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Introduction and Summary These are the reply comments of the Communications Workers of America (CWA), in response to comments filed by other parties responding to the joint application by MCI Communications Corporation and WorldCom, Inc. to transfer control of MCIs Title II and Title III authorizations and licenses to WorldCom, Inc. CWA represents 630,000 workers who are also consumers of telecommunications services. The majority of CWA members work in the telecommunications industry. CWArepresented employees work for firms providing local, long distance, wireless, video, Internet access, and other information services to residential and business customers. CWA filed comments in this proceeding on January 5, 1998 (as amended on January 6, 1998). n#A\  PP#э Comments of the Communications Workers of America, In the Matter of Applications of WorldCom, Inc. and MCI Communications Corporation for Transfer of Control of MCI Communications Corporation to WorldCom, Inc., CC Docket No. 97211, Jan. 5, 1998 (as amended Jan. 6, 1998) (hereinafter CWA Comments).n In those comments, we noted that because the applicants fail to demonstrate that the proposed merger is in the public interest, the Commission should deny the applicants request for transfer of control. We also noted the special significance of this merger review. This provides the Commission the opportunity to ensure vibrant competition drives the growth of the Internet, the communications infrastructure of the 21st century. Should the merger occur, WorldComMCI will have dominant control of the Internet backbone market. Because MCI, WorldCom, and the Internet are not regulated, this merger review provides the Commission its only opportunity to protect against monopoly bottleneck control over Internet access. In our comments, we cited four reasons that the proposed merger fails to meet the Commissions public interest standards. First, as noted above, the merger would result in an entity with monopoly control over the Internet backbone market. - #A\  PP#э Id., pp. 416. See also BellSouth Petition for Conditional Approval of the Applications of WorldCom, Inc. for Transfers of Control of MCI Communications Corporation, In the Matter of Applications of WorldCom, Inc. for Transfers of Control of MCI Communications Corporation, CC Docket No. 97211, Jan. 5, 1998, p. 19, (hereinafter BellSouth Petition); Petition to Deny of GTE Service Corporation and its Affiliated Telecommunications Companies, In the Matter of Applications of WorldCom, Inc. and MCI Communications Corporation for Transfer of Control of MCI Communications Corporation to WorldCom, Inc., CC Docket No. 97211, Jan. 5, 1998, p. 46 (hereinafter GTE Petition to Deny); Bell Atlantic Petition to Deny the Application of WorldCom or, in the Alternative, To Impose Conditions, In the Matter of Applications of WorldCom, Inc. and Howard A. White, Trustee, for Transfers of Control of MCI Communications Corporation and Request for Special Temporary Authority, CC Docket No. 97211, Jan. 5, 1998, pp. 313 (hereinafter Bell Atlantic Petition); Simply Internet Petition to Deny and Request for Hearing, In the Matter of Applications of WorldCom, Inc. and MCI Communications Corporation for Transfer of Control of MCI Communications Corporation to WorldCom, Inc., CC Docket No. 97211, Jan. 5, 1998; Comments of Telstra Corporation Limited, In the Matter of Applications of WorldCom, Inc. and MCI Communications Corporation for Transfer of Control of MCI Communications Corporation to WorldCom, Inc., CC Docket No. 97211, Jan. 5, 1998 (hereinafter Telstra Comments); Comments of American Federation of Labor and Congress of Industrial Organizations, In the Matter of Applications of WorldCom, Inc. and MCI Communications Corporation for Transfer of Control of MCI Communications Corporation to WorldCom, Inc., CC Docket No. 97211, Jan. 5, 1998, pp. 35 (hereinafter AFLCIO Comments); and Petition to Deny filed by Inner City Press/Community on the Move, In the Matter of Applications of WorldCom, Inc. and MCI Communications Corporation for Transfer of Control of MCI Communications Corporation to WorldCom, Inc., CC Docket No. 97211, Jan. 5, 1998 (hereinafter Inner City Press/Community on the Move Petition). - Second, the merger would delay the development of competition in the local exchange residential and small business market. #A\  PP#э CWA Comments, pp. 1924. See also Rainbow/PUSH Coalition Petition to Deny, In the Matter of Applications of WorldCom, Inc. and MCI Communications Corporation for Transfer of Control of MCI Communications Corporation to WorldCom, Inc., CC Docket No. 97211, Jan. 5, 1998, pp. 2226 (hereinafter Rainbow/PUSH Petition) ; AFLCIO Comments, pp. 56; Bell Atlantic Petition, pp. 1617; and GTE Petition to Deny, pp. 4245. Third, the merger would hurt universal service by shifting revenues off the public switched network to the private MCIWorldCom network, accelerating access charge bypass beyond the transitional reductions of the Commissions May 1997 Access Reform Order. #A\  PP#э CWA Comments, pp. 2531. See also Rainbow/PUSH Petition; Inner City Press/Community on the Move Petition; and AFLCIO Comments. Fourth, the merged entitys planned reduction in network investment and sales and customer service expenses would result in a loss of 75,000 current or new jobs that otherwise would have been created by the individual firms over the next four years. #A\  P P#э CWA Comments, pp. 3133. See also AFLCIO Comments; Rainbow/Push Petition; and Inner City Press/Community on the Move Petition. In addition to these issues, CWA believes that other commentators raise important concerns that provide additional reasons the Commission should deny the applicants request. First, as commentator GTE notes, the applicants fail to meet the legal standards for merger review that the Commission established in its Bell Atlantic NYNEX Order. #A\  P P#э GTE Petition to Deny, pp. 46. CWA also cited the Commissions Bell Atlantic NYNEX Order legal standards in our comments, see CWA Comments, p. 1 and n. 7. In that Order, the Commission placed upon the applicants the burden of demonstrating that the transaction is in the public interest. 7#A\  P P#э In the Applications of NYNEX Corporation, Transferor, and Bell Atlantic Corporation, Transferee, for Consent to Transfer Control of NYNEX Corporation and Its Subsidiaries, Memorandum Opinion and Order, File No. NSDL9610 (Aug. 14, 1997) at 29.7 MCI and WorldComs application is filled with platitudes and assertions, but few, if any, facts to demonstrate that the merger is in the public interest. Absent a more complete filing in the reply comments phase of this merger review, CWA agrees with commentator GTE that the WorldCom and MCI applications must be summarily denied. ^#A\  P P#э GTE Petition to Deny, p. vi.^ ÌSecond, commentators GTE, Rainbow/PUSH Coalition, BellSouth, and Bell Atlantic provide convincing evidence that the merger of the second and fourthlargest interexchange carriers would have serious anticompetitive effects in the long distance market. By eliminating the fourthlargest long distance carrier, the merger would eliminate the downward pressure on prices that maverick WorldCom currently plays in this already concentrated market. #A\  P P#э GTE Petition to Deny, pp. 1028; Bell Atlantic Petition pp. 1315; BellSouth Petition, pp. 714;  Rainbow/PUSH Petition, pp. 1621. Finally, CWA agrees with commentators GTE and Telstra that the merger would result in serious anticompetitive effects in international telecommunications markets. x #A\  PP#э GTE Petition to Deny, pp. 2942; Telstra Comments, pp. 113.x Below, we augment points made in our original comments. II. The Merged Entity Would Control the Internet Access Market Through its Domination of Interconnection to the Internet Backbone. In our original comments, we identify the Internet backbone market as a relevant product market for merger analysis. There is no demand substitute for the Internet backbone network. A national Internet backbone network transports data at DS3 (45 Mbps) or higher speeds, interconnects with other networks on both coasts, and is able to carry data traffic from the originating to the terminating user without having to purchase Internet access from any other company.The Internet backbone network is already a highly concentrated market, dominated by three or four large firms. The only publicly available market share data on the Internet backbone market is that collected by Boardwatch magazine. This data measures market share in two ways: the percent of Internet service providers (ISPs) that connect to each national backbone and the percent of ISP connections that each national backbone network has. (The numbers differ slightly since some ISPs have multiple connections.) The data is reproduced on the following page. ^ '44S+' Fi  '44S+' Fi ^  Table 1. Internet Backbone Providers BackboneConnections% of ISPs% of total connectionsP P MCI"156940.73%35.22%P P Sprint IP Svcs"117630.53%26.30%P P UUNET (WorldCom)"81121.05%18.20%P P AGIS"3037.87%6.80%P P BBN"1894.90%4.24%P P ANS (WorldCom)"691.79%1.55%P P Digex"611.58%1.37%P P DataXchange"531.37%1.19%P P CWIX"451.17%1.01%P P Goodnet"451.17%1.01%P P PSI"31.80%.70%P P NAPNet"23.60%.52%P P GridNet"21.55%.47%P P ATMnet"17.44%.38%P P IBM"13.34%.29%P P CAIS"10.26%.22%P P NetCom"9.23%.20%P P Savvis"5.13%.11%P P CompuServe (WorldCom)"5.13%.11%PP#A\  PP#Source: Boardwatch, June 1997. Bold indicates that this Internet service provider would be owned by the merged WorldComMCI. % of ISPs = % of all ISPs interconnecting with this backbone provider % of total connections = % of total ISP connections with this backbone provider. This table also includes Internet backbone providers which do not meet the definition of national backbone providers because they must purchase some Internet access from other providers.#XN\  PXP# This data demonstrates that today there are three dominant firms in the Internet backbone market: MCI, Sprint, and WorldCom (including UUNET, ANS and Compuserve). They are followed by BBN and AGIS (which lacks the large customers that BBN has). All other Internet backbone providers have small market share. Should the WorldComMCI merger occur, the merged entity would have 63 percent of all ISPs connected to the network and 55 percent of all ISP connections. 8 #A\  PP#э Jack Rickard, The Big, The Confused, and the Nasty: UUNet Resigns from the InternetU S West Expresses Clueless Green and Confusion, the FCC Rules on Access Charges, Boardwatch, June 1997 (http://www.boardwatch.com.mag/97/June/bwm1.htm (hereinafter Boardwatch). An updated fall 1997 Boardwatch survey reports that the merged company would own at least 48.43 percent of all Internet connections (29.43 percent for MCI and 19 percent for WorldCom/UUNET; no figures given for ANS or CNS). This updated survey reports that MCI would have 38.79 percent of ISPs connected to it, but does not report similar figures for WorldComs backbone networks. See Boardwatch, Internet Service Providers: Quarterly Directory, Fall 1997.8 The postmerger market share data for the dominant firms would be as in Table 2 below.  ^ '44Q"' Fi  '44Q"' Fi ^  Table 2. Internet Backbone Providers BackboneConnections% of ISPs% of total connectionsP P WorldCom"2,45463.7%55.08%P P Sprint IP Svcs"117630.53%26.30%P P AGIS"3037.87%6.80%P P BBN"1894.90%4.24%PP#A\  PP#Source: Boardwatch, June 1997.#XN\  PXP# While WorldCom and MCI may object to this market share data, there is no other publicly available data. Ideally, Internet backbone market share would be measured by a number of measures, including traffic flow, capacity, ISP connections, and direct and indirect end users. It is significant that MCI and WorldCom fail to provide in their transfer application any data regarding traffic flows and capacity on their Internet backbones. Evaluating market share using ISP connection data is a relevant starting point for merger analysis because the key issue in evaluating Internet dominance relates to the issue of interconnection. End users (customers) connect to the Internet through either dialup or dedicated connections to an ISP. The ISP passes traffic from end users across the country and around the globe by connecting to an Internet backbone provider. If the terminating end user connects (either directly or through a connected ISP) to a different backbone provider than the backbone provider of the originating customer, then the Internet backbone provider exchanges traffic at interconnection (peering) points. Some interconnection points are public (the two largest, MAEEast and MAEWest, are owned by WorldCom); increasingly, the large backbone providers interconnect at private peering points. So long as no one firm dominates the Internet backbone, it is in the interest of all the national backbone providers to agree to interconnect with each other on reciprocal terms. Since all providers depend on interconnection to ensure that their end users traffic reaches its destination, each national backbone provider has an interest in negotiating reciprocal interconnection (peering) agreements with the other national backbone providers and in providing the capacity to ensure quality interconnection. The nature of these interconnection agreements is key to understanding the competitive impact of the proposed merger. Currently, there are no transparency requirements for interconnection, and WorldCom insists upon a strict nondisclosure policy with its customers. The Commission should require WorldCom and MCI to provide copies of current interconnection agreements as part of the merger review so that the Commission can determine the nature of these agreements and whom WorldCom and MCI currently consider peers with reciprocal interconnection agreements and whom it considers customers who pay for interconnection. As Bell Atlantic noted in its comments, when the Internet backbone industry was small and fragmented, there was free peering among the many backbones and ISPs. As the market concentrates, the large backbone providers convert former peers into customers who pay for interconnection. In May 1997, WorldCom broke ranks and began charging smaller ISPs and backbone networks not only for Internet transit but also for access to its customer routes. Y #A\  PP#э Bell Atlantic Petition, p. 8.Y Smaller backbones and ISPs had little choice but to agree or go out of business, since refusal meant that their customers could not reach WorldComs customers. Once WorldCom instituted this new policy, the other large backbone providers, including MCI, Sprint, and BBN, followed suit. E #A\  PP#э Id.E It is important to stress that it is interconnection, not transport capacity, that is the key issue to consider regarding ease of or barriers to entry in the Internet access market. Should one firm grow too large, it will be able to set the terms of interconnection, through either unilateral or concerted action. Ultimately, the end user will be captive to the pricing set through the interconnection agreements of the dominant backbone provider. This is the scenario that will occur should the merger between MCI and WorldCom take place. Based on the Boardwatch statistics, the merged WorldComMCI will have 63 percent of all ISPs connected to its network and 55 percent of all ISP connections. #A\  PP#э Boardwatch, June 1997. As explained in n. 14, we use June 1997 data because the fall 1997 data published by Boardwatch is incomplete. Postmerger there will be two large Internet backbones: the dominant WorldComMCI and number two Sprint. In either unilateral or concerted action, the merged entity will have such dominant control over the backbone that it will have the power to set terms of interconnection. WorldComMCIs dominance could result in the following practices: refusal to interconnect smaller backbone providers and ISPs, thus squeezing out competition and further concentrating the market; discriminatory pricing in favor of its own ISPs (MCI and WorldComs UUNET, ANS and CNS are both backbone providers and among the largest ISPs); price increases; or provision of poor service to interconnecting providers, encouraging those providers customers to drop the competitors service and come over to the WorldComMCI backbone, further concentrating the market. A#A\  PP#э Bell Atlantic, in its comments, notes that even in the short run there are many technical obstacles to easy switching by ISPs should their backbone provider raise its prices or reduce service. Ninety percent of ISPs lease address space. For these ISPs, switching backbones would entail assigning its customers new IP addresses, which would require renumbering many hardware, operating system, network software, and other applications, a process which could take up to a year. (Bell Atlantic Petition, pp. 1011.)A ÌBecause the Internets value increases as the number of people and the quantity and quality of content connected to it increase, WorldComMCIs network will increase in dominance as more and more providers and customers connect to it. WorldComMCIs network will be vastly more valuable to the other providers than their networks are to WorldComMCI. Thus, postmerger, WorldComMCI would be able through unilateral or concerted action to set the terms of interconnection. Other backbone providers and ISPs wold have to accept the dominant WorldComMCIs terms for interconnection, or their customers would be unable to connect with WorldComMCIs connected customers. In short, in a postmerger environment, new entrants to the Internet access market, including many large telecommunications firms that employ CWA members, would face barriers to entry imposed by the dominant backbone provider through its control of interconnection. This would be true regardless of whether new entrants possess superior technology or provide higher quality service. There is a parallel in this scenario to the early days of the telephone industry, when the Bell Companys control of the long distance network allowed it to dominate both the long distance and local telephone markets, even though independent companies served 50 percent of all telephone subscribers. Through its control of the long distance (backbone) network, the Bell Company was able to set the terms of interconnection, adopting discriminatory pricing in favor of local Bell subsidiaries and refusing access to independents, forcing them to sell out to the Bells. Worried about impending monopoly control, the U.S. government negotiated the 1913 Kingsbury Commitment which mandated nondiscriminatory interconnection to the long distance network and federal oversight of future telephone company mergers. #A\  PP#э Robert Britt Horwitz, The Irony of Regulatory Reform: The Deregulation of American Telecommunications, New York: Oxford University Press, 1989, pp. 99103. The Internet backbone market is consolidating. To prevent monopoly dominance, the U.S. government faces similar choices as it did in 1913: to regulate or to prohibit monopolization of the network. In the absence of Internet regulation, the Commission should preserve Internet competition by denying the applicants merger request. Now is the time to act before it is too late. III. The Proposed Merger Would Delay Local Competition in the Local Exchange Residential and Small Business Market. In our original comments, we cited evidence from financial documents filed by WorldCom and MCI with the Securities and Exchange Commission that show the merged entity plans to reduce investment in the local residential and small business market by $5.3 billion over the next four years, compared to what they would have spent absent a merger. T#A\  PP#э CWA Comments, pp. 2023.T The merged entity plans to reduce capital investment in the local loop by $2 billion and to reduce operating costs to sell and service local markets by $3.3 billion over the next four years. (See Attachments, Excerpt from WorldCom Form 8K, Exhibit 99.3.) r 44Q 'e 44Q 'e r && Table 3. PostMerger Planned Reductions in Spending in Local Residential and Small Business Market &PP&  1999   2000   2001   2002  Total &P P & Operating Costs $500 million$700 million$900 million$1.2 billion$3.3 billion&P P & Capital Expenditures $700 million$575 million$450 million$300 million$2 billion&P P & Total $1.2 billion$1.2 billion$1.4 billion$1.5 billion$5.3 billion&PP&#A\  PP#Source: WorldCom Form 8K, Exhibit 99.3, MCI and WorldCom Analysts Presentation Given on Nov. 10, 1997.#XN\  PXP# In their application, MCI and WorldCom fail to explain how they will achieve these savings. Absent documentation that demonstrates that these synergy savings do not result from a shift in business strategy away from local exchange residential and small business customers, the applicants shall have failed to meet the Commissions merger review standard. In their reply to CWA comments filed before the Virginia Public Utilities Commission, MCI and WorldCom state that these figures represent cost efficiencies in carrying out present plans to expand local service (emphasis in original document). w#A\  PP#э Joint Opposition of WorldCom, Inc. and MCI Communications Corporation to Comments and Request for Hearing of GTE Corporation, GTE Communications Corporation, and Communications Workers of America, District 2, Case No. PUA970052 before the Commonwealth of Virginia State Corporation Commission, Jan. 16, 1998, p. 11.w It strains credulity to understand how MCI and WorldCom will be able to realize $5.3 billion in savings by expanding local service. An expansion of service entails costs, pure and simple. Expansion of local residential service is especially costly, as AT&T and MCI have learned recently. The only logical explanation for the reduction of $5.3 billion in expenses in the local market is that the merged entity will shift focus from MCIs premerger plans to compete in the residential and small business markets to WorldComs exclusive focus on large and mediumsized business customers. As recently as July 1997, MCI continued to maintain its commitment to enter the local exchange residential and small business markets, despite early losses. z#A\  PP#э One Year After Telecom Act: MCI Aggressively Expands Local Service; Brings Local Networks to Six New Cities, Plans Local Service for Residential Customers in More States; MCI Committed to Serving Local Customers Nationwide, Feb. 6, 1997 (http://www.mci.com/mcisearch/about...rests/publicpol/press/970206.html).z But since the merger announcement, MCI has retreated from this commitment. On January 22, 1998, MCI announced that it would proceed with the only business case that makes sense, providing facilitiesbased service to business customers. #A\  PP#э MCI to Abandon Marketing Local Residential Service, TR Daily, Jan. 22, 1998. Other commentators note that the merger would have the anticompetitive effect of reducing the number of facilitiesbased competitors in the local exchange. #A\  PP#э Rainbow/PUSH Petition, pp. 2226; AFLCIO Comments, pp. 56; Bell Atlantic Petition, pp. 1617; and GTE Petition to Deny, pp. 4245. In addition, the shift in business focus away from serving residential and small business markets will delay entry of the premerger most aggressive competitor into the bottleneck local exchange. This will undermine realization of a key procompetitive goal of the Telecommunications Act of 1996. IV. The Proposed Merger Will Hurt Universal Service. In our comments, we noted that the proposed merger will result in a vertically integrated company that would move highrevenue business traffic off the public switched network onto the private WorldComMCI network. Furthermore, we commented that the Commission recognized in its May 1997 Access Reform Order the need to transition out implicit universal service subsidies historically embedded in access charges. While competition ultimately makes such implicit subsidies untenable, flash cut of such support will result in local rate increases, reduced investment in the local exchange, or both. In merger documents filed with the Securities and Exchange Commission, WorldCom and MCI report $400600 million in savings from avoided access costsswitched minutes in the year 2002. #A\  P P#э Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934, Oct. 9, 1997, p. 9. (Http://www.sec.gov/Archives/edgar/data/64079/000104746997000296.txt). Such sharp reduction in revenues in the local exchange will reduce the affordability and quality of basic telephone service, and delay investments in upgrading the public network with capabilities to deliver advanced telecommunications services to residential consumers. Commentators Rainbow/PUSH Coalition, Inner City Press/Community on the Move, and the AFLCIO make similar points. Rainbow/PUSH Coalition and Inner City Press/Community on the Move note that redlining telecommunications investment especially hurts minority, inner city residents, further contributing to their economic deprivation. #A\  P!P#э Rainbow/PUSH Petition, pp. 2226; Inner City Press/Community on the Move Petition, pp. 1112. The AFLCIO is concerned about the impact on Americas working families. X#A\  P"P#э AFLCIO Comments, pp. 67. X Redlining undermines democracy as well as the basic principle of network economics: that the value of the network increases as more people are connected to it. The Commission has an obligation under Section 254 of the Telecommunications Act of 1966 to promote and advance universal service. The proposed merger would undermine this goal. IV. The Proposed Merger Would Result in Job Loss. In our comments, we calculated that the merged entitys reduced spending on all networks (long distance, local, international, Internet) and operating expenses necessary to serve all markets harm the public interest by reducing job growth by 75,000 jobs over the next four years. Within weeks of the merger announcement, MCI announced 1,500 layoffs. It also announced that it would take pretax charges of $200 million for restructuring and job cuts. #A\  P#P#э Bloomberg Business News, CorporateMCI to Feel Big Bite of Pretax Charges, The Commercial Appeal.Ĭ These are reductions from current employment levels. (At the same time that MCI announced the $200 million charge for job cuts, it also announced a $300 million charge to be used to retain top executives. This $300 million retention pool is in addition to $78.1 million that the top five MCI executives are promised upon completion of the merger, under terms of the WorldComMCI merger agreement.) Clearly, mergerrelated synergies and efficiencies that result in job loss are not in the public interest. VI. Conclusion In these reply comments, we note that the applicants fail to demonstrate that the merger is in the public interest and, short of receiving clear documentation to the contrary, the Commission should summarily deny the application. On the merits, the merger is not in the public interest. The proposed merger will have serious anticompetitive impact upon the Internet access, local exchange residential and small business, long distance, and international markets; it will harm affordable, quality universal service; and it will result in job loss in the telecommunications industry. Therefore, on the merits, the Commission should deny the applicants merger request. Respectfully Submitted, Communications Workers of America  By    George Kohl Senior Executive Director, Research and Development January 26, 1998  Attachments  Certificate of Service I hereby certify that I have this 26th day of January, 1998 served the following parties to this action with a copy of the foregoing Reply Comments to be delivered by U.S. first class mail to the following:  e e(#҇Michael H. Salsbury Mary L. Brown Larry A. Blosser MCI Communications Corporation 1801 Pennsylvania Avenue, N.W. Washington, D.C. 200063606 Andrew D. Lipman Jean L. Kiddoo SWIDLER & BERLIN, CHTD. 3000 K Street, N.W., Suite 300 Washington, D.C. 20007 Catherine R. Sloan Robert S. Koppel WORLDCOM, INC. 1120 Connecticut Avenue, N.W. Washington, D.C. 20036 Policy & Program Planning Division Common Carrier Bureau Federal Communications Commission 1919 M Street, N.W. Washington, D.C. 20554 Contact: Michelle M.. Carey International Reference Room International Bureau Federal Communications Commission 2000 M Street, N.W., Room 102 Washington, D.C. 20554 Contact: Mary Cobbs Wireless Reference Room Wireless Telecommunications Bureau Federal Communications Commission 2025 M Street, N.W., Room 5608 Washington, D.C. 20554 Contact: Maria Ringold International Transcription Service, Inc. 1231 20th Street, N.W. Washington, D.C. 20036   George Kohl