TELECOMMUNICATIONS - Ringing Endorsements

By Kirk Victor, National Journal
© National Journal Group Inc.
Saturday, June 26, 1999

	      Every now and then, consumer activists in Washington 
complain so bitterly--and so relentlessly--that their cacophony 
can't be ignored. They get invited to testify at congressional 
hearings, and their arguments are widely reported by the news 
media. 
	     That script has been followed recently, as watchdog 
groups have directed their ire at the Justice Department's 
Antitrust Division and its chief, Joel I. Klein. In a series of 
withering public condemnations, consumer advocates have charged 
that Klein and company have been asleep at the switch as 
telecommunications executives have pulled off one mega-merger 
after another in a wheeling-and-dealing spree that has reshaped 
the industry and hit many consumers in the pocketbook. 
	     ''For dealing with one-sixth of the economy, the 
telecommunications market, Klein flunks a test of meaningful 
antitrust enforcement,'' Gene Kimmelman, the co-director of the 
Washington office of Consumers Union, said in an interview. 
	     This merger mania, the critics say, is at odds with the 
promises made amid all the backslapping three years ago, when 
corporate honchos and their hired guns, along with quite a few 
members of Congress, hailed the enactment of the landmark 
Telecommunications Act of 1996, which deregulated the telephone 
and cable television industries. At the time, the proponents said 
that removing the regulatory shackles on these industries would 
spur competition and drive down prices. 
	     But once the high-fiving ended, plenty of the corporate 
chieftains opted for blockbuster merger deals over head-to-head 
competition. Local phone companies, already huge, have joined 
forces to become even bigger leviathans. 
	     ''People had said, 'Let us loose and we will compete
with everybody,' '' recalled Gregory C. Simon, who was Vice President 
Al Gore's top domestic policy aide during the debate on the 
telecommunications legislation. ''They didn't say, 'Let us loose 
and we are going to buy everybody.' '' 
	     The deal making that has especially appalled consumer 
critics involves the local-telephone giants known as the Baby 
Bells. These seven companies--Ameritech Corp., Bell Atlantic 
Corp., BellSouth Corp., NYNEX Corp., Pacific Telesis Group, SBC 
Communications Inc., and US West Inc.--were born 15 years ago, 
when the government split them from AT&T Corp., or Ma Bell, and 
restricted them to providing local phone service. AT&T was 
allowed to compete in the long-distance and equipment- 
manufacturing businesses. 
	     After the 1996 law ended those restrictions and allowed 
the local and long-distance carriers, as well as cable firms, to 
cross industry lines and compete, a frenzy of deal-cutting 
followed. In less than three years, the Justice Department has 
given the green light to four mergers involving five of the Baby 
Bells, which are also known as the regional Bell operating 
companies, or ''RBOCs.'' Two of those deals have yet to be 
approved by the Federal Communications Commission, but if they 
get the go-ahead, the seven Bells will have dwindled to four. 
(See chart, p. 1883.) 
	     Consumer advocates, increasingly dispirited by the 
Justice Department's reluctance to challenge telecommunications 
mergers, are looking to the FCC to impose conditions on the 
merging parties to promote more competition. But they don't 
expect much more than that, since the agency has never shot down 
a merger that the Justice Department has approved. At the same 
time, some lawmakers are so troubled by the FCC's expansive 
review of mergers that they are moving to curb the agency's 
powers. 
	     Assuming the FCC approves a pending merger between Bell 
Atlantic and GTE Corp., and another between SBC and Ameritech, 
the two mammoth firms that will emerge will control telephone 
lines serving about two-thirds of the nation. 
	     AT&T officials have pointed to the Bell mergers to 
bolster the justification for their own firm's aggressive deals. 
AT&T has argued that if the RBOCs can solidify their grip on the 
local-service market through mergers, then it should be allowed 
to acquire huge cable firms. Recognizing that any strategy that 
promises to boost competition is likely to win government 
approval, AT&T has pledged that those cable wires will be used to 
compete in the local-service market. But the firm's recent 
acquisition of MediaOne Group Inc., the third-largest U.S. cable 
firm, on top of its earlier purchase of Tele-Communications Inc., 
another cable giant, has drawn scorn from the consumer activists 
as well. 
	     How did this massive consolidation in the 
telecommunications industry occur just three years after passage 
of a law that was supposed to spur competition? And what, if 
anything, should Washington do about it? 
	     Consumer activists charge that Klein set the stage for 
this outcome by allowing the marriage of Bell Atlantic and NYNEX 
in April 1997, without imposing any conditions or safeguards for 
ratepayers. Though there had been a merger of two of the RBOCs-- 
SBC and Pacific Telesis--a few months earlier, it did not involve 
firms in contiguous territories. When Bell Atlantic was allowed 
to acquire NYNEX, that deal sent surefire signals to the 
marketplace that anything goes, the watchdog groups contend. 
	     By failing to mount an attack, Justice allowed a 
''triggering merger,'' in antitrust parlance, which is a deal 
that invites other firms to pursue similar strategies. The Bell 
Atlantic-NYNEX deal was especially egregious, the critics 
contend, because it involved two geographically adjacent firms, 
which could have been expected to compete. Instead, Bell Atlantic 
shelved its plans to invade NYNEX's market once the two firms 
began merger discussions, according to an FCC analysis. The two 
firms now have near-monopoly power over local telephone service 
in a region stretching from Virginia to Maine. 
	     ''Someday, people will look back on this, scratching 
their heads, and say, 'How did we get so few companies, and how 
in the world do we get out of this mess of no one really wanting 
to compete?' '' said consumer advocate Kimmelman. ''The logical 
place to point will be Joel Klein letting Bell Atlantic and NYNEX 
merge without any conditions.'' 
	     Mark N. Cooper, the director of research at the Consumer 
Federation of America, agreed. ''After that deal was approved, 
people thought, 'Jeez, we can get away with anything,' '' Cooper 
said in an interview. 
	     Brian R. Moir, who represents the International 
Communications Association, a broad-based group of business 
consumers, worries that the old Bell system is being 
reconstituted. ''Never in our wildest imagination did we believe 
that the Antitrust Division would sit idly by as Humpty-Dumpty 
was put back together,'' Moir said. 
Klein's Clout 
	     When Klein gave the thumbs-up to the Bell Atlantic-NYNEX 
merger in April 1997, he was the Justice Department's acting 
antitrust chief, having not yet won Senate confirmation. He was 
in a no-win position--subject to charges that he was responding 
to political pressures, no matter what he did. 
	     Despite the criticism, Klein does not second-guess his 
decision on that merger, or on any of the other RBOC deals. 
Though circumspect--even about a transaction that has already 
been approved--the intense but soft-spoken antitrust chief with 
the golden resume says that he and his staff reviewed millions of 
documents, interviewed plenty of the affected players, and 
concluded there was no basis to challenge it. 
	     ''I studied this case in extraordinary detail,'' Klein 
said in an interview. ''I remain fully comfortable with the 
decision that we made.'' 
	     Klein, when pressed on whether he overruled a 
recommendation by his Antitrust Division staff that favored 
challenging the Bell Atlantic-NYNEX deal, would say only that 
there was ''a very strong consensus not to proceed,'' though it 
was not unanimous. 
	     To bring a lawsuit against a proposed merger, the Justice 
Department has the burden of showing under the 1914 Clayton Act 
that the proposal ''may substantially lessen competition'' and 
would result in customers' being gouged. That is, the Justice 
Department must prove that the merger would snuff out the 
potential for competition that existed because the merging 
parties could have been expected to jump into each other's 
market. Most analysts agree that it is a heavy burden to show 
that competition would have been ''substantially'' diminished, 
especially since the Baby Bells had never before competed when 
they operated as regulated monopolies. 
	     The FCC, by contrast, operates under a looser ''public- 
interest'' standard in the 1934 Communications Act. To test 
whether a merger is in the public's interest, the FCC generally 
invites state regulators, consumer groups, competitors, 
employees, and others with a stake in the deal to make comments. 
The commission then writes an order based on that information; 
often these orders are designed to survive a court challenge 
because virtually every controversial order gets appealed. 
	     Even many of those who worry about the implications of 
the Bell mergers are quick to acknowledge that litigation in 
these circumstances is a high-risk proposition. So-called 
potential-competition cases--arguing that two companies would 
have competed, but for their merger--are ''very hard to 
successfully bring,'' said Philip L. Verveer, a veteran lawyer 
who served in Justice's Antitrust Division and at the FCC. ''In 
terms of a litigated-to-the-end potential-competition case, I 
don't think there has been one in 25 years or so.'' 
	     But the 52-year-old Klein doesn't shy away from 
challenges. He has gotten plenty of ink for pursuing other 
government prosecutions that push the antitrust envelope, 
including the controversial ongoing cases against Microsoft Corp. 
and American Airlines Inc. As a magna cum laude graduate of 
Harvard Law School, a law clerk to Supreme Court Justice Lewis F. 
Powell Jr., and a Washington litigator with more than 20 years of 
experience, Klein is not one to suffer from paroxysms of self- 
doubt. 
	     Peppered with questions about why he didn't challenge the 
Bell Atlantic-NYNEX deal or try to impose some conditions on the 
merger, he's unflappable. ''We don't seek to impose conditions 
unless we think we have a prosecutable case, and that's not the 
conclusion we reached in Bell Atlantic,'' Klein said. ''I don't 
think it is my function to simply put conditions on that I think 
would make sense, or be desirable. That is not the charge that 
Congress gave us.'' 
	     Klein is confident that, in the end, his views will be 
vindicated. Though he never explicitly says it, he seems to have 
concluded that this is not the time to pursue bold antitrust 
litigation in the rapidly changing telecommunications field. 
	     ''If in another several years, we don't have any new 
choices (in telephone service) for residences, then I would be 
concerned,'' he said. ''I don't want to sound Pollyannaish. I 
too, would like to see results more quickly. But for the time 
being, I think it is far too early to conclude that the process 
isn't working.'' 
Scolding Justice 
	     Governed by the far-more-elastic public-interest 
standard, the FCC was not as constrained as the Justice 
Department in reviewing the Bell Atlantic-NYNEX deal. Its lengthy 
order in August 1997, approving the merger but imposing 
conditions, reads like an antitrust brief that sets forth 
substantial concerns about the transaction. Some critics even 
read it as a sort of scolding of the Justice Department for not 
pursuing the case. 
	     ''The proposed merger will eliminate Bell Atlantic as a 
likely significant independent competitor in the (NYNEX) 
market,'' the FCC concluded. ''We conclude that Bell Atlantic did 
plan to enter . . . NYNEX territories and that Bell Atlantic 
should be considered a competitor to NYNEX but for the proposed 
merger.'' 
	     The two companies, the agency decided, ''failed to carry 
their burden'' under the public-interest standard that 
''efficiencies generated by the merger will mitigate entirely the 
potential competitive harms.'' 
	     But by accepting a series of conditions designed to 
make it easier for other competitors to freely enter their market, 
the two companies were able to satisfy the FCC's concerns. ''We 
didn't think the FCC's conclusions were at all justified by the 
record,'' said Thomas J. Tauke, senior vice president for 
government relations at Bell Atlantic. ''We acquiesced to the 
conditions in order to be able to close the deal.'' 
	     Roy Neel, the president of the U.S. Telephone 
Association, which represents the RBOCs, is far more blunt about 
what he sees as the FCC's overreach. ''The idea that the FCC 
would take what should be a very limited merger authority to 
review the transfer of licenses to try to extract concessions in 
an area that has absolutely nothing to do with the merger is 
outrageous,'' Neel said. 
	     Klein said that the FCC's conclusion was different from 
the Justice Department's because the commission applies ''a 
different standard, different burdens of proof, and different 
public-interest considerations.'' 
	     As for the possibility that Bell Atlantic would have 
competed with NYNEX except for the merger, the facts were 
''disputed,'' Klein said. He added that one could reasonably 
conclude that such competition might have oc-curred, but that 
such a finding still would not be enough to meet the tough 
threshold for an antitrust case. ''You still need to show a 
competitive impact--that this transaction was likely 'to 
substantially lessen competition,' '' Klein said. 
	     In another finding that must now seem especially ominous 
to Bell Atlantic and SBC, both of which have separate merger 
deals pending before the FCC, the agency also sent a strong 
signal that it was not going to look favorably on further Baby 
Bell mergers after the NYNEX deal. ''Further reductions in the 
number of Bell companies . . . would present serious public- 
interest concerns,'' the FCC concluded in its order on the Bell 
Atlantic-NYNEX deal. 
	     When asked if the FCC has the political will to stand in 
the way of a major merger, William E. Kennard, the chairman of 
the agency, said in an interview: ''Stay tuned.'' 
FCC Overreach? 
	     As the FCC shows a greater willingness to flex its 
muscles than does the Justice Department, it is getting hammered 
on Capitol Hill for its more aggressive, protracted review of 
mergers under its public-interest standard. 
	     Especially rankling to some lawmakers was a public 
hearing on May 6 on the proposed SBC-Ameritech deal, in which a 
top FCC staffer said that the merger ''flunks'' the public- 
interest test. ''This merger offers no redeeming public-interest 
benefits,'' said Thomas Krattenmaker, research director of the 
FCC's Office of Plans and Policy, who stressed that he was not 
purporting to speak for the commission members, just for himself. 
The merger should be rejected, he said, unless ''ameliorated by 
sufficient conditions.'' 
	     Some of Krattenmaker's concerns echoed those cited by the 
FCC in its review of the Bell Atlantic-NYNEX deal. For example, 
he said the two companies would serve as ''competitive checks'' 
on each other if they didn't merge. ''Who is more likely to 
effectively invade one Baby Bell's territory than another Baby 
Bell?'' he asked. ''Who is better able to sniff out some 
discrimination by a Baby Bell than another Bell?'' 
	     Some Bell executives believe that Krattenmaker's negative 
comments contributed to a dip in both companies' stock values. In 
any event, they argue that the FCC is vastly overstepping its 
bounds. ''The FCC is behaving like a regulatory bully,'' said 
Neel of the U.S. Telephone Association. ''They have enlarged 
their mandate. There is no check on it. That's one thing that 
Congress is looking at.'' 
	     Angrily denouncing Krattenmaker's statements, Neel said: 
''I have never seen such a case of bias seep through in a public 
meeting like that. I have never seen such bureaucratic arrogance 
as was displayed at that hearing.'' 
	     For his part, Sen. John McCain, R-Ariz., the chairman of 
the Senate Commerce, Science, and Transportation Committee, fired 
off a letter to Kennard, saying: ''You must do whatever is 
necessary to remove the institutional unfairness and prejudgment 
that has been permitted to taint this proceeding.'' In a response 
to McCain, Kennard expressed his confidence that the commission's 
review ''has been fair and impartial.'' 
	     Still, the lingering unhappiness over this episode and 
others has soured Kennard's already-strained relationship with 
key lawmakers. McCain recently joined with Sen. Orrin G. Hatch, 
R-Utah, the chairman of the Senate Judiciary Committee, to 
sponsor a measure that would eviscerate the FCC's authority to 
review mergers. McCain's unusual move to cede the Commerce 
Committee's jurisdiction over telecommunications mergers to the 
Judiciary Committee may not be greeted all that enthusiastically 
by his panel's members. 
	     The Senate bill mandates that once either the Justice 
Department or the Federal Trade Commission approves a 
telecommunications merger or expresses no intent to intervene, 
the FCC must follow their lead. If neither Justice nor the FTC 
states a position, that silence presupposes that the merger would 
be considered inconsequential or nonproblematic. The FCC would be 
limited to a 60-day review period and should presume approval. 
	     McCain and Hatch both said that their bill would 
eliminate duplicative work by Justice and the FCC, though it is 
obvious from the Bell Atlantic-NYNEX and SBC-Ameritech mergers 
that Klein and Kennard see their roles in the review process as 
being quite different. 
	     Rep. Edward J. Markey of Massachusetts, the senior 
Democrat on the House Commerce Telecommunications, Trade, and 
Consumer Protection Subcommittee, dismissed the Hatch-McCain 
proposal, and other efforts to roll back the government's 
authority to review mergers, as throwbacks to a bygone era. 
''It's not a good idea. It's not consistent with 20th-century 
experience,'' Markey said. ''Maybe the 19th century is a good 
model for the 21st century, but I would like to hear the case 
made for it.'' 
Dueling Forecasts 
	     Even as Kennard is taking his lumps, Klein is winning 
plenty of plaudits in corporate boardrooms and on Capitol Hill 
for his more-restrained approach to reviewing telecommunications 
deals. The global marketplace, corporate honchos are quick to 
say, demands heft for firms to be competitive. 
	     ''United States companies are in a global race, for God's 
sakes,'' said James D. Ellis, SBC's general counsel. ''Our 
country, our policy, our laws, should not handicap American 
companies from being able to compete with NTT of Japan or 
Deutsche (Telekom) or BT (British Telecom).'' 
	     Rep. W.J. ''Billy'' Tauzin, R-La., the chairman of the 
Telecommunications Subcommittee, shares Ellis' concerns. ''If 
some of these companies don't combine their assets so that they 
are capable of competing globally, you might find that the 
company that is supplying your services is headquartered in 
Europe,'' Tauzin said in an interview. 
	     The critics' focus on local-telephone mergers as the key 
link in evaluating competition in this rapidly changing industry 
is misplaced, Tauzin said. He points out that consumers have a 
nascent but growing array of alternatives from which to choose. 
	     ''Competition among telephone wires is the old 
paradigm,'' Tauzin declared, citing the explosive growth of 
telecommunications firms that rely on technology ranging from 
undersea cables and fiber links to terrestrial wireless systems 
and satellites. ''It's just an entirely different world from when 
you had one wire and one company running it. I don't think you 
can ever put all that back again.'' 
	     Others are not so quick to downplay the importance of the 
RBOC mergers. Markey is not pleased by the Justice Department's 
approach. He argues that until the RBOCs open their local markets 
to competition, they should not be allowed to acquire other 
companies. ''I'm not happy,'' Markey said. ''I don't think there 
should have been such a low standard established for approval of 
those mega-mergers.'' 
	     Kennard, in an interview, also questioned how mergers 
between the Baby Bells that have near-monopoly clout in their 
markets are consistent with the goal of promoting competition as 
envisioned by the '96 law. 
	     Such comments infuriate RBOC executives and their hired 
guns. They say that FCC officials are hostile to Bell mergers, 
but have a more tolerant view of AT&T's deals. 
	     For example, last year, when AT&T purchased Tele- 
Communications Inc., Kennard quickly endorsed the move as a way 
to jump-start competition in the local market by using cable 
wires. Still, the FCC chairman sang a different tune in response 
to AT&T's announcement last month that it planned to acquire 
cable giant MediaOne Group. ''Because of its size and reach and 
the many novel legal and policy issues involved, this proposed 
merger warrants very careful scrutiny,'' Kennard said in a 
statement. 
	     Neel has little confidence that the FCC will actually 
follow up on Kennard's promised scrutiny. ''AT&T still dominates 
the long-distance business, and it's about to dominate the cable 
business and the Internet-access business,'' Neel said. ''Talk 
about the pot calling the kettle black--and the FCC is sitting on 
its hands. I've never seen dereliction of duty like this by a 
regulator.'' 
	     In the wake of more mega-deals, telecommunications 
combatants have starkly different views of where the country is 
headed. Kimmelman seems resigned that the genie is out of the 
bottle. 
	     ''It is obvious already today that we are not getting 
competition, it will be more and more obvious over time, and it 
all goes back to a permissive merger policy, starting with Bell 
Atlantic-NYNEX,'' he said. ''I'm looking at people's bills. I'm 
looking at who's in the market, and I'm looking at the costs of 
using the new technologies--it all adds up to no meaningful 
competition for the vast majority of consumers.'' 
	     But as dour as that view is, Klein is just as upbeat that 
he has made the right moves. He pointed out that the 
telecommunications law is just three years old and that it took a 
long time, following the breakup of Ma Bell, for competition to 
develop in long-distance. ''Now you realize that we charted the 
right course even if there were some slow beginnings,'' Klein 
said. 
	     ''I think people are expecting things to move too 
quickly,'' he concluded.