FCC Okays Telecom Mergers With Conditions

The U.S. Federal Communications Commission (FCC) on Monday approved two giant telecommunications mergers with conditions that include holding some rates steady and offering “naked” DSL (Digital Subscriber Line) broadband service.

With the FCC approvals, Verizon Communications Inc.’s acquisition of rival MCI Inc. and SBC Communications Inc.’s purchase of AT&T Corp. are ready to go forward pending approval from a handful of states. Last Thursday, the U.S. Department of Justice (DOJ) approved the mergers under the condition that the two merged companies divest fiber-optic network facilities in several major cities.

Among the conditions imposed by the FCC and accepted by the companies, the carriers committed to offer DSL without circuit-switched telephone service to subscribers within their coverage areas. They agreed to provide the service within 12 months of the closing of each merger, according to an FCC statement. The carriers also committed not to increase the rates for wholesale DS-1 and DS-3 local private line services paid by existing customers of AT&T in SBC’s regions or customers of MCI in Verizon’s regions. They also agreed, for three years, to maintain settlement-free peering arrangements with at least as many providers of Internet backbone services as they did on the closing dates of the mergers.

The FCC had originally been scheduled to take up the mergers in a Friday morning meeting, but the meeting was rescheduled three times that day before finally being switched to Monday. The commission, which should have five members, currently has two Republicans and two Democrats and an unfilled Republican seat, and commissioners reportedly couldn’t agree on conditions to include with the merger approvals.

All four commissioners agreed on Monday to let the mergers go forward. FCC Chairman Kevin Martin said the deals advance the agency’s goals for competition, greater broadband availability and public safety.

“It is my expectation that these mergers will only increase the incentive and ability of the merged entities to invest in broadband infrastructure and spread the deployment of advanced services to all Americans,” Martin said in a written statement.

The concessions that the would-be mega-carriers made were small, said Frank Dzubeck, president of Washington, D.C., telecommunications consultancy Communications Network Architects Inc.

“There isn’t a board of directors in the world that isn’t smiling over what they gave away,” Dzubeck said. For example, agreeing to offer DSL without local phone service and accept caps on DS-1 and DS-3 rates affect traditional voice and leased-line businesses that are now fading, he said.

The requirement for settlement-free peering does prevent the carriers from imposing high peering charges to keep out traffic from other service providers, he said.

The Department of Justice’s divestiture requirements won’t significantly hurt the newly merged companies because they have redundant connections in the affected cities, Dzubeck said.

SBC announced in January a plan to acquire AT&T in a stock deal worth about US$16 billion. After a bidding war starting in February, MCI’s board in May approved a bid of about $8.4 billion from Verizon, spurning offers from rival carrier Qwest Communications International Inc.

The two mergers will give more enterprise and international focus to both SBC and Verizon, the world’s two largest telecommunications carriers in terms of annual revenue. Verizon ranked 14th on the 2005 Fortune 500 list of the world’s top revenue-generating companies, while SBC ranked 33rd. AT&T was the third largest telecom carrier on the list, while MCI was fifth, just behind BellSouth Corp.

The American Antitrust Institute, a Washington, D.C., think tank that promotes business competition, criticized the DOJ’s approval of the mergers, saying the conditions required by the agency will not go far enough to protect small telecom customers. While the required divestitures may provide some pricing competition in the large-business market, the DOJ conditions will not prevent a powerful duopoly, “to the detriment of the ordinary consumer,” Jonathan Rubin, senor research fellow at the institute, said in an e-mail late Thursday.

Verizon and SBC are two of the four remaining regional Bells after the U.S. government broke up the old AT&T in the mid-1980s, and the two have little history of competing in each other’s territories, Rubin said.

“The volume of traffic handled by these two mega carriers will greatly dwarf the next largest competitor,” Rubin added. “This puts all users of the Internet at the mercy of the two giant post-merger firms which will control the lion’s share of Internet traffic … The American consumer and small business are likely to find themselves at the mercy of one giant network or the other.”

Earlier this month, six communications companies joined the Ad Hoc Telecommunications Users Committee, representing high-volume business customers, in calling for a range of conditions to be placed on the mergers. The group, including MCI suitor Qwest and XO Communications Inc., asked the FCC to require, among other things, the two merged companies to reduce rates for high-speed DS1 and DS3 circuits by 50 percent, and to allow AT&T and MCI customers to void their contracts without paying a penalty.

In March, consumer advocacy group Consumers Union and the American Antitrust Institute announced opposition to the mergers, saying the two deals will raise prices and squeeze out smaller competitors.

By Stephen Lawson – IDG News Service (San Francisco Bureau)