Speech by Charles James, Assistant Attorney General for the Antitrust Division.
Date: December 13, 2001.
Event: 19th Annual Institute on Telecommunications Policy & Regulation.

Editor's Notes:
  James did not read from a prepared text.
  Tech Law Journal transcribed from its audio recording.
  Copyright 2001. All rights reserved.

Good afternoon, Ladies and Gentlemen. Ordinarily, I like to start out speeches by saying that it is my great pleasure to be here. In point of fact, it is not. [audience laughter]

Ordinarily, I spend my time speaking to antitrust audiences, and to business people. And I usually know a heck of a lot more about the topic than they do, and it is pretty easy. This audience I am a little bit intimidated by, which is one of the reasons that I brought Hew with me. I know that this particular group of people spends their waking hours scrutinizing ever footnote of every regulatory decision that affects the telecom industry. I don't do that. So, I am going to try to muddle through.

It is a funny thing about speeches. People call you months ahead of time and ask you whether you would like to speak. You look at your calendar. Of course, there is nothing on it. [audience laughter] And so you say "yes". And then all of a sudden the time comes upon you, and you are obliged to stand up and do twenty minutes or so of stand up comedy. In this particular instance you ought to congratulate your program chair, Mr. Wiley, because I don't think the words "Charles James" had passed the President's lips before I got a call from Dick [audience laughter] asking me to be on this program. And, I put him off, and put him off, and whined and moaned, and whined and moaned, and he finally convinced me to be here.

They say the road to Hell is paved with good intentions, and it was certainly my intention when I first got to the Antitrust Division, knowing the critical importance of the telecommunications industry, to spend a fair amount of time defining what our policies are with regard to this industry. I am, after all, a big fan of transparency in antitrust enforcement. And my plan was, or course, to come here and tell you what those policies are.

Unfortunately, a little thing called Microsoft intervened. And, first we had the Court of Appeals decision that came exactly one week after I started. We then had the interlocutory appeals, which we were successful in, sort of, cutting off. Getting ready for the now aborted remedies hearing, and then compulsory mediation of -- ordered by Judge Kotelly. And when she said compulsory, 24/7, negotiations, she meant it, because she constantly called and asked for reports on who was in the room, and how long, and those types of things. And so, we had to take that quite seriously.

And then, of course, the actual settlement, which lead yesterday to my little appointment with the Senate Judiciary Committee. And so, I spent two weeks, really, getting loaded for that event, and not for telecom policy. I don't know whether any of you followed the hearing, but very briefly into it some Senator evoked hundred year old procedural rule that requires the Senate to stand in adjournment. So, yesterday, I experience hearing interruptus. [audience laughter]

So, I appear before this very expert audience today with a little bit of an apology. I do not have a fully formed view about competition policy as I had planned to. My plans really were kidnapped by the Microsoft case. And I offer you that apology, as the fact that my plans have not come to fruition leads me to think of a quote from that great American philosopher, Mike Tyson. [audience laughter] Mike was once giving a press conference in connection with a fight that he had with a one of these English heavy weights that he used to beat the mess out of. And, he had beaten this guy once before, and the guy at the press conference ways saying, in plans for the new fight, that he had done it all wrong the first time, and that this time his plan was to this, and his plan was to do that, and the other things. And they turned to Mike and said, "What do you think Mike?" And he said, "Everybody has got a plan until they get hit." [audience laughter] I think that is pretty telling in light of my situation on telecom.

Before I bore you with my limited knowledge of this topic, I do want to sound a reassuring note. Our regulatory team at the Antitrust Division really is first rate in this area. I have the benefit of Hew Pate, who Dick introduced. Hew Pate probably has a resume that any person in this room would love to have, and he really is on top of these regulatory issues, and has already begun to make his imprint on a host of regulatory issues involving the airlines, and certainly, 271s, and our appellate policy in the telecom industry, and he is doing a fine job. We also have the benefit of Michael Katz, who many of you might recall as a chief economist at the FCC. Mike is not only one of the leaders in the industrial organizations field, but a person who is really very closely attuned to the issues that you fact. So, my ignorance notwithstanding, you are in good hands.

One further point that I would mention as a point. When I was preparing for this speech, which means, the hearing was over at 11, which means spending last night with Hew and three binders of materials, and working feverously on my word processor. I could not help but be really struck by one thing. I think during, probably, the most frenetic period of deal making in the history of our economy, and certainly a number of huge deals involving this industry, you really can't miss the fact that most of the antitrust policy in this area has been made through consent decrees -- consensual arrangements, rather than litigated results.

And I think as practitioners we all know how that drill works. You have these huge transactions -- there is certainly a core transaction that is implied in each one of these situations. There is a lot of gravy along the side of the plate. And, people are very much concerned about getting the transaction done.

You have to worry about the interplay between the Department of Justice and the FCC. You have the state commissions. And, increasingly, you have the European Union or other national authorities involved. And the instructions to counsel are always to "get the deal done". "Get the regulatory thing done quickly." And, so when the staffs of the agencies start raising concerns, the very first thing you people do is start talking about fixes.

And, in the process of talking about fixes at an early stage of the matter, you very often allow the analytics to get lost. Relevant market issues, geographical market issues, you know, remain sort of untested and unproven, as they would be if these cases actually went through the full judicial process. Dynamic entry conditions, as another example, are not fully vetted. And the theories of competitive harm, at least at the Antitrust Division, are certainly asserted, but they are never subjected to the full analysis that would take place. And, for lack of a more completely developed precedent, these decrees get analyzed by counsel, and become the analytical framework for everything that flows after.

I wonder, for example, as I looked at some of these decrees last evening, about, for example, the wireless divestitures in these RBOC combinations. I know that there was great interest in the distinctions between the AT&T TCI transaction where the concern was this national competition, versus [inaudible phrase] SBC and Ameritech, Bell Atlantic GTE, where people focused on local wireless competitive issues. And I wonder how the litigation process would reconcile those differences, for example.

We have asserted Internet backbone markets, and I know that that is a very complex matter in some cases. And, we have talked about broadband delivery mechanisms, again, another complicated and quickly evolving area. And, one has to always worry about how these cases would have fared in a litigation context.

I am not trying to say the results necessarily would have been different. I am just wondering whether, sort of, the top trial purity that we always hope to get in antitrust law is really followed through in the context of these non litigated things where I think the issue turns to problem solving very quickly.

And so, I would say, read our consent decrees, but don't get married to them. Because, the world, I think, is a little bit more complicated than that. Talking in more specifically about your industry, you certainly know what the issues are, changes in the telecommunications marketplace, is a very very overused word -- convergence -- which means everything to everyone. And we know the things that are driving it -- dramatic advances in technology, evolution in customer demand, fundamental changes in the regulatory framework.

Mike Powell, the Chairman of your guild's regulatory agency [audience laughter], who is, I should say, a very good antitrust lawyer, and, I am told, a pretty formidable communications lawyer as well, has talked about this, and noted the shift that is coming as a result of the 1996 Act, and the movement from a regulated monopoly model, to one in which more competition can take place.

Interesting time in antitrust enforcement for us right now. I have lots of friends in the telecommunications industry. Lots of the general counsel are people I know. And every time they see me they tell me, "Well, you know, boy have we got a deal for you." And interestingly, my phone isn't ringing. Declining stock market valuations mean you have to actually pay real money for assets these days. And, also, the fact, that I think in some substantial measure, business people in the telecommunications industry don't really know exactly what to do. The path is not as clear as it once seemed to everyone in terms of what assets to buy, and so that this frenetic deal making activity that we had a couple of years ago has slowed down considerably.

Which is not a good thing for me, because, as many of you know, our agency is funded by Hart Scott Rodino filings [audience laughter] and I am begining to think we are going to have to have a two for one sale or something. [audience laughter] But, I am sure you folks have been reclining long enough, and that you would be more happy when more deals are taking place. So, let's get the clients going. Charles? Come up. Bring it. We would love to see it. But in any event, in all seriousness, you know, we have to ready for the resumption of deal making activity that will certainly come.

And, I would like to talk today about, sort of, my core principles -- the principles that Hew, and Mike Katz, and others at the Department of Justice are going to use, really, to build our enforcement policies, with regard to this industry.

As a primary -- first step, I would emphasize that, as we all know, antitrust principles are flexible. One of the reasons that I became an antitrust lawyer is because, this only thing I had to worry about is "Thou shalt not restrict competition" and some concept called the rule of reason, and these were things that I could understand. So, these are very flexible kinds of concepts that need to evolve. You always have to be very fact specific in our analysis. We have to, sort of, stick to a core principle that antitrust laws are designed to promote competition, not protect particular competitors. And, we have to follow our core belief that we want to prevent agreements or mergers that create or increase market power, or facilitate its exercise. And everything in antitrust law is fact intensive. And, the only policy issue that we confront is this question of optimizing competition. There are no other issues afoot in antitrust analysis, and we believe, there should not be.

We have expert agencies like the Federal Communications Commission that certainly can look to broader policy issues. We have a myopic view focus on competition. I think Michael Powell had it correct when he that in the telecom industry, a lot of the most difficult issues are definitional. And, it is within that context that we do our work, in fact intensive, merger guidelines based, analysis of the competitive implications of important transactions.

There are three unifying principles that I would like to talk about that will guide our review process in telecommunications.

And those three principles, I think, will guide what we do. And if they don't, please tell us as we go forward.

Talk about these principles in a little bit more detail. First of all, I would like to talk a little bit about the kind of transactions that we confront, and how these principles would apply.

We see transactions -- the transactions that we are typically looking at are, because of the former regulatory nature of this industry, really, sort of, usually, going to the [inaudible word] market extension, or entries [inaudible word]. We find people who are, who are combining assets to achieve economies of scale necessary to facilitate the investment in particular technologies, or combinations with providers of complementary services in order to put in expansion or more detailed product offerings. Very few of the significant telecom transactions that we have had to deal with, deal with -- let, distinguish certain of the wireless over the last few -- deal with combinations among direct competitors. Instead, we have seen things that are more complementary, or conglomerate in nature. But we anticipate, with all of the convergence that you folks are bringing upon us, you will then start seeing many more horizontal transactions. And, of course, horizontal issues are the heart of our enforcement agenda at the Department of Justice.

One of the things that we see as an area where we have to really give some serious consideration in the telecom industry is how we deal with this world where convergence is not complete -- where we sort of see sloppy, or not complete convergence. Circumstances where markets are changing -- things are coming together -- how do we deal with that under the doctrine of potential competition.

I think it has been very easy always in the potential competition area to think of mergers between contiguous providers as necessarily raising potential competition issues. And when I say continuous providers, I mean not only geographically continuous, but contiguous in product space. Company A makes this, in, along this, up to this geographic market. The other one makes it, up [inaudible word] where there are markets, but, and so that, with regard to any potential merger in there, in that market, we always would necessarily jump to the conclusion that that firm is the most likely potential competitor.

I think that our analysis has to be more complex than that. I think that our analysis has to really focus on what the incentives are to the firm in moving from one contiguous market to the other. And, we also have to look very carefully, it seems to me, at what the market incentives are, and what the alternative space in -- where people might not necessarily be as contiguous, but also have other advantages in terms of entry. And as you know, one of the guiding principles is that you don't stop a merger based on the potential competition theory unless the merger partner is uniquely suited, uniquely situated to be a procompetitive entry into that market.

And so, we will look through those things from a factual standpoint. But, I want this audience to know that whether you are the merging party or a complainant -- and complainants are a big portion of our world these days -- we want you to know that we are not going to just jump to the conclusion that firms in close product space will necessarily raise these potential competition kinds of issues.

I think it is also worth noting that very often that some of these things that are taking place in the form of convergence are going to cause us to redefine our markets, and make the analysis more complicated. And so that you will not be surprised very often when you see people who are in alternative infrastructures -- you will not be surprised to see us including those in markets from the standpoint of our merger guidelines.

One of the things that the old regulatory structure at the FCC did is put lots of things in very convenient pigeon holes, and then stop people from competing outside of those pigeon holes. That regulatory change that has allowed the convergence has significance for our type of market definition, which, as you know, is a substitution driven market definition -- we ask whether or not the effect of price increase would cause consumers to switch from one product market to another -- if that switching would take place in response to a small but significant price increase -- we say that word could really be 5% -- that will be a factor in what will lead to the product market. In this converged world, this is going to bring more things together, in creating the concept of horizontal mergers out of a lot of transactions that people heretofore would have thought of as mergers between complimentary products or different products. And so, I don't know whether you are more safe, or less safe, but, I think factually, it depends on what you bring us.

Let's talk about the three principles. No convenient facilities doctrine. I say that and in antitrust audiences that gets a laugh. But, it's sort of inside baseball. Very often in the merger context, competitors of the merging parties will complain that the transaction will disrupt some existing [inaudible word] relationship. I think that that happens a fair amount in your regulatory context as well. I think if one were to adopt an industrial policy from, to that, the solution, or the regulatory outcome, would be fairly clear. A large number of competitors can potentially be facilitated by requiring firms to deal with firms, in sort of unbundling monopoly services, and requiring their resale, et cetera, et cetera. That creates a dominant -- well populated market, et cetera, et cetera. That is probably the appropriate approach for regulatory agencies. That is not the law enforcement approach. That is not the antitrust approach.

The antitrust approach should ask whether the transaction at issue will cause real exclusion or preclusion in a manner that maximizes or enhances market power. We have -- we in the Antitrust Division as we define our policy have no intention, really, of imposing [inaudible word] competitor rights, absent a showing of likely and meaningful antitrust injury. By that we mean that some substantial portion of the market would be foreclosed. That means that firms that could compete otherwise will be prevented from competing -- not just that "Wouldn't it be nice if everybody got to free ride on other people's facilities." That is not what rule guides our policy.

Notwithstanding this, we recognize that the Telecommunications Act of 1996 imposes affirmative obligations for us to deal their competitors. And the Division, as a participant in, for example, the 271 process, will have a role -- a continual role -- in reviewing these transactions, and essentially, and end competitive conduct that might flow from inappropriate grants under these [inaudible word].

One of the things that we have noted in some of our 271 work is that there is certainly a portion of the world, I think -- the FCC has talked about this fairly extensively -- that is going to be aided by this, sort of, non facilities based entry. But the long term reliance on that is not really going to get the industry to a point where we need to be. And, but, you know, facilities based competition is the thing that we are hoping will emerge, and that there is really going to create the kinds of companies that we are hoping to do -- hoping to see.

Similarly, competition in the broadband world, is likely to come under, come from a variety of platforms, and control[ling?] dominance with a single platform may not foreclose others [entering into the market?]. So, in both of these, sort of, areas where we are, things are developing simultaneously, it may be difficult for us to strike the right balance with regard to, you know, whether we want to facilitate entry through these shared facilities, or whether we want to [inaudible phrase] firms to go their own way. We think that it is very important that all of the policy -- both regulatory and antitrust -- give entry -- get entrants the opportunity to compete on the basis of their relative efficiency.

We need to protect companies from cross subsidized predation or discriminatory access. But we have to do so without extended preferences that are unrelated to efficiency. One of the things that we see in terms of our work in the merger area, and our work in the 271 area, is that the sort of overly expansive creation of duties to deal, to share facilities, and the imposition of competitor obligations to cooperate could potentially stifle innovation. We should not loose sight of that point certainly in either the regulatory or antitrust enforcement context.

The second concept that I introduced today is that we are not the anti tipping agency. I think if you read the antitrust literature over the last year, or last five years of so, the big concern is market tipping -- the idea that as businesses compete for markets, as [inaudible word] said, instead of competing for patronage, that more and more markets will demonstrate these things called network effects, and markets will shift, and we as antitrust lawyers ought to be concerned about markets tipping, because the effect of that will be that there will be a dominant firm or dominant technology or something of that nature. Tipping occurs in the network where a significant -- someone wrote this for me -- tipping occurs in the network where a significant combined penetration rate can cause certain consumers that have not already chosen the network to go with the larger entity. We in the Antitrust Division do not see our role as looking for markets that are about to tip and then throwing our bodies in the way of the process. That is not really what -- what we -- a policy that will really facilitate the kind of competition that we are hoping to create.

Tipping in the network industry can have actually beneficial effects that lead to the achievement of efficiencies and a benefit to consumers that result from the increased likelihood of systems compatibility and changeability. Our role is not to prevent implementation or adoption of a single industry standard, or the creation of a dominant network, where that dominant network really flows from efficiency.

We need to [inaudible word] where a participant with market power, or monopoly power, may be engaging in anticompetitive conduct that is designed to maintain the monopoly or to illegally extend the monopoly into another market -- not necessarily just to stop markets from developing, stop firms from developing dominant positions. One of the -- one of the things that is interesting footnote to an agency that is supposed to protect competition is that in the competitive market occasionally somebody wins. And when somebody wins, that is not necessarily a non antitrust or non competitive result.

Which brings me to my final point, which is that the Antitrust Division does not, and should not punish success. Participants in the telecom industry, which is very often characterized by network characteristics, rightly point out that economies of scale [inaudible word], economies of scope have, and that competitive advantages arises out of economies of scope and scale are the sort of efficiency advantages that really ought to prevail under competition.

One of the interesting things that I can tell you, however, from my work in the telecom industry, and the types of things we have brought very often in the Antitrust Division, is that everybody tells you that "I have to get bigger to compete." The standard mantra is "Please allow us" -- you're smiling Charles -- people are often coming in, and they say, "Gee, you know, if we just had all of the spectrum, you know [audience laughter] boy could we do something wonderful. You know, the fact of the matter is that if we could just get this company and that company, boy could we have the most efficient billing system that you would ever want to see."

And, you know, we understand that point. And, you know, we understand that there are some efficiencies out there that you ought to achieve. By the same token, we just don't take you on faith on that subject.

Very often, one of the ways in which we see this, very often, is that people talk about new technologies. "Boy, if we had all of the spectrum, we could create a 3G cellular platform that is going to do this, that and the other thing." And the fact of the matter is that these plans are not fully fleshed out. No one knows what the technologies people are going to be deploying, and no one knows how much spectrum is required in order to do.

And guess what. If you don't know, you don't get to merge on the basis of an economies of scale defense. It is just a point -- a marker that we will lay down to tell you that you actually have to think this stuff through and present a coherent argument about scale economies before you come in and make the argument to the Antitrust Division, because it doesn't quite work that way.

One related point that would -- it really doesn't related to this -- but, you are a telecom audience, let's say it to you anyway -- relates to, sort of, what is going on in the 271 area. I think we have heard a number of assertions from both applicants and opponents regarding the openness of particular markets. I don't think we can emphasize enough, the importance of substantiating these claims, and really, sort of, quantifying these claims in terms of competitive impact. We very often hear the opponents of the transaction come in and say, "Well, this is wrong, that is wrong, this is wrong." But there is never any referencing that issue back to the competitive significance of how the company is going to interact on a going forward basis.

We would encourage companies who are opponents of 271 applications to go ahead and make that connection, because we as an antitrust agency -- that is the way we come to understand these things. For the benefit of those who are applicants, the issue that we often get is, is "17% of the market is by CLECs. Therefore, we win, because it was 16.3% in the last one that you approved." Well, I think that our obligation is to conduct a more complete analysis than that. Our obligation is to understand the quality of entry. And, it is your obligation, if you want us to actually understand it, to come forward with evidence about how the quality of entry will actually affect the market on a going forward basis. [inaudible sentence] We are continuously assessing our 271 process, and how we can make it a more antitrust rich analysis, and we hope that you folks will help us in that process.

The Antitrust Division is a law enforcement agency. My job is not really to make policy. It is not to make industrial policy. My job really is to call balls and strikes. I have a striped shirt on underneath.

We recognize, however, that FCC more policy responsibilities, and we certainly respect that. One of the best parts of my job is the extent to which Commissioner, or Chairman Powell, in order to work with us, we talk a lot about cross training our staffs, putting people on detail to the other agency, so that we can do things better. And, one of the things that I think Chairman Powell is most committed to is letting the FCC be the FCC and letting the Antitrust Division be the Antitrust Division. And, we think we can figure out ways to work very well together.

We are highly supportive of the FCC's agenda to open markets to more and more competition, and to continuously look for ways of stimulating more competition, and deregulating. We like that, because that creates business for us. But, we also like it because it is important that we think, as an agency that views competition as the most important way to get economic efficiency, to get just that, to get good results for consumers and for America. I think that that is what everyone's goal is.

And with that, I will be happy to answer simple questions.