existing costs of switching 
suppliers. A procompetitive merger cannot be held unlawful and enjoined 
based on short term conditions that are dissipating.
    Competition Otherwise Precludes the Hypothesized Predatory Conduct. 
Even if AT&T's manufacturing arm could have some degree of ``market 
power'' over certain customers in an interim period, it is even clearer 
here than it was in Fruehauf that it is ``highly unlikely'' that the 
merger will lead to predatory misconduct that harms competition in 
local wireless markets. The competition that AT&T's manufacturing unit 
faces in equipment manufacturing generally--and its dependence on RBOCs 
and GTE--creates a greater inhibition on discrimination against those 
firms than was present in Fruehauf.
    Quite simply, competition means that AT&T's manufacturing arm has 
overwhelming incentives not to engage in any conduct that degrades any 
customer's service or that discriminates in favor of McCaw--or that 
even creates an appearance of such misconduct. The consequences of such 
conduct for AT&T's manufacturing arm would not merely be severe, but 
devastating. It would not merely assure AT&T's replacement with another 
cellular equipment vendor at the end of the claimed ``lock-in'' period. 
Cellular carriers can and do swap out a vendor whenever they are 
dissatisfied with its performance, regardless of whether the incumbent 
vendor is thought to have engaged in actionable or provable misconduct 
(see pp. 19-20, supra), so AT&T would then risk immediately being 
replaced in those markets. Further, as in Fruehauf, the discriminatory 
misconduct would also lead RBOCs and other customers to ``retaliat[e]'' 
by refusing to purchase other products that they ``presently'' purchase 
from AT&T. Compare Fruehauf v. FTC, 603 F.2d at 355 (emphasis added). 
For example, if such discrimination by AT&T were even suspected, RBOC 
wireless subscribers would refuse to buy AT&T's PCS equipment (which 
they would use to compete with McCaw in many markets) and which should 
be a multibillion dollar market given the imminent issuance of PCS 
licenses. Even more significant, RBOCs and GTE could then also buy less 
landline equipment.
    In this regard, in contrast to Fruehauf, moreover, McCaw's 
competitors are not ``insubstantial'' customers of AT&T Network 
Systems. Compare Fruehauf, 603 F.2d at 354. To the contrary, McCaw's 
competitors (RBOCs and GTE) accounted for some $6 billion of Network 
Systems' $10 billion in 1994 revenues, and it would be devastating if 
any significant portion of these sales were lost to competitors.
    That market forces preclude any substantial concerns was explained 
in detail by the FCC when it rejected the RBOCs' claims that the 
competitiveness of equipment manufacturing markets creates potent 
disincentives for any of the conduct that the RBOCs purport to fear:

    We believe that market forces will largely eliminate AT&T's 
ability to discriminate unreasonably. AT&T/McCaw cellular affiliates 
by themselves are not a large enough consumer of AT&T products to 
make it profitable for AT&T/McCaw to provide poor products or 
service to other customers, especially customers with the market 
power and sophistication of the BOCs, who have the choice of buying 
from other cellular equipment suppliers. Moreover, if unhappy with 
AT&T/McCaw's cellular products or servicing of those products, the 
BOCs also could shift their purchases of wireline network equipment 
to other suppliers. These threats to AT&T/McCaw's equipment sales 
create a powerful incentive for AT&T/McCaw to offer all of its 
cellular equipment customers, not just its cellular affiliates, 
quality products and services. As we have previously stated, AT&T's 
sales could otherwise decline as the fact of discrimination became 
known.\49\

    \49\ FCC Order, para. 97 (footnotes omitted). For the same 
reasons, the FCC found it unlikely that AT&T Network Systems would 
engage in the misuse of proprietary information. Id., para. 112.

On that basis, the FCC found that the ``market forces combined with the 
threat of litigation [if administrative duties are breached] will 
adequately deter AT&T/McCaw from discriminating in favor of its 
cellular affiliate, even in the subtle ways described by [the RBOCs],'' 
and that the merger, as conditioned by the FCC, cannot realistically 
---------------------------------------------------------------------------
have any adverse effect on competition.\50\

    \50\ FCC Order, para. 100.
---------------------------------------------------------------------------

    The Proposed Decree's Provisions Enjoin the Hypothesized 
Misconduct. The provisions of the Proposed Decree reduce even the 
slight risks that exist. It requires that McCaw be maintained as a 
separate corporation with separate officers and personnel who cannot 
delegate responsibility for the operation of McCaw's cellular systems 
to AT&T and that McCaw obtain services and products from AT&T under 
filed tariffs or by contract. Further, the Proposed Decree contains 
detailed provisions enjoining each kind of predatory misconduct that 
RBOCs purport to fear.
    First, the Proposed Decree requires AT&T's manufacturing subsidiary 
to treat its customers in the same way it would have if no merger had 
occurred. It requires AT&T to continue to provide each of its existing 
equipment customers with additional equipment, upgrades, technical 
support, maintenance, spare parts, and all other related products and 
services ``in accordance with the same pricing and other business 
practices that prevailed prior to August 1, 1993'' (a date before the 
merger was announced). Sec. V(B)(1) (emphasis added).\51\ Any deviation 
from pre-merger practices in the timing of delivery of cell sites, in 
the provision of upgrades and support, and in the manner in which 
prices are determined would violate this prohibition.

    \51\ AT&T is further prohibited from ``discriminat[ing] in favor 
of McCaw * * * in the way in which such services or products are 
made available'' to other cellular carriers. Sec. V(B)(1). And if 
AT&T discontinues the offering of any such product or service, it is 
required to seek to arrange an alternative source of supply or 
provide the carrier with whatever licenses and technical information 
are required to provide the product or service. Sec. V(B)(2).
---------------------------------------------------------------------------

    Second, the Proposed Decree prohibits AT&T from discriminating 
against McCaw's competitors in the development of new features and 
functions. If AT&T develops new features or functions that are intended 
for more than one customer prior to the date the AT&T-McCaw Decree is 
entered, it must make them available to all affiliated customers at the 
same time as it does to McCaw. Sec. V(C)(1). If AT&T develops features 
or functions for McCaw that are technologically applicable only to 
McCaw's network or proprietary to McCaw, it must provide all other 
carriers with the opportunity to contract for such features and 
functions on the same or more favorable terms. Sec. V(C)(2-3).
    Third, the Proposed Decree contains detailed protections against 
any misuse of competitive information that AT&T might obtain in the 
course of providing equipment to unaffiliated cellular carriers. It 
requires AT&T to establish separate sales and marketing teams to serve 
McCaw and unaffiliated cellular carriers and separate equipment 
development teams for proprietary equipment development work. 
Sec. V(A)(4). It prohibits AT&T from disclosing ``Nonpublic 
Information'' of an unaffiliated equipment customer ``for any reason'' 
to McCaw (including any system in which McCaw has only a minority 
interest), to any McCaw personnel, to any person marketing any McCaw 
service or AT&T telecommunications service, or to any of the marketing, 
sales, or equipment 

[[Page 49877]]
personnel that market to or perform development work for AT&T or McCaw. 
Sec. V(A)(1).
    Fourth, the Proposed Decree requires AT&T to facilitate the 
replacement of its equipment, in whole or in part, with integrated 
systems of switches and cell sites of competing manufacturers if AT&T's 
existing customers wish to do so. AT&T must waive any contractual 
provisions granting it rights of prior notice or consent if the 
customer chooses to redeploy AT&T equipment to a new location, and must 
provide all reasonably necessary technical assistance and cooperation 
to help the customer replace its equipment and operate AT&T's system in 
conjunction with systems of AT&T competitors in whole or in part. 
Sec. V(D).
    The AT&T-McCaw Decree contains elaborate compliance and enforcement 
provisions. For example, in addition to penalties for imprisonment or 
fines for contempt of court, the Proposed Decree provides that if the 
Department determines that AT&T has violated any of the Decree's 
requirements in its dealings with McCaw cellular competitors who 
purchased AT&T equipment prior to the Decree's entry, the Department 
will have the authority to require AT&T to ``buy back'' that equipment 
at the original purchase price, less depreciation calculated on the 
straight line basis with useful lives of ten years for switches and 
eight years for all other hardware--irrespective of any shorter 
depreciation schedule actively used by any carrier. Sec. V(E). The 
Department would have ``sole and unreviewable discretion'' to make that 
determination, and AT&T ``irrevocably waive[s] any right it may have to 
appeal, contest, or otherwise challenge any adverse determination.'' 
Id.
    Bell Atlantic/NYNEX appear to concede that these provisions mean 
that it is improbable that AT&T's manufacturing or other personnel 
would engage in any misconduct that is detectable and provable. They 
are thus reduced to suggesting that AT&T's manufacturing arm could 
engage in subtle misconduct that would degrade their cellular service 
but that would not be ``detectable.'' However, anything that degrades 
an RBOC's cellular service is by definition detectable by it (otherwise 
it could have no competitive consequences), and anything that is 
detectable in this way can be the subject of complaints and potentially 
of proof and adverse findings. Indeed, the only way that AT&T 
conceivably engage in misconduct that would degrade an RBOC's service 
in markets where it competes with McCaw, but that would not be 
provable, would be if AT&T engaged in the identical misconduct in every 
market in the country in which AT&T supplies cellular equipment, 
including the vast majority of AT&T-equipped systems that do not 
compete with McCaw. See Appendix (attached hereto). Obviously, AT&T has 
powerful disincentives to engage in such conduct in these other areas 
for no benefits to McCaw could offset harm to AT&T.
    Procompetitive Effects of the Merger. For all these reasons, the 
provisions of the Proposed Decree--and sanctions availble--reduce the 
already tenuous risks that AT&T would engage in the hypothesized 
misconduct. See Fruehauf, 603 F. 2d at 355; Emhart Corp. v. USM Corp., 
527 F.2d 177 (1st Cir. 1975). Furthermore, the Department was also 
entitled (and required) to weigh the fact that, in addition to the 
remote threat that AT&T could use its manufacturing position to impede 
competition in local cellular markets, the merger would otherwise 
promote competition and benefit consumers in these same local cellular 
markets and potentially landline services as well. See pp. 2-3, 24, 
supra. In short, there is no question that the Department acted 
rationally in not seeking to enjoin an otherwise procompetitive merger 
and in instead settling its vertical manufacturing claim.

II. The Ad Hoc IXC's and RBOCs' Claims That the Proposed Decree Should 
Be Modified To Create ``Parity'' Are Outside the Scope of This 
Proceeding and Constitute Hypocritical Attempts To Nullify 
Procompetitive Features of the Merger

    The foregoing discussion establishes that, if anything, the 
provisions of the Proposed Decree go far beyond what is reasonable to 
address the Department's concern that the combined AT&T-McCaw could use 
their positions in cellular services or in manufacturing to harm 
competition in adjacent markets. Nothing more need be said to establish 
that the Proposed Decree is in the public interest.
    However, four of the RBOCs and a group of switchless resellers of 
interexchange services (the ``Ad Hoc IXCs'') claim that the Proposed 
Decree is contrary to the public interest because it does not contain 
other provisions that address a different set of purported competitive 
concerns that these commentors have, but that the Department does not. 
These RBOCs claim that AT&T-McCaw could enjoy ``advantages'' over their 
cellular businesses by reason of the MFJ's restriction on RBOCs and 
AT&T's putatively ``dominant'' position in interexchange services. On 
this basis, the RBOCs contend that the Proposed Decree will not be in 
the public interest unless ``parity'' is achieved by (1) barring AT&T-
McCaw from using names, addresses, and usage information of AT&T's long 
distance customers to market cellular services to any individuals who 
are cellular customers of RBOCs, and (2) granting the RBOCs' motion for 
``generic wireless'' relief from the MFJ's long distance restriction 
and imposing the same equal access restrictions on AT&T-McCaw as apply 
to the RBOCs cellular systems under the MFJ. Similarly, the Ad Hoc IXCs 
appear to fear that the combined AT&T-McCaw could extend AT&T's long 
distance ``dominance'' by converting McCaw's cellular systems into 
alternatives to the landline exchange monopolies.
    The short answer to these claims is that they go beyond the 
violations alleged in the Department's Complaint and they therefore 
cannot be raised in this Tunney Act proceeding. See 15 U.S.C. 
Sec. 16(e). The Department's Complaint alleged only that the combined 
AT&T-McCaw could use power in manufacturing and cellular services to 
impede competition in adjacent markets. Although RBOCs have previously 
raised (and the FCC rejected) it, the Complaint does not make the 
allegation that the RBOCs and Ad Hoc IXCs make: that AT&T's putatively 
dominant position in long distance services could give it advantages in 
cellular markets. The Department's failure to pursue these claims is 
not reviewable in a Tunney Act proceeding.\52\

    \52\ See U.S.C. Sec. 16(e); S. Rep. No. 298, 93d Cong., 1st 
Sess. 3 (1973); In re IBM Corp., 687 F.2d 591 (2d Cir. 1981) 
(Justice Department's decision to dismiss competitive claims is not 
reviewable under the Tunney Act).
---------------------------------------------------------------------------

    Further, even if the Department's decision not to pursue these 
claims could be reviewed, there is not the slightest doubt that the 
Department's determination was reasonable and, indeed, was compelled by 
the antitrust laws. Because AT&T neither has a bottleneck over long 
distance services nor controls any facilities or information that is 
essential to cellular carriers or their customers, the four RBOC's and 
Ad Hoc IXCs' claim is not that AT&T has power over them or their 
customers that it could exercise to distort free choice in cellular 
markets. Rather, it is that AT&T's position in long distance RBOCs 
``[b]ecause of MFJ requirements'' (Bell Atlantic/NYNEX, p. 10), that 
the RBOCs may lose certain customers and profits because of these AT&T 
advantages, and that the ``public interest'' therefore requires 
``parity.''

[[Page 49878]]

    However, it is elementary that ``the purpose of antitrust policy * 
* * is not to make competitors equal, or to avoid all forms of 
advantage; the antitrust laws are for the protection of competition, 
not competitors.'' Environmental Action, Inc. v. FERC, 939 F.2d 1057, 
1061 (D.C. Cir. 1991). As Judge Greene has elsewhere held, the 
antitrust laws are not intended ``to assure positive results for 
[individual] competitors'' but to ``protect the competitive process.'' 
United States v. Western Electric, 698 F. Supp. 348, 363 (D.D.C. 1988).
    Further, it is sheer hypocrisy for the RBOCs to complain about a 
lack of parity and about the MFJ. The Department has previously found 
that the MFJ has not competitively disadvantaged the RBOCs in competing 
with McCaw.\53\ To the contrary, the RBOCs' exchange monopolies have 
given their cellular businesses immense regulatory and other advantages 
over McCaw and other nonwireline carriers, and the RBOCs' newly-found 
interest in ``parity'' is simply an attempt to nullify legitimate 
efficiencies of the merger that could offset some of the advantages 
that the RBOCs have received from their bottleneck monopolies. In this 
regard, Judge Greene and now even the FCC have repeatedly rejected the 
RBOCs' claims that the MFJ's restrictions could either be removed from 
the RBOCs (or be imposed on firms that have no bottleneck monopolies) 
in the name of ``parity.''

    \53\ See United States v. Western Elec. Co., Civ. No. 82-0192 
(D.D.C.), Memorandum of the United States in Response to the Bell 
Companies' Motions for Generic Wireless Waivers, pp. 18-19 (July 25, 
1994) (``DOJ Generic Wireless Memorandum'').
---------------------------------------------------------------------------

    In this regard, all of the specific claims that the RBOCs and Ad 
Hoc IXCs advance constitute challenges to procompetitive features of 
the merger.
A. The RBOCs' Proposal for a Marketing Restriction Is Both Antithetical 
to the Antitrust Laws and Hypocritical
    The four RBOCs' principal claim is that the Proposed Decree would 
be anticompetitve and contrary to public interest unless a new 
marketing/solicitation restriction were added that barred AT&T-McCaw 
from using the names, addresses, and long distance usage information of 
AT&T's long distance customers to market cellular service to any 
individual who is also an existing cellular customer of an RBOC. E.g., 
SBC, pp. 6-15; Bell Atlantic/NYNEX, pp. 10-12. The RBOCs assert that 
AT&T-McCaw would otherwise obtain ``anticompetitive'' advantages from 
its ``dominance'' in long distance service, that the customer 
information in question is the RBOCs' ``property'' which the Proposed 
Decree (and the MFJ) elsewhere protect, and that it was thus 
``inexplicable'' and ``inconsistent'' for the Department to allow AT&T-
McCaw to use this information.
    These claims are not merely baseless. They are transparent attempts 
to prevent competition for RBOC customers and to preserve advantages 
that the RBOCs derive from their control over bottleneck local 
telephone monopolies.
    The Claims Are Antithetical to Antitrust. First, the marketing 
restrictions that the RBOCs seek are antithetical to the antitrust 
laws. As courts have uniformly held and as the RBOCs have elsewhere 
argued, the ability of a firm to offer new services (e.g., cellular) to 
customers of its own services (e.g., long distance) is procompetitive 
and beneficial to consumers. Here, moreover, the ability of AT&T-McCaw 
to engage in this ``cross-selling'' is one of the principal ways in 
which the merger would create genuine efficiencies and consumer 
benefits that would offset advantages the RBOCs derive from their local 
exchange monopolies.
    In particular, AT&T provides an array of telecommunications 
services and products to actual or potential cellular customers--long 
distance services, cellular and other CPE, computers, and the AT&T 
Universal Card (a combined telephone calling/credit card). The 
relationships that AT&T has with these customers will enable the 
combined AT&T-McCaw both to identify actual or potential customers of 
cellular services and to inform them about AT&T cellular service at 
very low cost: e.g., through inserts in billing envelopes, direct 
mailings, or the like.\54\ In this regard, because AT&T has provided 
high quality services, superior customer support, and attractive 
prices, the AT&T brand is a strong warranty of quality, and there may 
be many existing AT&T customers who would value receiving an ``AT&T 
cellular service'' offering that same quality and who would choose to 
do so if AT&T engages in this direct marketing to its customers.

    \54\ Contrary to the RBOCs' suggestions (see SBC, Affidavit of 
John T. Stupka, para. 7), the Proposed Decree prohibits AT&T from 
providing long distance services on more favorable terms to cellular 
customers of McCaw than to other cellular customers (see 
Sec. IV(F)(1)), so AT&T could not make ``targeted offers'' for long 
distance services that would not be available to RBOCs' cellular 
customers.
---------------------------------------------------------------------------

    At the same time, contrary to the RBOCs' suggestions (e.g., Bell 
Atlantic/NYNEX, pp. 10-11), such marketing efforts would not and could 
not themselves cause any customer to switch to AT&T. Rather, they would 
merely be an efficient, low-cost way for AT&T to give its own long 
distance (and other) customers information about AT&T cellular service 
and the choice whether to use it or not. Those customers who are 
satisfied with the RBOC cellular service, who believe it will be 
improved, or who otherwise do not regard the AT&T-McCaw cellular 
offering as more attractive would say ``no'' to the AT&T offer. 
Conversely, those customers who value dealing with AT&T, who were 
dissatisfied with RBOCs, and who perhaps have dealt with them only 
because of doubts about McCaw, might say ``yes'' to the AT&T offer. In 
either event, consumers will benefit from the solicitation because 
additional choices will have been extended to them efficiently and 
because rivalry for their business will increase.
    In this regard, these RBOCs have elsewhere admitted that they are 
seeking to block these AT&T marketing efforts in order to protect the 
RBOCs' customer bases and profit margins, not to benefit consumers and 
competition. In particular, when NYNEX and Bell Atlantic unsuccessfully 
sought this same restriction on AT&T-McCaw at the FCC, these RBOCs 
claimed that the ``power of AT&T-McCaw brand'' and the ability to offer 
cellular packages that contain this same warranty of quality could 
cause the RBOCs to lose significant percentages (``10% to 25%'') of 
their existing customers ``in the first year.'' \55\ These assertions 
are likely hyperbole, for it is difficult to believe that even a 
slothful monopolist could have offered such poor service and so 
alienated its customers that so many would immediately switch to AT&T-
McCaw. However, the RBOCs have one and only remedy under the antitrust 
laws if they have created such a situation. It is to compete on the 
merits and to seek to retain customers, and to win back any that are 
lost, by improving the quality of their cellular services, reducing 
their price, or otherwise making their own cellular offerings more 
attractive. That would benefit consumers, and it is extraordinary that 
RBOCs would suggest that an antitrust court should seek to protect an 
RBOC's customer base and profits from competition.

    \55\ See AT&T-McCaw FCC Proceeding, Petition of NYNEX 
Corporation and Bell Atlantic Corporation for limited 
Reconsideration, p. 7 (Oct. 19, 1994).
---------------------------------------------------------------------------

    Similarly, SBC makes the anticompetitive and paternalistic 
assertion that many of its customers would be better off if they were 
protected from competition because they spend ``as little [sic] as'' 
$100 a 

[[Page 49879]]
month and are thus not ``sophisticated.'' SBC, p. 13. In particular, 
SBC contends that these customers would not know to respond to AT&T's 
solicitations by seeking better ``offers'' from competitors.\56\ Quite 
apart from the fact that the antitrust laws reject this paternalism, 
SBC ignores that the RBOCs are always free themselves to make these 
``better offers'': e.g., by reducing the price or improving the value 
of their services, by making ``counter offers'' to any customers who 
seek to terminate cellular service to go elsewhere, or by making 
targeted offers to ``win back'' customers who leave. Again, that is the 
competition that the antitrust laws seek to foster, and SBC's argument 
is an admission that it is seeking restrictions that would harm 
consumers and diminish rivalry.

    \56\ See Southwestern Bell v. FCC, Nos. 94-1637 & 94-1639 (D.C. 
Cir.), Brief for Appellant SBC Communications Inc., p. 29 (Dec. 28, 
1994).
---------------------------------------------------------------------------

    It is for these reasons that federal courts have uniformly held 
that restrictions on customer solicitations are alien to the antitrust 
laws. For example, courts of appeals have held that the antitrust laws 
cannot be used to enjoin or punish a firm's use of customer lists to 
market services even when the lists may have been misappropriated from 
a competitor in violation of state unfair competition laws \57\--as 
AT&T's lists of its own long distance customers were not. These courts 
hold that the customer solicitation ``enhance[s] rivalry rather than 
reducing it,'' that it benefits consumers to receive additional 
choices, and that while regulatory statutes and ``unfair competition 
laws'' may place some constraints on these activities, the antitrust 
laws cannot, for they are designed to protect competition, not 
competitors.\58\

    \57\ See, e.g., Northwest Power Products, Inc. v. Omark 
Industries, Inc., 576 F.2d 83 (5th Cir. 1978) (rejecting claim that 
it violated antitrust laws for dealer and new distributor to 
conspire to take away plaintiff old distributor's customers by 
hiring a contingent of its employees, together with a customer 
list); accord Seaboard Supply Co. v. Congoleum Corp., 770 F.2d 367, 
375 (3d Cir. 1985).
    \58\ See Northwest Power Products, 576 F.2d at 88-91 (noting 
that the challenged conduct, even if unfair, ``enhanced rivalry 
rather than reducing it,'' and holding that ``the purposes of 
antitrust law and unfair competition law generally conflict. The 
thrust of antitrust law is to prevent restraints on competition. 
Unfair competition is still competition and the purpose of the law 
of unfair competition is to impose restraints on that competition. 
The law of unfair competition tends to protect a business in the 
monopoly over the loyalty of its employees and its customer lists, 
while the general purpose of the antitrust laws is to promote 
competition'') (emphasis added).
---------------------------------------------------------------------------

    Indeed, courts have thus uniformly held that it raises no issue 
under the antitrust laws when, as here, a large integrated firm uses 
its own customer lists to market new services (like cellular) to 
existing customers of its own services (like long distance). In 
particular, it is well-settled that when no essential facilities are 
involved, it is efficient and procompetitive for a large multi-product 
firm to take advantage of its integration in the same way a smaller 
multi-product firm would. See Berkey Photo, Inc. v. Eastman Kodak Co., 
603 F.2d 263 (2d Cir. 1979). On this basis, courts have held that it is 
procompetitive and raises no issue under the antitrust laws when even a 
local gas monopoly uses lists of its own gas customers to advertise and 
market related products (there, gas vent dampers) because no essential 
facilities are involved and the conduct constitutes a legitimate and 
procompetitive efficiency of integration, not an abuse of monopoly. See 
Catlin v. Washington Energy Co., 791 F.2d 1343, 1345-48 & n.1 (9th Cir. 
1986) (rejecting claim of a group of suppliers of vent dampers that the 
gas company ``should be barred from permitting its merchandising 
division to use the list [of gas company customers] to advertise vent 
dampers to the detriment of competit[ors] in the vent damper market'') 
(internal quotation omitted).
    In this regard, the RBOCs' contention that AT&T is a ``dominant'' 
long distance carrier with ``market power'' is both erroneous and 
irrelevant. The claims are erroneous because the RBOCs' claims rest on 
FCC findings that were made in 1982 and that have no current 
validity.\59\ The reality is that AT&T faces up to 35 long distance 
competitors in each RBOC cellular system. Whereas AT&T believes that 
its share of cellular-originated long distance calling is not 
materially different from its share of switched long distance calling 
(currently 57.8% of minutes),\60\ the fact is that each AT&T long 
distance customer freely chose AT&T in a competitive market. In all 
events, the RBOCs' claims are irrelevant, for the foregoing cases 
squarely hold that it is procompetitive and beneficial to consumers for 
even ``the dominant firm in any market * * * [to] create demand for 
[its] new products'' by marketing new services to its existing 
customers.\61\

    \59\ The RBOCs rely on the fact that AT&T is classified as a 
``dominant'' carrier because the FCC previously found AT&T to 
possess market power. However, AT&T was so classified in 1982. Since 
that time, the FCC has eliminated price cap and other economic 
regulations of AT&T's 800 and large business services (Baskets 2 and 
3). See Competition in the Interstate Interexchange Marketplace, 6 
FCC Rcd 5880, 5893-96, 5908 (1991) (Basket 3); id., 8 FCC Rcd 3668, 
3671 (1993) (Basket 2). In addition, based on its finding of 
``adequate competitive alternatives,'' the FCC recently announced 
its intention to remove all commercial long distance services from 
Basket 1. See Revisions to Price Cap Rules for AT&T Corp., CC Docket 
No. 93-197, 1995 FCC LEXIS 250, para. 26 (Jan. 12, 1995). The FCC 
has retained price cap regulation of AT&T's residential services 
only because the FCC stated that it cannot determine (one way or 
another) whether AT&T has market power in these segments of the long 
distance market. See Competition in the Interstate Interexchange 
Marketplace, 6 FCC Rcd at 5908 (``there are unresolved issues and 
insufficient information in the record about the competitiveness of 
Basket 1 operator services''); Price Cap Performance Review for 
AT&T, 8 FCC Rcd 6968, 6970 (1993). Finally, AT&T has now shown that 
it has no such market power and should be classified as 
``nondominant.'' See Motion for Reclassification of American 
Telephone & Telegraph Company as a Nondominant Carrier, CC Docket 
No. 79-252 (FCC, filed September 22, 1993).
    \60\ The FCC has reported that, in the third quarter of 1994, 
some 71% of telephone lines were presubscribed to AT&T, but it has 
only 57.8% of total minutes. The discrepancy reflects that customers 
who make no, or few, long distance calls disproportionately select 
AT&T, which gives it a higher percentage of presubscribed lines that 
AT&T has of actual long distance calling. Similarly, whereas the 
Department has found that in excess of 70% of cellular customers 
select AT&T (Competitive Impact Statement, pp. 12-13), that figure 
does not reflect the percentage of cellular-originated calls or 
minutes that AT&T carries.
    \61\ Foremost Pro Color, Inc. v.Eastman Kodak Co., 703 F.2d 534, 
546 (9th Cir. 1983). Accord Berkey Photo, 603 F.2d at 273-76; Catlin 
v. Washington Energy, 791 F.2d at 1345-48.
---------------------------------------------------------------------------

    In this regard, whereas regulatory agencies have authority to adopt 
solicitation restrictions, the FCC has also concluded that it promotes 
competition and benefits consumers to allow AT&T to market other 
products or services to its long distance customers. For example, at a 
time in which AT&T's long distance market share was 90%, the FCC held 
that AT&T could use lists of its long distance customers and their 
usage information to market CPE and enhanced services to any customer 
who did not notify AT&T that it did not wish to receive such 
solicitations,\62\ and the FCC extended the same regulation to AT&T's 
marketing of cellular service in the order approving the AT&T-McCaw 
merger.\63\ In this regard, the FCC found that the ability of AT&T-
McCaw to engage in joint marketing and ``cross-selling'' is one of the 
principal ways in which the merged entity can compete more effectively 
with the local RBOC monopoly and that the RBOCs' ``parity for parity's 
sake'' arguments are contrary to the Communications Act as well as the 
antitrust laws.\64\

    \62\ See Amendment of Section 64.702 of the Commission's Rules 
and Regulations, 104 FCC 2d 958, 1089 (1986).
    \63\ See FCC Order, para. 83.
    \64\ See FCC Order, Paras. 32, 83.
---------------------------------------------------------------------------

    The RBOCs' Claims Are Hypocritical. The RBOC pleas for ``parity'' 
are not only anticompetitive, but also hypocritical, for they are 
simply seeking to preserve (and extend) advantages that the RBOCs 
received because of their 

[[Page 49880]]
local exchange monopolies. These monopolies meant that the RBOCs 
received ``B'' Block cellular licenses at no cost in their franchised 
monopoly territories, that they received one to three year headstart 
monopolies over nonwireline competitors which guaranteed the RBOCs the 
exclusive right initially to sign up the best cellular customers, and 
that the RBOCs are able to ``piggy back'' (SBC, p. 12) on the local 
exchange monopoly through use of common trade names and joint 
advertisements and the receipt of monopoly financing. See pp. 10-12, 
supra. These factors help explain why every significant nonwireline 
carrier (save McCaw) was forced to sell out to RBOCs, and why McCaw has 
the $5.7 billion debt, and marketing weaknesses, that led to the 
merger. See pp. 12-13, supra. The RBOCs previously defended this lack 
of ``parity.'' See pp. 10-13, supra.
    In this regard, if there were any basis for Bell Atlantic/NYNEX's 
prediction that they could immediately lose significant numbers of 
customers to AT&T-McCaw, the only possible explanation would be that 
these RBOCs have acquired and retained many of their customers solely 
because of the foregoing advantages. In particular, that prediction 
could be accurate only if these RBOCs had obtained and retained these 
customers solely by exploiting fears about McCaw's weaknesses and 
competence and the benefits of dealing with large, experienced 
telecommunications carriers, not because these RBOCs in fact provided 
high quality and competitively-priced services.
    Further, the RBOCs' proposal is hypocritical for the added reason 
that they have elsewhere argued the precise opposite of what they here 
urge. As noted above, there are conditions in which the FCC has the 
authority to impose the kinds of marketing/solicitation restrictions 
that RBOCs seek, and the RBOCs have opposed the adoption or 
continuation of these restrictions on the RBOCs' offerings. The RBOCs 
have argued to the FCC on the basis of Catlin and other authorities 
cited above that it is procompetitive for RBOCs to be free to use their 
monopoly local exchange customer lists and usage information to market 
competitive enhanced services and CPE to their customers.\65\ Indeed, 
the RBOCs succeeded, on that basis, in overturning FCC regulations that 
previously barred these direct solicitations.\66\ In each instance, the 
RBOCs are able to market their CPE and enhance services to local 
exchange customers who currently use other vendors for those 
competitive offerings and who are, in the RBOCs' words, a ``joint'' 
customers of an RBOC and an independent CPE and enhanced services 
vendor.

    \65\ For example, in defending against ``competitive equity'' 
challenges to the Commission's regulations that allow RBOCs to use 
their customers' names and usage information (``CPNI'') to market 
``enhanced services,'' the RBOCs, citing Catlin, ``argue[d] that 
their access to CPNI is no different from an unregulated company's 
access to its customer records and should therefore be permitted.'' 
Computer III Remand Proceedings, 6 FCC Rcd. 7571, 7608 (1991).
    \66\ See Furnishing Customers Premises Equipment by the Bell 
Operating Telephone Companies, 2 FCC Rcd 143, 152-53 (1987) 
(removing restrictions on RBOCs' use of local customer information 
in marketing CPE); Amendment of Section 64.702 of the Commission's 
Rules and Regulations (Third Computer Inquiry), 104 FCC 2d 958, 1091 
(1986) (removing restrictions on RBOCs' use of local exchange 
customer information to market enhanced services), recon., 2 FCC Rcd 
3072, 3094-95 (1987), recon., 3 FCC Rcd 1150, 1162-63 (1988), 
recon., 4 FCC Rcd 5927 (1989), vacated and remanded, California v. 
FCC, 905 F.2d 1217 (9th Cir. 1990), on remand, 6 FCC Rcd 7571, 7609-
14 (1991), vacated and remanded in part and affirmed on this ground, 
California v. FCC, 39 F.3d 919, 930-31 (9th Cir. 1994).
---------------------------------------------------------------------------

    Even more pertinently, the RBOCs seek the same rights in cellular. 
While FCC cellular regulations have barred RBOCs from using local 
exchange customers' information in marketing cellular service (47 CFR 
Sec. 22.901(d)), the RBOCs are seeking to overturn these restrictions 
and obtain the same rights to use their customers' information in the 
marketing of cellular radio service that AT&T possesses.\67\

    \67\ See, e.g., Petition of Bell Atlantic, NYNEX, and 
Southwestern Bell for Investigation and for Order to Show Cause pp. 
3, 12-14, FCC File No. MSD 93-13 (Jan. 27, 1993) (arguing that these 
and other Part 22 restrictions on RBOCs should be removed).
---------------------------------------------------------------------------

    The RBOCs also argue that AT&T would not have independent long 
distance customer relationships with RBOCs cellular subscribers if the 
MFJ did not bar RBOCs from providing interexchange services and require 
them to provide equal access. But that claim is irrelevant and 
erroneous. The plaintiffs in Catlin and the RBOCs' CPE and enhanced 
services competitors were legally barred from providing the monopoly 
gas and exchange services, but courts and the FCC nonetheless held that 
it was efficient and procompetitive for the monopolies in Catlin (and 
the RBOCs) to use their customer lists in marketing competitive 
products and services. Those principles apply a fortiori in the case of 
AT&T, for its long distance services are competitive.
    More fundamentally, the RBOCs' arguments simply confirm the wisdom 
of the MFJ. The MFJ restrictions on the RBOCs have been upheld by Judge 
Greene, the Court of Appeals, and the Supreme Court precisely because 
of the substantial likelihood that RBOCs would otherwise use their 
bottleneck monopolies to impede long distance competition, harm 
consumers, and thwart the objectives of the antitrust laws. The RBOCs 
are here seeking to prevent AT&T-McCaw from competing more effectively 
with the RBOCs' cellular services by claiming that they would now have 
long distance monopolies if the MFJ did not exist. That shows that the 
MFJ promotes competition in cellular as well as long distance services.
    The Information at Issue Is the Customers' Property, Not the 
RBOCs'. The RBOCs also claim that information that AT&T possesses 
consists of ``property'' or ``trade secrets'' that the Proposed Decree 
(and the MFJ) elsewhere protect, and that the Department acted 
inconsistently by allowing AT&T-McCaw to use AT&T's long distance 
customer information in marketing cellular services. There is no basis 
for this claim. The information that AT&T has consists of the names, 
addresses, and long distance usage information of AT&T's own long 
distance customers who freely choose AT&T services and who allow AT&T 
to use the information to offer other products or services. In this 
regard, the pertinent FCC regulations recognize that this information 
is the customer's not any carrier's, and the customer controls how the 
information is to be used. By contrast, the only information that the 
Proposed Decree protects is the nonpublic information of cellular 
carriers in their capacity as customers of equipment manufacturers.
    Preliminarily, there is no basis for the RBOCs' insinuations that 
AT&T's long distance arm has the lists and cellular usage information 
of the RBOCs' cellular customers. Lists of RBOC cellular customers and 
usage information are not provided to AT&T or any other long distance 
carrier when cellular systems ``cut over'' to equal access or 
otherwise. For example, to the extent that long distance carriers mail 
out marketing literature to cellular customers, they do so by providing 
the literature to independent agents who receive the customer lists 
from the RBOCs and who mail out the long distance carrier's literature. 
That has been the practice under the MFJ, and the Proposed AT&T-McCaw 
Decree similarly limits the use of McCaw's cellular lists to the 
marketing of long distance services. Proposed Decree, Sec. IV(C).
    Conversely, when a cellular customer selects an individual 
interexchange carrier, that customer's name, address, 

[[Page 49881]]
and long distance (but not local cellular) usage information is 
forwarded to the long distance carrier to whom the customer 
subscribes.\68\ Long distance carriers, in turn, are free to use that 
information to offer their long distance customers any other products 
or services, be they CPE, enhanced service, or cellular service, 
subject only to FCC regulations. Notably, contrary to these RBOCs' 
assertions (e.g., SBC, p. 8), the same rule applies under the Proposed 
Decree. If a McCaw cellular customer subscribes to Sprint, MCI, or any 
other AT&T competitor, that firm obtains the foregoing information from 
its customers and is free to use that information in offering other 
products or services, including cellular service or substitutes for 
cellular service (e.g., PCS), subject only to FCC regulations.

    \68\ SBC concedes the point, for it is reduced to making 
contrived arguments to the effect that AT&T could make guesses about 
whether a particular AT&T long distance customer is an ``above-
average'' cellular customer of an RBOCs. See SBC, p. 9. For example, 
SBC states that many cellular customers (an alleged 75%) who make 
over 275 minutes of long distance calls a month are above average 
local cellular users--meaning that 25% of even the heaviest long 
distance users are below average cellular customers. Conversely, as 
SMC's charts show, there are a significant percentage of ``above 
average'' customers (50%) that make few long distance calls (120 
minutes) and a significant percentage of ``above average'' cellular 
customers (10%) that make no long distance calls. See id., Stupka 
Aff., Attach. A. That reflects the reality that long distance 
calling represents a small fraction (an average of 10% according to 
the RBOCs) of total cellular usage.
---------------------------------------------------------------------------

    Further, the FCC regulations reject these RBOCs' claims that any 
information about their cellular customers is the RBOCs' property and 
hold, to the contrary, that the uses of the information should be 
controlled by the customer, not by any carrier. In particular, the FCC 
regulations applicable to AT&T provide that, upon a customer's request, 
AT&T must (1) make that customer's usage and other information 
available to AT&T competitors, and (2) prohibit AT&T personnel involved 
in marketing cellular service (or CPE and enhanced services) from using 
the customer's name, address, and long distance usage information.\69\

    \69\ See Furnishing of Customer Promises Equipment and Enhanced 
Services by AT&T, 102 FCC 2d 655 (1985); Amendment of Section 64.702 
of the Commission's Rules and Regulations (Third Computer Inquiry), 
104 FCC 2d 958 (1986), recon., 2 FCC Rcd 3072 (1987), recon., 3 FCC 
Rcd 1150 (1988), recon., 4 FCC Rcd. 5927 (1989), vacated in part on 
other grounds, California v. FCC, 905 F.2d 1217 (9th Cir. 1990). See 
also FCC Order, para. 83. Further, just as the FCC recognized that 
customers should control uses of information, the FCC stated that 
``[i]f a cellular carrier could prove that AT&T/McCaw 
misappropriated [customer information] or misused such information 
entrusted to it, that carrier would have a remedy through the 
Commission complaint process or the courts.'' FCC Order, para. 83.
---------------------------------------------------------------------------

    Against this background, there is no basis for the RBOCs' claims 
that the absence of a restriction on AT&T's solicitation of its own 
customers is inconsistent with other provisions of the Proposed Decree 
that protect cellular carriers' and cellular manufacturers' trade 
secrets and other nonpublic information. In particular, the RBOCs refer 
to the Proposed Decree's provisions that prohibit AT&T's manufacturing 
arm from disclosing to McCaw nonpublic information about its 
competitors' cellular systems (and that prohibit McCaw from giving 
AT&T's manufacturing arm nonpublic information of other cellular 
equipment manufacturers).
    But there is no inconsistency. In each event, it is the customer 
who controls dissemination of information. An RBOC cellular carrier is 
the customer of AT&T's manufacturing arm, and the Proposed Decree 
prohibits AT&T from disclosing to McCaw nonpublic information about the 
RBOC cellular system which the RBOC owns and has a legal right to 
protect, which is provided to AT&T under contractual provisions 
requiring that it not be disclosed to competing cellular carriers, and 
which (in the Department's view) the RBOC is required to continue 
providing AT&T by virtue of the alleged ``lock-in.'' AT&T and McCaw 
readily agreed to these provisions because each unit of AT&T will 
always safeguard nonpublic information that customers (or suppliers) 
provide AT&T in confidence.\70\ Competition requires all suppliers to 
protect customers' proprietary information (and vice versa), so the 
Proposed Decree merely enjoins AT&T and McCaw to behave as all firms 
behave in competitive markets.

    \70\ Further, because it is the Department's view that some of 
the information in question could not directly be exchanged between 
competing cellular carriers without facilitating collusion between 
carriers (see United States v. Container Corporation of America, 393 
U.S. 333 (1969)), the Proposed Decree provides that AT&T cannot pass 
such information on to McCaw even if the RBOCs consent.
---------------------------------------------------------------------------

    By contrast, the names, addresses, and long distance usage 
information of AT&T's long distance customers are not information from 
or about the RBOCs' cellular system. Rather, it is information about 
AT&T's customers which those individual long distance customers provide 
to AT&T by freely choosing AT&T's long distance service. Further, those 
customers can decide not to receive cellular or other solicitations 
from AT&T and are also free to reject any such solicitations from AT&T 
and are also free to reject any such solicitations (and to change long 
distance carriers). There is no competitive or other basis to prohibit 
AT&T from marketing cellular or other services to those customers who 
allow these solicitations. To the contrary, as explained above, that 
would be anticompetitive and harmful to consumers.
B. The RBOCs' Other Attempts to Obtain ``Parity'' Are Spurious 
Challenges to the MFJ
    In addition to the foregoing claims, the four RBOCs also argue that 
the Proposed Decree is not in the ``public interest'' because it does 
not otherwise achieve strict ``parity'' between the RBOCs and AT&T-
McCaw. In particular, while the Proposed Decree's equal access 
provision and interexchange services restriction on McCaw eliminate 
``disadvantages'' of which the RBOCs formerly complained--e.g., McCaw's 
ability to offer the ``City of Florida'' and other such ``bundled'' 
wide area calling plans--the RBOCs object that there are a number of 
respects in which the Proposed Decree otherwise contains different 
provisions from the MFJ. On the basis, these RBOCs claim that the 
Proposed Decree will not be in the public interest unless the MFJ's 
interexchange services restriction on RBOC wireless services is first 
removed and the Court adopts identical equal access and long distance 
restrictions for AT&T-McCaw and for RBOCs.
    These claims are baseless. While many of the RBOCs' claims are 
based on misinterpretations of the Proposed Decree, Judge Greene (and 
the FCC) have repeatedly held that the public interest patently does 
not require ``parity'' between AT&T-McCaw and the RBOCs and that the 
RBOCs are properly subjected to different restrictions under the MFJ 
because they alone have bottleneck monopolies.
    Foremost, Judge Greene has so held in a number of decisions under 
the MFJ. In particular, the RBOCs have repeatedly sought to modify the 
MFJ's long distance and other restrictions by claiming that doing so 
was necessary to enable them to compete with AT&T and others on equal 
terms. In each case, Judge Greene flatly rejected these claims on the 
ground that the RBOCs have bottleneck monopolies that can be used to 
impede long distance competition and AT&T and others do not.\71\

    \71\ See, e.g., United States v. Western Elec. Co., 627 F. Supp. 
1090, 1098-1104 (D.D.C. 1986) (shared tenant services); United 
States v. Western Elec. Co., 592 F. Supp. 846, 868 (D.D.C. 1984) 
(BellSouth NASA waiver).
---------------------------------------------------------------------------

    Further, the FCC has now agreed with Judge Greene. In particular, 
the FCC 

[[Page 49882]]
rejected the same arguments that these RBOCs here press in its order 
that approved the AT&T-McCaw merger. The FCC held that ``the rationale 
for the MFJ's limitations on the BOCs--the existence of a long-
entrenched exchange service bottleneck encompassing virtually every 
home and business in the BOCs' territories--does not apply to AT&T/
McCaw,'' that there is no competitive or other public interest reason 
for imposing additional restrictions on AT&T/McCaw, and that neither 
the antitrust laws nor the Communications Act permits the creation of 
``parity for parity's sake.'' \72\

    \72\ FCC Order, para. 32 (footnote omitted).
---------------------------------------------------------------------------

    Nor is there any merit to the four RBOCs' startling claim that the 
Proposed Decree is ``contingent'' on removal of the MFJ's interexchange 
services restriction on RBOC cellular systems and the adoption of 
``parity.'' BellSouth, p. 4; see SBC, p. 19. The proposed Decree says 
no such thing. The reason is that while the Department has urged 
(erroneously in AT&T's view) this modification of the MFJ under certain 
conditions, the Department recognized that AT&T opposed this proposal 
and that it would not be granted unless the Court concluded the 
proposal satisfied the standard set forth in Section VIII(C) of the 
MFJ. Further AT&T is a party to the Proposed Decree, and it would not 
have agreed to it if it were conditioned on modification of the MFJ.
    Indeed, in arguing otherwise, the four RBOCs rely on the 
Department's assertion in the Competitive Impact Statement that the 
equal access provisions in the Proposed Decree are ``modeled on'' the 
MFJ and ``largely identical to the conditions recommneded by the United 
States for provision of interexchange cellular service by the Bell 
Companies.'' Competitive Impact Statement, p. 15 (emphasis added). 
However, as the Department has made explicit, the two sets of 
conditions are identical only insofar as each is designed to prevent 
cellular carriers from using market power in cellular services to deny 
cellular customers the ability to select their interexchange services 
provider,\73\ and it is also the Department's view that the RBOCs' 
control of landline exchange monopolies require additional restrictions 
that apply to the RBOCs alone.\74\

    \73\ See Competitive Impact Statement, pp. 14, 16-17; DOJ 
Generic Wireless Memorandum, pp. 19-21.
    \74\ DOJ Generic Wireless Memorandum, pp. 40-42.
---------------------------------------------------------------------------

    The foregoing facts dispose of all the RBOCs' claims of lack of 
``parity.'' However, many of the RBOCs' specific claims rest on 
misunderstandings of the AT&T-McCaw Decree, and each of them is 
otherwise meritless.
    Interexchange Traffic Routing. First, three of the RBOCs (SBC and 
Bell Atlantic/NYNEX) object that the Proposed AT&AT-McCaw Decree allows 
McCaw's switches to perform ``interexchange traffic routing,'' \75\ but 
the Department has not proposed that the RBOCs be able to perform this 
function. This claim is baseless.

    \75\ I.e., sorting long distance calls by destination and 
routing them to different circuits depending on the destination of 
the call.
---------------------------------------------------------------------------

    Preliminarily, it is not the case that the Proposed Decree 
unqualifiedly allows interexchange traffic routing by McCaw. To the 
contrary, it allows McCaw to perform this function for AT&T only if 
McCaw is able to offer to do so for other interexchange carriers on the 
same terms and conditions. Proposed Decree, Sec. IV(D)(1). Further, 
while McCaw believes that it will perform these routing functions 
during the life of the Decree, it has no plans to engage in 
interexchange traffic routing in the immediate future or to do so on 
the scale hypothesized by the RBOCs. Compare SBC, pp. 20-21.
    Further, the difference in treatment between AT&T-McCaw and the 
RBOCs is abundantly justified. Because McCaw does not own the 
bottleneck landline access facilities that connect its MTSOs to 
interexchange carrier networks, there is no risk that McCaw's provision 
of interexchange traffic routing functions could lead to discrimination 
against competing interexchange carriers in access to essential 
facilities or to cross-subsidization of competitive services with 
monopoly revenues. By contrast, if an RBOC cellular system were 
authorized to provide functions from its MTSOs, its control of local 
bottlenecks would enable it to discriminate at will in pricing and 
provisioning monopoly exchange facilities. In particular, because its 
MTSO would then become part of its interexchange network, it could then 
preferentially provide itself bottleneck facilities on the ground that 
those facilities are not performing access functions, but are part of 
its ``competitive'' long distance business.
    In this regard, it is revealing that the only way the RBOCs can 
claim that they should be allowed to provide these interexchange 
traffic routing functions is by claiming, once again, that 
interexchange carriers are not dependent on RBOCs for the access 
facilities connecting interexchange carrier points of presence 
(``POPs'') to MTSOs, but can obtain these access facilities from their 
parties. See SBC, pp. 21-22. However, that assertion is false--as AT&T 
and MCI have elsewhere demonstrated.\76\

    \76\ See United States v. Western Elec. Co., Civ. No. 82-0192 
(D.D.C.), AT&T's Reply to the Response of the Bell Companies to 
AT&T's Supplemental Comments on the Motion for a Generic 
``Wireless'' Modification of the Decree's Interexchange Services 
Restriction, pp. 3-5 (Nov. 23, 1994); id., Transcript of Oral 
Argument Concerning Generic Wireless Waiver Request, pp. 49-54 (Dec. 
14, 1994).
---------------------------------------------------------------------------

    Sales Agency. The RBOCs next object that, whereas the Department's 
generic wireless proposal requires RBOCs to have separate sales forces 
for cellular services, the Proposed AT&T-McCaw Decree (the RBOCs claim) 
allows AT&T's long distance arm ``to perform all marketing of local and 
long-distance cellular services for McCaw.'' SBC, p. 25; see Bell 
Atlantic/NYNEX, p. 13. However, that claim is based on a misreading of 
the Proposed Decree.
    The Proposed Decree requires that McCaw be maintained as a separate 
corporation that is responsible for ``the operation * * * and the 
marketing'' of its wireless systems, that McCaw cannot ``delegate 
substantial responsibility for the performance of [these functions] to 
AT&T,'' and that McCaw cannot provide or market long distance service 
after a system converts to equal access. Sec. III(C). Because the 
ability of AT&T to use its long distance and other personnel to market 
cellular service and to engage in joint marketing of local cellular and 
long distance services through these other channels is a major 
procompetitive efficiency of the merger (see pp. 51-58, supra), the 
Proposed Decree also provides that AT&T is allowed to act as McCaw's 
``agent'' in marketing cellular service and in jointly marketing long 
distance and cellular service. However, this ``agency'' provision does 
not mean AT&T can perform all marketing for McCaw. The Decree requires 
McCaw to retain its own independent retail marketing outlets and sales 
channels.
    Customer Location Databases. Bell Atlantic/NYNEX further claim that 
the Proposed Decree is unlike the MFJ in that it purportedly does not 
require McCaw to provide interexchange carriers with nondiscriminatory 
access to McCaw's customer location databases. However, this claim, 
too, rests on a misunderstanding of the Proposed Decree. Although the 
Proposed Decree's definition of MTSO may not include customer location 
databases (compare Bell Atlantic/NYNEX, p. 3 with Proposed Decree, 
Sec. II(W)), the Proposed Decree requires that all interexchange 
carriers obtain ``customer location information for use 

[[Page 49883]]
in routing calls'' in the ``same manner'' and under the same ``terms 
and conditions'' as does AT&T. Proposed Decree, Sec. IV(D)(1).
    Boundaries After Equal Access Conversions. The Proposed Decree 
provides that after individual McCaw cellular systems convert to equal 
access, each system generally will be limited to the same local calling 
areas as apply to RBOCs under the MFJ. However, several RBOCs object 
that McCaw would be authorized to provide cellular service in 19 
multiLATA areas in which RBOCs do not currently have MFJ waivers to 
provide cellular service. BellSouth, pp. 10-11; Bell Atlantic/NYNEX, 
pp. 13-14. The Decree contains this exception because McCaw has been 
licensed to serve the MSAs that comprise these areas and McCaw has 
established a single integrated cellular system that serves MSAs in the 
remote LATAs through one or more central switches that are located in a 
different LATA.
    But there is no lack of ``parity'' in these areas, and no possible 
claim that this feature of the Proposed Decree is virtually certain to 
impede competition. Quite apart from the fact that there are many areas 
in which the RBOCs' cellular systems serve larger areas than do the 
competing McCaw systems, the overriding fact is the RBOCs are not 
licensed to serve the same MSAs that comprise any of these 19 multiLATA 
local cellular calling areas or otherwise have had no occasion to seek 
a comparable waiver under the MFJ for these areas. Further, each of 
these 19 areas is comparable in size and other characteristics to areas 
in which RBOCs have received MFJ waivers in the past, and the criteria 
that Judge Greene has applied under the MFJ would, in AT&T's view, 
support a waiver in each such area. For this reason, AT&T would not 
oppose an RBOC request for an identical MFJ waiver if an RBOC were to 
have reason to seek one. Finally, AT&T has also stipulated that the 
Justice Department can challenge any of these calling areas if it 
hereafter determines that they are too large.
    Decree Duration. Next, BellSouth objects that whereas the MFJ has 
no fixed termination date, the Proposed Decree provides that it expires 
after ten years. However, these differences merely reflect the reality 
that no one can predict when the conditions that led to the MFJ--the 
RBOCs' control over bottleneck local exchange monopolies--will end. By 
contrast, the Proposed AT&T-McCaw Decree is premised on the alleged 
``lock in'' of certain cellular carriers to AT&T equipment and the 
alleged absence of effective competition with today's cellular 
carriers. Given the rapid rate at which cellular equipment becomes 
obsolete and the imminent licensing of PCS systems, it can confidently 
be predicted that the conditions that gave rise to the Proposed Decree 
cannot last another ten years (and will almost certainly disappear much 
earlier). Further, because there is no statute of limitations on 
challenges to mergers, the Department will have the authority at the 
end of ten years to seek other injunctive relief against the merger in 
the unlikely event that conditions could then so warrant.
    The Proposed Decree's Inapplicability to PCS. Similarly, BellSouth 
complains that the MFJ restrictions apply to all RBOC services 
(including PCS), but that the Proposed Decree applies only to ``McCaw 
Cellular Systems.'' But here, too, these differences merely reflect the 
different competitive reasons for the two decrees. The restrictions on 
AT&T-McCaw are predicated on the alleged lack of effective competition 
among today's cellular systems, and if and when PCS systems are 
implemented, they will compete with today's entrenched cellular systems 
and provide alternatives to them. By contrast, the MFJ restrictions on 
RBOCs rest on the RBOCs' control over bottleneck landline monopolies 
that connect interexchange carriers to end user customers, and just as 
cellular systems have not created alternatives to landline exchanges to 
date, there is no basis for predicting that PCS systems will do so. 
However, if they do, the RBOCs will be entitled to removal of the MFJ's 
restrictions.
    Purportedly Different Modification Standards. BellSouth and Bell 
Atlantic/NYNEX also complain that the two decrees have different 
modification provisions. In particular, they state that the Proposed 
Decree allows McCaw to move for modifications that parallel any waivers 
that the RBOCs obtain under the MFJ by making a competitive and public 
interest showing (Sec. X), that McCaw can obtain rights to provide 
access to interexchange carriers at centralized points upon a similar 
showing (Sec. IV(G)), but that there is ``no apparent way for McCaw's 
relief to inure to the benefit of its competing Bell cellular company'' 
(Bell Atlantic/NYNEX, p. 15). However, just as AT&T-McCaw can seek 
modifications of the Proposed Decree that are parallel to any MFJ 
waivers, the RBOCs are free to seek modifications of the MFJ that 
parallel any modifications or waivers that are obtained under the AT&T-
McCaw Decree. Whether modifications or waivers of either decree are 
granted depends on whether the necessary competitive and public 
interest showings are made.
    BellSouth's Challenge to Definition of ``Control''. Finally, 
BellSouth challenges the Proposed Decree's definition of ``control,'' 
apparently because BellSouth fears the provisions of the Proposed 
Decree that govern ``McCaw Cellular Systems'' could be held applicable 
to the Los Angeles and Houston systems in which BellSouth and McCaw 
have what could loosely be described as ``joint control.'' However, 
this ``joint control'' was held sufficient to make these cellular 
systems ``BOCs'' under the MFJ, and it would be neither anomalous nor 
inappropriate if the systems were held to be ``McCaw Cellular Systems'' 
under the Proposed Decree. Further, the assertions that BellSouth and 
McCaw each have only ``negative'' control in these systems is not 
accurate. McCaw has the ability to cause management changes in these 
systems (over BellSouth's objection) if it can persuade the independent 
tie-breaking director to side with McCaw, and BellSouth has the same 
ability to impose changes over McCaw's objection if the independent 
director votes with BellSouth.
C. The Ad Hoc IXCs Are Challenging Procompetitive Features of the 
Merger
    Finally, comments have been filed by the Ad Hoc IXCs, a group of 
switchless interexchange resellers who own and operate no facilities, 
but make money solely through arbitrage. They have used their comments 
here--as they did in prior filings before the FCC and before Judge 
Greene in the Section I(D) waiver proceeding--to repeat allegations 
that AT&T has violated regulatory or contractual commitments in its 
dealings with these resellers. AT&T believes that these allegations 
will be rejected in the pending cases and appeals that the Ad Hoc 
resellers cite, but the short answer to them is that they do not 
implicate the antitrust laws,\77\ much less issues raised in the 
Department.

    \77\ For example, in the case cited (Central Office Telephone, 
Inc. v. AT&T, No. 91-1236 (D. Or.)), the District Court dismissed 
the plaintiff's antitrust claims and allowed only breach of contract 
and tort claims.
---------------------------------------------------------------------------

    Stripped of its rhetoric, moreover, the comments of the Ad Hoc IXCs 
have only a single substantive objection to the Proposed Decree: that 
it does not prohibit the combined AT&T-McCaw from offering alternatives 
to today's landline exchange monopolies if and when it becomes 
economically and technologically possible for cellular systems to do 
so. However, as Judge Greene and the Department have previously 
concluded, that would be a procompetitive development and it would be 
antithetical to the antitrust laws to prevent AT&T from doing so. 

[[Page 49884]]
Similarly, as the FCC and the New York PSC have found, the merger means 
that these procompetitive developments are more likely.

Conclusion

    For the reasons stated, the Proposed Decree is in the public 
interest within the meaning of the Tunney Act.

    Respectfully submitted,
Mark C. Rosenblum,
John J. Langhauser, 295 North Maple Avenue, Basking Ridge, NJ 07920, 
(908) 221-2000
David W. Carpenter,
Peter D. Keisler,
David L. Lawson, One First National Plaza, Chicago, Illinois 60603, 
(312) 853-7237
Attorneys for AT&T Corp.

                        Appendix--Extent of Competition Between McCaw and Individual LECs                       
----------------------------------------------------------------------------------------------------------------
                                                                     Number of                                  
                                                                  majority-owned   Total number      Number of  
                                                   Total number    systems that      of AT&T-      systems with 
                 Majority owner*                   of majority-    compete with      equipped     AT&T equipment
                                                   owned systems  McCaw majority- majority-owned   that compete 
                                                                   owned systems      systems       with McCaw  
----------------------------------------------------------------------------------------------------------------
Ameritech.......................................              24               0              22               0
Bell Atlantic...................................              28               2              10               1
BellSouth.......................................              43               6               9               2
General Cellular Corporation....................               8               0               1               0
GTE (Contel & Mobilnet).........................              76              13              61              12
Independent Cellular............................               7               4               7               4
NYNEX...........................................              13               1              12               1
Pacific Northwest Cellular......................               5               0               5               0
PacTel Corporation..............................               5               0               1               0
Southern New England Telecommunications.........               5               0               5               0
Southwestern Bell (SBMS)........................              30               4              13               3
United States Cellular..........................              35               6               2               0
U S West........................................              25              16               4               2
Vanguard........................................              16               0               1               0
                                                 ---------------------------------------------------------------
      Total.....................................             320              52             153              25
----------------------------------------------------------------------------------------------------------------
*Majority ownership consists of a greater than 50% interest.                                                    

Comments of Bell Atlantic Corporation and NYNEX Corporation on Proposed 
Final Judgment in United States v. AT&T Corp. and McCaw Cellular 
Communications, Inc.

    Bell Atlantic Corporation and NYNEX Corporation submit these 
comments in response to the Department of Justice's public notice and 
invitation for comments on the Proposed Final Judgment in United States 
 v. AT&T Corp. and McCaw Cellular Communications, Inc., Civil Action 
No. 94-01555 (HHG). 59 Fed. Reg. 44158 (Aug. 26, 1994).
    Bell Atlantic and NYNEX have filed a private action pursuant to 
Section 7 of the Clayton Act challenging the lawfulness of the AT&T-
McCaw merger. Bell Atlantic Corp. et al. v. AT&T Corp. et al., No. CV 
92-3682 (ERK) (E.D.N.Y.). Although we do not propose to present in this 
Tunney Act proceeding all the claims that we have raised in the private 
action, we summarize briefly below some of our concerns about the 
effectiveness of the proposed decree, concerns that we intend to 
develop fully in the upcoming trial in New York. Moreover, because the 
extensive pretrial and trial record of that case may inform the 
Department's and the Court's consideration of the proposed decree, AT&T 
should be directed to make available to all interested parties in this 
proceeding the full record of the New York case, including the trial 
proceedings that are scheduled to begin on November 1, 1994.

I. The Proposed Decree Does Not Sufficiently Rectify the Antitrust 
Violation Caused by the AT&T-McCaw Merger

    Bell Atlantic and NYNEX believe that the proposed decree is 
fundamentally inadequate to protect against the anticompetitive effects 
of the AT&T-McCaw merger alleged in the Department's Complaint and 
summarized in the Competitive Impact Statement.
A. The Vertical Effects
    The antitrust violation that results from combining AT&T's cellular 
equipment business with McCaw's cellular service business can be cured 
only by a structural remedy--one that either eliminates AT&T's 
equipment lock-in power or uncouples that power from the economic 
incentive to exploit it. An effective structural remedy would require 
the combined AT&T-McCaw (1) to divest McCaw (thereby removing AT&T's 
incentive to suppress competition in local cellular service markets); 
or (2) to divest AT&T's cellular equipment business (thereby removing 
the source of AT&T's lock-in power over its equipment customers); or 
(3) as one of several components of effective injunctive relief, to 
build switches and other cellular infrastructure equipment pursuant to 
publicly available standards, and to license the use of any necessary 
intellectual property, so that third parties can manufacture and sell 
equipment fully compatibly with AT&T equipment (thereby permitting 
meaningful competition in equipment markets and loosening AT&T's lock-
in power).
    Divestiture is the most straightforward structural solution. While 
AT&T's equipment customers would remain locked-in to their supplier, 
divestiture would ensure that their supplier does not also become their 
direct competitor. By keeping the power and the incentive to abuse it 
in separate hands, divestiture would best protect against the 

[[Page 49885]]
anticompetitive harms threatened by the vertical aspects of the AT&T-
McCaw merger.
    Opening equipment interfaces would attempt to attack AT&T's lock-in 
power at its source. If effectively implemented, that solution might 
enable other manufacturers to build equipment that could operate 
compatibly with AT&T switches, thereby weakening AT&T-McCaw's power to 
restrain competition in cellular service markets. Evidence to be 
presented in the New York private action will demonstrate that AT&T has 
developed and successfully pursued a covert policy, revealed in its own 
documents, of thwarting industry-wide open interfaces as part of a 
strategy to deter competition. The evidence will also show that 
competing manufacturers of cellular network equipment--including 
Motorola, one of AT&T's largest equipment competitors, and ADC Kentrox, 
a small but ambitious new entrant--have a strong interest in uniform 
and open industry standards and are prepared to build to such standards 
in direct competition with AT&T as soon as the currently proprietary 
interfaces are opened up.\1\

    \1\ If the Department were prepared to consider a modification 
of the proposed decree designed to open equipment interfaces and 
alleviate AT&T's lock-in power, it should incorporate provisions 
specifically requiring AT&T to (1) support in industry standards 
bodies, and participate actively in the development of, industry-
wide open equipment interfaces that would allow non-AT&T cellular 
network equipment to perform as well as equipment connected through 
AT&T's proprietary interfaces; (2) to publish and continue to 
support its proprietary interfaces; (3) to license on reasonable 
terms the patents and other intellectual property that a third party 
would need to build equipment fully compatible with AT&T equipment; 
and (4) to offer its customers equipment built either to industry-
wide or AT&T open interfaces by a reasonable date certain.
---------------------------------------------------------------------------

    The Proposed Final Judgment does none of these things. Instead of 
devising an effective structural solution, the decree attempts to 
address the merger's serious anticompetitive problems exclusively 
through conduct restrictions. But the proposed decree's general 
provisions--prohibiting discrimination and requiring the merged entity 
to operate under the same pricing and other business practices in 
effect prior to the merger--do not address many of the key competitive 
concerns and, as to those that are addressed, are far too vague to be 
enforceable at any reasonable cost or to deter potentially injurious 
anticompetitive conduct.
    Our evidence in the private action will demonstrate that AT&T-McCaw 
can inflict anticompetitive injury without engaging in detectable 
discrimination or otherwise violating the provisions of the proposed 
decree. Among the problems are the following:
    1. AT&T can raise equipment prices in a disparate fashion without 
an appearance of discrimination. AT&T does not publish fixed prices for 
its equipment; rather, its prices vary widely depending on a range of 
supposedly customized hardware and software features and capacities. 
AT&T will find it all too easy to justify higher prices to McCaw's 
competitors on the theory that they have ``unique'' equipment needs. 
Since the decree does not require AT&T to make public the terms of its 
equipment contracts--and since the contracts themselves forbid its 
customers from doing so--McCaw's competitors will have no basis for 
determining whether they are being discriminated against unreasonably. 
Moreover, AT&T can unfairly advantage McCaw by raising prices across 
the board to all its equipment customers. Because McCaw currently uses 
predominantly non-AT&T equipment, an increase in AT&T equipment prices 
will not hurt McCaw as much as its competitors. Any incidental impact 
on McCaw of an AT&T price increase is, in any event, merely an 
intracorporate accounting entry having no effect on the combined AT&T-
McCaw's financial position. Only intrusive cost-based equipment price 
controls could effectively protect competitors and subscribers from 
unreasonable pricing by AT&T.
    2. AT&T can restrict or delay its equipment customers' access to 
important new features or technologies without detection. Because its 
customers lack detailed information concerning the quality and quantity 
of resources that AT&T has devoted to meeting their equipment and 
software needs, they cannot hope to demonstrate that AT&T's refusal to 
supply equipment or software on a timely basis results from 
discrimination.
    3. The decree nowhere prohibits AT&T from discriminating in favor 
of its non-McCaw allies in cellular service markets. The combined AT&T-
McCaw plans to establish nationwide cellular alliances with other 
operators in markets not served by McCaw. In each such market, AT&T 
will be free under the decree to discriminate in pricing and service to 
favor the competitors of its locked-in customers.
    4. The decree's terms cannot legislate the kind of cooperative 
behavior that lies within AT&T's broad commercial discretion. Going the 
extra mile is not an enforceable standard of conduct, and yet it is 
often critical to an equipment customer's competitive success. AT&T's 
economic interests no longer justify taking the discretionary extra 
step to enhance the competitive position of McCaw's rivals, and nothing 
in the decree does or can require it to do so.
    5. Although the proposed decree prohibits AT&T from disclosing the 
confidential information of its equipment customers directly to McCaw, 
Proposed Decree Sec. V(A)(1)(a), it expressly allows senior officers of 
AT&T's manufacturing unit--the very employees with authority to 
allocate developmental resources and personnel--to receive precisely 
such confidential information, and it nowhere forbids them from using 
that information for the competitive benefit of McCaw. Id. 
Sec. V(A)(1)(c). Moreover, even assuming that an effective Chinese Wall 
can be erected between AT&T and McCaw, a remedy of that sort can aspire 
only to prevent improper dissemination of information, not misuse of 
information in the hands of AT&T manufacturing employees who already 
have it. No regulation can effectively bar AT&T's employees from 
considering such information in promoting the overall economic 
interests of their own employer.
    6. The proposed decree specifically permits AT&T to perform 
``proprietary development'' for McCaw (Secs. II(Y), V(A)(4)(b), 
V(C)(3)), and it affirmatively prohibits AT&T from disclosing to 
unaffiliated cellular operators the nature of any such proprietary work 
for McCaw (id. Sec. V(A)(1)(b)). These provisions will enable AT&T to 
reserve exclusively for McCaw the most promising operating improvements 
and new features, thereby placing other operators at a critical 
technological disadvantage in local cellular service markets.
B. The Horizontal Effects
    As the Department correctly observed in the Competitive Impact 
Statement, the AT&T-McCaw merger will ``foreclose competition between 
the two largest providers of interexchange service in the highly 
concentrated markets in which McCaw currently provides interexchange 
service to its cellular customers.'' 59 Fed. Reg. at 44169. Before the 
merger, McCaw competed primarily by purchasing long-distance service in 
bulk at wholesale from a facilities-based carrier--predominantly AT&T--
and reselling to its customers at a higher retail price. Apart from its 
role as a major reseller, however, McCaw also had been developing its 
own facilities-based long distance network in further competition with 
AT&T. In fact, before AT&T arrived as a suitor, McCaw had proclaimed 
its intention to construct a nationwide cellular network, consisting of 
both 

[[Page 49886]]
owned and leased facilities, that would allow it to serve the whole 
country independent of other carriers. McCaw's long distance network 
was already significantly completed at the state and regional levels, 
with large regional clusters in some of the country's most active 
markets, particularly the Pacific Northwest and Florida. Its growth 
strategy mirrored the strategy that MCI and Sprint used to mount their 
challenge to AT&T.
    The public record in the New York private action reveals that 
before the merger AT&T saw McCaw as a potentially powerful long 
distance competitor. For example, a May 1991 internal memorandum warned 
that McCaw's plans for ``a nation wide network to link cellular systems 
* * * should strike terror into the heart of AT&T communications. What 
McCaw is planning is a separate national network that could as time 
goes by * * * siphon traffic from our long distance network.'' 
Similarly, an AT&T strategic study, also in May 1991, concluded that 
non-RBOC cellular providers like McCaw ``have linked their own switches 
to bypass interexchange carriers and provide interlata service'' and 
that such providers ``could threaten AT&T's core long distance 
business.
    AT&T's answer to this looming competitive threat was to eliminate 
it. The merger utterly destroys McCaw as AT&T's most significant 
cellular long distance competitor, enhancing AT&T's existing market 
power and intensifying concentration in markets already exceptionally 
concentrated. There can be no doubt that the merger substantially 
lessens competition in violation of Section 7 of the Clayton Act. It 
also nips in the bud McCaw's ambitious plan to establish a nationwide 
long distance network of its own in further competition with AT&T.
    The antitrust violation that results from merging AT&T's and 
McCaw's directly competing cellular long-distance businesses is not 
cured by the proposed decree. On the contrary, a key provision of the 
decree actually codifies the violation. It specifically requires McCaw, 
``on a phased-in basis and no later than 21 months following the 
commencement of this action, [to] cease providing Interexchange 
Services.'' Proposed Decree Sec. IV(B).
    The Department may believe that its support of generic wireless 
relief will mitigate the merger's anticompetitive horizontal effects by 
allowing the entry of seven additional cellular long distance 
competitors. But AT&T seeks to frustrate even that objective by 
opposing the requested relief and subjecting it to a more rigorous 
standard of review. AT&T should be required, as a condition for 
approval of a decree that eliminates an important long distance 
competitor, to support, or at least not to oppose, additional entry to 
the extent supported by the Department of Justice.
    The proposed decree's ``equal access'' provisions (Proposed Decree 
Secs. IV(B)-(D)) do not make up for the loss of McCaw itself as an 
independent long distance provider. McCaw currently offers consumers in 
its service areas an important additional choice. In New York, for 
example, cellular subscribers can choose from among AT&T, MCI, or 
Sprint if they select NYNEX/Bell Atlantic as their local cellular 
provider. Alternatively, subscribers can choose McCaw for cellular 
long-distance service by selecting McCaw as their local cellular 
provider. Because a subscriber drawn to McCaw is a retail long distance 
customer lost to AT&T, MCI, or Sprint, McCaw's presence as a long 
distance competitor exerted downward competitive pressure on retail 
cellular long distance rates. McCaw's disappearance as a long distance 
provider will deprive consumers of a potentially attractive alternative 
source of supply and will tend to increase cellular long distance 
prices.

II. The Proposed Decree Does Not Prevent AT&T From Abusing 
Competitively Sensitive Information Acquired in Its Capacity as the 
Dominant Cellular Long Distance Carrier

    Aside from the proposed decree's fundamental inadequacies, we urge 
the Department to address a glaring but unexplained omission that 
threatens serious anticompetitive harm. As developed by SBC 
Communications, Inc., in its separate comments in this proceeding, the 
decree unjustifiably allows AT&T to exploit, to the competitive 
disadvantage of Bell company cellular providers in McCaw markets, the 
highly sensitive customer information that AT&T acquires as the 
dominant provider of cellular long distance service to the Bell 
companies' local cellular customers. We agree with SBC's comments on 
this issue.
    Because of MFJ requirements, AT&T has access to detailed 
information concerning the cellular telephone usage patterns of each 
Bell Atlantic and NYNEX customer that selects AT&T as its long distance 
carrier. Armed with that valuable information, and in the absence of 
any decree provisions to the contrary, AT&T can concentrate its 
marketing of McCaw services on our best cellular customers, effectively 
expropriating without charge one of our most valuable assets. We would 
never voluntarily turn over to our direct competitor our customer lists 
and usage information. It is simply indefensible to allow the combined 
AT&T-McCaw to target its local cellular service marketing at our best 
customers on the basis of information acquired solely in its capacity 
as the dominant cellular long distance carrier.
    It is no answer to say that these are AT&T customers and that AT&T 
should be free to use its own customer information. These are joint 
customers. The only thing that AT&T provides is long distance service, 
but long distance usage is not the only information that AT&T would use 
to market McCaw's cellular service. The critical information is that 
these subscribers, in addition to being long distance customers of 
AT&T, are cellular customers of Bell Atlantic and NYNEX. Although we 
obviously cannot object to AT&T's use of information about our joint 
customers' long distance usage to market its long distance service, we 
can and do object to its opportunistic use of information about their 
cellular usage to market McCaw cellular service.
    Allowing AT&T to exploit this information offers no public 
benefits. On the contrary, AT&T's ability to use our customer lists as 
a free-rider burdens competition in much the same way as patent 
infringement--one competitor's incentive to market its service 
aggressively will soon evaporate if another can gain the full advantage 
of those efforts without incurring any cost of its own. The proposed 
decree itself embraces that view. It specifically provides that McCaw 
shall provide customer lists to unaffiliated long distance carriers 
``for use solely in connection with marketing their Interexchange 
Services.'' Proposed Decree Sec. IV(C). The absence of a comparable 
restriction on AT&T's use of equivalent information about Bell company 
customers is an anomaly that should be corrected.
    We accordingly endorse SBC's proposed addition of a new Sec. IV(J).

III. The Proposed Decree Embodies Other Unexplained Inequities That 
Should be Eliminated

A. Interexchange Routing
    As SBC persuasively explains, the proposed decree would allow AT&T-
McCaw to engage in interexchange routing, even though Bell cellular 
companies are barred by the MFJ from providing such service and the 
Department has opposed giving Bell companies relief from that 
restriction in the generic wireless proceeding. We 

[[Page 49887]]
agree with SBC's analysis of this unexplained disparity and with the 
proposed alternative solutions.
    We note in addition that permitting this inequity to persist would 
give AT&T an additional incentive to behave anticompetitively. For 
example, it could create new wireless long distance offerings that 
depend on the provision by local wireless carriers of access services 
that include interexchange routing. McCaw would be able to offer the 
new long distance service to its cellular customers because it has 
authority to provide interexchange routing; Bell company customers, by 
contrast, would be excluded because the Bell cellular companies lack 
such authority and therefore cannot participate in the new service. The 
disparity should be eliminated to prevent the inevitable competitive 
distorations that will otherwise result.
B. Sales Forces
    We agree with SBC that there is no justification for requiring Bell 
companies to establish redundant sales forces for local services and 
wireless long distance services, while imposing no similar 
inefficiencies on AT&T-McCaw. If such a condition is upheld in the 
generic wireless proceeding, a similar requirement should be added to 
the AT&T-McCaw decree.
C. Other Disparities That Warrant Correction
    The proposed decree would create several additional inconsistencies 
between AT&T-McCaw and its Bell company competitors. Each is 
unexplained, and each should be eliminated to avoid unwarranted 
competitive dislocations.
    1. Under the proposed decree, McCaw is expressly permitted to 
aggregate its Pittsburgh system with its properties in West Virginia to 
create a non-equal-access calling area. Proposed Decree Sec. II(Q)(xix) 
(defining McCaw's Pittsburgh LATA to include the West Virginia MSAs). 
By contrast, Bell Atlantic whose Pittsburgh cellular system competes 
head-to-head with McCaw's, is barred from creating the same aggregated 
calling area. A disparity of this sort confers on McCaw an unwarranted, 
and presumably unintended, competitive advantage. It should be 
corrected, either by extending the same privilege to Bell Atlantic or 
by eliminating Sec. II(Q)(xix) from the proposed decree.
    2. Under the proposed decree, McCaw automatically benefits from any 
enlargements of the Bell company LATAs, which apply to McCaw ``as if'' 
it were a Bell operating company. Proposed Decree Sec. II(Q). But the 
reverse is not true. The 19 geographic waivers provided to McCaw in 
Sec. II(Q) do not extend to the Bell companies. If there is a cogent 
reason for this one-way ratchet, it is not set forth in the Competitive 
Impact Statement. To avoid causing needless competitive imbalances, 
similar waivers should be granted to the competing Bell wireless 
companies. At a minimum, the Department and AT&T-McCaw should state 
their commitment on the record of this proceeding to supporting 
parallel geographic waivers for the Bell companies.
    3. The proposed decree does not require McCaw to open up its 
customer location databases. It defines McCaw's ``MTSO'' as the Mobile 
Telephone Switching Office ``and the equipment used therein.'' Proposed 
Decree Sec. II(W). The Department's proposed wireless waiver, by 
contrast, defines a Bell company MTSO to include customer location 
databases, ``wherever located,'' that facilitate call completion 
services (Sec. VIII(L)(1)(a)), and it provides that ``MTSO functions 
used to provide this service shall be available to other carriers, 
including interexchange carriers'' (Sec. VIII(L)(2)(e)). This disparity 
likewise is not explained. It too should be corrected, either by 
conforming the wireless waiver to the AT&T-McCaw decree or by 
conforming the AT&T-McCaw decree to the wireless waiver. There is no 
reason for differing treatment of direct wireless competitors.
    4. Under the proposed decree, if there is insufficient demand for 
access to a McCaw cellular system within particular LATAs, McCaw may 
request from the Department a certification that would allow it to 
provide access to interexchange carriers at ``centralized points'' 
instead of providing equal access handoffs in each LATA. Proposed 
Decree Sec. IV(G). No similar relief is available to Bell companies, 
and there is no apparent way for McCaw's relief to inur to the benefit 
of its competing Bell cellular company. The differing treatment is 
unjustified and unexplained. It should be eliminated.
    Respectfully submitted,
Mark L. Evans,
Miller & Chevalier, Chartered, 655 Fifteenth Street, N.W., Suite 900, 
Washington, D.C. 20005, (202) 626-6010.
Attorney for Bell Atlantic and NYNEX.
October 25, 1994.
Of Counsel
James R. Young,
John Thorne,
S. Mark Tuller,
Robert H. Griffin,
Attorneys for Bell Atlantic.
Raymond F. Burke,
Gerald E. Murray,
Attorneys for NYNEX.

BILLING CODE 4410-01-M

[[Page 49888]]
[GRAPHIC][TIFF OMITTED]TN27SE95.000


BILLING CODE 4410-01-C

[[Page 49889]]


In the United States District Court for the District of Columbia

    In the matter of: United States of America, Plaintiff, v. 
Western Electric Co., Inc., et al., Defendants. Civil Action No. 82-
0192 (HHG).

Comments of BellSouth Corporation on Proposed Final Judgment

Introduction

    BellSouth Corporation (``BellSouth'') submits these comments on the 
proposed Final Judgment, United States v. AT&T Corp., Civ. No. 94-01555 
(D.D.C. filed July 15, 1994) (``Proposed Final Judgment''), pursuant to 
the Tunney Act, 15 U.S.C. Sec. 16(b)-(h). BellSouth believes that the 
Court cannot fully evaluate the competitive effects of the merger 
between AT&T Corporation (``AT&T'') and McCaw Cellular Communications, 
Inc. (``McCaw'') without first considering the motions of BellSouth and 
the other Bell Operating Companies (``BOCs'') for generic wireless 
relief.\1\ BellSouth further believes that the Court should decide that 
it is inappropriate to extend equal access obligations and 
interexchange restrictions to the BOCs' wireless services and, 
therefore, to AT&T/McCaw's wireless services. If the Court decides 
otherwise, it should, at a minimum, ensure that the BOCs and AT&T/McCaw 
are bound by identical restrictions and obligations. Finally, BellSouth 
believes that the term ``McCaw Cellular Systems'' should be clarified 
to specify that it does not include cellular franchises in which McCaw 
does not possess affirmative control.

    \1\ BellSouth has filed a motion for an order declaring that the 
equal access and interexchange restrictions of Section II of the 
Decree entered in United States v. American Tel. & Tel. Co., 552 F. 
Supp. 131, 226-34 (D.D.C. 1982), aff'd mem. sub nom., Maryland v. 
United States, 460 U.S. 1001 (1983) (``MFJ''), do not apply to the 
BOCs' wireless facilities, or, in the alternative, for a waiver of 
those restrictions. Southwestern Bell also has sought a waiver of 
Section II's restrictions insofar as they may apply to the BOCs' 
wireless facilities. All of the BOCs have joined in a motion for 
narrower wireless relief. These motions re fully briefed and ripe 
for decision.
---------------------------------------------------------------------------

Comments

1. The Court Should Decide the BOCs' Motion for Generic Wireless Relief 
Before Deciding Whether the Proposed Final Judgment is in the Public 
Interest
    The Tunney Act requires the Court to ``determine [whether] the 
entry of [the proposed final] judgment is in the public interest.'' 15 
U.S.C. Sec. 16(e). Central to this inquiry is the likely competitive 
impact of the Proposed Final Judgment. Id. In BellSouth's view, the 
Court cannot fully evaluate the competitive impact of this Proposed 
Final Judgment without first considering the BOCs' motions for generic 
wireless relief. Only then will the Court have a clear view of the 
competitive landscape. In particular, the Court cannot determine 
whether the Proposed Final Judgment adequately protects competition 
without first deciding whether the wireless operations of the BOCs are 
subject to (and should remain subject to) the interexchange prohibition 
and equal access restrictions of Section II of the MFJ.
    The local calling area restrictions and the equal access 
obligations of the Proposed Final Judgment are premised on the 
assumption that similar restrictions will apply to the BOCs' wireless 
franchises. According to the United States, ``[t]he equal access 
arrangements prescribed by Section IV are modeled on the analogous 
provisions of the Modification of Final Judgment * * * [and] are 
[purportedly] largely identical to the conditions recommended by the 
United States for provision of interexchange cellular service by the 
Bell Companies.'' Competitive Impact Statement at 15, United States of 
America v. AT&T Corp., (D.D.C. filed Aug. 5, 1994) (``CIS''). Indeed, 
the United States previously has acknowledged that ``the BOCs' generic 
wireless waiver request * * * raises a number of issues in common with 
the AT&T-McCaw transaction.'' Memorandum of the United States in 
Support of AT&T's Motion for a Waiver of Section I(D) of the Decree at 
3, United States v. Western Elec. Co., Civ. No. 82-0192 (D.D.C. filed 
July 15, 1994). The United States considered the BOCs' motions for 
generic wireless relief together with the Proposed Final Judgment in 
order to reach a consistent result and encouraged the Court to decide 
the two issues consistently. Transcript of Hearing, July 21, 1994, at 
50-51, United States v. Western Elec. Co., Civ. No. 82-0192 (D.D.C. 
filed July 21, 1994).
    The Proposed Final Judgment reflects the United States' view that 
the local calling area restrictions and the equal access obligations 
imposed on AT&T are contingent upon similar restrictions and 
obligations being applied to the BOCs' wireless services. Section X 
provides as follows:

    If BOC Wireless Systems are relieved in whole or in part of any 
or all of the comparable equal access or nondiscrimination 
obligations of the MFJ as a result of legislation, judicial orders, 
or agency orders that vacate, modify, supersede, or interpret the 
provisions of the MFJ, the provisions of Article IV of this final 
judgment shall be modified or vacated to provide the same relief to 
AT&T or McCaw upon their showing that competitive conditions do not 
require a different obligation for AT&T and McCaw and that this 
modification is equitable and in the public interest.

Proposed Final Judgment Sec. X. Moreover, although the Department of 
Justice (the ``Department'') and AT&T have agreed to permit AT&T/McCaw 
to offer ``Local Cellular Service'' in many areas larger than those 
authorized for the BOCs, the definition of ``Local Cellular Service 
Areas'' will automatically change to conform to the size of any areas 
in which the BOCs are permitted ``to provide cellular exchange services 
without any equal access obligation under the provisions of the MFJ.'' 
Proposed Final Judgment Sec. 11(Q).
    The appropriateness and scope of the BOCs' local calling area 
restrictions and equal access obligations are now squarely before the 
Court. All the BOCs have filed motions for generic wireless relief. 
BellSouth has asked the Court to declare that the equal access 
obligations and interexchange restrictions of the MFJ do not apply to 
wireless services; BellSouth and Southwestern Bell have asked the Court 
to waive those equal access obligations and interexchange restrictions 
to the extent they apply to wireless services; and all of the BOCs have 
requested narrower wireless relief. Given that the local calling area 
restrictions and equal access obligations of the Proposed Final 
Judgment are contingent upon the MFJ's similar restrictions, the Court 
should examine the MFJ's restrictions before examining the restrictions 
of the Proposed Final Judgment. The BOCs' motions some of which were 
first filed with the Department in 1991, are fully briefed and ripe for 
decision. Now that the AT&T/McCaw merger has been completed, there is 
no conceivable justification for considering the Proposed Final 
Judgment before deciding the BOCs' long pending motions.
    Indeed, it is difficult to understand how the Court could 
appropriately review the Proposed Final Judgment without first 
considering the BOCs' generic wireless waiver motions. The Court, in 
essence, is reviewing the discretion of the Attorney General; ``its 
task [is] to determine whether the Department of Justice's explanations 
[are] `reasonable under the circumstances.'' ' United States v. Western 
Elec. Co., 993 F.2d 1572, 1577 (D.C. Cir. 1993). The Department, 
however, found it necessary to review the merger and the BOCs' generic 
wireless waiver motions together to reach a consistent result; and its 

[[Page 49890]]
position on the Proposed Final Judgment assumes that the Court will 
order the relief the United States has proposed in response to the 
BOCs' generic wireless waiver motions. The proper scope of generic 
wireless relief for the BOCs is for the Court to decide, however, not 
for the Department of Justice. Accordingly, to evaluate whether the 
Department's explanations of its support for the Proposed Final 
Judgment are reasonable, the Court must at least ascertain whether it 
agrees with the wireless relief the Department has supported for the 
BOCs.
    Moreover, this is the first time the Court has had to address 
squarely the question of whether it is the public interest to impose 
equal access in wireless markets. The Department maintains that the MFJ 
requires it, and the BOCs have always offered it, but the Court has 
never squarely held that the MFJ requires equal access in wireless 
markets. See BellSouth Reply at 3-8. More important, the Court has 
never decided whether the extension of equal access to wireless markets 
is in the public interest. Wireless services were not at issue in the 
MFJ case. Compare Complaint para. 29C, United States v. AT&T, No. 74-
1698, with Plaintiff's Third Statement of Contentions and Proof (Jan. 
10, 1980). Thus, in the Tunney Act proceedings in connection with the 
approval of the MFJ, the Court did not consider whether the public 
interest required the application of equal access to wireless 
facilities. In view of the Department's assumptions regarding the 
application of equal access to the BOCs' wireless facilities in its 
explanation of the Proposed Final Judgment, the Court should first 
decide the BOCs' motions for generic wireless relief and then determine 
whether the Department's position on the merger is reasonable in light 
of the relief ordered by the Court on the generic wireless waiver 
motions.
II. The Court Should not Impose an Equal Access Paradigm on the 
Wireless Market
    The Proposed Final Judgment is premised on the notion that AT&T/
McCaw and BOCs' cellular franchises should be governed by similar 
rules. While BellSouth believes that the Proposed Final Judgment would 
not achieve such a result, see infra pp. 10-12, it agrees with the 
notion that a single paradigm should govern wireless markets: there 
should not be one set of rules for BOCs and another for non-BOCs. 
BellSouth, however, disagrees with the proposition that wireless 
markets should be divided into limited local calling areas with each 
local provider obligated to provide equal access to the entrenched 
interexchange providers.
    The Department has taken the view that the equal access obligations 
of the BOCs under the MFJ should apply to their wireless operations. 
The Proposed Final Judgment would impose equal access on McCaw's 
cellular systems as well. As a result of the Department's regulatory 
initiatives under the MFJ and in the Proposed Final Judgment, a 
substantial portion of cellular subscribers would be forced to buy 
wireless services in separate ``local'' and ``long distance'' 
components. Unconstrained competitors would have little incentive not 
to charge their own subscribers a separate fee for the ``long 
distance'' component of their service because AT&T/McCaw and the BOCs 
would not be permitted to sell integrated service. As a result, 
customers would pay two per-minute charges on all but the shortest 
distance wireless calls. Thus, by adopting artificially narrow market 
definitions at the outset and crafting decree restrictions to fit them, 
the Department would create regulatory boundaries to constrain the 
market to fit its artificial definition.
    Such a vertical division of wireless markets is unjustified. As 
AT&T's own consultants have noted, the local/long distance division is 
an artificial regulatory construct. Excerpt from Michael E. Porter, 
``Competition in the Long Distance Telecommunications Market: An 
Industry Structure Analysis'' at 7 (Oct. 1987) (attached as Exhibit 13 
to Affidavit of Donald G. Kempf, Jr., Bell Atlantic Corp. v. AT&T 
Corp., Civ. No. 94-3682 (E.D.N.Y. filed Sept. 8, 1994)). The equal 
access requirements of the Federal Communications Commission (the 
``FCC'') and the Decree were designed to permit the development of a 
competitive landline telephone system to the extent possible. 
Competition in local telephone service was not thought to be possible 
because it was thought to be a natural monopoly and was a legal 
monopoly by state law in many states.\2\ To ensure that these 
``bottlenecks'' were not used to prevent competition in the telephone 
service generally, providers of local monopoly telephone service were 
obligated to provide nondiscriminatory access to these ``essential 
facilities.'' United States v. American Tel. & Tel. Co., 552 F. Supp. 
at 160-65, 188.

    \2\ Experience has proven incorrect the assumption that local 
landline telephone service is a natural monopoly. See Memorandum of 
Bell Atlantic Corporation, BellSouth Corporation, NYNEX Corporation, 
and Southwestern Bell Corporation in Support of Their Motion to 
Vacate the Decree at 53-67, United States v. Western Elec. Co., Civ. 
No. 82-0192 (D.D.C. filed July 6, 1994).
---------------------------------------------------------------------------

    Wireless facilities, on the other hand, are not bottleneck or 
essential facilities. See, e.g., AT&T's Opposition to the Motions for 
``Generic'' Wireless Waiver of the Decree's Core Provisions at 18 n.22, 
United States v. Western Elec. Co., Civ. No. 82-0192 (filed Aug. 10, 
1994). Competitive alternatives exist. In every area of the country, 
there are two facilities-based cellular providers. Consequently, there 
is no antitrust justification for requiring equal access in wireless 
markets. BellSouth Reply at 26-28. The empirical data show why: equal 
access already has cost wireless subscribers hundreds of millions of 
dollars. BellSouth Reply at 22. This is not surprising given the fact 
that the interexchange market, which is dominated by AT&T, is more 
concentrated, and less competitive, than wireless markets. BellSouth 
Reply at 17-21.
    AT&T's motivation for accepting limited calling areas and equal 
access obligations is no mystery. Like MCI, AT&T support equal access 
because it allocates a portion of the wireless market to the entrenched 
interexchange carriers and confines wireless providers to small, 
inefficient local calling areas. AT&T provides over 70 percent of all 
``interexchange'' service to wireless customers who are subject to 
equal access, CIS at 12-13, and controls over 80 percent of the 
business of BellSouth's subscribers. BellSouth Reply at 18. If equal 
access is imposed in wireless markets, AT&T is sure to dominate the 
resulting wireless long distance market just as it dominates the 
landline interexchange market.
    If the Court determines that no equal access requirement should be 
imposed in wireless markets, AT&T/McCaw will have to compete on equal 
terms with other wireless providers who are not members of the 
interexchange oligopoly. The FCC has noted industry estimates that 
there likely will be more than 60 million wireless subscribers by the 
year 2002. Second Report and Order, In the Matter of the Commission's 
Rules to Establish New Personal Communications Services, 8 F.C.C. Rcd 
7700, 7710 (1993), recon. Memorandum Opinion and Order, FCC 94-144 
(June 13, 1994). The long distance traffic generated by wireless 
providers might, in time and absent equal access, eventually provide a 
challenge to the tripartie domestic long distance cartel. This is what 
AT&T hopes to prevent.
    Thus, not surprisingly, AT&T has argued that its own acceptance of 
local calling areas and equal access obligations should lead the Court 
to 

[[Page 49891]]
deny the BOCs' motions for generic wireless relief. Furthermore, AT&T 
has foreshadowed its ultimate gambit. It hopes that this Court will 
create momentum which will cause the FCC to impose a vertical market 
allocation on the wireless industry as a whole. Memorandum in Support 
of AT&T's Motion for a Waiver of Section I(D) of the Decree Insofar As 
It Bars the Proposed AT&T-McCaw Merger at 71, United States v. Western 
Elec. Co., Civ. No. 82-0192 (D.D.C. filed May 31, 1994). Indeed, AT&T 
already is citing the Proposed Final Judgment to the FCC as a 
justification for saddling the entire industry with an equal access 
requirement. Comments of AT&T at 5, In the Matter of Equal Access and 
Interconnection Obligations Pertaining to Commercial Mobile Radio 
Services, CC No. 94-54 RM-8012 (F.C.C. filed Sept. 12, 1994). Such a 
market paradigm will ensure that AT&T retains its dominant share of 
interexchange telecommunications services.
    According to the Department, ``the market power of each cellular 
duopolist'' justifies an equal access requirement. Memorandum of the 
United States in Response to the Bell Companies' Motions for Generic 
Wireless Waivers at 3, United States v. Western Elec. Co., Civ. No. 82-
0192 (filed July 25, 1994) (``U.S. Response''). See also, id. at 19-20. 
This justification rings hollow. If any anticompetitive harm resulted 
from providing integrated wireless services, the Department, which, by 
its own account, has been closely investigating this market since 1991, 
surely would have sued McCaw and other non-BOC providers under the 
antitrust laws for refusing to permit interexchange carriers``equal 
access'' to their wireless systems. The Department's reticence in this 
regard is understandable. The antitrust laws do not require that owners 
of non-essential facilities offer equal access. BellSouth Reply at 27-
28. The unrefuted empirical data emphatically demonstrate why: in 
wireless markets, consumers are better off without equal access. Id. at 
22.
    In many areas of the country, moreover, cellular competitors have 
been joined by providers of Enhanced Specialized Mobile Radio 
(``ESMR'') service, which competes directly with cellular service. Id. 
at 15. In addition, in six weeks the FCC will begin licensing several 
additional wireless competitors in each area in which cellular services 
are provided. On December 5, 1994, the FCC will auction spectrum for 
broadband Personal Communications Service (``PCS'') providers. 
Experience with PCS demonstrates that it will compete directly with 
cellular. Id. The fact that competing alternatives are available to 
wireless customers, and that many more soon will be, demonstrates that 
it is not in the public interest to extend equal access to the BOCs' 
wireless operations, and apart from correcting the competitive 
imbalance created by the MFJ, it is not in the public interest to 
impose equal access on AT&T/McCaw.
    Deciding that there is no basis specific to the BOCs and AT&T/McCaw 
for imposing equal access on their wireless systems, moreover, would 
clear the slate for uniform action by the FCC. At the urging of MCI, 
the FCC has announced that it will consider adopting an equal access 
requirement for cellular services similar to that which applies to 
landline services. The FCC's broad public interest inquiry should not 
be fettered by the reality of existing (but unjustified) equal access 
obligations on some market participants.
III. The Court Should Ensure the Terms of Competition Between the BOCs 
and AT&T/McCaw are Equal
    If the Court nonetheless artificially divides the wireless market 
into separate local and long distance components and requires equal 
access, it should, at a minimum, ensure that the conditions of 
competition for the BOCs and AT&T/McCaw are equal. The Proposed Final 
Judgment, however, would give AT&T/McCaw preferences over the BOCs, 
even if the Court ultimately adopted the Department's view of the 
proper scope of generic wireless relief for the BOCs.
    For example, the Proposed Final Judgment would apply only to AT&T/
McCaw's cellular systems (excluding cellular digital packet data 
services). Proposed Final Judgment at Sec. IV. The Department, on the 
other hand, supports equal access and local calling areas for other 
wireless services which may be provided by the BOCs, such as broadband 
PCS. U.S. Response at 27-45. There is no conceivable justification for 
this disparity.
    McCaw is also permitted to provide local cellular service in1 9 
areas larger than those available to the BOCs. Proposed Final Judgment 
Sec. II(Q). Again, there is no conceivable justification for this 
discriminatory treatment. Nor does the Department offer one, noting 
only that the Department reserves the right to seek an order confining 
AT&T/McCaw to LATA boundaries in the future. CIS at 24. The Department 
supports equal access restrictions for AT&T/McCaw for the same reasons 
it recommends them for the BOCs. Thus, it makes little sense to 
restrict the BOCs to LATAs while permitting AT&T/McCaw to provide 
service within multi-LATA clusters without equal access.
    Furthermore, AT&T/McCaw will be permitted to provide facilities-
based interexchange service to its wireless subscribers. The Department 
would permit the BOCs only to resell interexchange service and to 
purchase no more than 45 percent of such service from any one 
interexchange carrier. Id. at para. 2(1). These additional restrictions 
are flagrantly anticompetitive. They could prevent BOC cellular systems 
from purchasing a sufficient volume of service from a single provider 
to obtain the highest possible discounts; they ensure that AT&T will 
control a significant portion of the BOCs' wireless interexchange 
traffic; and they prevent full, facilities-based interexchange 
competition. Reply of the Bell Companies to Comments on Their Motion 
for a Modification of Section II of the Decree to Permit Them to 
Provide Cellular and Other Wireless Services Across LATA Boundaries at 
36-40, United States v. Western Elec. Co., Civ. No. 82-0192 (D.D.C. 
filed Sept. 2, 1994). One hardly needs to be an accomplished analyst to 
discern from AT&T's financial statements that it is not in need of a 
set aside.
    AT&T/McCaw also enjoys the benefits of a ``most-favored-nation'' 
clause which will permit them to obtain relief from the Proposed Final 
Judgment in the event that the BOCs are permitted to offer wireless 
service in expanded calling areas or without an equal access 
requirement. Proposed Final Judgment Secs. II(Q), X. The BOCs, quite 
inexplicably, would have no reciprocal right. This disparity is 
exacerbated by Section X of the Proposed Final Judgment, which is more 
lenient than either the standard announced in Rufo v. Inmates of 
Suffolk County Jail, 112 S. Ct. 748, 760 (1992), or Section VIII(C) of 
the MFJ. As a result, AT&T/McCaw is guaranteed any benefits of relief 
obtained by the BOCs, but the BOCs will be denied the benefits of 
relief obtained by AT&T/McCaw unless they can satisfy a more stringent 
standard for relief. If the Department views this as ``equal 
treatment,'' then it obviously considers some participants to be ``more 
equal'' than others.
    There also is no justification for including a 10 year expiration 
provision in the Proposed Final Judgment. Neither the MFJ, which is 
over 12 years old, nor the equal access requirements the Department 
proposes to apply to the BOCs' wireless services (see U.S. Response) 
include any expiration provision. Inasmuch as the Department has 
justified imposing equal access on the BOCs and AT&T for the same 

[[Page 49892]]
reasons and intends that the obligations be equivalent, it would be 
illogical and unfair to include an expiration provision in the Proposed 
Final Judgment.
IV. The Term ``McCaw Cellular System'' Should Be Clarified
    BellSouth also requests that the Proposed Final Judgment be 
clarified to specify that the term ``McCaw Cellular System'' includes 
only cellular franchises in which McCaw has affirmative control. 
Section II(T) defines ``McCaw Cellular System'' as any cellular system 
``in which McCaw controls, directly or through its affiliates, a direct 
or indirect voting interest of more than fifty percent (50%), or the 
right, power or ability to control, * * *'' ``Control'' is defined in 
Section II(K) as ``the power to direct or cause the direction of the 
management and policies of a corporation or a partnership, whether 
through ownership of voting securities, by contract, or otherwise.''
    Read together, these definitions appear to limit the requirements 
of Section IV to those cellular systems in which McCaw has affirmative 
control, or the power to direct the company to implement AT&T's 
obligations under the Proposed Final Judgment. A system in which AT&T/
McCaw has the power to veto actions with which it disagrees (negative 
control), but lacks affirmative control, should not be subject to 
Section IV's requirements. For example, if AT&T/McCaw owned 50 percent 
of the voting interests in a cellular system and a second firm owned an 
identical interest in that system, that system should not be considered 
a ``McCaw Cellular System'' for purposes of the Proposed Final Judgment 
because McCaw would lack ``the power to direct or to cause the 
direction of the management and policies'' of the cellular system. In 
such a circumstance, McCaw could not unilaterally direct the 
partnership to take any actions, including to ensure compliance with 
the Proposed Final Judgment.
    This issue is not one of theoretical interest. AT&T/McCaw is a 
partner of BellSouth's and owns negative control of cellular systems in 
Houston, Galveston, and Los Angeles, In each case, the system is 
governed by a partnership in which McCaw and BellSouth each own a 50 
percent voting interest. BellSouth requests that the Court remove any 
lingering uncertainty over the proper construction of the Proposed 
Final Judgment by specifying that the term ``Control'' only describes 
affirmative control and that the term ``McCaw Cellular Systems,'' 
therefore, does not include cellular franchises in which McCaw 
possesses negative control.

Conclusion

    The Court should decide the BOCs' motions for generic wireless 
relief before deciding whether the proposed consent decree is in the 
public interest. In that context, the Court should decide that the 
market for wireless services should not be burdened with equal access 
obligations and interexchange restrictions. If the Court nonetheless 
decides to the contrary, it should ensure that the terms of competition 
for the BOCs and AT&T/McCaw are equivalent. Finally, the Court should 
clarify that the term ``McCaw Cellular Systems'' does not include 
cellar systems in which McCaw does not possess affirmative control.

        Respectfully submitted,

    By:
Richard W. Beckler,
(Bar No. 262246)
Stephen M. McNabb,
(Bar No. 367102)
Michael P. Goggin,
(Bar No. 428288), Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, 
NW., Washington, DC 20004-2604, Telephone: (202) 662-0200, Telecopier: 
(202) 662-4643

Walter H. Alford, John F. Beasley, William B. Barfield,
Bellsouth Corporation, Suite 1800, 1155 Peachtree Street, NE., Atlanta, 
GA 30309-3610, Telephone: (404) 249-2641

Attorneys for Bellsouth Corporation

    Dated: October 25, 1994.

United States District Court for the District of Columbia

    In the matter of: United States of America, Plaintiff, v. AT&T 
Corp. and McCaw Cellular Communications, Inc., Defendants. Civil 
Action No. 94-01555 (HHG).

To: The Department of Justice

Comments of SBC Communications Inc. on Proposed Final Judgment

    Pursuant to 15 U.S.C. Sec. 16(d), SBC Communications Inc. 
(``SBC'')\1\ files these Comments in partial opposition to the proposed 
Final Judgment in this case. The proposed settlement addresses most of 
the competitive concerns raised by the merger of AT&T and McCaw 
Cellular Communications, Inc. (``McCaw''), and should be approved in 
substantial part. But the Final Judgment would not solve one aspect of 
a core problem the Department of Justice (``Department'') has 
identified: AT&T's ability to favor McCaw by misusing confidential 
information acquired in AT&T's capacity as a supplier of services to 
cellular carriers and their customers. The Department has insisted on 
considerable safeguards against disclosure of confidential information 
AT&T/McCaw acquires as a supplier or buyer of network equipment. Yet 
the Final Judgment would do nothing to prevent AT&T from advantaging 
McCaw, and disadvantaging competition, by disclosing confidential 
information AT&T acquires as a long-distance carrier.

    \1\ SBC Communications Inc. was formerly knows as Southwestern 
Bell Corporation.
---------------------------------------------------------------------------

    Moreover, the proposed settlement cannot be reconciled with 
statements the Department of Justice has made about Bell company (or 
``BOC'') provision of interLATA wireless services SBC disagrees with 
the Department's suggested conditions on wireless relief for the Bell 
companies. But if the Court finds the Department's reasoning persuasive 
in that context, the very same reasoning requires imposition of 
additional conditions on the AT&T/McCaw merger This Court should be 
unable to conclude that conditions like a ban on interexchange routing 
and sales force separation would promote competition if applied to BOC 
wireless systems, without finding that they would do the same if 
applied to AT&T/McCaw.

Introduction

    While the McCaw acquisition marks a dramatic expansion of AT&T's 
wireless business, AT&T occupied a commanding position in wireless even 
before it decided to spend about $12 billion to become the nation's 
largest cellular carrier. Indeed, one cannot understand the competitive 
risk presented by AT&T's entry into local cellular services without 
appreciating AT&T's central place in all other aspects of wireless 
communications.

1. Wireless Long Distance

    The Department freely acknowledges that AT&T remains the nation's 
dominant long-distance carrier. See Proposed Final Judgment and 
Competitive Impact Statement; United States of America v. AT&T Corp. 
and McCaw Cellular Communications, Inc., 59 FR 44,158, 44,166 (1994) 
[hereinafter Competitive Impact Statement]. AT&T's entrenched position 
is particularly evident in wireless. Due to the Modification of Final 
Judgment (MFJ), customers of BOC-affiliated cellular systems are 
required to buy their cellular long-distance service separately 

[[Page 49893]]
from local service.\2\ AT&T is the long-distance carrier for more than 
70 percent of these customers. 59 Fed. Reg. at 44,169. Moreover, while 
McCaw and other non-Bell company cellular carriers can and do resell 
interexchange services to their customers, they buy their wholesale 
service from AT&T in the vast majority of cases. See id.

    \2\ See United States v. AT&T, 552 F. Supp. 131, 227 (D.D.C. 
1982) (MFJ Sec.  II(D)(1)), aff'd sub nom. Maryland v. United 
States, 460 U.S. 1001 (1983).
---------------------------------------------------------------------------

    For Bell company cellular providers, a customer's selection of AT&T 
means that AT&T will obtain some of the BOC affiliate's most 
competitively sensitive confidential information. The MFJ prohibits BOC 
affiliates--including SBC's affiliate, Southwestern Bell Mobile Systems 
(SBMS)--from providing long-distance services. Largely as a result of 
this barrier to competition up to 90 percent of all SBMS customers 
choose AT&T. Stupka Aff. para. 4. SBMS must provide AT&T with these 
customers' names, addresses, and telephone numbers. In addition, once 
AT&T begins to carry an SBMS customer's calls, it can collect usage 
information (including the location and telephone number of the party 
called, the duration of the call, and personal calling patterns) for 
that customer.
    All of this non-public information has tremendous potential value 
in marketing cellular services. As explained in the attached affidavit 
of John T. Stupka, the information AT&T gains as a long distance 
carrier allows it to identify the particular customers who are the 
highest-volume users of SBMS local cellular services. These customers 
could be targeted for direct solicitation, and those solicitations 
could be tailored to the customer's historic calling patterns with 
SBMS. See Stupka Aff. Paras.  5-8. In other words, MFJ constraints 
guarantee AT&T a window into SBMS's most sensitive customer 
information, and a unique ability to access and potentially steal away 
SBMS' most valued customers.

2. Equipment and Software

    Cellular customers depend upon AT&T products and services even when 
they place local calls. AT&T is the nation's largest manufacturer of 
switches, cell site radios, and related network equipment used by 
cellular telephone systems. Competitive Impact Statement, 59 Fed. Reg. 
at 44,166-67. More important than AT&T's naked market share, however, 
is the so-called ``lock-in'' effect. See generally Eastman Kodak Co. v. 
Image Technical Servs., 112 S.Ct. 2072, 2087 (1992). As the Department 
has found, cellular providers that have purchased equipment from a 
particular manufacturer are locked into that manufacturer when they buy 
new equipment for the same service area. If they choose AT&T equipment 
for a particular system, cellular carriers either have to keep buying 
from AT&T or undertake a disruptive and expensive replacement of 
existing AT&T equipment with that of another manufacturer.\3\ The same 
is true for the complex and expensive computer software needed to 
operate this equipment, and for ongoing software upgrades that enhance 
performance and allow new services.

    \3\ With cell sites costing $750,000, and switches approximately 
$7 million, changing manufacturers is extremely expensive. SBMS 
estimates that it would cost over $1.2 billion to replace all the 
AT&T equipment it currently uses. Stupka Aff. Paras.  16-18.
---------------------------------------------------------------------------

    Moreover, as an equipment supplier, AT&T has access to the most 
sensitive proprietary information of its customers. The Department has 
explained that cellular equipment manufacturers, in performing routine 
maintenance, software upgrades, and other services, have access to 
system usage patterns and similar day-to-day operating information. 
Likewise, AT&T and other equipment suppliers are aware of plans for 
system expansions and new services and features, since their 
cooperation is essential to effect them. 59 Fed. Reg. at 44,168.

3. The McCaw Acquisition

    On September 19, 1994, AT&T committed to paying $12 billion for the 
nation's largest cellular provider. With its LIN Broadcasting 
subsidiary, McCaw serves roughly 3.4 million wireless callers. SBMS, by 
comparison, has about 2.6 million cellular customers. Stupka Aff. para. 
1. NcCaw has ownership interests in over 114 markets nationwide, and 
competes directly against SBMS in Dallas, San Antonio, Corpus Christi, 
Oklahoma City, Wichita, and Kansas City. Id.
    Before the McCaw acquisition, AT&T was unable to use the sensitive 
information it gains as a long-distance carrier to take customers from 
SBMS and other cellular providers. AT&T likewise had no incentive to 
favor one equipment customer over another. But that is no longer the 
case. AT&T now has the ``ability and incentive to use its position as 
equipment supplier to McCaw's wireless competitors to disadvantage 
those customers/competitors vis-a-vis McCaw.'' Competitive Impact 
Statement, 59 Fed. Reg. at 44,171. Similarly, AT&T now has the ability 
and incentive to use the information it obtains in providing long 
distance to BOC cellular customers to capture those customers for 
McCaw. These critical facts should inform consideration of the proposed 
Final Judgment.

I. The Proposed Decree Would Allow AT&T To Use Confidential Information 
It Gathers as the Dominant Interexchange Carrier To Obtain a 
Competitive Advantage in Cellular Services

    The Department correctly concluded that the AT&T/McCaw merger, by 
bringing together the dominant long-distance carrier and a major 
supplier of interLATA wireless services, would ``[d]ecreas[e] actual 
and potential competition in the market for interexchange services to 
cellular subscribers.'' Competitive Impact Statement at 44,166. The 
Department therefore insisted on equal access obligations that, in its 
view, will cure this problem. See id. at 44 169-71.
    The Department also properly found that preserving competition in 
the cellular services market requires restrictions on use of 
confidential and competitively sensitive information AT&T/McCaw 
acquires as a supplier of equipment and software to McCaw's rivals. 
Accordingly, the proposed Final Judgment would limit distribution of 
cellular carriers' confidential information within AT&T/McCaw, in an 
effort to ensure that this information is not used for the benefit of 
McCaw operations.
    Specifically, the Final Judgment identifies particular categories 
of information--such as cellular customer names, system subscribership, 
and system usage--that ``if inappropriately disclosed or used [by AT&T/
McCaw], could cause competitive harm.'' Id. at 44,172 & n.10. AT&T's 
equipment personnel are absolutely prohibited from disclosing this 
information to persons who play a role in providing, marketing, or 
developing AT&T or McCaw communications services. Id. at 44,172. The 
Department considers information like customer lists and usage 
information so competitively sensitive that AT&T equipment personnel 
could not disclose it even if the affected AT&T customer were to 
consent. Id.
    The Department further concluded that new restrictions on AT&T/
McCaw are necessary to protect against misuse of information McCaw 
obtains either in the course of interconnecting with long-distance 
carriers or as a buyer of cellular equipment manufactured by AT&T's 
competitors. The proposed Final Judgment thus contains provisions 
forbidding McCaw from transferring this 

[[Page 49894]]
information to AT&T, so that AT&T cannot obtain an unfair competitive 
advantage as an equipment supplier or interexchange carrier. Id.
    Finally, the Department concluded that allowing transfer of McCaw's 
presubscription and usage information to AT&T would deny other 
interexchange carriers ``a meaningful opportunity to market their 
services to customers of McCaw Cellular Systems.'' Id. at 44,170. The 
suggested settlement therefore prohibits McCaw from giving AT&T any 
such information, except that McCaw can provide AT&T information about 
its own long-distance customers if it gives other interexchange 
carriers the same information about their customers. Id.
    The Department's insistence on substantial safeguards to address 
each of these problems makes it inexplicable that the proposed Final 
Judgment would do nothing to address misuse of customer lists and other 
confidential information AT&T acquires as the dominant interexchange 
carrier. In each of the 58 markets where McCaw (including LIN) competes 
against a Bell company cellular affiliate, MFJ restrictions and AT&T's 
market dominance guarantee AT&T extensive access to much of the same 
information (such as customer lists and usage information) that the 
Department would unconditionally protect when AT&T acts as an equipment 
supplier. And no matter how that information is obtained, AT&T now has 
the incentive to use it in just the same way: to gain an 
anticompetitive advantage in cellular services.
    Consider the Dallas market, which is served by SBMS and McCaw. 
Seventy-nine percent of SBMS customers in Dallas select AT&T as their 
long-distance carrier. Stupka Aff. para. 6. SBMS therefore must give 
the parent of its local competitor the names, telephone numbers, and 
addresses of four out of every five SBMS customers, with the knowledge 
that AT&T can estimate their local cellular usage and track their 
calling patterns. Using the information it obtains as a long-distance 
provider, AT&T can market McCaw services directly to the most valued 
SBMS customers, without spending a penny on consumers who do not use 
cellular telephones in Dallas, or even SBMS customers who use their 
phone infrequently.
    A recent SBMS study illustrates the value of the information AT&T/
McCaw acquires about SBMS's Dallas customers. The study showed that 
roughly three-quarters of those SBMS customers who use at least 275 
minutes of AT&T cellular long distance each month are above-average 
users of SBMS local service, whereas less than 20 percent of the 
lowest-volume AT&T users are above-average local cellular callers. See 
id. para. 6 & Attachment A at 1. Further, a marketing program that 
captured just 2,222 high-volume SBMS callers could win for AT&T/McCaw 
as much cellular revenue as a campaign that, lacking inside 
information, switched 40,000 low-volume SBMS customers. Id. para. 6 & 
Attachment A at 2. AT&T/McCaw's unique ability to identify the highest-
volume cellular interexchange callers by name, address, and telephone 
number would thus convey a powerful advantage in local cellular 
marketing.
    AT&T/McCaw also can use the SBMS customer lists and usage 
information it acquires as a supplier of long distance to estimate 
changes in the size and composition of SBMS's subscribership. It can 
determine, for example, if an SBMS system is attracting new subscribers 
relatively quickly, or loosing existing subscribers. By noting the 
addresses and/or calling habits of new subscribers, AT&T/McCaw may even 
be able to figure out which SBMS service or marketing initiatives 
attract customers AT&T/McCaw would particularly like to claim for 
itself. With this unique insight into SBMS's most closely guarded 
proprietary information, AT&T/McCaw could respond to changes in SBMS 
services and promotions literally on a day-to-day basis, and counter 
those SBMS efforts. Id. para. 7.
    SBMS and other Bell company cellular providers, by contrast, are 
barred by the MFJ from providing long distance and do not receive 
customer information from BOC local exchange operations. See 47 CFR 
Sec. 22.901(d) (1994). BOC affiliates have ready means of identifying 
competitors' customers or discerning their calling patterns. They 
cannot instantly track their rivals' subscribership or target 
competitors' customers for solicitation. Similarly, cellular carriers 
that provide interexchange service only to their own customers have no 
ability to acquire such information. Even cellular carriers (such as 
Sprint/Centel) that are affiliated with an interexchange carrier will 
not be able to obtain meaningful access to McCaw's customer 
information, given that AT&T is certain to be the long-distance 
provider chosen by the overwhelming majority of McCaw cellular 
customers.\4\

    \4\ Section IV.C of the proposed Final Judgment requires 
disclosure of McCaw customer lists to unaffiliated long-distance 
carriers, but those lists may be used only in marketing 
interexchange services. See 59 FR at 44,162.
---------------------------------------------------------------------------

    The Department's failure to insist on safeguards against misuse of 
AT&T's unique information-gathering capability cannot be attributed to 
any confidence that competition will constrain AT&T from abusing its 
position in cellular long distance. The Competitive Impact Statement 
points out that AT&T is the ``dominant supplier of interexchange 
telecommunications service,'' 59 Fed. Reg. at 44,166, indicating the 
Department's acceptance that AT&T has market power. See, e.g., MCI 
Telecommunications Corp. v. AT&T, 114 S. Ct. 2223, 2226-27 (1994) 
(noting longstanding regulatory distinction ``between dominant carriers 
(those with market power) and nondominant carriers''). The Department 
further explains that the long-distance market is an oligopoly 
characterized by ``imperfect competition,'' 59 Fed. Reg. at 44,182-83, 
and notes AT&T's extraordinarily high market share in the wireless 
interexchange market, id. at 44,169.\5\

    \5\ The FCC similarly has determined that AT&T ``may retain some 
ability to control its prices'' for the residential and small-
business services used by most cellular customers who presubscribe 
to a long-distance carrier, and has identified evidence that 
regulation, not competition, holds down rates. Price Cap Performance 
Review for AT&T, 8 FCC Rcd 5165, 5167 (1993). In addition, SBC and 
others have demonstrated the absence of genuine competition to serve 
wireless long-distance customers. See Motion of the Bell Companies 
for a Modification of Section II of the Decree to Permit Them to 
Provide Cellular and Other Wireless Service Across LATA Boundaries 
and supporting affidavits, as well as Reply of the Bell Companies to 
Comments on Their Motion for a Modification of Section II of the 
Decree to Permit Them to Provide Cellular and Other Wireless Service 
Across LATA Boundaries and supporting affidavits, filed in the case 
of United States v. Western Elec. Co., No. 82-0192 (D.D.C.) on June 
20, 1994 and September 2, 1994, respectively.
---------------------------------------------------------------------------

    The Department's views about competition in local cellular services 
also fail to explain the absence of protections in the Final Judgment. 
The public interest demands appropriate safeguards against AT&T/McCaw's 
misuse of a competitor's confidential information no matter what the 
state of competition in the affected market. The Competitive Impact 
Statement, for example, contains no discussion of competition in 
cellular equipment and software markets. Yet the Department has 
determined that competition and the public interest would be served by 
a prohibition on sharing information McCaw obtains from its Swedish 
equipment supplier with employees of AT&T's equipment business. Id. at 
44,172. If the public interest is served by preventing anticompetitive 
exploitation of confidential information AT&T/McCaw acquires as a 
supplier of cellular equipment, as a supplier of local cellular 
services, or as a buyer of 

[[Page 49895]]
cellular equipment, the public interest must also require protections 
against use of similar or even more sensitive information AT&T/McCaw 
acquires as a supplier of cellular long distance.
    Prohibiting AT&T/McCaw from using customer information it obtains 
as a wireless long-distance carrier to market its own wireless services 
will not undermine any pro-competitive aspects of the merger. This 
leveraging of AT&T's dominant position in long distance would not 
enable McCaw to provide higher-quality or lower-cost service, or 
encourage investment in new technologies. Nor could it possibly assist 
in the development of wireless telephony by increasing overall cellular 
subscribership. Forbidding McCaw to piggy-back off AT&T's dominance in 
long distance would merely encourage McCaw to win new customers by 
offering higher-quality or lower-priced services, rather than barraging 
its competitors' best customers with personalized solicitations.
    AT&T has elsewhere opposed a ban on using interexchange customer 
information to sell wireless services by arguing that the FCC has not 
flatly barred use of this information to market customer premises 
equipment (CPE) or enhanced services. See AT&T's and McCaw's Opposition 
to Petitions to Deny and Reply to Comments at 83-84, AT&T Co. and McCaw 
Cellular Communications, Inc., File No. ENF-93-44 (FCC filed Dec. 2, 
1993). But these analogies are misplaced. The Commission relied on 
customer-initiated restrictions in the CPE and enhanced services areas 
because it anticipated that valuable customer information would mostly 
relate to sophisticated businesses that can take care of themselves.\6\ 
The same cannot be said about cellular customer lists and usage 
information. In Dallas, for instance, an SBMS customer who spends as 
little as $100 per month falls within the group of high-volume callers 
(25 percent of all callers) that accounts for the majority of cellular 
revenues. See Stupka Aff. Attachment A at 3.

    \6\ Furnishing of Customer Premises Equip. and Enhanced Servs. 
by AT&T, 102 F.C.C.2d 627 693 (1985); Amendment of Sections 64.702 
of the Commission's Rules and Regulations (Third Computer Inquiry), 
104 F.C.C.2d 958, 1089-90 & n.313 (1986), reconsidered, 2 FCC Rcd 
3035, further reconsidered, 2 FCC Rcd 3072 (1987), further 
reconsidered, 3 FCC Rcd 1150 (1988), further reconsidered, 4 FCC Rcd 
5927 (1989), vacated in part on other grounds, California v. FCC, 
905 F.2d 1217 (9th CIr. 1990).
---------------------------------------------------------------------------

    The Commission also reasoned in the enhanced services context that 
use of confidential information would benefit all enhanced services 
providers by ``mak[ing] consumers more aware of the benefits of 
enhanced services.'' \7\ As already explained, this rationale has no 
application here because AT&T would be marketing its own wireless 
services to existing cellular customers.

    \7\ Third Computer Inquiry, 3 FCC Rcd at 1163.
---------------------------------------------------------------------------

    AT&T has further claimed that it should not be restricted in using 
cellular interexchange customer information to market wireless services 
because ``[t]he information is AT&T's.'' AT&T's and McCaw's Opposition 
to Petitions to Deny and Reply to Comments at 83-84. Insofar as 
customer lists are at issue, that assertion is wrong in the most basic 
sense: AT&T obtains those lists only because the MFJ requires SBMS and 
other BOC affiliates to turn them over. The Department, in fact, has 
long recognized that BOC affiliates' customer lists are just that--the 
property of BOC affiliates. In 1987, it rejected AT&T's claim of an 
entitlement to full lists of BOC cellular customers, saying that 
whether or not to grant such access is a matter within the discretion 
of each BOC. Response of the United States Concerning its Enforcement 
of the Modification of Final Judgment at 13-16, United States v. 
Western Elec. Co., No. 82-0192 (D.D.C. filed May 27, 1987).
    With respect to information about long-distance and cellular usage 
that AT&T develops, AT&T's unrestricted ownership would extend no 
further than the long-distance ``half.'' The MFJ may guarantee AT&T, as 
the dominant interexchange provider, a unique chance to spy on BOC 
cellular systems, but that cannot mean that AT&T/McCaw, as wireless 
provider, has an unbridled right to exploit whatever cellular calling 
information AT&T can acquire.
    If accepted, moreover AT&T's argument would suggest an entitlement 
to use all confidential customer information however it pleases. The 
Department has clearly and correctly rejected that position with 
respect to customer information McCaw and AT&T acquire as providers of 
local wireless services and network equipment, and also with respect to 
information McCaw obtains about its equipment suppliers and connecting 
long-distance carriers. The rules governing use of non-public 
information AT&T collects as a wireless interexchange provider should 
be no different.
    This Court need not be concerned that conditioning approval of the 
Final Judgment on a modification prohibiting use of cellular carriers' 
customer lists and similar information to sell McCaw services will put 
the merger at risk. In connection with a suit by Bell Atlantic 
Corporation and NYNEX Corporation to undo the AT&T/McCaw merger, AT&T 
has already agreed to refrain temporarily from ``furnish[ing] to McCaw, 
or us[ing] in marketing McCaw's services, lists of, or usage 
information concerning, cellular customers of [Bell Atlantic and NYNEX] 
who have presubscribed to AT&T's long distance service for their 
cellular service.'' \8\ The condition here proposed by SBC would simply 
extend this commitment to all McCaw competitors, and extend its 
duration to match comparable provisions of the Final Judgment.

    \8\ Bell Atlantic Co. v. AT&T Corp., No. CV 94-3682, Order at 2 
(E.D.N.Y. Sept. 14, 1994). AT&T's agreement to this stipulation when 
under the eye of a court contrasts with AT&T's failure to sign a 
standard form contract governing access to SBMS systems, which 
requires interexchange carriers to keep customer lists provided by 
SBMS confidential. See Stupka Aff. para. 10.
---------------------------------------------------------------------------

    SBC does not suggest that the Court should intervene to correct 
every perceived shortcoming of the proposed settlement. But the Tunney 
Act requires more than a simple `` `rubber stamp' '' of a proposed 
decree. United States v. AT&T, 552 F. Supp. 131, 151 (D.D.C. 1982), 
aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983). Where, 
as here, the proposed decree and the Government's Competitive Impact 
Statement reflect a failure to consider significant competitive 
concerns and ``inconsistent * * * interpretations of the public 
interest,'' the Court is obligated to step in. United States v. Bechtel 
Corp., 648 F.2d 660, 666 (9th Cir. 1981), cert. denied, 454 U.S. 1083 
(1981); cf. Office of Communication of the United Church of Christ v. 
FCC, 707 F.2d 1413, 1424-26 (D.C. Cir. 1983) (rational decisionmaking 
requires reasoned analysis of departures from precedent and 
consideration of relevant factors and alternatives).
    Accordingly, this Court should condition its approval of the 
proposed Final Judgment on the addition of a new Section IV.J, as 
follows:

    J. AT&T shall not disclose to any person engaged in marketing 
any McCaw or AT&T Wireless Service names, addresses, or telephone 
numbers of, or usage information concerning, customers of a Wireless 
Carrier unaffiliated with AT&T or McCaw, if AT&T obtains that 
information in its capacity as a supplier of interexchange 
telecommunications services (as defined in the MFJ). Members of 
AT&T's management executive committee shall be permitted to receive 
such information in connection with their capacities as members of 
AT&T's management executive committee, but shall be bound by the 
nondisclosure obligation set forth in this Section IV.J.

[[Page 49896]]


II. If Imposed on BOC Wireless Providers, Certain Additional Conditions 
Should Be Imposed on AT&T/McCaw as Well

    Whereas the above condition responds to AT&T/McCaw's unique 
position as the dominant interexchange carrier and leading cellular 
provider, two further conditions--tracking ones the Department of 
Justice seeks for Bell company provision of interLATA wireless 
services--may be necessary to promote fair competition between AT&T/
McCaw and BOC providers of wireless services.
    The conditions discussed below would, in SBC's view, be 
anticompetitive if imposed on the Bell companies or AT&T/McCaw. But the 
Department's logic requires that they be applied to AT&T/McCaw if they 
are imposed on the Bell companies. Indeed, the conditions would have to 
be incorporated in the Final Judgment for acceptance of the 
Department's position in pending MFJ proceeding to make sense.

A. The Sufficiency of the Recommended Conditions on the AT&T/McCaw 
Merger Cannot Be Determined Until the Rules Governing McCaw's 
Competitors Are Set

    By urging equal access provisions that either reflect current MFJ 
requirements or ``basically track those the United States has 
recommended for the Bell Companies if they should be permitted to 
provide wireless interexchange service,'' 59 FR at 44,170, the 
Department has broadly accepted that parity between AT&T/McCaw wireless 
systems and their BOC competitors will serve the public interest.\9\ 
Indeed, the Department attached its generic wireless filings to the 
Competitive Impact Statement, making clear its view that MFJ 
restrictions on the BOCs and the proposed conditions on AT&T/McCaw are 
intertwined. See id. at 44,176-91.

    \9\ Congress also has determined that consistent regulatory 
treatment of cellular carriers serves the public interest. See 47 
U.S.C. Sec. 332(c).
---------------------------------------------------------------------------

    Yet, without any justification, the proposed settlement excuses 
AT&T/McCaw from requirements the Department seeks to impose on Bell 
company wireless operations. While this Court may not substitute its 
own judgment for the Department's, it nevertheless must assure itself 
that the Department has acted rationally in consenting to the proposed 
decree, See United States v. Western Elec. Co., 993 F.2d 1572, 1577 
(D.C. Cir. 1993). Just as an agency must explain departures from prior 
policies in adjudications or rulemakings, the Department may not simply 
ignore in this proceeding its inconsistent positions in the generic 
wireless matter. See id. (likening Tunney Act and APA review); 
Atchison, T. & S.F.R.R. v. Wichita Bd. of Trade, 412 U.S. 800 (1973) 
(agency must explain departure from position taken in prior cases). 
Moreover, the Department's reasons for changing course must be 
affirmatively stated, and cannot be inferred by the Court. See Motor 
Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 
(1983). Because the Competitive Impact Statement fails to knowledge, 
must less explain, departures from the Department's position in the 
generic wireless matter, this Court must itself determine whether the 
public interest requires the imposition here of conditions like those 
the Department seeks to place on the Bell companies.
    There is an obvious corollary to this point. Because rejecting the 
Department's proposed conditions in the generic wireless proceeding 
would eliminate any cause to consider their analogues here, the Tunney 
Act public interest determination would best be made after or together 
with this Court's decision on wireless relief for the BOCs--and issue 
that was fully briefed weeks ago.
    We recognize that the Court recently found disposition of the 
generic wireless waiver request unnecessary to address AT&T's motion 
for a waiver of the MFJ to acquire McCaw. But that determination rested 
on the reasoning that ``the only systems implicated by the AT&T 
[waiver] request will remain subject to all of the restrictions which 
the Regional Companies would eliminate by way of their wireless 
motion.'' United States v. Western Elec. Co., No. 82-0192, slip op. at 
25 (Aug. 25, 1994). No similar finding can be made here. Just as the 
generic wireless proceeding will determine the rules under which all 
Bell company cellular affiliates will operate, this Tunney Act 
proceeding will set the rules for all but the few AT&T/McCaw systems 
that (due to partial ownership by BOC affiliates) are already subject 
to MFJ restrictions. It is appropriate to consider these parallel 
matters in tandem.

B. If the Court Agrees With the Department That BOC Affiliates Should 
Be Prohibited From Routing Calls Between MTSOs, the Final Judgment 
Should Include a Similar Condition

    Sections II(D)(1) and IV(F) of the MFJ prohibit the Bell companies 
from directing long-distance calls to their destination. See United 
States v. Western Elec. Co., 552 F. Supp. at 227, 228. If applied to 
the BOCs' cellular systems and not AT&T/McCaw's, this prohibition will 
have serious anticompetitive consequences.
    A cellular system consists of dispersed radio transceivers 
connected to one or more switching facilities known as mobile telephone 
switching offices (MTSOs).\10\ Adjacent systems with large traffic 
volumes between them are frequently joined by links from MTSO to MTSO, 
permitting the cellular carrier to hand-off calls from one system to 
the other as the caller crosses a service-area boundary. Such links 
also can allow efficient delivery of cellular-originated calls placed 
to a phone in a different area served by the same wireless provider. 
Once installed, the dedicated lines have large capacities and the 
marginal cost of carrying traffic over them is very low.

    \10\ The MTSO controls the transfer of calls between cell sites, 
between the cellular system and local telephone networks, and 
between the cellular system and interexchange carriers.
---------------------------------------------------------------------------

    Under the proposed settlement, AT&T/McCaw could realize the 
efficiencies of inter-MTSO direct connections. McCaw would be free to 
provide the interexchange routing necessary to send cellular traffic 
over interLATA direct connections, as long as routing services are 
offered on a nondiscriminatory basis. 59 Fed. Reg. at 44,162 (Final 
Judgment Sec. IV.D.1); see id. at 44,160 (Final Judgment Sec. II.M, 
defining ``exchange access'' to include ``the origination, routing, or 
termination of interexchange calls''). Yet the Department opposes 
giving the Bell companies similar relief from MFJ restrictions. The 
Department seeks in the generic wireless proceeding to limit the Bell 
companies to reselling the switched long-distance services of other 
carriers. See 59 Fed. Reg. at 44,186. This restriction, if adopted by 
the Court, would prohibit Bell company wireless providers from 
constructing or even leasing dedicated lines between MTSOs, and self-
providing the necessary routing. AT&T/McCaw, in other words, would be 
legally guaranteed a continuing edge over SBMS and its other Bell 
company competitors.
    That competitive advantage would be substantial. SBMS, for example, 
estimates that it could carry all SBMS-originated calls between its 
Dallas and Oklahoma City service areas over a single leased 
interexchange line at a cost of $3200 per month, plus a one-time 
capital cost of $2000. At retail rates, AT&T would charge more than 
$30,000 per month to carry this same traffic between the two cities. 
See Stupka Aff. Paras. 19-20. Even considering volume discounts that 
SBMS might secure from AT&T, self-routing would still save 

[[Page 49897]]
SBMS thousands of dollars each month, and those savings would be 
reflected in lower charges to SBMS customers.
    The Department has offered no reasonable justification for imposing 
this extra expense of BOC affiliates and their customers. It defends 
the switched resale condition as necessary to protect against 
``discrimination aimed at favoring the BOC's service.'' 59 Fed. Reg. at 
44,186. If the Department means discriminatory use of BOC local 
exchange facilities, this cannot explain prohibiting inter-MTSO 
routing. Sending calls from one MTSO to another does not involve any 
use of the switched local exchange, but only MTSO functions and a 
dedicated connection that typically can be acquired from any of several 
providers.
    If, on the other hand, the Department means discrimination with 
respect to MTSO routing functions, there is no possible reason to treat 
the BOCs differently from AT&T/McCaw. McCaw and BOC cellular systems 
are physically alike in all relevant respects. Moreover, BOC affiliates 
(like AT&T/McCaw) would be bound to perform interexchange routing on a 
nondiscriminatory basis, if they could route calls at all. Compare 59 
Fed. Reg. at 44,162 (Final Judgment Sec. IV.D.1, requiring McCaw to 
provide routing for unaffiliated interexchange carriers on 
nondiscriminatory terms) with id. at 44,185 (noting BOC commitment to 
do same).
    Imposing an inter-MTSO routing ban on Bell company wireless 
providers therefore constitutes an irrational departure from the 
Department's overall policy of establishing similar rules for AT&T/
McCaw and the BOCs, where they are similarly situated. The Competitive 
Impact Statement offers no justification for treating AT&T/McCaw more 
favorably than the Bell companies, and none can fairly be deduced. 
Moreover, there appears to be no plausible rationale for denying Bell 
company cellular customers the savings that would result from dedicated 
connections between MTSOs.
    Rejecting the Department's proposed limitation in the generic 
wireless proceeding thus seems necessary. But if the Court were to 
discern some overriding rationale that would support the Department's 
position there, that same rationale would necessarily apply here. In 
that case, the public interest would require that approval of the Final 
Judgment be conditioned on addition of a new section, as follows:

    Notwithstanding any other provision of this Final Judgment, 
McCaw Cellular Systems shall not provide interexchange traffic 
routing services in connection with the routing of traffic between 
MTSOs.

C. If the Court Agrees With the Department That the BOCs Should Be 
Required To Establish Redundant Sales Forces, the Final Judgment Should 
Include a Similar Condition

    In the generic wireless proceeding, the Department also has urged 
the Court to require the Bell companies to maintain separate sales 
forces, with separate managers, for local services and wireless long-
distance services. See 59 Fed. Reg. at 44,187; DOJ Proposed Generic 
Wireless Order Secs. VIII(L)(3)(f), (g). If accepted, this proposal 
would burden BOC affiliates with the needless expense of redundant 
overhead, personnel, and administrative costs.
    The Department suggests that this requirement is necessary to allow 
the BOCs' competitors ``to compete on equal terms.'' Id. Competitors of 
BOC cellular affiliates, however, are not required to carry unnecessary 
marketing costs. Sprint/Centel, for example, can market its 
communications services through a single sales force, even though its 
operations (which include local and long-distance wireline service, as 
well as wireless) are broader than any BOC's. GTE (a landline and 
cellular carrier that does not offer wireless interexchange carriers 
equal access) likewise sells local airtime and long distance through 
the same sales force.
    Further, if generic wireless relief is granted subject to an equal 
access obligation, BOC wireless long-distance sales personnel will 
comply with extensive non-discrimination requirements whether or not 
they are part of a unified sales force. BOC long-distance salespersons 
would inform customers of their right to choose an interexchange 
carrier, would be denied special access to local customer information, 
and (if the Court accepts the Department's proposed waiver in toto) 
would offer local and long-distance wireless services separately. See 
id. at 44,187.
    It is impossible to see a rational reason for imposing mandatory 
inefficiencies on BOC affiliates. But if there were one, it would have 
to apply to AT&T/McCaw as well. AT&T/McCaw assuredly could realize 
whatever ``unfair'' efficiencies or advantages would be available to 
the BOCs through the maintenance of a unified sales force. The combined 
AT&T/McCaw is the largest wireless carrier in the country, as well as 
the largest interexchange provider. According to the Department, AT&T/
McCaw has market power in cellular services and is dominant in landline 
and wireless long distance as well. No other wireless carrier could 
employ joint marketing on a similar scale, and there is every reason to 
believe that this advantage would allow AT&T/McCaw to extend its 
current dominance even further.
    Yet the proposed Final Judgment does not contain a sales force 
separation requirement like the one the Department recommends for the 
BOCs. Although A&T's and McCaw's operations must be separate, the Final 
Judgment seems to erect no barrier to the use of a single sales force 
within AT&T for local wireless, wireless long-distance, and land 
services. The Department may be confused on this point, for it stated 
in the generic wireless matter that AT&T/McCaw would be ``subject to 
the same separation . . . restrictions'' as the BOCs. Id. at 44,187. 
But in fact, the AT&T/McCaw settlement, on its face, would allow AT&T 
to perform all marketing of local and long-distance cellular services 
for McCaw, with the possible exception of administering some part of 
interexchange carrier presubscription. See id. at 44,162-63 (Final 
Judgment Secs.  IV.B.3, IV.F); id. at 44,170 (discussing Sec.  IV.F).
    If imposing intentional inefficiencies on the BOCs somehow promotes 
competition, equivalent conditions on AT&T/McCaw would surely do the 
same. The Department evidently believes that this is so, given that the 
Final Judgment's joint marketing provisions were intended to 
``basically track [conditions] the United States has recommended for 
the Bell Companies.'' Id. at 44,170. Therefore, should the Court find 
the Department's proposed condition on the Bell companies appropriate 
in the generic wireless proceeding, that finding should compel a 
conclusion that the public interest requires equivalent separation of 
AT&T/McCaw sales forces. SBC suggests the following new section 
IV.F.1(f), modeled on the Department's generic wireless proposal:

    f. Retail store agents of McCaw and other salespersons who 
receive inquiries by prospective customers of McCaw Local Cellular 
Services shall be a distinct group of individuals, with separate 
managers, from any sales force that sells AT&T Interexchange 
Services and from any sales force that sells AT&T landline 
interexchange products or services.

Conclusion

    The Court should approve the proposed decree, subject to the 
modification recommended in Section I, above. The conditions on 
interexchange routing and sales force separation suggested in Section 
II of these Comments should be additional 

[[Page 49898]]
prerequisites of approval if, but only if, the Court deems comparable 
conditions necessary in the context of the Bell companies' motion for 
generic wireless relief.
    Respectfully submitted,
James D. Ellis,
Liam S. Coonan,
Paul G. Lane,
Paul K. Mancini,
175 East Houston, Room 1260, San Antonio, TX 78205, (210) 351-3449.
Martin E. Grambow,
1401 I Street, Suite 1100, Washington, DC 20006, (202) 326-8868.
Michael K. Kellogg,
D.C. Bar No. 372049.
Kellogg, Huber, Hansen & Todd,
1300 I Street, NW., Suite 500 East, Washington, DC 20005, (202) 326-
7900.
Counsel for SBC Communications Inc.
October 25, 1994.

United States District Court for the District of Columbia

    In the Matter of United States of America, Plaintiffs v. AT&T 
Corporation & McCaw Cellular Communications, Inc., Defendants. Civil 
Act No. 94-01555 (HHG).

Affidavit of John T. Stupka

    John T. Stupka, being duly sworn, deposes and says:
    1. My name is John T. Stupka. I am President and Chief Executive 
Officer of Southwestern Bell Mobile Systems, Inc. (``SBMS''), which is 
headquartered in Dallas, Texas. SBMS provides cellular telephone 
service as either the licensee or the general partner of the licensee 
in a number of markets, including such major markets as Chicago, 
Boston, Dallas, Washington, Baltimore, Kansas City and St. Louis. SBMS 
provides cellular service to over 2.6 million customers. SBMS competes 
directly with McCaw or Lin Broadcasting in Dallas, San Antonio, Corpus 
Christi, Oklahoma City, Wichita and Kansas City.
    2. I began my career with Southwestern Bell Telephone Company in 
1974. In 1983, I was appointed Vice-President--Network for AT&T 
Advanced Mobile Phone Service (AMPS). At divestiture, the southwest 
region of AMPS became a wholly-owned subsidiary of Southwestern Bell 
Corporation known as Southwestern Bell Mobile Systems. In December 
1984, I became Executive Vice President--Network where I was 
responsible for all of SBMS's network and engineering activities. In 
November 1985, I became President and Chief Executive Office of SBMS 
where I am responsible for the operation of twenty-eight metropolitan 
cellular markets in addition to markets in twenty-six rural service 
areas. In addition, since 1985, I have chaired the Technology Committee 
for the Cellular Telecommunications Industry Association (CTIA) which 
has been instrumental in fostering the development of intersystem 
standards. I am also the current Chairman of the Board of the CTIA. I 
have extensive knowledge and experience in operating cellular networks.
    3. I am submitting this affidavit in support of the Comments of 
Southwestern Bell Corporation on the Proposed Final Judgment regarding 
the merger of AT&T and McCaw Cellular Communications, Inc. (``McCaw'').

I. AT&T as a Provider of Cellular Long Distance Service

    4. In addition to being a provider of network equipment, AT&T is 
the dominant provider of cellular long distance service. The equal 
access obligations in the MFJ require SBMS customers to choose a long 
distance carrier unaffiliated with SBMS to provide them long distance 
service. There are as many as 35 separate carriers in some of SBMS' 
markets. Nevertheless, between 70 and 90 percent of all SBMS customers 
have chosen AT&T as their cellular long distance carrier. Through its 
role as a provider of cellular long distance service, AT&T has access 
to a wealth of confidential information about SBMS' customers.
    5. SBMS customers receive both a bill from SBMS for local cellular 
service and a bill from AT&T for their long distance usage. As a 
result, AT&T has the name, address and telephone number of between 70-
90 percent of SBMS' cellular customers, including customers in those 
markets where SBMS' direct competitor for cellular service is McCaw. In 
addition, AT&T has the usage information (the number of the calling 
party, the number of the called party, the duration of the call and the 
usage patterns of each individual customer) on all long distance calls 
placed by SBMS' cellular customers. AT&T could use this information to 
identify SBMS' customers who use a large amount of long distance 
service. Long distance usage is an excellent predictor of high cellular 
usage.
    6. SBMS has recently performed a study of the long distance usage 
of its cellular customers in Dallas for April 1994. In this study, SBMS 
determined that 79 percent of its Dallas customers have chosen AT&T as 
their long distance carrier. SBMS then identified those SBMS customers 
who have chosen AT&T as their long distance carrier and who were the 
highest volume users of long distance service. Predictably, those same 
customers were extremely high users of local cellular service as well. 
In fact, as shown on Attachment A, the 2,222 highest users of AT&T long 
distance service generated as much local airtime revenue as 40,000 of 
the lowest long distance users.
    7. With this information, McCaw could do a very targeted marketing 
program of those top 2,222 users and significantly diminish SBMS' 
revenue in Dallas. This marketing technique would be very strong. By 
targeting high users, the wireless subsidiary of AT&T would not have to 
offer special packages to the ubiquitous cellular customer. We estimate 
that such a campaign could result in a loss of $1,000,000 a month in 
local airtime revenue to SBMS. (See Attachment A). Any such targeted 
marketing scheme would not be the result of superior management, but 
only the result of AT&T's ownership of McCaw, coupled with its unique 
position as a long distance provider to SBMS customers. AT&T can also 
use this information to estimate changes in the size and composition of 
SBMS' Dallas subscribership. With this unique insight into SBMS' most 
closely guarded proprietary information, AT&T/McCaw could gauge the 
effectiveness of changes in SBMS' services and marketing literally on a 
day-to-day basis and counter those SBMS efforts.
    8. A recent conversation illustrates the seriousness of this 
problem. At a recent analysts' conference, I was approached by a 
representative of a major investor in SBC stock. This representative 
immediately commented that he was concerned that, once AT&T bought 
McCaw, AT&T would be in a unique position to determine the identity of 
its high long distance users and share that competitive information 
with McCaw. He indicated that such a situation could result in 
significant long term harm to SBMS and, therefore, SBC's stock value.
    9. Prior to its acquisition of McCaw, AT&T had no incentive to 
share competitively sensitive information concerning its customers with 
any particular wireless company. The AT&T enterprise could not benefit 
from McCaw or another carrier obtaining a competitive advantage over 
SBMS. After the acquisition, AT&T will likely find itself better off 
financially by favoring McCaw over SBMS and other service competitors.
    10. The ability to negotiate commercial agreements to protect this 
information is not to be presumed. When the Federal Communications 
Commission (FCC) detariffed cellular interconnection with interexchange 


[[Page 49899]]
carriers, SBMS drafted contracts incorporating much of the same 
language from the tariffs into the agreements. (See Attachment B). 
These agreements were sent to all interexchange carriers participating 
in SBMS markets. The agreements incorporate language to protect the 
confidentiality of SBMS' proprietary customer information. To date, 
AT&T has not executed this agreement.

II. Equipment

    11. In addition to the problems posed by the anti-competitive use 
of proprietary customer information, the merger raises severe 
competitive problems because AT&T is SBMS' supplier of cellular network 
equipment, including switches, cell site equipment and related 
software, and is the country's leading supplier of such equipment to 
cellular carriers. AT&T can use its position as equipment supplier to 
McCaw's competitors to create artificial competitive advantages for 
McCaw.
    12. This problem arises because once a decision is made to purchase 
a particular supplier's system, all upgrades and other equipment must 
be purchased from that supplier, both to assure quality and because, as 
will be discussed below, the carrier is essentially ``locked-in'' to 
that supplier's equipment in that particular market. Thus, the carrier 
must rely upon the vendor for equipment to expand its system, for 
prompt service, for updates to software and for new service features, 
as well as new operating and maintenance capabilities.
    13. AT&T could use its position as an equipment supplier to reduce 
the competitiveness of McCaw's rivals in a number of ways. For example, 
AT&T could increase the costs of software upgrades, delay delivery 
times, or decrease technological and development support to McCaw's 
rivals. In this business, a delay of even one week could be disastrous. 
SBMS would have no effective recourse against AT&T if it takes any of 
these actions. Suing AT&T would take years and could make things worse 
since we need AT&T for prompt service and upgrades.
    14. Since AT&T has not previously been a competitor of the BOC's 
cellular affiliates, it had no incentive to delay service or upgrades 
or to favor one purchaser over another. With the completion of the 
merger, however, AT&T is now in direct competition with the BOC's 
cellular affiliates and has the incentive to slow service and upgrades, 
to the detriment of SBMS, and to the benefit of McCaw.
    15. Even if SBMS was willing to forego the advantages of AT&T 
equipment, it could not avoid these problems by switching to another 
manufacturer's cellular equipment because it is effectively locked into 
using AT&T equipment. There are three principal reasons for this. 
First, the cost of installing a cellular system in a market of any size 
is enormous. Second, even if a carrier decides to incur that cost, 
making the change is very difficult and can create serious operational 
problems. Third, it is not possible to mix equipment from different 
manufacturers because of the ``closed architecture'' of equipment 
manufactured for the U.S. market.
    16. A brief discussion of the current cost of AT&T switches and 
cell sites will demonstrate the enormous cost of changing equipment. A 
large capacity AT&T switch costs approximately $7,000,000. We have more 
than one such switch in several of our major markets. Only about 
$185,000 of the equipment contained in a switch can be bought from a 
vendor other than AT&T, and our engineers believe that for some items 
we get better performance from AT&T than from other vendors' goods.
    17. An average Series II cell site using AT&T equipment costs about 
$750,000. Only about $29,000 of that could be purchased from other 
vendors. The number of cell sites can be quite large; for example, 
there are over 200 cell sites in Dallas and 20-30 new sites are being 
added each year.
    18. As these figures demonstrate, the costs of switching to 
anotherequipment supplier would be enormous. To take SBMS' Dallas 
network as an example, it would cost about $165,000,000 to change 
(assuming we could negotiate a contract similar to our AT&T contract 
with another vendor). Throughout all of our markets, it would cost 
approximately $1,200,000,000 over the next 2-3 years to change 
equipment to a vendor other than AT&T.

III. Network Efficiencies

    19. SBMS conducted a sample of mobile originated calls between its 
Dallas and Oklahoma City service areas during the month of September 
1993. We then calculated the number of minutes of use during the 
busiest hour and determined that the total number of minutes of use in 
that hour could be carried over a single DSI facility leased from an 
interexchange carrier. SBMS could obtain this circuit for a one time 
capital cost of $2,000 and a $3,200 per month flat rate lease payment. 
In fact, SBMS already has a leased facility in place to handle the 
messaging necessary for intersystem handoff and IS-41 call delivery. It 
might well be possible to carry all additional usage associated with 
this voice traffic over the already existing facility. The same would 
be true in many instances where the need for market-to-market 
connectivity already exists for intersystem operations.
    20. SBMS also multiplied the total number of minutes of use in a 
month between these markets by AT&T's current retail rates. SBMS 
determined that the number of minutes of mobile originated long 
distance traffic between Dallas and Oklahoma City would, at AT&T retail 
rates, generate revenue of $30,440.40. This is but one example of where 
SBMS could significantly reduce the cost of long distance service to 
its customers if SBMS were permitted to take advantage of the 
efficiencies available to non-RBOC affiliated providers.
John T. Stupka,
    Subscribed and sworn to before me on this 24th day of October, 
1994.
Ms. S.R. Drifton,
Notary Public.

Notes

    1. Southwestern Bell Mobile Systems (AT&T Long Distance Usage) 
Chart was unable to be published in the Federal Register.
    2. Southwestern Bell Mobile Systems (Customers Required To 
Generate $1,000,000 of Revenue) Chart was unable to be published in 
the Federal Register.
    3. Southwestern Bell Mobile Systems (cumulative Total Revenue 
and Customers Comparison) Chart was unable to be published in the 
Federal Register.

Southwestern Bell Mobile Systems

July 15, 1994.
Dear Carrier,
    As you may know the Federal Communication Commission (FCC) has 
mandated that all Commercial Mobile Radio Service Providers cancel 
any tariffs on file with the FCC. In response to the FCC's mandate 
Southwestern Bell Mobile Systems, Inc. (SBMS) sought and received a 
waiver from Judge Harold Greene to provide exchange access on an 
untariffed basis ``provided that such exchange access shall be 
provided to all interexchange carriers on the same terms and 
conditions (including price)''. Thus, we will file to cancel 
Southwestern Bell Mobile Systems, Inc. Tariff F.C.C. No. 1 pursuant 
to which we provide cellular equal access service within our 
operating areas.
    In order to fully comply with Judge Greene's ``same terms and 
conditions'' directive and to provide a smooth transition, SBMS has 
decided to offer exchange access service pursuant to contract based 
on the terms and conditions contained in our tariff. Thus, we have 
incorporated the applicable terms and conditions of the tariff into 
the attached ``Contract for Equal Access Service''. The terms and 
conditions of the ``Contract for 

[[Page 49900]]
Equal Access Service are identical for all interexchange carriers 
(IXC).
    Please execute both copies of the contract and return one copy 
at your earliest convenience. To insure that there is no disruption 
of service during any interim period prior to receiving an executed 
copy of the ``Contract for Equal Access Service'', SBMS will 
continue to provide access service on the terms and conditions 
contained in the tariff, as incorporated into the ``Contract for 
Equal Access Service'', provided you are not in violation of any 
such term or condition--in which case SBMS will pursue appropriate 
remedies and take appropriate action. If you are no longer 
interested in receiving SBMS' exchange access service on these terms 
and conditions please notify us and we will cancel your service and 
reballot any customers currently presubscribed to you.
    PLEASE NOTE THAT WE ARE CONTINUING TO PROVIDE YOU SERVICE BASED 
ON THE TERMS OF THE TARIFF AS INCORPORATED IN THE ENCLOSED AGREEMENT 
INCLUDING, BUT NOT LIMITED TO, YOUR AGREEMENT TO KEEP INFORMATION 
CONFIDENTIAL AND TO USE IT ONLY IN THE PROVISION OF INTEREXCHANGE 
SERVICE AND NO OTHER PURPOSE (SEE SECTIONS 3.1.11 AND 10). FURTHER, 
THE CONFIDENTIALITY OBLIGATIONS UNDER THE TARIFF FOR INFORMATION 
PROVIDED THEREUNDER SURVIVES THE CANCELLATION OF THE TARIFF. IF YOU 
DO NOT AGREE WITH SUCH TERMS PLEASE NOTIFY US IMMEDIATELY ON 214-
733-6100.
Lisa Guarnacci


Equal Access Agreement Between Southwestern Bell Mobile Systems, 
Inc. (``SBMS'') and __________ (``Carrier'')

    WHEREAS, in the markets listed in Exhibit ``A'', SBMS is 
offering Equal Access capability so that each SBMS cellular customer 
in said markets may reach the presubscribed interexchange carrier 
(``Carrier'') of their choice on a direct dialed basis (1+dialing 
may be necessary in some markets) if the Carrier has chosen to 
provide service in such markets; and
    WHEREAS, Carrier has sufficient capacity to adequately serve the 
cellular traffic of pre-subscribed cellular customers of SBMS by 
providing interLATA telecommunications services and Carrier is 
providing such services to customers of SBMS in the markets in 
Exhibit ``A''.
    WHEREAS, Carrier desires to participate in SBMS' Equal Access 
offering; and
    WHEREAS, SBMS is incurring substantial recurring costs to 
provide Equal Access to Carrier.
    NOW THEREFORE, in consideration of the mutual benefits accruing 
to each party, the parties hereto agree as follows:
    1. DEFINITIONS. For the purpose of this Agreement the following 
definitions are applicable:
    A. Casual calling--A subscriber not presubscribed to the 
interexchange carrier providing the service, but using the 
interexchange carrier's services on an occasional basis.
    B. Company--Southwestern Bell Mobile Systems, Inc.
    C. Customer--Customers which acquire cellular services from 
Company, including those who acquire service at wholesale rates such 
as resellers of the Company's cellular service.
    D. InterLATA--Communications which traverse LATA boundaries.
    E. Interexchange Service--the provision of voice or data traffic 
across LATA boundaries.
* * * * *
Company, after thirty (30) days written notice may disconnect 
Carrier from Company's Equal Access facilities and contact Carrier's 
Customers to obtain a new designated interLATA telecommunications 
service provider and/or withhold the provision of further 
Unsolicited or Solicited Care, and/or take any other action provided 
at law or in equity. Carrier is responsible for all reasonable and 
necessary collection costs and fees incurred by Company, including 
reasonable attorney's fees if Company must initiate legal 
proceedings to collect any sums due hereunder and if a final order 
directing Carrier to pay amounts is received by Company.
    3.1.10  Carrier will follow and abide by all equal access 
service provisions as outlined in Federal Communications Commission 
Memorandum Opinion and Order in CC Docket No. 83-1145, released June 
12, 1985, and Memorandum Opinion and Order in CC Docket 83-1145, 
released November 14, 1985, and any present or future Orders, Rules 
or Regulations of the Federal Communications Commission.
    3.1.11  Company and Carrier recognize that any customer lists 
which may be provided from one to the other in connection with, or 
subsequent to, the balloting and allocation process is proprietary 
information. Each of Company and Carrier agrees to use any such 
customer list solely for the purpose of providing interexchange 
communication services to such customers and shall be disclosed only 
within Company and Carrier to those individuals with a need to know 
in order to provide such service. Each of Company and Carrier agrees 
to keep such customer list confidential and agrees not to sell, 
transfer, assign, or otherwise disseminate the customer list to 
anyone except for the purpose of providing such interexchange 
services.
    4  INTERCONNECTION
    4.1.  GENERAL
    4.1.1  Carrier may interconnect with Company for the purposes of 
serving Company's customers interLATA telecommunications services 
requirements either by (1) local exchange carrier access tandem 
connection or (b) direct connection.
    4.2  LOCAL EXCHANGE CARRIER ACCESS TANDEM CONNECTION
    4.2.1  Subject to the terms of this Agreement, Company will 
provide to Carrier industry standard FGD signalling, protocol, 
transmission, and testing.
    4.2.2  Subject to the terms of this Agreement, Company will make 
arrangements with the local exchange carrier to provide the 
necessary Type II trunks to the local exchange carrier access tandem 
to serve Carrier's requirements and provide for industry standard 
equal access grade of service.
* * * * *
number or mobile number and the date of the call. Further, IXC 
agrees not to solicit Customer account information for IXC Calls 
made before one (1) year prior to the date of the Solicited CARE 
request. IXC agrees to update its data base and populate its 
customer account field to identify the Customer by the Customer 
mobile number or account number to properly identify the Customer 
for that period of time. IXC shall update its data base upon receipt 
of the solicited CARE records so that subsequent requests for 
solicited CARE will, if possible, request Customer information using 
the correct account number or mobile number.
    9.3  CARRIER DATABASE
    9.3.1  IXC is solely responsible for updating its internal 
customer data bases with any an all information received from SBMS. 
SBMS assumes, and IXC acknowledges, that SBMS has no fiscal or 
financial responsibility or liability regarding any information 
contained on any Reconciliation Tape, or any form of Unsolicited 
and/or Solicited CARE response and IXC's ability to bill or collect 
for services reflected on the foregoing or for services rendered by 
IXC on its network.
    9.4  COSTS
    9.4.1  IXC shall pay SBMS $.05 per message/record for each 
response to a Solicited CARE request and $300.00 for each tape 
containing the Solicited CARE records, and in the case of paper 
transmittal, $.05 per message/record for the Solicited CARE record.
    10.  CONFIDENTIALITY
    10.1.1  Any information and data of any nature, including, but 
not limited to Customer name, PIC information, account information 
from Casual Calling, Customer address, cellular account information, 
SBMS data processing/billing information, technical, or other 
Customer account information furnished by one part to the other in 
connection with this Agreement or which is identified or labeled as 
confidential or proprietary (``INFORMATION''), an all copies of such 
INFORMATION shall be treated in confidence and protected and shall 
be used and copies only for the exercise by the Receiving Party on 
performing its obligations hereunder. Each party agrees to use any 
INFORMATION received from the other party solely for the purpose of 
providing interexchange service to the Customers and such 
INFORMATION shall be disclosed within the Receiving Party only to 
those with a need to know in order to provide interexchange service.
    10.1.2  These restrictions on the use or disclosure of 
INFORMATION shall not apply to any INFORMATION:
    a. that is independently developed by the Receiving Party to 
lawfully received free of restriction from another source having the 
right to so furnish such INFORMATION;
    b. after it has become generally available to the public without 
breach of any obligation of confidentiality by the Receiving Party;
    c. that at the time of disclosure was known to the Receiving 
Party free of restriction as evidenced by documentation in such 
Receiving Party's possession; or

[[Page 49901]]

    d. that the Disclosing Party agrees in writing is free of such 
restrictions.
    10.1.3  Bith Parties shall retain copies of recorded information 
relating to its performance in the same manner, and for the same 
period, as it maintains such material for itself, subject to the 
rules, regulations and orders of applicable regulators or other 
lawful authority, and subject to such additional retention 
guidelines as the parties may mutually establish.
    11.  ERRORS
    11.1  Each Party shall bear its own expense or any error, 
omission, mistake or failure to perform its respective duties 
hereunder.
    12.  LIABILITY
    12.1  In no event will SBMS be liable or any matter relating to 
or arising out of this Agreement, whether based on an action or 
claim in contract, tort, or otherwise, for all events, acts or 
omissions which shall not exceed, in the aggregate, the actual costs 
and expenses to correct SBMS' data processing error, if any, or to 
provide additional solicited information. In no event will the 
measure of damages include, nor will SBMS be liable for any amounts 
for loss of income, profit or savings, or indirect, special, 
incidental, consequential, or punitive damages of any IXC, or any 
other party, including third parties.
    13.  AUDIT
    A. Upon request, after adequate written notice, and during 
normal business hours, SBMS will allow IXC to audit the SBMS records 
which support the Market Share calculation for IXC and the cost 
figures used by SBMS in calculating its Recurring Costs, provided 
that IXC will not be entitled to see market share information or pro 
rata cost information pertinent to other Participating
* * * * *

Certificate of Service

    I, Austin C. Schlick, hereby certify that copies of the 
foregoing Comments of SBC Communications Inc. on Proposed Final 
Judgment have been served by hand or Federal Express on this 25th 
day of October 1994 to the following:
Richard Liebeskind,
Assistant Chief, Communications and Finance Section, Room 8104, U.S. 
Department of Justice, Antitrust Division, 555 4th Street, N.W., 
Washington, DC 20001, Attorney for the United States
John D. Zeglis,
Mark C. Rosenblum,
AT&T Corp., 295 North Maple Avenue, Basking Ridge, NJ 07920, Attorneys 
for AT&T Corp.
Douglas I. Brandon,
McCaw Cellular Communications, Inc., 1150 Connecticut Avenue, N.W., 
Washington, DC 20036, Attorneys for McCaw Cellular Communications, Inc.

United States District Court for the District of Columbia

    In the Matter of United States of America, plaintiff, v. AT&T 
Corp. and McCaw Cellular Communications, Inc., Defendants. Civ. 
Action No. 1:94-01555 (HHG).

Comments and Objections of the Ad Hoc IXCs to the Proposed Final 
Judgment Between the United States, AT&T Corp. and McCaw Cellular 
Communications, Inc.

    The Ad Hoc IXCs, a group of non-dominant resale carriers, 
respectfully submits its comments on the Proposed Final Judgment 
(``Proposed Judgment'') drafted between the parties to this action, in 
which the United States correctly raised antitrust concerns in 
connection with the proposed merger between AT&T Corp. (``AT&T'') and 
McCaw Cellular Communications, Inc. (``McCaw'').

I. Introduction

    Through settlement of this action, the Justice Department hopes and 
believes it has adequately protected the public from the foreseeable 
anticompetitive effects of an AT&T-McCaw merger. However, when viewed 
in light of AT&T's abysmal record of antitrust violations, it becomes 
clear that neither the Proposed Judgment, nor any other arrangement 
sanctioning the AT&T-McCaw merger, can possibly protect the public from 
either the foreseeable or unforeseeable competitive abuses available to 
AT&T as a result of this merger. Accordingly, this and any other 
proposed AT&T-McCaw merger agreement should be rejected under the 
Tunney Act as against the public interest.

II. The Proposed Judgment Is Not in the Public Interest

    A consent decree settling an antitrust complaint must be drafted to 
``preserv[e] free and unfettered competition as the rule of trade.'' 
Northern Pacific Railway Co. v. United States, 356 U.S. 1, 4 (1958). 
Unless a colorable claim can be made that this standard is met in the 
present case, the Proposed Judgment must be rejected as not ``within 
the range of acceptability or . . . `within the reaches of public 
interest.' '' United States v. American Tel. and Tel. Co., 552 F. Supp. 
131, 150 (D.D.C.), aff'd sub nom., Maryland v. United States, 460 U.S. 
1001 (1982), quoting United States v. Gillette Co., 406 F. Supp. 713, 
716 (D. Mass. 1975).
    The Proposed Judgment fails to adequately protect the public 
interest primarily because it is based on the presumption that the 
parties to the Judgment, and particularly AT&T, will comply with its 
terms in good faith. The Justice Department is powerless to protect 
competition unless AT&T voluntarily follows both the letter and the 
spirit of the Proposed Judgment.
    Had the complaint been issued against a corporation with little or 
no history of antitrust abuses, the Justice Department's confidence in 
the protective provisions of the Proposed Judgment might be warranted. 
However, AT&T is no typical corporation. A brief review of AT&T's long 
history of anticompetitive practices, and an explanation of the more 
refined and clever tactics employed by the company today, demonstrate a 
deeply entrenched corporate hostility toward free competition. Unless 
and until AT&T reverses its unfairly competitive policies, the dominant 
carrier should not be entrusted with the power and potentially 
limitless opportunities for abuses that the AT&T-McCaw merger presents.

A. AT&T's Long History of Anticompetitive Practices

    AT&T's history of antitrust problems dates back a century to 1878 
when it litigated its first potential competitor out of business. The 
Congressional Committee considering telecommunications reform 
legislation during this past session (H.R. Report No. 103-559, Part 2, 
103d Cong., 2d Sess. (1994)), points out that by as early as 1910, 
AT&T's monopolistic goals were openly touted in its annual report:

    This process of combination will continue until all telephone 
exchanges and lines will be merged either into one company owning 
and operating the whole system, or until a number of companies with 
territories determined by political, business, or geographical 
conditions, each performing all functions pertaining to local 
management and operation will be closely associated under the 
control of one central organization exercising all the functions of 
centralized general administration.

Id. at 33.
    By 1913, the Justice Department had to file its first Sherman Act 
claim against AT&T. The Department then charged AT&T with unlawfully 
combining to monopolize telephone message transmission in the Pacific 
Northwest United States, Id. at 34-35. The litigation ended in 1914 
with the Kingsbury Commitment, in which AT&T agreed to avoid various 
anticompetitive act. Nevertheless and despite the Commitment, by 1925 
AT&T was an entrenched nationwide monopoly. Id. at 33.
    In 1949, The Department of Justice filed its second Sherman Act 
complaint against AT&T. The complaint alleged that AT&T purchased all 
its equipment needs from its subsidiary Western Electric, regardless of 
price or quality. Id. at 38-40. To remedy AT&T's continued pattern of 
anticompetitive conduct, DOJ sought to divest AT&T from its subsidiary. 
However, AT&T's 

[[Page 49902]]
influence and a change in administrations resulted in the Department's 
enforcement of the law to be compromised.
    DOJ backed off from its divestiture goal in the 1956 Consent 
Decree, and instead meekly required AT&T and the Bell operating 
companies to limit themselves to the offering of basic common carrier 
communications services under tariff. As the House Judiciary Committee 
Report recently noted:

    [T]he 1956 consent decree had little relevance to the original 
premise of the 1949 case: that the exclusive purchasing arrangement 
between Western Electric and the rest of the Bell monopoly was 
inherently anticompetitive and inflationary. This disappointing and 
puzzling retreat of the Department from the original vigor of the 
case brought in 1949 did not go unnoticed by the House Judiciary 
Committee.

Id. at 40.\1\

    \1\ A subsequent investigation into the consent decree 
``uncovered an elaborate campaign to undermine the case, 
orchestrated and executed by AT&T, in which AT&T enlisted the aid of 
top officials in the FCC, the Defense Department, and the Justice 
Department itself.'' Id. at 40. The findings were published in a 
1959 report. Id.
---------------------------------------------------------------------------

    AT&T's commitment to the preservation of its monopoly dominance 
resulted in the necessity for DOJ to file yet another antitrust 
complaint against AT&T in 1974. This time, DOJ charged AT&T with 
leveraging its monopoly position in local telephone exchange services 
to unlawfully impede competition in the markets for interexchange 
services, customer equipment and telecommunications equipment. Id. at 
47. DOJ defined 30 specific acts which AT&T had committed in violation 
of the antitrust laws. Id. at 48, in.18.
    The 1974 action by the Department of Justice established an 
unprecedented third attempt by the United States Government to stop 
AT&T from continuing its unabated policy of anticompetitive conduct it 
had commenced 100 years earlier:

    The Bell System's anticompetitive conduct and behavior was 
similar to actions attacked in the earlier Sherman Act suits. For 
example, the Bell System was alleged to have discriminated against 
its competitions in the quality of access it provided to its local 
telephone network, by giving competing interexchange carriers 
technically inferior connections and charging them greater access 
charges, or by denying equipment manufacturers essential information 
regarding the local exchange network. The Bell System was also 
engaging in predatory cross-subsidization by artificially depressing 
the prices it paid for Western Electric equipment and by allocating 
Western Electric's costs to the ratemaking base borne by telephone 
customers. The Department further asserted that the Bell System was 
engaging in monopolistic self-dealing--for example, by requiring 
affiliated local operating companies to acquire switching equipment 
from Western Electric rather than a lower-priced or higher-quality 
competitor.

Id. at 47-48.
    The 1974 antitrust complaint ultimately led to the well-known 1982 
Modification of Final Judgment (``MFJ''). The MFJ required AT&T, inter 
alia, to divest its 22 Bell operating companies, and was designed to 
put a final halt to AT&T's long history of anticompetitive acts. As the 
discussion, infra, demonstrates, the MFJ has not done so.

B. The Recent Increase in AT&T Anticompetitive Practices

    AT&T's anticompetitive practices have only become more refined and 
sophisticated in recent years. Instead of openly repressing competition 
in the marketplace, AT&T now adopts the disingenuous policy of publicly 
supporting the notion of competition, but privately subverting its 
competitors through a variety of unlawful tactics. AT&T has shown that 
it will stop at nothing to suppress competition, including breaching 
contracts, interfering with third party contractual relations, and 
intentionally misrepresenting its intentions to customers and the 
Federal Communications Commission. Nowhere are these tactics more 
widely employed by AT&T than in its campaign to eliminate switchless 
resellers such as the Ad Hoc IXCs from the marketplace for long 
distance telecommunication services.
1. New Anticompetitive Tactics Employed Against Switchless Resellers
    Each of the switchless resellers comprising the Ad Hoc IXCs started 
in the telecommunications business in late 1989 or early 1990. Each 
entered the industry after learning of the opportunity to resell AT&T's 
Software Defined Network (SDN) services. Each of the resellers invested 
substantial resources building customer bases. These customers were 
then committed to use AT&T's long distance network as part of the Ad 
Hoc IXCs' high dollar, high volume, long term contractual commitments 
required by AT&T's tariffs. As a result of the money and effort 
expended by the resellers, smaller end-users were able to earn larger 
discounts, and AT&T was able to garner substantial revenues that 
otherwise might have gone to competitor long distance carriers.
    At first, AT&T recognized the value of resellers as a customer 
base. However, AT&T reversed itself, and rather than viewing resellers 
as a welcome source of revenue, decided that resellers undermined its 
ability to offer higher tariffed long distance rates to small end-
users. As a result, AT&T embarked on a concerted campaign, through a 
variety of means and tactics, to drive the Ad Hoc IXCs and other 
companies like them out of business.
    For example, AT&T exploited their role in the provisioning process 
to the detriment of the resellers. AT&T refused to accept, lost, and 
delayed large numbers of service orders placed with AT&T by the 
resellers, which were to be used to hook up the resellers' own 
customers. AT&T refused to timely and accurately bill large numbers of 
their reseller customers, and in some cases engaged in double billing 
of such customers.
    AT&T also disparaged the competency of the Ad Hoc IXCs in the 
marketplace. AT&T did this by attacking the customer base of the Ad Hoc 
IXCs, through the use of its small competitors' proprietary information 
databases to cross market reseller customers.
    AT&T manipulated the tariffing processes, and attempted to create, 
before the staff at the FCC, the image of the Ad Hoc IXCs and companies 
like them as ``deadbeats,'' i.e., financially unsound entities, that 
are poorly managed. AT&T then attempted to use this inaccurate picture 
as justification for its use of its ``tariffed authority'' to terminate 
their resold networks.
    AT&T also stonewalled requests by some of the Ad Hoc IXCs to resell 
AT&T's Tariff 12 services. AT&T's efforts to block the resale of Tariff 
12 have been successful, as no Tariff 12 services were permitted to be 
resold by switchless resellers.\2\

    \2\ AT&T's tactics go well beyond the brief summary of actions 
described herein. For example, AT&T has gone so far as to use third 
party telemarketing companies to attack the customer base of small 
reseller competitors.
---------------------------------------------------------------------------

    Moreover, through these tactics, AT&T successfully divided the 
market for end-users such that resellers and the smaller switch-based 
carriers they resorted to for service, were excluded from the more 
lucrative market for larger direct access customers. Thus, AT&T ensured 
itself that it would dominate the large corporate customer market by 
forcing resellers off the AT&T network, and onto Spring, Wiltel, or 
other non-dominant carrier networks.
2. $13 Million Jury Verdict Against AT&T
    This corporate policy toward resellers was recently put on trial in 
the United States District Court for the District Of 

[[Page 49903]]
Oregon in Central Office Telephone, Inc. v American Telephone and 
Telegraph Company. Central Office Telephone, Inc. (``COT'') a 
switchless reseller primarily active in the Pacific Northwest United 
States, alleged that AT&T intentionally interfered with COT's business 
by abusing its power as the dominant carrier in the telecommunications 
industry. The testimony and documents presented during this trial, some 
of which are summarized below and attached hereto, demonstrate extreme 
lengths to which AT&T will go in order to snuff out competition.
    The plaintiff's first witness was the founder of COT, Gordon 
Rood.\3\ Mr. Rood testified at length about the numerous ways in which 
AT&T intentionally set out to disrupt his company's business, and 
undermine its ability to compete. AT&T exploited its role in the 
provisioning, billing and servicing process to create the appearance 
that COT was incompetent. When AT&T refused to clear up the problems it 
created for COT's end users, the end users inevitably had no choice but 
to switch to long distance carriers.

    \3\ Relevant portions of the transcript of Mr. Rood's testimony 
are attached hereto as Exhibit A.
---------------------------------------------------------------------------

    Mr. Rood first testified how AT&T ensured that COT's customers 
would not enjoy a smooth transition onto the SDN account. Tactics 
employed by AT&T in the provisioning process included:
     Failing to send carrier changes orders to the local 
exchange company (exh. A at 265);
     Doubling the time in which AT&T promised to provision new 
orders from 30 to 60 days (id. at 233-34);
     Randomly reducing the number of orders that COT could 
offer from 6,000 down to 400 per month (id. at 225-26); and
     Stalling the provisioning of COT customers to such an 
extent that, by the third quarter of 1990, COT customers had to wait an 
average of 6 months from the time SDN was ordered to the time it was 
turned up; (id. at 273-74).\4\

    \4\ By comparison, Mr. Rood testified that COT could get an 
order provisioned by Spring within 10 days. Exh. At at 331, lines 
12-16.
---------------------------------------------------------------------------

    If and when COT's customers were eventually provisioned on SND, 
their real problems began in the billing phase. AT&T created such 
extensive and tangled billing glitches (which to the end user appeared 
to be COT's fault) that COT was left with enraged customers who could 
not afford to spend valuable time sorting out billing errors. These 
billing tactics employed by AT&T included:
     Refusing to give COT multi-location billing as promised, 
such that COT could share a discount with a customer without costly and 
time-consuming adjustments after billing (id. at 374-75);
     Failing to provide call detail lists when billing COT's 
customers, or delaying call detail for months after bills were sent out 
(id. at 266-67);
     Incorrectly crediting or debiting the account of one end-
user for amounts due from or to another end-user (id. at 298);
     Failing to bill customers for network usage until several 
months after the use, sometimes billing a customer for eight months of 
use in one bill (id. at 303); \5\

    \5\ In one case, Monarch Hotel received a $36 bill one month, 
and the next bill received was for $10,000. Exh. A at 303. As a 
result, Monarch Hotels refused to pay the bill, and cancelled its 
account with COT. Id.
---------------------------------------------------------------------------

     Adjusting customer balances with unexplained credits and 
debits, causing major frustrations for customers (id. at 287-88);
     Double billing COT customers after COT assumed 
responsibility for billing its customers directly (id. at 298-99);
     Miscalculating the amount of volume discounts that a 
customer was owed (id. at 297);
     Refusing and/or failing to properly divide the SDN 
discount percentages between COT and the end-users, instead giving the 
entire discount to the end-user and thus cheating COT out of profits 
and cash flow (id. at 283-86);
     Refusing to correct erroneous bills brought to AT&T's 
attention (id. at 299, lines 11-13).
    Finally, Mr. Rood testified to numerous ways in which AT&T 
undermined COT's competitive edge. These unfairly competitive tactics 
included:
     Breaking its promise to provide COT with calling cards 
containing the AT&T and COT logos, making it more difficult for COT's 
business end-users to get SDN rates for calls made from out of the 
office, and impossible to get SDN rates for calls made from out of the 
country (id. at 215-218, 559-561);
     Illegally ``slamming'' COT customers and converting them 
to the higher tariffed service of AT&T (id. at 557);
     Referring all resellers problems to one understaffed and 
untrained office in Piscataway, New Jersey, where the AT&T employees 
did not have the time, expertise, or customer familiarity to resolve 
the problems experienced by COT and its end-users (id. at 255-57, 299-
300); \6\

    \6\ AT&T told COT that their account was being transferred to 
Piscataway, New Jersey because ``the SDN account was not for 
resellers,'' and even acknowledged that COT ``wouldn't be getting 
the same level of service that [it] had previously.'' Exh. A at 256, 
line 24 to 257, line
---------------------------------------------------------------------------

     Making a post-contract demand for a deposit from COT 
before provisioning customer (id. at 261-62);
     Refusing to join COT in explaining the provisioning and 
billing problems to endusers (id. at 267-68).
    The cumulative result of all these AT&T tactics was that COT lost a 
large part of his customer base. Indeed, by the Fall of 1991, COT was 
losing tens of thousands of dollars worth of customers every month. Id. 
at 304-05.
    After Mr. Rood explained the difficulties COT experienced, 
testimony from a former AT&T employee, Spencer Perry, established that 
COT's problems were all intentionally orchestrated by AT&T.\7\ Mr. 
Perry testified that resellers of SDN were first considered by AT&T to 
be a good source of revenue for the company,\8\ but that later they 
were regarded with hostility and even referred to as 
``cockroaches.''\9\ This reversal in AT&T policy occurred after AT&T's 
Director of Distribution Strategy, Michael Keith, decided that SDN 
resellers might erode AT&T's PRO WATS customer base. Id. at 1009, line 
18 through p. 1010, line 6.\10\ To prevent this, Mr. Keith formed an ad 
hoc committee on resellers in order to, in Mr. Perry's words, ``work on 
ways . . . to change the SDN offer, so that the switchless resellers, 
or the cockroaches . . . would not . . . buy the product.'' Exh. B at 
1038, at lines 20-23.\11\

    \7\ Mr. Perry was an AT&T employee for 14 years, reaching the 
level of district manager for the account management district known 
originally as the Carrier Service Center and later as the Channel 
Development and Operations Center (``CDOC''). The relevant portions 
of the trial transcript containing Mr. Perry's testimony in COT v. 
AT&T are attached hereto as Exhibit B.
    \8\ Specifically, Mr. Perry testified that AT&T was at first 
``overjoyed'' by resellers (exh. B at 993), because customers ``were 
walking in through the floor. It kind of reminded me of fish jumping 
out of the ocean into your boat. You don't even have to drop the 
line in.'' Exh. B at 994, lines 2-4.
    \9\ Exh. B at 1038.
    \10\ Mr. Perry explained the reasoning behind AT&T's sudden 
hostility toward resellers:
    [Y]ou would take a PRO WATS base of customers, and essentially 
take those customers, and move them to a product SDN that was lower 
priced. And that's referred to as base cannibalization. You are sort 
of eating your own customers.
    Exh. B at 1071, lines 7-11.
    \11\ Mr. Perry also was instructed to find ways ``to kill the 
arbitrage'' which Mr. Perry explained meant to eliminate the price 
gap between the SDN and PROWATS tariff rates, the existence of which 
enabled resellers to make a profit by aggregating smaller end-user. 
See Exh. B at 1018, lines 9-19.
---------------------------------------------------------------------------

    At Mr. Keith's behest, Mr. Perry and another AT&T employee prepared 
a memorandum outlining ways in which AT&T could erect roadblocks to SDN 


[[Page 49904]]
resale.\12\ The ideas contained in the memorandum were then discussed 
at the first meeting of the ad hoc committee on resellers held on March 
12, 1990. Id. at 1052-54. Seven AT&T officials attended the meeting, 
most of whom took notes. Id. at 1055, lines 14-15; 1056, line 20 
through 1057, line 2. According to Mr. Perry, it was in this and other 
ad hoc committee meetings that AT&T formed its plans for destroying 
---------------------------------------------------------------------------
resale that were ultimately used against COT and the Ad Hoc IXCs:

    \12\ The purpose of the memorandum was explained in its 
introduction:
    The recent unprecedented demand for AT&T [SDN] service, for the 
sole purpose of resale, has caused confusion in the marketplace, and 
has resulted in a clogged provisioning system, thus denying service 
to commercial customers. AT&T's interests may be well served in 
delivering this service to established, switch-based inter-exchange 
carriers. However, the current ability for switchless resellers to 
arbitrage the service has significant negative consequences to AT&T. 
This paper identifies tariffed elements and operational practices 
that attract arbitrageurs. Revisions to these elements and practices 
are listed in descending order of impact that would decrease the 
attractiveness of the service to switchless resellers.
    Exh. B at 1050, lines 8-12, and 1051, lines 6-16.
    This document is currently unavailable due to a pending AT&T 
remittitur motion. When available, this and other relevant documents 
from the COT trial will be submitted in a supplemental appendix.
---------------------------------------------------------------------------

    [O]ne of the things we were trying to do, was while making it 
less attractive to resellers, we wanted to keep the viability to 
commercial customers. And so, what we did, was we just listed ideas 
on the board, and then later went back, and then segmented those 
ideas, and tried to put some order to them, in terms of, you know, 
basically categorize the ideas.

Exh. B at 1052, lines 4-10. Mr. Perry testified that after this first 
ad hoc committee meeting ended, he was directed to gather the notes 
taken by the participants to the meeting and destroy them, which he 
did. Exh. B at 1056, line 3 through 1059, line 18.
    By the Fall of 1990, AT&T's anti-resale policies devised by the ad 
hoc committee were working very well. Indeed, Mr. Keith indicated his 
confidence in AT&T's ability to thwart resale in a candid moment upon 
Mr. Perry's departure from AT&T. Mr. Perry testified about the 
encounter at the trial:

    Well [Mr. Keith] had mentioned that when . . . he asked what was 
I going to do . . . I sa[id] I wasn't sure. And he sa[id] well, I 
hope you are not going into SDN resale. And I said, oh, why is that? 
And he picked up a piece of paper, and he sa[id], with a one percent 
provisioning rate, they won't be around much longer.

Exh. B at 1084, lines 11-17.
    Mr. Keith, in deposition testimony offered at the trial, 
essentially admitted that AT&T was working on ways of excluding 
resellers from the SDN markert.\13\ Mr. Keith confirmed that, when 
asked by an AT&T official how resale could be limited, Mr. Keith 
answered in writing:

    \13\ Relevant portions of Mr. Keith's testimony are attached 
hereto as Exhibit C.
---------------------------------------------------------------------------

    I don't really know at the moment. We are meeting weekly with 
the SDN product team to find out. We want to make sure SDN serves 
the top end of the market. There will probably be modifications to 
the product that will insure this, but may not serve the resellers. 
But no one knows exactly what these steps will be . . .

Id. at 1201, lines 1-6.\14\

    \14\ Mr. Keith also confirmed the disparate treatment that 
resellers received vis-a-vis larger corporate SDN customers. For 
example, AT&T refused to give their salespersons any commissions for 
sales to resellers. Id. at 1197. Moreover, unlike resellers, some 
corporate customers were given permission to use the AT&T logo, 
including for purposes of resale. Id. at 1199, 1202-03. Ironically, 
Mr. Keith testified that it was his organization within AT&T that 
was given responsibility for assisting resellers. See Exh. C at 
1189, lines 9-18.
---------------------------------------------------------------------------

    After a two week trial in which AT&T's anticompetitive tactics were 
explained at length, the jury concluded that AT&T had unfairly and 
intentionally excluded COT from reselling SDN as required by law and 
contract. The jury awarded COT $13 million in damages.
3. Other Actions Pending Against AT&T
    AT&T's anticompetitive vendetta against SDN and Tariff 12 resale 
generated numerous lawsuits and continue to do so. Exhibit D to this 
Opposition lists the known lawsuits that have been filed to date and 
are pending against AT&T for its activities against SDN resellers like 
the Ad Hoc IXCs. Exhibit E list the pending complaints against AT&T 
that have been filed with the Federal Communications by two of the Ad 
Hoc IXCs, with respect to AT&T's stonewalling of the resale of its 
Tariff 12 services.\15\

    \15\ These complaints are pending, and discovery in these 
proceedings to date have produced documents which demonstrate AT&T's 
motivation and intent to stop the resale of its services. Those 
documents are subject to various protective orders, but two of the 
companies comprising the Ad Hoc IXCs have requested a waiver of the 
protective order for purposes of this submission. If that waiver is 
granted, a supplemental appendix documenting AT&T's tactics will be 
submitted.
---------------------------------------------------------------------------

4. AT&T's Unfair Business Practices Demonstrate the Hypocrisy of its 
Present Endorsement of Free and Unfettered Competition
    As part of the Proposed Judgment negotiated with the Department of 
Justice, AT&T has once again endorsed the notion of free and unfettered 
competition. This is not the first time AT&T has endorsed competition 
in order to expand its dominance in the telecommunications market. 
Indeed, the first step in AT&T's campaign against resellers, described 
supra, was to win deregulation from the FCC. AT&T did so by expressly 
and repeatedly promising to the FCC and to the public, that AT&T would 
support competition, including long distance resale. Once it freed 
itself of regulatory constraints. AT&T reneged on these promises and 
initiated its efforts to put resellers out of business.\16\

    \16\ This is particularly true with respect to its Tariff 12 
services. For example, AT&T specifically represented to the FCC and 
to Congress that its ability to provide customized services would 
not violate the anti-discrimination provisions of the Communications 
Act (47 U.S.C. Sec. 202(a)) and would not be anticompetitive, 
because its Tariff 12 services could be resold. However, at the time 
these representations were made, AT&T's corporate policy impact was 
totally contrary to these representations, as AT&T's policy was that 
no Tariff 12 services would be permitted to be resold if AT&T could 
stop such resale. The documents discovered in the pending FCC 
complaint proceedings demonstrate the contradictions between AT&T's 
public representations and its internal anti-resale policies and 
practices.
---------------------------------------------------------------------------

    AT&T's pattern of publicly subscribing to notions of free 
competition, but privately attempting to eradicate competitors through 
unfairly competitive practices, must be taken into account here. To 
justify its merger with McCaw, AT&T again has broadly supported free 
and unfettered competition, and even claimed that its control of 
additional communications facilities will increase access to the 
market. In light of AT&T's prior pattern of conduct toward resellers, 
these claims simply cannot be believed. AT&T is quick to embrace 
notions of free and unfettered competition in order to garner the very 
power that it needs to suppress small competitors, and expand its own 
dominance in the telecommunications industry. There is little reason to 
believe that AT&T's present promises to allow competition in the 
cellular market are any more genuine than any of AT&T's previous pro-
competitive posturings.

C. Opportunities for Further Anticompetitive Practices Presented by an 
AT&T-McCaw Merger

    The discussion, supra, of the relentless and creative ways in which 
AT&T pursued one segment of small long distance competitors, shows that 
it is impossible to predict how AT&T will pursue these same long 
distance competitors with its new found dominance of the existing 
cellular phone segment of the industry and the platform that dominance 
provides AT&T for future wireless telecommunications services of PCS 
(see infra). The anticompetitive opportunities this merger will create 
will be limited only by the collective 

[[Page 49905]]
imagination of more AT&T ``ad hoc committees.'' There can be no doubt 
that the anticompetitive effects that will inevitably result from an 
AT&T-McCaw merger are clearly foreseeable and sharply defined against 
such entrenched anticompetitive behavior. The ``protective'' provisions 
of the Proposed Judgment will be powerless to prevent AT&T's unlawful 
restraints on competition.
1. Expansion of AT&T's Long Distance Domination
    In filings with the Federal Communications Commission (``FCC''), 
AT&T has made no secret of the fact that it seeks to acquire the 
cellular facilities of McCaw for use as wireless local access in order 
to protect and expand its ``core'' long distance services business. The 
AT&T-McCaw merger will only provide AT&T with the tools necessary to 
protect its dominance and its ability to control and manipulate prices 
in the marketplace.
2. Creation of an AT&T End-to-End Network
    Any Proposed Judgment in the public interest must be drafted with 
the recognition that AT&T's acquisition is designed to reintegrate its 
interexchange services with its control of local access, in order to 
create an end to end network in which AT&T will be able to bypass the 
local exchange carriers through the McCaw facilities. The creation of 
such a monolith was the very result that the MFJ was intended to 
prevent due to its anticompetitive nature.
    The marketplace reality is that none of AT&T's larger competitors 
have the ability to compete with an AT&T that possesses the tools 
necessary to bypass present local exchange access networks. MCI may in 
six or more years have a wireless or wired presence in several major 
cities.\17\ Competitive access providers exist only in small islands in 
a few cities and have recently suffered a major setback in their 
ability to expand on a more rapid and cost effective basis.\18\

    \17\ Exhibit F--MCI press announcement, Washington, D.C., 
February 28, 1994.
    \18\ Bell Atlantic Telephone Companies v. Federal Communications 
Commission, Case No. 92-1619 Slip Op. (D.C. Cir. June 10, 1994), 
vacated in part and remanded, Expanded Interconnection with Local 
Telephone Company Facilities (FCC Docket No. 91-141), Report and 
Order and Notice of Proposed Rulemaking 7F.C.C.R. 7369 (1992); 
Memorandum Opinion and Order, 8F.C.C.R. 127 (1993).
    Although the local exchange carriers one day likely will, under 
the proper combination of government regulation and technological 
advances, enter the interexchange market, as AT&T itself has 
consistently and vociferously argued, that day is far from being 
here. Hence, there is no need to accommodate AT&T's own attempts to 
get a head start on such entry by acquiring the local access 
facilities that will provide it with the capability to reestablish 
its monolithic end-to-end network reach. Clearly none of AT&T's 
competitors have a similar capability at this time, and will not 
have such a capability for the foreseeable future.
---------------------------------------------------------------------------

    In short, while the rest of the industry inches toward increasing 
their competitive parity, AT&T is seeking to further entrench its 
dominance by securing the assets necessary to put it so far ahead of 
all other competitors as to make any effective future competitive 
challenge impossible. If permitted to do so, the ``whale leading the 
pilot fish'' symbolism used by Professor Huber soon will be 
enshrined.\19\

    \19\ See Huber, Kellogg and Thorne. The Geodesic Network II. 
1993 Report on Competition in the Telephone Industry (1992) at 3.52.
---------------------------------------------------------------------------

3. Domination of the PCS Market
    Most industry experts agree that over the next ten years, personal 
communications services (``PCS'') technology will transform the way in 
which the public communicates electronically. PCS will enable people to 
be reached anywhere in North America over wired and wireless networks 
with a single personal telephone number. PCS will also support two way 
data, radio location, and image transmission.
    Dr. Jerry Lucas, a leading expert in the telecommunications 
industry, and publisher of Telestrategies Insight, predicts that, in 
the event that AT&T acquires McCaw, AT&T will be in a position to 
dominate the PCS market. In an article entitled ``The PCS Revolution 
and Why AT&T Will Dominate It,'' Telestrategies Insight, July 1994, Dr. 
Lucas analyzes the competitive prospects of leading companies in the 
PCS market. Dr. Lucas concludes that AT&T is positioning itself to 
dominate the PCS market through the AT&T-McCaw merger, and predicts 
that AT&T ultimately will choose to control 60% of the PCS market. Id. 
at 4.
    To give a company such as AT&T, with its history of anticompetitive 
abuses, the opportunity to dominate such an important emerging 
technology, would be reckless. The FCC will be selling PCS spectrum at 
the end of 1994, and AT&T-McCaw would be in the unique position of 
having the financial and capital resources to ensure its total 
domination of the PCS market before other companies have had an 
adequate opportunity to evaluate their prospects for entering the 
field. It is only by blocking the proposed merger that robust 
competition in this emerging industry can be salvaged.
4. Inadequacy of the Proposed Final Judgment Protective Provisions
    The Department of Justice undoubtedly believes the Proposed 
Judgment provisions adequately protect the public from the antitrust 
implications of an AT&T-McCaw merger. Unfortunately, the Proposed 
Judgment is entirely inadequate, as AT&T easily will be able to 
circumvent the anticompetitive spirit of the Judgment's protective 
provisions.
    For example, the Proposed Judgment contains provisions regarding 
the ``Separation of McCaw and AT&T'' and ``Equal Access'' for other 
long distance carriers (including, presumably, resellers like the Ad 
Hoc IXCs). These provisions, which presumably were drafted with the 
good intention of preventing AT&T from monopolizing all the long 
distance needs of McCaw cellular telephone customers, will in no way 
prevent AT&T from continuing the anticompetitive practices discussed 
above.
    Nor will these provisions fulfill the modest goals for which they 
were designed. The ``Separation'' provision, for example, presumably 
seeks to prevent AT&T from dictating how McCaw will operate its 
business. However, the Proposed Judgment does allow AT&T to funnel 
``general corporate overhead and administrative services to McCaw and 
McCaw affiliates.'' This is exactly the type of control that AT&T will 
seek to exploit, through liberal interpretations of corporate overhead 
and creative offers of administrative services which will subtly enable 
it through ``carrot and stick'' approach to get the operational control 
over McCaw that the Proposed Judgment seeks to prevent.
    Nor will the Equal Access provisions protect long distance 
carriers. The Ad Hoc IXC and COT currently operate in an equal access 
environment, but that hardly has guaranteed them the access to which 
they were legally entitled. Indeed, AT&T successfully thwarted the 
efforts of resellers to compete for large segments of the long distance 
market through the covert tactics described above. There is no reason 
to believe they will not repeat these actions once it has a foothold in 
the cellular industry, despite the Equal Access provisions contained in 
the Proposed Judgment.

III. Conclusion

    AT&T's historic practices have proven, if anything, that they have 
not earned the privilege of being entrusted with the means with which 
to further its anticompetitive attempts to dominate and restrain 
competition in the 

[[Page 49906]]
telecommunication industry. AT&T must be required to first earn the 
public's trust as the dominant carrier before being permitted to expand 
its power and influence in the industry. As such, the AT&T-McCaw merger 
should be rejected.
    Indeed, the actions thusfar taken endorsing the merger, if followed 
here, will be evidence of the Department's commitment to effectively 
enforcing the laws of this country. Approving the AT&T-McCaw merger 
will cheat the small businesses which have diligently fought to bring 
more effective competition to the telecommunications industry, and the 
small businesses and other small users who can only be properly served 
by the smaller carrier community of that industry. The Proposed 
Judgment cannot guarantee that these significant interests will be 
preserved. To the contrary, history has demonstrated, and history is 
repeating itself today, that AT&T will not allow the antitrust laws or 
government decree to sidetrack its continued and unabated efforts to 
remain dominant and controlling in its core line of business--long 
distance telecommunications.

    For the foregoing reasons, the Proposed Final Judgment must be 
rejected as against the public interest.
        Respectfully Submitted, The Ad Hoc IXCs
Charles H. Helein,
Their Counsel

Of Counsel: Helein & Waysdorf, P.C., Suite 550, 1850 M Street, N.W., 
Washington, D.C. 20036, (202) 466-0700.

Exhibit A--Excerpts of Trial Testimony of Gordon Rood, Central Office 
Telephone, Inc. v. AT&T, Civil Action No. 91-1236-JE, United States 
District Court, for the District of Oregon, June, 1994

    A. Exhibit 5 is a photocopy of the information about the SDN 
calling card, and how it would be laid out with our logo. And in the 
lower left corner is an actual copy of the calling card that LaDonna 
brought out as a sample. She put it down there, and she said here is--
and we made the copy together.
    She said here are the instructions on how--what information we had 
to provide them to get our logo printed. And she said this will have 
the AT&T logo here, and we will have the Central Office Telephone logo 
up here, and they will print the cart out.
    MR. HALL: Excuse me, your Honor. May I instruct the witness not to 
show the jury the exhibit until----
    THE COURT: Okay.
    BY MR. HALL:
    Q. I didn't tell you. That is my fault, Mr. Rood. But don't show 
the jury things you are looking at until the court has to admit it into 
evidence.
    We will offer that exhibit, your Honor.
    THE COURT: What is the number?
    MR. HALL: Exhibit 5.
    MR. PETRANOVICH: No objection.
    THE COURT: 5 is received.

(Exhibit 5 received.)
    BY MR. HALL:
    Q. I would like to ask if the blowup or the transparency can be put 
up. That may be a little easier for the jury to see than what you were 
showing them prematurely there.
    Can you see that over there readily?
    A. Yes, I think I can. It might be easier to look at this.
    Q. Why don't you just describe for the jury quickly again what you 
said about where the calling card information was located?
    A. Okay. The lower left, the white portion on there, it was the 
actual duplicate of the calling card sample that LaDonna brought out to 
us. The instructions above are--tell you the different options for--one 
says hot stamping. One was offset printing. One says exclusive customer 
design.
    Q. Now, when you were negotiating with LaDonna Kisor about entering 
the AT&T agreement on SDN, what was the discussion with regard to 
calling cards?
    A. Calling card was one of the most important things we saw. The 
SDN calling card was very similar to a standard AT&T calling card. You 
accessed it through a normal telephone, with what we call zero plus. 
You didn't have to dial an 800 number. One of the major benefits of it, 
it gave a 45 percent savings off of the AT&T card.
    Actually, there was a little bit more than that. But we--the 
initial charge was 30 cents compared to about 75 cents. And the cost 
per minute was considerably less. And it was also billed in six second 
increments as opposed to full minute increments, so there was at least 
a 45 percent savings off an average call using the SDN card compared to 
a standard AT&T credit card.
    Q. What did you consider the value of that calling card in relation 
to prospective customers?
    A. Oh, boy. It was really important. A lot of the customers we 
dealt with had actually spent more money on calling cards, because they 
would have a lot of salespeople traveling. And the savings, because it 
was 45 percent, if a customer, for example, had a $1,000 phone bill, 
and 500 of it was in calling cards, they could save 45 percent of the 
500, where we might only safe them 22 percent on the other 500 of their 
bill. So, it had a significant impact on customers in reduction of 
their telephone expense.
    Q. Okay. It's a little blurred there. There is the AT&T logo in the 
upper, left-hand corner. Was your logo going to be on there?
    A. Yes, she showed us where the logo--I wrote--those are my actual 
numbers. I wrote--that's our logo with a globe, and Central Office 
Telephone, and that is where we anticipated we would put our logo.
    Q. Okay. Was the--was having the AT&T logo along with your logo on 
your card of value to you?
    A. Absolutely. It gave us what I considered almost instant 
credibility with our customers.
    Q. Okay. Now, did you ever get the AT&T calling card?
    A. No. We never got their AT&T calling card. We submitted the 
artwork to them. I took it--I hand-carried it down to one of the people 
in their office that was on the account team. I think LaDonna was out 
of town.
    They called me up and said we need your artwork. I took it down to 
the AT&T office here, and we never heard anything more. And a couple 
months later, of course, our account--this was probably in December of 
1989. And somewhere around January or February, since our account was 
not yet turned up until April, we couldn't issue it, because it 
wouldn't work.
    And I asked LaDonna about the calling cards. And she says, well, 
she said, you can't have them. AT&T credit card manager, I think she 
said, had said the resellers weren't going to have use of the AT&T 
calling, the SDN calling card.
    Q. Okay. Would you distinguish between the resellers with the term 
commercials?
    A. Yes. A commercial account would be someone who purchased an SDN 
account or account for their own use or
 * * * * *
    Q. Did you actually contemplate telemarketing at the time you were 
considering going into this SDN program?
    A. Yes, we contemplated all different services. Telemarketing is 
one that we looked at. Actually, in 1990, in February of 1990, I met 
with a telemarketer, with Jerry Oren, who was our customer service 
manager. We talked about implementing--he was doing telemarketing 
already on SDN for another company, and said that he could bring four 
telemarketers over. But we were--we entered initial discussions about 
doing some telemarketing.
    Q. Okay. Might as well jump ahead here. Why did you not follow 
through on that? 

[[Page 49907]]

    A. The reason we didn't follow through, was AT&T changed the number 
of orders that we could offer. When we first signed up in October, they 
told us that the--we could have up to 6,000 locations on a multiple 
location, or multiple location billing account. If we ever exceeded 
that, we could add another 6,000 by partitioning it, which was simply 
adding a one-time fee of $10,000. We could actually have a second 
partition to do that.
    In looking at 75 accounts a month, we didn't think that 6,000 was 
something that we would be reaching in the immediate future. But, there 
was no limit put on to us up to that 6,000, as far as the number of 
accounts that we could put up. But, in February, I believe, of 1990, 
they came out, and they said we are going to restrict you to a maximum 
of 400 accounts, orders per month. They--so, we abandoned our calls, at 
that point, to do telemarketing, because telemarketers generally target 
a lesser amount. We wanted to talk to customers doing $100 a month and 
more.
    Telemarketers would generally be talking to smaller businesses. I 
didn't want to fill up my account with 400 orders for $40, when we had 
these salespeople, and these plans to expand, and we would much rather 
put on 400 orders of customers averaging five or $600 a month.
    Q. Okay. We were on--we were talking in terms of the EVP split 
here. Again, and that was a term related to MLB. Let me go back there 
and try to discuss this more completely in terms of MLB versus LABO 
through another chart. Can you look at Exhibit 250?
    THE COURT. Excuse me. Before you go on, what does BSD stand for on 
the chart up here?
    THE WITNESS. BSD?
    THE COURT: Up in the upper right.
    THE WITNESS: Business service----
    MR. HALL: Your Honor, I can ask some questions there.
    Q. Would you please explain to the jury what business services 
division customers means?
    A. Business service division customers would be those
* * * * *
    Mr. Petranovich. No objection.
    The Court. 39 is received.

(Exhibit 39 received)
    By Mr. Hall.
    Q. Anyway, looking at Exhibit 68, will you tell us how it came 
about that having started out to do this SDN part two program you just 
told the jury about on October 30, 1989, you ended up in this March 8, 
1990, agreement on something called MLCP?
    A. Yes. In February of 1990, LaDonna Kisor came and told us that 
they were having some difficulty in implementing some of the orders, 
our initial contract, because it wasn't due to go in, had not been--our 
initial contract has not been installed.
    As I told you, that she told us originally, that it would take, for 
subsequent orders, when we added customers to our network, it would 
take about 30 days, but she said----
    Q. Excuse me. When you say originally, are you referring back to 
October 30?
    A. I am referring to the original October '89. We were told that we 
would have subsequent locations added in 30 days. She came out and told 
us, in February, that they were having--they had a lot of orders from 
other sources, other resellers. They were having some difficulty in 
implementing the orders, and that actually, the implementation date, 
phase would change from 45 to 60 days, which is a fairly long time. 
When you go out and sell a customer service, and he said, yeah, gee, 
that sounds good. I want it. And you say, I can't get you up for two 
months or whatever.
    Actually, in some cases, with this, she also told us that we would 
now submit orders by a certain date each month. And she called them 
windows. She gave us a schedule, and said that if you give us all your 
orders by March 23, for example, then those orders will--would now be 
implemented on the second following month from about the 11th to the 
15th of the month. So, it was anywhere from 45 to 60 days. But, it also 
meant that if we--if the window date was March 23, and we signed up a 
new customer on March 25, two days later, we couldn't submit that 
customer until the next month. And the next month the window might be 
April 21, or April 19.
    So, we would have to hold that customer's order for almost a month, 
and then an additional time. It would take another 45 to 60 days. So, 
in some cases, it could be almost 75 to 90 days before that customer 
service was installed.
    Q. How does that relate to MLCP?
    A. Well, then that is why she came out, and she proposed
* * * * *
was interested in continuing to work on a full-time basis.
    Q. Okay. Following your April 9, 1990, agreement, for the MLB EVP 
six program there, what, what was your relationship to the business 
services division in the Portland branch?
    A. All right. LaDonna Kisor, at that point, continued and was still 
our account team manager. She was the sales rep. And we had the account 
team that we had, which consisted of Jan Bramlett and Lynn Rosen. They 
had a technical person assigned, Ken Merlot. So, they had a whole 
account team right here in Portland that we dealt with, that smoothed 
out any technical difficulties that came out.
    At that point, in earlier 1990, we were meeting on a weekly basis. 
We actually, I think, every Wednesday afternoon at 2:00 o'clock, 
LaDonna would come out, and we would give her orders. We would talk 
about anything, so we had a very close relationship with our account 
team at that point.
    Q. Okay. Did that change?
    A. Yes, it changed in May of 1990.
    Q. Okay. And will you just tell the jury what happened?
    A. AT&T decide that they were going to transfer all of the 
resellers to Piscataway, New Jersey, for processing orders. And the 
account representation, instead of being in Portland, would be in 
Pleasanton, California, the western sales group there.
    Q. How did you come to learn this?
    A. LaDonna told us that this was going to happen, and she asked the 
new sales executive, Trish North and her supervisor, who was Bob 
Alpert, to come to Portland and do a transition. To have them explain 
to us the new structure, the new method for in how our account was 
going to be handled at AT&T. That was the 25th of May.
    Q. Would you describe that meeting, who attended it, and what 
occurred there?
    A. Jerry Oren and I attended for our company. Trish North and Bob 
Alpert, LaDonna Kisor was there, and they came into,--and they had an 
agenda set for the meeting, a printed agenda, telling the things that 
they were going to talk about in the meeting. And they discussed the 
transition of our account to their new representation.
    Q. Okay. What, what were you told, with regard to how AT&T would be 
handling you from that point on? What were you told as to the support?
    A. We were told we would process our orders through the office in 
New Jersey. We were told that we would not be getting the same level of 
service that we had been getting in the past. Bob Alpert told us that 
the SDN account was not meant for resellers, and that we wouldn't be 
getting the same level of service that we had previously.
    Q. Okay. Was there, were there--were any names of any people 
mentioned at that time at CDOC for you to contact?
    A. Yes, they gave us the telephone numbers of several people. I 
don't recall. I think Tony Parisi's name was 

[[Page 49908]]
on that as a person that we would contact regarding processing the 
orders. And there was also someone in the--Cynthia Alexander's group, I 
believe. And you will have to--Jerry Oren, probably, since he was 
dealing with those people, on a daily basis, he probably has those 
names down. I don't recall them.
    But we were given, actually given the telephone numbers of the 
people that we would be talking to in Piscataway and in Pleasanton.
    Q. You mentioned CDOC, and talking about Piscataway, and what did 
you then know about what CDOC is or was?
    A. I didn't know a heck of a lot. It was a channel development 
operations group. And all I understood was that instead of being in the 
business services division, we would be dealing with the people back 
there. And that we would not have the account team that we had had at 
that point. That it was going to be basically our responsibility to 
process all of the paperwork, as opposed to some of the functions that 
had been performed by the Portland account team.
* * * * *
    A. This is a letter on July the 3rd of 1990 from Trish North as a 
followup to their meeting, saying that AT&T had completed a credit 
review, and based on that, they asked us for a $375,000 deposit.
    Q. You'd indicated you'd worked with MCI earlier on before you got 
into this SDN program in October. Had you had any troubles with credit 
with them?
    A. No, we had not.
    Q. Okay. And you had worked, at the time this letter came to you, 
with AT&T already under two different contracts?
    A. Right. We'd already had--we already had three accounts. We had 
the original SDN option 2, we had the multiple location calling plan, 
which they came out and sold to us, and we'd already signed up and had 
working the SDN option 6.
    Q. I didn't ask you this before, but when you did the option 6 back 
in April 9, 1990, was there any specific discussions with LaDonna Kisor 
about whether there would be a deposit?
    A. Yes. I had a credit background. We had been asked for a deposit 
with MCI. I was--and I brought it up. I said, ``You know, LaDonna, I've 
got to ask you this. I'm a little bit surprised that you haven't asked 
us for a deposit.'' Her reply was that, well, she had written up a good 
story about our company based on our history, and we had an account 
with MCI. And with our vast experience in telecommunications industry, 
she said a deposit wouldn't be required.
    Q. But, in any event, you did get this letter in July, and did you 
ultimately come down to a particular deposit figure for Trish North?
    A. Yes. I had a telephone conversation. I was pretty upset at the 
385,000 deposit, but I had a telephone conversation with an Alex Aja, 
A-J-A, I believe. And I said--in fact, Trish North told me if there was 
any questions regarding this, I should talk--gave me the telephone 
number.
    And I said, ``You know, I'm surprised that you are asking for a 
deposit.'' I had given them a bank record showing our bank balances. I 
gave them MCI as a reference. I actually had made out a--had a 
completed financial statement. At the time they gave me the credit 
applications, I said, ``Well, you know, let me give you a current 
financial statement.'' And that was at the--our accountant's at that 
point. So I wanted to give them current information. So I asked--I 
asked him, I said, ``Well, what did you find out when you talked to our 
banker or MCI?'' He says, ``We didn't talk to anyone.''
    Q. In any event, did you come down to a number?
    A. Yes. They agreed to talk to MCI, which they did. I
* * * * *

the problems is some of our customers may have 15 lines, and they would 
have five lines up on the SDN and the other 10 aren't working. Some of 
them would not have anything.
    So our salespeople had to go back out to the customers, tell them 
that we were having some problems, and we'd have to go to the terminal 
block and actually physically make calls from each line to do the 
verification to find out which numbers were actually up on SDN, if any 
of them. It was very time consuming. The customers were peeved, if not 
outright mad, because they had signed up for a service maybe four or 
five months before and still weren't on it. They may be getting some 
billing from us and some billing from someone else.
    And it was--the orders weren't working. We found out that the 
orders that we submitted in May that were supposed to be turned up in 
July--and I forget. There was something like 40 of them or whatever--
that not one of those orders were turned up, not a one. And we called 
Trish North and said, ``What happened? None of our July window went out 
or what was the orders that we had submitted in May.''
    She came back with a reply, someone forgot to send the orders to 
the LEC, which is L-E-C. It stands for local exchange company. It's an 
industry termination. So if we talk about LEC, we're talking about 
local exchange company, L-E-C.
    Q. Would that be like U.S. West?
    A. U.S. West, GTE, Continental Telephone, whoever happens to be the 
local serving telephone for that particular customer. So we were--we 
were really concerned. We were concerned that our account was not 
billing. Here we had given them enough orders to where we were 
expecting, by the May or June time frame, that our account would be 
billing $50,000 a month. And here on the July bill we only billed 
$13,000.
    We don't know what is happening. We know the orders aren't getting 
up. So we were terribly sensitive about it. And we said, well, you 
know, let's make sure we don't have any problems in August. This is 
really getting terrible.
    Q. Can I stop you here for a second? Before you go on to the next 
month, did you ask AT&T to join with you or itself make some 
explanation to your customers of why these problems were occurring?
    A. Not in July, no.
    Q. Okay. When was that?
    A. Actually, in September we made an original request that we--and 
the other thing that was happening, the accounts that were getting 
billed weren't getting call detail, and they were getting a bill for 
$200 or $1000 or $500, and there was no record of where they made their 
calls. Well----
    Q. Excuse me. Can you explain to the jury, especially in the 
business setting now, because these customers are all business 
customers, right?
    A. Right.
    Q. Can you explain in that setting what the value of the call 
detail was to a business customer?
    A. A business customer who doesn't know who in their organization 
makes calls--you get a bill for $1,000 for telephone calls, you sort of 
want to know where those calls went to and if the billing is correct. 
They're dealing with a reseller, and this may be the first bill. So all 
of a sudden they're getting a bill.
    The call detail we knew--we had ordered the call detail, and 
actually we didn't know and it wasn't explained to us, that the call 
detail actually came under separate cover. And if it came within a week 
or even----
    Q. Excuse me.
    A. --two weeks, that was probably timely. But by August and 
September, we were told that the call detail wasn't going to be coming 
out for several months yet for July and for August.
    And we asked AT&T to--well, you know our customers aren't going to 

[[Page 49909]]
    believe us on this. So we asked--asked them if they would write a 
letter with us explaining, you know, and they said no. So we wrote a 
letter in September explaining that AT&T had--was going through a new 
billing system on this and that the July and August call detail 
wouldn't be out for several months yet and asked--now, we did have a 
bill detail which came--was available to our office, but it showed most 
of the same information, but it did not show the destination city. It 
would say one--a call was made from this telephone number to 1-206. It 
wouldn't tell you if it was Vancouver or Chehallis or Seattle.
    And we would get copies of that and send that out, and that 
satisfied some of our customers. But we did the best--we were in 
constant daily communication with the billing office in Seattle getting 
copies of this, trying to satisfy our customers, because the customers 
simply won't pay their bill unless they know--most of them wouldn't. 
Some of them were very good and paid it and relied on us, and in a 
couple months the call detail came out maybe two weeks late, and that 
was acceptable to the customer. But we were getting a lot of complaints 
about the bill detail or call detail not coming with the account. When 
it was two and three months, it was outrageous.
    Q. Would you look at Exhibit 115, 115?
    A. All right.
* * * * *
this point unless you're prepared to make a firm representation that 
this will be connected up specifically with AT&T and somebody who can 
explain it in more detail. I don't know whether you want this witness 
to explain certain things that were going on that might relate to this 
or just that you want the document in. But if you just want the 
document in now, it's not sufficient. There's not a sufficient 
foundation.
    MR. HALL: All right, your Honor, we'll hold that back for a while, 
then.
    DIRECT EXAMINATION (continued)
    BY MR. HALL:
    Q. What was the provisioning rate for your company during the fall 
of 19--well, let's start--let's say what was the provisioning rate, to 
your recollection, for your company in the second quarter of 1990?
    A. I--I don't have any statistics. What I can tell you is that our 
entire July window didn't go up, our entire August window didn't go up. 
We continued to have problems. Our analysis told us that during this 
period that--we did an analysis of the dates that the orders went in. 
And during 1990, the second and third quarter, or this period, that the 
average installation on all of our accounts was over--was about six 
months from the time that we submitted the order to the time it was 
turned up.
    Q. So, in other words, it would be 180 days from the time the 
customer would order to when the customer actually got on line?
    A. Yes. It's about 180 days. I would--we have some supporting 
someplace.
    Q. And what was the promise that was made at the time that you 
entered the contract of April 9, 1990?
    A. We had been told at that time that from the time we gave AT&T 
the order, it would be 45 to 60 days.
    Q. Okay. Can you look at Exhibit 139?
    A. 139. All right.
    Q. Okay. Is--can you identify this?
    A. Yes. This is a document that we received from AT&T in the 
discovery process.
    Q. Okay. Can you--is that--can you identify that?
    A. It says, at the top, the--
    Q. Well, no. I'm not wanting you to read things. Do you know what 
it is?
    A. Yes. It's an alternate channel support group report on resellers 
and implementation of orders.
    Q. Okay. And is your company included in this listing?
    A. Yes, we are.
    Q. Okay. Can you--
    A. On page 21.
    Q. All right. And can you just summarize your understanding of what 
this chart's about or this tabulation?
    A. All right.
    MR. PETRANOVICH: Your Honor----
    MR. HALL: Just summarize----
    THE WITNESS: Yes.
    MR. PETRANOVICH: Your Honor, objection. We don't have this exhibit 
entered into evidence yet. And we've got a question asking the witness, 
as I understand it, to read from it.
    THE COURT: Well, without reading from it, what does it purport to 
be?
    THE WITNESS: It--it's a document showing, in this case, Central 
Office Telephone orders received by month and implementation.
    BY MR. HALL:
    Q. Okay. In connection with--does that include Central Office 
Telephone Company's own orders, as well as other--
    A. Yes. Page 21 specifically refers to Central Office Telephone.
    MR. HALL: We'll offer that, Your Honor.
    MR. PETRANOVICH: Your Honor, a few questions in aid of objection?
    THE COURT: You may.
* * * * *
    And she came back with an answer. I don't know if it one day or two 
hours or two days. She said, ``The SAGE test failed.'' Quote. And this 
is evidently--I don't know. It's a test that they say they have to 
perform to make sure that your data's entered correctly. And if it--I'm 
not an expert on the SAGE test, but that was the reason given to us for 
our August window not turning up.
    Q. Okay. Now, going on here, did you have any discussions during 
this time fram--we're in the fall of 1990 now--with Trish North with 
regard to the--the allocation of the discount under MLB that you'd 
asked for?
    A. Yes. Starting in August when the first billing went out, 
actually under the 15 million minute commitment, we noticed that there 
was no discounts allocated to headquarters except for a very small 
amount, which would have represented only those calls that our company 
made on our own account.
    Q. When you say, ``headquarters,'' are you referring in this 
instance to Central Office Telephone?
    A. To Central Office Telephone's own physical operation in 
Milwaukee, yes.
    Q. All right. Okay. And so, having notice that there was no 
discount allocations at headquarters, what did you do?
    A. We called Trish. And she came back, and we determined that all 
of the discounts were being given out to our end user customers, and 
the 50 percent that our headquarters was supposed to get was not on the 
bill.
    Q. All right. Did she indicate she would make any steps--take any 
steps with regard to this?
    A. Well, she sent us--one of the things--we had several discussions 
about the discounts--and there had been an error made where, we--we 
were told that 50 percent of the expanded volume plan could be 
allocated. Trish North informed us at this point that if we allocate 50 
percent of the URP, the usage reduction plan. That was a 5 percent 
discount.
    Well, we explained before, we had very carefully calculated those 
percentages that we could afford to allocate to our customers and still 
be profitable. So it turned out that the 50-50 allocation would not 
have been a correct allocation, simply because we were giving them not 
only half of the 12 percent, but we were giving them half of our 5 
percent, too, or 14 and a half percent. At the level we were at in 
volume discounts, it wouldn't allow us to be profitable.
    So we had a discussion about reallocating those discounts. And 
Trish told us that we--you know, any change in that allocation had to 
go in 10 days before the billing period. And we had our first 
discussion, I think on August 

[[Page 49910]]
29th. So we had first talked about changing that. And we asked her, 
``Can you make an allocation other than a full percentage allocation?'' 
And we used an example. We're talking about a 47 and a half and 52 and 
a half percent discount. And it took about a week, five or six days, 
before Trish got back and said, ``No, if you're going to make any 
allocation, it has to be in full percentage amounts. If you want 
something, you're either going to have to go 47 or 53.''
    Well, we had done some computing by this time. We had promised our 
customers a 12 percent volume discount. And during--one of the 
incentives of going to the option 6 was that during the first year, 
regardless of where we were in the contract, we would get, for the 
first year, a 24 percent expanded volume plan discount. So we promised 
our customers 12 percent. We'll give you half of our expanded volume 
plan, which is 24.
    So we tried to comeup--in addition to that we had a 5 percent 
discount, so our total discounts were 29 percent. We had promised our 
customers 12 percent. So we came up, and on about the 8th of September, 
which was still in the period to get it on the next billing, we asked 
to allocate 42 percent to our customers and 58 percent to headquarters. 
And 42 percent of 29 percent total comes out to 12.19 percent. So we 
actually had to give them a slightly higher percentage than we had 
promised, but that's the closest we could come to 12 percent and meet 
our commitment to our customers the give them the 12 percent discount.
    So we ordered a change in the discount allocation, from what was in 
the computer of 50 percent, to 42 and 58.
    Q. Okay. Now, did that change in allocation that you ordered at 
that time--as I understand it, prior to this time, there had been no 
allocation made whatsoever, is that correct?
    A. All of the discounts were going to the end user customer, yes.
    Q. Right. And what happened after this discussion?
    A. Trish told us--reported that she had turned in the order to 
change it and that it--the change would appear on the October 11th bill 
for September usage.
    Q. And did it?
    A. No, it did not.
    Q. Did it ever?
    A. No, it never did.
    Q. Okay. Did it ever appear to the day you left in September 30, 
1992?
    A. Well, we changed--because of all the billing problems, we had to 
change our billing option. So----
    Q. Excuse me.
    A. They reported to us that in March of 1991, which was two months 
after we changed to a different billing option as a matter of 
survival--they told us, ``The compute took your changes,'' but they 
were no longer doing our billing, so it didn't make any difference.
    Q. Let's go----
    A. I don't know that for a fact. they just told us that.
    Q. Let's go briefly forward to that point. You say that you changed 
finally to another form of billing. When was that?
    A. We actually ordered, initially, the change at the end of October 
when we again had a failure in getting the allocations out. Our 
customers started leaving us. We'd had a--we'd had problems with the 
implementation, we had problems with credit cards, we had problems with 
the substitute on the credit card.
    Now the billings were going out. And when AT&T had given all the 
billings out, they were now sending adjustments on the bill without any 
explanation to the customer. Because they had given the customer all of 
our discounts, now they decided they had to make an adjustment on the 
bill debiting the customer for an amount of money, which would get our 
discounts back, and the adjustments they sent out were worng.
    So our customers were just getting tired of it, and they started 
cancelling their accounts. Our salespeople were getting irate. They 
were losing their customers. They were spending all their time 
resolving problems and not going out and selling new accounts. And so 
we just said we've--the billing is just impossible. We can't do it. And 
we said, ``We've got to go to network billing,'' which was a sort of a 
traumatic thing, because it cost a lot of money to get it set up, and 
it was going to take several months to get it done.
    Q. I'd like to ask you if you'd tell the jury what the difference 
is--just so they know. They're trying to follow this along here. We've 
got this MLB and how it's supposed to operate and then MLCP as a 
temporary parking place. Now we're up to--back to MLB efforts again 
with Trish North. And I'm trying to get the distinction between the 
network billing, which you're now going to talk about, and the prior 
billing?
    A. Okay. Network billing, AT&T would continue to carry the service, 
but they would send us a magnetic tape. We signed up with a billing 
company, computer company who was in the business of doing telephone 
billing, and we signed up with them to transfer over other billings and 
have them do our billings for us. But what it did is it increased
* * * * *
a major problem. All of our discounts had been allocated back to the 
end user customer.
    AT&T decided that they had to go back and do a debit on their 
accounts. We'd asked them to just simply credit our account for what 
should have been on there, but they said, ``No, we've got to bill the 
customer.'' So they would issue a debit. They may issue a debit in 
October for two previous months. There would be two debits to a 
customer's account without explanation. These debits were computed 
wrong.
    In other words, let me give you an example. If our customer, say, 
got--had $1,000, a bill, and they got, say, $290 in volume discounts, 
actually the customer should have only had 120. Well, so AT&T would 
say, okay. We have to issue a debit to that account for the difference 
between the 290 we gave them and the 120. That, obviously, should be 
$170. Well, they would issue a debit maybe for $138. It has no rhyme or 
reason to be a correct amount to get our money back.
    And almost none, that I know of, of the debits that they made were 
computed correctly. Simply--they gave them all--they should have simply 
multiplied 58 percent times the amount of the volume discount the 
customer got. It was a pretty simple mathematical calculation. They 
never--they never got it correct. So they kept doing that.
    Some of our customers didn't understand them. They didn't call us. 
They wouldn't pay them. Some of them said, no, you gave me a discount. 
I'm not going to get it. They didn't understand it. And these bills 
were just fouled with incorrect balances every month. It was taking--
customers quit. They'd say, ``You know, I like your service. I simply 
can't spend four hours every month reconciling my AT&T phone bill or my 
Central Office Telephone phone bill.''
    So the balances were incorrect. Then we have some evidence that 
Customer A would pay his bill, and it would be credited incorrectly to 
Customer C's account. It was just a tangled web of incorrect billings 
that went out. Those bills were fouled.
    Well, when we went to network billing, we made one very good 
decision. We decided not to try and bring forward the balance the AT&T 
showed on these accounts, because there was no way--AT&T couldn't 
explain it to us. There's no way we could explain it to our customers. 
So when we started billing in February, we started and out as if the 
customer owed no previous balance. We started out with zero. So we 
didn't know where they really stood. There's no way of our 

[[Page 49911]]
telling without some--and we're still dealing with the Seattle office.
    And so there was an ongoing problem now, that we're--our customers 
are still getting billed. We didn't want any more incorrect bills to go 
out, so we tried to resolve the issue with AT&T to get them to correct 
the bills so they would be to our customer--customer deserves a correct 
billing. So we didn't bring back the fouled balances, so now we have 
all those bills out there with balances on them as a result of all of 
the incorrect billings from AT&T. So we just started out clean with our 
network billing and started collecting that.
    But now we have a problem that went on for months and months and 
months of trying to get AT&T to correct these bills. They absolutely 
refused to correct the bills. We had conversations. We started 
withholding our payments to them. We said, ``We are not going to pay 
any money until you get those bills corrected, because, you know, it's 
jeopardizing our business and our customers.''
    So we withheld--we withheld funds, and we had--we had conference 
calls a month down the line in 1991. They--our billing--billing 
responsibilities that I told you about that was handled in Seattle, 
that got moved back to another department in New Jersey. These people 
had no idea--the people that we dealt with in Seattle, Myrna Pharr and 
Becky Zeller, were completely familiar with our account, all the 
problems. Myrna Pharr was a supervisor. And she told us, she said, ``I 
won't let them transfer this account til we get this cleared up.'' 
Well, that didn't happen. They transferred the accounts.
    There was another problem that----
    MR. PETRANOVICH: Your Honor, if I could just ask for maybe for Mr. 
Hall to interpose a question every now and then. We're just getting a 
narrative here that's sort of hard to follow. And if we could do this 
on a question and answer basis, I think that would help everybody.
    MR. HALL: I agree with that, Your Honor.
    BY MR. HALL:
    Q. Did you get to the point where you hired an outside person to 
help you unscramble this?
    A. Yes. AT&T wouldn't do it. We told them that we would do it. We 
hired a person by the name of Griff Griffith, who had some computer 
knowledge and expertise. We installed a special--we asked him what we 
should install. We told him what the problem was, that we had all of 
these bills that are incorrect. We want to get them and resolve the 
balances. So we hired Griff Griffith to come up with a way of 
identifying all of these bills.
    Q. Okay. And did you get any satisfaction out of that arrangement 
in terms of your AT&T negotiations?
    A. No, we didn't. It took several months. We had to go back to 
every single bill that had been sent to every
* * * * *
the SDN program?
    A. Well, as I indicated, we had continued to have the problems of 
getting the billings corrected. AT&T was refusing to do it. And we went 
to network billing, but there was a new billing problem cropping up 
that was destroying us. And that's called unbilled toll, or--we'd get a 
report.
    And what happened, our customers would be on the SDN network, but 
for some reason their calls wouldn't be billed. And even though we were 
doing a network billing, we were not getting identification of the 
calls from our customers. Some customers were billing nothing, even 
though they said they weren't getting a bill from anyone else. And so, 
all of a sudden, a customer would get a bill, and it would be for eight 
months of long distance service.
    In September, particularly, Sam Allen, at the Monarch Hotel, called 
me, and he got a bill for that month for the Monarch Hotel of nine- or 
$10,000. The previous bill was $36. It had calls on it for eight 
months. And he ordered all of his service canceled. Sam Allen owns the 
Monarch Motor Hotel, the Sunnyside Inn, Days Inn, and the--he owns half 
of the Best Western at the Meadows. He canceled all those services, and 
said he would never do business with us again, and he wouldn't pay the 
$12,000 or $10,000 that we showed owing on the bill even though some of 
it was a current portion.
    Mr. PETRANOVICH: Objection. Hearsay as to what Mr. Allen told Mr. 
Rood.
    The COURT: I didn't hear the very last part. The objection's 
overruled as to the first part. He can testify he wouldn't do business 
with you again, but I don't want you to go on beyond that as to what he 
said.
    THE WITNESS: All right.
    BY MR. HALL:
    Q. Mr. Rood, I think you, just at the end there during the 
objection, were talking about the amount of the unbilled--the 
outstanding billing with your--what you had. You can testify as to what 
that was. What was the outstanding billing that Monarch had with you?
    A. The outstanding bill on the----
    Q. Yes.
    A. On that one account?
    Q. What they would have owed you, yes.
    A. About $10,000.
    Q. Okay. That was never paid to you?
    A. There were a number of other accounts at the same time. World 
One and Mark Gould in Florida. We also couldn't pay his account and 
canceled. We had pretty close to 25- to $30,000 a month in 
cancellations in the September time frame, because at this point we'd 
had so many customers drop off, that our AT&T account was down in the 
area of $100,000.
    The way the discounts were set up, we were only--we weren't getting 
enough money for it to be profitable. And with the cancellations, now, 
we were getting on that, there was no way that we could salvage it and 
make it profitably. And our salespeople, who were on commission, who 
waited months and months and months after they made a sale to get a 
commission, wouldn't sell AT&T. They absolutely--unless a customer 
begged to go on AT&T, they wouldn't turn in an order for AT&T. They 
absolutely--because their lives depended on it, and some of these 
people were making only half of what they should have made as far as 
their sales.
    So they--at that time we had another account with U.S. Sprint, and 
so they would sign them up on Sprint, but they wouldn't put anyone on 
AT&T. So there's no way to sustain our AT&T program. And I just decided 
that if I left AT&T build long enough, that eventually they would drive 
away every customer that I had on it. So we made a decision to cancel 
the account.
    Q. After you canceled the account did AT&T demand of you close to a 
million dollars?
    A. Well, not--not right away. We had--we received a
* * * * *
AT&T people, for the termination notice that you just read to us, would 
you describe the internal effect upon your company of the position that 
you were in at this time?
    A. Yes. This, we had--we were in total frustration with the entire 
AT&T SDN problem. We had ongoing problems that weren't solved, and no 
attempt was being made to solve them.
    In spite of what they say, we did not see any real improvement in 
the provisioning process. Part of that may have been due to the fact 
that our salespeople would no longer sell it, because they couldn't get 
their commissions. They could sell on our Sprint account and get the 
account up and working in 10 days and start getting commissions. And 
they would put them 

[[Page 49912]]
on SDN, and they would have to wait six months before they started 
making any money, and that wasn't fair to them.
    We had the substantial billing problem with the multiple location 
billing, which was never solved, and couldn't be resolved. We, we had 
gone through this expensive thing of providing them with our database, 
providing them with a complete analysis. We went down and broke every 
single bill down, and showed them what our figures were, as far as why 
we thought their bills were wrong, and they never would correct them. 
They wouldn't look at it.
* * * * *
    Q. Now, I think your testimony was, just after lunch, that there 
came a time that you were told, in March of 1992, you were told by 
AT&T, that they had got your system working, so that the allocations, 
percentage allocations could be made as you directed, correct?
    A. No, I didn't say that. I said that on April 9 of 1990, they told 
us that our first customer had been installed on the network.
    Q. Go back----
    A. No one said to me, at that time, that your percentages are going 
to be allocated correctly. That wasn't part of any discussion we had on 
April----
    Q. Is it your testimony today, that AT&T was never able to offer 
you multi-location billing, such that you could share a discount with 
your customer, 50/50, 48/50, 58/42, any way; is that your testimony 
today?
    A. It's my testimony today, that AT&T could have done it. That it 
was in their option. It is my testimony that AT&T did not do it.
    Q. Right.
    A. Ever.
    Q. But it's your testimony today, that as of the date of this 
letter, AT&T could have delivered multi-location billing?
    A. We were told they could.
    Q. All right. And you believe that they could?
    A. I certainly did.
    Q. All right.
    A. I probably would not have signed the contract, had we known that 
they couldn't or wouldn't.
    Q. Okay. Fair enough. Fair enough. That is one. You wouldn't have 
signed the contract, if you had known that they could not deliver it?
    A. Oh, absolutely.
    Q. All right. Now, let's talk about some things that you were not 
told that you think you should have been. How about the discount? 
Excuse me. Not the discount, the deposit. You were eventually required 
to place a deposit with AT&T, correct?
    A. Yes, in July 3rd of 1990.
    Q. All right. And is it your case here today, that you weren't told 
that in October of '89?
    A. We definitely were not told that in October of 1989.
    Q. Now, are you telling me you weren't told, or it just wasn't 
mentioned?
    A. It wasn't--we weren't----
    Q. No one mentioned it?
    A. In October of '89, it wasn't mentioned.
    Q. All right. No one mentioned it in October of 1989?
    A. No, they did not.
    Q. Okay. Let's spend some time on this deposit. Let's stop right 
here. MCI required you to place a deposit?
    A. Yes, they did.
    Q. You, yourself, COT, required its customers, in appropriate 
cases, to place a deposit?
    A. In very few, but, yes, there were times that we had customers 
place a deposit with us.
    Q. You knew, from your years with AT&T, that occasionally AT&T 
required its customers to place a deposit?
    A. If you want to include Pacific Northwest Bell being AT&T at the 
time, yes, that's fine, yes.
    Q. Yes, Pacific Northwest Bell.
    A. I knew occasionally Pacific Northwest Bell or AT&T required 
deposits, yes.
    Q. And it wouldn't have surprised you, on October 30, 1989, to be 
told that you would have to place a deposit, correct?
    A. No, it wouldn't have surprised me a bit.
    Q. And if you had been told, you would have signed that contract 
anyway, correct?
    A. Providing I could have met the deposit requirements, yes.
    Q. Okay. Well, we will get into the deposit requirements--well, 
let's get to that right now.
* * * * *
asked about three separate increases that occurred?
    A. Yes.
    Q. Okay. I would like you to look at paragraph 22. Earlier, in your 
cross-examination testimony, you mentioned the term slamming. Do you 
see that in there?
    A. Yes, that's the bottom sentence there.
    Q. Okay. Was that one of your problems?
    A. It was a problem. While it wasn't as significant as the other, 
it did create a problem with our customers. Slamming is a process of 
illegally converting a customer from one service to another. G.I. 
Joe's, which was a large customer at the time, multiple location, 
significant billing, and they were contacted by a telemarketer, 
employed by AT&T, and without authority, slammed all locations.
    All the time it took us to get them up on SDN, and whamo, 
overnight, they were switched back to 1-288, and we lost the billing. 
It was a nightmare. It took about four months. We lost the revenues. We 
ended up losing the customers. The customer, of course, blames us for a 
lot of things that happened, even though we are not involved.
    But it took some time, two or three months, I think, to get the 
customer converted back, and up on our service again. And so anytime 
something changes, and a problem occurs, they have a tendency to relate 
it to us. I--but this is one of the, one of the incidents. There is at 
least half a dozen more, and there is slamming done by other carriers, 
too, other than AT&T.
    Q. Okay. Now, did this contribute, this slamming to your statement, 
on cross-examination, about a total lack of trust?
    A. That is another factor, yes. That is definitely a factor.
    Q. And talking about that slamming, is this part of the types of 
problems that you attempted to have AT&T write to your customers about?
    A. I don't, I don't specifically recall. We, we had asked them--
most of these slamming incidents were coming in, say, 1991 or 1992, or 
most--you know, that is when they became a problem. And we--it was in 
1990 that they were denying to write letters. We didn't go back to 
them. We knew what the answer would be.
    Q. Okay. Let me ask you to look at paragraph 17. Okay. There's talk 
in there, is there not, in paragraph 17, about the calling card again, 
an NRA I?
    A. Yes.
    Q. Okay. Now, you have already testified that you had never got 
that AT&T calling card. Tell us, if you will, about what--about the NRA 
I. We have never gotten fully into that.
    A. Well, I have got to relate the NRA I to the SDN calling card.
    Q. Okay.
    A. The whole thing is--the SDN calling card, I told you how 
attractive it was. And you can make calls in the normal way that you 
could with any AT&T calling card, and you would save at least an 
average of about 45 percent per call. Had our logo.
    And once we were told we had it, we went out and told our 
customers, that we were signing up, it was going to be, you know, five 
months before we were 

[[Page 49913]]
on the network, but we told them about this calling card. And they are 
going to have the SDN calling card and save this money. And it was good 
for making international calls. It was also good from any U.S. direct 
country. If you were in Germany, and that was a U.S.--you could 
actually access that calling card from--I think there were 32 different 
foreign countries that were on the USA direct list.
    That was important to our customers. They had people out there that 
traveled internationally and made calls to international locations. And 
they came back, and they said that we were going to be denied use of 
that calling card. Well, that was--the bad part about that, is the fact 
that it caused us to have made a misrepresentation to our customer, 
unintentional, but it was a misrepresentation. Because we told them, in 
good faith, based on what we had, that we were going to have this card.
    So, Donna suggested that we get an alternate card, under the tariff 
called NRA I, Network Remote Access I. In this case, we would print the 
cards up. It was not going to be good from any U.S. direct country, 
because the only way you could access this card was an 800 number. So, 
our--made it more difficult for our customers to use, because, number 
one, they had to dial an 800 number, and then they had to put in their 
identification, and they had to put in the number they were dialing, 
and things like that.
    But, they--we were also told that it would be good for making 
international calls. So, it's a more difficult card to use. It's not 
good from the foreign countries, and that probably didn't affect more 
than five percent of our credit card users. But they--we had 
considerably more than that that made international calls. And, it was, 
again, reaffirmed, in the April 9 billing, that NRA I would be good for 
making international calls.
    So, we had these cards printed up. I think we printed up an initial 
5,000 of them. Our logo on, numbers, signed them out to our customers, 
and they weren't good until the network turned up. But when the network 
was turned up, we gave them to our customers. And they went out, and 
they immediately got calls. And the international calls were blocked. 
The customers that we had issued the cards to, they never could make 
calls, international calls.
    And most of them--you just don't do that, because people don't 
want--if they are going to have a service, they don't want to have to 
carry two calling cards. So, we virtually were denied--those people 
that wanted to make international calls, we were denied any income or 
revenue from those people.
    And, of course, if a company had 20 people and 10 of them made 
international calls, they don't want to issue AT&T cards or MCI cards 
to half their people, and give half to another. So, it virtually 
destroyed our credit card program.
    Q. Mr. Rood, I would like to ask you to take a quick squint at this 
one chart that you were shown. I think there was one over here. Yes. 
You were examined a little bit about this particular chart. And can you 
see it?
    A. I can see it, yes.
    Q. I will stay out of your way here. On that particular chart, a 
comparison is being made here between network billing and multi-
location billing. Is that a correct comparison, in your view, to have 
the comparison between
* * * * *

Exhibit B--Excerpts of Trial Testimony of Spencer Perry, Central Office 
Telephone, Inc. v. AT&T, Civil Action No. 91-1236-JE, United States 
District Court, for the District of Oregon, June, 1994

* * * * *
were people that were going literally through the door requesting SDN 
service, he was pretty happy, and so was I. We had made some 
significant revenue commitments to AT&T marketing, meaning that we--we 
said that we were going to bring in quite a bit more revenue then we 
had the previous year, and, so--
    Q. Just so the jury knows and we know, the previous year is 1988; 
is that correct?
    A. That's correct.
    Q. Or are we talking--previously, we were talking about 1989?
    A. That's correct. From 1985 up until 1989, the revenue for that 
organization had been steadily decreasing. I believe in '85, it was 
somewhere a little over a billion dollars, and by 1988, it had gone 
down to less than half of that amount. So, it was a significant revenue 
decrease that was happening over time, and it was about that time that 
AT&T's corporate marketing department was looking for new revenues from 
all of its sales folks and so forth, and, so, Walt, like I said, 
performed the study over a period of time and essentially convinced his 
management that we ought to go after the resell market, an when 
switchless resellers came and wanted to buy the service, we were 
overjoyed that there were people that wanted to buy the service and we 
didn't have to go out and beat the bushes, so to speak, looking for 
customers.
    They were walking in through the door. It kind of reminded me of 
fish jumping out of the ocean into your boat. You don't even have to 
drop the line in.
    Q. Well, were you given a revenue goal that you were to accomplish 
based on this advent of the stichless resellers?
    A. Yes, sir.
    Q. What was that?
    A. I believe the total revenue goal, and this is increased revenue, 
not the total revenue, but increased revenue, I think we had to provide 
somewhere in the neighborhood of 115-million dollars of new revenue to 
the company, and I think about 90-some of it was targeted towards the 
software defined network product.
    Q. At that point, did you view the switchless resellers as 
customers?
    A. Absolutely.
    Q. Now, you indicated that the switchless resellers were jumping 
into the boat like fish a minute ago.
    Tell me a time when your ability to handle this group of people 
coming in was taxed.
    A. Yes.
    Q. Explain that.
    A. Well, our organization--Wait Murphy's organization
* * * * *
was the operations center of this entire group. John Greco came out of 
the staff group that was doing the channel development work. Channel 
development was simply a term that was used by marketing to look at 
alternate distribution channels to sell AT&T services.
    Traditionally, AT&T sold its services via its own sales forces. It 
peppered the television, media with ads. It was kind of hard to turn on 
the television and not see an ad for AT&T with a telephone number. What 
they were looking at was things like sales agents and non-traditional 
ways of selling those services.
    Anyway, those two groups merged. John Greco came from that Channel 
Development Group, and when Michael came on board, where before I 
reported as a third level directly to Walt Murphy who was a fifth 
level, and we did not have a fourth level manager in that group. When 
Keith came in, he was, of course, the fifth level, and John Greco then 
stepped--sort of stepped in, and I wound up reporting to John so that I 
no longer reported directly to the fifth level manager.
    Q. Now, I am getting myself into another one here. You better 
explain to the jury what these levels are.
    A. All right. AT&T has--has a hierarchy of management that I think 
ranges from, say, the first level, which 

[[Page 49914]]
is the lowest level of management which might be considered like I 
guess in the Army you might call it second lieutenant or something like 
that, I suppose, all the way up to the chairman of the company who I 
guess would be a ninth level or maybe tenth level. I don't know.
    Q. Just to get it down to where you were, you were at what level at 
this point?
    A. I was at the third level.
    Q. Mr. Greco at fourth?
    A. Yes.
    Q. And Mr. Keith was fifth?
    A. Right, the level right below officer level.
    Q. When you did this study--by the way, do you have that study that 
you just talked about that you and Mr. Gengenback made?
    A. No. I recreated it, but I don't have the actual study that we 
did.
    Q. How did you come about to recreate it?
    A. I recreated it later on when I was executive director for the 
Interchange Reseller Association. That chart--if you just, you know, 
look at that chart, you can very quickly understand or you can explain 
if you were explaining where the price difference between, say, SDN and 
WATS, and you can look at that price gap, and you can very quickly 
understand where the market opportunity for resellers existed.
* * * * *
    Q. Did you show this chart to Mr. Keith?
    A. Yes, I did.
    Q. What was his reaction to the chart?
    A. Well, when he looked at the--at the percentage difference, he 
said that the AT&T's WATS base could be--could be eroded in no time.
    Q. And did he give you any instructions when he made that remark as 
to any further assignments for you?
    A. Yes. Yes, he did. Later on, and I don't know if it was the same 
day or perhaps a day later, but he essentially asked me to get with 
Glenn Starr's people. Glenn was the product management--product manager 
for SDN. He was the person in marketing responsible for the service--
you know, the service and its features and its profitability and all of 
that. He was the top dog of SDN.
    Q. Could you please look at Exhibit 243? I better give you--pardon 
me. I'm sorry. I made a mistake, your Honor.
    It's 248 A. I'm sorry.
    A. Okay.
    Q. Can you take a look at that for me and give me an idea as to 
what that represents?
    A. This is a organization chart, first quarter, 1990, of AT&T 
Communications--of the AT&T Communications organization or a partial 
organization chart.
    Q. Does this describe the various groups that you have been talking 
about today, such as product management, Mr. Starr's organization?
    A. Pretty much so. It is a little bit off, but for the most part, 
it does.
    Q.Does it describe Mr. Keith's organization?
    A. Yes, it does.
    Q. Now, you mentioned that AT&T traditionally does direct selling.
    Is the direct selling organization in there correctly--
    A. Well, it shows up here, but it shows up at a level--the head of 
the group shows up a level where--lower than what it really should be.
    Q. Do you have a pen with you?
    A. Yes.
    Q. Okay. Could you angle the direct sales organization and start it 
at a box higher or however you want to to do it so that it is 
corrected.
    A. (Complying).
    Q. Okay. Why don't you initial that with ``S.P.'', your initials?
    A. (Complying). Done.
    Q. Okay. Now, Michael Keith: Is he the Director of Distribution 
Strategies or was he at that time?
    A. Yes, he was.
    Q. That was Director of Distribution; correct?
    A. Yes.
    Q. Would you kindly write in ``strategy'' there?
    A. (Complying). Okay. Initial that as well?
    Q. Yeah. Thank you.
    A. (Complying).
    Q. Do you recognize all of the names on that document and the 
positions in which they are indicated to occupy?
    A. Yes, I do.
    Q. All right. There is also a box in there about the so-called ad 
hoc committee on resellers.
    Can you tell me what the ad hoc committee on resellers.
    Can you tell me what the ad hoc committee on resellers is or was, 
just briefly?
    A. Yes. You asked me what Michael Keith's reaction to that chart 
that I showed him was, and indicated that--well, I guess I didn't 
indicate, but he asked later on--
    MR. PETRANOVICH: Objection, your Honor. We have a question, and 
maybe we can get an answer to the question and then go on.
    The COURT. Okay. Could you restate question?
    Mr. HALL: Yes. I asked him to identify or just give me a brief 
description on what this ad hoc committee on resellers was.
    The WITNESS: It was an ad hoc group of people that was comprised of 
people within Michael Keith's organization and Frank Ianna's 
organization that got together on a couple of occasions to change the 
SDN offer.
    MR. HALL. All right. Your Honor, we will offer 243 A--248 A, I'm 
sorry.
    MR. PETRANOVICH: Few questions in aid of an objection, your Honor?
    The COURT. You may.
    MR. PETRANOVICH: On this chart that is 248 A, let's just look at 
Michael Keith. You told us that his real title was Director of 
Distribution Strategies; right?
    The WITNESS: That's right.
    MR. PETRANOVICH: Those people aren't on this chart?
    THE WITNESS: That's correct. It says it is a partial organization 
chart.
    MR. PETRANOVICH: It's a partial organizational chart?
    THE WITNESS: Correct.
    MR. PETRANOVICH: Similarly, there are folks who reports to Mr. 
Frank Ianna who are not on this chart?
    THE WITNESS: That's right.
    MR. PETRANOVICH: And I suppose there are others who report to Mr. 
Blanchard; is that correct?
    THE WITNESS: That's true.
    MR. PETRANOVICH: This chart is as of what?
    THE WITNESS: It says first quarter, 1990.
    MR. PETRANOVICH: And that would be the end of March of 1990?
    THE WITNESS: I suppose it would be as of the end of March.
    MR. PETRANOVICH: Okay. Now, you have got or--I guess I don't want 
to burden you with this, but this committee you just talked about, the 
ad hoc committee on resellers--do you see that?
    THE WITNESS: Um-hum (affirmative).
    MR. PETRANOVICH: That ad hoc committee is your term; isn't it?
    THE WITNESS: That's correct.
    MR. PETRANOVICH: I have no other questions, your Honor, and with 
notations that this doesn't describe the chart, I have no objections.
    THE COURT: 248 is received, but I'm not clear: Is ad hoc--are you 
the only one that uses that term or was that a term--let me ask it this 
way: Was that a term that was used within AT&T at the time? Mr. 
Petranovich asked you if that was your term.
    THE WITNESS: I heard Mr. Petranovich use it this morning. So, he 
has used it before.
    THE COURT: We have heard it used here. When people say ``ad hoc 
committee'', are we all going to be talking about the same thing?
    THE WITNESS: I suppose. It never had a formal name because it 
wasn't a 

[[Page 49915]]
formal organization. It was a group of people that met, to my 
knowledge, twice--only twice. So, that for that reason, I refer to it 
as an ad hoc committee.
    THE COURT: Okay.
    THE WITNESS: We can call it anything that you like.
    THE CLERK: Your Honor, just for clarification, they offered 248 A. 
You said 248 is received.
    THE COURT: 248 A is received.
    THE CLERK: They already offered and received 248 D.
    THE WITNESS: Your Honors, could I have some more water?
    MR. HALL: Your Honor, we have a problem here because he has now 
made some changes on that. If I can show it--I would like to project 
it, but he has made a couple of changes on there, and the lady 
operating the transparencies--if he would put it on for her some way.
    THE WITNESS: If you have a grease pencil--
    MR. URRUTIA: There should be a grease pencil there, your Honor. 
Perhaps, Mr. Perry could make the same changes on the transparency.
    THE COURT: That would be fine. Go ahead and put it on, and he can 
come down.
    Q. (by Mr. Hall) Go ahead and make the changes right on that 
transparency.
    THE WITNESS: (Approaching the projector). (Complying).
    Q. (by Mr. Hall) I think the first one was Mr. Keith's title. That 
is the easiest one.
    A. (Complying).
    Q. And then you said that that direct sales organization--we had 
that one wrong.
    Can you put a box to show it independently or whatever you want to 
do?
    A. First, his title wasn't director.
    Q. Then strike that, if you don't mind.
    A. (Complying).
    Q. So, you are showing organization as being at a higher level, 
then, than Michael Keith's; correct?
    A. That's correct, and it was the business sales division is I 
believe what it was called, the BSD.
    Q. Then, that line between Mr. Nacchio and Gus Blanchard shouldn't 
be there?
    A. That's correct.
    Q. Now, you mentioned product management.
    Would you just tell the jury where those two organizations, CDOC 
and product management, sit in this chart?
    A. This is product management here.
    Q. Mr. Starr's organization?
    A. Well, actually, Frank Ianna had product management, and Glenn 
Starr was fourth level who was the product manager for the SDN product.
    Q. Okay. Then, what about CDOC?
    A. CDOC was right here under Michael Keith, and as the counsel 
said, there should be another box here that has some other staff 
organization. Remember that I showed you there was the channel 
development piece of this?
    Q. Show yours there, please. You mentioned several names.
    A. I am Spencer Perry.
    A. Yeah. May I--well, I will just wait.
    Q. Now, on this ad hoc committee, let's--why don't you resume the 
stand there. Thank you.
    A. Go back up here? Turn this off?
    Q. No. Just resume the stand. We will take care of that part.
    A. (Returning to the witness stand).
    Q. You were starting to testify, I believe, that Mr. Keith had 
asked you to take some further steps after you gave him this report 
indicating what I think was price point comparisons for PRO WATS and 
SDN and so forth.
    What were the assignments that you were given?
    A. Well, he asked me to get with Glenn Starr's people to change the 
SDN offer to kill the arbitrage.
    Q. Want to tell the jury what the arbitrage is?
    A. ``Arbitrage'' is basically an economic term that explains a 
situation where you can go into one market, let's say, and buy a 
product or service or commodity at one price and, then, go into another 
market and buy the same or similar commodity or service at a lower--
typically, a lower price and, then, go back up into the first market 
and sell the commodity with a price spread and make some money doing 
it, and, you know, there is--and that's classical arbitrage, as I 
understand it.
    Mr. HALL: Your Honor, may I pick up an exhibit over here?
    THE COURT: Yes.
    Q. (by Mr. Hall) I'm showing you Exhibit 243 which has already been 
in evidence. I will put it over here. I don't know if you can see it at 
this angle or not.
* * * * *
    A. Correct.
    Q. Okay.
    A. And that would roll up to me.
    Q. Okay. What is the next one?
    A. Develop plans for SDN targeting and strategy to traditional 
resellers and deflect cockroaches.
    Q. Okay. Explain what that means?
    A. Like I said earlier, we had a significant commitment to raise 
our revenues selling SDN to traditional or switch based resellers. What 
we were doing here--well, what, what this represents is really like a 
parallel track of, of work that had to be done.
    One was go out and sell SDN, and measure it with your folks, and 
create a sales organization to go out to the traditional people. And, 
at the same time, cockroaches was a term that a lot of people within 
AT&T, basically smaller, lower level people, used to referred to 
switchless resellers.
    Q. Who specifically can you recall besides yourself there?
    A. I used it. People in my organization. I think Ed may have used 
it. John Greco used it. Several people. Marty Gitter used it. A lot of 
people.
    Q. Is Ed, Ed Gegenbach to whom you earlier referred?
    A. Yes.
    Q. I can't--what is the last line there? Actually, it's--
    A. It's cut off. It may be on the--
    Q. Okay. Account plans?
    A. Account plans, yeah. It says account plans by segment. And hold 
on just a second. Account plans by segment.
    Q. Okay. Thank you very much. Can you resume the stand? Thanks.
    A. Sure.
    Q. Now, when you were talking to Mr. Greco, after you talked to Mr. 
Keith, did you then make plans to call this meeting of this ad hoc 
committee?
    A. Well, shortly, shortly after the meeting with, with Keith, I got 
more specific instructions. And I think it was shortly, like a day or 
two later. I got specific instructions to, to organize a group to get 
with, with Glenn Starr's people. Glenn again being the SDN product 
manager. To, to get some of our people together, and his people 
together in a meeting. And, and work on ways to, to change the SDN 
offer, so that the switchless resellers, or the cockroaches, or 
whatever, would not, would not buy the product.
    Q. All right. Now, how did you go about meeting with Glenn Starr's 
group?
* * * * *
you look down at--in this document--let's just read. If you please, do 
for us the first line, and I will ask some questions.
    A. The first line of the document?
    Q. Yes, please.
    A. Not the title, but the line of text?
    Q. Yeah.
    A. Okay. The recent unprecedented demand for AT&T software defined 
network service, for the sole purpose of resale, has caused confusion 
in the marketplace, and has resulted in a clogged provisioning system, 
thus denying service to commercial customers.
    Q. Okay. Now, you said that you and Mr. Gitter wrote this memo. 
Where did you get your information about denying service to commercial 
customers?

[[Page 49916]]

    A. There was, there was a lot of talk, if you will, a lot of 
discussion among the various managers involved in this. And you know, 
we--I got both--well, I am going to speak for myself.
    I got a general sense of what was going on, you know, the global 
picture of what was going on, and--from various people. I hadn't 
attended any meetings, or actually had seen any, any data, but there 
was just a lot of what I would call scuttlebutt going on about, about a 
lot of problems that were happening out across the country.
    Q. Now, the commercial customers were under the--Mr. Blanchard's 
group, were they not?
    A. That's correct.
    Q. Okay. Would you read on then the rest of that paragraph?
    A. AT&T's interests may be well served in delivering this service 
to established, switch-based inter-exchange carriers. However, the 
current ability for switchless resellers to arbitrage the service has 
significant negative consequences to AT&T.
    This paper identifies tariffed elements and operational practices 
that attract arbitrageurs. Revisions to these elements and practices 
are listed in descending order of impact that would decrease the 
attractiveness of the service to switchless resellers.
    Q. Did you actually look at the SDN tariff to see areas where this 
could be accomplished?
    A. That wasn't the process that we used. I--as you described it.
    Q. Okay.
    A. I mean, if you like, I can describe the process Marty and I used 
that culminated in this paper.
    Q. All right.
    A. What, what we did, was I believe it was in my office, where 
Marty and I--we hashed out, in my office, and put--made notes on a--on 
the white board there, of different, different things that could be 
done to make the service less attractive to resellers.
    And one of the things that we were trying to do, was while making 
it less attractive to resellers, we wanted to keep the viability to 
commercial customers. And so, what we did, was we just listed ideas on 
the board, and then later went back, and then segmented those ideas, 
and tried to put some order to them, in terms of, you know, basically 
categorize the ideas.
    And then further, we then listed, listed those, those ideas, in 
what we thought were, was a, sort of rank order of effectiveness.
    Q. Okay.
    A. And then--just let me finish. And then I went back, and took 
those things, and wrote, and created the paper.
    Q. Okay. Did you take this paper with you to the meeting that you--
the policy group meeting?
    A. I don't recall that I did or didn't. I, I believe I, I--we 
handed it to John and perhaps Michael, but I don't recall taking it to 
the meeting.
    Q. All right. When you were at the meeting, did you do what you 
said you just did with Marty Gitter, which is have a blackboard to put 
down ideas?
    A. Yes, sir. Well, it was a white board.
    Q. Excuse me. Looking at the next page, there's this talk up in 
there about the AT&T logo. So perhaps if you would read the first item 
under billing. Not the first item, excuse me, the first paragraph.
    A. Okay, yeah. When AT&T provides billing to the SDN end user, 
switchless reselling is encouraged. The reseller is given additional 
credibility when the AT&T logo appears on the end users bill. Potential 
corrections include, and then there is a list of corrections.
    Q. Okay. The very bottom bullet there, what does that say?
    A. AT&T logo on end user bill for resellers.
    Q. Are you acquainted with multiple location billing?
    A. Yes, I am.
    Q. Okay. Did multiple location billing, as an option under SDN, 
result in these end users getting this very logo?
    A. Yes, it did.
    Q. Okay. Was that discussed?
    A. At, at the meeting?
    Q. Or at any time.
    A. Obviously, Marty and I discussed it.
    Q. Okay.
    A. That was--the whole billing, the whole billing issue, I think, 
was more--was, Marty was more expert on that than I was. So, I mean, I 
think that, that these--most of the billing ideas here were Marty's.
    Q. Okay. You can put the last one on to show signatures. I am not 
going to ask any questions. That was signed by yourself and Marty?
    A. It wasn't signed. It was just our names. We put our names down 
there. It was a draft.
    Q. All right. Would you turn to Exhibit 70, please.
    A. Okay.
    Q. That's what? Will you describe that document, please?
    A. This is a summary of the items that, that this, the group, what 
I call the ad hoc group, came up with, as a result of that meeting.
    Q. Okay.
    A. Of action items.
    Q. Okay. When did you do this summary?
    A. At the meeting.
    Q. All right. Is this all in your own handwriting?
    A. Yes, it is.
    Mr. HALL: Okay. We will offer Exhibit 70, your Honor.
    Mr. PETRANOVICH: No objection, your Honor.
    The COURT: 70 is received.

(Exhibit 70 received)
    By Mr. HALL:
    Q. Can you put up the transparency on that one? Can you move it 
over slightly there? Oh, that's a good idea. Thank you.
    All right. If you will look at that document, up at the top, it's 
got a whole bunch of names. Are these people that attended the meeting?
    A. Yes, sir.
    Q. All right. And at the right, you have got product management, 
and it's bracketing Ianna, Starr and Brittele. Are these the gentleman 
from that organization?
    A. Correct.
    Q. And the CDOC ones, I think you have got Keith, Greco, Gitter, 
and yourself. So, seven of you at this meeting?
    A. That's correct.
    Q. And then on the left-hand side, you have got some descriptions, 
tariff, policy, tariff. Can you explain the differences, why they are 
there?
    A. Yeah. All that does is just explain what kind of modification it 
is, whether it's a tariff, a change--a change to the tariff, or a 
change in AT&T operational policy. Some of the things, many of the 
things that associate--are associated with delivering of product aren't 
in the tariff. They are just policy. And so--
    Q. Can you give us examples of those?
    A. Sure. In most instances, billing, and how billing is 
accomplished and so forth is not specified in the tariff.
    Q. Is that -- does that include MLB?
    A. Well, yes. That's correct. There is only one mention, that I 
recall, of billing in the tariff with regard to SDN, and MLB wasn't one 
of them. Wasn't it.
    Q. All right. Then, when the meeting was completed, were you given 
any instructions as to the notes? Let me ask you, first of all, were 
any notes taken by others than yourself at the meeting?
    A. Yes, sir, there were.
    Q. Okay. and what instructions, if any, were given with regard to 
those notes?
    Mr. PETRANOVICH: Objection, your Honor. I would like a side bar.
    THE COURT: Okay. You may step up.
    THE CLERK: Jury need a stretch?

(Unreported discussion held at side bar)
    By Mr. HALL:
    Q. Mr. Perry, were there, at this meeting on March 12, 1990, were--
with 

[[Page 49917]]
the people that you have noted up there, were there notes taken by 
various people?
    A. Yes, sir.
    Q. Do you have any recollection of who was taking notes and who 
wasn't?
    A. Not exactly. I mean, I think probably most people were.
    Q. All right. And when the meeting ended, were you asked to gather 
the notes and to destroy them?
    A. Correct, yes, sir.
    Q. Okay. And who asked you?
    A. I, I really don't recall. I mean, there was a meeting. A lot of 
people were talking. A suggestion was made. I was sort of the de facto 
secretary of the meeting, and I did.
    Q. All right. Now, who was, who was--who presided at the meeting?
    A. I can't say that anyone really presided over it. I think Michael 
probably was, if--Michael Keith was the guy that was probably really 
directing the meeting, so to speak. But, after the meeting got going, 
it was just sort of kind of free form of ideas and so forth.
    Q. All right. Now, did you immediately, meaning at the very minute, 
destroy those documents?
    A. No, sir.
    Q. Okay. Now long was that meeting?
    A. Oh, it, it--I think it went well into the late afternoon and 
early evening.
    Q. Okay. How do you know that?
    A. I was starving by the time it was--

(Laughter)
    The Witness. It was past my dinner time. I normally eat dinner 
around 6:00 o'clock.
    By Mr. Hall:
    Q. Did you have any discussion with any people after the meeting?
    A. Yeah, yes, I did. Marty and I, at the end of this meeting, 
talked about it, about the meeting in the parking lot. And, and we 
were, we were sort of--again, both working in Michael Keith's 
organization, him being a new guy on the block, we were--we had sort of 
talked about what we were doing, and, and how this guy probably, of all 
the managers that we had ever come in contact with, was probably the 
most gung-ho kind of guy to actually make things happen, to make them 
happen very quickly.
    Q. Okay. And at that time, did you--when did you destroy these 
documents? I don't think you told us.
    A. The next day.
    Q. The next day. Did either you or Mr. Gitter express any concerns 
about the consequences of what you were doing?
    A. Well, yes. We both had come out of the AT&T external affairs 
organization, that was before that, the state regulatory organization. 
And we both had----
    Mr. Petranovich. Objection, your Honor. If we could go one by one. 
Mr. Gitter and Mr. Keith, or Mr. Perry, instead of both. I don't know 
who is saying what.
    The Witness. I am sorry. Mr. Gitter and I had both come from the 
external affairs organization.
    The Court. Okay.
    The Witness. And, and during our tenure there, when the carrier 
service center, later the CDOC, was part of that organization, we, we 
both understood that the reason why that group wasn't part of 
marketing, was because there were some, some potential--if this group 
ever became part of marketing, that, that some things could happen that 
weren't too kosher, that sort of went against the Federal 
Communications Act.
    And we discussed, and I think it was in his car or my car, that 
this is some pretty serious business that we are doing, that we are 
involved in. We had never, neither one of us had ever been involved in 
this kind of activity in our careers.
    By Mr. Hall:
    Q. Let me go back to that meeting. One of the names you have got up 
there--let's see. Where is that? Did you have any dealings with a Mr. 
Joe Brittele from product management during the course of these 
discussions?
    A. Yes, Joe was, was a participant in the meetings.
    Q. But he wasn't--he's now shown. Oh, yes. There he is. Okay. What 
did Mr. Brittele have to say, with regard to these problems? Are there 
any particular areas that he focused on?
    A. Well, during the discussion, I think Joe was probably the most 
animated of the people from product management at the meeting. And the 
one thing that, that stood out, in my mind, was Joe is a character. Let 
me say this. So that's how come I can kind of recall this.
    But, when we were talking about deposits, you know, Joe made the 
comment that, hey, these guys don't even have any skin in the game, so 
that they should be made to put some money up front in the form of 
deposits. And, you know, I recall Marty and Joe basically had most of 
the discussion about the, the issue of instituting deposit 
requirements.
    Q. Okay. Now that you mentioned that last comment, were assignments 
given to the various people that were at that meeting, to, to go out 
and accomplish?
    A. Yes, sir. What we did, was after we had come up with a list of 
things, we then went back, as you asked, you know, you said, well, what 
are the designations there, tariff and policy and so forth. And for the 
most part, they were all product management issues to go off and chase, 
so to speak.
    Q. Okay. At this time, had there been some--were there * * *
* * * * *
    A. Yes, I, I know what that meant.
    Q. What did it mean?
    A. Base cannibalization is the term you are referring to?
    Q. Yes.
    A. That was my understanding of what the main issue always was with 
the switchless resale. And that was that you would take a PRO WATS base 
of customers, and essentially take those customers, and move them to a 
product SDN that was lower priced. And that's referred to as base 
cannabilization. You are sort of eating your own customers.
    Q. If you look at the second page there--excuse me--the name of 
Central Office Telephone appears thereupon. Did you know--did you even 
know Central Office Telephone at that time?
    A. No, sir.
    Q. Would you look at Exhibit 11, please.
    A. Okay.
    Q. Can you identify that document for us?
    A. This appears to be a package that was put together by Susan 
Early, that was a comprehensive communications package to the BSD sales 
force.
    Q. That is the direct sales force?
    A. Correct.
    Q. And was it----
* * * * *
    A. I had just talked to my supervisor, Mary Upchurch, and she said 
I better go tell Michael. And we went down the hall. And there were 
some folks in his office. They left. I had a seat outside. The folks in 
the office left. I went in, and, apparently, she had told him that I 
was leaving. And we had a conversation. And he asked, he asked why I 
was leaving, and I told him that I wasn't happy there. And we chatted 
about that.
    Q. Did you have any discussions as to the status of SDN resellers?
    A. Well, he, he had mentioned that when, when he asked what was I 
going to do, and I says I wasn't sure. And he says, well, I hope you 
are not going into SDN resale. And I said, oh, why is that? And he 
picked up a piece of paper, and he says, with an one percent 
provisioning rate, they won't be around much longer.
    Q. Could you identify that piece of paper?
    A. No, sir.
    Q. Then after that, I think you have already testified, you took 
this job as the executive director of the inter-exchange Reseller's 
Association?

[[Page 49918]]

    A. Yes, sir, that day.
    Mr. HALL: Okay. That's all I have, your Honor.
    The COURT: It's time for lunch. Since we lost a little time getting 
started this morning, I would like to
* * * * *

Exhibit C--Excerpts of Trial Testimony of Michael Keith, Central Office 
Telephone, Inc., v. AT&T, Civil Action No. 91-1236-JE, United States 
District Court, for the District of Oregon, June, 1994

    Mr. URRUTIA: Your honor, we would offer 87 at this time.
    Mr. PETRANOVICH: No objection, your Honor.
    The COURT: 87 is received.

(Exhibit 87 received)
    By MR. URRUTIA:
    Q. Do you help your customers by giving their competitors hints on 
how to stick it to them in the marketplace?
    A. No, I don't see that as helping them. But I had a role to 
service and help the resellers.
    Q. That was your responsibility?
    A. Yes.
    Q. Other people in the company had other roles, perhaps, which 
might include competing against them?
    A. That's correct.
    Q. But you, Michael Keith, or Mike Keith, and your organization 
were supposed to help them?
    A. That was one of my responsibilities, yes.
    Q. And one of the men that worked for you is a guy named Jim 
Murphy, right?
    A. Yes.
    Q. And Mr. Murphy wrote an article in this paper, that you reviewed 
before it was published, called, quote, selling against a reseller, 
unquote?
    A. That's correct.
* * * * *
that has the interview with Mr. Barillari? I will spell it, B-A-R-I-L-
L-A-R-I?
    A. No, I have not seen the tape.
    Q. Are you aware of the fact that a videotape was done? You do know 
who Mr. Barillari is, right?
    A. Yes.
    Q. He is one of your in-house lawyers?
    A. That's correct.
    Q. At least the one with authority on SDN reseller issues, right?
    A. He would be one of the lawyers. I am not sure if that's his only 
responsibility, yes.
    Q. As far as those sales people were going, what you were telling 
them, in this magazine that was especially for them, is that their 
compensation was going to be affected by resellers, right?
    A. What do you mean by that? I don't understand.
    Q. Weren't you telling the folks in the field that if they sold to 
resellers, that they were not going to get any commissions?
    A. Oh, yes. That's correct.
    Q. Mr. Perry testified yesterday, that part of his job was to go 
out there in the branches and make the branches turn over resale 
accounts to CDOC; is that right?
    A. I asked John Greco to identify SDN resellers, because the 
decision is that we will meet the needs of those customers through the 
CDOC organization. So, working with the branches, both terms would get 
together, and identify those people that are resellers, and that should 
be serviced out of the CDOC branch.
    Q. So, you would have given that responsibility to Mr. Greco?
    A. Yes.
    Q. And would you assume, in the ordinary course of business, he 
would use those people who worked for him?
    A. Yes.
    Q. Like Spencer Perry and Marty Gitter to do that job?
    A. That's correct.
    Q. You formulated the corporate agenda for SDN resellers and had it 
published in this, in this magazine, so the sales force would know 
about it, right?
    A. That's correct.
    Q. Did you give an interview that was published in the June 11, 
1990, edition of Network World?
    A. Yes.
    Q. And that document has been marked for identification as 
Plaintiff's Trial Exhibit 93. Many say that AT&T was generally 
surprised--excuse me--quote, many say that AT&T was generally 
surprise--genuinely surprised at the quick expansion of aggregation--
aggregation. Has AT&T decided to take action against aggregation, 
unquote?
    Would you read your answer, please, Mr. Keith?
    A. Quote, I don't feel there's been a radical change in our 
attitude. However, we are starting to evaluate how we can realign our 
strategies to make our products better suited for the marketplace. Our 
principal theme is that we believe our sales force is the way we want 
to reach our customers, not through service aggregators, end quote.
    Mr. URRUTIA: Mr. Petranovich, we are going to skip to page 107, 
Line 12.
    Mr. McDERMOTT: We have got some on 98, don't we?
    Mr. URRUTIA: Did I miss some on 98?
    Mr. McDERMOTT: Lines four to 14. By Mr. URRUTIA:
    Q. Okay, Thank you. We are going to go back to 98, and then we will 
move forward.
    Did you ever allow the commercial users of SDN to use the AT&T 
globe?
    A. There may be examples of that, yes.
    Q. I mean, you have seen it right there on their newsletter, 
haven't you?
    A. I wouldn't doubt that I have seen it on customer newsletters, 
yes.
    Q. And if we see that globe on a newsletter, then we know that that 
is an authentic document, as far as AT&T is concerned, right?
    A. Yes.
    Q. We will start on page 107, line 12.
    Plaintiff's Exhibit 77, have you turned to it, Mr. Keith?
    A. Yes.
    Q. Now, this is a letter that you wrote to Gail McGovern, right?
    A. That's correct.
    Mr. URRUTIA: Your Honor, four our record, Plaintiff's Exhibit 77 
has been received into evidence by Mr. Perry. It was the April 3, 1990, 
memo.
    Q. And it has all of the--or various recommendations, right, six 
recommendations?
    A. That's correct.
    Q. Plaintiff's Trial Exhibit 93----
    A. This is the second time he's asking?
    Q. The second time Mr. Briere asked you.
    A. Yes.
    Q. On page five of the article.
    A. Right, yes.
    Q. Question, quote, what means can AT&T use to limit SDN reselling, 
unquote?
    A. Answer, quote, I don't really know at the moment. We are meeting 
weekly with the SDN product team to find out. We want to make sure SDN 
serves the top end of the market. There will probably be modifications 
to the product that will insure this, but may not serve the resellers. 
But no one knows exactly what these steps will be, end quote.
    Q. Skip to page 128. Line 10.
    Q. Do you recall the day that Spencer Perry left the employment of 
AT&T?
    A. It was in the fall of 1990.
    Q. Did he come to see you?
    A. Yes, he did.
    Q. Mr. Keith, tell us what your bottom line assessment of 
provisioning was, at the time you began working in CDOC?
    A. It was a disaster. That is, the provisioning problem is the 
fundamental problem that caused all the action in the case here. And at 
this time, and it wasn't directed towards any class of customers. 
Anyone asking for provisioning of switched access had a terrible time, 
during this period, of 

[[Page 49919]]
getting it in. And it took us a long period of time.
    It was getting better by the time I was leaving in 1991. By better, 
I mean with a set of predictability you could say that this order you 
gave me will be completed in 45 days plus or minus 10 days. And that 
was a better condition at the end of my tenure. At the beginning of my 
tenure, I didn't even understand how bad it could be.
    Q. Plaintiff's Exhibit 91 is in front of you. It's easier to read 
out of the book.
    A. That's fine.
    Q. I think you said that this was a letter that you had written to 
Gail McGovern?
    A. That is correct.
    Mr. URRUTIA: And your Honor, this is already in our record as 91. 
It's been received, and it's the April 21 letter--excuse me. May 21, 
1990, letter.
    Q. Who is Gail McGovern?
    A. Gail McGovern was my counterpart in the business unit that owned 
the product SDN. So, her product chose the one that makes changes to 
it.
    Q. All right. And what does this letter consist of?
    A. It consists of a series of recommendations and modifications to 
the process of provisioning and the underlying service itself.
    Q. Now, are you aware of whether commercial users of SDN were using 
the AT&T globe to sell long distance services to third parties?
    A. To third parties?
    Q. Right.
    A. They could. But if they were using it inside their own company, 
they would use their own logo.
    Mr. URRUTIA: And that concludes the designated depositions for Mr. 
Keith.
    Mr. URRUTIA: Do you have Mr. Greco's?
    Mr. PETRANOVICH: Yes.
    The COURT: Would you sell Greco for us, please?
    Mr. URRUTIA: Sure. Spelled G-R-E-C-O. The deposition of Mr. John A. 
Greco, Junior, was taken on February 26 of 1993. It was taken in the 
offices of AT&T at 295 North Maple Avenue in Baking Ridge, New Jersey, 
starting at 1:00 p.m. Mr. Hall was present for the Central Office 
Telephone and took the deposition for Central Office Telephone, and I 
believe Mr. Petranovich was present for AT&T.

Direct Examination

    BY MR. URRUTIA:
    Q. And it starts on page five. I want to go back to when you first 
came into the SDN program and get the time frames established for your 
involvement. When did you first become involved with SDN?
    A. I guess when you are saying involved with SDN, it's parts of the 
AT&T's offer, so my involvement, specifically, my job responsibility, 
it's----

Exhibit D--Pending Federal Court Litigation Instituted by Resale 
Carriers Against AT&T

1. AT&T v. NOS Communications, Inc. (counterclaim), Civil Action 92-
4172 (MTB) D.C.D.NJ
2. Target Telecom, Inc. v. AT&T, Civil Action No. 93-1851 (MTB) 
D.C.D.NJ
3. Group Long Distance, U.S.A. v. AT&T, Civil Action No. 93-1851 
(MTB) D.C.D.NJ
4. Communications Services of America v. AT&T, Civil Action No. 93-
1851 (MTB) D.C.D.NJ
5. Telecomp Technologies Network, Inc. v. AT&T, Civil Action No. 93-
1851 (MTB) D.C.D.NJ
6. Business Choice Network v. AT&T, Civil Action No. 93-1851 (MTB) 
D.C.D.NJ
7. Telcom United North v. AT&T, Civil Action No. 93-2625 (HAA) 
D.C.D.NJ
8. National Communications Association v. AT&T, Case No. 92 Civ. 
1735 (LAP) D.C.S.D.NY
9. Envoy Communications, Inc. v. AT&T, Case No. 91-1333 (JE) 
D.C.D.OR
10. Central Office Telephone, Inc. v. AT&T, Case No. 91-1236 (JE) 
D.C.D.OR
11. Affinity Network, Inc. v. AT&T, Case No. 92-2836 (JSL) 
D.C.C.D.CA
12. AT&T v. The People's Network, Inc. (counterclaim), Case No. 92-
3100 (AJL) D.C.D.NJ
13. Teledesign v. AT&T, Susan Robinson & Toby Ragsdale, Case No. H-
92-1414 D.C.S.D.TX Houston Div.
14. US Wats, Inc. v. AT&T, Case No. 93-CV-1038 D.C.E.D.PA--
Philadelphia Div.
15. Telexpress, Inc. v. AT&T, Case No. 93-0256 (AWT) D.C.C.D.CA
16. Paragon v. AT&T, Case No. 91-5057 (JSL) D.C.C.D.CA
17. SCG Financial Corporation, Inc. v. AT&T, Case No. CV-91-5057 
(JSL) D.C.C.D.CA
18. Association of Long Distance Users, Ltd. v. AT&T, Case No. 4-93-
283 (D.C.D. Minn.--4th Division) (Stayed by Federal Court pending 
outcome of FCC action.)
19. Cunningham Enterprises, Inc. v. AT&T (counterclaim), Case No. 
90-4111 (TJM) (D.C.C.D.CA)
20. AT&T v. Equal Access Corp., Case No. CV-92 (WDK) (D.C.C.D.CA)
21. MJM Communications, Inc. v. AT&T, Case No. CV-92-1951 (JSL) 
(D.C.C.D.CA)
22. National Communications Ass'n, Inc. v. AT&T, 93 CIV 3707 
(D.C.S.D.NY)
23. Retco Enterprises, Inc. v. AT&T, Case No. H-91-2221 (D.C.S.D. 
Tex.--Houston Div.) (Case settled July 1993)
24. Triad Communications Group v. AT&T, Case No. SACV-93-529 AHS 
(D.C.C.D.CA)
25. Uni-Tel of Farmington, Inc. v. AT&T, Case No. 92-0963SC/AY 
(D.C.D.NM) (Not active at this time)
26. Telegroup, Inc. v. AT&T, Case No. 94 CIV 4123 (D.C.S.D.NY)
27. ProGroup, Inc. v. AT&T, Case No. 94 CIV 4123 (D.C.S.D.NY)

Exhibit E--List of Pending Complaints Against AT&T That Have Been Filed 
With the Federal Communications Commission by Two of the Ad Hoc IXCS 
With Respect to AT&T's Stonewalling of the Resale of Its Tariff 12 
Services

    List of pending complaints against AT&T that have been filed with 
the Federal Communications Commission by two of the Ad Hoc IXCs with 
respect to AT&T's stonewalling of the resale of its Tariff 12 services.

1. Affinity Network, Inc. v. AT&T, Case No. E-92-96 (FCC, June 26, 
1992)
    2. NOS Communications, Inc. v. AT&T, Case No. E-92-101 (FCC, July 
27, 1992)

Exhibit F--MCI Press Announcement, Washington, DC February 28, 1994

CONTACT:
CORPORATE NEWS BUREAU
1-800-289-0073
202-887-3000
SUSAN SUSS
NEXTEL COMMUNICATIONS
212-536-8770
BILL DORBELMAN
COMCAST CORPORATION
215-981-7550

MCI Will Invest $1.3 billion in Nextel to Offer Nationally Branded 
Wireless Services

Network MCI Strategic Alliance With Nextel and Comcast Will Provide 
First Digital Personal Communications Services

    WASHINGTON, D.C., February 28, 1994--A strategic alliance formed 
today by MCI, Nextel Communications, Comcast Corporation and Motorola 
will begin offering MCI wireless personal communications services this 
year. A $1.3 billion MCI investment in Nextel will accelerate this 
first nationwide offering of advanced wireless voice and data 
communications, featuring digital clarity and reliability, a single 
telephone number that will work anywhere, and availability throughout 
the country.
    The companies said that their alliance will bring these enhanced 
flexible services to consumers, business and government customers far 
sooner than generally had been expected. The services will be marketed 
jointly by MCI, Nextel and Comcast under the MCI brand name.
    Nextel's license coverage and planned interoperability agreements 
give the alliance the potential to reach 95 percent of the U.S. 
population. Its first 

[[Page 49920]]
digital network is already serving customers in the Los Angeles area 
and will stretch across California within the next few months. With the 
investment by MCI, plans are underway to accelerate construction in 
most major cities.
    ``Wireless communication is becoming an integral part of our daily 
lives, and demand is growing rapidly,'' said Bert C. Roberts, Jr., MCI 
chairman and CEO, at a press conference in Washington, D.C. ``Customers 
have been asking us to provide a totally portable communications 
service that meets their needs any time, anywhere. This alliance means 
that Nextel is the platform on which we will build an integrated 
wireless strategy, and that we will be able to reach virtually every 
American who wants wireless service.''
    The strategic agreement will capitalize on the strengths of four 
dynamic companies, each a leader in its field. MCI brings world-class 
marketing assets--name recognition, customer base and distribution 
channels--as well as the company's intelligent network. Nextel adds 
licenses with extensive geographical coverage, planned interoperability 
agreements and proven wireless products and services. Comcast 
contributes its experience and know-how in operating cable and cellular 
systems and will support the build-out and operation of Nextel systems. 
And Motorola will provide its Integrated Radio Service (MIRS) 
technology platform, as well as subscriber equipment. These combined 
strengths will enable the companies to provide a wide array of advanced 
wireless servicers to consumers, business and government customers over 
a larger area than any other wireless service competitor.
    ``This alliance means that everyone else will be playing catch 
up,'' said Morgan E. O'Brien, Nextel chairman. ``MCI's enormously 
successful marketing and branding, and large customer base give us the 
ability to extend beyond our core of business customers to serve 
virtually anyone who could benefit from wireless communications. We are 
delivering the first of these advanced wireless services on our all-
digital network in L.A., including wireless telephone, two-way paging 
and dispatch radio.''
    Under terms of the agreement, MCI will purchase approximately 17 
percent of Nextel's stock, which will match Comcast's ownership. The 
initial purchase, expected to occur in a few months, will consist of 22 
million shares of Nextel stock at $36 per share. MCI has also committed 
to purchase an additional 15 million shares at an average cost of $38 
per share over the next three years, for a total investment of more 
than $1.3 billion.
    The announcement adds one more key component to networkMCI, the 
company's strategic vision announced in January. When networkMCI was 
unveiled, MCI highlighted its intent to form alliances with 
communications and information industry leaders to provide innovative 
new communications services. It identified wireless personal 
communications services as an integral part of the networkMCI vision.
    Roberts pointed out that the demand for wireless voice 
communications is expected to grow from 15 million users today to 80-90 
million users in the next 10 years. Data, paging and messaging 
applications will further expand the total wireless market.
    The companies said they will provide consumers, business and 
government customers with MCI-branded services such as mobile calling 
services, alphanumeric messaging, dispatching and data transmission, 
all integrated in a single digital phone. The same telephone number 
will work from anywhere in the United States.
    Comcast has been increasing its presence in the telephony business 
in recent years through its ownership and operation of cellular 
properties in the Northeastern U.S. and cable/telephone operations in 
the United Kingdom. As part of the alliance, MCI and Comcast have 
entered into a shareholders' agreement with equal representation, and 
together they will own approximately 35 percent of Nextel.
    Comcast is proud to have been a catalyst for bringing this alliance 
together,'' Brian L. Roberts, president of Comcast, said. ``We are 
delighted that MCI will be joining us as both an operating partner and 
an investor in Nextel. From the time of our original investment in 
Nextel just 18 months ago, management's efforts have resulted in a near 
tripling of the reach of its operations. In addition to marketing under 
the MCI name, Comcast may market Nextel's under our own brand as 
well.''
    Handsets and infrastructure for the new system, both produced by 
Motorola, provide improved functionality over earlier mobile services, 
including digital voice, message and data services. Messages can be 
displayed on phone screens. The phones also can be used as mobile data 
receivers. Because it will be fully digital, the wireless services will 
provide crisper voice and dataquality than current analog systems.
    The new system will use Motorola's powerful new digital 
communications technology, Motorola Integrated Radio System (MIRS). 
Motorola Chief Executive Officer Gary L. Tooker said, ``The versatility 
and spectrum efficiency of MIRS will open the door to a whole new world 
of digital, personal communications services. As it will on other MIRS 
systems around the world, this technology adds the power of messaging, 
dispatch and data, to the same handset.''
    The agreement is subject to appropriate regulatory review.

Certificate of Service

    I, Charles H. Helein, attorney at Helein & Waysdorf, P.C. hereby 
certify that I have this 25th day of October, 1994 caused the foregoing 
document to be served by hand delivery upon:
Richard Liebeskind, Assistant Chief, Communications and Finance 
Section, Room 8104, U.S. Department of Justice, Antitrust Division, 555 
4th Street, N.W., Washington, D.C. 20001;

and by overnight mail upon the following:

John D. Zeglis, AT&T Corp., 295 North Maple Avenue, Basking Ridge, New 
Jersey 07920
Douglas I. Brandon, McCaw Cellular Communications, Inc., 1150 
Connecticut Avenue, N.W. Washington, D.C. 20036
Charles H. Helein

Certificate of Service

    I, Kathy L. Cuff, hereby certify under penalty of perjury that I am 
not a party to this action, that I am not less than 18 years of age, 
and that I have on this day caused the Response to Public Comments to 
the Proposed Final Judgment to be served by mailing a copy, postage 
prepaid, to:

John D. Zeglis, Mark C. Rosenblum, AT&T Corp., 295 North Maple Avenue, 
Basking Ridge, NJ 07920
Douglas I. Brandon, McCaw Cellular Communications, Inc., 1150 
Connecticut Avenue, N.W., Washington, D.C. 20036
Kathy L. Cuff
July 25, 1995
[FR Doc. 95-23636 Filed 9-26-95; 8:45 am]
BILLING CODE 4410-01-M