Alliance: Put Brakes on Mergers

In a regulatory battle of David versus Goliath, a group of telecom companies has united to oppose planned megamergers that would help two regional phone giants grow stronger while ending the sovereignty of AT&T Corp. and MCI Inc.

Former FCC Chief Economist Simon Wilkie is among a team of experts retained by competitive telecommunictions providers to oppose planned megamergers that would end the sovereignty of AT&T Corp. and MCI while helping the regional Bells grow stronger.

The coalition representing XO Communications Inc. and five other telecom firms has assembled a team of experts whose job is to compile a mountain of data showing the big mergers are anticompetitive. Other members include Broadwing Communications LLC, Covad Communications Group Inc., Cbeyond Communications, Eschelon Telecom Inc. and SAVVIS Communications Corp.

“The group came together largely to share resources,” says Brad Mutschelknaus, a partner with the law firm of Kelley, Drye & Warren LLP, and who is involved in the coalition.  “Clearly to oppose mergers of this size … is a major undertaking and I think there is a sense that no one company has the resources to make a serious effort on its own.”

The FCC will spend at least six months reviewing the planned mergers, beginning with SBC Communications Inc.’s $16 billion bid to acquire AT&T. The FCC, Department of Justice and state public utility commissions are participating in the review of a merger that would bring pieces of the old Bell monopoly back together.

The DOJ has opened an investigation into the AT&T and SBC pact to examine the effects on competition and how the transaction would impact consumers, but the documents the agency reviews are confidential. Documents filed with the FCC about the proposed merger are public.

A team of experts, including renowned litigator Gary Reback, who is credited for inciting the DOJ to file an antitrust suit against Microsoft Corp., has been retained to help persuade the federal government to block the mergers or impose a number of conditions that would protect the interests of competitors like XO. Former FCC Chief Economist Simon Wilkie and former FCC General Counsel Christopher Wright also are part of the team.

In 2000, the DOJ moved to block the combination of WorldCom Inc. and Sprint Corp. The DOJ said the merger would have violated antitrust laws by curtailing competition in numerous markets.

Some observers argue the pending mergers also would concentrate market power in the hands of too few companies. The American Antitrust Institute, a Washington, D.C. think tank opposing the mergers, estimates an AT&T-SBC combination would control 42.7 percent of revenue in the wireline business market while MCI and Verizon Communications Inc. would comprise 35.6 percent of sales if they teamed up as planned. Consequently, SBC and Verizon would control a combined 78.3 percent of the business wireline revenue following the mergers, according to AAI.

“AAI arrives at these numbers by narrowly defining the “enterprise business marketplace” and ignoring dozens of companies that while not traditional “phone companies” still compete aggressively to provide telecommunications services to large business customers,” adds Verizon spokeswoman Christy Reap.

Several think tanks and research firms, including the Washington, D.C.-based Precursor Group, expect regulators to approve the mergers. “We don’t believe there is much chance the government will block either merger, but there is a reasonable chance they could be subject to conditions,” says Scott Cleland, CEO of the Precursor Group.

Russ Merbeth, federal counsel for Eschelon Telecom, says the mergers would eliminate two of the regional Bells’ biggest rivals:  AT&T and MCI. “Two of the biggest competitive players are basically being taken out,” Merbeth says of AT&T and MCI.  Competitors say the mergers could severely hamper their ability to reach U.S. businesses. Apart from the Bells, AT&T and MCI have been the primary suppliers of network infrastructure to competitive carriers supporting medium and large businesses, Mutschelknaus says.  A federal ruling granting the Bells relief from leasing their networks to competitors at government-mandated rates was partly based on the grounds that their smaller rivals have the option to purchase network components - including transport and local loops extending to businesses - from AT&T, MCI and other carriers. “The whole underpinning of that order has been junked,” Mutschelknaus says. The ruling is before the U.S. Court of Appeals for the District of Columbia Circuit.

Some telecom providers competing with the Bells say the mergers threaten to wipe out the progress they have made over the last several years. The telecommunications providers united to oppose the mergers “because we were very concerned the market we have spent the last eight years … opening to competition will be remonopolized,” says Heather Gold, senior vice president of government relations with XO. “They are trying to put Humpty Dumpty back together again.”

AT&T and SBC don’t see it that way.

“The operations of the two companies are largely complementary. AT&T is focused primarily on serving national and global enterprise customers with sophisticated needs while SBC chiefly addresses the needs of residential customers and smaller and regional businesses whose operations are primarily inside SBC’s 13-state region,” AT&T and SBC stated in a joint filing with the FCC.

What is more, AT&T Chairman and CEO Dave Dorman says the merger could foster a rivalry between the Bells in the enterprise market and even provoke competition among the regional giants for consumer dollars since AT&T has rolled out Internet phone service to homes across the country.

Critics say they have heard such empty promises before. SBC and Verizon both own properties in California and Texas, yet XO’s Gold asserts they do not go outside their territories to compete head-tohead.  Perhaps that is one stipulation the federal government would impose as a condition of the mergers - requiring the regional phone companies to end their sibling alliance and confront each other in the market.

Their smaller rivals say they aren’t counting on it, though.