FCC Approves Verizon, SBC Mergers
Unanimous Vote Sets Conditions on Prices, Web Traffic

By Arshad Mohammed
Washington Post Staff Writer
Tuesday, November 1, 2005; D05

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

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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