Story: MCI Plan to Sell Internet Backbone Business Criticized, 5/29/98

MCI Plan to Sell Internet Backbone Business Does Not Placate Competition

(May 29, 1998) MCI announced on Thursday that it plans to sell much of its Internet backbone infrastructure to the British telecommunications company, Cable & Wireless. The proposed merger of MCI and WorldCom has raised concerns that the new entity would concentrate Internet backbone service. The merger is under review by the Department of Justice, Federal Communications Commission, and European Union. Both GTE and Sprint claim that the proposed divestiture does not go far enough.

GTE filed a Complaint on May 7, 1998 in U.S. District Court against WorldCom and MCI asserting that the proposed merger should be barred because it would violate the Clayton Antitrust Act by concentrating Internet backbone service in one company.

Related Story: GTE Files Antitrust Suit Against WorldCom and MCI, 5/11/98.

The proposed merger also needs the approval of the Antitrust Division of the U.S. Department of Justice, the Federal Communications Commission, and the Competition Directorate of the European Commission.

Cable & Wireless announced in a press release on May 28 that the terms of the $650 Million deal are as follows:

"MCI will sell to Cable & Wireless its Internet backbone service business, comprising all of its 22 domestic nodes, 15,000 interconnection ports, more than 40 ongoing peering agreements, and equipment dedicated to supporting the network including routers and switches. These are key pieces of technology that will allow users to access the Internet efficiently."
"Cable & Wireless will acquire and assume support for MCI's contracts with its Internet Service Provider (ISP) customers, whose business is primarily re-selling Internet access. Today, MCI has more than 1,300 US domestic and international ISP customers across 76 countries."
"In order to continue high standards of service for all customers, Cable & Wireless and MCI have concluded an agreement to ensure the fulfillment of all existing contractual arrangements with customers. Initially, MCI will provide the underlying telecommunications transport services supporting the Cable & Wireless backbone and will provide additional services as required by Cable & Wireless. MCI will use Cable & Wireless's backbone services to support its growing base of non-ISP customers."

Cable & Wireless is one of the world's leading providers of global telecommunications services with revenues of approximately $12 billion annually. Its businesses provide 17 million customers in 70 countries with a complete range of international, domestic and mobile communications. Cable & Wireless is the world's third largest carrier of international traffic, provides mobile communications in more than 30 countries and operates the world's largest cableship fleet.

Cable & Wireless also stated in the press release that "[t]he transaction gives Cable & Wireless a premier Internet business in the fastest growing sector of the US telecommunications market. It also addresses anti-trust issues being examined by the US Department of Justice and the European Commission and, subject to approval by those authorities, should clear the way for the swift approval of the MCI WorldCom merger."

However, long distance and internet competitors GTE and Sprint were quick to assert that the proposed sale does not remove the antitrust problems.

GTE spokesman Bob Bishop stated that "what they are doing does not even remotely address the antitrust problem we've got." He said that "they are simply selling infrastructure," while retaining their huge customer base. This is merely "an attempt to win clearance by the EC with the appearance of divestiture."

Bishop says that to comply with antitrust law, the companies must "sell the entire Internet business of either MCI or WorldCom so that a business results from that sale that can compete."

Mark Schechter, an antitrust lawyer in the Washington DC office of Howrey & Simon, and one of the attorneys for GTE, said that "the proposed sale is entirely inadequate to eliminate the concerns raised by the merger."

"What they are proposing to do ... is that they are going to sell ... their circuits and peering agreements, and Cable & Wireless will become the wholesale provider of backbone service to MCI ... but MCI will control customer relationships," said Schechter. "The net result is that this divestiture will not create a viable (competitor)."

"It is not going to make it," said Schechter. "I will be a most amazed antitrust lawyer ... if the EU finds this acceptable, or for that matter, DOJ."

Sprint also criticized the proposed sale in a press release issued on Thursday. "[I]t appears the bulk of MCI's Internet business, including residential and commercial customers, transport services, personnel, marketing, and branding rights and agreements, would remain with MCI. If this is true, what MCI is proposing is not divestiture - it is selling off a small piece of the business. The price of $625 million would also suggest a partial sale."

WorldCom spokesman Terri Howell stated that "we are continuing our discussions with regulators" and look forward to a quick resolution, but would not comment on MCI's proposed sale to Cable & Wireless. Katy O'Keefe, at Cable & Wireless Inc., the U.S. subsidiary of Cable & Wireless, stated Thursday that "we do not comment on parent company activities." Neither MCI, nor the U.S. Department of Justice Antitrust Division, returned phone calls on Thursday. Federal Communications Commission spokesman Rochelle Cohen would only confirm that the merger was being reviewed by the FCC, and would not comment on the proposed sale by MCI.

Excerpt from Complaint in GTE v. WorldCom and MCI:
"The merger will destroy the critical competitive balance that exists on the Internet today by creating a dominant provider of Internet backbone service. At its core, the Internet is a competitive network of networks. A healthy number of firms operate the backbone networks that comprise the heart of the Internet, and no single backbone operator accounts for a dominant share of Internet traffic or destinations. Although staunch competitors, all of the major backbones today are also dependent upon each other for interconnection. They thus find it in their independent interests to cooperate to maintain and upgrade the capacity of interconnection among their networks in order to offer their customers ubiquitous, high-quality access to the whole Internet. This vital structure of competitive interdependence has made it possible for Internet providers to accommodate enormous growth in traffic, to achieve stunning technological innovation, and to maintain low-cost Internet access for tens of millions of Americans -- all without any government regulation. That structure will disintegrate if the MCI-WorldCom merger is allowed to go forward. By concentrating under common control the two largest Internet backbone networks to create one dominant national network, the merger will give MCI-WorldCom a stranglehold over the burgeoning Internet and the incentive and ability to stifle competition from all other rival Internet backbone operators, including GTE. If this unprecedented merger is not stopped, the Internet will cease to be an open, highly competitive marketplace and rapidly degenerate into a closed network dominated by a single megafirm that will, for all practical purposes, become the Internet."
At pages 2-3. See, Complete HTML Copy of Complaint.