FCC Approves Verizon, SBC Mergers

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By Arshad Mohammed
Washington Post Staff Writer
Tuesday, November 1, 2005

The Federal Communications Commission yesterday approved two huge telephone mergers with limited conditions in the belief that new technologies will give consumers choice in an industry that is rapidly consolidating into a few large players.

The FCC voted unanimously to allow SBC Communications Inc. to buy AT&T Corp. and Verizon Communications Inc. to buy MCI Inc. with tailored conditions designed to smooth the way to a world where cable, wireless and Internet phone services may offer real competition to the old-line telephone goliaths.

Consumer groups and smaller communications companies harshly criticized the FCC's actions and said the mergers will raise prices.

To try to protect ordinary consumers, the FCC obliged the two new companies to sell broadband DSL Internet access without tying it to traditional phone service. It also sought protections to guarantee customers open access to the Internet. Both provisions expire after two years.

Those steps aim in part to ensure that voice over Internet (VOIP) phone service remains a viable competitor.

To protect businesses, the agency froze certain prices the companies charge corporate customers for up to two and a half years.

Commissioners also added protections to try to ensure that the companies are more open about how they exchange Internet traffic with other networks over the next two years and that they do not cut off smaller carriers over the next three years.

The sunset clauses reflect a compromise between Republican FCC Chairman Kevin J. Martin, who did not want any conditions on the mergers, and the commission's two Democrats, who demanded them.

"The conditions 'won' by the Democratic commissioners are mere fig leafs designed to give the appearance of consumer protection," Earl Comstock, president of the CompTel trade group, which represents competing telecom firms, said in a statement. "Today's decision is bad news for American consumers and businesses."

"These conditions are not nearly enough," said Mark Cooper, the Consumer Federation of America's research director. "Chairman Martin's failure to agree to meaningful protections against pricing abuse means competitors can be squeezed out of the market and consumers face price increases."

By allowing the deals to go through, the commission is essentially closing the books on a decade-long regulatory experiment that tried to pit local and long-distance companies against each other.

Instead, the commissioners are betting on a new world of competition from wireless, cable and Internet-based providers that analysts said may take years to emerge as real contenders.

"The analysis here is much more about where the market is going than about where the market is," said Legg Mason Wood Walker Inc. telecom analyst Blair Levin.

"If you look at markets in long-distance and local service, traditional antitrust analysis would be very troubled by this. If you look at what the opportunities are, what the potential is, there is greater justification for this," he said.

While growing fast, VOIP and cable are not yet major players.

According to the Boston-based Yankee Group Research Inc., less than 3 percent of households get phone service from cable and Internet providers. This is expected to rise to about 18 percent by 2009. The mergers will make what are already the two biggest telephone companies in the country even bigger. According to Yankee Group estimates, SBC and Verizon will each have roughly 30 percent of the $62 billion consumer market and about a quarter of the $145 billion business market.

The mergers illustrate how much the telecom world has changed since 1984, when the government forced the breakup of AT&T, and since 1996, when Congress rewrote communications laws to pit local and long-distance companies against each other and to open up competition more generally.

AT&T, which in 1913 received government authorization to operate the nation's phone system as a regulated monopoly, is now a shell of itself. The company now has about 40,000 employees, down from more than 1 million before the breakup.

Verizon and SBC require some state regulatory approvals before the mergers close. Verizon stock fell 19 cents to close at $31.51, while SBC fell 4 cents, to $23.85.


© 2005 The Washington Post Company

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