Download OVERVIEW OF THE FCC'S MERGER ANALYSIS OF THE SBC

OVERVIEW OF THE FCC’S MERGER ANALYSIS OF
THE SBC/AT&T AND VERIZON/MCI TRANSACTIONS
Martin L. Stern and Kristin M. Cleary1
INTRODUCTION
Transactions involving Federal Communications Commission (“FCC” or “Commission”)
licenses and authorizations require application to the FCC for consent to the assignment or
change in control to the buyer of the Commission licenses and authorizations. Essentially,
Section 310(d) of the Communications Act of 1934, as amended, 47 U.S.C. § 310(d), which
applies to all FCC station licenses, requires that no license may be assigned or transferred,
including through a transfer of control, without application being made to the FCC and the FCC
finding that the assignment or transfer would serve the public interest.2 In addition, Section 214
of the Communications Act and the FCC’s rules similarly require prior FCC approval of
transfers of control or asset sales involving both domestic and international common carrier
authorizations.3 Commission approval is also required for transfers of control and assignments
involving cable landing licenses.
In this paper, we review the FCC’s consideration of SBC’s recent acquisition of AT&T
and Verizon’s recent acquisition of MCI. In both those cases, the sellers had domestic and
international authorizations, radio licenses, and cable landing licenses, requiring Commission
review and approval of the transactions before the transactions could be consummated.
AT&T and MCI, of course, were the nation’s two largest interexchange carriers
(“IXCs”), with nationwide and international networks, as well as significant local facilities.
Following passage of the Telecommunications Act of 1996 (“1996 Act”), both MCI and AT&T
forays into local service markets, and were viewed as among the most significant post-1996 Act
competitive local exchange carriers (“CLEC”). Verizon and SBC, two of the four remaining
Regional Bell Operating Companies (“RBOCs”), were the nation’s two largest incumbent local
1
Marty Stern is a partner and Kristin Cleary is an associate with Preston Gates Ellis & Rouvelas Meeds LLP, the
Washington, D.C. office of Preston Gates & Ellis LLP. The authors also wish to thank Tim Tardiff, Vice President,
National Economic Research Associates (NERA), for his review of and comments on this paper.
2
Additionally, Section 310 requires that the assignee or transferee meet the requisite requirements for holding the
particular FCC license.
3
See 47 U.S.C. § 214; 47 C.F.R. §§ 63.03, 63.24. There is an exception to the prior approval rule for nonsubstantial transfers or assignments that are pro forma in nature, e.g., those that involve intermediate changes in
corporate structure without an ultimate change in the entity that controls the authorization holder. Such pro forma
transactions typically require only after the fact notification.
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exchange companies (“ILECs”), viewed as significant competitive rivals to AT&T and MCI. In
addition, after satisfying the requirements of Section 271 of the Communications Act, 47 U.S.C.
§ 271, which restricted RBOC provision of in-region interLATA services, Verizon and SBC
each became significant long distance providers in their respective regions.
Just several years ago, a merger between SBC and AT&T was viewed as “unthinkable”
by the then-Chairman of the FCC. Certainly there were many who reacted viscerally to these
transactions as representing the reintegration of the old Bell system. Yet both the FCC and the
U.S. Department of Justice had little trouble passing on the two transactions. At bottom, beyond
the knee-jerk reactions that these transactions provoked in some quarters, when the actual
markets affected by the transactions were analyzed, in most, the deals raised virtually no
competitive concerns. In those markets where competitive concerns were raised, those concerns
were easily addressed though the imposition of voluntary conditions agreed to by the parties.
In this paper, we provide an overview of the Commission’s decisions approving both
transactions, and specifically the markets the Commission looked at in reviewing the deals and
its conclusions it reached with respect to each.4 We also provide a brief discussion of the
benefits the Commission found from the mergers. Appendix A to this paper also includes a
general overview of the FCC merger review process.
A.
Background on the Communications Act and the Public Interest Standard
The lynchpin of the FCC’s decision on a transaction involving FCC licenses and
authorizations is a finding that the associated assignment or transfer of the license or
authorization is in the public interest. The FCC’s public interest standard involves a balancing
process -- weighing the potential public interest harms of the proposed transaction against the
potential public interest benefits.5 Overall, “the Commission possesses broad discretion to
review a variety of factors in making a public interest determination with respect to a transfer
application.”6 Precisely what is included in the public interest varies over time and with the
particular type of license at issue. Importantly, evaluation of the public interest includes an
evaluation of the impact of the transaction on competition, though the Commission’s
consideration of the public interest harms and benefits from a transaction “is not limited to the
potential competitive effects of the transaction, as informed by traditional antitrust principles.”7
4
See In the Matter of SBC Communications Inc. and AT&T Corp. Applications for Approval of Transfer and
Control, Memorandum Opinion and Order, 20 FCC Rcd 18290, ¶ 16 (2005) (hereinafter “SBC/AT&T”) and In the
Matter of Verizon Communications Inc. and MCI, Inc, Applications for Approval of Transfer of Control,
Memorandum Opinion and Order, 20 FCC Rcd 18433, ¶ 16 (2005) (hereinafter “Verizon/MCI”).
5
See In re Applications of Ameritech Corp, Transferor, and SBC Communications, Inc., Transferee, For Consent to
Transfer Control of Corporations Holding Commission Licenses and Line, Memorandum Opinion and Order, 14
FCC Rcd 14712, ¶ 48 (rel. Oct. 8, 1999) (“Ameritech/SBC”).
6
See Matter of Qwest Communications Int’l Inc. and US West, Inc., Memorandum Opinion and Order, 15 FCC Rcd
5376, ¶ 28 (2000).
7
SBC/Ameitech, ¶ 49 (1999). Beyond antitrust principles, “competition in the telecommunications industry is
shaped…by regulatory policies that govern interactions among industry participants.” Id. Thus, the Commission’s
public interest analysis is informed by the “broad aims of the Communication’s Act.” In the Application of NYNEX
Corp., Transferor, and Bell Atlantic Corp., Transferee, For Consent to Transfer Control of NYNEX Corp. and Its
Subsidiaries, 12 FCC Rcd 19985, ¶ 2 (1997). These broad aims include the implementation of Congress’ “procompetitive, deregulatory national policy framework” for telecommunications, and “accelerating rapidly private
sector deployment of advanced telecommunications and information technologies and services.” Id.
2
So what does this mean in terms of what the Commission considers in addition to
antitrust principles? Where implicated by a particular transaction, the Commission balances
such factors as:
•
How the transaction will affect the quality of and rates for telecommunications
services;
•
The trends within and needs of the industry, including the complexity and rapidity of
change in the industry;
•
Impact of the transaction on spectrum use and efficiency;
•
Diversity of license holdings;
•
National security, law enforcement, and public safety impacts of the proposed deal.
The FCC’s competitive analysis focuses on three factors. First, the Commission
determines the markets potentially affected by the proposed transactions. Second, the
Commission assesses the effects that the transactions may have on competition in these markets.
Third, the Commission decides whether the proposal will result in merger-specific public
benefits: “Efficiencies generated through a merger can mitigate competitive harms if such
efficiencies enhance the merged firm’s ability and incentive to compete and therefore result in
lower prices, improved quality, enhanced service or new products.”8
B.
Relevant Markets Analyzed by the FCC in SBC/AT&T and Verizon/MCI
In this section of the paper, we provide an overview of the application of these principles
by the FCC to the SBC/AT&T and Verizon/MCI transactions. Specifically, we review the
relevant markets the Commission looked at in its decisions in SBC/AT&T and Verizon/MCI, and
the conclusions the Commission reached as to each.
1.
Wholesale Special Access Competition
The Commission defined special access as a dedicated transmission link between two
points within an exchange. Special access is a critical input for, inter alia:
•
CLECs providing service to retail enterprise customers
•
Wireless carriers and CLECs connecting networks to other carriers
•
Entities connecting with Internet backbones
•
IXCs connecting to customer premises or from local facilities to IXC points-ofpresence (“POPs”).
Within the special access market, the Commission found two separate product markets:
Type I special access markets are those where provision of special access services occurs from
8
See Verizon/MCI at 194.
3
end-to-end over a single carrier’s facilities, including last mile access. Type II special access
markets are those in which a provider uses a third party carrier’s facility for the last mile of
connectivity. The Commission found that the geographic market for special access was local
and that prices are set on a regional basis.
In both SBC/ATT and Verizon/MCI, the Commission found that the respective mergers
would lead to significant increases in market concentration in local Type I special access markets
and increased prices in those markets where the respective parties had overlapping last mile
facilities. In both cases, applicants made concessions not to raise rates or offer services to
affiliates not made available to similarly situated customers on the same terms and conditions,
and agreed to a form of divestitures in certain markets in the form of indefeasible rights of use
(or “IRUs”— a long-term right to use a fixed amount of capacity) in fiber facilities serving
certain buildings.
In the Type II special access market, the FCC found sufficient competition in components
of the Type II special access markets from other providers where the parties had overlapping
facilities. Thus, the FCC was not concerned about adverse competitive effects in Type II special
access.
2.
Retail Enterprise Competition
The Commission defined separate retail enterprise markets for the provision of local
voice, long distance and international voice, data services, high-capacity transmission services,
emerging technologies to the small, medium and large enterprise markets. The Commission
found that the small and medium enterprise markets were local, while the large enterprise market
was national. The FCC determined that in small enterprise markets, both AT&T and MCI had
pulled out of those markets so the respective mergers would not likely lead to anti-competitive
effects. In medium-sized and large enterprise markets, in addition to those markets including
multiple competitors, the purchasers in those markets are sophisticated, high-volume purchasers,
with significant leverage, such that the mergers would not likely raise competitive concerns.
3.
Mass Market Competition
The Commission’s mass market consumer analysis is divided into three separate product
markets: local services, long distance services, and bundled local and long distance services. In
each of these markets, the Commission determined that the geographic market is local. The FCC
then aggregated customers who face similar competitive choices in order to assess potential
pricing impacts from the merger. This analysis was then narrowed and studied on a state-bystate basis.
Overall, the Commission had no real concerns in the market for mass market services.
The long distance market is unconcentrated and highly competitive, with the growth of Voice
over Internet Protocol (VoIP) services and bundled offerings by wireless providers, reducing the
competitive significance of this market. In the market for mass market local services, MCI and
AT&T had no real presence. In addition, even if wireless services are viewed as substitutes for
wireline services, pre-merger, both SBC and Verizon, were partners in significant wireless joint
ventures (Cingular and Verizon Wireless, respectively), and the transactions did not lead to
further increases in their respective wireless holdings. Bundled offerings, in particular, are a
relatively new area of focus, but a market of increasing importance, particularly given increases
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in wireless penetration and bundles of local and long distance. Competition, however, is
increasingly in the form of “one-stop shopping” and bundled offerings, rather than the purchase
of services from separate stand-alone firms, further reducing any competitive impacts from the
merger in the mass market sector.
4.
Internet Backbone Competition
The Commission also examined the impact of the transactions on Internet backbone
markets. Internet backbone providers (“IBPs”) are categorized into tiers based on size,
geographic scope and interconnections. Tier I providers are the largest IBPs that sell transit and
dedicated Internet access to significant numbers of ISPs, corporate customers, smaller IBPs and
other enterprises. At the time of the mergers, there were six to eight providers in this tier, two of
which were operated by AT&T and MCI, respectively. SBC and Verizon, however, did not have
comparable backbone operations.
The Commission’s primary competitive concern in the Tier I Internet backbone market
was whether the combination of Verizon’s backbone facilities with MCI’s and the combination
of SBC’s backbone facilities to AT&T’s would lead to a phenomenon called “tipping.”
Currently, because the Tier I providers are relatively comparable in size, they all have the
incentive to exchange traffic at no cost. In addition, the price of transit remains relatively
competitive. The concern is that, should one or two Tier I IBPs become dominant, the Tier I
market could “tip,” allowing those providers to raise transit prices to lower tier IBPs, as well as
rival’s peering costs. The Commission concluded, however, that there was no risk of tipping
from the Verizon-MCI and SBC-AT&T transactions, though such concerns could become more
pronounced if the backbone market were continue to contract.
Vertical foreclosure issues were also not a concern for the Commission, largely because
of the commitments and conditions agreed to by the parties to the mergers. In particular, there
was insufficient evidence to find potential for packet discrimination or degradation against
VOIP, Video Over IP, and other IP enabled services. Nonetheless, the merged companies,
among other things, committed to maintain peering arrangements and to post peering policies on
publicly accessible websites, as well as agreeing to certain other Internet-related conditions.
5.
Wholesale Interexchange Competition
The Commission found that the respective mergers were not likely to result in anticompetitive effects in the wholesale domestic, interstate, interexchange services market, which
the Commission identified as a separate product market. The Commission found that the market
will remain competitive post-merger, due primarily to the presence of multiple carriers with
excess capacity.
6.
U.S. International Service Competition
The Commission identified four separate end-user international service markets, and two
intermediate international service markets potentially affect by the mergers:
• Mass market
•
Enterprise market
5
•
Global telecommunications market
•
International transport capacity market
•
Facilities-based International Message Telecom Services (IMTS)
•
Private line service
The Commission reached the same general conclusions with respect to the mergers’ potential
impact on U.S. international service competition as it did with respect to the wholesale
interexchange market, above: the markets are relatively unconcentrated and firms in the market
have significant excess capacity. The Commission did look at several international routes served
by MCI where Verizon controlled the incumbent provider on the foreign end. Under the
Commission’s rules, various competitive safeguards were imposed on the merged entity to
prevent discrimination against competing carriers, eliminating any competitive concern that
otherwise might flow from the Verizon-MCI deal in the provision of international services on
these routes.
C.
Benefits from the Mergers
As discussed above, before the Commission may approve the transfers of control or
assignments of licenses and authorizations associated with a merger, the Commission must find
that the transfers or assignments are in the public interest. In addition, benefits from a particular
transaction, for example, in the form of efficiencies and cost savings, can be used to offset
competitive harms from a transaction. Consequently, a significant aspect of the parties’ case
supporting their merger and the Commission’s decision approving a merger, is a discussion of
these benefits. The SBC/AT&T and Verizon/MCI mergers are illustrative. In this section, we
provide a brief overview of the benefits that the Commission found in connection with those
mergers.
1.
Enhancements to National Security and Government Services
The Commission found that combined, non-overlapping IP networks can provide the
government with additional security and routing efficiency for vital and sensitive government
communications. In addition, the mergers will create stable, reliable, US-owned companies that
will provide improved service to government customers. SBC and Verizon will become
integrated and full-service, and will have improved communications security and network
efficiency.
2.
Efficiencies Related to Vertical Integration
The Commission found that significant benefits are likely to result from the vertical
integration of the largely complementary networks and facilities of SBC/AT&T and
Verizon/MCI.
3.
Economies of Scale and Scope
The Commission had difficulty quantifying scale and scope economies from SBC and
AT&T because “while SBC and ATT compete in many of the same markets, the focus and
success of their efforts has often come in different segments of these markets.” Verizon and
MCI, on the other hand, had complementary networks and facilities so the benefit there was
6
easier to determine. The Commission also found that by broadening their customer base, the
merged entities would have an increased incentive to engage in basic research and development
and to continue to invest in more applied research and product development.
4.
Cost Synergies
The parties to both mergers estimated significant cost savings from the mergers, which
factored into the Commission’s analysis: AT&T-SBC estimated savings of more than $15
billion for both fixed and variable operations costs; Verizon-MCI estimated more than $7 billion
cost savings from the merger.
7
Appendix A
General Stages of FCC Merger Review
Under the Communications Act and the Commission’s rules, parties to a merger must file
an application with the Commission seeking Commission approval or assignment of the licenses
and authorizations being transferred. Shortly after the application is filed and found to be
complete, the Commission will place the application on public notice, which sets a date for
interested parties to file comments on the transaction, as well a petitions to deny the application.
More recently, recognizing the importance of certain confidential and sensitive information to
analysis of a transaction, the Commission has entered protective orders with the parties, which
governs the use of and access to confidential information in the proceeding.
After the Commission completes its review, it can grant the application without
condition, or as is the case in more significant transactions, impose conditions on the assignment
or transfer, in what is referred to as a conditional grant. Parties, as was the case with
SBC/AT&T and Verizon/MCI, often will make voluntary concessions to smooth the way for
approval, but it is also common for the parties to agree reluctantly to conditions imposed by the
Commission, or for the Commission to impose conditions that the parties find objectionable. In
the rare case where the Commission is unable to find that approval of the transaction, even with
conditions, would serve the public interest, rather than deny the application outright, the
Commission sets the application for hearing. At this point, given timing considerations and
regulatory uncertainty, it is not uncommon for parties to withdraw their application and abandon
their transaction.
For years, merger reviews at the FCC had no time limit and were completely open ended
and opaque, leading to significant outside criticism of the agency. This led the FCC to form a
Transaction Teams within the Office of General Counsel to coordinate the FCC's review of
applications for the transfer of control and assignment of licenses and authorizations in
connection with major transactions. The Team helps ensure that the Commission's internal
procedures are transparent and uniform across the various Bureaus. The Commission's goal is a
faster and more consistent review and analysis of applications. The Transaction Team also has
developed an informal time table to ensure that most applications are processed within 180 days
after the assignment application is placed on public notice.
Once the application is placed on public notice, interested parties have 30 days to file
initial comments or petitions to deny. The oppositions and reply comments provide the parties
as well as other interested parties, with an opportunity to address issues raised in the petitions to
deny and initial comments. While reply comments in particular, are supposed to be limited to
matters in the comments, in reality, Commission practice is fairly loose about introducing new
matters and issues at this stage. Moreover, under the Commission’s ex parte rules, which govern
meetings and filings with the Commission outside the formal comment cycle, many transactions
are designated as “permit but disclose” proceedings, which means ex parte meetings and filings
are not restricted, so long as they are memorialized in a filing made in the proceeding docket,
which is available for review on line. In contested proceedings, these ex parte meetings and
filings typically continue unabated throughout the Commission review process, and are used by
the applicants, petitioners, and commenters, to introduce and brief existing and new issues that
may arise in the course of the proceeding.
The FCC makes an initial decision regarding the completeness of the record within 75
days from public notice of the transaction. The FCC evidences its decision that the record is
complete and adequate to go forward by sending a “completeness letter” to the applicant. If the
FCC determines that the record is not complete, instead of a “completeness letter,” the FCC will
request additional information from the applicants, which as discussed below. Information
requests and any non-confidential responses are filed in the public docket. Typically, where the
FCC requests additional information, depending on the complexity of the transaction, the 180
day may be stopped because the applicants provide a delayed or incomplete response, to give
FCC staff sufficient time to review the information and follow-up, to give interested parties an
opportunity to comment, or for myriad other reasons. Once supplemental information is filed
and complete, the clock typically is restarted, though in one recent transaction, the FCC reported
that it had been so inundated with documents in response to its inquiries that it stopped the time
clock on Day 179 so that it could thoroughly assimilate the new information.1
All in all, since formation of the Transactions Team and establishment of the 180-day
clock, the Commission has worked hard to complete its review within the 180-day, and timely
completion of merger reviews has been an important priority for the current Chairman of the
FCC. Nonetheless, some transactions have extended beyond the 180 days, if only slightly.
SBC/AT&T and Verizon/MCI, for example, were both completed in 199 days. Cingular’s
acquisition of AT&T Wireless Services, the most significant wireless merger reviewed by the
Commission and one which raised important new issues of first impression, was completed on
day 208. Sprint/Nextel, however, was completed in 157 days, and AllTel/Western Wireless was
completed in 154 days. Some transactions involving major cable operators have been taking
longer. For example, Comcast’s acquisition of AT&T Broadband was completed in 188 days,
while Adelphia’s spin-off of systems to Comcast and Time Warner is still pending after 258
days.
1
Other reasons that the Commission has halted the 180-day timeline include: pending review by or untimely
exchange of information between the FCC and the Department of Justice and/or Federal Bureau of Investigation,
pending resolutions of issues with other federal agencies, and on one rare occasion, an extension of a comment
period because of an unusual degree of uncertainty with respect to an applicant’s ongoing restructuring efforts.
2