FCC Approves Cingular Merger; Copps, Adelstein Raise Concerns

The order was more exacting than the Justice Dept.’s Mon. decision (CD Oct 26 p1), but it didn’t vary by much. The FCC order requires the companies to address competitiveness issues in 22 markets. The FCC said it determined that anticompetitive effects are “unlikely” in the nation’s remaining 712 Cellular Market Areas. As with the DoJ order, the largest market at issue is Oklahoma City. The FCC is forbidding the companies to merge operations in 15 other markets, including Sherman- Dennison, Tex., and Owensboro, Ky. In 4 local markets -- Shreveport, La., Pittsfield, Mass., St. Joseph, Mo., and Louisiana RSA No. 1 -- the companies must convert non- passive, minority equity interests of AT&T Wireless in competing mobile telephony carriers to passive interests.

The companies will have to sell 10 MHz of spectrum in Detroit and Dallas; this was also a condition of the DoJ order. Most of the divestitures, as in the DoJ order, are in small markets. The order also limits the company’s participation in Jan.’s Auction 58, requiring that the carrier not bid for licenses in any BTA in which Cingular controls, or has a 10% interest in, 70 MHz or more of cellular and/or PCS spectrum.

The FCC also approved applications filed by Cingular and T-Mobile USA allowing the unwinding of their GSM network infrastructure joint venture in portions of Cal., Nev. and N.Y. The FCC approved an application by Triton PCS and AWE to exchange spectrum in portions of N.C. and Ga.

“Based on the record developed in this proceeding, the Commission concluded the acquisition generally is not likely to cause competitive harm in most mobile telephony markets,” the FCC said. In a section of the order likely to get the most careful reading, the Commission downplays wireline-wireless competition concerns. “We conclude that any potential public-interest harm to intermodal competition arising from the loss of AT&T Wireless as an independent competitor is mitigated by the limited level of wireless-wireline competition at this point in time, and by the continued existence of a number of independent national and regional wireless carriers in the markets relevant to this transaction,” the order said. “We also find that any potential harm is outweighed by the potential benefits that the merged entity could bring to the majority of mass market consumers.”

Adelstein questioned why the FCC wasn’t willing to look more closely at the effects on competition between the wireline and wireless markets. “The majority declines to adopt any condition to ensure that intermodal competition does not disproportionately suffer as a result of our approval of the merger,” he said. “They do so even though the item itself concludes that intermodal competition will suffer as a result of this merger. I find the unwillingness to confront this issue far too short-sighted for a Commission that is perfectly willing to look prospectively towards communications landscapes on the horizon when that approach is more convenient.”

Copps said the proceeding “was harmed by the absence of rigorous analysis of the implications of this merger for intermodal competition… The order devotes a mere 13 paragraphs of a more than 100 page order to the intermodal competition that stands at the center of so much of this Commission’s competition philosophy… In the end, the order dismisses the problem posed by the merger by asserting that wireless was never really an intermodal competitor after all because ‘most wireline customers do not now consider wireless service to be a close substitute in the antitrust sense for their primary line obtained from a wireline carrier,’ and because ’there remain qualitative differences between wireless and wireline services.’ I guess this means we won’t be hearing so much rhetoric in the future about the power of wireless as an intermodal competitor.”

Copps also questioned the numbers the FCC used in reaching its decision. “In the interest of improving and quickening the review of future mergers, I must note that the data that we relied upon in making these decisions were not what they could have been,” he said. “The item relies almost exclusively on the NRUF [Numbering Resource Utilization & Forecast] database of telephone numbers to determine market shares. I am not convinced that this database alone is adequate for this important determination.”

Chmn. Powell disputed his colleagues’ arguments in his statement on the merger. “In their partial dissent, my colleagues incorrectly assert that we confined our merger evaluation to wireless intramodal issues,” Powell said. “To the contrary, I took very seriously the complex issues that arise from the combination of wireless and wireline companies. This was and will remain a matter of focus and concern. However, at the end of the day we did not believe that the evidence in the record was sufficient to justify and substantiate additional conditions beyond those already imposed by the Order.”

Layoffs are coming for the combined company, Cingular CEO Stan Sigman said, but not until the new year. In a conference call, Sigman said it’s not known how many layoffs are likely, but company officials will have a better idea once they're allowed access to more detailed AWS data later this week. The companies have 68,000 employees total, he said.

Cingular will merge AWS offerings with its own products in time for the Christmas rush, Sigman said. “Going to market in the holiday season is very important for the new Cingular,” he said. “Customers will have a common service experience.” Sigman said customers would begin to have access to both networks “immediately.” Cingular is very experienced with mergers and will offer AWS consumers a “seamless” integration. Also, Sigman said Cingular expected to be able to roll out a 3G network nationwide by 4th quarter 2005.

Most integration costs will be realized in 2005, Sigman said, and they're likely to be “significant.” It’s unclear what the divestitures will cost the new company, he said. Cingular will be headquartered in Atlanta, but Sigman said it would keep a significant presence in Wash. “I'm very comfortable with a decentralized approach,” he said.

Legg Mason characterized the conditions imposed by the FCC as comparatively “light.” It warned that the merger could still take more time to complete formally, even with regulatory uncertainty removed. “The DOJ’s proposed settlement must still be approved by a federal court. This can take several months, but is essentially a technicality and we do not expect any problems. We understand that the parties intend to close this week, perhaps as early as today.”

Deutsche Telekom said the agreement was a “favorable settlement… with minimal asset divestitures and limited spectrum disposals required.” Still, the firm said, closing on the merger will “set in motion an integration effort, which we believe will be a fairly long and complicated one.”