1 1 Before the 2 FEDERAL COMMUNICATIONS COMMISSION 3 Washington, D.C. 20554 4 In Re the Matter of: ) 5 COMMON CARRIER BUREAU PUBLIC ) 6 FORUM MCI WORLDCOM - ) 7 SPRINT PROPOSAL MERGER ) 8 Commission Meeting Room 9 FCC Building 10 455 Twelfth Street, S.W. 11 Washington, D.C. 12 Wednesday, 13 April 5, 2000 14 The parties met, pursuant to the notice of the 15 Commission, at 9:00 a.m. 16 APPEARANCES: 17 On behalf of the Common Carrier Bureau (CCB): 18 LARRY STRICKLING 19 Chief 20 ROBERT ATKINSON 21 Deputy Bureau Chief 22 MICHELLE CAREY 23 Chief, Policy and Program Planning Division 24 WILLIAM ROGERSON 25 Chief Economist 26 CLAUDIA FOX 27 Senior Attorney 28 Panel Members: 29 MICHAEL SALSBURY 30 Executive Vice President and General Counsel 31 JONATHAN SALLET 32 Chief Policy Counsel 33 MCI WorldCom 2 1 Panel Members: -- CONTINUE -- 2 RICHARD DEVLIN 3 Executive Vice President and General Counsel 4 VONYA McCANN 5 Senior Vice President of Federal External Affairs 6 Sprint 7 GENE KIMMELMAN 8 Co-Director, Washington Office 9 Consumers Union 10 REVEREND JESSE JACKSON 11 Rainbow PUSH 12 SANDY WAGNER 13 Vice President for Federal Regulatory Matters 14 JERRY HAUSMAN 15 Professor of Economics 16 Massachusetts Institute of Technology 17 DON FLEXNER 18 Partner, Boies, Schiller & Flexner 19 SBC 20 DAVID WHEELER 21 Vice President and Associate General Counsel 22 GTE 23 ANDREW MORLEY 24 Senior Vice President for Global Marketing 25 Level 3 26 DIRCK HARGRAVES 27 Counsel 28 TRAC 3 1 P R O C E E D I N G S 2 (9:00 a.m.) 3 MR. STRICKLING: I want to thank everyone for 4 attending today's public forum on the MCI-Sprint merger. 5 With me this morning at the podium are Bob Atkinson, Deputy 6 Bureau Chief for the Common Carrier Bureau, Michelle Carey, 7 Chief of the Policy Division in Common Carrier, Claudia Fox, 8 Senior Attorney and Team Leader on this project in the 9 Common Carrier Bureau, and Bill Rogerson who is our Acting 10 Chief Economist of the Bureau. He got a promotion from 11 Chief Economist of the Agency. But I am glad Bill is able 12 to work with us on this project. 13 This forum is an opportunity to aid Bureau staff 14 in understanding and fleshing out the critical issues raised 15 in the MCI-Sprint merger and to enable the Commission to 16 make an informed judgement about whether this transfer 17 serves the public interest. We set up three panels for this 18 morning, one on the long distance market, one on the 19 internet, and one on the public interest benefits raised by 20 the merger. Those will be the three issues we focus on 21 today, although obviously there are a host of other issues 22 that we are also examining as we review this record. 23 Everyone should have an agenda for this morning. 24 Our format will be somewhat informal. We really want to 25 have as much as possible a discussion among the 4 1 participants. Therefore, we are not going to have opening 2 statements of any great nature. And we would ask 3 participants to limit their remarks to three to five minutes 4 so that we can hear from everybody and get a good interplay 5 between the various participants in our panel. 6 There will be an opportunity for folks in the 7 audience to make comments or raise questions. If you would 8 like to participate in that, please pick up an index card 9 from the table at the back of the room, fill out your name 10 and the subject of your question or comment and return the 11 card to the back table. And we will have a period at the 12 end of the session this morning where we will call on folks 13 from the audience. 14 We would like to stick to our schedule as strictly 15 as we can. We ask everyone's cooperation in accomplishing 16 that. We will have a time keeper who will routinely remind 17 folks of time constraints. And we hope you all will be able 18 to follow her guidance in this. There will be a transcript 19 of the forum that will be placed in the public record and 20 will be available on our website in about a week. 21 I would like just before we start the first panel 22 to just ask Bob Atkinson, Deputy Bureau Chief, for some 23 remarks in terms of the nature of the analysis that the 24 Bureau and the Commission will be conducting in reviewing 25 this merger. Bob. 5 1 MR. ATKINSON: Thank you, Larry. Traditionally, 2 the FCC has applied a four-part test or process in 3 evaluating license transfer applications associated with 4 these sort of major transactions. And this has bene 5 consistently applied in the -- it is the burden of the 6 applicants to demonstrate compliance with satisfaction of 7 this four-part test by a preponderance of the evidence. 8 So the first question that is asked is would the 9 merged entity after the merger be in violation of the 10 Communications Act. The second question is somewhat related 11 which is would the merged entity be in violation of the 12 FCC's rules. Typically, those have included such things as 13 spectrum cap violations, anti-cable buy-out restrictions in 14 the '96 Act and things like that. And as you would note 15 from today's forum, we will not be directly addressing those 16 two questions. 17 But if any party or anybody here wants to raise 18 questions about whether the merged entity would be in 19 violation of the Communications Act or of the FCC's rules, 20 we would certainly appreciate some comment on that. 21 The third and fourth questions are really the 22 subject of today's forum. The third question is would the 23 combination of firms frustrate the FCC's ability to enforce 24 the Communications Act or to substantially impair its 25 efforts to achieve the goals of the Act. And this morning, 6 1 for example, the agenda -- the title of today's session is, 2 "How does the proposed merger affect the FCC's statutory 3 mandate to increase competition and minimize regulation in 4 the telecommunications market?" So that addresses very 5 specifically this third question. 6 The fourth and final question the FCC asks is 7 would affirmative public interest benefits be realized from 8 the merger that would not be achieved without the merger. 9 And that is essentially the third panel in today's session 10 which asks does the merger create public interest benefits 11 that could only be realized through the merger. 12 So that is the overall context in which we 13 evaluate merger, the license transfer applications that are 14 associated with mergers. It is a totally balancing of all 15 the factors. And at the end of the day if the judgement is 16 that the proposal is net in the public interest, then the 17 application would be approved. 18 But if the judgement at the end of the day by the 19 Commission is that there is not a positive public interest 20 benefit, then the merger -- then the transfers -- the 21 license transfers would not be made. So it is a balancing 22 of a variety of factors. Thank you. 23 MR. STRICKLING: Thanks, Bob. Let me introduce 24 our first panel. This panel will be focusing on the issues 25 raised by the merger as it reflects in the long distance 7 1 market. Representing the applicants this morning, from MCI 2 WorldCom, Michael Salsbury, Executive VP and General 3 Counsel, and Jonathan Sallet, Chief Policy Counsel. And 4 representing Sprint, Rich Devlin, Executive Vice President 5 and General Counsel, and Vonya McCann, Senior VP of Federal 6 Affairs. 7 Our other panelists represent a broad spectrum of 8 interests in this merger. From Rainbow PUSH Coalition, the 9 Reverend Jesse Jackson. From the Consumers Union, Gene 10 Kimmelman, Co-Director of the Washington Office. And from 11 SBC, Sandy Wagner, Vice President for Federal Regulatory 12 Matters, and Professor Jerry Hausman of MIT. 13 So let's kick it off. And we will turn I guess to 14 Michael Salsbury. If you could, give us a brief overview of 15 the issues you think are critically important for our 16 evaluation of the effects of this merger in the long 17 distance business. 18 MR. SALSBURY: Is this on? Good. I think that 19 our filings on the merger have attempted to make two or 20 three arguments that we feel are important for the 21 Commission's consideration of the application. First of 22 all, we describe a long distance marketplace that -- I think 23 to put it in simple terms, the genie is out of the bottle in 24 terms of competition. 25 Capacity is dramatically increasing in this 8 1 marketplace, primarily what are loosely termed the emerging 2 carriers, not AT&T, MCI WorldCom or Sprint. The competitors 3 are flooding into the marketplace. They are for the most 4 part well capitalized. And the number is increasing as we 5 see liberalization overseas that brings more and more 6 potential entrants into the marketplace. 7 Obviously, we have all read about some of the 8 discussions that have been taken place between American 9 carriers and foreign carriers. And the customer base is 10 increasingly very well educated, very price sensitive and 11 very willing to switch carriers. 12 We find as a result of that that the long distance 13 business is extraordinarily competitive. It is largely 14 deregulated by the Commission. There is no price 15 regulation. And we don't see how this merger will adversely 16 affect the level of competition in the marketplace. 17 Our competitors -- I shouldn't say our 18 competitors. Our opponents describe a world that frankly we 19 don't recognize. It is a world where people don't use 20 emerging carriers, where there is very few carriers in most 21 parts of the country. There are large parts of the country 22 without multiple carriers and where the larger carriers -- 23 larger long distance carriers have extraordinarily high 24 profit margins, in some cases well over 50 percent, some 25 approaching 90 percent according to their figures. 9 1 We don't recognize that world. And I think if the 2 world were that way, perhaps a lot of their arguments would 3 have some merit. But it isn't. I think the world is as we 4 describe it, tremendously competitive. There is very few 5 barriers to entry. 6 The Commission has noted that with all -- once you 7 have capacity, the next -- the barriers for entry for a 8 carrier are very, very small. And it is one where we see 9 the level of competition increasing, the consumers prices 10 falling and new innovation in the marketplace. So we feel 11 that this merger would not have an adverse impact on the 12 level of competition in the long distance business. 13 MR. STRICKLING: Thank you. Let me turn to some 14 of our other panelists for their reaction to those remarks. 15 Let me start first with Gene Kimmelman from Consumers Union. 16 Gene. 17 MR. KIMMELMAN: Thank you. There is no doubt that 18 the market is changing significantly. But one cannot 19 disregard the market at it exists and just focus on a 20 hypothetical future market. This area has been plagued by 21 promises and bigger promises and more enormous promises for 22 years that often are not achieved because it is difficult to 23 predict exactly where technology is headed, exactly where 24 prices are going, whether costs will go up or come down. 25 And certainly, in a reasonable time frame, it has been 10 1 enormously difficult to make those guesses. 2 So one has to start with the reality. The reality 3 is a highly concentrated long distance market for the 4 residential consumer business with AT&T, the dominant long 5 distance firm, MCI WorldCom and Sprint controlling 80 to 85 6 percent when you include their dial-around affiliates. 7 These levels of concentration run counter to the 8 perception of our antitrust laws and I would suggest counter 9 to the goals of the '96 Communications Act providing for 10 other competition. There is no doubt that this merger would 11 diminish choice for consumers among the largest players who 12 mass market advertise both their branded and their non- 13 branded services and are in an enormous position to 14 otherwise compete more aggressively against each other but 15 for this proposed merger. 16 So we don't dispute the notion that there are many 17 changes about to occur. We dispute the claim that it is so 18 obvious exactly what is about to occur. And what is really 19 obvious is what is, and that is a highly concentrated long 20 distance market. And it would be contrary to the public 21 interest to allow MCI, WorldCom and Sprint to combine. 22 MR. STRICKLING: Reverend Jackson. 23 REVEREND JACKSON: Thank you very much. The 24 concern of Rainbow PUSH is a matter of race profiling, 25 consumer and economic profiling and universal access. I 11 1 submitted to each of you maps from Chicago showing a 2 pattern. What the maps demonstrate is that MCI WorldCom's 3 network in Chicago has significantly expanded since the 4 merger. 5 New fiber has been laid in the city's loop. A 6 network has been extended to certainly the wealthy area, to 7 the lower side, to the west suburban corridor. There has 8 not been a single strand of fiber laid to serve the city's 9 southside, home to a large portion of the city's minority 10 residences and businesses. Also a significant number of low 11 income families. 12 As a result, southside residences and businesses 13 have been denied access to high speed data and other 14 advanced services available from this state of the art 15 technology. The maps paint a clear picture of the pattern. 16 We pleaded against this three years ago. And since that 17 time, the crisis has only been exacerbated. So please take 18 a look at the maps. And we can verify what fiber has been 19 laid -- excuse me. And it has just been impacted upon 20 people of color and poor people and residential areas 21 denying us access. 22 Secondly, the proposed merger will have an 23 increased concentration -- would result in increased 24 concentration in the international long distance market 25 raising rates for international calls. Right now calls to 12 1 Europe are cheaper than calls to Central America or Africa 2 or the Caribbean. 3 And so with the insensitivity that has been 4 expressed in essentially the redlining or the profiling of 5 people essentially by race and by class, we object strongly 6 until in fact they can prove and make a commitment to in 7 fact stop a pattern that we can document. 8 I might add lastly that what kind of exacerbates 9 it in Kansas City was Sprint's building, a one billion 10 dollar campus. Several minority business people are with us 11 here today. Less than one million of a percent in contracts 12 have gone to people -- to African American people. The 13 population there is about 30 percent. 14 And business constituents in California, the 15 California filing, Sprint reported it had awarded none of 16 its contracts, none, none to African Americans, none to 17 Asian Americans and 1.8 percent to Latino firms. MCI 18 WorldCom did not file any data on this minority contracting 19 record. 20 We likewise sent them a questionnaire that was not 21 responded to. So whether it is in the redlining or 22 profiling of the district impact upon the Caribbean and 23 Africa and South America as compared with Europe, whether it 24 is in contracts and businesses, we see the gap is in fact 25 getting wider. Thank you. 13 1 MR. STRICKLING: Thank you. As a resident of the 2 southside of Chicago myself, I will look forward to your 3 answers to the Reverend's questions. But first let me get a 4 response from SBC concerning some of the issues we should be 5 looking at as we analyze this long distance market. 6 MS. WAGNER: Larry, thanks. I think one of the 7 things -- the place we have to begin when contemplating this 8 merger is that by every quantitative measure, the 9 presumption of unlawfulness is not only there, it is there 10 in multiple times. If you take the long distance market in 11 toto, quantifiably measured, the likely competitive impacts 12 or the likely impacts on competition of this merger is more 13 than five times the effect necessary to conclude that the 14 merger is presumptively unlawful. 15 The same holds true in if you segment the market 16 by segment, mass market versus business and so forth. What 17 that does is it sets a threshold that is -- it sets an 18 aggressive threshold if you will for the applicants to 19 demonstrate substantial positive effects from this merger to 20 overcome that presumption. 21 And in SBC's opinion, the applicants have simply 22 failed to do that. They have raised a fairly modest showing 23 of benefits from things like MMDS, penetration and so on 24 that don't come close to overcoming the competitive harms 25 that this merger will have in an existing long distance 14 1 market. 2 Some of the other rationale that the applicants 3 raise to support their market is that in the first instance 4 speculative as Mr. Kimmelman pointed out. It is talking 5 about a market that is at best just beginning to 6 materialize. And that is this thing that applicants have 7 referred to as the all distance market. 8 I guess in a nutshell, applicants seem to be 9 relying on a set of not so much facts as speculation. The 10 purported benefits of the merger and also in and of 11 themselves speculative in nature to a large extent. We -- 12 in our view, the facts are the facts. And they pretty much 13 speak for themselves. There is a strong showing of a high 14 likelihood of competitive harm from this merger that simply 15 hasn't been overcome. 16 MR. STRICKLING: Well, in analyzing this market, I 17 mean, Mike Salsbury talked about the capacity increasing 18 rapidly, the few barriers to entry. How do we -- first off, 19 do you agree with those assessments of the market as Mike 20 described them? And if so, how do we take those into 21 account in looking at this merger? 22 MS. WAGNER: There is clearly some changes going 23 on in this marketplace. There is no argument about that. 24 There is new capacity being built. But fundamentally, the 25 capacity is being built in high density, high traffic areas. 15 1 And there is little new capacity, relatively little new 2 capacity coming on line anyplace other than that. 3 New entrant carriers depend heavily on the 4 incumbent carriers, the big three if you will, who have 5 ubiquitous nationwide networks for the completion of a 6 nationwide footprint. In other words, they procure capacity 7 largely from the big three to fill out what otherwise would 8 not be a ubiquitous nationwide footprint. 9 So there is -- it is that reliance on the big 10 three to create this kind of nationwide, multiple 11 facilities-based carriers that is troublesome in the context 12 of this merger. It is that reliance on the big three for 13 wholesale capacity essentially. 14 MR. STRICKLING: Mike, do you have a response to 15 that, the idea that it matters whether or not we have a 16 ubiquitous national provider with capacity as opposed to 17 capacity being developed in isolated pockets? 18 MR. SALSBURY: Well, again, as I said earlier, I 19 think that the opponents are talking about a world that 20 isn't today's world. If you look at the data that we 21 submitted, particularly the LATA study by Dr. Kelly, almost 22 every LATA in the country has three or more facilities-based 23 carriers setting aside in the post-merger worlds and not 24 taking into account the merger between MCI WorldCom and 25 Sprint. 16 1 So the suggestion that fiber is not being deployed 2 throughout the country is just wrong. Maybe a year ago, 3 that wasn't the case. And maybe they are basing their data 4 on a year or 18 months ago. But if you look at what is out 5 there today -- and I agree with Mr. Kimmelman, that is the 6 first place you would look is what is there today -- today 7 there is capacity almost across the country in every LATA. 8 It is relatively -- it is a commodity if you want 9 to add on. It is true that most carriers, including MCI 10 WorldCom and Sprint depend on other carriers to reach every 11 single LATA. AT&T is the only carrier I believe that goes 12 to every single LATA. But the vast majority of the new 13 carriers are building networks that hit virtually all the 14 households, is one percent or less of the households that 15 would not be today facing at least three facilities-based 16 carriers. 17 With respect to the market share points that were 18 made, there is no question -- again, we are not relying 19 entirely on the potential entry of the RBOCs. That is a 20 voluntary action that they will decide when they want to do 21 it. I would just say that if you look at the marketplace 22 today, yes, market shares are relatively concentrated. That 23 concentration has been falling rapidly over the last few 24 years as the emerging carriers develop their facilities and 25 their marketing. 17 1 Most of the growth in the business has been with 2 the emerging carriers. That if you look at AT&T's share 3 which has been falling dramatically over the last several 4 years, most of that business has gone to the emerging 5 carriers. And I think that it is hard to say that the new 6 entrants are depending solely on us and AT&T. I think that 7 they are building out their networks and putting facilities 8 into place. 9 You know, I think it is true that there an all 10 distance market developing. Again, I don't think this is 11 speculative. If our opponents use cell phones, they 12 probably have an all distance marketplace in their wireless, 13 an all distance product when they use their wireless phones. 14 I think that is coming to the wire line world probably this 15 year. 16 But as far as whether it is here today, I think 17 that is something that we are saying is going to be here 18 very soon. It is something that one would take into account 19 in accessing the competitive effect of this merger. But it 20 is -- I would agree that it is not here as we speak today. 21 i think it will be here within the year. 22 MR. KIMMELMAN: Could I just respond? 23 MR. STRICKLING: Gene. 24 MR. KIMMELMAN: I'll turn it over to you in a 25 second. I think when we scrutinize some of those claims 18 1 very carefully, leaving aside Reverend Jackson's point about 2 particular populations in particular communities which is a 3 significant point, looking at the here and now, let's look 4 at the residential long distance market. Is this an all 5 distance market? Is it about to become an all distance 6 market? And the reference was just to cell phones. 7 More and more people have cell phones. But look 8 at the Bureau's own statistics of usage for interLATA, 9 interstate long distance. Fifty percent of consumers 10 according to your own data are still making less then $4.50 11 dollars of interstate long distance calls per month on 12 average, half of the residential market. And those people 13 do not have cell phones almost across the board. Maybe 14 someday they will. 15 There is hardly robust competition for this half 16 of the market, not a little teeny segment, half of the 17 market. And so if the data is even correct that there are 18 three facilities-based carriers in many LATAs -- and I would 19 suggest that having one switch or two switches may not be 20 fully adequate to reflect full facilities-based competition, 21 that is not robust competition. We need more. There is not 22 enough. 23 And, therefore, the combination of the number 2 24 and number 3 firms in a highly concentrated market is 25 extremely problematic. 19 1 MR. STRICKLING: Gene, what would your prediction 2 be for the half of the market that is not making a lot of 3 calls as a result of the merger? 4 MR. KIMMELMAN: Well, the pattern has been 5 increased monthly charges before you ever pick up the phone, 6 minimum bill requirements. There is a lot of discounting 7 that is going on, but discounting most beneficial to the 8 high volume users, approximately the top 20 to 30 percent of 9 the market. There is no doubt that there is much more 10 robust competition at that end of the market. 11 For the bottom half, we don't see heavy emphasis 12 on price reductions. We have seen price increases. Now, 13 some of this can be addressed regulatorily as is currently 14 pending in access charge proceedings. But a lot of it 15 reflects on this market. The fact that there are 500 16 carriers is not new. 17 In the early '80s, there were almost 500 carriers. 18 Now, they were of a different nature. There was an awful 19 lot more resale going on. But the fundamentals of this 20 market have not changed that dramatically. There may be 21 some things on the horizon. I don't dispute that. But it 22 hasn't changed that dramatically in where AT&T's market 23 share has shifted. 24 It first shifted predominantly in the residential 25 market to MCI and somewhat to Sprint and then to some of the 20 1 companies that MCI has since merged with. And it is growing 2 among the emerging competitors. But a significant portion 3 of that are affiliates of MCI WorldCom and their dial-around 4 service. So the shift has not been as dramatic as 5 described. 6 MR. STRICKLING: Jonathan, do you want to respond 7 to that? I also want to give you a chance to respond to 8 some of the concerns raised by Reverend Jackson in his 9 comments, as well. 10 MR. SALLET: I will try to do both. Let me refer 11 first to the comments that Reverend Jackson made. And let 12 me make plain that we do not quarrel with the goals that 13 Reverend Jackson supports. But we do believe that his 14 concerns are misplaced when careful examination of the facts 15 is undertaken. And let me if I might go through some of the 16 aspects of that. 17 Reverend Jackson begins by talking about the 18 geographic location of fiber. As the Commission found in 19 the MCI WorldCom order, fiber has historically been laid to 20 serve large business customers. That is not a fact that is 21 unique to these companies. The Bell operating companies 22 have not used fiber as the means of deploying advanced 23 services to residential customers. 24 The fact of the matter is that because of the high 25 capacity of fiber and its expense, fiber is used in the 21 1 marketplace generally to supply the higher volume 2 requirements of large business. And for that reason, the 3 geographic location of fiber as the Commission found in the 4 previous order is not -- provides no evidence to suggest 5 discriminatory intent. It is simply proceeding on a plane 6 than is different than. 7 Now, there are, of course, barriers to reaching 8 residential neighborhoods with advanced services. But as 9 the people from the Common Carrier know, it is the view of 10 this company at least that those barriers are largely the 11 difficulty we have had entering local markets to deploy 12 other mechanisms of advanced service transmission including, 13 for example, DSL which is a -- one of the solutions now 14 being used in the residential market. 15 More to the point, and as we will discuss in 16 greater detail on the public interest discussion, one of the 17 positive aspects of this merger is the ability to deploy in 18 a national footprint, a broad band wireless service using 19 the MMDS spectrum that offers the ability to reached under- 20 served communities, business and residential customers, 21 particularly offers advantages in rural America in ways that 22 in many cases provide cost advantages precise to reach the 23 goal of additional deployment of advanced services. 24 The second point, the question of the pricing of 25 international long distance calls. As the Commission is 22 1 aware, particularly through its work in the International 2 Bureau, the pricing of international long distance calls has 3 as its most singly important variable the price of 4 settlement costs imposed on American consumers by foreign 5 telephone companies. 6 The FCC has done yeoman's work to bring those 7 charges down which are equivalent to access charges in the 8 domestic arena. But they have not come down uniformly and 9 at the same time. Our experience is that disparities in 10 pricing in international calling reflects the disparity in 11 the levels of settlement costs and not any other intent. 12 Indeed, we note speaking to Latin America and the 13 Caribbean specifically that considerably more cable is being 14 deployed from the United States to the Caribbean and in 15 Central and South America. For example, since the WorldCom 16 merger, at least five cable systems have been issued landing 17 licenses and executive construction contracts for the 18 Caribbean/Latin American route, a development which will 19 continue to bring benefits of competition. 20 Thirdly, in terms of other issues, we have filed 21 very recently, Reverend, the data in California. We had 22 received an extension to file the data and we have filed it. 23 As to the questionnaire, Reverend, I will just say that I 24 had not realized and did not know that there was a 25 questionnaire to which we had not responded. But we will 23 1 certainly go back after this hearing to try to find that and 2 look at the information. 3 But I would simply say to sum up these points, 4 that although the goals are important, it is very important 5 also to find the explanatory variables. And I believe in 6 these instances, the explanatory variables do not lay at the 7 feet of this company or the merging companies. 8 To speak somewhat more broadly to Gene's point, a 9 couple of points. And, you know, when one sits next to the 10 person to whom one reports, you know, one recognizes that 11 one may -- one's remarks may be added to. 12 But just a couple of points about this. In 13 thinking about the long distance market, the way that the 14 Commission has proceeded is to look to find all the barriers 15 to entry that would preclude people from responding to 16 changes in the marketplace. 17 In other words, the Commission doesn't look 20 18 years in the future. But neither does it feel that it must 19 look only at the competitors who are engaged in actions of 20 the precise kind they are engaged in today. Instead, using 21 normal approaches in this area, it looks to see what ability 22 would there be for people to respond to changes in the 23 marketplace. 24 The point that the Commission has made in the 25 past, the point that we make in our filings, that point that 24 1 is very straight forward is that capacity continues to grow, 2 that there are no barriers to entry in the long distance 3 market, that there is a tremendous opportunity for anyone to 4 enter the marketplace as we are seeing with the emerging 5 carriers increasing their market share. So that in 1998, 6 for example, they had over 20 percent of total toll service 7 revenue. 8 And that, in fact, as with the history of MCI, the 9 incentives will be for people who own capacity to deploy it 10 all times of the day which tends to mean the use of it for 11 not just business, but residential. So we feel that we have 12 dealt with and that the facts support the notion that there 13 would not be ways for competitors for respond. 14 Second point, Gene notes that there are other 15 proceedings going on in front of the Commission that deal 16 with some of the issues to which he alludes. On some of 17 those proceedings, we don't always take the views of 18 everybody else. 19 But we are certainly participating in them. And 20 we do regard them as the appropriate forum for dealing with 21 these issues because to the extent they are issues, we 22 regard them as cross-industry questions, not issues that are 23 merger specific and, therefore, issues we believe that 24 should not be dealt with in this particular procedural 25 context. 25 1 MR. STRICKLING: But if we stay focused on the 2 merger for a second, if I understand Gene's point, Gene's 3 point is that all of this growth in capacity, this growth in 4 competition hasn't been felt by this 50 percent of consumers 5 who don't make a lot of long distance calls. And I guess 6 the question before us today is will the merger have -- what 7 effect will the merger have on the competition for those 8 customers that Gene believes aren't getting all the benefits 9 of competition today. 10 MR. SALLET: One needs to look carefully at the 11 make-up of the market as a whole. I mean, one needs to 12 think about, for example, the extent to which these 13 customers are one of these two companies or whether they may 14 be in a disproportionate way customers of another company 15 that has been identified as a leading long distance provider 16 for historical reasons, just for historical reasons. 17 Secondly, one needs to link this, as well, to our 18 ability to aggregate demand from low volume users. One way 19 to solve in the marketplace problems that are perceived by 20 some with low volume users is to have companies that can 21 come in and provide both local and long distance, that is to 22 say to aggregate the demand that comes from those customers. 23 Our experience in New York where we are the 24 leading competitive entry demonstrates that there are price 25 savings that go to all customers who will come to us, 26 1 precisely because for the first time, we are in a position 2 to treat them not as people who make only a few dollars of 3 long distance calls, but as people who make a variety of 4 both local and long distance calls. 5 We think that is a very important way to address 6 both the specific concern and the broader problem that at 7 the moment, the local market is still dominated by incumbent 8 Bell operating companies. 9 REVEREND JACKSON: Mr. Chairman? 10 MR. STRICKLING: Reverend Jackson? 11 REVEREND JACKSON: You know, in baseball to 12 protect the very character of a league development and not 13 just a team dominance which would tend to destroy the 14 league. A team like the Yankees would seem to have 15 unlimited money and big city markets just overflow. And 16 they keep on winning because they simply buy up competition. 17 They simply buy the best players. 18 Sprint was seen as a catalyst to competition. 19 Sprint reduced the flat rate. And when they did, MCI 20 WorldCom and AT&T had to make an adjustment to the 21 marketplace. Now MCI WorldCom is making one of these George 22 Steinbrenner type moves, buying up a major force that has 23 benefitted consumers, benefitted the marketplace. 24 So in the one concern here is that when they buy 25 up Sprint, we lose a major relevant catalyst. There may be 27 1 many other copies, but Sprint is the one at the level that 2 becomes a source of stimulus really for MCI WorldCom and for 3 AT&T. That is one. 4 A second is that gentleman admitted the fiber has 5 been laid in the Loop and north. So he did not contradict 6 my proposition that it has not gone south. It is a chicken 7 and egg situation because if you build out where businesses 8 are, will businesses build where the fiber is? And so it 9 becomes, in fact, apartheid. 10 If there is more fiber headed to where businesses 11 can come to where they are not, there comes an incentive to 12 move in that direction. The big Chicago right now, for 13 example, about they are building a third airport because 14 right now the O'Hare is driving the economy more than the 15 Loop is because everything is moving northwest. Well, the 16 third airport southwest is Ballace Grove. One disincentive 17 to locate businesses there is lack of this infrastructure. 18 And so there is some need for these companies to, in fact, 19 take into account Ballace economic growth. 20 Again, I repeat why do we have all this fiber and 21 cable in Europe and not in Africa and the Caribbean and 22 South America? It raises reasons of fundamental bias. And 23 Europe has the first and best of it all and Africa, the 24 Caribbean, South America has what is left. 25 And if we are to come to a public interest forum, 28 1 we want to make certain that the price they pay for public 2 support is that they serve all of the public. But right now 3 they are not serving all of the public fairly and in a 4 balanced way. That is why we protest this merger. 5 MR. SALSBURY: Thank you. You made an interesting 6 point about Sprint as a pricing leader. I know, Professor 7 Hausman, your submission contains some information on the 8 role of Sprint perhaps as the maverick in pricing. Could 9 you elaborate a little bit on your views on that and how 10 that affects our view of this industry, particularly as we 11 look at the expanding capacity and as we try to analyze 12 barriers to entry? 13 PROFESSOR HAUSMAN: Can I actually talk about the 14 long distance market and competition, as well, or do you 15 just want me to answer that single question? 16 MR. STRICKLING: I can't control what you say. I 17 can only ask the questions. 18 PROFESSOR HAUSMAN: Well, I came here to talk 19 about long distance. I mean, if you don't want me to talk 20 about that. 21 MR. STRICKLING: No, go ahead. 22 PROFESSOR HAUSMAN: Okay, good. I would like to 23 start off at the beginning and at least get my two or three 24 minutes. I think from the Commission's point of view, as I 25 have said in a number of papers, it should be thinking of 29 1 consumer welfare. And here that could go with competition. 2 But I think the major point is that price is going 3 to be higher than they otherwise would be in the absence of 4 this merger. So I don't always agree with Mr. Kimmelman, 5 but I do agree with certain things he said today. And that 6 is especially for the 50 percent of low-use customers. I've 7 said this a number of times. 8 I am quite confident the prices are above the 9 competitive level. And this merger is going to make things 10 worse rather than better in ways that I will get to in a 11 second. 12 Now, to start with, I think that if you do look at 13 this merger in terms of market shares, absent extraordinary 14 circumstances, this merger should not take place. In my 15 view, Sprint and MCI have done economic analysis or no test 16 for these extraordinary circumstances. Okay? 17 Instead, they basically made a legal argument that 18 with no barriers to entry there is no market power that can 19 be said in five words. When I look at this, they do seem to 20 be close competitors. And I think the data bears that out. 21 And, in fact, as I will respond with my next affidavit, even 22 if one acts as if they are just equal competitors and not 23 the closest competitors, you still get a predicted price 24 increase of well above five percent, the teeth statistic of 25 well above seven. 30 1 So that it seems to me that there has been no 2 showing made that prices won't go up where if you look at 3 the background of this from economics, given the shares, you 4 would expect them to go up. 5 Now, what they have basically argued is that 6 because there are no barriers to entry, there is no market 7 power. That seems to me to have two implications. The 8 first is that if the FCC allows this to happen, I see now 9 reason using the same argument that AT&T and MCI should 10 merge. 11 If there are no barriers to entry, there is no 12 market power. Why not put MCI and Sprint together. We will 13 get up to 80 percent. But, of course, according to their 14 argument, that would be completely disciplined by the new 15 entrants. That seems to me just contrary to market facts in 16 which the new entrants, like QWEST and all, have been unable 17 to really ever break in with any significance, at least 18 according to my estimates and all, to these -- to many of 19 the customers in the market. So that is the first point. 20 The second point is that I think -- I forget the 21 gentleman's name, but the last speaker at the other table -- 22 that he was talking about the experience in -- excuse me, I 23 don't know. I am not a regular here. But he was talking 24 about their experience in New York. And I actually agree 25 with that. But I think it has a very different implication. 31 1 And that is that there are going to be bundles 2 offered. I don't agree with all distance at the current 3 time. But I do agree that there will be bundles offered of 4 local and long distance. And I see this as going from three 5 to two in terms of bundles, okay, that you are going to take 6 one of the companies out of the market. 7 I see absolutely no evidence at all that the so- 8 called -- the new emerging entrants are going to go into the 9 business of offering bundles. There has been no evidence of 10 that to date. So far as I know, QWEST isn't offering 11 bundles of local service. They are basically offering long 12 distance mainly to large customers. 13 So that when you look at long distance in that 14 context in terms of bundles, again, I think competition will 15 be less and prices will be higher. And I see no -- you 16 know, nothing that changes my mind on that. Okay. I am 17 getting to Larry's point. I just have one other point. 18 And that is that, again, if these people are 19 right, I once published an academic article on Michael 20 Jordan a couple of years ago. He is one of my favorite 21 guys. Okay. I really like to see Michael on TV. I don't 22 understand why MCI is spending 100 million dollars, which is 23 what they were reported to spend, in 1998 on Michael and 24 Bugs if there is no branding and there is no brand 25 recognition. How are they ever going to recover the 100 32 1 million dollars they spent on Michael and Bugs? 2 Okay. So that when we see these type of levels of 3 advertising, I think, you know, along with AT&T and Sprint, 4 as well -- so I always like to say I dated the dime lady 5 when i was in college -- you don't spend that kind of money 6 on this type of thing unless you expect to get it back. I 7 mean, why else are you spending hundreds of millions of 8 dollars in advertising? 9 This seems to me to be very much a differentiated 10 market. Okay? And just saying that there is all this 11 capacity being laid and that will discipline the market just 12 seems to me contrary to market fact. So then I will now get 13 to the Sprint and the innovation. 14 I agree fully with Reverend Jackson on this point. 15 It seems to me that Sprint has innovated all along. They 16 came out with the dime program. They came out with the 17 nickel program. And they have then forced MCI to go along 18 and AT&T has followed in the rear. So that these three 19 carriers have 80 percent. 20 Sprint and MCI's share have been almost completely 21 unaffected by the merging carriers as far as I can see 22 looking at the data. There has been no effect on Sprint and 23 MCI's share. AT&T has continued losing share over time. 24 But we are still talking about the three large carriers. 25 I don't necessarily call Sprint a maverick. That 33 1 is sort of a legal term. But I will say that Sprint has had 2 a lot of innovative effect. And I think taking them out, 3 especially for this branded end of the market, will have a 4 big effect. 5 And just to end up on that point, you could look 6 at all sorts of consumer goods in which there are store 7 brands. Almost everything we buy from toilet tissue to soda 8 to everything has store brands. And it is a very similar 9 situation I think to what is going on here, is some people 10 buy those brands. You know, they do well. The stores sell 11 them. They actually get a good profit margin on them. 12 Nevertheless, you see the branded products, be it 13 Coke, be it Pepsi, be it Kleenex, be it Charmin tissue, in 14 all those products, price is well above marginal cost. And 15 through heavy advertising, they are able to convince 16 consumers that that is a product that they want to buy. 17 Now, to an economists, it is a perfectly good thing. 18 I see this market being very similar to that. I 19 can't remember that I have ever seen a QWEST ad on TV or I 20 can't remember that I have ever seen an Excel ad on TV. I 21 am not saying that they don't exist. But I watch a fair 22 amount of TV and I haven't seen them. Yet I see ads all the 23 time for the big three. 24 They are actually selling a branded, 25 differentiated product. And I do not see, you know, 34 1 especially in the next two years which I think is the 2 correct horizon to look for a merger, the new emerging 3 carriers constraining them. 4 So I do believe that prices will be higher than 5 they otherwise would be in the absence of a merger. And I 6 think that is what the Commission should really look most 7 closely at. 8 MR. STRICKLING: Okay. We got capacity over here, 9 no barriers to entry. We've got branding. We've got 10 advertising. It seems to be two different views of the 11 market. Mike, how do you suggest we evaluate the branding 12 and advertising issues as we look at barriers to entry? 13 MR. SALSBURY: I guess I will come back to what I 14 opened with. And I suggest you look at the facts rather 15 than the assertions. I -- you know, I find it hard to 16 believe that one would say that they hadn't seen a QWEST ad 17 or an Excel ad. I'm sure Professor Hausman hasn't, but he 18 probably doesn't watch "60 Minutes" or the NCAA basketball 19 tournament where both had Excel and Broadwing and QWEST ads. 20 I don't think that anyone would honestly say that 21 those emerging carriers don't do television advertising. I 22 don't think anyone who knew the facts would honestly say 23 that we had spent 100 million dollars on Michael Jordan ads. 24 As we submitted in our reply, of the budget that MCI 25 WorldCom had on consumer advertising last year, more than 35 1 half of it, more than half of it was for unbranded, 2 unbranded services. 3 The bulk of the advertising in this marketplace by 4 the more established carriers is frankly to publicize 5 pricing plans and not to emphasize brands. If brands are so 6 important, why are the emerging carriers capturing a 7 disproportionate amount of the market share as time goes 8 along? 9 I would also add that, sure, Sprint's market share 10 of the residential market is around five or six percent. 11 And it has been around five or six percent for the last 12 several years. Yes, MCI's share of the residential market 13 is around 16, 17, 18 percent. It has been at that level for 14 the last several years roughly. 15 But what has happened in the marketplace is that 16 AT&T's share has dropped precipitously. And that share has 17 not gone to MCI WorldCom or to Sprint. It has gone to the 18 emerging carriers. Now, with respect to -- 19 MR. STRICKLING: Mike, could I ask are those 20 numbers true across the board when we speak of the mass 21 market, you know, the residential and single line business 22 customer as well as when we speak of all customers or 23 business customers? 24 MR. SALSBURY: When I look at the Commission's 25 statistics, the most recent of which were the 1998 36 1 statistics, it shows that during the 1997 -- actually, you 2 have to back up more and go maybe 1995 to 1998. If you look 3 at the fall in the market share that AT&T has had and the 4 rise in the market share of the other carriers, I think you 5 will see exactly what I am saying. But -- 6 MR. ROGERSON: Larry, could I ask just -- 7 MR. STRICKLING: Sure. 8 MR. ROGERSON: I think you nailed Professor 9 Hausman on the he hasn't watched enough TV apparently. But 10 that isn't really kind of what I found compelling in his 11 statements. The thing that really caught my interest was 12 his point that, oh, yes, there is all this capacity coming 13 on line. So we don't need to worry about current market 14 shares seems to imply -- you know, your same reasoning seems 15 to have improved too much perhaps. 16 Would you say the logic of your reasoning does 17 suggest that a merger of AT&T, MCI, Sprint and WorldCom 18 would be just fine because, after all, there is all this 19 capacity coming on line and the market is going to change 20 dramatically in six months so current market shares are 21 meaningless? I would actually like a specific answer to 22 that question. 23 MR. SALSBURY: And the specific answer is no. 24 MR. ROGERSON: Oh, so that would be a bad merger. 25 MR. SALSBURY: Well, the reason, let me explain 37 1 why if I could. 2 MR. ROGERSON: Okay. Yes. 3 MR. SALSBURY: We have never suggested that a 4 merger that would put -- create a carrier that exceeded the 5 Commission's dominance, the guidelines and create in effect 6 a dominate carrier in the marketplace would be a good 7 merger. This merger would not do that. And, therefore, we 8 don't see how under the Commission's rules that would create 9 a problem. 10 MR. ROGERSON: So I should look at current market 11 shares, that they are vitally important to prevent in terms 12 of measuring dominance, but they are meaningless in terms of 13 measuring competitive -- other aspects of competition other 14 than dominance? Is that what you are saying? 15 MR. SALSBURY: I am not sure because you are an 16 economist and I am not. So I hesitate to get into a -- 17 MR. ROGERSON: Well, you told me market shares 18 really matter for measuring dominance, but they don't matter 19 much for measuring your particular merger because you are 20 not dominant. It seems like a rather selective use of these 21 current market shares. Why wouldn't you use them to measure 22 the competitive effects of your merger if they are useful 23 for measuring dominance? 24 MR. SALSBURY: I think market shares are a 25 starting point in any competitive impact analysis. The 38 1 question is are there barriers to entry that would change 2 the market share analysis. I think it is a very different 3 thing to say if you have two carriers that would have 4 roughly 20 or 25 percent today of the residential 5 marketplace, looking out in the future, we could see fairly 6 rapid changes if we look at one state example where it is -- 7 the likely impact is that Bell Atlantic will acquire ten 8 percent of the market this year. Okay. This is what all 9 the analysts are saying. This is what Bell Atlantic is 10 saying. 11 I think it is hard to look at that situation where 12 you have one carrier with another carrier having three times 13 its market share roughly, AT&T, and another big entrant 14 coming in that will take roughly have the share and within a 15 year. 16 I think that is a very different world to me. I 17 agree market shares are starting in that point for the 18 analysis. But I think it is a very different world than 19 looking at creating a carrier that would have 80 percent of 20 the market. And to me, that is pretty basic. 21 I agree, I am not an economist. I am sure that 22 there are all kinds of theories and papers you can point to 23 that would suggest that your view is right. But I think 24 that really we are not contending that the -- a merger of 25 AT&T, MCI WorldCom and Sprint would not be -- create 39 1 severe -- 2 MR. ROGERSON: Well, let me -- I don't want to ask 3 you a theoretical question. Let me ask you just kind of a 4 common sense question. Do you think that if AT&T, MCI, 5 Sprint and WorldCom all merged that they would be able to 6 raise price by five percent make more money doing that? 7 MR. SALSBURY: I don't know. I would have to look 8 at, you know, the time. I think it is unlikely that they 9 would do it. 10 MR. ROGERSON: Oh, so they actually don't have 11 market. You think then they couldn't raise price -- 12 MR. SALSBURY: No, I think it is kind of like -- 13 MR. ROGERSON: -- because of all this capacity on 14 line. 15 MR. SALSBURY: I think it is unlikely that that 16 kind of merger could occur before our substantial RBOC entry 17 had occurred. And I think once you had substantial RBOC 18 entry, I think it would be very difficult for that combined 19 entity to raise prices. 20 MR. ROGERSON: But in today's world. In today's 21 world. 22 MR. SALSBURY: But, again, I am not advocating -- 23 excuse me. 24 MR. ROGERSON: Yes. 25 MR. SALSBURY: I am not advocating and I don't 40 1 think that is the merger that is before the Commission 2 today. What we are saying is for a host of reasons, 3 barriers to entry being the most important one and one that 4 is basically unrebutted by the opponents, the fact that 5 there are no substantial barriers to entry in this 6 marketplace suggests to us that given the relatively modest 7 shares in the residential market relative to the number one 8 carrier and relative to the emerging carriers, that one 9 would find -- be hard pressed to find that in a market share 10 analysis alone, this would be a troubling merger. 11 REVEREND JACKSON: Mr. Chairman? 12 MR. STRICKLING: Reverend Jackson? 13 REVEREND JACKSON: Just a comment that it seems to 14 me that there are private interests. You represent public 15 interests. And MCI WorldCom-Sprint needs the merger for 16 their profit and their growth. The customers don't need it. 17 They need it. The customers need the competition for 18 options. They need to reduce the competition for control. 19 You can become dangerously close to the capacity 20 to fix prices when the competition is reduced so very much. 21 This is a source of great anxiety. When these two dinosaurs 22 begin to wrestle, what happens to the others in the animal 23 kingdom is that the options are just reduced drastically. 24 The competition in our economy matters. 25 Secondly, the idea of Sprint and that big man on 41 1 the campus and the denial of opportunity for business 2 development matters. I wish you would have a hearing in 3 Kansas City where you can see for yourself away from this 4 place Sprint vis-a-vis the black and brown communities in 5 where they operate from. They operate, take this case. I 6 wish you would have a hearing in Kansas City to see Sprint 7 at that level of operation. 8 I would think that you look at MCI WorldCom and 9 look at Sprint's records on involvement in procurement and 10 auxiliary relationships. That also hits in the federal law, 11 EEOC, Office of Contract Compliance. In those levels, 12 compliance matters just as on the one hand long distance 13 pricing and fair competition matters. And please take that 14 into account. 15 MR. DEVLIN: Mr. Strickling, I need to respond to 16 that, please. 17 MR. SALSBURY: Rich Devlin. 18 MR. DEVLIN: Thank you very much. I think the 19 Reverend is wrong on his facts. He is wrong about 20 California not having a single minority contract. He is 21 wrong about our campus. When we built our campus and we are 22 in the process of building it in Kansas City, we established 23 very aggressive minority procurement goals. And at various 24 checkpoints, we were exceeding those goals. 25 Now, it turned out at one point in time within the 42 1 minority cottager, there was an under-utilization of African 2 American minority contractors. That was brought to our 3 attention and we remedied that problem. I would love to 4 have this hearing in Kansas City, sir. We are the largest 5 employer in Kansas City. We care deeply about our employees 6 and our community. And I resent the suggestion that we do 7 not care for the minority community. It is just wrong. 8 REVEREND JACKSON: Well, Kansas City, here we 9 come. Let's go. 10 MR. STRICKLING: Let us know when you set a date. 11 Gene, did you want to add something? 12 MR. KIMMELMAN: I thought that Mike made a number 13 of important points here. There is obviously a lot of churn 14 in this market. And I have gone through the data and I find 15 it more perplexing and raising more questions more questions 16 than answer it, especially in light of this fundamental 17 philosophical question and economic question of if this 18 merger is okay, why not a combination with AT&T, as well. 19 I think -- and I know Professor Hausman has some 20 interesting views on this. I am still finding it remarkable 21 that even with the switching, even with the lack of barriers 22 to entry, I still see the sizeable portion of switching 23 being among the three dominant, branded carriers. 24 There is significant minority going elsewhere for 25 some little bit of calling, unclear how much. Maybe MCI 43 1 WorldCom and Sprint can clarify a little bit more. I didn't 2 think their filing did. But it still strikes me as the bulk 3 is dominated by the three carriers. Maybe Professor Hausman 4 could elaborate. 5 PROFESSOR HAUSMAN: Yes. I mean, if you look at 6 the data and the reply of Sprint and MCI's economists, you 7 know, it sort of proves too much, again. That is much of 8 the argument in my view. What they show is that, you know, 9 using their definition of the major carrier, I think they 10 show in an 18-month period that "45 percent of the people" 11 are using this. Now, that just doesn't make economic sense. 12 I mean, I think it is a definitional problem 13 because otherwise that says since the generic carriers are 14 still only around 20 percent, that "25 percent of the 15 people" have tried them and don't like it, you know, which 16 again is contrary to the non-brand generic things. Since 17 these people are lower priced, they are lower priced and 18 everything else is equal, why don't you just use them? You 19 know, why wouldn't 90 percent of AT&T customers switch to 20 the generic carriers tomorrow since they could get a cheaper 21 price? 22 So I think that most of the switching or much of 23 the switching that goes on is among the three carriers. And 24 even their own data shows that Sprint and MCI are the 25 closest competitors to each other, you know, compared to 44 1 AT&T. So, you know, I think their own data just backs up 2 the econometrics. 3 This can't -- cannot in my view be a generic 4 market because if so, again, we cannot explain why there are 5 very large proportions of customers who would get a cheaper 6 price. I don't think anybody would disagree that there is 7 no quality difference in long distance anymore. The voice 8 quality is the voice quality. Yet we find very large 9 percentages of customers who would have a lower bill, you 10 know, just to rate their bill if they switched to one of 11 these generic carriers. 12 And the question is why don't they. Why doesn't 13 everybody buy store-brand tissue? Why doesn't everybody buy 14 store-brand pasta? It is chemically the same. It runs off 15 the same lines. You know, it is chemically the same 16 product. Nevertheless, you know, people don't do it. And 17 we see the same thing here. 18 So I think, again, as Mr. Kimmelman said, the 19 switching data and just consumer behavior, again, backs up 20 the fact that the generic carriers are not constraining the 21 big three here. 22 MR. SALSBURY: If I can respond. 23 PROFESSOR HAUSMAN: Oh, I would like to make one 24 other point, too, on this. Excuse me for interrupting. In 25 the last set of comments, New York was just brought up about 45 1 how Bell Atlantic is going to come in and, you know, pick up 2 ten percent of the market. 3 Again, if you take a two-year horizon, which I 4 think is the correct horizon to consider a merger -- it is 5 also consistent with merger guidelines -- there are not -- 6 there is not going to be enough BOC entry to do this. I am 7 going to talk about this in my affidavit. 8 So just picking New York as one example, there may 9 be a few other states, you know, in the meantime, but they 10 will not -- it is very unlikely, it is extremely unlikely 11 that there will be enough BOC entry to constrain the pricing 12 of the long distance carriers in most of the country. And 13 so just picking out New York and, you know, maybe Texas will 14 be next, whatever happens. I just don't see enough BOC 15 entry to constrain it. So I don't think that argument 16 should be used to allow the merger to go through. 17 MR. STRICKLING: Mike, I'll give you a chance to 18 respond. But let me ask you a question to set the stage, 19 too. Which as we look at these emerging carriers, and I 20 know that you can look at any particular area and you can 21 see that emerging carriers as a group may be acquiring a 22 certain share of the market. 23 But do we see that any individual carrier is 24 gaining a significant amount of share where they can step up 25 and really join the class of the other three national 46 1 branded providers? If you could, respond to that and then 2 respond to the other remarks that have been made. 3 MR. SALSBURY: The short answer is to your most 4 recent question, I am not -- I don't track that. I 5 certainly look at the ads and I look at the overall mix. 6 You would have to talk to our marketing people. I certainly 7 see QWEST being very active. 8 What we have seen and we have listed in our reply 9 is on the larger business marketplace, we have listed a 10 number of the really substantial wins by the new carriers. 11 Obviously, we don't track customer-by-customer win basis in 12 the residential market. But I do think that the data that 13 we submitted, again, I suppose, you know, economists will 14 look at any data and they will draw many different 15 conclusions. 16 But the data that we submitted shows the facts are 17 that there is substantial switching in the residential 18 marketplace and that customers of MCI WorldCom and Sprint 19 switch disproportionately not to each other, but to the 20 emerging carriers. Now, this is something that I think 21 people who do not -- are not active consumers in the 22 marketplace, I don't know about pasta, I don't know about 23 toilet tissue. I know something about telephone calls. 24 And I believe that most of the consumers, 25 certainly our consumers are highly educated, that they 47 1 switch in and out of carriers regularly. They do not just 2 sit with one carrier, at least not our customers. 3 There certainly is a group of customers that have 4 been with the largest established carrier every since 1984 5 and probably will stay with them. But if you look at the 6 consumer marketplace based on the data that we have 7 submitted, the actual facts, customers do switch back and 8 forth. They don't switch and then stay. They switch back 9 and forth. 10 The question is why would they stay with AT&T if 11 there was a lower price deal someplace else. Well, the fact 12 of the matter is some of them will always stay with AT&T. 13 Others respond to promotions. Believe it or not, customers 14 switch to AT&T. Some of our customers switch to AT&T. Some 15 of the emerging carriers customers switch to AT&T. 16 And guess what. Six months later, they may switch 17 back. There is an awful lot of activity in the marketplace. 18 Customers are highly educated. They have the information. 19 They are not confused I don't believe. We see that they are 20 acting in a highly economic, rational way. They go where 21 the cheapest price is at that moment in time. 22 And unlike switching local -- your local carrier 23 which is not easy to do in most -- and, in fact, impossible 24 in most places of the country. Switching your long distance 25 carrier takes a moment. You make a phone call and you can 48 1 switch. And because it is so easy, customers switch very, 2 very often. 3 REVEREND JACKSON: Mr. Chairman? 4 MS. WAGNER: Larry? 5 REVEREND JACKSON: I would submit to you that a 6 significant number of customers are not highly educated. 7 And that's why they must be protected. They are not highly 8 educated and they are manipulated by brand names, by 9 advertising, and in some instances by lack of access. The 10 whole idea of universal access is there are a lot of poor 11 people who tend not to use phones in the same way people who 12 are better off. 13 The fact of the matter is that those who come from 14 the recent immigrant populations tend to call back and forth 15 more because of family ties. So they call more at a higher 16 cost if they are calling the Caribbean or Africa or Latin 17 America. And I just want to make certain that in the mix of 18 things, that those who represent under-served markets who 19 essentially are less able to fend in the marketplace are 20 protected by the public interest of this discussion. 21 MR. KIMMELMAN: And in addition to those people, 22 Larry, there are highly educated consumers who think they 23 are making an economically rational choice. And when they 24 see 99 cents for ten minutes or 20 minutes, it sounds 25 wonderful. And then when they get their bill and they find 49 1 after they have switched that a bunch of their calls are one 2 minute and they are 99 cents and two minutes and 99 cents, 3 they switch again because it wasn't what they thought it 4 was. 5 As the Commission knows from numerous proceedings 6 in looking at proliferation of line items and bills and 7 various scams in calling plans, while there is a lot of good 8 information in the marketplace, there is a lot of bad 9 information in the marketplace. 10 And a lot of the cloud of confusion, a lot of the 11 intricacy here partially may reflect some fairly 12 sophisticated choosing and market differentiation on the 13 highly competitive end of the market. And part of it may be 14 a total cloud of annoyance, confusion, cacophony to lead one 15 back to a name brand and have one feel more comfortable with 16 that because one can't really figure out whether it is a 17 good deal or bad. 18 So I would suggest that the data are very 19 interesting in the submissions. I don't think they answer 20 the questions. I think they raise more questions why the 21 switching is occurring, what it truly reflects about the 22 nature of the market. And I would urge more detailed 23 analysis. 24 MR. STRICKLING: Okay. Sandy, did you have a 25 comment you wanted to make? 50 1 MS. WAGNER: Yes, thank you. I'm sorry. Larry, 2 the answer to your question about the next carrier is -- the 3 market share question is they have about 2.5 percent today 4 of this class of emerging carriers that collectively -- this 5 600 carriers or so in the market that collectively have 20 6 percent. The largest has about 2.5. 7 Market shares today are relatively stable among 8 the carriers. And the fact is is that the combination that 9 the Commission is contemplating now of these two companies, 10 if that were consummated that the two largest carriers, that 11 being AT&T and the new WorldCom, would return the combined 12 market share of the two largest carriers to the size of the 13 market share of that combination as it was in 1989 with the 14 next largest carrier having about 2.5 percent of the market. 15 MR. STRICKLING: Our time is up. But we will give 16 you all the last comment before we take our break, Mike or 17 Jonathan. 18 MR. SALLET: Well, I -- since there can't be 19 rebuttal, I will do it, Mike, until the next panel. I am a 20 little -- I understand what Sandy has just said. A couple 21 of points about that. 22 My understanding is that her company's position is 23 that there will be a new and strong entrant in the long 24 distance market in Texas in about 90 days. As we look at 25 the question of Bell entry around the country, as has been 51 1 essentially conceded, because of the national averaging 2 rules, Bell entry need not occur in every state to have a 3 sizeable impact on long distance competition. 4 We have been careful not to say one need make 5 assumptions about Bell entry in order to approve the merger. 6 But one needs to recognize the fact that entry in, say, New 7 York, Texas, California and Florida would represent 8 something on the order of 30 percent of all the access lines 9 used for long distance in the country and, as an example, 10 would have a big impact. 11 It is just interesting, of course, to hear the 12 talk about market shares from a company that has said that 13 it intend to be offering service within about three months 14 in the long distance market. 15 There are many market shares that are small. MCI 16 had a very small market share at one time, facing a single 17 competitor with a much larger market share than what is said 18 to be the combined market shares of Sprint, AT&T and MCI 19 today. And MCI succeeded. 20 We believe that the seeds for success are 21 available to these other companies, as well, not just 22 because they have capacity, not just because they have the 23 financial wherewithal to run branding advertisements on "60 24 Minutes." But also because as we have laid out in our 25 reply, the series of innovations that have come in long 52 1 distance have come from a variety of players including as we 2 talk about a series of emerging carriers in pricing 3 innovation and in new product innovation. They are bringing 4 that to the marketplace. 5 Two final points. When we -- switching data to 6 which Mr. Salsbury referred shows that customers of ours and 7 Sprint switch disproportionately to the emerging carriers, 8 demonstrating we think the importance of that market force 9 in disciplining the market. Because as we have also 10 explained in our reply comments, customer survey data 11 demonstrates again and again that customers say that price 12 is the most important single factor in choosing a long 13 distance company. 14 Now, Mr. Kimmelman raises a series of issues. I 15 think really the identification of some of those issues 16 demonstrates that they are not merger-specific and should be 17 dealt with by the Commission to the extent the Commission 18 thinks action is necessary in proceedings that include the 19 entire industry including AT&T, not merely these two 20 companies; issues, for example, about whether there is 21 confusion among customers; issues, for example, around the 22 use of some dial-around products. 23 These are not company-specific. They are not 24 merger-specific. They are issues that Mr. Kimmelman is 25 raising about the industry and should be resolved, 53 1 therefore, not in this proceeding, but in more generalized 2 proceedings that can reach all of the long distance 3 industry. 4 MR. STRICKLING: All right. Thank you. We will 5 end this panel at this time. We will take a ten-minute 6 break and resume promptly in ten minutes. 7 (Whereupon, a brief recess was taken.) 8 MR. STRICKLING: See, nothing ever starts on time 9 around here and people get used to that. So we are breaking 10 the mold. 11 MS. CAREY: I would like to remind everybody at 12 the end of the forum today, we will be having 40 minutes for 13 public questioning of the audience. If people have 14 questions, they should fill out an index card and the index 15 cards are available on the back table. And return the index 16 cards with your name and what your subject matter is and we 17 will call you. 18 I would like to introduce the internet panel. 19 Representing the applicants are the same representatives. 20 Representing GTE is David Wheeler, Vice President and 21 Associate General Counsel. Representing Level 3 is Andrew 22 Morley, Senior Vice President for Global Marketing and 23 Sales. I would like to start off the discussion by asking 24 how should the Commission evaluate the internet backbone 25 market and how should we measure market share. 54 1 MR. DEVLIN: If I may start on that, please. 2 Sprint is in an unusual position here today because two 3 years ago, we were on the other table when MCI and WorldCom 4 wanted to merge. And we were arguing that the combination 5 of the two could possibly tip the market in internet. 6 So I want to focus on the changes that have 7 occurred in those two years and help you understand how we 8 get comfortable with the notion that there is a very low 9 probability that tipping could occur. First of all, by any 10 measure, the internet has grown quite successfully in the 11 past two years. The number of users is up four-fold to 200 12 million worldwide. Traffic, up six to ten times. The 13 number of ISPs now exceed 5,000. 14 An essential difference was in 1998, there were 15 four tier-one carriers. And most of the traffic went 16 through those four tier-one carriers. These days, no one 17 even uses the term, "tier one", anymore. It is an obsolete 18 term. 19 But if you resurrected it for purposes of this 20 discussion, you would have at least seven companies there, 21 potentially 12. You would have MCI WorldCom, Cable and 22 Wireless, AT&T, GTE, PSI Net, Sprint, QWEST, possibly 23 Williams, Level 3, Broadwing, Frontier and Teleglobe. 24 The number of national backbone providers, up to 25 44. The number of public access points went from a handful 55 1 in 1995 to more than 40 today. And there has been 2 significant expansion appearing both among smaller ISPs and 3 by larger suppliers, larger providers. And in that regard, 4 MCI WorldCom added 15 peers and Sprint has added a number of 5 peers since 1998. 6 Our position is that it is these expansions of the 7 market, it is the private and public peering, the decrease 8 in transmission cost and technological developments that 9 make peering very unlikely. 10 Today, multi-homing is real. Multi-homing means 11 an ISP connects to more than one backbone at the same time 12 and can determine what percent of traffic it sends to the 13 particular backbone provider. In fact, it has doubled from 14 '99 over '98. Why has this occurred? Because transmission 15 rates have plummeted and because the cost of BGP-4 routers 16 have plummeted. 17 So that means that multi-homers can make dynamic 18 decisions around problems. So if you thought that a 19 dominate carrier was trying to degrade connections, you 20 could just route around. 21 Another thing, we have talked about the expansion 22 appearing. But the reality is it is actually becoming less 23 important. I know it is an odd notion that there is more 24 peering, but it is less important. But that is what is 25 happening because we have this decline in price, in transit, 56 1 in routers, and you have multi-homing. And you have 2 something called distribution storage services which is 3 where you bring the data locally. So you don't have to 4 traverse long networks. You don't have to traverse peering 5 connections. 6 The combination of those actually reduced the 7 importance of peering. And, indeed, an increasingly small 8 amount of traffic on Sprint's network actually comes through 9 peering connections. 10 Having said all that, Sprint has been very open 11 that we are prepared to address any concerns that public 12 policy-makers have about the combination of our network and 13 MCI WorldCom. I guess stated another way, Sprint is 14 prepared to divest its internet business if public policy- 15 makers believe that that is important and necessary. 16 MS. CAREY: I would like to ask Level 3 who is 17 relatively a new entrant in the backbone market whether you 18 agree that peering is less important. 19 MR. MORLEY: Absolutely not. Just to talk to 20 market share briefly, there is a number of ways to measure 21 market share. Market share is quite a bit uncertain in this 22 marketplace. You can look at revenues. One can look at the 23 number of customers that one has. One can look at the 24 amount of traffic that is carried over a provider's network. 25 If you look at the host -- there are a number of 57 1 ways to look at it. If you look at the market share of 2 combined Sprint and WorldCom entity, and the internet 3 backbone space would be anywhere from 45 percent to roughly 4 60 percent based on a number of different industry analysts. 5 I guess the -- but the point that -- the point of 6 market share is really not the issue here from a Level 3 7 perspective. And I would disagree with the comments that 8 peering is not important. For the Level 3 -- from the 9 standpoint of a new entrant in the internet market or a 10 smaller entrant, the single most critical issue to 11 maintaining a competitive environment in the internet 12 backbone space is open interconnection, period. 13 As in any network service, the value of the 14 internet backbone market is driven by the number of 15 customers that a provider has on its network and is able to 16 connect to. That's the genesis of the internet in its 17 infancy and what created the value of it, was that open 18 interconnection. 19 And given the high concentration of customers on a 20 small number of providers' networks, the dominant providers' 21 networks, without open nondiscriminatory interconnection to 22 those networks, a small provider or a new entrant is at a 23 competitive disadvantage and is unable to effectively 24 compete for customers. 25 So, you know, the merger between Sprint and 58 1 WorldCom creates a concentration of market power which is 2 likely unhealthy for the industry. And, therefore, some 3 kind of divestiture, as was suggested, of one of the two 4 internet backbones probably likely makes sense. 5 But that is not the issue. The issue is that a 6 system for real, open, nondiscriminatory interconnection has 7 to be put in place. And from -- and the merger -- this 8 merger could create market shifts, market imbalances, market 9 power shifts that could further exacerbate that issue. So 10 it makes the requirement for this kind of open 11 interconnection that much more important. 12 I guess the -- from Level 3's perspective, there 13 is a number of elements of what open interconnection would 14 entail. First of all, the first would be the establishment 15 of open, objective, measurable peering criteria by all 16 providers. The second would be that that peering criteria 17 would be published so that all providers would know what the 18 requirements are to peer with the dominant providers. 19 Thirdly, that each provider would publish the 20 people, the other providers that they peer with. And the 21 fourth would be the establishment of a mechanism to ensure 22 that providers adhere to their peering policy. And our 23 suggestion would be that this would be a system self- 24 regulation -- industry self-regulation with some kind of 25 third party arbitration process in the event of disputes. 59 1 That kind of open interconnection policy is 2 critical to maintaining and developing and ensuring a 3 competitive innovative market. There were a couple of -- so 4 bottom line, that peering is critical and open 5 interconnection is critical to competition in this market. 6 There were two -- 7 MR. STRICKLING: Andrew, before you go on, is the 8 industry moving to the environment you described as a matter 9 of self-regulation? And depending on how you view the trend 10 today, what do you see is the impact of the merger as either 11 hastening the move toward this model of self-regulation or 12 perhaps slowing it down or preventing it? 13 MR. MORLEY: Peering -- the industry has gone 14 through a couple of phases. In the beginning of this -- you 15 know, of the internet, open interconnection was the norm. 16 It was how the value of the internet was initially 17 developed. As dominant providers emerged, their willingness 18 to openly peer with people dramatically shifted. 19 And so -- and, you know, the reason for that is 20 once you have a critical mass and a large dominant share of 21 customers and endpoints, the value of your network and the 22 value of those customers is so significant and gives you 23 that market -- that dominant market position that there is 24 an incentive to not allow others to have equal access to 25 those customers. 60 1 Now, you can get access. And new entrants like 2 Level 3 can get access. But we typically have to pay for 3 that access like a customer even though in reality, we look 4 like a co-carrier. We look like, you know, a peered network 5 to that provider. That we have made progress -- Level 3 has 6 made progress in establishing peering with both WorldCom and 7 with GTE, two of the four dominant providers, as well as 8 with Cable and Wireless. 9 Those are, however, very difficult negotiations. 10 Those are very protracted negotiations. And I don't know if 11 it is coincidence, but progress always seems to coincide 12 with some type of regulatory scrutiny. So it is -- you 13 know, they are very, very protracted discussions. 14 And we, Level 3 right now still does not have 15 peering with Sprint. We have a comparable network to 16 Sprint. We carry traffic on our network. The same amount 17 of traffic that Sprint carries for us, we carry for Sprint. 18 We route traffic the same as Sprint does on our network. We 19 use our connection with Sprint to transfer traffic to 20 Sprint. Sprint uses that connection to transfer traffic to 21 Level 3. 22 And yet Level 3 pays Sprint as a retail customer 23 for that connection. Sprint pays nothing. So it is -- and, 24 you know, we have continually -- you know, Sprint has an 25 ambiguous peering policy. We -- despite our view that we 61 1 have met that policy, we have -- and repeatedly had 2 communication -- or attempted to have communication with 3 Sprint saying that we have met their policy, they come back 4 to us and give us ambiguous reasons for not peering such as 5 your traffic volume is insufficient, even though -- 6 insufficient for the additional cost, the incremental cost. 7 One, there is no incremental cost. Two, our 8 traffic volumes are six times the traffic volume that UU Net 9 requires for their peering policy. And they are the 10 dominant provider in the internet backbone space. So we are 11 -- you know, that is an indication of kind of the state of 12 the market, particularly as it applies to Sprint as one of 13 the dominant providers. 14 MS. CAREY: Andrew, let me give Rich an 15 opportunity to respond to some of your comments. 16 MR. MORLEY: Sure. 17 MR. DEVLIN: Thank you. I take it that means you 18 are in favor of the merger? 19 MR. MORLEY: I will leave it up to others to 20 decide whether or not the merger is a good thing and whether 21 or not divestiture of the internet backbone is required. 22 The real issue is interconnection. 23 MR. DEVLIN: Okay. Great. Four quick points. 24 The first is market share. I would agree with the statement 25 that there really is no accepted way to measure market 62 1 share. We have all heard of the expression, "Lies, damn 2 lies and statistics." Well, we can add internet market 3 share to the end of that list. 4 We think there is two ways -- again, there is no 5 great way to do it. There is problems with any way. But we 6 think revenues may be a reasonable surrogate. It will get 7 you close. Another way to look at it is in the connections 8 that one has with its peers and its customers, what the band 9 width is there. Under both of those tests, the combined 10 company would have less than 50 percent. But, again, this 11 is not an area where there is exact science. 12 On the notion of peering, which is now being 13 characterized as open interconnection, it would be useful 14 just to talk a second about what peering is. Peering is a 15 voluntary arrangement between two companies when they 16 believe that the cost to provide and exchange traffic is 17 roughly equivalent. And if it is roughly equivalent, it 18 makes no sense to exchange settlement dollars. 19 So peering is a pricing mechanism. It has nothing 20 to do with open interconnection. Open interconnection is 21 fully available through transit. And as we have talked 22 about before and demonstrated in our reply, the price for 23 these connections has just plummeted. 24 I think it is worthy to note that this issue, 25 while apparently important to Level 3, has nothing 63 1 whatsoever to do with the merger. What Level 3 is really 2 asking for is the Commission to institute an inquiry looking 3 at the industry's peering policies and would like to 4 prescribe rules. And if the Commission were inclined to do 5 that, it should look at it in a notice in common proceeding. 6 It was previously asked to do that and it declined 7 because that fundamentally would be regulating the internet. 8 And I don't think that is what the Commission wants. 9 Finally, the notion that we have comparable 10 networks, you know, we just see things differently. I think 11 Level 3 admitted in its reply comments that carriers have a 12 legitimate interest in avoiding free-riders. That is, 13 people who want to come on for free, but who dump 14 disproportionate cost on the other provider. 15 Level 3 acknowledged that and asserts that its 16 policy protects against that. So they drew a line one place 17 and we drew a line a different place. You know, that is 18 just the way this thing goes. Level 3 dumps more traffic on 19 us than we provide back to them. That is why we don't peer 20 with them. 21 MR. MORLEY: Can I just make a couple of comments 22 on that? 23 MS. CAREY: Okay. 24 MR. MORLEY: The last statement is just wrong. We 25 have equal balanced traffic between Level 3 and Sprint. If 64 1 the rationale for peering is balanced traffic between two 2 providers, why won't you peer with us? And it is not that 3 you have drawn a line in the sand. It is an ambiguous, 4 fuzzy -- you know, we have no idea -- we do not know what 5 your specific peering requirements are because you will not 6 tell us. 7 So will you tell us what your specific traffic 8 requirements are which is why in your last communication to 9 us you stated that you would not peer with us -- will you 10 tell us specifically what your requirements are -- your 11 traffic exchange requirements are to peer? 12 MR. DEVLIN: Thirty seconds and then maybe we can 13 move on to other issues. 14 MR. MORLEY: Well, let me talk about a few other 15 things. I mean, maybe the -- 16 MR. DEVLIN: Wait, you didn't want an answer? 17 MR. MORLEY: Well, another way to think about 18 market share is our customers will not buy from us unless we 19 peer. That in and of itself I think is -- with the dominant 20 providers, and the dominant providers really being the big 21 four, the big four being GTE, Sprint, Cable and Wireless and 22 WorldCom. That in my mind is a statement of market power. 23 MR. DEVLIN: It is still 30 seconds. I learned 24 this trick watching the Presidential debates. But, 25 unfortunately, I didn't have it in my pocket already. It 65 1 was in my notebook. So I am in the process of folding it 2 very quickly and putting it in my pocket and then taking it 3 out. 4 And I would say I have in front of me a letter 5 dated January 6th, 1999 to Ms. Laura Nolan, Carrier 6 Relations Manager, Network Planning and Development, about 7 Sprint's bilateral peering policy. It contains a copy of 8 the policy and asks that it be held in confidence. 9 MS. CAREY: I would like to ask GTE a question. 10 MR. MORLEY: But, I mean, that's absurd. 11 MR. ATKINSON: I would just like to actually 12 follow up really on part of Larry's original question and 13 what we have been hearing back and forth. Certainly, the 14 FCC has spent an awful lot of time over the years on trying 15 to -- dealing with interconnection issues on the 16 conventional telephone -- telecommunications network. And I 17 think it is true that the Commission has expressed a strong 18 desire never to get into that black hole with the internet. 19 So the real question, Andrew, is does this merger 20 increase -- does it really increase the likelihood of having 21 to get regulators involved in some fashion, state, federal 22 or -- 23 MR. MORLEY: Right. 24 MR. ATKINSON: -- international involved in the 25 internet which is clearly something I think that most people 66 1 would be fairly aghast at. 2 MR. MORLEY: Yes. And by the way, we are not 3 asking for regulation of the internet. We are asking for 4 self-regulatory policy. 5 MR. ATKINSON: But what happens if the self- 6 regulatory policy -- Larry's question was, you know, has -- 7 is the industry moving towards self-regulation because if it 8 isn't, then presumably it is moving in the other direction. 9 And which way is it going? 10 MR. MORLEY: I would say the industry is moving in 11 fits and starts towards self-regulation. But it is not 12 universal. And it is not -- and, you know, dominant 13 carriers can play the game. 14 But with regard specifically to the merger, there 15 is a couple of -- there is a number of points. First of 16 all, assuming there is -- there would be a divestiture of 17 either the unit backbone of the Sprint Link backbone, the -- 18 just the dislocation -- as in any merger, there is going to 19 be operational dislocations associated with that merger with 20 the spun off entity and, you know, being acquired by another 21 party. 22 That in and of itself as we have seen in prior 23 instances will allow for the opportunity for further 24 concentration amongst the dominant providers in the backbone 25 -- the internet backbone market. So that in my mind makes 67 1 it more imperative to put in place and to ensure some kind 2 of open interconnection to alleviate the issue of more 3 concentrated market share. 4 In addition, given the anticipated price that some 5 acquirer would pay for -- let's assume Sprint Link is the 6 divested entity. Given the anticipated, you know, value 7 that someone would pay for that, there is going to be an 8 incentive to continue not to peer with providers like Level 9 3 and continue to extract revenue from them and payments 10 from them to accelerate the return on investment in that 11 purchase. 12 Compound that with the fact that, again, the 13 operational dislocations of some type of acquisition by a 14 third party of the Sprint Link backbone would make it that 15 much more difficult and -- to -- for them to focus on these 16 peering issues and give them frankly an excuse to say we are 17 dealing with a merger, we can't enter into peering 18 discussions with you. 19 I think the thing to think about here is by 20 requiring some kind of open interconnection policy that 21 would be self-regulated by the two largest providers of the 22 internet backbone, you can create basically a de facto 23 standard and use this opportunity to essentially not have 24 to, you know, provide some kind of general rule-making or 25 that kind of a proceeding going forward. 68 1 MS. CAREY: David, GTE has been a major internet 2 backbone provider for many years. Do you agree with Rich 3 when he says that there has been significant changes in the 4 past two years such that those changes would alleviate any 5 harms arising from this merger? 6 MR. WHEELER: Boy, I am afraid my answer is going 7 to be a little boring compared to that heated debate that we 8 just had. I will say that I remember when Mr. Devlin was on 9 this side of the table and when I worked with his colleagues 10 in the MCI WorldCom proceeding to fashion the arguments that 11 the FCC accepted, the European Commission accepted and for 12 all intents and purposes, the Department of Justice 13 accepted. 14 I do agree with Mr. Devlin that the internet has 15 grown significantly since last time, that there is a lot of 16 good things that have happened to the internet since last 17 time, more customers, more ISPs, better access, all those 18 things we would expect to happen in a competitive market. 19 And thank God, Mr. Devlin was on this side of the table last 20 time to make sure that MCI divested internet MCI so that the 21 market remained competitive. 22 I don't agree though that there is enough that has 23 happened in the marketplace that changes the economics of 24 the situation. The fact of the matter is that the economics 25 are still the same. No matter how you slice or dice the 69 1 market share here, you know, whether one of them is perfect 2 or, you know, all of them aren't quite perfect, the fact of 3 the matter is that what you see repeatedly is that a 4 combination of Sprint and MCI shows that they will dominate 5 the internet backbone market. 6 Their own numbers even with regard revenues 7 indicate that they will be more than three times -- in 1999 8 terms, three times the next carrier in terms of revenue, 2.5 9 times in 2001 and more than two times in 2003. It is not 10 just sheer size. It is also sheer size relative to your 11 next participant. And they will be big. They will be very, 12 very big. And that is going to be a problem here for them. 13 The fact of the matter is that what they seem to 14 want to argue for is that since there is not a very good way 15 to define market share here -- and I will admit, there is 16 not a perfect way -- but, frankly, even the merger 17 guidelines recognize that revenues, although generally a 18 very good way to take a look at markets and market shares, 19 isn't necessarily perfect in and of itself and is willing to 20 consider other means of defining the market and looking at 21 market shares. 22 Their argument seems to be that somehow just 23 because there is not a perfect way to measure market share, 24 again, despite the fact that all the numbers seem to show 25 they dominate, that they should be able to win the day, that 70 1 there is nothing there that seems to indicate perfectly that 2 they will dominate the market. 3 Yet at the same time, they haven't put forward any 4 type of analysis of shifts that they don't dominate the 5 marketplace. And really, the burden is on them to come 6 forward and show an analysis that shows that they do not 7 dominate this marketplace once merged and that they won't do 8 it. 9 I mean, currently, their view is almost kind of an 10 Alice in Wonderland view of competition law, that somehow it 11 stands everything on its head, that the opponents have the 12 burden of somehow showing that some measurement is 13 absolutely perfect. We don't think that you have to show 14 that. What we do show is that all of these measurements 15 directionally show that there is a problem. 16 MS. CAREY: Could you talk specifically about 17 some of the ways in which they could exert their market 18 dominance? 19 MR. WHEELER: Sure. The main way is the same way 20 that we saw back in MCI WorldCom and the concerns that we 21 have there and as Andrew alluded to, also, is that you get 22 to such a large size that you essentially can sit there and 23 in negotiating with a smaller carrier with regard to 24 peering, tell them that you have to come to terms on my 25 terms or I can screw you up. And it can be done in any 71 1 number of ways. You could pass along higher prices. You 2 could force them to buy transit. You could start degrading 3 their service. 4 And degrading service is something that -- it 5 isn't something that has to be done intentionally. It is a 6 matter of slow rolling these interconnections because the 7 internet is growing so quickly that these interconnection 8 points, peering points have to be upgraded quickly. And, 9 you know, if you kind of drag your feet, you kind of slow 10 roll that, then you create congestion at those peering 11 points. And your customers don't get access to my customers 12 as well. Granted my customers don't get access to yours 13 either. But my customers don't have as much pain. 14 I mean, if I am a backbone that has 50 percent of 15 the market and you are a backbone that has eight percent of 16 the market, my customers only see degradation eight percent 17 of the time. Your customers see if 50 percent of the time. 18 And your customer might be somebody who is trying to develop 19 e-commerce, who needs access to my customers. 20 In the end because this market is growing so 21 quickly, your customers can't sit there that long and hope 22 somehow that you are going to be able to come to terms and 23 fix this problem. Eventually, they will come to me or they 24 will interconnect with me through multi-homing. But 25 eventually they all come to me because I am bigger and I can 72 1 give them a lot more of the internet than you can. 2 MR. ROGERSON: Mr. Wheeler, Mr. Devlin said that 3 perhaps the fact that most ISPs now multi-home means that, 4 you know, the argument you just outlined, why a big firm 5 might -- why it might be bad in a network industry -- 6 MR. WHEELER: Right. 7 MR. ROGERSON: -- doesn't really apply here 8 anymore because now ISPs routinely connect to all of you 9 anyhow. 10 MR. WHEELER: Well -- 11 MR. ROGERSON: Could you comment? First of all, 12 flesh that argument out for me and then tell me what you 13 think of it. 14 MR. WHEELER: Flesh his argument or flesh my 15 argument? 16 MR. ROGERSON: Yes, flesh his argument out for me 17 and then -- 18 MR. WHEELER: In that situation -- I will do my 19 best -- 20 MR. ROGERSON: And then -- yes. 21 MR. WHEELER: -- on that. As best as I can tell, 22 his argument is that because all ISPs are connected to all 23 the major backbones already, the ISPs won't feel any types 24 of degradation. Go ahead. 25 MR. ROGERSON: Yes. Well, are all ISPs connected 73 1 to you? 2 MR. WHEELER: No. The fact of the matter is also 3 we have taken a look at some statistics that appears to us 4 that most people who are multi-homed with us tend to be 5 multi-homed either to Sprint or MCI or both. I mean, the 6 fair amount of multi-homing that is done is done towards MCI 7 and Sprint, certainly toward UU Net because of its large 8 share in the marketplace. 9 And that makes sense. I mean, it is kind of what 10 we would have expected, is that to the extent that you are 11 going to pay and invest to multi-home with somebody else, 12 you are going to multi-home with a bigger network so that 13 you can ensure that you have connectivity to quite a bit of 14 the internet. You know, it is something that we would 15 expect in the competitive marketplace. 16 The fact of the matter is that I don't necessarily 17 agree that multi-homing, the current state of multi-homing 18 resolves anything. In fact, it actually exacerbates the 19 problem. Multi-homing, as Mr. Devlin knows, he and his 20 economists helped us argue last time, multi-homing 21 exacerbates the problem because when somebody is getting 22 ready to multi-home, they are going to multi-home to the 23 dominant network. 24 I mean, again, let's use this example. I am a 50 25 percent backbone. You are an eight percent backbone. Your 74 1 customer is sitting there trying to think about multi- 2 homing. My customer is thinking about multi-homing. Well, 3 my customer only feels pain eight percent of the time. So 4 multi-homing is more than just about cost. It is also about 5 what benefit you get to it. So the benefit that my customer 6 gets is that they get eight percent improvement. The 7 benefit your customer gets is 50 percent improvement. 8 So on average, your customers are going to be 9 multi-homing quite a bit. And where are they going to 10 multi-home? They are going to multi-home to me because I am 11 the dominant backbone. They can bypass any of the 12 degradation. They can come to me. 13 Now all that traffic that was originally sent to 14 me through you by your customers is now sent to me directly. 15 I get to grow even larger now because all that traffic is 16 now coming directly to me. Your market share is now 17 shrinking. My market share is growing. So let's play this 18 game all over again and I will just keep doing it until I 19 crush you. 20 MR. ROGERSON: Well, do you think that the rise in 21 multi-homing to some extent might be a manifestation of the 22 fact that firms are worried about degraded interconnection 23 or is that taking this too far? 24 MR. WHEELER: I don't know. I have never actually 25 polled any of the ISPs with regard to why it is that they 75 1 multi-home. There is probably many reasons why they multi- 2 home, redundancy. Andrew appears to have some views on 3 that. But, you know, I don't know. 4 I mean, I would say that I don't see how multi- 5 homing though in any way prevents a dominant backbone from 6 exercising its dominance. 7 MR. MORLEY: Yes, just to comment on that. I 8 agree 100 percent with David. There is a couple of reasons 9 why somebody multi-homes. Number one is redundancy. And, 10 again -- and then a second is that they want a direct 11 connection to the customers upon -- to the network where the 12 customer, the ultimate destination, resides. 13 And both of those factors play, as David said, to 14 the dominant provider. And, therefore, multi-homing really 15 reinforces the position of a dominant provider. There a 16 customer has to multi-home with the large providers because 17 they have got the large number of destinations on their 18 network. And, therefore, they are incentivized to multi- 19 home with them. And your -- the multi-homing is typically 20 done for redundancy and for that direct connection -- 21 MR. ROGERSON: I thought Mr. Devlin was saying 22 that if he tried to degrade interconnection with you, then 23 ISPs will just directly connect with you so there is no 24 point in him trying to do that. I thought that was his 25 argument. 76 1 MR. MORLEY: The point is though, again, to go 2 back to what -- as David said, that the -- again, as a large 3 carrier, his degrading interconnection with us has a very 4 small effect on our customers -- or on his customers because 5 of the large market share that he has. It has a very, very 6 large effect on our customers because as David mentioned, 50 7 percent of our traffic, 50 percent of the time, we are going 8 to see a substantial degradation in that traffic. 9 So, again, it is -- you know, the dominant -- 10 multi-homing is really reinforcing the position of the 11 dominant provider. 12 MR. WHEELER: And if I may interrupt, I mean, you 13 are right. That is Mr. Devlin's argument. But remember 14 that the decision to multi-home is a cost benefit analysis. 15 Overwhelming, your customers on the eight percent backbone 16 are going to achieve much more benefit by multi-homing to me 17 than my customers are going to be in investing for the cost 18 to multi-home to you. 19 So on average, you are going to have a fair amount 20 of your customers multi-homing. To the extent that people 21 now are sitting in a position to decide on whether they want 22 to multi-home, a fair amount of your customers are going to 23 make that decision to multi-home because they get an extreme 24 amount of benefit from that. A handful of customers might 25 think about multi-homing from me to you. 77 1 But what then ends up happening though is that 2 just perpetuates the imbalance because now I have a lot more 3 of your customers coming to me directly, jamming their 4 traffic through their multi-home lines to me directly which 5 they originally were going through you. Now your -- now the 6 amount of traffic that you are bringing to me is shrinking. 7 And you are getting smaller and smaller, and I am getting 8 larger and larger. 9 Sure, I've got a couple of people who are multi- 10 homing to you. But the fair -- you have so many people 11 multi-homing to me that I get to grow even larger. And then 12 the people who are on the margin of my customers who are 13 thinking about multi-homing are now seeing a reduction in 14 degradation because you are getting smaller. 15 MR. ROGERSON: Well, what fraction of your 16 customers do you think do not multi-home with one of the big 17 guys or do all -- let me -- do almost all of your customers 18 multi-home with one of the big guys? 19 MR. WHEELER: I would say that of our customers 20 that multi-home, yes. 21 MR. ROGERSON: No, no. Do they -- well, of all of 22 your customers, do most of them multi-home with a big guy? 23 MR. WHEELER: I don't know off the top of my head. 24 MR. ROGERSON: See, if they did -- let us just 25 speculate for a moment that they did, then why would Sprint 78 1 have any incentive to degrade interconnection with you 2 because all of those customers can reach you directly in any 3 event? 4 MR. WHEELER: Well, one thing that is clear is 5 that it is not the case that all of their customers multi- 6 home to us. Okay? They have a fair amount of customers 7 that are unique that we can only get to through them. And 8 it only gets exacerbated when they merge together because 9 Sprint has a fair amount of unique questions. 10 The UU Net has a fair amount of unique customers, 11 obviously putting them -- and they also have a fair amount 12 of multi-homing between them so that the only two places 13 that we can get to customers is either through Sprint or 14 through UU Net. You put those two companies together, now 15 there is a significant number of addresses, important 16 addresses that we can't get to at all except for through 17 their network. 18 So it doesn't really matter how many people -- how 19 many of our customers are multi-homed to them. It is a 20 matter of how many of their customers are multi-homed to us. 21 In fact, I would be extremely worried about this merger if I 22 learned that all of our customers were multi-homed to them 23 because then I have no defense whatsoever. 24 MS. CAREY: Mike Salsbury, do you have a response 25 to multi-homing, degradation, interconnection issue? 79 1 MR. SALSBURY: We, obviously, have a somewhat 2 different view of this theory. Let me just say briefly that 3 this was a theory that MCI and WorldCom both disagreed with 4 two years ago. It is a theory that we disagree with today. 5 It is a theory that has no evidence ever to support it in 6 the marketplace. And, in fact, everything that we predicted 7 two years ago is what has occurred. 8 There has been increased multi-homing, increased 9 peering and a very vibrant and competitive marketplace. 10 Having said all that, it is not our desire to re-fight those 11 battles. We think that the theory wasn't right to begin 12 with. I think some of the things that Mr. Rogerson said a 13 moment ago are true. 14 We don't -- as a rule, carriers don't go around 15 trying to degrade connections because their customers will 16 scream. MCI WorldCom has service level guarantees with our 17 customers that if we were to degrade their service, we would 18 -- they would have free service or we would be paying them 19 penalties. We are in the business of connecting with as 20 many of our customers and where appropriate and our peering 21 guidelines are published with as many the appropriate number 22 of customers as other providers as we can and having an open 23 and very useful network. 24 And I think our way has been shown to be a 25 successful way. It works for us. I think it works for most 80 1 of the carriers in the business. I am not aware of any 2 internet providers who have made a habit of trying to 3 degrade interconnections. I have just never seen it. 4 And I think that if they did do that, because 5 traffic could be pretty easily switched, that it would not 6 be -- this would not be successful strategy. I think the 7 whole theory, the whole premise of this theory is that there 8 is something unique, some bottleneck that one who is the 9 internet provider can exercise over his customer base. That 10 is not true and it has no application here. There is 11 nothing unique here. 12 And I -- what I often say is that if one believed 13 this network theory, then one would never have believed that 14 AT&T could have lost market share over the years because 15 they had the biggest network. And it is because they lost 16 control of the bottlenecks that their share was eroded. We 17 don't have control over any bottlenecks, so I don't think 18 that the last mile generally speaking is provided by the 19 LECs. 20 I don't think that there is any evidence that this 21 theory would actually happen. But maybe it is just because 22 we have had proceedings like this that that has bene a way 23 to prevent it. I don't know. There is just no evidence 24 that this theory ever has any legs. That's all I would 25 say. But it is not our desire to re-fight that here today. 81 1 MS. CAREY: Is there any sort of -- if the merged 2 entity were to slow roll interconnection, what sort of 3 redress would the competitor have? Is there something in 4 the peering criteria or in the agreements? 5 MR. SALSBURY: I find that -- it would be a 6 premise that we have peered. We have published. When you 7 meet our published peering criteria, we peer with you. The 8 number of -- we have increased the number of peers 9 substantially since the merger. I don't believe that anyone 10 has ever seriously contended that we don't follow our 11 published peering policy or that it doesn't make economic 12 sense. 13 We peer with Level 3. We peer with GTE. We peer 14 with AT&T. We have -- as carriers, I think it is as Mr. 15 Devlin indicated before. As carriers reach a substantial 16 size and traffic flows gets into balance, it makes sense to 17 peer. And when it makes economic sense to peer, we and most 18 of the other big carriers peer. 19 MS. FOX: Can you tell me how many peers Sprint 20 has acknowledged since 1998? 21 MR. DEVLIN: I believe it is six additional ones. 22 Do you want me to take the time to look? 23 MS. FOX: No. A ballpark is fine. 24 MR. DEVLIN: I believe it is six. 25 MS. FOX: Okay. Going back to something that 82 1 Level 3 said, if Sprint can now charge Level 3 for transit 2 and can send traffic to Level 3 for free, isn't there an 3 incentive then in the future not to try to peer with Level 3 4 and -- or with similarly situated ISPs? 5 MR. DEVLIN: First of all, let's keep this thing 6 in perspective. A little level setting here. Level 3 is 7 spending a lot of time, energy and money on this point. But 8 we billed them for all of their transit 2.5 million dollars 9 last year. So this is for, you know, a very large company a 10 very small issue. But having said that, when they meet our 11 peering criteria, we will peer with them. That is our 12 company policy. We will do it. 13 MR. MORLEY: And we don't know what that peering 14 criteria is. 15 MR. DEVLIN: Okay. You are -- it is still in my 16 pocket. So let me give it to you. 17 MR. MORLEY: Will you give that peering policy to 18 the FCC to review? 19 MR. DEVLIN: Of course I would. But the question 20 is do you want the FCC regulating peering? And also, what 21 does it have to do with this merger? Sprint, if not 22 obviously to you, Sprint is being acquired in this merger. 23 You should be -- if you are upset about our peering policy, 24 you should be jumping with joy with the merger. 25 MR. MORLEY: What peering has to do with the 83 1 merger is the market share and the market -- the further 2 market dominance that this will create. And it exacerbates 3 the need for open interconnection. 4 MR. ATKINSON: But they -- I think Mr. Devlin 5 indicated that at least as a prospect, that Sprint's 6 backbone would be divested. Doesn't that solve your 7 problem? 8 MR. MORLEY: Again, as I said before, even with 9 the divestiture, you still run a high risk as in other 10 situations of further concentration in the backbone market. 11 So I think it does further -- no matter -- even if you do 12 divest, it does create -- exacerbate the need for open 13 interconnection -- 14 MR. ATKINSON: But that would just -- that 15 wouldn't come from then this merger. That would just come 16 from the structure of the industry as it exists, i.e. the 17 MCI backbone would be your problem. But that is not merger- 18 specific. 19 MR. MORLEY: But further -- again, the 20 dislocations of a merger, of spinning out an entity, of 21 having it merge, going through all the issues of 22 acquisition, integration are going to create situations to 23 allow the existing dominant providers to further concentrate 24 market share even in the event of a divestiture. 25 MR. STRICKLING: Both I and Bob have tried this. 84 1 I am going to try it one last time. 2 MR. MORLEY: Okay. 3 MR. STRICKLING: For each of the panelists or for 4 each of the companies represented, we don't regulate peering 5 today. We kind of like that. We would like to see it stay 6 that way. The question I think that is presented here is if 7 as a result of this merger does it become more likely that 8 the FCC or some other perhaps new commission needs to be 9 created to regulate what today is not regulated? And, 10 David, let me ask to start with you. Yes or no or -- 11 MR. WHEELER: Yes. 12 MR. STRICKLING: And why is that? 13 MR. WHEELER: Because now you are going to have 14 dominant backbone. Now you are going to create essentially 15 a bottleneck, if you will. And that is the reason why we 16 have regulations for interconnections, is to open up those 17 bottlenecks to other people. 18 The fact of the matter is we think, you know, 19 right now you don't need that regulation. Competition is 20 there. Competition is working. People sit there and 21 negotiate peering arrangements. Are they easy? No. You 22 know, do they take a while? Sometimes, yes. But that is 23 the nature of competition. 24 The market structure is such that it is self- 25 regulating. I don't know that we need an arbitration body. 85 1 I don't know whether, you know, we need to mandate that your 2 peering policies are public or not because that is frankly 3 what competition is all about. Some people do it. Some 4 people don't, you know. 5 It allows people to then, you know, have the 6 ability to grow. Like Level 3, they can peer with us. They 7 can peer with MCI. They can grow. And maybe they grow to a 8 point that Sprint can't ignore them at all. I don't know. 9 But frankly, that is what competition is about. It is 10 supposed to help make those things happen. People will win. 11 People will lose. And that is okay. 12 MR. STRICKLING: Okay. Andrew. 13 MR. MORLEY: Absolutely, I think the merger would 14 have a negative impact and would increase the likelihood of 15 having to do some kind of regulation. Again, we don't -- we 16 are not -- that's not -- I don't think that is good for the 17 industry. We are not proposing that. 18 But the concentration of market share, the 19 additional market share provides further incentive for the 20 dominant providers to avoid peering, avoid interconnecting 21 with the new entrants and the smaller providers like Level 3 22 and others. 23 MR. STRICKLING: Rich. 24 MR. DEVLIN: Well, I think it depends on which 25 theory you buy. If you buy the theory that if there is a 86 1 large dominant carrier there are incentives to discriminate, 2 degrade interconnections and so forth, then you are worried 3 about this. Now, that is the theory that we espoused two 4 years ago. It is the theory that we still believe in. But 5 we believe that there have been changing events in the past 6 two years, very fundamental changes, that make it unlikely 7 that a dominant carrier could succeed in tipping this market 8 or unfairly discriminating against certain providers. 9 But having listened to Mr. Wheeler about the 10 competitiveness of the market today, the success of the 11 market, frankly the success of the divestiture by MCI, 12 presumably a divestiture of Sprint's internet business would 13 simply keep the status quo and not result in any need for 14 the Commission to get involved in any of this consumer. 15 MS. CAREY: I think we ended things perfectly. 16 Time is up. And we are ready for our third panel, public 17 interest benefits. 18 MR. STRICKLING: Right, we won't take a break. If 19 the panelists on the third panel could just come forward. 20 MR. ATKINSON: Okay. I think we will begin the 21 third session. And let me just remind the public members 22 here, if you do -- if you would like to speak or ask some 23 questions at the end of this third panel, if you could get 24 an index card from the table at the back. Just indicate 25 your name and a general area of your inquiry. And then we 87 1 will organize a Q&A session following this panel. 2 And this third panel is -- we have the same group 3 of people from the applicants. I am sure they are getting 4 as weary as we are. So think you for bearing up and -- 5 okay. And then we have some new faces and some old faces 6 from the prior panels. 7 We have, well, a missing -- no, we are not missing 8 Jerry Hausman. I was going to say. We have Sandy -- 9 MR. ROGERSON: No, I miss Jerry. 10 MR. ATKINSON: We have Sandy Wagner from SBC and 11 then Don Flexner, also representing SBC. And Dirck 12 Hargraves from TRAC. Thank you. 13 This session -- the previous two sessions were 14 really focusing on the prospect of some public interest 15 negatives resulting from the proposed merger. 16 The other side of the coin and the fourth step in 17 the traditional FCC inquiry is to look at whether there are 18 affirmative public interest benefits that would be realized 19 from the merger that really couldn't be realized without the 20 merger. So what we are -- the inquiry is basically what 21 merger-specific benefits come from this proposal. So I 22 would ask the applicants if they could suggest perhaps one 23 or two maximum, but the most significant public interest 24 benefits that could only be achieved as a result of this 25 merger, merger-specific. Jonathan? 88 1 MR. SALLET: Well, he said it is the fourth issue, 2 so it makes me feel like the zeppo of this hearing. But I 3 will emphasize one market and multiple pathways. The 4 significant merger-related, public interest benefit that we 5 will derive from this merger, if I had to name only one as 6 you asked, is that we will have a stronger competitor to 7 enter the local markets which now, four years after passage 8 of the Telecommunications Act, still remain in essence the 9 province of the incumbent Bell operating companies. 10 In this regard, we are moving entirely in league 11 with regulatory policy, recognizing that although regulatory 12 policy can break down barriers, the market circumstances 13 that we face, the difficulties that have come about, the 14 slowness in opening these local markets requires a stronger 15 competitor to be able to take advantage of new market 16 openings and to try to create them where they have yet to 17 occur. 18 Now, we intend to do that in a variety of ways 19 through a variety of paths. In the use of platform, which 20 MCI WorldCom has employed to reach residential customers in 21 New York, we will achieve economies of scale in marketing 22 and advertising and in internal work as, for example, the 23 creation of interfaces to be able to operate with incumbent 24 OSS systems. 25 In loops, we will see lower costs of co-location 89 1 because we will be able to -- as you know, traditionally we 2 enter the local market -- well, "traditionally" is the wrong 3 statement because we have only been allowed to do it in the 4 very recent future. 5 But what we have tended to do in New York is to go 6 to customers to whom we provide long distance and offer them 7 local. Loops is an advantage to us. We have always 8 regarded platform as a transition because it allows more 9 innovation to be brought into the network. 10 But being able to spread the costs of loops, for 11 example, the costs of co-locating in end offices over a 12 larger potential customer base lowers the cost of co- 13 location, increases the penetration rate that we would be 14 able to achieve using loops as a method of local entry. 15 Through the use of CLEC facilities, MCI WorldCom 16 now provides service to more than 42,000 buildings through 17 its own facilities. But the combination with Sprint would 18 allow us to provide benefits for the Sprint customers, as 19 well, using those facilities. We would have positive 20 benefits on transports and on -- and I think Sprint will 21 address this -- the deployment of the innovative Sprint Ion 22 service. 23 But coming to the final point I want to make in 24 this opening, broad band wireless offers another opportunity 25 in a very small universe for facilities-based last mile, 90 1 competing with the Bell Copper. This merger would allow us 2 to combine a national footprint -- create a national 3 footprint, I should say, in what has been known as the MMDS 4 spectrum which has the characteristics and the opportunities 5 to provide broad band wireless service to both residential 6 and business customers. 7 This is very important. We do not want to be 8 always prey to the Bell operating networks. We want to be 9 able to move in a place where we have our own facilities and 10 we can maximize our own product development and innovation. 11 MMDS offers a pathway, not the exclusive pathway, but an 12 important pathway to allow us to do that in a way that would 13 create a third pathway to the home and the small business in 14 addition to the resident copper and, to the extent it is 15 being used, local cable facilities. In this regard, it will 16 present another important benefit to customers, both 17 business and residential. 18 So for all of these reasons -- and I assume later 19 in the panel we will probably come back and go over some of 20 these in detail -- all of these different reasons goes to 21 the single point, we have yet to achieve the kind of 22 competition in local markets that was the purpose and goal 23 of the Telecommunications Act. 24 Other companies have come in front of this 25 Commission saying they needed to be bigger and stronger in 91 1 order to be able to compete in local. We are saying to you 2 that without the kind of last mile facilities that other 3 people have or are in the process of acquiring, it is 4 critical for us and beneficial to the public to have a 5 stronger competitor to finally break open the local monopoly 6 markets. 7 MR. STRICKLING: I just wanted to ask, I don't 8 know if it goes to Richard or Vonya, where today is Sprint 9 marketing their residential and small business customers as 10 a CLEC? I mean, what is happening with your local entry 11 strategy as it relates to, you know, the mass market 12 customer? 13 MS. McCANN: Sprint has -- can you hear? Okay. 14 Sprint has made efforts to enter the local market in 15 California. That effort did not go well. And we are in the 16 process of just maintaining service for grandfathered 17 customers. We entered the CLEC market also in Florida, 18 again, in a very small way. And things are not progressing 19 in a big way there either. 20 We have also entered the market in New York. And 21 in doing so, we have -- in each of these three locations 22 where we have entered the market, we have done so on a 23 resale basis. And as you know, the prices that we are 24 charged, the wholesale prices that we are charged for that 25 service does not allow us to provide it on a large-scale 92 1 basis. 2 So we have entered the market in some limited 3 circumstances. But we have not done it in -- to the degree 4 and magnitude as MCI WorldCom. 5 MR. STRICKLING: Roughly, if you can say how many 6 lines do you serve as a CLEC. 7 MR. DEVLIN: I would say under 10,000. 8 MR. ATKINSON: I was wondering if I could perhaps 9 ask probably SBC if they agree or disagree that a merger 10 is -- of this sort is necessary to enter local markets as a 11 CLEC. 12 MS. WAGNER: I think in some comments I made on 13 the first panel, I characterized the potential for public 14 interest benefit that might flow from the sorts of things 15 that the applicants have described that they would be able 16 to do or that they believed they would be able to do as a 17 merged company. I think I used the word, "modest", to 18 describe what some of those benefits might be. And I have 19 continued to subscribe to that theory -- or to that belief. 20 Largely, what you heard described briefly so far 21 on this panel is nothing more than what the parties are 22 doing today, can do today. They have each separately and 23 independently made investments, for instance, in MMDS 24 technology and licenses. Together, they do have a national 25 footprint. Each has about half of the nation. 93 1 Those licenses -- license investments were made, 2 like I said, independently. And I doubt seriously that the 3 business enterprise would have invested in those licenses 4 did they not think they could turn something of value into 5 the marketplace utilizing the assets they bought. 6 In terms of other forms of competitive entry, the 7 descriptions that you heard are essentially what parties are 8 able to and/or are doing today. So you have to -- I mean, 9 to your point, Mr. Atkinson, what you are going after is 10 what public interest benefits would accrue from this merger 11 that could not accrue were this merger not to happen. And I 12 think -- I continue to believe that if there are any, they 13 might be modest and clearly don't rise to a net benefit to 14 the public given the potential for harm in the long distance 15 market. 16 MR. ATKINSON: We have not yet heard from TRAC. 17 So perhaps you could jump in and perhaps comment on the 18 merger-specific benefits from this merger. 19 MR. HARGRAVES: If I could. I want to echo some 20 of Sandy's comments. Again, for those who haven't heard 21 from TRAC or know who we are, we are a nonprofit 22 organization that represents low or small residential 23 businesses and consumers. And our chief concern is how the 24 merger will impact long distance rates. 25 And when you ask the question, does the merger 94 1 create public interest benefits that can only be realized 2 through the merger, the benefit that we would hope to see 3 would be a reduction in long distance rates. And TRAC does 4 a bimonthly or bi-annual, rather, "Teletips" publication 5 that shows how long distance rates are rising with the low 6 volume customers. I think that was indicated by the 7 Reverend Jackson this morning. 8 The heavy usage customers' costs are going down. 9 But, you know, we are 50 percent of the market and we are 10 low cost individuals -- low volume usage individuals are. 11 Those costs are going up. 12 And getting to the points that the --Sprint and 13 MCI panelists have suggested in terms of why the merger can 14 only -- why the benefits that can be achieved by these two 15 companies can only be achieved by the merger, again, as 16 Sandy had indicated, I don't see where the promising 17 technology that MCI and Sprint are engaging in and MMDS 18 cannot be achieved separately by the applicants. 19 I also don't see why the scale of the roll out 20 these two companies are attempting cannot continue to go 21 forward because as I understand it, it is not the market 22 base. It is integrating the operating systems of the 23 entrants and the incumbents. So with those two points, I 24 will kind of move forward. 25 MR. ATKINSON: Jonathan, I asked at the beginning 95 1 one or two, you know, major public benefits. Where does 2 lower long distance rates for the low volume user come? Is 3 it on the list anywhere? 4 MR. SALLET: Yes. It is what I said before. To 5 the extent that that issue is merger-specific -- and I 6 maintained on an earlier panel that the substantial reason 7 is I believe it is not. 8 To the extent it is, what I said in an earlier 9 panel was that in New York where we are reaching residential 10 customers, we can offer savings that accrued to lower volume 11 LD users who are not necessarily lower volume local users 12 because we are in essence -- they are able to in essence 13 aggregate their demand. And they realize savings from that 14 meaning that the benefits that we have been able to bring in 15 local in New York can provide benefits for low volume users, 16 as well. 17 But I would also -- I would like to, you know, 18 address the SBC comments for a moment if I could. SBC says 19 the benefits from the merger would be modest. At the risk 20 of being immodest, let me say that is not the case. But one 21 is hard pressed to address this issue without noting the 22 identity of the party who makes it. 23 One has not typically heard SBC complain that 24 there is not enough competition in local markets. SBC is an 25 incumbent serving its economic interests by keeping the 96 1 local markets closed as long as it can and maintaining its 2 market share as high as it can. 3 So it leads one to ask the question, what is the 4 actual reasons why SBC appears saying, gosh, we don't think 5 there is enough people going to come in and bang on us and 6 our markets as a result of this merger. I mean, the fact of 7 the matter is SBC was in front of this Commission not very 8 long ago saying that it needed to merge with Ameritech if it 9 was to be able to enter local markets outside of the one- 10 third of the country whose access lines it would control 11 upon the consummation of the Ameritech merger because it 12 wasn't big enough, SBC said. 13 But, in fact, as of the beginning of the day, SBC 14 today has more revenue on an annual basis, has a higher 15 EBIDA, has a bigger market cap. than MCI WorldCom. So it is 16 a little -- I am a little confused as to why a theory that 17 was good for SBC, a theory that had to be markedly bigger 18 doesn't apply to suggest that we need to be, say, as big as 19 SBC on some grounds. 20 Now, this isn't the fundamental point that we are 21 making. But I do think it suggests some perspective that 22 will be taken to the issue. On the question of whether the 23 benefits are really merger-related, I said that, for 24 example, in some parts of entering local markets, there 25 would be economies of scale that would be realized. 97 1 It is attacked as a fanciful theory I guess by SBC 2 which confuses me again when I pick up the New York Times 3 this morning and I read about a potential merger of SBC and 4 Bell South's wireless operations. And it says one of the 5 advantages of this would be the economies of scale in 6 advertising and marketing that would come from being able to 7 combine SBC and Bell South's wireless operations. It is not 8 obvious to me why that would not obtain in this case, as 9 well. 10 The fact of the matter is when the Commission has 11 looked at local competition, it has looked at will local 12 competition go more broadly, will it go more quickly, will 13 it go more efficiently as a result of a merger. In this 14 case, we satisfy all three prongs of that in very specific 15 ways. 16 In our reply brief, we have demonstrated with 17 facts and figures and numbers why it is there are concrete 18 benefits, financial benefits that will come from, for 19 example, the merger in the deployment of loops. As to 20 MMDS -- and in platform and in the other methods that I 21 mentioned. 22 But let me talk for a minute on MMDS which was 23 specifically created. Again, I -- you know, I read this 24 Bell South/SBC story this morning about needing to have a 25 bigger national footprint. And I am a little confused about 98 1 why MMDS doesn't fall within the same category. 2 But assuming for a minute it is different, the 3 fact of the matter is we have -- we do not yet have a 4 successful national MMDS policy for two-way broad band. The 5 FCC has moved in a very innovative fashion to allow that 6 opportunity to occur. But we don't yet have national 7 standards. We don't yet have uniform equipment. We don't 8 yet have tower sittings everywhere. We don't yet have the 9 service going. 10 And so what we have done is to demonstrate in a 11 variety of ways that there would be very specific financial 12 advantages which would accrue to customers through the 13 creation of a merged entity that can gain efficiencies in a 14 number of ways. Let me just mention a couple. 15 As I have said before, having marketing and 16 advertising and customer support spread over a larger base 17 provides economies of scale which are pro competitive. We 18 have an analysis in our reply that talks about equipment 19 savings -- I noted before that there is not yet common 20 equipment -- equipment savings that could come from being 21 able to proceed in a national footprint and which estimates 22 that those equipment savings could exceed 500 million 23 dollars. 24 We give the very practical example of Sprint PCS 25 towers. MMDS needs to be sighted. And as one deploys more 99 1 and more band width in a market, one does so generally 2 through the cellularization of a market, meaning we have to 3 be in more towers. One very practical example is that the 4 ability for us to be able to share towers that are now used 5 for Sprint PCS lowers cost than the deployment of MMDS. 6 MR. ATKINSON: But Sprint could do that -- 7 MR. SALLET: Sprint could do that. But there is a 8 merger-related benefit from our being able to do that, as 9 well. Just as we could use our CLEC facilities, but there 10 is a merger-related benefit in Sprint Ion being able to use 11 them, as well. 12 MR. ATKINSON: Or you could lease the tower space 13 as MCI. You know, you don't have to merge to get on their 14 towers. 15 MR. SALLET: Let me talk about that. Some 16 commentators have suggested that we could do by contract a 17 number of these things. The fact is our experience and the 18 experience of this sector has shown that it is very 19 important to have uniform management if one is to move 20 quickly in the introduction of innovative technologies. 21 It is after all uniform management that SBC sought 22 when it merged with PacBell, when it merged with SNET, when 23 it merged with Ameritech, when Bell Atlantic merged with 24 Nynex, when Bell Atlantic proposed to merge with GTE, when 25 AT&T merged with TCI, although I suspect a statement could 100 1 have been made that AT&T could have by contract become the 2 local telephone provider on all TCI systems. 3 The reason for all of this is that people have 4 recognized, and it is true here, as well, that having a 5 uniform management provides speed in deploying services in 6 that there are some economic decisions that will not be made 7 unless they are made within the context of uniform 8 management. 9 MR. ROGERSON: Can I ask a slightly different 10 question related to this merger specificity on the MMDS 11 issue? As I understand it, roughly speaking, the situation 12 is you own licenses in half the country. They own licenses 13 in the other half of the country. And you are saying 14 something like maybe each of your operations individually is 15 only worth a billion dollars in some sense. But if you 16 combine them, the fact that you have a national footprint 17 makes it such a more attractive offering in a variety of 18 ways that maybe the combined thing would be worth ten 19 billion dollars. All right. 20 Now, let me -- I gather there is some dispute 21 about that even because there is questions about whether 22 alternate spectrum could be combined in other regions with 23 the spectrum you have, et cetera. But ignore that. I would 24 like to give you your point for a minute that maybe it 25 really is the case that when you own half, it is worth a 101 1 billion to you. And when they own half, it is worth a 2 billion to them. But if somebody owned it all, it would be 3 worth ten billion to them. 4 Now, if that was really the case, why wouldn't one 5 of you sell it to the other one? Now, I am not talking 6 about an arrangement by contract. Businesses have been 7 known to sell. You know, if something is worth five bucks 8 to me and it is worth 40 bucks to you, there is a good 9 chance we can find a price that would make us both better 10 off. 11 So I just don't see any way, shape or form that 12 you could call this benefit of merging the two half 13 footprints a merger-specific benefit. One of -- if it 14 really is a big benefit, one of you could sell it to the 15 other one and you both would be better off and you would 16 come here and argue that there was a benefit for it and the 17 FCC would buy it. 18 MR. SALLET: Well, as I said before, MMDS is an 19 important, but not an exclusive way to reach residential and 20 business customers. The reason -- in other words, we are 21 creating a portfolio of names to reach local, residential 22 and business customers. So that we are saying that there 23 are advantages that come not solely from your postulated 24 increase in the worth of MMDS, but more systemically from 25 the combination of a variety of pathways including platform, 102 1 including looks, including MMDS, including -- 2 MR. ROGERSON: Right. And I was just -- 3 MR. SALLET: -- on the DSL -- I'm sorry. I am 4 just trying to answer as best I can. 5 MR. ROGERSON: Okay. Yes, okay. 6 MR. SALLET: So what we are saying is that this is 7 not just a merger of MMDS properties. We are saying MMDS is 8 one way that taken into account with all of the other means 9 of entering local markets creates a recognizable public 10 benefit that would not otherwise be -- 11 MR. ROGERSON: Right. And I just want to look at 12 that one way. 13 MR. SALLET: -- would -- could not otherwise be 14 realized. 15 MR. ROGERSON: The one issue of MMDS, I think if 16 there was truly a massive efficiency to be had with the 17 two -- with one person owning a national footprint in those 18 frequencies, I would see one of you sell it to the other. 19 And you may well do that if the merger is prevented if it is 20 really true. 21 MR. SALLET: But, you see, I have tried to give 22 the first half of the answer. And if I might, to the first 23 is that there are a variety of platforms. But the second, 24 of course, is that a number of the efficiencies of the 25 advantages to which I have eluded come from the fact that 103 1 one would have a larger customer base composed of both 2 current MCI WorldCom and Sprint customers over whom one 3 could spread costs in the nationwide MMDS deployment. 4 If one company was simply to purchase the MMDS, 5 they would have only its own customer base over which to 6 spread those costs. The spreading mechanism would be 7 smaller. And, therefore, all of the advantages could not be 8 realized. 9 MR. ROGERSON: Okay. Well, I am happy to -- you 10 know, you've got this -- the argument that actually SBC made 11 last time around that once they merge with somebody, they 12 will have twice as much customers to spread fixed costs 13 over, you know, works equally well for you and them. But I 14 think then we have both agreed that if there was actually a 15 real economy, if -- to have an MMDS network work properly 16 you needed a national footprint, that could be accomplished 17 without the merger. I think we have both agreed on that 18 point. 19 MR. SALLET: No. 20 MR. ROGERSON: No? Okay. Then tell me why we 21 haven't. 22 MR. SALLET: Because you started your hypothetical 23 by quantifying benefits, although they were hypothetical 24 numbers. And what I am saying is that -- and you did it by 25 considering an order of magnitude difference between your 104 1 two numbers. 2 And I am saying for the second reason I have 3 given, the full quality of the increase in value combined 4 with the fact that there are additional benefits that come 5 when MMDS is combined with other means of local entry, both 6 demonstrate an outcome that is greater in value to the 7 public than an answer as to MMDS alone. 8 MR. STRICKLING: I would like to maybe change the 9 subject slightly. 10 MR. SALLET: Wait, wait. I want to -- 11 MR. STRICKLING: Can I? 12 MR. SALLET: Sure, you may. 13 MR. STRICKLING: Because I wanted to go a 14 different direction which is to have you maybe state with a 15 little more specificity what the synergies are on the non- 16 MMDS local entry strategy because what I heard from Sprint 17 was that they are a fairly small player, not too active, 18 using a strategy for entry that MCI doesn't use. And I am 19 trying to understand exactly where the source of synergy 20 might be on the wire line side of this. 21 MR. SALLET: The specific merger-related synergies 22 on which we have relied focus on long distance and wireless. 23 And if I could, let me give you a sense of what those are. 24 MR. STRICKLING: No, I think I understand those. 25 Why don't you just speak on -- I am speaking on the local 105 1 side. 2 MR. SALLET: Well, okay. Let me then make -- 3 MR. STRICKLING: I mean, what I heard Bill 4 Rogerson ask you was, wait a second, if you are looking for 5 some kind of economies of scale or some other benefits of 6 MMDS, why doesn't one of you buy out the other. I heard you 7 answer, well, but, no, you need to look at local in its 8 entirety and not just the wireless piece of it. 9 So then I am saying, well, when I take the 10 wireless out of it, I don't see any synergies on the local 11 side because they are not really a player in the local entry 12 right now. 13 MR. SALLET: Let me give you an example. And it 14 is an example that I have just used in a slightly different 15 context. The costs of local entry are made smaller if the 16 size of the customer base over which those costs can be 17 spread is larger. Okay? If we are in a position of being 18 able to market to the people who currently are long distance 19 customers to both MCI WorldCom and Sprint, we have a larger 20 customer base over which to spread the cost. 21 This can have dramatic effects. We have put into 22 a reply an analysis from an economist that said, for 23 example, in the deployment of loops in New York State, the 24 effect of this change in and of itself would be to make the 25 addressable market grow from 42 percent to 72 percent which 106 1 is a very significant increase. 2 Now, this is all without dealing with the question 3 of Sprint Ion which it is -- of course, Sprint is in a 4 better position than I to address. 5 MS. McCANN: For Sprint, the opportunity to take 6 this wonderful new technology, Ion, that we have spent 7 millions of dollars developing but have not been able to 8 conquer, a way to roll it out in an efficient and an 9 effective manner. We have an opportunity with the merger to 10 use the metropolitan fiber rings that MCI WorldCom has built 11 all around the country and to use those facilities to help 12 us bring this innovative service to consumers, both 13 residential and business, all over the country. 14 With respect to co-locations, as I told you, we 15 don't have many. Our local CLEC strategy has been very 16 limited to this day. But MCI WorldCom has been far more 17 aggressive in establishing co-locations. And they have, you 18 know, over 500 now and are looking to do more this year. 19 We can share space with them on those facilities 20 that would substantially reduce our costs, both our non- 21 recurrent costs and our recurring costs like power and rent 22 and things like that. Those for us are significant savings. 23 Just on those two efficiencies alone, we are looking at 50 24 million dollars worth of savings over the next few years. 25 In addition, the network effects of Ion are such 107 1 that they become enhanced by making it available to more 2 customers more quickly by using their local facilities, by 3 using MMDS. We will have a chance to roll out this service 4 more quickly and bring it to customers sooner -- more 5 customers sooner. 6 MR. STRICKLING: Let me change subjects just a 7 little bit. I -- or at least I would like to certainly give 8 Don Flexner an opportunity to comment on the merger-specific 9 public interest benefits. 10 MR. FLEXNER: I appreciate that. Let me just 11 start by backing up a little bit because -- is it on? Yes, 12 okay. There are two issues that we really need to address. 13 One is are the benefits merger-specific and the second is 14 are they substantial enough to outweigh the costs. And I 15 just want to make sure that we keep in very clear 16 perspective that very important balancing that has to be 17 done because it seems to me that the more substantial cost, 18 the greater the burden on the applicants to show that the 19 benefits are both offsetting and merger-specific. 20 Here without question you have a transaction which 21 is unprecedented before the Commission in terms of producing 22 concentration in multiple markets. It is unprecedented. It 23 is nothing like MCI WorldCom, nothing like it at all. In 24 fact, I would venture that there has been no transaction 25 before this Commission that has involved the degree, the 108 1 extent and at a qualitative level the danger of 2 consolidation that this transaction poses. 3 We have gone through the long distance market. We 4 see that we are talking about creating essentially a 5 duopoly, close to 80 percent in residential. The same is 6 true with respect to the business market. The same is true 7 with respect to packet switched data services. The same is 8 true with respect to the internet backbone. 9 And lo and behold, in local exchange, the same is 10 true because what we have is a transaction that is going to 11 not only eliminate head-to-head competition between MCI 12 WorldCom and Sprint which ought to be of grave concern to 13 the Commission, but we also have the elimination of non- 14 trivial actual potential competition. 15 We have just heard that turned into a benefit. It 16 is better to have one free-riding the cost that has been 17 incurred by MCI WorldCom in getting co-location ahead of the 18 game, ahead of Sprint than to have two vying for that 19 position in competition with SBC. 20 Now, if one thing is clear, and certainly SBC has 21 had to address it each and every time that we have been 22 here, it is that the '96 Act is at once de-regulatory, but 23 it really favors de-concentration. And what we have both in 24 all of these markets is a very, very significant lessening 25 of competition through concentration which is facially a 109 1 merger guidelines violation. And that is true even if you 2 ignore the issue of product differentiation. 3 So you have here a transaction that I believe 4 poses a reasonable probability, to use a Section 7 term, 5 chance of raising interstate toll, residential rates which 6 is of concern to SBC, and causing very, very significant 7 anti-competitive harms even if you set to one side the issue 8 of product differentiation. 9 So we turn now against that background. And I 10 don't think you can divorce the threat of very, very 11 substantial competitive injury which is supposedly mitigated 12 by factors. And we are confronted with a series of benefits 13 that are supposedly a) outweighing the harms and b) merger- 14 specific. MMDS it seems to me fails the test. 15 You have here by the applicants' own admission on 16 both their parts a sunk investment of hundreds of millions 17 of dollars in these -- in this technology in license 18 purchase, in testing, in presumably deployment. None of 19 them has said, neither of them has said that they are going 20 to abandon that program. 21 You can reasonably expect, therefore, that you 22 will see each of them in competition with each other and 23 other technologies, deploying that technology as best they 24 can absent this merger. They have an economic incentive to 25 do it. They have already invested in it. They can't 110 1 recover that investment unless they roll it out. 2 Now, what they have the burden of showing with a 3 time tape and a substantiation and a rational explanation of 4 what the near-term benefits are going to be sufficient to 5 outweigh the likely harms, that this is not -- this is a) 6 going to happen and but for the merger would not happen. 7 And it seems to me that on that basis, it has failed. 8 Local exchange, the Commission ought to worry 9 first and foremost about the competition that is going to be 10 lost as between these two head-to-head competitors, MCI 11 WorldCom as a CLEC, Sprint as an ILEC. And the Commission 12 ought to be no less concerned about the adjacency of these 13 firms in terms of potential competition than they have been 14 in other cases. 15 Finally, I think it is fair to say that -- to 16 answer your question, that plainly you do not need a merger 17 to create CLEC competition. There is plenty of CLEC 18 competition. And there is plenty of CLEC competition that 19 is coming from the parties to this transaction. 20 The Bell South -- the announced Bell South 21 transaction with SBC is by no means, by no stretch analogous 22 to what is before the Commission. What is before the 23 Commission is the question of whether or not substantial 24 lessening of competition is outweighed by public interest 25 benefits that are merger specific. 111 1 The Bell South/SBC transaction is a joint venture 2 which will not involve any elimination of competition, but 3 rather will put together two complementary wireless systems 4 so that there is a national footprint and national 5 competition so we can compete with the likes of Sprint. 6 I presume that MCI WorldCom and Sprint, if it had 7 a mind to mimic SBC, could create a joint venture in which 8 they could put their MMDS properties if complementarily was 9 a feature of those two assets and if MMDS was really the 10 concern that they say it is. 11 MR. ATKINSON: Okay. We are just about at the end 12 of time, but I would like to ask one brief question that 13 came up a little bit in the previous panel and is hopefully 14 a brief yes or no kind of question. But in the last panel, 15 we were talking about -- the issue came up about, you know, 16 the prospect of -- the horrible prospect perhaps of some 17 sort of regulation of the internet. 18 How about I would like a yes or a no answer. Does 19 this merger raise the prospect of more regulation of the 20 conventional long distance inter-exchange markets or at 21 least any reduction or halting of the long-term trend of 22 less regulation? Maybe, Dirck, if you could start. 23 MR. HARGRAVES: Well, if we look at the way the 24 long distance rates have been going and how the plans have 25 been becoming more confusing to a lot of consumers, 112 1 certainly with the FCC and MCI entering into an agreement 2 with the dial-around issue, if complaints rise -- continue 3 to rise and consumers are continuing to be baffled and 4 confused by fine print language, we may run into an 5 environment where more regulation may be needed. 6 MR. ATKINSON: MCI or Sprint, more or less 7 regulation as a result of this merger? 8 MR. SALSBURY: You know, our expectation is that 9 there would be less. I think we -- in the first panel, we I 10 believe pretty fully responded to the arguments that there 11 would be a lessening of competition in the long distance 12 marketplace. 13 Mr. Flexner raises this issue about a packet 14 switch data marketplace which nobody really has ever 15 identified before. It is a new one. We don't think it 16 exists. So we will just sort of set that aside. 17 But I will say that we believe if you look at the 18 communications -- domestic communications marketplace as the 19 Commission does, there is no price regulation as we said in 20 long distance today. We don't see that this transaction 21 would lead to increased pressure for price regulation in the 22 future. 23 There certainly is still regulation, both federal 24 and local, of the local markets. And we believe that this 25 merger will create for the reasons Mr. Sallet, Mr. Devlin, 113 1 Ms. McCann mentioned earlier, will create a much stronger 2 entrant in the local marketplace not withstanding what the 3 monopolies will have you believe. I think the fact that 4 they are here opposing this is probably the best evidence 5 that they think that we will be a very effective competitor. 6 And I think when you add on to that -- and when 7 you have local entry, that will lead -- when you have robust 8 -- more robust local competition, someday there will be a 9 lessening and probably doing away with price regulation at 10 the local level. 11 And when you add on to that the overlay that the 12 MMDS technology offers, which is to bring the benefits of 13 the local competition to under-served areas, to particularly 14 rural areas which you would think you would worry that it 15 would have to retain regulation along this period, you know, 16 we see that this can very, very much advance the 17 Commission's desires and I think Congress' desires to have 18 less regulation. 19 MR. ATKINSON: Thank you. We have -- how many 20 questions do we have or people who would like to speak 21 roughly? Okay. What I would like to do would be to go to 22 the public questions. And to the extent that there is any 23 additional time at the end of that, maybe we could 24 reconvene. But if the panelists could perhaps stay where 25 they are. And if any of the other previous speakers, if a 114 1 question is addressed to them, they could rejoin the table. 2 But, Michelle, are you going to run this? 3 MS. CAREY: The first question is from CWA who has 4 a question about service quality and employment issues. 5 MR. ATKINSON: If the next couple of people could 6 kind of line up. 7 MS. CAREY: Okay. After that, Al Sonnenstrahl has 8 a question. He is from the Consumer Action Network with the 9 Deaf and Hard of Hearing Americans. He has a question about 10 TRS. 11 MS. GOLDMAN: I am going to begin with a couple of 12 comments and then end I suppose with a question. It was my 13 understanding that that was permissible under this format. 14 We have heard a lot today, and I am not going to repeat some 15 of the concerns that CWA has that others have already 16 mentioned with this merger, the competitive harm in long 17 distance markets, the competitive harm in the internet. 18 I do want to focus though on two issues. The 19 first is related to the internet. As I listened to that 20 panel, one of the things I thought is that one could emerge 21 from listening to that and think that, in fact, the IMCI 22 divestiture had been totally successful. 23 And I think one does have to look at a divestiture 24 in which market share which had been about 40 percent before 25 under the -- when MCI had that internet business has dropped 115 1 to what according to the applicant's own numbers in their 2 filing shows to under nine percent for cable and wireless in 3 a market which is growing, as the Chairman of the Commission 4 has said, doubling every two months. 5 Therefore, one needs to look at whether that 6 remedy was, indeed, effective in replacing Internet MCI with 7 another effective competitor and to look seriously about 8 what would make an effective remedy this time. 9 The second thing I wanted to just raise has to do 10 with some of the speculative claims of the parties that the 11 real public interest benefit of this merger is that it will 12 increase competition and improve service and choice for 13 consumers in local markets. And, of course, we know that 14 business customers now have a lot of choice in local 15 markets. 16 So really one would have to say then they are 17 talking about those consumers for which competition has been 18 slowest to develop which is the residential and small 19 business market. And I question the sincerity of the 20 parties when they make that point for two reasons. 21 First, if you look at MCI WorldCom, they promised 22 this Commission two years ago that one of the benefits of 23 their merger would be that they would increasingly compete 24 for this segment of the market. And they haven't. The only 25 place they have entered that market is in New York. 116 1 There are other CLECs competing for residential 2 and small business customers in other states. But MCI 3 WorldCom is not. And as Reverend Jackson mentioned, even 4 where they built fiber, they are not using that as a base to 5 jump off toward other residential and small business 6 customers. 7 And the second point is -- and this is where I 8 speak from a great deal of experience from the membership of 9 our union. Our union represents 5,000 employees who work in 10 Sprint's local telephone division in 12 of the 18 states 11 where Sprint's local telephone division serves local 12 customers and local markets. 13 And the reports that we have from our members and 14 our leaders is that Sprint, indeed, is moving away from its 15 local telephone operations. And, in fact, it is 16 disinvesting in the networks, is not reinvesting, is using 17 local rate payor cash to finance its non-local telephone 18 operations. 19 And this comes up and appears in service quality 20 statistics, the FCC's own service quality statistics that 21 show that service outages and trouble reports are sky 22 rocketing. It comes out after the merger is announced where 23 our members discover through a memo from the local telephone 24 division that there is a mandate to start cutting operating 25 costs by ten percent, a local hiring freeze that had been 117 1 imposed in the local areas that I am pleased to say seems to 2 be being lifted in some areas as a result of bringing this 3 issue to the attention of some state regulators who are very 4 concerned. 5 But all of these lead us to say that we don't see 6 the commitment from these companies now to this segment of 7 the market. And we question whether this is just simply a 8 speculative commitment made to please the Commission but 9 that once the merger takes place, absent any conditions, we 10 will not see any real benefits. Thank you. 11 Oh, I had one third point I guess. And that is 12 the issue of employment impacts. We have brought to the 13 attention of the Commission before the fact that after the 14 MCI and WorldCom merger, MCI laid off about five percent of 15 its work force. We say that employment impacts is a public 16 interest consideration. But it is also an issue of service 17 quality and what is the impact on the network. 18 Last week or two weeks ago, the Washington State 19 Commission in the staff issuing its report on this merger 20 noted that in that state since the merger between MCI and 21 WorldCom occurred, since the job cuts that were connected to 22 that occurred, there has been an increase of over 30 percent 23 in customer complaints against MCI WorldCom. 24 And so we encourage the Commission also to look at 25 the employment impacts that will come from the merging of 118 1 overlapping businesses where there is a target to achieve 2 cost synergies in the range of 1.3 billion dollars in the 3 first year alone. And what will that mean for families, 4 individuals, communities and for the quality of service the 5 customers receive? Thank you. 6 MS. CAREY: Thank you. 7 MR. DEVLIN: May we respond very briefly? 8 MS. CAREY: Yes, please. 9 MR. DEVLIN: Thank you very much. I appreciate 10 the comments. First, on the success of the IMCI 11 divestiture, we heard a fair amount of comment today from 12 the panelists that the internet market today, the internet 13 backbone services market is competitive. 14 Now, in my mind that means one of two things. 15 Either the theory we espoused last time was wrong or the 16 divestiture worked. The reality is the market is 17 competitive. You don't look at what MCI was -- and it 18 clearly wasn't 40 percent -- and compare it to what cable 19 and wireless is now. That doesn't determine whether the 20 market is competitive. You have to look at the whole thing. 21 With respect to activities in our local division, 22 I will acknowledge that we are making changes. We need to 23 make changes. The Commission has a policy in favor of local 24 competition. We are trying to become more competitive 25 ourselves. And we realize that that is a difficult 119 1 transition for some people. And it is an issue that we are 2 discussing with the CWA. 3 MR. SALSBURY: With respect to the MCI WorldCom 4 employment figures -- and we pointed this out in the reply - 5 - I understand that this is something that sometimes is 6 confusing to people. But in point of fact, since the 7 merger, MCI WorldCom sold a subsidiary, SHL, to EDS. And 8 that had roughly a little over 9,000 or 10,000 employees. 9 And if you actually look at -- which accounts for a 10 subtraction of employees. 11 And if you look at the overall employment of the 12 company since the merger, well, in the one year, I look at 13 September '99, it is obviously higher now. But the numbers 14 we put in were in the one year after the merger, there is 15 actually -- if you take out those employees who were part of 16 the division that was sold off, there has actually been a 17 net increase of over 6,000 employees. And it is -- you 18 know, that is eight, nine, ten percent gain which is roughly 19 in line. It may not have been to the last employee, but it 20 is roughly in line with what we predicted. 21 With respect to the increased choice in local 22 markets, you know, it is difficult to sit here patiently and 23 be berated about the fact that the people on the public 24 interest benefit across the way will not open their local 25 markets, so we can't go in and enter it. In the one state, 120 1 they can -- well, you only went in in one state. Well, only 2 one state has the local market been found to be open. For 3 gosh sakes, we are trying. 4 And one of the things that this merger will do, we 5 hope, is make it more possible for us to do it more quickly 6 and more efficiently. And it is -- one has been patient. 7 But this is not one of the things that I think is fair to 8 lay at our feet. I would lay it at the feet of the RBOCs 9 who are opposing us. 10 MS. CAREY: Okay. Thank you. 11 MR. MORLEY: Can I just make one comment on the 12 Internet MCI divestiture? By most accounts, that 13 divestiture has not worked. And if you just look at market 14 share, again, maybe the market share wasn't 40 percent. But 15 it was a dominant share, perhaps in the 25 to 35 percent 16 range. By some accounts cable and wireless now has six 17 percent market share. So that is a pretty clear indication 18 that that divestiture did not work. 19 And I guess it just points to the fact that I 20 wanted to raise that I think that it is important if there 21 is a divestiture either of UU Net or of Sprint Link, that 22 that divestiture be done to another provider who has the 23 ability to operate that entity independent of Sprint or 24 WorldCom. So -- 25 MR. STRICKLING: I understood Rich Devlin's point 121 1 though -- I thought I understood him to say the internet 2 business is more competitive today than it was two years 3 ago. And whether or not any one competitor is doing as well 4 today as they did two years ago, we shouldn't be concerned 5 with that. Is it your contention that the overall internet 6 backbone business is less competitive today than two years 7 ago? 8 MR. MORLEY: I think there is competition. But I 9 believe that that specifically, there has been -- there was 10 an increase in market share among -- by UU Net as a result 11 of the weakening of Internet MCI. 12 MR. SALSBURY: If I can just respond, you know, 13 there aren't any statistics that really bear that out. And 14 I do think that the question, whether MCI WorldCom's market 15 share increased, it has been pretty steadily declining. 16 But I think the real question is exactly what you 17 asked, Mr. Strickling, is this a very competitive market 18 today. The answer is yes. Was it a very competitive market 19 before the merger. The answer is yes. 20 And as Mr. Devlin said, there is really only two 21 possibilities. We happen to disagree on what those -- which 22 is the right one. But there is really only two 23 possibilities. And one is that the theory just is not valid 24 or, two, that the divestiture was successful. 25 MR. STRICKLING: Next question? 122 1 MS. CAREY: We have a few questions about TRS from 2 Al Sonnenstrahl, Claude Stout and Pam Stewart. 3 (Presentation from Mr. Sonnenstrahl and Mr. Stout 4 through Ms. Stewart, interpreter for the hearing impaired.) 5 MS. STEWART (INTERPRETING FOR MR. SONNENSTRAHL): 6 Good morning -- well, actually, good afternoon. My name is 7 Al Sonnenstrahl. We are representatives of the deaf 8 community and a user of the relay service, the TRS, the 9 Telecommunication Device Relay Service. I have a written 10 paper that I will give to the Secretary for review of my 11 comments here. 12 To date, 27 states have single vendoring contracts 13 with Sprint due to their excellent services. However, MCI's 14 track record of services has a lot of room for improvement. 15 The Telecommunication Relay Service community has concerns 16 about the possibility of losing the quality of services. We 17 recommend that the FCC require that MCI WorldCom and Sprint 18 develop a plan to ensure high quality service and encourage 19 competition among all the providers. 20 Also, we recommend that the FCC creates a 21 committee to oversee the relay service nationally. Thank 22 you. And Claude has a few things to say from the TDI. 23 Thank you. 24 MS. STEWART (INTERPRETING FOR MR. STOUT): TDI has 25 a few words. Will you hold this for me, please? Thank you 123 1 for allowing us the opportunity to give you a few comments 2 and feedback. TDI hereby submits this list of requests to 3 the Federal Communications Commission regarding its review 4 of the MCI WorldCom-Sprint merger application. 5 This statement of requests concerning the merger 6 application review is divided into two parts. The first 7 part consists of TDI's request concerning the MCI WorldCom 8 merger generally. And the second part outlines TDI's 9 request specifically concerning the merger of corporate 10 entity as a TRC provider. 11 These requests of the FCC do not reflect any 12 position of the TDI, either in support of or opposed to this 13 proposed merger, but rather a request that we would hope 14 that the FCC could take into consideration during their 15 review. Requests concerning the MCI WorldCom-Sprint merger 16 generally, the TDI requests that the FCC ensure that MCI 17 WorldCom-Sprint is committed to either maintaining the 18 present level or increasing the level of funding for 19 research and development within the merger organization. 20 The TDIF requests that the FCC ensure that MCI 21 WorldCom-Sprint would maintain an affirmative action policy 22 regarding hiring of persons with disabilities for clerical, 23 specialized and administrative positions. TDI requests that 24 the FCC ensure that MCI WorldCom makes products and services 25 available to customers and adequate supply regardless of 124 1 geographic location and business or residential status. 2 TDIF requests that the FCC ensures that the MCI 3 WorldCom-Sprint would routinely conduct assessments on the 4 telecommunications and information needs of individuals with 5 disabilities. TDIF requests that the FCC ensure that MCI 6 WorldCom-Sprint would guarantee that any emerging and future 7 communications technology distributed to its customers 8 including people with disabilities would be compatible with 9 any telecommunications technology and service currently used 10 by them or that a period of transition for transfer of one 11 technology for another would go orderly and smoothly. 12 TDI requests that the FCC ensure that MCI 13 WorldCom-Sprint maximizes the number and availability of 14 accessible telecommunication products and services with 15 disabilities. TDI requests that the FCC ensure that the MCI 16 WorldCom-Sprint establishes and maintains consumer advisory 17 groups that include representatives from national, state and 18 local organizations that represent individuals with 19 disabilities. 20 TDI requests that the FCC ensures that the 21 provision of TRS by the merged corporate entity be of the 22 highest quality level consistent with the excellent services 23 that Sprint has provided during the past. TDI requests that 24 the FCC ensure that the merged corporate entity treat TRS as 25 a vital consumer business service and not to judge it solely 125 1 by its profitability as cost center. 2 TDI requests that prior to the FCC's granting full 3 or conditional approval for the merger, a special report for 4 the FCC's review be prepared and submitted by the MCI 5 WorldCom-Sprint detailing its 12-month, five-year and ten- 6 year plans for its overall TRS operations. 7 And lastly -- last but not least, TDI requests 8 that the FCC, if it were to grant approval to the MCI 9 WorldCom-Sprint merger, that it would only do so after being 10 given assurances by MCI WorldCom and Sprint that the 11 quality, availability, accessibility and affordability of 12 the products and services including TRS will be provided to 13 its consumers anytime and anywhere. Thank you very much to 14 the panel. 15 MS. CAREY: Thank you. Do the applicants have any 16 response? 17 MR. SALLET: I do. Just to say that we -- I think 18 we just want to -- 19 MS. STEWART: Just a reminder. Excuse me. We 20 have his comments here in paper for anyone who wants a copy 21 of them. 22 MS. CAREY: Thank you. I'm sorry, Jonathan. 23 Please go ahead. 24 MR. SALLET: Oh, no. No problem. We obviously 25 agree that the goals that have been outlined providing 126 1 excellent service to this and other communities are 2 important. We take our responsibilities in this area very 3 seriously. We appreciate the fact that there is a written 4 document because we obviously would like to be able to 5 review the many specifics that have been just outlined. 6 And we certainly also, just as a final point, 7 agree that Sprint does have an excellent record of service 8 in this area. And frankly, in the merged company, we hope 9 to be able to learn from Sprint. 10 MS. CAREY: Okay. Thank you very much. 11 MS. STEWART: Thank you. 12 MS. CAREY: The next question is from Chris 13 Wysocki, President of the Small Business Survival Committee. 14 And the question after that will be from James Palmer from 15 Consumer Alert. 16 MR. WYSOCKI: Thank you. I just wanted to make a 17 couple of points. And I will make it quick for the sake of 18 time. But Small Business Survival Committee represents 19 about 50,000 small businesses across America. 20 And it is our contention that the 21 Telecommunications Act of 1996 is working and that it is 22 also important to remember that this merger is a private 23 merger between two private companies that is being designed 24 with the sole intent of creating an efficient and productive 25 company that will serve its customers better, that will 127 1 enable residential customers and small business customers 2 across America to have more choices in local and long 3 distance service. 4 The long distance market today is more competitive 5 than it ever has been. That is contrary to the local phone 6 market where local phone providers are maintaining a 7 monopoly. Further, this merger will create an opportunity 8 to increase broad band service for small business customers 9 and residential customers. Third, it will create an 10 alternative to residential customers that are not currently 11 served by DSL. 12 And what I would like to ask just in general is a 13 question, is why the opponents to this merger are so focused 14 on stopping a merged company between two private companies 15 operating in a competitive market when the SBC-Ameritech 16 merger which was not too long ago before this Commission, 17 the arguments in favor of the merger this time sound similar 18 to the arguments that the FCC approved in the merger between 19 SBC and Ameritech. 20 And it is just a -- I will put the question out 21 there. But the same arguments that were made in the SBC- 22 Ameritech merger in that the economies of scale were needed, 23 creating a national footprint is an important element in 24 creating a company to compete in the global and 25 international arena. 128 1 The same arguments that were made in the 2 Ameritech-SBC merger are being made now in large part by MCI 3 and Sprint. And it just seems rather inconsistent that the 4 RBOCs are opposing this merger, yet were supporting the 5 merger between SBC and Ameritech. 6 MS. CAREY: Sandy, did you have a response? 7 MS. WAGNER: Yes. I do. I would like to point 8 out some of the distinctions, first of all, between the SBC- 9 Ameritech merger and the merger that is before this 10 Commission today. Mr. Atkinson made a clear distinction 11 when we were talking public benefits that he was interested 12 in hearing about benefits that were merger-specific. 13 There is a very distinct difference between what 14 SBC and Ameritech said in the context of their merger about 15 needing the scale and scope to enter markets -- 30 markets 16 outside the region and, in fact, to become a global 17 competitor. What we said at the time, what we believed at 18 the time and the commitment that we made in the context of 19 the merger approval was that absent that approval, we would 20 not be able to enter those markets outside the region, 21 certainly not with the vigor and in the timing that we are 22 able to do it today once the merger has been done. 23 That benefit was clearly merger-specific. The 24 kinds of benefits that the parties are talking about today 25 in the context of the merger before you, I think we can at a 129 1 minimum question whether or not the full effect of the 2 benefits the parties are talking about are merger-specific, 3 specifically the kinds of questions that were raised about 4 MMDS; also, the kinds of questions that were raised about 5 the ability to enter the local market on the rest of the 6 platform basis that the parties have been talking about. 7 Clearly, those kind of -- that kind of entry -- 8 MMDS, the parties were doing it before the merger. Between 9 them they have a national footprint. They made investments 10 that absent this merger you would expect reasonably those 11 companies to continue to try to act on. That is one point. 12 The national footprint issue, again, MMDS is what 13 the national footprint is in this merger. I think we have 14 probably talked about that enough. National footprint is 15 important for a national provider. You can't just stitch 16 together a capacity for -- to make a national network from 17 all sorts of capacities that are out there. 18 You can't take the capacity of an electrical 19 utility in Montana, stitch it together with transport that 20 goes across the nation and then, you know, put on the other 21 end of it the capacity from other sort of provider, try to 22 make a national network out of this kind of tapestry of 23 threads and say you can actually have a vibrant competitor 24 facilities base, three or four no matter where you are 25 anywhere in the nation. It just won't work. No long 130 1 distance carrier would put together a network that way. 2 MR. SALSBURY: Sorry. If you're not done -- 3 MS. WAGNER: Fundamentally, what SBC is doing in 4 this proceeding is simply raising the facts of the case. 5 The fact is that this is a market that has -- this merger is 6 a combination of the second and third largest providers in 7 the long distance market. The consummation of this merger 8 would make the market share enjoyed by the top two carriers 9 in the market the same as it was in 1989 which predates by a 10 substantial number of years this Commission's action of 11 finding that AT&T was non-dominant. 12 So to some extent, I think that is relevant to the 13 question Mr. Atkinson asked earlier about the potential at 14 least for regulatory concern to be heightened by the 15 consummation of this merger. You are taking the structure 16 of the market back to before -- back when AT&T was 17 considered dominant. So I think it should raise some flags 18 in your minds. I think you ought to think hard about 19 whether or not there is some relevance to that in terms of 20 that question. 21 MS. CAREY: Michael. 22 MR. SALSBURY: If I could just respond briefly. I 23 think that the benefits of the merger that we have been 24 explaining this morning and in our papers that accompany the 25 application I think are very merger-specific. And I don't 131 1 mean to suggest that what SBC and Ameritech said before was 2 not true and accurate. I think that they presented what 3 they believed to be merger-specific benefits, as well. 4 I would just observe that in much the same way as 5 they say we could enter separately local markets, they could 6 have entered any of those 30 local markets on their own if 7 they desired to. What they felt was that they wanted more 8 scale and more resources in order to do that which is the 9 same thing that we have said. 10 I think they feel that entering a local market 11 that is monopolized against an incumbent is a very difficult 12 thing to do. I agree with them. But I think that just the 13 same way that they felt they needed larger scale and 14 resources to take on the entrenched incumbent monopolies, we 15 do, as well. 16 With respect to the MMDS national footprint issue 17 and does that -- what does that mean with respect to the 18 ubiquity of long distance networks, which I take to be her 19 argument, let me just say that it is absolutely the case 20 that in creating a national footprint in a wireless service, 21 that is very, very important. 22 That is not -- the spectrum is scarce. And if MCI 23 WorldCom could have just gone out and said we are a wireless 24 provider, maybe this merger would not have been something 25 that we would have seriously entertained. But we couldn't 132 1 do that. 2 But that is not the case. And that is why you do 3 need to have combinations just like SBC and Bell South are 4 talking about in their cellular operations, the way we are 5 talking about in the MMDS operations. There are clear 6 benefits from doing that. 7 Frankly, in the long distance marketplace where 8 transport is a commodity, maybe SBC has been active in that 9 market. There are actually commercial exchanges set up that 10 that trade as a commodity, this transport, this is not a 11 difficult thing to do. We do it. Virtually every national, 12 with the exception of AT&T, every national network provider 13 does it. And they have done it for years. 14 MS. CAREY: Thank you. I think we have time for 15 one more question and that is James Palmer from Consumer 16 Alert. 17 MR. PALMER: Hi. I have more of a comment 18 actually. I am representing Consumer Alert. We are a free 19 market consumer group based here in D.C. And we believe 20 that the marketplace, not the FCC, can best decide how to 21 serve consumers. The FCC should continue its hands off 22 approach to telecommunications competition by allowing this 23 merger to go through. 24 The new WorldCom will be better positioned to 25 compete for local and long distance services against both 133 1 the baby Bells and the larger AT&T behemoth. You will also 2 be competing against, for example, the emerging digital 3 telephony systems offered on the internet, AOL's new instant 4 messenger service still in Beta at the click of a mouse. 5 You can talk from PC-to-PC start-up services like 6 dialpad.com offers free PC-to-phone long distance services. 7 A post-merger WorldCom will be better equipped to 8 eliminate redundancies and cut overhead costs to compete 9 with foreign and domestic telecommunications firms under 10 trade agreements signed by this administration. Soon we 11 will be seeing companies like Deutsche Telecom and Japan's 12 NTT entering into domestic markets. These cost savings can 13 also be reinvested into providing new services for consumers 14 or passed along in the form of lower costs. 15 The FCC should not be hampering competition by 16 blocking the MCI WorldCom-Sprint merger. But neither should 17 they be protecting a new large company like WorldCom. They 18 should be more rapidly facilitating the entry into long 19 distance of smaller Bell companies and cable providers and 20 anyone else who wants to get into the marketplace. 21 Freeing the marketplace will allow new competition 22 and consumers alike to keep WorldCom honest. Tying up the 23 merger in red tape will only hamper and delay further 24 innovations in the telecommunications field that consumers 25 need and want. That is basically it. Thanks. 134 1 MS. CAREY: Okay. Thank you. I think we can 2 squeeze in another question. Thomas Turner from PAS 3 Communications. 4 MR. CHAPAL: We just have a quick comment that the 5 discriminatory practices that are being practiced by Sprint 6 should be looked at when the Commission considers whether to 7 approve this merger between Sprint and MCI because the 8 impact will be monumental in terms of the ability for 9 minorities to contract not only with one of -- or two of the 10 biggest companies in the United States now, but also on the 11 wide range of federal contracts that are currently in 12 progress and planned for in the future. I will turn over 13 the comments for Mr. Turner. 14 MR. TURNER: Thank you. I would like to address 15 the Commission and let the -- ask the Commission, how can 16 the discriminatory practices that Sprint shows toward 17 African Americans benefit competition? We have tried to 18 negotiate with Sprint in a fair manner. 19 We've -- I represent five contractors. One 20 contractor is one of the largest construction contractors in 21 Kansas City, has not been able to participate on their 22 billion dollar headquarters in Kansas City. I reside in 23 Kansas City where both SBC and Sprint provide services. And 24 there is a lack of inclusion for African American 25 contractors. 135 1 Mr. Devlin addressed that and I agree with him. 2 He says that they have tried to work on it. I disagree with 3 him. Thank you. 4 MS. CAREY: Any comments from the applicants? 5 MR. DEVLIN: No, I would appreciate his -- like to 6 acknowledge his comments and state that I appreciate them. 7 And this is an area where, frankly, we are proud of our 8 record. But we always need to do more and we are working on 9 it. 10 MS. CAREY: Okay. Thank you. One last card. So 11 I know we are a little bit over time. But Peter Ferrar from 12 the General Counsel of Americans for Tax Reform. 13 MR. FERRAR: Hi. Americans for Tax Reform is a 14 nationwide taxpayers group. We believe in the free markets, 15 low taxes and low prices. And we support this merger and 16 hope that you will approve it because we think there will be 17 more competition if you allow this merger and there will be 18 less competition if you disallow it. 19 We believe that the merger will create a more 20 effective competitor that will be able to compete in a 21 broader market, domestically and internationally. The 22 opposition to this is based on an old fashioned conception 23 of the market. There is no "old phone" long distance 24 market. There is a broader telecommunications market. 25 And this merger will allow them to provide 136 1 stronger competition in that broader market. And we believe 2 that it will benefit consumers. In this rapidly changing 3 technology that is going on now, we think consumers are 4 being benefitted by all this innovation, all the massive 5 movement in the marketplace, and that the government ought 6 to keep its hands out of it and let the marketplace provide 7 all these innovations to consumers. 8 We think they are going to be better served in 9 that if there is a light hand of regulation here rather than 10 a heavy hand of regulation. And we think by stepping in and 11 stopping these sorts of mergers, you are going to slow the 12 great boom in innovation and advances that are benefitting 13 consumers and producing lower prices. Thank you. 14 MS. CAREY: Thank you. I think that is it. 15 Thanks to all the panelists. Oh, we didn't receive a card 16 for you. I'm sorry. 17 MR. SILVERS: Oh, I thought we were signed up. 18 MS. CAREY: I'm sorry. We just didn't receive it 19 in a card. But if you would like to say something, please 20 go ahead. 21 MR. SILVERS: Sure, I'll be very brief. I am 22 Damon Silvers. I am Associate General Counsel of the AFL- 23 CIO. Our member unions represent 13 million consumers of 24 telecommunication services. In addition, we are in the 25 process of constructing a unique web program, 137 1 workingfamilies.com, designed to bring all 13 million 2 members and their families onto the internet in short order. 3 I will be very brief here. We commented on the 4 MCI WorldCom merger several years ago. In response to I 5 think many comments that shared our point of view, the 6 Commission sought a divestiture of internet backbone assets 7 from that deal. I think it has become quite clear that 8 frankly that divestiture was a farce. 9 We believe that this merger represents the threats 10 that that merger represented in the internet backbone area 11 manifold times and that, in addition, contrary to what has 12 been said recently by some of the other people speaking this 13 morning, that the merger does also represent an unwarranted 14 concentration in the long distance consumer market. 15 We would very strongly urge the Commission to act 16 on the impulse that guided the requirements of divestiture 17 in the last go-around with the knowledge that the remedy of 18 divestiture is, frankly, with these particular 19 "corporations" unfeasible and that the appropriate remedy is 20 not to allow the concentration of market power in the first 21 place that would prevent the merger. Thank you. 22 MS. CAREY: Okay. Thank you. Anything -- 23 applicants want to -- no? Okay. Thanks to everyone. 24 Thanks to all the panelists. It was a very fruitful 25 discussion. I know it was a long morning. But thank you 138 1 for your attendance. 2 (Whereupon, at 12:40 p.m. on Wednesday, April 5, 3 2000, the hearing in the above-entitled matter was 4 adjourned.) 5 // 6 // 7 // 8 // 9 // 10 // 11 // 12 // 13 // 14 // 15 // 16 // 17 // 18 // 19 // 20 // 21 // 22 // 23 // 24 // 25 // 0 1 REPORTER'S CERTIFICATE 2 FCC DOCKET NO.: N/A 3 CASE TITLE: MCI WorldCom-Spring Proposed Merger 4 HEARING DATE: April 5, 2000 5 LOCATION: Washington, D.C. 6 I hereby certify that the proceedings and evidence 7 are contained fully and accurately on the tapes and notes 8 reported by me at the hearing in the above case before the 9 Federal Communications Commission. 10 Date: _4-5-00___ _____________________________ 11 Jan M. Jablonsky 12 Official Reporter 13 Heritage Reporting Corporation 14 1220 L Street, N.W., Suite 600 15 Washington, D.C. 20005-4018 16 TRANSCRIBER'S CERTIFICATE 17 I hereby certify that the proceedings and evidence 18 were fully and accurately transcribed from the tapes and 19 notes provided by the above named reporter in the above case 20 before the Federal Communications Commission. 21 Date: _4-19-00__ ______________________________ 22 Bonnie Niemann 23 Official Transcriber 24 Heritage Reporting Corporation 25 PROOFREADER'S CERTIFICATE 26 I hereby certify that the transcript of the 27 proceedings and evidence in the above referenced case that 28 was held before the Federal Communications Commission was 29 proofread on the date specified below. 30 Date: _4-19-00__ ______________________________ 31 Lorenzo Jones 32 Official Proofreader 33 Heritage Reporting Corporation