Federal Communications Commission
on Mergers and Consolidation in the Telecommunications Industry
Committee on the Judiciary
U.S. House of Representatives
June 24, 1998
Mr. Chairman and Members of the Judiciary Committee. Thank you for this opportunity to appear before you today to discuss mergers and consolidation in the telecommunications industry. I commend the Committee for holding this timely and important hearing as part of your oversight on the state of competition in several key U.S. industries. I am pleased to join my friend, Assistant Attorney General Joel Klein, on this morning's panel. The FCC works in tandem with the Department of Justice on merger review and a variety of other matters related to the Commission's discharge of its statutory responsibilities under the Communications Act.
The communications and information sector of our economy leads all other sectors in job growth and the development of new products and services. Recent mergers between large carriers -- the focus of this morning's hearing -- illustrate the size of this industry. Assuming the approval and consummation of two pending deals, three of the ten most highly-valued U.S. corporate mergers of all time are last year's $22.7 billion merger of Bell Atlantic and NYNEX, WorldCom's pending takeover of MCI Communications Corp. for $37 billion, and SBC Communications Inc.'s proposed $62 billion merger with Ameritech.
Obviously, the scale of these firms is substantial. So, too, is their importance in the nation's economy. Communications and information processing represent a growing part of many corporate budgets -- even as the unit prices for these capabilities declines. Communications and information are key strategic assets for many companies, and the quality, efficiency, abundance, and affordability of communications services all help to strengthen the position of U.S. companies in the global marketplace for many goods and services.
The Telecommunications Act of 1996 was intended to usher in an era of increased competition, and lessened regulation. There are signs of progress toward these goals. But the many mergers that have occurred, or have been proposed, or are now being considered make it timely to focus anew on the issue of mergers, as this Committee is doing today. Does consolidation strengthen the prospects for competition, or decrease them? As the independent agency charged with promoting competition in communications, the FCC has a statutory obligation under the Communications Act to determine whether a merger between telecommunications firms is in the public interest.
At the core of FCC merger policy is that merger review helps to promote the procompetitive, deregulatory framework established by Congress in the Telecommunications Act of 1996. As the only member of the current Commission to have evaluated significant telecommunications mergers -- such as last year's merger of Bell Atlantic and NYNEX -- I appreciate this chance to discuss our merger review policy with you. At the same time, the Committee should note that the current Commission includes four members who have not yet had an opportunity to vote on merger issues. This will soon change, given the pendency of WorldCom's proposed acquisition of MCI and the anticipated merger application of SBC/Ameritech.
Needless to say, our decisions on mergers are made only after we compile and review a full record. Therefore, I am unable to comment on the merits of any pending merger application and nothing I say today should be construed as expressing my views as to the merits of such mergers.
The FCC's Role in Promoting Competition in the Telecommunications Marketplace
As the expert agency charged with the responsibility of ensuring that the pro-competitive goals of the Telecommunications Act of 1996 are achieved, one of the FCC's core responsibilities is to write fair rules of competition for all communications markets, and to forbear from regulation or deregulate where markets have become competitive. Almost two-and-one-half years after passage of the Act, we are seeing a communications marketplace in transition. Increasingly, business and other high-volume customers enjoy competitive choice in voice, video, and data from a variety of communications services providers, while the vast majority of residential and other low-volume customers continue to have no choice in the provision of either local voice or video service.
Signs of budding competition are emerging. We continue to see robust investment in competitive local telephone companies (CLECs), which today have approximately 1.9 million access lines in service, representing approximately 2% of all local lines. The CLECs have raised $20 billion in investment, since the 1996 Telecommunications Act, compared to the $2.4 billion they raised from 1992-95. In 1997, the top ten CLECs had switches in 132 cities in 33 states, and these numbers are continually growing.
The long distance marketplace continues to be substantially competitive. Today there are approximately 621 long distance service providers, and rates have fallen 6% since 1996. New bandwidth is coming on-line as network builders like Qwest, Level 3, and others sink miles of fiber-optic cable into the ground daily.
As a result of spectrum auctions authorized by Congress and market-based spectrum policies instituted by the Commission, we are finally seeing the advent of vigorous mobile telephone competition in most communities.
Video services competition is slowly but steadily eroding the monopoly position of cable systems. Direct broadcast satellites systems have almost tripled their customers to over 6 million in two years. Some local phone companies are overbuilding cable systems in their regions. In some markets, utility companies are teaming up with communications services providers to offer integrated packages of voice, video, and data.
More recently, with Regional Bell Operating Companies preparing to offer high bandwidth data delivery services like xDSL and cable operators preparing to deploy high-speed cable modems, there is reason to hope that the owners of the principal wires into the bulk of American households -- local telcos and cable -- are positioning themselves for a battle in the delivery of residential bandwidth. We hope to see this battle waged.
What all this means is that we are on our way to realizing the Act's goal of a "pro-competitive, deregulatory national policy framework . . . . and the opening of all
telecommunications markets to competition." But we're far from there. To achieve true
deregulation, all parts of all communications networks must become competitive. For this reason
the Commission has worked hard to develop a dialogue with Regional Bell Operating Companies
and their would-be competitors concerning compliance with the Act's market-opening conditions
as required by Section 271. This will lead to increased competition where it is needed most -- in
local phone service -- and also bring strong new participants to the long distance market.
The FCC's Merger Review Authority
The Commission evaluates mergers under the authority granted to it pursuant to Sections 214 and 310(d) of the Communications Act. These provisions place upon merger applicants the burden of demonstrating that the proposed transaction is in the public interest. The Commission also has authority under Section 7 of the Clayton Act to review mergers between common carriers.
Courts have ruled that the FCC's broad public interest directive is to be "so construed as to secure for the public the broad aims of the Communications Act."(1) In carrying out its statutory obligation, the FCC examines how the proposed transaction will affect the development of competition in all communications markets. The public interest also requires the FCC to balance the potential pro-competitive effects of a transaction with its anticompetitive effects. In evaluating whether a proposed merger is in the public interest, the Commission considers whether the transaction will, on balance, enhance competition.
The ultimate goal of the competitive analysis of a merger is to determine how the merger will affect the development of competition as the transition to a deregulated environment envisioned by the Telecommunications Act evolves. Thus we must not look at the current significance of merging parties today, but rather their expected significance as the Act is implemented. This is especially important in telecommunications markets.
As you know, the 1996 Act removed both legal and economic barriers to entry in many markets. In such markets, which we call transitional markets, carriers that we expect to be significant competitors in the future have no presence today because entry barriers have kept them out. In the Bell Atlantic-NYNEX Order, we called such carriers "precluded competitors." In assessing a precluded competitor's likely future competitive significance, we must assess its incentives to enter the market in question as well as the assets and capabilities that would allow it to provide service should it enter. As the Bell Atlantic-NYNEX Order notes, these might include superior expertise in providing the services, access to sufficient capital for expansion, brand name recognition among customers, superior reputation for providing the service, and existing business relationships with customers. Firms with the greatest incentives, assets, and capabilities will be deemed to be the most significant precluded competitors and, typically, we would expect that a merger that includes a large incumbent and a most significant precluded competitor in a market in which there are few other significant competitors would be likely to lead to the enhancement of market power (either unilateral or coordinated).
Our analysis also considers the effect of committed entry on the exercise of market power. That is, if we determine that a merger is likely to lead to the exercise of market power, we then ask if such market power would cause other firms to enter the market and eliminate the ability to exercise any market power arising from the merger.
In addition, we examine any efficiencies from the merger to see if such efficiencies enhance the merging parties' incentives to compete. For such efficiencies to be considered, they must be merger-specific (that is, they arise only if the merger takes place), they must be verifiable, and they must not arise as a result of anticompetitive reductions in output.
Because the effects of a merger can be different in different markets, the Commission's merger review policy also must be sufficiently dynamic to take account of marketplace trends and to permit a balancing of competitive benefits versus anticompetitive effects. Mergers and other consolidations can enhance competition to the extent they lead to greater efficiency and, consequently, better prices for consumers. Alternatively, mergers and other consolidations can be used by firms as a tactic for defending against new competition and creating a further concentration of monopoly power. Our responsibility is to sort out those that have beneficial effects from those that do not (or, in the latter case, to explore ways in which detrimental effects can be more than offset by procompetitive conditions).
In addition to considering the effects on competition, the Commission may also evaluate other public interest factors. For example, in a mass media merger, one such consideration might be the effect of the merger on diversity of voices. In a telecommunications merger, public interest considerations could possibly include: effects on universal service (affordability of telephone service), effects on network reliability (benefits of independent redundant networks versus benefits of consolidated operations), effects on viability of other market participants' strategies (will otherwise viable competitors need to redirect their energies from competing to consolidating, to defend against the power from the newly combined entity), or effects on the agency's ability to discharge its regulatory functions (e.g., through benchmarking), etc.
The FCC's Merger Review Experience
The Commission's Order last year approving the merger of Bell Atlantic and NYNEX shows how the Commission employs its merger framework in reviewing potential mergers. There, the Commission found that the Bell Atlantic-NYNEX merger posed serious competitive concerns, arising from the fact that Bell Atlantic chose to merge rather than compete directly with NYNEX in the New York metropolitan area. The Commission concluded, however, that certain commitments by Bell Atlantic -- designed to facilitate the opening of its markets throughout its entire thirteen-state region -- offset the possible adverse effects on competition. Briefly, those conditions included: 1) performance monitoring reports, negotiated performance standards, and enforcement mechanisms; 2) carrier-to-carrier testing of uniform operations support systems, which enable resale and unbundled network elements; 3) prices (other than for resale) based on forward-looking economic costs; 4) shared transport facilities priced on a minutes-of-use basis; and 5) easy payment plans for non-recurring charges, so that even relatively thinly capitalized new entrants can establish a toehold in the marketplace.
The broad weighing of pro-competitive benefits versus anticompetitive effects that the Commission engaged in in the Bell Atlantic-NYNEX Order lies at the heart of the Commission's determination whether a proposed transaction is in the public interest. It also shows how the Commission's and the Justice Department's roles in merger review are complementary.
Although both agencies are of course concerned first and foremost with the goal of competition, the Justice Department and the Commission have different responsibilities and processes. The Department of Justice focuses solely on whether a potential merger violates antitrust laws; the Commission applies a broader public interest standard that permits assessment of the effects of a potential merger on other provisions and goals of the Communications Act. The Justice Department carries the burden of proof, should it decide to challenge a proposed merger; at the FCC, the burden of persuasion is on the proponent of the merger. The Justice Department functions more like a litigant, for a decision to challenge a merger is often brought to a district court for resolution; the FCC functions more like a judge deciding a contested proceeding. The Justice Department's processes involve greater use of investigatory tools than do those of the Commission, which is feasible largely because of confidentiality protections that the Commission cannot provide; the FCC's proceedings are generally open and based upon a highly public record.
I am mindful that having both the FCC and the Justice Department involved in merger review creates a potential for additional costs and delays in the consummation of business transactions. But my experience tells me that the FCC and the Justice Department can both play constructive roles, avoid unnecessary duplication and delays, build public confidence, and produce better outcomes. The work of both agencies has never been more important, given the historic changes that are now underway in this vital sector of the American economy.
I appreciate the opportunity to appear before you today. I would be pleased to answer any questions you may have.