Congress Weighs In on Megamergers

Massachusetts Congressman Edward Markey blames federal regulators for the planned megamergers that will shrink the pool of big U.S. phone companies. The Democrat, a ranking member on the House Subcommittee on Telecommunications and the Internet, says the FCC ‘closed the door’ on long-distance phone companies’ ability to compete in the local residential market.

“The FCC’s decisions are predictably causing companies to merge and will result in fewer competitors in the marketplace and that’s bad news for consumers, high-tech workers, manufacturers and the prospects for further innovation,” Markey said in a statement Feb. 14, the day Verizon Communications Inc. announced plans to acquire MCI Inc. in a deal valued at $6.75 billion.

During a hearing March 2 before the House Committee on Energy and Commerce, Congresswoman Heather Murphy, R-N.M., warned of a duopoly emerging between the phone companies and the cable operators, The Washington Post reported. Some consumer advocates share a similar view. “The merger wave is drowning competition in the communications marketplace,” says Mark Cooper, director of research for the Consumer Federation of America. “Most Americans today face higher phone bills, fewer choices, and worse service quality as a direct result of the massive industry consolidation we have seen in recent years.”

Members of the House of Representatives who guide telecommunications policies, however, support the mergers. Texas Republican Joe Barton, the chairman of the House Committee on Energy and Commerce, and Republican Fred Upton of Michigan, the chair of the telecom subcommittee, have expressed support for the planned mergers combining Sprint Corp. and Nextel Communications Inc.; AT&T Corp. and SBC Communications Inc.; and MCI Inc. and Verizon Communications Inc.

The “once ‘unthinkable’ merger of AT&T and SBC is now very realistic,” Barton says. “AT&T is a different company than it was 10 years ago. AT&T and SBC have complementary assets … . The same logic applies to the Verizon-MCI deal.”

You won’t find SBC Chairman and CEO Ed Whitacre arguing with that assessment. In testimony before the House, Whitacre says the AT&T-SBC combo is a “natural and healthy evolution of a dynamic, competitive industry that is light-years removed from when the last federal telecom law was enacted in 1996.” Citing anecdotal evidence, SBC’s chief says there are more wireless subscribers than traditional phone lines in the United States.

For years, Whitacre and his peers stayed away from acquisitions as competitors like MCI faced accounting scandals and restructured under record bankruptcies or liquidated during a period in which an estimated $2 trillion in equity evaporated.

Much has changed even over the last year. Until the summer, AT&T and SBC were heated rivals in the consumer phone market as the two giants assaulted each other’s bread-and-butter businesses. AT&T lost the battle. In a historic decision, it moved to stop marketing traditional phone service to consumers after a federal appeals court struck down wholesale network rules that had laid the foundation for local phone competition and had been the subject of court appeals for eight years.

Of course, AT&T has faced a number of other pressures. The Bedminster, N.J., company with roots dating back to the invention of the phone has been bleeding billions of dollars in revenue for years, and its decision to spin off its cable TV and wireless businesses were arguably grave mistakes. AT&T Wireless is now part of Cingular Wireless, the No. 1 wireless carrier owned jointly by BellSouth Corp. and SBC. Comcast Corp., the No. 1 cable operator, owns AT&T Broadband.

AT&T Chairman and CEO Dave Dorman says revenue at Old Ma Bell declined from $49.6 billion in 1999 to $30.5 billion in 2004.

MCI, which has been the subject of a bidding war between Verizon and Qwest Communications International Inc., is in the same predicament as its traditional rival. Annual revenue at the carrier dropped 15 percent to $20.7 billion, and the former WorldCom expected revenue in 2005 to fall by 10 percent to 14 percent.

AT&T and MCI are still giants in comparison to the hundreds of smaller phone companies scattered across the United States. Although they have retreated from the consumer marketing wars, AT&T and MCI continue to support millions of local and longdistance residential phone customers.

MCI has more than 3 million combined local and long-distance residential phone customers, says an MCI spokesman, and the majority of the company’s roughly 15 million customers are residential subscribers. AT&T reported about 24 million standalone long-distance and bundled customers in its consumer division at the end of the fourth quarter; and it ended the year with approximately 4.2 million local residential phone customers.

Some analysts predict regulators will require significant divestitures as part of the big mergers. Qwest Chairman and CEO Richard Notebaert used that scenario to his advantage in his bid to convince MCI to accept Qwest’s $8 billion. As of early March, MCI was reevaluating Qwest’s revised offer.

“Qwest is confident that the significantly smaller footprint overlap … in a Qwest/MCI combination will lead to fewer and less extensive divestiture demands from regulatory agencies and will avoid the industry concentration and public policy issues the Verizon/MCI merger presents,” he wrote in a letter to MCI Chairman Nicholas Katzenbach.

It likely will be several months before state and federal regulators approve all the mergers. AT&T and SBC began the process for regulatory review of their planned merger in February, one month before FCC Chairman Michael Powell planned to leave the agency after having served at the commission since 1997 under President Clinton.

AT&T and SBC, which had combined 2004 revenue of $71.2 billion, say the combination will enhance competition in the telecommunications industry and strengthen national security by continuing to support such government agencies as the Department of Defense and the White House. AT&T chief Dorman also said in testimony the combination would “establish a world leader in advanced communications services” at a time when the United States is lagging behind other countries in the penetration of highspeed Internet subscribers.

The megamergers also could set up a type of rivalry the competitive industry long has sought - a war between the Bell brothers. Following the mergers, the Bells are going to battle for corporate customers in each other’s territories and the fight could spread to the residential market, according to analysts and executives of the companies. AT&T has rolled out Internet phone service in roughly 170 markets in 39 states and the District of Columbia, extending into territories beyond SBC’s local turf of 13 states.

“With this merger, the combined company will be competing for large business customers across the nation and very much in the local service territories of the other Bell companies,” Dorman said before the House Committee on Energy and Commerce. “They will have to improve their services, both in their incumbent regions and beyond, if they are to remain competitive. And the combined company will continue to develop AT&T’s VoIP service, which is designed for residential customers throughout the nation in direct competition with the Bells’ local service offerings.”

Not everyone is convinced the Bells will compete with one another following the mergers. Cooper, of the Consumer Federation of America, says the Bells have made similar promises under previous acquisitions. “It is always the next merger that they claim will unleash competition, but it never does,” he says.