Senate Committee Holds Hearing on SBC/ATT and Verizon/MCI Mergers

March 15, 2005. The Senate Judiciary Committee held a hearing on the SBC/ATT and Verizon/MCI mergers.

Sen. Arlen Specter (R-PA), the Chairman of the full Committee, made an opening statement, and then departed. Sen. Mike Dewine (R-OH), the Chairman of the Antitrust Subcommittee, Sen. Herb Kohl (D-WI), the ranking Democrat on the Subcommittee, and Sen. John Cornyn (R-TX), also made statements. The CEOs of all four companies testified. Then, Sen. DeWine and Sen. Kohl asked numerous questions.

Neither the Committee, nor the Congress, can block either merger, or impose any conditions. The Committee can hold hearings, and make recommendations to U.S. antitrust regulators. The Department of Justice's Antitrust Division could block, or impose conditions upon, either or both transaction. Also, the Federal Communications Commission (FCC) exercises a redundant antitrust review in its proceedings on the transfer of FCC issued licenses associated with these mergers.

Sen. Specter said that "the question we have to answer is whether there will be sufficient competition for consumer protection."

Sen. DeWine said in his opening statement, and during questions, that the competition issue of concern to him is the telecommunications enterprise market. He said that the mergers will result in fewer competitors. He questioned to what extent intermodal competition will protect competition in the enterprise market. The CEOs argued that there is lots of intermodal competition.

Sen. Kohl asked the CEOs whether they would agree to certain conditions being imposed upon their mergers. All CEOs declined to agree to any merger conditions proposed by Sen. Kohl.

Sen. DeWine (at left) wrote in his prepared statement, which he read at the hearing, that "Market pressures and regulatory changes have significantly limited the options of the long-distance carriers, so that AT&T has already announced that it is exiting the market for residential service -- and MCI appears headed in the same direction. Under these circumstances, it is not surprising that many have done a quick analysis and concluded that these deals do not pose any significant antitrust concerns. However, a quick analysis, whatever the outcome, is not enough. And in fact, I think that certainly there are some antitrust issues that require more thorough examination."

He continued that "Perhaps the most obvious area of concern is the so-called ``enterprise market´´ -- the sector of the market comprised of large businesses with sophisticated telecommunications needs. In this market sector, all four of the merging parties currently compete and so competition there will be affected by these deals. There are also questions regarding the impact of these deals on the markets for long-haul capacity, and in the market for Internet backbone."

Sen. DeWine said that "Certainly these mergers represent a loss of competition among the phone companies, but the remaining players will tell us that competition is flourishing via different platforms --specifically, that we will have cable companies, wireless companies, and companies that provide ``Voice Over IP´´ services. In other words, so-called ``inter-modal´´ competition will protect competition in these markets."

Sen. Kohl (at right) said in his opening statement that "It is our first responsibility to ensure that these emerging new technologies have a real change to succeed. The possible benefits of new competition will drive growth throughout the economy for decades to come. We must insist that the promise of tomorrow's technology is not stifled in its infancy by today's consolidation. And we must seek to avoid the creation of a world where consumers are left with only two choices for a bundle of telecom services -- the ``Baby Bell´´ phone company and the cable company."

He said that "we have two concerns with these mergers. First will this consolidation decrease the choices and increase the costs to consumers and to business customers, both large and small? Second, how can we ensure that new technologies and new services can get access to the SBC and Verizon networks? A good place to start would be to require that the Baby Bells offer consumers the choice of buying Internet access without also requiring them to buy phone service. We expect to recommend additional specific pro-competitive merger conditions to the Justice Department and FCC in the coming weeks."

Edward Whitacre, Ch/CEO of SBC, stated in his prepared testimony, which he read, that with exceptions, "SBC and AT&T do not compete head to head", and where they do compete, there are numerous other competitors. Rather, by acquiring AT&T, SBC will be able to provide services that it does not now provide. He said the merger will "enhance competition".

David Dorman, Ch/CEO of  AT&T, asserted in his prepared testimony that "The merger is fully consistent with the antitrust laws. It will not lessen competition in any line of commerce or create a monopoly -- to the contrary, it will promote competition and benefit the public."

Ivan Seidenberg, Ch/CEO of Verizon, stated in his prepared testimony that "the old distinction between local and long distance is obsolete, as is the need for separate companies to provide them. Competing technologies – cable, wireless, satellite, IP, and wireline -- now offer consumers a wide range of choices for voice, data and, increasingly, video. And the pace of technological change is accelerating, which makes these markets more dynamic and competitive with each passing day."

Michael Capellas, P/CEO of MCI (formerly known as WorldCom), emphasized technological changes, and their consequences for competition, in his prepared testimony

He said that computing is changing the nature of telecommunications. "First of all, there is a movement within computing towards standardization. Basic computer building blocks such as servers, storage and microprocessors are standard devices that are addresses on a network and can reside anywhere. Second, the rise of Internet commerce accelerated the adoption of software standards that enable different systems to talk to each other. At the same time, new tools like web services are allowing developers to write applications across different platforms."

He said that "communications travel over the network in what we call ``packets.´´ There is no difference between a voice or data packet over the network. Whether you are making a voice call or purchasing an MP3 music file, it is all the same -- a packet is a packet."

"The Internet-driven standards that allow systems to talk to each other have redefined network requirements. Formerly, local, long distance and data traveled separate network paths. Now, there's a need for integrated, intelligent paths which can carry voice, data and streamed video without the developer or end-user needing to know or care how the path is developed."

Capellas said that "We are already seeing intermodal competition begin to take place with cable companies investing heavily in their networks. Wireless companies, such as Sprint and Nextel, are moving to provide wireless broadband services. Power utilities are beginning to provide facilities-based broadband in some localities. The use of licensed and unlicensed spectrum to provide new, wireless broadband networks will be an area of great significance in the coming years. Emerging intermodal competition promises a continuing, robustly competitive marketplace."

Sen. Kohl asked the CEOs if they would agree to certain merger conditions. For example, he asked if they would agree to a condition requiring the separate sale of internet access service without phone service. Seidenberg said that "I would prefer not to agree to any conditions." Whitacre said that "what you are asking is already being done". However, he would not agree to any conditions.

Sen. Kohl also asked about a merger condition prohibiting the blocking of access by VOIP providers such as Vonage. Seidenberg said that he knew of no case where Verizon has done that, and that Verizon has no reason to do that. But, he would agree to no condition. (See also, story titled "FCC Stops Broadband Provider From Blocking VOIP Traffic" in TLJ Daily E-Mail Alert No. 1,089, March 7, 2005.)

Whitacre said that "SBC would not block any Vonage traffic, or anybody else's". But, he too did not want to commit to any conditions.

Sen. Kohl also asked the CEOs why some of them have been lobbying against municipalities providing internet access services. Seidenberg and Whitacre both argued that it is unfair for governmental entities that make laws, regulate, and charge franchise fees to telecommunications companies to also enter into competition with them.

Sen. Kohl also asked if after these mergers, SBC and Verizon will only compete in enterprise markets in their respective territories, rather than nationally, as had AT&T and MCI. Seidenberg and Whitacre insisted that they will compete nationally.

Sen. DeWine suggested that these two mergers, taken together, will constitute a three to one transaction for the enterprise market. That is, he said that there are now three main competitors, AT&T, MCI, and the RBOC. Whitacre, Seidenberg and Dornan all disputed this assessment. They asserted that there is competition from other carriers, and from non telecommunications companies, such as Cisco, IBM, Cox Cable, CSC, Lockheed, and BT.

Sen. DeWine also expressed his concern about the possible effect on competition in policy making. He said that previously AT&T and MCI could be counted on to oppose the RBOCs on public policy issues.

Finally, Sen. Kohl asked who would end up as CEOs of the two merged entities. The four CEOs sat in silence.

Sen. Sam Brownback (R-KS), whose state is served by SBC, did not attend the hearing, but submitted a statement for the record. He wrote that "I strongly support the SBC-AT&T union".

Sen. Patrick Leahy (D-VT), the ranking Democrat on the full Committee, did not attend, but submitted a statement for the record. He wrote that "we should closely scrutinize deals that would put more and more of our telecommunications infrastructure under the control of fewer companies. At the same time, we must also acknowledge and consider the rapid pace of technological change that has taken place within this industry in the past several years."

Sen. Leahy concluded that "While anti-trust enforcement always requires some attempt to predict the future, we in Congress must attempt to draft legislation that not only accommodates technological innovation, but protects and promotes it. This will be particularly important as Congress revisits the Telecommunications Act of 1996."

The Committee heard only from the CEOs of the four companies. Sen. DeWine announced that the Antitrust Subcommittee will hold a second hearing on April 19, 2005 at which it will hear testimony from other witnesses.