12/29. The Federal Communications Commission (FCC)
announced, but did not release, a Memorandum Opinion and Order (MOO) regarding the merger
of AT&T and BellSouth. This item temporarily regulates the practices of the merged
entity by, for example, imposing a two year network neutrality mandate.
The conditions imposed by this MOO apply only to the new entity.
The FCC did issue a
release [23 pages PDF] that describes some of the contents of this MOO, and
the FCC Commissioners released statements. Most of the release consists of appended
documents submitted by AT&T and BellSouth. The FCC drafted portion contains little
information. It does not state that the FCC has either drafted or adopted this item.
The FCC release states that "on December 28, 2006, AT&T made a
series of voluntary commitments that are enforceable by the Commission and
attached as an Appendix. These conditions are voluntary, enforceable commitments
by AT&T but are not general statements of Commission policy and do not alter
Commission precedent or bind future Commission policy or rules."
See, AT&T's December 28
document [20 pages
in PDF] and story titled "AT&T Proposes Further Merger Conditions" in
TLJ Daily E-Mail Alert No. 1,511, December 28, 2006.
Network Neutrality. AT&T's proposal states, in part, that
"AT&T/BellSouth also commits that it will
maintain a neutral network and neutral routing in its wireline broadband
Internet access service. This' commitment shall be satisfied by AT&T/BellSouth's
agreement not to provide or to sell to Internet content, application, or service
providers, including those affiliated with AT&T/BellSouth, any service that
privileges, degrades or prioritizes any packet transmitted over AT&T/BellSouth's
wireline broadband Internet access service based on its source, ownership or
destination." (Footnote omitted.)
FCC Commissioners Copps and Adelstein delayed the FCC's approval of this transaction
in order to extract this network neutrality concession from AT&T.
Michael Copps (at left) released a
statement [7 pages in PDF]. He criticized the DOJ's previous approval of the
merger without any conditions as "incomprehensib[e]" and "Surreal".
The Department of Justice's (DOJ) Antitrust Division, which possesses both the
statutory authority, and economic expertise, to conduct antitrust merger
reviews, approved this proposed merger without conditions on October 11, 2006. See, story
titled "DOJ Approves AT&T BellSouth Merger" in
TLJ Daily E-Mail Alert No.
1,466, October 11, 2006.
Copps then wrote that "the applicants have now offered unprecedented and
substantial commitments that I believe will safeguard and serve the public
He elaborated on the network neutrality language: "when the Internet is
increasingly controlled by a handful of massive private network operators, the
source of centralized authority that threatens the Internet has dramatically
shifted. The tiny group of corporations that control access to the Internet is
the greatest threat to Internet freedom in our country today. If left unchecked,
the merged entity resulting from today’s decision would have gained the ability
to fundamentally reshape the Internet as we know it -- in whatever way best
serves its own profit motives, rather than preserving the integrity and the
effectiveness of the Internet."
He continued that the merged entity "is prohibited from privileging,
degrading, or prioritizing any packets along this route regardless of their
source, ownership, or destination. This obligation is enforceable at the FCC and
is effective for two years. It ensures that all Internet users have the ability
to reach the merged entities' millions of Internet users -- without seeking the
company’s permission or paying it a toll."
Like Copps, Commissioner
Jonathan Adelstein also insulted the "supposed antitrust watchdogs at the
Department of Justice" in his
statement [8 pages in PDF].
He then wrote that the network neutrality language in the MOO "will help
preserve the open nature of the Internet from the consumer to the Internet
cloud". He stated that this is "an historic agreement to ensure that the
combined company will maintain a neutral network and neutral routing in its
wireline broadband Internet access service".
He also wrote that this MOO "takes a long-awaited and momentous step in this Order
by requiring the applicants to maintain neutral network and neutral routing in the
provision of their wireline broadband Internet access service. This provision was critical
for my support of this merger and will serve as a “5th principle,” ensuring that the
combined company does not privilege, degrade, or prioritize the traffic of Internet content,
applications or service providers, including their own affiliates."
The FCC's August 5, 2005,
Statement [3 pages in PDF] contains four items. AT&T's document states that
"Effective on the Merger Closing Date, and continuing for 30 months thereafter,
AT&T/BellSouth will conduct business in a manner that comports with
the principles set forth in the Commission's Policy Statement ..."
Kevin Martin (at right) and Commissioner
Deborah Tate released a joint
[PDF] in which they stated that "the merger will enable the combined company to
accelerate its deployment of broadband and IPTV in the BellSouth region", and
"promises to result in greater competition in the broadband and video markets".
They also criticized the MOO: "we have reservations about some of the
voluntary commitments offered by the merger applicants."
The continued that "We find the imposition of some of the conditions, however, to
be unnecessary. And, some of the conditions impose burdens that have nothing to do with
the transaction, are discriminatory, and run contrary to Commission policy and
precedent." They added that some conditions "may actually deter broadband
They particularly condemned the network neutrality mandates. They wrote that these
provisions will "have very little to do with the merger at hand and very well may
cause greater problems than the speculative problems they seek to address. These conditions
are simply not warranted by current market conditions and may deter facilities investment.
Accordingly, it gives us pause to approve last-minute remedies to address the ill-defined
problem net neutrality proponents seek to resolve."
The procedure by which Copps and Adelstein obtained the network neutrality
mandate, and the Chairman's adamant opposition, limits the reach of this mandate.
First, Martin and Tate stated that the conditions "in no way bind future Commission
action. Specifically, a minority of Commissioners cannot alter Commission precedent or bind
future Commission decisions, policies, actions, or rules. Thus, to the extent that AT&T
has, as a business matter, determined to take certain actions, they are allowed to do
The two added that "There are certain conditions,
however, that are not self-effectuating or cannot be accomplished by AT&T alone. To
the extent Commission action is required to effectuate these conditions as a policy going
forward, we specifically do not support those aspects of the conditions and will
oppose such policies going forward."
"For example, today's order does not mean that the Commision has adopted an additional
net neutrality principle. We continue to believe such a requirement is not necessary and may
impede infrastructure deployment. Thus, although AT&T may make a voluntary business
decision, it cannot dictate or bind government policy. Nor does this order. Similarly, this
order does not bind the Commission to reregulate prices or reestablish price
controls", wrote Martin and Copps.
AT&T's concessions are all time limited. Moreover, were AT&T to violate
certain of the conditions, the likelihood of any enforcement action by the FCC
would be minimal. AT&T and BellSouth had a great interest in obtaining
regulatory approvals to enable them to complete the merger. Commissioners Copps
and Adelstein, with two votes (and McDowell's recusal), could block the merger.
They held a strong bargaining position.
Now that AT&T has its regulatory approvals, Copps and Adelstein are in a weak
position. Two minority Commissioners' votes cannot impose enforcement upon AT&T.
In the future, Copps and Adelstein may prove powerless to compel AT&T to stop
some practice that Copps and Adelstein belief violates the network neutrality
provisions of the MOO.
Moreover, AT&T has a history of asserting creative interpretations of the
nature of the services that it provides, which regulatory provisions apply to
those services, and how the statutes, rules and conditions are to be construed.
Other MOO Provisions: Special Access Competition. The FCC's release states
that "The record indicates that, in a small number of buildings in the BellSouth
in-region territory where AT&T and BellSouth are the only carriers with direct
connections, and where entry is unlikely, the merger is likely to have an
anticompetitive effect. The Commission found that a commitment by AT&T to divest
indefeasible rights of use (IRUs) to those facilities adequately remedied the
competitive harm. The Commission further found that the merger was not likely to
result in anticompetitive effects with respect to other special access services
that combine one carrier’s own facilities with those of another."
Other MOO Provisions: Retail Enterprise Competition. The FCC's release
also states that the FCC "found that the merger is not likely to have
anticompetitive effects for enterprise customers, even though the Applicants
currently compete against each other with respect to certain types of enterprise
services and some classes of enterprise customers. The Commission found that
competition for medium and large enterprise customers should remain strong after
the merger because medium and large enterprise customers are sophisticated,
high-volume purchasers of communications services and because there will remain
a significant number of carriers competing in the market."
Other MOO Provisions: Mass Market Voice Competition. The FCC's release
also states that the FCC "concluded that the merger is not likely to have
anticompetitive effects in the mass market. The Commission found that neither
BellSouth nor AT&T is a significant present or potential participant in this
market outside of their respective regions. Consequently, the Commission found
that neither party was exerting significant competitive pressure on the other in
their respective in-region territories. The Commission further noted that the
rapid growth of intermodal competitors -- particularly cable telephony providers
(whether circuit-switched or Voice over IP (VoIP)) -- is an increasingly
significant competitive force in this market, and anticipates that such
competitors likely will play an increasingly important role with respect to
future mass market voice competition." (Parentheses in original.)
Other MOO Provisions: Mass Market Internet Competition. The FCC's release
also states that the FCC "found that the merger is not likely to result in
anticompetitive effects for mass market high-speed Internet access services.
Specifically, the Commission concluded that the merger caused no horizontal
effects for these services because neither BellSouth nor AT&T provides any
significant level of Internet access service outside of its respective region.
The Commission also concluded that, while the merger may result in some vertical
integration, the record did not support commenters’ conclusions that the merged
entity will have the incentive to act anticompetitively in the mass market
high-speed Internet access services market."
Other MOO Provisions: Internet Backbone Competition. The FCC's release
also states that the FCC "concluded that the merger is not likely to result in
anticompetitive effects in the Internet backbone market. The Commission found
that the merger is not likely to cause the Tier 1 backbone market to tip to
monopoly or duopoly, nor is it likely to increase the Applicants’ incentive
and/or ability to raise rivals’ costs."
Other MOO Provisions: International Competition. The FCC's release also
states that the FCC "found that the merger is not likely to result in
anticompetitive effects for international services provided to mass market,
enterprise, or global telecommunications services customers. The Commission also
concluded that the merger is not likely to result in anticompetitive effects in
the international transport, facilities-based IMTS, or international private
Reaction. FCC Commissioner Robert McDowell,
who recused himself from participation in this proceeding, wrote in a brief
[PDF] that "I am delighted that my colleagues and the merging companies were able to
come to terms so quickly after last week's announcement. The shareholders, employees and
customers of the new combined company all stand to benefit from the Commission's thoughtful
and prompt action. Congratulations to all."
See, story titled "McDowell Disqualifies Himself in AT&T BellSouth Merger
Proceeding" in TLJ Daily E-Mail Alert No. 1,507, December 18, 2008.
Rep. John Dingell (D-MI), the soon to be
Chairman of the House Commerce Committee
(HCC), stated in a release that "I am pleased to learn that all sides have reached
agreement and that the merger will soon close ... At the same time, I have significant
concerns over the process followed at the FCC during these final weeks, and believe that
such process may be suitable for Committee review." He did not list or
explain his concerns.
Gigi Sohn, head of the Public
Knowledge, an interest group that advocates legislative and regulatory
network neutrality mandates, stated in a release that "Everyone who uses the
Internet will benefit, at least in the short term, from AT&T’s latest
concessions in its takeover of BellSouth. By promising not to offer ‘any service
that privileges, degrades or prioritizes any packet transmitted over AT&T/BellSouth's
wireline broadband Internet access service based on its source, ownership or destination,’
AT&T has agreed to essential Net Neutrality principles."
Sohn added that "The two-year term of the agreement should give policymakers
in Congress and the FCC enough time to come up with a permanent Net Neutrality
policy that reflects the significant agreements AT&T has set out."
She added in a second release that the FCC "should make clear, and should
strictly enforce, those Net Neutrality provisions. In the past, AT&T has claimed
that its IPTV video service is not a cable service, and not subject to proposed
legislative mandates that would apply to cable, such as a build-out requirement.
Now, AT&T should not be allowed to claim that IPTV is a cable service, not a
data service, and attempt to circumvent the Net Neutrality conditions that apply
to every other aspect of its Internet services. Congress, not an AT&T sleight of
hand maneuver, should ultimately decide whether Net Neutrality should apply to
cable and video services.”
Randy May, head of the recently formed
Free State Foundation,
stated in a release that the DOJ and FTC should be "given
principal responsibility for reviewing telecom mergers, with the FCC confined to
ensuring compliance with existing statutory and regulatory requirements. As it
is now, FCC review under the vague public interest standard is just an
invitation for the Commission to hang out a sign stating: `Bizarre Bazaar Now
Open. Merger Negotiations This Way. No holds Barred.´"
FCC Merger Review Process. The FCC possesses statutory authority to review the
transfer of federal communications licenses, but not statutory antitrust merger review
authority. In contrast, the DOJ and Federal Trade Commission (FTC) possess antitrust merger
review authority, but not sectoral license transfer authority. Nevertheless, the FCC
has successfully leveraged its license transfer authority to perform antitrust merger
reviews. It has restricted its exercise of this authority to transactions in
which the transfer of communications licenses is necessary to the participating companies
for achieving the expected benefits of the proposed transaction.
The FCC does so without a specific grant of statutory authority. It does so without the
rigor of economic analysis currently being employed by the DOJ and FTC; it is more
influenced by political processes than the Antitrust Division and FTC currently are. Also,
the FCC does so without concern that the parties to the merger will seek judicial review
of the order approving the merger.
The merger of AT&T and BellSouth entailed the transfer of numerous licenses. This
merger was dependent upon the transfer of these licenses. The FCC employed its license
transfer authority in this proceeding, and in many other mergers and related transactions,
to extract from the participating companies concessions that further the policy goals of
the FCC or its members or staff. For example, in the present case, by holding up the merger
approval, Copps and Adelstein were able to extract from AT&T and BellSouth the
network neutrality provisions. The FCC, and its member and staff, in turn, respond to
outside pressure from federal and state officials, regulated entities, other affected
entities, and other organized interests.
The FCC usually employs license transfer authority to attain policy objectives that
it cannot obtain by other means, such as by rulemaking proceedings. For example,
the FCC's ability under current statute to write regulations affecting
information services is limited.
The FCC only rarely outright denies a license transfer request in a
proceeding in which it is leveraging its license transfer authority to pursue
policy objectives. The FCC delays acting on the merger until it obtains the
conditions that it seeks. As it delays, there is no final order denying a
transfer that can be subjected to judicial review. Moreover, by extracting the
conditions from the transacting parties as voluntary commitments, they are not
able to then seek judicial review of the final order.
However, while the FCC's merger review process enables it to pursue wide ranging policy
interests in an unconstrained and unreviewable manner, the scope of this authority also
has several limitations. First, the FCC can only apply this authority at the point in time
that companies are merging. This authority gives the FCC no control over companies that
do not merge or acquire. Second, the commitments that are extracted in the license transfer
proceedings only apply to the transacting parties. The FCC is unable to impose its policies
industry wide via its antitrust merger review proceedings. Finally, in some proceedings,
such as the present one, the FCC's ability to extract a concession is much greater than
the proponents' ability to enforce that concession.
AT&T. AT&T announced in a
release that "The completion of the BellSouth acquisition comes after an
extensive review process, which included approval by or filings with 36 states,
the U.S. Department of Justice and the Federal Communications Commission (FCC),
as well as with three foreign countries. In order to receive bipartisan FCC
approval, AT&T volunteered a number of commitments ..."
AT&T also stated that "Whitacre will continue to serve as chairman and CEO
and as a member of the board of directors. Duane Ackerman will serve as chairman
emeritus of BellSouth for the transition period following the merger." Also,
"Three members of the former BellSouth's board of directors have joined the AT&T
board — Reuben V. Anderson, James H. Blanchard and James P. Kelly."
Jim Cicconi will be SEVP for external and legislative affairs. Jim Ellis will
be SEVP and General Counsel.
Proceeding Details. This FCC proceeding is WC Docket No. 06-74. The FCC's release
does not include an FCC document number for this item. The FCC release does not assert that
the FCC has yet drafted the order that it just announced.
Also, the FCC's release does not state that this item has yet been "adopted".
Rather, it states as follows: "Action by the Commission, and effective upon
adoption, Friday, December 29, 2006, by Memorandum Opinion and Order."
The FCC's release states that the FCC's contact for this item at the Wireline Competition
Bureau is Nicholas Alexander at 202-418-2173 or nicholas dot alexander at fcc dot gov.