A Federal Communications Commission internal memorandum calls the proposed $129 billion merger of MCI WorldCom Inc. and Sprint Corp. an "intolerable" blow to competition--the latest sign of the regulatory difficulties facing what would be the largest corporate marriage in history.
The Oct. 21 memo obtained by The Washington Post was written by Tom Krattenmaker, the research director of the FCC's Office of Plans and Policy. He has led the assessment of a host of enormous mergers and formerly worked in the antitrust division of the Justice Department.
Knowledgeable sources previously have told The Post that federal regulators are unlikely to approve the deal because it would place 80 percent of the nation's long-distance business in the hands of two companies--AT&T Corp. and the new WorldCom.
Krattenmaker's memo--addressed to FCC Chairman William E. Kennard and other officials--begins with a disclaimer: "I know very little about the 'proposed' merger . . . and so am reluctant to say anything."
But he highlights two problems: Both companies own substantial Internet "backbones"--the networks that carry computer data--and they are the nation's second- and third-largest long-distance providers.
"This will raise the most troublesome issue," Krattenmaker said, echoing worries similar to those expressed by Kennard. "Any further consolidation among the major [long distance] providers would be intolerable, especially in its impact on residential subscribers."
Krattenmaker declined to comment. FCC Chief of Staff Kathryn Brown stressed that his memo was written weeks before MCI and Sprint filed paperwork with the commission requesting merger approval.
"It represents a very preliminary assessment of one of our staff members," she said. "It does not represent any decision of the commission. The commission hasn't even seen the application."
A spokeswoman for the Justice Department, which could intervene to try to block the merger or negotiate conditions if it finds the deal violates antitrust laws, said no judgments have been made, nor can any be accurately construed from Krattenmaker's memo.
"Anyone who understands our investigative process would know that there's no room for these kinds of inferences," said spokeswoman Gina Talamona. "Our investigation is continuing."
Lawyers for MCI and Sprint highlighted Krattenmaker's disclaimer, saying they remain confident that regulators will recognize the merger is in the public interest.
"Tom [Krattenmaker] is a well-respected person at the FCC and Tom is a person who looks at the facts," said attorney Richard Metzger, who represents MCI WorldCom and is a former FCC common carrier bureau chief. "He hasn't looked at the case yet."
MCI WorldCom and Sprint have argued that regulators would be wrong to focus on the deal's effects on the long-distance market, because that market no longer exists: Telecommunications companies are seeking to become one-stop shops for all services, from local and long-distance to high-speed Internet access.
At first glance, the companies have acknowledged, the deal could be seen as a rollback to long-distance competition, but the relevant view is broader: In the battle to offer the spectrum of services, the new WorldCom Inc. would be merely one of several global players. The deal would advance competition, they say, by creating a new company big enough to take on the others.
Krattenmaker's memo suggests the FCC is predisposed against that argument, according to a former FCC official and an industry antitrust attorney, who spoke after portions of the memo were read to them. They said the memo signals the deal is in trouble--particularly at the Justice Department, which must focus narrowly on existing market conditions.
"If that's what Tom Krattenmaker thinks, there's probably someone at the Justice Department who thinks the same thing," the former FCC official said.
If MCI WorldCom "wants to acquire Sprint's Internet backbone facilities," the memo postulates, "there is a strong presumption against the transfer." That issue is not likely to be a deal-breaker: The two companies have said publicly they would consider selling facilities to get the deal through.
But the long-distance issue looms larger. In their filing, the companies argue the long-distance market has been flooded by new companies and more capacity to carry calls, replacing what competitive pressure might be lost through their fusion. They argue that the impending entry of the Bell companies into the long-distance business adds competition as well.
Krattenmaker's memo reveals doubt: "I don't believe that actual entry in the past year has been sufficient to alleviate those fears."