Ch 21 Antitrust And Merger Review In Telecommunications

Antitrust and Merger Review in Telecommunications

  • An important aspect of government intervention in telecommunications is competition policy and enforcement
  • Important issues to consider:
    • Consider the substance of the various mergers at issue.
    • Focus on the FCC’s merger procedure itself.

Background on Merger Policy

  • When Congress enacted the Communications Act of 1934, it retained the core of the Willis-Graham Act: the relevant agency—now the FCC—had the power to exempt local telephone company mergers from antitrust scrutiny.
  • Specifically, Section 221(a) of the 1934 Act gave the Commission authority to exempt mergers from “any Act or Acts of Congress making the proposed transaction unlawful.”
  • That authority remained with the Commission for over 50 years, until Section 601(b) of the Telecommunications Act of 1996 expressly repealed Section 221(a).
  • The Act now states that the FCC has no authority “to modify, impair, or supersede the applicability of any of the antitrust laws.”
  • The Clayton Antitrust Act grants the FCC concurrent jurisdiction with the Justice Department to act on transactions among “common carriers engaged in wire or radio communications.” (14 USC Section 18)
  • The Commission has come to apply a four-part test in judging license transfers:
    • Will the transfer violate the statute?
    • Will the transfer violate a regulation?
    • Will the transfer frustrate the purposes of the Act or a regulation?
    • Is the transfer likely to provide affirmative public benefits?
  • In judging common carrier mergers, the FCC has typically focused on competition issues and Commission goals regarding the equitable build-out of new services.
  • In transactions involving broadcast licenses, the FCC has typically focused on issues related to diversity.
  • Under the public interest standard as interpreted by the FCC, the FCC need not show that a transaction is likely to reduce competition in order to challenge that transaction.
  • Under the “broad aims” of the Act, the FCC could instead decide that a merger might affect any of the Act’s goals (as the FCC interprets them) and, for those reasons, block, condition, or approve a transaction regardless of its competitive effects.
  • The sine qua non of merger review under the federal antitrust statutes is thus market power in the sale of a given product or service.
  • In contrast, under the four-part test the FCC applies in its public interest analysis, even a merger that would not harm consumers might be challenged because, for example, it would not create “affirmative” benefits for consumers or would make regulatory oversight more difficult.

Applications of Ameritech Corp., Transferor, and SBC Communications, Inc., Transferee, for Consent to Transfer Control of Licenses and Lines Pursuant to Sections 214 and 310(d) of the Communications Act, 14 FCC Rcd. 14712 (1999)

  • Introduction
    • In this Order, we consider the joint applications filed by SBC Communications, Inc. (SBC) and Ameritech Corporation (Ameritech) pursuant to Section 214(a) and Section 310(d) of the Communications Act of 1934 for approval to transfer control of licenses and lines from Ameritech to SBC in connection with their proposed merger.
    • We conclude that approval of the applications to transfer control of FCC licenses and lines from Ameritech to SBC is in the public interest because such approval is subject to significant and enforceable conditions designed to mitigate the potential public interest harms of their merger, to open up the local markets of the RBOCs, and to strengthen the merged firm’s incentives to expand competition outside its regions.
    • Specifically, we conclude in this Order that the proposed merger of these RBOCs threatens to harm consumers of telecommunications services by:
      • Denying them the benefits of future probable competition between the merging firms.
      • Undermining the ability of regulators and competitors to implement the pro-competitive, deregulatory framework for local telecommunications that was adopted by Congress in the Telecommunications Act of 1996.
      • Increasing the merged entity’s incentives and ability to raise entry barriers to, and otherwise discriminate against, entrants into the local markets of these RBOCs.
    • The proposed conditions, however, change the public interest balance. We expect that with these conditions, competition in the provision of local exchange services, including advanced services, will increase both inside and outside the merged firm’s region.
  • Executive summary
    • With the conditions adopted by this Order, the Applicants have demonstrated that the proposed transfer of licenses and lines from Ameritech to SBC will serve the public interest, convenience, and necessity.
    • Harms – the proposed merger of these RBOCs threatens to harm consumers of telecommunications services in three distinct, but interrelated ways:
      • The merger will remove one of the most significant potential participants in local telecommunications mass markets both within and outside of each company’s region.
      • The merger will substantially reduce the FCC’s ability to implement the market-opening requirements of the 1996 Act by comparative practice oversight methods.
      • The merger will increase the incentive and ability of the merged entity to discriminate against its rivals, particularly with respect to the provision of advanced telecommunications services.
    • Benefits – the asserted benefits of the proposed merger do not outweigh the significant harms, detailed above:
      • The Applicants have failed to demonstrate that the merger is necessary in order to obtain the benefits to local competition of the National-Local Strategy, a plan in which the merged firm will enter 30 out-of-region markets as a competitive LEC.
      • Only a small portion of the Applicants’ claimed cost-saving efficiencies, including procurement savings, consolidation efficiencies, implementation of best practices, faster and broader roll-out of new products and services, and benefits to employees and communities, are merger-specific, likely and verifiable.
      • The only merger-specific benefits to product markets other than local wireline telecommunications markets, such as wireless services, Internet services, long distance and international services, and global seamless services for large business consumers, relate to a somewhat increased pace of expansion and modest reductions in unit costs.
    • Conditions – on July 1, 1999, the Applicants supplemented their application by proffering a set of voluntary commitments that they agreed to undertake as conditions of approval of their proposed transfer of licenses and lines, following these goals:
      • Promoting advanced services deployment
      • Ensuring that in-region local markets are more open
      • Fostering out-of-region competition
      • Improving residential phone service
      • Enforcing the Merger Order
    • These commitments are sufficient to tip the scales, so that, on balance, the application to transfer licenses and lines should be approved.
  • Background
    • In 1982, the US District Court for DC entered a consent decree in an antitrust suit entitled United States v. AT&T Corp.
    • The 1982 Consent Decree also known as the “Modification of Final Judgment (MFJ),” when fully enforced in 1984, substantially dismantled what had formerly been an integrated end-to-end monopoly of US telecommunications services, the Bell System.
    • By fundamentally altering that environment, the MJF, together with its underlying rationale, provides the central backdrop against which all telecommunications regulation takes place in this country, and, and indeed, the measure against which we evaluate the merger before us.
    • The entry of the 1982 Consent Decree created SBC and Ameritech.
    • The MJF essentially divorced the Bell System’s local exchange operations from its other lines of business by requiring the creation of seven regionally-based operating companies (i.e. the RBOCs).
    • The Bell System was broken up because of two firmly held beliefs.
      • Competition, rather than regulation, could best decide who would sell what telecommunications services at what prices to whom.
      • The principal obstacles to realizing that carriers, who typically controlled virtually all local services within their regions, to wield exclusionary power against their rivals.
    • When Congress passed the 1996 Act, it codified the standards and principles established by the Bell System breakup and set forth a framework that governs us today.
    • Two aspects of the 1996 Act in particular drive our analysis of the license transfer application and the companies’ subsequent proposed conditions.
    • First, Congress not only firmly ratified the pro-competitive thrust of the MFJ and embraced its rationale, but it extended the goals of the decree.
    • The MFJ principally sought to further competition in ancillary fields, such as long distance, equipment manufacturing, and information services.
    • Second, Congress directed this FCC and the state commissions to achieve these competitive ends by deregulatory means.
    • The 1996 Act introduced into our telecommunications law a clearly stated duty of dominant LECs to interconnect with their competitors.
  • Analysis of Potential Public Interest Harms
    • We conclude that the proposed merger, considered without supplemental conditions, threatens our ability to fulfill our statutory mandate in the following three ways:
      • First, the proposed merger between SBC and Ameritech significantly decreases the potential for competition in local telecommunications markets by larger incumbent LECs.
      • Second, the proposed merger frustrates the ability of the FCC (and state regulators) to implement the local market-opening provisions of the 1996 Act.
      • Third, while it would diminish regulatory efficacy, the proposed merger also would increase the incentives and ability of the larger merged entity to discriminate against rivals in retail markets where the new SBC will be the dominant incumbent LEC.
    • In short, absent stringent conditions, we would be forced to conclude that this merger does not serve the public interest, convenience, or necessity because it would inevitably retard progress in opening local telecommunications markets, thereby requiring us to engage in more regulation.
  • Conditions
    • On July 1, 1999, the Applicants supplemented their initial Application to include a package of voluntary commitments that they intended would alter the public interest balance in their favor.
    • Promoting Equitable and Efficient Advanced Services Deployment
      • Separate Affiliate for Advanced Services – under this condition, SBC and Ameritech will create, prior to closing the merger, one or more separate affiliates to provide all advanced services in the combined SBC/Ameritech region on a phased-in basis.
      • Because the merged firm’s own separate advanced services affiliate will use the same processes as competitors, and pay an equivalent price for facilities and services, the condition should ensure a level playing field between SBC/Ameritech and its advanced services competitors.
      • Nondiscriminatory Rollout of xDSL Services – as a means of ensuring that the merged firm’s rollout of advanced services reaches some of the least competitive market segments and is more widely available to low income consumers, SBC and Ameritech will target their deployment of xDSL services to include low income groups in rural and urban areas.
    • Ensuring Open Local Markets
      • Carrier-to-carrier performance plan – as a means of ensuring that SBC/Ameritech’s service to telecommunications carriers will not deteriorate as a result of the merger and the larger firm’s increased incentive and ability to discriminate and to stimulate the merged entity to adopt “best practices” that clearly favor public rather than private interests, SBC/Ameritech will publicly file performance measurement data for each of the 13 SBC/Ameritech in-region states with this FCC and the relevant state commission on a monthly basis.
      • Carrier-to-carrier promotions – to offset the loss of probably competition between SBC and Ameritech for residential services in their regions and to facility market entry, the Applicants propose three promotions designed specifically to encourage rapid development of local competition in residential and less dense areas.
    • Fostering Out-of-Territory Competition
      • Out-of-territory competitive entry (national-local strategy) – as a condition of this merger, within 30 months of the merger closing date the combined firm will enter at least 30 major markets outside of SBC’s and Ameritech’s incumbent service area as a facilities-based provider of local telecommunications services to business and residential customers.
      • Improving Residential Phone Service
        • Pricing of interLATA services – as a direct benefit to consumers, particularly low-income consumers and low-volume long distance callers, this condition provides that SBC/Ameritech will not charge residential customers a minimum monthly or minimum flat rate charge for long distance service for a period of not less than three years.
      • Ensuring Compliance With and Enforcement of These Conditions
        • The conditions therefore establish compliance and enforcement mechanisms that not only provide SBC/Ameritech with a strong incentive to comply with each of its requirements, but also will facilitate the FCC’s oversight of the Applicants’ obligations under these conditions.
        • As a general matter, the conditions place the responsibility of taking active steps to ensure compliance on SBC/Ameritech by:
          • Establishing a self-executing compliance mechanism
          • Requiring an independent audit of the Applicants’ compliance with the conditions
          • Providing self-executing remedies for failure to perform an obligation

Separate Statement of Commissioner Harold Furchtgott-Roth Concurring in Part, Dissenting in Part, 14 FCC Rcd. 14712, 15174-189 (1999)

  • I cannot support the reasoning of the Order and must dissent in full from the adoption of the conditions on these license and authorization transfers.
  • The Conditions Are Inconsistent with the Communications Act
    • The conditions imposed in this Order are, in my opinion, of highly questionable legal validity.
    • Many of the conditions are inconsistent with specific sections of the Communications Act.
    • Carrier-to-carrier promotions will not be available on an equal basis to all requesting carriers.
    • In this way, then, the conditions violate the “non-discriminatory access” requirement of Section 251(c)(3), as well as the resale non-discrimination requirement of 251(c)(4)(B).
  • The Conditions Are Disproportionate to the Alleged Potential Harms
    • The transaction does not violate the specific terms of any extant communications statute or regulation.
    • The alleged harms are speculative and do not flow from the merger
  • The FCC foresees three potential harms in the consummation of the license transfers.
  • That the merger will remove significant potential participants in the local exchange market with, and outside of, each company’s current region.
  • That the merger will impair this Commission’s ability to engage in comparative practice oversight and consequently extend the entrenchment of certain firms and raise the cost of regulating them.
  • That the merged entity will have increased incentive and ability to discriminate against competitors, and that this increased incentive and ability will have particular force with respect to the provision of advanced telecommunications services.
  • The first harm is premised on the Commission’s “precluded competitor” doctrine.
  • According to this theory, the license transfers will result in reduced or precluded competition both inside the RBOC territories and outside the SBC/Ameritech regions.
  • The second harm is similarly conjectural.
  • Can the Commission really defend the proposition that a reduction from six to five local exchange carriers creates a significant, material, and appreciable difference in its ability to make comparative evaluations?
  • This harm is based at most on the possibility that the Commission will, assuming statutory authority to do so, in the future adopt rules benchmarking performance to industry standards.
  • The third alleged harm is based on an especially large ratio of speculation to actual likelihood.
  • The Order does not demonstrate why the combined firm has any more incentive and ability to discriminate against competitors than do the separate companies.
  • All these alleged harms bear a common characteristic: the merger itself does not increase the likelihood of any of them. That is, they are things that the individual companies would be equally likely to do if the merger never took place.
    • The conditions do not materially remediate the alleged harms
      • Even if once assumes that the harms have been predicted with adequate certainty, the conditions do not really address those harms.
      • The conditions impose undue administrative burdens and costs on the Commission and participants in the telecommunications market
    • To really apply and enforce these conditions, the Commission would seem to need to create a separate “SBC/Ameritech” division in the Common Carrier Bureau.
      • The conditions are either voluntary and unenforceable, or involuntary and judicially reviewable
    • It is simply not possible to have it both ways, however:
      • Either the commitments are de facto standards and subject to judicial review
      • Or they are legally unenforceable and thus meaningless as a practical matter
      • The Commission lacks “merger” review authority
    • This Commission possesses no statutory authority to review “mergers” writ large.
    • The Communications Act charges the Commission with a much narrower task: review of the proposed transfer of licenses under Title III from Ameritech to SBC, and consideration of the transfer of common carrier lines between those parties.

Statement of Commissioner Michael K. Powell, Concurring in Part, Dissenting in Part, 14 FCC Rcd. 14712, 15197-99 (1999)

  • I find fault with the underlying public interest standard, and its application in this proceeding sharpens my concerns with its pitfalls.
  • The formation of the Public Interest Standard as an Unconstrained Balancing Test is both substantively and procedurally flawed
    • I am very uncomfortable with a standard that places harms on one side of a scale and then collects and places any hodgepodge of conditions—no matter how ill-suited to remedying the identified infirmities—on the other side of the scale.
    • This balancing approach leads to a number of problems:
      • The approach creates a great temptation to load up the benefits side of the scale with a big wish list of conditions that are non-germane to the merger’s harmful effects.
      • The approach makes it easier for identified harms, even significant ones, to be visited upon the public in exchange for other benefits.
      • The conditions that are sought are more often surrogates for policies and rules of general, rather than merger-specific, applicability, but without the extensive deliberative process and the check of judicial review normally afforded a rulemaking.
      • The process of obtaining “voluntary” conditions involves bilateral negotiations with the parties that leave the integrity of the Commission’s process vulnerable to criticism.

Reforming the FCC’s Merger Review Process

  • In March 2000, the Commerce Committee of the US House of Representatives had drafted legislation entitled, “The Telecommunications Merger Review Act of 2000,” the purpose of which was to curtail the Commission’s authority to impose conditions outside the formal rulemaking process and to accelerate the FCC’s review by requiring final action within 60 to 90 days from the filing of a merger application.
  • The Commission, in an effort to preempt some of the concerns raised by the proposed bill, and in anticipation of Congressional hearings on the legislation, held a public forum at which it presented its own proposal for streamlining FCC review of merger-related applications.

Statement of Chairman William E. Kennard, before the House Committee on Commerce; Subcommittee on Telecommunications, Trade and Consumer Products, March 14, 2000

  • The FCC has a legal duty to review mergers.
    • The FCC must consider the impact of transactions on competition as part of the public interest standard.
    • Preserving competition is of particular concerns in an environment where vigorous competition is being relied on to achieve goals formerly served by regulations and where mergers of unprecedented number and size are taking place.
  • The FCC is working to make the process better.
    • The FCC and its staff have worked hard to meet this challenge.
    • I have taken additional steps in the last several months to make the FCCs process for reviewing merger-related applications more efficient, transparent, and predictable.
  • The draft bill would deny the FCC sufficient flexibility to resolve merger cases
    • The proposed bill would limit regulation to rulemaking and impose drastically shortened time limits on FCC action.
    • These solutions would create speed and certainty only by sacrificing the meaningful participation of the American people, by eliminating regulatory flexibility in a context where it is most essential, and by casting significantly increased responsibilities (but no additional resources) on the DOJ and FTC while eliminating inter-agency cooperation.
    • This bill is, in short, a recipe for making scrutiny of mergers less public, less flexible, and less likely.
    • The FCC role is not duplicative of other agencies
    • The FCC has a special responsibility and somewhat different standard in cases involving the creation of competition to replace former regulated monopolies.

Statement of Commissioner Harold Furchtgott-Roth, before the House Committee on Commerce; Subcommittee on Telecommunications, Trade and Consumer Products, March 14, 2000

  • Duplication of Department of Justice and Federal Trade Commission efforts
  • Merging companies should not have to jump through excessive federal antitrust hoops, and those hoops should be held out by the institutions with the express statutory authority and expertise to do so.
  • Potentially arbitrary review: choice of transfers for full-scale review and substantive standards to be applied
    • The Commission annually approves tens of thousands of license transfers without any scrutiny or comment; others receive minimal review, and a select few are subjected to intense regulatory scrutiny.
    • There is no established Commission standard for distinguishing between the license transfers that trigger extensive analysis by the full Commission and those that do not.
    • Nor do any of the Commission’s orders in “merger” reviews elucidate the standard.
    • There is clearly a different “public interest” test being applied, sub silentio, in different cases under the very same statutory provisions usually Section 310 and Section 214.
    • The long and short of it is this: regulated entities currently have little basis for knowing how their applications will be treated, either procedurally or substantively.
    • The license transfer process at the Commission is lacking in any transparent, fixed, and meaningful standards.

The FCC’s Own Institutional Reforms

  • At about the same time as the above testimony was given, the FCC proposed to “streamline” its merger review process by committing to a timeline that would culminate in a final Commission order within 180 days from the filing of a transfer request.
  • The steps in the proposed timeline are:
    • Issuance of a public notice on the date of filing
    • A public comment period lasting until day 30
    • A reply comment period lasting until day 45
    • Review by the agency for completeness of the filing lasting until day 75
    • Analysis of the record and discussions with the parties until day 110
    • On day 110, major changes to the transaction at issue could be submitted by the parties, followed on day 130 by a public forum on any such changes
    • Issuance of a final decision by day 180
  • In addition to addressing the question of timing, the Commission’s Issues Memorandum also addressed several other issues that have given rise to concern about the Commission’s role in reviewing mergers.
  • Two particularly important issues addressed in the memorandum were:
    • Variability in standards from transaction to transaction
    • Coordination with the federal antitrust agencies

FCC Approves SBC/AT&T and Verizon/MCI Mergers, 2005 WL 2850037 (Oct. 31, 2005)

  • The FCC states that consumers would reap the rewards of the public interest benefits that will flow from these mergers.
  • These benefits include integration of complementary networks, which will increase efficiency and provide consumers with new services and improved network performance and reliability.
  • The mergers will create stable, reliable US-owned companies that will provide improved service to government customers and benefit national defense and homeland security.
  • The mergers will give the companies increased economies of scale and scope, which should increase their incentives and resources to engage in basic research and development.
  • The mergers should result in substantial cost savings, which should benefit consumers throughout the country.
  • The Commission’s analysis of the competitive effects of the mergers focused on six key services areas.
    • Special access competition – mergers could have an anticompetitive effect on wholesale special access services that are provided entirely over a single carrier’s facilities.
    • Retail enterprise competition – mergers are not likely to result in anti-competitive effects for medium to large enterprise customers because these customers are sophisticated, high-volume purchasers of communications services and because a significant number of carriers will continue to compete in the market.
    • Mass market competition – mergers are not likely to result in anti-competitive effects fro mass market customers because AT&T has ceased marketing those services and is gradually withdrawing from that market, while MCI has significantly reduced its marketing.
    • Internet backbone competition – mergers are not likely to result in anti-competitive effects in the Internet backbone market.
    • Wholesale interexchange (long distance) competition – market is likely to remain competitive after the mergers, due primarily to the presence of numerous competitive nationwide fiber networks with excess capacity.
    • International competition – mergers are not likely to result in anti-competitive effects for mass market, enterprise, or global telecommunications customers.
    • Public interest benefits – Commission specifically recognized the applicants’ progress implementing the Commission’s VoIP 911 requirements for interconnected VoIP providers.
  • The Commission also adopted in the Order as enforceable conditions certain voluntary commitments made by the applicants. (see p. 1086-1088)
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