Regulatory News - Competitors Urge Denial of MCI WorldCom-Sprint Merger

Posted:  04/2000

Competitors Urge Denial of MCI
WorldCom-Sprint Merger
BY KIM SUNDERLAND

As two of the nation’s largest IXCs attempt
to combine forces in one of the new millennium’s first and biggest telecom
mergers, the FCC (www.fcc.gov) prepares to
issue its determination of whether the controversial deal benefits the public
interest.

To hear competitive carriers tell it, there’s no way the proposed arrangement should be allowed to happen. At a minimum, restrictive conditions are in order if the federal agency is considering approval, they say.

According
to comments filed at the FCC by a myriad of telecommunications companies and
lobbying groups, the most crucial concern of the pending MCI WorldCom Inc. (www.wcom.com)
and Sprint Corp. (www.sprint.com) merger is
the expected anticompetitive effects of the IXCs’ combined Internet backbones.

The
merger would create an allied entity with dominant control over roughly 70
percent of the national Internet backbone market, largely from MCI WorldCom’s
UUNet Technologies Inc. ( www.uu.net), the
competitors say.

"Because of the profound anticompetitive effects of this
merger on the Internet backbone market, this application must be denied, or at
the very least, conditioned on the divestiture of one of the merging parties’
Internet business," AT&T Corp. (www.att.com)
says in its filing.

“The commission should approach this application with the strong presumption that, to acquire Sprint’s backbone facilities, MCI WorldCom would need to demonstrate that entry barriers to this market are virtually non-existent,” AT&T’s comments state.

AT&T also suggests the merger should not give the proposed new entity the ability to create anticompetitive network effects in the national Internet backbone market.

Others, which also have filed concerns, agree.

"A
horizontal combination of the first and second largest backbone networks
threatens considerable harm to consumers," according to GTE Service Corp.
and GTE Internet-working (www.gte.com). It its
filing, GTE states, "Moreover, the synergies offered to justify these
consumer losses are overstated, speculative and not merger specific."

GTE notes that data MCI WorldCom and Sprint supplied confirm they rank first and second, respectively, among Internet backbone providers in connections with ISPs, and that the combined company would have more than four times as many ISP connections as the next largest backbone.

MCI WorldCom’s UUNet serves 37 percent of the top 500 websites, while Sprint serves 12 percent. No other backbone provider serves more than 13 percent, according to GTE’s filing.

The size disparity among large backbone providers created in this situation “substantially changes the combined firm’s incentives to the detriment of customers and competition,” GTE says.

In other words, competitors would need to interconnect more with the merged entity than would the MCI WorldCom/Sprint company, according to GTE’s comments. This could lead to degraded interconnection quality or higher interconnection fees, and possibly to monopoly control of the Internet, the company continues.

In
their own proposed merger, GTE and Bell Atlantic Corp. (www.bell-atl.com)
attempt to get around this issue by transferring the Internet backbone and
related assets of GTE Internetworking to a corporation they propose calling
DataCo. They say DataCo would be owned and controlled by third-party public
shareholders and operated independently.

Under the proposal, the merged entity would receive a 10 percent equity interest in DataCo and the rights to convert its equity interest to up to 80 percent, exercisable within five years.

Bell Atlantic and GTE say this proposal complies with Section 271 of the Telecommunications Act of 1996. The FCC was expected to receive in mid-March final comments on this proposal. A final ruling is expected this spring.

Competitors, however, aren’t convinced the GTE/Bell Atlantic backbone proposal is such a great idea either.

The
Competitive Telecommunications Association (CompTel, www.comptel.org)
opposes the Bell Atlantic/GTE divestiture proposal because it "would
exercise de facto control over the divested company known as DataCo."

As a result, CompTel said this would enable the merged Bell Atlantic/GTE to provide in-region long-distance services on the date of divestitur–a violation of Sec. 271.

As an alternatie, CompTel urges that, should the FCC decide not to require the full divestiture of DataCo, it should require the merged entity to exercise its conversion rights within two years–instead of the proposed five years–from the consummation of the merger. This requirement “would provide a strong incentive for Bell Atlantic to accelerate its efforts to open local markets to competitive entry” and comply with the Telecom Act, CompTel says.

Overseas
Interest

The Internet backbone concerns in the MCI WorldCom/Sprint
proposed merger stretch to international proportions. The European Commission
(EC, http://europa.eu.int/comm) has
launched a comprehensive antitrust probe into the proposed merger of MCI
WorldCom and Sprint, citing similar concerns that the deal would dominate
Internet access in Europe.

According to an EC spokesman earlier this year, the
European Union’s (http://europa.eu.int)
watchdog has three areas of concern: Internet access, telecom services to
multinationals and transatlantic long-distance phone traffic.

The EC’s review
is slated for completion in early summer, after it opted to extend its
investigation for another four months, despite Sprint’s sale in January of its
interests in Global One Inc. (www.globalone.com),
which EC regulators said has "negligible involvement" in the market
for Internet connections.

In 1998, the EC forced WorldCom to sell its online assets in exchange for approval of its purchase of MCI Communications Corp. While the merger was approved, MCI WorldCom still controls more than 50 percent of all Internet traffic, with Sprint handling roughly 20 percent, according to various reports.

“Given the combined firm’s absolute size and the great disparity between a merged MCI WorldCom-Sprint and its remaining competitors, all of the factors that led regulators to block the combination of MCI’s and WorldCom’s Internet assets apply with equal force here,” GTE says.

And
Cable & Wireless PLC (www.cwplc.com),
which bought MCI WorldCom’s Internet backbone business for $1.75 billion, is
embroiled in two lawsuits against MCI WorldCom, alleging MCI WorldCom failed to
switch over its Internet customers to Cable & Wireless.

The EU is investigating those claims and says the MCI WorldCom/Sprint proposal raises similar Internet-dominant concerns.

The companies have promised to divest Sprint’s Internet backbone subsidiary in order to gain global approval of the deal, an EC statement states.

Other
Persistent Problems

The level of market power that would be concentrated
in the merged company isn’t just confined to Internet backbone facilities,
according to R. Gerard Salemme, senior vice president of NEXTLINK Communications
Inc. (www.nextlink.net), in the company’s
filing.

“It also would have an anticompetitive effect on telecommunications, and, particularly, the competitive exchange access market,” Salemme says in the filing. The merger would combine MCI WorldCom and Sprint dominant long distance and local exchange carrier operations–both CLEC and LEC, according to the CLEC.

NEXTLINK accuses Sprint of using its purchasing power as one of the Big Three IXCs “to engage in an illegal and discriminatory campaign to disadvantage unaffiliated CLECs.” Specifically, Salemme points to Sprint intentionally withholding switched access charges owed to NEXTLINK and other CLECs.

"Moreover,
Sprint has discriminated against nonaffiliated CLECs by paying access charges of
its own local affiliates and permitting its own local affiliates to charge other
carriers access rates that equal or exceed the rates Sprint refuses to
pay," the filing says. NEXTLINK has filed comments on this situation with
the New York Public Service Commission (www.dps.state.ny.us),
and calls on the FCC to deny the merger until the commission first investigates
Sprint’s behavior and takes remedial action.

According to the filing by SBC
Communications Inc. (www.sbc.com), approval of
the merger adversely will affect mass market competition, and the only way to
constrain that is through widespread RBOC long-distance entry.

“The timing of RBOC entry is not sufficiently certain to allay the competitive concerns that arise from this merger,” SBC’s filing says. “Such entry [to date] has occurred in only one state, and the process of securing regulatory approval has proved itself to be a lengthy one.”

At
press time, the FCC was analyzing and completing its record on this proposal.
Similar to the Bell Atlantic/GTE merger proposal, a ruling is expected this
spring.