[Senate Hearing 106-978]
[From the U.S. Government Publishing Office]
S. Hrg. 106-978
THE MCI WORLDCOM/SPRINT MERGER: A COMPETITION REVIEW
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
S. 1854
A BILL TO REFORM THE HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF
1976
__________
NOVEMBER 4, 1999
__________
Serial No. J-106-59
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
71-693 WASHINGTON : 2001
COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
Manus Cooney, Chief Counsel and Staff Director
Bruce A. Cohen, Minority Chief Counsel
(ii)
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Hatch, Hon. Orrin G., U.S. Senator from the State of Utah........ 1
Leahy, Hon. Patrick J., U.S. Senator from the State of Vermont... 66
Feingold, Hon. Russell D., U.S. Senator from the State of
Wisconsin...................................................... 76
CHRONOLOGICAL LIST OF WITNESSES
Panel consisting of Bernard J. Ebbers, president and chief
executive officer, MCI WorldCom, Clinton, MI; William T. Esrey,
chairman and chief executive officer, Sprint Corporation,
Westwood, KS; James F. Rill, Collier, Shannon, Rill and Scott,
Washington, DC; Gene Kimmelman, co-director, Consumers Union,
Washington, DC; and Tod A. Jacobs, senior telecommunications
analyst, Sanford C. Bernstein and Company, Inc., New York, NY.. 6
ALPHABETICAL LIST AND MATERIALS SUBMITTED
Ebbers, Bernard J.: Testimony.................................... 6
Esrey, William T.: Testimony..................................... 8
Jacobs, Tod A.:
Testimony.................................................... 27
Prepared Statement........................................... 31
Kimmelman, Gene:
Testimony.................................................... 23
Prepared Statement........................................... 24
Rill, James F.:
Testimony.................................................... 10
Prepared Statement........................................... 12
Exhibits 1-6............................................. 17
THE MCI WORLDCOM/SPRINT MERGER:
A COMPETITION REVIEW
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WEDNESDAY, NOVEMBER 4, 1999
U.S. Senate,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to notice, at 11:14 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Orrin G.
Hatch (chairman of the committee) presiding.
Also present: Senators Thurmond, DeWine, Ashcroft, Leahy,
and Kohl.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
THE STATE OF UTAH
The Chairman. The committee will come to order. Good
morning, and welcome to today's hearing examining the proposed
merger of MCI WorldCom and Sprint. I first would like to thank
all of our witnesses today for their time and cooperation, and
I would ask all witnesses to come forward. We are going to
merge both panels, if we can, in the interest of time. I
understand some of you have to catch planes and I want to
accomplish that if I can.
Last month, MCI WorldCom and Sprint announced their
intention to merge in a deal valued at nearly $130 billion.
This is the largest merger in history, although given how the
merger wave has been going, I don't know how long it will last
being the largest. The resulting company, the Washington Post
reported, ``would be broad by any measure, able to sell, local,
long-distance and wireless service, along with high-speed
Internet access. The merger would cement MCI WorldCom's
position among the handful of large players * * * expected to
dominate global communications in the future by offering a full
array of services in a `bundle' to businesses and consumers.
Our hearing today will focus on the possible effects this
merger will have on competition and consumer choice in the
telecommunications industry. Let me also point out that without
commenting on the merits of this particular merger, mergers of
this type that affect a significant portion of the economy is
what the premerger notification requirement under our antitrust
laws were intended to cover.
That is why today I will be introducing sensible bipartisan
legislation, cosponsored by Senators DeWine and Kohl, that is
designed to update the Hart-Scott-Rodino transaction thresholds
to more accurately reflect today's economy. This will provide
significant financial and regulatory relief for small
businesses all across the country.
In our examination of the competitive effects of this
merger, I would hope to hear from our witnesses on the effects
on the ever-changing landscape of the telecommunications
markets in general, and on several specific markets in
particular. These specific markets are, the market for consumer
long-distance telephone services; the provision of broadband
Internet services to consumers and businesses; and the market
for the reportedly concentrated Internet backbone, which is the
underlying network used to transmit Internet traffic.
We are fortunate to have before us today two distinguished
panels of witnesses, which we are going to merge in order to
assist our examination. The witnesses are Mr. Bernard J.
Ebbers, the president and chief executive officer of MCI
WorldCom. We are happy to have you here, Mr. Ebbers.
Mr. William T. Esrey, the chairman and chief executive
officer of Sprint Corporation. We are certainly delighted to
have you here as well.
Mr. James F. Rill, we are always glad to get you back, Jim,
with the great job when you served as former Assistant Attorney
General in charge of the Antitrust Division. And, of course,
Jim is currently a partner in Collier, Shannon, Rill and Scott.
Mr. Gene Kimmelman, a respected former member of the
Judiciary Committee staff, and currently Co-Director of the
Consumers Union. It is good to see you back, too.
And Tod A. Jacobs, Senior Research Analyst for
Telecommunications at Sanford C. Bernstein and Company.
Again, I want to thank all of our witnesses for appearing
today, and I look forward to hearing from you.
Let me now just turn to Senator Kohl, who will represent
the minority, and then I will also turn to Senator DeWine.
Senator DeWine is the chairman of the Antitrust Subcommittee,
and Senator Kohl is the ranking member.
So we will turn to the Democrat side first, to Senator
Kohl, and then to Senate DeWine for any remarks they care to
make.
Senator Kohl. Thank you, Mr. Chairman. Today's hearing is
important not only because we are examining the largest merger
in history, worth nearly $130 billion, but also because it
would combine two of the most important competitors in the
long-distance telephone market and two key providers of
Internet services. Indeed, Mr. Chairman, if there is a merger
that ``reaches out and touches'' the ``friends and family'' of
every American, this one is it.
We certainly recognize the strength of both MCI WorldCom
and Sprint, and the business acumen of you, Mr. Ebbers, and
you, Mr. Esrey. You have built your respective companies from
scrappy upstarts to become vigorous competitors to AT&T. Your
companies have been real American success stories, offering
inexpensive and reliable long-distance telephone services and,
through dynamic competition, leading the way to reduced prices
and improved quality in a manner that has, without doubt,
greatly benefited consumers over the last two decades.
But it is exactly for these reasons that many of us have
serious concerns about this merger. With respect to long-
distance, three major companies currently control over 80
percent of the market. One need not be a rocket scientist--or
even an antitrust lawyer--to be highly suspicious of a merger
which reduces the number of rivals in an industry from three to
two. Such mergers raise the dangerous possibilities of
collusion, price coordination, cartel pricing, and reduction in
quality of service.
In fact, Mr. Esrey, you might even agree. In written
testimony last year, you told our subcommittee, ``Fewer larger
telephone companies make innovation less likely and make it
more difficult for regulators and customers to compare relative
performance.''
Mr. Chairman, protecting robust competition in long-
distance telephone service is all the more important because it
has been one of the brightest spots in the telecommunications
industry, and a stark contrast to the lack of competition at
the local level.
Despite the promise of the 1996 Telecommunications Act,
residential consumers have seen few benefits. Are we now about
to end the fierce competitive battle which has prevailed in
long-distance? Will the long-distance market unhappily come to
resemble the less competitive local markets?
This merger, of course, is about much more than about long-
distance telephone competition. Both MCI WorldCom and Sprint
play crucial roles with respect to Internet access, and both
companies view this merger as strengthening their ability to
offer broadband. But with the ever-growing importance of the
Internet to the national economy, regulators will need to
scrutinize this deal closely to determine whether the combined
entity will control too much Internet infrastructure.
In fairness to our witnesses, let me make just a few more
points. First, in an era of converging technologies, many argue
that the old paradigm of long-distance and local no longer
applies. Second, in the last few years regulators have
permitted a series of horizontal mergers among the companies
that have been most resistant to opening their markets, which
has created giant conglomerates against which you must compete.
On that basis, it is not surprising that your two companies
would want to merge. But that doesn't make the deal necessarily
a good one. Given the strength and size of your combined entity
and the strong competition now existing between your two
companies, the burden of proof is squarely on you, Mr. Ebbers,
and you, Mr. Esrey, to show that your merger will benefit
consumers rather than create obstacles to competition. We hope
that you can convince us of that, and we look forward to
hearing your testimony today.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
We will turn to Senator DeWine now.
Senator DeWine. Thank you very much, Mr. Chairman. The full
Judiciary Committee, as well as our Subcommittee on Antitrust,
Business Rights, and Competition, has been working hard to
promote competition in the telecommunications industry ever
since the passage of the Telecommunications Act of 1996. And
while many of us are disappointed with the level of local
competition the Telecom Act has produced, I think it is fair to
say that competition has been booming in the market for long-
distance service.
In the years since AT&T was broken up, MCI and Sprint have
become strong competitors to AT&T. Consumers have benefited
from the battles among these three companies. Quality has
improved, new services have been introduced and, most
importantly, prices for long-distance service have dropped
dramatically.
Now, however, Mr. Chairman, MCI and Sprint have announced
that they will merge. The proposed deal between MCI and Sprint
is valued at approximately $130 billion and, if approved, it
will dramatically alter the landscape of long-distance service.
The long-distance market will move from three primary
competitors to two, known in antitrust lingo as a duopoly. Most
economists agree that duopolies do not provide the same level
of service and price competition as will be found in markets
including three competitors.
In this instance, Mr. Chairman, economic theory may well be
correct. Certainly, long-distance, with three major
competitors, has been a very competitive market. Sprint and MCI
have been very aggressive in competing with AT&T, and I think
that as consumers we have all benefited from the competition,
even if we sometimes get annoyed by those dinner time telephone
calls.
So I am concerned, Mr. Chairman, about the impact of this
proposed merger. If MCI WorldCom and Sprint are allowed to
merge, consumers will only have two major choices for long-
distance service. Mr. Chairman, I am not convinced that any of
the smaller long-distance providers currently have the name
recognition or reach to compete strongly with the major
players. Further, it is unclear exactly when the regional Bell
operating companies will be granted the legal authority under
section 271 of the Telecommunications Act to compete for long-
distance customers within their own regions. Until these
smaller companies grow into brandname competitors and the Bell
companies are allowed to provide long-distance competition
throughout the Nation, AT&T and the merged parties will
dominate the long-distance market.
It is possible that broadband service can ultimately fill
the void. As a growing number of telecommunications companies
are able to provide bundled services, customers will have
greater and greater choice in the broadband market. But even
though the broadband market is growing, and it appears to be
the way of the future, it is not here yet today. Most consumers
still pay separate bills for separate services, and one of
those services is simple, old-fashioned long-distance telephone
service. In that very important market, this merger will
dramatically decrease competition.
This merger does offer some significant benefits to
consumers. For example, it will allow the companies to combine
their strengths to better compete in the market for bundled
services, and provide better local and wireless service to
customers. Further, there may be ways to fix the problems of
this deal, possibly by divesting certain properties. However,
my primary concern, Mr. Chairman, is the effect this deal will
have in the long-distance market. So the burden is on you, Mr.
Ebbers and Mr. Esrey, to show me that long-distance customers
will benefit from this deal.
Thank you, Mr. Chairman.
The Chairman. Thank you.
We are going to turn to Senator Thurmond now, who has about
a minute-and-a-half statement, and then I will turn to Senator
Ashcroft, since Sprint is your State, as I understand it.
Senator Thurmond. Mr. Chairman, I am pleased that we are
holding this hearing today regarding the proposed merger
between MCI WorldCom and Sprint. The goal must always be to
promote strong competition in the telecom industry because that
is the key to keeping rates down for consumers.
I have to leave for another engagement. However, I would
like to place some questions into the record for the witnesses
to answer in writing.
Mr. Chairman, thank you very much.
The Chairman. Thank you, Senator Thurmond.
We will turn to Senator Ashcroft.
Senator Ashcroft. Thank you, Mr. Chairman. I thank you for
holding the hearing today. Obviously, this is a matter of great
interest to me and my constituents in Missouri. As you know,
Sprint is a very large employer in my State--approximately
6,800 Sprinters in the State of Missouri, and they are people
who are highly talented and very, very committed to providing
the best in communications.
Sprint connected its first call about 100 years ago in
Abilene, KS, as the Brown Telephone Company. Today, the company
employs a total of 78,000 employees; 16,000 are located in the
Kansas City area. The rest of the country appreciated, I think,
the plummeting long-distance rates created when Sprint entered
the market. Missourians not only benefited from lower rates,
but from the job growth that was created when this kind of
capacity and integrity and competition entered. That ever-
recognizable pin drop of Sprint, representing quality, provided
the entire State and community with a sense of pride.
Now, as we discuss the larger merger in history, I
understand that there are members of the committee who have
concerns about the impact that this will have on the
competitive nature of the telecommunications industry, and I am
also concerned and interested in hearing the testimony of the
witnesses on this subject.
While competitive implications should be fully examined, of
course, my largest concern is for the jobs of the hard-working
and talented people in the State of Missouri. Based on the
conversations I have had with Bernie Ebbers, of MCI WorldCom, I
believe that the job growth potential of the combined companies
will bring additional workers to Kansas City and the State of
Missouri. It is those Missouri and Kansas technicians,
engineers and scientists that have brought such innovative
products to the telecommunications market to help build the
company into what it is today. In fact, it is their effort that
makes Sprint such an attractive company to MCI WorldCom.
I looked at some of the other mergers with this in mind.
When the former LDS took WillTel, the Tulsa Corporation that
survived from the Williams Brothers transmission of energy
services at one time, just 3 years after being purchased by
WorldCom, WillTel's employment grew from 2,000 to 4,500
employees in Tulsa.
I think the proposed merger fills gaps in both companies'
service offerings, and the combined company would offer one-
stop shopping for consumers. I think they should create
efficiencies, and those efficiencies should continue to drive
down prices for telecommunications services, local access,
long-distance, wireless, and Internet.
I just from my own perspective note that virtually everyday
I get mail that suggests to me that I can have cheaper and
cheaper long-distance service, and it is in addition to the
television advertising I see from MCI and Sprint comparing the
virtues of Michael Jordan with other individuals in
recommending service to me.
I noted an AP story just a month or so ago, ``Little-known
service provider IDT is escalating the long-distance rate price
war, undercutting the industry's giants with charges as low as
3.5 cents per minute.'' I think the telecommunications
framework which requires the options and opportunities for
resellers and others in the marketplace appears to be providing
a basis for people to continue to drive down costs, and drive
down costs to consumers.
I must say at this point I am strongly inclined to support
the proposed merger. It promises, I think, to be a win/win
situation, winning for Missouri with more jobs and opportunity,
and winning for consumers. But I will reserve my final decision
in order to examine other issues, including the effects on
competition, including long-distance and other
telecommunications services.
I am delighted that these two leaders of American industry
and the industry in which America leads the world have decided
to come and be with us today, and I thank the chairman for this
opportunity to make comments.
The Chairman. Well, thank you, Senator Ashcroft.
We are going to begin with Mr. Ebbers. We will go to Mr.
Esrey, then we will go to Mr. Rill, then Mr. Kimmelman, and we
will wind up with you, Mr. Jacobs. We are delighted to welcome
all of you here. We look forward to your testimony. And we
understand there is a time constraint here, so we will try and
move this as quickly as we can. We hope you can limit
yourselves to 5 minutes. It is a big deal to be limiting
yourselves to 5 minutes, but I have found people of your
caliber can do that.
So we will turn to you, Mr. Ebbers.
PANEL CONSISTING OF BERNARD J. EBBERS, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, MCI WORLDCOM, CLINTON, MI; WILLIAM T. ESREY,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER, SPRINT CORPORATION,
WESTWOOD, KS; JAMES F. RILL, COLLIER, SHANNON, RILL AND SCOTT,
WASHINGTON, DC; GENE KIMMELMAN, CO-DIRECTOR, CONSUMERS UNION,
WASHINGTON, DC; AND TOD A. JACOBS, SENIOR TELECOMMUNICATIONS
ANALYST, SANFORD C. BERNSTEIN AND COMPANY, INC., NEW YORK, NY
STATEMENT OF BERNARD J. EBBERS
Mr. Ebbers. Thank you, Mr. Chairman and members of the
committee. I appreciate the opportunity to come and speak to
you today.
In the changing world of the telecommunications
marketplace, the question facing us is simple: Can competitive
long-distance providers survive to fight against the Bell and
cable monopolies? The MCI WorldCom/Sprint merger is the answer
to that question, and that answer is yes.
Consider what the recent months have brought. First, a
dramatic decrease in the price of traditional long-distance
service; second, the explosive growth of wireless telephony
that has eliminated the artificial distinction between local
and long-distance calling. There is no such thing anymore as
pure long-distance. Third, the mega-Bells are edging closer to
entry into what has been known as the long-distance market.
Fourth, we see a growing demand for broadband capacity from
both residential and business customers.
Our conclusion is that the separate market for long-
distance created by the divestiture of AT&T is eroding, that
successful competitors like ourselves need to be able to
fulfill all of a customer's needs for wireless and wireline,
and that strong competitors must be able to effectively bring
broadband Internet access and services all the way to the
customer's home or business.
In other words, the telecommunications industry of the
future requires that a company be able to provide a
comprehensive suite of services, broadband capabilities, and to
the maximum extent possible to reach the customer directly. The
broadband battle is basically about the last mile, and in the
world of the last mile two titans are emerging. One is an old
titan reborn through local cable facilities, AT&T. The other,
ironically, is the offspring of that company, the Bell
operating companies, or the now mega-Bells.
The new mega-Bells have maintained their hold over local
markets, are already major wireless providers, and have moved
swiftly to leverage those local assets toward becoming
providers of the full range of voice and data services, and
they are not even in long-distance yet. AT&T, meanwhile, has
chosen to buy up the other last mile, cable, and is seeking to
dominate the provision of high-speed Internet access and bundle
it with its own wireless local and long-distance services.
Faced with these trends, MCI WorldCom had a tough choice to
make. We could have left residential customers to the Bells and
big cable, but that would have been bad for those customers and
bad for us. We could have merged with a Bell in order to gain
the advantage of controlling the critical last mile of copper
wire into every home. Or we could get stronger and even more
competitive. You know the choice that we made.
MCI WorldCom and Sprint decided to join forces as the
single best hope for a strong and effective alternative to the
mega-Bells and the emerging AT&T cable monopoly. We know how to
do this. Both MCI WorldCom and Sprint were born outside of the
Bell system and share an entrepreneurial spirit that has
contributed to rapid growth and success. Dedicated to opening
markets to competition, both our companies have focused on
delivering benefits to customers, lower prices, innovation, and
higher-quality services.
And we will be able to do all of this more efficiently.
Over the next 5 years, the merged company will realize cost
savings of $9.7 billion in operating costs and $5.2 billion in
capital expenditures. These cost savings not only allow for the
new company to compete aggressively in both the business and
consumer markets, but also will enable us to aggressively
invest in new technologies such as broadband access and next-
generation wireless. And as you have observed, since our merger
with MCI the bulk of that savings has been passed through to
consumers.
And that world, as we know it, is becoming smaller. Our
competitors overseas, spurred by mounting competition on their
home turf, are making acquisitions, joint ventures, and
aggressive international investments in key markets around the
world, ours included. The combined complementary strengths of
MCI WorldCom and Sprint will make us uniquely equipped to
develop and market the communications products and services
customers need and want most--data, Internet, wireless, local,
long-distance, distance-insensitive, and international.
Together, we will have the capital, proven marketing
strength, and end-to-end state-of-the-art networks to compete
more effectively against the internationally incumbent
carriers. Our self-reliant, facilities-based global strategy
positions us well to fully serve the rapidly growing global
telecom market, a market valued at $1 trillion by the year
2002.
Our new company will have the people and the technology
required to bring innovative services and the benefits of
competition to residential and business consumers across
America and around the world. Here in the United States, we can
already see hints that this combination will accelerate
broadband deployment in competition with Bell, DSL, and AT&T
cable modems.
MCI WorldCom is breaking through in local markets in New
York State, already providing over 200,000 residential
customers there with two things they have never had before--
choice and low, flat-rate service. Sprint is going forward with
the introduction of its Integrated On-demand Network, ION, in
Kansas City, Seattle, Denver, and eventually in local markets
across the country. MCI WorldCom will be colocated in 1,500
central offices for DSL by the end of this year, and 2,000 by
next year.
We have both invested heavily in a fixed wireless
technology known as MMDS that will allow us to get to customers
who are beyond the reach of DSL, usually in predominantly rural
areas. With these MMDS and DSL assets, combined with Sprint ION
networks and local facilities, we are in a very strong position
to bring consumers, both urban and rural, the broadband they
need and most definitely want.
Some regulators have reacted to the news of an MCI
WorldCom/Sprint merger by raising a yellow flag of caution.
That is their job. We look forward to demonstrating, and we
will, that this merger is procompetitive in all markets,
including what has historically been known as long-distance.
That debate will benefit everybody because it will help
government officials and consumers alike to understand the best
way to advance the cause of telecommunications competition in
the next century.
Thank you very much.
The Chairman. Thank you, Mr. Ebbers.
Mr. Esrey.
STATEMENT OF WILLIAM T. ESREY
Mr. Esrey. Thank you, Mr. Chairman. I welcome this
opportunity to offer you Sprint's perspective on our merger
with WorldCom. We believe that with Sprint's human talents and
the physical assets combined with WorldCom's, we will break the
local telephone monopoly that has frustrated public
policymakers throughout the 20th century. We will bring to
local customers advanced technologies and lower prices, just
like we did in long-distance.
In the early days of long-distance competition, Sprint and
MCI WorldCom successfully challenged the established players
and offered the public new and innovative services. Now that
long-distance competition has matured, our combined
capabilities are uniquely suited to meet the new competitive
challenges that have arisen. We will build on our competitive
heritage to help open monopoly local markets to competition, to
provide the next generation of broadband services, and to offer
packages of voice and data wireless and wireline services that
consumers are increasingly demanding both domestically and
worldwide.
The telecommunications industry is undergoing massive
change. One or more Bell operating companies appear on the
verge of getting approval to offer in-region long-distance
service, a market they were barred from in 1984 because of
their local bottlenecks. Simultaneously, AT&T, the former
parent of the Bell companies, is getting back into the local
service business through its acquisitions of TCI and MediaOne.
At the same time, policymakers have made two critical
decisions that will further strengthen the local monopolies.
The first was to allow cable companies to close off access to
their broadband systems, thus depriving competitors of access
to the cable line to the house for services such as high-speed
Internet. The second was to permit the first of two mega-BOC
mergers that creates a single telephone company that controls a
third of the Nation's telephone lines.
As these policy choices were made, it became clear to us at
Sprint that our future should no longer hinge on a plan that
depended upon cable companies or Bell companies to reach our
customers. We looked at alternative strategies as a stand-alone
company. We also explored alternatives to associate our human
resources and the state-of-the-art assets with other resources
and assets in ways that would complement our own and fill in
our own missing pieces. WorldCom offered us the best
opportunity to meet both shareholder and customer needs.
Together, we will marshall the necessary talents and
capabilities to meet the new, larger-scale challenges and new,
larger competitors.
And let me be specific. While Sprint's local telephone
companies serve principally residential users in rural and
suburban communities throughout 18 States, we need access to
local customers throughout the remainder of the country. Our
breakthrough initiative announced last year, Sprint ION, can
offer customers exciting and innovative means of communicating,
but only if we can reach those customers in their homes and
offices nationwide. WorldCom's local facilities covering more
than 100 urban centers go a long way toward addressing this
problem.
To deliver Sprint ION, we also need bandwidth to the home.
At Sprint, we believe that bandwidth is the next great leap in
telecommunications services for both businesses and residential
users. Sprint's broadband wireless assets, MMDS, which is
multichannel, multipoint distribution services, when combined
with WorldCom's, create a true local broadband alternative to
the RBOC's and to AT&T.
Moreover, there is a substantial and an increasing demand
by consumers for a full range of services from their
traditional providers. Many of the telecommunications mergers
announced recently echo this view, including those which have
been the subject of hearings before this very committee.
The new WorldCom will be able to provide the full range of
products that consumers demand, including local, long-distance,
international, Internet access, and mobile services. By
supplying the missing pieces in each other's portfolios, the
merger better positions our companies to compete in the bundled
services marketplace.
Sprint and MCI WorldCom have each grown and achieved
success by innovating and offering choices, as compared to the
traditional, established companies. In so doing, each company
has individually acquired distinctive capabilities and assets.
By combining these unique capabilities in local access and in
ION and wireless and MMDS and international infrastructure, the
new WorldCom can be a distinctive telecommunications company
that has the potential to, one, achieve the objective of the
1996 Telecommunications Act by breaking open the local
monopolies, and, two, by bringing a distinctive competitor to
the worldwide communications marketplace.
Thank you.
The Chairman. Thank you.
Now, we will go to you, Mr. Rill.
STATEMENT OF JAMES F. RILL
Mr. Rill. Thank you, Mr. Chairman, members of the
committee. I think as the competition review of this
transaction unfolds, it will become apparent that it can only
be perceived as a broader-scale, aggrandized version of the
WorldCom/MCI merger which was challenged last year in some
respects by enforcement agencies here and elsewhere in the
world.
I have a prepared statement which I would like to
summarize, Mr. Chairman.
The Chairman. We will put all prepared statements in the
record as though fully delivered.
Mr. Rill. I would like to focus on three main points.
First, in the Internet backbone market this merger will create
substantial harm to competition which is not curable by the
sort of partial divestiture that was effected last year, in
1998, in the case of the WorldCom/MCI merger.
Second, in the long-distance market this merger creates and
entrenches a very, very substantial duopoly. Third, the
dynamics of this merger underscores a necessary but not
sufficient step, the need for lifting of the Telecom Act 271
restrictions on long-distance entry by the RBOC's so as to
further stimulate competition as envisioned under the 1996
Telecom Act in the long-distance market, as well as other
markets.
I would like to cover each of these points. First, with
respect to the Internet backbone market, we have essentially
the same issues as last year. This fact has been acknowledged
by Sprint, although not in its prepared testimony. Here we have
the number one and two firms in the Internet backbone market
merging, and as a result the bargaining power with competitors
who are also customers will be irrevocably skewed in the
direction of the merging parties and give them the opportunity
to degrade the Internet connection of rivals, which will cause
their customers in turn to abandon them and entrench the
Internet backbone monopoly of these parties.
The remedy that was imposed in 1998, I respectfully submit,
by the European Commission, and accepted by the U.S. Department
of Justice, was not fully adequate. It left critical
facilities, especially the Internet backbone pipeline, in the
hands of the merging parties, thus creating the capacity for
anticompetitive strategies, such as the degradation of
connection, with the competitors who are also customers.
Certain problems arose. There was no consent decree that
was entered by the Department of Justice, therefore no
mechanism of review, no opportunity for the purchaser Cable and
Wireless to negotiate modifications of the transaction that
would have made it a more effective competitor. And as I
understand it, there is a Cable and Wireless lawsuit pending
now challenging whether or not WorldCom MCI has adequately even
lived up to the bargain that was presented to Cable and
Wireless at the time of that partial divestiture. The point is,
Mr. Chairman, it was not the divestiture of a going business;
it was the divestiture of some partial, inadequate assets.
In the long-distance market, market shares created by this
merger blast through the 1992 DOJ-FTC merger guideline levels
at which anticompetitive results are presumed. As indicated by
subcommittee chairman Senator DeWine, we have a situation here
where the combined share is approximately 80 percent of the
relevant long-distance market, with the next competing firm
having approximately 2 percent of the market.
The Herfindahl Index, the DOJ-FTC index which gauges
concentration levels and attempts to use concentration as an
initial litmus for antitrust review, presumes competitive harm
when the threshold of 1,800 and an upward change of 100 are
surpassed. In this transaction, just for example, in the
consumer retail market, the post-merger Herfindahl Index would
be 4164, with a change of concentration more than twice the
100-level of a change that the Department and the FTC view as
likely to create anticompetitive concerns, and other markets
are similarly affected.
No wonder Chairman Kennard has observed, ``Competition has
produced a price war in the long-distance market. This
merger,'' referring to the one in front of us now, ``appears to
be a surrender. How good can this be for consumers?''
There are other factors in merger review than
concentration. Entry is the most important, but under the
merger guidelines entry must be timely, likely, and sufficient
to deter the anticompetitive effect of a merger transaction.
Mr. Chairman, ``edging closer'' is not an antitrust standard
under the 1992 merger guidelines.
Section 271 has greatly impeded RBOC entry. It has taken 2
years to obtain PSC review in New York, and that is only one
State. Under 271, state-by-state approval is necessary, and it
is highly improbable that approval be forthcoming in other
States within the time frames set by the parties for the
conclusion of this merger. Finally, approval in one State--that
is, New York--should it be forthcoming under the ``edging
closer'' standard, is not going to do anything for consumers in
Utah or Vermont or Ohio or Wisconsin or Missouri.
In fact, the likelihood is, with the entrenched monopoly in
those States, profits in those States will be used to subsidize
what competition arises in the one State where 271 relief has
been granted. Nevertheless, 271 relief is necessary as a first
step toward ensuring the reinvigoration of competition in the
long-distance market.
There have been several interpretations of 271 by the FCC,
and applications and advice by the Department of Justice that
we submit have not fully realized for Congress the goals of the
1996 Telecom Act. And those restrictions and those
interpretations should be removed to facilitate competition.
Mr. Chairman, section 251 of the 1996 Act is working. There has
been realistic entry into the market. The availability of entry
is there. 271, if it had a purpose, has been served and needs
to be relieved as a first step.
One word, if I may, about the MMDS argument--really, two
words. It is not clear that this is driving the merger or that
the merger is necessary to achieve the scale of MMDS. And even
if it is so, it doesn't seem right under antitrust standards to
justify anticompetitive results now in two important markets
for the hope of facilitating greater entry into another market
which is not yet fully established. It is not true under the
case law, it is not true as a matter of good public policy.
I have run over time. Thank you very much for your
patience, Mr. Chairman.
The Chairman. Thank you, Mr. Rill.
[The prepared statement of Mr. Rill follows:]
Prepared Statement of James F. Rill
I appreciate the opportunity to offer my views on the merger under
scrutiny by this Committee today, and I thank Chairman Hatch, Senator
Leahy and the other members of the Committee for inviting me to appear.
The proposed merger of MCI WorldCom and Sprint is an aggravated
version of last year's merger of MCI and WorldCom. The merger of MCI
and WorldCom presented serious antitrust issues in two product markets:
It would have resulted in undue concentration in the Internet backbone
market, and antitrust authorities therefore required MCI to divest its
Internet backbone operations. And it barely survived competitive review
in the long-sea --distance market, where it reduced the number of
significant players from four to three. Apparently hoping that the
antitrust authorities are asleep at the switch, MCI WorldCorn now seeks
to consummate a merger that would again result in undue concentration
in the Internet backbone market and that would create a duopoly in the
long-distance market.
My testimony will address four basic points:
1. The proposed merger of MCI WorldCom and Sprint would
significantly harm competition in the Internet backbone market, for the
very same reasons antitrust enforcers required MCI last year to sell
off its Internet backbone operations before merging with WorldCom.
2. The merger would create a damaging duopoly in the long-distance
market, with AT&T and the new MCI WorldCom-Sprint controlling more than
80 percent of the market. Indeed, even the agreement to merge is almost
certain to suppress--in the immediate future, even before closing--any
further price competition of the sort that MCI WorldCom and Sprint have
been engaged in.
3. In the event that MCI WorldCom and Sprint were required to
divest either of their pre-existing Internet backbone operations, their
consolidation of their long-distance facilities would mean that any
acquirer of the Internet backbone operations would fail to obtain the
supporting facilities infrastructure needed to remain viable. Just as
with Cable & Wireless's acquisition last year of MCI's Internet
operations, MCI WorldCom's real game appears to be to consolidate its
and Sprint's long-distance operations in order to entrench its
dominance in the Internet backbone market.
4. An essential step toward promoting competition in all markets--
local, long-distance, and Internet backbone--is to abolish the section
271 restrictions on Regional Bell Operating Company (``RBOC'')
provision of long-distance services.
1. THE INTERNET BACKBONE MARKET
The effects of an MCI WorldCom-Sprint merger on the Internet
backbone market would be profoundly negative. Indeed, this merger is
nothing more than a replay of last year's merger between MCI and
WorldCom, which would have combined the largest Internet backbone with
one of its few competitors. Fortunately, antitrust enforcers recognized
that competitive parity among backbone providers is essential to the
continued success of the Internet, and they therefore required that MCI
divest its Internet backbone operations before merging with WorldCom.
It is worth noting that Sprint was among the most vocal opponents
of MCI's and WorldCom's attempt to consolidate their Internet backbone
operations. Sprint pointed out that if WorldCom were able to add MCI's
Internet backbone to the backbone networks that WorldCom had already
amassed through its acquisitions of UUNet, ANS, and Compuserve,
WorldCom would become ``the overwhelmingly dominant provider of core
Internet backbone services.'' \1\ Espousing the very points embraced by
the antitrust agencies, Sprint explained that the disparity in size
between the combined MCI WorldCom and the few other Internet backbone
providers would ``lead[] to asymmetries in the bargaining power of the
merged WorldCom/MCI vis-a-vis its core backbone rivals.'' \2\ MCI
WorldCom would then have the incentive and ability to degrade
interconnection with these backbone rivals, which would in turn induce
customers of those rivals to switch and become customers of MCI
WorldCom, which would further entrench MCI WorldCom's dominance, which
would then enable MCI WorldCom to extract monopoly prices for Internet
interconnection from Internet service providers.\3\ Once MCI WorldCom
established such dominance in the Internet backbone market, it would
then be able to leverage that dominance throughout adjacent Internet
service markets.
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\1\ Comments of Sprint Corporation, In the Matter of Applications
of WorldCom, Inc. and MCI Communications Corporation for Transfer of
Control of MCI Communications to WorldCom, Inc., CC Docket No. 97-211,
at iii (FCC filed March 13, 1998).
\2\ Id. at 14-15.
\3\ Id. at 15-16.
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Having been thwarted last year in its attempt to establish
dominance in the Internet backbone market, MCI WorldCom now seeks to
achieve the same goal by acquiring Sprint's Internet backbone. For the
reasons so well articulated by Sprint last year, such a combination
would be profoundly anticompetitive and should not be permitted.
2. THE LONG-DISTANCE MARKET
By any measure--including the joint Department of Justice-FTC
horizontal merger guidelines--the long-distance market is already
highly concentrated. The Big Three--AT&T, MCI WorldCom, and Sprint--
have the only significant brand names and control more than 80 percent
of the market, widle none of the remaining small players accounts for
more than 2 percent or so. As FCC Chairman William Kennard warned last
year in discussing the merger of then-Number 2 player MCI with then-
Number 4 player WorldCom:
Once this merger is consummated, the industry will again be
poised just a merger away from undue concentration. I daresay
that any subsequent merger--of this or similar magnitude--
between long distance firms in the near future should be judged
quite differently than the merger before us today.\4\
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\4\ Press Statement of FCC Chairman William E. Kennard On Merger Of
WorldCom And MCI, Sept. 14, 1998.
Of course, the proposed merger of MCI WorldCom and Sprint is not
merely of ``similar magnitude'' to last year's merger of MCI and
WorldCom. It is far larger. Sprint has a much greater presence in long
distance--especially in the retail market segments--than did WorldCom
before last year's merger. And the combined MCI-WorldCom is, of course,
larger than MCI was. It is no wonder, then, that Chairman Kennard
---------------------------------------------------------------------------
reacted as he did to this merger proposal:
Competition has produced a price war in the long distance
market. This merger appears to be a surrender. How can this be
good for consumers? \5\
---------------------------------------------------------------------------
\5\ Statement of FCC Chairman William E. Kennard On Proposed Merger
of MCI WorldCom, Inc. And Sprint Corp., Oct. 5, 1999.
The clear answer to Chairman Kennard's question--how can this merger be
good for consumers?--is that it certainly would not be. On the
contrary, the merger would result in a duopoly in the already highly
concentrated long-distance market. Such concentration levels create a
presumption that anticompetitive effects would result from the merger.
Prices would rise. The quality of customer service would fall. And AT&T
and WorldCom would extract monopoly rents from American consumers. As
the lessons of a century of antitrust economics teach us, this
duopolistic market structure would invite tacit, and difficult-to-
---------------------------------------------------------------------------
detect, collusion rather than vibrant competition.
Not surprisingly, by any accepted measure of industry
concentration, this merger would be profoundly anticompetitive. For
example, the standard measure of market concentration is the
Herfindahl-Hirshman Index, or HHI, which is calculated by summing the
squares of the individual market shares of all the participants. Under
the joint Department of Justice and FTC horizontal merger guidelines,
markets with HHI's above 1800 are regarded as highly concentrated, and
a merger that produces an increase in the HHI of more than 100 points
is presumed to enhance market power.
This merger would produce HHI numbers that are off the chart. To
begin with, the pre-merger HHI for the consumer long-distance market
(see Exhibit 1, attached) is 3945--which reflects an extraordinarily
high level of concentration. Worse, the merger would push the HHI some
219 points higher--again, an increase well above the level that
presents a threat to competition.
The effect on each of the other long-distance market segments (see
Exhibits 2-6, attached)--including the business long-distance market
and the wholesale long-distance market--is similarly problematic. In
each of these other segments, the merger would take a market that is
already well above the 1800 HHI threshold and push the HHI higher by
some 400 to 1000 points.
Moreover, anticompetitive effects from the MCI WorldCom/Sprint
merger are likely to be experienced almost immediately, even before the
merger is projected to close. MCI WorldCom and Sprint have led the
recent price declines in the long-distance market. But now that they
have agreed to merge, they no longer have the incentive to continue to
translate a portion of their ongoing cost reductions into price cuts.
In other words, long-distance prices would continue to fall but for the
agreement to merge. This makes it all the more important that antitrust
authorities sound the death knell of this deal sooner rather than
later.
I understand that MCI WorldCom and Sprint may claim that the
potential entry of the RBOCs into the long-distance market is somehow
sufficient to dispel any concerns over the long-distance duopoly that
would result from their merger. I fully agree that actual and pervasive
entry into the long-distance market by the RBOCs would be the single
most important factor in ensuring the long-term competitiveness of the
long-distance industry. But the suggestion that entry would be
sufficiently widespread, likely and imminent to counteract the
manifestly anticompetitive effects of this merger cannot survive the
slightest scrutiny.
In the first place, nearly four years after the enactment into law
of section 271, all of the RBOCs remain barred by section 271 of the
Communications Act from providing general long-distance services in any
of their in-region States. This bar will continue indefinitely in each
State until FCC approval of a section 271 application is obtained for
that State. As of now, the FCC has not approved a single section 271
application. The only section 271 application currently pending before
the FCC is Bell Atlantic's application for New York, where a
cumbersome, exhaustive process involving more than 400 different
performance measures took well over two years to run through the New
York commission. And while industry observers expect Bell Atlantic's
New York application to be granted by the end of this year, it is worth
noting that MCI WorldCom and Sprint have obstructed and delayed
approval, and both have filed oppositions to Bell Atlantic's 271
application.
Second, it is farfetched to believe that section 271 approvals will
have been obtained for many, much less most or all, States by the time
MCI WorldCom and Sprint intend to close their merger. Indeed, apart
from Bell Atlantic, it is highly doubtful that any RBOC will have made
marked progress towards obtaining widespread section 271 approvals by
the end of 2000. For a large number of States, 271 approval could
easily be 3 to 5 years into the future--perhaps even more.
Third, even when section 271 approval has been obtained for a
particular State, such approval will not significantly alter the
competitive landscape in the national long-distance market. For
starters, such approval, of course, does nothing for those States where
section 271 approval has not been obtained. The citizens of Utah or
Vermont, for example, would not receive any protection from the AT&T-
WorldCom duopoly by virtue of Bell Atlantic 271 approval in New York.
Indeed, it is far more likely that AT&T and WorldCom would further
exploit their duopoly in Utah in order to subsidize their competition
against Bell Atlantic in New York. Moreover, even as to the State for
which section 271 approval has been obtained, the RBOC will remain
handicapped in certain long-distance market segments. For example, even
once Bell Atlantic obtains section 271 approval for New York, Bell
Atlantic will be at a competitive disadvantage in the large business
market because it will still have to develop the more complicated
systems that large business customers require and because (until such
time as it has obtained section 271 approvals for its other in-region
States) it will be unable to offer a full package of services to a New
York-based business that has branch offices in, say, Boston or
Washington, D.C, or Philadelphia.
In sum, there is no reason to believe that RBOC entry into the
long-distance market would be so timely, likely and sufficient as to
discipline the duopolistic conduct of AT&T and the combined MCI
WorldCom-Sprint in the foreseeable future. For this reason, unless and
until some other solution permits massive, widespread, and immediate
entry by the RBOCs into the long-distance market, MCI WorldCom and
Sprint should not be permitted to consummate their merger.
3. REMEDIAL PROBLEMS
Short of blocking MCI WorldCom from acquiring Sprint's long-
distance operations, it is not clear that there is any divestiture
remedy that would adequately address the problems that the merger would
create in the long-distance market.
Because Sprint's Internet backbone business shares network
facilities with its long-distance business, divestiture is also a
highly dubious remedy for the undue Internet backbone concentration
that the merger would create. In particular, the experience of the MCI-
WorldComn merger counsels caution in accepting divestiture of Sprint's
Internet backbone business, severed from many of the underlying
facilities, as a workable remedy for this problem. In order to close
its merger with WorldCom, MCI last year sold its Internet business to
Cable & Wireless. Antitrust authorities permitted this supposed remedy
notwithstanding warnings from Sprint and others that Cable & Wireless
was not acquiring the facilities infrastructure that it needed in order
to maintain itself as a viable competitor but would instead be
critically dependent on MCI WorldCom, which would then have the
incentive and ability to exploit Cable & Wireless's vulnerability. And,
indeed, these warnings appear to have been prophetic. According to
market analysts, Cable and Wireless's market share has fallen
precipitously into the mid-single digits. In addition, Cable & Wireless
has sued MCI WorldCom for noncompliance with the terms of the
divestiture agreement.
In this regard, MCI WorldCom's and Sprint's proposed consolidation
of their long-distance facilities--which in turn are integrated with
their current Internet backbone operations--should be regarded not only
as leading to a duopoly in the long-distance market but also as a ploy
to entrench their dominance in the Internet backbone market. For if
this consolidation were to proceed, any company to whom Sprint divested
its Internet backbone operations would, like Cable & Wireless, soon
discover that it lacked the facilities infrastructure that it needed to
maintain its status as a major Internet backbone provider.
4. ABOLITION OF SECTION 271 RESTRICTIONS
A necessary step toward ensuring vigorous competition in the local,
long-distance, and Internet backbone markets lies squarely within
Congress's power: abolish the section 271 restrictions on the RBOCs'
provision of long-distance services.
Such abolition is manifestly in the public interest. It would
stimulate a competitive free-for-all in both long-distance and local
markets that would lead to lower prices and higher-quality services for
all Americans, and it would ensure competitive parity in the critical
Internet backbone market. It would especially benefit those Americans--
in more rural areas, for example--who have so far not directly
benefitted from the competition directed at business and high-value
customers, since their local providers would immediately be able to
provide them an attractive and competitive alternative for long-
distance and Internet services.
It is time for Congress to recognize that the section 271 process
has gotten badly off track in at least three respects. First, the
section 271 restrictions have been deemed to apply to Internet (and
other packet-switched) traffic, even though the LATA architecture
underlying section 271 has no sensible application to the Internet.
Because of their existing customer base and brand name, the RBOCs are
the only companies well-positioned to restore vibrant competition to
the Internet backbone market. The lamentable, but predictable, effect
of locking out the RBOCs from the Internet backbone market has been to
lock up the market for the Big Three long-distance companies.
Second, the section 271 process has focused too narrowly on
competitors using an RBOC's own network elements to compete against it,
and has given virtually no attention to the actual development of true
facilities-based alternatives to the RBOC's network. This misfocus has
required the incredibly costly and time-consuming development and
implementation of extremely complicated laboratory tests measuring an
RBOC's performance in providing network elements.
Third, as a result of the FCC's approach to the section 271
approval process, which affords undue weight to entry by the Big Three
long-distance carriers (rather than carriers generally) into the local
markets, AT&T, MCI and Sprint have been able to game the system. In
order to protect their long-distance market shares for as long as
possible, AT&T, MCI, and Sprint have made the tactical decision to
delay entering local markets, all the while diverting attention by
complaining that their entry is being impeded.
Bell Atlantic's recent experience with MCI WorldCom in New York is
instructive. Even though smaller players with fewer resources had
already entered the residential local market, MCI WorldCom did not
seriously undertake to compete for residential local customers until
after it had become clear that Bell Atlantic was well on the path to
section 271 approval. Specifically, in the months immediately preceding
Bell Atlantic's filing of its 271 application, MCI WorldCom began
serving 160,000 local lines, the vast majority of which are to
residential customers. See also P. Elstrom, AT&T's Wireless Path to
Local Service, Bus. Week, Dec. 28, 1998, at 53 (``AT&T executives are
seriously considering launching the commercial trial (of AT&T's fixed
wireless approach, Project Angel) in New York. * * * The reason is
strategic: Bell Atlantic is likely to get approval in 1999 to provide
long distance service to New York residents.'').
Moreover, section 271 no longer serves any useful purpose. Genuine
facilities-based competition is occurring, and, in any event, the
market-opening requirements imposed on all incumbent local exchange
carriers under section 251 fully ensure that the RBOCs would not be
able to leverage any local market power into the long-distance market.
The lesson is clear: Abolish section 271 and competition will
flourish in the local, long-distance, and Internet backbone markets.
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The Chairman. We will turn to you, Mr. Kimmelman.
STATEMENT OF GENE KIMMELMAN
Mr. Kimmelman. Thank you, Mr. Chairman. On behalf of
Consumers Union, publisher of Consumer Reports, we appreciate
the opportunity to testify, and I personally appreciate the
opportunity to come back to my alma mater.
Let me start off by saying I totally agree with Mr. Rill's
antitrust analysis related to this merger regarding Internet
backbone and the long-distance market. There are enormous
concerns for consumers in this transaction. I would like to
focus on one piece of that because while everyone is totally
correct in applauding the decline in long-distance pricing that
we have experienced over the past 20 years, there is a hidden
side to this that is often not visible to the public and to
policymakers. I daresay most of the people in this room have
not reflected on this because it doesn't reflect their usage.
They are not the typical consumer long-distance user.
Five cents a minute, seven cents a minute, sounds great.
When you look at the plans, there is often more to it than
that--$1.95, $5.00 minimum, $5.95. Sprint and MCI have that. It
is not just Sprint and MCI; it is AT&T. We have gone back to
look at what the typical consumer uses in long-distance to
figure out what is really happening in this market.
Five cents a minute, seven cents a minute, often translates
into as much as effectively 20 to 35 cents a minute when you
add in all of these fees. The FCC's own data show that people
who make less than 30 minutes of interstate long-distance calls
a month are today paying three times as much as they did 2
years ago.
Going to higher levels of usage, half of the country is
paying about $2 billion a year more than at the time you passed
the Telecommunications Act, effectively for the same long-
distance usage. And as far as we can tell, you need to go up to
70, 80-percent level before you start to see full break-even or
coming out ahead. A nickel, seven cents is good for some
people, but there are a lot of people who are not getting the
benefits of long-distance competition today. And for those
people, going from three carriers to two as the dominant
players is a significant concern that needs to be addressed.
However, having said that, I want to agree with quite a bit
of what Mr. Ebbers and Mr. Esrey have said. They have outlined
in great detail the problem they face. We have too much
concentration of ownership in the local telephone companies,
with expanding local telephone monopolies. We have allowed what
looks like the first cross-sector entry, AT&T into cable, to
expand into broader cable horizontal concentration, dominating
that wire. And they face an enormous problem. It is
understandable. The question is whether this transaction solves
the problem or adds to it.
I am fearful we are at a point where merger mania has just
gone too far for consumers, not just this transaction, but the
ones that preceded it. And what you heard this morning, stated
quite eloquently, boils down to this. This committee has done
more to oversee these transactions than any other, and I
commend you, Mr. Chairman, and Senator DeWine and Senator Kohl,
for sitting through hours of hearings on this.
First, we had Bell Atlantic and NYNEX saying it is not a
problem to join together; we were not potential competitors; we
really weren't going to compete against each other. Then you
have, after SBC buys Pacific Telesis, a purchase of Ameritech,
and it is ``don't look at our concentration, look at the fact
that we want to go into local phone service elsewhere.'' Then
AT&T: don't look at our concentration in cable, look at the
fact that we want to go and provide local telephone service and
broadband somewhere else.
And now we have today's proposal. It is more of the same.
Effectively, this boils down to concentration today. You
justify today's merger by yesterday's merger, which sets the
stage for tomorrow's merger--concentration, more concentration,
higher prices for cable, higher prices for some in the long-
distance area, and promises of benefits, just promises. Mr.
Chairman, I don't think that is fair for consumers. I don't
think that is enough.
We want to put an end to this merger mania. We urge you to
go back and review the Telecom Act. From Consumers Union's
perspective, we think the administration has done an abysmal
job of implementing this, both on the antitrust and the
regulatory front, and we have a mess. I think it is time to
review the law to ensure that with these consolidations, we do
not end up in a world where prices keep going up, the choice
that was promised doesn't appear, and we end up with either a
digital divide, with the majority of consumers not benefiting,
or the need to come in and regulate once again because
competition just did not thrive.
Thank you.
The Chairman. Thank you, Mr. Kimmelman.
[The prepared statement of Mr. Kimmelman follows:]
PREPARED STATEMENT OF GENE KIMMELMAN
Consumers Union \1\ is concerned that an avalanche of mergers in
the telecommunications and cable industries is threatening to undermine
the development of broad-based competition for local telephone, long
distance, television and high-speed broadband Internet services. The
Clinton Administration--including its antitrust and regulatory
enforcers--and the Congress appear frozen in place as today's mergers
are justified on the basis of yesterday's mergers, and then used to
justify even further consolidation in the future. This merger-mania is
already so out of hand that the most popular services most consumers
want and need may be available from only one or two players in the
market.
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\1\ Consumers Union is a nonprofit membership organization
chartered in 1936 under the laws of the State of New York to provide
consumers with information, education and counsel about good, services,
health, and personal finance; and to initiate and cooperate with
individual and group efforts to maintain and enhance the quality of
life for consumers. Consumers Union's income is solely derived from the
sale of Consumer Reports, its other publications and from noncommercial
contributions, grants and fees. In addition to reports on Consumers
Union's own product testing, Consumer Reports with approximately 4.5
million paid circulation, regularly, carries articles on health,
product safety, marketplace economics and legislative, judicial and
regulatory actions which affect consumer welfare. Consumers Union's
publications carry no advertising and receive no commercial support.
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The proposed merger between the second and third largest long
distance companies, MCI WorldCom and Sprint, illustrate this pattern.
In defending its proposed merger MCI WorldCom-Sprint argue that:
* * * the Bell operating companies have consolidated their
local operations through a series of mergers and are moving
toward becoming full-service providers of voice, wireless and
data services. AT&T, meanwhile, will dominate the provision of
broadband services over cable while operating its own
nationwide wireless network. MCI WorldCom's merger with Sprint
would offer consumers a strong and effective alternative-
especially in local markets, where neither company can compete
as effectively alone against entrenched monopolies.\2\
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\2\ John Sidgmore, ``More Choices for Telecom Consumers,'' letter
to editor, Washington Post, October 20, 1999.
In other words, MCI WorldCom-Sprint claim that consumers have
nothing to fear from a merger that dramatically concentrates control of
the residential long distance market (in apparent violation of the
Justice Department's merger guidelines) between AT&T (58 percent market
share) and MCI-Sprint (24 percent combined market share \3\), and
consolidates substantial Internet backbone capacity, because the merger
will improve chances for these combined companies to compete in the
local telephone and broadband Internet markets. Will this competition
materialize? Here is an example of what the merging companies said
about the likelihood of anyone being able to compete against the
consolidated Bell companies:
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\3\ Trends in Telephone Service, Federal Communications Commission,
September 1999, p. 11-11.
The pending mergers of Bell Atlantic and GTE, and SBC and
Ameritech, are over the line and must be blocked. The mergers
would create two mega Bells owning and controlling two-thirds
of the local telephone access lines in this country. The
situation is now critical and Federal policymakers must stop
the local telephone industry from transforming itself into
basically a Bell West and a Bell East monopoly.
* * * * *
The conduct of these companies in the two-and-a-half years
since the Telecom Act became law has been to fight competition
in both local central office and the courts, which causes us to
believe that the purpose of these mergers is to fortify against
competition and not to embrace it. The result is that local
telephone consumers on an even wider scale will continue to be
denied the benefits of choice, price, products, quality and
service.\4\
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\4\ Statement of William T. Esrey, CEO Sprint before the Antitrust,
Business Rights, and Competition Subcommittee of the U.S. Senate
Committee on the Judiciary, September 15, 1998.
While we agree with Mr. Esrey's assessment of these Bell
mergers,\5\ and have raised similar concerns about AT&T's even more
enormous consolidation of cable companies serving almost 60 percent of
cable consumers,\6\ it is hard to understand how a merger of MCI
WorldCom with Sprint will undo the harm caused by the mergers that have
preceded it. The logic appears to be two wrongs--Bell mergers and AT&T/
cable mergers--justify a third wrong!
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\5\ Testimony of Gene Kimmelman on behalf of Consumers Union,
before the Antitrust, Business Rights, and Competition Subcommittee of
the U.S. Senate Committee on the Judiciary, September 15, 1998.
\6\ Comments of Consumers Union, Consumer Federation of America,
and Media Access Project Before the Federal Communications Commission
In the Matter of Implementation of Section 11(c) of the Cable
Television Consumer Protection and Competition Act of 1992, Horizontal
Ownership Limits, MM Docket No. 92-264 and in the Matter of
Implementation of the Cable Television Consumer Protection and
Competition Act of 1992, Review of the Commission's Cable Attribution
Rules, CS Docket No. 98-82, August 17, 1999.
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Just consider where this wave of consolidation leaves American
consumers. At the time Congress passed the 1996 Telecommunications
Act,\7\ there were eight large local telephone monopolies (seven Bell
companies and GTE); three large long distance companies and a handful
of small-but-growing competitors; a comparable number of large cable
monopolies; four satellite ventures, and electric companies and
independent wireless firms were beginning to show interest in expanding
more broadly into telecommunications. With markets and technology
converging, the Telecommunications Act's goal of promoting broad-based
competition could have yielded industry combinations (e.g., local
phone/long distance/satellite, cable/long distance) that would have
offered consumers a dozen national firms, with as many as half of them
attempting to offer a full package of telecom and television services
in each local market.
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\7\ Public Law 104-104.
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Instead, merger-mania is shrinking the competitive field: SBC and
Bell Atlantic have each gobbled up two other regional companies to
control about two-thirds of local phone lines, and are partnering with
mid-size long distance companies and one of the two remaining satellite
firms.\8\ AT&T purchased TCI and is in the process of merging with
MediaOne (which has a substantial stake in Time Warner's cable
systems,) giving AT&T an ownership stake in cable wires reaching about
60 percent of consumers, plus arrangements to provide local telephone
services through other cable companies.\9\ Once this degree of
horizontal power is established in these entrenched monopoly markets,
it becomes more difficult for the few remaining players to challenge
the dominant local phone and cable players, increasing incentives for
further consolidation and partnership.
---------------------------------------------------------------------------
\8\ Testimony of Gene Kimmelman op. cit.
\9\ Comments of Consumers Union, op. cit.
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And even these two giant consolidated groups are not well
positioned to take each other on in most local markets with a full
package of services. For example, AT&T's cable empire has not wired
businesses, but can offer consumers a high-speed TV-quality Internet
service that local phone companies cannot technically compete
against.\10\ Unless the price of satellite TV hookups and equipment
keep falling and local broadcast channels become readily available from
satellite TV providers, the Bell companies will not be able to compete
against AT&T and other cable companies. As a result, two giants may not
be enough to ensure consumer choice for local phone, cable or TV-
quality high-speed Internet services. And the ``silent majority'' of
consumers who are modest users of these services are likely to find
themselves on the wrong side of a ``digital divide'' with rising
monthly bills.\11\
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\10\ David Lieberman, ``On the Wrong Side of The Wires,'' USA
Today, October 11, 1999.
\11\ Cooper, Mark and Gene Kimmelman, The Digital Divide Confronts
the Telecommunications Act of 1996: Economic Reality vs. Public Policy,
Consumer Federation of America and Consumers Union, February 1999.
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Of course the consolidating companies have proposed a host of
promises designed to alleviate antitrust and competitive concerns about
their mergers. SBC and Bell Atlantic promise to invade other
territories, AT&T promises to make its cable systems into local
telephone competitors, and now MCI WorldCom-Sprint promises to take a
hodge-podge of wireless licenses (MMDS which has significant capacity
and line-of-sight limitations) \12\ added to limited local wireline
infrastructure and become ``a third'' full service provider into the
home. Will these promises be kept? Unfortunately, there is no way of
knowing, and probably no way of mandating competitive behaviors that
would be sustainable in unknown, future market conditions. So the
tradeoff is simple: allow enormous within-sector consolidation of local
telephone companies, then cable companies, and then long distance
companies, in the hope that they will-then cross sectors and challenge
each other for a full package of telecom, Internet and television
services.
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\12\ Lieberman, op. cit.
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The dangers of allowing entrenched monopolies (local phone and
cable) to expand their core markets, or actual competitors (MCI
WorldCom and Sprint) to merge are obvious. With cable rates continuing
to rise about three-times faster than inflation (23 percent rate
increases since passage of the Telecom Act) \13\ and local phone rates
restrained only by regulation, the fact that little competition is
emerging casts significant doubt about recent consolidation in these
markets. And long distance competition is not nearly as robust as
advertisements for new calling plans would lead you to believe.
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\13\ Bureau of Labor Statistic cable and ``all items'' consumer
price indexes.
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A careful analysis of consumers' long distance bills reveals that
since passage of the Act, the majority of consumers are paying a net
increase of about $2 billion a year on their long distance bills. This
results from new monthly fees and line-item charges (e.g., federal
access, universal service, monthly minimum charges, monthly service
charge) added to the lower per-minute rates.\14\ These net price hikes
are most alarming because they come during a period when the Federal
Communications Commission (FCC) reduced the cost of connecting long
distance calls by more than $4 billion a year. Apparently, even as
costs decline and usage increases, the long distance companies do not
feel competitive pressure to pass along savings to a large segment of
the consumer market:
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\14\ Comments of Consumer Federation of America, Consumers Union,
and The Texas Office of Public Utility Counsel, Before the Federal
Communications Commission, in the Matter of Low-Volume Long-Distance
Users, CC Docket No. 99-249, September 22, 1999.
How did the telecom companies maintain their profit margins?
The secret is that many consumers are paying monthly fees of
about $4.95 in return for the lowest rates. AT&T officials on
Monday said revenue per minute has actually increased in part
because of these monthly fees. Also, people are talking more
because they think their long-distance costs are lower.
One other significant but little noticed factor is that the
long-distance companies are now paying less to the regional
Bell operating companies to originate and terminate calls.\15\
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\15\ Rebecca Blumenstein, ``MCI's Revenue, Operating Profit
Surges,'' Wall Street Journal, October 29, 1999.
With inadequate competitive pressure in today's market to hold down
long distance prices for the majority of consumers who are modest users
of long distance services, it is difficult to understand how a merger
of the number two and number three companies will benefit consumers.
Speculation that some day, the few remaining Bell companies will open
their local networks to competition, in compliance with the 1996 Act,
and offer long distance service nationwide, is not enough to justify
reduced competition for today's long distance consumers.
CONCLUSION
It is time for policymakers to put an end to the telecommunications
and cable consolidation that is threatening the growth of broad-based
competition. We offer excerpts from a recent ``Essay'' by William
Safire as a wake-up call to reverse course on telecommunications
policy:
Why are we going from four giants in telecommunications down
to two? Because, the voice with the corporate-government smile
tells us, that will help competition. Now each giant will be
able to hedge its bets in cable, phone line and wireless, not
knowing which form will win out. The merger-manic mantra: In
conglomeration there is strength.
That's what they said a long generation ago when business
empire-builders boosted their egos by boosting their stock to
buy the earnings of unrelated companies. A good manager could
manage anything, they said, achieving vast economies of scale.
As stockholders discovered to their loss, that turned out to be
baloney.
Ah, but now, say the biggest-is-best philosophers, we're
merging within the field we know best. And if we don't combine
quickly, the Europeans and Asians will, stealing world business
domination from us. The urgency of ``globalization,'' say
today's merger-maniacs, destroys all notions of diverse
competition, and only the huge, heavily capitalized
multinational can survive.
* * * * *
Here are two startling, counterintuitive thoughts: The fewer
companies there are to compete, the less competition there is. And as
competition shrinks, prices go up and service declines for the
consumer. (Say these reactionary words at the annual World Economic
Forum in Davos, and listen to the global wheeler-dealers guffaw.)
Who is supposed to protect business and the consumer from the power
of trusts? Republican Teddy Roosevelt believed it to be the Federal
Government, but the antitrust division of Janet Reno's Justice
Department is so transfixed by its cases against Microsoft and overseas
vitamin companies that it has little time to enforce antitrust law in
dozens of other combinations that restrain free trade.
Our other great protector of the public interest in diverse sources
is supposed to be the F.C.C. When MCI merged with WorldCom last year,
the chairman appointed by President Clinton, William Kennard, took no
action but direly warned that the industry was ``just a merger away
from undue concentration.'' Now that is happening.
Why will the F.C.C. after asking for some minor divestiture,
ultimately welcome a two-giant waltz? For the same reason that the
broadcasters' lobby was able to steal tens of billions in the public's
bandwidth assets over the past few years: Mr. Clinton wants no part of
a communication consumer's ``bill of rights.''
Candidates Bradley, Bush and Gore look shyly away lest trust-luster
contributions dry up * * *\16\
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\16\ William Safire ``Clinton's Consumer Rip-Off,'' Essay, New York
Times October 11, 1999.
The Chairman. Mr. Jacobs, we will take your testimony now.
STATEMENT OF TOD A. JACOBS
Mr. Jacobs. Mr. Chairman, members of the committee, thank
you for inviting me here to discuss the proposed merger of MCI
WorldCom and Sprint. My name is Tod Jacobs and I am the senior
telecom analyst at Sanford Bernstein and Company.
My job is to forecast the growth and earnings and stock
performance of the telecom industry, as well as the largest
local, long-distance, and wireless companies that make up that
industry. Our firm is somewhat unique in that we don't do
investment banking; that is to say, we don't work for the
companies that we follow. I only have one set of clients and
that is institutional investors, and I only have one mandate
and that is to try to be right. Therefore, we don't live with
fear of repercussions when we say things that the companies
don't like, and we avoid conflicts of interest.
For the record, I am currently recommending the stocks of
some large long-distance companies, including WorldCom and
Sprint, as well as AT&T, and am currently neutral on the baby
Bells.
I would like to cover three topics today: No. 1, why
stories of telecom mergers appear on the cover of the Wall
Street Journal more frequently than taxes, healthcare, or
Hillary Clinton's newfound love of the Yankees combined; No. 2,
where this merger fits into the changing Internet landscape;
and, No. 3, where this merger fits into the changing long-
distance landscape.
Now, first, on mergers, we have attached as an exhibit a
piece that we released in October on industry consolidation
that argues the following thesis. First off, telecom is a very
high-fixed cost business, and like all high fixed-cost
businesses, the way to compete successfully is to have lots of
customers and lots of traffic so that your average cost per
unit will fall.
Low-cost positions are critical, since exploding national
and global competition are pushing prices down rapidly in
telecom, especially in wireless and in long-distance, if not
yet in local. So in each category, there is a mad rush to get
big as fast as you can. Our Exhibit 1 with our testimony shows
several examples of such scale-driven mergers.
Second, telecom companies are also attempting to get broad,
that is to assemble the assets that will enable a carrier to
offer the full slate of products and services to all the major
customer segments. And once anybody can offer multiple products
across a single network and a single sales force, then
essentially everybody will have to create the same capability.
Why? Because the more products you offer to a given customer,
the more you can discount the products and still make money.
Thus, anyone who remains a single-product risks seeing
their product become someone else's loss leader. And since no
single telecom company was born with all the necessary limbs,
and growing new ones either takes too long or indeed isn't
possible, merger and acquisition is the only real solution.
Exhibit 2 shows several examples of such scope-driven mergers.
The proposed MCI/Sprint merger fits squarely into this category
and is primarily driven by MCI's need for wireless. We have an
attached research report from this past May that proposed this
very merger as a way for WorldCom to solve its wireless
dilemma. Consumers should delight in this because this is how
they are going to continue to get lower prices in long-distance
and wireless, and eventually in local service.
On the Interest, for starters let me tell you what I have
already told my clients. Rightly or wrongly, Sprint will almost
certainly have to divest itself of its Internet backbone
business prior to this merger, just as MCI had to sell its
business prior to merging with WorldCom, and I believe the
companies know it and I believe they are prepared for it.
Despite complaints to the contrary, I would point out that
Cable and Wireless, which bought MCI's Internet business prior
to that merger, is a healthy Internet player despite the huge
turnover that they experienced in the very senior management
that effected that deal right after the deal was closed. So,
clearly, it is a viable option, and there will be numerous
interested buyers when Sprint Internet goes on the block.
As to current competition in the Internet, as Exhibit 3
shows with our testimony, we believe that the current domestic
Internet backbone market is about $8 billion. Here, MCI
WorldCom leads the pack, with more than $3 billion in revenue.
GTE, AT&T, Sprint and Cable and Wireless are numbers 2 through
5, respectively. So, clearly market share has more to do with
investment and marketing than with how big your overall company
is.
Competition has caused MCI WorldCom to lose about 11
percent of its market share in Internet since 1997. By 2003, we
believe they will have lost at least a quarter of that market
share, especially given the entry of the baby Bells and
numerous aggressive new competitors into that space.
Point three is we have been asked to discuss the so-called
peering situation, and we have portrayed that in schematic in
Exhibit 4. Now, if you will follow that schematic, suppose I am
Hillary and my Internet provider is Al's ISP. Al, in turn,
rents access to WorldCom's global Internet backbone. However,
I, Hillary, want to access the ACLU Web site that is sitting on
Cable and Wireless' backbone.
Now, peering allows for unfettered flow of traffic onto
each other's backbone networks, which makes all Internet
service possible. Without peering, MCI WorldCom would be out of
the Internet business, and it should be noting that peering
arrangements at MCI, which currently number 72, have been
rising and not falling. Put shortly, the sale of the Internet
business will address all the relevant Internet concerns.
Finally, in long-distance, this merger would create a
company that, in consumer long-distance, is something more than
half the size of AT&T, as Exhibit 5 shows. While both Sprint
and MCI have done a good job competing against AT&T in consumer
long-distance, the reality is that neither has the size nor the
scale to compete with what is otherwise becoming a two-horse
race between AT&T and the baby Bells to offer a full bundle of
products to consumers.
Indeed, either stand-alone company would have been highly
imprudent to enter that most expensive race without substantial
existing market share to justify it. Thus, this is a clear case
where the creation of larger scale in consumer long-distance
will actually motivate further investment and competition. And
given the companies' recent complementary investments in a new
wireless technology called MMDS as a high-speed data solution,
we actually now expect the development of a third broadband
pipe to the home. And we note that we expect the RBOC's to take
about a quarter, at least, of the long-distance market and
consumers within a few years of entry.
As to business long-distance, the short story is that on a
combined basis, the company will be about the size of AT&T. And
when you consider that the amount of new capacity being
activated by new carriers over the next 12 months is
approximately two times greater than the entire capacity of the
big three players, it should give you some sense of why
business pricing is already low and getter lower, and why this
company will be very lucky indeed to make our long-term share
forecast. To the contrary, if the MCI merger is a guide, the
cost savings generated by the merger will in large measure be
given back to customers in the form of lower prices.
Thank you very much.
The Chairman. Thank you, Mr. Jacobs.
[The prepared statement of Mr. Jacobs follows:]
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The Chairman. Let's have a few questions, and let me ask
this to Mr. Esrey and Mr. Ebbers. There are a lot of people
concerned about the merger's effect on prices for long-
distance. That has been raised here. Should we be concerned
about that, or how do you answer those worries?
Mr. Ebbers. Mr. Chairman, as Mr. Jacobs stated, the
increased capacity and the new players that are coming on board
that will continue to drive down long-distance rates, if you
look at them as long-distance rates, will continue. If you look
at the difference in pricing between at the time we announced
the MCI merger and the pricing today, you see a significant
decrease in long-distance rates, and so I would certainly
expect that to continue.
But let me add for just a moment something that I think is
very fundamental to the telecom industry as a whole going
forward in what Mr. Jacobs tried to demonstrate, and that is
the concept of long-distance was created at the time of
divestiture of AT&T in order to separate two businesses, to
agree to have two businesses continue.
In the deregulation of the telecommunications market in
Europe, in Canada, and in Mexico, there is not a separation of
local and long-distance. In this country, as a result of the
Telecommunications Act, where companies like Sprint and MCI are
now allowed to compete in local service, where we were not
before, the definition of a call that we have commonly called
long-distance is evaporating very rapidly.
We do not charge anymore based on distance; our rates are
distance-insensitive. And so it is very critical for a company
to be able to touch the customer at the access end with local
service, and that is the way the industry is headed.
I know it has been important to talk about long-distance
rates going forward, but what is going to be the prevailing
concern of consumers going forward from this point on is not
going to be the separate nature of local versus long-distance.
It is going to be how those two are integrated and how the
customer buys that as one product.
The Chairman. I see. Mr. Esrey, do you have any comment?
Mr. Esrey. I would just agree, but then I would go on to
add that there are 600 companies today in the United States
offering long-distance. There are 28 of these that currently
have revenue in excess of $100 million; there are 7 in excess
of $1 billion. There is a lot of competition out there.
WorldCom itself was a rather small company a few years ago that
entered the market as a competitor, as we have these hundreds
of companies today all providing competition.
I would like to add when the regional Bells get into long-
distance--Mr. Kimmelman said that entering in New York won't
help Utah or other States, and that is contrary because the FCC
rules require long-distance pricing to be equivalent around the
country. So the pricing competition in New York will
immediately spread around the country, so you have these giants
about to enter long-distance.
I think people can be very comfortable with the fact that
the competition and continuing price competition will be in
long-distance, although the real battle ground, as Mr. Ebbers
said, will be in the bundled services and getting more
efficient too the customer.
The Chairman. Thank you.
Our ranking member is here and he would like to deliver a
set of remarks, and then I have a couple more questions.
Senator Leahy. Mr. Chairman, I appreciate that. I will put
my full statement in the record, in the interest of time.
[The prepared statement of Senator Leahy follows:]
PREPARED STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM
THE STATE OF VERMONT
I am pleased we are having this hearing today. Preserving
competition in the communications industry is an issue of crucial
importance to consumers and to America's economic future. The proposed
merger between MCI WorldCom and Sprint raises once again questions
concerning the effectiveness of the Telecommunications Act of 1996 in
promoting competition rather than consolidation.
One of the major reasons I voted against the Telecommunications Act
of 1996 was my concern that its promise of real competition was
illusory, and that consumers would end up paying higher prices. We have
all enjoyed the benefits of extensive price competition in the long
distance industry, as the three major carriers, led by fierce
competition between MCI WorldCom and Sprint, reduced their long-
distance rates to the lowest point in history. None of us want to see a
merger between two of these three carriers put an end to this welcome
competition, as well as the benefits that long distance consumers have
derived from it. This merger is certainly the largest horizontal merger
we have seen in the telecommunications industry, and it therefore
raises questions that mergers such as the SBC-Ameritech and GTE-Bell
Atlantic mergers have not. When two large and direct competitors in
such an important industry merge, it is a cause for concern. That being
said, I am grateful for the opportunity to hear the thoughts of today's
witnesses on this topic, and I plan to keep an open mind on this issue.
I do, however, continue to fear that concentration of ownership in
the telecommunications industry is proceeding faster than the growth of
competition. Fewer than 20 years after AT&T's monopoly on long distance
was broken up, we are now faced with the prospect of a long distance
duopoly consisting of AT&T and WorldCom. Meanwhile, the regional Bell
operating companies continue to consolidate. I am more than ever
reminded of a 1998 editorial in the Rutland Daily Herald that observed:
``It might even seem as if Ma Bell's corpse is coming back to life.''
This rash of consolidation was something I feared and expressed in
my floor statement on the day that the 1996 Act passed:
Mega-mergers between telecommunications giants, such as the
rumored merger between NYNEX and Bell Atlantic, or the gigantic
network mergers now underway, raise obvious. concerns about
concentrating control in a few gigantic companies of both the
content and means of distributing the information and
entertainment American consumers receive. Competition, not
concentration, is the surest way to assure lower prices and
greater choices for consumers. Rigorous oversight and
enforcement by our antitrust agencies is more important than
ever to ensure that such mega-mergers do not harm consumers.
The NYNEX-Bell Atlantic merger has been followed by numerous other
mega-mergers, and the 12 largest long distance and local providers that
existed in 1996 will be pared to six if this merger receives approval.
I do not believe that bigness by itself is bad, and I understand that
mergers can produce economies of scale that benefit consumers and
shareholders alike. I also take note of the fact that the six surviving
companies offer more services today than they did when the Act was
passed, in part due to an explosion of the Internet that few predicted
three short years ago.
But mergers in this vital area of the economy still demand strict
scrutiny from regulators and from this Congress. I have a few
particular concerns about this merger that I would like to see
addressed in this hearing.
First, I am concerned about the impact of this merger on long
distance consumers. FCC Chairman Kennard has pointed out in his
discussions of this merger that Americans currently pay lower long
distance rates than at any time in history. If this merger is approved,
AT&T and WorldCom will control more than 80 percent of the long
distance market, with its nearest competitor, Qwest, controlling less
than 2 percent. I understand that hundreds of companies sell long
distance services, but I also know that many of those companies are
simply resellers who rely on MCI to sell them bundles of long distance
minutes. I am interested in hearing from the witnesses whether AT&T and
WorldCom will have sufficient incentives to compete on price in the
short term, instead of taking advantage of the inevitable period of
time it will take for a major, competitor to arise to maximize short-
term profits at competitors' expense. (While some advocates of this
merger have argued that dominance of the long distance industry will
quickly become irrelevant due to the rising power of the Internet and
cellular and digital phones, that theory might also lead to the
conclusion that AT&T and WorldCom have an incentive to maximize long
distance profits while they still can.)
I am also concerned about the effects of this merger on business
long distance users. Forrester Research has reported that corporate
users will suffer as a result of the merger, since MCI is already a
market leader in that area, and since there may be no practical third
options for business users at this time.
Second, questions have been raised about the effects of this merger
on the expense of Internet access. FCC Chairman Kennard recently
pointed out that Americans currently pay the world's lowest Internet
rates. But MCI WorldCom and Sprint are the two largest Internet
backbone providers--in other words, they run the two largest networks
that carry Internet traffic. The two companies currently control about
two-thirds of the long-haul Internet market. I understand that the
parties have signaled a willingness to divest themselves of some
portion of their Internet backbone business, which I believe would
probably be necessary to avoid antitrust consequences, especially given
the increasing importance of the Internet in our economy. But even so,
consumers and businesses that rely on the Internet on a daily basis
will want assurance that disruptions would not result from the
divestiture itself.
Third, I am concerned whether this merger will produce broader
anti-competitive effects. It now seems highly likely that our
communications industry will consist of a smaller number of companies
offering a wider range of services, from long distance to wireless to
Internet access to cable. If that is true, our economy might be better
off if our existing communications companies--some of which already
offer almost all of those services--remained in existence and developed
competing services in each of those areas. I understand that one of
MCI's major motivations in entering into this merger was its desire to
acquire Sprint's wireless services. I am interested in hearing from the
witnesses whether the American and global economies might not be better
served if MCI developed its own wireless services so that consumer
choices would broaden, instead of remaining stagnant or decreasing.
In conclusion, I would like to thank our witnesses for coming here
today to offer their thoughts, and I look forward to this discussion of
these issues.
Senator Leahy. I have expressed concern about some of these
mergers, as you know, and one of the reasons I voted against
the Telecommunications Act was I was afraid it might go too
far. On the other hand, I have seen a number of things that
have actually helped us.
I did have a couple of questions. I wasn't quite sure--
maybe this was cleared up before I came in. Mr. Rill, are you
here representing GTE? I know that is one of your clients.
Mr. Rill. I am here representing GTE, Senator Leahy. The
views I express are, in addition, my own.
Senator Leahy. I appreciate that. I didn't have it in my
notes and I just wanted to clear that up.
Mr. Rill. That is correct.
Senator Leahy. Mr. Ebbers has said that the merger is
necessary for MCI WorldCom to keep pace with AT&T and the
regional Bells in the broadband battle. Do you agree with that?
Mr. Rill. I think that would be a heavy load to carry,
Senator Leahy. I think what we have heard here is estimates and
suggestions that may somewhere down the road be right as to the
dynamics of this marketplace. I don't think antitrust
enforcement authorities, antitrust analysis, can be comfortable
with that kind of prediction as to what may occur in the
future, and therefore permit the going forward of a merger that
creates an 80-percent market share in an existing market, a
merger between direct competitors to occur based on those hopes
and expectations for the future that may never be realized.
I would like to just comment briefly on the notion that
long-distance prices have gone down. Of course, there is a
hearing today being conducted by the Federal Trade Commission
and the FCC as to what really long-distance prices are. But the
fact is that, absent mergers of this sort which increase
concentration and raise antitrust concerns in the long-distance
market, prices might even go down further if the markets were
fully competitive.
Senator Leahy. Mr. Ebbers, did you want to respond?
Mr. Ebbers. Well, there wasn't much substance there, but
the fact of the matter is, you know, the idea of long-distance
is going away. And I know I keep saying that, and antitrust
officials are required to look out 2 years to see what the
marketplace is. And certainly with the mega-Bells now, most of
the calling that they have is not even out-of-region anymore;
it is in-region because they have expanded so much. But the
concept of long-distance as a stand-alone business is just not
a correct way to look at the industry.
What is occurring in our industry is that we need to
provide broadband access to users that are going to use it for
a lot of different things. I would say that in the not too
distant future, we are not going to know whether a call is
long-distance or local, or whether it is a call to an Internet
provider. It is bits, as you well know, Senator, and the world
is changing out there.
The fact of the matter is that if there is going to be more
than two competitors for the local end of the service, which is
a necessary end because you have to touch your customers, then
this merger is a very good step in the right direction to
provide more than two alternatives for local service.
Senator Leahy. Thank you. Mr. Chairman, I will submit other
questions for the record, and I appreciate you and Senator Kohl
and Senator DeWine having this hearing.
The Chairman. Thank you, Senator.
If I could just ask one or two more, then I am going to
turn to Senator Kohl and then Senator DeWine to finish up.
MCI WorldCom and Sprint both own substantial portions of
the Internet, ``backbone,'' the systems that carry Internet
data. It is reported that an MCI WorldCom/Sprint merger would
give the new WorldCom some, ``choke-holds,'' on Internet access
points. According to some media reports, more than three-
quarters of all Internet traffic from Europe to the United
States comes through the MCI WorldCom network access point here
in Washington, DC. Is that right? Is that pretty close?
Mr. Ebbers. I don't know.
Mr. Esrey. I am not sure about international.
The Chairman. OK; that is according to some media reports,
with much of the remaining Internet traffic coming through a
network access point controlled by Sprint. At least that is
what they report. First, it would be helpful to some of us and
many who may be watching if you could explain to us what the
Internet, ``backbone,'' is and how it relates to the Internet
access that is purchased by consumers. And then please explain
what the likely effects of this merger will be on the Internet
backbone and on consumers, and if any of the rest of you would
care to comment, I would be happy. We will start with Mr.
Ebbers first, Mr. Esrey, and then whoever else wants to
comment.
Mr. Ebbers. Bill, I am over my head technically here, so I
don't know. I will say this, Mr. Chairman, that the allegation
that the transaction with Cable and Wireless did not work well
is not sustainable by fact. Because Cable and Wireless has
filed a lawsuit against us doesn't have anything to do with the
success. They are growing their Internet business, as Mr.
Jacobs demonstrates in his graphs, at 29 percent. They are
publicly stating that this has been a very, very successful
transaction for them, whereas the remaining part of the company
of ours is growing only 23 percent. So they are outgrowing us
at this point in time, and that is a successful transaction.
The backbone is the fiber over which the traffic is
carried, and there are a substantial number of players that
participate in that. Bill, do you want to help me with that?
Mr. Esrey. Well, sure. We could spend more time than you
want in describing the Internet and I am not sure how good a
job we would do. But, basically, if you start from the consumer
side, they need a way to get onto the Internet, so they have an
Internet access provider. And there are literally thousands of
those people that provide access to the backbone of the
Internet, if you will. They service the customer and they bill
the customer.
The Chairman. But by backbone, you actually mean the fiber,
the transmission?
Mr. Esrey. Right, the interstate highway system, if you
will.
The Chairman. Right.
Mr. Esrey. And the Internet access providers provide all
the byways and the local access to the Internet, but we are
talking about the backbone traffic that goes over there, and it
is because of a number of things. It is because MCI WorldCom
and Sprint's backbone is very data-efficient and can handle
this traffic very, very effectively and very, very efficiently.
And so the traffic is handed from somebody else's customer to
our backbone networks, where we route it to wherever the
customer wants to go, some computer or some server somewhere,
and hand it off.
The Chairman. OK, thank you. Does anybody else care to
comment?
Mr. Rill. Yes, I would just very briefly, Mr. Chairman. I
think the notion of a superhighway metaphor for the backbone is
a good one, and if the superhighway is controlled by a dominant
firm, it is going to be able to control the entry and exit
ramps. If it controls the entry and exit ramps, it can
discriminate through access derogation to its competitors, who
are also its customers, and as a result develop a monopoly
which will produce network tipping effects to entrench that
monopoly for the foreseeable future.
I don't know what the market share numbers are. I think as
the antitrust investigation unfolds, we will see what the
market share numbers look like. But I think that this merger
would give the superhighway-dominant firm the opportunity to
derogate the connections of its competitors customers and
severely and long term injure competition.
Mr. Ebbers. Mr. Chairman, could I respond to that just real
quick?
The Chairman. Yes.
Mr. Ebbers. Let me say that those same allegations were
made by the company that Mr. Rill represents in the transaction
with MCI. At that point in time, GTE was one of our largest
customers, has grown to be an even larger customer, and they
can make no claim that there was any degradation in service or
controlling of entry points or any of the things that he is
suggesting.
Mr. Jacobs. Can I make a comment, Mr. Chairman?
The Chairman. Sure.
Mr. Jacobs. The point of the Internet is that everybody has
access to everybody else's network. That is the only reason
that it works. That is the only reason that it has grown as
quickly as it has over the last few years in terms of how you
have seen the explosion in the industry.
The Chairman. So you are saying this backbone is not
controlled by any one company?
Mr. Jacobs. There are approximately 72 companies at this
point, or more, who either own or lease their own backbone
Internet networks. They all have to be able to interconnect
with each other because no one would be able to serve their
customer if their customer was going to be denied access to
anybody else's network. The reality is if there are 72 backbone
networks, some of those backbone networks hold Yahoo's Web site
information, some hold Lycos' Web site information, some hold
the hundreds of thousands of other Web sites that are out there
that people access.
The way that you get big in the Internet business is simply
by providing a good highway system and efficient connections
with the other networks, and that is the whole game. If
WorldCom attempted for a minute to limit the ability of their
customers, for instance, to access what was on the Cable and
Wireless network, WorldCom would be out of business because
every customer would simply go to another backbone provider.
The schematic that we drew in Exhibit 4 tried to capture that
in very, very simple terms.
The Chairman. You are saying, unlike Microsoft which
basically controls the underlying operating system--that has
been the big gripe there, and their ability to force people to
cooperate with them--there is no way that MCI WorldCom could
force people to cooperate with them with regard to access to
the backbone or to the Internet or to the worldwide
superhighway or whatever you want to call it?
Mr. Jacobs. That is absolutely true, and if you look
particularly at the aggressiveness of the new carriers who are
coming on with brand new fiber which has basically no traffic
on it yet, no variable costs, which is to say the cost of
building the network is done so all they have got to do is pour
more traffic on those networks--if WorldCom tried to deny
anybody access anywhere, there are numerous other competitors
who have ample capacity to provide that entranceway onto the
Internet to any customer who wants it, and the rules are pretty
clearly stated.
The Chairman. Mr. Rill, you seem to disagree with that.
Mr. Rill. Substantially, and I think not only do I disagree
with it, so did the Department of the Justice and the
Competition Directorate of the European Commission when these
same arguments were raised when WorldCom acquired MCI.
While I don't know what the market share numbers are, I am
sure the antitrust agencies and the Federal Communications
Commission will, and I predict that they will find that the
Internet backbone is close to 50-percent controlled, or more,
by the merging parties. When they get that level of control,
they will have a dominant position over the pipeline and over
the entry and access points to those pipelines, which will
permit them to go ahead and derogate the customers who are also
their competitors based on established antitrust analysis that
presents that kind of dominant opportunity where there are
network and tipping effect considerations to be taken into
account. This is what the antitrust agencies need to look at,
not the speculative notions that we have heard from the
analysts here.
Mr. Kimmelman. Mr. Chairman, could I just add this is the
sine qua non problem of telecommunications we have had
throughout history of a bottleneck problem. Some of them have a
long history with a litany of abuses that I think MCI WorldCom
probably was best at characterizing earlier in the old AT&T
monopoly. The same concerns have been raised about AT&T's
dominance over a broadband cable wire. This is not the national
superhighway; this is the local choke point and these concerns
here.
Some of them are more future-oriented, and I think Mr. Rill
has described that appropriately, and they are significant
concerns. The other ones, based on our experience, became very
real as profit motive led to favoritism, where there was
inadequate competition, and I think that is the appropriate
role for antitrust oversight here to ensure that that
appropriate entrepreneurial zeal doesn't go over the line.
Mr. Rill. Just one sentence. I think last year--if one
wants to look at what Sprint said last year about the MCI/
WorldCom merger and its effect on the Internet backbone market,
that would give you a good basis for a starting point of
analysis of that market.
The Chairman. Well, I have other questions that I will
submit in writing to you.
Let me turn to Senator Kohl. I have taken enough time.
Senator Kohl. Thank you, Mr. Chairman.
Mr. Ebbers, if your merger is completed, there will only be
one major competitor for AT&T in long-distance telephone
services. We are not just talking about the abstract here. We
had a member our staff call AT&T, MCI WorldCom, and Sprint, and
ask about various long-distance plans. She is one of your
typical customers, a 25-year-old single woman. She called
twice, once to ask for a plan best suited for a person with
above average long-distance calling, and another time to ask
for a plan best for a person with below average calling.
You will be pleased to know that each time, both of your
companies beat AT&T, but one of you did not consistently beat
the other one. Each of you offered differing plans with
differing features that would be advantageous for differing
types of consumers. So, gentlemen, what do you tell a consumer
like this staffer from my office that this deal will result in
more rather than fewer choices, either one, Mr. Esrey, Mr.
Ebbers?
Mr. Ebbers. I would just suggest, Senator, that there are
not only, if this merger is complete, two competitors for long-
distance. In areas where the Bell operating companies and GTE
has been able to compete in long-distance, they have taken up
to 30 percent of the market.
What we are facing in this transaction is our ability to
compete with the companies that are allowed to provide or are
capable of providing local service, in addition to long-
distance. Those calling plans in the companies that Mr. Rill
represents are very effective long-distance competitors in the
markets that they choose to compete in and in the markets that
the Bell operating companies will soon be in.
Mr. Esrey. I would like to make just a couple of comments.
One, your staff representative could have called many other
long-distance companies and gotten more choices, I think, that
are available out there in the market today. But let's back up
and look at what we are really talking about factually here in
terms of the consumer marketplace.
If you add Sprint and MCI WorldCom on access lines, our
combined market share, it is 18 percent, compared to 67 percent
for AT&T. If you prefer to take revenue and you add our
combined revenue, it is about 24 percent, compared to close to
60 percent for AT&T. That is what is happening today.
Now, let's look at what is going to happen when the RBOC's,
which are going to get into long-distance, whether it is
imminent or a few months or whatever--look at Southern New
England Telephone Company. Within 2 years, in their local
areas, they got 35-percent market share, substantially more
than the combined of Sprint and AT&T. So this marketplace is
obviously changing very rapidly, and when the regional Bells
get in--when Bell Atlantic filed, they said that they would
expect to get 25 percent market share almost immediately. That
is in excess of our combined market share in the consumer
marketplace. So I think there are plenty of choices that are
going to continue to be out there.
Senator Kohl. But is it true that in the long-distance
market today your combined share is 80 percent?
Mr. Esrey. No, no.
Mr. Jacobs. With AT&T added in.
Mr. Ebbers. That is including AT&T.
Senator Kohl. The three of you, yes. Yes, I understand. So
if you just merge, you two, then along with AT&T, we have 2
companies controlling 80 percent of the long-distance market.
And you said, well, there will be plenty of competition, but
when you go down from three to two, doesn't that reduce
enormously the level of competition?
There is a fact here, isn't there, that when you go from
three to two and the two now control 80 percent, there is a
reduction of competition enormously, a reduction of consumer
choice enormously? Now, you may cite other benefits and other
things, but that is almost uncontestable, isn't it?
Mr. Ebbers. That fact, if that were a stand-alone fact, I
think could give you legitimate concern. But the fact of the
matter is we are not going from three to two; we are going from
three to nine, with the Bell operating companies getting in, in
addition to all of the other competitors that are out there.
Let's be honest about it. In the long-distance marketplace,
we saw a rate come out yesterday with a small company that is
coming out with a 3.5-cent rate for long-distance service.
Customers can change service providers very, very easily, and
they certainly will take market share away from us if we don't
meet those types of price points.
Senator Kohl. I think this particular person on my staff
would say that not having Sprint and WorldCom is a reduction in
her choice. I mean, you might have other things you would want
to say to her, but I think she would regard that pretty clearly
as a reduction in her ability to choose. You wouldn't disagree
with that too strongly, would you?
Mr. Ebbers. I wouldn't disagree if those are the only calls
she made for choices, but there are 600 other calls she could
have made to get a long-distance service provider.
Senator Kohl. Mr. Kimmelman.
Mr. Kimmelman. Yes; Senator Kohl, it is correct that there
are hundreds of very small companies offering some long-
distance service. It is hard to figure out who they are and
what their rates are, whereas Spring, MCI WorldCom and AT&T
deluge us with advertising. Now, maybe that is good or bad. I
don't know.
Mr. Jacobs made a comment about the scale effect of
combining MCI WorldCom and Sprint to be able to challenge AT&T
better. I guess that is more advertising, or more outreach to
the public. These small companies are not in a position to do
that. I think most consumers are not aware of how to reach
them.
And then there is a speculation. Mr. Ebbers, I wish there
were seven Bells left, but there are not. There are fewer; two
dominant ones, it appears. When they enter, if they enter, that
may help. They are certainly large enough. They have the
capital base to go out and do mass-market advertising. They are
not there yet. Bell Atlantic may be getting very close in one
State. We have a way to go before we get that more choice from
other big players.
Senator Kohl. Well, let me ask this question, Mr. Rill and
Mr. Kimmelman. If the RBOC's were already in long-distance,
wouldn't this be an easier call for you?
Mr. Rill. Entry under the antitrust guidelines is certainly
a very important factor to undercut market concentration. When
we designed the 1992 modifications to the horizontal merger
guidelines, we looked at entry and we said entry, in order to
trump an anticompetitive merger, which this one certainly is at
80 percent of the market being controlled by two firms, the
next largest having 2 or less--entry has to be timely, likely,
and sufficient to overcome the anticompetitive effects of the
merger.
Entry, as Mr. Ebbers said, with a Bell edging toward entry
in one market, one State, is not under any analytical standard
likely to be timely, likely, or sufficient to overcome the
anticompetitive effects of this transaction. If the parties are
so convinced that entry is going to happen in that magnitude,
with that expedition, then why don't they defer the merger
until the entry takes place?
Mr. Kimmelman. Senator Kohl, Mr. Rill is absolutely
correct. However, I fully understand the predict that Mr.
Ebbers and Mr. Esrey are in because that is an absolutely
correct analysis for the long-distance market. However, they
face an entrenched monopolist in the local market being the
``about to be, edging closer'' entrant. And until we have fully
resolved how these long-distance companies can fully come in
and fairly compete in the local market, we are in a pickle.
Senator Kohl. So you would say, Mr. Ebbers and Mr. Esrey,
you simply want to try and stay ahead of what you see as the
inevitable curve?
Mr. Ebbers. Yes; I would suggest that the Bell operating
companies could have been in long-distance a long time ago had
they chosen to be. The checklist is a very valid list of
criteria for them to make. They choose at which speed they meet
that compliance requirement, and choose at which speed they get
it. Obviously, if they could argue that if they don't get in
long-distance and we have to wait until they get in long-
distance, they will never get in long-distance.
Mr. Rill. Let me just the point. I am not in the management
business, but as a lawyer one would even look at the Justice
Department comments just made on the 271 application of Bell
Atlantic, in New York, and indicate that there has been utterly
no negative comment on the good faith of Bell Atlantic to
undertake to comply with the provisions of the statute, and
indicating further that it is a very complex question, one that
presents difficulties. I am not representing Bell Atlantic, but
I think that the notion that the Bells could flip a coin and
get in at any time is absolutely untrue under the conditions
set forth in the Act.
Senator Kohl. One other question for all of the members of
the panel. Gentlemen, what is the biggest problem facing
markets today? Is it this deal or is it the failure of the
RBOC's to open their markets, or is it both?
Mr. Jacobs, would you like to make a comment?
Mr. Jacobs. We are now approximately approaching, what, 4
years past the--I think next February we will be 4 years past
the passage of the Telecom Act of 1996. The local monopolies,
the RBOC's and GTE combined, have lost approximately one point
of market share in the residential markets, and they have lost
approximately five to seven points of market share in the
business markets.
It is hard to count because it is a complex calculation to
put together because the data is not so forthcoming from
numerous companies. But that is about our best guess, and we
have published that many times and no one has ever told us it
is incorrect.
The regional Bell companies basically made a decision
sometime around the end of 1996 that they didn't like the way
the Telecom Act was being implemented by the FCC. The FCC had
some up with a plan essentially to force a very low-priced
resale of the local service to the competitors. And had the
RBOC's gone along with that, they would have gotten into long-
distance. That was basically the way the FCC tried to implement
the Telecom Act.
The RBOC's took it to court and that whole situation was
tied up for a period for 2\1/2\ years or so, and essentially
that was why the RBOC's didn't lose share and that is why the
RBOC's are not in long-distance right now. Had they decided
that that bet was worth it, they would be in long-distance at
this moment.
Why didn't they decide long-distance was worth it? Well, a
couple of reasons. The local market is a $100 billion market.
It has 40-percent operating cash flow margins. It has 25-
percent operating margins. And it is growing and there is no
competition, and you can grow your earnings 10, 12 percent a
year, as the RBOC's have done every single year, without
getting into long-distance and without having to worry about
it.
The long-distance market is about a $60 billion, $60 to $70
billion market, with about half the margin structure of the
other market. So if the RBOC's were going to get into long-
distance and lose local, it was not, in their view, a fair
trade because it was much less profitable and much smaller, the
business being offered as a carrot than the business they were
going to be losing share in.
The RBOC behavior didn't change until AT&T bought TCI. That
was the beginning of the entire change because at that moment
the RBOC's realized that their loss of market share was no
longer in their own hands. AT&T has bet at this point over $100
billion on the concept of coming into local, building out their
own facilities across the cable plant, and offering local
service in competition.
If you look at the behavior of the RBOC's in relation to
that merger, it was only after that merger and the subsequent
AT&T attempt to merge with MediaOne that the RBOC's began to
truly ramp up their desire to get into the long-distance
markets, as well as to build out, by the way, broadband
capabilities, known as ADSL, in terms of their technology.
So I have to agree with Mr. Ebbers that the choice of
getting into long-distance and the timing of getting into long-
distance has largely been in the RBOC's hands. If you look at
the competitive framework of the market, they still control
certainly as a monopoly point of view the local markets. The
long-distance markets are very competitive at this point. Every
single long-distance company saw projections for revenue growth
lowered in the third quarter because of the fact that pricing
simply sort of went out of bounds beyond what anybody was
expecting. It has to do with new competition in long-distance.
So I think that should more or less sum up the situation.
Senator Kohl. Mr. Esrey.
Mr. Esrey. The single policy issue, I believe, in this
country and what the Telecom Act of 1996 was designed to do is
break open the local markets to competition, and that offers a
huge engine of promise for the consumer, for business, for our
economy, and for our social fabric to give competition, give
choice, and let our great system work by giving choice, which
will give better value, lower prices, and so forth.
This merger is a lot about that issue because the
capabilities that have been assembled by MCI WorldCom in terms
of local access capability, what they have done with MMDS, what
we have done with ION and MMDS, put together, make a force that
we believe can go and break open that local monopoly, but do it
in a way that offers the consumers a whole different choice
than they have had before.
Rather than just local service, we give them multiple
lines, high-speed Internet access. I won't go into all the
capabilities, but it is a new choice. This is what competition
does--better things, lower prices. That is what this is about.
Each one of us alone would have difficulty doing that,
especially due to the size of the regional Bells and AT&T's
monopoly position in cable.
We look at the size of this merger and we say, gosh, this
is huge. If you look at what AT&T paid for TCI and MediaOne
together, it is $110 billion, to position themselves to get
into the local market. Our combined capabilities offer that
same type of promise of what we can do for the consumer.
Mr. Rill. If I may just for one moment, first, the purpose
of the Telecom Act is to open up all markets, including the
long-distance market. Second, I think the statements made by
Mr. Jacobs are essentially a diversion. What is before this
committee and what is going to be before the enforcement
agencies is whether or not it is necessary to have strong
anticompetitive effects in two present, current, relevant
markets, long-distance and the Internet backbone, in order for
the allegations, the hopes, of more competition in a third
market might be realized. I don't think the antitrust analysis
as it unfolds is going to justify those kinds of assertions and
that kind of damage to consumers in the long-distance and
Internet backbone markets.
Mr. Kimmelman. Senator Kohl, I think Mr. Rill is absolutely
right. The Telecom Act appeared to be about breaking open all
markets to competition, open entry everywhere. I think our
problem is we have had enormous within-sector consolidation. We
have gone from a few dozen companies from different sectors of
telecommunications that could have combined somewhat, but left
us with a dozen or more national players, many going into the
local market, offering the bundles that Mr. Ebbers and Mr.
Esrey described.
We don't have that today. We have fewer local phone
companies consolidating their control. With AT&T, we have fewer
cable companies consolidating their control. And I fear this
merger could be fewer players in long-distance. Tomorrow's
market may be very different. Today's market is a danger of
price increases for consumers, and we have an enormous problem
here. The Act is way off course.
The Chairman. Let me interrupt. We are running out of time,
but let me make the point that Senator Feingold has submitted a
statement for the record.
[The prepared statement of Senator Feingold follows:]
PREPARED STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Mr. Chairman, first let me thank you and the Ranking Member for
convening this important hearing. I have my own feelings about this
proposed mega-merger, but I look forward to hearing from this panel of
experts to see if, in fact, the Sprint/MCI WorldCom merger would
enhance competition in the long-distance telephone market.
I won't mince words, Mr. Chairman, I am disheartened by this
proposed merger, to say the least. Should this merger pass muster with
the Federal Communications Commission and the Justice Department, about
90 percent of the long-distance telephone market would be controlled by
just two companies. According to the FCC, the next largest companies
possess just percent of the market each. I fail to see a benefit to
consumers from combining the second and third largest long-distance
companies in an already concentrated market.
Mr. Chairman, many people will be surprised to learn that according
to Consumers Union, the Consumer Federation of America, and the Texas
Office of Public Utility Counsel, the majority of residential long
distance consumers are actually paying more today for long distance
calling than they did before the passage of the Telecommunications Act
of 1996. What with nickel nights to 5 cents every day to 7 cent ``one
rates,'' long-distance rates have seemed to fall precipitously in the
recent past--unfortunately, those gains for consumers on per-minute
rates have been more than offset by a host of new charges and fees.
Now, these two behemoths want to consolidate and thereby strangle some
of the competition that has led at least to falling long-distance
rates. And again, consumers inevitably will take it on the chin. Mr.
Chairman, this is a step backward, not progress toward competition.
As I have discussed, there also is evidence that the benefits of
competition in the long-distance market are not all it's cracked up to
be. The long-distance companies have more than made up for falling
long-distance rates with monthly minimum usage charges, the
presubscribed interexchange carrier charge, and the universal service
fund charge, which hit low-income, low-volume callers
disproportionately.
Some of the witnesses before us today may argue that this proposed
merger will increase competition in the long-distance telephone market,
but I am skeptical, given what has happened so far. Analysis by the
organizations I mentioned found that 71 percent of poor households; 64
percent of lower-middle income households; 58 percent of middle income
households; 50 percent of upper-middle income households; and 43
percent of wealthy households now pay more in their long distance bills
than they did before the 1996 Telecom Act. Since the Act passed, about
70 million households are paying $2.3 billion more per year in their
long-distance bills. One-half to two-thirds of all residential
consumers are paying more expensive telephone bills. This is occurring
while 60 percent of the wealthiest Americans are paying less. If this
is the effective competition we were promised, I won't lose any sleep
over my vote against the Telecom Act.
Mr. Chairman, the fact that we're even considering this merger
shows, once again, that the 1996 Telecommunications Act has not led to
the vaunted growth in competition that it promised and has failed to
deliver significant benefits to consumers. In fact, just the opposite
has happened.
I was one of just five senators to vote against the Telecom Act. In
fact, I strongly opposed the provisions that supporters contended would
lead to greater competition and lower rates for consumers. Those few of
us in the Congress who voted against the Telecom Act did so because it
did not seem likely to lead to true competition and benefits to
consumers. We have been hoping to be proved wrong, but it doesn't seem
to be working out that way. In fact, it is now clear that competition
is dwindling before our eyes, and certainly not growing.
Mr. Chairman, I favor increased competition and deregulation of
telecommunications markets because true competition benefits consumers
by providing them with more choices, lower prices and improved service.
The spate of recent mergers, including the proposed union of Sprint and
MCI/WorldCom that we are discussing today, has led and will continue to
lead to fewer choices. I would wager that higher prices and diminished
service will follow hard on the heels of that merger.
Over the past few years, the biggest news in the telecommunications
industry has been the tremendous consolidation of all its facets, from
local and long distance phone service, to cable television to the
Internet. The latest merger rage has highlighted the willingness of
companies that traditionally have operated in one realm to buy their
way into other realms, but the only problem with that trend is that it
brings consolidation--the enemy of competition.
The most obvious example is AT&T. Over the past year and a half,
AT&T has committed $112 billion to the acquisition of cable television
companies. Last year, AT&T agreed to acquire Tele-Communications, Inc.
(TCI) from Time/Warner. TCI was the nation's second-largest cable
company. Earlier this year, AT&T reached an agreement to acquire
MediaOne, the nation's fourth-largest cable company. Aside from
becoming the nation's largest cable company, AT&T also is aligned with
the nation's other two largest cable companies.
The AT&T/MediaOne deal extends AT&T's reach into cable television
and continues AT&T's move to provide consumers with a bundled, full
range of telecommunications services. The merger could allow AT&T to
provide competition against Baby Bells in local phone markets through
cable connections.
Not to be outdone, the Baby Bells, have saddled up in a move toward
regional monopolies. The 1984 breakup of Ma Bell spawned seven Baby
Bells that could offer local phone service only. The 1996
Telecommunications Act allowed the Baby Bells to provide long-distance
service should they meet conditions that open their local service to
competition. There are now four remaining regional Bell operating
companies. They control 98 percent of all local telephone service. I
fail to see how a few vast regional monopolies are any better than a
single vast national monopoly.
So, the statistics presented by a recent American Antitrust
Institute report are striking. This study cataloged 4,728 reportable
mergers in 1998, compared to 3,087 in 1996, and 1,529 in 1991. The
total value of U.S. mergers completed in 1998 was $1.2 trillion in an
economy with a gross domestic product of $8.4 trillion. Mergers are the
big story in American economic life today, and as the report shows in
stark terms, funding for the agencies on which we rely to police those
mergers has not nearly kept up.
Mr. Chairman, we now have four companies controlling 98 percent of
the local telephone market; six companies controlling more than 80
percent of the cable television market; seven firms controlling nearly
75 percent of cable channels and programming; and four companies
accounting for nearly a third of the radio industry's annual revenue.
The speed of these mergers can make your head spin just to keep up
with the name changes. But they have real life consequences for
consumers.
I look forward to hearing the testimony of the witnesses. And I
look forward to their answers to some of my concerns.
The Chairman. Senator DeWine, who has agreed to Chair these
hearings because I have to leave, has agreed to allow Senator
Ashcroft to ask his questions before Senator DeWine finishes
up.
So we will turn to you.
Senator Ashcroft. Mr. Chairman, I thank you, and I thank
the Senator from Ohio for his courtesy and his kindness to me.
Mr. Jacobs, there seems to be an implicit understanding or
assumption or suspicion on the part of some members of the
panel that if this merger goes through that somehow the
emerging entity would raise prices for long-distance. What
would be the business consequence to the surviving organization
if it were to raise prices for long-distance after a merger
like this?
Mr. Jacobs. They would immediately lose market share, and
most of the analysts would downgrade their stocks from ``out-
perform'' to ``under-perform,'' point one. Point two is I think
there is a certain point that is being missed here altogether.
Once you have the RBOC's coming into long-distance and once
AT&T goes into local--and those are foregone conclusions, those
two things are happening--the whole concept of long-distance is
going to go away.
AT&T has already talked about what its pricing plan is
going to be. Its pricing plan is going to be a flat rate, you
know, monthly fee for all you can eat once they pull this thing
together, all the local you can eat, all the long-distance you
can eat, all the high-speed data you can eat.
The RBOC's, when they come into long-distance, are going to
do the exact same thing, and it is only sensible because costs
do not act on a per-minute basis. Costs are fixed, and
therefore what you do is you create fixed revenue streams and
you give the customer more and more and more. That is the way
telecom is going to look. Two companies are headed for that
strategy, you know, irrevocably, irretrievably, and the issue
is are we only going to have two--and by the way, two is
infinitely better than one, which is what we currently have--or
do you have the chance of getting a third. And I think what is
going to happen is we are going to get a third and this concept
of per-minute long-distance is going to be a relic in another 2
years.
Senator Ashcroft. That is not the structure of long-
distance now?
Mr. Jacobs. Correct.
Senator Ashcroft. Let me sort of recite this carefully and
see if I can say this properly. The long-distance provider,
before the call is delivered to the consumer, has to pay a
local provider.
Mr. Jacobs. Correct.
Senator Ashcroft. That is sort of a barrier, a toll booth
there, and AT&T's merging with the cable companies is to get
them around the toll booth so that they won't have to pay that
extra charge.
Mr. Jacobs. Correct.
Senator Ashcroft. Now, what percentage of a long-distance
call is that access charge now?
Mr. Jacobs. The access charge, on average--if you take all-
in on a domestic minute of long-distance, the average revenue
in the industry is about 10 percent. That is, by the way, if
you take the monthly fee and you also figure that in over the
number of minutes on average, around 10, 11 cents. Depending on
where you are, the average all-in access fee that is paid to
the RBOC is somewhere on the order of magnitude of about 4
cents, something like that.
Senator Ashcroft. So it is 40 percent of the cost of a
long-distance phone call.
Mr. Jacobs. Forty percent to revenue. It is actually half
of the cash cost, half of the cash cost. It is the most
significant.
Senator Ashcroft. I just want to see if I can carry this.
And what they are proposing is a means of getting around this
toll booth, which is 40 percent. Now, there must be some costs
to getting around the toll booth.
Mr. Jacobs. $100 billion in AT&T's case.
Senator Ashcroft. And what would that result in, though, on
a per-call basis? Can they do it cheaper, is what I am saying.
Can they provide access cheaper by going around the toll booth
than by going through the toll booth?
Mr. Jacobs. It is a simple question to answer because it is
very expensive to get that new highway. It is actually the last
mile we are talking about, you know, out to the customer--very,
very expensive, $100 billion for AT&T, and I think that the
assets of the RBOC's are something like $100 billion as well.
But once you are there, access charges paid to the RBOC's have
very little to do with actual cost. They are filled with
subsidies, they are filled with overhead, they are filled with
all sorts of----
Senator Ashcroft. Are you saying, then, that the long-
distance rates--there would be every reason on a cost basis for
long-distance rates to go down?
Mr. Jacobs. Correct. The expensive thing is to create the
connection with the customer. The cheap thing is to then pour
the service over that, and that is why what I tried to say in
my testimony is once you get to a point where you have bundling
companies who have numerous products to put over a single pipe
sold by a single sales force, there is every reason in the
world to discount very, very heavily, and each side will
discount the other guy's product.
Senator Ashcroft. Let's go quickly to something else. I
think I have heard it said that there are 600 long-distance
companies.
Mr. Jacobs. I think there are actually closer to 800, but
yes.
Senator Ashcroft. And these guys don't all own
superhighways. There are, what did you say, 70-some
superhighways?
Mr. Jacobs. Well, you have to be careful about
superhighways. There is the Internet superhighway, and since
MCI has 72 different companies that they so-called peer with
who are allowed free access--and by the way, those companies
meet a certain criterion in terms of having lots of traffic--
there are 72 companies of stature on the Internet.
Senator Ashcroft. I want to go back to this. How do we have
600 companies if it is so impossible to do this unless you own
this big infrastructure?
Mr. Jacobs. You can always get access to long-distance
backbone fiber by renting it because the reality is that in--we
have to be clear on one thing. There are local facilities, the
last mile, of which there is right now only one into the house
offering telephone service. And then there is the connecting
point for the whole country, which is the long-distance
backbone or the Internet backbone. At this point, there is, in
theory, almost an infinite amount of capacity in that backbone.
There is ample excess capacity.
Senator Ashcroft. So these 600 or 800 guys----
Mr. Jacobs. You can rent it for nothing, basically.
Senator Ashcroft [continuing]. Go and rent it very cheaply.
Mr. Jacobs. Correct.
Senator Ashcroft. And is if someone were to try and elevate
the costs of long-distance----
Mr. Jacobs. It would be suicide.
Senator Ashcroft [continuing]. These rent-for-nothing
people would be able to deliver to my door mimeographed flyers
and things that said you can go around these high costs by just
dialing 10-10-blank-blank-blank or what have you and get 5
cents a minute. I mean, at my house I get these flyers
everyday.
Mr. Kimmelman, I think there is a certain responsibility on
the part of a consumer to be able to read, and I get this stuff
everyday and they are not big companies, but they tell me I can
have 5 cents a minute with no monthly charges. I do have to
dial seven extra digits, which a 1999 phone can program once
and for all, if you want. I don't want to tell people how to
avoid using Sprint and MCI and paying the extra value to
Michael Jordan and the other advertisers.
So what you are saying is the potential for price reduction
is always there from the other 6 or 800?
Mr. Jacobs. I would defy anyone on this panel to show me a
single price in telecom that has ever gone up in the last 10
years. Costs are falling and competition is increasing, and you
cannot find a price for anything in telecom that is falling.
The only single thing I can think of is that at one point some
of the long-distance carriers with some of the large pipes of
data before some of the new guys had brought their pipes on the
marketplace were very capacity-constrained. That is about the
only thing I can think of in 10 years.
Senator Ashcroft. You would probably confess that if a
person was going to make one 5-minute call a month and opted
for a service that required a $4.95 a month charge that that
price to that consumer--that is Mr. Kimmelman's point, I think.
Mr. Kimmelman. It is one of my points, Senator Ashcroft. I
have got to tell you there is no way we want to condone
stupidity on the part of consumers, but today the Federal Trade
Commission and the FCC are holding a hearing to admonish this
very industry for distorting its information it is providing in
those flyers, not all of them, but some of them because it is
totally--the consumer can't understand it.
It is described as 5 cents a minute, but it is 99 cents for
the first minute, the second minute, all the way up to 20
minutes. We get this all the time, and I can show you probably
a dozen AT&T basic schedule rate increases in the last decade.
I mean, there are rate increases all over the place, almost
every one of which were followed by an MCI rate increase and a
Sprint rate increase, a follow-the-leader rate increase. There
are enormous segments of this market that are not competitive.
It is just totally factually inaccurate what you are saying.
Senator Ashcroft. Well, let me just say this. I think there
are places where you get this deal that says 99 cents for up to
20 minutes, and I guess if you have 20 seconds, you pay 99
cents, too. And I think that is an enforcement problem; that is
an FTC problem, but that is not a merger problem, that is not a
structure of the industry problem. That is an advertising
problem of having truth in advertising in communications.
But we need to look at structure here and we are asking
ourselves whether a combined structure of these two companies
is likely to have an increase in cost or a decrease in cost for
long-distance. That has been an expressed concern, and the only
thing I have been able to hear so far, and the only thing I can
figure out, is that, they want to avoid the toll booth by
getting all the way to the consumer which would at least
provide a decrease in cost, and you seem to be nodding your
head that they would do so. And the other is that if they tried
to increase their cost, they would just incredibly savage and
hemorrhage in terms of market share.
And the last point is that the current landscape is not the
landscape to be considered. It is a landscape where it is
anticipated that there will be another competitor in virtually
every setting that will enter the market with a 25-percent
share, which is more than either of these two individual
companies now have, and will obviously avoid the toll booth
because they own the toll booth.
It seems to me that when we are talking about structure, we
ought to at least try and figure that out. And I am very
pleased to hear from you, Mr. Rill, because so far if you have
got a point to make, it is not coming across to me.
Mr. Rill. Well, the point is one that is really hornbook
antitrust analysis and established in the merger guidelines
enforced by the Federal Trade Commission and the Department of
Justice, and that is in a given industry when a market
structure reaches two firms with 80-percent control and the
next firm in that market with no more than 2 percent of the
market, the presumption is that that is going to be
anticompetitive market. Now, I would grant you that----
Senator Ashcroft. Well, wait. Let's make it clear that when
we are talking about 80 percent of the market, we are not
talking about the surviving entity here. You are talking
about----
Mr. Rill. Two firms.
Senator Ashcroft. You are talking about 80 percent of the
market being----
Mr. Rill. Controlled by two firms.
Senator Ashcroft. But if these each had 2 percent and AT&T
had 76 percent, you would have the same problem.
Mr. Rill. Then we would have a separate problem with the
76-percent firm, but that is not what we have here. We don't
have that. We have a firm with approximately 48 percent, 50
percent, another firm with approximately 30, 32 percent. I
think that is a given. You can strip away a percent or two, but
that is a given. Under the merger guidelines, there is a
presumption in that market that there is an anticompetitive
effect.
Now, if there is entry such that that is either not a
market or that any anticompetitive price increase or failure,
by the way, to reduce prices to reflect declining costs--
declining prices are not necessarily good enough; prices should
decline at a level dictated by competition. The entry story
that we have heard today is entirely speculative. It is not
there. Mr. Ebbers set up an antitrust standard that I haven't
heard before that if I were defending a merger I would like to
use, and that is the ``edging toward entry'' standard.
Unless entry is timely, likely, or sufficient--and this is
under the DOJ-FTC merger guidelines--to deflect, undercut an
anticompetitive price increase, it will not cut the mustard.
And as the antitrust agencies look at this merger, I predict
they will find that entry is not timely, within a merger
guideline timeframe, or sufficient to permit this high level of
duopoly to go forward.
Mr. Kimmelman. Senator Ashcroft, I was aggressively nodding
in agreement with you because I want to make it clear that on
your point of avoiding the toll booth, there is no one who
wants to get that toll booth out of the way any more than the
consumer. I think that 4 cents a minute, that 40 percent, is a
bloated, vastly inflated number. It is keeping prices way too
high for connecting long-distance calls. My concern is I don't
see enough about this merger that allows MCI WorldCom and
Sprint to truly avoid that toll booth.
I heard a description of use of some wireless equipment for
broadband that may work, may not work. It has been a problem.
Wireless cable has not worked well because of capacity and
line-of-sight problems for offering an alternative to cable.
Maybe it is better here. I didn't hear much about local phone
service, which is what that toll booth is the problem in.
And most of what I heard about was a continuation of
leasing lines from Bell companies and GTE, and it is hard for
me to understand how the consumer is better off whether it is
just MCI WorldCom/Sprint leasing those lines or the two of them
separately leasing those lines.
Senator Ashcroft. Well, the two of them, plus another 6 or
800. And I don't know who the next giant is, but they grow
quickly and the kinds of things they do in competition force
the big guys to change.
LCI International, I don't know how long ago, decided they
weren't going to play the round-up game or round-off game, or
whatever it is, with time. They said we are only going to
charge you for the amount of time you are on the phone. They
are infinitesimal in the market, but they have an impact in the
market.
I think what we have to look at as policymakers--and I
thank the chairman for his indulgence and I will quit with
this--we have to look not at hornbooks. Frankly, as
policymakers, we are in charge of developing a hornbook that
will make the system work, not in respecting a hornbook that
may protect the kind of industry that might have existed or
market structure that might have existed. We need to make the
system work.
We need to look when we are looking at things to find ways
so that we can have competitors in the United States that stand
well among world competitors so that we can have consumers that
are served well and efficiently. And I think this Telecom Act
which we put in place provides tremendous opportunity. We have
had a proliferation of companies that, with their offers of
competition and the like, have just helped this industry
explode.
So I am pleased that all of you came. I think the debate
has been very productive, but I think we ought to try and find
a way to do things that results in better service and lower
rates and greater competitiveness for our players on the
international scene.
I thank you, Mr. Chairman, and am grateful for this
opportunity to be with you.
Senator DeWine [presiding]. Thank you, Senator Ashcroft,
very much.
Gentlemen, I think this has been a productive 2 hours. Let
me see if I can summarize a little bit, and also maybe get you
to engage a little more. Frankly, none of you are shy and
retiring, but I sort of feel like we are talking around each
other today for the last couple of hours and let me see if I
can summarize and maybe spark a little more direct debate here.
Mr. Kimmelman and Mr. Rill, basically what you are saying
is, look, we are going from three companies to two companies
who are now going to have 80 percent of the market. Under
classic analysis, this is a problem. The lights ought to go
off. The burden of proof ought to be on the company that wants
to do it.
Mr. Ebbers and Mr. Esrey, and I guess Mr. Jacobs as well,
you seem to be saying, no, no, no, you guys are all wrong, you
don't get it. You can't apply the normal standards, and the
reason you can't apply the normal standards is this is a moving
target. It is not static. You can't just look at it from a
point of view of long-distance, even though long-distance is
still what people think about. What they are saying is that is
wrong. Mr. Kimmelman and Mr. Rill, you just don't get it.
You get into the 21st century and long-distance is over
with, it is dead. That is not how we do business anymore. It is
just a different world, and what is going to happen is that
AT&T is going to get into local, the RBOC's are going to get
into long-distance, and this whole business changes. And, in
fact, it is changing and, in fact, therefore it is a moving
target. And you guys want to take a snapshot and look at it and
freeze it, and really that is just not the way the world is
working today.
Now, is that a fair summary of what I have heard over the
last 2 hours?
Mr. Rill. I certainly would never suggest it is not a fair
summary.
Senator DeWine. Well, you just tell me what is wrong about
it, then. You tell me what I am hearing that is----
Mr. Rill. I think I could put it somewhat a different way,
and I will start out with your statement that long-distance is
what people think about today. And the reason they think about
it today is it is a relevant market today.
Senator DeWine. But they are saying, yes, it may be
relevant today, but it is really not going to be relevant
tomorrow.
Mr. Rill. That is speculative, Mr. Chairman. They are
trading off injury to long-distance consumers and injury to
customers and competitors on the Internet backbone, which will
be a fact by this merger of two direct competitors in those
markets with overwhelming market shares, against speculation
that somewhere down the road maybe there will be more
competition. And maybe there will, but the merger analysis must
show with a clear confidence that that entry will be timely,
likely and sufficient now to dissipate the anticompetitive
effects that this merger will have in two markets that today,
to put it in your terms, is what people really think about.
Senator DeWine. Mr. Ebbers, Mr. Esrey, let me just ask it
this way, and I want you to have the opportunity to respond.
They are basically saying you are speculative; you are talking
about someplace out in the future. And that may or may not be
true, but today the analysis has to be of what the market is
today, and today you guys are going to end up with 80 percent
of the long-distance market.
Now, am I right in saying that what you are really telling
this committee is that is the wrong premise to start with, that
is the wrong place to start with? It seems to me where we
start, whatever our basic assumption is, is where we end up. On
one analysis, it is very tough for you to climb that hill and
show us or show the American people that having two companies
having 80 percent of the market is not a bad thing, when there
is a lot of competition out there now with three, plus.
I mean, is that correct? You are just saying that we
shouldn't take that as the initial analysis? That shouldn't be
our premise, that shouldn't be our starting place?
Mr. Esrey. Well, I agree with your basic statement and I
don't think it is speculative.
Senator DeWine. Which one?
Mr. Esrey. Pardon?
Senator DeWine. Which one?
Mr. Esrey. Well, your synopsis of what was said here in the
last couple hours.
Senator DeWine. All right.
Mr. Esrey. But I think the issue is it is not speculation.
AT&T spent $110 billion to position themselves to enter the
local market. You know, it is quite clear what they are going
to do.
Senator DeWine. When?
Mr. Esrey. Pardon?
Senator DeWine. I guess the question is when?
Mr. Esrey. They are rolling it out now. As we speak, they
are rolling it out. It doesn't happen overnight, obviously, but
they have already started to roll it out to offer that type of
service.
Senator DeWine. Well, should the public policy analysis be
where we are now or where we will be in 5 years or 10 years as
far as what should be allowed now? Isn't that the question?
Mr. Esrey. It is not 5 years or 10 years.
Senator DeWine. OK. How many years is it?
Mr. Esrey. It is months, it is months that you see this
happening. It is going on right now and, of course, it is
somewhat evolutionary. You don't wake up one morning and
switch.
Senator DeWine. I understand.
Mr. Esrey. But it is going on right now. You can see by
Bell Atlantic's own statement that they expect to get 25
percent of the market when they get in. People are investing
enormous sums of money because the industry landscape is
clearly changing.
And talking about speculation, I think Mr. Rill says injury
to consumers. What injury to consumers? That is where the
speculation is. I think as Mr. Jacobs says, and it is quite
clear to us, if we sat and attempted to raise long-distance
prices, there would be injury, but it wouldn't be to consumers.
It would be to our companies.
Senator DeWine. Mr. Kimmelman.
Mr. Kimmelman. I think your synopsis is correct, with a
little footnote, and that is that some of the mergers that Mr.
Ebbers and Mr. Esrey are describing as somewhat motivational or
that they have responded to are not completed. The Antitrust
Division is still reviewing the AT&T/MediaOne transaction.
Now, the Chairman of the FCC has stated very clearly that
he thinks getting AT&T to expand off-cable plant and
hopefully--again, another promise, speculation--offering local
phone service and broadband is worth them owning all that cable
plant. The Antitrust Division has not ruled on that. If that
transaction does not go forward as it was proposed, that
changes the landscape.
What Mr. Jacobs described as this inexorable movement, that
there will be a Bell doing all of this and AT&T with its cable
plant doing all of this, is not anywhere near as real as what
people are paying today and receiving today for cable, local
phone service, and long-distance. I don't dismiss it as a
possibility, but it is not real.
Senator DeWine. Mr. Ebbers, you wanted to say something.
Mr. Ebbers. Yes; I would just be real factual, if I could,
about this. The company that Mr. Rill represents, which is in
the process of merging with Bell Atlantic, determines when they
want to get in the long-distance business. He says it is not
imminent or it is not soon or it is not for sure. Why are they
doing this merger, then? They stated publicly that the reason
for this merger is they want to be part of an RBOC that has
access lines that is going to be a significant competitor in
long-distance. I don't blame them. I think it is the right way
to go.
But, you know, it is kind of foolish for us to sit here and
listen to him say that the timing isn't imminent. The
applications are forthcoming. The PSC in Texas is supposed to
vote this week and is expected to approve the application of
SBC to be in long-distance in Texas. It only takes 4 States to
have 24 percent of the market competitive when they enter.
Senator DeWine. Mr. Rill?
Mr. Rill. Mr. Chairman, there is not one State yet in which
these applications have been approved. Certainly, it is an
intention of all firms in this business to compete and succeed
in being competitive. The fact of the matter, under the
antitrust analysis that is going to be required of the
agencies, is whether or not that entry will be of such
magnitude, speed, and likelihood to offset what is clearly
under the merger guidelines presumptively an illegal merger in
two markets.
Senator DeWine. Anyone else?
Mr. Kimmelman. Senator DeWine, just one more point here.
Senator DeWine. Mr. Kimmelman.
Mr. Kimmelman. $110 billion is a lot of money that AT&T has
spent, and just to conclude that they are absolutely right or
know what they are doing, I think, is going a little overboard.
The relevant analysis is how do they make the most money once
they have spent that, and how do the Bells once they have spent
it in their merger, and the entrepreneurs here at the table.
And what is troubling from the consumer perspective if we
constantly see people entrenching and staying more in their
core market and finding they can make more money there--and Mr.
Jacobs reflected on that before--than aggressively challenging
others in new markets. That is what is of greatest concern to
us.
Senator DeWine. Mr. Kimmelman, on the one hand you have
said that once horizontal power is established, it is difficult
for the remaining players to compete. But on the other hand,
you have said that two wrongs don't make a right and we
shouldn't let these competitors merge. Now, I have already
expressed my concern about the impact of this merger on long-
distance customers. But to be fair, as you have acknowledged,
Mr. Esrey and Mr. Ebbers have a business to run. They need to
be able to anticipate market trends and they need to be able to
react to these trends.
How do we reconcile those issues? When should a deal such
as this one be allowed? How do we deal with that problem?
Mr. Kimmelman. We are in a pickle. I truly wish that our
enforcement agencies had approached this very differently over
the last few years. Now, that is water over the dam at this
point. How do we undo the potential danger that they feel they
are responding to, which I think is real, cable concentration
and consolidation in the local market? I would suggest this
merger needs to be scrutinized carefully because I think for
the market we know today, it consolidates too much power in
long-distance, however saying at the same time I believe that
that should be done in conjunction with the AT&T/MediaOne
transaction, which I think--and Mr. Jacobs knows the market
better than I do--will send a very, very different signal than
has been sent over the last 3 years from the enforcement
agencies about how companies can combine and will need to align
themselves to meet public policy standards for competition.
I think that is the way we need to go. If there is not the
will power in the enforcement agencies to do that, I would
suggest that you follow up on the logic you have presented this
morning which is extremely consumer-friendly and consider
legislation to ensure that with fewer players, whom I don't
believe you can absolutely commit in law to living up to their
promises--that these fewer players do not raise prices, do not
take advantage of consumers, and ensure that they offer a fair
price in the marketplace.
Senator DeWine. As many of you know, Senator Hatch, Senator
Kohl and myself have introduced a bill that would force the FCC
to decide these mergers within 6 months so that the industry
can have some certainty. So at the conclusion of this hearing,
I will put my commercial in for that piece of legislation.
Mr. Rill. We will say that at least for our purposes we
endorse that legislation.
Senator DeWine. Thank you very much. I appreciate that.
Any concluding comments that anyone feels they have to
make?
Seeing no one feeling the desire to continue beyond 2
hours, I appreciate your testimony. I think it has been very
helpful.
Mr. Rill. Thank you very much, Mr. Chairman.
[Whereupon, at 1:02 p.m., the committee was adjourned.]