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Document 77 of 133.

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November 8, 1999, Monday

COMMITTEE: U.S. SENATE COMMITTEE ON COMMERCE, SCIENCE AND TRANSPORTATION

HEADLINE: HEARING ON TELECOMMUNICATIONS MERGERS

LOCATION: 253 RUSSELL SENATE OFFICE BUILDING NOTE"NOT AN OFFICIAL TRANSCRIPT. This is an unofficial transcript from a recording of a public event or proceeding and does not constitute an official transcript of the event or proceeding. No assurances are made as to the accuracy and completeness of this transcription, and the rules and practices of the particular agency or entity involved may permit corrections, revisions, or other alterations to the original material."

TIME: 9:30AM

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NAME: SPEAKERS:
U.S. SENATOR JOHN MCCAIN (R-AZ), CHAIRMAN
U.S. SENATOR TED STEVENS (R-AK)
U.S. SENATOR CONRAD BURNS (R-MT)

U.S. SENATOR SLADE GORTON (R-WA)

U.S. SENATOR TRENT LOTT (R-MS)

U.S. SENATOR KAY BAILEY HUTCHISON (R-TX)

U.S. SENATOR OLYMPIA J. SNOWE (R-ME)

U.S. SENATOR JOHN ASHCROFT (R-MO)

U.S. SENATOR WILLIAM FRIST (R-TN)

U.S. SENATOR SPENCER ABRAHAM (R-MI)

U.S. SENATOR SAM BROWNBACK (R-KS)
U.S. SENATOR ERNEST F. HOLLINGS (D-SC), RANKING MEMBER
U.S. SENATOR DANIEL K. INOUYE (D-HI)
U.S. SENATOR JOHN D. ROCKEFELLER IV (D-WV)
U.S. SENATOR JOHN F. KERRY (D-MA)
U.S. SENATOR JOHN B. BREAUX (D-LA)
U.S. SENATOR RICHARD H. BRYAN (D-NV)
U.S. SENATOR BYRON L. DORGAN (D-ND)
U.S. SENATOR RON WYDEN (D-OR)
PANEL I
HONORABLE WILLIAM KENNARD, CHAIRMAN
FEDERAL COMMUNICATIONS COMMISSION
HONORABLE ROBERT PITOFSKY, CHAIRMAN
FEDERAL TRADE COMMISSION
PANEL II
MR. SCOTT CLELAND, MANAGING DIRECTOR
LEGG MASON PRECURSOR GROUP
MR. PAUL GLENCHUR, DIRECTOR
CHARLES SCHWAB WASHINGTON RESEARCH GROUP
MR. GENE KIMMELMAN, CO-DIRECTOR
CONSUMERS UNION
MR. MIKE MCTIGHE, CEO, GLOBAL OPERATIONS
CABLE AND WIRELESS
MR. JOHN SIDGEMORE, VICE CHAIRMAN
MCI/WORLDCOM

LENGTH: 21805 words

PROCEEDINGS

MCCAIN: Good morning. Today the Commerce Committee meets to examine the implications of the wave of megamergers taking place in the telecommunications industry.

Let me thank our witnesses for agreeing to share their perspective with us this morning.

Our first panel will consist of our government witnesses, William Kennard, chairman of the Federal Communications Commission, and Robert Pitofsky, chairman of the Federal Trade Commission, both of who are well-known to this committee, very well-respected and highly regarded, and we are grateful that they would take the time to be with us this morning.

Following their testimony, a second panel will present the views of a cross-section of nongovernment interests. Representing the telecommunications industry are Mike McTighe, chief executive officer of Global Operations, Cable and Wireless, and John Sidgemore, vice chairman of MCI/WorldCom.

Scott Cleland, managing director, Legg Mason Precursor Group, and Paul Glenchur, director, Charles Schwab Washington Research Group, will represent the investment community on the second panel. And Gene Kimmelman, co-director of Consumers Union, will testify to the interests and concerns of consumers, as he has so capably done in virtually every telecommunications hearing I've held since I became chairman of this committee. Some allege that he is a member of this committee.

(LAUGHTER)

I stoutly reject such an allegation.

And welcome to you all. I look forward to your views and response to our questions.

Let me briefly set the stage for while we're meeting today. Anybody who pays attention to the headlines can reel off a list of recent telecom industry megamergers: SBC-Ameritech; Bell Atlantic- NYNEX-GTE; U.S. West-Qwest; MCI-Worldcom and MCI/WorldCom-Sprint; Time-Warner-Turner; and of course, AT&T-TCI-Media One.

Huge as these deals are, they represent only a fraction of the consolidation that has taken place in the telecommunications industry. As Chairman Pitofsky notes in his written testimony, since 1995, the number of telecom mergers filed for government approval has increased almost 50 percent, and their combined dollar value has increased eightfold.

Why the sudden urge to merge? Part of the credit goes to the 1996 Telecommunications Act. By redrawing the ownership and competition rules that govern the industry, it has created incentives both intended and unintended for companies to merge.

Also powering these mergers are the growing globalization of commerce, the advent of digital convergence, and the general state of the American economy.

As a result of all these factors, telecommunication companies are restructuring to align themselves to better compete using one of two alternative business strategies. Some are focusing on strengthening their positions in one specific core market, while others are expanding to compete in new markets.

Either way, most Americans tend to view increased concentration of control as a negative, and unfortunately this is often the case, at least for the average consumer. For while merging industries enjoy the cost-saving benefits of increased efficiency, the average consumer doesn't always reap the benefits of lower prices and better service.

These worries are already apparent in the context of telecommunications mergers. We worry whether increasing consolidation in the radio broadcasting industry will homogenize radio programming. We worry whether Bell company mergers will ultimately create only two surviving companies, Bell East and Bell West. And we worry whether AT&T will be reincarnated as Ma Cable, dominating the markets for voice, video and high-speed data services.

There is another valid reason why we disfavor undue industry concentration. The more industry becomes consolidated, the harder it is for new companies to enter the market, or for small companies already in the market to survive. This challenges a bedrock principle of our free enterprise system -- that every business should have a fair opportunity to enter the market and to succeed or fail based on initiative and hard work.

And if small businesses cannot compete in the telecom market in the Information Age, what stake will small businesses have in our economy as a whole?

Unfortunately, these valid concerns sometimes prompt the wrong responses. For example, government sometimes confuses the notion of "leveling the playing field" with "reconstructing the stadium." That is, instead of making sure that incumbent firms can't exercise the power to eliminate competition, government sometimes tries to deprive incumbent firms of virtually any advantage of incumbency.

Similarly, in an attempt to preserve ownership opportunities, government tends to retain outmoded ownership restrictions or adopts regulations creating new services that the market does not need and will not support.

Have we reached the point at which further industry mergers should be regarded as unthinkable? If not, what different standards, if any, should apply to telecom industry mergers in the year 2000 and beyond, as the industry becomes more concentrated? Who should apply these standards and do they become harder or easier to articulate and enforce?

And finally, of course, there is the most important question of all: Who is being benefited by these mergers? And what more must we do to assure that all Americans can enjoy these benefits?

And so the Commerce Committee meets today to examine where the current trend of telecom mergers is taking the industry, what it all means for small businesses and for the average consumer, and what government's response should and should not be.

This may not be the last hearing we have on this issue, but I thought it was very important as we are winding down here to at least start in our proper and appropriate oversight responsibilities of this committee. This is very, very interesting, exciting, stimulating and incredibly unusual activities that are taking place, the likes of which have probably not been seen in history or at the time of the early stages of the industrial revolution.

But therefore, I view this hearing as one of education and information, and I believe that in the future, we need to have additional hearings to determine what, if any, actions the Congress or what involvement the Congress of the United States should have.

I'd like to thank Senator Wyden and Senator Bryan for being here. Senator Wyden.

WYDEN: Thank you, Mr. Chairman, and let me begin by commending you for taking on a series of issues that's especially important to consumers. I will tell you, Mr. Chairman, I hope that this will be just the beginning of an effort by this committee to examine the impact of mergers on our economy. Among my responsibilities on this committee is jurisdiction over the Federal Trade Commission, which reviews mergers in a wide variety of industries providing goods and services that affect millions of Americans each day -- not just telecommunications, but oil and gas and pharmaceuticals and a wide variety of areas. It's not just telecommunications, but it's Barnes & Noble threatening small bookstores; Mobil and Exxon; BP and Arco; Alcoa and Reynolds Aluminum; Phelps-Dodge and others.

I hope that we will on this committee examine these questions more generally. My gut feeling is is that a fair number of these mergers do not threaten the interest of consumers -- more likely to be responsive to global competition, technology and productivity.

But I do think a relatively small percentage of these mergers are truly serious for consumer interests. And of those that represent a problem, a disproportionate percentage are in the telecommunications sector.

It's becoming clear to me from the merger surge in telecommunications that what's needed are some new rules of the road for the information superhighway. In the past, for example, regulators tended to find problems mostly in cases where merging companies were direct head-to-head competitors. For example, the proposed deal between MCI/Worldcom and Sprint is the kind of merger that's always brought antitrust scrutiny. But especially with high- tech and new economy industries, the old approach to merger review doesn't cut it anymore. Bell-Atlantic and NYNEX were never direct competitors because for years they were regulated monopoly utilities. But after deregulation, they could have been competitors if the merger hadn't gone forward.

Now it's hard to measure this loss of potential competition from the marketplace, and that makes it hard for regulators to hold up mergers that only reduce potential, not actual, competition. Yet these same regulators are willing to allow mergers between U.S. companies to go forward when the merging companies can point to potential overseas competition that might come into U.S. markets.

So I want to wrap up with a few theories that we might examine. First, if potential overseas competition is a valid reason to let these mergers of U.S. telecommunications firms go forward, then the loss of potential domestic competition also should be an equally valid reason to hold up mergers in some other cases. One theory I'd like to examine is exploring whether a more consistent standard should be applied when evaluating the impact of mergers, both pro and con, of potential competition.

A second concern, besides losing potential competition, is combinations like Bell-Atlantic and NYNEX can also mean the loss of critical information necessary to protect consumers. For example, one way regulators can implement regulations is to compare local exchange companies in different parts of the country to see if one is overcharging customers. If they all merge, you can't do that anymore. In some cases, regulators have required divestitures or imposed conditions on particular mergers to address these concerns. But it's been ad hoc.

For example, in the SBC-Ameritech merger, regulators imposed conditions for providing broadband access to low income areas. That's a laudable goal. But these conditions raise other questions. Is this approach the best way to achieve universal broadband access? And how does it affect competition with unmerged companies that have no similar requirement? And what's going to happen to the customers of unmerged companies in low income areas?

Third, in the past regulators have generally been favorable towards vertical combinations that involve companies at different levels of the same industry, such as a manufacturer and a retailer merging together. In general, when both companies are in unregulated and competitive markets, these type of combinations make for efficient competition in the industry.

But when these types of mergers involve regulated companies or companies with tremendous market power, as is the case in telecommunications, the merger may need special scrutiny to ensure the benefits of greater efficiency outweigh the potential for unfair competition. When a company that already dominates one market merges with a company in a competitive market, then that combined company may be able to dominate both markets. A possible example there is TCI and AT&T.

In evaluating these mergers, how do we make sure that the merged company can't leverage its market power to compete unfairly in other sectors?

Finally, when evaluating the type of megamergers we're seeing today, should the regulators take a broader view that considers not only the immediate merger proposal, but how competitors in the industry are likely to respond. Even if the particular deal looks OK, another similar merger in the industry may go over the top in terms of too much market concentration and not enough competition. Regulators don't have to be soothsayers to be able to anticipate that one megadeal with prompt others to follow. In certain cases, it should be fairly obvious that once the door is open with one megamerger, others will follow. For example, the clear channel-AM/FM merger can be seen as an effort to remain competitive with a merged CBS-Viacom company.

Mr. Chairman, the merger surger may in fact be contagious. But I'm not prepared at this point to impose a quarantine on all mergers. I think it's time to look at some of the distinctions between what constitutes a merger that's in the consumer's interest and a set of factors that may constitute mergers that hurt consumers. So we want to look at these issues.

I appreciate your holding this hearing, and I hope that this will in fact begin a series of hearings so that we can in fact look at the enormous ramifications that mergers do have on our society. And I thank you.

MCCAIN: Senator Bryan.

BRYAN: Thank you very much, Mr. Chairman. Let me join with my colleagues in commending you for your leadership in having this hearing. We will hear shortly from the chairman of the Federal Trade Commission, but I think in his prepared statement, there is an interesting statistic that I think underscores what the chairman -- what you have said, as well as what Senator Wyden has said, and that is he goes on to point out that there has been an unprecedented merger wave in this country. In fiscal year 1999, we received almost 4,700 Hart-Scott-Rodino filings. That is nearly three times the number that we received only four years ago -- his statement.

Mr. Chairman, we had a similar situation at least in terms of the numbers of mergers and combinations that occurred in the last century. That led to a whole regulatory structure that protected consumers from unfair combinations -- the Sherman Act, the Clayton Antitrust Act. I'm not suggesting that the merger wave that we have seen in the last decade suggests that we need some type of new regulatory model or constraint. But I think it does raise some serious questions, and hopefully we can get some of the answers this morning.

There is no question, at least if you follow the television ads, that it appears that long distance carriers are highly competitive -- ad after ad after ad of one company competing against another. Less clear, Mr. Chairman, in my judgment, is the situation with respect to local service.

We are fortunate in Southern Nevada -- Sprint does a fine job in terms of the technology and the quality of the service that they provide. But I must say I have some questions in terms of what are the long term implications of these mergers? Does the consumer benefit? Are there some things that we ought to be concerned about down the road? And I would hope that we might get some of those answers this morning.

You know, the Congress in its enactment of the 1996 Telecom Act I think expected a number of things to occur, but its underlying premise was to generate more competition. I think that has occurred in some aspects of the telecommunication industry. Regrettably, I think that has not been the case with respect to local service generally.

And so it is not without precedent that our legislative enactments create the doctrine of unintended consequences. I don't know whether that is true in this case, but our first two witnesses I think can provide us considerable insight into these questions, and I look forward to hearing their testimony. And again, Mr. Chairman, I thank you for your leadership in providing us with this hearing.

MCCAIN: I thank my colleagues for being here. I thank the witnesses for being here. I don't know who is senior here, but if we go by age, Mr. Pitofsky, I think we would start with you.

(LAUGHTER)

PITOFSKY: Thank you, Senator. Mr. Chairman, members of the committee, I...

MCCAIN: It's something I've become more and more cognizant of.

PITOFSKY: So have I. It seems to happen to all of us.

I'm really delighted to be here and to present testimony of the Federal Trade Commission on this extremely important subject of mergers, and especially mergers in the telecommunication industry.

As each of your opening statements pointed out, there is a remarkable merger wave going on in this country -- the most active in terms of the percentage of national assets since the end of the 19th century.

In each of the last two years, the department and the Federal Trade Commission reviewed roughly 4,700 mergers. In 1998, $1.6 trillion in assets were scooped up in merger activity. When I say 4,700 mergers, by the way, we only look at mergers where the acquired asset is valued at $15 million. So we're talking about fairly substantial deals.

Nevertheless, I do not believe that the merger wave -- the 4,700 -- is the problem. Rather, I think it's a symptom of a successful, unusually dynamic economy. A lot of these mergers are reactions to global competition -- firms trying to position themselves to compete in an increasingly global market. Many of them involve high-tech firms where there's a lot of moving around, a lot of changing, a lot of restructuring. And of course, many of these mergers are a response to deregulation, including the wave of mergers in the telecommunications field.

We challenge about two percent of all the mergers that we -- "we" being the department and the FTC. That's a good deal more than the 1980s, but not too different from averages over recent decades.

The problem, I think, is not the 4,700 mergers. It's the increasing number of megamergers involving very large firms, usually often direct competitors at the top of their markets. We find mergers being proposed among firms that are numbers one and two in the market, one and three, two and three. And that's a little different. I think that's a change from what we saw 10 and 20 years ago. And I think there's some of that that's going on in telecommunications as well.

Now I should say that most telecommunication mergers are handled by the Department of Justice, certainly the long distance instances, the ARBOX (ph) and so on. We have traditionally taken the lead with respect to cable, and I thought I would talk about that a little bit. We have challenged several instances in which there were cable overlaps, although in most regions of the country there's really only one cable company. But if there were two and they try to merge, we have successfully challenged those transactions.

The most important and complicated case that we handled in this area had to do with the proposed TCI-Time-Warner-Turner merger. It was a very complicated transaction, but reduced to essentials, the merger would have produced at the programmer's level -- the people who create programming for cable and TV -- 40 percent market share, and at the distribution level, 44 percent market share. Those are very high. It was essentially a vertical merger, but those are still very high market shares.

Step one is -- and incidentally we settled the case with an elaborate regulatory order -- step one was to ensure that TCI essentially stepped out of the deal. And they did that by giving up voting rights in the stock that they would have owned in Time-Warner. Step two was slightly unusual for us, and that was a regulatory order which dealt with the possibility of discrimination against the smaller companies that the chairman mentioned who were trying to get into this market.

The programmers were fearful of discrimination; that they would not have a fair opportunity to compete for space on the Time-Warner cable systems if they were competing with Turner materials; and the possible competitors of cable -- direct broadcast was the most obvious example -- were very concerned that they were fearful that they would not have access to programming.

What we did was introduce with the consent of the parties a regulatory order which provided that there should be no discrimination and that parties would be treated no differently whether they were part of that corporate family or not. I don't usually like orders like that. They're difficult to monitor. They're difficult to administer. In this case, however, I think it's probably worked out rather well. We have not received a complaint in the two-and-a-half years since we entered that order by any programmer or by any cable competitor that they've been denied fair access to material.

Finally, let me say a word about the standards that ought to be applied to telemarketing mergers. In one sense, it is not appropriate to have different standards for the oil industry, the steel industry, and communications industries. The Clayton Act doesn't draw any distinctions. On the other hand, I've always felt that the history of antitrust, the policy of antitrust is more than economics. It's more than dollars and cents. It's more than supply curves and demand curves. And therefore, when you're talking about telecommunications, cable, network, we must remember that we're talking about the marketplace of ideas. We're talking about elements that impact on the First Amendment.

When we look at a merger involving two firms in the defense industry, we take national security in to account. Judges have said, of course if we need this merger for national security purposes, I will take -- that's a factor that I would consider. Again, I don't think the standards can be different, but certainly we can give close scrutiny to mergers that impact on the First Amendment and the marketplace of ideas.

Finally, let me just share the comments of Senator Wyden that there is no more important issue on the economic side of domestic policy, certainly on the antitrust side, than this wave of mergers and this introduction in just the last few years of megamergers. I mean, we never saw $60 billion and $80 billion and $120 billion mergers until quite recently. Now we see them practically every several months. We thought we had the record merger at the FTC when Exxon and Mobil proposed a merger of $80-something billion. That record lasted for about four months.

It is an important issue and it deserves and merits the attention of this committee, and I'm pleased to compliment the committee on taking the time and effort to address these problems.

Thank you.

MCCAIN: Thank you very much, Mr. Chairman. Chairman Kennard.

KENNARD: Thank you, Mr. Chairman, and members of the committee. I too appreciate the opportunity to testify before the committee today on this important issue. It's also an honor to testify with Chairman Bob Pitofsky, someone who has been a leading thinker on these issues and someone whom I've admired for many years.

As you said at the outset, Mr. Chairman, these are extraordinary times for consumers in telecommunications. We are seeing glimpses of a future where phone lines will deliver movies, cable lines will deliver phone calls, and the airwaves will carry both. Economic indicators are up across-the-board for the industry. Over the past three years alone, revenues in the communications sector have grown by $140 billion, climbing to a revenue level of $500 billion in 1998 and creating over 160 million jobs during that period.

In the wireless industry, capital investment has more than quadrupled since 1993 for a cumulative total of over $60 billion. And now over 80 million Americans have a mobile phone.

As we see more competition developing in some of these sectors, we're seeing consumer welfare gain, particularly in the long distance marketplace. By the end of 1997, there were over 600 long distance providers competing for customers. We have seen prices for interstate long distance calls drop dramatically by approximately 35 percent since 1992, while prices for international calls have fallen by around 50 percent.

Although the -- we'd like to see more competition in the local phone sector, we're also seeing some encouraging signs. Wall Street is pouring money into the SELAC (ph) community. At the time that the 1996 act was passed, there were only about six competitive local exchange carriers with the market collectively of $1.3 billion. Today, there are over 20 publicly-traded SELACs (ph) with a market cap of over $35 billion. We're also seeing a lot of investment poured into the cable sector as that sector tries to compete in new market areas. Operators in the cable field have invested nearly $8 billion per year since 1996 to upgrade their systems. By the end of the year, it's estimated that 65 percent of homes passed by cable will have been upgraded, bringing more channels and enabling additional services such as high speed Internet access and cable telephony.

The cable industry is also driving residential broadband deployment, with the number of households connected expected to triple in 1999 to more than 1.5 million.

Now as we see this investment pouring into the industry and communications firms scrambling to provide new services, they're looking for ways to take advantage of economies of scale which can lead to lower prices and higher quality services. They see mergers as an important way to take advantage of changes in technology and changes in the marketplace and changes in the law.

Now as has been pointed out, some mergers are beneficial to consumers. But it's the FCC's to make sure that no transfer of control creates a conglomerate so large and so dominant that it kills competition and undermines the intent of the Telecommunications Act of 1996. The worries that were outlined by Chairman McCain in his opening statement are exactly true. We must make sure that this consolidation does not undermine consumer welfare. And it's the FCC's job to make sure that the promises that these merging parties make when they come before the FCC and argue that their merger is in the public interest are kept. We must hold these merging parties to their promises -- promises to the American consumer.

Now the Department of Justice and the FTC are, of course, charged with ensuring that the public reaps the benefits of a competitive communications marketplace. But those agencies have different laws. They apply differently in practice in the marketplace. The FTC and the DOJ administer the antitrust laws. The FCC is charged with ensuring that license transfers serve the public interest.

Now the FCC's review of these transactions is not an antitrust analysis cloaked in public interest rhetoric. It is a fundamentally different approach to viewing these transactions. The DOJ and the FTC do not duplicate the role of the FCC under the Communications Act, nor are they charged like the FCC with creating more competition. Their mandate is to protect existing competition from well-defined abuses, including mergers that substantially lessen competition and mergers that tend to create monopolies.

The FCC, by contrast, has the responsibility to make sure that no transaction will subvert the goals of the Communications Act. So we at the FCC have a statutory obligation to ensure that mergers will result in tangible benefits for American consumers, namely more choices, lower prices, better services, benefits for all American consumers.

Now when the FCC considers license transfers, it is acting like a court in its quasi-judicial role. In this capacity, the FCC follows procedures that are well-defined in the Administrative Procedure Act. The process is open. The FCC develops a public record. The FCC explains its decisions in writing and the FCC's decisions are subject to judicial review.

During my tenure as chairman, the FCC has been presented with mergers of breathtaking size and scope, which will affect consumers for many years to come. So I have insisted that the public have a role in these decisions. It is not possible to define the public interest without public participation, so I have insisted on an open process. I have insisted on a process in which we hold public hearings -- a process that allows many people who are affected by our decisionmaking, but who do not always have a voice in our decisionmaking, to be heard -- like state regulators and national and state consumer groups and small businesses.

I think it's important to put this process in context. Since the passage of the 1996 act, the number of mergers presented to the commission has increased to historic proportions. Never before have we been faced with the number and complexity of transactions to review, and we've had to handle these responsibilities with no increase in resources.

And frankly, I believe that much of the current controversy concerning the FCC's merger review role is a result primarily of one transaction -- the FCC's review of the SBC-Ameritech merger. That involved a proposal by one company seeking to acquire fully one-third of the telephone lines in the United States -- one-third of all telephone lines in this country. And that merger has profound implications for the future structure of the telecommunications industry and the ability of the FCC to fulfill its mandate to bring competition to telephone consumers as required by the act that you passed.

In reviewing that merger, we designed a process to ensure that the public would be heard, and that the pro-competitive benefits that the parties came forward and promised would be delivered would actually be realized by the public. And in thinking about our review of that particular transaction, I was going over the points that Senator Wyden made -- the four points that he outlined that should be considered in review of a merger. And clearly, the FCC looked hard at three of the four of those issues in the context of that merger -- the fourth one, leveraging market power into another area did not directly apply. But I assure you, Senator Wyden, that in the context of that transaction, your concerns that you stated earlier were indeed addressed.

Now having dealt with a number of mergers since the act was passed, including mergers like SBC-Ameritech, we have learned much about the process of handling these huge megamergers, and we have listened to concerns of the Congress, particularly concerns of Senator McCain and others, and we're in the process of developing procedures to ensure that the application of our public interest test is even more clear and predictable. I have charged our General Counsel Chris Wright (ph) to organize an intra-agency transaction team to streamline and accelerate the transaction review process, the primary goal being to bring more clarity, to better explicate our own case law on mergers, with written guidelines.

We also look at ways to leverage the specialized skills of the staff and to minimize the resources needed for processing the most complicated transactions. The team will also work to make the process even more transparent.

In conclusion, Mr. Chairman, these are indeed extraordinary times in the telecommunications industry. No one can predict with precision how this marketplace will develop. But of one thing I am certain: Unbridled consolidation in this field will subvert the aims of the communications laws to bring competition and deregulation to this marketplace. And unbridled consolidation will reverse the progress that we have made thus far toward competition and more consumer welfare.

So I respectfully suggest, Mr. Chairman, that now is not the time to strip away the FCC's historic authority to protect consumers. Now is the time more than ever before to make sure that any merger approved will serve the public interest.

And finally, on a somewhat related topic, I wanted to commend you, Mr. Chairman, for your leadership in introducing the Telecommunications Ownership Diversity Act. In this era of consolidation, we must continue to look for ways to ensure that small businesses, particularly those owned by minorities and women, have an opportunity to participate in this exciting marketplace. And I commend you and your colleague, Senator Burns, for recognizing that and introducing historic legislation.

Thank you, Mr. Chairman.

MCCAIN: Thank you very much, Chairman Kennard, and thank you for your endorsement of the recent legislation that Senator Burns and I introduced. I hope we can move on it. I think it's very clear that one of the unintended consequences that I referred to in my opening statement has to do with fewer and fewer minority-owned businesses and involvement in the telecommunications industry. That's not appropriate and we ought to give a level playing field to every American.

Mr. -- Chairman Pitofsky, because of its recent acquisition of TCI and other cable companies, according to Mr. Kimmelman, AT&T now serves 60 percent of all cable customers. Notwithstanding this, AT&T- TCI is now attempting to acquire Media One, which owns 25.5 percent of Time-Warner. How is this acquisition not at odds with the FTC's Time- Warner-Turner decision, the point of which was to separate these cable conglomerates?

PITOFSKY: It's a good question and I have not really looked into the more recent proposals. When you talk about market shares at that level, it certainly is a matter of concern. And while I haven't looked at these particular facts, I do know that our goal was to keep access open. If there's one shorthand way of looking at what we did in TCI-Turner-Time-Warner, it was access, access, access. And I would be -- I would want to look very carefully at the impact of that on access of these new proposals.

MCCAIN: Well, as you know in the Time-Warner-Turner, you were concerned that the combined company would leverage its programming market power to kill competition and distribution by denying competitors who must have cable channels at nondiscriminatory prices. Is this bring into play again your concerns?

PITOFSKY: It brings it into play. We'd want to look at it very carefully.

MCCAIN: In your testimony, you refer to the local telephone companies' cartel behavior and insulating themselves from competition by maintaining local exchange networks that are supposed to be, but may not effectively be nondiscriminatory. And you state that this can be a serious anticompetitive problem. Based on these views, could you analyze the competitive impact of the cable industry's attempts to bundle their high speed Internet service with their proprietary ISP and to insulate this arrangement from any type of open access requirement?

PITOFSKY: I'm not sure I fully understood the question. MCCAIN: In your testimony, you refer to local telephone companies' cartel behavior -- insulating themselves from competition by maintaining local exchange networks that are supposed to be, but may not effectively be nondiscriminatory. That's in your statement. Then what is the competitive impact of the cable industry's attempts to bundle their high speed Internet service with their proprietary ISP and to insulate this arrangement from any type of open access requirement? Do you believe that's the case?

PITOFSKY: Again, we haven't had an opportunity to look at that because those cases are at the DOJ and not at the FTC. If in fact a consequence of these transactions is to raise barriers to entry, deny access, then we're already -- we've taken the position in this industry that access is critical and I would expect that the department will take a very careful look at that issue.

MCCAIN: I thank you, Mr. Chairman. Mr. Kennard, in your statement you characterize a good merger as one in which the combined company can, quote "move more quickly into monopolized markets." In voting to approve the AT&T-TCI merger last February, you stated, and I quote: "I'm optimistic because the combined resources of AT&T and TCI surely will generate a very substantial effort to expand the choices now available to residential phone subscribers in TCI territories. I'm especially pleased by the commitment of AT&T Chairman Michael Armstrong that AT&T will offer service uniformly in all neighborhoods in every city it serves."

Did you impose any conditions on this merger to assure that AT&T does in fact move quickly to all-out competing for local residential telephone service? And did you impose any conditions on the merger to assure that AT&T does in fact offer this service universally in all neighborhoods in every city it serves?

KENNARD: Actually, Mr. Chairman, AT&T did make representations in the record that they would roll out telephone service and broadband services ubiquitously. And we did rely on those representations when they in fact filed their transaction and we issued an order granting it.

MCCAIN: And have they so far complied -- lived up to your optimism?

KENNARD: I think it's too early to tell. We're watching carefully and we will continue to monitor the roll out. I know that they are investing heavily in upgrading these systems, and it's my hope that they will be able to bring consumers new services -- telephone services in particular -- to compete against the incumbents in that market.

MCCAIN: Can you tell us what they're doing to comply with its commitment, to give TCI subscribers direct, nondiscriminatory access to the Internet service provider of their choice?

KENNARD: Well, we did not impose a condition in the merger that they provide nondiscriminatory access to ISPs. That was an issue that was raised in the merger, but the FCC decided ultimately that that particular condition would not be imposed.

MCCAIN: Chairman Kennard, it takes the FCC an average -- the FTC an average of about four months to issue decisions on merger cases. How long has it taken the FCC recently?

KENNARD: Well, it takes different amounts of time depending on the size and complexity of the transaction. On average -- we sort of have to look at this question in terms of the type of transaction involved. We deal with license transfers and approvals of that nature. The small ones go forward very quickly, in a matter of days or a couple of months. The more complex transactions -- the megamergers if you will -- take us longer. On average, if you look at the category of large mergers, they go through in about six months.

We have taken a lot longer in cases where we have these megamergers of huge size and scope involving many issues of first impression, and lots and lots of public interest. And there, as I stated earlier, I have made sure that we open up the process so that states attorney generals and state regulators, consumer reps, and others have an opportunity to be heard. And that takes longer.

MCCAIN: Finally, Chairman Kennard, in his testimony, Mr. Kimmelman states that the number of regional Bell operating companies has shrunk from seven to four. MCI and Worldcom have merged, now MCI- Worldcom is attempting to acquire Sprint, together representing the majority of long distance revenues. The majority of cable TV companies are either owned or operated by AT&T or in the process of being owned or operated by AT&T and the rest are busy making nice with each other in order to consolidate their service territories. Do you agree with Mr. Kimmelman's testimony?

KENNARD: I agree with Mr. Kimmelman that we should be quite concerned about the pace and the scope of consolidation that we're seeing in these markets. And if you look at -- just at the history of Bell operating company mergers since the act was passed, beginning with SBC-PacTel and then Bell-Atlantic-NYNEX and finally SBC- Ameritech, you can see in our decisions an increasing level of concern about the pace of this consolidation and also an increase in the nature and enforceability of these conditions that we've imposed to make sure that this consolidation doesn't subvert the goals of the Communications Act.

MCCAIN: This is a tough question for both of you to answer. How concerned should the Congress be?

KENNARD: I think the Congress should be very concerned. This is an area that has -- represents fully about one-third of our economy. It is producing a lot of economic growth and jobs, and that's a function primarily of competition -- companies being able to move into new markets. The last thing we want to see is for that engine of competition to be somehow squelched by monopoly power and consolidation. So I think we have to be very, very watchful in this area.

MCCAIN: Chairman Pitofsky, how concerned should we be? PITOFSKY: Very concerned. I agree with everything that Chairman Kennard has said. And I would just add this dimension. It's not just the question of where we are now, it's where we're going. And that's the hardest question for people looking at mergers and antitrust generally. You look at the first deal and you say: Well, that one's OK. We can live with that. Then the next people come along and say: Well, you cleared that deal, what about ours? And then the third and the fourth and the fifth.

One must ask the question particularly in this sector of the economy: Where is it all going to end? And I think Congress should be very concerned with that question.

MCCAIN: Senator Wyden.

WYDEN: Thank you, Mr. Chairman. Both of you have been excellent. Bob Pitofsky's last point raises the question that is central to me in this communications area. And I think that when you look at some of these deals in the communications area, you're talking about what is potentially a threat to the First Amendment. And I think we're going to have to start factoring in the First Amendment in a very specific way as we look at these deals -- Time-Warner-Turner, you know, 40 percent of the cable programming being merged. As you know, the reason I pushed you all so hard on the Barnes & Noble- Ingraham (ph) merger is I was very troubled about what would happen if a retailer and a wholesaler merged, and I thought we'd lose a lot of the diversity of ideas in our country.

So my first question to you, Mr. Pitofsky, would be: How should antitrust regulators incorporate First Amendment concerns in decisionmaking, given where we're headed?

PITOFSKY: Well, I think, unless Congress wants to direct us otherwise, I think it's through close scrutiny. I think that one should simply pay more attention when communications, news and so forth is involved. I thought we did that in Barnes & Noble. Incidentally, we did that in Time-Warner. One of the conditions of the order was that there would be a second 24-hour news service introduced because we were concerned that a combination of CNN and Time-Warner would produce such a dominant player that others would not compete. And in fact, a second and then a third new service came into play.

Is that because a wholly different set of rules apply to networks and cable? No, I don't think that's fair. But we should be more alert, more sensitive, and give more careful consideration.

WYDEN: I obviously don't want to get you into the area of nonpublic information. But what can you tell us simply from a theoretical standpoint about the proposed CBS-Viacom merger, which would give the combined company control over broadcast television stations that reach more than 40 percent of the national audience, and in addition what they would get through cable interests. Set aside the matter of nonpublic information and if you can, touch on it in theory. PITOFSKY: Well, it's awkward for me. It's an ongoing -- not only is it an ongoing investigation, but it's not our ongoing investigation. It's the Department of Justice. So I think I probably should limit myself to the sort of thing I've said so far this morning, and that is, those are very large companies, very significant market power at both levels, and therefore, deserves the most careful and thorough review.

WYDEN: The next area I wanted to touch on were copycat mergers, which I think are getting to be an increasing problem as well.

What is your sense about what antitrust regulators ought to do if they foresee imposing conditions on a merger are going to cure an immediate antitrust problem with that merger but the likely effect will be that other companies in the industry follow up with, you know, copycats, we end up with more consolidation and less, you know, competition?

What I'm trying to do, in addition to the points I made earlier, and I appreciate Mr. Kennard's, you know, statement, is to try to set out what I think are some key new problems. The First Amendment is one that we touched on in the last minute or so, but copycat mergers strike me as another very serious one, and what is your sense about how this committee and the Senate ought to look at those?

PITOFSKY: Let me take the first shot at it and then I'll ask Bill to direct an answer to that.

I think, everything considered, it's the toughest call we have to make. And part of that is because there's two reasons why copycat mergers could be occurring.

One is everybody in the industry recognizes that the first merger was very efficient and sensible and pro-consumer, and therefore the trend toward concentration is really energized by the fact that the first merger was a good idea.

On the other hand, you have other copycat mergers in which the first firm achieves substantial market power and then the second pair and the third paid come to the conclusion that they have to be the same size as the first pair in order to compete in global markets or even in a domestic market.

You know, one of the things that they teach in the business schools these days, and I'm not sure it's such a great idea, is that you can't really be successful in a market unless you're number one or number two. And therefore I worry that the trend toward merger, the trend toward consolidation in some industries is motivated simply by a concern to have as much market power as anybody else in that industry.

And playing those two things off against each other is exceptionally difficult, especially when the first merger is one that the courts are very unlikely to strike down. And it's only because it'll lead to the second, third and fourth that you're concerned. WYDEN: Let me see if I can touch on one involving Microsoft decision. Some of the analysts have been arguing in the last couple of days that the Microsoft decision has set some limits for when a company can use marketplace power to compete in what amounts to another marketplace sector.

Again without forcing you into areas that are sensitive, if that's the case, how would you foresee it applying to cable companies or local telephone service companies with marketplace power in one area seeking to compete in other markets?

PITOFSKY: I too have seen the reports from Silicon Valley and elsewhere that's we're changing the rules of the game in the way in which we regulate large firms. The Federal Trade Commission sued and then settled with Intel. The Department of Justice has this long- running controversy, antitrust controversy with Microsoft.

I want to fundamentally disagree with people who say we're changing the rules of the game. On the contrary, I think what these cases are doing is reestablishing what fundamental rules under the Sherman Act really are. And I think in the long run they will help us encourage innovation rather than discourage innovation in high tech markets.

WYDEN: Mr. Kennard, let me ask you one about that noncontroversial matter in my home town involving AT&T and TCI and broadband. The Legg Mason analyst who's going to testify, I guess this morning, states, and I quote: "It's clear that the market doesn't demand a closed network in order to justify broadband investment."

And AT&T, TCI argue that open access to their cable network is going to dry up investment needed to upgrade the network. Now, WorldCom and Sprint and some of the local carriers have invested heavily in upgrades, so their networks can carry broadband and they all have open access requirements.

Given that my constituents feel so strongly, you know, about this, what is it about AT&T that it can't attract investment without a closed network?

KENNARD: Well, it's -- we've had many conversations, you and I, about this topic over this past several months, and I think it's fair to say that we agree on what the end game should be here.

I certainly want to see broadband deployed not only by the cable industry, but by many players -- in an open environment, in a competitive environment -- and we need to get those broadband pipes built quickly. It's important for the country, it's important for electronic commerce, it's important for us to maintain our world dominance in the Internet community.

And I would not dispute the fact that companies like AT&T, I think, would go ahead and deploy broadband even if you had some sort of open access regime. But I think the fundamental question is, is regulation necessary at this time, particularly when we have a very nascent industry, the broadband industry, and you have the prospect, the hope, that multiple players are going to deploy it, not only on the DSL platform, but also on wireless platforms.

And as Chairman Pitofsky stated I thought very eloquently in his testimony, when you're transitioning from a monopoly environment to a competitive environment there's always the urge to impose more regulation on the new competitors, the new entrants in those markets.

But I think that our goal as policy makers should be to try to promote competition and ease regulation on all of the players, and that's why I have advocated consistently that that's the approach we should take with respect to broadband deployment on cable, at least at this juncture.

If we find that consumer welfare is being undermined in some way or consumers lack choice, we will have opportunities to step into that marketplace and intervene. But I just don't think that now is the time.

WYDEN: Thank you, Mr. Chairman.

BROWNBACK: Thank you, Mr. Chairman. And thanks for holding this hearing. I think it's a very timely and very important hearing to hold. And thank the two chairman for coming up to testify and meet with us. I'm here in a capacity of listening and gaining input.

The last merger that took place involving Sprint's headquartered in Kansas and has a lot of direct impact on constituents of mine, so I have a concern not only for the impact it's having across the marketplace and legalities, but the impact it's having on constituents and job dislocation that could potentially happen there.

I'd like to ask, Chairman Kennard, if I could, a year ago we had MCI, WorldCom and Sprint, two, three and four, all competing in this long distance marketplace, and here we are a year later and all three of them are together.

You know, as you look at that fast year that took place, what levels of concern does that raise in your mind for the public interest of having those three major competitors in that long distance market merging together here in a short, fast year?

KENNARD: Well, Senators, as you know, that merger will soon be before the FCC, so I don't think it would be appropriate for me to forecast what the decision will be there.

But I will say that, as I've said before, I think that we should be concerned when the number two and three competitors in the residential long distance marketplace propose a combination like this before us. And so we'll be looking very carefully at that question.

BROWNBACK: I would think, you know, as we would look forward, we would be deeply concerned. If I could ask actually both of you, in looking forward, if we were to project out in three years, how many national full-service telecommunications providers do you anticipate that there will be and how many do you think, to provide adequate, aggressive competition, that there should be?

KENNARD: It's hard to predict at this point. We do know that companies are scrambling to gain economies of scale and provide national footprints so they can roll out bundled packages of telecommunication services. In many cases that's a good thing and that maximizes consumer welfare, and I think that trend will continue.

But I also think, and I hope, and we're working hard at the FCC to accomplish a situation where you have a number of national players, but also lots of niche players that are able to serve discrete market needs. That's why we've worked hard at the FCC to assist companies that want to -- smaller companies that want to get in and compete head to head against the large, incumbent, historic monopolies.

But I think the best way to answer your question is from a consumer point of view: What is best for the consumer? And that is, the consumer should be able to have a range of product choices, three, preferably four or more, in each product sector.

And so what we strive to do is make sure that consumers have choice in all of these different sectors, be it wireless, local, long distance, high speed Internet access or video. And we've accomplished that in some areas, long distance and wireless being probably the best examples, but we have a ways to go in the other areas.

BROWNBACK: So you would -- you would look for an optimal situation to be three or four competitors?

KENNARD: I would say optimal would be four or more in each product sector.

BROWNBACK: Is that something that you'll be pressing for as you look and put forward these orders and rulings that'll be shaping much of this landscape?

KENNARD: As a very general matter, yes, Senator.

BROWNBACK: Mr. Pitofsky, do you have a comment regarding that question of looking down the road where we would anticipate being and where we should be?

PITOFSKY: I share Chairman Kennard's sense.

Let me just say that one of the things we've learned compared to 30 or 40 years ago is you ought not to do this analysis on the numbers alone. There will be sectors where two or three are enough, there are others where you need five or six in order to be assured that there's vigorous competition and consumers will not be taken advantage of.

But certainly it's true in virtually every sector of the economy that when you get monopolies and duopolies, when you get just one or two firms, it's very unlikely that they're going to compete at a level that's optimum, that's going to serve consumers well. And therefore it's a rare case in which you don't try to prevent mergers that concentrate a market to the point where there are only two firms or maybe three left.

BROWNBACK: So you would look at it as more of a rolling, you wouldn't put a hard and fast three or four competitors in each place but would look at it in differing standards and differing parts of the industry?

PITOFSKY: Very much so. It depends on barriers to entry, whether it's a homogeneous product or not, what's the level of communication between the players and the market and so forth. There are about half a dozen, eight factors that you look to in addition. But I've always said that while numbers are not dispositive, as they may have been thought to be 30 years ago, it is the ramp that leads you into the analysis. And one must not forget how many players are left after the string of mergers takes place.

BROWNBACK: I think we need to look at the level of competition and the ability of consumers to be able to get some choices in their services, but obviously concerned about what impact it has on places and two constituents of Sprint and other facilities around the country that have built up large groups.

And I haven't stated one way or the other where I am on the merger, but just have a deep concern when people contact you, and calling wondering what's going to happen to them in the future is something that you folks watch clearly as well.

Thank you, Mr. Chairman.

MCCAIN: Thank you.

Senator Bryan.

BRYAN: Thank you very much, Mr. Chairman.

Chairman McCain asked each of you a question, how concerned should we be about these trends that we've been discussing. And, Mr. Kennard, your response was very concerned. Mr. Pitofsky, you said you joined in that.

If you're very concerned, I suspect that we ought to be very concerned and the American public ought to be very concerned about this.

Are you recommending any course of action that we should consider in the Congress that we have not done, either a review of the basic legislation that gives you the power to review or any other changes in law? What should we make of your very concern and what should our response be to that?

KENNARD: Well, Senator, I wouldn't presume to suggest any legislation to you at this time. All I would ask is that you continue to support agencies like the FCC, the FTC and the Department of Justice that are sort of on the front lines making sure that there is a strong counter force in government against this consolidation that has the threat of undermining what -- the gains that we've made in creating competition in these markets.

BRYAN: And when you say support, I take it you're talking about resources, financial support in terms of appropriation level. Any other kind of support?

KENNARD: Well, certainly just an affirmation that when the FCC goes out and seeks to protect the public interest in the context of these mergers that you are supportive of our efforts and understand that what we're trying to do here is not undermine the ability of these businesses to grow or to hamper their prospects, but fundamentally to support the competition that we have in consumer markets and ensure that consumers have the choice that we've been talking about today.

BRYAN: Chairman Pitofsky, your thoughts.

PITOFSKY: I would not -- I would urge that legislation is not the right way to go here. For over a hundred years we've had an unusual situation in this country. We have a Sherman Act that's two paragraphs long, a very short Clayton Act. Most of it is judge-made law. And I think we've done well in this field.

I must say now, and I haven't said it in the past, our resources are being terribly stretched by this merger wave, including mergers that are such enormous size that, frankly, we've never dealt with mergers like this before. The members of this committee have been very supportive of us and the commission has done reasonably well.

It's not that we won't look at the mergers, it's the virtually all of the other responsibilities of antitrust that we have are being pushed to the side by this merger wave.

We spend over two-thirds of all of our antitrust resources doing nothing but merger review. And I suspect in the present year that figure may be even higher because of the frequency and the size of the mergers that we're seeing.

BRYAN: I take it, Mr. Chairman, you're suggesting that we need to be much more attentive to your requests in terms of levels of appropriation to carry out these functions.

PITOFSKY: That would help.

(LAUGHTER)

Although I hasten to add...

BRYAN: I suspect it would, although this is not the committee that does that, as you know.

(LAUGHTER)

PITOFSKY: Well, but you have been supportive of us throughout... BRYAN: Yes.

PITOFSKY: ... and we really appreciate it.

BRYAN: Well, I think your point is well taken. If we're concerned, as all of us have shared these concerns, about what the implications are for us with all of these mergers that are occurring, it's incumbent upon the Congress to provide each of you the necessary resources to conduct that oversight function.

Let me follow up with a process question. That is we have, you know, the two of you and the Department of Justice involved in these decisions. Does the process itself -- I'm not now talking about the substance of the decision -- the process, is it working, do we need to revisit the process or are you comfortable with the process. Maybe start with you, Chairman Pitofsky, first this time.

PITOFSKY: Maybe I'm not the most objective about this. I think the process between the DOJ, the Department of Justice, and the FTC has never been better. We never investigate the same transaction at the same time, we clear transactions to each other much more promptly than we did in the past, we finish our investigations more quickly than we have in the past.

So that is not a system that's broke. And I'm sure we can do even better, but things are going very well in terms of that division of responsibility.

BRYAN: Chairman Kennard?

KENNARD: Yes, thank you, Senator.

I think the process is working reasonably well under very difficult strain. We at the agency have continued to process the many thousands of proposals that come before us.

I think that we've learned a lot in the past year or two on how to deal with these mega-mergers that present us with difficult questions of first impression. And we are working internally to come up with ways to handle the mega-mergers better.

We also have dealt with huge records in this merger. In the SBC- Ameritech transaction we had tens of thousands of pages of public comment. And we have -- our role, which is somewhat different from the antitrust agencies, is we have to develop a record, distill all of these facts into an order that will withstand judicial scrutiny. And so it is -- it's putting a tremendous strain on our resources, but we're coming up with better ways to do more with less, because that's all we can do at this time.

BRYAN: Later on this morning we're going to hear testimony that points out that SBC and Bell Atlantic have about two-thirds of the local phone lines in the country, that with AT&T's proposed acquisition that they will own about 60 percent of the customers in their field of endeavor, all of which tends to suggest that there is a real threat to continued competition and an incentive for more consolidation.

Is that a concern that you have? And if so, what action should be taken? Mr. Kennard?

KENNARD: It is a concern that we have had. I guess fundamentally what we're dealing with here is a marketplace that was historically governed by monopoly regulation, that kept all these companies into neat little regulatory boxes. A lot of those restrictions were taken away by the '96 act, and now many of these companies, including the largest companies in our country, want to leverage their economies of scale to compete in new markets.

Now, sometimes that's a good thing. If a cable company is able to aggregate its resources and capital and compete in rolling out broadband in competition with incumbent Bell companies, that's a good thing.

The question is, are consumers going to be harmed by historic monopolies that are allowed to get bigger? And that has really been the question that we have asked in all of these major proceedings, and that's why we've imposed conditions when we felt appropriate.

BRYAN: And the last question that I would have, after every Sunday you see some plays that are called in which the quarterback would say: You know, I wish I had the ball back.

Now, you all make some very, very tough decisions, and I think both of you are doing a very good job. I've been...

UNIDENTIFIED WITNESS: Thank you.

BRYAN: ... very pleased with the working relationship that we've had with each of you. But you're making these decisions and you're trying to make the judgment as best you can looking ahead in terms of what the implications are, but none of us have a Promethean vision.

What happens at the end of the day if you say, based upon the experience of a year or two, "Oops, I wish I had the ball back, I didn't fully understand"? And that's not to offer any pejorative observation, none of us can fully anticipate what the future. What do you do?

KENNARD: That's what the court of appeals is for, Senator.

(LAUGHTER)

BRYAN: But what can you do? Do you -- Chairman Pitofsky? I mean, you've made the approval and all of a sudden it doesn't work out like you thought it would.

PITOFSKY: Well, if we bring a case and we're wrong, then the courts will tell us so very promptly. You're asking, suppose we let one go by?

BRYAN: Yes. And you think -- you're doing it for what you think are all the right reasons, but, you know, year, two, three years down the road it's clear that in retrospect you'd never have done that.

PITOFSKY: Well, let me be direct. Technically, we could go back and challenge the mistakes that we've made. We could, under Supreme Court law, you can bring an enforcement action based on the circumstances at the time of the action, and that could be three years later. That's technically.

As a practical matter, it's not fair to the parties. They have to plan, they need what's called repose. And therefore if we make a mistake we live with it. And we -- I'm not aware of a situation in which we cleared a deal -- no, I'm afraid -- I wish that were true -- where we clear a deal and then we went back three, four, five years later and challenged it.

BRYAN: Chairman Kennard?

KENNARD: I would agree with Chairman Pitofsky. It's not really practical to go back later. You do the best you can and you try to develop as comprehensive a record and hear from as many people as you can and make your best decision.

Unlike some of the antitrust authorities, we have imposed conditions that give us some ability to maintain continuing oversight. So if promises made are not kept in the context of these mergers, we do have an ability to go in with our enforcement powers and try to rectify things.

But fundamentally I think you're left with the challenge of just not screwing up in the first place.

MCCAIN: Senator Dorgan.

DORGAN: Mr. Chairman, thank you very much.

You've been quizzed about a number of very important issues. Some of the headline mergers obviously are important and there will be other discussion about them today. I want to talk to you just for a moment, ask you a question some things that are happening beneath the headlines.

There are about 1,200 television stations in our country today. Twenty-five owner groups now own about 400 of those television stations. The top 10 radio groups in 1994, top 10 radio group ownership in 1994 owned 195 radio stations; they now own 1,647.

Let me say that again, because I think this is important. In 1994, the top 10 radio ownership groups owned 195 radio stations; now they own 1,647.

Now, when the Telecommunications Act came to the floor of the Senate I attempted to -- I offered an amendment to scale back the ownership limits and I actually won the amendment by about -- my amendment carried by about three or four votes. That was about 4:00 in the afternoon.

Then dinner intervened and several senators had some sort of epiphany over dinner and we had another vote on it, because someone had changed their vote and wanted to have it reconsidered, as is certainly legitimate in the Senate, and there was, as I said, this epiphany and I lost by three or four votes about four hours later.

I was convinced then and am convinced now that the lifting of the ownership limits was not in this country's interest.

Andy Anderson (ph) died last week, he was 80 years old, he owned a country-western station in Bismarck, North Dakota for many, many, many years, wonderful guy. He could climb up the antennas and fix it all. He did everything. And he was a great guy. But people like Andy aren't going to be around anymore with these concentration in ownerships that's occurring and the death of localism in broadcasting, the narrow economic calculus of value is in terms of income streams is some owners that have never visited the area where they own a station.

Are we losing something there? It seems to me we're losing something very significant. And are you concerned? Let me ask you, you concerned about 10 radio groups holding 195 stations, five years later they hold 1,647 stations? That concern you? And if so, what do you think we do about that?

KENNARD: Senator, I am concerned about that. As you know, the '96 act lifted the cap on national radio ownership, and so that's a statutory right now that these companies have to own as many stations as they can nationwide.

But notwithstanding that, I think that we should be very alert to the amount of consolidation in local markets. In some of the major markets, where you have lots of competing voices, it's not as much of a problem. When you get in some of the smaller communities, I believe it is a problem, and I think that we should be very cautious about that.

But I also believe that we've got to find ways to bring new voices and new entrants into this field. That's why I think Senator McCain's legislation to reinstate the tax certification is so important, because it'll create incentives for the creation of whole new radio groups that are now being denied entry into this marketplace.

I also think we ought to continue to look for ways to use spectrum more efficiently so that we can bring more entrants onto the radio band and the TV band.

PITOFSKY: Senator, you mentioned TV and radio, but it's happening across the economy. It's banks. It's supermarkets. It's retailing generally.

You asked the question, are we losing something? And my answer is probably we are, especially in areas involving communications.

Now, if the reason these mergers are happening is because they are vastly more efficient with size and they do a better job, then I think we shouldn't get in the way. But if the reason these mergers are happening is just to produce larger firms with more market power, more ability to push their suppliers around and so forth, then I think it is a matter of concern and it cuts across the entire economy.

DORGAN: But, Mr. Pitofsky, your answer seems to suggest the only calculus here is the narrow financial calculus. And with respect to broadcasting, I submit to you there's another calculus that you must and Mr. Kennard must consider, and that's the public interest.

PITOFSKY: Oh, I completely agree. I completely agree...

DORGAN: So would you...

PITOFSKY: ... that when you're talking about the First -- matters that affect the First Amendment, then it's -- then if antitrust is just dollars and sense then we've missed the boat on what antitrust is about in this country.

DORGAN: Well, just to stick with this just for a moment. If we have 10 radio groups owning 1,647 radio stations and the top 25 radio -- television station owners owning 500 of the 1,200 television stations in the country, and that's where we are, let me ask you to project where we're heading.

Without some restraint, any -- some kind of restraint that's exhibited somewhere in public policy, either legislative or administrative, are we likely to see continued galloping concentration in both of these areas? And have you studied that or can you make some projections about it?

PITOFSKY: We have not studied that. I think that if that's the way things are going, it's what I said earlier, it's not just where we are now, it's where we're going. And if in fact by clearing mergers now we open the door to more and more and more concentration, then we have to -- then we have to draw the line somewhere, and maybe this is the place to draw it.

DORGAN: I mean, it is true that we've cleared mom and pop out of the corner grocery. The grocery's still there, but it's owned in Texas and they own thousands of them. And it's true that we're clearing out most of the lumber yards. I understand all that and I -- and the community loses something from that as well.

But with respect to broadcasting there is a different standard and a different set of interests. Broadcasting includes and has always included some feeling that there needs to be localism in broadcasting to contribute to the community. And what I worry about here is that without limits -- let me -- let me finish by asking, because my time is ending, let me ask the question. I won't tell you without limits where I was going.

But the question is, should there be some limits applied to radio station ownership? If the top 10 groups own 1,600 and some radio stations at this point and it's galloping off in a manner that I think no one predicted, should there be some limits attached to radio station owners?

KENNARD: Well, Senator, there are some limits. The 1996 act did place limits on the number of stations that any single owner can control in a local market area.

But what we're seeing in some of these transactions is that one owner will acquire a number of stations that doesn't exceed the statutory -- the numerical limit, but nevertheless controls so many revenues in that market that it does have an impact on the ability of other smaller businesses to compete.

And that's how you see the small market single-station owners being -- and even large market single-station owners being driven out in particular marketplaces. And I think that that is a serious concern.

DORGAN: Would you recommend any additional ownership limits on either television or radio based on your policy experience at this point?

KENNARD: Well, I think Congress has spoken in the '96 act. But I do believe that under the public interest standard we do have some authority to look at -- and certainly the FTC and the Department of Justice have authority to look at aggregations of market power in a specific marketplace, even if it doesn't violate the numerical caps in the act.

DORGAN: Congress has spoken, but the Congress always has the opportunity to speak again. Do you -- would you believe that what has happened since Congress spoke should persuade us to review this once again and consider some changes?

KENNARD: I think it's always appropriate for Congress to be thinking carefully about developments in this market. Careful answer.

DORGAN: Very good, Mr. Kennard. That is -- that's a very careful answer.

(LAUGHTER)

Well, I wanted to raise the issue because I know there's going to be a lot of discussion about the large mergers. But under the headlines these other things are happening in concentration that I think are alarming.

I appreciate your responses and I'd like to communicate more with both of you. Thank you.

MCCAIN: Our chief interrogator has one more question.

Senator Wyden.

WYDEN: Thank you, Mr. Chairman, I'll be brief.

My question for you, Mr. Pitofsky, is how do you believe the Senate ought to look at the short-term versus the long-term ramifications of these mergers. And let me tell you the example that comes to mind is airlines.

United States Congress deregulated the airlines in 1978. Short term, everybody thinks this is going to be good. More competitors, things look good. Long term, we've seen some consolidations that have been very anti-consumer, in my view. We've got some places that have little or not coverage now in terms of air service.

How would you recommend, as we look at these mergers in telecommunications specifically, but also with some ramifications in other areas, how do we factor in the short term, which may look good for the consumer, with the longer term? PITOFSKY: We have to look at both. Let me -- let me just -- let's use airlines for a minute, because it's a classic example.

I think deregulation of airlines was a very good idea, and competition thrived for a while there. On the other hand, there were 24 airline mergers in the 1980s. This was a period in which DOT had control of airline mergers. Some of these took place over the objection of the Department of Justice. Twenty-four proposed mergers, not one was challenged.

I think airline passengers today are paying the price for that inactivity on the antitrust front. It happens every time...

PITOFSKY: (OFF-MIKE) I mean some of them, you look back at some of them, Ozark, TWA, how could -- how could that have been clearer? Those were two horizontal, direct competitors in the same hub market.

What you want to be sure when deregulation occurs, and Bill Kennard said the same thing earlier, you want to make sure that the regulatory regime that we decided as a country we didn't want anymore is restored by monopoly and duopoly pricing through mergers.

When deregulation occurs, we should be more, not less attentive to restructuring in those markets. And I think you've got to take into account both short term and long term.

Short term is really what the courts look at. They'll look at two, three, four years. But I think as a matter of prosecutorial discretion you have to look beyond the two, three, four years to where that sector of the industry is going.

WYDEN: Thank you, Mr. Chairman.

MCCAIN: Thank you very much.

I want to thank both of you. We've had you here for a long time.

I just want to say that I believe the committee needs to look at this situation further. We're probably going out of session here in the next few days, or at least that's the hope that many have.

In the intervening time I'm going to ask for some studies, including for -- from the General Accounting Office, from the consumer viewpoint of this entire situation, so that the committee will have a better understanding -- and other studies that we can find from those people who are objective and informed -- so that the committee can have a better understanding.

And we may ask you to come back to another hearing because I think in your testimony some of the ramifications of these mergers have not been -- prospective mergers have not been fully appreciated or understood.

I appreciate your comments that we should be concerned. I feel it is our responsibility. And we look forward to working with you. And as you both pointed out, this is an incredibly extraordinary time in the history of this country. I don't know of another time like it, as you were talking about. So I think we have to be extremely vigilant to make sure that things go well given the incredible impact that what's taking place now will have on the future of the country in the next millennium.

I thank you both for being with us.

UNIDENTIFIED WITNESS: Thank you, Mr. Chairman.

MCCAIN: Thank you.

Our next panel is Mr. Scott Cleland, the managing director of Legg Mason Precursor Group. Mr. Paul Glenchur, director, Charles Schwab Washington Research Group. Mr. Gene Kimmelman, co-director, Consumers Union. Mr. Mike McTighe, who is the CEO of Global Operations, Cable and Wireless. Mr. John Sidgemore, the vice chairman of MCI/WorldCom.

Could I, while the witnesses are seating themselves, I'd like to make one additional comment. If there's any individuals or organizations who felt they were not allowed to speak today, we obviously would appreciate their written testimony, and we will be glad to consider them for inclusion in further hearings on this very important issue.

And I would appreciate it if we could keep the noise down so we could hear from our first witness, Mr. Cleland. And if we could...

(CROSSTALK)

MCCAIN: Welcome, Mr. Cleland.

CLELAND: Mr. Chairman, thank you for the honor of testifying before your committee.

CLELAND: The views expressed here are mine and mine alone.

I offer four insights and a conclusion in hopes that they will be useful to committee.

My first point is: Telecommunications consolidation is a natural market development. It's a natural given that this is a highly capital intensive business requiring economic skill. And both regulation and technology have been greatly expanding the skill required, both globally and across industry.

My second point: Big is not necessarily bad. The pending mergers are not necessarily bad developments for competition and consumers as long as there's two preconditions that are met: number one, that there's vigilant antitrust enforcement and it continues to ensure that individual service markets remain competitive; and number two, the communications networks continue to be public, i.e. open to competition.

And that needs to be open competition on a facilities bases between different broadband pipes and resale competition on each of the local broadband access points to the customer. Open access is essentially what keeps vertical markets competitive going forward.

My third point: Companies don't need a closed network to deploy broadband. Other than AT&T and cable, open access is a fact of life and investors implicitly factor in open access into their business models. It's clear from the billions being spent in broadband systems, which are open, that the market does not demand a closed network in order to justify broadband investment.

My fourth point is that market forces don't necessarily open networks. I think it's naive to believe that market forces alone will eventually open the cable network to competition. It simply does not square with past experience or market reality.

So my brief conclusion is: Broadband access if the bundle platform of the future, and if that bundle platform is not open, then competition cannot flourish. Because the future of communications is broadband, and we want to have a successful, robust competition which depends on open access to those rare broadband access facilities, at least for an initial transition period so that broadband competition can develop.

Now, other than requiring open, competitive local broadband access to the customer, I think that the Internet and data networks should continue to develop free of intrusive regulation, assuming that we have vigilant antitrust enforcement.

Now many appear right now to hope that a handful of facilities- based broadband competitors is sufficient to create a competitive broadband market. However, they ignore the reality that there's very little switching -- or competitive churn, as we call it -- in broadband access.

Now one analyst recently quipped that the broadband churn rate is less than moving or death rates. Unlike long-distance competition, people don't switch carriers just by calling up their carrier over the phone and it's done. Broadband access switching is much more difficult. You have to buy new and expensive equipment, and you have to have somebody come out to your home to professionally install it.

So the competitive reality, once someone signs up for broadband access, they tend to be a very sticky customer, or they tend to be effectively locked in. Hence, that is the rush rate now to lock customers up through the first mover advantage.

So without cable resale, once cable locks in a local broadband customer, and then bundles them vertically, prices can drift higher on the vertically tied services in their broadband bundle.

Furthermore, no competitor can offer the customer a better deal with its alternative bundle, which resell the underlying cable platform.

Now referring back -- why I'm making such a big point of this on consolidation is the chart we have here talks about -- and it's also a chart in my testimony -- is that when you have open access, you have vertical markets that can become competitive.

Through the '96 act, through the 1934 act, through FCC policies in the past, essentially the local telcos can't leverage their market power vertically. (AUDIO GAP) you have a facility access competitive market, an Internet access horizontal competitive market, Internet long distance is competitive, and the customer equipment is competitive.

However, if you do not have open access and you have market power at the local level -- as cable does -- then you can vertically take that market power all the way through those horizontal markets that are competitive when it's open and walk your way all the way up into e-commerce and essentially the new economy. That's why this issue is so important. Local broadband access is a rare commodity, and it's the one part of this new economy that requires openness more than anything else.

Thank you for you time, Mr. Chairman.

MCCAIN: Thank you very much, Mr. Cleland. I found your chart to be very interesting and informative.

Senator Ashcroft could not be here today. He asked that he may submit a statement for record. He also asked to be allowed to submit written testimony of Todd Jacobs (ph) from last week's Judiciary Committee hearing on the proposed MCI/WorldCom-Sprint merger, without objection.

Mr. Sidgemore, welcome.

SIDGEMORE: Thank you and good morning. I certainly appreciate the opportunity to share with the committee our vision of how MSAT, WorldCom and Sprint together will continue to bring increased competition and new technology to the changing world of telecommunications.

I want to say up front that Bernie Evers (ph), our CEO, sends his regrets. He had a long-standing commitment outside the state today.

MCCAIN: We regret he couldn't be here, but we fully understand, and we'll want to continue our communications with him and with you as we go through this process. We thank...

SIDGEMORE: Thank you very much.

The question facing us today we think is simple. It's whether or not a competitive long-distance provider can survive the fight against the mega-Bell and cable monopolies on a nationwide basis. We think the answer is yes, and our merger is the pathway to meet that challenge.

Consider the changes we've seen over the last couple of years in communications: One, dramatic decreases in the price of traditional long distance service; two, explosive growth of wireless telephony; three, consolidation of the seven Bells into two mega-Bells and two other Bells, or their imminent entry into long distance, in traditional long distance; and five, the growing demand for broadband capacity.

Our conclusion from all this is that the separate market for long distance that was created by the divestiture of AT&T is eroding, and that successful competitors like ourselves need to be able to fulfill all of the customers' needs for wireless and wire line, and to effectively bring broadband Internet access all the way to (AUDIO GAP) to the maximum extent possible to be able to deliver those services to the customer directly.

The broadband battle is basically about the last mile. It's not about the Internet backbone, which is already open and competitive, despite what some of our competitors have said.

In the real world of the last mile, there are really two titans emerging. One is the old titan reborn through local cable facilities, AT&T, the other is the Bell operating companies.

The new mega-Bells have maintained their hold over local markets. They're already major wireless providers; they've moved swiftly toward becoming providers of a full range of communication services.

AT&T, on the other hand, has chosen to buy up the other last mile, which is cable. It is seeking to dominate the provision of high-speed Internet access, bundling it with it's own wireless local and long-distance services. Faced with these trends, MCI/WorldCom had a tough choice to make. We could have left residential customers to the big Bells and to the big cable company, but that would have been bad for consumers and bad for us. We could have merged with a Bell in order to gain the advantage of controlling the critical last mile into every home or we could get stronger and even more competitive. And you now know what choice we made.

MCI/WorldCom and Sprint decided to join forces as what we think is the single best hope for a strong and effective alternative to the mega-Bells and emerging AT&T monopoly. And we'll be able to do -- we know how to do this and we'll be able to do this more efficiently. Over the next five years, the merged company will realize cost savings of almost $10 billion in operating costs; $5 billion in capital expenditures. And these cost savings not only allow the new company to compete aggressively in both business and consumer markets, but will also enable us to aggressively invest in new technologies such as broadband access and next generation wireless.

SIDGEMORE: Hopefully we'll have all the piece parts to be a strong competitor to AT&T and the mega-Bells. Our competitors overseas who were spurred by mounting competition on their home turf, are making acquisitions and aggressive moves, and international investments in key markets around the world.

The combined complimentary strengths of MCI/WorldCom and Sprint, we think, will make us uniquely equipped to market communications products consumers need and want most, including international, and that together, we'll have the capital and the proven marketing strength, and end-to-end networks, to compete effectively against the international incumbents.

Here in the U.S., we can already see hints that this combination is accelerating broadband deployment, in competition with the Bells. We've both -- MCI/WorldCom and Sprint have invested heavily in new broadband technologies over the past year -- both DSL and in fixed wireless technology, known as MMDS, that will allow us to get to customers who are even beyond the reach of DSL, often into rural areas.

And with these new broadband local assets, together, we think we're in a strong position to bring consumers, both urban and rural, the broadband access that they need and want.

Now we know that -- as we heard this morning -- that any major merger in this industry is going to be viewed skeptically at this point. But it's important to remember that not all mergers are the same. This is not a merger of monopoly providers. This merger is being done so that we can become larger enough in scope to compete with the monopoly powers. We think that's a critical difference.

Some regulator have reacted to the news -- this potential merger -- by raising a yellow flag of caution. And we understand that that's their job. We look forward to demonstrating -- and we will -- that this merger is pro-competitive in all markets. The debate, we think, will benefit everybody, because it will help government officials and consumers alike, understand how to advance the cause of communications competition in the next century.

Thank you.

MCCAIN: Thank you very much, Mr. Sidgemore.

Mr. Glenchur. GLENCHUR: Thank you Mr. Chairman, members of the committee. Thank you for the opportunity to appear before you today. My statement has been submitted for the record. And I'd just like to take a brief moment to summarize it.

At the Schwab Washington Research Group we examine legal, policy, and regulatory trends of significance to institutional investors. We cut across several industry sectors, including telecommunications, health care, and financial services. And we've looked at the telecom industry's trend toward consolidation. The statements I make today are my own views, however.

I agree with other panelists, today, as to the reasons for consolidation. Greater scale reduces the unit costs of serving customers in what could become an increasingly commoditized business. It also adds capabilities to offer new and better services.

The consolidation trend has emerged against the regulatory backdrop of the Telecom Act of 1996. It articulated a policy objective of creating competition in the local loop, and established a process to achieve it, including resale, the leasing of network facilities, and ultimately, a preference for facilities-based competition.

The incentives structure established in the act promised long distance entry for the Baby Bells, if their markets were deemed open to competition under Section 271 of the act. The technological and global trends today, however, have expedited the push to consolidate. Cable lines can offer broadband services. Digital Subscriber Lines can offer similar service over phone lines, and eventually will be adapted to offer voice-over-DSL service.

The need to make huge capital investment, in response to this competitive climate should not be surprising. But the rush to consolidate has implications for enforcement policies behind the telecom act. The FCC has pointed to a lack of benchmarking as an example of a possible impairment of its ability to promote competition under the act. Similarly, the acquisition of long-distance backbone networks by the Baby Bells has implications for enforcement of the long distance restrictions of the act.

The FCC has attempted to sort through situations where the economic and business objectives of mergers collide with the telecom act policies of promoting competition in the local loop. Questions have arisen regarding the FCC's time for making decisions regarding license transfers, and the standards applied to define the public interest, and the implementation of conditions that may not bear directly on the original public interest concerns that generated public interest scrutiny.

The FCC has announced measures to enhance the predictability of the process, and to allow more efficient resolution of license transfer applications. Progress in this regard would prove helpful to investors. When mergers are announced, the investor community understands that regulatory risk is part of the analysis. Primarily, however, they hope to focus on the fundamental, strategic, and financial aspects of a given deal. They would welcome greater predictability in the overall process.

Thank you for the opportunity to appear before you. I'll be happy to answer any questions you may have.

MCCAIN: Mr. Kimmelman.

KIMMELMAN: Thank you Mr. Chairman, members of the committee. On behalf of the Consumers' Union, the publisher of Consumer Reports, we once again appreciate the opportunity to testify before you.

Mr. Chairman, I'm a little baffled this morning, as I listened to the chairman of the FTC and the chairman of the FCC. I have great respect for -- they described a world in which there are tremendous concerns. And they said, don't do anything. And they described a world in which they said that, of course, if you make a mistake, you have to live with it. And then they told you about the airline mistakes.

And I think if we go back and review the facts here, we'll see tat we're beyond just a little concern. And if you apply their own reasoning, we're in a big, big mess.

MCCAIN: In deference to them, Mr. Kimmelman, they did say very concerned, very concerned.

UNIDENTIFIED: They didn't say a little concerned.

(LAUGHTER)

KIMMELMAN: I'm sorry Mr. Chairman, you're absolutely right. Very concerned. I feel like I see policy makers in this administration staring at us bulldozer barreling down the road at them. And they're just caught staring at it. And frankly, consumers are getting mowed down right and left. Cable rates are up three times inflation -- 23 percent since passage of the Telecom Act.

Under the leadership of the FCC, we've got $4 billion in new fees on consumers' phone bills, a $2 billion net increase for the majority of consumers for long distance service -- mostly low volume customers. We've heard a lot about how wonderful things are...

MCCAIN: How much of that is because of the wiring of schools and libraries to the Internet?

KIMMELMAN: It's hard to break it apart, Mr. Chairman, but I can tell you that it breaks down to a $1.50 federal access fee that wasn't there two years ago. From AT&T, they use a flat charge of $1.38 now for universal service, which includes that program and others. One program has a $1.95 fee. One has $4.95. One has a three dollar minimum, another, a five dollar minimum.

And the FCC's numbers say that if you make less than 30 minutes of long distance calls today, you're paying three times as much as two years ago. It doesn't sound like a really robust, competitive market. The chairman of the FCC said we ideally should have four or more choices for each customer service.

I totally agree with him. I don't know how we get from here to there. What has happened under the '96 act, which was supposed to bring us cross market competition, cable, telephone, has instead brought us with in-sector consolidation.

The Bells -- two-thirds of the country controlled by two dominant Bells now.

Cable -- AT&T crossed over, appropriately, into the cable sector. But it's primarily a cable consolidation transaction now, where the logic applied by the Chairman of the FTC, in his review of the Time Warner-Turner transaction, would never allow this transaction to go forward. And yet, the chairman of the FCC, who says he wants four or more choices creates a road map for AT&T, through its horizontal rules, to acquire all these new properties. It makes no sense. WorldCom, with MCI, now with Sprint. We have more and more with in- sector consolidation, not cross-market competition.

The theme is, today's merger should be justified, as we sort of heard already, by yesterday's merger. And then of course, tomorrow's merger is used to justify the one we allow to go through today. We have megamerger mania, and it needs to be stopped. Unfortunately it is too late, at this juncture, to get from here to there the three or four competitors in each product line, as the chairman of the FCC said.

Consumers are getting the short end of the stick -- higher fees, higher prices. Unless you're in the high end of the market, you're a high volume customer, then you get choices. But the chairman of the FCC says we have promises that are now memorialized through an oversight process.

Promises of competition tomorrow, promises of entry into the sector that these very companies told you in 1995, they were ready to enter then, if you just passed the law. Nope, it didn't happen. They consolidated.

Consolidation today, the monopoly is growing, consumers not getting anymore choice for local phone service, seeing new fees on their bills, but promises that tomorrow, someday, they will enter. And there are opportunities for the FCC to enforce.

The FCC did the very same thing when it looked at the Bell Atlantic-NYNEX merger. It said "we're not sure any more of these are OK, but we're going to impose strict conditions for opening up networks, for making competition come. If you go down to the FCC, Mr. Chairman, you'll see those conditions have been met. Maybe they're starting to meet them in New York -- one state, but not across the region.

There were penalties that could have been imposed. There were penalties that have been suggested. The FCC has done nothing to enforce those conditions. I don't know how consumers can or should rely on those kinds of promises.

Mr. Chairman, I think the '96 Act had numerous weaknesses, as you know. But more importantly, with this wave of mergers, there is can bring you the goal that you and congress hope for -- broad-based competition against all communications markets.

I think you have to open it up. I think you have to review this law, and you have to step in. There's one critical question that arises over and over again. Implicit in what you heard this morning, from the Chairman of the FTC and the FCC -- and that is, as companies entered new markets, should they be allowed to increase the monopoly in an existing markets, increase their monopoly power, raise prices, because they plan, promise, hope to enter a new market? Or is that inappropriate?

I think the antitrust laws should take care of it, but they haven't. I think the FCC should take care of it, but it hasn't. And so, I leave it for you, Mr. Chairman, should Congress allow consumers to be ripped off in a core market that has monopoly attributes, because that monopoly says I want to go somewhere else and compete. I don't think that's fair. I hope the reports that you are requesting will address these issues, and we will see swift action next year to reopen the law, and make it truly consumer friendly.

Thank you.

MCCAIN: I want to thank you for your usual reserved, non- controversial testimony before this committee, Mr. Kimmelman.

(LAUGHTER)

Mr. McTighe.

MCTIGHE: Thank you, Mr. Chairman. I'd like to thank you for the opportunity for Cable and Wireless to provide its perspective on mergers in the telecommunications industry. I would also like to thank you personally, because it's the first time that I've had the opportunity to go through this kind of process, being a British citizen. I have to commend you on the transparency of this process. I wish that we had these kinds of processes in other parts of the world.

MCCAIN: Well, we wish we had the question period for the leader of the country...

(LAUGHTER)

MCTIGHE: Touche.

MCCAIN: ... as you have in the British Parliament, so...

MCTIGHE: Thank you.

Cable and Wireless is here this morning to make three points to you. First, the government must address the threat to competition in the Internet backbone market, posed by the merger of MCI/WorldCom and Sprint. To prevent UUNet from dominating the Internet, it is essential that the divestiture of one of the merging companies' Internet backbones -- preferably UUNet -- be a condition of the merger.

Second, we wish to share our recent experience with the divestiture of an integrated Internet business. We have found that absent extreme good faith on the part of the seller, and strict continuing oversight by the responsible regulatory agencies, the competitiveness of the divested business will be compromised.

Third, it follows that unless there are assurances that the merging parties will act in good faith, and that the regulators will hold them strictly accountable, such mergers should not be allowed to proceed.

I'd like to go through each point in a little more detail.

Internet backbone competition -- the Internet backbone is to the 21st Century, what the railways were to the 19th. The highway created by the Internet backbone will be the transport mechanism for the new e-commerce model of the future. How it is competitively structured is essential to the development of e-commerce over the next two or three decades.

I'd like, if I may, to use an analogy to describe the issue that we feel is confronting us. We all are familiar with the highway system. We have highways that are local, national, regional. The Internet is the same. We have highways on the Internet, each of them owned and operated by a number of different companies.

These highways intersect. Or, to use our jargon for the industry, they peer with one another. The peering process is essential if we are to enable traffic and data to move from one end of the Internet to the other, one end of the globe to the other.

However, we have a new phenomenon that's emerging. We have a number of four or five global superhighways being provided by companies like Cable and Wireless, MCI/WorldCom, Sprint, GTE, AT&T, BT. These global superhighways allow more traffic to flow more quickly and with less accidents -- if I can continue the analogy.

it is essential for the local highways to be able to intersect with these superhighways if they are to truly have access to the content and to the consumers that exist around the globe for this new e-commerce phenomenon.

In addition, these superhighways have on-ramps and off-ramps. And basically, today we have people on the on rams, like Yahoo, like BarnesandNobles.com and these other e-commerce companies. And we also have people on the off-ramp -- the Internet Service providers around the world that we all support. Access to these highways is critical.

Today's situation is relatively straightforward. Largely, these superhighways, these peering arrangements are toll-free -- if I can use that analogy. And using the off-ramps and the on-ramps is actually very, very competitive today. The problem that we have is that the combination of MCI/WorldCom and Sprint leads to the creation of a dominant Internet backbone supplier. Many analysts predict that they would have somewhere in excess of 60 percent of the Internet backbone globally. It is very possible that this dominant position could be used to discriminate in terms of cost and service levels, against the other highway providers, and in favor of the new combined entity.

And therefore, the question for us, in terms of Internet backbone capacity is a very simple one. Do we want the essentially toll-free environment of a competitive market, or the prospect of a toll-booth environment of a de facto monopoly.

And now I'd like to touch on the Cable and Wireless experience. What we are confronting today, with the MCI/WorldCom-Sprint proposed merger is deja vu. One year ago today, we saw exactly the same discussion over MCI and WorldCom. At that time, the European Union, endorsed by the Department of Justice here in the United States, required MCI to divest its highly integrated Internet business.

Cable and Wireless purchased the MCI Internet business, relying upon the binding undertakings that MCI had made to the European Union -- i.e., that MCI would deliver an operating entity. However, if I can just summarize our experience, the takeaway for us is very simple. The bottom line is that successful divestiture of an integrated business requires the seller to disrupt its own business, to support the creation of a new competitor.

In this situation, MCI/WorldCom failed to carry this out. And quite frankly, I can illustrate that with a number of points that we might want to get to in questions.

That leads me, frankly, to my final point of enforcement. Cable and Wireless fundamentally believes that it is possible to divest an integrated business. But it is only possible with a high level of oversight and compliance monitoring. If the various regulatory authorities around the world feel that such oversight and monitoring is inappropriate. Or, they just don't want to do it.

And let's not kid ourselves. these kinds of forced divestment are not going to work. So, let's not do them.

In summary, Mr. Chairman, the Internet backbone is a key component of tomorrow's global business model. We believe very strongly in the powers of the market. This is not, for us, a question of regulation or deregulation. His is about creating the competitive landscape on which we can allow the market to have full reign. It's for us, about having a toll-free environment, or a toll boot.

I'd like to thank you for this opportunity to provide you with our perspective, and I'll be happy to address any questions you may have.

MCCAIN: I'd like to depart from the usual procedures here, for a second, and allow Mr. Sidgemore to respond to -- in any way that he wants to -- to previous two witnesses.

SIDGEMORE: Well, if it's anyway I want to, this could take two or three hours. But I'll try and keep it brief.

I think many of you are aware that we have a commercial dispute, in litigation right now with Cable and Wireless. So it's probably not appropriate to respond to the detailed points. But I have to say, from my perspective, this is kind of an old story. You know, the Department of Justice and the European Union, last year, sought to create an effective competitor to UUNet when we divested Internet MCI. And I think by virtually any measure, that has taken place.

I must say to Mr. McTighe here, that the Cable and Wireless people, including the CEO Mr. Wallace, and Mr. McTighe, regularly brag to their analysts about how robust their Internet business is. And in fact, have made statements which we can make available, that the Internet business and the revenues, and so forth are roughly in line with what they expected when they bought the business.

They also claim to have 30 percent market share, today, on the Internet backbone. So I guess I would just say that they tell a very, very different story to their analysts when they're selling their case for why they're strong in Internet, than they make here today.

I think, at the end of the day, you look at the Internet backbone. This is a very robustly competitive environment today, despite what some of the competitors say. I would also say that with respect to peering, which has received a lot of notoriety, you know, we have more peers every year, than the year before.

Just to put it in perspective, we have over 70 today. Over 70 other backbones have equal status with MCI/WorldCom's backbone, UUNet today. That to me doesn't sound like a very restrictive situation. And each year the number of those peers increases. So, if we were really trying to use our market power to stop competition, I think you'd see those number of peers go down over time.

Just in closing, I'd like to say that we believe that the Internet MCI disposition, although there were some problems that we are discussing today, was largely as advertised. And we think it was one of the more successful divestitures around.

Again, a 30 percent market share, by industry analysts, and by their own recognition, robust growth in the business, and basically in line with the initial expectations.

Thank you.

MCCAIN: The purpose of this hearing is not to specifically address your pending merger. It's the general issue. And I kind of would like to keep us on that. But I do understand that, obviously because of recent events that -- and I hope that our other members of the committee will allow to respond as we go through this.

Mr. McTighe, I need to ask Mr. Kimmelman a question here. Mr. Kimmelman, as you know this week, Congress is expected to vote on legislation intended to help satellite TV compete effectively with cable television. Yet the conference committee's draft satellite TV bill is being criticized as not terribly pro-competitive, or pro- consumer.

As a spokesman for competition and consumers who represent no special interest, please give me your opinion on what provisions this satellite home viewer act legislation must contain, in order to be truly pro-consumer and pro-competitive.

KIMMELMAN: Mr. Chairman, we've been very critical of a number of the suggestions. I don't know that it's been resolved yet, in the conference committee. We asked for as much parity as possible between satellite and cable companies, for the ability to obtain broadcast programming. As you, and everyone else knows, that one of the biggest problems satellite providers have in reaching consumers, is they are not able to offer the local broadcast channels, with a broader package of cable service.

We wanted to make sure that, for consumers to have more choice, and the lowest prices, that those channels would be available under the same terms and conditions that cable receives them. Unfortunately my understanding is that there are a number of provisions being discussed that still give advantages to cable in how they may negotiate with broadcasters, as opposed to satellite.

What all this will do, Mr. Chairman, unfortunately, is slow down the development of competition, create other barriers to competition that are inappropriate and unnecessary. And so, at a time when we have now no regulation of cable prices, and they're going up three times inflation, we want to see as much competition as quickly as possible. And from what I have seen, I know it's still under negotiation, a number of provisions just do not promote as much competition as is necessary.

MCCAIN: Well obviously, I have heard the same, and know of the same, and that's why I asked this question. This would be terribly disappointing. Good legislation was passed by the House. And it would be terribly disappointing if we, again, stiffed these people all over America, who have seen their screens go blank, and not allow them to have access to the service of their choice.

Chairman Kennard consistently states that long distance rates are going down. You state, just as consistently, that a majority of consumers are paying $2 billion a year more on their long distance bill, since the passage of the telecom act. Can you explain why the same industry statistics lead you and Chairman Kennard to mutually inconsistent conclusions?

KIIMMELMAN: I wish I could fully explain it. We're using the chairman's own data, from his agency. The easiest way I can explain it is, when you aggregate everyone together, people who are on the phone for hours and hours -- and they're getting five cents a minute, four cents a minute, special deals. They've got phone companies knocking off the $1.50 charge, the $1.95 charge, offering them even lower prices if they'll by Internet access and something else. But there is no doubt in my mind that they're saving money. Their prices are coming down.

You combine those people with the majority of consumers -- and these are just FCC numbers -- the majority of people who are on the phone for less than an hour for their interstate long distance calling, and you look at the new fees that have been added to their bill, before they ever pick up the phone and get a dial tone, you can homogenize all that and say there's some benefits. When you pull out that majority of people, and say what have they gotten, it is absolutely clear. They've gotten a price hike. There's just no question about it. It's unnecessary and inappropriate.

We believe if the FCC had just done its job effectively, there were more than $4 billion in savings during this period of time we're discussing, to long distance companies, through access charge reductions, for connecting long distance calls to the local phone companies. Somebody's getting the benefit of those cost reductions. Unfortunately, it's not the majority of consumers.

MCCAIN: I'd appreciate if you'd submit for the record, corroborating information to your statement.

KIMMELMAN: I already have done that.

MCCAIN: And I'd appreciate it if the representatives of the phone companies -- and we'll try and get something from the FCC so perhaps we can match them up. I guess it's one of those examples about liars and statistics. But we'll find out about it.

I've exceeded my time. Senator Wyden.

WYDEN: Thank you Mr. Chairman. All of you have been helpful. And the last question I asked Mr. Pitofsky was very much on my mind today -- this question of looking short term versus long term as these matters of deregulation are approached, of course leads you to the airline example.

It was before I was in the United States Congress, but ballyhooed claim was we're going to have more entrants, we're going to have more competition, and this is going to be the greatest thing since night baseball for the consumer. And what in effect we've had, is very significant consolidation -- a lot of areas, one carrier, and some, not even that.

I'd like to just kind of go down the row. We can start with Mr. Kimmelman, and ask you to give us your vision of what things would look like in the communications sector 20 years from now, if we essentially stayed in this mode that we're in.

What concerns me, of course, because Portland is really in the eye of the storm with respect to broadband, is whether or not, 20 years from now, we're just going to have a handful of broadband barons, you know, sort of like the airline hubs that control access and basically let the prices go up, and harm the consumer.

So, let's let each of you have a crack at sort of what it looks like 20 years from now, and start with you Mr. Kimmelman.

KIMMELMAN: I don't think anyone can predict accurately. I'll give you my concerns, based on the market consolidation we have seen. Everyone is moving to offering a package of services for consumers -- local phone, long distance, Internet access, a variety of entertainment and communications services.

The difficulty appears to be that no one player can offer everything exactly as some other player, because of technological and other barriers at this point in time. What we're seeing is a consolidation of local phone companies, offering a package of services, that is not nearly as fast, and can't offer the video quality that a cable company can offer. But simultaneous consolidation, through AT&T's transactions of cable wires around the country.

We have an opportunity for more mergers or consolidation here with two satellite companies left. There used to be four, but they could play, and bring the satellite piece into it. But that has limitations, in terms of two way Internet as well. And so you have packages where certain sets of services will be more attractive to consumers, or more attractive to businesses from predominantly one company.

If we don't crack that nut, we are in danger of either having unregulated monopoly, or a need for a lot more regulation down the road. It includes broadband, it includes video services. And it may include some business services for Internet and data transmission. So I'm very fearful that the strong concern that has been raised is not enough, that we need more aggressive intervention now to have more players.

Finally, I will say that looking 20 years ahead, I just look back. We made an enormous mistake in 1984, deregulating cable, before there was real competition. And Congress came back in and re- regulated it in 1992. Whatever one thinks of that, what I think everyone concurs is, it was an enormous mess coming back in and trying to undo what was perceived as a mistake. And as much as Chairman Kennard says we can look at that down the road, I'm fearful that that down the road is such a big mess that we can't undo the mistake.

WYDEN: I'm going to Mr. McTighe answer, but I think your point is critical with respect to the need for preventive, kind of, action. However you feel about a particular area, you don't want to get to the point where you have to run a swayers' full employment program to resolve some of these areas. And that's also an issue in the Microsoft case, is you don't want these questions to reach that kind of threshold.

And it's one of the reasons why -- and I think you heard several of us say we are going to try to think anew, about this whole area. I'm one who thinks, for example, that a great many of these mergers are not going to have dire consequences for consumers. But I think a fairly small percentage are going to be very, bad news for consumers. They're going to really threaten the first amendment. And that's why I raised that question earlier.

So, rest assured that this not going to be something that's going to vanish into the vapor. And that's one of the reasons why I've spent the last few hours here, and will be pursuing it very vigorously in the days ahead.

Mr. McTighe?

MCTIGHE: Senator Wyden, I don't think I'm particularly qualified to give you a detailed U.S. answer, but perhaps I could give you more of a broader perspective.

We believe, fundamentally, that what is required is to open up all aspects of the value chain. In other words, from the delivery international services, through long distance, through local access into content, and to insure that you have a competitive framework in every one of those discrete areas. And if we can do that, then we would allow the free market forces to decide exactly what degree of competition is delivered.

As an observation, the U.S. tends to be one of the most regulated environments that we come across. And it seems to me that there is more of a holistic view needs to be taken of this -- more consideration of all access mediums. So, we tend to have discussions about local access, in terms of wire line. And then I see local access discussions of wireless. And then I see cable discussions. These are all mediums.

WYDEN: My time's short. Are any of you interested in commenting on what it's going to look like in 20 years?

Yes.

SIDGEMORE: Why don't I -- in 20 years -- I just wanted to make the point that with respect to the analog in the airline industry, I think it's very different. If you look at that industry, you wound up with a route by route competition model, where you really only had two or three potential competitors in the first place. And so, any consolidation was bad.

I really do believe, to the points before, that in the communications industry, in the not too distant future -- just a couple of years out -- you're going to have at least five or six major people competing in all aspects of the market. And you can easily name them, you know, on one hand, or two hands. You know, there's AT&T, MCI/WorldCom, SBC, Bell Atlantic, US West/Qwest. I mean, I think you're going to have at least those, and a number of niche players. So, I think it's very, very different, because the market characteristics are different.

The other thing I would say, just briefly, is I don't often agree with Scott. And I very rarely agree with Mike. But I would say that I agree on this question of open access. I mean, I think we are absolutely pro open access. And I think that is absolutely critical to ensuring that the effects the broadband technology get moved all the way to the consumer population in the rural areas of the United States, not just the major cities.

KIMMELMAN (?): Yes, I'd like to echo that. If we look 20 years out, what we should be seeing is the future is bundle competition. We see competition in electricity, and gas, in telecommunications. I imagine there will be more competition in cable. And so, what you want in the future is, everybody competing for the customer in putting together their bundle.

One person may say I think the customer wants cable, telecommunications and gas. Somebody else will throw in electricity. Somebody else will sell in -- will do autos. I mean, we don't want to limit the bundle capacity that anybody can offer. Let the market, let the consumer choose what they want.

The only way that vision will happen, though, is if we encourage facilities based competition for all those with market power, and we have resale of all the underlying assets. WYDEN: Before we move on, you would then share my view that if you have only one provider of broadband, you know, Internet access, bundling proprietary information, essentially, with access in a given area, that would certainly be a free speech and First Amendment question, wouldn't it?

KIMMELMAN (?): I'm not a First Amendment expert, but it certainly would be economic power being leveraged into vertical markets. Because, what you're concerned about is on broadband, almost all of these different services can be bundled together, because it's one pipe.

WYDEN: Sir.

UNIDENTIFIED: Thank you. I think a point to keep in mind, in terms of predicting where this all goes, is telecommunications is very unique -- perhaps very different from the airline industry in this regard. And that is, it's at the intersection of communications and technology. I mean, we may get to the point where third generation wireless and satellites, and other alternatives create options and choices that we really can't get our arms around at this point. And so it's hard to predict where it goes. The key thing is to make sure that there are enough players out there, who have incentives to innovate, and make investments in new technology.

MCCAIN: Senator Brownback.

BROWNBACK: Thank you panel members for being here today.

Mr. Sidgemore, I've got a couple of questions I'd like to ask you if I could. As you look to the future, on the merger that you've had -- the MCI/WorldCom -- and then adding into it, the one you're projecting in -- to bringing Sprint into the fold of that. Where do you see your major growth coming from in the next year or two? Where are you really projecting to try to grow this business the most?

SIDGEMORE: I don't know whether you're talking geographically or functionally, but I...

BROWNBACK: Functional.

SIDGEMORE: From a market point of view, we've been very public with this. We think the two biggest growth markets, over the next several years, will be wireless and Internet. And of course, wireless is right at the heart of our acquisition strategy, with respect to Sprint.

BROWNBACK: OK, if I could focus, just in on the Internet area of that, where do you -- what do you anticipate your growth to being in that field? What are you anticipating the growth in the next couple of years in that Internet arena, and the Internet backbone services -- data services -- that you have.

SIDGEMORE: Well, we have talked publicly about growth rates in the high 40 to 50 percent range. We're growing today at a little over 50 percent per year. We do think that one of the biggest drivers for growth over the next few years, on the Internet, will be wireless data.

You know, if you can imagine a number of new devices proliferating, like Palm Pilots, personal digital assistants, and so forth, which we believe is going to happen, you can easily see the growth of wireless data sort of skyrocketing over the next few years -- particularly when every day devices like cars will all have Internet interfaces as well.

So, wireless data, we think, is actually going to be the most significant piece of the growth of the Internet. And again, this get's back to why we have been so aggressive in attempting to find a wireless solution, and why Sprint is right at the center of what we've been thinking about.

BROWNBACK: Does the merger with Sprint -- the proposed merger there -- work if you do not achieve that rate of growth that you're projecting in the Internet backbone business that you were talking about?

SIDGEMORE: Yes, let me just clarify something. We did not count a single dollar of synergy from merging the Internet backbones. And when I'm talking about growth and what we were after at Sprint had nothing to do, whatsoever, with the Internet backbone. It had to do with getting access to the wireless business of Sprint, which we believe will be an important part as an interface, into the Internet backbone space.

And to the extent that, you know, the -- will the merger work without the wireless Internet piece? Virtually all of the financial synergies inherent in the deal are based on the non-Internet and non- wireless businesses.

BROWNBACK: What role do you see Sprint's current operations playing in that growth that you're projecting, for the overall company over the next few years?

SIDGEMORE: Well, I think if you look at it in pieces, obviously we don't have a wireless business. So it's very highly likely that Sprint will -- Sprint people and the Sprint operations that exist today will actually operate the wireless business for the combined company. I think there's very little question about that.

I think, you know, considering the size -- I mean I think that the MCI/WorldCom people will probably manage the Internet backbone piece. In terms of traditional local operations, which -- traditional local operations, of which MCI/WorldCom has none -- I think that is going to be virtually 100 percent Sprint.

And then you get down to merging the long distance networks, and where we will put people to run that. I think it's highly likely that the concentrations of people around the country will stay largely the same. I don't want to speculate today, because it's way too early, as to which manager will run which division, and do forth. But think it's highly likely that the general concentrations of people, as they exist today, will stay the same. We've made over 60 acquisitions in the last four years, and that's almost -- that's been true, just about universally. We have largely kept the operations in the place where they have been before the merger.

BROWNBACK: I believe Mr. Evers (ph) was in last week, in the Judiciary Committee. And he was projecting merger savings of $9.7 billion in operating cost savings, is what he was projecting last week, over the next five years. And that's some of what you've elaborated and testified a little bit.

Could you elaborate any further about where you anticipate those operating cost savings coming from, over the next five years?

SIDGEMORE: There are, really, three sources to -- I mean, simplistically, there are are really three sources. The first is network synergies, which, you know, result from, A, our avoiding access fees, by using local facilities, or bypass facilities that one of us have.

For example, MCI/WorldCom has significant select facilities which we can then use to originate and terminate Sprint customers. We can terminate Sprint traffic internationally on our MCI/WorldCom's own local facilities in Europe, as an example. It's a significant source of the savings. So, there are a number of network savings we get as a result of using each other's facilities, including the Sprint local facilities.

Second is advertising. And I doubt anyone will miss a few advertisements from TV at night. And that is -- I don't want to get into exactly how much that is. We have some internal debates about this, as you might imagine. But that is a very significant amount of money. It costs a lot to put Michael Jordan on television regularly.

And then, finally, there will be savings from projections of personnel growth over the next few years. And I want to be careful on this, because I just want to make the statement, that of all the mergers we've done, we have always had, a year after the merger, more employees in total, than the individual companies had combined before the merger.

So, while there may be some dislocations in certain areas, you know, and in certain functions, in our judgment, this merger is about growth. We fully expect to have more people a year after the merger, in the combined company, than we had before.

BROWNBACK: If I could take you right down to that point, how many, though, do you anticipate jobs will be eliminated initially, because of duplicative jobs with the proposed -- if the merger is approved -- on the Sprint with the MCI/WorldCom?

SIDGEMORE: We don't actually have that number today. We have numbers that are based on sort of longer term projections. But we have not gotten down into the bowels of each operating unit, and sorted through which unit does what, how much overlap there is, et cetera. We know there will be some. I'm not saying there won't be any. I mean there will be, certainly, in accounting, and functions like that. There will be some, but we do not have a detailed roadmap yet that would project that out.

BROWNBACK: Well, thank you. I'm sorry to be so detailed and focused in on you, but it's not only the broader, bigger concern, but it's also a narrow concern for a number of constituents. And so I wanted to have a chance to be able ask you. And I hope we have the chance to have your chairman, Mr. Evers in sometime as well, to visit more thoroughly about this.

Thank you all, panelists for being here today. We appreciate it. I think it was a very illuminating testimony. The hearing's adjourned.

END PHONE(202) 966-2211 FAX(202) 966-1770

LOAD-DATE: November 12, 1999

Document 77 of 133.


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