Common Carrier Mergers & Acquisitions - the FCC Perspective Remarks of John W. Berresford Senior Antitrust Attorney Competition Division Office of the General Counsel Federal Communications Commission at the Second Annual Conference on Technology Law for the Information Age Washington, D.C. October 29, 1996 Common Carrier Mergers & Acquisitions - the FCC Perspective Thank you, Marty. Let me start by saying that although I am an FCC employee, I am here in my private capacity and what I am going to say does not necessarily represent the official position of the Commission or any other Commission personnel. My topic is the FCC's treatment of recent major common carrier mergers, something I am happy, and perhaps qualified, to talk about. I want to begin by explaining how the Commission gets involved in mergers. Its jurisdiction has two parts. First, Congress has given us Section 7 Clayton Act authority, exactly like DOJ's, over mergers of common carriers by wire and radio. In these areas, the FCC functions the way the Federal Trade Commission does in most other areas of the economy, as DOJ's twin reviewer of mergers. We have not, to my knowledge, exercised this jurisdiction for years. Our second source of jurisdiction, Sections 214 and 310 of the Communications Act, requires us to review "transfers" of "licenses." Most common carrier mergers entail the transfer of many licenses, so this authority over license transfers turns into de facto merger authority. The standard for our decision about each particular transfer is whether it will "serve the public interest." This is broader than simply an antitrust standard. But the courts have told us that while considering the public interest, we must weigh a proposed transfer's effect on competition. Marty asked me to discuss mergers from the point of view of both (a) what was driving the business deal (other than the obvious desire to make money) and (b) what the competitive issues were. I am going to run quickly through the three biggest common carrier mergers of the last few years. One concerned the dispatch business (the services used by taxicabs and delivery trucks); one concerned the cellular mobile phone business; and one concerned cellular and two vertically related businesses, long distance and the manufacture of cellular networks. Then I will briefly mention the competitive issues that have been alleged in two mergers that are now before the Commission. I should add that time does not permit me to go into two very interesting quasi-mergers, the acquisitions of significant ownership interests in MCI and Sprint by the telephone companies of the UK, France and Germany. I commend them to your attention, however, as examples of how to discipline a bottleneck. Nextel. The dispatch merger was a series of acquisitions by a company called Nextel, which was founded by an enterprising FCC lawyer. Nextel acquired many dispatch systems, both in the same area and all over the country. What was driving the business aspect of these acquisitions was the desire to create -- from within a Balkanized, relatively low-tech business -- one relatively large company, using the latest technology, that would have a chance to compete head-to-head with the big players in mobile services. There was even speculation that Nextel might turn into a "third cellular system" that could reduce the profits being earned by the cellular duopoly that we at the FCC created in the 1980s. What were the competitive issues? The biggest competitive issue was, as in so many antitrust merger cases, the definition of the product market. If the product market had been limited to the existing dispatch business, in some areas Nextel would have gained a market share that would have resulted in a troublesome HHI. But the Wireless Bureau approved the transfers/mergers because it found that the product market consisted of all land mobile telecommunications services, a market consisting of approximately 200 MHz of spectrum, in which Nextel would have only 10 MHz at most, a very small market share. The factual predicate for this finding was that the Commission was in the process of "de-zoning" land mobile spectrum -- allowing previously pigeon-holed dispatch, cellular, and paging carriers to offer each others' services for the first time -- dispatch could offer telephone service, cellulars could offer dispatch, and so on. In addition, the Commission was in the process of allocating huge amounts of new spectrum for "Personal Communications Services" or PCS, which could take the form of one or more of these services or any combination of them. In this market of relatively abundant and relatively de-zoned spectrum, therefore, the fear of monopolizing a dispatch market was specious, largely because any such narrow market was ceasing to exist. Bell Atlantic Mobile - NYNEX. The second major common carrier merger of recent years was that of Bell Atlantic Mobile Systems and NYNEX Mobile, which were basically two neighboring Bell cellular duopolies. As to what was driving the business deal, there were the usual economies of a merger of two companies in the same business. More important, though, I think, was the approach of PCS that I mentioned a minute ago. The cellular duopoly we set up in the 1980s, plus the Bell System breakup of 1984, resulted in 7 large, regionally concentrated Bell cellular companies. Then, in the early 1990s, we announced that, through PCS, we would be creating several more mobile competitors in each area. These new competitors had the potential to take the form of nationwide, not regional, firms. Naturally, this gave the incumbent regional cellular firms an incentive to merge and start building their own national images, brand names, and marketing and sales programs. Finally, one might think this merger was seen by its participants as a dress rehearsal for the merger that the parties' parent companies are now proposing to effect. In its decision, the Wireless Bureau approved the license transfers. In the few areas where BAMS and NYNEX Mobile together held both cellular licenses, one was divested (pursuant to longstanding Commission rule). The party who would receive the divested licenses, Southern New England Telephone, was a perfectly capable cellular company. So, the Bureau was left with the basic facts that before the merger, there were two cellular systems in each area; and after the merger, there would still be two cellular systems in each area. Ergo, no major reduction in competition. The Wireless Bureau, as I said, approved the license transfers entailed in the merger; an application for review is before the full Commission. AT&T - McCaw. By far the most contentious merger of recent years in the common carrier field has been that of AT&T and McCaw. This combined AT&T, with its presence in the businesses of long distance and the manufacture of cellular networks, with McCaw, which was in the businesses of operating cellular networks. As to what was driving the business deal, I think AT&T wanted to get back into local service, which it bowed out of in 1984. It also wanted to get into wireless services. Finally, for its international operations, it may have wanted to have people who had actually run cellular networks, whereas AT&T only had people who knew how to manufacture them. Several Bell cellular companies protested the merger strongly. What were the competitive issues? The AT&T-McCaw merger posed several vertical issues that were slightly difficult. AT&T sold cellular networks to some of McCaw's competitors, and these competitors claimed that if we allowed the merger, AT&T would sell lousy networks to them. We found this highly unlikely as to new sales: McCaw's competitors, mainly Bell cellular companies, are powerful and sophisticated purchasers and can easily choose other suppliers (Motorola, Ericsson, Alcatel, several Asian-based companies). However, AT&T had some of McCaw's competitors "locked in" to long-term contracts for network improvements, additional radio towers, and the like. There was a more significant risk of mistreatment there, at least for duration of "lock in" (several years). Aggravating this possible problem was the fact that in the course of performing these long term contracts, AT&T received McCaw's competitors' trade secrets (e.g., projected customer numbers, plans for next year's construction). Might AT&T leak these valuable secrets to McCaw? The Commission found this risk unlikely, because such misconduct would be detected by the Bell cellular companies and, in a flash, AT&T would lose new sales worth hundreds of millions of dollars a year and would never sell a cent of PCS networks to any of McCaw's competitors. In other words, the operations of the marketplace would prevent and/or punish the alleged misconduct, so government intervention in the marketplace was probably not needed. Nevertheless, in approving the license transfers, we imposed a condition forbidding AT&T from unreasonably discriminating in the provision of products and services against purchasers of cellular networks under contracts in effect on the release date of the Commission's Order. I am aware of no claim that this condition has been violated. I should add that there was a major pro-competitive advantage to the AT&T-McCaw merger, which I call The Last of the Mohicans effect. Mobile service may someday become a competitor for the telephone companies' wired local service -- this has always been one of the great hopes of those of us in the business. But since the Bell break up, the Bells had bought most cellular properties in the country, both halves of the duopoly. McCaw was the last major cellular company that hadn't been swallowed up by one of the Bells and was therefore the last, best hope for cellular to become a true competitor for local wired service as soon as possible. McCaw, without a wireline base to protect, could be a last champion for the wireless industry to press for favorable interconnection with the phone company, something that it is hard to believe a Bell cellular company would dare do. Finally, there was a theme running through both the Bell oppositions to the merger, which the Commission rejected. The opponents were generally seeking to have the Commission impose MFJ-like relief on the combined AT&T-McCaw. They had two basic arguments. The first was a plain "level the playing field" argument, that we Bell cellular companies are under this awful MFJ, so our competitors should be, too. We answered that assuming that the MFJ was harmful to consumers or competition, imposing it on more companies would merely compound the harm. Two wrongs do not make a right, nor do they always make for competition. On a more thoughtful level, some of the opponents of the AT&T-McCaw merger argued that the substantive risks of the old Bell System -- a local monopoly leveraged into vertically related fields -- would be posed anew by the merged McCaw (a local duopolist) and AT&T (with significant presences in two vertically related markets, long distance and manufacturing). We disagreed, again. While the cellular duopoly is far from perfect competition, a duopoly with only 10% penetration (at that time) was better than a monopoly with virtually 100% penetration, and the vertically related businesses (long distance and manufacturing) were far more competitive in 1994 than they were in the early 1980s. Therefore, the analogy of the old Bell System to AT&T-McCaw, while enough to give pause, was not close enough to make the fix of the former appropriate for the latter. We approved the license transfers involved in the merger of AT&T and McCaw and were upheld by the Court of Appeals. Pending Matters. I want to take a minute to go over, in very general terms, a few (by no means all) of the claims that have been made to the Commission concerning two major proposed mergers/license transfers. They are the mergers proposed by, to use their old names, Southwestern Bell and Pacific Bell, and by Bell Atlantic and NYNEX. Each is a proposed merger of the possessors of market power in the same business, but in different territories. In one case, Bell Atlantic-NYNEX, the merging parties border each other and on their border is New York City, a lucrative market by any measure. The claims made for the mergers are basically that they will not harm competition between the parties, for the simple reason that there is none to harm (the parties do not now compete); that the mergers will permit efficiencies and economies not possible except through merger; and that each merged company will be a stronger competitor in entering new markets where strong entrants are needed, such as long distance, video distribution, and international services. The arguments raised against the mergers, again at a very general level, are that far from being a stronger competitor in new markets, the combined companies will be better monopolists in their present markets, that they in combination will pose some risk to competition that they do not pose separately; and that ongoing regulatory remedies, such as Sections 251-52 and 271-72 of the Communications Act, will not reduce those risks to an acceptable level. There is also a potential competition issue -- and this is not the place to go through all the steps of the actual and perceived potential competition doctrines. But suffice it to say the question in very broad terms is whether, in the case of each proposed merger, either party would have invaded the other party's territory in the absence of their merger, and whether that invasion would have reduced competition in a highly concentrated market in a way that no other company could. The volume of this argument is highest, of course, in the case of New York City, which lies on the border between Bell Atlantic and NYNEX. Since these matters are now pending before the Commission, further the deponent sayeth not. Also, because the Bell Atlantic - NYNEX Mobile matter is also pending before the Commission, I cannot answer questions about that, either.