[Federal Register Volume 61, Number 23 (Friday, February 2, 1996)]
[Notices]
[Pages 3970-4028]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1742]
[[Page 3969]]
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Part II
Department of Justice
_______________________________________________________________________
Antitrust Division
_______________________________________________________________________
Public Comments and Response on Proposed Final Judgment, United States
v. Sprint Corporation and Joint Venture Company; Notice
Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 /
Notices
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[[Page 3970]]
DEPARTMENT OF JUSTICE
Antitrust Division
[Civil No. 95-1304]
Public Comments and Response on Proposed Final Judgment, United
States v. Sprint Corporation and Joint Venture Company
Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.
16(b)-(h), the United States of America hereby publishes below the
comments received on the proposed Final Judgment in United States v.
Sprint Corporation, et. al., Civil Action No. 95-1304, filed in the
United States District Court for the District of Columbia, together
with the United States' response to the comments.
Copies of the comments and response are available for inspection in
Room 215 of the U.S. Department of Justice, Antitrust Division, 325 7th
Street, NW., Washington, DC 20530, telephone: (202) 514-2481, and 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. Copies of any of these
materials may be obtained upon request and payment of a copying fee.
Constance K. Robinson,
Director of Operations, Antitrust Division.
Comments Relating to Proposed Final Judgment and Response of the
United States to Comments
United States of America, Plaintiff, v. Sprint Corporation and
Joint Venture Company, Defendants.
[Civil Action No. 95-1304 (TPJ)]
Pursuant to Section 2(b) of the Antitrust Procedures and Penalties
Act (15 U.S.C. Sec. 16(b)-(h)) (``APPA''), the United States of
American hereby files the public comments it has received relating to
the proposed Final Judgment in this civil antitrust proceeding, and
herein responds to the public comments. The United States has carefully
reviewed the public comments on the proposed Final Judgment. While the
United States remains convinced that entry of the proposed Final
Judgment is in the public interest, in this Response the United States
clarifies the meaning of several provisions of the proposed Final
Judgment in response to issues raised by the public comments to ensure
that there is no uncertainty as to how the proposed Final Judgment will
operate. The United States also explains why other provisions of the
proposed Final Judgment that were questioned or criticized in the
public comments need not be changed in light of the factual
circumstances, including developments in France and Germany and actions
taken by the European Commission and the Federal Communications
Commission.
At this time, it would be premature for the Court to render a
decision on entry of the proposed Final Judgment. The Joint Venture
must first be made a party to the Stipulation consenting to entry of
judgment, and the United States must have this Response and the public
comments published in the Federal Register, certify that all of the
requirements of the Tunney Act have been met, and move for entry of
judgment. It is anticipated that these steps will be completed in a
period between two weeks to a month from this filing. The filing of
this Response has been delayed as a result of the shutdown of
government functions in December and early January due to lack of
funding. Before the United States moves to enter the Final Judgment,
the United States and defendants expect to arrange with the Court for
the scheduling of a status conference, in order to determine what
further procedures the Court may wish to follow to complete the
proceedings under the Tunney Act.
I
Background
A. The Proceedings in This Case
This action was commenced on July 13, 1995, when the United States
filed a civil antitrust complaint under Section 15 of the Clayton Act,
as amended, 15 U.S.C. Sec. 25, alleging that the proposed acquisition
of 20% of the stock of Sprint Corporation (``Sprint'') by France
Telecom (``FT'') and Deutsche Telekom AG (``DT''), and the proposed
formation by Sprint, FT and DT of a joint venture to provide
international telecommunications services, would violate Section 7 of
the Clayton Act, as amended, 15 U.S.C. Sec. 18. The Complaint alleges
that because of the market power held by FT and DT in
telecommunications services in France and Germany, the acquisition and
the joint venture may substantially lessen competition in two markets:
(1) provision of international telecommunications services between the
United States and France, and between the United States and Germany,
and (2) provision of seamless international telecommunications
services.
Also on July 13, 1995, the United States submitted a proposed Final
Judgment and a Stipulation, and this Court subsequently approved the
Stipulation for filing. In the Stipulation, defendant Sprint and the
United States have consented to entry of the proposed Final Judgment by
the Court after completion of the procedures required by the APPA, and
agreed to certain other preconditions for consummation of the
transactions between Sprint, France Telecom and Deutsche Telekom.\1\
After the Joint Venture has been formed, and before the Court is
requested to enter the proposed Final Judgment, the United States and
all defendants expect to file an amended version of the Stipulation
including consent to entry of judgment by the Joint Venture.\2\
\1\ The United States has been advised by FT and DT that one of
those preconditions, the divestiture of the Initial Tranche of FT's
and DT's shares of Infonet Services Corporation, has now been
completed.
\2\ Paragraph 6 of the July 13, 1995 Stipulation signed by the
United States and Sprint provides that ``Joint Venture Co. is
necessary as a defendant in this action, together with Sprint, for
the relief specified in the proposed Final Judgment to be
effective.'' It further sets out required conditions pertaining to
Joint Venture Co. including ``that Joint Venture Co. (i) has been
created as a legal entity, (ii) is subject to suit and is within the
reach of the jurisdiction of the United States courts, and (iii)
will have full authority and power to carry out all of the
obligations imposed upon it by the proposed Final Judgment as those
obligations take effect, and Joint Venture Co. has consented to and
executed this Stipulation on the same terms as Sprint, without
reservation or qualification, * * *'' The stipulation further
provides that until these conditions pertaining to Joint Venture Co.
are satisfied, the United States ``shall be under no obligation to
move for entry of the Final Judgment and may withdraw its consent to
entry of the Final Judgment, and defendants shall not move for entry
of the Final Judgment.'' The original stipulation signed by both
Sprint and the United States essentially makes the formation of the
joint venture and its execution of the Stipulation consenting to
entry of the proposed Final Judgment preconditions for entry of the
Final Judgment.
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On August 14, 1995, the United States filed a Competitive Impact
Statement explaining the basis for the Complaint and the provisions of
the proposed Final Judgment, including their anticipated effect on
competition in relevant markets. The terms and conditions imposed by
the Final Judgment are intended to safeguard against discriminatory and
other anticompetitive practices that would favor the defendants over
competing United States providers of international telecommunications
services and harm competition. The Competitive Impact Statement
addresses the reasons why entry of the proposed Final Judgment would be
in the public interest.
The proposed Final Judgment would subject Sprint and the Joint
Venture to various restrictions affecting their relationship with FT
and DT. These restrictions operate in two distinct phases, lessening
over time as
[[Page 3971]]
competition develops in France and Germany. During Phase I, while DT
and FT still have monopoly rights in Germany and France and competitors
have not been licensed, Sprint and the Joint Venture may not acquire
ownership or control of certain types of facilities from FT and DT, may
not provide services in which FT or DT have special rights except in
limited, non-exclusive circumstances, and may not benefit from
discriminatory treatment, disproportionate allocation of international
traffic, or cross-subsidization by FT and DT. In addition, access to
the French and German public switched networks and public data networks
cannot be limited in such a way as to exclude competitors of Sprint and
the Joint Venture.
During both Phase I and Phase II, after FT and DT face licensed
competitors in all areas of services and facilities in France and
Germany, Sprint and the Joint Venture must make certain information on
their relationships with FT and DT available to competitors, will be
precluded from receiving competitively sensitive information that FT
and DT obtain from the competitors of Sprint and the Joint Venture, and
may not offer particular services between the United States and France
and Germany unless other United States providers also have or can
readily obtain licenses from the French and German governments to offer
the same services. These provisions of the decree will remain in effect
for five years beyond the end of the first phase.
B. Other Significant Developments Affecting These Transactions
In the Competitive Impact Statement, the United States noted that
both the competition authorities of the Commission of the European
Union, and the Federal Communications Commission in the United States,
had pending investigations of these transactions. See Competitive
Impact Statement, 60 Fed. Reg. 44049, at 44065 (Aug. 24, 1995). The
issues in these separate investigations overlapped to a certain extent
with those considered by the United States under the Clayton Act, but
also differed significantly in some respects, both for jurisdictional
and substantive reasons. The European Commission and the FCC now have
both resolved their separate investigations of these transactions. Both
of these authorities have determined that the transactions should be
allowed to proceed, subject to various modifications, limitations and
safeguards addressing the concerns within their areas of
responsibility. Other relevant developments have also taken place in
the European Union and in France and Germany indicating further
progress toward removal of legal barriers to competition and the
establishment of effective regulatory regimes to protect competition.
1. The European Commission Decision
The competition authorities of the European Commission considered
not only the transactions between Sprint, France Telecom and Deutsche
Telekom leading to the formation of the ``Phoenix'' alliance referred
to in the proposed Final Judgment as Joint Venture Co., but also the
formation of the strategic alliance between France Telecom and Deutsche
Telekom in Europe known as ``Atlas,'' which was outside the scope of
U.S. antitrust review. Their decision, first reached and announced in
October 1995 shortly before the end of the public comment period on the
proposed Final Judgment, was officially published on December 15,
1995.\3\ It is subject to an ongoing public comment period before it is
finalized, which will likely occur sometime in the first half of 1996.
\3\ Case No. IV/33,337--Atlas, Notice pursuant to Article 19(3)
of Council Regulation No. 17 and Article 3 of Protocol 21 of the
European Economic Area Agreement concerning a request for negative
clearance or an exemption pursuant to Article 85(3) of the EC Treaty
and Article 53(3) of the EEA Agreement, 1995 O.J. No. C 337/2 (Dec.
15, 1995), and Case No. IV/35,617--Phoenix, Notice pursuant to
Article 19(3) of Council Regulation No. 17 and Article 3 of Protocol
21 of the European Economic Area Agreement concerning a request for
negative clearance or an exemption pursuant to Article 85(3) of the
EC Treaty and Article 53(3) of the EEA Agreement, 1995 O.J. No. C
337/13 (Dec. 15, 1995). For convenience these decisions have been
attached to this Response as Exhibit H.
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The European Commission recognizes in its decision that other
competitors of the Atlas and Phoenix ventures will be dependent in
France and Germany on the monopoly services of FT and DT, including the
public switched telephone network (PSTN) and other reserved services
such as leased lines. Moreover, FT and DT already have very high market
shares in various types of services in their home countries that the
parties had planned to provide through Atlas and Phoenix, including
standardized low-level packet-switched data communications services.
The European Commission gives DT's share of data communications
services in Germany as 79%, and FT's share of data communications
services in France as 77%. In order for the Atlas and Phoenix
transactions to be exempted from the prohibitions of European
competition law and enabled to proceed, FT and DT accepted various
conditions and modifications to the transactions, while the French and
German governments also committed to make important changes in their
national laws.
First, the French and German governments have made a written
commitment to the European Commission to permit competition in the
provision of telecommunications infrastructure for services other than
public switched voice by July 1, 1996, and to permit full competition
for voice telephone services and all types of telecommunications
infrastructure by January 1, 1998. This early liberalization for
infrastructure used for services other than public switched voice will
authorize competitors in France and Germany to begin developing and
operating alternative telecommunications networks a year and a half
before the date of full liberalization in France and Germany, and also
considerably before the earliest time that a shift from Phase I to
Phase II could occur under the proposed Final Judgment. For Phase II to
begin in either France or Germany, there must have been, among other
things, complete removal of all legal prohibitions on competition,
which would not occur before January 1, 1998 at the earliest based on
current schedules for liberalization in France and Germany.
Second, FT is precluded from integrating its Transpac public
switched X.25 data network in France into Atlas, and DT similarly is
precluded from integrating its Datex-P public switched X.25 data
network in Germany into Atlas, until January 1, 1998, the planned date
of full liberalization. Atlas may not acquire any form of legal
ownership or control over the Transpac network in France or the Datex-P
network in Germany before that date, although certain international
operations of Transpac outside of France can be contributed to Atlas.
In essence, the European competition authorities have extended to Atlas
the prohibition on integrating the Public Data Networks into Phoenix
during Phase I that is contained in Section III.B of the proposed Final
Judgment.\4\ The Transpac and Datex-P networks in France and Germany
are to be wholly owned subsidiaries of FT and DT during the period
before they can be integrated into Atlas, while Atlas will have
subsidiaries of its own in France and
[[Page 3972]]
Germany to provide its other services. FT and DT will have the ability
to cooperate with respect to Transpac and Datex-P, using Atlas as a
manager, only in certain specified areas involving the development of
common products and technical network elements, including network
planning and information systems.
\4\ There are minor differences between these integration
prohibitions. The European authorities have opted for a fixed date
on which the prohibition terminates, whereas the termination of
Phase I is flexible and depends on the satisfaction of certain
conditions, and also can differ for France and for Germany. Also,
the definition of the Public Data Networks in Section V.S. of the
proposed Final Judgment, with respect to Germany, is broader than
the Datex-P network and also includes some other data services.
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Third, FT has committed to divest its Info AG data network in
Germany, instead of integrating it into Atlas. This responds to
concerns on the part of the EU competition authorities about loss of
horizontal competition between Info AG and DT in Germany in data
services, similar to the concern of the United States about the loss of
competition between Sprint and Infonet Services Corporation in the
U.S., which was addressed by FT's and DT's agreement to divest their
interest in Infonet.
Fourth, Atlas and Phoenix will not act as agents for the
international half-circuits of DT and FT, a change to the original
agreements of the parties. These international half-circuits will
continue to be sold by DT and FT directly.
Fifth, the non-compete agreements of the parties to the Phoenix
joint venture will not apply to long distance services, except for
competition with entities providing long distance services that are
controlled by Phoenix.
Sixth, Atlas, Phoenix, DT, FT and Sprint and their affiliates are
precluded from making a telecommunications operator's ability to use
the Phoenix international carrier services (i.e., sales of switched
transit capacity to other telecommunications carriers), or the
commercial terms on which such services are offered, conditional upon
use or distribution by that telecommunications operator of services of
Atlas, Phoenix, DT, FT or Sprint.
Seventh, DT and FT have committed directly for Atlas, and DT, FT
and Sprint have committed for Phoenix, to certain undertakings
regarding forms of behavior that could have anticompetitive effects.
These undertakings, enforceable by the European competition
authorities, are similar in many respects to the obligations that would
be made binding on Sprint and the Joint Venture directly, and
indirectly affect FT's and DT's conduct, under the terms of the
proposed Final Judgment. They do not conflict with the proposed Final
Judgment in any way.
Several of these undertakings are directed at preventing
discrimination in public switched telephone network (PSTN) and reserved
services, such as leased lines. FT and DT will be required to give
similar terms and conditions of service (including availability, price,
quality of service, usage conditions, delays for installation and
repair and maintenance) to Atlas and Phoenix and other providers of
similar services, with respect to FT's and DT's PSTN services and other
reserved services. Atlas and Phoenix are not to be granted terms and
conditions or to be exempted from usage restrictions regarding the PSTN
and other reserved services that would enable them to offer services
that competing providers are prevented from offering. DT and FT are
prohibited from discriminating between Atlas and Phoenix and any
competing service provider in connection with substantial modifications
to interfaces for reserved services or the disclosure of technical
information relating to the operation of the PSTN. DT and FT also are
prohibited from discriminating between Atlas and Phoenix and other
competitors regarding the disclosure of commercial information,
including customer information derived from operating the PSTN or
providing reserved services, that would confer a substantial
competitive advantage and is not readily available elsewhere. While
these restrictions presumably would cease to apply to particular
services as they lose their reserved status, they would continue to
apply to the PSTN with no specific time limit.
Other undertakings are intended to ensure that access to the DT and
FT national public switched data networks remains available to
competitors. These services, though not considered to be PSTN or
reserved services, nonetheless are ones for which DT and FT remain the
dominant providers in their home countries. DT and FT will be required,
as of January 1, 1996, to establish and maintain third-party access to
their public switched data networks in Germany and France on a non-
discriminatory, open, and transparent basis, for all other providers of
X.25 packet-switched data communications services. In order to ensure
such non-discriminatory access to their national public switched data
networks, DT and FT will be required to establish and maintain
interfaces based on the X.75 standard (a form of protocol for
interconnection between data networks that is commonly used as an
international standard and is suitable for the provision of end-to-end
X.25 services) or any other generally used standard interconnection
protocol that may modify, replace or co-exist with the X.75 standard.
Access based on such protocols is to be offered on publicly available
standard non-discriminatory terms including price, availability of
volume or other discounts, and quality of interconnection, and FT and
DT are required to make available to the European competition
authorities the terms of any agreements concerning access. Atlas,
Datex-P and Transpac will not be prohibited, however, from developing
additional proprietary interfaces between their networks, provided that
access granted to Atlas through such interfaces is economically
equivalent to the access that third parties are able to obtain. Apart
from a prohibition on the sharing of customers' confidential
interconnection information between Transpac, Datex-P and Atlas, which
would be lifted once these networks can be combined into Atlas, the
obligations regarding access to the public data networks do not expire
at any predetermined time.
Further undertakings are directed at preventing cross-subsidization
by FT and DT of the Atlas and Phoenix ventures as well as Datex-P and
Transpac. These obligations last until the telecommunications
infrastructure and service markets in France and Germany are fully
liberalized, as is expected to occur by January 1, 1998. All entities
formed pursuant to the Atlas and Phoenix ventures must be distinct and
separate from DT and FT. Atlas, Phoenix, Datex-P and Transpac must
obtain their own debt financing, with certain exceptions similar to
those in the proposed Final Judgment. They are also prohibited from
allocating directly or indirectly any part of their operating expenses,
costs, depreciation, or other business expenses to any parts of FT's or
DT's business units, again with provisos similar to the proposed Final
Judgment. They are required to keep separate accounting records
identifying payments and transfers to and from FT and DT, and are
prohibited from receiving any material subsidy or any investment or
payment from FT or DT that is not recorded in their books as an
investment in debt or equity.
Atlas, Transpac and Datex-P will be subject to regular auditing
obligations to ensure that any transactions between them and FT or DT
are on an arm's length basis. FT, DT, Phoenix and Atlas will also be
subject to recording and reporting obligations, in order to enable FT's
and DT's undertakings not to discriminate or cross-subsidize to be
effectively monitored by the European Commission competition
authorities. These conditions will last until full telecommunications
liberalization takes place in France and Germany.
2. The FCC Decision
On December 15, 1995, the Federal Communications Commission
announced its decision on the proposed
[[Page 3973]]
acquisition by FT and DT of 20% of the equity of Sprint, and the
formation of the ``Phoenix'' joint venture between these three
companies, under the ``public interest'' standard of the Communications
Act of 1934 and relevant provisions of that statute, including 47
U.S.C. Secs. 214 and 310(b).\5\ The FCC, similarly to the United
States, has recognized in its decision that the 20% investment in
Sprint and formation of the Joint Venture will give FT and DT
incentives that they would not otherwise have to engage in various
types of anticompetitive behavior favoring Sprint and the Joint Venture
over other U.S. competitors, potentially raising prices and reducing
service quality and innovation.\6\ Based on the recent policy shift by
the French and German governments toward competitive telecommunications
markets and the potential benefits of the transactions for consumers,
the FCC has determined that allowing these transactions to be
consummated would be in the public interest notwithstanding the present
lack of ``effective competitive opportunities'' for U.S. providers in
France and Germany. However, it has also imposed several significant
conditions on the transactions.
\5\ In the matter of Sprint Corporation Petition for Declaratory
Ruling Concerning Section 310(b)(4) and (d) and the Public Interest
Requirements of the Communications Act of 1934, as amended, File No.
ISP-95-002, FCC 95-498 (released January 11, 1996) (hereinafter
``FCC Sprint Order''). Because this document is lengthy and is
publicly available in the U.S., it has not been attached as an
exhibit to this Response.
\6\ Id., Paras. 56-57.
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First, the FCC has restricted Sprint's ability to operate new
international circuit capacity to France and Germany for either its own
use or that of the Joint Venture, beyond the existing and idle capacity
it already has to those countries on several submarine cables, until
(1) infrastructure liberalization for facilities used to provide
services other than public switched voice has actually occurred in
France and Germany (as the European Commission's settlement requires to
take place by July 1, 1996), and (2) opportunities exist in France and
Germany for basic public switched voice resale services to be provided
on a competitive basis, including international traffic between France
and Germany and the U.S.\7\
\7\ Id., Paras. 109-115.
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Second, Sprint will be subject to regulation as a ``dominant
carrier'' with respect to traffic between the U.S. and France and
Germany, due to its relationship with FT and DT, which are considered
to be dominant carriers in their home markets, until Sprint
demonstrates that there is no longer a substantial risk of
anticompetitive effects in the U.S. arising from its relationship with
FT and DT. This would mean that Sprint would be required to notify the
FCC and obtain approval whenever it seeks to add new circuits to those
countries, either for itself or the Joint Venture, whereas nondominant
carriers only need obtain approval when first commencing service to a
particular country and can thereafter add capacity freely. It would
also mean that Sprint's tariffs filed with the FCC for basic
telecommunications services, such as switched voice, to France and
Germany would be subject to longer waiting periods before taking
effect, and that Sprint would have to file quarterly traffic and
revenuer reports.\8\
\8\ Id., Paras. 103-108.
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Third, Sprint will be obligated not to accept any ``special
concessions'' directly or indirectly from any foreign carrier or
administration, including FT or DT, with respect to traffic or revenue
flows between the United States and any foreign country, including
France or Germany. Other U.S. carriers that are considered to be
affiliated with a foreign telecommunications carrier under 47 C.F.R.
Sec. 63.14 have a similar obligation. This requirement will remain in
place indefinitely, unless removed by the FCC. ``Special concessions''
are defined by the FCC to include any arrangements that affect traffic
or revenue flows to or from the United States that are offered to a
particular U.S. carrier but not to other similarly situated U.S.
carriers that are authorized to serve a particular route. 47 C.F.R.
Sec. 63/01(r)(3)(1). The FCC's decision illustrates the effect of this
prohibition with detailed examples. Sprint would be precluded from
accepting disproportionate amounts of return traffic, preferential
changes in methods of allocating traffic, or discriminatory accounting
rates from FT or DT.
Furthermore, if FT or DT were to grant an operating agreement or
marketing arrangement to Sprint for a particular type of basic service
but to withhold such agreements from other similarly situated U.S.
carriers, or only offer agreements on discriminatory terms, Sprint
would be in violation of the ``no special concessions'' requirement
were it to offer service under the special operating agreement or
marketing arrangement. Sprint will also be precluded from accepting any
discriminatory interconnection or distribution arrangements from FT or
DT, or arrangements for the joint handling of basic traffic involving
third countries that are not available to other U.S. carriers. Sprint
could not receive directly or through the Joint Venture (i) information
about FT's or DT's basic network services that had not been publicly
disclosed and that would affect U.S. carriers' provision of service,
(ii) proprietary or confidential information that FT or DT have
obtained from other competing U.S. carriers, or (iii) FT's or DT's
telephone customer information that is not also available to U.S.
competitors. In furtherance of this obligation not to accept special
concessions, Sprint will also have to obtain a written commitment from
FT and DT not to offer or provide any special concessions to Sprint or
the joint venture relating to the provision of basic telecommunications
services or facilities. Sprint also will be obligated to maintain
records on its provisioning and maintenance of network facilities and
services with FT and DT (including services or facilities procured on
behalf of Joint Venture customers), to file various types of reports
with the FCC on its numbers of circuits, revenues, numbers of messages
and minutes for originating and terminating traffic between the U.S.
and France and Germany, and to make available its contracts and
agreements with FT and DT relating to routing of traffic and settlement
of accounts on the U.S.-France and U.S.-Germany routes.\9\ These
conditions are similar to the obligations the FCC imposed on MCI in
connection with its sale of 20% of its equity to British
Telecommunications plc and formation of a joint venture in 1994.\10\
\9\ Id., Paras. 116-127.
\10\ MCI Communications Corporation/British Telecommunications
plc, Joint Petition for Declaratory Ruling Concerning Section
310(b)(4) and (d) of the Communications Act of 1934, as amended, 9
FCC Rcd 3960, 3973 (released July 25, 1994).
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Fourth, Sprint will have to obtain a written commitment from France
Telecom to lower its accounting rates for U.S.-France traffic within
two years to the levels of the lower accounting rates between U.S.
carriers and British carriers for U.S.-U.K. traffic, and between U.S.
carriers and DT for U.S.-Germany traffic. The FFC has found that the
U.S.-France rates are 28% above the level of the others and that this
difference is unjustified.\11\
\11\ FCC Sprint Order, Paras. 90-92, 131.
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Fifth, Sprint will have to file annual reports, beginning in 1996,
concerning the status of telecommunications markets and regulatory
regimes in France and Germany.\12\ These reports are intended to enable
the FCC to evaluate how far France and Germany have progressed toward
meeting the
[[Page 3974]]
``effective competitive opportunities'' criteria that the FCC has
announced it will apply generally to foreign telecommunications carrier
acquisitions of over 25% of the equity in U.S. telecommunications
carriers leading to affiliation, or other investments likely to have
competitive significance.\13\ The reports will continue until the FCC
finds that ``effective competitive opportunities'' exist in France and
Germany, and the FCC has said that it will reconsider whether the
public interest continues to be served by Sprint's authority to provide
facilities to France and Germany if effective competitive opportunities
are not available by 1998.\14\
\12\ Id., Paras. 128-29.
\13\ The ``effective competitive opportunities'' criteria are
explained fully in the FCC's decision in Market Entry and Regulation
of Foreign-affiliated Entities, IB Docket No. 95-22, Report and
Order (released Nov. 30, 1995). In summary, they are: (1) whether
U.S. carriers can, as a matter of law, offer in the foreign country
international facilities-based services, including the ability to
obtain a controlling interest in a facilities-based provider and to
offer basic International Message Telephone Service traffic; (2) the
availability of reasonable and nondiscriminatory published charges,
terms and conditions for interconnection to foreign domestic
carriers' facilities for termination and origination of
international services; (3) whether competitive safeguards exist in
the foreign country to protect against anticompetitive conduct,
including cost-allocation rules to prevent cross-subsidization,
timely and nondiscriminatory disclosure of technical information
needed to use or interconnect with carriers' facilities, and
protection of carrier and customer proprietary information; and (4)
whether there is an effective regulatory framework in the foreign
country to develop, implement and enforce legal requirements,
interconnection arrangements and other competitive safeguards,
including separation between the regulator and the foreign operator
of international facilities-based services, and the existence of
fair and transparent regulatory procedures. A favorable competitive
opportunities finding can be made if effective competitive
opportunities currently exist or it is reasonably certain that they
will be available in the near future. The FCC places greatest
emphasis on the legal ability to provide international facilities-
based service, but if any of the factors of the test are completely
absent, the FCC will deny authority to provide facilities-based
service on an international route where the foreign carrier is
dominant at its end, unless other public interest factors lead to a
different result. Id. at Paras. 42-55.
\14\ FCC Sprint Order, para. 132.
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3. Other Significant Actions by European Union Authorities
The Competitive Impact Statement addresses the European Union's
overall plans for the introduction of full telecommunications
competition by January 1, 1998, and infrastructure competition for
services other than public switched voice in 1996. 60 Fed. Reg. at
44062. Over the past few months, the Commission of the European Union
has proposed several other major directives, all of which are necessary
steps on the road to full competition and an effective regulatory
framework, and together indicate the substantial progress that is now
being made toward telecommunications competition.
On July 19, 1995, the European Commission issued a proposed draft
directive governing interconnection in telecommunications, which has
now been submitted to the Parliament and the Council of Ministers who
are responsible for adopting it.\15\ This directive comprehensively
addresses the manner in which Member States of the European Union,
including France and Germany, would be required to ensure that
telecommunications operators such as France Telecom and Deutsche
Telekom provide interconnection to their networks for other
telecommunications network and service providers. Under the terms of
this directive, FT and DT, as entities with significant market power,
would have to establish transparent, unbundled, cost-oriented
interconnection charges, and would not be able to discriminate among
providers in interconnection. They would have to publish tariffs for
their standardized interconnection services, and not simply establish
interconnection terms through commercial negotiation as is more typical
today. Moreover, where any interconnection arrangements are negotiated,
regulatory authorities would have to ensure that agreements are reached
within specified times and provide for review with published decisions.
This directive is scheduled for final adoption by the end of 1996, and
member States, including France and Germany, would have to take the
measures necessary to bring themselves into compliance before the end
of 1997, so as to have an interconnection regulatory regime in place
prior to the start of full competition.
\15\ Commission of the European Communities, Proposal for a
European Parliament and Council Directive on Interconnection in
Telecommunications, COM (95) 379 final, O.J. No. C 313/7, November
24, 1995. Although only recently published, this directive was
submitted by the Commission on August 31, 1995, shortly after the
Competitive Impact Statement was filed in this case.
---------------------------------------------------------------------------
On November 14, 1995, the European Commission also adopted a
proposed draft directive, to be acted upon by the Parliament and
Council of Ministers, to ensure a common framework in the European
Union for the grant of general authorizations and individual licenses
to provide telecommunications services by the Member States, including
France and Germany.\16\ This directive would apply to all types of
telecommunications services as they become open to competition. Under
this proposed directive, Member States would not be permitted to impose
limits on the number of licenses granted to provide particular services
or facilities, except as necessary in the case of radio-based services
because of limits on the availability of spectrum. Licensing procedures
would have to be open, transparent and nondiscriminatory, and any
denials of licenses would have to be justified and subject to appeal.
This directive is scheduled for final adoption by the fall of 1996, and
Member States would have to take measures to bring themselves into
compliance by July 1, 1997, six months before the start of full
competition, so as to enable competitors to be licensed in a timely
manner.
\16\ Commission of the European Communities, Proposal for a
European Parliament and Council Directive on a Common Framework for
General Authorizations and Individual Licenses in the Field of
Telecommunications Services, COM (95) 545, Nov. 14, 1995.
---------------------------------------------------------------------------
Other existing European Union directives governing
telecommunications services are also being updated to account for the
plans for full introduction of competition by 1998. Under proposed
changes to the existing directive governing the framework for open
network provision, announced on November 14, 1995 by the European
Commission, Member States that retain a significant degree of ownership
or control of a telecommunications provider, as France and Germany both
still do, would have to take additional measures to ensure the
effective separation of regulatory activities from activities of the
government related to ownership or control of the telecommunications
provider.\17\ The regulatory authorities would have to be both legally
distinct from and functionally independent of all organizations
providing telecommunications networks or services, effective structural
separation from any activities associated with ownership or control of
such organizations would have to exist, and rights of appeal from the
regulator to an independent body would have to be provided. These
changes to the framework directive are also scheduled for final
adoption by the fall of 1996, and Member States would have to take the
measures needed to bring themselves into compliance by the end of 1997.
\17\ Commission of the European Communities, Proposal for a
European Parliament and Council Directive amending Council
Directives 90/387/EEC and 92/44/EEC for the purpose of adaption to a
competitive environment in telecommunications, COM (95) 543 final,
Nov. 11, 1995.
[[Page 3975]]
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4. Progress Toward Competition in Germany and France
Notwithstanding these important developments at the level of the
European Union, it is also necessary to consider actions taken by the
German and French governments to move towards a competitive
telecommunications environment. European Union measures must be
transposed into law at the national level, and national regulatory
authorities have the primary responsibility for implementing and
enforcing them. Even though the European Union telecommunications
directives do not discriminate among European and U.S.-owned providers
in the rights that would be accorded to firms doing business in Europe,
the Member States retain the authority to establish the terms on which
international services to countries outside the European Union will be
provided, as discussed in the Competitive Impact Statement, 60 Fed.
Reg. at 44063. They may elect to liberalize these services partly or
entirely on their own now, or to await the results of ongoing
multilateral trade negotiations on telecommunications services.
a. Germany. The German government set out its proposals for
liberalization in March 1995,\18\ and these proposals are generally in
line with the approach being taken by the European Union. Draft
legislation for a new Telecommunications Act was to be prepared by fall
1995, and the United States understands that this process is on
schedule. Draft legislation was in fact released by the German Post and
Telecommunications Minister in June 1995 and now is under consideration
at the highest levels of the German government. The legislation
originally was scheduled to be adopted by both houses of the German
federal legislature by summer 1996, and now is expected to be passed
even earlier, in the late spring of 1996. By the spring of 1997, even
more rapidly than the European Union would require, the German
telecommunications regulator expects to have awarded licenses to
applicants, and it will not restrict the numbers of licenses made
available, except where necessary due to scarcity of resources such as
frequencies, nor will it impose restrictions on foreign investment in
licensees. The new telecommunications law will take effect by January
1, 1998. As part of the new legislation, the German government also is
considering various alternatives to create a more independent
telecommunications regulator.
\18\ Federal Ministry for Post and Telecommunications, Corner
Stones of a Future Regulation Framework in the Telecommunications
Sector, March 27, 1995.
---------------------------------------------------------------------------
Having agreed to authorize competition for infrastructure used to
provide services other than public switched voice, the German
government is also preparing legislation for this partial early
liberalization, which is planned to be adopted by the German federal
legislature by the spring of 1996, apparently as part of the larger
telecommunications reform law. The German government informed the FCC
by letter on October 17, 1995 that it is committed to allowing
alternative facilities providers to commence operations as of July 1,
1996.\19\ Also, in October 1995, the German telecommunications
regulator adopted a licensing regulation, which is to be used to
consider applications to operate competing telecommunications systems
pending the enactment of the new law.\20\
\19\ FCC Sprint Order, para. 67, citing Letter from Dr. Wolfgang
Boetsch, Federal Minister for Posts and Telecommunications, to Reed
E. Hundt, Chairman, Federal Communications Commission (Oct. 17,
1995).
\20\ Regulation on the Opening of Markets for Services as well
as on the Content, Scope and Procedure of Licensing in the
Telecommunications Sector, October 31, 1995.
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The German government has confirmed, in a letter from the
Bundesministerium fur Post und Telekommunikation (BMPT), the German
telecommunications regulator, to the Department of Justice,\21\ that
international telecommunications infrastructure, including submarine
cable ownership interests, will be included within the partial
liberalization of infrastructure planned to occur by July 1, 1996. At
that time, providers other than Deutsche Telekom will acquire the right
to set up and operate transmission lines for all services other than
public voice telephony. The BMPT has stated that Germany does not
require special licenses for submarine cable landing rights, and there
will be ``non-discriminatory, open and transparent access regulation in
Germany for submarine cables,'' without regard to the nationality of
the operator or owner of the cable. Thus, U.S. firms should lawfully be
able to acquire interests in the German end of submarine cables by mid-
1996 and use such facilities for services other than public switched
voice. The BMPT also has informed the Department that it intends to
issue a draft regulation governing interconnection with public
telecommunications networks immediately following the entry into force
of the proposed new Telecommunications Act in 1996, although the draft
of this regulation is not yet prepared and the exact date of its
submission has not yet been scheduled.
\21\ Letter from Dr. Witte, BMPT, to Carl Willner, Department of
Justice (December 13, 1995). This letter is attached to this
Response as Exhibit I.
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In Germany, there are several large firms that are already
providing some types of telecommunications services now open to
competition, and have announced plans to become telecommunications
carriers once they are able to obtain licenses, including Mannesmann/
CNI, Thyssen, Vebacom, RWE and VIAG. Mannesmann is the major competing
cellular radio provider and Thyssen also has a mobile radio license,
while the other firms all have some amount of wireline and fiber-optic
infrastructure that is used for their own internal or separate business
purposes today and might be offered for telecommunications networks
were they permitted to compete in this area. The German national
railway, Deutsche Bahn, also has internal telecommunications
capabilities and rights of way that it plans to make available to
others for telecommunications networks. Vebacom and VIAG have already
formed international alliances with the principal British
telecommunications carriers, British Telecom and Cable & Wireless. In
some major German cities, such as Frankfurt and Cologne, authorization
has already been granted for firms other than Deutsche Telekom,
including U.S. providers such as MFS, to establish local
telecommunications networks serving business users.\22\ These
developments do not mean that Deutsche Telekom is in imminent danger of
losing its dominant position in German telecommunications markets. For
the reasons indicated in the Complaint and Competitive Impact Statement
in this case, it is reasonable to expect that DT will continue to
exercise market power for some time. But these developments do indicate
that actual and potential competitors exist that may be willing to take
advantage of early infrastructure liberalization in Germany and begin
to develop alternative networks in advance of full liberalization.
\22\ These networks are being established under an exception to
the general DT monopoly still in effect on telecommunications
infrastructure that permits separate facilities to be established to
provide non-monopoly services, but only with a 25 kilometer limit.
At present they must use DT leased lines for interconnections
outside the 25 kilometer area.
---------------------------------------------------------------------------
b. France. Progress toward liberalization in France has not been as
[[Page 3976]]
rapid as in Germany. Privatization of FT, if it occurs at all, will
only be partial, with the French government retaining a controlling
interest. Unlike Germany, no privatization legislation has been
introduced let alone enacted. Nor has the process of adopting
legislation governing the transition to full competition progressed as
rapidly as in Germany.
An important step, however, has been taken with the publication by
the French Ministry of Information Technologies and Postal Services and
the French telecommunications regulator, Direction Generale des Postes
et Telecommunications (DGPT), in October 1995, of a consultative
document outlining the steps to be taken and the timetable planned for
introduction of competition.\23\ This document indicates that the
French government plans in March 1996 to introduce telecommunications
reform legislation for the full introduction of competition by January
1, 1998, with passage of the legislation by Parliament expected during
the spring of 1996. By the end of 1996, regulations reflecting the new
law are to be established, along with the principles for
interconnection and licensing of competitors. Licenses are to be issued
to competing telecommunications operators in the spring of 1997. The
consultative document outlines the types of services for which
individual licenses, as opposed to general authorizations, will be
required. According to the DGPT, the number of licenses for services or
facilities should not be limited, unless this is justified by scarcity
of resources such as frequencies. Some telecommunications operators,
including France Telecom, will be required to publish their
interconnection terms in advance, rather than relying merely on
commercial negotiation, and the structure and pricing of their
interconnection terms will be subject to regulatory approval based on
auditable cost accounts. France Telecom will be expected to issue its
interconnection tariffs by July 1997, according to the consultative
document. This document also addresses the need for changes to give the
telecommunications regulator greater independence as part of the
opening of the French telecommunications markets to full competition
and considers options to do so, suggesting that this could be done as
early as January 1, 1997.
\23\ Ministry of Information Technology and Postal Services, New
Ground Rules for Telecommunications in France, October 1995.
---------------------------------------------------------------------------
In one important respect, partial liberalization of infrastructure
for services other than public switched voice, France is able to move
more rapidly than Germany, since the regulator already has some
statutory authority to permit greater competition without the need to
pass new legislation as in Germany. The regulator has already granted
experimental licenses for some competitive pilot projects, and one U.S.
firm, MFS, has been authorized to establish competing local fiber-optic
infrastructure for closed groups of business users in Paris. The French
government has informed the FCC, by letter of October 20, 1995, that
legislation to provide for alternative infrastructure liberalization
for services other than public switched voice will be introduced in the
French Parliament in the spring of 1996 and will take effect by July 1,
1996.\24\
\24\ FCC Spring Order, para.65, citing Letter from Bruno
Lasserre, Director General, DGPT, to Reed E. Hundt, Chairman,
Federal Communications Commission, at 2 (Oct. 20, 1995).
---------------------------------------------------------------------------
To date, not as many large potential providers of competing
telecommunications networks have emerged in France as in Germany. The
French telecommunications regulator anticipates that France Telcom's
dominant position will continue for some time.\25\ One major firm that
plans full-scale entry into liberalized telecommunications services and
infrastructure, however, is Compaignie Generale des Eaux (CGE). This
firm is already a provider of cable television infrastructure as well
as the largest shareholder of France's principal competing mobile
telephone services provider, SFR, and provides various types of
business telecommunications services that are already open to
competition in France. AT&T and the Unisource partners (the principal
telecommunications providers in Sweden, the Netherlands, Spain and
Switzerland) have reached an agreement to form a strategic alliance
with CGE's telecommunications subsidiary IRIS, much as British Telecom
has done with VIAG and Cable & Wireless with Vebacom in Germany. There
are other cable television companies in France such as Lyonnaise
Communications that are considering entering the telephone business
using their networks, and the French national railroad, SNCF, also has
an internal telecommunications network including fiber-optic cable that
it plans to make available to telecommunications network providers.
\25\ The October 1995 consultative document states that France
Telecom will continue to have ``strong dominant market positions''
after 1998 in several important telecommunications market sectors
and indicates that there may even be de facto monopolies in certain
services or market segments. Ministry of Information Technology and
Postal Services, New Ground Rules for Telecommunications in France,
at 24.
---------------------------------------------------------------------------
In France, unlike Germany, it appears that international
telecommunications facilities to the United States may not be
liberalized automatically with the rest of the opening to partial
infrastructure competition due to take place on July 1, 1996 under the
agreement with the European Union. Although the French government has
stated in a letter from DGPT to the Department of Justice \26\ that it
``fully supports opening up all telecommunications services in all
markets,'' whether this liberalization actually occurs in the case of
international half-circuits and submarine cable landing rights for
competing providers on the France--U.S. route will depend on the
outcome of ongoing multilateral trade negotiations or separate
bilateral agreements. However, draft legislation in France that will
permit the granting of various experimental telecommunications service
licenses in 1996, including public voice telephony services in
geographically limited areas, does not contain any foreign ownership
restrictions for wireline networks.
\26\ Letter from M. Bruno Lasserre, Director General of DGPT, to
Carl Willner, December 8, 1995. This letter is attached to this
Response as Exhibit J.
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II
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. Sec. 16(b). In this
case, the sixty-day comment period commenced on August 24, 1995, and
terminated on October 23, 1995. During this period, the United States
received comments by seven competitors of Sprint and the proposed joint
Venture or other interested persons, including AT&T Corporation, MCI
Communications Corporation, BT North America Inc., Cable & Wireless
Europe, ACC Corp., Esprit Telecom United Kingdom Limited, and Prof.
Charles M. Haar of the Harvard University Law School.\27\ The United
States responds herein to these comments. Upon publication in the
Federal Register of these comments and the following response of the
United States to these comments, pursuant to 15 U.S.C. Sec. 16(d) of
the APPA, the procedures required by the APPA prior to entry of the
proposed Final Judgment will be completed. The United States expects to
move for entry of the proposed Final Judgment after the public comments
and this response of
[[Page 3977]]
the United States have been published in the Federal Register and the
Joint Venture has been formed and has executed the Stipulation, binding
it as a party to the proposed Final Judgment under the terms specified
in the Stipulation.\28\
\27\ These comments are attached as Exhibits A-G.
\28\ Until these events have taken place, and the United States
has certified that the requirements of the Tunney Act have been met,
the Court should not rule on entry of the proposed Final Judgment.
---------------------------------------------------------------------------
III
Response to Public Comments
In consenting to the entry of the proposed Final Judgment in this
case, the United States took into account various considerations
bearing on the risks of competitive harm affecting U.S. consumers and
the desirability of further litigation. These included the size of the
planned 20% investment by Deutsche Telekom and France Telecom in
Sprint, the potential for new services to be offered and other
efficiencies realized by the Joint Venture, the increasing progress
toward removal of legal and practical barriers to telecommunications
competition in France and Germany, and the involvement of foreign
telecommunications providers subject to distinct regulatory regimes in
their home countries. Competitive Impact Statement, 60 Fed. Reg. at
44075.
The public comments express various types of concerns about the
interpretation or the adequacy of the proposed Final Judgment, and
several contend that the Final Judgment should not be entered unless
substantial changes are made. It appears that many of these concerns
are based on misunderstandings or uncertainties on the part of the
commenters about the meaning of provisions of the proposed Final
Judgment or their application to the agreements between Sprint, FT and
DT, and conduct in which they might engage. The United States
accordingly provides further clarification of the meaning and
application of several provisions of the proposed Final Judgment below.
Some other concerns expressed in the public comments are simply not
germane to the problems associated with these transactions that are
identified in the Complaint and Competitive Impact Statement in this
case. It is not the role of the Court, in a proceeding under the Tunney
Act to approve an antitrust consent decree, to each beyond the terms of
the complaint and consider whether other cases might have been brought
and other violations alleged. United States v. Microsoft Corp., 56 F.3d
1448, 1459-60 (D.C. Cir. 1995).
A number of the comments question whether there is sufficient
relief in the proposed Final Judgment to remedy the problems alleged by
the United States, contending that further modifications should be
made. These commenters overlook, however, the context in which these
transactions take place. Two other government agencies in addition to
the United States Department of Justice have reviewed these
transactions, and have imposed additional relief that complements and
reinforces in important respects the terms of the proposed Final
Judgment. Moreover, an ongoing process of telecommunications reform and
opening to competition is taking place in the European Union, France
and Germany. In ruling whether this proposed Final Judgment is
sufficient to satisfy the ``public interest'' standard of the Tunney
Act, the Court should not limit its consideration to whether all of the
potential competitive problems arising from the monopoly rights and
market power of Deutsche Telekom and France Telecom in their home
countries are fully corrected within the four corners of the proposed
Final Judgment alone. Rather, it should ask whether the proposed Final
Judgment satisfies the ``public interest'' bearing in mind that it will
operate together with all of the other relief imposed by the European
Union competition authorities and the FCC, and with the liberalization
measures now planned in Germany and France. When the issue is properly
understood in these terms, it is apparent that the proposed Final
Judgment does indeed promote the ``public interest.''
Because the same types of issues are raised by many of the
commenters, this Response is structured in terms of the issues raised
rather than separately addressing each of the comments filed.
A. Transition from Phase I to Phase II of the Proposed Final Judgment
Several commenters, including AT&T, MCI, BT North America, Esprit
Telecom and Cable & Wireless, raise the issue of whether the proposed
Final Judgment will be effective in light of the possibility that the
transition from Phase I to Phase II could occur while DT and FT, though
deprived of their legal monopolies, still have de facto market power in
Germany and France. They point out that effective competition could
take substantial time to develop after removal of the monopoly rights
and licensing of competitors. Some, including BT, Cable & Wireless and
Esprit Telecom, are also concerned that the decree would not ensure
that effective regulatory regimes are in effect in France and Germany
at the time the transition to Phase II takes place to ensure rights
such as interconnection with the networks of the dominant carriers.
AT&T and MCI favor modifying the decree to keep the Phase I
restrictions in effect until ``actual'' or ``effective'' competitive
alternatives are found to exist in France and Germany, while BT
proposes keeping the various Phase I restrictions in effect for the
entire duration of the decree, essentially eliminating the distinction
between Phase I and Phase II.\29\ Esprit and Cable & Wireless also take
the position that alternative infrastructure must be in place in France
and Germany before these transactions are implemented, or at least
before the Joint Venture is formed.
\29\ Because many of BT's observations on the various provisions
of the proposed Final Judgment are in fact reiterations of this same
argument, not all of BT's comments about particular provisions of
the decree are separately discussed in this Response.
---------------------------------------------------------------------------
The United States has no fundamental disagreement with the
commenters on the importance of effective competitive alternatives, or
the crucial significance of the ability of competitors to interconnect
their networks and facilities with those of DT and FT on reasonable,
transparent and non-discriminatory terms. Nor does it disagree with the
desirability of having effective regulatory regimes to complement the
protections provided by competition, and afford a recourse to
competitors who experience anticompetitive practices by DT and FT. But
the United States parts company with the commenters at their evident
assumption that all of these protections must be contained within the
four corners of the proposed Final Judgment itself for it to be deemed
in the ``public interest.''
The proposed Final Judgment operates in conjunction with the relief
imposed by the European Commission and the FCC, and the various
liberalization measures in the process of being enacted by the EU and
the French and German governments. Early liberalization for provision
of competing infrastructure for non-monopoly services, to take effect
on July 1, 1996 in France and Germany, will give potential competitors
the opportunity to begin establishing alternative networks a year and a
half before the earliest time that Phase I is likely to expire, making
possible the ``actual'' or ``effective'' competition that AT&T and MCI
desire.
Because the EU and the German and French governments have all
announced that they will be adopting open
[[Page 3978]]
licensing policies and will not restrict the numbers of licenses
(except where necessary due to limits on radio frequencies, which would
not affect landline fiber-optic networks), potential providers of
alternative networks should not be deterred from entering the market
now by the fear of being denied full use of their network for voice
services for want of a license when full liberalization occurs.
Moreover, both the German and French telecommunications regulators plan
to license competitors during 1997, enabling them to prepare to provide
services in advance of full liberalization.
BT is mistaken in believing that Phase I could terminate if only
one competitor is allowed to provide competing facilities-based
switched voice services in France and Germany. In fact, the definition
of Phase II of the proposed Final Judgment is not intended to condone
any form of legal duopoly (such as still exists in the U.K. for
international facilities-based services but has otherwise been ended
there). Section V.Q specifies that among the conditions necessary for
Phase II to be reached, France and Germany must have ``removed all of
the legal prohibitions'' on competing provision of public switched
domestic and international voice services, and construction, ownership
or control of both domestic and international telecommunications
facilities and the use of such facilities to provide any services. The
existence of artificial restrictions on the numbers of domestic or
international licenses available for either telecommunications services
or facilities in France or Germany would mean that the conditions for
moving from Phase I to Phase II in that country would not be
satisfied.\30\ Moreover, should either France or Germany decline to
remove all of the legal prohibitions on competition in international
services and facilities to and from the U.S., even if liberalization
within the EU has taken place as required by the planned directives,
the transition to Phase II still would not take place for that country.
Since both France and Germany have announced that they will grant
licenses in 1997 under their planned open policies, and have not shown
themselves to date unwilling to license large foreign firms to provide
the types of services already open to competition (as evidenced by BT's
ability to provide data services in both France and Germany today),
BT's suggestion that the French and German governments might in
practice license only a small number of ineffectual competitors seems
conjectural.
\30\ This would not preclude France or Germany from having a
limited number of licenses available for radio-based services
justified for objective reasons of spectrum scarcity.
---------------------------------------------------------------------------
The concerns expressed by commenters about the lack of an effective
system of transparent and reasonable interconnection with FT and DT are
addressed during Phase I by the nondiscrimination requirements of
Section III.D as well as the provisions ensuring standardized access
protocols in Sections III.H and III.I. The EU's planned interconnection
directive will require Member States, including France and Germany, to
have interconnection regimes in place that comply with the directive
before January 1, 1998, the earliest that Phase I is likely to expire.
Both the French and German telecommunications regulators are planning
to have new interconnection regimes based on the EU principles in
effect in their countries before that time.
The EU and the French and German governments all have recognized
the need for more independent regulatory authorities where state
ownership of telecommunications carriers continues, as will be the case
for several years in Germany and indefinitely in France. Both France
and Germany are contemplating changes to their regulatory systems
before 1998 to address this problem. In the interim, the full
protections of this decree and the EU settlement dealing with the
various risks identified by the commenters, including discrimination
and cross-subsidization, will be in effect as independent safeguards
against anticompetitive conduct. Some of the EU's safeguards, in
particular those involving nondiscrimination in access to and use of
the FT and DT PSTNs and availability of standardized interfaces for
Transpac and Datx-P, would continue beyond the date of full
liberalization in France and Germany as they have no predetermined time
limits. The FCC's general prohibition on ``special concessions,'' also
will be available to reinforce nondiscriminatory interconnection
rights, and the FCC's ability to act under its policy is not time-
limited.
It is not practical or necessary for the United States antitrust
authorities to maintain indefinitely the degree of oversight of the
relationship between DT, FT and the Joint Venture contemplated by Phase
I of the proposed Final Judgment, taking into account the clear
policies of moving toward full liberalization and more effective
regulation within a definite time that have been announced by the EU
authorities and the governments of France and Germany, and the
existence of other regulatory authorities, including the FCC, BMPT in
Germany and DGPT in France, that have ongoing responsibility for
regulatory oversight of the telecommunications industry. Fundamentally,
what is at stake here is the reasonableness of the United States'
judgment under the ``public interest'' standard that the transition to
more effective competition and better regulatory safeguards is likely
to continue to move forward in a reasonable time in France and Germany,
so that it is not necessary to stop these transactions altogether or
substantially alter the terms of the proposed settlement in order to
safeguard against DT and FT using their continuing market power in
anticompetitive ways to favor Sprint and the Joint Venture. This
judgment continues to be reasonable, given that the policies and
timetables that the EU and the French and German governments have
announced for the transition to full competition include not only
removal of legal barriers to competition and licensing of competitors,
but also the other key measures such as an interconnection regime that
are needed for real competition to develop. Moreover, AT&T, BT and
Cable & Wireless all have been forming strategic alliances with the
large firms that have entered telecommunications service markets in
Germany or France and are planning networks in anticipation of full
liberalization and licensing of competing providers. These alliances
make available to the German and French partners resources, expertise
and international access to customers that can help to make them more
effective rivals to DT and FT.
The judgment that these transactions should not be stopped, given
the progress of the liberalization process, is shared by the FCC and
the European Commission. These authorities have also shared the concern
of the United States about the ongoing ability of FT and DT to exercise
market power to the detriment of competition, and have imposed their
own remedies and safeguards to help ensure both that liberalization
advances and that no harm occurs to international telecommunications
competition during the transition period. In light of the circumstances
of this transaction and the actions taken by other authorities, the
United States does not believe that extending Phase I safeguards for
several more years, imposing some form of ``effective competition''
test in the proposed Final Judgment, or precluding the transactions
until significant
[[Page 3979]]
alternative infrastructure competition is ongoing are necessary steps
to protect the ``public interest.'' The United States will retain the
ability under this Final Judgment, pursuant to Section VIII, to seek
modifications should new events, such as any major breakdown of the
transition to competition underway in France and Germany, indicate the
need for additional measures within the context of the Final Judgment
to prevent substantial harm to competition and U.S. consumers.
B. Opening to Voice Resale Competition in France and Germany
ACC contends that entry and the effective date of the Final
Judgment in this case should be conditioned on DT and FT agreeing to
open their public switched voice services to resale competition. These
services currently are provided on a monopoly basis in France and
Germany, though DT and FT apparently could voluntarily open these
services to some resale competition. The United States agrees with ACC
that resale competition at the German and French ends of international
routes with the U.S. would likely benefit United States consumers of
international services to France and Germany, and indeed the FCC has
made this one of the conditions for the removal of the freeze imposed
on Sprint's ability to add circuits to France and Germany, in order to
limit Sprint's advantage over other U.S. providers from being the only
carrier with allies that can provide end-to-end service between the
U.S. and France and Germany. But the question for purposes of this
Tunney Act proceeding is whether, in light of the other restrictions in
the proposed Final Judgment as well as the FCC's action and the
announced intention of the European Union, Germany and France to remove
all restrictions on voice competition by 1998, it is necessary to
impose such a condition as part of this decree to prevent some
lessening of competition that would otherwise occur. The United States
does not view this as necessary for the decree to accomplish its
purposes. The transition from Phase I to Phase II cannot occur for
either Germany or France under this decree while any form of
prohibition on voice competition, resale or facilities-based, remains
in effect in that country. During Phase I, ACC and other prospective
U.S. international providers of resale services will be able to avail
themselves of all the protections against discrimination in Section
III.D, if Germany or France permits resale competition (as the FCC's
decision indicates is already legally permissible to some extent, based
on representations by the German and French governments \31\) but DT or
FT acts to favor its own affiliates over competitors in PSTN
interconnection, leased lines, or other FT or DT Products and Services
that would be used by switched voice resellers.\32\ Moreover, during
Phase I and Phase II, Section II.C of the proposed Final Judgment will
ensure that neither Sprint nor the Joint Venture provide voice resale
services, or any other type of services, or make facilities available
to FT or DT to do so (other than under existing bilateral correspondent
agreements that have also been made available to other U.S.
competitors), if competitors cannot obtain licenses in France and
Germany.
\31\ FCC Sprint Order, para. 112.
\32\ Contrary to the assertion of Cable & Wireless, the proposed
Final Judgment's protections are not limited only to ``reserved''
monopoly services such as public switched voice. Most of the
safeguards are defined in terms of FT and DT Products and Services,
and Section V.L. expressly states that the services defined as being
within this category will remain so regardless of whether the
services are considered to be reserved exclusively to FT or DT under
French or German law. Other safeguards, including Sections III.B.
and III.I, apply to Public Data Networks, which are legally open to
competition in France and Germany and are not even listed as FT and
DT Products and Services.
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C. Non-Exclusive Licensing Requirement
BT proposes a number of changes to Section II.C, as does Esprit
Telecom. This provision ensures that neither Sprint nor the Joint
Venture receive exclusive licensing advantages directly from French or
German authorities or indirectly by affiliation with FT or DT, and that
neither Sprint nor the Joint Venture provide facilities to FT or DT
enabling them to offer to the United States any services for which they
have exclusive licenses in France or Germany, other than existing
correspondent services that other U.S. providers can also offer under
operating agreements with FT and DT. Some of the changes recommended by
BT are already addressed implicitly within the language of the existing
provision, while the United States believes that the remaining
modifications are not necessary for this provision to accomplish its
purposes.
A principal concern for BT is the language in Section II.C.3(i)
requiring that, before Sprint, the Joint Venture, DT or FT are able to
provide an international telecommunications service pursuant to an
individual license granted by the French or German governments, ``one
or more'' other U.S. international telecommunications service providers
also have received a license. BT would prefer that at least three other
licenses be granted before the Joint Venture be allowed to offer a
service. However, BT's fear that under this provision the French or
German governments might be able to mandate a duopoly, or arbitrarily
delay granting licenses to all competitors but one, is not consistent
with other language of Section II.C.3 or with the licensing policies
announced by the French and German governments. Section II.C.3 also
mandates, for any services that require individual licenses in France
or Germany, that ``established licensing procedures are in effect as of
the time of the offering of the service by which other United States
international telecommunications providers are also able to secure a
license.'' This means, as the United States and defendants have agreed,
that there must be licensing procedures in place that are reasonable
and neutral, that do not discriminate among providers or restrict the
entry of U.S. providers, and that do not arbitrarily limit the number
of licenses available. Clearly a duopoly licensing scheme for
international services would not meet the terms of this provision, for
once the one other license were awarded to a French or German firm,
United States providers would not be able to secure a license. In any
event, the EU authorities plan to mandate, and both the French and
German governments have indicated that they will adopt, open licensing
schemes that would meet the above criteria, and the French and German
telecommunications regulators will make their decisions on licensing
before 1998. Moreover, under Section II.C.3(ii), which ensures that
where Sprint, the Joint Venture, FT or DT applies for a license first
other competitors applying later can receive their licenses within no
less time than was needed for the first license to be granted, the
``reasonable time'' provision can mean in particular cases that the
time to grant additional licenses should be even less than for the
first licensee, whose application presumably raised the most difficult
regulatory issues about the service, if any.
BT expresses apprehension that the French or German governments may
deny or fail to act on license applications of competitors who seek a
license for a particular service before the Joint Venture does, so as
to delay their entry until the Joint Venture is ready to enter the
market. It does not, however, suggest a practical means of addressing
this concern, since United States authorities are not in a position to
direct the French or German governments to grant a license to any
particular provider, but only to ensure that the parties to the
transactions are not given
[[Page 3980]]
an advantage over others in the timing of their licenses. The United
States also believes that Esprit's proposal to require that German and
French regulators commit to some expedited schedule for licensing, with
suspension of Joint Venture services while any competitor applications
have been pending for over 60 days, is impractical and should not be
adopted, as it could perpetually postpone the entry of the Joint
Venture into the market as each new applicant comes forward. In fact,
under the proposals put forward by the EU authorities and the French
and German governments, most types of telecommunications services will
be subject to class licenses that will not require any individual
approval. BT also recommends that the full range of regulatory reforms
in France and Germany be in place before activities of the Joint
Venture are permitted to commence under this provision. The United
States continues to believe, however, that the service-specific
approach is preferable. For example, if reasonable, nondiscriminatory
open licensing procedures are in effect by which competitors can obtain
licenses to operate a data service, it does not appear necessary or
desirable to forbid the Joint Venture from offering that service to
consumers under II.C. because rules are not yet in place governing a
voice service.
D. Facilities Ownership Provisions
BT seeks clarification of the meaning of several aspects of
Sections III.A and III.B, which preclude during Phase I any ownership
or control by Sprint or the Joint Venture of (i) facilities in France
or Germany legally reserved to FT or DT, (ii) international half-
circuits terminating in France or Germany used for U.S.-France or U.S.-
Germany telecommunications services, or (iii) the Public Data Networks,
as defined in Section V.S.
The United States agrees with BT that the concept of ownership and
control in this provision includes Indefeasible Rights of Use (IRUs),
so that Sprint or the Joint Venture could not acquire IRUs in German or
French half-circuits while other providers legally could not do so. The
exclusion for ``publicly available leases or other publicly available
uses'' in Section III.A was simply meant to ensure that the definition
of ``control'' was not interpreted here to preclude Sprint or the Joint
Venture from such normal forms of generally available usage as leasing
a private line under tariff. Moreover, as a general matter, the
preclusion on Sprint or the Joint Venture acquiring ownership or
control over any facilities legally reserved to FT or DT would mean
that Sprint and the Joint Venture could not acquire such interests in a
type of facility (e.g., submarine cable) or a form of ownership or
control that remained reserved, even if some other type of facility
that might compete with it in some respects (e.g., a privately owned
satellite) or some other form of ownership or control of the same
facility is not reserved. The restriction on ownership of international
half circuits, with the ``aggregate quantity'' exception, under Section
III.A(ii) is in addition to the prohibition on ownership or control of
reserved facilities, not an alternative to it. The United States does
not agree with BT, however, on the interpretation of the ``aggregate
quantity'' exception as limited to the quantity of half-circuits held
by any other single provider. The FCC's freeze on operation of new
capacity by Sprint on the U.S.-France and U.S.-Germany routes will help
to counter BT's expressed fear that Sprint or the Joint Venture would
be able to use a quantity of circuits far greater than those of any
other single provider. Nor does the United States agree with BT that
modification of the restriction on international half-circuits ``where
plaintiff and defendants agree that meaningful competition exists'' can
only be done after public comment and hearing procedures, but there is
nothing to preclude the United States from seeking information from
other interested persons before agreeing to a modification.
E. Antidiscrimination Provisions
1. ``Steering'' of Customers to Phoenix and Sprint
AT&T, MCI and Cable & Wireless all object to a provision of the
Joint Venture Agreement between Sprint, FT and DT, Section 10.6(b).
They are concerned that this provision would require DT and FT, when
customers approach them for international facilities or services over
which they have monopolies in their home countries, such as half-
circuits, to take measures to ``steer'' the customers to Sprint or
Phoenix to provide the U.S. end of these international facilities or
services, i.e., induce them to obtain the service from the Joint
Venture and disclose their identities to the Joint Venture, even if
they would prefer to use another U.S. carrier. AT&T requests that the
anti-discrimination provisions of the proposed Final Judgment in
Section III.D be clarified to preclude such activity.
AT&T has correctly understood the intent of Section III.D of the
Proposed Final Judgment. Sprint and the Joint Venture are precluded by
Section III.D from receiving more favorable terms from FT or DT than
other similarly situated United States international telecommunications
providers with respect to any FT or DT Products and Services, and are
also precluded from benefitting from any more favorable term that FT or
DT offer to any customer of FT or DT Products and Services, conditioned
on Sprint or the Joint Venture being selected as the United States
provider of a telecommunications or enhanced telecommunications
service. FT or DT Products and Services, under Section V.L, are defined
as correspondent services, transit services, leased lines or
international half circuits, and interconnection to the PSTNs provided
by FT or DT in France or Germany, or between the United States or
France and Germany, regardless of whether the service is exclusively
reserved to FT or DT as a matter of law. Accordingly, if FT or DT were
to ``steer'' customers of FT or DT Products and Services to Phoenix or
Sprint in the manner originally contemplated by Section 10.6(b), Sprint
and the Joint Venture would be placed in violation of Section III.D of
the Final Judgment. In order to eliminate any confusion on this point,
Sprint, FT and DT have agreed to amend Section 10.6(b) of the Joint
Venture Agreement, deleting any requirement that customers of FT or DT
Products and Services be ``steered'' to the Joint Venture.\33\ The FCC
also has stated that its ``no special concessions'' requirement would
preclude such ``steering'' with respect to basic services such as
private lines.\34\
\33\ Letter from Kevin R. Sullivan to Carl Willner, Nov. 21,
1995, and attached amendment to Phoenix JVA Section 10.6(b). This
letter and the modifying language are attached to this Response as
Exhibit K.
\34\ FCC Sprint Order, para. 125.
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2. Effect of Exclusion of DT and FT as Parties
BT objects to the exclusion of DT and FT as parties to the proposed
Final Judgment, even though BT similarly is excluded as a party under
the separate decree governing its joint venture with MCI. BT's
particular concern is that if the antidiscrimination provisions of
Section III.D are read to include some form of ``knowledge'' or
scienter requirement, it could prove difficult or impossible to enforce
them without the ability to get information directly from FT and DT.
BT's concern is based on a misunderstanding of the
antidiscrimination provisions of the proposed Final Judgment. There is
no requirement that Sprint or the Joint Venture have known of any
[[Page 3981]]
discrimination, for a violation of Section III.D.1 or III.D.2 to be
found. Rather, it is merely necessary that the discrimination have
occurred, as defined in Section III.D, for the United States to take
action to enforce the decree. Indeed, in the negotiations leading to
the proposed Final Judgment, the concept of requiring some knowledge of
discrimination on the part of Sprint or the Joint Venture was
explicitly rejected.\35\ Ordinarily, whether discrimination has
occurred would be evaluated by comparing the terms made available by DT
or FT to a complaining competitor (with which it would be familiar)
with the terms made available to Sprint or the Joint Venture (which
could be ascertained using the visitorial and compliance powers of
Section VI), and the disclosure requirements of Section II.A would
facilitate detection and reporting of such discrimination by
competitors. Thus, the United States reasonably concluded that the
antidiscrimination provisions of the proposed Final Judgment were
adequate without making DT and FT parties to the decree.
\35\ Issues of knowledge would thus only come into question to
the extent that they are relevant under established legal principles
to particular forms of culpability or sanctions, i.e., criminal
contempt, but would not affect civil enforcement.
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3. Other Issues Concerning the Antidiscrimination Provisions
BT recommends that Section III.D.1 be clarified to ensure that the
protection against discrimination applies to all similarly situated
providers. The United States agrees that the language prohibiting
Sprint and the Joint Venture from obtaining FT and DT Products and
Services on terms ``more favorable * * * than are made available to
other similarly situated United States international telecommunications
providers'' means that no similarly situated provider can be disfavored
in any of the ways proscribed by this provision, even if some other
similarly situated providers are being treated in the same way as
Sprint and the Joint Venture.
BT also proposes that Section III.D.2's prohibition on Sprint or
the Joint Venture receiving any ``benefit'' from more favorable terms
offered by FT or DT to customers of FT or DT Products and Services,
conditioned on Sprint or the Joint Venture being selected as a service
provider, be clarified to apply to situations where FT or DT is acting
as the distributor for the Joint Venture, and to cover both implicit
and express conditioning. The United States agrees that Section III.D.2
reaches all such conditioning of terms for FT or DT Products and
Services, express or implicit, and was intended to apply to situations
where FT and DT are distributing Joint Venture products and services.
Esprit Telecom urges that DT and FT should be prohibited from
providing leased lines for Joint Venture services unless such lines are
provided in a nondiscriminatory manner, including equal treatment on
all terms such as price and provisioning intervals, to all competitors.
This is already accomplished by Section III.D, since leased lines are
expressly treated as FT and DT Products and Services by Section
V.L(iii). Esprit also contends that DT and FT should be required to
provide leased lines at wholesale, cost-based rates to competing
carriers on a priority basis. The proposed Final Judgment does not
mandate that leased lines be provided at any particular price level,
nor would it be practical to do so for FT's and DT's leased lines,
which are located outside the U.S., are under the regulatory
supervision of foreign authorities and are also subject to EU
directives on open network provision and the terms of provisioning of
leased lines. While the United States is cognizant of the evidence that
FT's and DT's leased lines are priced far above U.S. levels and are
generally provided much more slowly than in the U.S., the concern of
the United States in this case is to ensure that neither those nor
other potential abuses of FT's and DT's monopoly positions lead to
advantages for Sprint or the Joint Venture that could harm competition.
This Clayton Act case is not a vehicle for addressing all difficulties
that competitors may face in doing business in France or Germany or all
harms that U.S. consumers may experience as a result of having to use
the services of the DT and FT monopolies. Whatever the prices at which
leased lines may be provided in France or Germany, or the time needed
to provide them, Sprint and the Joint Venture will not fare better than
other competing providers under the terms of this proposed Final
Judgment. Moreover, as competition develops in France and Germany due
to alternative infrastructure liberalization in 1996 and full
liberalization in 1998, leased line prices can be expected to decline
substantially and provisioning times improve, as has occurred in the
United States and the United Kingdom.
Cable & Wireless has brought to the attention of the United States
new evidence that Colisee International, a subsidiary of FT engaged in
reselling FT capacity, has behaved in an anticompetitive manner and
that complaints about Colisee have been confirmed by findings of the
French telecommunications regulator. These complaints and the
regulator's findings of FT's noncompliance with French law, according
to Cable & Wireless, relate to (i) sales by FT of leased lines and PSTN
interconnection at rates below the official tariffs from which other
competitors must buy capacity, and (ii) FT's grant of more favorable
access arrangements to its International Transit Center for Colisee
than for other competitors.\36\ The United States has examined
substantial information on this allegation, including the regulator's
findings of noncompliance and FT's plans to make substantial changes to
the Colisee service in response. In addition to being subject to
challenge under French law, it appears that the types of discrimination
alleged here are of the sort that would be covered by the
antidiscrimination provisions of the proposed Final Judgment, if Sprint
or the Joint Venture were to receive such favorable treatment through
FT or any of its subsidiaries. No modification to the proposed Final
Judgment is necessary to deal with this matter, but the Colisee
International evidence indicates that the antidiscrimination provisions
of the proposed Final Judgment are indeed focused on substantial
competitive concerns.
\36\ Comments of Cable & Wireless Europe, at 6.
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F. Protections Against Cross-Subsidization
BT's principal arguments on this provision, favoring extending it
through the life of the decree or until comprehensive protections
against cross-subsidization are determined to be part of the French and
German telecommunications regulatory systems, do not differ
substantially from its general arguments for extending the duration of
all of Section III, which the United States has already addressed and
declined to accept. Cross-subsidy risks were perceived here, by both
the United States and the European Commission competition authorities,
to be particularly substantial while DT and FT still have three-
quarters of their business legally protected from competition. During
this time, DT and FT enjoy a very large base of revenues into which
costs could be shifted, or from which subsidies could be obtained,
without risk of increasing entry by competitors into the services which
provide the subsidies and which would be priced at higher levels to
generate them. The evidence of past cross-subsidies of the Datex-P data
network by DT on a large scale, and the risk of use of cross-
subsidization to put
[[Page 3982]]
competitors in a ``price squeeze,'' Competitive Impact Statement, 60
Fed. Reg. at 44064, 44072, support having these restrictions in the
decree during Phase I. However, neither the United States nor the
European Commission's competition authorities extended the structural
separation of the Public Data Networks, or the specific cross-subsidy
safeguards, into the period following full liberalization in France and
Germany, when DT and FT will legally be subject to competition in all
their areas of business and will face actual licensed competitors. At
that point, while cross-subsidization potentially could still occur,
the risks of it substantially harming competition over a sustained
period will have been reduced owing to the possibility for competitive
entry into the markets providing the subsidies, and policing cross-
subsidization can with greater confidence be left to the national
regulators, who by then should have greater independence as well.
BT also seeks to give competitors and other interested parties
access to all of Sprint's and the Joint Venture's records to determine
if cross-subsidization has occurred. The United States does not
consider a modification of this sort to be necessary or desirable. The
disclosure provisions of Section II.A of the proposed Final Judgment
strike a careful balance between providing information competitors
would need to detect discrimination, and protecting Sprint's and the
Joint Venture's confidential business information from disclosure to
competitors. BT's disclosure proposal would expose far more of Sprint's
and the Joint Venture's business information to their competitors, in a
way that if abused could harm rather than help competition. The United
States notes, however, that nothing precludes it from using independent
auditors under contract to assist in reviewing Sprint's and Joint
Venture's documents for cross-subsidization, and that the EU
competition authorities have imposed an auditing requirement on Atlas,
Transpac and Datex-P during the pre-liberalization period.
Cable & Wireless argues that there should be structural separation
between the Atlas and Joint Venture entities and their parents. In
fact, the proposed Final Judgment already mandates such separation
between FT and DT on the one hand, and the Joint Venture and Sprint on
the other, through a combination of the facilities ownership provisions
of Sections III.A and III.B, the non-exclusive agency provisions of
Section III.C, the prohibitions on cross-subsidization in Section
III.F, and the prohibitions on sharing of confidential information in
Section II.B. The EU competition authorities have further reinforced
this separation through their treatment of Atlas, Transpac and Datex-P.
Esprit Telecom urges that DT and FT be precluded from predatory
pricing of end-user services. The cross-subsidization prohibitions of
the proposed Final Judgment will help to achieve that objective, as
will the EU's complementary safeguards, while predatory pricing remains
independently actionable under the antitrust laws as well.
G. Treatment of Operating Agreements
AT&T and BT both have raised issues regarding the operation of
Section III.G.1. This provision precludes Sprint from providing any
correspondent telecommunications or enhanced telecommunications service
between the United States and France or Germany pursuant to any
operating agreement with FT or DT, unless at least one other U.S.
international telecommunications provider has also obtained an
operating agreement with FT and DT for the provision of that service.
AT&T has requested that the interplay of Section III.G and Section
III.D.1(v), which prohibits discrimination between Sprint and other
similarly situated providers in the ``terms of operating agreements for
correspondent services and connection of international half-circuits,''
be clarified to preclude discrimination in the granting of operating
agreements by FT and DT. BT is concerned about the risk of allowing
Sprint to provide service if FT or DT has granted an operating
agreement to only one competitor, particularly if that one competitor
is an inadequate alternative.
The United States agrees that operating agreements already granted,
or granted in the future, could not thereafter be modified or withdrawn
on a discriminatory basis favoring Sprint or the Joint Venture, for to
do so would amount to a discrimination in the ``terms of operating
agreements'' prohibited under Section III.D.1(v). Existing operating
agreements, particularly those covering International Message Telephone
Service (IMTS) switched voice traffic and private lines, account for
what will likely continue to be the bulk of telecommunications
international traffic for the next several years at least. Moreover,
the terms of all operating agreements granted must be
nondiscriminatory, whatever the number of carriers that receive them.
AT&T is thus correct insofar as it says that Section III.G.1 does not
abrogate the requirement of nondiscrimination in the terms of operating
agreements under Section III.D.1(v), or any of the other requirements
of Section III.D.
Section III.G.1 affords an additional measure of protection with
respect to any correspondent services where agreements have not yet
been negotiated, or the service itself has not yet been developed,
ensuring that Sprint will not be able to obtain the only operating
agreement or to go first while entry of competitors is delayed, as a
result of its special relationship with FT and DT. It was not written
to require that all other carriers receive operating agreements for
such new services, since U.S. carriers may vary considerably in traffic
volumes and foreign carriers may be reluctant to incur the expense of
providing a facilities-based interconnection with a low-volume
provider. The counterpart Section III.G.2 provides a mechanism for such
smaller carriers to have their traffic delivered at reasonable,
nondiscriminatory rates accounting for the value of proportionate
return traffic from France and Germany.
It is implicit in the concept of Section III.G.1 that the other
U.S. international telecommunications provider that receives an
operating agreement not be a sham or subterfuge to circumvent the Final
Judgment, but a real provider capable of offering its own alternative
service. Should FT or DT grant operating agreements for new
correspondent services to Sprint and another alternative provider, but
withhold them from other similarly situated U.S. international
carriers, those carriers would still be able to complain to the FCC
that Sprint was receiving improper ``special concessions.'' The FCC's
policy is thus broader in one respect than that in the proposed Final
Judgment, but does not explicitly mandate, as does Section III.G.1,
that one other carrier already have an operating agreement before
Sprint can provide a service. These policies operate together to ensure
effective international competition by multiple U.S. carriers
notwithstanding the affiliation of FT and DT with Sprint.
The United States understands that there are relatively few issues
concerning the grant of operating agreements now outstanding between
U.S. international carriers and DT and FT. For the major longstanding
services such as IMTS, as well as for relatively new services such as
International Virtual Private Networks (IVPNs), FT and DT have now
granted operating agreements to multiple U.S. international
telecommunications carriers in addition to Sprint. Accordingly, in
light of the additional protections afforded by Section
[[Page 3983]]
III.D.1(v) and the FCC's ``special concessions'' prohibition, and
available evidence on the current practice of FT and DT, the United
States does not consider it necessary to modify Section III.G.1.
H. Standardized Interface Requirements
BT takes issue with the provisions ensuring the maintenance of
standardized PSTN and data network interfaces by FT and DT, Sections
III.H and III.I, which were closely followed by the EU competition
authorities in their own settlement. Apart from its general arguments
for extending these provisions through the duration of the decree, BT
also objects to the opportunity that these provisions give to Sprint
and the Joint Venture to develop proprietary interfaces with FT and DT.
BT is concerned that this could allow the parties to these transactions
to develop certain types of advanced services and interconnection
protocols that would not be available to competitors.
To the extent that competitors are similarly situated, of course,
the antidiscrimination provisions of Section III.D would remain
available to address any handling of interconnection to the FT and DT
PSTNs that disfavors competitors of Sprint and the Joint Venture.
Sections III.H and III.I go beyond the antidiscrimination provisions in
mandating availability of standard interfaces and protocols for FT and
DT Products and Services, and for the Public Data Networks, without any
proof of discrimination against similarly situated competitors. Neither
the United States nor the European Union competition authorities,
however, found it desirable to prohibit FT and DT from also developing
any proprietary or nonstandardized protocols, in the way BT advocates.
The various strategic alliances that have formed or are now forming to
provide seamless international telecommunications services, including
the BT-MCI partnership, AT&T's alliance with the Unisource partners in
Europe, and the FT-DT-Sprint combination, all will be seeking to
develop advanced telecommunications services which may require
nonstandardized or proprietary protocols not currently available. Some
competitive risks inhere in the ability of telecommunications providers
with monopoly rights, such as DT and FT, or market power, such as BT in
the UK, to develop nonstandardized protocols and interfaces that are
not universally available and might be used to favor particular
providers. In the case of these international strategic alliances,
however, there are also substantial competitive benefits to consumers
from the development of advanced seamless telecommunications services,
and all of the alliances will be competing with each other to produce
the most attractive advanced services and differentiate them from those
of the other competitors. These benefits could be reduced if FT and DT
were precluded from developing with their Joint Venture and Sprint any
proprietary or nonstandardized interfaces and protocols for new
services, as BT would have the United States do. Furthermore, the
prospect of full liberalization in France and Germany two years from
now and liberalization for alternative infrastructure used to provide
services other than public switched voice within six months means that
BT and other competitors should not remain indefinitely dependent on a
single provider in France and in Germany to supply all
telecommunications lines and network interconnections. Rather, they
will be able to have their local allies in France and Germany adopt
whatever proprietary and nonstandardized protocols they may develop
that are inconsistent with those used by DT and FT.
I. Access to FT's ``Orange List'' Customer Information
Charles M. Haar, a professor at Harvard University Law School who
is working as an expert for a company named Filetech, which is involved
in litigation with France Telecom in the United States District Court
for the Southern District of New York,\37\ has filed comments
requesting that entry of judgment in this case be conditioned on France
Telecom making available to competitors certain information about
customers, known as the ``Orange List,'' that it acquires in the course
of its responsibilities for maintaining the French telephone directory.
\37\ Filetech S.A.R.L. v. France Telecom, Civil Action No. 95-
1848 (CSH) (S.D.N.Y.).
---------------------------------------------------------------------------
The United States expresses no view on the merits of Filetech's
litigation with France Telecom, but its allegations did not form any
specific part of the complaint in this case. While the complaint is
based on France Telecom's ability to use its monopoly rights and
dominant position in France to favor Sprint and the Joint Venture over
competitors in various ways, it does not appear that France Telecom
would be able lawfully to use preferential access to the Orange List to
favor Sprint or the Joint Venture, since France Telecom has represented
in its litigation with Filetech that this information is confidential
and under French law cannot be disclosed to others, except for the
limited purpose of publishing telephone directories.\38\ Moreover, the
FCC has indicated that preferential disclosure of telephone customer
information by DT and FT to Sprint would be an impermissible ``special
concession.''\39\ Thus, the United States does not believe that any
modifications to the proposed Final Judgment are needed to address this
issue.
\38\ Filetech S.A.R.L. v. France Telecom, Civil Action No. 95-
1848 (CSH), Memorandum of Law of France Telecom and France Telecom
Incorporated in Support of their Motion to Dismiss the Complaint at
10-15, and Declaration of Jacques Henrot (S.D.N.Y., filed June 2,
1995).
\39\ FCC Sprint Order, para. 123.
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IV
Standard of Review
Pursuant to 15 U.S.C. Sec. 16(e), the proposed Final Judgment
cannot be entered unless the Court determines that it is in the public
interest. The focus of this determination is whether the relief
provided by the proposed Final Judgment is adequate to remedy the
antitrust violations alleged in the Complaint. United States v. Bechtel
Corp., 648 F.2d 660, 665-66 (9th Cir.), cert. denied, 454 U.S. 1083
(1981), quoted with approval in United States v. Microsoft Corp., 56
F.3d 1448, 1457-58, see also 56 F.3d at 1459-60 (D.C. Cir. 1995). In
the recent Microsoft decision by the United States Court of Appeals for
the District of Columbia Circuit, which reversed the district court's
refusal to enter an antitrust consent decree proposed by the United
States, the court of appeals held that the provision in Section
16(e)(1) of the Tunney Act allowing the district court to consider
``any other considerations bearing upon the adequacy of such
judgment,'' does not authorize extensive inquiry into the conduct of
the case. 56 F.3d at 1458-60. The court of appeals concluded that
``Congress did not mean for a district judge to construct his own
hypothetical case and then evaluate the decree against that case.'' Id.
To the contrary, ``[t]he court's authority to review the decree depends
entirely on the government's exercising its prosecutorial discretion by
bringing a case in the first place,'' and so the district court ``is
only authorized to review the decree itself,'' not other matters that
the government might have but did not pursue. Id.
Under the public interest standard, the Court's role is limited to
determining whether the proposed decree is within the ``zone of
settlements'' consistent with the public interest, not whether the
settlement diverges from the Court's view of what
[[Page 3984]]
would best serve the public interest. United States v. Western Electric
Co., 993 F.2d 1572, 1576 (quoting United States v. Western Electric
Co., 900 F.2d 283, 307 (D.C. Cir. 1990)); United States v. Microsoft
Corp., 56 F.3d at 1460. Moreover, the Court should give a request for
entry of a proposed decree even more deference than a request by a
party to an existing decree for approval of a modification, for in
dealing with an initial settlement the Court is unlikely to have
substantial familiarity with the market involved. United States v.
Microsoft Corp., 56 F.3d at 1460-61.
Absent a showing of corrupt failure of the government to
discharge its duty, the Court, in making its public interest
finding, should * * * carefully consider the explanations of the
government in the competitive impact statement and its responses to
comments in order to determine whether those explanations are
reasonable under the circumstances.
United States v. Mid-America Dairymen, Inc., 1977-1 Trade Cas. para.
61,508, at 71,980 (W.D. Mo. 1977). The Court may reject the agreement
of the parties as to how the public interest is best served only if it
has ``exceptional confidence that adverse antitrust consequences will
result. * * *'' United States v. Western Electric Co. 993 F.2d at 1577
(D.C. Cir.), cert. denied, 114 S. Ct. 487 (1993), quoted with approval
in United States v. Microsoft Corp., 56 F.3d at 1460.
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
the United States' discretion 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, after the Joint Venture has been made a party to the
stipulation for entry of judgment and the United States has completed
the procedures mandated by the Tunney Act and moved for entry of
judgment.
Dated: January 16, 1996.
Respectfully submitted,
Carl Wilner,
Joyce B. Hundley,
Attorneys, U.S. Department of Justice, Antitrust Division.
Certificate of Service
I hereby certify that on this date I have caused to be served by
first class mail, postage prepaid, or by hand, if so indicated, a copy
of the foregoing Response to Public Comment upon the following person,
counsel for defendants in the matter of United States of America v.
Sprint Corporation: Kevin R. Sullivan, Esquire, King & Spalding, 1730
Pennsylvania Avenue, N.W., Washington, D.C. 20006, Counsel for
Defendants, Sprint Corporation and Joint Venture Company.
Dated: January 16, 1996.
By Hand:
Carl Willner,
Attorney, Telecommunications Task Force, Antitrust Division, U.S.
Department of Justice.
United States of America Plaintiff, v. Sprint Corporation and
Joint Venture Co., Defendants
[Civil Action No. 95 CV 1304 (TPJ)]
Comments of AT&T Corp.
AT&T Corp. (``AT&T), pursuant to the Antitrust Procedures and
Penalties Act, 15 U.S.C. Sec. 16(b)-(h) (the ``Tunney Act''), hereby
submits these comments on the proposed Final Judgment in the above-
entitled action concerning the planned acquisition by France Telecom
(``FT'') and Deutsche Telekom A.G. (``DT'') of 20 percent of the voting
shares of Sprint Corporation (``Sprint''), and the proposed formation
of a joint venture among Sprint, FT and DT to provide international
telecommunications services (the ``Joint Venture'').
AT&T will be adversely affected by the proposed acquisition and
joint venture. AT&T provides international telecommunications services
to customers in the United States in competition with Sprint. Moreover,
to provide these services, AT&T is required by law to sue the
bottleneck monopoly services of FT and DT to terminate its
telecommunications traffic to France and Germany respectively. AT&T and
its customers will suffer competitive injury if the proposed
transactions are allowed to proceed without the Department of Justice
(the ``Department'') clarifying certain provisions and procedures in
the proposed Final Judgment. Specifically, the Department should
condition its continuing consent to the proposed Final Judgment on the
adoption of clarifying changes making explicit that: (1) Sprint cannot
offer a new correspondent service unless other U.S. carriers can
provide such service with FT and/or DT on a non-discriminatory basis;
(2) Sprint and the Joint Venture cannot provide services to customers
who have been ``steered'' to Sprint or the Joint Venture by FT and/or
DT; and (3) the Phase I conditions will not expire until practical
alternatives, i.e., competitive networks, exist in France and Germany
for the termination of international telecommunications traffic,
including basic switched voice services.
Introduction and Summary
The Department has accurately concluded that the proposed
acquisition and Joint venture threaten U.S. competition and consumers.
As described in the Department's Competitive Impact Statement, the
acquisition and the joint Venture would provide FT and DT ``increased
incentives and the ability using their monopolies and dominant
positions in France and Germany respectively, to favor Sprint and Joint
Venture Co. and to disfavor that United States competitors in
international telecommunications services. * * *'' \1\ As the
Department has elsewhere stated:
\1\ Competitive Impact Statement (``CIS''), Fed. Register, Vol.
60, No. 164, 44049, 44063 (Aug. 24, 1995).
The continued existence of telecommunications monopolies in
foreign countries results in higher prices, lower output,
inefficient quality of service and slower innovation for U.S.
consumers of international telecommunications services. Facilities-
based competition in foreign countries is the best solution to these
problems, and neither resale nor regulation is an equally effective
substitute.\2\
\2\ Market Entry and Regulation of Foreign-Affiliated Entities,
10 FCC Rcd. 4844 (1995) (``Market Entry NPRM''), Reply Comments of
the Department of Justice (filed May 12, 1995) at ii (emphasis
added).
AT&T believes that the threat to United States competition and
consumers would justify Department action to block the proposed
acquisition. In the exercise of prosecutorial discretion, however, the
Department has entered into a proposed Final Judgment with Sprint and
the Joint Venture containing nondiscrimination and other protections
designed to mitigate the competitive harms associated with the Sprint,
FT and DT transaction.
Under the Tunney Act, however, the Court must find that the
proposed Final Judgment ``is in the public interest'' in order to enter
it. Thus, the Court must determine whether the proposed decree
[[Page 3985]]
``would serve the public interest in free and unfettered competition.''
\3\ This inquiry appropriately involves an analysis of the clarity and
adequacy of the decree's essential nondiscrimination provisions and
compliance mechanisms, as well as an analysis of the injury that third
parties might suffer as a result of the decree.\4\
\3\ CIS at 44077 (citing United States v. Waste Management,
Inc., 1985-2 Trade Cas. para. 66,651, at 63,046 (D.D.C., 1985).
\4\ United States v. Microsoft Corp., 56 F.3d 1448, 1461-62
(D.C. Cir. 1995).
---------------------------------------------------------------------------
In determining whether the decree meets the public interest
standard, the Court will consider the explanations for the consent
decree contained in the Department's Competitive Impact Statement \5\
and whether the decree will protect third parties.\6\ In this
proceeding, the Department has accurately described in its Complaint
and the Competitive Impact Statement the monopolistic leveraging in
which FT and DT could engage absent the nondiscrimination provisions
set forth in Section III of the decree. This leveraging would severely
harm the third parties the decree is designed to protect. The clarity
and efficacy of the Section III nondiscrimination provisions thus are
central to the Court's public interest determination.\7\
\5\ United States v. Mid-America Dairymen, Inc., 1977-1 Trade
Cas. para. 61,508, at 71,980 (W.D. Mo. 1977) (Court carefully
considers explanations of the government in the Competitive Impact
Statement when determining if decree is in the public interest).
\6\ Microsoft Corp., supra, at 1462.
\7\ Id.
---------------------------------------------------------------------------
AT&T's objections to the proposed Final Judgment all fall within
the areas appropriate for review by a court in its determination of
whether a proposed consent decree is in the public interest.
Accordingly, AT&T believes that the Department should condition its
continued support of the proposed Final Judgment on acceptance of the
proposed clarifications and change in implementation procedures for the
essential nondiscrimination provisions as set forth below.
First, the Department should clarify that the provisions of Section
111.G.1 of the decree do not abrogate the nondiscrimination
requirements of Section III.D of the proposed Final Judgment. Section
III.D prohibits Sprint and Joint Venture from accepting any FT or DT
Products and Services on a discriminatory basis. Section III.G.1 seeks
to protect competition further by restricting Sprint from providing a
correspondent service with FT or DT unless at least ``one'' other
carrier has reached an agreement with FT or DT to provide such a
service as well. The proposed Final Judgment should be clarified to
ensure that Section III.G.1 is not interpreted as absolving the parties
of their nondiscrimination obligations once one other carrier offers a
correspondent service with FT or DT.
The second area requiring clarification involves the Joint Venture
Agreement's attempt to require that FT and DT steer business to the
Joint Venture. Such a marketing strategy by the parties violates the
clear intent of Section III.D because, as noted in the Competitive
Impact Statement, the discrimination prohibited by that provision
``includ[es] activities involving the sale [sic] marketing, and
distribution of Sprint and Joint Venture Co. services by FT and DT.''
\8\ The consent decree should be clarified to prohibit expressly the
steering of customers by FT and DT to the Joint Venture because such
activity constitutes banned favoritism.
\8\ CIS at 44071.
---------------------------------------------------------------------------
AT&T's final concern rests with the mechanism chosen to trigger the
expiration of the nondiscrimination protections in Section III of the
decree (the ``Phase I Conditions''). The Phase I Conditions for each
country expire once France or Germany authorizes domestic and
international facilities-based competition in basic telecommunications
services and issues one license to a competitor to FT or DT. The
Department's rationale for the lifting of the Phase I Conditions upon
the authorization of competition and licensing of a competitor in
France and Germany is that U.S. carriers will have means other than
FT's and DT's bottleneck facilities to terminate their traffic to
France or Germany.\9\ Yet, the Department's own explanation for why the
Phase I Conditions are necessary, coupled with the Department's
acknowledgment that mere legal authorization to compete and issuance of
one license to do so may not result in a competitive alternative to FT
or DT, mandate that the Department ensure continuance of the Phase I
protections until FT and DT face actual competition.\10\
\9\ See pp. 16-17, infra.
\10\ CIS at 44074.
---------------------------------------------------------------------------
The Department Must Clarify the Scope of Certain Conditions and Change
Implementation Procedures of the Proposed Final Judgment
As the Department recognizes in its Competitive Impact Statement,
FT and DT--the world's largest government-owned monopoly
telecommunications carriers--have absolute control over
telecommunications services in France and Germany, respectively. FT is
the fourth largest provider of telecommunications services in the
world, while DT is the second or third largest.\11\ FT and DT are each
the state authorized monopoly provider of public switched voice
service, as well as all transmission facilities for domestic and
international telecommunications in their respective home
countries.\12\ As a result, ``[a]ccess to FT's and DT's public switched
network and transmission infrastructure is necessary for international
telecommunications and enhanced telecommunications services that
originate or terminate in France and Germany,'' and ``virtually all
international telecommunications traffic between the U.S. and France
and between the U.S. and Germany originates or terminates over FT's or
DT's public switched networks, their transmission infrastructure, or
both.'' \13\
\11\ CIS at 44060.
\12\ Id.
\13\ Id. at 44061.
---------------------------------------------------------------------------
Under the proposed joint venture, FT and DT are required to refrain
from competing with Sprint in the United States in the Joint Venture's
services and in other services.\14\ FT and DT thus ``generally will
only be able to participate directly in United States
telecommunications markets through their ownership interests in
Spring.'' \15\ Moreover, the United States is ``by far'' the most
important location of those customers who desire global seamless
telecommunications services, i.e., multinational corporations who seek
one stop shopping for their communications needs irrespective of
national borders.\16\ Because FT and DT can participate in the U.S.
market only through the Joint Venture, they will have increased
incentives and the ability, using their monopolies and dominant
positions in France and Germany, respectively, to favor Sprint and the
proposed Joint Venture and to disfavor their United States
international telecommunications services competitors and their
customers.\17\
\14\ Id. at 44059. Similarly, Sprint must refrain from competing
with the Joint Venture anywhere in the world and must refrain from
competing with FT and DT in France and Germany. Id.
\15\ Id.
\16\ Id.
\17\ Id. at 44063
---------------------------------------------------------------------------
The Competitive Impact Statement sets forth in detail the myriad
ways that FT and DT could use their control over essential facilities
in France and Germany to favor Sprint and to harm Sprint's U.S.
competitors and their
[[Page 3986]]
customers.\18\ Although this threat to U.S. competition and consumers
would justify the Department's blocking of the proposed acquisition,
the Department has exercised its prosecutorial discretion and entered
into the proposed Final Judgment, which seeks to prevent such
anticompetitive conduct through conditions. However, unless the
clarifications and change to implementation procedures set forth herein
are made, FT and DT will be able to leverage their monopoly power
contrary to the Department's intent, and to the public interest test in
the Tunney Act.
\18\ Id. at 44063-64.
---------------------------------------------------------------------------
A. The Department Should Make Clear That Sprint and the Joint Venture
Cannot Offer a New Correspondent Service Unless Other U.S. Carriers Can
Provide Such Service With FT and/or DT on a Non-Discriminatory Basis
Because FT and DT each has the ability to leverage its monopoly
power over telecommunications in France and Germany, respectively, in
favor of Sprint or the Joint Venture and against other U.S. carriers,
the proposed Final Judgment prohibits any discrimination in favor of
Sprint. Section III.D thus explicitly prohibits Sprint and the Joint
Venture from accepting any FT or DT Products and Services on a
discriminatory basis for the provision of any telecommunications or
enhanced telecommunications service in the United States or between the
United States and France or the United States and Germany.
As a result of FT's and DT's monopolies over the provision of basic
telecommunications services in their countries, U.S. carriers can
provide U.S.-to-France service and U.S.-to-Germany service only through
agreement with FT and DT for the termination of such calls. Such
services are referred to as correspondent services. The provision of
correspondent services is included within the nondiscrimination
protections of Section III.D. Sprint and the Joint Venture cannot
accept ``FT or DT Products and Services'' that are provided on a
discriminatory basis, and ``FT or DT Products and Services'' are
defined to include correspondent services.\19\ Further, Sprint and the
Joint Venture are specifically prohibited from receiving discriminatory
``terms and conditions of operating agreements for correspondent
services and international half-circuits.'' \20\ The Final Judgment
thus would prohibit Sprint or the Joint Venture from offering
correspondent services between the U.S. and France or the U.S. and
Germany where FT or DT has not made such correspondent services
available to other U.S. carriers on a nondiscriminatory basis.
\19\ Final Judgment, Sec. V.L.(i).
\20\ Id. Sec. III.D.1(v).
---------------------------------------------------------------------------
In order further to protect U.S. competition and consumers from
monopoly leveraging, Section III.G.1 of the proposed decree provides
that Sprint may not provide a correspondent service with FT or DT
unless at least one other carrier has reached agreement with FT or DT,
as the case may be, to provide such a correspondent service:
Sprint may not offer, supply, distribute or otherwise provide
any correspondent telecommunications or correspondent enhanced
telecommunications service between the United States and France or
Germany pursuant to any operating agreement with FT or DT, unless
with respect to such service, at least one other United States
international telecommunications provider has also obtained an
operating agreement with FT and DT for the provision of such service
between the United States and France and Germany. This provision
will operate separately for France and Germany.
This provision is designed to ensure that Sprint does not have an
exclusive or preferential arrangement with FT or DT, which would limit
competition in the provision of U.S.-to-France or U.S.-to-Germany
services in the U.S. In addition, it balances that interest with the
public interest of permitting new services to be offered to U.S.
customers on an expedited basis by allowing Sprint to introduce a
correspondent service as soon as another U.S. carrier also has reached
agreement with FT and DT to do so. Sprint need not wait to offer the
service until FT and DT have reached nondiscriminatory operating
agreements covering such service with all U.S. carriers.
Section III.G.1 must be interpreted, however, consistent with the
antidiscrimination protections of Section III.D. Otherwise, Section
III.G.1 could permit FT and DT to introduce a new correspondent service
with Sprint once that service is offered by any other U.S. carrier
selected by FT or DT--without regard to the practical ability of that
other carrier to compete effectively with Sprint. Moreover, such an
interpretation could be used to limit FT's and DT's obligation to
provide the same correspondent service to other U.S. Carriers that
today serve the route or that seek to do so in the future. Limiting
FT's and DT's nondiscriminatory treatment merely to one other carrier
would be inconsistent with Section III.D and clearly was not intended.
The Department thus should clarify that Section III.G.1 does not
abrogate any of the nondiscrimination requirements of Section III.D.
Specifically, the Department should make clear that the Final Judgment
requires FT and DT to offer correspondent services to all U.S. carriers
on a nondiscriminatory basis, and prohibits Sprint from offering a
correspondent service where FT or DT has discriminated in offering to
provide such correspondent services with other U.S. carriers.\21\
Further, this obligation should be viewed as a continuing obligation.
Were FT or DT has a service arrangement with other U.S. carriers that
is later offered with Sprint, FT or DT should be required by Section
III.D.1 to extend any different terms and conditions it has offered to
Sprint to the other U.S. carriers.
\21\ Section II.C of the proposed Final Judgment confirms this
reading. That section prohibits Sprint and the Joint Venture from
participating in the provision of a service that requires a license
in France or Germany unless other carriers can obtain the necessary
authorization on the same terms and conditions, including the same
time frame as FT or DT. It would be inconsistent to permit Sprint or
the Joint Venture to benefit from FT or DT discrimination in
providing authorization (via an operating agreement) that is solely
under their control, when Sprint and the Joint Venture are not
permitted to benefit from discrimination by France or Germany in
granting governmental authorization.
---------------------------------------------------------------------------
B. The Department Should Make Clear That Sprint and Joint Venture Co.
Cannot Provide Services to Customers Who Have Been ``Steered'' to
Sprint or the Joint Venture by FT and/or DT
Section 10.6(b) of the Joint Venture Agreement between Sprint, FT
and DT specifically requires FT and DT to steer customers toward Joint
Venture services even where the customer has affirmatively requested
that another U.S. carrier provide the U.S. half of the service:
If a Party or any of its Affiliates receives an unsolicited
request from a customer of a Party or any of its Affiliates or of
the Joint Venture to enter into a Contract to provide to such
customer in conjunction with other persons a service that is
currently offered by the Joint Venture, such Party or its Affiliates
will use commercially reasonable efforts to persuade such customer
to purchase such service from the Joint Venture. If despite such
Party's efforts, the Customer prefers not to purchase such service
from the Joint Venture, such party will refer such matter to the
Global Venture Office which, within ten (10) Business Days, will
present its observations regarding such matter. * * *
For example, if a customer comes to DT (which the customer must do
in Germany) and requests that DT arrange for private line service
between Germany and the U.S. and requests that
[[Page 3987]]
MCI provide the U.S. half-circuit, DT must use ``commercially
reasonable efforts'' to persuade MCI's customer instead to use the
Joint Venture for such service.\22\ Further, DT must refer the
customer's request to the Joint Venture (including Sprint's
representatives) if it fails to convince the customer to purchase Joint
Venture services.\23\
\22\ It is unclear what would constitute ``commercially
reasonable efforts'' if one is a monopolist to whom all customers
must come for service.
\23\ Sprint's representative to the Joint Venture thus would be
informed of every unsuccessful attempt in Europe to steer global
customers to the Joint Venture (i.e., every time a customer wanted
to use a U.S. carrier other than Sprint or the Joint Venture). Such
market leads obtained solely because of FT's and DT's monopoly
status would permit Sprint to target the U.S. offices of these
customers for follow-up persuasion.
---------------------------------------------------------------------------
Such discriminatory marketing activity by a company controlling
essential facilities in favor of its affiliate is precisely the type of
monopoly leveraging that the Final Judgment seeks to prohibit.\24\ The
Department should clarify that the receipt of such favored treatment by
Sprint or the Joint Venture would violate the prohibition against
discrimination contained in Section III.D.1 of the proposed Final
Judgment.
\24\ Sprint does not dispute AT&T's interpretation of FT's and
DT's obligation under the Joint Venture Agreement, and does not deny
its intent to engage in such steering of customers. Indeed, Sprint
argues that the steering of customers by a monopolist to its U.S.
affiliate merely reflects ``economic self-interest'' and is not
improper. Market Entry NPRM, Sprint Supplemental Reply (filed Sept.
15, 1995) at iv.
---------------------------------------------------------------------------
C. The Department Should Make Clear That the Phase I Conditions Will
Not Expire Until Practical Alternatives Exist in France and Germany for
the Termination of International Telecommunications Traffic, Including
Basic Switched Voice Services
The Final Judgment would impose two sets of conditions on Sprint
and the Joint Venture, one set that continues for the term of the
decree and one set that expires upon the happening of certain events.
The Phase I protections against discrimination will terminate
(separately for each country) once France or Germany authorizes
domestic and international competition and issues a license to one
competitor of FT or DT. The restrictions contained in Section II will
continue through the entire term of the consent decree.
As the Department explains, stricter prohibitions during Phase I
are necessary ``because there is considerably greater potential for
competitive abuses to occur in the period while competitors have no
legal alternative to using FT's and DT's facilities and services and
before the French and German governments finish implementing their
program of regulatory reform.'' \25\ Further, in order for Phase II to
begin, ``the licensed competitors must have authority to construct or
own a sufficiently large amount of international capacity that other
providers would have a realistic alternative to the use of the
international facilities of FT or DT. * * *'' \26\ In short, the
Department's rationale for the lifting of the Phase I Conditions is
that, once Phase II begins, U.S. carriers will have means other than
FT's or DT's bottleneck facilities to terminate their traffic to France
or Germany. Moreover, if ``the entry of licensed competitors in France
or Germany has been significantly delayed after the granting of
licenses, or has otherwise not proven sufficient to provide a
competitive alternative [to FT or DT],'' the Department would request
reinstatement of the Phase I Conditions.\27\
\25\ CIS at 44066.
\26\ Id. at 44065.
\27\ Id. at 44074.
---------------------------------------------------------------------------
Despite the stated rationale for the Phase I conditions, the Final
Judgment appears to provide for their termination upon the mere removal
of legal restrictions and the issuance of a license to a potential
competitor in France and Germany. There is no demonstration required by
the parties that effective competition exists in France and Germany for
the termination of international traffic. Thus, the Phase I Conditions,
which include the prohibitions against discrimination, would terminate
once France and Germany each legally authorizes competition in
international and domestic services and issues one license to do so,
regardless of whether the recipient of that license is capable of
providing U.S. carriers any practical alternative to FT or DT for
terminating calls to France or Germany. This result would conflict with
the Department's own underlying rationale for the proposed two-phased
decree. To remedy this problem, the Department should modify the
implementation provisions of the decree to require Sprint to
demonstrate to the Department that an actual competitive alternative to
FT and DT exists in France and Germany, respectively, for the
termination of telecommunications traffic, including basic switched
voice services, in order for the Phase I Conditions to be lifted.
Conclusion
As set forth above, the application of key provisions of the
proposed Final Judgment must be clarified in order for the decree to be
applied in the manner intended by the Department and in order to
prevent anticompetitive abuse. Unless the Department adopts the
clarifications and implementation modification set forth herein, the
Final Judgment will not satisfy the Tunney Act's requirement that the
decree be in the public interest. The Department therefore should
clarify that (1) Sprint cannot offer a new correspondent service unless
other U.S. carriers can provide such service with FT and/or DT on a
non-discriminatory basis, and (2) Sprint and the Joint Venture cannot
provide services to customers who have been ``steered'' to Sprint or
the Joint Venture by FT and/or DT. The Department also should modify
the implementation provisions of the decree so that the Phase I
Conditions will remain in effect until Sprint demonstrates to the
Department that practical alternatives exist in France and Germany for
the termination of international telecommunications traffic, including
basic switched voice services.
Dated: October 23, 1995.
Respectfully submitted,
Judith A. Maynes,
Mark C. Rosenblum,
Stephen C. Garavito,
Karen L. Itzkowitz,
Attorneys for AT&T Corp.
Comments of MCI Communications Corporation on Proposed Consent
Judgment
United States of America, Plaintiff, v. Sprint Corporation and
Joint Venture Co., Defendants.
[No. 95-CV-1304 (TPJ)]
Dated: October 23, 1995.
Anthony C. Epstein,
J. Paul Oetken,
Jenner & Block, Attorneys for MCI Communications Corporation.
Of Counsel:
Michael H. Salsbury,
Executive Vice President and General Counsel, MCI Communications
Corporation.
To: The Department of Justice
Comments of MCI Communications Corporation on Proposed Consent
Judgment
United States of America, Plaintiff, v. Sprint Corporation and
Joint Venture Co., Defendants.
[No. 95-CV-1304 (TPJ)]
Pursuant to Sec. 2 (b), (d), and (f)(4) of the Antitrust Procedures
and Penalties Act (the ``Tunney Act''), 15 U.S.C. Sec. 16 (b), (d), and
(f)(4), MCI Communications Corporation (``MCI'') submits these comments
regarding the consent
[[Page 3988]]
judgment proposed by the United States Department of Justice (``DOJ'')
in this proceeding.
I. Introduction and Summary
If the proposed transactions among Sprint Corporation (``Sprint''),
France Telecom (``FT''), and Deutsche Telekom A.G. (``DT'') are
consummated, FT's and DT's monopoly power in France and Germany would
pose a serious and long-term threat to U.S. consumers and competition.
The heart of DOJ's complaint is that the transactions threaten
substantially lessened competition because of the danger that FT and DT
will ``use their market power over the public switched networks,
transmission infrastructure and public data networks in France and
Germany to discriminate in favor of Sprint and [Phoenix] vis-a-vis
other United States international carriers'' and to engage in other
anticompetitive conduct.\1\ In addition to financial incentives, the
proposed transactions would create contractual and corporate duties on
the part of FT and DT to discriminate in favor of Sprint and
Phoenix.\2\
\1\ Competitive Impact Statement, 60 Fed. Reg. 44,058, 44,063
(filed Aug. 14, 1995) (``CIS'').
\2\ See infra at 11-12 and n. 29.
---------------------------------------------------------------------------
However, the proposed consent decree falls conspicuously short of
alleviating these dangers. Most significantly, it allows the shift from
a de jure to a de facto monopoly in France and Germany to trigger the
lifting of its crucial substantive protections against anticompetitive
behavior. The critical question is whether FT's and DT's monopoly power
persists, not whether their monopolies are de jure or de facto. Under
DOJ's proposed consent decree, however, the substantive protections
against abuse of FT's and DT's monopoly power immediately and
automatically expire as soon as competition is legally authorized and
just one competitor has been licensed in France or Germany. By removing
Phase I protections before the development of genuine, effective
facilities-based competition in France and Germany, the decree
substantially undermines its own force.
The competitive problems posed by these transactions stem mainly
from three facts. First, FT and DT have market power in France and
Germany, and international telecommunications carriers are completely
dependent on them in connection with services to France and Germany.
Second, even after effective facilities-based competition is legally
permitted in France and Germany, it will take, at a minimum, several
years to develop, and effective regulation of FT and DT will be
essential during the transition period. And third, as government-owned
and government-controlled monopolies, FT and DT lack any independent
regulator in their home countries.
The proper benchmark for when such anticompetitive behavior ceases
to be a threat is not the legal possibility of competition, but rather
the actual development of facilities-based competition. As DOJ itself
recently stated in a related proceeding, ``facilities-based competition
is by far the best solution to the problems * * * that arise today from
[foreign] monopoly provision of key network facilities and services.''
\3\ DOJ recommends the imposition of these restrictions because of FT's
and DT's monopoly power, so they should remain in effect as long as
that monopoly power persists.
\3\ Reply Comments of DOJ, at 17, Market Entry and Regulation of
Foreign-affiliated Entities, IB Docket No. 95-22, RM-8355, RM-8392
(FCC) filed May 12, 1995).
---------------------------------------------------------------------------
FT's and DT's monopoly power--and hence the anticompetitive
threat--will persist for years after the triggering events for
termination of the Phase I competitive safeguards (formal authorization
of competition and licensure of one competitor). First, new entrants
will need time to construct networks and develop a customer base.
Second, numerous regulatory implementation issues will have to be
resolved by French and German authorities after the formal licensing of
competitors. And third, regulation is especially unlikely to be
effective when, as in the case of FT and DT, ``foreign authorities are
regulating government-owned monopoly carriers.'' \4\ There is no basis
for equating the elimination of legal entry barriers and the licensing
of one competitor with the immediate reduction, much less elimination,
of FT's and DT's market power.
\4\ Id. at 27.
---------------------------------------------------------------------------
DOJ attempts to justify the premature expiration of Phase I's
competitive safeguards by relying on the ``assumption'' \5\ that the
French and German governments eventually will provide equivalent
protection, even though the governments will continue to own FT and DT.
As DOJ itself has observed, however, ``[f]oreign regulation normally
should not be considered a sufficient alternative to protect U.S.
consumers in the absence of any meaningful facilities-based
competition, however effective that regulation may be represented to
be.'' \6\ Such foreign regulation may not be adopted for years in
France and Germany and is unlikely effectively to rein in FT's and DT's
monopoly power--particularly given that the regulators would also be
the owners of the regulated entities. In any event, DOJ's independent
responsibility to enforce the U.S. antitrust laws and to protect U.S.
consumers is not shared by French and German regulators.
\5\ CIS, 60 Fed. Reg. at 44,066.
\6\ Reply Comments of DOJ, at 27.
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By permitting anticompetitive conduct to occur under the de facto
monopolies of FT and DT after de jure protections have been eliminated,
the proposed consent decree fails to prevent serious harms to
competition and consumers during a crucial period of years. Therefore,
the proposed decree is not in the public interest unless it is modified
to provide that the restrictions remain in effect until actual,
effective facilities-based competition is found to exist in France and
in Germany.
II. Background
A. Legal Standards Under the Tunney Act
The Tunney Act provides that proposed consent judgments in
antitrust cases brought by the United States are subject to a 60-day
period during which written comments may be filed.\7\ The United States
is required to ``receive and consider'' any such comments.\8\
\7\ 15 U.S.C. Sec. 16 (b) and (d).
\8\ Id. Sec. 16(d).
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In requiring consideration of public comments, the Act contemplates
a critical reexamination of the decree by DOJ in light of the points
made in any submitted comments. DOJ has the authority to withdraw its
consent to the decree at any time before it is entered.\9\ Therefore,
if the public comments persuade DOJ that the decree should be modified,
it is free to condition its continued consent on these modifications.
\9\ See Stipulation para. 2, 60 Fed. Reg. 44,049 (``Plaintiff
may withdraw its consent to entry of the Final Judgment at any time
before it is entered, by serving notice on the defendants and by
filing that notice with the Court.'').
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If DOJ decides that no modifications are appropriate in light of
the public comments, the Court must determine whether entry of the
proposed consent judgment ``is in the public interest.'' \10\ In making
that determination, the Court may consider:
\10\ 15 U.S.C. Sec. 16(e).
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(1) the competitive impact of such judgment, including
termination of alleged violations, provisions for enforcement and
modification, duration or relief sought, anticipated effects of
alternative remedies actually considered, any other considerations
bearing upon the adequacy of such judgment;
(2) the impact of entry of such judgment upon the public
generally and individuals alleging specific injury from the
violations
[[Page 3989]]
set forth in the complaint including consideration of the public
benefit, if any, to be derived from a determination of the issues at
trial.\11\
\11\ Id.
The Court is specifically authorized in making its public interest
determination to review any comments of interested parties and DOJ's
response to such comments.\12\
\12\ Id. Sec. 16(f)(4).
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Although an antitrust consent decree proposed by DOJ is entitled to
deference, the Tunney Act was ``intended to prevent `judicial rubber
stamping' '' of such decrees,\13\ and to require ``an independent
determination as to whether or not entry of a proposed consent decree
[was] in the public interest.'' \14\ Thus, while the D.C. Circuit made
clear in its recent Microsoft decision that ``Congress did not mean for
a district judge to construct his own hypothetical case and then
evaluate the decree against that case,'' \15\ it also reaffirmed the
district court's duty to inquire into ``the purpose, meaning, and
efficacy of the decree,'' \16\ and to determine whether the remedies
proposed are ``inconsonant with the allegations.'' \17\
\13\ United States v. Microsoft Corp., 56 F.3d 1448, 1458 (D.C.
Cir. 1995) (quoting H.R. Rep. No. 1463, 93d Cong., 2d Sess. 8
(1974)).
\14\ Id. (quoting S. Rep. No. 298, 93d Cong., 1st Sess. 5
(1973)).
\15\ Id. at 1459.
\16\ Id. at 1462.
\17\ Id. at 1461.
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DOJ accurately describes the character of the ``public interest''
determination in the context of this case:
The courts have recognized that the term ``public interest''
``take[s] meaning from the purposes of the regulatory legislation.''
NAACP v. Federal Power Comm'n, 425 U.S. 662, 669 (1976); United
States v. American Cyanamid Co., 719 F.2d 558, 565 (2d Cir. 1983),
cert. denied, 465 U.S. 1101 (1984). Since the purpose of the
antitrust laws is 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), the focus of the ``public interest'' inquiry
under the Tunney Act is whether the proposed final judgment would
serve the public interest in free and unfettered competition. United
States v. Waste Management, Inc., 1985-2 Trade Cas. para. 66,651, at
63,046 (D.D.C. 1985).\18\
\18\ CIS, 60 Fed. Reg. at 44,076-44,077; see also United States
v. Western Elec. Co., 900 F.2d 283, 308 (D.C. Cir.) (``To remain
consistent with antitrust policy, the court should revise the decree
that is shown to lessen competition substantially in present
circumstances.'') (quoting 2 P. Areeda & D. Turner, Antitrust Law
para. 330, at 141-42 (1978)), cert. denied, 498 U.S. 911 (1990).
A proposed consent decree that fails to cure the antitrust violation is
not in the public interest.\19\
\19\ See United States v. AT&T, 552 F. Supp. 131, 150
(D.D.C.1982), aff'd mem. sub nom. Maryland v. United States, 460
U.S. 1001 (1983).
---------------------------------------------------------------------------
B. The Proposed Transactions
Two related transactions are the subject of DOJ's antitrust
complaint and consent decree. First, Sprint, FT, and DT have entered
into an agreement providing for the formation of an international joint
venture, now known as ``Phoenix,'' to provide a variety of voice,
video, and data services. Under the agreement, each party would
contribute most of its existing operations outside its home country to
the Phoenix joint venture. FT and DT would hold and manage their
interests in Phoenix together through their own proposed two-party
joint venture, known as ``Atlas.'' Phoenix would have a board on which
FT, DT, and Sprint would be equally represented. Sprint would have the
exclusive right to provide Phoenix services in the United States, and
FT and DT would not compete with Sprint in the United States with
respect to such services. Sprint similarly would not compete with FT
and DT in their home countries. None of the three owners would compete
against Phoenix.\20\
\20\ See CIS, 60 Fed. Reg. at 44,058-44,059.
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Second, Sprint, FT, and DT have entered into an agreement entitling
FT and DT each to acquire a 10-percent equity interest in Sprint, and
thus to become Sprint's largest shareholders. FT and DT would acquire
special shareholder rights, including the right to appoint three
members of Sprint's 15-member Board of Directors.\21\
\21\Id.
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C. The Proposed Consent Decree
On July 13, 1995, DOJ filed a civil antitrust complaint alleging
that the proposed Sprint-FT-DT transactions would violate Sec. 7 of the
Clayton Act \22\ by lessening competition in the markets for
telecommunications services between the United States and France and
between the United States and Germany. On the same date, Sprint and DOJ
stipulated to the entry of a proposed consent decree, which purports to
remedy the fundamental problem created by an alliance between Sprint
and two foreign, government-owned monopoly carriers that are among the
largest telecommunications providers in the world. The danger addressed
by DOJ's complaint and consent decree is that FT and DT will ``use
their market power over the public switched networks, transmission
infrastructure and public data networks in France and Germany to
discriminate in favor of Sprint and [Phoenix] vis-a-vis other United
States international carriers'' and to engage in other anticompetitive
conduct.\23\
\22\ 15 U.S.C. Sec. 18.
\23\ CIS, 60 Fed. Reg. at 44,063.
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The proposed consent decree imposes restrictions and obligations in
two separate phases. Phase I terminates, for France and Germany
independently, when legal prohibitions on competition against FT and DT
have been removed and one or more competitors have been licensed to
provide facilities and services in each country.\24\ Phase II continues
for five years after the end of Phase I.\25\
\24\ Id. at 44,065; Final Judgment V.Q, 60 Fed. Reg. 44,051,
44,056.
\25\ CIS, 60 Fed. Reg. at 44,074; Final Judgment X.B, 60 Fed.
Reg. at 44,058.
---------------------------------------------------------------------------
The provisions of the decree that apply during both Phase I and
Phase II include:
requirements of disclosure of the terms and conditions of
dealings among Sprint, FT, DT, and Phoenix (II.A)
restrictions on the sharing of information (II.B)
limitations on the ability of Sprint and Phoenix to offer
international services involving France or Germany, or to provide
facilities to FT or DT for such services, if other United States
international telecommunications providers are not permitted to provide
the same services (II.C)\26\
\26\ CIS, 60 Fed. Reg. at 44,067-44,070; Final Judgment, 60 Fed.
Reg. at 44,051-44,053.
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The provisions that are applicable only during Phase I include:
restriction against the acquisition by Sprint or Phoenix
of ownership interests in or control over facilities legally reserved
to FT or DT, and limitations on their ability to acquire international
half-circuits terminating in France or Germany (III.A)
prohibition of the acquisition by Sprint or Phoenix of
ownership interests in or control over FT or DT public data networks
(III.B)
prohibition against Sprint or Phoenix providing FT or DT
products and services on an exclusive basis (III.C)
prohibition against Sprint or Phoenix obtaining FT or DT
products and services on a discriminatory basis (III.D)
prohibition of Sprint's acceptance of correspondent
telecommunications traffic on a disproportionate basis (III.E)
restrictions designed to guard against cross-subsidization
of Sprint or Phoenix by FT or DT (III.F)
[[Page 3990]]
prohibition of any exclusive operating agreements between
Sprint and FT or DT (III.G)
requirements that Sprint and Phoenix not provide
telecommunications or enhanced telecommunications services using FT or
DT products and services or public data networks, if FT or DT has
established proprietary or nonstandardized protocols or interfaces and
has failed to continue to provide other competitors with access to
those services and networks on a standardized basis (III.H-I)\27\
\27\ CIS, 60 Fed. Reg. at 44,070-44,073; Final Judgment, 60 Fed.
Reg. at 44,053-44,055.
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III. The Proposed Decree Should be Modified so That its Safeguards
Against Abuse of FT's and DT's Monopoly Power Continue as Long as Their
Monopoly Power Continues
The proposed transactions pose a well-established threat to U.S.
consumers and competition. DOJ recognizes that the transactions
threaten substantially lessened competition because they give FT and DT
``increased incentives and the ability, using their monopolies and
dominant positions in France and Germany respectively, to favor Sprint
and [Phoenix] and to disfavor their United States competitors in
international telecommunications services in various ways,'' including
discrimination, cross-subsidization, and sharing of confidential
information.\28\ The proposed transactions also would create
contractual and corporate duties on the part of FT and DT to
discriminate in favor of Phoenix and Sprint. For example, the Joint
Venture Agreement would require FT and DT to ``use commercially
reasonable efforts to persuade'' customers to use Phoenix services when
they have requested the services of another U.S. carrier.\29\ DOJ does
not point to any procompetitive benefits created by the transactions
that would mitigate their anticompetitive effects.
\28\ CIS, 60 Fed. Reg. at 44,064-44,064.
\29\ Section 10.6(b) of the Joint Venture Agreement (p. 81)
provides:
If a Party or any of its Affiliates receives an unsolicited
request from a customer of a Party or any of its Affiliates or of
the Joint Venture to enter into a Contract to provide to such
customer in conjunction with other Persons a service that is
currently offered by the Joint Venture, such Party or its Affiliates
will use commercially reasonable efforts to persuade such customer
to purchase such service from the Joint Venture. If despite such
Party's efforts, the customer prefers not to purchase such service
from the Joint Venture, such Party will refer such matter to the
Global Venture Office which, within ten (10) Business Days, will
present its observations regarding such matter. * * *
---------------------------------------------------------------------------
The proposed consent decree fails in a basic respect to prevent the
injury that DOJ alleges arising from FT's and DT's monopoly power. In
particular, it allows the shift from a de jure to a de facto monopoly
in France and Germany to trigger the lifting of its substantive
protections against anticompetitive behavior. By providing for the
removal of Phase I restrictions before the development of genuine,
effective facilities-based competition in France and Germany, the
decree fundamentally fails to solve the anticompetitive problems that
would result from the transactions.
A. The Proposed Consent Decree Would Permit Anticompetitive Activity to
Occur Under De Facto Monopolies in France and Germany
The Phase I restrictions are necessary because of FT's and DT's
monopoly power. Under the consent decree as currently proposed, Phase
II would begin as soon as France or Germany (1) has legally authorized
competition, and (2) has issued one license for the construction or
ownership of facilities and the provision of services. At that time,
Phase I's substantive restrictions intended to prevent misuse of FT's
and DT's monopoly power would immediately and automatically end--even
if FT's and DT's monopoly power was unabated as a practical matter.\30\
\30\ DOJ contemplates that the end of Phase I would be
contemporaneous with the EU liberalization reforms currently
scheduled for 1998. CIS, 60 Fed. Reg. at 44,066, 44,074.
---------------------------------------------------------------------------
DOJ cannot justify this premature trigger for the lifting of the
crucial Phase I restrictions before the advent of effective competition
in France and Germany. DOJ states:
These [Phase I] restrictions * * * are expected to become less
necessary once competition has been introduced in France and
Germany, which should occur concurrently with the regulatory reform
program being undertaken by the EU authorities. At that point,
competitors will be less vulnerable to abuses of market power by FT
and DT because of the alternatives available for transmission
infrastructure, and should be better protected by European
regulatory requirements to the extent that they continue to depend
on the services and facilities of FT and DT.\31\
\31\ Id. at 44,070.
But competition is ``introduced,'' and there are ``alternatives
available for transmission infrastructure,'' only when competition
actually has developed in France or Germany--not when it is simply made
legally permissible. When France (or Germany) eliminates its de jure
monopoly and licenses one initial competitor, FT (or DT) will still
continue to operate as a de facto monopoly for a significant period of
time--i.e., until a competitor actually develops its own network
sufficient to constitute a realistic alternative to the facilities of
FT (or DT). And during this period of time--which is likely to last a
number of years--Sprint and Phoenix will be able to benefit from the
same discriminatory and other anticompetitive monopolistic conduct that
DOJ agrees the judgment should prohibit. Whether FT and DT use de jure
or de facto monopoly power to harm U.S. competition and consumers is
irrelevant. The same need for the Phase I restrictions exists
regardless of the source of the monopoly power.
DOJ itself has emphasized the essential need for actual (versus
potential) facilities-based competition in foreign telecommunications
markets. In comments filed with the FCC, the Department states that
``facilities-based competition is by far the best solution to the
problems'' for U.S. consumers created by foreign de jure and de facto
monopolies.\32\ DOJ cites the existence of real competition in the U.K.
as permitting the particular relief provided in the MCI-BT decree, and
as resulting in significantly lower prices.\33\ Even parts of its
Competitive Impact Statement reveal DOJ's fundamental agreement with
the proposition that actual competition--rather than the mere legality
of competition--is the sine qua non of preventing the harms of monopoly
and market power.\34\
\32\ Reply Comments of DOJ, at 17, Market Entry and Regulation
of Foreign-affiliated Entities, IB Docket No. 95-22, RM-8355, RM-
8392 (FCC) (filed May 12, 1995); see also id. at ii (``Facilities-
based competition in foreign countries is the best solution to these
problems, and neither resale nor regulation is an equally effective
substitute.''); id. at 27 (``the existence of facilities-based
competition is the best means of ensuring that U.S. consumers of
international services are adequately protected'').
\33\ Id. at 14, 19-21.
\34\ See, e.g., 60 Fed. Reg. at 44,071 (``The limitation on
ownership or control of international half-circuits can be lifted,
if the United States and defendants agree that meaningful
competition exists to the half-circuits provided by FT or DT.'')
(emphasis added); id. at 44,072 (``Once FT and DT face competition
in the areas of their business now protected by monopoly rights, and
the EU authorities have improved safeguards against cross-subsidy as
part of their liberalization program, there is reason to believe
that the risks of such conduct should diminish. * * *'') (emphasis
added).
---------------------------------------------------------------------------
In another proceeding in this Court, DOJ also recognized the
substantial danger that an incumbent telecommunications monopolist will
abuse its monopoly power in favor of an affiliated entity unless and
until actual facilities-based competition develops. DOJ has moved to
permit one of the Regional Bell Operating Companies (``RBOCs'' or
``Baby Bells'') to provide on a trial basis through a separate
affiliate domestic and international long
[[Page 3991]]
distance service, but only after ``actual competition (including
facilities-based competition)'' has developed.\35\ FT's and DT's
monopoly power in France and Germany over local (and domestic long
distance) services is as great as the RBOCs' monopoly power in the U.S.
over local services, and FT and DT control the ability of international
carriers to reach French and German customers to at least as great an
extent as the RBOCs control their ability to reach U.S. customers.
Accordingly, decree restrictions involving FT and DT should continue as
long as decree restrictions on the RBOCs--until actual facilities-based
competition has developed.
\35\ Memorandum of the United States in Support of Motion for a
Modification of the Decree to Permit a Limited Trial of
Interexchange Service by Ameritech, at 28-29, United States v.
Western Elec. Co., No. 82-0192 (D.D.C.) (filed May 1, 1995) (``DOJ
Mem. re Competition'').
---------------------------------------------------------------------------
For three reasons, it will take time for actual competition to
develop after formal legal barriers to entry are eliminated and a
competitor is licensed. First, after they obtain a license, new
entrants will need time to construct alternative networks and develop a
customer base. DOJ acknowledges this fact:
Although some competition to the FT and DT public switched voice
services and network would likely emerge were all legal restrictions
on competition lifted, replication of the entire public switched
network would be prohibitively expensive for any new entrant.\36\
\36\ CIS, 60 Fed. Reg. at 44,061-44,062.
The slow development of competing data services in France and Germany
is illustrative: although legal entry barriers were removed a few years
ago and competitors have been licensed, FT and DT continue to have
considerable market power.\37\ DOJ also recognized this problem in
discussing economic barriers to competition in local telecommunications
markets in the United States--barriers that are comparable to the
barriers in France and Germany. In the proceeding in this Court
concerning the RBOC waiver, DOJ stated that ``even as legal and
regulatory barriers come down, a substantial barrier remains if
entrants must replicate the entire network of the [local exchange
carrier] in order to provide local exchange service.'' \38\
\37\ Id. at 44,060, 44,062.
\38\ DOJ Mem. re Competition, at 3.
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This Court well understands that the elimination of legal barriers
to competition should not be confused with actual competition in
telecommunications markets. As the Court explained in rejecting DOJ's
attempt to equate elimination of legal entry barriers with effective
competition in U.S. telecommunications markets:
To be sure, as long as states and localities prohibit outsiders
from competing with the local Operating Companies, the monopolies
will continue to exist. But the reverse is not true. Even if all
state and local regulation prohibiting competitive entry into the
local exchange market were to be repealed tomorrow, and anyone were
free, as a matter of law, to sell local telephone service, the
exchange monopolies would still exist substantially in the same form
and to the same extent as they do now.\39\
\39\ United States v. Western Elec. Co., 673 F. Supp. 525, 544
(D.D.C. 1987) (footnote omitted), aff'd in relevant part, 900 F.2d
283 (D.C. Cir.), cert. denied, 498 U.S. 911 (1990).
This observation is as true for French and German telecommunications
markets as it is for U.S. markets.
Second, a number of regulatory issues critical to the development
of effective competition will have to be resolved after French and
German regulators formally license potential competitors of FT and DT.
The threat of cross-subsidy provides one example. DOJ acknowledges that
existing French and German regulations ``are very limited and have not
prevented instances of massive cross-subsidy.'' \40\ Unless effective
regulations to prevent cross-subsidy are both adopted and implemented,
would-be competitors of FT and DT will be at an insuperable competitive
disadvantage, with FT and DT continuing to have a unique ability to
fund competitive services with inflated revenues coerced from captive
monopoly customers. If such cross-subsidization is allowed to continue
after the removal of legal entry barriers and the licensing of one
competitor, it will be impossible for competition to develop.
Similarly, French and German regulators will have to resolve issues
about the price that FT and DT charge for essential inputs. DOJ
acknowledges that even licensed competitors will continue to be
dependent on FT and DT for certain inputs for a significant period of
time,\41\ and if those inputs are overpriced, other firms will not be
able to compete effectively.
\40\ CIS, 60 Fed. Reg. at 44,072. Although section III.F of the
decree prohibits FT and DT from cross-subsidizing the international
services of Sprint and Phoenix, the proposed decree does not address
cross-subsidization of domestic services provided by FT and DT over
their domestic networks. The latter is the kind of cross-
subsidization that would prevent competition to FT and DT from
developing in France and Germany.
\41\ Id. at 44,061-44,062 (because of the prohibitive cost of
constructing a complete competitive network, ``any provider of
telecommunications or enhanced telecommunications services, or
seamless international telecommunications services, whether in the
U.S., France, Germany or elsewhere, is and will continue to be
dependent to some extent for the foreseeable future on FT for
origination and termination of telecommunications between France and
anywhere else, and on DT for origination and termination of
telecommunications between Germany and anywhere else'').
---------------------------------------------------------------------------
Regulatory implementation issues following formal liberalization
will be a major obstacle to the development of effective competition.
DOJ itself recognized the critical importance of these implementation
issues in the pending proceeding in this Court concerning the RBOC
waiver:
[T]he transition to competition in local exchange services will
be complex. No set of conditions for promoting such competition
could hope to address in advance the dozens of complicated
implementation issues that will have to be resolved before
meaningful competition is a practical reality, rather than merely a
theoretical possibility.\42\
\42\ DOJ Mem. re Competition, at 3. The development of domestic
long distance competition provides an instructive example. By the
early 1970s, the FCC had determined that long distance competition
was in the public interest and authorized MCI to compete against the
Bell System, which at that time controlled local and long distance
telephone service in the United States in much the same way that FT
and DT control local and long distance telephone service in France
and Germany. It still took MCI years to become a significant
competitor because MCI was forced repeatedly to seek relief from the
FCC and the courts from the determined efforts of the incumbent
monopolist to obstruct MCI's ability to compete. MCI Communications
Corp. v. AT&T, 708 F.2d 1081 (7th Cir.), cert. denied, 464 U.S. 891
(1983); see also United States v. AT&T, 524 F. Supp. 1336, 1353-57
(D.D.C. 1981); United States v. AT&T, 552 F. Supp. at 160-63. The
implementation issues in France and Germany will be at least as
difficult as those in the United States.
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DOJ's observations apply with equal force to the introduction of
competition in foreign countries. Yet DOJ would allow the Phase I
restrictions to be lifted while meaningful competition is only a
``theoretical possibility,'' not a ``practical reality.''
Third, resolution of these regulatory implementation issues on
terms that permit effective competition to emerge will be especially
difficult because the French and German governments are both the owners
and regulators of FT and DT.\43\ So long as those entities are
controlled by the French and German government, there will be strong
incentives for the governments to favor them, as well as Sprint and
Phoenix, in adopting and implementing regulatory reforms. The inherent
conflict of interest when the same entity owns and regulates a carrier
is certain to retard the development of meaningful competition. Indeed,
full privatization
[[Page 3992]]
of FT and DT--when private investors, and not the French and German
governments, own FT and DT--is likely to be practical prerequisite to
effective competition.
\43\ FT is a 100-percent Government-owned and -operated entity
and is expected to remain Government-controlled. Although DT became
a private corporation this year, the German Government is its sole
shareholder and is expected to retain majority control at least
through 1999. See CIS, 60 Fed. Reg. at 44,060.
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For these three reasons, and despite DOJ's apparent recognition
that the serious threats to U.S. consumers and competition alleged in
the complaint will continue until effective competition in France and
Germany develops, the proposed consent decree fails to guard against
those threats by terminating the Phase I safeguards when competition is
theoretically possible but long before it becomes actually effective.
It is plain, therefore, that there is a major gap in the protections
afforded by the consent decree. This gap is particularly significant
because it will occur during years of crucial development and
innovation in telecommunications.\44\ As a result, the harms to
competition--and ultimately to consumers--will have long-term and
extensive consequences.
\44\ see, e.g., Reploy Comments of DOJ, at 10.
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Accordingly, the transition from Phase I to Phase II under the
decree should take place not with the elimination of the legal
monopolies and licensing of a competitor in France and Germany, but
rather upon a finding that there is actual, effective facilities-based
competition in France and Germany. Such a finding by DOJ--as it has
proposed in other contexts \45\--should be included in the consent
decree as a prerequisite to the lifting of the Phase I restrictions.
Any DOJ decision concerning the state of competition in France and
Germany should be preceded by a mandatory public-comment period during
which intervenors are given an opportunity to present evidence to DOJ.
Following consideration of public comments, the Court should adopt or
reject DOJ's finding of actual, effective competition. Only if the
Phase I restrictions continue until FT's and DT's monopoly power has
ended can the proposed decree be effective.\46\
\45\ See DOJ Mem. re Competition, at 28. Such a finding would
require ``more than a single competitor serving niche markets.'' ID.
at 33. Indeed, DOJ recognizes in its consent decree that such
minimal competition is insufficient to prevent anticompetitive
behavior. See Final Judgment III.B, III.I, 60 Fed. Reg. at 44,053,
44,054-44,055; CIS, 60 Fed. Reg. at 44,071, 44,073 (applying Phase I
restrictions to public data networks despite existence of limited
competition).
\46\ It is reasonable to expect that such a finding would be
possible when, at a minimum, three years have elapsed since full
liberalization and privatization in France and Germany.
---------------------------------------------------------------------------
Extending the Phase I protections as proposed here would neither
unduly burden Sprint and Phoenix nor eliminate any possible benefits of
the alliance. The defendants have no legitimate interest in being the
beneficiaries of discrimination or other anticompetitive behavior, and
the Phase I restrictions (such as those prohibiting cross-subsidization
and nonstandard interfaces) will not impair Sprint's or Phoenix's
ability to compete. If French and Germany regulatory authorities
eventually adopt measures parallel to the Phase I restrictions, Sprint
and Phoenix would not be prejudiced merely because the same conduct
would be prohibited by the consent decree, particularly because DOJ
contemplates that the victim of any violation would pursue regulatory
remedies in France and Germany before complaining to the
Department.\47\ In sum, the demonstrable harms resulting from premature
expiration of the Phase I safeguards are into outweighed by any
offsetting benefits.
\47\ CIS, 60 FR at 44,074.
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B. Conditions Protecting U.S. Competition and Consumers Should Not Be
Ended Prematurely on the Assumption That Foreign Regulators Will
Provide Equivalent Protection
DOJ states that its acquiescence in the termination of the Phase I
restrictions under the terms of the proposed judgment rests in part on
the assumption that European regulatory authorities will protect
competition from U.S. carriers trying to compete with FT's and DT's
affiliates Sprint and Phoenix:
Generally speaking, during Phase II the proposed Final Judgment
relies to a greater extent on enforcement by national regulatory
authorities in Europe, the EU itself, and the FCC in the United
States to protect competition, while during Phase I the proposed
Final Judgment provides for additional types of injunctive relief to
ensure that Sprint and [Phoenix] do not benefit from anticompetitive
conduct by FT and DT. * * * Although the proposed Final Judgment
does not specifically reference all of the directives and measures
envisioned by the European authorities, an underlying assumption is
that these authorities will carry out their publicly announced
intention of having all the key regulatory measures needed for
development of effective competition in place by the time full
liberalization is to take effect in 1998.\48\
\48\ Id. at 44,066.
Reliance on such assumptions is misplaced. As DOJ itself has stated,
``Foreign regulation normally should not be considered a sufficient
alternative to protect U.S. consumers in the absence of any meaningful
facilities-based competition, however effective that regulation may be
represented to be.'' \49\
\49\ Reply Comments of DOJ, at 27.
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First, for the reasons explained above, even assuming implausibly
for purposes of argument that the French and German governments will
act affirmatively and aggressively to foster competition against the
incumbent monopolists that they own, it will take time for competition
to develop, and the threat to U.S. competition and consumers arising
out of these monopolies, and the corresponding need for the Phase I
protections, will continue until effective competition has taken root.
Second, as also explained above, because they own FT and DT, the
French and German governments that also regulate FT and DT and their
would-be competitors have an incentive to protect and preserve FT's and
DT's monopolies and to maximize their value if their shares are ever
sold to private investors. Moreover, the French and German governments
have considerable flexibility not to implement procompetitive reforms.
DOJ explains why:
The EU authorities have exercised a very significant role in
bringing about telecommunications liberalization in Europe, but
there are important limits on the scope of their authority. The
decision whether to privatize the government-owned
telecommunications carriers, and the pace at which this occurs,
[are] wholly at the discretion of the member states. Moreover, the
EU's powers to compel liberalization and protect competition relate
to activities affecting commerce within or between the member
states. The decision of whether and how to regulate the dealings of
FT and DT with foreign telecommunications carriers outside the EU,
including the terms on which operating agreements and leased lines
are made available, has been left to the French and German
authorities. It is not yet clear whether the EU's liberalization
measures will confer any rights on providers from the United States
and other countries outside the EU, or only on firms operating
within the EU. The national governments at present are free to limit
entry by such non-EU competitors, subject to the results of ongoing
multilateral telecommunications trade negotiations.\50\
\50\ CIS, 60 Fed. Reg. at 44,063.
Even if EU measures are effective in theory in preventing the risks
associated with the Sprint-FT-DT transactions, France and Germany can
delay adoption of those measures well beyond an EU implementation
deadline. Potential regulatory changes in France and Germany are simply
too uncertain to serve as the basis for expiration of the fundamental
substantive protections of the decree.
Third, DOJ has an independent responsibility to enforce the U.S.
antitrust laws to protect U.S. trade and U.S. consumers, and French and
German regulators do not share this
[[Page 3993]]
duty or this commitment. Deferring to the French and German governments
while FT's and DT's monopolies persist is inconsistent with the very
premise of the proposed judgment: if such deference were appropriate,
no decree at all would be necessary or appropriate. DOJ has stated:
``Regulation generally is an imperfect substitute for competition, and
that is particularly true when foreign authorities are regulating
government-owned monopoly carriers.'' \51\ If reliance on French and
German regulators to protect U.S. trade and consumers is inappropriate
today, it will continue to be inappropriate until effective facilities-
based competition has emerged in France and Germany.
\51\ Reply Comments of DOJ, at 27.
---------------------------------------------------------------------------
Contrary to DOJ's suggestion, its authority to seek modification of
the judgment does not solve the problem. DOJ notes that it could seek
modification pursuant to section VIII.A ``if, after the termination of
Phase I, discrimination * * * or other types of conduct occur that
would have been prohibited under the Phase I restrictions, resulting in
a substantial harm to competition.'' \52\ Before seeking modification,
DOJ ``would ordinarily inquire at the outset whether injured
competitors had availed themselves of existing regulatory remedies, if
any, in France or Germany as well as the United States, and what relief
had been provided or action taken, if any. * * *'' \53\ In other words,
DOJ recognizes a substantial possibility that the French and German
governments will not take the actions necessary to permit effective
competition to develop against FT and DT, and if its current hopes
thereby turn out to be unfounded, DOJ in effect commits itself to
seeking modification of the judgment.
\52\ CIS, 60 Fed. Reg. at 44,074.
\53\ Id.
---------------------------------------------------------------------------
This approach does not protect the public interest. The purpose of
the Phase I protections is to prevent competitive harm from occurring,
not merely to provide an after-the-fact remedy. Reimposing Phase I
protections after protracted modification proceedings would be too
little too late, and the judgment would provide no substantive
protection for competition by U.S. carriers from the end of Phase I
until DOJ prevailed on its modification motion. Moreover, the kind of
modification proceeding that DOJ contemplates would put it and the
Court in the position of evaluating the efficacy and reasonableness of
specific French and German regulations. Such a review would not promote
the interests in international comity espoused by DOJ.\54\ For these
reasons, reliance on possible future modification of the judgment to
solve the problem of future anticompetitive conduct would undermine the
purposes of the judgment.
\54\ Id. at 44,076.
---------------------------------------------------------------------------
The simpler, more direct, and more effective approach is to
continue the Phase I protections until effective competition develops.
Reliance on a hope that the French and German governments will provide
equivalent protection of U.S. trade and consumers once they license one
competitor would embroil DOJ and the Court in difficult enforcement and
modification issues in the likely (if not inevitable) event that this
hope turns out to be unrealistic.
C. Making Termination of Phase I Restrictions Dependent on the
Development of Effective Competition Is Consistent With the Decree
Entered in Connection With the MCI-BT Alliance
As DOJ acknowledges, there are ``crucial differences between this
transaction and the BT-MCI alliance.'' \55\ These differences make it
clear that modifying the proposed decree to retain the Phase I
restrictions until effective competition develops in fact and not
merely in theory is entirely consistent with, if not compelled by, the
decree entered in connection with the MCI-BT transaction.
\55\ Id. at 44,065.
---------------------------------------------------------------------------
At the time of the MCI-BT transaction, BT's position in the United
Kingdom's telecommunications market was dramatically different from the
current positions of FT and DT in their home markets:
Although BT continued to have some market power in basic
telecommunications services and facilities and control over local
bottlenecks in the United Kingdom at the time it formed its alliance
with MCI, all of its lines of business were already open to
competition and BT actually faced facilities-based competition to
some extent at all levels, from independent carriers and cable
television companies. Moreover, since 1993 BT has ceased to be
government-owned, so that it is independent from its government
regulator in the United Kingdom.\56\
\56\ Id. (emphasis added).
---------------------------------------------------------------------------
In stark contrast, FT and DT have legal monopolies over all basic voice
services--and over three-quarters of all telecommunications business--
in their markets; they do not face facilities-based competition in the
small segments in which it is legally permitted; and they are
government-owned entities with no independent regulators.\57\
\57\ Id.
---------------------------------------------------------------------------
The size of the proposed Sprint-FT-DT alliance magnifies its
anticompetitive risks. The combined revenues of Sprint, FT, and DT were
approximately $85 billion in 1994, more than twice the total revenues
of MCI and BT.\58\ France and Germany represent two of the three
largest telecommunications markets in the European Union; together they
are more than twice the size of the U.K. market. The proposed alliance
would have a significant portion of the overall European market as a
protected base from which to operate.
\58\ Id. at 44,059.
---------------------------------------------------------------------------
DOJ purports to provide for these differences between the Sprint-
FT-DT alliance and the MCI-BT alliance by imposing the Phase I
safeguards until competition is legally permitted in France and Germany
and then by imposing Phase II requirements that generally parallel the
injunctive provisions in the MCI-Concert decree.\59\ However, as
explained above, the most significant problem with the proposed decree
is that the Phase I restrictions are lifted before the actual
development of facilities-based competition in France and Germany. To
be consistent with the MCI-Concert decree, the Phase I restrictions on
Sprint and Phoenix should continue until there is as much competition
in France or Germany as there was in the United Kingdom at the time the
MCI-Concert decree was entered. At that time, it would be appropriate
to implement the Phase II restrictions comparable to the restrictions
in the MCI-Concert judgment.
\59\ Id. at 44,065.
---------------------------------------------------------------------------
IV. Conclusion
For the foregoing reasons, the consent decree as currently proposed
fails to remedy the antitrust violation alleged in the complaint and
therefore is not in the public interest. The decree should be modified
to provide that the restrictions imposed in Phase I remain in effect
until actual, effective facilities-based competition is found to exist
in France and in Germany.
Respectfully submitted,
MCI Communications Corporation.
[[Page 3994]]
Dated: October 23, 1995.
Anthony C. Epstein,
J. Paul Oetken,
Jenner & Block, Attorneys for MCI Communications Corporation.
Of Counsel:
Michael H. Salsbury,
Executive Vice President, and General Counsel, MCI Communications
Corporation.
Comments of BT North America Inc. to the U.S. Department of Justice
Regarding the Proposed Final Judgment
United States of America, Plaintiff, v. Sprint Corporation and
Joint Venture Co., Defendants.
[Civil Action No. 95-1304 (TPJ)]
Dated: October 23, 1995.
David J. Saylor,
Hogan & Hartson L.L.P., Columbia Square.
Attorneys for BT North America Inc.
Timothy R.W. Cowen,
British Telecommunications plc.
James E. Graf II,
BT North America Inc.
Exhibit C
Comments of BT North America Inc. to the U.S. Department of Justice
Regarding the Proposed Final Judgment
[Civil Action No. 95-1304 (TPJ)]
United States of America, Plaintiff, v. Sprint Corporation and
Joint Venture Co., Defendants.
I. Introduction
A. Background
In response to the public notice \1\ issued under the Antitrust
Procedures and Penalties Act (or Tunney Act),\2\ BT North America Inc.
(``BTNA'') submits these comments on the proposed Final Judgment or
Decree. The Complaint and Decree relate to the proposed twenty percent
investment by France Telecom (``FT'') and Deutsche Telekom AG (``DT'')
in Sprint Corporation (``Sprint'') and the three companies' proposed
formation of a Global Partnership. The Complaint defines their Joint
Venture Company (``JVCo'') as ``all entities to be formed as a joint
venture between Sprint, DT, and FT under the terms of the Joint Venture
Agreement when that agreement is consummated, including the governing
bodies of such venture.''\3\ The overall set of transactions is
sometimes referred to as the Phoenix Alliance, to distinguish it from
another proposed alliance between FT and DT called Atlas.
\1\ 60 Federal Register (FR) 44049 (August 24, 1995).
\2\ 15 U.S.C. 16(b)-(h).
\3\ Complaint para. 24; see also the definition of ``Joint
Venture Co.'' as multiple ``entities'' in Section V.O. of the
proposed Decree. The Stipulation (para. 6 thereof) filed on July 13,
1995, contemplates that JVCo will be created as ``a legal entity''
and will execute the Stipulation. 60 FR at 44050.
---------------------------------------------------------------------------
BTNA, a wholly owned subsidiary of British Telecommunications plc
(``BT''), is authorized by the Federal Communications Commission to
operate as a United States international resale carrier. BT is a
domestic and international telecommunications provider in the United
Kingdom (``UK'') and, through subsidiaries and affiliates, elsewhere in
the world. BT has a twenty percent investment in US carrier MCI
Communications Corporation (``MCI'') and has formed an international
joint venture with MCI known as Concert Communications Company
(``Concert'').\4\ MCI and Sprint are facilities-based competitors in
the provision of US international telecommunications service, including
to France and Germany. As distributors of Concert services, BT
(including BTNA as a US reseller) and MCI will be direct competitors of
Sprint, FT, and DT as distributors of JVCo services, if the Phoenix
Alliance is consummated. Where permitted by law, BT has been
endeavoring, directly or through joint ventures, to compete against FT
and DT on the European Continent. BTNA qualifies under Section V.F. of
the proposed Final Judgment as a US international telecommunications
service provider that ``directly or through a subsidiary or affiliate''
holds or has applied for a US, French, or General license, or actually
provides service that does not require a license, involving the US-
France or US-Germany route.\5\
\4\ BT's investment in MCI and their formation of Concert were
investigated by the Antitrust Division of the Department of Justice
(``DOJ'') and were allowed to go forward subject to a consent
decree. See United States v. MCI Communications Corp. & BT Forty-
Eight Co., 1994-2 Trade Cas. (CCH) para. 70,730 (D.D.C., final
judgment entered September 28, 1994) (``BT-MCI Final Judgement'').
\5\ BTNA is licensed by the FCC, inter alia, to resell switched
services and non-interconnected private lines between the US and
France and Germany. See BT North America, Inc., FCC File No. I-T-C-
93-126, DA 94-1257 (Chief, Int'l Bur., released November 14, 1994).
---------------------------------------------------------------------------
B. Overview of the Problems With the Proposed Decree
As explained in considerable detail in Part II of these Comments,
the proposed Final Judgment requires clarifications and modifications
in many important respects. With respect to the needed modifications,
four inter-related themes are paramount.
First, the Final Judgment should be rewritten so that the
transactions may not be consummated unless and until certain minimum
French and German laws and rules are in place. For example, if France
and Germany are actually preparing legislation and regulations allowing
alternative infrastructure (such as utility owned private networks
owned by railroads and electric utilities) to be used for public
telecommunications services other than switched voice, \6\ and if (as
the parties maintain \7\) those governments are not far behind in
preparing laws and regulations allowing facilities-based competition in
public switched voice, why not condition consummation of the
transactions on the prior completion of those efforts?
\6\ See ``Germany, France Agree to Liberalize Phone Markets as
Part of Sprint Venture,'' Wall Street Journal, October 13, 1995, at
A10.
\7\ See Sprint Corp., FCC File No. ISP-95-002, Reply Comments of
France Telecom (September 15, 1995) at 17-19; Reply Comments of
Deutsche Telekom (September 15, 1995) at 2-3, 25-26.
---------------------------------------------------------------------------
Second, excluding FT and DT as parties to the Final Judgment is
very problematic. In many cases, defendants Sprint and JVCo will be
able to turn a blind eye to discrimination or other impermissible
activity by FT and DT toward others that benefits Sprint and JVCo. This
is because it is too easy under the Decree for Sprint and JVCo to claim
they lacked sufficient information to actually know that something was
amiss in FT's or DT's conduct toward others. After all, there is
nothing in the proposed Decree binding FT and DT to disclose to Sprint,
JVCo, or anyone else critical information that would unmask FT's and
DT's wrongdoing. Additionally, because FT and DT are not defendants,
the Decree focuses upon forbidding Sprint and JVCo to undertake certain
activity until FT and DT conduct themselves in a specified way vis-a-
vis rivals. This backhanded approach, made necessary because FT and DT
are not defendants, will tend to postpone desirable technological
progress and innovation until Sprint and JVCo have caught up with, and
are prepared to compete against, their more pioneering competitors. A
direct approach, binding FT and DT as parties to the Decree, would
avoid allowing Sprint and JVCo to control the pace of industry
progress.
Third, and very important, in several places the proposed Decree
improperly assumes that the mere issuance of ``one'' license (or the
execution of ``one'' operating agreement) evidences so profound a
change in competitive circumstances as to justify automatic lifting of
key Decree safeguards. (The phrase ``one or more'' licenses, as used in
the proposed Decree, does not disguise the fact that ``one'' is legally
sufficient.) Indeed, there is no Decree requirement that the ``one''
licensee be
[[Page 3995]]
a major competitor and not a weak neophyte or even a shill. Thus, under
Section II.C., the issuance of an individual license to ``one or more''
other US provider(s) could unleash Sprint and JVCo to offer their US-
French/German services even though all other significant US competitors
are still knocking on the French and German authorities' doors for
essential licenses.\8\ And, Section III's crucial provisions
restricting unequal access to facilities ownership, prohibiting
discrimination and cross-subsidization, mandating proportionate
returns, and ensuring equal technical access to public network
interconnection, all expire when Phase I of the Decree terminates--
which is when, among other things, ``one or more'' entities is/are
licensed to provide facilities-based public switched voice services
(Section V.Q.(2)).
\8\ See pages 18-19, infra.
---------------------------------------------------------------------------
Fourth, as noted, Section III's protections automatically expire at
the end of Phase I when FT's and DT's public infrastructure and
switched voice monopolies formally terminate and ``one'' competing
license issues. Yet, nothing in the definition of Phase II assures that
the French and German governments will have in place from that point
forward adequate regulations, properly enforced, to prevent
discrimination, cross-subsidization, disproportionate returns, etc. DOJ
admits the ``proposed Final Judgment'' rests on the ``underlying
assumption * * * [that] all the key regulatory measures needed for
development of effective competition [will be] in place by the time
full liberalization is to take effect in 1998.'' \9\ There is
absolutely no warrant for DOJ's giant leap of faith that market-opening
measures inevitably will be accompanied by EC and national regulation
fully adequate to prevent FT and DT from abusing their enormous market
power. Nor, given the persisting government equity interests in FT and
DT (and indirectly in Sprint and JVCo), is there any basis to presume
that the national regulators will have the full independence or proper
inclination to provide sufficiently vigorous and impartial regulation
as to adequately replace Section III of the Decree.
\9\ Id. at 4406.
---------------------------------------------------------------------------
C. DOJ's Discretion to Withdraw and Renegotiate the Decree
The proposed Decreed was developed without benefit of the insights
of any affected industry members other than Sprint (and presumably FT
and DT). Now that it has received this and other Tunney Act comments,
DOJ should take a fresh look at the document. Whatever limits the case
law may place on a court's ability to reject a proffered antitrust
consent decree,\10\ those limits do not apply to the Department of
Justice. Paragraph 2 of the July 13, 1995 Stipulation says
unmistakably: ``Plaintiff may withdraw its consent to entry of the
Final Judgment at any time before it is entered, by serving notice on
the defendants and by filing notice with the Court.''
\10\ See US v. Sprint, Competitive Impact Statement (``CIS''),
60 F.R. at 44076-78.
---------------------------------------------------------------------------
While a reviewing court may have discretion to reject a proposed
decree on public interest grounds only if the decree is not ``within
the reaches of [the] public interest,''\11\ DOJ has the discretion and
the duty, particularly after receiving extensive public comment from
expert (albeit interested) industry participants, to determine anew
whether the proposed Decree is satisfactory or whether the antitrust
laws require additional or changed language. There is ample precedent
for DOJ modifying a proposed decree and seeking the defendants' consent
to essential changes.\12\ If defendants are absolutely unwilling to
accept needed changes, that alone may reveal something about
defendants' hidden motivations or agenda and reinforce DOJ's conviction
that the changes are absolutely vital to protect competition and the
public interest. In any case, no harm will come from DOJ proposing
further discussions among the Decree parties regarding such possible
modifications.
\11\ See id. at 44077, quoting, 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).
\12\ See, e.g., United States v. United Technologies Corp., No.
78 CV 580 (S.D. N.Y.), DOJ Responses to Comments, 46 F.R. 8787,
8789, 8798 n.3 (January 27, 1981) (modifying proposed antitrust
consent decree in response to public comments); United States v.
National Broadcasting Co., Civil Action No. 74-3601-RJK (C.D. Cal.),
Stipulation of May 4, 1977 (modifying proposed antitrust consent
decree after public comment), 42 F.R. 24996, 24997-98 (May 16,
1977).
---------------------------------------------------------------------------
Moreover, the parties to the proposed Decree must recognize that
the district court's authority is not zero. ``A decree, even entered as
a pretrial settlement, is a judicial act, and therefore the district
judge is not obliged to accept one that, on its face and even after
government explanation, appears to make a mockery of judicial power.''
\13\ This Decree will be reviewed by the court to see whether the
remedies proposed are ``inconsonant with the allegations.'' \14\
Moreover, in determining whether to approve a proposal, the court is
supposed ``to pay close attention to the compliance mechanisms in [the]
consent decree.'' \15\ The court also ``should pay special attention to
the decree's clarity'' or lack thereof.\16\ The judge ``is certainly
entitled to insist on that degree of precision concerning the
resolution of known issues as to make his task, in resolving subsequent
disputes, reasonably manageable.'' \17\
\13\ United States v. Microsoft Corp., 56 F. 3d 1448, 1462 (D.C.
Cir. 1995).
\14\ Id. at 1461.
\15\ Id. at 1462.
\16\ Id. at 1461.
\17\ Id. at 1462.
---------------------------------------------------------------------------
As Part II of these Comments brings out, there are a number of
instances in which the remedies proposed fall so far short of
correcting or preventing the anticompetitive problems described in the
Complaint, that the decree, unless significantly modified, will not be
within the broad ``reaches'' of the public interest. Further, there are
major loopholes, gaps in logic, and facial inconsistencies and
ambiguities that must be addressed and resolved before the court would
be right to approve the proposal.
II. The Proposed Final Judgment Must be Withdrawn and Substantially
Modified and Clarified to Come ``Within the Reaches of the Public
Interest''
A. The Phase I and II Equal Licensing Opportunity Provision (Section
II.C.) Requires Modification and Clarification
Section II.C. of the proposed Final Judgment is intended to ensure,
throughout Phases I and II, that US international telecommunications
service providers receive equal opportunity with Sprint, JVCo, and
their affiliates, in access to essential French and German licenses and
other forms of governmental authorization. Before discussing several
fundamental deficiencies in Section II.C.--which must be corrected, it
should be useful to review how central this matter of licensing is to
remedying the competitive problems described in the Complaint.
The Complaint asserts that the transactions at issue will
substantially lessen competition by giving FT and DT increased
incentives and ability to use their government-granted monopolies and
market power to discriminate against competitors of Sprint and
JVCo.\18\ This discrimination, which can take many forms, will raise
competitors' costs and diminish the quality and quantity of their
services--all to the detriment of consumers.\19\ FT and DT have
government-granted monopolies encompassing essentially all
[[Page 3996]]
international and domestic public telecommunications infrastructure
(excluding certain mobile telephone and satellite radio facilities) and
the provision of public switched voice services.\20\ Although their
legal monopolies over international and domestic public data
transmission have recently expired, FT's and DT's well-established and
ubiquitous public data networks retain nearly 100 percent monopoly
market shares.\21\
\18\ Id. para. 40.
\19\ Id.
\20\ Id. Paras. 25-26, 31-32, 34-35.
\21\ Id. Paras. 33,36.
---------------------------------------------------------------------------
For the immediate future, then, any competitor wishing to provide
public telecommunications voice, data, or other value-added services
between the US and France or Germany is dependent upon FT and DT for
their cooperation and much more.\22\ In the case of bilateral
correspondent services where each corresponding carrier is responsible
only for its end, US providers need FT and DT to provide the requisite
French or German connecting international half-circuits and also
domestic circuits terminating communications in those countries or
transiting them to third country.\23\ For services that do not qualify
as traditional bilateral correspondent services, such as seamless end-
to-end services, US providers need to obtain from FT and DT leased
international half-circuits and domestic French and German private
lines, as well as interconnection to each country's public switched
telephone network (PSTN) for voice services and public switched data
networks for many data services.\24\
\22\ Id. Paras. 31-36
\23\ Id. Paras. 31, 34.
\24\ Id. Paras. 31-36.
---------------------------------------------------------------------------
The Complaint recognizes that the European Union (EU) may
eventually require France and Germany to allow entry by additional
providers of public telecommunications infrastructure and switched
voice services.\25\ The Complaint also notes, however, that the same
French and German governments that own FT and DT will have to develop
licensing and interconnection regulatory regimes and actually issue
licenses and other authorizations before ``real competition'' truly
exists.\26\
\25\ Id. para. 37.
\26\ Id.
---------------------------------------------------------------------------
Section II.C. purports to address the risk that French and German
licensing requirements and processes will be used in ways that
discriminate against US competitors of Sprint and JVCo.\27\ This is a
very substantial risk for two reasons. First, the French and German
governments are the sole owners, and are pledged to remain the
controlling owners, of FT and DT respectively.\28\ These ownership
interests give the two governments strong financial incentives to favor
FT and DT and the entities those governments will indirectly own in
part, i.e., Atlas, JVCo, and Sprint. Second, even if those governments
were to drastically revise their laws so as to fully insulate the
licensing bodies from such conflicts of interest, FT and DT will have
strong incentives to use (or misuse) the licensing requirements and
processes to discourage, delay, and defeat the licensing of rivals.
Section II.C. falls so far short of the mark in preventing
anticompetitive licensing discrimination that it must be modified in
several crucial respects and clarified in certain other respects.
\27\ United States v. Sprint Corp., Competitive Impact Statement
(CIS), 60 F.R. at 44049, 44058, 44069-70.
\28\ Complaint Paras. 2, 25, 26; CIS, 60 F.R. at 44065;
Statement by French Minister Fillon, August 30, 1994 (``a majority
of [FT's] capital will remain held by the public sector''), attached
to Sprint Corp. ex parte letter, Sprint Corp., FCC File No. ISP-95-
002 (filed September 28, 1995); Speech and Responses to Questions by
German Minister Botsch, National Press Club, Washington, D.C., April
3, 1995 (German government intends to retain majority control of
DT), recorded on Dow Jones Investor Network videotape.
---------------------------------------------------------------------------
Specifically, the situation Section II.C. must more adequately
address is when a competitor of Spring or JVCo needs to secure a French
or German individual license in order lawfully to offer a particular
telecommunications service between the US and France or Germany. For
example, suppose MCI seeks to offer an end-to-end Concert-branded
service between the US and France that would require MCI or Concert (or
BT on behalf of MCI or Concert) to obtain an individual license
covering all or part of the French end.\29\ It is essential that
Section II.C. be modified so that: (1) an individual license will be
issued promptly even if Sprint and JVCo are not sufficiently
technologically advanced to offer a directly competing service; (2) the
individual license is not burdened with discriminatory terms and
conditions; (3) unfair delay in issuing the individual license cannot
be justified on the ground that French and German authorities have
already licensed ``one'' other unaffiliated US provider, however weak
and insignificant that provider may be; and (4) the license-issuing
process cannot be skewed to give Sprint and JVCo an unfair headstart.
\29\ Under the current monopoly regime, the French license might
be for the right to offer ``bearer services,'' e.g., packet switched
data services over international half-circuits and domestic private
lines leased from FT. See Complaint para. 33. After FT's legal
monopoly over public voice and infrastructure is abolished, the
French license might be to offer public switched voice services over
international and domestic circuits owned by the licensee or leased
by the licensee from FT or its new infrastructure competitors.
---------------------------------------------------------------------------
1. Failure to Precondition Consummation of the Transactions Upon Actual
Accomplishment of Regulatory Reforms in France and Germany
A key flaw in Section II.C. is its failure affirmatively to require
that, as a prior condition of the parties' consummating the FT/DT
investments in Sprint and the formation of JVCo, nondiscriminatory
requirements and procedures for prompt French and German licensing of
US international providers must be established and in place for all
services (except, regrettably, still-monopolized public switched voice
services). Instead, Section II.C. comes at the problem indirectly and,
unfortunately, much less effectively.
Section II.C. bars Sprint and JVCo from offering (or providing
facilities enabling FT or DT to offer) ``any particular * * * service''
between the US and France or Germany unless (1) US competitors seeking
to offer ``such a service'' do not need a license (or other
authorization) for any French or German aspect of the service, or (2)
the requisite French or German class license is in effect for US
providers, or (3) French or German individual licensing procedures are
established ``as of the time'' Sprint and JVCo begin offering ``such a
service.'' Given Section II.C.'s oblique approach to the problem,
France and Germany (motivated perhaps by their direct ownership
interests in FT and DT and indirect interests in Sprint and JVCo) can
delay determining whether a license is required, can delay placing a
class license in effect, and can delay adopting individual licensing
procedures, until FT, DT, Sprint, JVCo, and their affiliates, are ready
to offer the ``particular * * * service'' themselves. Thus, US
consumers of US-French/German telecommunications services can be denied
the benefits of early innovation and competition from pioneering
entities outside the Sprint alliance while French and German
authorities postpone essential decisionmaking needed by those entities.
In effect, Section II.C. lets FT, DT, and Sprint control the pace of
innovation and progress on the US-French/German routes to suit their
own parochial economic interests and schedule.\30\
\30\ The problem is exacerbated by Section II.C.'s reliance on
the term ``particular * * * service.'' The Section seems to presume
that the only competitive alternative to a ``particular * * *
service'' is ``such a service'' (emphasis added), i.e., an identical
type of service provided by a rival. This creates a serious problem
illustrated by the following example. Assume Sprint and its allies
are content to offer a certain level of enhanced voice service on a
correspondent basis with FT and DT subject to a certain accounting
rate that keeps settlement rates and retail prices up. If another US
carrier wanted to undercut the Sprint correspondent service by
offering an end-to-end enhanced voice service on a non-
correspondence or self-correspondence basis, Section II.C. (absent
modification or clarification) would seem of no help. This is
because the new service probably would not be considered ``such a
service'' as the ``particular * * * service'' offered by Sprint.
[[Page 3997]]
---------------------------------------------------------------------------
To be sure, US authorities probably lack the authority to impose
requirements directly upon foreign states' licensing authorities. But
where foreign states own controlling interests in commercial entities
that seek to invest in and form a joint venture with a US international
carrier (here Sprint), US authorities have the jurisdiction and the
statutory obligation to prevent that investment and joint venture from
occurring unless and until the foreign sovereign authorities have taken
adequate legal actions in their own jurisdictions to ensure fair
competition.\31\ The proposed decree should be modified to accomplish
that objective.
\31\ The situation here is totally distinguishable from that in
United States v. MCI Communications Corp. and BT Forty-Eight
Company, Civil Action No. 94-1317 (D. D.C., filed June 15, 1994). At
the time of the consent decree settling that matter, the United
Kingdom no longer owned a significant interest, much less a
controlling interest, in BT. See U.S. v. Sprint Corp., CIS, 60 F.R.
at 44065. Consequently, the British government and its licensing and
regulatory authorities (DTI and OFTEL) had no economic or financial
interest in BT, MCI, or their joint venture.
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2. Failure to Specify That Individual Licensing Must be
Nondiscriminatory
A second serious flaw is the failure of subparagraph 3 of Section
II.C. to require explicitly that individual licensing procedures be
nondiscriminatory, substantively and temporally. The provision says
that the Sprint/JVCo ``particular * * * service'' offering may not
proceed unless:
3. If an individual license is required in France or in Germany
to offer such a service, established licensing procedures are in
effect as of the time of the offering of the service by which other
United States international telecommunications providers are also
able to secure such a license * * *. [Emphasis added.]
The provision may intend that the ``Licensing procedures'' be
evenhanded and nondiscriminatory, but it does not unequivocally say
so--which it should. The provision needs to be modified to read
``established licensing procedures (either the same as, or no more
demanding of the prospective licensee than, those procedures applicable
to the particular service offering of Sprint, Joint Venture Co., FT, or
DT) * * *''.
To ensure no temporal discrimination, the phrase ``as of the time
of the offering of the service'' should be modified so that the Sprint
group does not receive an unfair headstart. The phrase should read:
``as of the time that Sprint, Joint Venture Co., FT, DT, or their
affiliate applied for the requisite license * * *.'' Otherwise the
Sprint group could complete the licensing process and be poised to
offer the service before rival U.S. providers would even be able to
submit their license applications.\32\
\32\ The modification proposed in the text presumes that Sprint,
JVCo, FT, or DT, as the case may be, must secure ``an individual
license'' before any Phoenix Alliance entity (including Atlas) may
offer the particular U.S.-France/Germany service. DOJ should confirm
that, if ``an individual license'' must be obtained by other U.S.
providers (or their affiliates), then the Decree also requires one
of the Phoenix entities to apply for and obtain a comparable
``individual license.'' DOJ needs to clarify that the Phoenix
entities may not simply operate their service over FT's and DT's
pre-existing telecommunications operators' licenses thereby evading
the equal opportunity intent of Section II.C.
On the other hand, if the Decree contained a loophole allowing
the Phoenix entities to bypass applying for any new French and
German licenses and permitting them to rely solely upon FT's and
DT's pre-existing operators' licenses, then some modification or
clarification of Section II.C. would be essential. First, DOJ would
need to clarify that Section III.C.3. applies even when the relevant
``individual license[s]'' for the Phoenix group are FT's and DT's
pre-existing operators' licenses. Second, Section III.C. would need
to be revised to impose on the Phoenix group a reasonable moratorium
preventing Sprint and JVCo from offering the U.S.-France/Germany
service (or providing facilities enabling FT or DT to offer that
service) until the requisite ``individual licens[ing]'' procedures
that other U.S. providers must go through had been ``established''
long enough that any providers applying promptly after those
procedures took effect would also be licensed.
---------------------------------------------------------------------------
Finally, to ensure that rival U.S. providers are not subject to
unfair discriminatory conditions, the phrase ``such a license'' should
be rewritten to say: ``such a license (with requirements and conditions
no more onerous than those imposed on Sprint, Joint Venture Co., FT,
DT, or their affiliate).'' Without this amendment, the whole provision
could be severely undercut, for example, by France or Germany imposing
unfairly discriminatory license or interconnection fees, geographic
requirements or limitations, service eligibility restrictions (such as
satellite-only when terrestrial is needed), universal service
obligations or contributions, and the like, upon the other U.S.
providers.
3. Failure to Require That More Than One U.S. Provider Besides Sprint
and JVCo be Licensed
One of the most troubling loopholes in Section II.C. relates to the
second part of subsection 3 which, as now written, can be satisfied in
either of two ways: (i) simultaneous or earlier licensing of other U.S.
providers(s), or (ii) later licensing. The pertinent language is:
* * * and (i) one or more United States international
telecommunications providers other than FT, DT, Sprint or Joint
Venture Co. and unaffiliated with FT, DT, Sprint or Joint Venture
Co. have secured such a license in France and in Germany, or (ii) if
Sprint or Joint Venture Co. or FT or DT is the first provider to
seek a license to offer such a service, other United States
international telecommunications providers are also able to secure
such a license within a reasonable time and in no event longer than
the time it took Sprint, Joint Venture Co., FT, or DT to obtain such
a license, after having applied for such a license, unless the
additional time required is attributable to delay caused by the
applicant. [Emphasis added.]
Alternative (i) is met if ``one or more'' US providers other than
Sprint, JVCo, et al., actually ``have secured a license.'' Clearly the
word ``or'' in the phrase ``one or more'' is used here in the
disjunctive sense; consequently, the words ``or more'' add nothing
mandatory to Section II.C.3.(i)'s requirement. Doubtless Sprint and
JVCo will claim that Section II.C.3(i) is fully satisfied if a license
is issued to only ``one'' unaffiliated US provider, no matter how weak
or inconsequential that provider is.\33\ Thus, AT&T, BTNA, Concert,
MCI, IDB, Worldcom, MFS, ACC, and other significant competitors could
find their license applications held up indefinitely, so long as a
single heretofore unknown, unaggressive, resource-limited US provider
has the one other license besides the Sprint group.
\33\ Alternative (ii) in Section II.C.3. cannot be relied upon
to close any loophole left available under alternative (i).
Separated by the disjunctive ``or,'' subsections 3(i) and 3(ii)
clearly are alternatives; both need not be satisfied, only one.
---------------------------------------------------------------------------
Subsection (i) absolutely must be rewritten to increase
significantly the minimal number of required licenses. As the Complaint
itself says: ``Mere lifting of the legal prohibitions on competition
would not alone bring about real competition, since actual competitors
[sic] must also be licensed to operate.'' \34\ To ensure that the
minimal number of licensees includes significant competitors, certainly
the major US carriers AT&T and MCI (or their affiliates, such as
Concert or BT for MCI) should have to have been proffered licenses
before Sprint and JVCo could proceed with their offering.\35\ The
minimal number should
[[Page 3998]]
be three.\36\ Moreover, Section II.C.3. should be rewritten so that the
revised first part of subsection 3 becomes the first requirement, the
revised subsection (i) becomes the second requirement, and a revised
subsection (ii) (discussed infra) becomes the third requirement.\37\
\34\ Complaint para. 37 (emphasis added).
\35\ Section II.E. of the Final Judgment in the BT-MCI matter
required that the UK grant UK-US international simple resale (ISR)
licenses to ``all qualified United States international
telecommunications providers'' before MCI or Concert could provide
BT facilities or services for a UK-US ISR offering. At the time,
seven such US providers were identified. See US v. MCI, CIS, 59 F.R.
33009, 33021 n.12.
\36\ If at least three US competitors or their affiliates do not
seek licenses or are ``gaming'' the process to slow their own
applications, presumably DOJ, the other parties, and the Court can
agree to waive the requirement-of-three. See Section VIII.A.
\37\ To be consistent with the anti-discrimination change that
should be made in the first part of subsection 3, the revised second
requirement (currently subsection 3(i)) should say: ``secured such a
license (with requirement and conditions no more onerous than those
imposed on Sprint, Joint Venture Co., FT, DT, or their affiliate).''
---------------------------------------------------------------------------
If subsection 3(ii)'s timely future licensing concept were retained
as a complete alternative to the concept of simultaneous (or previous)
licensing of competitors, it would open a potentially very significant
loophole. Subsection 3(ii) requires licensing of Sprint's and JVCo's
rivals ``within a reasonable time.'' If it turns out later (after
Sprint and JVCo begin offering service) that US rivals remain
unlicensed even though a reasonable time has expired,\38\ the horse
will be long gone from the barn and hardly susceptible to quick capture
and return. The prospect that the court would actually order Sprint and
JVCo to stop service to customers (and indeed terminate their
contracts) seems quite remote--although that would be the correct
result under the proposed decree. Thus, there is a substantial
practical risk that subsection 3(ii) violations would not be remedied
soon enough, if ever. To avoid that problem, it is important that both
subsections 3(i) and 3(ii) be made separate mandatory obligations that
stand on their own. In that way, there will be licensed competitors
(three under our alternative approach, perhaps only one under the
proposed Final Judgment) even if subsequent licensing of others is
delayed.
\38\ The delay may be unexplained or may be attributable to
various anticompetitive explanations, including the attempted
imposition of discriminatory conditions on the rivals of Sprint and
JVCo.
---------------------------------------------------------------------------
4. Need To Require That All Subsequent License Applications be
Processed at Least as Promptly as Sprint's and JVCo's
As explained supra, both subsections 3(i) and 3(ii) should be
mandatory provisions, not optional alternatives to compliance with each
other. Subsection 3(i), after being rewritten in the mandatory language
we suggest, would require that at least three US international
providers (or their affiliates) be licensed before Sprint and JVCo may
offer their service. Subsection 3(ii), in turn, would require prompt
processing of any later-filed applications by additional US providers
beyond those licensed in accordance with subsection 3(i).
When rewritten, subsection 3(ii) should also be clarified in one
important respect. As now written, the provision requires the license
to issue ``within a reasonable time * * * unless the additional time is
attributable to delay caused by the applicant.'' The provision should
say ``solely attributable'' to take care of the situation where the
French or German government imposes unfairly discriminatory conditions
or information requirements and the applicant refuses to acquiesce in
the discrimination, thus resulting in delay.\39\
\39\ DOJ should make clear that, in some situations, a
``reasonable time'' may actually be shorter than the time taken for
processing the application of Sprint, JVCo, FT, or DT. Presumably
action on that application will have resolve most or all general
regulatory issues, permitting much faster processing of subsequent
applications filed by others.
---------------------------------------------------------------------------
* * * * *
To summarize the foregoing points, here is how Section II.C.3.
should read in full:
3. If an individual license is required in France or in Germany
to offer such a service (or one competitive with it),
(i) established licensing procedures (either the same as, or no
more demanding of the prospective licensee than, those procedures
applicable to the particular service offering of Sprint, Joint
Venture Co., FT, or DT) are in effect as of the time that Sprint,
Joint Venture Co., FT, DT, or their affiliate applied for the
requisite license for the offering of the service, by which
procedures other United States international telecommunications
providers are also able to secure such a license (with requirements
and conditions no more onerous than those imposed on Sprint, Joint
Venture Co., FT, DT, or their affiliate); and
(ii) at least three major United States international
telecommunications providers (including minimally AT&T and MCI or
their affiliates) other than FT, DT, Sprint or Joint Venture Co. and
unaffiliated with FT, DT, Sprint or Joint Venture Co. have secured
such a license (with requirements and conditions no more onerous
than those imposed on Sprint, Joint Venture Co., FT, DT, or their
affiliate) in France and in Germany; and
(iii) other United States international telecommunications
providers are also able to secure such a license within a reasonable
time and in no event longer than it took Sprint, Joint Venture Co.,
FT or DT to obtain such a license, after having applied for such a
license, unless the additional time is solely attributable to delay
caused by the applicant.
B. Phase I's Facilities Ownership Prohibitions (Sections III.A.-B.)
Must Be Modified and Clarified in Key Respects
Sections III.A.-B. are intended to ensure that, throughout Phase I
of the Final Judgment, Sprint and JVCo gain no unfair advantage from
FT's and DT's continuing government-protected infrastructure
monopolies. Thus, Section III.A.(i) prevents Sprint and JVCo from
``acquiring an ownership interest in, or control over,'' facilities
``in'' France or Germany that are ``legally reserved to FT or DT.''
Section III.A.(ii) forbids Sprint and JVCo from ``acquiring an
ownership interest in, or control over,'' international half-circuits
``terminating in France or Germany'' that are used for US traffic
unless: (1) those half-circuits are ``no greater than the aggregate
quantity'' that ``other providers unaffiliated with FT, DT, Sprint, or
[JVCo] actually own and control,'' or (2) DOJ agrees that ``meaningful
competition exists to such international half-circuits provided by FT
or DT.'' Section III.B. prohibits Sprint and JVCo from investing in or
controlling FT's and DT's Public Data Networks.
Phase I (as well as each of the foregoing Section III.A.-B.
restrictions) expires on a country-specific basis when the relevant
French or German government (1) removes all of the legal prohibitions
on public infrastructure and switched voice competition and (2)
licenses ``one or more'' entities unaffiliated with FT, DT, Sprint, and
JVCo to (i) construct, own, and control domestic and international
infrastructure, and (ii) provide switched domestic long distance voice
services ``without any limitation on geographic scope or types of
services offered'' and ``international voice service[s]'' between the
US and that country. See Sections V.P.-Q. for definitions of Phases I
and II.
To avoid the very sorts of anticompetitive problems described in
the Complaint (discussed supra), these provisions must be modified and
clarified in certain key respects.
1. ``Ownership Interest'' and ``Control'' Need Clarification
Section III.A. uses the terms ``own,'' ``ownership interest,'' and
``control.'' ``Control'' is defined to exclude ``publicly available
leases or other publicly available uses of such facilities.'' ``[O]wn''
and ``ownership interest'' are not defined.
DOJ should clarify what constitutes an ``ownership interest'' or
``control,'' as
[[Page 3999]]
distinguished from ``publicly available leases [and] * * * uses.'' In
the case of undersea cables, certainly an entity that holds title to
the cable, or owns an equity interest in the corporation, partnership,
or venture that holds title to the cable, has an ``ownership interest''
for purposes of Section III.A. Cable investments in the form of
indefeasible rights of use (IRU) are long-term non-management rights
generally obtained through private negotiation with the cable owner(s).
IRUs provide ``control'' over half-circuits and should not be excluded
from Section III.A. as ``publicly available leases or * * * uses.''
With respect to satellites used for international telecommunications,
generally the owner is an international organization of sovereign
states. Each member state commonly designates a single signatory
carrier to obtain long-term transponder allotments. Surely the entity
that either owns the satellite (or transponder) or signs a commitment
for the transponder allotment ``owns'' or ``controls'' the uplink and
downlink half-circuits in its country within the meaning of Section
III.A.
Clarification along the foregoing lines is needed so that Sprint
and JVCo are not able to find a loophole in Section III.A. that permits
them to gain an anticompetitive cost advantage over competitors that
lack their close affiliation with FT and DT. FT and DT are the only
undersea cable owners (or IRU holders) ad international satellite
signatories in France and Germany as of now.\40\ Competition would be
severely distorted if FT or DT could favor Sprint or JVCo with special
cable IRUs and/or satellite circuit allotments priced at book value or
some other level far under the long-term lease rates ``publicly
available'' to their competitors.
\40\ See Complaint Paras. 32, 35; CIS, 60 F.R. at 44071.
---------------------------------------------------------------------------
2. The ``Aggregate Quantity'' Exception Requires Clarification
The first exception to Section III.A.(ii) says: ``except to the
extent that, and in no greater than the aggregate quantity that, other
providers unaffiliated with FT, DT, Sprint or Joint Venture Co.
actually own and control such international half-circuits.'' The most
reasonable reading of this exception is that Sprint and JVCo may own or
control only the ``aggregate[d] quantity'' of half-circuits that any
single ``other provider[]'' owns or controls. If, however, the
provision enables Sprint and JVCo to own or control as many half-
circuits as all ``other providers'' in the ``aggregate'' own or
control, then the provision must be modified for the following reason.
If half-circuit ownership is split among many ``other providers,''
Sprint and JVCo with far greater capacity than any other competitive
provider will easily be able to divide and conquer. Facilities
ownership/control gives a carrier lower costs and greater certainty
about its costs than a carrier compelled to rely, in whole or in part,
on leasing half-circuits. To be sufficiently attractive from price,
technical, or other perspectives to elicit customer orders, a
particular service offering may require a substantial number of half-
circuits. If that number exceeds the maximum available half-circuits
that any individual competitor other than Sprint/JVCo can readily
acquire from FT and DT, obviously Sprint/JVCo's advantage deriving from
the affiliation with FT and DT would unfairly distort competition.
Section III.A.(ii) should be clarified to ensure that this cannot
happen.
The first exception in Section III.A(ii) requires further
modification or clarification to make clear that the term ``such
international half-circuits'' means that the competitor's half-circuits
are comparable and not inferior to Sprint/JVCo's half-circuits. The
competitor's half-circuits should have the same technical features
(bandwidth transponder power, etc.), belong to the same distribution
mode (e.g., submarine cable compared to submarine cable), connect to
the same or a commercially equivalent terminus (in the case of cable),
and serve the same geographic area (in the case of satellite) as the
Sprint/JVCo owned or controlled half-circuits. Otherwise, for example,
Sprint/JVCo might be allowed to own/control undersea fiber optic cable
half-circuits up to the aggregate number of the competitor's satellite
half-circuits even though the former transmission mode is far
preferable for trans-Atlantic voice communications. Similarly, Sprint/
JVCo might benefit unfairly be being allowed to own/control undersea
cable half-circuits that terminate in the most desirable locations
whereas the competitor would be relegated to less desirable locations
further removed from higher quality gateway switches and larger
population centers.
3. The ``Meaningful Competition'' Exception Requires Clarification
Section III.A. provides a second exception viz.: if ``plaintiff and
defendants agree that meaningful competition exists.'' DOJ needs to
clarify that it will not ``agree'' unless such a conclusion is fully
supported by a factual record developed after reasonable notice and
opportunity for public comment.
4. The ``One or More Licenses'' Concept That Would Terminate the
Facilities Ownership Prohibitions of Sections III.A. and B. Needs
Revision
Sections III.A. and B. (like Sections III.C.-I.) automatically
expire when Phase I, as defined, ends.\41\ Under Sections V.P. and V.Q.
of the proposed Final Judgment, Phase I terminates on a country-
specific basis when (1) all legal prohibitions against entities other
than FT and DT providing domestic and international infrastructure and
public switched voice are removed, and (2) ``one or more licenses or
other necessary authorizations'' are issued to entities unaffiliated
with FT, DT, Sprint, and JVCo. The phrase ``one or more'' raises the
same problem here as it does in Section II.C.3(i) supra. In the Section
III.A.B. context, the interests of promoting competition would be
seriously disserved if Sprint and JVCo could start owning and
controlling French and German domestic and international infrastructure
even when only a single competitor (and quite possibly a weak one or
one antagonistic to AT&T, MCI, and US carriers) had been licensed.
Section V.Q.(2) should be modified to say, in pertinent part, ``issued
licenses or other necessary authorizations to at least three entities
other than FT, DT, Sprint or Joint Venture Co. and unaffiliated with
FT, DT, Sprint or Joint Venture Co. * * *.'' The provision should go on
to say that the three should ``minimally include AT&T and MCI or their
direct or indirect affiliates,'' (e.g., a BT joint venture with a
German company, an AT&T/Unisource entity, etc.). This modification will
provide assurance that the licensees providing alternatives to FT and
DT will be vigorous and financially strong competitors and also that
Sprint and JVCo will not obtain an anticompetitive advantage over their
principal US competitors when Phase I expires.
\41\ See Section X.B. second sentence.
---------------------------------------------------------------------------
C. The Principal Provision Prohibiting Discrimination During Phase I
(Section III.D.) Requires Modification and Clarification
Although several other provisions are also intended to prevent FT
and DT from unfairly favoring Sprint and JVCo,\42\ the principal anti-
discrimination provision is Section III.D., which has two parts.
Section III.D.1. says Sprint and JVCo ``shall not purchase, acquire or
accept from FT or DT any FT or DT Products and Services on any
discriminatory basis for use in
[[Page 4000]]
the offer, supply, distribution or other provision by Sprint or
[JVCo]'' of any US-France/Germany telecommunications service.
``[D]iscriminatory basis'' means ``terms more favorable to Sprint or
[JVCo] than are made available to other similarly situated'' US
providers, i.e., providers ``that are generally comparable to Sprint
and [JVCo] with respect to volume or type of FT or DT Products and
Services purchased, acquired or accepted from FT and DT * * *.''
Section III.D.2. supplements Section III.D.1. by coming at the anti-
favoritism issue from a different angle. Section III.D.2. says ``Sprint
and [JVCo] may not benefit from any discount or more favorable term
offered by FT or DT to any customer for FT or DT Products or Services,
that is conditioned on Sprint or [JVCo] being selected'' as the US
provider. These provisions require modification and clarification to
eliminate possible loopholes in interpretation and enforcement.
\42\ See e.g., Section III.C., III.E., III.I.; cf. Sections
II.A.-7.
---------------------------------------------------------------------------
1. The Failure To Bind FT and DT Directly as Parties to the Decree Is a
Significant Flaw That Should Be Corrected
The stated purpose of Section III.D.1 is ``to prevent FT or DT from
using their monopolies and market power in France and Germany to favor
Sprint and [JVCo] in the provision of products and services that other
providers must also have to compete effectively.'' \43\ A crucial
deficiency of Section III.D.1. is that it is framed only in terms of
what Sprint and JVCo may not ``purchase, acquire or accept'' from FT
and DT but not also in terms of what FT and DT may not provide to them.
FT and DT are not made defendants and, therefore, are not bound to
comply with the prohibition against discrimination.\44\ Although on its
face Section III.D.1. is not limited to knowing or intentional receipt
of discriminatory preferences, there is a substantial risk (absent
clarification) that Sprint and JVCo will view their obligations as
extending only to situations where they know they are beneficiaries of
preferential treatment by FT and DT. Moreover, there is no provision
expressly requiring Sprint and JVCo affirmatively to inquire of FT and
DT in advance to make certain there will be no discrimination if they
purchase, acquire or accept a particular FT or DT Product or Service.
Instead, Sections II.A.1.-5. only require Sprint or JVCo, as the case
may be, to determine and disclose what it is receiving from FT and DT
in terms of interconnection, other services, accounting and settlement
rates, and circuit and service provisioning and restoration (and also,
under subsections A.2. and A.4., to disclose what FT and DT are
providing to customers ``in conjunction with'' FT's and DT's
distribution of JVCo services). Sprint and JVCo, therefore, will not
necessarily know whether they have acquired FT or DT Products and
Services on a discriminatory basis because they may not know what
prices, terms, and conditions FT and DT have agreed to provide others.
\43\ CIS, 60 F.R. at 44071 (emphasis added).
\44\ Sprint and JVCo are defined so as not to include FT, DT,
Atlas, or each other. See Sections V.O. and V.T.
---------------------------------------------------------------------------
A similar problem exists with respect to Section III.D.2. This
provision fails to prohibit FT and DT (because they are not defendants
bound by the decree) from offering discounts or other favorable terms
to customers conditioned upon the customers using Sprint or JVCo as US
provider. Section III.D.2. certainly does not say Sprint or JVCo must
know of the ``discount or more favorable term'' and of the
``condition[ing]'' for the prohibition to come into play. Nonetheless,
there is a substantial risk Sprint and JVCo will consider the Section
III.D.2. obligation to apply only if they have such knowledge. Nothing
in the Section or elsewhere imposes upon Sprint and JVCo an express
affirmative obligation to obtain from FT and DT all the information
necessary to determine that such conditional discounting (or other
favoritism) has not occurred and will not occur. Section II.A.7.
requires Sprint and JVCo to make disclosures only when they are in
``receipt of any information from FT or DT, or otherwise learn[ ] of
any discount or more favorable term'' offered to customers by FT or DT
on condition that Sprint or JVCo is selected as US provider. Under
Section II.A.7., clearly there is no obligation imposed on FT and DT to
provide the requisite information to Sprint and JVCo and apparently
there is no obligation on Sprint or JVCo to insist that FT and DT
provide such information to them.
To be effective, the decree should be revised to include FT and DT
as parties and to make the anti-discrimination language apply directly
to FT's and DT's actions in creating any discrimination as well as to
Sprint's and JVCo's actions in accepting the benefits of
discrimination.\45\ In the event that cannot be accomplished, at a
minimum the decree must be clarified to make certain that Sprint and
JVCo understand their obligations apply strictly regardless of what
facts Sprint and JVCo may or may not actually know or even have reason
to know after due inquiry.
\45\ This situation is entirely distinguishable from US v. MCI,
supra, where there was no need to make BT a party to the consent
decree. The decree there had no substantive anti-discrimination
obligation because BT already faced facilities-based and reseller
competition, the UK government did not own any significant interest
in BT (nor would it have an indirect ownership interest in MCI or
the NewCo (Concert) joint venture) and thus had no conflict between
its interest as owner and its interest as regulator; and there was
an established UK regulatory regime that prevented undue
discrimination. See US v. MCI, CIS, 59 F.R. at 33015, 33016, 33022-
23.
DOJ said there: ``Persons affected by an undue preference or
undue discrimination on the part of BT in violation of Condition 17
of BT's license, or other violation of BT's license, in favor of MCI
or NewCo, may complain to the United Kingdom Office of
Telecommunications for such relief as OFTEL is authorized to provide
under the United Kingdom Telecommunications Act and BT's license. *
* * Because * * * the telecommunications regulatory regime in the
United Kingdom now embodies or is developing important competitive
policies and safeguards, the United States concluded that it is
possible to protect competition in these circumstances without
placing specific antidiscrimination prohibitions in the proposed
Final Judgment * * *.'' i.d. at 33022-23. By contrast, ``[h]ere, the
competitive concern [particularly about discrimination and cross-
subsidization] is * * * that [French and German] regulation is at
present insufficiently developed to safeguard competition adequately
by itself, in the absence of alternative telecommunications
infrastructure that can be used by all competitors in France and
Germany.'' US v. Sprint, CIS, 60 F.R. at 44076.
---------------------------------------------------------------------------
2. The Anti-Discrimination Requirements Should Stay in Effect for the
Life of the Decree
According to Section X.B. (second sentence), Section III.D.
automatically expires when Phase I of the Decree terminates. Under
Sections V.P.-Q., Phase I ends when FT's and DT's monopolies lose their
formal legal protection and ``one or more'' competing licenses are
issued. Nothing in the Decree requires that France and Germany have in
place at that time adequate laws and regulations preventing and
remedying discrimination--as Section III.D. is supposed to do during
Phase I. The Competitive Impact Statement recognizes that ``the
[nondiscrimination] provisions of the Final Judgment are considerably
more specific and comprehensive than any existing regulatory
obligations applicable to Sprint, FT, or DT.'' \46\ Moreover, DOJ is
rightly concerned that ``regulatory regimes in France and Germany are
not fully developed'' and that, in any case, ``Joint Venture Co. may
not be subject to direct or complete oversight by any United States,
French or German telecommunications regulator.'' \47\ DOJ effectively
acknowledges that the fact
[[Page 4001]]
``FT and DT continue both to be government-owned'' is a reason not to
rely totally on the French and German governments to prevent
discrimination by FT and DT.\48\
\46\ CIS, 60 F.R. at 44071.
\47\ Id.
\48\ Id.
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DOJ also has no basis at present to presume that European Union
(``EU'') directives addressed to Member States \49\ will somehow ensure
by the end of Phase I that France and Germany have adequate anti-
discrimination regimes and will deploy sufficient resources to enforce
them. First, the proposed market-opening measures that the European
Commission (``EC'') is considering are draft proposals \50\ that may
not be adopted in a form which ensures adequate anti-discrimination
measures. Second, Member States, including France and Germany, have
been tardy in implementing EC directives and have sometimes refused to
implement them in full.\51\ Third, as the CIS itself cautions, ``[i]t
is not yet clear whether the EU's liberalization measures will confer
any rights on providers from the United States.'' \52\
\49\ Id. at 44062-63.
\50\ See Proposal for a European Parliament and Council
Directive on Interconnection in Telecommunications Ensuring
Universal Service and Interoperability through Application of the
Principles of Open Network Provision (ONP), COM (95) 379 (July 19,
1995) (``Draft Interconnection Directive''); Draft Commission
Directive of ______, 1996, amending Commission Directive 90/388/EEC,
regarding the implementation of full competition in
telecommunications markets (96/______/EC) (July 19, 1995)
(unofficial draft) (``Draft Voice and Infrastructure Directive'').
\51\ See EC, DG, IV, Communication by the Commission to the
European Parliament and the Council on the Status and Implementation
of Directive 90/388/EEC on Competition in the Markets for
Telecommunications Services, COM (95) 113 final (April 4, 1995)
(``1990 Services Directive Implementation Report'') at 11, 20, 22,
34.
\52\ CIS, 60 F.R. at 44063.
---------------------------------------------------------------------------
In short, there is no basis for trusting to a leap of faith that,
when Phase I ends, there will be fully functioning and adequate anti-
discrimination regimes in force in France and Germany protecting US and
other competitors of FT, DT, Sprint, and JVCo. Section III.D. must be
revised so that it runs for the life of the Decree. If France and
Germany ultimately put into place sufficient substitutes for Section
III.D., the parties could propose, subject to public notice and
comment, a waiver or modification under Section VIII.
3. Section III.D.1.'s Definitions of ``Discriminatory Basis'' and
``Similarly Situated'' Require Clarification
Section III.D.1. says `` `discriminatory basis' shall mean terms
more favorable to Sprint or [JVCo] than are made available to other
similarly situated United States international telecommunications
providers * * *.'' DOJ should clarify that the word ``all'' implicitly
modifies the phrase ``other similarly situated [US] * * * providers''
so that all such providers are protected against discrimination. In
other words, if the favorable terms received by Sprint or JVCo are
received by only one ``similarly situated'' US provider (or fewer than
all ``similarly situated'' US providers), the receipt of such terms by
Sprint or JVCo would still be on a ``discriminatory basis'' because
other ``similarly situated'' US providers were unable to obtain
comparable terms. If that were not a correct reading, FT and DT could
circumvent the purpose of this provision by granting one (or a few)
weak and ineffective US provider(s) the same favorable terms as
received by Sprint and JVCo and denying such terms to the US providers
that are Sprint and JVCo's principal competitors .
Section III.D.1. defines ``similarly situated'' to mean providers
that are ``generally comparable to Sprint and [JVCo] with respect to
the volume or type of FT or DT Products and Services purchased * * *,
provided that volume and type are relevant distinctions in establishing
service conditions.'' \53\ The provision adds: ``Defendants shall make
available to plaintiff all information that was available to them,
whether possessed by them or obtained from FT or DT, in considering the
relevance of such distinctions.'' It is critical that ``plaintiff''
(DOJ) be able to disclose that information to affected US providers so
that they may comment upon whether an impermissible ``discriminatory
basis'' exists. To remove any ambiguity, the beginning of the sentence
should be revised to read: ``Defendants shall disclose to the United
States all information. * * *'' By using the defined term
``[d]isclose'' (see Section V.F.), the sentence would make clear that
the information will be disclosed through DOJ to interested US
providers. If the sentence is not rewritten in this way, DOJ at least
should clarify that the provision as written impliedly permits it to
disclose the information to US providers.\54\
\53\ DOJ should clarify that if ``volume and type of FT or DT
Products and Services'' are not ``relevant distinctions in
establishing service conditions,'' then a US provider is ``similarly
situated'' to Sprint or JVCo if the provider and Sprint or JVCo are
acquiring the same or ``generally comparable'' FT or DT Products or
Services.
\54\ The revision or clarification will also make clear that US
providers will have access, through DOJ, to any ``justification of
costs'' which Sprint or JVCo offer ``to rebut a claim of
discrimination.'' See penultimate sentence of Section III.D.1.
---------------------------------------------------------------------------
4. Section III.D.2. Needs Clarification
Section III.D.2. ``is designed to prevent Sprint and [JVCo] from
receiving benefits of discrimination indirectly, through special deals
or arrangements that FT and DT offer to customers in order to induce
them to obtain services from Sprint or [JVCo], rather than through more
favorable terms offered directly to Sprint [or JVCo] addressed by
[Section] III.D.1.'' \55\ Because FT and DT (or Atlas), rather than
JVCo, will interface directly with the customer in the sale of JVCo
services, this provision is of paramount importance in guaranteeing
that FT and DT do not misuse their dominant home country positions to
impair competition in the provision of US-France/Germany
telecommunications services. Consequently, it would be helpful for DOJ
to clarify that Section III.D.2. governs, inter alia, situations
``where FT or DT is acting as the distributor for Joint Venture Co.''
and FT or DT Products or Services are ``provided [to the customer] by
FT in France or DT in Germany in conjunction with'' the distributed
``Joint Venture Co. services.'' \56\ To guard against enforcement
loopholes, DOJ should clarify that Section III.D.2's phase
``conditioned on'' covers not only express conditioning but also
situations where the circumstances reasonably imply that the discount
in FT or DT Products or Services is available only if the customer
selects Sprint or JVCo products or services. DOJ should also make clear
that, if the overall circumstances reasonably indicate the availability
of the discount or more favorable term increased the customer's
willingness to take the Sprint or JVCo product or service, that is
enough to establish the proscribed ``condition[ing].'' DOJ should add
that just because the FT or DT item offered to the customer at discount
(or with some other preferential term) is formally covered by a
different invoice or contract than the Sprint or JVCo product or
service, hardly proves there has been no illicit ``condition[ing].''
\55\ CIS, 60 F.R. at 44071.
\56\ The quoted language, containing the ``in conjunction with''
concept, appears in Sections II.A.2. and II.A.4.
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D. The Restrictions Against Cross-Subsidy (Section III.F.) Should Be
Extended to the End of Phase II and Strengthened
The stated purpose of Section III.F. is ``to ensure that the
activities of Joint Venture Co. and Sprint are not subsidized by FT and
DT.'' Yet, these vitally important restrictions
[[Page 4002]]
automatically expire at the end of Phase I. The Competitive Impact
Statement (CIS) acknowledges that ``[e]xisting regulatory safeguards
against cross-subsidization in France and German are very limited and
have not prevented instances of massive cross-subsidy.'' \57\ Under the
decree, Phase I ends when French and German authorities eliminate FT's
and DT's legal monopolies over domestic and international
infrastructure and public switched voice and issue licenses to ``one or
more'' competitors.\58\ There is no requirement that French and German
authorities also have in place regulations and enforcement resources
adequate to prevent more ``instances of massive cross-subsidy.''
\57\ CIS, 60 F.R. at 44072.
\58\ See Section V.Q.
---------------------------------------------------------------------------
The formal termination of the legal monopolies and the issuance of
one (or more) competitor licenses will not eradicate FT's and DT's
incentive and ability to cross-subsidize. FT and DT have retained high
market shares and considerable market power in data transmission even
though competition has been allowed for a few years.\59\ There is no
reason to assume that the market power FT and DT have in the currently
monopolized segments (such as public switched voice) will dissipate so
fast after the arrival of Phase II that a strategy of predatory cross-
subsidization will necessarily fail and therefore will not be
attempted. The risk of cross-subsidization is not restricted to
situations of 100% legal monopoly, but can also materialize where a
company has substantial market power in one segment of its operations
and the ability to absorb costs properly attributable to a more
competitive segment. The type of rate regulatory scheme applicable to
the segment where market power is present may actually exacerbate the
company's incentive to cross-subsidize,\60\ in addition to being
ineffective in detecting and preventing cost-shifting by the company.
\59\ See Complaint Paras. 33, 36.
\60\ A rate base, rate of return regulatory scheme would
encourage the regulated entity to shift cost of its nonregulated
businesses to its regulated business.
---------------------------------------------------------------------------
The CIS assumes that with the arrival of Phase II ``the EU
authorities [will] have improved safeguards against cross-subsidy.''
\61\ But, as the CIS also recognizes, EU directives are merely an
``overlay'' of requirements that mean very little unless and until
Member States transpose them into national laws and then effectively
enforce those laws.\62\ Furthermore, ``[i]t is not yet clear'' whether
EU measures (and, therefore, the requisite follow-on national laws)
would ``confer any rights on providers from the United States.'' \63\
Consequently, there is a significant risk that US providers may lack
standing or adequate procedural rights to challenge suspected cross-
subsidization. Moreover, FT and DT will remain at least majority-owned
by their respective governments beyond the end of Phase I,\64\
privatization being ``wholly at the discretion of the [M]ember
[S]tates'' and not something the EU has sought to dictate.\65\ As a
consequence, there is a substantial risk that the French and German
governments' ownership interests in FT and DT will deter those
governments (as has happened up to now) from imposing and/or
effectively enforcing regulations intended to detect, prevent, and
remedy cross-subsidization.
\61\ CIS, 60 F.R. at 44072.
\62\ Id. at 44062.
\63\ Id. at 44063.
\64\ See page 12, note 28, supra.
\65\ Id..
---------------------------------------------------------------------------
To correct this major flaw, Section III.F. should be modified so
that it remains effective for the entire life of the decree.
Alternatively, the Section should be revised so that it expires only
after the market-opening standards for starting Phase II are satisfied
\66\ and France and Germany have put into effect comprehensive measures
for preventing, detection, and remedying cross-subsidization and have
granted affected US and other providers adequate rights to complain
about and receive prompt and complete injunctive and monetary relief
for any cross-subsidization that does occur.
\66\ The ``one or more'' licensee portion of the definition of
Phase II also must be revised. See pages 27-28, supra.
---------------------------------------------------------------------------
Section III.F.3. says that the required separate ``accounting
systems and records of Joint Venture Co. will be made available
pursuant to the visitorial provisions of Section VI.'' Section CI bars
disclosure to the public, including certainly JVCo's competitors, of
any information or documents obtained thereunder by DOJ. By its very
nature, cross-subsidization is not something that a competitor can
readily infer simply from knowledge of its own costs and what targeted
customers may say they are being offered or charged by someone else.
Consequently, DOJ cannot assume that JVCo's books will need to be
examined only when DOJ receives a credible complaint from a JVCo
competitor. Yet, given its limited resources and other priorities, DOJ
is hardly in a position regularly to audit JVCo's financial records to
discover any cross-subsidization. The decree needs to be revised so
that interested parties, pursuant to a confidentiality commitment, many
examine the JVCo records and bring any evidence of cross-subsidization
to DOJ's attention. A possible (although less effective) alternative
would be for the decree to provide that DOJ shall hire an independent
auditor for regular audits at JVCo's expense.
E. The Restrictions Regarding Proportionate Returns and Correspondent
Operating Agreements (Sections III.E. & G.) Should Be Extended to the
End of Phase II and Strengthened
1. Proportionate Returns
Section III.E. is designed to prevent FT and DT from favoring their
partially owned affiliate Sprint over other U.S. international carriers
in returns of voice correspondent traffic. Because FT and DT are not
Decree defendants, the obligation is imposed upon Sprint for the
duration of Phase I not to ``accept'' returns from either FT or DT or
``accept or benefit from'' any methodology changes inconsistent with
FCC proportionate return policies or which ``substantially favor[ ]''
Sprint over other U.S. providers. The CIS points out that the French
and German regulators ``have not imposed any form of proportionate
allocation requirement on their national carriers.'' \67\ The Complaint
correctly states that ``FT and DT, as a result of the proposed
[investment and joint venture] agreements, will have an increased
incentive and ability to direct their switched telecommunications
traffic from France and Germany disproportionately to Sprint rather
than other U.S. international carriers, either directly as part of the
correspondent system, or outside that system through the Joint Venture
Co. backbone network.'' \68\
\67\ CIS, 60 F.R. at 44072.
\68\ Complaint para. 40(c).
---------------------------------------------------------------------------
As the proposed decree is now drafted, Sprint's Section III.E.
obligation automatically expires when the French and German public
switched voice and infrastructure markets are first opened to
competition. DOJ does not (nor could it) presume that France and
Germany will impose proportionate returns obligations to take effect
when that happens. In fact, as indirect partial owners of Sprint
(through their ownership of FT and DT), the French and German
governments would have an interest in Sprint receiving preferential
returns over AT&T, MCI, et al. It is wrong for the Decree to assume
that the formal elimination of FT's and
[[Page 4003]]
DT's legal monopolies and the mere licensing of ``one'' competitor (or
even ``more'' competitors) will deter FT and DT from favoring Sprint or
diverting correspondent traffic through their JVCo. Newly licensed
entrants in public switched voice will need substantial time and effort
to build up their international capacity to the point where it becomes
a realistic alternative to FT and DT. Until that happens, FT and DT
will not avoid favoring Sprint or JVCo because they fear retaliation by
other U.S. carriers diverting returns to the new French and German
international licensees.
In short, there is no basis for Section III.E. to expire at the end
of Phase I. The obligation should be modified to run for the entire
life of the decree.\69\ Alternatively, the Section could be modified to
run until both Phase I ends and the French and German governments
promulgate (and demonstrate the intention to enforce) a proportionate
returns requirement comparable to that in Section III.E.
\69\ If the French and German governments do in fact promulgate
and effectively enforce a proportionate returns requirement, the
parties could seek a modification or waiver under Section VIII of
the decree, subject to public notice and comment.
---------------------------------------------------------------------------
2. Correspondent Operating Agreements
The Complaint says that, as a result of these proposed
transactions, ``FT and DT will have an incentive to favor Joint Venture
Co. and Sprint over their competitors, particularly new entrants and
providers of new services, by denying operating agreements * * * or by
offering such agreements on discriminatory terms.''\70\ To address this
concern, Section III.G.1. of the proposed Final Judgment forbids Sprint
from offering any particular US correspondent service with FT or DT
unless ``at least one other'' US international provider ``has also
obtained an operating agreement with FT and DT for the provision of
such service * * *.'' Once again, the Decree's failure to require more
than ``one'' competitor is a major problem. Section III.G.2. attempts
to remedy that problem by requiring Sprint to carry the correspondent
traffic of any US provider that ``has requested but has not yet
received an operating agreement with FT or DT * * *.'' Rates and terms
and conditions for such substitute carriage by Sprint must be
``commercially competitive'' with those for the US providers that have
operating agreements. The rate schedules must be annually updated to
``reflect the estimated value of any adjustments in proportionate
return traffic that may be received by Sprint from France or Germany''
as a result of carrying the traffic originated by the US provider
having no operating agreement. Section III.G.2. is limited to ``IDDD
voice service or any other [correspondent] services that make use of
the FT/DT PSTNs.''\71\
\70\ Complaint para. 40(b).
\71\ Given the market power reflected in FT's and DT's public
data networks (see Complaint Paras. 33, 36), this provision should
be modified so as to afford protection for any non-voice
correspondent services that are intended to interconnect with the FT
and DT public data networks.
---------------------------------------------------------------------------
Like Section III.E. dealing with proportionate returns, Section
III.G. automatically expires once Phase I ends. There is no basis for
the apparent assumption that the problem to be remedied by Section
III.G. will simply disappear on the day the first facilities-based
domestic and international public switched voice competitor for FT and
DT is licensed. It will take years for a newly licensed competitor to
build up its facilities and geographic service areas to become an
adequate and cost-competitive alternative to FT and DT for terminating
US correspondent traffic. Given their continuing ownership of FT and DT
(and derived ownership interests in Sprint and JVCo), the French and
German governments may not impose and enforce a regulatory alternative
to Section III.G.
Section III.G. should be modified so that it extends for the life
of the decree.\72\ As a next best alternative, Section III.G. could be
modified so that it expires only when both Phase I terminates and the
French and German governments promulgate (and demonstrate the intention
to enforce) requirements that FT and DT not refuse to deal or
discriminate in any way against Sprint's rivals in terms of
correspondent operating agreements.
\72\ The parties can always seek a Section VIII waiver or
modification if the respective French and German governments
establish and enforce a regulatory regime that accomplishes the same
protection of fair competition intended by Section III.G.
---------------------------------------------------------------------------
F. Provisions Requiring Access to Technical Interfaces (Section III.H.)
and Public Data Network Protocols (Section III.I.) Should Be Extended
to the End of Phase II and Broadened
As the Complaint explains, the investments in Sprint and JVCo will
give FT and DT the incentive to use their market power over voice and
data services and facilities to favor Sprint and JVCo.\73\ Of
particular concern is the danger of favoritism and discrimination ``in
providing access to [FT's and DT's] local, domestic long distance and
international telecommunications services and facilities and to their
public data networks * * *.'' \74\ Sections III.H.-I. of the proposed
Final Judgment are intended to address the technical side of the access
problem, but they apply only during Phase I. The public interest
requires that these provisions be strengthened and extended for the
life of the Final Judgment.
\73\ Complaint para. para. 2, 3, 31-36, 40(a)-(e).
\74\ Id para. 3.
---------------------------------------------------------------------------
1. Essential Modifications of Section III.H
Section III.H. in essence prohibits Sprint and JVCo, when providing
services in the US that use FT or DT Products or Services, from
accessing those Products or Services through ``any proprietary or
nonstandardized interface or protocol'' if competitors cannot access
the same Products or Services through ``a non-proprietary or
standardized interface or protocol.'' By forbidding ``exclusive
access,'' DOJ intends the provision to ``have a significant role in
ensuring that competitors can obtain interconnection to the public
switched [voice] networks in France and Germany.'' \75\
\75\ CIS, 60 F.R. at 44073.
---------------------------------------------------------------------------
There are two problems with Section III.H.'s approach. First, it
provides no assurance that FT or DT will work cooperatively with
Sprint's and JVCo's competitors when those competitors develop
innovative services that need to interconnect with FT's and DT's
networks through interfaces and protocols that are more technically
advanced than FT's and DT's ``non-proprietary or standardized interface
or protocol.'' By contrast, Section III.H. allows Sprint and JVCo to
interconnect with FT's and DT's networks using ``proprietary or
nonstandardized interface[s] or protocol[s].'' The anti-discrimination
language in Section III.D.1.(iii)-(iv) does not expressly address this
substantial risk of FT/DT technological favoritism toward Sprint and
JVCo.
Second, making matters worse, Section III.H. automatically expires
at the end of Phase I. This will occur even though the formal
elimination of legal protections for FT's and DT's switched voice and
infrastructure monopolies and the grant of ``one or more''
geographically unlimited voice licenses in each country will not
instantaneously (if ever) establish alternative public switched
networks as sufficient substitutes for FT's and DT's networks.
Moreover, continuing French and German government ownership of FT and
DT (and indirectly of Sprint and JVCo) does not augur well for
government intervention to assure that
[[Page 4004]]
competitors will have access, not to mention the most technologically
advanced access, to FT's and DT's public switched networks.
Plainly, the proper solution is to revise the decree the ensure
that FT and DT cannot provide Sprint and JVCo more technologically
advanced interconnection to their public networks and access to other
FT and DT Products and Services. Further, the modified language should
be applicable through the life of the decree, subject to Section VIII.
waiver or modification proceedings conducted with adequate public
notice and opportunity to comment.
2. Required Modifications of Section III.I
The public data ``counterpart'' to Section III.H.,\76\ Section
III.I. requires that FT's and DT's ``Public Data Networks that are
based on the X.25 or any other protocol, continue to be available to
all other United States international telecommunications providers on
nondiscriminatory terms to complete data telecommunications between the
United States and France and between the United States and Germany, and
within France and Germany for traffic originating within the United
States, France or Germany, using the X.75 standard protocol for
interconnection between data networks, or any generally accepted
standard network interconnection protocol that may modify or replace
the X.75 standard.''
\76\ CIS, 60 F.R. at 44073.
---------------------------------------------------------------------------
While this provision purports to assure ``nondiscriminatory
terms,'' it leaves wide open the possibility that FT and DT will work
cooperatively with Sprint and JVCo to develop advanced data services
and a superior network interconnection protocol, but refuse to
cooperate with their competitors who wish to engage in a similar
innovative effort. The provision does not require cooperation nor
forbid favoritism toward Sprint and JVCo in the level or degree of
cooperation provided. Moreover, Section III.I. permits JVCo and Sprint
to use interconnection protocols that may be more advanced than the
``X.25/X.75 protocols'' unless and until those advanced protocols
become the new ``generally accepted standard.'' Of course, they may
never become ``generally accepted'' if they remain proprietary and
unavailable to others interconnecting the FT and DT data networks.
As ``the principal safeguard in th[e] proposed Final Judgment for
competitive access to DT's and FT's public data networks,'' \77\
Section III.I. falls woefully short. Given that those networks have
tremendous market power (although not 100% monopoly shares) because of
FT's and DT's infrastructure monopolies and the governments'
ineffective regulation,\78\ and given the governments' continuing
direct and indirect ownership interests, there is no basis for the
decree to require anything less than across-the-board nondiscrimination
by FT and DT in providing technical access to their data networks and
in working to improve interconnection of data networks. Further,
because the mere formal elimination of infrastructure monopolies and
the issuance of ``one or more'' licenses at the end of Phase I will not
instantly result in fully operating facilities-based alternatives to
FT's and DT's public data networks, this Section III.I should be
modified so that it runs through the life of the decree. A waiver or
modification, pursuant to public notice and comment procedures, can
always be sought under Section VIII., if and when conditions become
appropriate.
\77\ Id. Section III.D.'s anti-discrimination language applies
to ``FT or DT Products and Services,'' a category that expressly
includes products or services needed for interconnection to ``FT/DT
PSTNs'' but excludes ``services involv[ing] interconnection to the
Public Data Network.'' Section V.L. (i) & (iv).
\78\ See Complaint para. para. 32-36; CIS, 60 F.R. at 44061-62.
---------------------------------------------------------------------------
III. Conclusion
DOJ should withdraw the proposed Final Judgment and undertake to
negotiate a new decree along the lines of the modifications and
clarifications set out in Part II of these Comments.
Dated: October 23, 1995.
Respectfully submitted,
David J. Saylor,
Hogan & Hartson, L.L.P.
Timothy R. W. Cowen,
British Telecommunications plc.
James E. Graf II,
BT North America Inc.
Attorneys for BT North America Inc.
Cable & Wireless Europe; Comments on Final Judgement of Department of
Justice on Sprint Corp. Joint Venture--Phoenix.
Case 95-CV-1304
Exhibit D
Part I
Introduction
The position of Cable & Wireless Europe (C&WE) on the joint
venture between Sprint Corporation, Deutsche Telekom AG (DT) and
France Telecom (FT) known as ``Phoenix'', as notified is that it:
is restrictive of competition
poses a real risk of eliminating competition
provides considerable potential to abuse a dominant
position
is not indispensable for addressing the target market
The Phoenix JV is restrictive of competition in that it
effectively facilitates;
the direct fixing of prices and other trading conditions
the limitating or control of production, markets, technical
development and investment
market sharing between the parents
discriminatory behaviour in the way the parents treat the
JV and all other actual or potential competitors to the disadvantage
of the latter.
It is inevitable that the effect of the Phoenix arrangements
will be the coordination of prices by Sprint, DT and FT if it is to
function as a one-stop-shop. Until now the relevant subsidiaries of
DT, FT and Sprint have spearately set prices independently and
competitively.
That Phoenix will engage in market sharing is clear from the
published announcement of the European Commission (OJ C184 of
18.7.95) where it states:
``Phoenix products will be distributed by DT and FT in France
and Germany, by Sprint in the United States and by the ``rest of
Europe'' operating group in Europe''.
It is clear from the same published details that no attempt has
been made to differentiate DT's and FT's monopoly activities from
those activities open to competitive forces. This gives rise to a
real threat that the assets of the monopoly will be leveraged into
those areas where the notifying parties face competition. Such
behaviour would be an abuse of a dominant position.
Section 10.6(b) of the Joint Venture Agreement submitted to the
Department of Justice means that if a customer approaches FT and
requests a private line service between France and, say the US, then
FT should ``use commercially reasonable efforts to persuade'' the
customer to use the JV for such services and must refer the request
of the customer to the JV and its members if FT fails to convince
the customer to purchase JV services. This is a clear abuse of a
dominant position, and a pooling of information.
For example the published notification (OJ C184 of 18.7.95)
states ``Phoenix products will be distributed by DT and FT in France
and Germany * * *'' This means that the sales forces of the monopoly
will promtoe the products of Phoenix giving the real possibility for
illegal bundling and predatory cross-subsidies.
The Final Judgement of the Department of Justice on the JV
recognised the substantial threats to competition in international
telecommunications posed by the JV. The original structure of the JV
provided a set of incentives for the relevant parties to behave in a
discriminatory and anti-competitive manner to the advantage of
themselves and to the disadvantage of all competitors, actual or
potential. The most severe threats to competition posed by the JV
are in the two home markets of the participating monopolies--Germany
and France.
[[Page 4005]]
Any telecoms operator, from whatever home base, intending to
address the global telecoms market must have an effective presence
in the European Union. Germany and France in combination account for
some 40% of the EU's telecoms market.
A large number of potential corporate customers have sizeable
operations in the German and French markets and these potential
corporate customers require global communications facilities in
order to carry on their businesses. All potential or actual
providers of the necessary communications capabilities must be able
to offer cost effective and efficient telecoms services to these
customers in these two markets if they are to provide a viable
product. However in order to do so any competitor operator must deal
with the relevant domestic monopolist.
Consequently, the monopolists in these markets could, if the
incentives were in place, behave in a manner that would
significantly distort competition in a vital part of the global
market to the extent that competitors would not only be
disadvantaged inside these markets but also be disadvantaged outside
these marekts. Quite simply, if a competitor is unable to provide a
cost effective solution in one vital segment of the global market it
may be handicapped from gaining customers because these customers
are seeking global (total) solutions to their communications needs.
Key Issues
In recognition of these conditions the Final Judgement of the
Department of Justice proposed various restrictions on the JV,
pertaining in particular to the conditions obtaining in Germany and
France. Two questions arise:
Are the restrictions adequate to ensure fair and
undistorted competition so that all actual and potential
competitiors have an equal opportunity of addressing the needs of
the target customers in the relevant countries?
Are the restrictions fully enforceable in the relevant
countries?
Given the structure of the telecommunications services supply
sector in the United States, the issue of adequacy does not present
itself in the US. Furthermore, the question of enforceability does
not arise in the United States because first, the parties do not
hold monopoly positions in the US market and second, the Department
of Justice has sufficient powers to ensure compliance with its
decisions. The issues of adequacy and enforceability arise in the EU
and in particular Germany and France. The restrictions of the Final
Judgement appear to fall on both criteria.
Part III of these comments addresses the issues of adequacy and
Part IV addresses the issue of enforceability.
Part II
Conditions in Germany and France
The principal markets of concern with respect to competition and
access for competitor operators to the JV are France and Germany.
This is clear both from the Final Judgement and from the brief
details in the published (OJ C184 of 18.7.95) by the European
Commission where it states ``Phoenix products will be distributed by
DT and FT in France and Germany * * *''. This simple statement has
ramifications for all actual or potential competitors in the
provision of global telecoms services. Given the significance of
these markets in the EU and the overall global telecoms market and
the fact that the vast majority of the assets of DT and FT are
located in Germany and France respectively, it is the conditions in
these two markets that are the most relevant to the restrictions in
the Final Judgement
(a) The situation in Germany. Self-evidently, DT holds a
dominant position in all the most important product and service
markets in the German telecommunications sector. The
``corporatisation'' of Deutsche Telekom AG (DT) into a joint stock
company has made no material difference to its position on the
German market or its effective relation with the Bundesministerium
through the Bundesanstalt fur Post und Telekommunikation.
DT retains the exclusive legal right to supply public voice
telephony as defined in the Services Directive (Directive 90/388/
EEC), the major piece of specific legislation covering competition
in telecoms services in the EU. All other services are legally open
to competitive supply.
DT retains the exclusive right over the infrastructure necessary
to deliver telecommunications services and, as the European
Commission recognised in the MSG Media Service (Case IV/M.469)
prohibition decision, owns and operates most of Germany's cable TV
networks, which could provide an alternative source of
infrastructure to competitors to DT.
DT is also the market leader in liberalised telecommunications
services in the German market. According to the Services Directive,
the monopoly in services only remains over the provision of
telephony to the public, all the rest being ``liberalised''.
This fact is relevant to the restrictions enumerated in the
Final Judgement of the Department of Justice. The press release of
July 13, 1995 states on page 3 at bullet point 1 that the JV
``Cannot own, control or provide certain services until competitors
have the opportunity to provide similar services in France and
Germany.'' Under EU law the only service which remains the exclusive
right of DT is public voice telephony. This implies that the
Department's restrictions only apply to public voice telephony (the
market fully controlled by DT). However, this service is not the
target of the JV which seeks to attract corporate customers.
Therefore, there is some doubt as to the adequacy of the
restrictions of the Department of Justice in its Final Judgement if
these restrictions fall only on public voice rather than on
liberalised services.
All competitors to DT in the liberalised sector have to lease
infrastructure from DT if they wish to offer liberalised services.
Equally, all competitors need to use DT for any switched traffic and
call termination at interconnection (access) charge rates determined
by DT. This state of affairs will continue in the future even when
there are alternative providers of infrastructure given the ubiquity
of DT. Therefore the costs of all competitors to DT in Germany are,
and will continue to be, largely determined by DT.
This state of affairs has a substantial impact on the economics
of any competitor to DT. Whereas it may be legally permitted to
compete against DT it may not be economically feasible to do so.
Again this reflects upon the restrictions of the Final Judgement.
The ability of a competitor to gain a licence and to take advantage
of the licence in a meaningful way are very different concepts in
practice. Unlike the US and British telecommunications markets,
there is no history in Germany of rate setting for leased lines and
interconnection (access) charges by market mechanisms or developed
regulatory intervention.
Also of relevance is the European Commission's ``Communication
by the Commission to the European Parliament and the Council on the
status and implementation of Directive 90/388/EEC on competition in
the markets for telecommunications services'' (COM(95) 113). This is
a status report on the degree of implementation of the Services
Directive, which contains a report on conditions in Germany. As
noted above this is the key piece of European legislation on
liberalisation of telecoms.
In this document the Commission reported that the German Law of
14 September 1994 (Postneuordnungsgesetz--PTNeuOG) did not comply in
full with the Services Directive. The new law did not reflect the
definition of ``voice telephony'' of the Services Directive.
Consequently, since the new law did not reflect the definition
of ``voice telephony'' of the Services Directive, DT has benefited
from a monopoly definition that is wider than that sanctioned by the
Services Directive. This has impeded competition in Germany by
restricting the range of services competitors could offer to
customers. Additionally, competition has been restricted by the
failure to implement correctly Article 6 of the Directive causing
delays in the use of some terminal equipment. These matters were
only resolved following the intervention of the European Commission
Furthermore, the Commission's document found that the German Law
did not implement in an appropriate manner Articles 6 and 7 of the
Directive, of which the latter is the most important.
Article 7 of the Services Directive (Directive 90/388/EEC)
instructs Member States to separate telecommunications regulatory
and operational functions so that the regulatory body is independent
of the telecommunications organisation.
The issue of Article 7 of the Services Directive does not appear
to be fully resolved with the possibility that a regulator that is
not independent may not act so as to prevent the restriction or
distortion competition. This state of affairs concerning the non-
implementation of the Services Directive has implications for the
enforceability of the restrictions of the Final Judgement of the
Department of Judgement in the Phoenix JV.
The absence of an effective regulator of DT was demonstrated in
the case of the cross-subsidy from the monopoly sector into Datex-P.
This case and the non-implementation of Article 7 of the Services
Directive are
[[Page 4006]]
discussed in Part IV. DT has also been accused by its competitors (the
Association of Private Telecommunications Operators) of cross
subsidizing its leased line business. The draft new German Law for
telecommunications is also discussed in Part IV as it has a bearing
on the enforceability of the restrictions in the Final Judgement.
(b) The situation in France. The conditions in France are
slightly less restrictive than those in Germany in that there has
been some limited ``experimentation'' with alternative
infrastructure. Nevertheless FT retains the exclusive legal right to
supply public voice telephony as defined in the Services Directive
and the exclusive right over the infrastructure necessary to deliver
telecommunications services. FT is overwhelmingly dominant on the
French market.
FT is the market leader in liberalised telecommunications
services in the French market (e.g., paging), a position reinforced
by the necessity for competitors to FT in the liberalised sector to
have to lease infrastructure from FT and its subsidiaries if they
wish to offer liberalised services. Equally, all competitors need to
use FT for any switched traffic and call termination at
interconnection charge rates determined by FT. The costs of all
competitors to FT are largely determined by FT, both now and in the
future. As with Germany, there is no history of cost based rate
setting for leased lines and interconnection (access) derived from
market forces or well developed regulatory intervention.
There is a strong doubt whether Article 7 of the Services
Directive (Directive 90/388/EEC) has been implemented. For example,
the French Regulator sits on the Board of FT and the regulatory
function sits within the same Ministry that acts as the owner of FT.
In these circumstances it is doubtful whether the French regulator
is independent and there is a clear potential for a conflict of
interest between promoting competition (and the interest of
competitors) and defending FT from competition.
There are concerns that Colisee International behaves in an
anti-competitive manner. The company is a subsidiary of FT which is
engaged in reselling of the capacity of FT. Complaints about Colisee
have been confirmed by the French regulator. The latter has found
that:
FT sells leased lines and the PSTN to Colisee at
tariffs below the official list price whilst competitors to FT are
forced to buy these inputs at the official published tariff.
FT is offering Colisee direct access to its
International Transit Centre but does not permit competitors similar
access.
This behaviour is clearly abusive but the French regulator has
not resolved the issues to the satisfaction of competitors to FT.
Part III
Adequacy of the Restrictions of Final Judgement of the Department
of Justice
The restrictions detailed in the Final Judgement represent a
sound and justifiable set that are appropriate to the circumstances,
particularly on the trans-Atlantic route between the US and the two
monopoly markets of Germany ad France.
However, these restrictions apply in part to services that
competitors cannot legally supply in Germany and France. In the EU,
the only service which remains the exclusive right of the monopolist
is public voice telephony. Public voice telephony is supplied by DT
and FT. This service is not the target of the Phoenix JV. All of the
services of the target corporate customers are open to competition.
Consequently, to the extent that the restrictions of the Final
Judgement apply to services which are not the target of the JV, the
restrictions are not adequate.
In other respects the restrictions contained in the Final
Judgement are equivalent to a commitment on the parties to the JV to
comply with the competition rules of the US and the EU--something to
which the parties must comply in any event.
Whilst the monopoly of infrastructure remains in place in
Germany and France, this monopoly can effectively limit access to
networks in a way that excludes or severely restricts the
possibilities of parties other than Sprint, DT and FT in the Germany
and France even when the competition rules are adhered to. For
example, DT and FT could charge non-discriminatory interconnection
(access) but high charges to themselves and all competitors. As far
as DT and FT are concerned, this would merely represent a transfer
of funds from one part of the business to another. However, for
competitors such charges are real costs that could limit the
viability of their offerings.
This implies that the restrictions of the Final Judgement may
not be adequate to achieve its objectives.
An adequate environment which would promote effective
competition and thereby provide for the conditions in which the JV
would not distort competition are listed below.
Legislative Framework
(a) Infrastructure. As has been made clear, the JV through the
monopolies of infrastructure in Germany and France determine the
costs (leased lines and interconnection) of all competitors on the
relevant market. Equally, the monopolies of infrastructure allow the
parties to the JV to control the functionality of competitors
thereby determining the nature of offerings they can make to the
market.
Competitors to the monopolists are at the same time major
customers. Furthermore, this competitor/customer relationship means
that competitors pass information on their customer to their
monopoly competitors. Only the freedom of choice of infrastructure
for all competitors would allow for competition to develop by
allowing competitors more control over their costs and
functionality.
Consequently, any remedy to the real risks to competition posed
by the JV must include the acceleration of the liberalisation of
infrastructure in Germany and France. Alternative infrastructure is
available form cable TV operators and many utilities. The
liberalisation of these facilities would enhance the prospects for
competition. In this respect cable TV has a particular importance
because it would provide an alternative to the local loop
bottleneck.
To date both DT and FT (and the respective Governments) have
exhibited a reluctance to support any such acceleration of the
liberalisation of infrastructure.
(b) Interconnection. Even where alternative infrastructure is
found, unavoidably competitors will use the assets of the monopolies
for call termination and origination given the ubiquity of the
monopolists. In these circumstances the terms for interconnection
are of central importance if the access barrier is to
These terms of interconnection cover a wide range of matters,
most of which are addressed in the European Commission's ``Proposal
for a European Parliament and Council Directive on interconnection
in telecommunications''.
Two issues of particular importance to the promotion of
effective competition. There are:
the points where interconnection is permitted.
the charges for interconnection at these ponts.
Ideally these matters should be resolved through commercial
negotiations. However the UK experience demonstrates that it is
extremely difficult, if not impossible, to resolve these matters
satisfactorily. Consequently, regulatory intervention is required.
In these circumstances the optimal solutions to these issues are
the following:
interconnection should be permitted at any technically
feasible point within the hierarchy in the network rather than at a
very limited number of points determined by the monopolist. This
allows competitors to make choices and trade offs between
functionality and costs
interconnection must be charged in an unbundled manner, for
only those assets or elements used in the network.
Whith respect to these interconnection charges it is appropriate
that the competitor pays for the costs if causes. There are two
dimensions to cost causality:
the correct cost basis (level of the charge)
the appropriate cost drivers (structure of the charge).
The correct cost basis for interconnection charges is Long Rung
Average Incremental Costs (LRAIC), which is the methodology accepted
by the UK regulator, Oftel.
The appropriate cost driver in telecoms is buy hour capacity.
Competitors should therefore pay for the addition to busy hour
capacity that they cause--termed Capacity Based charged (CBC).
Consequently, in order to promote effective competition and
access the appropriate interconnection regime must be based on the
principles of:
interconnection at any technically feasible point
LRAIC
CBC.
Freedom of choice between competing infrastructure for service
providers coupled with interconnection based on the principles
outlined here would be necessary, though not sufficient, to permit
the JV to go ahead. However, a second set of structural conditions
also needs to be addressed.
[[Page 4007]]
Structural Change
Currently, no distinction has been made by the parties between
the activities of the parent monopolies, DT and FT, and those of the
JV. This absence of a separation gives rise to the real possibility
for cross-subsidies from monopoly to competitive activities. The
Datex-P case in Germany demonstrated the reality of this
possibility. The absence of any separation also facilitates the
pooling or transfer of information concerning customers and
competitors.
The Phoenix notification is identical to the Atlas notification
with respect to the absence of separation between the activities of
the parent monopolies in Europe and Sprint. Consequently, the
potential of Phoenix to prevent, restrict or distort competition and
to behave abusively in the relevant market is substantial. This
issue arises as a result of the absence of separation between
monopoly and competitive activities.
The only feasible remedy is to impose the structural separation
of Atlas and Phoenix from the parents. Such a structural separation
should take the following form.
(a) Separation of monopoly and competitive products and
services. Atlas and Phoenix should not be permitted to offer any
product or service where there is any impediment (in terms of
exclusive or special rights, licensing, authorisation, choice of
infrastructure, conditions of interconnection) preventing an
efficient competitor from supplying the same products and services.
Effectively this condition would separate monopoly provided products
and services from those in the competitive sector.
(b) Financial separation. There should be a complete financial
structural separation between Atlas, Phoenix and the parents. The
purpose is to provide for full transparency of the financial flows
between Atlas, Phoenix and its parents and to safeguard against
cross-subsidies. All services and products (including
interconnection based on the principles outlined above) provided by
the parents to the JVs (and vice versa) to be supplied at published
tariffs and available to all competitors at identical terms and
conditions.
(c) Other separation. The parents should not be permitted to
transfer to the JVs any proprietary, customer, competitor or market
sensitive information, or any other asset including all types of
telephone numbers, which would give the JVs a competitive advantage.
Only when the parents give 30 days notice to all competitors of such
a transfer, and offer to supply competitors on exactly the same
terms and conditions, should such transfers be permitted.
The feature of each of these types of separation is that they
facilitate transparency and equality of treatment between the
parents, Atlas, Phoenix and all competitors.
Whilst most of these conditions fall outside the jurisdiction of
the Department of Justice, the Department should look towards
substantial progress on these matters if the JV is not to distort
competition and impede competitive entry to the key German and
French markets for all potential entrants.
PART IV
Enforceability of the Restrictions of Final Judgement of the
Department of Justice
Given that the Department will need to co-operate with the
National Regulatory Authorities in Germany and France in order to
effectuate an enforcement of its restrictions, it is important that
these authorities are appropriately constituted.
It is questionable whether Article 7 of the Services Directive
(concerning the independence of the Regulator) has been implemented
in either Germany or France with important ramifications for the
enforceability of the restrictions contained in the Final Judgement
as they impact on the German and French markets.
The judgements of the European Court of Justice (ECJ) of 27
October 1993, the Taillandier (C-46/90) and Decoster (C-69/91) cases
are pertinent to this particular matter. These judgements mean that
two different services within the same Ministry performing the
regulatory and operational functions does not comply with the
requirements of Article 7 of the Services Directive. The judgements
of the ECJ mean that there should be a real and not just a formal
separation of functions. The ECJ has therefore decided that the
operational and regulatory bodies should not both be answerable to
the same Minister.
Currently, in both France and Germany the relevant Ministry
effectively acts as both owner and regulator (the
``corporatisation'' of DBPT having no effective meaning in this
matter). This condition does not comply with the European Services
Directive and can act as a major impediment to the development of
competition. There is the potential for a conflict of interest
between the Ministry as regulator pursuing polices that promote
effective competition and the Ministry as owner pursuing policies
that protect the perceived value of the monopoly. Equally, there is
a potential for a conflict of interest where the regulatory sits on
the board of the monopolist.
Further, the Department of Justice should take particular note
of the Datex-P case in Germany.
According to press reports 1994 (see for example Financial Times
26-May-94), the Bundeskartellamt (BKA) carried out an investigation
into the affairs of Datex-P (which operates in the liberalised
telecommunications sector) in Germany. These reports stated that the
BKA found a cross-subsidy from the monopoly activities of DT (then
called DBP-T) to Datex-P amounting to some DM 2 billion (allegedly a
sum that exceeded the turnover of all competitors combined).
Normally, abuse of a dominant position of this magnitude would
lead to the imposition of several penalties on the perpetrator and
the payment of damages to injured parties. However, this has not
occurred in the case of Datex-P. This is because the then DBP-T did
not fall under the jurisdiction of the BKA and was therefore not
fully subject to Germany's strict competition laws. This situation
could only be acceptable if DBP-T was subject to similar controls to
those of the BKA being exercised by the National telecommunications
regulatory authority (NRA). However, this was not the case.
The NRA in Germany is the Bundesministerium Fur Post und
Telekommunikation. The German telecommunications law of 1989, the
Postverfassungsgesetz, (PVG) defines the tasks and organisation of
this Ministry. Under the PVG, the Minister appoints one third of the
members of the Supervisory Board of DBP-T/DT. The approval of the
Minister is required for all the important decisions of DBP-T/DT
(including presumably the Phoenix and Atlas JVs.). The same Minister
defines the long term objectives of DBP-T/DT and earmarks the funds
necessary for the development of telecommunications.
The Minister is responsible for the appointment of the official
acting as the regulator of the sector, and as events have
demonstrated, for the dismissal of the official.
In these circumstances the independent character of the NRA is
not fulfilled as required by Article 7 of the Services Directive and
the ECJ cases cited. DT is not regulated by an independent NRA
neither is it regulated by the competition laws of Germany. In these
circumstances it is possible for Datex-P to avoid the normal
punishments for such anti-competitive behaviour.
The draft German law on the future regulation of
telecommunications (Diskussionsentwurf fur ein
Telekommunikationsgesetz of 31.5.95) is silent or vague on the
following key issues:
equal access
numbering portability and numbering in general
licensing processes, appeal procedures, arbitration etc.
duct/trench-sharing, mandatory or otherwise
Ministry policy on international voice telephony
principles applying to tariff policy and proposals for
rebalancing.
Decisions on each of these subjects will have a substantial
impact on the development of effective competition and access. For
example there will be a major difference with respect to effective
market access if the Ministry's policy on international voice
favours a duopoly or full competition.
A policy on the critical commercial issue of interconnection has
yet to be developed and this represents a serious impediment for the
prospects for effective competition.
According to Sec. 22 of the German Law against Restraints of
Competition licensees which are dominant operators, or have a market
share of at least 25%, may be required to provide certain universal
services. Again this prospect gives rise to serious doubts
concerning the development of effective competition and market
access. Sec. 22 could be used as a tax on success and certainly
provides an incentive for competitors to stay below the 25%
threshold. Sec. 22 is incompatible with the development of effective
competition and should be withdrawn.
Interestingly, if an operator cream-skims (Mehrerlosabschopfung)
deliberately or out of negligence contrary to a decree under Sec. 32
issued by the NRA, it could be required to pay an equivalent sum to
the NRA (Sec. 33). Sec. 32
[[Page 4008]]
works in a manner that distorts the development of effective
competition and should be withdrawn.
As yet therefore, there are very serious doubts as to whether
the emerging regulatory environment in Germany is appropriate for
effective competition and effective market access to all potential
entrants. In these conditions it is inappropriate to allow Phoenix
to proceed.
The new regulatory environment in France has not yet been
defined and we are therefore unable to provide any information on
it. A consultation document on the future regulatory environment is
anticipated in November 1995. Would be inappropriate to permit
Phoenix to proceed before this regulatory environment is known.
It would be instructive for the DoJ to examine the regulatory
history and environment in the UK. Here we have a government
committed to competition in telecoms, an independent regulator and a
liberal regime.
Despite these apparently favourable conditions, over the last
decade, Mercury Communications Ltd (the major challenger to BT) has
found it extremely difficult to compete on a fair basis with BT.
Mercury has never reached an interconnection agreement with BT, even
though to do so would benefit Mercury. It has always been forced to
seek a determination from the Office of Telecommunications (OFTEL).
Interconnection charges have not been based on the correct cost
basis. Mercury has had to pay Access Deficit Charges which OFTEL
recognise as a severe distortion of the market. This concept is now
popular with the monopolists in the rest of Europe. Furthermore,
Mercury's functionality has been severely restricted by the limits
on the technical point of interconnection with BT.
Consequently, the lesson from the UK is that even under a regime
which favours competition the monopolist can substantially impede
the process of competition.
Part V
Conclusions
The Final Judgement of the Department of Justice on the JV
recognised the substantial threats to competition in international
telecommunications posed by the JV.
In recognition of these conditions the Final Judgement of the
Department of Justice proposed various restrictions on the JV,
pertaining in particular to the conditions obtaining in Germany and
France. Two questions arise:
Are the restrictions adequate to ensure fair and
undistorted competition so that all actual and potential competitors
have an equal opportunity of addressing the needs of the target
customers in the relevant countries?
Are the restrictions fully enforceable in the relevant
countries?
However, it appears that the restrictions are directed at an
area of activity which the JV will not address (public voice
telephony). In these circumstances the restrictions of the Final
Judgement fail the adequacy test. Consequently, the restrictions
will not bring about effective competition and effective market
access.
There are also doubts with respect to the enforceability of the
restrictions because there is a question mark over the independence
of the regulators in Germany and France. Furthermore the absence of
a regulatory regime, for interconnection and other vital matters,
which would foster effective competition and effective market access
in either country does not support the need for enforceability.
In Part III of these comments a set of conditions which would
promote effective market access were presented. The most important
of these concern infrastructure and interconnection. The Department
of Justice should look for substantial progress on these matters
before permitting the arrangements between Sprint, DT and FT to
progress.
The Department of Justice should set the following minimum
conditions before allowing Phoenix to proceed:
the liberalization of alternative infrastructure including
cable televisions
interconnection at any technically feasible point
interconnection charges based on LRIC and CBC
Additionally the structural issue needs to be addressed. The
minimum conditions required in this respect are:
Phoenix should not be permitted to offer any product or
service where there is any impediment (in terms of exclusive or
special rights, licensing, authorisation, choice of infrastructure,
conditions of interconnection) preventing an efficient competitor
from supplying the same products and services.
there should be a complete financial structural separation
between Atlas, Phoenix and the parents.
the parents should not be permitted to transfer to the JVs
any proprietary, customer, competitor or market sensitive
information, or any other asset which would give the JVs a
competitive advantage which are denied to competitors
Any remedies less demanding than those listed here would not be
sufficient to address the ability of the JVs to prevent, restrict or
distort competition and to behave abusively in the relevant market.
* * * * *
October 24, 1995.
Donald J. Russell, Esq.,
Chief, Telecommunications Task Force, Antitrust Division, Room
89104, 555 Fourth Street, NW., Washington, DC 20001
Re: United States v. Sprint Corporation and Joint Venture Co., Civil
Action No. 95-1304 (D.D.C. filed July 13, 1995)
Dear Mr. Russell: On behalf of ACC Corp., we transmit an
original and five (5) copies of its comments in the above-referenced
proceeding. We regret that necessary coordination with overseas
counsel delayed this filing until today, but we hope that you will
be able to consider the comments on their merits. To avoid any
prejudice to the defendants, copies of these comments are being sent
by facsimile to the counsel identified below.
Should there be any questions concerning this matter, please do
not hesitate to contact me.
Very truly yours,
Helen E. Disenhaus,
Counsel for ACC Corp.
Of Counsel:
Francis D.R. Coleman, Esq.,
Secretary and Corporate Counsel, ACC Corp.
October 24, 1995.
Donald J. Russell, Esq.,
Chief, Telecommunications Task Force, Antitrust Division, Room
89104, 555 Fourth Street, NW., Washington, DC 20001
Re: United States v. Sprint Corporation and Joint Venture Co., Civil
Action No. 95-1304 (D.D.C. filed July 13, 1995)
Dear Mr. Russell: On behalf of ACC Corp. (``ACC''), a United
States international telecommunications common carrier based in
Rochester, New York, we submit these comments on the above-
referenced proposed Consent Decree. ACC's comments chiefly describe
certain initiatives undertaken by its subsidiaries in Germany and
France in furtherance of its proposed domestic and international
resale service offerings in these countries.
Currently pending before the Federal Communications Commission
(``FCC'') are applications of ACC's wholly-owned subsidiary, ACC
Global Corp., for authority pursuant to Section 214 of the
Communications Act of 1934, as amended, 47 U.S.C. Sec. 214, to
provide international switched telecommunications services over
international private lines on the U.S.-Germany and U.S.-France
routes. See FCC File Nos. I-T-C-95-056; I-T-C-95-059. In an effort
to keep the FCC apprised of relevant developments in Germany and
France, ACC has regularly provided the Commission with updated
chronologies reflecting significant contacts with the national
regulators in those countries and with Deutsche Telekom (``DT'') and
France Telecom (``FT''). The most recent chronologies, which are
also being filed this day with the FCC by copies of this letter
submitted for inclusion in the application dockets and the Sprint/
DT/FT docket, are attached. Also attached is a copy of a letter sent
to M. Bruno Lassere, of the DGPT in France, that summarizes ACC's
analysis of the permissibility under existing French law of resale
competition in France.
As a general matter, ACC has been actively pursuing
opportunities for resale competition in both Germany and France.
With respect to Germany, ACC has confirmed with senior officials of
the Ministry of Posts and Telecommunications that resale competition
is currently permissible in Germany under certain terms and
conditions. ACC has also met with officials of DT to discuss
implementation of such resale service in the near-term. While ACC
has been encouraged by the recent interest shown by Ministry
officials in its proposal, ACC is concerned that DT has been
dilatory in scheduling follow-up meetings to address the issue and
may be attempting to avoid giving substantive consideration to the
proposal.
[[Page 4009]]
ACC therefore urges the Department to condition entry and the
effective date of the proposed Consent Decree on DT's opening its
services to resale competition to the extent permissible under
current law in Germany, with DT agreeing to cooperate in the resale
service implementation program to the extent necessary.
With respect to France, ACC is still exploring with DGPT
officials the feasibility of resale competition under current French
law. While ACC has had several productive meetings with regulatory
officials, ACC is concerned about the lack of progress in France. As
shown by the enclosed summary of the relevant legal issues, however,
there should be no legal impediments to implementation of limited
resale in the manner proposed by ACC in the near term. ACC also,
therefore, urges the Department to condition entry and the effective
date of the proposed Consent Decree on FT's opening its services to
resale competition to the extent permissible under current law in
France, with FT agreeing to cooperate in the resale service
implementation program to the extent necessary.
ACC firmly believes that resale competition in domestic and
international services abroad as well as in the U.S. is critical to
ensuring that competition in the U.S. market is not adversely
affected by the formation of global alliances by the world's largest
facilities-based carriers. The FCC has long recognized the benefits
of resale competition in ensuring that consumers in all market
segments receive the economic benefits of a competitive
telecommunications market. ACC is not asking for exclusivity with
respect to resale competition but merely for a general lowering of
unnecessary entry barriers that adversely affect competitive
entrants.
ACC therefore urges the Department to condition entry and the
effective date of a Consent Decree on the availability of market
participation by U.S. carriers in all market segments in which such
competitive entry is lawful, even if such entry is dependent upon DT
and FT's taking affirmative steps to facilitate such entry before
full services and infrastructure competition is lawful in Germany
and France.
Very truly yours,
Helen E. Disenhaus,
Counsel for ACC Corp.
Of Counsel:
Francis D. R. Coleman, Esq.,
Secretary and Corporate Counsel, ACC Corp.
October 24, 1995.
Mr. Bruno Lasserre,
Director General of Posts and Telecommunications, Ministry of
Industry, Posts and Telecommunications and Foreign Commerce
Dear Mr. Lasserre: As agreed at our September 22 meeting in your
Paris office, ACC is pleased to provide you with the following
summary of its legal research on the extent to which France Telecom
(``FT'') may voluntarily delegate part of its telephone service
monopoly to ACC under current French law:
French law gives FT the benefit of a monopoly over the
provision of real-time switched voice telephone services over the
French PSN. (Articles L32, L33.1, L34.1 of Code of Post &
Telecommunications, Article 3 of Law 90-568 of 2 July 1990 and
Decree n deg.90-1213 of 29 December 1990.) Such services constitute,
according to a legal tradition in the field of telecommunications in
France, a public service mission entrusted to FT.
To perform its public service mission, FT may form a
subsidiary (Article 7 of Law 90-568 of 2 July 1990; Article 32 of
Decree 90-1213 of 29 December 1990) which is part of FT's ``group of
companies'' to provide services (as opposed to infrastructure)
including switched voice telephone services.
The concept of a ``group of companies'' is not defined
in French corporate law. Accordingly there is no legal requirement
that FT be the sole shareholder of such a subsidiary.
However, it is reasonable to conclude that under French
law the subsidiary would be considered a member of FT's ``group of
companies'' if three criteria were met; (a) if FT owned a majority
of the capital and voting rights of the subsidiary; (b) if FT held
the power to appoint a majority of the members of the Board of
Directors of the subsidiary; and (c) if FT had preponderant control
over the management of the subsidiary. It should be possible for
these conditions to be met even though ACC had minority ownership,
operational involvement, and certain acceptable protective legal
mechanisms with regard to the subsidiary.
Such protective legal mechanisms for ACC could include
those which apply now, and those which applied with FT's service
monopoly decreased or ceased.
The provision of public services (on FT's public
infrastructure) by such a subsidiary would require the favorable
opinion of the Public Service Commission for Posts &
Telecommunications and the approvals of the Minister of Post &
Telecommunications and the Minister of Economy & Finance (Article 32
of Decree 90-1213 of 29 December 1990).
Such public support, or the absence of it, by the
French government could be highly significant and persuasive in
France, Europe, and the United States.
ACC Corp. would welcome an active dialogue with your office and
with FT to explore the creation of an FT/ACC subsidiary in
accordance with the above research at your earliest convenience.
If you have any questions, please do not hesitate to contact me.
Best personal regards.
Sincerely,
ACC Corp.
Francis D.R. Coleman,
Secretary and Corporate Counsel.
FDRC/csg
cc: Helen Disenhaus, Esq.
Scott Blake Harris, Chief-International Bureau, FCC
Diane J. Cornell, Chief-Telecommunications Division, FCC
Mr. Mickey Kantor-U.S. Trade Representative
Anne K. Bingaman, Esq., Assistant Attorney General, DOJ
Donald J. Russell, Chief-Telecommunications Task Force, DOJ
French Chronology
September 11, 1995
Informal discussion with Monsieur Lasserre at luncheon in
Washington, D.C. prior to his remarks on anticipated changes in
France's telecommunications regulatory framework. A meeting with ACC
in Paris was agreed to for the near future.
September 12, 1995
Letter from ACC Corp. to Monsieur Lasserre requesting a meeting
in Paris on September 22 to continue a dialogue on domestic and
international resale for France.
September 22, 1995
Meeting at the DGPT with Monsieur Lasserre and Madam Niclot
attended for ACC by Mr. Francis Coleman and Mr. Michael Taylor and
Mr. Lucien Rapp of the law firm of Serra, Michaud & Associes.
Monsieur Lasserre agreed to receive ACC's analysis of the extent to
which portions of France Telecom's switched voice telephony monopoly
might be delegated to independent third parties such as ACC with
regulatory approval. At Monsieur Lasserre's request, ACC outlined
the manner in which this issue was moving forward in Germany and
agreed to provide copies of relevant correspondence to Monsieur
Lasserre. Monsieur Lasserre expressed great interest in ACC's
progress with Deutsch Telekom and the German Ministry and indicated
that information on such progress could be relevant in France.
September 26, 1995
Letter from ACC Corp. to Monsieur Lasserre thanking him for the
September 22, 1995 meeting, confirming that German correspondence
would be sent to him shortly, and expressing the desire to continue
discussions with him and his staff so that suitable progress could
be made.
October 4, 1995
Letter from ACC Long Distance UK Ltd. to Monsieur Lasserre
enclosing copies of ACC's correspondence with Deutsch Telekom and
the German Ministry.
October 18, 1995
ACC's legal counsel in Paris receives request from Monsieur
Lasserre for status of ACC's legal analyses of extent to which
portions of France Telecom's service monopoly might be delegated to
ACC.
October 24, 1995
Letter to Monsieur Lasserre (with copies to DOJ, FCC, and USTR)
summarizing ACC's legal analyses (i.e., extent to which portions of
France telephone service monopoly might be delegated to ACC with
France governmental approvals) and requesting support for further
progress.
Chronology--ACC France International Simple Resale Application
3 November 1994
Meeting between ACC Corp. and France Telecom to discuss the
provision of domestic
[[Page 4010]]
simple voice resale and international simple voice resale in France.
10 November 1994
Submission of application by ACC Corp. on behalf of ACC France
(a company in the process of being registered under French Law) to
the French Ministry of Industry Ports, Telecommunications and
External Affairs (Direction de la Reglementation Generale des Postes
et Telecommunications (``DGPT'')) to provide domestic simple resale
services in France and international simple resale services on the
France-U.S. route, and for commercially reasonable interconnection
to the public switched telephone network.
14 November 1994
ACC Corp. letter to France Telecom requesting support for ACC
France's domestic simple resale services and international simple
resale services application submitted to the DGPT, as well as for
ACC France's request for commercially reasonable interconnection to
the public switched telephone network.
16 November 1994
Submission of application by ACC Global Corp. to the Federal
Communications Commission for authority to resell private lines for
the provision of switched services interconnected to the PSN at both
ends and at one end only between the United States and France.
18 November 1994
Response from Monsieur Bruno Lasserre, Director General of DGPT,
to ACC-France's application for domestic and international simple
resale dated 10 November 1994. Response raises public voice
telephony regulatory issues and equivalency issues between France
and the United States, and invites ACC-France to meet with Ms.
Niclot, Head of Network and Fixed Services, DGPT.
2 December 1994
Letter from ACC-France to Monsieur Bruno Lasserre acknowledging
letter of the 18th of November and confirming meeting with Ms.
Niclot to discuss ACC-France's application of 10 November.
14 December 1994
Meeting with Ms. Claire Niclot, Head of Network and Fixed
Services, DGPT, to discuss the parameters of services that ACC Corp.
may provide to the general public and interconnection with France
Telecom.
23 December 1994
Letter from ACC Corp. to Mr. Guillaume, Directeur Juridique,
France Telecom advising him of ACC Corp.'s desire to discuss
commercially reasonable interconnection with France Telecom.
23 December 1994
Letter from ACC Corp. to Ms. Claire Niclot seeking
interpretation of services that ACC Corp. may provide in France
under current French law. ACC Corp. also requests Ms. Niclot's view
on when France Telecom's monopoly on voice services to the general
public will likely be relaxed.
4 January 1995
Letter from Ms. Claire Niclot in response to ACC's letter of
December 23, 1994, discussing regulatory issues and extending an
invitation for further discussions.
13 January 1995
Letter from Congressmen Thomas Bliley, Chairman of the House
Committee on Commerce; Jack Fields, Chairman of the House
Subcommittee on Telecommunications and Finance; and Bill Paxon,
House Subcommittee on Telecommunications and Finance member, to FCC
Chairman Reed E. Hundt urging Chairman Hundt ``to press forward as
strongly as possible to open [the French market] to the United
States telecommunications providers.''
30 January 1995
Letter from ACC in response to Ms. Claire Niclot's letter of
January 4, 1995. ACC expresses its pleasure for the opportunity to
meet with Ms. Niclot to investigate further the regulatory issues
raised in ACC's letter of December 23, 1994, and in Ms. Niclot's
letter of January 4, 1995.
2 February 1995
Letter from Monsieur Bruno Lasserre, Director General, DGPT, to
ACC inviting ACC to meet with him to discuss ACC's application and
the services that ACC would be permitted to offer in France under
appropriate interpretations of current French law and regulations.
The purpose of the meeting would also enable Monsieur Lasserre to
discuss with ACC the steps currently being considered to introduce
regulations in contemplation of the liberalization of
telecommunications in accordance with EU proposals.
5 February 1995
Monsieur Bruno Lasserre, Director General of DGPT, requests
ACC's French counsel to continue discussions with the DGPT and, to
this end, to schedule a meeting with Ms. Claire Niclot.
8 February 1995
Letter from ACC's French counsel to Monsieur Bruno Lasserre
requesting him to meet with Mr. Francis Coleman, General Counsel of
ACC, and Mr. Michael Taylor, Secretary of ACC Long Distance (U.K.)
Limited, in Paris during the week of March 13, 1995.
2 March 1995
Letter from ACC Corp. to Monsieur Lasserre confirming a meeting
with Monsieur Lasserre on March 15, 1995 and stating ACC's interest
in obtaining approval to provide domestic and international simple
resale in France. ACC's letter also raises the question of the
extent to which France Telecom can voluntarily delegate to ACC any
portion of its reserved switched voice telephony service monopoly.
2 March 1995
Letter from ACC Corp. to Monsieur Emmanuel Guillaume, Directeur
Juridique, France Telecom, seeking a meeting to explore the extent
to which France Telecom can voluntarily delegate any portion of its
monopoly to third parties.
15 March 1995
Meeting at the DGPT with Monsieur Lasserre and Madam Niclot
attended by Mr. Francis Coleman and Mr. Michael Taylor of ACC. Mr.
Coleman reviewed the role of resale as an important and additional
way to ensure competition and avoid the pitfalls of duopoly network
pricing. Monsieur Lasserre reviewed the scope of France Telecom's
switched voice telephony monopoly and the extent, if any, to which
France Telecom may delegate portions of that monopoly and stated
that France Telecom would not be permitted to delegate any portion
of this monopoly. Invitation extended to Monsieur Lasserre and Madam
Niclot to visit ACC's operations in the U.K. and the U.S.A.
15 March 1995
Meeting at France Telecom with Monsieur F. Guilbeau and Monsieur
Jean-Francis Thomas attended for ACC by Mr. Francis Coleman and Mr.
Michael Taylor. Purpose of meeting to discuss the timetable of
liberalization of services and infrastructure in France and the
benefits to France Telecom and the public of resale as a competitive
service. Invitation extended to France Telecom to send a delegation
to visit ACC's operations in the U.K. and the U.S.A. in April. The
invitation was accepted. Purpose of trip will be to learn more of
ACC's activities and ACC's competitive position in relation to other
carriers. Future and continuing meetings are anticipated.
September 11, 1995
Informal discussion with Monsieur Lasserre at luncheon in
Washington, D.C. prior to his remarks on anticipated changes in
France's telecommunications regulatory framework. A meeting with ACC
in Paris was agreed to for the near future.
September 12, 1995
Letter from ACC Corp. to Monsieur Lasserre requesting a meeting
in Paris on September 22 to continue a dialogue on domestic and
international resale for France.
September 22, 1995
Meeting at the DGPT with Monsieur Lasserre and Madam Niclot
attended for ACC by Mr. Francis Coleman and Mr. Michael Taylor and
Mr. Lucien Rapp of the law firm of Serra, Michaud & Associes.
Monsieur Lasserre agreed to receive ACC's analysis of the extent to
which portions of France Telecom's switched voice telephony monopoly
might be delegated to independent third parties such as ACC with
regulatory approval. At Monsieur Lasserre's request, ACC outlined
the manner in which this issue was moving forward in Germany and
agreed to provide copies of relevant correspondence to Monsieur
Lasserre. Monsieur Lasserre expressed great interest in ACC's
progress with Deutsch Telekom and the German Ministry and indicated
that information on such progress could be relevant in France.
September 26, 1995
Letter from ACC Corp. To Monsieur Lasserre thanking him for the
September 22, 1995 meeting, confirming that German correspondence
would be sent to him shortly, and expressing the desire to continue
discussions with him and his staff so that suitable progress could
be made.
[[Page 4011]]
October 4, 1995
Letter from ACC Long Distance UK Ltd. to Monsieur Lasserre
enclosing copies of ACC's correspondence with Deutsch Telekom and
the German Ministry.
October 18, 1995
ACC's legal counsel in Paris receives request from Monsieur
Lasserre for status of ACC's legal analyses of extent to which
portions of France Telecom's service monopoly might be delegated to
ACC.
October 24, 1995
Letter to Monsieur Lasserre (with copies to DOJ, FCC, and USTR)
summarizing ACC's legal analyses (i.e., extent to which portions of
France telephone service monopoly might be delegated to ACC with
France governmental approvals) and requesting support for further
progress.
Chronology--ACC Germany International Simple Resale Application
2 November 1994
Meeting between ACC Corp. and Deutsche Bundespost (``DBP'')
Telekom to discuss the provision of domestic simple voice resale and
international simple voice resale in Germany.
2 November 1994
Meeting between ACC Corp. and the Federal Ministry of Posts and
Telecommunications (``BMPT'') to discuss the provision of domestic
simple voice resale and international simple voice resale in
Germany.
14 November 1994
Submission of application by ACC Corp. on behalf of ACC
Deutschland gmbh (in the process of formation) requesting authority
from the BMPT to provide domestic simple resale services and
international simple resale services on the Germany-U.S. route.
14 November 1994
ACC Corp. letter to DBP Telekom requesting support for ACC
Deutschland's application for authority to provide domestic simple
resale services and international simple resale services, submitted
to the BMPT, and stating ACC Deutschland's request for commercially
reasonable interconnection to the public switched telephone network.
16 November 1994
Submission of application by ACC Global Corp. to the Federal
Communications Commission for authority to resell private lines for
the provision of switched services interconnected to the PSN at both
ends and at one end only between the United States and Germany.
22 December 1994
ACC Corp. letter to DBP Telekom regarding arrangement meeting to
commence negotiations for an interconnection agreement.
5 January 1995
Phone conference between ACC Corp. and the BMPT. BMPT noted that
ACC Corp.'s German application requesting authority from the BMPT to
provide domestic simple resale services and international simple
resale services on the Germany-U.S. route is under review.
13 January 1995
Letter from Congressman Thomas Bliley, Chairman of the House
Committee on Commerce; Jack Fields, Chairman of the House
Subcommittee on Telecommunications and Finance; and Bill Paxon,
House Subcommittee on Telecommunications and Finance member, to FCC
Chairman Reed E. Hundt urging Chairman Hundt ``to press forward as
strongly as possible to open [the German market] to the United
States telecommunications providers.''
5 June 1995
Letter from Francis Coleman to Herr Hefekauser enclosing a paper
setting out the key areas that would comprise an arrangement with
DBP Telekom providing for commercially reasonable interconnection to
the PSN and confirming a meeting with Herr Hefekauser on June 16,
1995.
7 June 1995
Letter from Francis Coleman to Herr Hefekauser setting out a
proposed rebiller scenario for discussion at the June 16, 1995
meeting.
7 June 1995
Letter from Francis Coleman to Herr Feier of the BMPT setting
out a proposed rebiller scenario for discussion at a meeting
scheduled from June 16, 1995.
8 June 1995
Letter from Francis Coleman to Dr. Manfred Witte of the BMPT
confirming June 16, 1995 meeting.
16 June 1995
Meeting at the BMPT. Representing the BMPT was Herr Knobloch.
Representing ACC were Francis Coleman and Michael Taylor.
The proposed rebiller scenario with DBP Telekom was discussed.
Herr Knobloch confirmed that the BMPT did not find the scenario as
presented to be contrary to the existing German regulatory
framework. Herr Knobloch suggested that ACC, as a next step present
the proposed rebiller scenario to DBP Telekom and request a proposed
tariff for BMPT review and approval.
16 June 1995
Meeting with Herr Hefekauser, Christophe Dreier and Gerhard
Horter of DBP Telekom attended by Francis Coleman and Michael
Taylor. ACC and DBP Telekom discussed the proposed rebiller scenario
and ACC informed DBP Telekom that the BMPT had found no regulatory
prohibitions to prevent DBP Telekom from entering into a rebiller
arrangement with ACC subject to BMPT review and approval of terms
and tariffs. DBP Telekom and ACC agreed that ACC would provide
further details and information requirements to proceed with
discussions.
28 June 1995
Meeting with DG IV at the European Commission. Representing DG
IV were Dr. Stefan Rating, Madam Suzette Schiff-Cockborne, Mr. Rein
Wesseling and Mr. Kevin Coates. Representing ACC were Francis
Coleman and Michael Taylor. Francis Coleman spoke about the benefits
of resale as a means of introducing switched voice telephony
competition prior to January 1, 1998.
Francis Coleman also updated those present on the German
Ministry's confirmation of ACC's ability to enter into a rebiller
arrangement with DBP Telekom in Germany.
8 August 1995
Letter from Michael Taylor to Herr Hefekauser setting out the
benefits to DBP Telekom of appointing ACC as a rebiller and
requesting tariff details including payment terms and billing
information required for ACC to bill its customers.
9 August 1995
Letter from Michael Taylor to Herr Knobloch confirming ACC's
ability to enter into a rebiller arrangement with DBP Telekom in
Germany.
22 August 1995
ACC meeting with Bruce Rogers (Telecommunications officer at
U.S. Embassy in London reporting directly to the U.S. Ambassador).
Michael Taylor of ACC provided an update on ACC's initiatives in
Germany.
6 September 1995
Oftel Director General Donald Cruikshank gives speech to Euro-
Forum in Dusseldorf entitled ``Liberalisation and the Promotion of
Competition in Infrastructure and Services: Lessons from the UK
Experience.'' Mr. Cruikshank describes ``* * * how the UK opened up
[its] regime to U.S. resale companies, starting with ACC back in
1992 * * *'' (Page 9) and states that ``* * * ACC, our first
licensed International Simple Resale company back in 1992, have now
applied to engage in resale in Germany. I wish them every success
over here and hope that the authorities here will be far-sighted and
quick footed enough to recognize the benefits that such foreign
investment, experience, and entrepreneurship can bring to the German
economy (page 12).
13 October 1995
Francis Coleman of ACC Corp. invited by FCC to October 17
meeting at FCC offices in Washington with Prof. Dr. Stephan
Schrader, Telecommunications Advisor to Minister Botsch, following a
meeting between the FCC and Minister Botsch in Bonn the week of
September 25.
17 October 1995
Francis Coleman of ACC Corp. meets with Prof. Dr. Stephan
Schrader to discuss resale in general and ACC's strategy and efforts
to become a rebiller under contract to Deutsch Telekom now, as
approved in principle by the German Ministry last June. Mr. Coleman
requested Dr. Schrader to encourage Minister Botsch's office to
strongly support ACC's efforts now.
23 October 1995
As suggested by Dr. Schrader, Mr. Coleman sends letter to Prof.
Dr. Eberhard Witte at Ludwig Maximilians Universitat in Munchen,
Germany, requesting discussions in furtherance of ACC's efforts to
become a
[[Page 4012]]
German rebiller. Dr. Witte chairs a seven person Committee reporting to
Minister Botsch on German telecommunications deregulation.
October 24, 1995.
Donald J. Russell, Esq.,
Chief, Telecommunications Task Force, Antitrust Division, Room
89104, 555 Fourth Street, N.W., Washington, D.C. 20001
Re: United States v. Sprint Corporation and Joint Venture Co.,
Civil Action No. 95-1304 (D.D.C. filed July 13, 1995)
Dear Mr. Russell: On behalf of Esprit Telecom United Kingdom
Limited, we transmit an original and five (5) copies of its comments
in the above-referenced proceeding. We regret that the unexpected
absence from his office of the company's European counsel delayed
this filing until today, but we hope that you will be able to
consider the comments on their merits. To avoid any prejudice to the
defendants, copies of these comments are being sent by facsimile to
the counsel identified below.
Should there be any questions concerning this matter, please do
not hesitate to contact me.
Very truly yours,
Helen E. Disenhaus,
Counsel for Esprit Telecom United Kingdom Limited.
Of Counsel:
David E. Reibel,
Corporate Counsel, Esprit Telecom Benelux B.V., World Trade Center.
October 24, 1995.
Donald J. Russell, Esq.,
Chief, Telecommunications Task Force, Antitrust Division, Room
89104, 555 Fourth Street, N.W., Washington, D.C. 20001
Re: United States v. Sprint Corporation and Joint Venture Co.,
Civil Action No. 95-1304 (D.D.C. filed July 13, 1995)
Dear Mr. Russell: On behalf of Esprit Telecom United Kingdom
Limited (``Esprit''), which recently received from the Federal
Communications Commission (``FCC'') authority pursuant to Section
214 of the Communications Act of 1934, as amended, 47 U.S.C.
Sec. 214, to operate as a United States international facilities-
based carrier (see FCC File No. I-T-C-95-435), we submit the
following comments on the proposed Consent Decree filed in the
above-referenced action.
Esprit and its affiliates have provided value-added and
liberalized services in Europe since 1992. As documented in comments
filed with the FCC by Esprit and by third parties, Esprit's attempts
to enter and compete in the German and French markets have met with
serious obstacles imposed by the dominant carriers, Deutsche Telekom
(``DT'') and France Telecom (``FT''), and their respective national
regulatory authorities. Esprit is therefore concerned that the
restrictive provisions and reporting conditions of the proposed
Consent Decree will be insufficient to prevent DT and FT from
continuing to use their monopoly power in the still-reserved leased
line and voice services market segments, as well as their dominant
positions in all services in their home markets, to impair the
ability of new entrants to compete in those markets.
Moreover, as a new entrant in the U.S. international services
market, Esprit is particularly concerned that the proposed alliance
with Sprint Corporation (``Sprint''), by allowing DT and FT to
leverage their market power in their home markets, will limit
competition in the U.S. international services market. DT and FT
will be uniquely advantaged because their joint venture will be able
to provide end-to-end international services (including but not
limited to those on the U.S.-Germany and U.S.-France routes) that
are foreclosed to their competitors. This advantage is increased by
the fact that DT and FT have already stymied many of the efforts of
potential competitors to establish themselves in the German and
French markets as providers of enhanced and liberalized services. At
the very least, German and French regulators should make a
commitment to license competitors on an expedited basis, with the
implementation of joint venture services suspended while
applications from new entrants filed within 60 days of the entry of
any Consent Decree in this action remain pending.
Moreover, as a condition of entry of a Consent Decree, DT and FT
should be precluded from predatory pricing of end-user services and
should be required to provide leased lines at wholesale, cost-based
rates on an expedited and priority basis to competing carriers. DT
and FT should not be allowed to provide leased lines for end-to-end
joint venture services unless they provide leased lines in a non-
discriminatory manner, including ensuring that joint venture
services are not provisioned while competitors' service orders
remain unfilled. Competitors must receive equal treatment with
respect to all terms and conditions affecting service, including
price and provisioning intervals.
While the Phase I conditions proposed by the Department go
farther than the conditions imposed on the British
Telecommunications alliance with MCI, they may not go far enough to
avoid the alliance's having an adverse impact on competition. The
Department acknowledges the current limitations on the effectiveness
of the German and French regulators. Because the Department but not
competitors will have access to the only information providing any
degree of transparency into DT, FT, Sprint, and joint venture costs
and prices, the Department must be prepared to thoroughly review on
an expedited basis all data filed with it and to utilize such data
in promptly considering competitor complaints. When colorable
complaints are presented to the Department, it must be prepared to
provide complainants the necessary data to support their claims
unless the Department immediately implements remedial action.
Because of the dependence of competitors on interconnection with the
carriers' networks and access to the carriers' facilities, without
vigorous oversight and enforcement by the Department, mere reporting
conditions and abstract prohibitions against preferential treatment
of alliance affiliates are insufficient protection against
discrimination. Unless the Department undertakes an aggressive role
in entertaining and investigating complaints of anticompetitive
conduct, the Consent Decree will be little more than a piece of
paper.
Some of Esprit's specific concerns about the anticompetitive
conditions in the German and French telecommunications markets are
briefly described in Attachment A, which also includes a copy of
comments filed by Esprit before the FCC, as well as some recent
trade press addressing these issues. Esprit would be pleased to meet
with officials of the Department to discuss these concerns and
possible additional competitive safeguards that would promote
continuation of the vigorous competition now exhibited by the U.S.
telecommunications market and promote expanded competition aboard.
Very truly yours,
Helen E. Disenhaus,
Counsel for Esprit Telecom United Kingdom Limited.
Of Counsel:
David E. Reibel,
Esprit Telecom, World Trade Center.
Concerns of Esprit Telecom About the ``Phoenix'' Alliance Among Sprint
Corporation, Deutsche Telekom, and France Telecom
The experiences of the Esprit Telecom (``Esprit'') companies in
attempting to compete in the French and German telecommunications
markets as providers of enhanced and liberalized telecommunications
services demonstrate that without regulators committed to a
competitive telecommunications market and effective regulatory
oversight, Deutsche Telekom (``DT'') and France Telecom (``FT'')
will continue to be able to exercise their market power to forestall
effective competition. Moreover, upon consummation of the Phoenix
joint venture, their market power will be enhanced by the addition
of Sprint Corporation (``Sprint'') to their alliance. Unless the
Department undertakes an aggressive continuing oversight program,
the Phase I restrictions and reporting requirements included in the
proposed Consent Decree will be inadequate to prevent
anticompetitive conduct that will affect not only the domestic
markets in Germany and France, but also the U.S. and worldwide
international telecommunications markets.
As the Department recognizes, unlike the situation in the United
Kingdom at the time the British Telecom/MCI venture was approved,
neither France nor Germany has a well-established, effective
regulator committed to a competitive marketplace, and restrictive
entry barriers have limited competitors to a few narrow niche
services rather than to competition in all service categories. The
Department should therefore give serious consideration to expanding
the prophylactic measures included in the proposed Consent Decree to
ensure that the Phoenix Alliance results in a net increase in
telecommunications competition rather than promoting the development
of a marketplace composed exclusively of a few international
behemoths that function as an oligopoly.
[[Page 4013]]
In particular, Esprit's concerns focus on the following issues:
Regulatory Transparency--It is critical that France and Germany
implement regulatory systems that provide transparency by
affirmatively disseminating information about licensing procedures,
cost accounting/orientation, tariffs, interconnection regimes, and
infrastructure use and development. Current ad hoc procedures
disadvantage new entrants by making it difficult for them to find
out about, much less take advantage of, market entry opportunities,
as well as by limiting their ability to challenge discriminatory
conduct by the dominant providers.
Effective Enforcement--The Department has recognized the serious
adverse implications of the fact that, while France is planning to
establish an independent regulatory body, one is not yet in place.
Similarly, as the Department recognizes, the independence of the
German regulator is uncertain, especially in light of questions
raised about the continuing involvement of key officials with DT.
It is also of major concern that neither DT nor FT has been
privatized, raising a substantial conflict of interest for
regulators in both countries, who are employed by governments with a
vested interest in the profits of DT and FT. Given this motivation
for continued preferential regulatory treatment of the state-owned
national carriers, the Department must ensure that there are in
place effective measures for ensuring a fair hearing of challenges
to regulatory actions even when such challenges raise the issue that
the regulator has impermissibly favored the dominant carrier.
Esprit's concerns in this area are particularly great because
there is considerable doubt as to whether the national carriers and
the national regulators in Germany and France have in the past fully
complied with European Union and national laws affecting
telecommunications regulation and competition. As detailed in the
attached letter submitted last November to the EU's Director-General
of DG-IV, the Competition Directorate of the European Commission,
Esprit strongly opposes rewarding non-compliant national carriers
and governments by allowing them to exploit new opportunities while
they benefit from violations of existing law. These concerns are
particularly relevant here, because the European Commission has
itself cited several deficiencies in the implementation by Germany
and France of the current Services Directive. Additionally, it
appears that neither DT nor FT has complied fully with the Leased
Line Directive (94/44/EEC), which, under Article 10(2), required the
regulators of Member States to ensure that their telecommunications
operators implemented and effective cost accounting system by
December 31, 1993. Nor do the regulators appear to have complied
even with the requirements of Article 10(1) of that Directive, which
required compliance with basic principles of cost orientation and
transparency. As a direct result of these deficiencies in regulatory
oversight, consumers and competitors have been--and continue to be--
overcharged for leased lines, and there is insufficient information
to permit effective review of possible occurrences of cross-
subsidization.
The Department should therefore ensure, at the very least, that
both countries have established independent regulators prior to U.S.
approval of Phoenix by the FCC and the District Court. Approval
should also be conditioned on the establishment by the countries'
competition agencies of procedures for expedited consideration of
complaints of anticompetitive conduct, as well as the availability
of remedies before the European Union and its regulatory agencies.
Additionally, the Department should exercise continuing oversight of
the competitive practices of Phoenix and its members. The Department
should entertain complaints of, and be prepared to take appropriate
remedial actions with respect to, anticompetitive activities by
Phoenix members, regardless of whether the challenged activities
actually occur within the U.S.
Cross-Subsidization--As a competitor and potential competitor of
DT and FT, Esprit is also particularly concerned about the carriers'
opportunities for cross-subsidization that can facilitate both
unreasonably high wholesale rates and predatory pricing of end-user
customer prices. Absent effective national regulators with broad
authority and interest in ensuring that such cross-subsidization is
both prohibited and prevented, competition will not flourish.
DT and FT must be required to demonstrate that they have priced
their services and those of the joint venture on the basis of well-
documented costs, without lowering prices to end-users in a
predatory manner or discriminatorily raising prices charged
competitors. Issues of cross-subsidization arise at both the
``macro'' and the ``micro'' levels.
With respect to ``macro'' cross-subsidization, the marketplace
and the regulators must have full information about any start-up
investments, transfers of assets, bank guarantees, loans, and other
occasions of cross-subsidization. They must receive guarantees and
time commitments for implementation of specific measures designed to
prevent such cross-subsidization and its anticompetitive
consequences, including the provision of sufficient information to
allow competitors to challenge pricing effectively. One major
concern of many potential new entrants is that Atlas/Phoenix will
attempt to increase its market share quickly by ``dumping''
telecommunications services at prices below their actual costs
(i.e., engage in ``predatory pricing''). Evidence of such pricing
practices has already been apparent to firms that have initiated
competition in the limited market segments now open to them.
Similarly, new entrants are at a substantial disadvantage in
that in many cases they must lease lines from the dominant
operators. Not only does this provide opportunities for carriers
with market power to delay provisioning or provide inferior quality
circuits, but also it provides an opportunity for the dominant
carriers to substantially increase the operating costs of their
competitors. For a carrier such as Esprit, leased line costs may
account for 40%-50% of the company's operating costs. but such costs
may be dramatically changed at the whim (or the will) of the
dominant carrier, which has a substantial opportunity for cross-
subsidization.
At the ``micro'' level, both DT and FT have been found to have
cross-subsidized their telecommunications services when competition
enters a market segment. The record before the Department includes
evidence concerning the substantial fine recently imposes on DT for
cross-subsidization of its data services, and Worldcomm has been
attacking DT cross-subsidization in Germany for some time.
Similarly, as indicated in the attached article from La Monde
Informatique, French regulators have found FT to be cross-
subsidizing with monopoly revenues the activities of FT's
competitive subsidiary, Colisee International. In addition to
implementation of prophylactic measures to ensure that such
activities do not continue, appropriate compensation should be made
to adversely affected consumers and competitors as a pre-condition
to approval of the Phoenix alliance.
Availability of ``Alternative'' Infrastructure--While we
understand that both Germany and France are accelerating the
availability of alternative infrastructure, these market segments
should be fully liberalized before Phoenix is implemented. Not only
should alternative infrastructure be available from public utilities
and cable television operators, as is currently planned in the
relatively near-term, but also competitors such as Esprit should be
allowed to provide their own infrastructure (and the availability of
this option should be made public information, without the necessity
of ad hoc initiatives and narrow rulings limited to a single
operator).
The availability of such alternative sources of circuit capacity
will do much to prevent anticompetitive leased line provisioning by
dominant carriers, and therefore it is critical that there be
written commitments to authorize complete infrastructure competition
in the near-term. Moreover, in the meantime, prior to its
availability, DT and FT should be required to provide high quality
leased lines in timely fashion and at cost-based prices to
competitive carriers.
Interconnection Arrangements--Perhaps the greatest obstacle to
implementation of a competitive marketplace is the absence of an
effective regulatory regime that will ensure that the dominant
carriers provide in timely fashion interconnection arrangements that
are cost-based, feature-rich, and transparent across networks.
Before Phoenix is approved, the Department should insist that,
pending publication of the European Commission's forthcoming
interconnection directive, both DT and FT publish proposed
interconnection plans that include standard terms and conditions,
cost-based tariffs, quality standards, and provisioning intervals,
and that these proposals are made subject to public comment and
scheduled for regulatory consideration on an expedited basis.
Conclusion
The Department is correct in insisting on detailed reporting of
information to ensure
[[Page 4014]]
that the members of the Phoenix alliance act in a non-discriminatory
manner vis-a-vis their competitors. At this time, neither Germany
nor France has in place the types of detailed accounting rules
established by the Federal Communications Commission to ensure
transparency into carrier cost accounting and tariffing. Nor is
there any transparency as to the carriers' terms and conditions of
service provisioning. Mere reporting, however, is insufficient to
address Espirit's substantial concerns about regulatory
transparency, effective enforcement, cross-subsidization,
availability of alternative infrastructure, and availability of
proper interconnection arrangements.
The Department should seriously consider adding to the proposed
Consent Decree the described above recommendations of Esprit.
Additionally, it should make a clear-cut commitment to vigorous
oversight and enforcement of the activities of the Phoenix joint
venture and its members. To the extent that the reporting
requirements of the Decree deny competitors access to critical
information necessary to document the basis of their complaints of
discrimination, the Department must assume an active role in
reviewing all the data presented to it and must address complaints
in timely fashion. Only if the Department undertakes this level of
continuing oversight can approval of the alliance increase rather
than substantially lessen competition in the international
telecommunications services market.
21 November 1994.
Mr. Claus-Dieter Ehlermann,
Director General, DG-IV, Commission of the European Union, Rue de la
Loi 200, B-1049 Brussels, Belgium
Re: Telecommunications Alliances
Dear Mr. Ehlermann: I am writing to request that you consider
the following principles that Esprit Telecom proposes ought to be
used for evaluating telecommunications alliances in Europe prior to
Commission approval:
The Commission should not permit the formation of
alliances if a monopoly member is not fully compliant with all
aspects of Commission directives. In particular, monopoly members
should comply with the Open Network Provision (ONP) and the
implementation of related liberalisation legislation. (Even the most
basic provisions, such as those requiring cost accounting have not
been achieved by many monopoly providers.)
The Commission should not permit the formation of
alliances if a National Regulatory Authority under which a monopoly
member operates has not fully complied with Commission directives.
Moreover, the Commission should not permit operators to join
alliances while continuing to violate their own national regulations
and laws.
The failure of Member States to fully implement Commission
directives has permitted some monopoly operators to benefit from a
protected home market--often with the aid of their national
regulatory authorities--while aggressively pursuing opportunities in
liberalised markets abroad. Esprit Telecom believes that if the
objective criteria outlined above are utilised by the Commission, a
more rapid and comprehensive liberalisation of the European market
can be achieved. Esprit Telecom believes that liberalisation is a
precondition for providing consumers with more choices and lower
costs.
Sincerely,
Michael Potter,
President.
Federal Communications Commission
Opposition of Esprit Telecom, U.K., to Sprint Corporation Petition for
Declaratory Ruling
In the Matter of: Sprint Corporation Petition for Declaratory
Ruling Concerning Sections 310(b)(4) and (d) and the Public Interest
Requirements of the Communications Act of 1934, as amended. File No.
I-S-P-95-002.
I. Introduction
Esprit Telecom, U.K. (``Esprit''), by its undersigned counsel,
submits its Opposition to the Petition for Declaratory Ruling
(``Petition'') of Sprint Corporation (``Sprint'') \1\ seeking
confirmation that its ``Global Partnership'' arrangement with France
Telecom (``FT'') and Deutsche Telekom (``DT'') does not violate the
Communications Act or the Commission's Rules. Specifically, Sprint
seeks confirmation that (1) its formation of a ``Global
Partnership'' with DT and FT and the related investment in Sprint by
DT and FT does not involve a transfer of control within the meaning
of Section 310(d) of the Communications Act; (2) a level of 28%
foreign ownership in Sprint is not inconsistent with the public
interest under Section 310(b)(4) of the Communications Act; and (3)
the transaction is otherwise consistent with the public interest.
\1\ See Sprint Corporation Petition for Declaratory Ruling, File
No. ISP-95-002 (filed Oct. 14, 1994); FCC Public Notice, Report No.
I-8084 (released August 4, 1994).
---------------------------------------------------------------------------
As explained below \2\ Esprit strongly opposes approval of
Sprint's Petition prior to the introduction of switched voice
competition in France and Germany and the establishment of
independent regulatory bodies in France and Germany that can and
will effectively enforce regulations, including those relating to
transparency of cost information and imputation of costs, that are
designed to prevent anticompetitive behavior.
\2\ Esprit is currently the recently-filed ``Competitive Impact
Statement'' of the Department of Justice and may supplement these
comments in a reply pleading following its review of those
documents.
---------------------------------------------------------------------------
II. Statement of Interest
Esprit, owned and controlled by United States citizens, is a
wholly-owned subsidiary of Esprit Telecom (Jersey) Limited, which is
organized under the law of Jersey, Channel Islands, in the United
Kingdom. While it has recently applied for authority to enter the
U.S. telecommunications market as a common carrier,\3\ Esprit
operates primarily as a value-added services provider to large and
medium-sized business users in the European telecommunications
market. Specifically, in the U.K. Esprit provides to large and
medium-sized businesses a wide range of value-added, switched and
dedicated, voice and data services liberalized by the U.K.
government. In continental Europe, Esprit's affiliates \4\ provide
value-added private network and facsimile services in Spain,
Belgium, the Netherlands, and France, again serving primarily large
and medium-sized business users. To date, however, Esprit has made
no progress in its efforts to provide in Germany the value-added
services liberalized by the European Union (``EU''), and it has
experienced increasingly high leased line provisioning rates in both
Germany and France.
\3\ Application of Esprit Telecom of the United Kingdom Ltd. for
Authority Pursuant to Section 214 to Operate as an International
Resale Carrier Between the United States and Various Points, File
No. I-I-C-95-435.
\4\ Services in Belgium and the Netherlands are provided by
Esprit Telecom Benelux B.V. Services in France are provided by
Esprit Telecom France S.A. Services in Spain are provided by Esprit
Telecom de Espana S.A.
---------------------------------------------------------------------------
Esprit is concerned that the proposed alliance among DT, FT, and
Sprint will have a substantial adverse impact on Esprit's plans to
construct a pan-European network absent commitments by regulators in
France and Germany to implement immediately and fully all service
and infrastructure liberalization directives promulgated by the EU
and, further, to open the infrastructure and services monopolies of
DT and FT to competition prior to consummation and implementation of
the alliance. As a new entrant into the U.S. international services
market, Esprit has a substantial concern that FT and DT will be able
to leverage their monopoly positions in their home markets to
enhance their position in the U.S. market and reduce the current
level of competition here. Accordingly, Esprit has a direct interest
in any Commission action that would have the effect of relieving the
pressure on FT and DT and the French and German regulators to open
the French and German telecommunications markets to competition in
order for FT and DT to receive the U.S. regulatory approvals
necessary to consummate their proposed investment in Sprint.
III. Approval of Sprint's Proposed Joint Venture Will Retard Rather
Than Enhance Competition in the Global Telecommunications Market
Instead of promoting the Commission's articulated goal of
fostering a competitive global telecommunications market, approving
Sprint's proposed Global Partnership now, prior even to the
authorization of resale competition in all service categories, much
less full liberalization of the French and German telecommunications
markets, would eliminate the chief incentive for the French and
German governments to open their telecommunications markets to
effective competition. The Commission must consider the potential
adverse impact on the continuation of robust competition in the U.S.
market, as well as the adverse impact on
[[Page 4015]]
the ability of U.S.-owned carriers to penetrate foreign markets, that
would result from permitting the largest U.S. carriers to enter into
alliances with the largest foreign monopoly carriers. In addition,
while enhancing the competitive positions of the large U.S. carriers
through financial investment, such alliances simultaneously deprive
the U.S. market of some of its most vigorous new entrants. They also
introduce new and unreasonable market distortions to the extent that
alliance members are allowed to offer end-to-end services their
competitors are foreclosed from providing. Therefore, it is
imperative that the Commission permit such alliances to go forward
only after it is convinced that any potential adverse impact on the
level of competition in the U.S. market is offset by increased
global competition that affords new opportunities for U.S.-owned
carriers.
Here, the proposed Global Partnership involves three, rather
than two, of the world's largest carriers, two of which retain
substantial monopolies in their home markets, and competition in the
French and German markets is far less extensive than that prevailing
in the U.K. at the time the British Telecom /MCI joint venture was
approved. Sprint's proposed alliance with FT and DT raises even more
serious competitive concerns than did the BT/MCI ``Concert''
alliance. Moreover, instead of being in the vanguard of
liberalization in Europe as is the U.K.'s regulatory regime, both
France and Germany are only beginning to develop independent
regulatory agencies \5\ and regulations designed to ensure that the
opportunity for fair competition develops.
\5\ The Direction Generale des Postes et Telecommunications in
France and the Ministry for Post and Telecommunications, assisted by
a new Regulierungsrat (Regulation Council), in Germany.
---------------------------------------------------------------------------
Illustrating the magnitude of the problem, despite the EU's
mandate, Germany simply has not adopted any laws to implement the
EU's Services Directive \6\ and authorize the offering of the
liberalized services (virtually all services other than switched
voice services) in its market. Moreover, neither the French nor the
German government has fully implemented the Leased Lines Directive
\7\ requiring national regulators to obtain and review accounting
separations data to ensure that the dominant carriers do not abuse
their facilities monopolies or virtual monopolies by cross-
subsidization \8\ or by imputing lower costs to their competitive
operations than they charge their competitors. While France,
commendably, has allowed value-added service providers to enter the
market without formal application procedures or processing
delays,\9\ in Germany the regulator's failure to implement European
law with respect to liberalized services, leased lines, and open
network provisioning \10\ has chilled market entry by potential
service providers who cannot rely on obtaining the necessary
authorizations and leased lines in any predictable time frame. The
few competitive authorizations that have been issued to date have,
moreover, been issued on an ad hoc basis that gives little guidance
as to the factors that will be considered in awarding such
authorizations. In both countries, the efficient working of the
competitive marketplace is already hampered by the regulators'
failure to carry out their mandate to implement the EU Directives,
and the problem could be worsened if the proposed Sprint/DT/FT
alliance is allowed to proceed at this time.
\6\ 90/388/EEC: Commission Directive on 28 June 1990 on
Competition in the Market for Telecommunications Services, 1990 O.J.
(L 192/10).
\7\ 92/44/EEC: Council Directive of 5 June 1992 on the
Application of Open Network Provision to Leased Lines, 1992 O.J. (L
165).
\8\ The substantial governmental investment interest in both
European carriers also raises further concerns about the potential
for substantial cross-subsidization and the regulatory directives to
preclude it.
\9\ See Article L. 34 of Law No. 90-1170 of 29 December 1990.
(This section modifies the Code des Posts et Telecommunications to
provide that the France Telecom monopoly extends only to ``services
provided to the public, which, in the case of reserved voice
telephony is ``the commercial provision of a system of direct, real-
time voice transmissions between users connected to termination
points of a telecommunications network,'' and establishes a
notification procedure for competitive entry into most unreserved
service segments.)
\10\ 90/387/EEC: Council Directive of 28 June 1990 on the
Establishment of the International Market for Telecommunications
Services Through the Implementation of Open Network Provision, O.J.
(L 192/1).
---------------------------------------------------------------------------
IV. Continued Regulatory Pressure is Critical
In light of the virtually complete monopoly status of FT and DT
in their respective markets and the current absence of competition
in switched voice services in those markets, approving this alliance
would eliminate all incentive for FT and DT to relinquish their
respective strangleholds on the French and German telecommunications
markets and could sound the death knell for emerging competitive
carriers like Esprit. Even if France and Germany were to open their
markets to competition, however, the potential and opportunity for
anticompetitive behavior and discrimination in favor of Sprint and
the joint venture company to be formed with Atlas is great and would
likely have a preclusive effect on the entry of any new carriers.
Therefore, until the regulator in each country establishes clear and
transparent regulations with respect to application procedures,
accounting separation procedures and cross-subsidization safeguards,
as well as requiring cost-based leased line rates \11\ and
commercially reasonable interconnection charges, the Commission
should not approve the proposed Sprint/DT/FT alliance. Although in
recent months the French and German regulatory authorities have
appeared to be more favorably disposed to increased
telecommunications services competition, neither France nor Germany
has yet taken any effective action to open its basic
telecommunications services market to competition.
\11\ Critical to Esprit's business plan of providing reliable
competitive telecommunications services across Europe is the ability
to lease lines at commercially reasonable rates or construct its own
network.
---------------------------------------------------------------------------
Accordingly, Esprit urges the Commission to deny Sprint's
Petition until, at a minimum, concrete steps, such as implementing
the European Community's Services, Open Network Provisioning, and
Leased Line Directives, are taken in both Germany and France to
liberalize their respective telecommunications markets. Given that
FT and DT are the two largest telecommunications carriers in Europe,
access to the French and German telecommunications markets is
critical to successful market penetration by competitive entrants.
The Commission should therefore decline to approve the proposed
alliance until the French and German regulators adopt (1)
transparent application procedures for licensing carriers to provide
all services, (2) transparent rules to authorize competitive
carriers to construct their own fiber and microwave networks, (3)
rules to implement the European Community Leased Lines, Open Network
Provisioning, and Services directives,\12\ and (4) cost accounting
rules to permit cross-subsidization.
\12\ See, supra, notes 6, 7, and 10.
---------------------------------------------------------------------------
V. Conclusion
For the foregoing reasons, Esprit respectfully urges the
Commission to deny Sprint's Petition at this time as contrary to the
public interest in promoting a competitive global telecommunications
market.
Dated: September 1, 1995.
Respectfully Submitted,
Esprit Telecom, U.K.
Margaret M. Charles,
William B. Wilhelm, Jr.,
Swidler & Berlin, Chartered.
Certificate of Service
I hereby certify that, on this 1st day of September 1995, a copy
of the Opposition of Esprit Telecom, U.K., to Sprint Corporation
Petition for Declaratory Ruling was served by hand delivery to the
following:
International Transcription Service, Inc., 2100 M Street, NW., Suite
140, Washington, DC 20037
International Reference Room, International Bureau, 2000 M Street,
Room 102, Washington, DC 20554
Katherine A. Swall.
Harvard University Law School
October 19, 1995.
Mr. Donald Russell,
Chief, Telecommunications Task Force, Antitrust Division, Room
89104, 555 Fourth Street, NW., Washington, DC 20001
Re: Proposed Final Judgment and Competitive Impact Statement; United
States v. Sprint Corporation and Joint Venture Co.
Dear Mr. Russell: The purpose of this letter is to comment on
the Proposed Final Judgment and Competitive Impact Statement in
United States v. Sprint Corporation and Joint Venture Co., Civ.
Action No. 95-1304 (D.D.C. July 13, 1995), published at 60 Fed. Reg.
44049 (August 24, 1995). In particular, I want to recommend that the
Justice Department require, as a condition for
[[Page 4016]]
settling the case, that France Telecom remove all obstacles that hinder
or render impossible the use by its competitors whether in the
telecommunication sector (fixed telephone or mobile) or in the data
processing sector, of public information contained in the French
telephone directory it maintains in its capacity as a public
utility.
Since 1989, France Telecom has been adamantly refusing to share
with its competitors--specifically in the data processing sector--
the contents of what has become known as the ``Orange List''. French
regulations promulgated in 1989 have prohibited anyone from
soliciting individuals who have informed France Telecom of their
request not to be disturbed by commercial solicitations emanating
from the telephone directory. France Telecom has created a list of
such individuals which it calls the Orange List.
As a result of France Telecom's conduct, the French telephone
directory is mixed with Orange List individuals whom no one other
than France Telecom can identify. Yet, under French law, it is a
crime to solicit such people. France Telecom refuses to share this
information with its competitors, subjecting them to the risk of
criminal prosecution if they compile their data from the telephone
directory, and actually filing criminal complaints with the public
prosecutor against its own competitors.
Using regulations intended strictly to protect a small group of
individuals who wish not to be disturbed by commercial
solicitations, France Telecom has basically made it impossible for
any other entity to participate in the data base end of the direct
marketing business, a business so crucial to the flow of goods and
services from the U.S. to the French consumer market.
Indeed, the Orange List has potential implications beyond the
data processing sector. If and when deregulation occurs in France,
AT&T and MCI may seek to enter the telecommunication market in
France. When they do so, they will, in all likelihood, need to
solicit potential customers through direct mail or telemarketing.
The only conceivable source of information they can use in such a
campaign would be the French telephone directory; no other source
would allow them to reach the totality of French households and
entities. Unfortunately, because of France Telecom's refusal to
share the Orange List with competitors, the U.S. competitors of
Sprint would be unable to use the information contained in the
directory. Should they do so, France Telecom would surely complain
to the authorities which would lead to their criminal prosecution.
On the other hand, France Telecom and Sprint could easily reach
the totality of the French population, because unlike its
competitors, France Telecom can identify those individuals listed in
the telephone directory who have put themselves on the Orange List.
A recent initiative undertaken by France Telecom in the mobile
telephone sector will illustrate another aspect of the problem. The
mobile telephone sector in France is open to competition and France
Telecom has two competitors operating mobile telephone networks.
France Telecom has recently informed its mobile telephone
subscribers that they may request to be included in the telephone
directory, and if they do so they will be automatically put on the
Orange List.
The French regulation is clear about the fact that the request
to be put on the Orange List must come from the individual and not
at the initiative of France Telecom. But in moving to expand the
reach of the Orange List, France Telecom has chosen to make it
impossible for any of its competitors to solicit its clients, since
it is unlawful to solicit individuals who are on the Orange List.
Yet if another mobile operator published a directory of its
subscribers, nothing could stop France Telecom from soliciting its
competitor's clients.
The problem I am focusing on is not at all about protecting
privacy, but about how much one is willing to pay France Telecom for
the directory information purged of the Orange List. To obtain the
entire directory purged of the Orange List would cost between $1.5
million and $3 million, depending on which of France Telecom's
departments one buys it from. Paying this price will not get a data
processing company or a marketing director of a competing
telecommunications company very far because--on the very following
day--the directory purchased will not contain the new additions to
the Orange List. Since France Telecom does not supply the Orange
List, the customer will have to procure the entire directory again
and again. Quite frankly, it is just absurd--except for procuring a
monopoly position by France Telecom, millions of dollars will have
to be spent on nothing more than a telephone directory available on
every street corner in Paris and which will be rendered obsolete the
next day.
Meanwhile, France Telecom's U.S. operations in the transmission
and processing of data are continuing to grow. Its on-line
``Minitel'' network of services is now available all over the United
States to anyone with a modem-equipped personal computer. The France
Telecom telephone and business directories are available to U.S.
residents by simply dialing a local telephone number. France Telecom
can use this access it has to American consumers, not only for
direct profit (use of each on-line service generates income for
France Telecom) but also to attract clients to its global
telecommunications services. No one else can offer data processing
services emanating from an all-encompassing and exhaustive data base
of French residents.
France Telecom is seeking to profit as a market participation in
the United States telecommunications economy, through its
involvement in the Joint Venture Co., and must therefore live with
the regulatory consequences of making this choice, including
complying with applicable United States antitrust laws and policies.
Since the preparation and distribution of telephone directories and
related information is an integral aspect of the telecommunications
business--the ``telecommunication service'' and the ``public data
network'' that are the subject of the Proposed Final Judgment--that
will be pursued by the Joint Venture Co, and since France Telecom's
monopoly position has allowed it to limit competition concerning
such directories and information to the detriment of United States
businesses, the Antitrust Division's authority to require France
Telecom to share the Orange List with its competitors for the sole
and non-commercial purpose of allowing them to purge their data
bases of those individuals who do now wish to be solicited, is not
open to serious dispute. France Telecom should also be compelled to
make available to its competitors updated versions of the telephone
directory at a commercially reasonable price which takes into
account the fact that its own data processing divisions obtain it, I
presume, at no or little cost. These conditions should be
specifically included in the final judgment in United States v.
Sprint Corporation and Joint Venture Co.
My initial interest in this matter stems from consulting work I
did for the New York law firm of Fisher and Soffer representing a
French data marketing firm and its United States subsidiary in
litigation with France Telecom over access to such telephone
subscriber lists. My primary motivation for writing to you now,
however, is to bring to your attention an important public policy
issue within the scope of your mission, and not merely to advocate a
position on behalf of a client.
The United States antitrust laws have played an important role
in maintaining a level playing field for business competitors, both
domestic and foreign, who seek to profit by participating in the
United States economy. This role has become more demanding, and
crucial, with the growth of our globalized economy. I urge the
Antitrust Division to uphold this important role of the antitrust
laws, and to require France Telecom to make its telephone directory
truly available to competitors.
Respectfully submitted,
Charles M. Haar
Exhibit H
Notice Pursuant to Article 19 (3) of Council Regulation No 17 \1\ and
Article 3 of Protocol 21 of the European Economic Area Agreement
Concerning a Request for Negative Clearance or an Exemption Pursuant to
Article 85 (3) of the EC Treaty and Article 53 (3) of the EEA Agreement
\1\ OJ No 13, 21. 2 1962, p. 204/62.
---------------------------------------------------------------------------
Case No IV/35.337--Atlas
(95/C 337/02)
(Text With EEA Relevance)
Introduction
1. Atlas was notified to the Commission on 16 December 1994.
This transaction brings about a joint venture owned 50% by France
Telecom (FT) and 50% by Deutsche Telekom (DT). Atlas is also the
instrument of DT and FT's participation in a second transaction,
named Phoenix, with Sprint Corporation \2\. In the course of the
procedure before the Commission, FT and DT agreed to modify both the
Atlas and the Phoenix agreements. The latter, notified on 29 June
1995, are
[[Page 4017]]
described in a separate notice pursuant to Article 19 (3) of
Regulation No 17, published in this edition of the Official Journal
of the European Communities.
\2\ Notification announced in OJ No C 184, 18. 7. 1995, p. 11.
---------------------------------------------------------------------------
2. The Atlas venture will be structured at two levels. A holding
company established in Brussels, Atlas SA, will be incorporated as a
societe anonyme under the laws of Belgium. Atlas SA will have three
operating subsidiaries, namely one in France (Atlas France), one in
Germany (Atlas Germany), and one for the rest of Europe. Atlas
France and Atlas Germany will initially provide technical and sales
support to FT and DT, i.e. the French and German distributors of
Atlas and Phoenix products. After full liberalization of the
telecommunications infrastructure and services markets in France and
Germany, scheduled to occur by 1 January 1998, DT's subsidiary for
the provision of standardized low-level packet-switched X.25 data
communications, Datex-P, will be merged with Atlas Germany while
FT's subsidiary for the provision of standardized low-level packet-
switched X.25 data communications, Transpac France, will be merged
with Atlas France.
A. The Parties
3. Deutsche Telekom AG (DT) and France Telecom (FT) are the
public TO in Germany and France. Both supply telephone exchange
lines to homes and businesses; local, trunk and international
communications to and from their respective home country. Worldwide
turnover in 1994 was ECU 31,8 billion, a 4,3% increase over 1993,
for DT and ECU 21,7 billion, a 1,8% increase over 1993, for the FT
group.
B. The Relevant Market
1. Product Markets
4. Atlas will address the markets for the provision of value-
added telecommunications services to corporate users both Europe-
wide and nationally. Atlas will target two separate product markets
for value-added services, namely:
5. The market for advanced telecommunications services to corporate
users
This market comprises mostly customized combinations of a range
of existing telecommunications services, mainly data communications
and liberalized voice services including voice communication between
members of a closed group of users (virtual private network (VPN)
services), high-speed data services and outsourced
telecommunications solutions specially designed for individual
customer requirements. The market for advanced telecommunications
services to corporate users, enhanced by features such as tailored
capacity allocation, billing, 24h/24h technical service, etc., is
currently changing and evolving rapidly. Whether each of these
services constitutes a separate product market can be left open for
the purpose of this case, as Atlas and its competitors usually offer
customized packages of such services in combination with individual
enhanced features.
These services are provided over high-speed large-capacity
leased lines linking sophisticated equipment on customer premises to
the service provider's nodes. Alternatively, other means of
transmission, e.g. satellite or mobile radio capacity, can be used
to ensure the geographic coverage demanded from time to time. Such
services employ advanced state-of-the-art standards, data
compression techniques, equipment and software. In this market,
Atlas is expected to offer a portfolio of services including the
following:
--date services: high speed packet-switched and Frame Relay
services; pre-provisioned, managed and circuit-switched bandwidth,
--value-added application services: value-added messaging and video-
conferencing services,
--voice VPN services,
--intelligent network services,
--integrated very small aperture satellite (VSAT) network services,
and
--outsourcing: customers are offered to transfer responsibility and
ownership of their networks to Atlas. In this connection, Atlas may
integrate into its own offerings third-party products already owned
by customers who wish to keep such offerings, as the case may be.
6. Due to the high cost of building and operating the networks
needed to provide advanced corporate services, such services can be
commercially viable only if provided to large businesses and other
large telecommunications users who generate continued high traffic
volumes \3\. Customers for advanced services targeted by Atlas are
multinational corporations, extended enterprises, and other
intensive users of telecommunications and notably the largest among
these customers. Many of these potential customers have huge
telecommunication needs and have often acquired expertise in
managing own internal networks; they are not likely to switch to
service providers such as Atlas unless doing this proves to be cost-
effective. Finally, given their knowledge of the market these
customers are in a position to request offers from different
competitors.
\3\ See Commission decision in Case No IV/34.857 (BT-MCI) of 27
July 1994 (OJ No L 223, 27. 8. 1994).
---------------------------------------------------------------------------
7. The market for standardized low-level packet-switched data
communications services
Atlas will also be active on a separate market for packet-
switched data communications services. The Commission considers data
communications services a distinct telecommunications product
market, without prejudice to the existence of narrower markets \4\.
One narrower market is that for packet- and circuit-switched
services \5\. Packet switching is a means to improve network
capacity utilization and consists of splitting data sequences into
`packets', feeding these and other `packets' into the network
optimizing utilization of available capacity, switching the
`packets' to the desired destination and rearranging the `packets'
to obtain the data sequences sent. The most common standard used for
the provision of packet-switched data services is the `X.25'
standard.
\4\ Commission's Guidelines on the application of EC competition
rules in the telecommunications sector (OJ No C 233, 6. 9. 1991, p.
2, paragraph 27).
\5\ As defined in Article 1 (1), 9th indent of Commission
Directive 90/388/EEC of 28 June 1990 on competition in the markets
for telecommunications services (OJ No L 192, 24. 7. 1990, p. 10),
(the `Services Directive').
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Packet-switched data communications services constitute a
distinct product market because they are provided over basic
terrestrial network infrastructure and based on more mature
technology. These services are provided to different customer
segments within the same products market, namely:
1. On the one hand, customers who generate mostly erratic and
geographically widespread traffic. These features are due either to
the specific type of use (e.g. banks operating cash machines
nationwide, networks of points-of-sale in shops) or to the size of
such customers, i.e. small and medium-sized enterprises (SMEs). Such
services are billed according to published tariffs that are
proportional to the actual time of use of the network.
All incumbent Member State TOs including DT and FT operate dense
public data networks with nationwide coverage providing packet-
switched data communications services to this customer segment. In
each Member State there is only one public data network built by the
respective incumbent TO under a public service obligation before
market liberalization.
2. On the other hand, larger corporate customers and other
extended users generate more substantial and regular traffic. The
requirements of these users justify that either third-party service
providers or the potential customer itself assume the high cost of
creating customized leased lines circuits to meet individual service
demand. Packet-switched data communications services to such users
are billed according to negotiated rates that take account of the
individual demand features of a particular customer.
8. Virtually all companies active in each individual Member
State of the European Union are potential if not actual customers
for national standardized low-level packet-switched data
communications services. These services are also required by SMEs,
albeit in smaller volumes and possibly less regularly than by larger
users. Seldom will such volumes justify that service providers
invest in leased lines with the specific purpose of reaching these
SMEs, which are therefore in a weak negotiating position and hardly
capable to date of switching from the current provider, typically
the incumbent TO, to a competitor.
9. Standardized low-level packet-switched data communications
may also be offered as one service combined with advanced corporate
service offerings. However, even as part of such combined offerings
packet-switched data communications services are provided over
standard terrestrial infrastructure. At the national level, choice
from a wider range of offerings than merely standardized low-level
packet-switched data communications services may also be available
to larger customers that are not using the TO's public data networks
but are served over customized leased-line circuits. However, most
existing customers for standardized low-level packet-switched data
communications currently generate annual
[[Page 4018]]
turnover of far below ECU 10 000 each and are not therefore
potential users of advanced corporate network services. Therefore,
packet-switched data communications offered by Atlas constitute a
product market separate from the advanced network services market
equally targeted by Atlas.
2. Geographic Markets
The markets for advanced telecommunications services to corporate
users
10. Given that price differences are quite substantial, demand
for these services exists in at least three distinct geographic
markets, namely at a global, a cross-border regional and a national
level. Atlas will provide advanced telecommunications services to
corporate users Europe-wide and nationally. Through Phoenix,
advanced telecommunications services offered by Atlas will also have
global `connectivity', i.e. the technical option to extend a given
service offering beyond Europe by linking a customer's premises
worldwide over the Phoenix `Global Backbone Network'.
11. Given the considerable costs involved, advanced services are
today mainly demanded by large multi-national corporations, extended
enterprises, as well as major national and other intensive users of
telecommunications. The requirements of such users, that extend to
all products or corporate services provided by Atlas, were discussed
in detail in the BT-MCI decision \6\. Essentially, customers demand
a customized package of sophisticated telecommunications and
information services offered by one single provider. This provider
is expected to take full responsibility for all services contained
in the package from `end to end'. Accordingly, DT and FT intend to
offer such customers through Atlas what existing technology allows
to offer from time to time within the applicable regulatory
framework. In this regard, the parties have indicated that Atlas
will eventually extend to international voice traffic and other
basic services, regulation permitting.
\6\ See footnote 3 above.
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12. Due to the cost structure of advanced corporate services,
notably the cost of leasing the required infrastructure, prices of
such services are related to geographic coverage, as is the cost of
additional features (e.g. one-stop-billing, help-desk and technical
assistance around the clock, customized billing). There is
indication that increasing availability of trans-European networks
will ultimately blur the distinction between national and cross-
border or ultimately Europe-wide advanced corporate services.
However, certain national sophisticated value-added services (e.g.
national voice VPN services as well as data communications services
based on Asynchronous Transfer Mode (ATM) or equivalent switching
technology) currently available from DT and FT in Germany and France
respectively will not be integrated into the Atlas offerings. This
circumstance illustrates that a distinction between national and
cross-border advanced network services remains valid to date.
The markets for standardized low-level packet-switched data
communications services
13. Price differences may be less acute than for advanced
corporate services. However, a national, cross-border regional and
global geographic level can be distinguished for standardized low-
level packet-switched data communications services. In terms of
traffic volumes, supply and demand of standardized low-level packet-
switched data communications services are mostly national. For
instance, in Germany DT's existing Datex-P packet-switched data
communications services division hardly ever provides such services
across the border while FT's German subsidiary Info AG, in spite of
appertaining to FT's seamless cross-border Transpac network, only
provides one fifth of its packet-switched data communications
services across the border. This assessment was confirmed by
interested third parties who submitted observations further to the
Commission's notice on the Atlas notification \7\.
\7\ Notification of a joint venture (Case No IV/35.337--Atlas)
(OJ No C 377, 31. 12. 1994, p. 9).
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14. At a global and Europe-wide level, low-level data services
and advanced network services may be partly converging to the extent
that large customers of the latter do not require separate provision
of standardized low-level packet-switched data communications
services once such services are available as part of service
combinations offered over advanced networks. Accordingly, large
European telecommunications users demand services with global
`connectivity', i.e. that may be extended beyond Europe if so
required. DT and FT have moved to meet this demand in entering the
Phoenix agreements with Sprint. Along with increased availability of
advanced cross-border network infrastructure, the market is
generally expected to overcome distinctions along national borders
in the medium term. However, separate national geographic markets
subsist to date for standardized low-level packet-switched data
communications services and advanced network services respectively.
C. Market Shares of Atlas
The markets for advanced corporate telecommunications service
15. The parties estimate the European corporate
telecommunications services markets (exclusive of data
communications services) to be worth approximately ECU 505 million
(1993 figures). Of this total, end-to-end services accounted for
approximately ECU 15,1 million, VPN services for approximately ECU
220,6 million, VSAT services for approximately ECU 173,2 million and
outsourcing services for approximately ECU 96,4 million. According
to the notification DT and FT's aggregate market shares (1993
figures) in the European Union were 25% in the end-to-end services
market, 27% in the VPN services market and 2,3% in the outsourcing
services market. Market shares for VSAT services are difficult to
calculate given that TOs mostly use VSAT terminals either as back-up
facilities for other services or to extend the geographic scope of
services despite terrestrial infrastructure shortcomings; however DT
and FT taken together operated 10 907 VSAT terminals by June 1994,
equivalent to 29% of the total installed base of interactive, data
one-way or business television VSAT terminals in the European
Economic Area.
As to different segments of the advanced corporate services
market at the national level, DT and FT's aggregate market shares in
France and Germany respectively are 93% in the French VPN market
(where DT has no presence) against 0% in the German VPN market, and
60% in the French market for end-to-end services against 35% in the
equivalent German market. DT and FT's outsourcing joint venture,
Eunetcom BV, achieved 36% of total outsourcing turnover generated in
France and 29% of total outsourcing turnover generated in Germany.
As for VSAT services, DT has installed approximately 25% of all VSAT
terminals in Germany; this Member State accounts for 18% of the
total installed base of such terminals in the EEA.
The market for standardized low-level packet-switched data
communications services
16. DT and FT estimate the European market for data
communications services to be worth approximately ECU 2,8 billion
(1993 figures). According to the notification DT and FT's aggregate
shares (1993 figures) of this market were 35%. Among national
markets, Atlas will have a particularly strong position in France
and Germany. DT and FT's aggregate market share for all data
communications services is 79% in Germany and 77% in France, of
which approximately half accounts for services provided by DT's
Datex-P division and FT's Transpac France subsidiary, both of which
remain outside the scope of Atlas until the French and German
telecommunications infrastructure and services markets are fully
liberalized as scheduled for 1 January 1998.
D. Main Competitors of Atlas
The markets for advanced corporate telecommunications services
17. Since the Commission's BT-MCI decision many players, acting
alone or jointly with partners, have entered or are entering the
market for international value-added services. Among the most
important of these players, albeit with disparate geographic scope
and target customers, are: AT&T WorldPartners, Concert, IBM-Stet,
International Private Satellite Partners, Unisource or Uniworld.
Some of the above are mere projects of strategic alliances between
TOs, others are awaiting regulatory approval. However, all of the
above share the aim to position the respective partners in view of
the full liberalization to come.
The market for standardized low-level packet-switched data
communications services
18. The market for standardized low-level packet-switched X.25
data communications services features a substantially larger number
of players than that for customized offerings comprising advanced
corporate services. Among the global players in this
[[Page 4019]]
market are the alliances mentioned at paragraph 17 above competing with
providers such as EDS, FNA, Infonet, SITA or SWIFT and operating
subsidiaries of large global companies such as AT&T Istel, Cable &
Wireless Business Networks, DEC's Easynet, or GEIS.
In addition, a large number of smaller players compete at a
cross-border regional or national level in the EEA. For instance,
FT's indirect German subsidiary Info AG, that provides most of its
data communications services within Germany, is DT's second-largest
competitor in the German national market for standardized low-level
packet-switched data communications services. None of these smaller
players can compare with large alliances in terms of reach, access
to transmission capacity and financial backing.
E. The Transaction
19. The Atlas transaction notified to the Commission comprises a
set of agreements whose main features are described below.
1. Agreements as Originally Notified
(a) The Atlas Joint Venture Agreement (JV Agreement) is the main
agreement providing for the establishment of the Atlas joint
venture.
(b) The Intellectual and Industrial Property Transfer and
License Agreements will be concluded by each of FT and DT with Atlas
SA. Under these agreements FT and DT make available to Atlas SA the
intellectual property rights (IPRs) needed to operate the Atlas
business.
(c) The Services Agreements will be framework agreements setting
forth the basic terms and conditions with respect to the supply by
DT and FT of certain services to Atlas SA and the supply by Atlas SA
of certain services to FT and DT.
(d) The Distribution Agreements: two substantially similar
distribution agreements with FT and DT respectively will lay out,
for the home countries (France and Germany respectively), the
marketing and sale of Atlas products.
(e) The Agency Agreements under which each parent appoints Atlas
SA non-exclusive worldwide agent for the sale of DT and FT's
international leased lines (half-circuits) with the territorial
exception of Germany as regards DT's half-circuits.
2. Contractual Provisions
20. In particular, the above agreements provide for the
following:
1. Structure of the Atlas Venture
Atlas SA will be created as a joint venture between FT and DT,
each owning half the share capital. The management structure of
Atlas SA will be as follows:
(a) Shareholders' meeting: Prior approval of the shareholders'
meeting is necessary for matters such as the amendment of the
articles of association, modification of capital, issuance of
shares, mergers, sale of all or a substantial part of the assets,
and liquidation.
(b) Strategic Board: It is envisaged that the Strategic Board of
Atlas SA will have two co-chairmen and eight members, one half
appointed by each parent, who may be freely removed and shall meet
at least twice a year. The Strategic Board has a quorum of a
majority of its members, including at least two members appointed by
each party; the co-chairmen do not have a tie-breaking vote. Prior
approval by the Strategic Board is required for matters such as the
entry into a joint venture or other strategic alliance with a third
party, any significant modification of the scope of Atlas's business
and such matters as may from time to time be submitted to it by a
vote of one half of the members of the Board of Directors. The
Strategic Board shall also review all strategic plans of Atlas SA.
(c) The Board of Directors: It is envisaged that Atlas SA's
Board of Directors will have nine members, four elected by each of
DT and FT and one by Sprint. Prior approval by the Board of
Directors is required for a number of important decisions such as
the approval of business plans and annual budgets and changes in the
scope of Atlas, the conclusion of important contracts, etc.
Decisions on changes in the Atlas business, management appointments,
and the approval of the business plan, the annual operating plan,
and the budget require that at least two directors nominated by each
party vote with the majority. Matters on which the Board of
Directors fails to reach agreement shall be brought before the
Strategic Board.
(d) Chief Executive Officers (CEOs): It is envisaged that Atlas
SA will have two CEOs, one nominated by FT among is representatives
in the Board of Directors, the other by DT among its representatives
in the Board of Directors. The CEOs shall be jointly responsible for
day-to-day operations and the management of the business and affairs
of Atlas. Approval of both co-CEOs is required for all important
decisions including the hiring or dismissal of key employees.
The parties will contribute to Atlas their existing European
assets outside France and Germany (as well as some assets in France
and Germany) used for the provision of services coming within the
scope of Atlas.
2. Purpose and Activities of Atlas
The Atlas venture is to provide seamless national and
international end-to-end services to corporate customers (i.e. to
multinational companies (MNCs) and SMEs alike). The portfolio of
Atlas services comprises data network services, international end-
to-end services, (managed links), voice VPN services, customer-
defined networks, outsourcing and VSAT services. These services are
fully liberalized in the European Union and are widely liberalized
worldwide. Atlas will have the responsibility for the services
portfolio mentioned above outside of France and Germany.
In France and Germany, Atlas will be providing sales support to
FT and DT's sales forces as regards all services mentioned in the
Atlas portfolio, with the exception of public X.25 packet-switched
network services within France and Germany, which will be provided
by FT's Transpac France subsidiary and DT's Datex-P subsidiary
respectively until the telecommunications infrastructure and
services markets are fully liberalized in France and Germany, as
scheduled for 1 January 1998.
Each acting as an exclusive distributor, DT will sell Atlas
services in Germany, while FT will sell Atlas services in France.
Atlas products will be sold in France and Germany under the common
globally used Atlas/Phoenix brands. Passive sales of Atlas services
by DT in France, by FT in Germany and by any Atlas operating entity
in both Member States will be allowed. Outside France and Germany,
Atlas products will be sold by the Atlas operating entity for the
rest of Europe.
It is planned that there will be a balancing payment by DT at
each closing to equalize the respective contribution values of the
two parties. It is further envisaged that certain adjustment
payments will be made on the respective net worth of the entities
concerned at the time of contribution to Atlas. A separate
adjustment payment may be made between FT and DT if the actual
performance of the FT contributed businesses in France or the DT
contributed businesses in Germany falls significantly short of
projections in 1995 (and possibly 1996).
3. Provisions Concerning Dealings With/by Atlas
Mutual service provision between Atlas and FT/DT will be the
object of two Services Agreements pursuant to which dealings between
FT/DT and Atlas shall be transparent, non-discriminatory and at
arm's length.
As for services generally offered by DT or FT, the prices and
other terms which DT or FT generally apply from time to time to
their customers shall equally apply for Atlas. As for services not
generally offered by FT or DT, market prices and terms shall apply
and be negotiated between the Parties in good faith at arm's length.
Consequently, Atlas will purchase such services from DT or FT at the
same prices and conditions that any third party generally offering
such services would apply under the same circumstances. If
information on relevant market prices is not available, the prices
applicable for Atlas shall be determined on the basis of a
calculation model that is used, within FT, to make offers to
customers with special requests and, within DT, to calculate intra-
group transfer prices. Prices resulting from such calculation shall
cover, for the relevant period, all costs as well as a reasonable
profit margin.
4. Non-Compete Provisions
Pursuant to Article XIII of the Atlas JV Agreement, FT and DT
will not engage anywhere in the production of services that are
substantially the same or compete directly with the Atlas services,
and will not engage outside of France and Germany in the marketing,
sale or distribution of services that are substantially the same or
compete directly with the Atlas services. Furthermore, FT will not
market or distribute Atlas services in Germany and DT will not
market and distribute Atlas services in France; passive sales are
however permitted by FT outside of France, by DT outside of Germany
and by Atlas in both France and Germany.
5. Provisions Relating to Intellectual and Industrial Property
FT and DT will each conclude an Intellectual and Industrial
Property Transfer and License Agreement with Atlas SA under
[[Page 4020]]
which the parties make available to Atlas SA the intellectual property
rights (``IPRs'') which are needed to operate the Atlas business in
accordance with the following principles:
(a) IPRs owned by, or licensed to, the parties that are used
exclusively for the Atlas business shall be transferred to Atlas SA;
(b) IPRs owned by, or licensed to, the parties that are used
predominantly for the Atlas business shall also be transferred to
Atlas SA, and a sub-license shall be granted to the parties (Grant
Back License sub-license); and
(c) IPRs owned by, or licensed to, the parties that are used
predominantly for the parties' business are (sub-)licensed to Atlas
SA.
F. Changes Made and Undertakings Given Further to the Commission's
Intervention
21. Certain features of the Atlas transaction as notified
appeared to be incompatible with Community competition rules.
Consequently, the Commission by letter of 23 May 1995 informed the
parties of its concerns. In the course of the notification procedure
the parties have amended the original agreements and given
undertakings to the Commission.
1. Contractual Changes
22. Non-appointment of Atlas SA as an agent for international
half-circuits. Further to the Commission's letter of 23 May 1995, DT
and FT abolished the Agency Agreements and amended the original
Service Agreements to take account of the non-appointment of Atlas
SA as a non-exclusive agent for DT and FT's half-circuits.
23. Non-integration of French and German public data networks
before full liberalization of the telecommunications infrastructure
and services markets. Atlas SA shall not acquire legal ownership or
control within the meaning of Article 3 of Council Regulation 4064/
89 \8\ of the French and German public X.25 packet-switched data
networks, Transpac France and Datex-P respectively, before the
telecommunications infrastructure and services markets are fully
liberalized in France and Germany, as is scheduled to occur by 1
January 1998. Until then, it is envisaged that:
\8\ OJ No. L 395, 30. 12. 1989, p. 1.
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1. Transpac SA will be split into Transpac France and Transpac
Europe;
2. Transpac Europe will be contributed to Atlas;
3. Transpac France will be a wholly owned subsidiary of FT;
4. DT's Datex-P services division will be incorporated as a
separate company under German law and become a wholly owned
subsidiary of DT;
5. DT and FT's outsourcing joint venture, Eunetcom BV, will be
fully contributed to Atlas SA; and
6. Atlas SA will create a subsidiary in France and Germany
(Atlas France and Atlas Germany respectively) to provide the
following services:
(i) sales support regarding Atlas products to distributors in
France and Germany; and
(ii) services within the scope of Atlas other than X.25 packet-
switched data network services including:
--VSAT services,
--international end-to-end services,
--voice VPN services,
--customer-defined solutions (excluding national X.25 data
communications services in France and Germany), and
--outsourcing services.
Provided the telecommunications infrastructure and services
markets are fully liberalized in France and Germany on 1 January
1998, Transpac France and Datex-P will be contributed to Atlas on
that date in such a way that Atlas France and Atlas Germany will be
merged with Transpac France and Datex-P respectively.
24. Technical cooperation. Ahead of full liberalization of the
telecommunications infrastructure and services markets in France and
Germany, scheduled to occur by 1 January 1998, DT and FT will
cooperate in the development of common technical network elements.
This cooperation will comprise only the following areas:
1. FT and DT will cooperate in the development of common
products and common technical network elements (i.e. such products
and elements that share the same features, yet separately built and
owned); such cooperation will extend to the French and German public
X.25 packet-switched data communications networks. Only the
following functions will be managed by Atlas SA for Transpac France
and Datex-P respectively:
(a) product management and development, provided that product
branding and pricing as well as product implementation in the
network will be managed by Transpac France and Datex-P respectively;
(b) certain network planning functions; and
(c) information systems, provided that central information
system functions (e.g. billing information and statistics) will be
operated by Transpac France and Datex-P respectively.
The above areas of cooperation shall in no case be tantamount to
a de facto integration of the French and German public switched data
networks, which will be controlled by two separate network
management centres; and
2. Atlas may subcontract certain operational functions to
Transpac France and Datex-P respectively.
25. Non-integration of assets of FT's indirect German
subsidiary. The assets of FT's German corporate telecommunications
services provider Info AG shall not be integrated into Atlas save as
indicated at paragraph 27 below. Moreover, FT shall divest Info AG.
2. Non-Discrimination
26. In order to provide the services described under paragraph 5
above, Atlas or any other service provider is dependent on the
public switched telecommunications network (PSTN) and reserved
services.\9\ In France and Germany, only FT and DT provide both
access to the PSTN and reserved services. Given that FT and DT are
indirect shareholders of Atlas it is essential for the safeguarding
of fair competition between Atlas and other existing or future
telecommunications services providers to eliminate the risk that the
former are granted more favourable treatment regarding access and
use of the French and German PSTN and reserved services.
\9\ Reserved services are services which are provided pursuant
to special or exclusive rights granted by the EU Member States to
their respective TOs in compliance with EC law.
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The Commission set out in its notice on the Infonet joint
venture \10\ how prohibition to discriminate must be understood in
detail. Accordingly, to ensure the absence of discrimination, the
Commission intends to decide that DT, FT and Atlas shall comply with
the following:
\10\ Notice pursuant to Article 19(3) of Council Regulation No.
17 concerning Case No. IV/33.361--Infonet, (OJ No. C 7, 11. 1. 1992,
p. 3, at paragraph 9).
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1. Terms and conditions: The terms and conditions applied by DT
and FT to Atlas for access to the PSTN and for the provision of
reserved services (e.g. provision of leased lines) in connection
with the services described under paragraph 5 above shall be similar
to the terms and conditions applied to other providers of similar
services. This requirement covers availability price, quality of
service, usage conditions, delays for installation of requested
facilities, and repair and maintenance services among other
services.
2. Scope of services available. Atlas shall not be granted terms
and conditions, or be exempt from any usage restrictions regarding
the PSTN and reserved services, which would enable it to offer
services which competing providers are prevented from offering.
3. Technical information: DT and FT shall not discriminate
between Atlas and any other service provider competing with Atlas in
connection with either a decision to substantially modify technical
interfaces for the access to reserved services or the disclosure of
any other technical information relating to the operation of the
PSTN.
4. Commercial information: DT and FT shall not discriminate
between Atlas and other providers of services as described under
paragraph 5 above as regards the disclosure of certain commercial
information. This means that DT and FT shall not provide Atlas with
systemized and organized customer information derived exclusively
from the operation of the PSTN or the provision of reserved services
if such information would confer a substantial competitive advantage
and is not readily and equally available elsewhere by service
providers competing with Atlas.
3. Undertakings Given by the Parties
27. Divestiture of Info AG. FT shall divest of its interest in
Info AG. To the extent separable from the product divisions of Info
AG that shall be divested, advanced network services for
multinational clients whose headquarters are outside Germany may be
transferred to Atlas.
28. DT and FT have also given the additional undertakings
described below.
[[Page 4021]]
1. Use of DT and FT's Public Data Networks
Each of FT and DT will as of 1 January 1996 establish and
thereafter maintain third-party access to their public switched data
networks in France and Germany respectively. Non-discriminatory,
open and transparent access will be granted to all data services
providers that offer X.25 packet-switched data communications
services. To ensure non-discriminatory access to their national
public X.25 packet-switched data networks, FT and DT shall:
(a) establish and maintain standardized X.75 interfaces to
access their national public X.25 packet-switched data networks;
this interconnection is suitable for the provision of end-to-end
services based on X.25 specifications for end-user access speeds up
to 64 kbps; and
(b) offer such access on non-discriminatory terms, including
price, availability of volume or other discounts and the quality of
interconnection provided.
FT and DT shall further ensure non-discriminatory access by
making publicly available the standard terms and conditions for such
X.75 interface standards, including, if any, volume and other
discounts, as of 1 January 1996. FT and DT will make available for
inspection by the Commission any agreements relating to such X.75
interfaces, including all specifically agreed terms. Until such time
as Transpac France and Datex-P are integrated into Atlas, neither
Transpac France nor Datex-P shall disclose to Atlas any such
specifically agreed terms that are identified and maintained as
confidential by the party obtaining interconnection through such
X.75 interfaces. Finally the above obligations shall likewise apply
to any generally used CCITT-standardized interconnection protocol
that may modify, replace or co-exist as a standard related to the
X.75 standard and is used by FT and DT.
Proprietary interfaces may be retained or established among
Transpac France, Datex-P and Atlas; such interfaces are defined by
the particular type of technology, hardware and software that a
network operator uses to provide advanced or customized services.
Atlas will be allowed to access the Transpac France and Datex-P
public packet-switched data networks through these proprietary
interfaces, also for the provision of X.25 data communications
services, provided access granted to Atlas through such interfaces
is economically equivalent to third-party access to the Transpac
France and Datex-P networks.
2. Cross-Subsidization
DT and FT shall not engage in cross-subsidization within the
meaning of the Commission's competition guidelines for the
telecommunications sector \11\ in connection with the Atlas venture.
To avoid that Atlas benefits from cross-subsidies stemming from the
operation of public telecommunications infrastructure and of
reserved services by either DT or FT, all entities formed pursuant
to the Atlas venture will be established as distinct entities
separate from DT and FT.
\11\ Guidelines on the application of EEC Competition Rules in
the Telecommunications Sector (OJ No. C 233, 6. 9. 1991, paragraph
102 et seq.).
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Atlas SA, Datex-P and Transpac France shall obtain their own
debt financing on their own credit, provided that FT and DT:
(a) may make capital contributions or commercially reasonable
loans to such entities as required to enable Atlas SA, Datex-P and
Transpac France to conduct their respective business;
(b) may pledge their venture interests in such entities, in
connection with non-recourse financing for such entities; and
(c) may guarantee any indebtedness of such entities, provided
that FT and DT may only make payments pursuant to any such guarantee
following a default by such entities in respect of such
indebtedness.
Atlas SA, Datex-P and Transpac France shall not allocate
directly or indirectly any part of their operating expenses, costs,
depreciation, or other expenses of their business to any parts of FT
or DT's business units (including without limitation the
proportionate costs based on work actually performed that are
attributable to shared employees or sales or marketing of Atlas
products and services by DT or FT employees), provided however that
nothing shall prevent Atlas SA, Datex-P and Transpac France from
billing DT or FT for products and services provided to DT or FT by
such entities on the basis of the same price charged third parties
(in the case of products or services sold to third parties in
commercial quantities) or full cost reimbursement or other arm's
length pricing method (in the case of products and services not sold
to third parties in commercial quantities).
Atlas SA, Datex-P and Transpac France shall keep separate
accounting records that identify payments or transfers to or from DT
and FT. Moreover, Atlas SA, Datex-P and Transpac France shall not
receive any material subsidy (including forgiveness of debt)
directly or indirectly from DT or FT, or any investment or payment
from DT or FT that is not recorded in the books of such entities as
an investment in debt or equity.
DT, FT and Atlas shall comply with the above until the
telecommunications infrastructure and services markets in France and
Germany are fully liberalized, as is scheduled to occur by 1 January
1998.
3. Auditing
Atlas SA (which includes its consolidated subsidiaries),
Transpac France and Datex-P shall be audited on a regular and
customary basis, and such audit shall confirm from an accounting
viewpoint that the transactions between these entities, on the one
hand, and FT and DT, on the other hand, have been conducted at arm's
length. This obligation shall remain in force until the
telecommunications infrastructure and services markets in France and
Germany are fully liberalized, as is scheduled to occur by 1 January
1998.
4. Recording and Reporting
To allow the Commission to monitor compliance with the
undertakings the parties have agreed the following:
(a) Recording obligations. DT, FT and Atlas each undertake to
keep records and documents suitable to prove compliance with the
terms of the above undertakings ready for inspection by the
Commission.
(b) Inspection of records. For the purpose of ascertaining and
ensuring compliance by DT, FT or Atlas with the above undertakings,
DT, FT or Atlas shall, on reasonable notice, during office hours,
and without a need for the Commission to invoke the powers of
inspection pursuant to Regulation No. 17, give the Commission's
Directorate-General for Competition access to DT, FT or Atlas'
business premises to inspect records and documents covered by the
above recording obligations and to receive oral explanations
relating to such documents.
(c) Reporting obligations. DT, FT and Atlas also undertake to
provide the Commission's Directorate-General for Competition, for
the purpose of ascertaining whether DT, FT and Atlas comply with the
requirements of the above undertakings, with:
--any records and documents in the possession or control of DT, FT
or Atlas necessary for that determination, and
--oral or written complementary explanations.
These recording and reporting obligations will remain in force
until the telecommunications infrastructure and services markets in
France and Germany are fully liberalized, as is scheduled to occur
by 1 January 1998.
29. In so far as related to existing obligations under national
or Community law, the above is intended to ensure the parties' firm
commitment to comply with the applicable legal framework.
G. The Regulatory Situation
30. In letters sent to the Commission, the French and German
Governments have undertaken to take the necessary steps to
liberalize alternative infrastructure for the provision of
liberalized telecommunications services by 1 July 1996 and to
liberalize the voice telephony service and all telecommunications
infrastructure fully by 1 January 1998. The availability of
alternative telecommunications infrastructure in Germany and France
render competitors of Atlas independent of DT and FT's
infrastructure for the purposes of creating trunk network
infrastructure to provide liberalized services.
Early alternative infrastructure liberalization in France and
Germany adds to a regulatory framework in the home countries of the
Atlas partners that is designed to ensure a level playing field in
the telecommunications markets.
1. France
1. Separation of Regulatory and Operative Functions
Pursuant to French law, the minister for telecommunications
shall ensure that regulation of the telecommunications markets is
undertaken separately of service provision in these markets. A
specific national regulatory authority (NRA), the Direction Generale
des Postes et Telecommunications (DGPT), is competent for licensing
providers of telecommunications networks and services in France
based on objective and transparent
[[Page 4022]]
criteria. The DGPT shall survey FT's market behaviour and approve FT's
tariffs for (i) reserved services and leased lines and (ii) such
liberalized services that are not in fact provided by a third party
active in the French market.
2. Non-Discriminatory Access
Further to the adoption of the Commission's Services Directive
and the ONP Framework Directive \12\ Article L. 32-1-4 deg. of the
French Law of 29 December 1990 grants all users equal access to the
public network on objective, transparent and non-discriminatory
conditions. FT is under an obligation to effectively grant such
access and must publish information on the network (e.g. technical
features, tariffs and usage conditions) and on leased line
offerings. The DGPT may verify FT's compliance with these
obligations and investigate complaints filed against FT for non-
compliance with these obligations. The DGPT shall further ensure
compliance with FT's obligation to share available transmission
capacity for liberalized services with competitors and shall publish
annual statistical reports on FT's compliance with these
obligations.
\12\ Council Directive of 28 June 1990 on the establishment of
the internal market for telecommunications services through the
implementation of open network provision (OJ No. L 192, 24.7. 1990,
p. 1).
---------------------------------------------------------------------------
3. Prevention of Cross-Subsidies
To allow the DGPT to supervise FT's market behaviour, FT is
under the legal obligation to keep an analytical accounting system
that relates costs to each individual FT service. Where an offering
comprises the provision of both reserved and liberalized services,
FT must separate each kind of service in the contract and in the
invoice. In this connection, FT's data communications services are
already provided by a separate legal entity.
2. Germany
1. Separation of Regulatory and Operative Functions
Pursuant to the German 1989 Poststrukturgesetz, the 1994
Postneuordnungsgesetz and the 1994 Post- und Telekommunikation
Regulierungsgesetz, regulatory competencies are assigned to a
Federal agency created under the Federal Ministry of Post and
Telecommunications (BMPT) while telecommunications operations are
undertaken by DT, a fully State-owned joint stock corporation.
Regulatory obligations of DT are policed by independent bodies, so-
called regulatory chambers.
2. Non-Discriminatory Access
Under the current and future German regulatory framework, DT
shall provide third parties with both access to monopoly
infrastructure and reserved or mandatory services on a non-
discriminatory and transparent basis according to objective
criteria. Upon application, DT shall supply state-of-the-art leased
lines over service-neutral access points without delay. With the
only restriction of voice telephony service provision, leased lines
may be freely interconnected and used for any service. Leased lines
must meet market demand and DT must publish data concerning
availability and quality of such lines.
3. Prevention of Cross-Subsidies
The BMPT (i) shall approve both tariffs and other price-
sensitive contractual terms for DT's reserved services and (ii) may
object to DT's tariffs for mandatory services. The BMPT may also
seize DT's profits stemming from tariffs in excess of the approved
amount and take any measure necessary to reestablish a fair
competitive environment jeopardized by unlawful cross-subsidization.
Moreover, DT's subsidiaries an affiliates shall use reserved
services for the provision of competitive services under the same
terms as DT's customers and must use such terms to account internal
services transfer.
The Commission's Intentions
31. On the basis of the foregoing, the Commission intends to
take a favourable position on the notified transactions under the
competition rules of the EC Treaty and under Article 53 of the EEA
Agreement and to grant Atlas an individual exemption pursuant to
Article 85 (3) of the EC Treaty and Article 53 (3) of the EEA
Agreement. Before doing so, the Commission invites interested third
parties to send their observations within six weeks from the
publication of this notice to the following address, quoting the
reference `IV/35.335--Atlas':
European Commission, Directorate-General for Competition (DG
IV), Directorate for Information, Communication and Multimedia, Rue
de la Loi/Wetstraat 200, B-1049 Brussels. Fax: (32-2) 296 98 19.
Notice Pursuant to Article 19 (3) of Council Regulation No. 17 \1\ and
Article 3 of Protocol 21 of the European Economic Area Agreement
Concerning a Request for Negative Clearance or an Exemption Pursuant to
Article 85 (3) of the EC Treaty and Article 53 (3) of the EEA Agreement
\1\ OJ No 13, 21.2. 1962, p. 204/62.
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Case No IV/35.617--Phoenix
(95/C 337/03)
(Text With EEA Relevance)
Introduction
1. The Phoenix transaction was notified to the Commission on 29
June 1995. The Phoenix transaction is linked to a separate
transaction bringing about a joint venture, Atlas, owned 50% by
France Telecom (FT) and 50% by Deutsche Telekom (DT), given that
Atlas is a parent to the joint venture entities created pursuant to
the Phoenix agreements. The Atlas Agreements, notified on 16
December 1994, are described in a separate notice published in this
Official Journal of the European Communities.
2. The Phoenix agreements comprise two main transactions
involving two European Union telecommunications organizations (TO)
and one US telecommunications operator:
(i) each of FT and DT is to acquire an equity stake of
approximately 10% in Sprint worth US$ 4,2 billion. Both FT and DT
will obtain proportionate board representation and investor
protection as minority shareholders in Sprint; as detailed below,
provisions have been included in the Investment Agreement to prevent
DT and/or FT, either separately or jointly, from controlling or
influencing Sprint; and
(ii) Atlas and Sprint are to create a joint venture, Phoenix,
for the provision of enhanced and value-added global
telecommunications services and other telecommunications services to
corporate users, carriers and consumers. The Phoenix joint venture
will be structured into several operational entities under the
strategic supervision of a Global Venture Board (collectively
referred to as the `Phoenix entities'). One such entity will provide
Phoenix services worldwide except in Europe and the United States
(the `Rest of World (ROW) entity'), a second entity will provide
Phoenix services in Europe except in France and Germany (the `Rest
of Europe (ROE) entity') and a third entity will operate the global
backbone network of Phoenix (the `Global Backbone Network (GBN)
entity'). The Global Venture Board shall take decisions on matters
of policy only and will not engage in the management of individual
operational entities created pursuant to the Phoenix agreements.
A. The Parties
3. Deutsche Telekom AG (DT) and France Telecom (FT) are the
German and French public TO respectively. DT is the world's second-
largest and FT the world's fourth-largest telecommunications carrier
in terms of revenue. Details of both undertakings are provided in
the notice on the Atlas venture published in this issue of the
Official Journal.
4. Sprint Corporation (Sprint) is a holding company in the
United States. The Sprint group of companies is a diversified
telecommunications group providing global voice, data and video-
conferencing services and related products. Sprint's main
subsidiaries provide local (US) exchange, cellular wireless as well
as domestic (US) and international long-distance telecommunications
services. Other Sprint subsidiaries engage in wholesale distribution
of telecommunications products and the publishing and marketing of
white and yellow page telephone directories. Worldwide turnover for
Sprint in 1994 was ECU 10,9 billion; Sprint is the world's 11th
largest telecommunications carrier in terms of revenues.
B. The Relevant Market
1. Creation of the Phoenix Entities
5. The Phoenix entities will address several product and
geographic markets, namely (i) the markets for value-added
telecommunications network services to corporate users both globally
and regionally, (ii) the market for traveller services and (iii) the
market for so-called carrier's carrier services.
1. Product Markets
The markets for value-added telecommunications network services
6. The Phoenix entities will be active on the same markets for
both advanced
[[Page 4023]]
telecommunications services to corporate users and standardized low-
level packet-switched data communications services described in the
separate notice on the Atlas venture published in this issue of the
Official Journal.
The market for traveller services
7. The market for traveller telecommunications services
comprises offerings that meet the demand of individuals who are away
from their normal location, either at home or at work. Among the
most relevant of these offerings are those offered by the Phoenix
entities, namely calling cards (i.e. prepaid cards with or without a
code and postpaid cards), including those in combination with credit
cards and other branded service cards (`affinity cards').
8. Customers for traveller services include both business
travellers and other travellers. In the card business targeted by
Phoenix, the former are by far the largest group of buyers. Business
travellers are generally intensive card users, the main incentive
for card usage being the possibility to avoid paying hotel telephone
surcharges.
The market for carrier's carrier services
9. The market for carrier's carrier services comprises the lease
of transmission capacity and the provision of related services to
third-party telecommunications traffic carriers. Along with
liberalization and globalization of telecommunications markets,
demand for efficient, high-quality traffic transportation capacity
has risen among old and new carriers. In this connection, the
traditional model of separate arrangements with other individual
carriers is increasingly challenged by players with global network
infrastructure that offer carriers an array of services. The most
relevant of such services are:
(a) switched transit, i.e. transport of traffic over bilateral
facilities between the originating carrier, the transit carrier and
the terminating carrier; neither the originating carrier nor the
terminating carrier need bilateral facilities between themselves,
but only with the transit carrier;
(b) dedicated transit, i.e. transport of traffic over permanent,
dedicated facilities through the domestic network of the transit
carrier; facilities used for this purpose may include discrete voice
circuits or a highbandwidth digital circuit that can be used for
both voice and data services; and
(c) traffic hubbing offerings, where the provider takes care of
all or part of international connections; these offerings are
typically designed for emerging carriers, who are interconnected
with the provider over bilateral facilities and whose international
traffic is merged with other traffic on the provider's global
network.
As international telecommunications markets are deregulated,
demand for carrier's carrier services is increasingly driven by
alternative carriers concerned with entrusting the incumbent TO with
their international traffic, for reasons such as technical
dependency and commercial sensitivity of customer information.
10. Purchasers of carrier's carrier services include established
and emerging carriers. Both groups of clients have substantial
bargaining power and are highly competition-sensitive. Among the
latter group, one may distinguish facilities-based carriers that
provide telecommunications services over alternative infrastructure
or cable television networks seeking greater efficiency in the
transport of international client traffic, while non facilities-
based carriers seek to preserve a competitive advantage by avoiding
dependence on a local TO for international client traffic.
2. Geographic Markets
11. Along the lines of the Commission's findings in its BT-MCI
decision,\2\ the geographic scope of certain markets targeted by the
Phoenix entities as well as the market that must be considered in
respect of the investment of DT and FT in Sprint is international
and even global. Although national borders subsist for many
services, strategic alliances like Phoenix are built not only in
anticipation of a market unaffected by national boundaries but even
with the express purpose to offer large global telecommunications
users seamless end-to-end services anywhere by overcoming the
difficulties inherent in the current market structure split along
national borders. However, the service offerings of the Phoenix
entities will be relevant to different existing geographic markets.
\2\ Commission decision of 27 July 1994 (OJ No L 223, 27. 8.
1994, p. 36).
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The markets for value-added telecommunications network services
12. As described in the separate Atlas notice, demand by
corporate users for advanced services exists in at least three
distinct geographic markets, namely at a global, a cross-border
regional and a national level. Phoenix services will have global
reach given that each of DT, FT, Sprint and the ROE and ROW entities
will be interconnected over the Phoenix global backbone network. In
the global market for advanced telecommunications services to
corporate users, the Phoenix venture will therefore create
competition for instance for BT and MCI's existing Concert venture.
In the European Union, the ROE entity will cooperate with DT, FT and
ATLAS to provide advanced telecommunications services to corporate
users at the cross-border regional level; these services will have
`global connectivity', i.e. allow for an extension beyond the
European Union if a customer so requires.
13. Standardized low-level packet-switched data communications
services in each geographic market mentioned in the previous
paragraph are a part of the Phoenix offerings portfolio. However,
such services will be provided at the national level only if so
decided by the regional Phoenix operating entity. Therefore, the ROE
entity will provide Europe-wide packet-switched data communications
services, that will initially be based on the existing Transpac and
Sprint networks. The extent to which the ROE entity will provide
such services in national markets within the EEA will depend on the
coordination between Atlas and the ROE entity as the competent
Phoenix entity in that region.
The market for traveller services
14. Along with the globalization of the economy the market for
traveller services appears to be increasingly global; worldwide
travellers demand offerings which include a single bill and
integrated functions such as voice messaging, voice response and
information systems. Geographic limitations of current traveller
service offerings are generally due to technical shortcomings set to
be overcome in the near future, such as the incompatibility of
mobile communications systems or differences in prepaid cards
without an individual user code. As illustrated at paragraph 7
above, none of the services targeted by the Phoenix entities is
affected by these shortcomings; however, the geographic scope of the
traveller services offered by Phoenix can be left open for the
purposes of this case, as the finding of narrow geographic markets
would not affect the assessment of the parties' competitive
position.
The market for carrier's carrier services
15. Both supply of and demand for carrier's carrier services are
by nature international. Geographic proximity between purchaser and
supplier of switched transit capacity is hardly relevant for
switched transit which carriers use either as a substitute for
operating own international lines or to deal with peak traffic on
such lines. Likewise, dedicated transit services offer cable- or
satellite-based routing capacity across third countries. Finally,
using hubbing services is an alternative to entering into an
undetermined number of bilateral agreements with individual
carriers.
2. DT and FT's Investment in Sprint
16. The acquisition by DT and FT of new equity equivalent to an
approximate 20% stake in Sprint aims at consolidating a strategic
alliance to enter the global telecommunications markets, which
serves the parties best interest to improve and extend service in
new market segments. Telecommunications markets are developing
quickly and there is uncertainty about what they will look like in a
few years' time: the prospect of full liberalization is pushing TO's
to take positions, in order to be in the best possible situation
when full liberalization comes. As shown by the BT-MCI alliance,
investment in a US carrier offers one efficient way to address
multinational companies, i.e. the largest target customer group for
global value-added telecommunications network services, notably in
the United States.
C. Market Shares of Phoenix
The markets for advanced telecommunications services to corporate
users
17. Global market. The parents estimate the global value-added
telecommunications network services market addressed by Phoenix
(exclusive of data communications services) to be worth
approximately ECU 4,8 billion (1993). Of this total, end-to-end
services accounted for approximately ECU 37,6 million, VPN services
for approximately ECU 2,8 billion, VSAT services for approximately
ECU 1,4 billion and outsourcing services for approximately ECU 527
million. In 1993, the aggregate turnover of DT, FT and Sprint in the
different market
[[Page 4024]]
segments amounted to approximately ECU 3,8 million for end-to-end
services, approximately ECU 576 million for VPN services and
approximately ECU 6 million for outsourcing services, giving Phoenix
a theoretical market share of 11,8% in the global market for
advanced telecommunications services to corporate users.
18. Cross-border regional market. Services in the European Union
(exclusive of data communications services) accounted for
approximately ECU 505 million in 1993, According to the notification
the Phoenix parents' aggregate market shares in the European Union
in 1993 were [. . .] % \3\ in the end-to-end services market, [. .
.] % \4\ in the VPN services market [. . .] % \5\ in the outsourcing
services market and [. . .] % \6\ in the VSAT market. However,
market shares for VSAT services are difficult to calculate given
that TOs mostly use VSAT terminals as back-up facilities for other
services or to extend the geographic scope of services despite
terrestrial infrastructure shortcomings.
\3\ Business secret (less than 30%).
\4\ Business secret (less than 30%).
\5\ Business secret (less than 5%).
\6\ Business secret (less than 25%).
---------------------------------------------------------------------------
19. National markets. National markets for advanced
telecommunications services to corporate users within the EEA are
discussed in the notice on the Atlas venture, published in this
issue of the Official Journal. In this regard, Sprint has a
significant share of total outsourcing turnover generated in Member
States such as the Netherlands [. . .] % \7\ and the United Kingdom
[. . .] % \8\, where DT and FT's outsourcing joint venture, Eunetcom
BV, has a lesser presence (5% of total turnover in both Member
States). As for France and Germany, adding Sprint to DT and FT
brings Phoenix's fictional aggregate share of total turnover
generated by outsourcing services to [. . .] % \9\ in France and to
[. . .] % \10\ in Germany, compared with 31% in France and 33% in
Germany for the second-largest provider, Concert's Syncordia, in
both these national markets.
\7\ Business secret (less than 10%).
\8\ Business secret (less than 10%).
\9\ Business secret (less than 45%).
\10\ Business secret (less than 40%).
---------------------------------------------------------------------------
The market for standardized low-level packet-switched data
communications services
20. The global market for standardized low-level packet-switched
data services was worth approximately ECU 5,3 billion in 1993, while
DT, FT and Sprint's aggregate sales were [. . .] % \11\ or [. . .] %
\12\ worldwide. The European market for data communications services
is discussed in the separate notice on the Atlas transaction,
published in this issue of the Official Journal. Sprint's turnover
for standardized low-level packet-switched data services was [. . .]
in 1993, bringing DT, FT and Sprint's aggregate shares of that
market to [. . .] % \13\. As for national markets, Sprint achieved
its highest turnover in France, Germany, Italy and the United
Kingdom. Neither DT nor FT have a significant market presence in the
latter two Member States, where Sprint has [. . .] % \14\ and [. .
.] % \15\ market share respectively. In turn, Sprint's turnover in
France (ECU [. . .] % \16\) and Germany (ECU [. . .] % \17\ ) equals
market shares in these Member States of only [. . .]% and [. . .]%
respectively \18\.
\11\ Business secret.
\12\ Business secret (less than 25%).
\13\ Business secret (less than 40%).
\14\ Business secret (less than 5%).
\15\ Business secret (less than 5%).
\16\ Business secret.
\17\ Business secret.
\18\ Business secret (less than 5% respectively).
---------------------------------------------------------------------------
The market for traveller services
21. Total calling card revenue in the European Union was
approximately ECU 120,5 million in 1994, most of which generated by
national dialling. In 1993, DT had issued 200,000 cards (all of
which in German), equivalent to 2,1% of the total card subscriber
base in the European Union; FT had issued 1,5 million cards (all of
which in France), equivalent to 15,7% of the card subscriber base in
the European Union; and Sprint had issued 12 million cards
worldwide, of which 500,000 (equivalent to a 5,2% market share) in
the European Union. The aggregate market shares of the parents would
therefore make Phoenix the largest calling-card services provider in
the European Union (23% market share) in terms of subscriber
numbers, ahead of AT&T and BT with 21 and 17,8% market share
respectively. In terms of calling card traffic within the European
Union, the aggregate market shares of FT (21%) and DT (3%) are equal
to BT's market share of 24%.
The market for carrier's carrier services
22. The market for global switched transit services is estimated
to be worth approximately ECU 301,1 million, equivalent to 1 500
million minutes of international traffic or approximately 3% of the
world's international telephony traffic. Of this total,
approximately ECU 165,6 million are services provided by European
carriers, of which approximately ECU 30,1 million to other European
carriers. Within the global switched transit market (1994), with 5-
6% annual growth, DT had a turnover of ECU [. . .] \19\, FT of ECU
[. . .] \20\ and Sprint of ECU [. . .] \21\. The aggregate market
shares of DT, FT and Sprint make Phoenix the thrid largest global
switched transit provider behind AT&T and BT (20,2% each).
\19\ Business secret (market share less than 10%).
\20\ Business secret (market share less than 15%).
\21\ Business secret (market share less than 5%).
---------------------------------------------------------------------------
D. Main Competitors of the Phoenix Entities
The market for value-added telecommunications network services
23. The situation in these markets is discussed in the separate
notice on the Atlas venture published in this issue of the Official
Journal.
The market for traveller services
24. More than one third of calling cards in Europe are issued by
US operators. AT&T is estimated to have 2 million postpaid card
customers in Europe, equivalent to 21% of all cards issued there.
These customers generate 59% of calling card traffic initiated in
Europe on the US route. MCI is estimated to have 1 million postpaid
card customers in Europe (10,5%), which generate 27% of calling card
traffic initiated in Europe on the US route. Executive Telecard
International (ETI) markets calling cards in Europe through
agreements with local operators or credit card companies; ETI's
market position is similar to that of MCI.
The market for carrier's carrier services
25. Major players in the market for carrier's carrier services
and notably global switched transit services competing in the EEA
include AT&T, BT (each holding approximately one fifth of the
market), Cable & Wireless, MCI and Teleglobe Canada. Along with the
increasing proliferation of new carriers that seek to be independent
of the incumbent TO for their international traffic, new suppliers
of such services, some with substantial infrastructure resources,
are emerging in the market, e.g. Hermes Europe Railtel.
E. The Transaction
26. The transaction notified to the Commission comprises a set
of agreements whose main features are described below.
1. Agreements as Originally Notified
1. Agreements Regarding the Phoenix Joint Venture
The parties have to date submitted one final agreement: the
Phoenix Joint Venture Agreement (the `JV Agreement'), that sets out
the parties' essential commitments and business objectives. Attached
as annexes to the JV Agreement are detailed term sheets for all
agreements described below, which will be submitted upon closing of
the Phoenix Transaction. These term sheets detail the agreed content
of the following agreements:
(a) the Transfer Agreements will provide for the transfer by
Sprint, FT, DT, and Atlas (collectively referred to an the
`parents') of certain basic and related businesses to the relevant
ROE, ROW, and GBN entities.
(b) The Intellectual Property and Trademark Licence Agreements
will concern the grant by the parents and certain affiliates to the
Phoenix entities of non-exclusive, non-transferable licences to use
certain of the parents' technical information and trademarks.
(c) The Services Agreements will specify the terms and
conditions of trading relationships among Sprint, Atlas, and the ROE
and ROW entities, including the supply and support services needed
to provide Phoenix services worldwide.
2. Agreements Regarding FT and DT's Investment in Sprint
(a) The Investment Agreement will provide for the purchase by
each of FT and DT of approximately 10% of the common stock of
Sprint.
(b) The Standstill Agreement will bind FT and DT for a period of
15 years not to acquire additional shares in Sprint which would
increase their combined aggregate voting rights to more than 20%.
(c) The Registration Rights Agreement is required in order for
each party to consummate the transactions contemplated by the
Investment Agreement.
[[Page 4025]]
2. Main Contractual Provisions
1. Concerning the Phoenix Entities
(a) Structure of the Phoenix Venture
The JV Agreement provides for the creation of the following
operating entities: Phoenix Rest of Europe (ROE), Phoenix Rest of
the World (ROW) and Global Backbone Network (GBN). The ROE entity
will conduct the Phoenix business within the ``rest of Europe''
region (i.e. outside of France and Germany), while the ROW entity
will conduct the Phoenix business within the ``rest of the world''
region (i.e. outside Europe and the United States). The GBN entity
will own and operate as global transmission network over which
Phoenix services and other traffic will be routed.
FT and DT will each be the exclusive distributor of Phoenix
services in France and Germany respectively; however, FT and DT will
meet unsolicited customer requests for services regardless of the
customer's location. Moreover, the French and German subsidiaries of
Atlas will provide FT and DT with (i) sales support services
regarding Phoenix products to distributors in France and Germany;
and (ii) services within the scope of Phoenix other than X.25
packet-switched data network services.
A new, wholly-owned subsidiary of Sprint (the ``Sprint
Subsidiary'') and Atlas will each initially own 50% of the
outstanding voting equity of each of the parent entities of the ROW
entity and the GBN entity. The Sprint Subsidiary and Atlas will
initially own 33\1/3\ and 66\2/3\%, respectively, of the voting
equity of the parent entity of the ROE entity.
A Global Venture Board will be established to set global
policies and monitor compliance of the operating groups with their
business plans. Any initiative of the Global Venture Board will
generally require a unanimous vote.
Day-to-day operations will be the responsibility of the chief
executive officers of the operating entities, who are under the
supervision of the governing board of the relevant parent entity of
either ROE, ROW, or GBN entity. Most decisions of each governing
board will be adapted by simple majority vote of the members
present. Unanimous consent is however required for a number of
important decisions including final approval of business plans,
certain changes in structure and capitalization, and certain
decisions on technology and investments.
(b) Purposes and Activities of Phoenix Entities
The business of the joint venture will initially consist of the
provision of (i) global international data, voice, and video
business services for multinational companies and business
customers; (ii) international services for consumers, initially
based on card services for travellers, and (iii) carrier services
providing certain transport services for the parents and other
carriers. The Phoenix entities may also offer telecommunications
equipment and invest in national operations.
To market these services the Phoenix joint venture will be
responsible for the planning and management functions of operations,
as well as marketing and customer support, including the following:
(i) Central coordination of product development and management
to ensure seamless global services; the Phoenix entities shall
notably define functionality, technical standards, and service level
requirements for Phoenix services;
(ii) Implementation of a common global network and information
systems platform rationalizing and integrating the currently
separate international data, voice, and overlay networks of the
parents; the GBN will link overlay and backbone networks in each
operating area (i.e. ROE and ROW) while proprietary interfaces will
allow provision of seamless services; within its first few years of
operating, Phoenix will begin to deploy the next generation of
Asynchronous Transfer Mode (ATM) technology, comprising any and all
of transmission, switching, signalling, network intelligence, and
service management elements;
(iii) Integration and development of information systems for
coordinated billing, customer support, and other backoffice
functions, supporting national distributors; and
(iv) Development of a sales presence in the ROE and ROW
territories either directly or through distribution arrangements
using a common ``masterbrand''; in particular, national service
operations will be established or consolidated in each major
country, and will be responsible for distributing Phoenix services
within that country; in addition, regional sales offices will be
established to provide technical and sales support, including
identification of potential customers and assisting in preparation
of customer proposals.
(c) Provisions Concerning Dealings With/by Phoenix Entities
Pursuant to the JV Agreement, transactions among the Phoenix
entities, on the one hand, and FT, DT, and Atlas, on the other, will
generally be conducted on the most favourable terms and conditions
that are offered to third parties. If products, services, or
facilities relevant to these transactions are not commercially
available, such transactions shall be conducted in accordance with
an arm's length pricing method, using full-cost reimbursement or
such other arm's length pricing method as may be agreed on by the
parties. The parents shall have the first right to offer to supply
certain products, services, and facilities to the Phoenix entities.
Notwithstanding, each Phoenix entity may purchase from a third party
which, on otherwise comparable terms and conditions, offers lower
prices, either once the parties have been given the opportunity to
match such terms and conditions or if a customer so requires.
Each of the Phoenix entities and their parents have the first
right to offer to perform in their respective territory any
facilities or services required by another party to the Phoenix
agreements. Such services may be obtained from a third party at a
lower price under comparable terms and conditions, or where a
customer so requires. In accordance with this principle, the ROE and
ROW entities will be required to purchase telecommunications network
transmission capacity from the GBN entity to the extent available.
(d) Non-Compete Provisions; Distribution
Pursuant to the JV Agreement as originally notified, albeit
subject to various exceptions, no party or affiliate of a party may
distribute any international telecommunications services which are
either provided by the Phoenix entities or substitutable for such
services. Likewise, no party or affiliate of a party may invest in
any entity that offers such services. Moreover, no party or any of
its affiliates may offer national long-distance services in
competition with either a national operation of Phoenix or a pubic
telephone operator affiliated with Phoenix (e.g. a national
distributor of Phoenix). Nor may any party or any of its affiliates
make investments in any entity offering such competing national long
distance services or in any national operation allied with a major
competitor of Phoenix.
Outside the parents' home countries exclusivity will be granted
to distributors on a case-by-case basis. Passive sales by one
distributor to customers in the respective sales territory of any
other distributor will be allowed in the EEA.
(e) Licenses to be Granted to Phoenix Entities
Under the Intellectual Property Agreements; each parent will
grant each of the Phoenix entities non-exclusive, non-transferable
licences to use certain technical information of that parent in the
respective territories of such entities to conduct the Phoenix
business. Each Phoenix entity shall have the right to sub-license
the rights granted to any other Phoenix entity or any affiliated
national operation or local partner, to the extent such sub-licence
is necessary to conduct the Phoenix business. Likewise, each Phoenix
entity shall on request also sub-licence such rights to any parent
or affiliate of such parent, to the extent such sub-licence is
necessary to conduct the Phoenix business.
Royalties shall be payable as customary in the market and
negotiated by the parties on an arm's-length basis. License rights
granted to a party under the Intellectual Property Agreements will
continue in the event of either termination of the Phoenix venture
or transfer of such party's interest in the Phoenix venture.
Similarly, pursuant to the Trademark Licence Agreement each
parent grants each of the Phoenix entities non-exclusive, non-
transferable rights to use certain trademarks owned by or licensed
to such parent in connection with the marketing or sale of certain
authorized products and services in the respective territories of
such entity.
2. Concerning FT and DT's Investment in Sprint
(a) Restrictions on Transfer of Shares by FT or DT and Limits on
Increases of Their Shareholding in Sprint
Pursuant to the Investment Agreement, neither FT or DT may
dispose of its shares in Sprint for five years after the closing
date. Thereafter restrictions apply to large transfers, which would
in most circumstances give Sprint the rights of first refusal.
Pursuant to the Standstill Agreement, FT and DT shall each have
the right to acquire additional Sprint shares to reach and
[[Page 4026]]
maintain a 10% shareholding, but shall not for 15 years after the
closing date acquire additional shares that would increase their
aggregate voting rights to more than 20%. Once this initial
`standstill' period has expired, FT and DT may acquire additional
shares, but may not increase their aggregate voting rights about 30%
nor conduct certain activities intended at taking control of Sprint.
(b) Consent Rights and Board Representation of FT and DT
FT and DT have the right to elect directors to the Sprint board
in proportion to their shareholding, provided that each has the
right to elect at least one director. Neither FT or DT may have
access to confidential, competitive information on Sprint's
activities in the EEA through their representation on Sprint's
board. Nor may these representatives provide Sprint with
confidential information that FT or DT may have obtained from US
competitors through correspondent relationships.
As the sole holders of Sprint's class A common stock, FT and DT
have been granted substantial consensual rights with respect to
certain corporate actions of Sprint, which nevertheless fall
considerably short of control. These actions include major equity
issuances, disapproval of investments in Sprint by major
competitors, participation rights in transactions involving change
of control, and other bilateral corporate transactions. FT and DT
have a right of first offer with respect to long-distance assets of
Sprint for a fixed period of time.
F. Changes Made and Undertakings Given Further to the Commission's
Intervention
27. Some features of the agreements as notified appeared to be
incompatible with the Community competition rules. In the course of
the notification procedure the parties have amended certain clauses
in their agreements and given undertakings to the Commission.
1. Contractual Changes
28. Non-appointment of Phoenix as an agent for international
half-circuits. Following an announcement made in the Phoenix
notification, which did not yet reflect the parties commitments
regarding Atlas further to the Commission's intervention, DT, FT,
Atlas and Sprint have deleted FT and DT's `international private
lines', i.e. FT and DT's international half-circuits, from the list
of products that Phoenix would distribute as agent.
29. Non-compete provisions. The parties have not yet sought an
exemption pursuant to Articles 85 (3) of the EC Treaty and 53 (3) of
the EEA Agreement for any specific agreements regarding national
long-distance services. The non-compete clause in the original JV
Agreement has therefore been amended: the parties are now obliged to
refrain only from either (i) competing with or (ii) investing in a
competitor of entities providing long-distance services provided
such entities are controlled by Phoenix.
2. Non-Discrimination
30. Just as DT and FT shall be prohibited from discriminating in
favour of the joint venture, as described in the separate notice on
the Atlas transaction, the Commission intends likewise to prohibit
DT and FT from discriminating in favour of the Phoenix entities. The
same is true for the specific elements covered by this
requirement.\22\
\22\ See notice pursuant to Article 19 (3) of Council Regulation
No 17 concerning Case No IV/33.361--Infonet (OJ No C7, 11. 1. 1992,
p. 3, at paragraph 9).
---------------------------------------------------------------------------
3. Undertakings Given by the Parties
31. Carrier's carrier services. Neither Atlas, Phoenix, DT, FT,
Sprint or any affiliate of these entities shall make a particular
telecommunications operator's ability to use Phoenix international
carrier services conditional upon use or distribution by that
telecommunications operator of services provided by Atlas, Phoenix,
FT, DT or Sprint. Neither shall Atlas, Phoenix, DT, FT, Sprint or
any affiliate of these entities make its commercial dealings (i.e.
terms, conditions, price, discounts) with any telecommunications
operator conditional upon use or distribution by that
telecommunication's operator of services provided by Atlas, Phoenix,
FT, DT or Sprint.
32. DT, FT and Sprint have also given further undertakings that
mirror the undertakings given in connection with the Atlas
notification; reference is therefore made to the separate notice on
the Atlas transaction published in this issue of the Official
Journal.
1. Cross-Subsidization
As in the context of the Atlas transaction, DT and FT shall not
engage in cross-subsidization within the meaning of the Commission's
competition guidelines for the telecommunications sector \23\ in
connection with the Phoenix venture. To avoid that the Phoenix
entities or their distributors benefit from cross-subsidies stemming
from the operation of both public telecommunications infrastructure
and reserved services by either DT or FT, all entities formed
pursuant to the Phoenix venture will be established as distinct
entities separate from DT and FT.
\23\ Guidelines on the application of EEC Competition Rules in
the Telecommunications Sector (OJ No C 233, 6. 9. 1991, p. 2,
paragraph 102 et seq.).
---------------------------------------------------------------------------
The ROE and ROW entities will obtain their own debt financing on
their own credit, provided that Sprint, FT and DT:
(a) may make capital contributions or commercially reasonable
loans to such entities as required to enable the ROE and ROW
entities to conduct the Phoenix business;
(b) may pledge their venture interests in such entities in
connection with non-recourse financing for such entities; and
(c) may guarantee any indebtedness of such entities, provided
that Sprint, FT and DT may only make payments pursuant to any such
guarantee following a default by such entities in respect of such
indebtedness.
The ROE and ROW entities shall not allocate directly or
indirectly any part of their operating expenses, costs,
depreciation, or other expenses of their businesses to any parts of
DT or FT's business units (including without limitation the
proportionate costs based on work actually performed that are
attributable to shared employees or sales or marketing of Phoenix
products and services by DT or FT employees). However, nothing shall
prevent such Phoenix entities from billing DT or FT for products and
services provided to DT or FT by such entities on the basis of the
same prices charged to third parties (in the case of products or
services sold to third parties in commercial quantities) or full
cost reimbursement or other arm's length pricing method (in the case
of products and services not sold to third parties in commercial
quantities).
The ROE and ROW entities shall keep separate accounting records
that identify payments or transfers to or from DT and FT. The ROE
and ROW entities shall not receive any material subsidy (including
forgiveness of debt) directly or indirectly from DT or FT, or any
investment or payment from DT or FT that is not recorded in the
books of such entities as an investment in debt or equity.
2. Recording and Reporting
The same undertakings apply as described in the notice on the
Atlas transaction published in this issue of the Official Journal.
33. In so far as related to existing obligations under national
or Community law, the above is intended to ensure the parties' firm
commitment to comply with the applicable legal framework.
G. The Regulatory Situation
34. The regulatory situation in France and Germany is described
in the notice on the Atlas transaction. As for the United States,
pursuant to the 1934 Communications Act, Sprint shall publish tariff
schedules and contracts describing its network arrangements and
services. Furthermore, the 1934 Communications Act, enforced by the
Federal Communications Commission (FCC), prohibits Sprint from
providing services that unjustly or unreasonably discriminate
against Sprint's competitors or foreign correspondents, which may
lodge a formal complaint before the FCC if Sprint does not comply
with these obligations.
35. While the European Commission was assessing the Phoenix
notification under Community law, the US Department of Justice has
concluded a procedure under US anti-trust law by entering a consent
decree. This consent decree spells out undertakings by the parties
that largely resemble those described in this notice.
The Commission's Intentions
36. On the basis of the foregoing, the Commission intends to
take a favourable position on the notified transaction under the
competition rules of the EC Treaty and under Article 53 of the EEA
Agreement and to grant Phoenix an individual exemption pursuant to
Article 85 (3) of the EC Treaty and Article 53 (3) of the EEA
Agreement. Before doing so, the Commission invites interested third
parties to send their observations within six weeks from the
publication of this notice to the following address, quoting the
reference `IV/35.617--Phoenix':
European Commission,
Directorate-General for Competition (DG IV),
Directorate for Information, Communication and Multimedia,
Rue de la Loi/Wetstraat 200,
B-1049 Brussels.
[[Page 4027]]
Fax: (32 2) 296 98 19.
Exhibit I
Federal Republic of Germany Ministry for Post and Telecommunication
United States Department of Justice,
Antitrust Division,
Mr. Carl Willner,
Telecommunications Task Force,
Judiciary Center Building,
555 4th Street, NW,
Washington, DC 20001
Your reference, Your letter of
Your telefax of 29 November 1995
My reference, my letter of 112b B 1311
Bonn 14-11 28
U.S. Antitrust Review of ``PHOENIX'' Joint Venture including
Deutsche Telekom AG
Dear Mr. Willner: Thank you very much indeed for your telefax of
29 November 1995 requesting additional information on the planned
legal framework governing telecommunications. I am of course pleased
to provide you with such information on specific regulatory issues
at short notice. In doing so. I also take account of your intention
to use these clarifications in the above antitrust review.
1. Your first question concerns the regulation of ownership and
landing rights for submarine cables.
Under the draft Telecommunications Act any company will be
allowed to set up and operate transmission lines and offer voice
telephony, However, both activities--if offered to the public--will
be subject to license and may hence also be subject to certain
requirements. The setting up and operation of transmission lines
will be permitted as from 1 July 1996 provided that such lines are
not used to offer voice telephony for the public (alternative
infrastructures); provision of voice telephony to the public will be
permitted as from 1 January 1998.
Regulatory intervention through the licensing of operators of
transmission lines and voice telephony providers is exclusively
limited to German territory which include German coastal waters
covering three, in some cases 12, nautical miles.
Unlike US law (Submarine Cable Landing License Act), German law
does not provide for the granting of landing licenses for access to
the national territory. As a consequence, a particular landing
license is neither envisaged for the future nor does it exist under
current German law. This regulation is based on the idea that
unnecessary state intervention in market developments should be
avoided. In addition, the nationality of the operator or owner of
the submarine cable is of no legal relevance. This means that we
will have a non-discriminatory, open and transparent access
regulation in Germany for submarine cables.
In order to preclude possible misunderstandings I wish to point
out that the above regulations refer to the telecommunications
market. There are also further legal provisions from other areas
such as the environmental and nature protection or marine traffic
legislation which must be complied with in respect of submarine
cables. Such legislation does not, however, refer to market entry in
telecommunications.
2. The second question refers to the regulation of
interconnection with public telecommunications networks. A draft
ordinance of this Ministry on this issue has not been drawn up as
yet. Nor has an exact date for its submission been scheduled at
present. It is however intended to issue the relevant ordinance
immediately following the entry into force of the Telecommunications
Act. This ordinance will also be in line with the targets laid down
by the European Union. Might I also request you to consider in this
respect that recently, ie on 31 August 1995, the European organs
submitted a Proposal for a European Parliament and Council Directive
on interconnection in telecommunications with regard to ensuring
universal service and interoperability through application of the
principles of Open Network provision (ONP). As regards the legal
procedure at European level it is fair to say that to date the EU
has not fully determined all details to which further action in
Germany will strictly be geared in the future. Some preparatory work
has yet to be done in this field.
I hope that this information will be of assistance to you in the
above antitrust review. Please do not hesitate to contact me if you
require clarification on further aspects of our planned market
regulation.
Sincerely yours,
By direction of the Minister
Dr. Witte
Exhibit J
French Republic
Paris, December 8, 1995.
Ministry Delegate of Post, of Telecommunications and of Space
Directorate General of Posts and Telecommunications
The Director General
Dear Mr. Willner, I understand that, in connection with the
review by the Department of Justice of the Phoenix transaction, you
have asked counsel for France Telecom whether U.S. companies will be
able to participate fully in the liberalized French
telecommunications market after July 1, 1996. Currently, French law
does not limit foreign equity participation in the construction and
operation of facilities, or in the provision of liberalized
services. Indeed, today, several U.S. companies hold VSAT licenses
and MFS has just been granted a license to build a metropolitan
fiber network in Paris to provide services that have been
liberalized.
The only exception in French law to the general rule is that
companies not established in the European Union can own up to 20% of
entities providing public wireless services. By law, however, this
cap may be lifted if other countries have opened their public
wireless markets to French enterprises.
Furthermore, as demonstrated by the very liberal offer of the
European Union in the context of the World Trade Organization
discussions, France fully supports opening up all telecommunications
services in all markets. We hope that agreement can be reached among
like-minded countries on the rules for further market liberalization
and that, as a consequence of these negotiations or, should the
latter fail, on a bilateral basis, any then-existing restrictions in
French law on foreign ownership of infrastructure or service
providers would be removed for U.S. companies.
As an evidence of this policy, I would like to stress that the
Government-sponsored recent draft legislation which will permit the
granting in 1996 of experimental licenses for innovative multimedia
services, including the provision of public voice telephony services
on geographically limited areas does not contain any foreign-
ownership limit for wire-line based services.
Very truly yours,
Bruno Lasserre,
Carl Willner, Esq.,
Antitrust Division, Telecommunications Task Force, U.S. Department of
Justice.
Exhibit K
November 21, 1995.
Carl Willner, Esq.,
Antitrust Division, United States Department of Justice, 555 4th
Street, N.W.,
Washington, D.C. 20001
Re: U.S. v. Sprint Corp.
Dear Carl: Enclosed is the text of a revision to Section 10.6(b)
of the Joint Venture Agreement among Sprint, FT and DT. The revision
to Section 10.6(b) will be part of the closing documentation for the
transaction. The attached language has been presented to the
European Commission for purposes of their review. It should resolve
any confusion by third parties regarding the scope of the Agreement
among Sprint, FT and DT. Specifically, I want to assure you that it
was never the intent of the parties to cause FT or DT to steer
customers of FT and DT reserved services to Phoenix. In order to
resolve any doubt on this issues, however, the parties have agreed
to the revised language enclosed with this letter.
Sincerely,
Kevin R. Sullivan
KRS:ss
Enclosure
cc: J. Cunard, M. Ryan, J. Hoffman
King & Spalding
November 21, 1995.
Carl Willner, Esq.,
Antitrust Division, United States Department of Justice, 555 4th
Street, N.W., Washington, D.C. 20001
Re: U.S. v. Sprint Corp.
Dear Carl: Enclosed is the text of a revision to Section 10.6(b)
of the Joint Venture Agreement among Sprint, FT and DT. The revision
to Section 10.6(b) will be part of the closing documentation for the
transaction. The attached language has been presented to the
European Commission for purposes of their review. It should resolve
any confusion by third parties regarding the scope of the Agreement
among Sprint, FT and DT. Specifically, I want to assure you that it
was never the intent of the parties to cause FT or DT to steer
customers of FT and DT reserved services to Phoenix. In order to
resolve any doubt on this issues, however, the parties
[[Page 4028]]
have agreed to the revised language enclosed with this letter.
Sincerely,
Kevin R. Sullivan
KRS.ss
Enclosure
cc: J. Cunard, M. Ryan, J. Hoffman
November 21, 1995.
Phoenix JVA Section 10.6(b) [p. 81]; Unsolicited Customer Requests
``(b) If a Party or any of its Affiliates receives an
unsolicited request from a customer of a Party or any of its
Affiliates or of the Joint Venture to enter into a Contract to
provide to such customer in conjunction with other Persons a service
that is then currently Offered by the Joint Venture, such Party or
its Affiliates will use commercially reasonable efforts to persuade
such customer to purchase such service from the Joint Venture. If
despite such Party's efforts, the customer prefers not to purchase
such service from the Joint Venture, such Party will refer such
matter to the Global Venture Office which, within ten (10) Business
Days, will present its observations regarding such matter to one of
the representatives of such Party on the Global Venture Committee
for final resolution by such representative. Not withstanding the
foregoing, the Parties agree that the customer's preference will be
honored in all cases. The Parties further agree that,
notwithstanding the foregoing, this Section 10.6(b) shall not apply
to ``FT or DT Products and Services'' as defined in Section V.L. of
the Final Judgment in U.S. v. Sprint Corporation, Civ. No. 95-1304
(D.D.C. July 17, 1995), provided that, for purposes hereof, such FT
or DT Products or Services are agreed to include not only ``leased
lines or international half circuits between the United States and
France or between the United States and Germany'' as defined in
Subpart V.L. (iii) of such Final Judgment, but also international
leased lines or international half circuits between France or
Germany and any other country or territory.''
[FR Doc. 96-1742 Filed 2-1-96; 8:45 am]
BILLING CODE 4410-01-M