FCC Approves AT&T-BellSouth Merger with Copps and Adelstein Concurrences

Martin and Tate questioned whether conditions attached to the merger were necessary, especially since neither the FCC’s nor other regulators’ reviews found potential harms to public interest that needed to be addressed. “Some of the conditions impose burdens that have nothing to do with the transaction, are discriminatory, and run contrary to Commission policy and precedent,” Tate and Martin said: “The conditions regarding net neutrality 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 statement by Martin and Tate made clear that they do not see the FCC as adopting a new net neutrality principle that will guide future decisions. “Although AT&T may make a voluntary business decision, it cannot dictate or bind government policy,” they said: “Nor does this order.” They also argued that rate caps on special access are “inconsistent with the Commission’s general policies of deregulating prices in competitive markets.”

But Copps called AT&T’s merger concessions “a modest victory for American consumers.” The “tortured odyssey” of the merger talks began in Oct., when DoJ in “incomprehensibly concluded that it had no concerns” and was complicated by a move to get Comr. McDowell to participate, Copps said in his comments, calling the McDowell gambit “a farce transcending the comedic.”

“After much hard work and countless hours of deliberation on all sides, the applicants have now offered unprecedented and substantial commitments that I believe will safeguard and serve the public interest to a degree few envisioned at the time the merger item was presented to the Commission,” Copps said: “Would I have preferred to do even more? Of course. Am I entirely satisfied? No. Do I agree with much of the analysis contained in the Order? Decidedly not.”

Adelstein voiced similar reservations. “This transaction has given me serious pause, but through hard work and genuine compromise, we were able to achieve a result that delivers major, tangible benefits to consumers,” he said: “A historic merger warrants historic conditions. I don’t pretend that we addressed every possible issue presented here or that it is possible, or even appropriate in this context, to try to rectify years of decisions that have undercut competition. Yet, drawing on the full record, I have tried to counter-balance the effects of this transaction by asking for meaningful conditions that protect the open and neutral character of the Internet, benefit consumers by promoting affordable broadband services, and preserve competitive choices for residential and business consumers.”

“I am delighted that my colleagues and the merging companies were able to come to terms so quickly after last week’s announcement,” Comr. McDowell said, referring to his decision not to participate in the vote since he represented CLECs before joining the Commission.

Rep. Dingell (D-Mich.), incoming chmn. of the Energy and Commerce Committee, said the merger agreement likely will be the subject of hearings after Congress returns this week. “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,” Dingell said.

The biggest financial concession was on special access, which could cost AT&T $500 million over the caps’ 4-year term, sources said. Should AT&T take $125 million annual hits, they would be small compared with $2.25 billion savings projected by year 3 of the deal -- about 1 cents an outstanding common share. The merger seems to break ground on net neutrality. Other key provisions require AT&T to sell off its 2.5 GHz spectrum holdings and to offer stand-alone DSL.

Bank of America analyst David Barden said in a research note that even with AT&T’s concessions the deal makes sense. “The concessions generally break down along anticipated lines and do not meaningfully impact the overall economics of the… merger,” he said: “Where the concessions do touch the economics of the deal, the biggest concessions deal with containing upside opportunities (like postponing internet traffic prioritization or capping special access rates) rather than introducing new competition or forcing prices down.”

AT&T also made what Barden termed “smaller, more politically visible concessions,” such as returning 3,000 offshore BellSouth jobs to the U.S. He said these moves are “unlikely… to bubble to the surface in the income statement.”

Colleen Boothby, counsel to the Ad Hoc Telecommunications Users Committee, said the concessions on special access are significant and likely will amount to about $500 million -- though the numbers are difficult to gauge based on the large number of rate elements regionwide and the amount of data the Bells haven’t made public.

“There’s a lot more that needs to be done, but I don’t want to downplay the significance of what the Commission has achieved in this condition,” Boothby said: “It’s good for enterprise customers and it’s good for competition. It’s a big step forward. There’s a lot more that needs to be done.”

Telecom customers wanted the FCC to complete a long-open rulemaking, Boothby said: “The record in that rulemaking is very clear that there’s a problem and the solution is that the Commission has got to face market realities and change the way it regulates special access because competition just has not developed the way they thought it would when they wrote the rules. It doesn’t take a rulemaking to say a 98% rate of return on a regulated service is too high and they need to push those prices down.”

Harold Feld, senior vp at the Media Access Project, said the net neutrality provisions will have far reaching effects. “This is a well-constructed definition of net neutrality that extends from the subscriber all the way to the backbone and is something that could easily be replicated by law or regulation,” he said: “People have said, ‘We don’t know what net neutrality means.’ We've got a pretty good working definition out of this merger.”

The agreement makes residential WiMAX service subject to net neutrality, Feld said: “We have broken the wireless barrier and are actually applying net neutrality to a wireless platform.” Feld also noted AT&T’s agreement to divest its 2.5 GHz spectrum. In the earlier Sprint Nextel merger, for example, the FCC imposed only buildout requirements, he said.

“This is the first time the Commission has ordered this kind of broad wireless divestiture,” he said: “It’s a recognition that if the Commission wants to see a 3rd broadband alternative and is betting on WiMax to be the competitor to DSL and cable, then the Commission needs to free up enough spectrum to make that happen.”

Clearwire filed an ex parte letter Fri. backing the 2.5 GHz divestiture. “Should the Commission accept these important commitments as conditions to approving the merger, they will open the door for the deployment of competitive wireless broadband networks, including mobile WiMax networks, and promote broadband competition to the benefit of American consumers,” the company said.

But Randolph May, pres. of the Free State Foundation, has deep concerns about the negotiations between FCC Democrats and AT&T that led to the agreement, he said.

“While it is understandable, after waiting nearly a year for a decision, that the companies felt the need to make further concessions in the face of apparently unrelenting demands from Commissioners Copps and Adelstein, the real lesson here is that the FCC’s merger review process must be reformed,” May said. “The Dept. of Justice and the 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.'”

Christopher Yoo, prof. of law at Vanderbilt U., voiced similar concerns. Regulation is inconsistent, he said, noting that companies that merge are under rules different from others.

“Merger conditions do not go through the usual administrative process of notice and comment,” Yoo said: “Although the FCC invites interested parties to comment on the merger in general, it rarely discloses the proposed conditions until after they have been approved. The process is even more problematic when one recognizes that these conditions (along with similar conditions imposed in the SBC-AT&T and Verizon-MCI acquisitions) were imposed while the FCC has a formal proceeding open to assess network neutrality.”