Copyright 1999 Federal News Service, Inc.
Federal News Service
NOVEMBER 4, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
2547 words
HEADLINE: PREPARED TESTIMONY OF
GENE
KIMMELMAN
BEFORE THE SENATE COMMITTEE ON THE JUDICIARY
SUBJECT - "THE MCIWORLDCOM-SPRINT MERGER:
A COMPETITIVE REVIEW"
BODY:
Consumers Union/1 is concerned
that an avalanche of mergers in the telecommunications and cable industries is
threatening to undermine the development of broad-based competition for local
telephone, long distance, television and high-speed broadband Internet services.
The Clinton Administration -- including its antitrust and regulatory enforcers -
and the Congress appear frozen in place as today's mergers are justified on the
basis of yesterday's mergers, and then used to justify even further
consolidation in the future. This merger-mania is already so out of hand that
the most popular services most consumers want and need may be available from
only one or two players in the market.
The proposed merger between the
second and third largest long distance companies, MCI WorldCom and Sprint,
illustrate this pattern. In defending its proposed merger MCI WorldComSprint
argue that:
... the Bell operating companies have consolidated their local
operations through a series of mergers and are moving toward becoming
full-service providers of voice, wireless and data services. AT&T,
meanwhile, will dominate the provision of broadband services over cable while
operating its own nationwide wireless network. MCI WorldCom's merger with Sprint
would offer consumers a strong and effective alternative--especially in local
markets, where neither company can compete as effectively alone against
entrenched monopolies."2
In other words, MCI WorldCom-Sprint claim that
consumers have nothing to fear from a merger that dramatically concentrates
control of the residential long distance market (in apparent violation of the
Justice Department's merger guidelines) between AT&T (58% market share) and
MCI-Sprint (24% combined market share/3), and consolidates substantial Internet
backbone capacity, because the merger will improve chances for these combined
companies to compete in the local telephone and broadband Internet markets. Will
this competition materialize? Here is an example of what the merging companies
said about the likelihood of anyone being able to compete against the
consolidated Bell companies:
The pending mergers of Bell Atlantic and GTE,
and SBC and Ameritech, are over the line and must be blocked. The mergers would
create two mega Bells owning and controlling two-thirds of the local telephone
access lines in this country. The situation is now critical and Federal
policymakers must stop the local telephone industry from transforming itself
into basically a Bell West and a Bell East monopoly.
The conduct of these
companies in the two-and-a-half years since the Telecom Act became law has been
to fight competition in both local central office and the courts, which causes
us to believe that the purpose of these mergers is to fortify against
competition and not to embrace it. The result is that local telephone consumers
on an even wider scale will continue to be denied the benefits of choice, price,
products, quality and service.4
While we agree with Mr. Esrey's assessment
of these Bell mergers,/5 and have raised similar concerns about AT&T's even
more enormous consolidation of cable companies serving almost 60 percent of
cable consumers,/6 it is hard to understand how a merger of MCI WorldCom with
Sprint will undo the harm caused by the mergers that have preceded it. The logic
appears to be two wrongs - Bell mergers and AT&T/cable mergers -- justify a
third wrong! Just consider where this wave of consolidation leaves American
consumers. At the time Congress passed the 1996 Telecommunications Act,? there
were eight large local telephone monopolies (seven Bell companies and GTE);
three large long distance companies and a handful of small-but-growing
competitors; a comparable number of large cable monopolies; four satellite
ventures, and electric companies and independent wireless firms were beginning
to show interest in expanding more broadly into telecommunications. With markets
and technology converging, the Telecommunications Act's goal of promoting
broad-based competition could have yielded industry combinations (e.g., local
phone/long distance/satellite, cable/long distance) that would have offered
consumers a dozen national firms, with as many as half of them attempting to
offer a full package of telecom and television services in each local market.
Instead, merger-mania is shrinking the competitive field: SBC and Bell
Atlantic have each gobbled up two other regional companies to control about
two-thirds of local phone lines, and are partnering with mid- size long distance
companies and one of the two remaining satellite firms.8 AT&T purchased TCI
and is in the process of merging with MediaOne (which has a substantial stake in
Time Warher's cable systems,) giving AT&T an ownership stake in cable wires
reaching about 60 percent of consumers, plus arrangements to provide local
telephone services through other cable companies.9 Once this degree of
horizontal power is established in these entrenched monopoly markets, it becomes
more difficult for the few remaining players to challenge the dominant local
phone and cable players, increasing incentives for further consolidation and
partnership.
And even these two giant consolidated groups are not well
positioned to take each other on in most local markets with a full package of
services. For example, AT&T's cable empire has not wired businesses, but can
offer consumers a high-speed TV-quality Internet service that local phone
companies cannot technically compete against.l0 Unless the price of satellite TV
hookups and equipment keep falling and local broadcast channels become readily
available from satellite TV providers, the Bell companies will not be able to
compete against AT&T and other cable companies. As a result, two giants may
not be enough to ensure consumer choice for local phone, cable or TV-quality
high- speed Internet services. And the "silent majority" of consumers who are
modest users of these services are likely to find themselves on the wrong side
of a "digital divide" with rising monthly bills. 11
Of course the
consolidating companies have proposed a host of promises designed to alleviate
antitrust and competitive concerns about their mergers. SBC and Bell Atlantic
promise to invade other territories, AT&T promises to make its cable systems
into local telephone competitors, and now MCI WorldCom-Sprint promises to take a
hodge- podge of wireless licenses (MMDS which has significant capacity and
line-of-sight limitations)12 added to limited local wireline infrastructure and
become "a third" full service provider into the home. Will these promises be
kept? Unfortunately, there is no way of knowing, and probably no way of
mandating competitive behaviors that would be sustainable in unknown, future
market conditions. So the tradeoff is simple: allow enormous within-sector
consolidation of local telephone companies, then cable companies, and then long
distance companies, in the hope that they will-then cross sectors and challenge
each other for a full package of telecom, Internet and television services.
The dangers of allowing entrenched monopolies (local phone and cable) to
expand their core markets, or actual competitors (MCI WorldCom and Sprint) to
merge are obvious. With cable rates continuing to rise about three-times faster
than inflation (23 percent rate increases since passage of the Telecom Act)13
and local phone rates restrained only by regulation, the fact that little
competition is emerging casts significant doubt about recent consolidation in
these markets. And long distance competition is not nearly as robust as
advertisements for new calling plans would lead you to believe.
A
careful analysis of consumers' long distance bills reveals that since passage of
the Act, the majority of consumers are paying a net increase of about $2 billion
a year on their long distance bills. This results from new monthly fees and
line-item charges (e.g., federal access, universal service, monthly minimum
charges, monthly service charge) added to the lower perminute rates.14 These net
price hikes are most alarming because they come during a period when the Federal
Communications Commission (FCC) reduced the cost of connecting long distance
calls by more than $4 billion a year. Apparently, even as costs decline and
usage increases, the long distance companies do not feel competitive pressure to
pass along savings to a large segment of the consumer market:
How did the
telecom companies maintain their profit margins? The secret is that many
consumers are paying monthly fees of about $4.95 in return for the lowest rates.
AT&T officials on Monday said revenue per minute has actually increased in
part because of these monthly fees. Also, people are talking more because they
think their long-distance costs are lower. One other significant but little
noticed factor is that the long- distance companies are now paying less to the
regional Bell operating companies to originate and terminate calls. 15
With
inadequate competitive pressure in today's market to hold down long distance
prices for the majority of consumers who are modest users of long distance
services, it is difficult to understand how a merger of the number two and
number three companies will benefit consumers. Speculation that some day, the
few remaining Bell companies will open their local networks to competition, in
compliance with the 1996 Act, and offer long distance service nationwide, is not
enough to justify reduced competition for today's long distance consumers.
CONCLUSION
It is time for policymakers to put an end to the
telecommunications and cable consolidation that is threatening the growth of
broad-based competition. We offer excerpts from a recent "Essay" by William
Satire as a wake-up call to reverse course on telecommunications policy:
Why
are we going from four giants in telecommunications down to two? Because, the
voice with the corporate-government smile tells us, that will help competition.
Now each giant will be able to hedge its bets in cable, phone line and wireless,
not knowing which form will win out. The merger-manic mantra: In conglomeration
there is strength.
That's what they said a long generation ago when business
empire- builders boosted their egos by boosting their stock to buy the earnings
of unrelated companies. A good manager could manage anything, they said,
achieving vast economies of scale. As stockholders discovered to their loss,
that turned out to be baloney.
Ah, but now, say the biggest-is-best
philosophers, we're merging within the field we know best. And if we don't
combine quickly, the Europeans and Asians will, stealing world business
domination from us. The urgency of "globalization," say today's merger-maniacs,
destroys all notions of diverse competition, and only the huge, heavily
capitalized multinational can survive.
Here are two startling,
counterintuitive thoughts: The fewer companies there are to compete, the less
competition there is. And as competition shrinks, prices go up and service
declines for the consumer. (Say these reactionary words at the annual World
Economic Forum in Davos, and listen to the global wheelerdealers guffaw.)
Who is supposed to protect business and the consumer from the power of
trusts? Republican Teddy Roosevelt believed it to be the Federal Government, but
the antitrust division of Janet Reno's Justice Department is so transfixed by
its cases against Microsoft and overseas vitamin companies that it has little
time to enforce antitrust law in dozens of other combinations that restrain free
trade.
Our other great protector of the public interest in diverse sources
is supposed to be the F.C.C. When MCI merged with Worldcom last year, the
chairman appointed by President Clinton, William Kennard, took no action but
direly warned that the industry was "just a merger away from undue
concentration." Now that is happening.
Why will the FCC after asking for
some minor divestiture, ultimately welcome a two-giant waltz? For the same
reason that the broadcasters' lobby was able to steal tens of billions in the
public's bandwidth assets over the past few years: Mr. Clinton wants no part of
a communication consumer's "bill of rights."
Candidates Bradley, Bush and
Gore look shyly away lest trust-luster contributions dry up...
FOOTNOTES:
1 Consumers Union is a nonprofit membership organization chartered in 1936
under the laws of the State of New York to provide consumers with information,
education and counsel about good, services, health and personal finance; and to
initiate and cooperate with individual and group efforts to maintain and enhance
the quality of life for consumers. Consumers Union's income is solely derived
from the sale of Consumer Reports. its other publications and from noncommercial
contributions, grants and fees. In addition to reports on Consumers Union's own
product testing, Consumer Reports with approximately 4.5 million paid
circulation, regularly, carries articles on health, product safety, marketplace
economics and legislative, judicial and regulatory actions which affect consumer
welfare. Consumers Union's publications carry, no advertising and receive no
commercial support.
2 John Sidgmore. "More Choices for Telecom Consumers."
letter to editor, Washington Post. October 20, 1999.
3 Trends in Telephone
Sen,ice, Federal Communications Commission. September 1999. p. 11-11.
4
Statement of William T. Esrey. CEO Sprint before the Antitrust, Business Rights.
and Competition Subcommittee of the U.S. Senate Committee on the Judiciary,
September 15, 1998.
5 Testimony of Gene Kimmelman on behalf of Consumers
Union, before the Antitrust Business Rights. and Competition Subcommittee of the
U.S. Senate Committee on the Judiciary, September 15. 1998.
6 Comments of
Consumers Union. Consumer Federation of America, and Media Access Project Before
the Federal Communications Commission In the Matter of Implementation of Section
11 (c) of the Cable Television Consumer Protection and Competition Act of 1992,
Horizontal Ownership Limits. MM Docket No. 92-264 and in the Matter of
Implementation of the Cable Television Consumer Protection and Competition Act
of 1992, Review of the Commission's Cable Attribution Rules, CS Docket No. 98-
82, August 17. 1999.
7 Public Law 104-104
8 Testimony of Gene Kimmelman
op. cit.
9 Comments of Consumers Union. op. cit.
10 David Lieberman, "On
the Wrong Side of The Wires." USA Today, October 11, 1999.
11 Cooper, Mark
and Gene Kimmelman. The Digital Divide Confronts the Telecommunications
Act of 1996: Economic Reality vs. Public Policy, Consumer Federation of
America and Consumers Union, February. 1999.
12 Lieberman, op. cir.
13
Bureau of Labor Statistic cable and "all items" consumer price indexes
14
Comments of Consumer Federation of America, Consumers Union, and The Texas
Office of Public Utility Counsel Before the Federal Communications Commission,
In the Matter of Low-Volume Long-Distance Users, CC Docket No. 99-249, September
22, 1999.
15 Rebecca Blumenstein, "MCI's Revenue. Operating Profit Surges, "
Wall Street Journal, October 29. 1999.
16 William Satire "Clinton's Consumer
Rip-Off," Essay, New Fork Times October 11, 1999.
END
LOAD-DATE: November 9, 1999