Response to Public Comments on the Proposed Final Judgments in United States, 17164-17232 [06-3090]
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Federal Register / Vol. 71, No. 65 / Wednesday, April 5, 2006 / Notices
DEPARTMENT OF JUSTICE
Antitrust Division
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Response to Public Comments on the
Proposed Final Judgments in United
States v. SBC Communications, Inc.
and AT&T Corp. and United States v.
Verizon Communications Inc. and MCI,
Inc.
Pursuant to the Antitrust Procedures
and Penalties Act, 15 U.S.C. 16(b)–(h),
the United States hereby publishes the
three comments received on the
proposed Final Judgments in United
States v. SBC Communications, Inc. and
AT&T Corp., Civil Case No.
1:05CV02102 (EGS), and United States
v. Verizon Communications, Inc. and
MCI, Inc., Civil Case No. 1:05CV02103
(EGS), filed on March 21, 2006 in the
United States District Court for the
District of Columbia, together with the
response of the United States to the
comments. On October 27, 2005, the
United States filed separate complaints
alleging that the proposed acquisitions
of AT&T Corp. (‘‘AT&T’’) by SBC
Communications, Inc. (‘‘SBC’’) and MCI,
Inc. (‘‘MCI’’) by Verizon
Communications, Inc. (‘‘Verizon’’)
would both violate section 7 of the
Clayton Act, 15 U.S.C. 18, by
substantially lessening competition in
the provision of local private lines (also
called ‘‘special access’’) and other
telecommunications services that rely
on local private lines in eleven and
eight, respectively, metropolitan areas—
SBC/AT&T: Chicago; Dallas-Fort Worth;
Detroit; Hartford-New Haven,
Connecticut; Indianapolis; Kansas City;
Los Angeles; Milwaukee; San Diego; San
Francisco-San Jose; and St. Louis; and
Verizon/MCI: Baltimore; Boston; New
York; Philadelphia; Tampa; Richmond,
Virginia; Providence, Rhode Island; and
Portland, Maine. To restore competition,
the proposed Final Judgments, if
entered, would require the defendants
in both actions to divest assets in the
metropolitan areas listed above in order
to proceed with the acquisitions. Public
comment was invited within the
statutory 60-day comment period. The
comment and the response of the United
States thereto are hereby published in
the Federal Register, and shortly
thereafter these documents will be
referenced in a Certificate of
Compliance with Provisions of the
Antitrust Procedures and Penalties and
filed with the Court, together with a
motion urging the Court to enter the
proposed Final Judgment. Copies of the
Complaint, the proposed Final
Judgment, the Competitive Impact
Statement, and other papers are
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currently available for inspection in
Room 200 of the Antitrust Division,
Department of Justice, 325 Seventh
Street, NW., Washington, DC 20530,
telephone: (202) 514–2481 and the
Clerk’s Office, United States District
Court for the District of Columbia, 333
Constitution Avenue, NW., Washington,
DC 20001. (The United States’s
Certificate of Compliance with
Provisions of the Antitrust Procedures
and Penalties Act will be made available
at the same locations shortly after they
are filed with the Court.) Copies of any
of these materials may be obtained upon
request and payment of a copying fee.
J. Robert Kramer II,
Director of Operations, Antitrust Division.
In The United States District Court for
The District of Columbia
United States of America, Plaintiff, v.
SBC Communications, Inc. and AT&T
Corp., Defendants
[Civil Action No.: 1:05CV02102 (EGS)]
United States of America, Plaintiff, v.
Verizon Communications Inc. and MCI,
Inc., Defendants
[Civil Action No.: 1:05CV02103 (EGS)]
Plaintiff United States’ Response to
Public Comments
Pursuant to the requirements of the
antitrust Procedures and Penalties Act,
15 U.S.C. 16(b)–(h) (‘‘APPA’’ or
‘‘Tunney Act’’), the United States
hereby responds to the public comments
received regarding the proposed Final
Judgments in these cases. After careful
consideration of the comments, the
United States continues to believe that
the proposed Final Judgments will
provide an effective and appropriate
remedy for the antitrust violations
alleged in the Complaints. The United
States will move the court for entry of
the proposed Final Judgments after the
public comments and this Response
have been published in the Federal
Register, pursuant to 15 U.S.C. 16(d).
On October 27, 2005, the United
States filed the Complaints in these
matters alleging that the proposed
acquisition of AT&T Corp. (‘‘AT&T’’) by
SBC Communications, Inc. (‘‘SBC’’), and
the proposed acquisition of MCI, Inc.
(‘‘MCI’’) by Verizon Communications
Inc. (‘‘Verizon’’), would violate Section
7 of the Clayton Act, 15 U.S.C. 18.1
1 Because these matters raised similar issues,
including almost identical allegations of
competitive harm and proposed relief, the United
States filed an uncontested motion to consolidate
them on November 1, 2005. That motion was
granted by the Court. Because the Complaints,
Competitive Impact Statements, and proposed Final
Judgments in the two matters are virtually identical,
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Simultaneously with the filing of the
Complaints, the United States filed
proposed Final Judgments 2 and
Stipulations signed by plaintiff and
defendants consenting to the entry of
the respective proposed Final
Judgments after compliance with the
requirements of the Tunney Act.
Pursuant to those requirements, the
United States filed Competitive Impact
Statements (‘‘CISs’’) in this Court on
November 16, 2005; published the
proposed Final Judgments and CISs in
the Federal Register on December 15,
2005, see United States v. SBC
Communications Inc. and AT&T Corp.,
70 FR 74,334, 2005 WL 3429685; United
States v. Verizon Communications Inc.
and MCI, Inc., 70 FR 74,350 2005 WL
3429686; and published summaries of
the terms of the proposed Final
Judgment and CISs, together with
directions for the submission of written
comments relating to the proposed Final
Judgments, in the Washington Post for
seven days beginning on December 8,
2005 and ending on December 14, 2005.
The 60-day period for public comments
ended on February 13, 2006, and three
comments were received as described
below and attached hereto.
I. Background: The United States’
Investigation and Proposed Resolution
On January 30, 2005, SBC entered into
an agreement to acquire AT&T. On
February 14, 2005, Verizon entered into
an agreement to acquire MCI. Over the
following eight and a half months, the
United States Department of Justice
(‘‘Department’’) conducted an extensive,
detailed investigation into the
competitive effects of the proposed
transactions. As part of this
investigation, the Department issued
Second Requests to the merging parties,
as well as more than 60 Civil
Investigative Demands to third parties.
In response, the Department received
and considered more than 25 million
pages of material. More than 200
interviews were conducted with
customers, competitors, and other
the documents will be referred to collectively.
Moreover, because the comments received by the
United States generally relate to both matters, this
response will also refer to both, unless otherwise
indicated.
2 The United States filed amended proposed Final
Judgments on November 28, 2005. The amendments
added appropriate procedural recitals regarding the
Court’s public interest determination to both
proposed Final Judgments and corrected an error in
the SBC/AT&T proposed consent decree,
conforming it to the parties’ intent. The SBC/AT&T
Competitive Impact Statement reflects the
correction to the proposed Final Judgments. The
corrected versions, not the original versions, were
published in the Federal Register. None of the
public comments addressed this aspect of the
proposed Final Judgment.
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individuals with knowledge of the
industry. Two commenters here—
COMPTEL and ACTel—represented
carriers who had complaints about the
proposed transactions; the investigative
staff carefully analyzed their allegations
and submissions, as well as the views
and data presented by dozens of others.
While the Department was reviewing
these transactions, the Federal
Communications Commission (‘‘FCC’’),3
numerous state public utility
commissions, and several state
Attorneys General conducted their own
reviews. The third commenter, the
Attorney General of the State of New
York, was one of the reviewing state
officials.
As part of the Department’s
investigation, it considered the potential
competitive effects of these transactions
on numerous products, customer
groups, and geographic areas. For the
vast majority of these, the Department
concluded that the proposed mergers
were unlikely to reduce competition.
Indeed, the Department concluded that,
viewed as a whole, the transactions
were likely to create substantial
efficiencies that could benefit
consumers. For the most part, the
mergers combined firms with
complementary strengths, assets, and
customer bases. Whereas SBC’s and
Verizon’s strengths were in the ‘‘mass
market’’ and small business segments,
AT&T’s and MCI’s strengths were in
serving large enterprises; whereas SBC
and Verizon had very extensive local
networks, AT&T and MCI had extensive
national and international networks. In
areas of significant overlap, with the
exception of the markets alleged in the
Complaints, there will remain, postmerger, sufficient competitive
alternatives such that no
anticompetitive effects are likely.
Because AT&T and MCI have among
the most extensive local networks of any
competitive local exchange carriers
(‘‘CLECs’’) in SBC’s and Verizon’s
regions, the Department devoted
substantial time and resources to
analyzing those overlapping assets, and
the products and markets they
implicated to determine whether the
3 The FCC approved the proposed mergers in
orders adopted on October 31, 2005, and released
on November 17, 2005, including voluntary
commitments of the parties as conditions.
Memorandum Opinion and Order, In the Matter of
SBC Communications Inc. and AT&T Corp.
Applications for Approval of Transfer of Control,
FCC WC Docket No. 05–65 (rel. Nov. 17, 2005),
2005 WL 3099626; Memorandum Opinion and
Order, In the Matter of Verizon Communications
Inc. and MCI, Inc. Applications for Approval of
Transfer of Control, FCC WC Docket No. 05–75 (rel.
Nov. 17, 2005), 2005 WL 3099625 (collectively
‘‘FCC Orders’’).
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merger would likely reduce
competition.4 The Department sought
extensive data from the merging firms as
well as dozens of CLECs regarding their
local networks, and the products
provided over those networks. In every
metropolitan area of overlap, the
Department found that there were
multiple CLECs with local networks
offering products and services very
similar to the merging firms. Indeed, in
most of the overlapping metropolitan
areas the acquired CLEC did not even
have the most extensive local network
in terms of number of buildings
connected or miles of fiber-optic cable
installed. And even in the few cases
where the acquired CLEC did have the
most extensive local network, there
were ample other firms that have
extensive networks and that continue to
grow those networks.
Nevertheless, the Department
identified one limited competitive
problem: for hundreds of buildings, the
transactions would combine the only
two firms that owned or controlled a
direct fiber-optic connection to the
building, and for a subset of these
buildings, entry (i.e., another carrier
constructing its own fiber-optic
connection) was not sufficiently likely
to offset the potential anticompetitive
effect. These fiber-optic connections are
used to provide Local Private Lines 5 to
wholesale and retail customers and
value-added telecommunications
services that rely on Local Private Lines.
Accordingly, the Department filed
Complaints alleging competitive harm
in this set of buildings and sought a
remedy that would ensure that for each
of the buildings where there would
4 Local networks typically are comprised
principally of fiber-optic cable running throughout
the metropolitan area. Fiber connecting aggregation
points is often called ‘‘transport’’ fiber, and fiber
running from a central office or node to an end-user
building is often referred to as a loop or ‘‘last-mile
connection.’’ These local networks are typically
used to provide services to large enterprise
customers. As part of its investigation, the
Department interviewed scores of such customers,
and received affidavits from dozens of others. In
general, customers had little competitive concern
regarding the proposed mergers and, indeed, many
believed they were likely to be beneficial.
5 ‘‘A Local Private Line is a dedicated, point-topoint circuit offered over copper and/or fiber-optic
transmission facilities that originates and
terminates within a single metropolitan area and
typically includes at least one local loop. Local
Private Lines are sold at both retail (to business
customers) and wholesale (to other carriers). [SBC
and Verizon refer] to Local Private Line circuits as
‘special access.’ Depending on how they are
configured, Local Private Lines can be used to carry
voice traffic, data, or a combination of the two.
Local Private Lines may be purchased as standalone products but are also an important input to
value-added voice and data telecommunications
services that are offered to business customers.’’
Complaints ¶¶ 13–14.
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otherwise be a reduction in competition,
there would be, post-merger, another
carrier besides the merged firm with a
direct fiber-optic connection to the
building. In the Department’s judgment,
a divestiture of fiber-optic capacity to
the buildings of concern would remedy
this potential loss of competition.6
As explained more fully in the
Complaints and CISs, the proposed
transaction would lessen competition
substantially for (a) Local Private Lines
and (b) voice and data
telecommunications services that rely
on Local Private Lines in several
hundred commercial buildings. To
restore competition, the proposed Final
Judgments, if entered, would require a
divestiture of indefeasible rights of use
(‘‘IRUs’’) 7 for lateral connections 8 to the
buildings in question along with
transport facilities 9 sufficient to enable
the IRUs to be used by the purchaser to
provide telecommunications services.
Entry of the proposed Final Judgments
would terminate these actions, except
that the Court would retain jurisdiction
to construe, modify, or enforce the
provisions of the proposed Final
Judgments and punish violations
thereof.10
6 The modest nature of the competitive problem,
as compared to the overall value of the mergers, is
illustrated by the fact that in 2004, Local Private
Lines offered by AT&T in SBC’s territory accounted
for less than 0.3 per cent of AT&T’s total revenues.
And, the revenues attributable to the buildings at
issue in this case would be a fraction of that.
7 ‘‘An IRU (or indefeasible right of use) is a longterm leasehold interest commonly used in the
telecommunications industry that gives the holder
the right to use specified strands of fiber in a
telecommunications facility.’’ CISs at 11.
8 A ‘‘lateral connection’’ is the last segment of the
fiber-optic cable to a building, running from the
point of entry of the building to the splice point
with fiber used to serve different buildings. CISs at
10.
9 ‘‘Transport,’’ as used in the industry, has no
precise meaning but generally refers to fiber-optic
capacity to carry data between aggregation points
on a network. Often, it is used to refer to
‘‘interoffice transport,’’ i.e., carriage of data between
two central offices (switching facilities). In the
proposed Final Judgments and CISs the term more
broadly refers to facilities used to carry data from
the splice point of the lateral connection to the
purchaser’s network. CISs at 9–11.
10 The SBC/AT&T merger closed on December 18,
2005, and the Verizon/MCI merger closed on
January 6, 2006. In keeping with the United States’
standard practice, neither the Stipulations nor the
proposed Final Judgment prohibited closing the
mergers. See ABA Section of Antitrust Law,
Antitrust Law Developments 387 (5th ed. 2002)
(noting that ‘‘[t]he Federal Trade Commission (as
well as the Department of Justice) generally will
permit the underlying transaction to close during
the notice and comment period’’). Such a
prohibition could interfer with many time-sensitive
deals or prevent the realization of substantial
efficiencies. Here, the magnitude of the potential
competitive harm from the mergers was relatively
small, but delaying the closing of the transactions
by the several months required for the Tunney Act
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II. Legal Standard Governing the
Court’s Public Interest Determination
Upon publication of the public
comments and this Response, the
United States will have fully complied
with the Tunney Act. It will then ask
the Court to determine that entry of the
proposed Final Judgments would be ‘‘in
the public interest,’’ and to enter them.
15 U.S.C. 16(e). In making its public
interest determination, the Court shall
consider:
(A) the competitive impact of such
judgment, including termination of alleged
violations, provisions for enforcement and
modification, duration or relief sought,
anticipated effects of alternative remedies
actually considered, whether its terms are
ambiguous, and any other competitive
considerations bearing upon the adequacy of
such judgment that the court deems
necessary to a determination of whether the
consent judgment is in the public interest;
and
(B) the impact of entry of such judgment
upon competition in the relevant market or
markets, upon the public generally and
individuals alleging specific injury from the
violations set forth in the complaint
including consideration of the public benefit,
if any, to be derived from a determination of
the issues at trial.
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Id. section 16(e)(1). As the Court of
Appeals has held, the Tunney Act
permits a court to consider, among other
things, the relationship between the
remedy secured and the specific
allegations set forth in the government’s
complaint, whether the proposed Final
Judgment is sufficiently clear, whether
enforcement mechanisms are sufficient,
and whether the proposed Final
Judgment may positively harm third
parties. See United States v. Microsoft
Corp., 56 F.3d 1448, 1458–62 (D.C. Cir.
1995).
The Tunney Act is not intended to
impose on a court procedures that
would impair the utility of consent
decrees in antitrust enforcement. Thus,
the Act is not to ‘‘be construed to
require the court to conduct an
evidentiary hearing or to require the
court to permit anyone to intervene.’’ 15
U.S.C. 16(e)(2)(2006). In conducting its
public interest inquiry, ‘‘[t]he court is
public interest determination could have costs tens,
if not hundreds, of millions of dollars in lost
efficiencies from the transactions as a whole. In
consent decrees requiring divestitures, it is also
standard practice to include ‘‘preservation of
assets’’ clauses in the decree and stipulation to
ensure that the assets to be divested remain
competitively viable. That practice was followed
here. Proposed Final Judgments § VIII; Stipulations
§ V. In appropriate cases, particularly where a
separate, distinct operating business is to be
divested, ‘‘hold separate’’ provisions are also
included. In the Proposed Final Judgments at issue
here, no ‘‘hold separate’’ provisions were necessary
or appropriate, as the divested assets are not of a
type that could meaningfully be ‘‘held separate.’’
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nowhere compelled to go to trial or to
engage in extended proceedings which
might have the effect of vitiating the
benefits of prompt and less costly
settlement through the consent decree
process.’’ 119 Cong. Rec. 24,598 (1973)
(statement of Sen. Tunney).11 Rather:
[a]bsent a showing of corrupt failure of the
government to discharge its duty, the Court,
in making its public interest finding, should
* * * carefully consider the explanations of
the government in the competitive impact
statement and its responses to comments in
order to determine whether those
explanations are reasonable under the
circumstances.
United States v. Mid-America
Dairymen, Inc., 1977–1 Trade Cas.
(CCH) ¶ 61,508, at ¶ 71,980, 1977 WL
4352, at *9 (W.D. Mo. 1977).
A court’s task under the Tunney Act
is to review the negotiated settlement of
a dispute, not to devise a remedy for an
adjudicated antitrust violation.
Accordingly, a court may not ‘‘engage in
an unrestricted evaluation of what relief
would best serve the public.’’ United
States v. BNS Inc., 858 F.2d 456, 462
(9th Cir. 1988) (quoting United States v.
Bechtel Corp., 648 F.2d 660, 666 (9th
Cir. 1981)); see also Microsoft, 56 F.3d
at 1460–62.12 Courts have held that:
[t]he balancing of competing social and
political interests affected by a proposed
antitrust consent decree must be left, in the
first instance, to the discretion of the
Attorney General. The court’s role in
protecting the public interest is one of
insuring that the government has not
breached its duty to the public in consenting
to the decree. The court is required to
determine not whether a particular decree is
the one that will best serve society, but
whether the settlement is ‘‘within the reaches
of the public interest.’’ More elaborate
requirements might undermine the
effectiveness of antitrust enforcement by
consent decree.
Bechtel, 648 F.2d at 666 (emphasis
added) (citations omitted).13
11 The public interest determination can be made
on the basis of the CISs and the United States’
Response to Comments. The Tunney Act authorizes
the court to use various procedures to gather
additional information, 15 U.S.C. 16(f), but a court
need not invoke them unless it believes that the
information already available is insufficient to
resolve any critical issues that the public comments
may have raised. See H.R. Rep. No. 93–1463, 93d
Cong., 2d Sess. 8–9 (1974), as reprinted in 1974
U.S.C.C.A.N. 6535, 6538–39.
12 Cf. United States v. Gillette Co., 406 F. Supp.
713, 716 (D. Mass. 1975) (recognizing it was not the
court’s duty to determine whether the proposed
decree was the best settlement, because the parties,
not the court, settle the dispute).
13 Cf. BNS, 858 F.2d at 464 (holding that the
court’s ‘‘ultimate authority under the [Tunney Act]
is limited to approving or disapproving the consent
decree’’); Gillette, 406 F. Supp. at 716 (noting that
the court is constrained to ‘‘look at the overall
picture not hypercritically, nor with a microscope,
but with an artist’s reducing glass’’); see generally
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The proper test of the proposed Final
Judgment, therefore, is not whether it is
certain to eliminate every
anticompetitive effect of a particular
merger or to assure absolutely
undiminished competition in the future.
Court approval of a consent judgment
must be subject to a standard more
flexible and less strict than the standard
the court would apply were it devising
a remedy after an adjudication of
liability. Microsoft, 56 F.3d at 1460–61
(‘‘[W]hen a consent decree is brought to
a district judge, because it is a
settlement, there are no findings that the
defendant has actually engaged in
illegal practices. It is therefore
inappropriate for the judge to measure
the remedies in the decree as if they
were fashioned after trial.’’ (citation
omitted)); see also United States v.
AT&T Corp., 552 F. Supp. 131, 151
(D.D.C. 1982) (‘‘[A] proposed decree
must be approved even if it falls short
of the remedy the court would impose
on its own, as long as it falls within the
range of acceptability or is ‘within the
reaches of public interest.’ ’’) (quoting
Gillette, 406 F. Supp. at 716), aff’d sub
nom. Maryland v. United States, 460
U.S. 1001 (1983); United States v. Aclan
Aluminum Ltd., 605 F. Supp. 619, 622
(W.D. Ky. 1985) (approving the consent
judgment even though the court might
have imposed a greater remedy had the
matter been litigated).
The Court must evaluate the adequacy
of the proposed decree as a remedy for
the antitrust violations alleged in the
Complaint, not for other supposed
violations. The Tunney Act does not
authorize the Court to ‘‘construct [its]
own hypothetical case and then
evaluate the decree against that case.’’
Microsoft, 56 F.3d at 1459. Because the
‘‘court’s authority to review the decree
depends entirely on the government’s
exercising its prosecutorial discretion by
bringing a case in the first place,’’ it
follows that ‘‘the court is only
authorized to review the decree itself,’’
and not to ‘‘effectively redraft the
complaint’’ to inquire into other matters
that the United States did not pursue.
Id. at 1459–60. The United States is
entitled to ‘‘due respect’’ concerning its
‘‘prediction as to the effect of proposed
remedies, its preception of the market
structure, and its view of the nature of
the case.’’ United States v. ArcherDaniels-Midland Co., 272 F. Supp. 2d 1,
6 (D.D.C. 2003) (citing Microsoft, 56
F.3d at 1461).
Microsoft, 56 F.3d at 1461 (discussing whether ‘‘the
remedies [obtained in the decree are] so
inconsonant with the allegations charged as to fall
outside of the ‘reaches of the public interest’ ’’).
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In 2004, Congress amended
provisions of the Tunney Act, but the
amendments did not materially affect
the scope or standard of review. Where
pre-amendment the Act provided a list
of factors a court ‘‘may’’ consider in
making its public interest
determination, post-amendment the
court ‘‘shall’’ consider the listed factors.
Compare 15 U.S.C. 16(e) (2004) with 15
U.S.C. 16(e)(1) (2006) (amended
version). Of course, even before the
amendment courts were unlikely to
choose to ignore factors that were on the
list, and thus of clear congressional
interest, merely because the statute used
‘‘may’’ rather than ‘‘shall.’’ The
amendment also slightly modified the
list of factors. It added one new factor
(whether the terms of the judgment are
ambiguous, 15 U.S.C. 16(e)(1)(A), which
the Court of Appeals had already made
clear was appropriate to consider,
Microsoft, 56 F.3d at 1461–62);
modified a catch-all factor to limit its
scope to competitive considerations; 14
and added ‘‘upon competition in the
relevant market or markets’’ to the list
of impacts to be considered, 15 U.S.C.
16(e)(1)(B), as one would expect in an
antitrust case. As for procedure, the
amendment added the unambiguous
directive that ‘‘[n]othing in this section
shall be construed to require the court
to conduct an evidentiary hearing or to
require the court to permit anyone to
intervene.’’ 15 U.S.C. 16(e)(2).
In addition to amending the Tunney
Act, Congress made findings. In
particular, it found that ‘‘it would
misconstrue the meaning and
Congressional intent in enacting the
Tunney Act to limit the discretion of
district courts to review antitrust
consent judgments solely to determining
whether entry of those consent
judgments would make a ‘mockery of
the judicial function.’ ’’ 15 That finding
seems entirely correct. And, so far as we
know, no court has ever construed the
Tunney Act to limit judicial review
solely to whether the proposed
judgment would make a ‘‘mockery of
the judicial function.’’ 16 In any event,
14 The language was modified to read ‘‘any other
competitive considerations bearing upon the
adequacy of such judgment that the court deems
necessary to a determination of whether the consent
judgment is in the public interest.’’ 15 U.S.C.
16(e)(1)(A) (italics indicate new language).
15 Antitrust Criminal Penalty Enhancement and
Reform Act of 2004, Pub. L. No. 108–237,
§ 221(a)(1)(B), 118 Stat. 661, 668 (2004).
16 ‘‘[M]ockery of the judicial function’’ echoes
Microsoft’s ‘‘[a] decree * * * is a judicial act, and
therefore the district judge is not obliged to accept
one that, on its face and even after government
explanation, appears to make a mockery of judicial
power.’’ Microsoft, 56 F.3d at 1462 (emphasis
added). The Court of Appeals was, of course, not
limiting Tunney Act review solely to whether a
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Congress in 2004 did not change the
applicable standard, but limited itself to
a finding purporting to clarify its intent
of 30 years ago—a finding that is not
inconsistent with the case law’s
interpretation of the Tunney Act.
The purpose of the Tunney Act, both
before and after amendment, is clear:
courts must determine that a proposed
decree is in the public interest before
entering it, and must do so after the
public has had an opportunity to
comment and the government has
responded to any comments. As part of
that determination, a court should
consider certain factors listed in the Act
relating to the competitive impact of the
judgment and whether it adequately
remedies the harm alleged in the
complaint. But the scope of a court’s
review is not unlimited: The Tunney
Act does not permit a court to redraft
the complaint, examine possible
competitive harm the United States did
not allege, or engage in a wide-ranging
search for the relief that would best
serve the public.
III. Summary of Public Comments and
Responses
During the 60-day public comment
period, the United States received
comments from COMPTEL, ACTel, and
the New York State Attorney General.
Upon review, the United States believes
that nothing in the comments warrants
a change in the proposed Final
Judgments or is sufficient to suggest that
the proposed Final Judgments are not in
the public interest. These comments, in
large measure, do not address whether
the proposed remedy adequately
redresses the competitive harm alleged
in the Complaints, but rather whether
the United States should have brought
a different much broader case. The
comments do include some concerns
relating to whether the proposed Final
Judgments adequately remedy the
alleged harms. The United States
addresses these concerns below and
explains how the remedy is appropriate.
decree makes a ‘‘mockery of judicial power.’’ It
explicitly stated that in a Tunney Act review, ‘‘the
court can and should inquire * * * into the
purpose, meaning, and efficacy of the decree. If the
decree is ambiguous, or the district judge can
foresee difficulties in implementation, we would
expect the court to insist that these matters be
attended to. And certainly, if third parties contend
that they would be positively injured by the decree,
a district judge might well hesitate before assuming
that the decree is appropriate.’’ Id. at 1462. A
comparison of the Tunney Act as amended, and the
associated congressional findings, with Microsoft
perhaps suggests why Senator Hatch, then
Chairman of the Senate Judiciary Committee, said
that ‘‘this amendment essentially codifies existing
case law.’’ 150 Cong. Rec. S3610, at S3613 (daily
ed. Apr. 2, 2004).
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A. ACTel
1. Summary of Comment
The Alliance for Competition in
Telecommunications (‘‘ACTel’’) is a
group whose members include CLECs
and interexchange carriers (‘‘IXC’’) that
buy Local Private Lines at wholesale
from the merging companies,17 and
compete against the merging companies
for retail business customers. On
February 9, 2006, ACTel submitted a
comment alleging that the proposed
remedy ‘‘cannot succeed’’ and fails to
meet the Tunney Act standard. After
some discussion of that standard,18 and
a description of ACTel’s view of the
wholesale markets for Local Private
Lines, ACTel criticizes the proposed
Final Judgments. ACTel notes that
whereas the Complaints allege harm to
competition in the provision of Local
Private Lines, the remedy is focused on
the divestiture of (a) certain laterals to
particular buildings, and (b) sufficient
transport to connect those circuits to the
network of the entity purchasing the
divested lateral circuits. ACTel
identifies what it claims are three
‘‘deficiencies’’ in the remedy that will
prevent it from being effective.
First, ACTel notes that the proposed
Final Judgements do not cover all
buildings for which the mergers will
reduce the number of Local Private Line
competitors from ‘‘2 to 1’’ (i.e.,
buildings where only the merging firms
have last-mile connections). Relying on
data purchased from a third party,
ACTel contends that the number of
buildings for which the United States
seeks relief is at least two orders of
magnitude less than the number of
buildings it believes present a 2-to-1
problem. It thus contends that the
‘‘Government’s remedy does not include
all buildings that the Complaint
purports to cover,’’ suggests that the
‘‘Government needs to explain its
methodology,’’ and argues that ‘‘[i]f the
Proposed Final Judgment does not
address all situations in which AT&T is
17 ACTel Comment at 3 (attached hereto as
Attachment 1). ACTel was formed in March 2005
by six competitive carriers ‘‘to challenge the
Verizon/MCI and SBC/AT&T mergers’’ and was an
active complainant in both the United States’ and
FCC’s investigations of these transactions.
Competitive Carriers Challenge Telecom Mergers
(Mar. 15, 2005), available at https://
www.allianceforcompetition.com/newsroom/
release/050315–1.php.
18 ACTel states that the public interest
determination here ‘‘will constitute the first
significant application of the Tunney Act since
Congress amended that statute in 2004.’’ ACTel
Comment at 4. However, since the effective date of
the Tunney Act amendments—June 22, 2004—at
least 12 antitrust consent decrees have been
reviewed by courts, found to be in the public
interest, and entered.
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eliminated as the only facilities-based
competitive alternative to SBC for loops,
the court must withhold its approval of
the settlements.’’ 19
Second, ACTel contends that the
proposed Final Judgments are deficient
because they address ‘‘only the part of
the Local Private Line that connects to
a building, not the part of the Private
Line that connects to a carrier’s
network.’’ It argues that if the number of
suppliers of the ‘‘transport’’ part of the
network (the part of a circuit that
interconnects carrier central offices)
goes from two to one, customers of
Local Private Lines will still be subject
to competitive harm, and contends that
the United States must look at transport
on a ‘‘segment by segment’’ basis. In
short, ACTel contends that the proposed
remedy is ineffective because customers
will ‘‘still be subject to the ‘2 to 1’ choke
hold because the Government’s remedy
does not include transport (unless it is
attendant to a divested loop for a
building).’’ 20
ACTel’s third alleged deficiency is
that the remedy addresses only 2-to-1
situations, whereas it believes there are
‘‘many ‘anticompetitive effects’ in
Private Line situations beyond ‘2 to 1’
loops.’’ 21 In particular, it argues that 4to-3 and 3-to-2 situations also create a
competitive problem here, and suggests
that the United States has done ‘‘an
about-face’’ and engaged in a
‘‘significant departure from established
and documented procedures’’ by not
alleging a competitive problem in those
instances.22 Finally, ACTel argues that a
purchaser of the divested assets, even if
it is a ‘‘viable, ongoing
telecommunications business’’ may not
be an effective competitive substitute for
AT&T and MCI at least in part because
its network would not be as broad, or its
customer base as ‘‘robust.’’ 23 ACTel
concludes by suggesting alternate
remedies to those contained in the
proposed Final Judgments including
divestiture of ‘‘all redundant loop and
transport circuits,’’ releasing customers
from their current contracts, and
prohibiting the merged firms from
raising prices.24
2. Response
Tunney Act review principally
addresses the adequacy of the remedy,
not the adequacy of the complaint.25
19 Id.
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20 Id.
at 12, 15.
at 21.
21 Id.
22 Id.
at 23.
at 24.
24 Id. at 25.
25 See, e.g., Microsoft, 56 F.3rd at 1459 (‘‘Congress
surely did not contemplate that the district judge
would, by reformulating the issues, effectively
23 Id.
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Most of the issues ACTel raises,
however, question the wisdom of the
filed Complaints, and urge theories of
competitive harm that the United States
did not believe were supported by the
evidence. Additionally, in a number of
instances in which ACTel claims to be
challenging the adequacy of the remedy,
ACTel construes the Complaints far too
broadly. For instance, ACTel misreads
the Complaints as identifying a
competitive problem in all 2-to-1
buildings. The allegations in the
Complaints do not reach all such
buildings, and therefore, whether the
remedy addresses them is not a proper
subject for Tunney Act review. In any
event, the United States believes the
proposed remedy is adequate to redress
the likely competitive harm from the
mergers.
a. Transport
In its investigation, the United States
examined the extent of AT&T’s local
networks in SBC’s territory, and MCI’s
local networks in Verizon’s territory,
which the acquired firms use to provide
Local Private Line and related services.
In order to analyze the competitive
effects of the mergers, the United States
also examined the other CLEC networks
in each metropolitan area of overlap.
Using compulsory process, the United
States obtained highly-confidential
maps of fiber-optic networks and
information about ‘‘on-net buildings’’ 26
from more than two dozen different
CLECs. The United States found that
there were multiple CLECs with local
networks in every metropolitan area
under consideration. Those networks
vary in their scope and reach, but
several in each metropolitan area reach
the highest volume locations, especially
redraft the complaint himself.’’); id. (stating that the
district judge may not ‘‘reach beyond the complaint
to evaluate claims that the government did not
make’’); BNS, 858 F.2d at 462–63 (The Tunney Act
‘‘does not authorize a district court to base its
public interest determination on antitrust concerns
in markets other than those alleged in the
government’s complaint.’’) Nothing in the 2004
Tunney Act amendments could be viewed as
suggesting that the reviewing court should look
beyond the allegations in the complaint in
determining whether the proposed decree is in the
public interest. Indeed, to do so could result in the
court substituting its prosecutorial judgment for
that of the United States. Were a court to reject a
proposed decree on the grounds that it failed to
address harm not alleged in the complaint, it would
offer the United States what the Court of Appeals
for the D.C. Circuit referred to as a ‘‘difficult,
perhaps Hobson’s choice’’: it would have to either
redraft the complaint and pursue a case it believed
had no merit, or else drop its case and allow
conduct it believed to be anticompetitive to go
unremedied. Microsoft, 56 F.3d at 1456.
26 An ‘‘on-net’’ building is a building for which
a carrier has built or acquired its own last-mile
fiber-optic connection, connecting the building to
its network. Complaints ¶ 16.
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central offices with sizable demand.
Moreover, CLECs typically continue to
add new locations to their networks as
demand warrants.27
Accordingly, the United States
concluded that the mergers were
unlikely to create a ‘‘metropolitan areawide’’ competitive problem, or a
competitive problem in the vast
majority of buildings in any given
metropolitan area.28 Nevertheless,
because there is considerable
differentiation in the buildings reached
by different carriers networks,
particularly for end-user buildings, in a
relatively small number of buildings the
acquired company is the only
alternative to the RBOC 29 for a last-mile
connection. The competitive problem
created by the mergers, therefore,
involves this set of buildings.
As ACTel correctly points out,
however, the relevant product that uses
this connection or loop is Local Private
Lines service (or value-added services
that rely on Local Private Line). What
the Complaints therefore allege is a
likelihood of harm in the markets for
Local Private Lines, or services that rely
on Local Private Lines, due to a
reduction from two to one in the
number of providers of last-mile
connections. In other words, the market
is Local Private Line, but the mergercreated bottleneck or competitive
problem alleged in the Complaints is the
last-mile connection.30 In general, there
is no such bottleneck for transport, nor
do the Complaints allege a competitive
problem specific to transport. Thus,
contrary to ACTel’s contention, there is
no ‘‘inconsistency’’ between the
Complaints and proposed Final
Judgments in their treatment of
transport nor are the proposed Final
Judgments deficient because they
address ‘‘only the part of the Local
Private Line that connects to a
27 The FCC reached a similar conclusion. See,
e.g., FCC Orders ¶ 45 (‘‘In many MSAs, some
competitors appear to have more extensive
networks than [AT&T/MCI]. We conclude,
therefore, that there are existing competitors with
local fiber networks that reasonably could provide
wholesale special access in MSAs where [AT&T/
MCI] now operates local facilities.’’).
28 Indeed, for the vast majority of buildings in a
given metropolitan area the SBC or Verizon is the
only firm with a last-mile connection to the
building. Complaints ¶ 15. Accordingly, the merger
results in no less of actual competitive options to
that vast majority of buildings.
29 The term ‘‘RBOC’’ refers to a regional Bell
operating company, such as SBC or Verizon.
30 Similarly, the proposed Final Judgments focus
on divestiture of ‘‘laterals’’ and ‘‘transport’’ rather
than Local Private Lines because, as ACTel
acknowledges, Local Private Line is a product, not
a specific asset. Any divestiture needs to identify
specific assets, rather than ‘‘products,’’ in order to
avoid the very ambiguity that would cause concern
under the Tunney Act.
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building,’’ not the transport part.31 It
would be inappropriate to suggest that
the remedy is inadequate because it
does not address a competitive harm
that the United States neither concluded
was likely nor alleged in its
Complaints.32
The divestiture remedy is focused on
the assets that would be necessary to
replace the competition lost in the
buildings where harm was anticipated
as a result of the mergers: those assets
are the laterals to the specific buildings
that likely would be subject to
anticompetitive effects. As noted in the
CIS, however, lateral’s are of little use
if they are not connected to a network.
Therefore, the proposed Final
Judgments also require the divestiture of
IRUs for transport facilities sufficient to
connect the divested laterals to
locations mutually agreed upon by
Defendants and the purchaser. This will
ensure that the purchaser can connect
the laterals to its network facilities and
provide both Local Private Lines and
any other telecommunications services
that rely on Local Private Lines that a
customer in the building may desire.
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b. Omitted 2-to-1 Buildings
ACTel complains that the proposed
Final Judgments do not cover all 2-2buildings. However, it incorrectly
suggests that it is ‘‘impermissible by the
express terms of the Complaint’’ for the
United States to have excluded certain
2-to-1 buildings because the Complaints
allege harm in all 2-to-1 buildings.
Nowhere do the Complaints state that
there would be competitive harm in all
2-to-1 buildings, nor would the facts
support such an allegation. One reason
is that for some of the 2-to-1 buildings
31 Indeed, contrary to ACTel’s assertion (ACTel
Comment at 16), the Complaints never even use the
word ‘‘transport.’’
32 ACTel argues ‘‘the Government must look at
transport on a ‘segment by segment’ basis rather
than via area-wide analysis.’’ Indeed, the United
States effectively did just that. Although the United
States’ investigation revealed that the vast majority
of interoffice transport routes where AT&T or MCI
is present would also have competitive alternatives
post-merger, the United States, like ACTel, was
concerned about any reduction of competitive
options from two to one that could potentially
result. Because an interoffice transport circuit is
essentially a circuit to a central office location, the
United States chose to treat ‘‘central offices’’ as any
other building and analyzed Local Private Line
connections to them along with all other buildings
connected to AT&T’s and MCI’s networks.
Ultimately, the United States identified only two
SBC central offices and three Verizon central offices
where AT&T or MCI, respectively, was the only
connected CLEC and where entry was unlikely.
Consistent with the United States’ approach to
other 2-to-1 buildings where entry was unlikely,
these five central offices are included in the
proposed remedy and thus, to the extent that there
is a competitive problem for the small number of
transport routes from these central offices, the
proposed Final Judgments will remedy it.
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entry would be likely in response to a
post-merger price increase. Indeed, the
Complaints specifically list some of the
factors governing whether a CLEC will
build fiber to a particular building and
state that ‘‘entry may occur in response
to a post-merger price increase in some
of buildings where [AT&T or MCI] is the
only connected CLEC.’’ 33 Similarly, the
CISs also discuss entry, and conclude
that ‘‘[w]hile entry may occur in some
buildings where [AT&T or MCI] is the
only CLEC present in response to a postmerger price increase, the conditions for
entry are unlikely to be met in the
hundreds of buildings that are the
subject of the Complaint[s].’’ 34 The
Complaints did not allege, nor were
intended to allege, harm in all 2-to-1
buildings; rather the ‘‘subject of the
Complaint[s]’’ is the subset of buildings
where harm was likely and that were
identified in the proposed Final
Judgments.
Ambiguity in the terms of a proposed
judgment is a legitimate subject for
consideration under the Tunney Act. 15
U.S.C. 16(e)(1)(A). ACTel contends that
there is ambiguity ‘‘due to discrepancy
between the number of buildings the
Proposed Final Judgment identifies and
what publicly available data suggests in
terms of the number of ‘2 to 1’ loop
buildings affected by the mergers.’’ 35
This ‘‘discrepancy,’’ however, is not an
ambiguity in the terms of the proposed
Final Judgments. The proposed Final
Judgments very clearly specify the
buildings to be divested. It is true that
although the Complaints allege
competitive harm in only a subset of 2to-1 buildings, they do not specifically
list the buildings in that subset.
However, the set of buildings as to
which the United States believed there
was sufficient evidence to support a
conclusion of competitive harm, and
which is the subject of its Complaints,
is the set of buildings identified in the
proposed Final Judgments filed
simultaneously with the Complaints.
Thus, the question of whether the
United States should have sought relief
in additional 2-to-1 buildings goes not
to the adequacy of the remedy, but
rather to the United States’ conclusions
33 Complaints ¶ 29. ACTel cites the Complaints
on entry, quoting the language ‘‘entry is unlikely to
eliminate the competitive harm that would likely
result from the proposed merger.’’ ACTel Comment
at 15. That language recognizes that for the
hundreds of buildings identified in the proposed
Final Judgments entry is indeed unlikely, and a
remedy is required. But ACTel omits the preceding
language that acknowledges that for some of the 2to-1 buildings, entry may well occur. See
Complaints ¶ 29. For these buildings, a remedy is
unnecessary.
34 CISs at 8.
35 ACTel Comment at 12.
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about where the mergers might cause
competitive harm, and it is therefore not
a proper subject for Tunney Act
consideration.36
In any event, the United States
believes that divestitures of laterals to
the set of buildings identified in the
proposed Final Judgments are sufficient
to remedy any competitive harm that
otherwise would be likely to result from
the mergers. In order to identify
buildings where the merging firms were
the only carriers with a last-mile
connection (i.e., 2-to-1 buildings),37 the
United States sought and received, via
compulsory process, ‘‘on-net’’ building
lists from AT&T, MCI, and over 30 other
CLECs and compared those lists.38 The
United States then eliminated from the
resulting list of 2-to-1 buildings those
buildings where circumstances
suggested that there was no competitive
problem. For instance, because where
there is no likely customer, there
probably is no harm, the United States
eliminated vacant buildings, buildings
where a subsidiary of the merging firms
was the only customer, and buildings
with zero current demand for Local
Private Line or related services.39
36 Ultimately, the United States makes two kinds
of judgments. The first is whether and where a
particular merger is likely to cause competitive
harm; the second is whether a remedy is likely to
be adequate to remedy the identified harm. The first
is not a proper subject for Tunney Act review, as
it would require the Court to substitute its
prosecutorial judgment for that of the United States;
the second is indeed a proper subject for such
review, as intended by Congress. The United States’
as to which 2-to-1 buildings pose a competitive
problem and therefore require a remedy is
fundamentally a judgment of the first kind, not the
second.
37 The United States’ reasons for treating
differently buildings where at least two carriers
would have a last-mile connection post-merger, is
discussed below. See infra section III.A.2.c.
38 In its comment, ACTel suggests that the
number of 2-to-1 buildings in each metropolitan
area is in the thousands. Such numbers are absurdly
high. For instance, ACTel’s estimate that there are
6318 2-to-1 buildings in Los Angeles exceeds AT&T
total number of on-net buildings in that
metropolitan area (much less 2-to-1 buildings) by
more than twenty times. Contrary to ACTel’s
assertions that the number of 2-to-1 buildings in
each metropolitan area is in the thousand buildings,
the United States found that the total number of 2to-1 buildings in all the alleged metropolitan areas
combined barely reached 1,000 for the Verizon and
SBC regions respectively.
39 Of course, it is hypothetically possible that a
building in this category could have a competitive
problem, for instance, if post-merger a new
customer moved into a vacant building. However,
Section 7 does not look to some hypothetical
possibility of harm, but rather to a likelihood of
harm. See, e.g., New York v. Kraft General Foods,
Inc., 926 F. Supp. 321, 358–59 (S.D.N.Y. 1995)
(‘‘Section 7 deals in ‘probability,’ not ‘ephemeral
possibilities.’ ’’) (quoting United States v. Marine
Bancorp., Inc., 418 U.S. 602, 622–623 (1974)));
Fruehauf Corp. v. F.T.C., 603 F.2d 345, 351 (2d Cir.
1979) (‘‘[T]here must be ‘the reasonable probability’
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acknowledges this, suggesting that the
United States has done ‘‘an about-face’’
by not alleging a competitive problem in
those instances in its Complaints.
Because the United States did not
conclude that there was likely to be a
competitive problem in 4-to-3 or 3-to-2
buildings, there is no reason to have
included such buildings in the proposed
remedy.
In many markets, a merger reducing
the number of competitors from three to
two or four to three is a competitive
problem and the United States does not
hesitate to bring such cases. To
conclude, however, that a merger is
anticompetitive simply because the
number of competitors is reduced from,
e.g., three to two, is incorrect. Many
other considerations relating to market
structure are also relevant. Before
coming to a judgment on the
competitive effect of a merger, the
United states evaluates whether
coordinated or unilateral effects are
likely,43 whether entry likely will occur,
and whether a merger will generate
efficiencies.44 Here, given the particular
structure of the marketplace, in looking
at buildings where the number of
competitors went from three to two or
four to three, the United States was
unable to conclude that the mergers
would significantly increase the risks of
coordinated interaction. Moreover,
largely because the merging firms were
not especially close substitutes, the
c. Anticompetitive Effects Beyond 2-to1 Loops
ACTel alleges that the proposed
remedy does not fix the ‘‘many
‘anticompetitive effects’ in Private Line
situations beyond ‘2 to 1’ loops’’ 41 such
as buildings where the number of
providers would go from four to three to
two. The Complaints, however, do not
allege a competitive problem as a result
of reducing the number of competitors
serving a building from four to three, or
three to two.42 Indeed, ACTel
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In addition, because entry is likely to
occur in response to a price increase for
some set of the 2-to-1 buildings, the
United States considered the prospects
for entry for each of the 2-to-1 buildings.
As noted in the Complaints, two of the
most important factors in determining
whether entry is likely in a given
building is the proximity of competitive
fiber to that building, and the capacity
required by the building.40 The United
States sought and received through
compulsory process the fiber maps of
more than two dozen CLECs. Using
mapping software, the United States
compiled ‘‘master’’ electronic maps of
each of the overlapping metropolitan
areas. For each of the hundreds of
buildings in question, the United States
identified the distance to the nearest
competitive fiber and compared that
with demand data for each of the
buildings. From this, the United States
was able to make judgments about the
likelihood of entry in each building. The
buildings it chose to include in the
proposed Final Judgments are those as
to which the United States believed it
could show that entry was unlikely, and
therefore that competitive harm would
be likely. Accordingly, the divestitures
required by the proposed Final
Judgments reflect the set of 2-to-1
buildings where competitive harm was
likely, and should be adequate to
remedy the mergers’ likely
anticompetitive effects.
at 21, and state that ‘‘AT&T and MCI are the most
significant and effective competitors to the
acquiring companies,’’ Id. at 23. In both cases it
cites to paragraph 17 of the Complaints. Paragraph
17, however, makes no such allegations. Instead, it
makes the more limited allegations that AT&T and
MCI are, respectively ‘‘among the leading CLECs’’
in the number of buildings connected to their
networks, and that for hundreds of buildings, the
merging firms are the only two carriers that own or
control a direct building connection.
43 United States Department of Justice & Federal
Trade Commission, Horizontal Merger Guidelines,
(rev. Apr. 8, 1997) § 2, available at https://
www.usdoj.gov/atr/public/guidelines/hmg.htm.
44 Id. §§ 3, 4. Thus, ACTel’s contention that the
United States’ decision to allege only a problem in
certain 2-to-1 buildings is an ‘‘about-face’’ and
represents a ‘‘significant departure from established
and documented procedures’’ is without merit.
Merger analysis is a complex, fact-specific, case-bycase undertaking and one which cannot simply be
resolved by looking only at the change in
concentration or the number of remaining
competitors in a market. See, e.g., id. § 0 (‘‘Because
the specific standards set forth in the Guidelines
must be applied to a broad range of possible factual
circumstances, mechanical application of those
standards may provide misleading answers to the
economic questions raised under the antitrust
laws.’’); see also United States v. Continental Can
Co., 378 U.S. 441, 458 (1964) (‘‘Market shares are
the primary indicia of market power but a judgment
under § 7 is not to be made by any single qualitative
or quantitative test. The merger must be viewed
functionally in the context of the particular market
involved, its structure, history and probable
future.’’).
of a substantial impairment of competition to
render a merger illegal under § 7. A ‘mere
possibility’ will not suffice.’’) (citations omitted).
40 Complaints ¶¶ 27–28. The closer a building is
to a competitor’s fiber, the less it is likely to cost
that competitor to install additional fiber to reach
that building (since typically a major component of
the cost of installing fiber is the cost of digging up
city streets to lay new fiber-optic cable and that cost
increases with distance). The larger the demand for
capacity in a building, the greater the expected
revenues. The decision of a carrier whether to enter
a building often turns on the extent to which the
expected revenue exceeds the construction cost. See
also CISs at 8.
41 ACTel Comment at 21.
42 ACTel’s comment incorrectly cites the
Complaints. It alleges that ‘‘according to the
Complaint AT&T and MCI are the most significant
competitors for SBC and Verizon,’’ ACTel Comment
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evidence did not support a finding of
likely unilateral anticompetitive effects
in these buildings. Finally, the fact that
at least two CLECs has added the
buildings in question to their networks
suggested that the characteristics of the
buildings (e.g., location, capacity
demand) made them susceptible to
entry—significantly more so than the 2to-1 buildings.45 Thus, after almost nine
months of analysis, and consideration of
millions of pages of material and
hundreds of interviews, the United
States determined that the evidence did
not support alleging a competitive
problem in the 3-to-2 or 4-to-3 buildings
in the SBC and Verizon territories; the
likely competitive problem is limited to
the provision of Local Private Line and
related services in certain 2-to-1
buildings. That is the only competitive
harm alleged in the Complaints, and the
only harm that the proposed Final
Judgments properly remedy.46
d. Divestiture Purchaser
ACTel does raise one point that goes
directly to the adequacy of the proposed
remedy. It argues that a purchaser of the
divested assets, even if it is a ‘‘viable,
ongoing telecommunications business,’’
may not be an effective competitive
substitute for AT&T and MCI at least, in
part, because its network would not be
as broad, nor its customer base as
‘‘robust.’’ It is, indeed, important for the
success of the proposed remedy that the
divestiture buyer be able to replace the
competition that might otherwise be lost
as a result of the merger. For that reason,
the proposed Final Judgments require
that the purchaser, and terms of the
purchase, be subject to the United
States’ approval. As the CISs note, in
scrutinizing the proposed purchaser(s),
‘‘the United States will be particularly
focused on the purchaser’s ability to be
a viable competitor in offering Local
Private Lines on both a retail and/or
wholesale basis.’’ CISs at 9.
In each metropolitan area under
consideration there are at least several
45 In arguing that the mergers present competitive
problems in Local Private Lines beyond the limited
number of 2-to-1 situations alleged by the United
States, ACTel relies heavily on information it and
its members submitted to the Department and FCC.
The Department devoted significant time to
analyzing this date. But based on this analysis, as
well its consideration of the large volumes of other
information gathered during the course of the
investigation, the Department could not draw the
same conclusions as ACTel seeks to draw. Nor,
apparently, could the FCC. See. e.g., FCC Orders
¶ 46.
46 The FCC, which conducted its own in-depth
analysis of the transactions, reached a consistent
conclusion. FCC Orders ¶ 40 (‘‘We find that the
terms of the consent decree should adequately
remedy any likely anticompetitive effects in the
provision of Type I wholesale special access
services.’’).
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CLECs with extensive networks,
including, e.g., switches, fiber, dozens
or hundreds of‘‘on-net’’ locations. Those
carriers are already effective competitors
in the metropolitan area. Where those
carriers are not currently effective is the
specific buildings here the acquired firm
has fiber and they do not. The proposed
remedy, by providing another carrier
with fiber-optic capacity to these
buildings, will enable it to replace the
competition that could be lost as a result
of the merger. Even if the purchaser’s
pre-existing network is not as extensive
as the acquired firm’s, as long as it has
all the assets necessary to be able to
reliably provide service to the buildings
in question, there is little reason to
believe that the purchaser would likely
be a less aggressive, effective competitor
for those buildings. In short, the United
States believes that there are potential
purchasers who could effectively use
the assets to compete, and intends to
exercise its approval rights to approve
only such purchasers.47
(e) Alternate Remedies
Because the United States’ proposed
remedy adequately redresses the
competitive harm alleged in its
Complaints, there is no need to consider
the remedies proposed by ACTel in its
comment. Moreover, some of its
proposed remedies could raise difficult
issues.48 That the proposed Final
Judgments do not include ACTel’s
suggested remedies in no way suggests
that they fail to fall within the reaches
of the public interest.
B. COMPTEL
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1. Summary of Comment
COMPTEL, a trade association of
communications providers that compete
against the merging firms and also
purchase wholesale services from them,
submitted a comment on February 13,
2006, objecting to the proposed Final
Judgments because, in its view, they ‘‘do
not replace the competition lost from
the elimination of AT&T and MCI as the
two most significant competitors to SBC
and Verizon.’’ 49 COMPTEL’s comment
47 This does not mean that only a carrier with an
extensive pre-existing network could be acceptable
as a purchaser. Depending on the assets the carrier
is purchasing from the merged firm in the particular
metropolitan area, its plans to build or acquire other
assets, its existing customer base, its business plan,
etc., an established carrier without a pre-existing
network in the metropolitan area in question might
also be acceptable as a purchaser.
48 For instance, their proposal that the merged
firm divest all duplicative ‘‘loop and transport
circuits’’ could cause significant customer
disruptions as discussed further, see infra Sections
III.B.2.b, III.B.2.c.i.
49 COMPTEL Comment at 2 (attached hereto as
Attachment 2). COMPTEL also filed a Motion to
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begins by summarizing, and criticizing,
the United States’ Complaints. In
particular, it contends that the
geographic market alleged by the United
States is too narrow and ‘‘cannot
plausibly be considered to be as small
as an individual building.’’ 50 Moreover,
it suggests that there are barriers to entry
in addition to those alleged in the
United States’ Complaints, and that
barriers to entry apply not just to
buildings, but to entry into a
metropolitan area as sell. COMPTEL
suggests that a ‘‘post-merger price
increase in the metropolitan area is just
as much (actually more) of a danger
than the threat of building-specific price
increases’’ and contends that the
proposed remedy would not prevent
those increases.51
COMPTEL’s comment also addresses
the proposed remedy specifically,
arguing that it is inconsistent with the
United States’ merger and remedy
guidelines. It suggests that a divestiture
of laterals to only certain 2-to-1
buildings is inadequate and that,
instead, the merged firms should be
required to divest ‘‘all of the AT&T and
MCI network assets that serve each
metropolitan area.’’ Next, COMPTEL
contends that the proposed remedy is
faulty because it requires only the
divestiture of currently unused fiberoptic strands to the buildings in
question, and without a guaranteed
customer or revenue stream, a proposed
purchaser would be unwilling to
commit the capital to purchase the
assets and install equipment needed to
‘‘light’’ the fiber-optic strands in
questions and make them ready to use.
Third, COMPTEL argues that the form of
the proposed divestitures—10-year
IRUs—is inadequate to resolve the
competitive concerns. Finally,
COMPTEL suggests that the remedy is
not ‘‘clear and enforceable’’ because
some terms of the divestiture (pricing,
splice points, and transport) are left to
negotiation between the merged firms
and divestiture buyers.
The final section of COMPTEL’s
comment complains that certain RBOC
contracting practices are serving as a
barrier to entry, and that the combined
effect of the mergers and the contracting
practices will be to enhance the risks of
anticompetitive coordination between
the two surviving firms. COMPTEL
suggests that the proposed remedy
would compound this problem if AT&T
(as the merged SBC/AT&T is now
Intervene on February 8, 2006, raising essentially
the same concerns regarding the proposed Final
Judgments as are expressed in its comments.
50 Id. at 8.
51 Id. at 12.
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known) were to buy the divested assets
from Verizon and vice versa. COMPTEL
argues in favor of an alternate remedy
that would require the merged firms to
divest all the acquired companies’ ‘‘inregion assets’’—including customers
and employees—and would also
eliminate certain contracting practices.
2. Response
Like ACTel’s comment, some of
COMPTEL’s comment criticizes the
United States’ Complaints rather than
the adequacy of the remedy for the harm
alleged in the Complaints. In particular,
COMPTEL criticizes the Complaints’
geographic market definition as well as
the decision not to include any
allegations of ‘‘metropolitan-area-wide
harm,’’ harm due to coordinated
interaction between the two merged
firms, or harm due to RBOC contracting
practices. However, the proposed Final
Judgments should not be viewed as
inadequate because they fail to address
competitive harm not alleged in the
Complaints. COMPTEL also raises
concerns that do go to whether the
proposed remedy is sufficient to rectify
the competitive harm alleged in the
Complaints. However, the United States
believes that the proposed remedy will
adequately redress the alleged
competitive harm and will do so in a
manner that avoids disruptions or
dislocations of the ultimate retail
enterprise customers whose businesses
depend on reliable telecommunications
service.
a. Metropolitan Area Harm
COMPTEL contends that the proper
geographic market definition cannot be
as small as an individual building. It
suggests that the market is much
broader, and that the harm the mergers
cause is likely to be felt throughout the
metropolitan area, rather than just in the
specific buildings identified in the
United States’ papers. This concern is,
primarily, a challenge to the United
States’ Complaints rather than the
proposed remedy and, as previously
noted, Tunney Act review properly
addresses the proposed remedy, not the
correctness of the Complaints’
allegations of geographic market or
competitive harm.
In any event, the market definition is
correct, and markets can be as narrow as
the individual building.52 As COMPTEL
52 The FCC also concluded that the geographic
market is the individual building. FCC Orders ¶ 28
(stating that ‘‘the relevant geographic market for
wholesale special access services is a particular
customer’s location’’). It also is worth noting that
even the statement of Dr. Farrell, submitted on
behalf of Global Crossing in the FCC’s SBC/AT&T
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notes, the United States defines markets
primarily from the demand perspective,
i.e., what options face the customer.53
Customers for Local Private Lines can
select only from the set of providers that
offer service to the particular building
those customers need to connect.
Although RBOC networks are typically
ubiquitous and reach virtually every
building in their franchised territories,
CLECs, including AT&T and MCI,
directly connect to only a small
minority of buildings. Because the set of
providers varies from building to
building, and because a customer for a
Local Private Line cannot substitute a
circuit to a different building to supply
the one it needs to connect, the relevant
geographic market for Local Private
Lines can indeed be the individual
building.54
Regardless, however, of whether the
appropriate geographic market here is as
narrow as the individual building or as
broad as the metropolitan area,55 the
competitive harm likely to result from
the proposed merger is limited to a set
of 2-to-1 buildings, and that is what the
Complaints allege.56 In the vast majority
merger proceeding and attached to COMPTEL’s
comment as Exhibit E, recognizes that markets as
narrow as individual buildings would be an
appropriate way to analyze the geographic markets
here. See Statement of Joseph Farrell ¶¶ 10–14
(Apr. 25, 2005).
53 COMPTEL Comment at 10; Horizontal Merger
Guidelines § 1.0.
54 That a customer might need Local Private Lines
to multiple locations does not in itself change this
analysis. For instance, a customer’s need for
connections to three locations within a given
metropolitan area does not necessarily mean the
geographic market is the metropolitan area. The
customer may simply be an active purchaser in
three different markets. In fact, wholesale
customers—such as those that constitute
COMPTEL—often will purchase from multiple
providers of Local Private Lines in a given
metropolitan area, relying on the RBOC for the
majority of their circuits, but purchasing from lower
priced CLECs for the locations to which the CLECs
can provide service. The fact that the wholesale
customers may have ‘‘master service agreements’’
with carriers that cover a whole metropolitan area
and specify the terms under which circuits are
purchased does not change the fact that their
competitive alternatives (and hence, prices) vary by
building, and they may (and often do) choose to
purchase circuits on a building-by-building basis.
55 Because there are also some facts that suggest
broader markets, the United States’ Complaints
acknowledge that the geographic market may be as
broad as the metropolitan area. Nevertheless, if the
market is as broad as the metropolitan area, then the
market is highly geographically differentiated, with
different carriers able to reach very different sets of
locations and buildings within the area.
56 See, e.g., Complaints ¶ 25 (alleging that the
merging parties ‘‘are the only two carriers that own
or control a Local Private Line connection to many
buildings in each region. The merger would,
therefore, effectively eliminate competition for
facilities-based Local Private Line service to those
buildings’’) (emphasis added); see also CISs at 10
(‘‘[T]here are numerous buildings where [AT&T or
MCI] is the only CLEC with a last-mile connection.
It is the decreased competition in the provision of
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of buildings, the RBOC is the only firm
owning a last-mile connection, and the
merger does not change this. For most
of the small percentage of buildings
where AT&T or MCI is present as a
competitive option, either another CLEC
is also present or circumstances are
such that entry would be likely in
response to a price increase. Therefore,
for these buildings also the evidence is
insufficient to establish that the merger
will likely lead to competitive harm.
Only in the set of 2-to-1 buildings for
which the United States sought a
remedy did it conclude that the
evidence was sufficient to show that the
merger would likely lead to competitive
harm. COMPTEL’s contention that the
remedy is insufficient because it does
not address the concern that the mergers
will lead to price increases throughout
all the buildings in a metropolitan area
is therefore without merit: The evidence
did not show that such increases were
likely,57 the United States did not allege
such increases, and therefore there was
no reason to seek relief to prevent such
increases.
b. Divestiture of Specific Assets Versus
an Operating Business
COMPTEL complains that the
proposed remedy is inadequate to
resolve the harm alleged in the
Complaints because it achieves the
divestiture of only specific assets
(laterals to certain 2-to-1 buildings),
rather than an entire operating business.
It contends that this is in violation of
the United States’ remedy guidelines.58
COMPTEL’s position, however, than an
these last-mile connections to buildings where
[AT&T or MCI] is the only CLEC that creates the
harm alleged in the Complaint * * *. [D]ivesting
these last-mile connections will restore the lost
facilities-based competition.’’).
57 As COMPTEL notes, often a particular carrier’s
default pricing for Local Private Lines covers an
entire metropolitan area. However, given that in
each metropolitan area in question, AT&T or MCI
were each only one of multiple CLECs with local
networks and typically controlled no more than a
small minority of CLEC on-net connections, the
evidence did not show that elimination of AT&T or
MCI as an independent competitor would lead to
‘‘metropolitan area-wide’’ anticompetitive price
effects; the likely anticompetitive effect could be no
broader than certain individual buildings.
58 COMPTEL Comment at 14; see U.S. Dep’t. of
Justice, Antitrust Div., Antitrust Division Policy
Guide to Merger Remedies, § I (Oct. 2004) (‘‘Remedy
Guide’’) available at https://www.usdoj.gov/atr/
public/guidelines/205108.pdf. (‘‘This Guide is a
policy document, not a practice handbook. It is not
a compendium of decree provisions, and it does not
list or give ‘best practices’ or the particular language
or provisions that should be included in any given
decree.’’). Although the Remedy Guide is not
binding, the proposed remedy here is entirely
consistent with the Remedy Guide. As the Remedy
Guide notes, the fact that a provision was included
in prior settlements does not make it necessarily
appropriate for new ones; each matter must be
evaluated on a case-by-case basis. Id.
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entire operating business needs to be
divested here appears largely based on
its erroneous assertion that the likely
competitive harm extends beyond a
limited set of 2-to-1 buildings. To the
extent that COMPTEL’s argument is that
an entire operating business needs to be
divested in order to resolve the
competitive harm in the specific 2-to-1
buildings identified in the United
States’ papers, that contention is
meritless.
The purpose of any remedy is to avoid
harm to competition that would
otherwise be created by the merger.
Here, AT&T and MCI are being
eliminated as independent competitors
in the respective RBOC regions for Local
Private Lines and value-added services
that rely on Local Private Lines. But the
competitive problem is not a dearth of
providers of these services in the
specified metropolitan areas; indeed,
each metropolitan area in question has
several competitive providers of Local
Private Lines and value-added services
that rely on Local Private Lines. The
problem here is there are some
buildings in each metropolitan area to
which AT&T or MCI can offer fully
facilities-based Local Private Line and
related services but that to which no
other CLEC can, or would be likely to,
offer such services post-merger. An
effective remedy in this instance,
therefore, does not necessitate creating
an entirely new competitor offering
Local Private Line and related services
in each metropolitan area, but rather can
be limited to a divestiture that would
allow an existing carrier to provide fully
facilities-based Local Private Line and
related services to the particular set of
buildings in which the merger would
otherwise be likely to harm
competition.59 Accordingly, a remedy
that gives an already viable CLEC the
fiber-optic capacity to serve the
buildings in question on acceptable
59 See, e.g., Remedy Guide § III.C.2 (‘‘Divestiture
of Less than an Existing Business Entity Also May
Be Considered When Certain of the Entity’s Assets
Are Already in the Possession of, or Readily
Obtainable in a Competitive Market by, the
Potential Purchaser.’’). Here, essentially all the
assets necessary to compete in the problematic
buildings are already in the hands of, or readily
obtainable by, numerous potential purchasers—
except the fiber-optic connections to those
buildings. For recent cases in which the United
States has required divestiture of only certain assets
rather than an entire operating business, see United
States v. Cal Dive Int’l, Inc., No. 1:05CV02041 (EGS)
(D.D.C. Jan. 12, 2006) (order entering final judgment
requiring divestiture of two vessels and a saturation
diving system), available at https://www.usdoj.gov/
atr/cases/f213100/213177.htm; United States v.
Cingular Wireless Corp., No. 1:04CV01850 (RBW)
(D.D.C. Mar. 14, 2006) (order entering final
judgment requiring, in certain markets, divestiture
of wireless spectrum only), available at https://
www.usdoj.gov/atr/cases/f208000/208093.htm.
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terms resolves the competitive harm. A
divestiture of an entire ‘‘operating
business’’ is unnecessary.60 The only
question is whether the particular assets
that the divestiture buyer must receive
under the proposed Final Judgments,
and the terms by which those assets are
conveyed, are sufficient to allow the
buyer to compete effectively in the
buildings in question. As discussed
further below, the United States believes
that the proposed Final Judgments
adequately resolve these issues.
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c. Concerns Regarding the Assets To Be
Divested
COMPTEL contends that the
divestiture of unused capacity to the
buildings in question in the form of tenyear IRUs is inadequate to resolve the
competitive concerns alleged in the
Complaints. This raises several separate
but related issues regarding the
proposed remedy: (a) Whether it is
sufficient to divest fiber-optic capacity
(as opposed to also divesting
customers); (b) whether it is sufficient to
divest ‘‘unused’’ capacity, i.e., ‘‘unlit’’
fibers; (c) whether a divestiture in the
form of an IRU, instead of ownership, is
sufficient, and (d) whether ten years is
a sufficiently long IRU term. The United
States considered each of these issues in
its negotiation of the remedy.
Ultimately, the United States concluded
that the provisions of the proposed
Final Judgments are sufficient to redress
the competitive harm. Events since the
filing of the proposed Final Judgments
have helped confirm the United States’
judgment, and should serve to reassure
the Court as to the adequacy of the
proposed remedy.
As a result of the proposed mergers,
customers for Local Private Line and
related services to certain buildings will
lose their only alternative to SBC or
Verizon. The purpose of the divestiture
remedy is to ensure that if and when
those customers seek a provider for the
relevant services, another competitive
carrier will be able to supply them. That
purpose will be achieved if another
carrier acquires sufficient AT&T or MCI
assets to service the buildings in
question. However, another carrier will
only purchase the divested assets if they
present a viable business opportunity.
60 Divestiture of an entire ‘‘operating business’’ or
‘‘business unit’’ is not only unnecessary here, but
also impractical. Neither AT&T nor MCI have
separate, easily severable ‘‘business units’’ that
operate the Local Private Line business is the
metropolitan areas in question. The manner in
which the respective corporations are organized
would make it very difficult to implement an
effective divestiture of an entire ‘‘operating
business’’ here. Moreover, such a divestiture could
cause substantial customer disruption. See infra
Section III.B.2.c.i.
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Therefore, the divestiture package must
be one a carrier would be willing to buy.
COMPTEL’s criticisms of the proposed
divestiture properly address whether
any buyer would be willing to purchase
and operate the assets under the
proposed terms (e.g., ‘‘unlit’’ fibers,
without customers, on an IRU basis, for
only ten years).
The United States believes that the
proposed terms are adequate to secure a
viable buyer for the assets. Since the
United States agreed to the divestiture
terms, the divestiture process itself has
helped to validate their adequacy. Both
AT&T and Verizon are well into the
process of auctioning the divestiture
assets in question.61 Affidavits that both
have filed with the United States
pursuant to Section IV(B) of the
Stipulations and Section IX of the
proposed Final Judgments indicate that
there has been substantial interest in the
divestiture assets: multiple carriers have
submitted proposals for some, or all, of
the AT&T and MCI assets. The bids
cover every metropolitan area identified
in the proposed Final Judgments. In the
case of AT&T (which began the
divestiture process earlier than did
Verizon), definitive agreements have
already been reached with three
different well-established carriers that
would cover divestiture of all the assets
in question.62 That several CLECs have
bid to purchase and operate the assets,
and the AT&T has already been able to
reach definitive agreements to divest all
its required assets, should help allay
any concerns about whether the terms of
the proposed divestiture are sufficient to
attract viable buyers.63
61 In order to secure a prompt remedy, the
proposed Final Judgments require a divestiture
within 120 days after the closing of the respective
acquisitions, or within five (5) days after notice of
the entry of final judgment by the Court, whichever
is later. Proposed Final Judgments § IV(A).
62 On February 20, 2006, AT&T entered into
definitive agreements to divest the assets in Los
Angeles and Chicago to one carrier, and the assets
in Detroit, Hartford, Kansas City, Milwaukee, San
Francisco, and St. Louis to another. On February 21,
2006, AT&T entered into a definitive agreement to
divest the San Diego, Dallas, and Indianapolis
assets to a third carrier. The United States has not
yet determined whether to approve these purchases,
pursuant to Section IV(A) of the Stipulation and
Section VI(C) of the proposed Final Judgment.
63 If the United States is wrong about whether the
terms of the proposed divestiture are attractive
enough to prompt a carrier to purchase the assets
in any given metropolitan area, then after both the
defendant(s) and trustee have failed to sell the
assets, the trustee will file a report with the Court,
the United States will make recommendations, and
the Court ‘‘shall enter such orders as it shall deem
appropriate to carry out the purpose of the Final
Judgment.’’ Proposed Final Judgments § V.G. Such
orders could alter the terms of the divestitures, or
the nature of the assets, in such a way as to make
the divestiture viable.
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(i) Capacity Without Customers
As COMPTEL has noted, the United
States often requires the divestiture of
customers in antitrust remedies.64
Nevertheless, such a divestiture is not
always necessary or appropriate. Here,
because there are multiple providers of
Local Private Line and related services
in each metropolitan area, the set of
divestiture assets could be relatively
narrow: a purchaser could serve the
potentially problematic buildings
simply by acquiring ‘‘last-mile’’ fiberoptic capacity connected to its local
network. Because fiber-optic capacity
will be sold to an established CLEC,
there is little concern that the purchaser
would not be competitively viable
without also receiving customer
contracts. A divestiture of customers
would be necessary or appropriate in
this case only if no adequate purchaser
were willing to take on the assets in the
absence of some sort of guaranteed
revenue stream. From its investigation,
the United States concluded that
purchasers would be willing to take on
the assets, even without customers, on
the assumption that they would be able
to compete for, an and win, customers
over time in the buildings at issue. The
fact that multiple CLECVs—including
members of COMPTEL—submitted bids
for these assets (and, in AT&T’s case,
have agreed to purchase the assets)
helps confirm this.65
(ii) Unused Capacity Versus ‘‘Lit’’ Fibers
COMPTEL correctly notes that
purchasers of the divested assets will
receive unused capacity to the point of
entry of each building, and, in order to
begin serving customers, would have to
invest some capital to gain building
entrance and activate (‘‘light’’) the
fibers. COMPTEL’s analogy to the cost
of constructing entirely new ‘‘last-mile’’
connections, however, and its
64 See, e.g., Remedy Guide § III.B (‘‘In markets
where an installed base of customers is required in
order to operate at an effective scale, the divested
assets should either convey an installed base of
customers to the purchaser or quickly enable the
purchaser to obtain an installed customer base.’’)
65 In this instance, a divestiture of customers
might cause substantial disruption and
complication—far more than in the ordinary
antitrust settlement. Among other things, shifting a
portion of a customer’s telecommunications service
risks outages, something particularly worrisome
given the extent to which many retail enterprises
depend on reliable telecommunications service.
Had the United States sought to include a customer
divestiture as part of the proposed remedies, it
could well have run afoul of the Tunney Act’s
concern that the proposed remedy not adversely
affect third parties. 15 U.S.C. 16(e)(1)(B) (requiring
court to consider the impact of entry of the
judgment ‘‘upon the public generally’’), see also
Microsoft, 56 F.3d at 1462 (suggesting the Tunney
Act analysis should consider whether ‘‘third parties
* * * would be positively injured by the decree’’).
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contention that these entrance and
activation costs would prevent the
remedy from being effective, are
misplaced.
Although costs vary widely, the cost
of gaining building entrance and
activating fibers is typically a small
fraction of the cost of constructing an
entirely new ‘‘last-mile’’ connection
often an order of magnitude less.
Optronics equipment (equipment to
light fiber) may not be cheap, but its still
typically does not cost anywhere near as
much as digging up city streets and
laying new fiber. Moreover, whereas
most of the cost of a new ‘‘last-mile’’
connection is sunk (i.e., it cannot be
recouped once committed), much of the
cost of optronics equipment is not
generally sunk because the carrier can
remove the equipment and use it
elsewhere if it is no longer needed in its
original location. Accordingly, the
evidence gathered by the United States
revealed that whereas carriers do not
typically ‘‘build out’’ (i.e., build a new
last-mile connection) to a customer
without a relatively large guaranteed
revenue commitment, they typically do
light fiber and negotiate entrance to
buildings connected to their network
with unlit fiber if they are able to secure
a customer of even modest capacity
needs.
As COMPTEL suggests, for each
building in question, the buyer of the
divested assets may not negotiate a
building entrance agreement or activate
a fiber lateral until it has secured a
customer in the building. But that does
not negate the effectiveness of the
remedy. The buyer of the divested assets
can bid to supply Local Private Line and
related services to the building in
question, and if it prevails, negotiate
building entrance and activate the fiber.
The CLECs who have bid for the assets
in all likelihood plan to do exactly
that.66 Customers for Local Private Line
66 The United States also concluded that any
attempt to divest ‘‘lit’’ capacity would have been
unduly complicated and problematic. For instance,
splicing ‘‘lit’’ fibers out of the seller’s network and
into the buyer’s would raise the prospect of
customer outages. On a similar note, if the proposed
Final Judgments had required the merged firm to
provide the purchasers with fiber into the building,
as opposed to simply to it, the merged firm might
have to negotiate entrance agreements with
hundreds of landlords on behalf of a third party
who might not need entrance agreements for all
those buildings until some time in the future.
Perhaps more importantly, the divestiture buyer
could well have ended up paying lease or entrance
fees for countless buildings where it had no
customers, greatly adding to the carrying costs of
the fiber and making the divestiture assets much
less attractive as a business proposition. The better
approach was to simply let the buyers negotiate
their own building entrance agreements, on their
own terms, and better suited to their specific needs,
for each building if and when they need it (i.e., if
and when they win a customer in that building).
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and related services will thereby have
the benefits of competition, even if the
divestiture purchaser ultimately does
not win a customer contract, or ‘‘light’’
the fiber in their particular building.
(iii) IRU Versus Ownership
COMPTEL characterizes the form of
the divestiture as a ‘‘lease’’ and suggests
that it will be ineffective because it is
not full ownership. Although COMPTEL
is correct in that the remedy does not
require transfer of full ownership, IRUs,
which carry broader rights than typical
leases, are commonly used in the
industry and often viewed as almost
indistinguishable from ownership. In
fact, many CLECs’ metropolitan area
networks—including some of those of
pre-merger AT&T—are constructed
largely from IRU fiber rather than
owned fiber. In its investigation, the
United States did not uncover any
significant evidence suggesting that
conveying laterals in the form of IRUs
would undermine the effectiveness of
the remedy.
(iv) Ten-Year Duration
COMPTEL complains that the
required minimum term of the IRU—ten
years—is ‘‘relatively short’’ and will
impair the effectiveness of the remedy.
The United States disagrees. Retail
agreements for Local Private Line and
related services are virtually always
much shorter than ten years; typically
they are no more than two or three
years. The fact that the IRUs are for ten
years should not impair the ability of
the divestiture purchaser to compete
except, perhaps, near the end of the tenyear term. At that point, it is impossible
to predict what the competitive
landscape will look like, especially in
the rapidly changing
telecommunications industry. It is for
that reason that the United States’
consent decrees—including those
proposed here—do not extend beyond
ten years. The United States cannot,
with confidence, predict whether the
mergers would continue to cause
anticompetitive harm beyond ten years
in the future, as technological or other
changes could substantially reshape the
industry. Therefore, the remedy cannot
be faulted for not extending beyond ten
years.67
67 It
is also worth noting that fiber-optic cable
does not last forever. The useful life of that fiber
may be no more than 20 to 25 years. It is possible,
if not likely, that much of the AT&T and MCI fiber
at issue here may have been laid ten or more years
ago. Thus, in many cases, in 10 years time, much
of the divestiture fiber may be nearing the end of
its useful life and there would be little purpose in
requiring an IRU significantly longer than ten years.
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(v) Negotiable Terms
COMPTEL suggests that the remedy is
not ‘‘clear and enforceable’’ because
some terms of the divestiture (pricing,
splice points, and transport) are left to
negotiation between the merged firm
and divestiture buyer. In any
divestiture, however, many of the terms
need to be negotiated between the seller
and buyer. Indeed, the United States
never specifies a purchase price in its
settlements. The requirements of the
proposed Final Judgments here are
‘‘clear and enforceable’’: the merged
firms must divest laterals to more than
700 specific addresses and sufficient
transport to connect those laterals to the
buyer’s network. The United States has
no reason to believe that the negotiation
of a commercial, arms-length agreement
between the merged firms and
divestiture buyers are likely to lead to
any unusual problems.68 In fact, the
evidence to date is otherwise: AT&T has
already submitted to the United States
for approval definitive agreements for
the divestitures required by the
proposed Final Judgment with the terms
fully resolved. Of course, should there
be any difficulties, the ultimate terms of
the divestiture must be acceptable to the
United States.69
d. Contracting Practices and
Coordination
COMPTEL complains at length that
certain RBOC contracting practices are
serving as a barrier to entry, and that, in
its view, the combined effect of the
mergers and the contracting practices
will be to enhance the risks of
anticompetitive coordination between
the two surviving firms. As part of its
investigation the United States, of
course, considered potential entry
barriers in the markets in question
(including RBOC contracting practices)
as well as the possibility that the
mergers could enhance the risks of
collusion. Whatever the entry barrier
that may be posed by RBOC contracting
practices, the mergers do nothing to
enhance them. Nor have such contracts
served to prevent multiple CLECs from
building networks, entering markets,
and selling significant volumes of, both
wholesale and retail, Local Private Lines
and related services. To the extent that
AT&T and MCI were successful in
68 Indeed, because of the relative simplicity of the
remedy here, the agreements between the merged
firms and divestiture buyers are likely to be much
less complex and potentially problematic than
many other divestitures, which typically can
involve difficult issues regarding, e.g., transition
agreements, intellectual property transfer, ‘‘splitting
up’’ of customer contracts, arrangements for
employees.
69 Proposed Final Judgments § VI(C).
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selling Local Private Lines and related
services to the buildings in question, the
divestiture purchaser could be as well.
As for coordination, the United States
was unable to conclude that the change
in market structure brought on by the
mergers was likely to lead to
competitive harm due to an increased
risk of coordination.70 The existence of
numerous competitors (in addition to
the merging firms) for both wholesale
and large retail telecommunications
customers tends to make collusion
difficult. In any event, the United States’
Complaints did not make any
allegations regarding RBOC contracting
practices or anticompetitive
coordination, and hence, COMPTEL’s
concerns are beyond the scope of the
Complaints and have essentially
nothing to do with whether the
proposed remedy resolves the
competitive harm alleged by the United
States.71
C. New York Attorney General
1. Summary of Comment
On February 13, 2006, the New York
Attorney General (‘‘NYAG’’) submitted a
comment arguing that the proposed
remedies are ‘‘unlikely to constrain the
merged entities,’’ 72 in particular,
because (a) they did not address the
effect of the mergers on Internet access,
and (b) they inadequately addressed the
competitive concerns as to Local Private
Lines. With respect to the former, NYAG
argues that the proposed Final
Judgments are faulty because they do
not require the merged firms to offer
DSL on a stand-alone basis to
consumers (i.e., without also requiring
consumers to subscribe to telephone
service), and because they do not
require any relief related to Internet
‘‘backbones,’’ the large, interconnecting
fiber-optic networks that constitute the
core of the Internet. With respect to
Local Private Lines, NYAG complains
that the proposed remedies do not
address the loss of competition from the
potential elimination of AT&T’s and
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70 The
FCC reached a similar conclusion. FCC
Orders ¶ 52 (‘‘We also do not believe that the
merger increases the likelihood of coordinated
interaction.’’); see also id. 54.
71 COMPTEL’s sole basis for arguing that the
contracting practices and coordination are relevant
to the remedy is its allegation that if Verizon buys
the divested AT&T assets, and vice versa, that may
compound the competitive harm COMPTEL alleges.
Putting aside the questionable merit of these claims,
as discussed above, the merging firms have already
solicited and received bids for the assets in question
as required under the proposed Final Judgments,
and Verizon did not bid for the AT&T assets nor
did AT&T bid for the MCI assets that Verizon is
divesting. Thus, COMPTEL’s concern appears to be
moot.
72 NYAG Comment at 4 (attached hereto as
Attachment 3).
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MCI’s resale of circuits owned by SBC
and Verizon; 73 argues that the proposed
divestitures are inadequate because they
involve only a ‘‘handful of buildings’’
and, therefore, would not affect pricing
throughout New York City or State, or
constitute a viable network for a
buyer; 74 and suggests that the remedy is
‘‘written in disappearing ink’’ because
the assets to be divested can be
modified at the purchaser’s option and
with the consent of the United States.75
2. Response
a. DSL, Internet Backbone, and Local
Private Line Resale
Most of NYAG’s comment 76 relates to
issues well beyond the scope of the
Complaints. NYAG argues that the
proposed Final Judgments should have
required customer access to unbundled
DSL services. It is not clear from the
comment what merger-related harm
NYAG intends this to remedy, but, in
any event, there appears to be no
relationship between that proposed
restriction and the markets alleged in
the United States’ Complaints.77
73 Id.
at 5.
at 6.
75 Id. at 6–7.
76 NYAG also filed comments with the New York
Public Service Commission (‘‘NYPSC’’) on April 29,
2005, as part of the Verizon/MCI merger
proceedings before that body, raising essentially the
same ‘‘naked DSL’’ and Internet backbone concerns
it raises here. The NYPSC approved the Verizon/
MCI merger, with certain conditions, in a detailed
64-page order on November 22, 2005. Order
Asserting Jurisdiction and Approving Merger
Subject to Conditions, Joint Petition of Verizon
Communications Inc. and MCI, Inc. For a
Declaratory Ruling Disclaiming Jurisdiction Over or
in the Alternative for Approval of Agreement and
Plan of Merger, New York Public Service Comm’n
CASE 05–C–0237, (Nov. 22, 2005) (‘‘NYPSC
Order’’), available at https://www3.dps.state.ny.us/
pscweb/WebFileRoom.nsf/ArticlesByCategory/
135BB9AA905F47A7852570C0005155BD/$File/
05c0237_11_22_05.pdf?OpenElement.
77 DSL is primarily a ‘‘mass market’’ service, and
the most frequently cited justification during the
Department’s and FCC’s investigations for requiring
the merged firms to offer ‘‘naked’’ or ‘‘unbundled’’
DSL as a remedy is the allegation the mergers
would reduce competition for mass market
telephone service. If the merged firms were required
to offer naked DSL, it would allegedly make it
easier for standalone VoIP (‘‘voice over internet
protocol’’) providers like Vonage to compete against
the merged firm. The United States concluded that
the evidence would not support a Section 7 case
alleging competitive harm in the ‘‘mass market.’’
That conclusion was consistent with those reached
by the New York Public Service Commission as
well as the FCC. See NYPSC Order at 29 (‘‘We
conclude that the merger will not likely result in
anti-competitive effects for mass market
customers.’’); FCC Orders at ¶¶ 81 (SBC/AT&T), 82
(Verizon/MCI) (‘‘As discussed below, we find that
[Verizon/SBC]’s acquisition of [MCI/AT&T] is not
likely to result in anticompetitive effects for mass
market services.’’). Although neither the FCC nor
the NYPSC identified a problem in ‘‘mass market,’’
and therefore saw no need for a mandatory ‘‘naked
DSL’’ remedy, they did accept the parties’ voluntary
74 Id.
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Similarly, NYAG argues that the
mergers could have anticompetitive
effects in the Internet backbone market
and argues that ‘‘[t]he Court should
reject the Verizon-MCI merger unless
and until Verizon provides the
information needed to make an
informed decision regarding the extent
to which backbone concentration will
increase as a result of the proposed
merger with MCI.’’ It goes on to suggest
that the Court should consider ‘‘the
appropriateness of divestiture of
backbone assets’’ based on that
information.78 The United States
investigated the effects of the mergers
on the Internet backbone market,
considering both the current traffic
shares of the merging parties as well as
potential increases in shares that might
result from shifting SBC or Verizon
retail customers onto the AT&T and MCI
backbone. Ultimately, the United States
concluded that competition in this
market would not be harmed as the
merged firms would continue to face
several strong competitors. Therefore, it
did not allege Internet backbone as a
relevant product market, nor did it
allege any harm in such a market.79
Accordingly, relief directed to the
Internet backbone market is unnecessary
and NYAG’s concerns about Internet
backbone do not implicate whether the
proposed Final Judgments are in the
public interest.
NYAG’s comment also includes a
paragraph complaining that the mergers
will adversely affect competition
because they will eliminate ‘‘discounted
‘last mile’ wholesale leasing.’’ Although
this concern does, at least, involve Local
Private Lines, it raises an issue
unrelated to anything alleged in the
United States’ Complaints. The United
States investigated whether the mergers
would have a significant adverse impact
on competition in Local Private Lines by
eliminating AT&T and MCI as
independent resellers of ILEC circuits,
but determined that the evidence did
commitments to provide ‘‘naked DSL’’ and
included them as part of their orders. FCC Orders,
Apps. F, G (respectively); NYPSC Order at 61–62,
63.
78 NYAG Comment at 17. Essentially, NYAG asks
the Court to conduct its own discovery and de novo
antitrust investigation of the Internet backbone
market, conduct a trial on whether the discovered
facts prove liability, and then determine the
appropriate remedy. This is, of course, not
consistent with the Tunney Act.
79 The FCC and the European Union also looked
at the Internet backbone issue and determined that
no relief was rquired. See, e.g., FCC Orders ¶¶ 108
(SBC/AT&T), 109 (Verizon/MCI); Commission of
the European Communities, Case No. COMP/
M.3752–Verizon/MCI, Art. 6(1)(b) Non-Opposition
Decision, ¶ 45 (Oct. 7, 2005), available at https://
europa.eu.int/comm/competition/mergers/cases/
decisions/m3752_20051007_20310_en.pdf.
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not support such a conclusion.80
Accordingly, it did not allege this as
competitive harm in its Complaints, nor
would it be appropriate to seek any
relief regarding resold circuits.81
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City or State-wide Pricing
NYAG briefly complains that the
divestiture of only a ‘‘handful of
buildings’’ is insufficient because it
would not affect pricing throughout
New York City or State. The United
States did not allege, however, that the
mergers would adversely affect prices
throughout a whole city, state, or
metropolitan area. As previously noted,
there are multiple carriers with
extensive networks in each metropolitan
area under consideration,82 and the
evidence did not demonstrate a
likelihood of anticompetitive price
effects covering all buildings in a
metropolitan area. What the United
States alleged was that the proposed
mergers were likely to reduce
competition to certain 2-to-1 buildings
in each area, and the proposed remedy
is directed at restoring competition to
those buildings.83 NYAG notes that it is
‘‘hard to see how this remedy could
have any significant positive effect on
80 The United States’ investigation determined
that A&T’s and MCI’s sales of resold circuits are
relatively small and of limited competitive
significance. Moreover, because numerous other
CLECs have extensive fiber-optic networks in the
metropolitan areas under consideration, as well as
contracts with Verizon and SBC providing them
with discounts similar to those of AT&T and MCI,
other competitors could likely replace any
competition that might be lost by the elimination
of AT&T and MCI as independent resellers in SBC’s
and Verizon’s territories respectively. The FCC
reached a similar conclusion. FCC Order ¶¶ 33, 43.
81 The United States devoted significant time to
investigating the issues discussed in NYAG’s
comments and concluded that the evidence did not
support alleging competitive harm related to ‘‘mass
market,’’ Internet backbone, or resold Local Private
Lines. NYAG has the statutory ability to investigate
violations of state and federal antitrust laws, see
e.g., N.Y. Gen. Bus. Law § 343 (McKinney 2006)
(providing for pre-complaint discovery), and the
standing to enforce them. If NYAG believed the
evidence justified a broad antitrust case based on
resold Local Private Lines, Internet backbone, DSL,
or anything else, it could have brought that case.
Here, it elected not to do so.
82 For instance, in the New York metropolitan
area—the focus of NYAG’s concerns—the United
States’ investigation identified more than a dozen
carriers besides Verizon and MCI with significant
fiber networks. At least a half dozen of these had
hundred or thousands of route miles of fiber. The
United States identified well in excess of 4,000
CLEC ‘‘last-mile’’ building connections; less than 15
percent of these belonged to MCI. These
conclusions are consistent with those reached by
the New York Public Service Commission in its
analysis of the New York metropolitan area. See
NYPSC Order at 45 (‘‘We conclude that on average
there are approximately six alternative fiber
networks within 1/10 of a mile of the MCI-lit
buildings in New York, and that 75% of those
buildings have two or more alternative carriers.’’)
83 See supra note 56.
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competition beyond the footprint of the
handful of individual buildings
identified.’’ 84 But that is the point: The
identified buildings are the only ones
where competition was likely to be
harmed, and they are, therefore, the
only ones for which a remedy was
required. The proposed remedy should
not be viewed as inadequate, or
inconsistent with the public interest,
simply because it fails to affect
competition in locations where the
evidence did not demonstrate an
anticompetitive effect.
(c) Scope of Divestiture
NYAG also argues that the divested
buildings, at least in New York, ‘‘do not,
themselves, form the critical mass
needed to build a network * * *. [A]ny
would-be competitor who acquired the
divested MCI facilities serving these
scattered buildings would have neither
the scope nor scale necessary to stand
in MCI’s competitive shoes.’’ 85 But the
proposed Final Judgments did not
contemplate that the purchaser would
necessarily have no other assets beyond
those being divested. As discussed in
Section III.A.2.d, in every metropolitan
area identified in the Complaints
(including New York) there are at least
several CLECs with extensive networks,
including, e.g., switches, fiber, dozens
or hundreds of ‘‘on-net’’ locations.
Those CLECs are already effective
competitors in many buildings in the
metropolitan area, though not in the
buildings covered by the proposed Final
Judgments where they lack a last-mile
connection. The proposed remedy, by
providing a carrier with fiber-optic
capacity to those buildings, will enable
it to replace the competition that could
potentially be lost as a result of the
merger. The purpose of the United
States having approval rights over the
proposed buyer of the assets is to ensure
that the assets are acquired by a firm
that can effectively compete to provide
services to the buildings in question.
(d) ‘‘Disappearing Ink’’
Finally, NYAG also raises one brief
point regarding the assets to be divested:
it suggests that the proposed remedy is
‘‘written in disappearing ink’’ because
the assets to be divested can be
modified at the purchaser’s option and
with the consent of the United States.86
84 NYAG
Comment at 6.
85 Id.
86 NYAG Comment at 7; see Proposed Final
Judgments § II(D) (‘‘With the approval of the United
States, and in its sole discretion, and at the
Acquirer’s option, the Divestiture Assets may be
modified to exclude assets and rights that are not
necessary to meet the competitive aims of this Final
Judgment.’’). This provision is similar to ones used
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The proposed divestitures in these
matters involve a great many assets,
including more than 700 lateral
connections to specific street addresses.
Moreover, because 18 metropolitan
areas are involved, there will almost
certainly be several different purchasers.
It is possible that as the divestiture sales
proceed, it will be discovered that
exclusions in the divestiture assets are
desirable. For instance, if it turns out
that, unbeknownst to the United States
at the time of filing, one of the buildings
in question is scheduled for demolition,
it hardly makes sense to require a
divestiture of a lateral to that building.
In order to maintain flexibility to deal
with such contingencies, and to avoid
burdening the Court with requests for a
decree modification each time such an
occasion might arise, the United States
included in the proposed Final
Judgments a mechanism for minor
exclusions from the divestiture assets.87
To ensure that such exclusions are
consistent with the purposes of the
proposed Final Judgments, any
exclusions must be at the purchaser’s
option, will require the consent of the
United States, and are limited to assets
and rights not necessary to meet the
competitive aims of the Final Judgment.
IV. Conclusion
After careful consideration of these
public comments, the United States
remains of the view that the proposed
Final Judgments provide an effective
and appropriate remedy for the antitrust
violation alleged in the Complaints and
that their entry, therefore, would be in
the public interest. Any settlement is a
product of negotiation and compromise,
and as courts have noted, the purpose
of Tunney Act review is not for the
court to engage in an ‘‘unrestricted
evaluation of what relief would best
serve the public’’ 88 or to determine the
relief ‘‘that will best serve society,’’ 89 it
is simply to determine whether the
proposed decree is within the reaches of
in other antitrust consent decrees that suggest that
something less than the entire ‘‘divestiture assets’’
can be sold if the United States consents in writing.
See e.g., United States v. Marquee Holdings, Inc.,
No. 05 CV 10722 § IV(I) (KMW) (S.D.N.Y. filed Dec.
22, 2005) (proposed final judgment), available at
https://www.usdoj.gov/atr/cases/f213800/
213862.htm.; United States v. United Health Group
Incorporated, No. 1:05CV02436, § IV(I) (RMU)
(D.D.C. filed Dec. 20, 2005) (proposed final
judgment), available at https://www.usdoj.gov/atr/
cases/f213800/213817.htm.
87 The Tunney Act condemns ambiguity in
proposed Final Judgments. 15 U.S.C. 16(e)(1)(A). It
is for that reason that the proposed Final Judgments
are extremely specific, identifying hundreds of
individual building addresses. But that very
specificity creates the need for some flexibility.
88 BNS, 858 F.2d at 462 (citing Bechtel Corp., 648
F.2d at 666).
89 Bechtel, 648 F.2d at 666.
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the public interest—‘‘even if it falls
short of the remedy the court would
impose on its own.’’ 90
Under subsection (A) of 15 U.S.C.
16(e)(1), the Court is instructed to
consider a number of factors relating to
the competitive impact of the proposed
Final Judgments.91 With respect to the
‘‘termination of alleged violations,’’ the
Section 8 violation in each matter here
is a merger that would reduce
competition in Local Private Line and
related services to certain buildings; by
restoring competition to those buildings,
the proposed remedy terminates the
violations. With respect to ‘‘provisions
for enforcement and modification,’’ the
proposed Final Judgments contain the
standard provisions that have been
effective in numerous other cases
brought by the United States. In
particular, the proposed Final
Judgments, provide that the Court
retains jurisdiction over this action, and
the parties may apply to the Court for
any order necessary or appropriate for
the modification, interpretation, or
enforcement of the Final Judgment.
With respect to ‘‘duration of relief
sought,’’ the proposed divestitures are
for a minimum of ten years. As
discussed above, this period is adequate
and appropriate given the rapidly
changing nature of technology and the
industry, as well as the useful life of the
divestiture assets. With respect to
‘‘anticipated effects of alternative
remedies actually considered’’ the
alternative of injunctions blocking the
proposed mergers would likely have
prevented the firms in question from
realizing literally billions of dollars in
efficiencies. Such an extreme remedy is
unwarranted given the relatively small
magnitude of the competitive problem
and the availability of a divestiture
remedy that will completely resolve it.
With respect to ‘‘whether its terms are
ambiguous,’’ no term in either proposed
Final Judgment is ambiguous. Among
other things, the assets to be divested
are specified down tot he individual
building addresses. Finally, with respect
to ‘‘any other competitive
considerations bearing upon the
adequacy of such judgment,’’ none casts
90 AT&T,
552 F. Supp. at 151.
Court shall consider ‘‘the competitive
impact of such judgment, including termination of
alleged violations, provisions for enforcement and
modification, duration of relief sought, anticipated
effects of alternative remedies actually considered,
whether its terms are ambiguous, and any other
competitive considerations bearing upon the
adequacy of such judgment that the court deems
necessary to a determination of whether the consent
judgment is in the public interest.’’ 15 U.S.C.
16(e)(1)(A).
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91 The
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doubt upon the adequacy of the
proposed Final Judgments.
Under subsection (B), the Court is to
consider ‘‘the impact of entry of such
judgment upon competition in the
relevant market or markets, upon the
public generally and individuals
alleging specific injury from the
violations set forth in the complaint
including consideration of the public
benefit, if any, to be derived from a
determination of the issues at trial.’’ 92
Because the buildings identified in the
proposed Final Judgments are the only
ones in which competition is likely to
be lessened as a result of the mergers,
the impact of entry of the proposed
Final Judgments will be to restore any
competition lost as a result of the
merger in Local Private Lines and
related services. Customers for Local
Private Line and related services
provided to the buildings in question—
parties who might have otherwise
suffered injury from the violations set
forth in the Complaints—are likely to
have competitive choice restored to
them via the contemplated divestitures.
Moreover, the relief is sufficiently
limited so that the public will not suffer
any adverse consequences from the
proposed Final Judgments.93 No
conceivable benefit could arise from a
determination of these issues at trial.
Based on the factors set forth in the
Tunney Act, the proposed Final
Judgments are in the public interest.
Pursuant to Section 16(d) of the
Tunney Act, the United States is
submitting the public comments and its
Response to the Federal Register for
publication. Our response is also being
provided to each of the commenters.
After the comments and the United
States’ Response to Comments are
published in the Federal Register, the
United States will move this Court to
enter the proposed Final Judgments.
Respectfully submitted,
Laury E. Bobbish,
Assistant Chief.
Lawrence M. Frankel,
(D.C. Bar No. 441532), Trial Attorney.
U.S. Department of Justice, Antitrust
Division, Telecommunications and Media
Enforcement Section, 1401 H Street, NW.,
Suite 8000, Washington, DC 20530,
Telephone: (202) 514–5621, Facsimile: (202)
514–6381.
92 15
U.S.C. 16(e)(1)(B).
an injunction against the mergers,
or a divestiture of customers as proposed by
COMPTEL would likely have adverse impact on the
public.
93 Conversely,
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Plaintiff United States’ Response to
Comments
Filed in United States v. SBC
Communications, Inc. and AT&T
Corp., Civ. Action No. 1:05CV02102
(EGS) and United States v. Verizon
Communications and MCI, Inc., Civ.
Action No. 1:05CV02103 (EGS)
Attachment 1—Comments Regarding
the Proposed Consent Decrees
Submitted on Behalf of the Alliance for
Competition in Telecommunications
(ACTel)
Comments Regarding the Proposed
Consent Decrees in United States v.
SBC Communications, Inc. and AT&T
Corp. (Civil Case No. 05–2102) and
United States v. Verizon
Communications, Inc. and MCI, Inc.
(Civil Case No. 05–2103)
Submitted on Behalf of the Alliance for
Competition in Telecommunications
(ACTel)
Thomas Cohen,
Executive Director, Alliance for Competition
in Telecommunications.
Gary L. Reback,
Carr & Ferrell LLP.
On December 15, 2005, the
Department of Justice published in the
Federal Register the Proposed Final
Judgments resolving virtually identical
Complaints filed by the United States to
enjoin the acquisition of AT&T Corp. by
SBC Communications Inc., and the
acquisition of MCI, Inc. by Verizon
Communications, Inc. The respective
Complaints characterize the former
acquisition as creating ‘‘the nation’s
largest provider of telecommunications
services,’’ and the latter transaction as
creating ‘‘one of the nation’s largest
providers of telecommunications
services.’’ Complaints at ¶1. Among all
of the overlaps and increases of
concentration in telecommunications
products, services and assets that the
transactions procedure, and
notwithstanding the complaints and
protests of consumer and business
customers at both the state and Federal
level, the Department of Justice’s
challenge to the proposed transaction is
limited to the effect of a single
duplicative product offering.
Specifically, the Complaints seek to
enjoin both transactions, because they
‘‘will substantially lessen competition’’
in the provision and sale of ‘‘Local
Private Lines’’ (also known as ‘‘special
access’’) to the wholesale market as well
as voice and data services that rely on
Local Private Lines, with the likely
result that prices for the Lines and
services using those Lines will increase
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‘‘to levels above that which would
prevail absent the merger(s).’’
Complaints ¶¶1, 25, 33. The Complaints
indicate that, absent relief, competition
will be diminished and prices will rise
for both wholesale and retail ‘‘Local
Private Line’’ customers. Complaints
¶25.
These comments are directed to both
cases and are timely submitted pursuant
to the Antitrust Procedures and
Penalties Act, 15 U.S.C. 16(b)–(e)
(known as the ‘‘Tunney Act’’), on behalf
of the Alliance for Competition in
Telecommunications (‘‘ACTel’’). ACTel
members include both competitive local
exchange carriers (‘‘CLECs’’) and
interexchange carriers (‘‘IXCs’’) that buy
Local Private Lines 1 at wholesale from
the merging companies. ACTel members
combine these purchased lines with
additional facilities, technology,
products and services to sell their own
value-added telecommunications
services, sometimes in competition with
the merging companies, to end user
business customers. Many of these
value-added telecommunications
services are directed to small- and
medium-sized business customers.
These facts are described in the
Complaints at ¶¶14, 23.
ACTel members and their customers
are therefore among those that the
Complaints identify as suffering
competitive injury from the
transactions, and on whose behalf the
Government seeks relief. ACTel agrees
that the harm alleged in the Complaints
is accurate, demonstrable, and unless
adequately remedied, ruinous. Indeed,
ACTel members, in compliance with
Department of Justice compulsory
process, produced documents and
information revealing that the proposed
transactions can be expected to increase
the cost of Local Private Lines from 20%
to 500% depending on the metropolitan
area and type of circuit being
purchased—if the merged parties even
continue to sell Local Private Lines to
ACTel members at all after the
acquisitions.
But while the Complaints correctly
identify the competitive harm produced
by the transaction, the remedy in the
Proposed Final Judgments fails even the
most deferential standard for Tunney
Acts review. The remedy does not
prevent the elimination of competition
of Local Private Lines (the injury
charged in the Complaints) because,
among other things, the remedy set forth
in the Proposed Judgments, unlike the
injury charged in the Complaints,
1 Actually the Lines are based, but because the
Complaint uses terminology of sale, these
comments do, as well.
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addresses only the part of the Private
Line that connects to a building, not the
part of the Private Line that connects to
a carrier’s network. Hence, reviewing
the remedy ‘‘in relationship to the
violations that the United States has
alleged in its Complaints(s),’’ 2 and
deferring to the Government to whatever
extent is required by law, the remedy
does not, and cannot logically,
ameliorate the harm alleged in the
Complaints.
The judicial review of the
Government’s settlements in these cases
will constitute the first significant
application of the Tunney Act since
Congress amended that statute in 2004.
The Congressional amendments
specifically overruled District of
Columbia Circuit Court of Appeals and
District Court precedent that was
deemed overly deferential to Antitrust
Division consent decrees.3 In response
to those decisions, Congress
reemphasized its intention that courts
reviewing consent decrees ‘‘make an
independent, objective, and active
determination without deference to the
DOJ.’’ 4 Courts are to provide an
‘‘independent safeguard’’ against
‘‘inadequate settlements.’’ 5 Specifically,
the Act was amended to compel
reviewing courts to consider both
‘‘ambiguity’’ in the terms of the
proposed remedy, as well as the
‘‘impact’’ of the proposed settlements on
‘‘competitors in the relevant market or
markets.’’ 6
This is not a case in which there is
some debate about the efficacy of the
proposed remedy. Rather, this is the
case in which the court documents filed
by the Government, as well as
uncontroverted parts of the
Government’s evidence, compel the
2 This is the standard the Government claims is
appropriate for Tunney Act review. See FR at
74350. However, given that Congress amended the
Tunney Act to overrule District of Columbia Circuit
Court of Appeals and District Court precedent that
was overly deferential to Antitrust Division consent
decrees, it would make a mockery of the legislation
to impose the very narrow standard of review
advocated by the Government. The amendments to
the Tunney Act compel the reviewing court to
consider, inter alia, the ‘‘impact’’ of the entry of
judgment on ‘‘competition in the relevant market’’
See Pub. L. 108–327, 221(b)(2) rewriting 15 U.S.C.
16(e).
No suggestion is made in the statute or legislative
history that the courts should defer to either the
Government’s identification of injury or the
Government’s proposed remedy to that injury. On
the contrary, as explained in the text following
footnote 2 above, the reviewing court is to conduct
an ‘‘independent, objective, and active
determination without deference to the DOJ.’’
3 See 150 Cong. Rec., S 3617 (April 2, 2004)
(Statement of Sen. Kohl).
4 Id.
5 Id.
6 See id at S 3618; Pub. L. 108–327, § 221(b)(2)
amending 15 U.S.C. 16(e).
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conclusion that the remedy cannot
succeed. The proposed remedy fails to
satisfy the Tunney Act even when
judged under the overly deferential
standard proposed by the Government.
When evaluated under the standard
required by Congress in the 2004
amendments to the Tunney Act, the
proposed remedy is barely worth of
serious consideration.
Prior to the Acquisitions, The
Wholesale Market Functioned
Effectively, Producing Low Prices
Any evaluation of the Government’s
efforts in these cases to protect the
wholesale Private Line market from
anticompetitive injury must begin with
an understanding of the magnitude of
the wholesale market and its
importance. While the Complaint 7
formally denominates the relevant
product market as ‘‘Local Private
Lines,’’ the Complaint goes on to
explain that SBC and Verizon refer to
these products as ‘‘special access’’
circuits.
As the Complaint points out, most
office buildings are connected, or ‘‘lit,’’
only by either SBC or Verizon in their
respective territories. In pricing ‘‘special
access’’ circuits, then, SBC and Verizon
can frequently charge whatever the
market will bear, unless the price for a
particular circuit is constrained by FCC
regulations. Consequently, SBC and
Verizon special access revenues, as well
as annual rates of return on special
access, have grown dramatically over
the past decade. Verizon’s annual rate of
return on special access was 2.14% in
1996, but over 23% in 2003. SBC’s
annual rate of return on special access
was 63.14% in 2003. Overall, according
to official comments filed by MCI at the
FCC, special access revenues were
approximately $3.14B in 1996, but had
grown to $13.4B in 2003.
Over the years, in response to the high
special access prices that SBC and
Verizon charged, a robust and
competitive wholesale market for Local
Private Lines has emerged. In this
wholesale market, carriers like the
ACTel members lease Local Private
Lines from other carriers, in order to
reach business customers. AT&T and
MCI have the largest networks, aside
from ‘‘Baby Bells’’ like Verizon and
SBC, see Complaint ¶ 17, and AT&T and
MCI have become mainstays of the
7 The two Complaints use identical paragraph
numbering and virtual identical language. For ease
of presentation, the singular is generally used
instead of the plural throughout the rest of these
comments, and SBC and AT&T are generally used
as examples (as opposed to Verizon or MCI) but the
comments are directed to both cases unless
otherwise indicated.
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wholesale market. In fact, it is doubtful
there would be a wholesale market,
certainly a market of the current size
and scope, without these two
companies.
The AT&T and MCI networks were
not created overnight; they were built
up over decades. Because neither AT&T
nor MCI started from a position of local
monopoly, as Verizon and SBC did, the
business incentives and perceived
opportunities of AT&T and MCI, on one
hand, and SBC and Verizon on the
other, were always quite different. In
particular, both AT&T and MCI seized
upon the opportunity to capture
additional revenue by leasing capacity
in their local networks to other
competitive carriers. In addition, AT&T
and MCI negotiated significant
discounts from SCB and Verizon for the
circuits they leased. These discounted,
leased circuits, coupled with the large
networks built or acquired by AT&T and
MCI, permitted those companies to
make very broad, low-priced offerings to
the wholesale market. As a result, the
wholesale market for Local Private Lines
grew to an enormous size. In widely
published reports that were submitted
to the Department of Justice, two
respected analysts estimated the Local
Private Line market as roughly $14B.
Companies that procure Local Private
Lines in the wholesale market keep
records of competitive bids submitted to
them for the purchase of these Lines
from other companies, specifically
including AT&T and MCI. Many such
bidding records, kept in the ordinary
course of business to select the lowest
wholesale price offered for circuits to be
procured, were turned over to the
Government in response to compulsory
process as part of the Government’s
investigation of these acquisitions.
These data sets show that AT&T and
MCI are the low-price leaders in the
wholesale market for Local Private
Lines. They are not only the most
pervasive suppliers, but they are the
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most aggressive and cheapest suppliers,
as well. Standard statistical analysis of
this bid data demonstrates that AT&T’s
bids result in lower prices for Local
Private Lines in SBC territory, and
MCI’s bids result in lower prices for
Local Private Lines in Verizon territory,
regardless of the number of other
bidders offering the same circuit. In fact,
the data gathered by the Government’s
investigation showed that even SBC
itself has responded to competition from
AT&T by lowering its own Local Private
Line wholesale prices.
Finally, the data sets gathered by the
Department of Justice also demonstrate
that the larger the number of competing
offers (up to a reasonable level), the
lower the price charged for a particular
circuit to the acquiring purchaser. In
other words, these are not markets in
which two competitors are as good for
competition as a larger number of
competitors would be. To the contrary,
three competitors offering to sell a
particular circuit produces lower prices
that just two competitors, and four
competitors produces lower prices than
three competitors.
In sum, there is good reason for the
Department of Justice to file lawsuits to
try and prevent competitive injury to
the wholesale market for Local Private
Lines. That market, prior to the
acquisitions, was vast, robust and
competitive. It operated efficiently,
producing significantly lower prices
than the prices that SBC or Verizon
charged, and it allocated resources
according to competitive bidding. The
wholesale market has been producing
differentiated telecommunications
services at low, free-market prices to all
types of business customers,
particularly medium-sized enterprises.
Unless conditioned in a meaningful
way, the proposed acquisitions will
devastate this market. But by its own
terms, the Government’s proposed
remedy does not meet the competitive
danger.
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The Proposed Judgment Is Inconsistent
With the Complaint in the Treatment of
‘‘Transport’’
The Complaint identifies the relevant
product market as ‘‘Local Private
Lines,’’ and telecommunications
services that rely on those lines.
Complaint ¶ 19. As the Complaint
explains, a Local Private Line is not a
fixed, freestanding physical product, but
rather is more akin to a marketing
concept—a recognized service category
among carriers and customers.
Complaint ¶ 21. It is basically a portion
of a carrier’s network (a circuit or group
of circuits) that is specified
(‘‘dedicated’’) and sold to ACTel
members and other carriers to connect
their networks to discernible points
outside of those networks. As the
Complaint states, a Local Private Line
originates and terminates within a
single metropolitan area. Complaint
¶ 13.
According to the Complaint, a
‘‘typical’’ Local Private Line has two
components—‘‘local loop’’ (also called
‘‘laterals’’) and ‘‘transport.’’ Complaint
at ¶ 13. See also Proposed Final
Judgment § II, D; Competitive Impact
Statement, FR 74348. A ‘‘loop’’ connects
a building to a carrier’s network. But
that connection might not occur at the
right point on the network to facilitate
the transmission of voice and data from
the building to its desired termination
point—a faraway building, for example.
As the Proposed Final Judgment
explains, the loop only goes from a
building to the first splice point on a
carrier’s network used to serve different
buildings. Proposed Final Judgment § II
F. So a ‘‘transport’’ circuit is added into
the Private Line to extend it, from the
end of the loop to the right place on the
carrier’s network (perhaps a switching
facility farther away), or from one
carrier’s network to another carrier’s
network. See Figure 1.
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There may be multiple carrier
suppliers of a particular ‘‘loop’’ and the
same or different multiple carrier
suppliers of transport circuits that
connect to the loop. Increasingly, as
documents submitted to the
Government indicate, CLECs and IXCs
buy transport and loop circuits
separately from different suppliers, and
combine the segments into Local Private
Lines for resale to end user business
customers.
The Government documents
sometimes focus on Local Private Lines
and sometimes focus only on the loop
portions of those Lines. For example,
the ‘‘Relevant Product Markets’’ in the
Complaint are defined as Local Private
Lines, Complaint at ¶ 19, and the
‘‘Anticompetitive Effects’’ section of the
Complaint is directed to the effect of the
merger on ‘‘Local Private Line’’ service,
Complaint at ¶ 25. Similarly, the
explanation of the relief in the
Competitive Impact Statement speaks of
a remedy that will ‘‘eliminate the
anticompetitive effects of the
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acquisition of Local Private Lines.’’ See
FR 74348. The 2004 Tunney Act
amendments require the reviewing court
to consider the impact of the proposed
settlement on competition in this
particular market identified by the
Government. See 15 U.S.C. 16(e); S
3618.
But the Proposed Final Judgment does
not speak of ‘‘Local Private Lines’’ at all.
Rather, the Judgment requires the
divestiture only of certain ‘‘loop’’
circuits, identified by the addresses of
the buildings at which the loops
originate. See Proposed Final Judgment
§ II D. The Competitive Impact
Statement explains that these are
buildings serviced pre-merger by both
AT&T and SBC loops (or MCI and
Verizon loops, as the case may be).
However, not all buildings serviced by
merging parties are covered by the terms
of the Proposed Judgment. Divestiture of
a loop circuit to a particular building is
required only if AT&T and SBC (or
Verizon and MCI) were the only carriers
connected by their own loops to the
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building prior to the acquisition. Only
in these ‘‘2 going to 1’’ loop scenarios
is a divestiture required. See FR at
74348. See Figure 2.
The Final Judgment also provides for
the divestiture of certain ‘‘transport’’
circuits—but only those attendant to the
divested loops. See Proposed Judgment
§ II D. The Competitive Impact
Statement explains that the only
transport circuits to be divested are
those that enable the divested loops to
be connected to the network of the
specific carrier purchasing those loops.
FR 74348. No provision is made for the
transmission of voice and data
information from the purchasing
carrier’s network to another building in
the same metropolitan area not directly
connected to that carrier’s network.
Merely from a review of the
Government’s documents, it is apparent
that three deficiencies in the
Government’s approach prevent the
proposed remedy from being effective.
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The Proposed Final Judgment Does Not
Even Appear To Cover All ‘‘2 to 1’’
Loop Buildings
First, there is some ambiguity, if not
outright error, in the discrepancy
between the number of buildings the
Proposed Final Judgment identifies and
what publicly available data suggests in
terms of the number of ‘‘2 to 1’’ loop
buildings affected by the mergers.
Ambiguity in the proposed remedy is
one of the issues the District Court is
required to consider by the express
terms of the 2004 Tunney Act
amendments.
The building lists attached to the
Proposed Judgment lists only 383
buildings in SBC territory and 356
buildings in Verizon territory to which
the remedy will apply. This is
inconsistent with data relied upon by
both SBC and Verizon in Federal
Communications Commission
proceedings. GeoResults, Inc., a private
corporation, publishes data listing the
presence and type of network
terminating equipment carriers have
placed in buildings. Verizon has stated,
in FCC proceedings, that the data used
by GeoResults is ‘‘recognized as an
industry standard by numerous national
and international telecommunications
standard-setting bodies’’ and can be
reliably used to ‘‘identify and locate
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buildings * * * that are served by
[competitive providers’] fiber-enabled
network equipment.’’ 8 SBC similarly
stated to the FCC that ‘‘GeoResults is a
reasonably reliable source, and if
anything its data understate the
deployment of competitive fiber.’’ 9
GeoResults data includes buildings in
which CLECs buy loops from SBC and
Verizon, as well as buildings to which
CLECs physically connect with their
own fiber. GeoResults may therefore
significantly overestimate the number of
‘‘2 to 1’’ loop situations the
Government’s remedy purports to
address. But the difference between
what the GeoResults data predicts and
the number of buildings the
Government’s remedy purports to
address is so vast as to defy such an
easy explanation. This is true for both
SBC and Verizon territory. For example,
as to SBC territory, GeoResults data
indicates that in Cleveland there are
approximately 1630 ‘‘2 going to 1’’
buildings, but the Government’s list in
the Proposed Final Judgment includes
none. In Milwaukee, the GeoResults
8 Verizon comments, Declaration of Verses,
LaTaille, Jordan and Reny, July 15, 2004, FCC
Docket 01–338, ¶¶ 22–24.
9 Joint Declaration of Scott Alexander and
Rebecca Sparks of SBC, ¶¶ 22–23, attached to Letter
of Christopher Hermann of SBC to Ms. Marlene
Dortch of FCC, Nov. 16, 2004, FCC Docket 01–338.
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17181
data predicts 1124 such buildings, but
the Proposed Final Judgment lists but
38. In Los Angeles, GeoResults predicts
6318 buildings requiring the
Government’s remedy, but the
Government lists only 36.
The same discrepancy appears for the
cities in Verizon territory. GeoResults
data indicates there are more than 100
‘‘2 to 1’’ buildings in Pittsburgh, but the
Government has none listed. According
to GeoResults, Philadelphia should have
almost 300 such buildings, but the
Government lists only 12. So, making
whatever allowance is appropriate for
the inclusion of leased loops in the
GeoResults data, the Government’s lists
seem to include far two few buildings.
The Government does not explain or
document, for the benefit of both the
Court and the public, how it arrived at
its lists of ‘‘2 to 1’’ situations.
Presumably the Government started
with building lists tendered by the
merging parties, and either audited or
made adjustments to these lists. While
the GeoResults inclusion of leased loops
might account for some of the
discrepancy between the GeoResults
data and the Government lists, it
certainly appears likely, from the filings
AT&T made in the FCC to secure
clearance for its acquisition, that the
Government’s remedy does not include
all buildings that the Complaint
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purports to cover. There is another more
plausible explanation for this
discrepancy.
At the FCC, AT&T’s economic expert
filed a declaration in aid of the merging
companies’ claim that the proposed
merger would not produce the
anticompetitive effects feared by the
Government. The declaration sets forth
the total number of ‘‘2 to 1’’ buildings
in SBC territory based on AT&T internal
records.10 That precise number is
redacted from the FCC public record,
but the other verbiage from the
declaration, including the expert’s
methodology, remain in the public
record. In the declaration, the expert
starts with the total number of ‘‘2 to 1’’
buildings and then makes subtractions
from that total. For example, in aid of
his argument that all ‘‘2 to 1’’ situations
will not produce price increases, the
expert subtracts ‘‘2 to 1’’ situations in
which he argues that other CLECs might
build their own loops, even if AT&T’s
loops are acquired by SBC. Similarly, he
subtracts situations in which he claims
that, although AT&T is eliminated as
SBC’s only competitor, the FCC
regulates the price SBC can charge for
the loop in question, so competitive
injury is minimized. See Carlton Dec. at
¶¶ 15–48.
Given the large discrepancy between
publicly available data and the number
of buildings on the Government’s lists,
it would appear that the Government
made such subtractions from the total
number of ‘‘2 to 1’’ buildings to come
up with the lists attached to the
Proposed Final Judgment. It appears, for
example, that the Government
subtracted the situations in which
AT&T’s expert argued that the CLECs
would build their own loops.
But such subtractions are
impermissible by the express terms of
the Complaint. The Complaint plainly
states, for example, that competitive
injury will occur whenever AT&T is the
only ‘‘facilities-based,’’ (i.e., owning its
own line) competitive alternative to SBC
for Local Private Line connections to
buildings. Complaint at ¶¶25, 26. The
Competitive Impact Statement similarly
states that ‘‘buildings where AT&T is
the only CLEC with a last-mileconnection’’—without limitation or
subtractions—are the places where
10 Reply Declaration of Dennis W. Carlton and Hal
S. Sider, May 9, 2005, as an attachment to the Joint
Opposition of SBC Communications Inc. and AT&T
Corp. To Petitions To Deny and Reply Comments,
filed In the Matter of Applications for Consent to
Transfer of Control of Licenses and Section 214
Authorizations from AT&T Corp., Transferor, to
SBC Communications Inc., Transferee, WC Docket
No. 05–65, Federal Communications Commission,
May 9, 2005, at ¶¶ 15–48 (hereinafter sometimes
‘‘Carlton Dec.’’).
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injury to competition occurs. FR At
74348. And the Complaint expressly
rejects the notion that other CLECs
might build their own lateral
connections to these buildings.
Complaint at ¶¶27–29. After reviewing
the costs associated with building a
lateral, the Complaint concludes that
‘‘entry is unlikely to eliminate the
competitive harm that would likely
result from the proposed merger.’’
Complaint at ¶29.
The Government needs to explain its
methodology to permit meaningful
judicial review. The Government papers
are filled with precisely the ambiguity
that the amended Tunney Act does not
permit. If the Proposed Final Judgment
does not address all situations in which
AT&T is eliminated as the only
facilities-based competitive alternative
to SBC for loops, the court must
withhold its approval of the settlements.
The Proposed Judgment Fails to
Remedy the Injury Because the
Judgment Addresses Only the Building
End of Loops
Even when the building lists are made
complete to conform to the
Government’s allegations, the remedy in
the Proposed Final Judgment—
providing a divestiture for all ‘‘2 going
to 1’’ loop situations—fails to correct the
competitive injury alleged in the
Complaint (elimination of competition
for ‘‘Private Line’’ service), and
therefore fails the most deferential
Tunney Act review. This failure results
from the fact that the remedy, unlike the
injury charged in the Complaint,
addresses only the part of the Local
Private Line that connects to a building,
not the part of the Private Line that
connects to a carrier’s network.
The Complaint explains that a
‘‘typical’’ Local Private Line has two
components—a ‘‘loop’’ (or ‘‘lateral’’)
and a ‘‘transport’’ circuit. Complaint at
¶13. As explained above, the ‘‘loop’’
connects the building to a carrier’s
network and the ‘‘transport’’ circuit
extends the loop from the initial splice
point on the carrier’s network to other
points on the carrier’s network or to
other carriers’ networks.
The Complaints alleges that where
AT&T is eliminated as the only
facilities-based competitor to SBC for
Local Private Lines, the merged
company will be able to raise prices to
customers of Local Private Lines
(including ACTel members), thereby
creating an antitrust violation.
Complaint ¶¶25, 32–33. But the
Proposed Final Judgment orders the
divestiture of only certain loops
(‘‘laterals’’) with attendant transport.
Final Judgment § IID. The Competitive
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Impact Statement tries to explain this
inconsistency by suggesting that it is
decrease in competition for loops (2
going to 1) that creates the injury in the
Local Private Line market. FR 74348.
The approach used in the Proposed
Final Judgment requires the divestiture
only of these loop segments (with
attendant transport) that result in a ‘‘2
to 1’’ loop situation when viewed from
the origin of the loop, that is, from the
building. Even assuming the rather
dubious assertion that it is the decrease
in competition for loops that creates the
injury in the Local Private Line market,
the remedial approach used in the Final
Judgment (looking to the origin point of
the loop by building address), will not
prevent the harm alleged in the
Complaint (a price increase to
customers of Local Private Lines).
This is because the ‘‘remedy’’ will
only maintain competitive alternatives
for transmissions from a building to a
carrier’s network. But no one simply
calls a carrier’s network; the intended
destination of a call is always another
building, frequently connected to the
carrier’s network by another Local
Private Line that may not be covered by
the terms of the Proposed Final
Judgment. Because the Proposed Final
Judgment identifies the affected ‘‘2 to 1’’
Local Private Lines only from the point
of the loop original at the building, it
does not prevent the acquisition from
restraining competition by producing ‘‘2
to 1’’ situations in the Local Private
Lines that take the call from the carrier’s
network to the destination building.
This is best illustrated by the example
of a corporation with main offices in a
downtown high-rise and branch offices
in suburban office parks in the same
metropolitan area. The corporation is a
customer of a CLEC. The customer’s
headquarters downtown needs to send
high-volume voice and data
transmissions to its branch offices in the
suburbs. Before the merger, the CLEC
bought a Private Line from AT&T to
service the customer and connect the
originating building to the CLEC’s
network. If AT&T were the only
facilities-based carrier serving the
building in competition with SBC before
the merger, the Final Judgment remedy,
in theory, would prevent the merged
company from extracting a higher price
for the Private Line because the CLEC
would be able to buy the divested loop
itself, or lease it from the carrier that
buys it as a ‘‘divestiture asset’’ under the
Proposed Final Judgment.
The Proposed Final Judgment also
requires the divestiture of transport
circuits sufficient to connect that loop’s
splice point on the AT&T network to the
purchasing CLEC’s network. FR 74348.
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17183
But when the voice and data
transmissions leave the CLEC’s network
and go to the suburban office park
location, the Final Judgment ‘‘remedy’’
often will be of no help. The
transmissions would have to go from the
CLEC’s network over a ‘‘transport’’
circuit to a splice point for the lateral
connecting to the suburban office
building. Before the acquisition, if
AT&T and SBC provided the only
facilities-based competition for the
transport circuit, then after the
acquisition the merged company, as the
only supplier of the transport circuit, is
in a position to raise the price for that
circuit to higher than competitive levels
under the theory of the Government’s
Complaint. See Complaint at ¶25. The
remedy does not address the ‘‘2 to 1’’
transport situation.
This problem cannot be argued away
by suggesting that there is a great deal
of duplicative transport circuitry in each
metropolitan area. This kind of
areawide analysis would also show a
plethora of duplicative loops in each
metropolitan area. But the Government
has decided that this type of areawide
analysis is inappropriate. Instead, the
Complaint elects to analyze each Local
Private Line individually in order to
assess the effect of the mergers on
competition. The Government conducts
this analysis for the loop components of
the Local Private Lines on a segment-bysegment basis and must therefore do the
same for transport. A change in
methodology for transport would
undermine the integrity of the
Government’s loop analysis.
It is impossible to say, from the public
record, precisely how often a ‘‘2 to 1’’
reduction in transport circuit providers
occurs. But this much is known. SBC
itself has acknowledged that there are
numerous situations in which AT&T is
likely positioned as the only facilities-
based competitor for a group of
transport circuits around on SBC wire
center.11 The actual bid data submitted
by ACTel members to the Department of
Justice is even more compelling. These
data sets reflect carriers that actually
have transport circuits to sell to the
wholesale market (some carriers may
have transport circuits filled entirely by
their own traffic). The data contains
numerous examples in which SBC and
AT&T (or MCI and Verizon) were the
only competitors on a particular
transport circuit. Indeed, the data shows
that AT&T and MCI are far and away the
leading CLEC suppliers of transport
circuits to the wholesale market.
In short, then, although the transport
circuit from the carrier’s network to the
splice point for the loop goes from two
facilities-based competitors to one, the
‘‘remedy’’ will not provide relief unless
the loop circuit from the end of the
transport segment to the destination
building also goes from ‘‘2 to 1.’’
Frequently, however, the merger will
not result in a true ‘‘2 going to 1’’
situation for the loop segment
connecting the splice point to the
building. Sometimes, for example, there
might be only one supplier of the loop
to begin with, SBC, but price regulation
by the FCC prevents SBC from raising
the rate on the loop to higher than
competitive levels. However, the
connecting transport circuit is likely not
under a similar FCC constraint. The
merged company could therefore raise
the price of the Local Private Line from
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11 SBC has admitted in the public record that
there are scores of wire centers in which AT&T is
SBC’s only competitor. See letter from Gary L.
Phillips of SBC to Ms. Marlene Dortch of the FCC
filed as an ex parte communication on August 12,
2005, In the Matter of Applications for Consent to
Transfer of Control of Licenses and Section 214
Authorizations from AT&T Corp., Transferor, to
SBC Communications Inc., Transferee, WC Docket
No. 05–65, Federal Communications Commission.
But even this may understate the number of
transport circuits for which AT&T and SBC are the
only competitors because AT&T’s expert has also
admitted in the public record that the presence of
smaller competitors at other SBC wire centers does
not necessarily indicate ownership of transport
circuits in competition with SBC. See Carlton Dec.
¶54.
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So, prior to the acquisition, the CLEC
had two Private Line choices from the
downtown main office to its network,
and the CLEC continued to have two
choices after the acquisitions. The
remedy can therefore be presumed
successful at getting the call onto the
CLEC’s network without a price increase
created by a ‘‘2 to 1’’ loop situation
resulting from the acquisition. See
Figure 3.
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the carrier’s network to the destination
building by using its ‘‘choke hold’’ over
the transport segment of that Line.
Nor is this problem confined to a
situation in which there is only one
supplier of the loop going from the
transport segment to the building. If
there are three suppliers of the
outbound loop, for example, the
divestiture remedy would not apply at
all. Nor would the divestiture remedy
apply if the two suppliers of the loop
were carriers other than both AT&T and
SBC. (See Figure 3) In each such case,
the remedy does not apply, but the
merged company can create precisely
the anticompetitive injury identified by
the Complaint because of its ‘‘choke
hold’’ over the transport circuit from the
carrier’s network to the splice point.12
The Government’s solution fails to
remedy the injury identified in the
Complaint because the solution applies,
by its own terms, only to loops
connecting buildings to networks, but
not to transport connecting networks to
each other. Even assuming the relief
proposed in the Proposed Final
Judgment is effective for transmissions
to a carrier’s network, transmissions
from that network to terminating
buildings will still be subject to the ‘‘2
to 1’’ choke hold because the
Government’s remedy does not include
transport (unless it is attendant to a
divested loop for a building).
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The Proposed Judgment Does Not
Produce the Promised Remedy Because
the Judgment Does Not Eliminate the
Anticompetitive Effects of the
Acquisitions
The Government’s remedy only
addresses certain ‘‘2 to 1’’ loop
situations. The most serious problem
with the proposed ‘‘remedy’’ is that the
remedy simply cannot logically or
factually ‘‘eliminate the anticompetitive
effects of the acquisition of Local Private
Lines,’’ the claim made in the
Competitive Impact Statement. See FR
at 74348. The Complaint also focuses on
Local Private Lines, defining the
relevant product market as ‘‘Local
Private Lines,’’ not loop segments going
from two choices to one. Under the 2004
amendments, Tunney Act review must
therefore consider the impact of the
remedy on that very market. The
Government’s remedy might at best
‘‘eliminate’’ certain ‘‘2 to 1’’ loop
situations, but the remedy does not
12 The data sets submitted by ACTel members to
the Government contain numerous examples of all
three situations described in the text: (a) SBC as the
only supplier of a loop circuit under UNE pricing;
(b) three suppliers of a loop circuit; (c) two
suppliers of a loop circuit, but not both SBC and
AT&T.
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‘‘eliminate the anticompetitive effects of
the acquisition of Local Private Lines’’
because there are many
‘‘anticompetitive effects’’ in Private Line
situations beyond ‘‘2 to 1’’ loops.
The Complaint correctly points out
that AT&T competes with SBC and MCI
competes with Verizon pervasively
across the metropolitan areas at issue—
not just at ‘‘2 to 1’’ buildings. Complaint
at ¶11. In fact, according to the
Complaint, AT&T and MCI are the most
significant competitors for SBC and
Verizon See at 17. Id. The actual bid
data produced by wholesale purchasers
of Local Private Lines confirms
precisely what the Complaint charges:
AT&T and MCI are by far the most
significant competitors of SBC and
Verizon in the Local Private Lines
market, and competition by AT&T and
MCI produces lower Local Private Line
prices in all competitive situations—not
just ‘‘2 to 1’’ loop situations.
Moreover, the actual bid data
produced by purchasers of Local Private
Lines demonstrates exactly what
common sense and economic theory
suggest—that four competitors offering a
particular Local Private Line produce
lower prices than three competitors.
And three competitors produce lower
prices than just two competitors. Of
course, the data also show that two
competitors produce lower prices than a
single vendor, but no one could
rationally suggest that merely
addressing the latter situation will do
what the Competitive Impact Statement
and Complaint indicate—elimination of
the anticompetitive effects of the
acquisition of Local Private Lines.
If the Government’s Complaint and
Competitive Impact Statement
purported to remedy ‘‘only a small
portion of the competitive injury caused
to the Local Private Line market,’’ at
least the documents would be internally
consistent. But the Final Judgment
remedy addresses only certain ‘‘2 to 1’’
loop situations, while the Complaint
and Competitive Impact Statement
claim to ‘‘eliminate’’ the anticompetitive
effects of the acquisitions on Local
Private Lines—claims that are not only
inconsistent with the Proposed Final
Judgment, but also with the data
gathered by the Government’s
investigation.
The Government’s failure to address
anything other than ‘‘2 to 1’’ situations,
while at the same time claiming to
‘‘eliminate’’ the anticompetitive aspects
of the acquisitions, runs afoul of the
2004 Tunney Act amendments.
Moreover, the Government’s actions in
these cases are a marked departure from
long-established Antitrust Division
practices. Remedying only ‘‘2 to 1’’
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situations prevents only ‘‘mergers to
monopoly.’’ The Final Judgment remedy
does not prevent the competitive injury
caused by lessening competition (‘‘4 to
3’’ or ‘‘3 to 2’’) in highly concentrated
but not monopoly situations. For
decades, there have been those who
have argued that only ‘‘merger to
monopoly’’ situations should be
remedied by the Antitrust Division, but
the Division for the entire period of
time, on the basis of sound economics,
has adopted both written Guidelines
and consistent practices that recognize
the competitive injury caused by
reducing competition—even if the
reduction is not the elimination of all
but a single vendor. Yet the Government
in this case does an about-face and
precludes only ‘‘merger to monopoly,’’
without any public discussion of this
most significant departure from
established and documented
procedures.
Furthermore, AT&T and MCI are the
most significant and effective
competitors to the acquiring companies.
See Complaint ¶ 17. As the Government
has long recognized, acquisitions that
eliminate the most formidable
competitors, leaving only less effective
or ineffective competition, are
anticompetitive and must be remedied.
Yet in this case the Government
assumes that the carrier purchasing the
divested assets from the merging
companies will be an effective
competitive substitute for AT&T or MCI
merely because the purchasing carrier
has a ‘‘viable, ongoing
telecommunication business.’’ Proposed
Final Judgment § IV H. Given that AT&T
and MCI are the most significant
competitors for SBC and Verizon, there
is no basis for the assumption that any
acquiring carrier will be even a remotely
effective competitor. All competitors are
not equally effective; merely giving
customers a second choice does not
mean that the second choice is
meaningful. The Government’s prior
practice recognized these facts, but the
current proposal is to the contrary.
Finally, and most significantly, the
proposed remedy denies widely
accepted principles of network
economics that the Government has
long recognized in its Guidelines and
practices. AT&T and MCI were the most
effective competitors of the acquiring
companies because of the breadth of the
AT&T and MCI networks and the
robustness of their customer base in
terms of network traffic. It was these
factors, not the presence of AT&T or
MCI on a particular loop circuit, that
made those companies effective
competitors. These factors enabled
AT&T and MCI to offer loop and
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transport circuits to wholesale
purchasers at lower prices than other
carriers. The fact that a ‘‘viable, ongoing
telecommunications business’’ will
purchase divested lines does not in any
sense mean that those lines will be
offered to the wholesale market at the
same low prices at which AT&T and
MCI sold the lines.
Given that the acquiring company is
certain to be significantly smaller than
AT&T or MCI (as the Complaint
indicates at ¶17), the only rational
inference is that the prices for the lines
will go up and competition will be
damaged, even if two carriers present
choices on ever loop circuit. Of course,
this conclusion does not merely rest on
rational inferences or even on the
allegations in the Complaint. Data
gathered by the Government during its
investigation demonstrate that AT&T
and MCI were far and away the low
price sellers for Local Private Lines at
wholesale, and the prices for such lines
will increase enormously in the future.
The Government’s proposal does not
remedy those facts; it does not even
address them.
sroberts on PROD1PC70 with NOTICES
A Truly Effective Remedy Will Produce
No Loss in Efficiency
The Complaints correctly state that
AT&T’s local networks (every single
loop and transport circuit in every
metropolitan area) are wholly redundant
with those of SBC. Complaint ¶¶11, 12–
17. MCI’s local networks (every single
loop and transport circuit in every
metropolitan area) are wholly redundant
with those of Verizon. Even the most
modest effective remedy would include
the divestiture of all of the redundant
loop and transport circuits Such a
divestiture might at least enable the
acquiring carrier to offer a significant
competitive alternative to the merged
corporations.
Even assuming that the mergers
produce some efficiencies by combining
the local networks of SBC and Verizon
with the long-distance networks of
AT&T and MCI, a divestiture of all
redundant local assets would not
interfere at all with the realization of the
claimed efficiencies. It would, on the
other hand, produce a viable competitor
for local traffic without sacrificing any
benefit the mergers allegedly produce.
To make the divestitures
competitively effective, the Government
should enable any customer under an
old contract to the merging companies
to solicit and accept new, postdivestiture competitive offers.
Otherwise, the divestitures will not
provide any benefits to existing
customers of the merging companies.
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And, as both an interim step and a
more complete remedy if the
Government is not going to require any
meaningful divestitures, the
Government should, at a minimum,
expressly prohibit the merged
companies from raising prices to
anticompetitive levels in the wholesale
market for Local Private Line services.
This is a remedy recently adopted by
the Commonwealth of Virginia’s State
Corporation Commission in response to
public protests and concerns regarding
the impact of the loss of an
‘‘independent MCI’’ on the provision of
local services to mid-sized business
customers in Virginia. See Order
Granting Approval, Virginia State
Corporation Commission, Oct. 6, 2006,
at 27.
Following a thorough staff
investigation, public hearings and
written submissions, the Virginia
Corporation Commission required MCI,
post-merger, to continue to offer
wholesale customers in Virginia private
line loop and transport facilities ‘‘at premerger terms and conditions and at
prices that do not exceed pre-merger
rates.’’ Id. The Commission made this
order applicable to both ‘‘existing and
future wholesale customers of MCI in
Virginia’’ thereby preserving a
wholesale market for Local Private Lines
in Virginia at competitive rates. Id. at
27. The order is to remain in effect until
the loss of MCI as a competitor will no
longer raise rates on Local Private Lines
to an anticompetitive level. Id.
This remedy is currently in effect in
Virginia and must be obeyed by the
merging companies. Extending the
remedy nationwide would in no way
prevent the merging parties from fully
exploiting any efficiencies the merger
might produce. However, a nationwide
remedy of this type would prevent the
merged companies from gouging their
wholesale customers with higher than
competitive rates. Unless the merged
companies have the intention to raise
prices post-merger, it is difficult to see
any objection to this remedy.13
Conclusion
The whole point of a divestiture
remedy is to permit a free market
solution (after the divestiture) to resolve
the concentration issues created by the
merger. But the divestiture remedy
13 The FCC provided price protection to existing
customers under contract with the merging parties
for a short period of time after the mergers. But the
FCC remedy does not preserve a competitive
wholesale market. Rather, by only protecting
existing contracts and not bids to new customers,
the FCC simply postponed the date at which the
merging parties will be able to raise their customer’s
prices.
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17185
proposed by the Government has no
hope of achieving that result. At a
minimum, facilities need to be divested
in operating units over wide areas,
probably nationwide, and at the very
least regionwide, to enable the
competitive carrier acquiring the assets
to have even a reasonable chance to
replacing the competitive pricing from
MCI and AT&T lost by the acquisitions.
And the wholesale market needs to be
protected with interim pricing
provisions while these divestitures
become competitively effective.
From the perspective of remedies, the
acquisitions now before the Courts bear
a strong resemblance to the
Government’s controversial clearance of
Thomson’s acquisition of West
Publishing Company a decade ago.
There, as here, the greatest concern was
that the acquisition would put the two
principal competing systems (here, the
competing local networks) under
common ownership. There, as here,
counsel for the merging companies
argued for piecemeal divestiture
properties, rather than something more
substantial.
In the West deal, the Government
adopted the approach sought by the
merging companies, requiring
divestiture of piecemeal properties,
rather than a comprehensive set of
properties that could be used in the
marketplace to actually produce
competitive benefits. The result, in
terms of antitrust enforcement, was a
wholly ineffective remedy. See, e.g.,
John E. Morris, How the West Was Won,
The American Lawyer, September 1996.
The District Court ultimately approved
the remedy with modifications, but
under the constraint of the Court of
Appeals authority subsequently
repudiated by Congress. See United
States v. Thomson Corp. and West
Publishing Co., 949 F. Supp. 907 (D.D.C.
1996).
The American Lawyer characterized
the West Settlement process as a
‘‘microanalysis of competition’’ in
which the Government became
‘‘obsessed with the competing seedlings
and overlooked how the giants of the
forest can block out the light,’’
attributing this result to the actions of
Thomson’s lawyers in deftly
maneuvering the merger through the
government review process.’’
In the years following the
consummation of the West acquisition,
prices to customers rose dramatically,
just as critics predicted, producing
further criticism of the Division’s
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decision.14 And when it came to light
that the Division’s clearance of the deal
coincided with extensive political
maneuvering, criticism reached both the
largest mass circulation media 15 and
even the most prestigious legal
publications. See, e.g., Mark Hansen, A
Question of Influence, 83 American Bar
Association Journal 36, June 1997.
There is much in the current situation
to suggest precisely these concerns—
the very concerns voiced by Congress is
overruling the District of Columbia
Circuit in 2004—‘‘political pressure to
enter into a ‘sweetheart settlement.’ ’’ 16
Department of Justice clearance of these
telecommunication acquisitions
followed extensive lobbying by the
merging companies of both the
Administration and Congress. Indeed,
the acquisitions were brought to a head
and cleared by the Antitrust Divisions at
a time when there was not a confirmed
head of that group—when the
Administration’s designated Assistant
Attorney General was awaiting
confirmation and was subsequently
under Senatorial ‘‘hold’’ because,
according to the press, of his more
serious enforcement mentality.
There is no reason to repeat the
problems of West/Thomson. Remedial
relief can be achieved in these cases
with minimum disruption and
inconvenience to either the merging
companies or business customers.
Attachment 2—Comments of COMPTEL
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Pursuant to the Antitrust Procedures
and Penalties Act (i.e., the ‘‘Tunney
Act’’),1 COMPTEL hereby files these
comments explaining why the Proposed
Amended Final Judgments (PAFJs or
PAFJ) resolving simultaneous
Complaints filed by the United States to
prevent the acquisition of AT&T Corp.
by SBC Communications Inc., and the
acquisition of MCI, Inc. by Verizon
Communications, Inc. do not replace the
competition lost from the elimination of
AT&T and MCI as the two most
significant competitors to SBC and
Verizon.2 Because the PAFJs do not
14 See, e.g., Susan M. Ryan, Cost Inflation by Page
Reductions, 14 The Bottom Line: Managing Library
Finances, No. 1, at pp. 6–11 (2001); Douglas
McCollam, Volumes Are Giving Way to Velocity, 25
National Law Journal, No. 46 at S1, July 14, 2003.
15 See, e.g., Brooks Jackson, Moving Money
Through State Capitals, CNN, April 11, 1997;
https://www.cnn.com/ALLPOLITICS/1997/04/
11Jackson/; Viveca Novak and Michael Weisskopf,
The https://www.cnn.com/ALLPOLITICS/1997/04/
14/time/novak.html: Mark Hansen, A Question of
Influence, 83 A.B.A.J. 36, June 1997.
16 150 Cong. Rec. § 3617, supra.
1 15 U.S.C. 16(b)–(e).
2 Although AT&T and SBC are now known as
AT&T (while Verizon retained its name after its
acquisition of MCI), we refer to each by their pre-
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address the harm alleged by the DOJ in
the Complaints, entry of the PAFJs is
not in the public interest. Therefore,
absent significant amendment of the
PAFJs, the Court will have no option but
to reject the PAFJs as filed. The DOJ has
the ability to recognize the deficiencies
in the PAFJs at this stage of the
proceedings. These comments are
intended to elucidate the short-comings
of the PAFJs and facilitate a more
appropriate ‘‘divestiture.’’ COMPTEL’s
members are the primary remaining
customers and competitors of the
surviving entities of the respective
mergers, and, therefore, have a strong
interest in securing appropriate
divestiture relief.
Introduction
The simultaneous acquisition of the
nation’s largest local competitors by the
two largest incumbent providers should
have initiated one of the nation’s most
extensive antitrust inquiries. Instead, as
COMPTEL explains below, the DOJ has
failed to fully recognize the
anticompetitive effects of the merger in
the single product market for which it
has chosen to bring suit—the market for
dedicated intra-city transmission
services, typically referred to as
‘‘Special Access’’ or ‘‘Local Private
Line’’—and has devised a remedy that
directly conflicts with, and falls
woefully short of, the basic tenants of its
own Merger Remedy Guidelines and the
mandates of Supreme Court precedent
to restore competition to the level prior
to the merger.
The Tunney Act governing this
proceeding was adopted to ensure that
the settlements of civil antitrust suits by
the Department of Justice are in the
public interest. Congress specifically
amended the Tunney Act in 2004 to
emphasize that it expected an
independent judiciary to oversee
proposed settlements to ensure that the
needs of the American consumer were
met. Implementing Congress’
unequivocal reaffirmation of the Tunney
Act’s requirement of independent
judicial scrutiny is critical in the review
of these simultaneous—and
competitively interrelated—mergers that
will reconcentrate the
telecommunications market to a level
unseen since the AT&T divesture just
over twenty years ago. By permitting
these mergers to occur with minimal or
no modifications to the PAFJs, the DOJ
is effectively reversing that historic
divestiture. As he implemented the
Tunney Act in that original AT&T case,
Judge Greene admonished that:
merger names in these comments (unless otherwise
indicated) to avoid confusion.
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[i]t does not follow * * * that courts must
unquestionably accept a proffered decree as
long as it somehow, and however
inadequately, deals with the antitrust and
other public policy problems implicated in
the lawsuit. To do so would be to revert to
the ‘‘rubber stamp’’ role which was at the
crux of the congressional concerns when the
Tunney Act became law.
U.S. v. American Telephone and
Telegraph, 552 F.Supp. 131, 151 (D.D.C.
1982), aff’d sub nom., Maryland v. U.S.,
460 U.S. 1001 (1983).
In the comments that follow,
COMPTEL explains that the proposed
settlements of these mergers blindly
ignore both the DOJ’s Merger Guidelines
and Merger Remedy Guidelines. In
order to demonstrate that the proposed
settlements serve the public interest, the
DOJ must present a clear and
compelling explanation as to how its
proposed remedies have any hope of
restoring the competition that will be
lost by these dominant firms each
acquiring their largest competitive
rivals. The remedies crafted by the DOJ
are not sufficient to restore competitive
conditions the merger would remove;
they do not promote competition (but
they do protect the largest, post-merger
‘‘competitors,’’ SBC and Verizon); and
they lack sufficient clarity and
specificity to be enforceable. As
currently crafted, the proposed consent
decrees are not in the public interest.
II. Summary of Complaint
Any conventional antitrust analysis
begins by defining the relevant product
and geographic markets. In its
complaints here, however, the DOJ
adopts a clear definition of only the
product market, while dismissing the
importance of correctly establishing the
geographic market. As COMPTEL
explains, the DOJ’s failure to identify
the relevant geographic market is one of
the reasons that its proposed remedy
cannot plausibly be expected to restore
competition to pre-merger levels.
A. The Product Markets
The Government defines two product
markets: (1) ‘‘Local Private Lines’’ (more
commonly referred to as ‘‘special
access’’), and (2) the retail voice and
data telecommunications services that
rely on Local Private Lines. Complaint
at ¶ 19. The DOJ describes ‘‘Local
Private Lines’’ as dedicated, point-topoint circuits offered over copper and/
or fiber optic transmission facilities
(copper or fiber wires), and notes that
the Bell monopolies use the term
‘‘special access’’ to refer to this product
market. Complaint at ¶ 13.3
3 The term ‘‘special access’’ is a byproduct of the
initial AT&T divestiture. The basic structure of the
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For the first product market—Local
Private Lines or Special Access 4—the
DOJ provides some description of the
competition foreclosed by the merger.
The Complaint against SBC and AT&T,
for example, notes that SBC dominates
this market with $4.4 billion in sales in
2004, as compared to AT&T’s local
private line revenues (as one of SBC’s
largest competitors) of $0.09 billion in
the SBC region. Complaint at ¶ 20.5 The
Complaint does not indicate what
portion of SBC’s $4.4 billion in sales are
to AT&T—indeed, the complaint does
not even acknowledge that two of the
largest purchasers of special access are
the acquired firms—or whether any of
these circuits are then combined with
AT&T’s own facilities and resold to
other carriers or business consumers.
However, it is certain that these sales
are significant in size 6 and competitive
implication.7
Modified Final Judgment (MFJ) implementing the
AT&T divestiture was the structural separation of
AT&T’s intercity long distance operations from its
local exchange operations. In order for AT&T and
other long distance carriers to meet the specialized
needs of very large business customers, they would
need to lease local transmission facilities from the
divested Bell Operating Companies (such as
Verizon and SBC) to connect to large users. These
connections were referred to as ‘‘special access’’
because they were used to connect specific,
individual business customers to the long distance
carrier’s network and were designed to be used
where the customer had large volumes of data and/
or voice traffic.
4 As the DOJ notes, Verizon and SBC generally
use the term ‘‘special access’’ to refer to Local
Private Lines. Complaint at ¶13. This term is more
commonly used by the industry because the
principal use of such facilities is a wholesale input
to another carrier that provides retail service to the
customer. (While some business customers
purchase Local Private Line services, the primary
customers for Local Private Line are other carriers.
Complaint at ¶23.) Because the term ‘‘special
access’’ better captures the predominant use of such
facilities, and because it is term more commonly
used by the industry, COMPTEL will generally use
the term in these comments in place of the DOJ’s
‘‘Local Private Line’’ nomenclature.
5 Similar allegations are made against Verizon
and MCI.
6 While we do not know with specificity the
actual dollar volume of AT&T’s purchases of SBC
special access, we do know that they have a
minimum commitment level of $765 million in
special access purchases form SBC. See AT&T ex
parte at 5, filed with the Federal Communications
Commission in RM–10593 November 9, 2004. A
copy of AT&T’s submission is attached as Appendix
A.
7 COMPTEL explains later in these comments that
the proposed merger creates a unique
interrelationship between Verizon and SBC. By
acquiring the special access contracts of AT&T and
MCI (the largest purchasers of special access),
Verizon and SBC will become one of each other’s
largest competitors and customers. Because both
Verizon and SBC must rely heavily on inputs (i.e.,
special access) acquired from one another to
compete with each other, both carriers have builtin supply mechanisms that monitor the competitive
output of the other, providing a very real danger of
coordinated pricing. In addition, special access
contracts have volume-discounted pricing
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The Complaint further explains that
one ‘‘element’’ of Local Private Line
service is the so-called ‘‘loop’’ or ‘‘last
mile’’ which is the portion of copper—
more likely, fiber—that provides the
dedicated connection from one part of
the network to the end-user’s building.
Complaint at ¶ 12. What is not
explained in the Complaint is that there
are other elements of special access
service that must typically be purchased
in order for the special access line to be
commercially useful. The other
principal element of special access
service is ‘‘transport.’’ Transport is the
transmission component typically used
to collect ‘‘loop’’ traffic at one point on
the network and transport that traffic to
another point on the carrier’s network.8
The second product market that the
Government alleges will be harmed as
the result of this merger is the market
for retail voice and data
telecommunications services that rely
on special access. The DOJ provides no
discussion as tot he value of this market,
or the relative market shares of the
relevant firms within the territories
served by SBC and Verizon. This
fundamental failure in analysis makes
an appropriate Tunney Act public
interest determination very difficult, if
not impossible. While the DOJ makes no
effort at all to describe the size of this
market, it is clearly substantial.9 Thus,
restoring competition lost as the result
of the elimination of such a significant
competitor would likely demand a
significant divestiture of a cognizable
business unit. It is not surprising that
the DOJ chose not to provide any
specifics on this product market, given
the extremely limited value of the
‘‘divestitures’’ the decree proposes.
B. The Geographic Market
Despite its analytical significance, the
DOJ fails to clearly identify the relevant
geographic market for special access
(and the retail services that rely upon
it). Rather, the DOJ merely notes that the
relevant geographic markets for both
product markets are ‘‘no broader than
each metropolitan area and no more
narrow than each individual building.’’
Complaint at ¶ 24. Importantly, as
COMPTEL explains below, the DOJ’s
analysis ignores the significance of
regionwide contracting strategies in its
analysis of geographic markets entirely,
and has designed a building-specific
remedy approach without offering any
convincing explanation as to why a
building-specific market definition is
preferred to its metropolitan area
alternative.
To begin, focusing ‘‘solely on demand
substitution factors—i.e. possible
consumer responses’’ 10—within the
reality of the special access/Local
Private Line market, it is difficult to
understand how the DOJ could define a
geographic market as narrowly as an
individual building. As an initial
matter, the only customers for whom
this could be true would be customers
whose demand was individually large
enough to stimulate alternative entry,11
but whose total demand was sufficiently
concentrated in that specific building
for it to be willing to contract for service
in that individual building alone.12 Yet,
the DOJ has made no allegation that SBC
(or Verizon) pre-merger, or post-merger,
engage in building specific price
10 Merger
schedules that discourage each firm from using
competitive input suppliers even when they are
available. Notably, the DOJ’s competitive analysis
completely ignores the competitive symbiosis
between SBC and Verizon that the mergers will
create.
8 For example, a carrier might use a looptransport-loop service connecting Georgetown
University’s Law School on Capitol Hill with its
main campus in Georgetown (2 ‘‘end points’’ with
transport in the middle). Alternatively, a wireline
carrier might provide only transport (i.e., no loops
to a retail customer) between a cell site tower and
a mobile telephone switching center.
9 For instance, AT&T earned $22.6 billion in
business revenue in 2004. The fact that
approximately 1⁄3 of the nation’s total access lines
are in the territory served by SBC suggests that the
value of retail voice and data communications that
rely on private lines provided by AT&T are worth
approximately $7 billion. SBC’s retail business
revenues from voice and data communications are
likely to be equally as large as AT&T’s. Commenters
should not, however, have to estimate this
information. It needs to be provided by DOJ to
permit an appropriate review of the PAFJs. The
Verizon/MCI PAFJ is equally deficient in providing
necessary data to perform a meaningful competitive
analysis.
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Guidelines, Section 1.0.
has previously explained that it would
need over 2,016 voice grade lines (which is the
voice grade equivalent of a small fiber-system
known as an OC–3—in an individual location in
order to justify building facilities into that location.
AT&T Petition for Rulemaking To Reform
Regulation of Incumbent Local Exchange Carrier
Rates For Interstate Special Access Services, Reply
Declaration of Janusz A. Ordover & Robert D. Willig
on Behalf of AT&T Corp. at ¶ 29, filed with the
Federal Communications Commission in RM–10593
on January 23, 2003.
12 Most customers do not typically contract for
special access-based services on a building-bybuilding basis. Rather, as SBC has explained to the
FCC, ‘‘the overwhelming majority of special access
circuits are purchased by customers that bargain for
substantial term, volume, and overlay discounts.’’
SBC Reply Comments at 26, filed with the Federal
Communications Commission in the Matter of
Special Access Rates For Price-Cap Local Exchange
Carriers, WC Docket No. 05–25 on July 29, 2005
(internal citations omitted). Moreover, [t]hese
contract tariffs vary in their scope, covering a single
MSA, multiple MSAs, or SBC’s entire service
territory.’’ SBC Comments at 53 n.176 filed with the
Federal Communications Commission in In the
Matter of Special Access Rates For Price-Cap LECs,
WC Docket No. 05–25 on June 13, 2005.
11 AT&T
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discrimination.13 Nor is COMPTEL
aware of any evidence that would
support a geographic market definition
that narrow and the Competitive Impact
Statement filed with the PAFJs does not
provide any such evidence. Indeed, in
COMPTEL’s experience, the fact that
Verizon and SBC offer special access
service on state or regionwide volume
discount schedules suggests that it is
more likely that the appropriate
geographic market is actually broader
than the metropolitan area alleged by
the DOJ (and cannot plausibly be
considered to be as small as an
individual building).14 As explained by
former DOJ and FCC chief economist
Joseph Farrell:
15. I understand that, today, SBC’s pricing
does not fully respond to such granular
competitive conditions, building by building,
and that SBC is content to price well above
CAPs [Competitive Access Providers] where
it does face CAP competition and offers
substantial discounts in return for regionwide commitments to give SBC not simply a
large amount of business but a large share of
the carrier’s business.
16. Such a pricing practice links special
access pricing in different buildings, and—
while it persists—argues for a region-wide
market definition because (as I explain
below) it can make region-wide
concentration a more important determinant
of competitive behavior and overall pricing
than concentration and entry possibilities
specific to a building or route.15
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C. Anticompetitive Effect
In two brief paragraphs, the DOJ
posits that the primary anticompetitive
effects of the two largest local Bell
monopolies acquiring their two largest
competitors will be felt in those few
buildings where the number of carriers
serving the buildings with their own
fiber or copper transmission facilities
will decline from two to one. The DOJ
explains that even though other
competitors might still be able to resell
private lines from SBC, these
13 Normally, the DOJ would only define
geographic markets this narrowly if a ‘‘hypothetical
monopolist’’ could identify and price differently to
buyers in these buildings. See Merger Guidelines,
Section 1.22 ‘‘Geographic Market Definition in the
Presence of Price Discrimination.’’
14 Although the correct geographic market
definition is probably the entire SBC or Verizon
region, for purposes of this filing, COMPTEL will
adopt the largest geographic market asserted by the
DOJ in its Complaint (the metropolitan area) when
evaluating the adequacy of the DOJ’s remedy.
Complaint at ¶ 24.
15 Statement of Joseph Farrell attached to the
Opposition of Global Crossing filed with the
Federal Communications Commission in In the
Matter of SBC/AT&T Merger, WC Docket No. 05–
65 on April 25, 2005. For the convenience of the
DOJ, COMPTEL includes Professor Farrell’s
observations regarding the proper geographic
market definition. A copy of the Statement is
attached hereto as Appendix B.
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competitors would not be as effective at
constraining the post-merger firm’s
prices to customers, because the merged
firm will control the price of a critical
input. Complaint at ¶ 25. According to
the Complaint, this anticompetitive
effect (reduced competition in a limited
number of buildings) will not be limited
to the market for ‘‘raw’’ special access
service (unadorned transmission
services), but will also distort prices in
the market for ‘‘finished’’
telecommunications services (i.e.,
switched voice or managed data/
Internet service) that use private lines as
a critical input. Complaint at ¶ 26. As
we discuss below, however, the PAFJs
not only do not remedy this
anticompetitive effect, but rather may
actually exasperate it.
The Merger Guidelines are primarily
concerned with entry from the
perspective of whether it is reasonable
to expect that a post-merger, unilateral
increase in price would be met with
entry that is timely enough, reasonably
likely, and on a sufficient scale to defeat
the hypothetical price increase. In the
Complaints, the DOJ states that other
carriers are unlikely to replicate AT&T’s
last mile connections into the few
buildings for which the merged firm has
consented to make unused capacity
available. The DOJ explains that carriers
decide whether to build last mile
facilities based on several factors:
a. The proximity of the building to the
CLEC’s existing network
interconnection points;
b. The capacity required at the
customer’s location (and thus the
revenue opportunity);
c. The availability of capital;
d. The existence of physical barriers,
such as rivers and railbeds, between
the CLEC’s network and the
customer’s location; and
e. The ease or difficulty of securing
the necessary consent from building
owners and municipal officials.
Complaint at ¶ 27. COMPTEL does not
disagree that the point listed above are
barriers to entry; nor does COMPTEL
disagree that entry—by either the last
mile or transport facilities—would not
be sufficient or sufficiently timely to
defeat a post-merger increase in price.
However, COMPTEL must point out
that the entry barriers the DOJ identifies
are by no means exhaustive. It is well
recognized that dedicated, high-capacity
telecommunications networks are
characterized by substantial economies
of scale and scope.16 Moreover, the
16 In one of the early antitrust cases, this Court
determined with respect to the local private line
service offered by AT&T pre-divestiture, ‘‘that there
are three reasons for defendants having achieved
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‘‘sunk’’ aspect of the high capital costs
that are characteristic of competitive
fiber deployment are additional entry
barriers.17
Importantly, however, these and the
other barriers the DOJ identifies are
similar for all transmission facilities,
regardless of whether they are ‘‘loops’’
or ‘‘transport;’’ and the inability of entry
to defeat a post-merger price increase in
the metropolitan area is just as much
(actually more) of a danger than the
threat of building-specific price
such clear economies of scale. First, as defendants’
witnesses explained, higher levels of demand allow
efficient use of high-capacity facilities and
technologies which provide transmission service at
progressively lower unit costs. Second, the process
by which the network is configured allows for the
fullest utilization of these high-capacity, low-cost
facilities. Finally, defendants supply the entire
spectrum of communications services, and through
the networking principle, demand for all those
services is concentrated or pooled so that it can be
transmitted and switched over the same facilities.
This last phenomenon is referred to by economists
as ‘‘economies of scope’’. Economies of scope exist
when it is cheaper to produce two or more goods
or services together than to produce each one
separately. Southern Pac. Communications Co. v.
American Tel. & Tel. Co., 556 F. Supp. 825, 861–
862 (D. D.C. 1982). As notes above, with SBC’s
acquisition of AT&T, the pre-divestiture AT&T has
been substantially reconstituted. Furthermore, the
FCC has found that ‘‘Scale economies, particularly
when combined with sunk costs and first-mover
advantages * * * can pose a powerful barrier to
entry. If entrants are likely to achieve substantially
small levels of sales than the incumbent, then with
scale economies their average costs will be higher
than those of the incumbent, putting them at a
potentially significant costs disadvantage to the
incumbent. Profitable entry may not be possible if
retail prices are close to the incumbent’s average
costs. The greater the extent and size of the scale
economies throughout the range of likely demand,
the higher the barrier they pose.’’ In the Matter of
Review of the Section 251 Unbundling Obligations
of Incumbent Local Exchange Carriers, Report and
Order on Remand, 18 FCC Rcd. 16978 at ¶ 87
(2003), vacated in part (on other grounds), aff’d in
part and remanded sub nom. United States Telecom
Association v. Federal Communications
Commission, 359 F.3d 554 (D.C. Cir. 2004), cert.
den. sub nom. AT&T Corporation v. United States
Telecom Association, 125 S. Ct. 316 (2004).
17 The existence of high, or proportionately high,
sunk costs is generally recognized as a barrier to
entry. See, e.g., Larson, An Economic Guide to
Competitive Standards in Telecommunications
Regulation, I CommLaw Conspectus 31, 52 (January
2000) (‘‘if entry requires the incurrence of capital
costs, and a ‘high’ proportion of these are sunk costs
for entrants, then entry barriers exist.’’ (c.f., Bolton,
Brodley, and Riordan, Predatory Pricing: Strategic
Theory and Legal Policy, 88 Geo. L.J. 2239, 2265
(August, 2000) (‘‘if challenged by new entry, the
incumbent will rationally disregard such [sunk]
costs in its pricing decisions rather than lose the
business. The entrant * * * must now incur such
costs, and therefore faces risk of underpricing by an
incumbent with sunk costs. Thus, as a result, sunk
costs may act as an entry barrier, giving the
incumbent the ability to raise price above the
competitive level.’’) The FCC has specifically found
that ‘‘[s]unk costs, particularly when combined
with scale economies, can pose a formidable barrier
to entry.’’ In the Matter of Review of the Section 251
Unbundling Obligations of Incumbent Local
Exchange Carriers, Report and Order on Remand, 18
FCC Rcd. 16978 at ¶ 88.
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increases. (As COMPTEL has explained,
the DOJ has not offered any evidence
that building-specific pricing by SBC
and Verizon is the norm). Consequently,
while the DOJ has recognized that the
conditions for post-merger price
increases are present, it has failed to
fashion any reasonable remedy that
would prevent such increases from
occurring.
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III. The Proposed Divestitures Will Not
Restore Competition
The formal policy guidance to the
Antitrust Division regarding merger
remedies is contained in the Antitrust
Division Policy Guide to Merger
Remedies [‘‘Merger Remedy Guide’’].18
In this policy statement, the Antitrust
Division sets forth broad principles that
it claims will guide its decisions to seek
remedies to offset potential harms to
competition resulting from mergers. A
controlling policy principle is that
‘‘restoring competition is the ‘key to the
whole question of antitrust remedy.’ ’’ 19
Importantly, the goal of restoring
competition is not a policy choice made
by the DOJ. Rather, it follows from the
guidance provided by the Supreme
Court that ‘‘relief in an antitrust case
must be efffective to redress the
violations and ‘to restore competition’
[and that] * * * [c]omplete divestiture
is particularly appropriate where asset
or stock acquisitions violate the
antitrust laws.’’ Ford Motor Co. v.
United States, 405 U.S. 562, 573 (1972);
accord United States v. E.I. du Ponte de
Nemours & Co., 366 U.S. 316, 331
(1961); California v. American Stores
Co., 495 U.S. 271, 280–81 (1980).
The DOJ has followed this policy and
precedent time and time again in
divestitures across various industries
including telecommunications. In
previous telecommunications mergers
in which the DOJ has negotiated
remedies, the divested assets included
not just network infrastructure, but also
customer contracts, business and
customer records and information,
customer lists, accounts, leases, patents,
licenses, and operational support
systems—in essence complete operating
businesses. For example, in U.S. v.
Cingular Wireless Corp. et al., DOJ
required the divesture of AT&T
Wireless’s entire mobile wireless
business in the identified geographic
markets to prevent the substantial
lessening of competition for mobile
wireless services. See U.S. v. Cingular
18 Antitrust Division Policy Guide to Merger
Remedies, U.S. Department of Justice, Antitrust
Division, October 2004. Available at https://
www.usdoj.gov/atr/public/guidelines/205108.htm
19 Id., citing United States v. E.I. du Pont de
Nemours & Co., 366 U.S. 316, 326 (1961).
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Wireless Corp. et al., No. 1:04CV01850,
Proposed Final Judgment (D.D.C.
November 3, 2004). Similarly, in U.S. v.
WorldCom, Inc. and Intermedia
Communications, DOJ required
WorldCom to divest all Intermedia
assets, except for the voting interest in
Digex, as an ongoing, viable business to
prevent the substantial lessening of
competition in the market for Tier 1
Internet backbone services. Again, the
required divestiture included customer
contracts, operational support systems
and each of the aforementioned assets
among a host of others. U.S. v.
WorldCom, Inc. and Intermedia
Communications, No. 1:00CV02789,
Proposed Final Judgment (D.D.C.
November 17, 2000). See also U.S. v.
SBC Communications Inc. and
Ameritech Corp., No. 99–0715,
Proposed Final Judgment (D.D.C. March
23, 1999). (DOJ required divestiture of
an entire business including the assets
listed above). Most recently, only one
year prior to the present mergers being
field with the DOJ, the DOJ was
perfectly willing to follow its own
counsel in the case of Qwest—another
large incumbent local exchange carrier,
but substantially smaller than either
SBC or Verizon—seeking to acquire
Allegiance Telecom in a bankruptcy
proceeding. There, the DOJ signed a
consent decree with Qwest that required
Qwest to entirely divest itself of all of
Allegiance’s in-region business.20
A key question underlying the DOJ’s
approach here is simply ‘‘what
happened?’’ Why is the guidance of its
Merger and Remedy Guidelines—
guidance to which the DOJ has
consistently adhered in merger after
merger, involving firms far smaller than
those being combined here—no longer
relevant to its analysis? 21 As we explain
below, the divestitures required under
the proposed final judgments cannot
plausibly restore the competition lost by
the simultaneous acquisition of the
nation’s two largest competitors by the
20 Ultimately, Qwest was out-bid in a bankruptcy
auction by XO Communications and the consent
decree was not filed. The proposed consent decree
is provided here as Appendix C to illustrate a
divestiture approach more consistent with the
public interest than that to which the DOJ has
acquiesced here.
21 COMPTEL is not so naıve as to believe that the
¨
massive size of the merged entities in these
proceedings is necessarily unrelated to the
Government’s approach. Mergers concentrate
political capital in a manner comparable to their
amalgamation of economic power—a fact Senator
Tunney well recognized ‘‘[i]ncreasing concentration
of economic power, such as occurred in the flood
of conglomerate mergers, carries with it a very
tangible threat of concentration of political power.
Put simply, the bigger the company, the greater the
leverage it has in Washington.’’ 119 Cong. Rec. 3451
(Feb. 6, 1973).
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nation’s two largest incumbents, much
less do the divestitures even hint at
addressing the heightened threat of
coordinated pricing resulting from SBC
and Verizon becoming each other’s
largest customer and competitor.
The DOJ’s Merger Remedy Guide
makes clear that the preferred course to
restore competition is to divest
sufficient assets to replace the
competition lost by the merger,
recognizing that such divestitures will
likely require more than mere physical
assets:
Divestiture must contain at least the
minimal set of assets necessary to ensure the
efficient current and future production and
distribution of the relevant product and
thereby replace the competition lost through
the merger. The Division favors the
divestiture of an existing business entity that
has already demonstrated is ability to
compete in the relevant market. An existing
business entity should possess not only all
the physical assets, but also the personnel,
customer lists, information systems,
intangible assets, and management
infrastructure necessary for the efficient
production and distribution of the relevant
product.22
The goal of a divestiture is to ensure that
the purchaser possesses both the means and
the incentive to maintain the premerger
competition in the market(s) of concern.23
Divestiture of an operating, on-going
business redresses the antitrust
violations and restores competition in
the affected market.24 Significantly, the
‘‘divestitures’’ required by the consent
decrees are not real divestitures at all
(as the term is used to effect a
‘‘structural remedy’’ in the Merger
Remedy Guide). Rather, the proposed
decrees call only for a ten-year lease of
the defendant’s unused fiber capacity—
capacity that is dormant cannot be made
useful without substantial additional
investment—and which only connects
to buildings where the available revenue
is already locked into long-term
contracts with the defendants, most
likely through a contract tying the
service in the named building to the
customer’s requirements in other
locations. This temporary lease of the
defendants’ unused capacity to a carrier
that has neither the scale nor scope of
the defendants cannot restore the level
of competition lost by the acquisition of
AT&T and MCI.
A. A Building-Specific Remedy Is
Insufficient
To begin, although the DOJ was
unable to define the relevant geographic
market with precision—concluding only
that it was no smaller than an
22 Merger
23 Merger
Remedy Guide at 12.
Remedy Guide, at 9.
24 Id.
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individual building and no larger than
a metropolitan area, the DOJ’s ‘‘remedy’’
assumes that individual buildings are
the appropriate measure. Moreover, the
proposed final judgments only apply in
those relatively few buildings where the
merging parties control the only
facilities serving the building (i.e.,
where because of the merger, the
number of facility-paths to the building
will go from 2-to-1). Notwithstanding
the lack of any explanation of why only
the ‘‘2:1’’ buildings are of concern (as
opposed to circumstances where
competitive choice collapses from 3:2
for instance), the DOJ’s focus on a
building-specific remedy assures higher
prices to retail customers.
As noted earlier, COMPTEL is
unaware of any market evidence that
suggests that customers make
purchasing decisions—or that carriers
make pricing decisions—on a buildingby-building basis. If customers do not
make their decisions that way, and
carriers do not price their services that
discretely, there is no reasoned basis to
conclude that the remedy can restore
competition when the market has been
incorrectly defined so narrowly.
In COMPTEL’s experience, customers
make their purchasing decisions for
much broader areas that generally
conform to the areas that the
incumbents use to calculate volume
discounts. Even if one assumes that a
relatively (compared to our experience)
narrow market definition of a single
metropolitan area is appropriate, the
only way to restore the competition lost
by the mergers is to divest all of the
AT&T and MCI network assets that
serve each metropolitan area. Only if
that were to occur, could the purchasing
entrant be assured of the opportunity to
offer customers service package with a
similar footprint as provided by the
former competitors, AT&T and MCI.
Notably, AT&T and MCI were two of
the largest purchasers of wholesale
special access services in the territories
served by SBC and Verizon and, as
such, were able to take advantage of
SBC’s and Verizon’s volume discount
pricing strategies to achieve lower
special access prices than other
competitors. Because large end-user
customers typically contract for retail
services at multiple locations, AT&T
and/or MCI were able to bid on such
contracts using a blend of their own
facilities and the heavily discounted
special access facilities they leased from
SBC and Verizon. Consequently, even if
leasing the unused capacity that exists
at some of the customer’s locations to
other entrants (a term called for by the
proposed consent decrees) was able to
replicate the facilities-based
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competition from AT&T and MCI (a
proposition with which we disagree, for
other reasons that we describe here),
unless other entrants also enjoyed the
same discounts achieved by AT&T and
MCI for the special access circuits used
to form the complete bid for all of the
customer’s locations, the level of
competition in the metropolitan area
would be harmed and prices would be
expected to rise.
B. The Lease of Unused Capacity Does
Not Restore Competition
Another remarkable feature about the
proposed consent decrees is that they
only require the defendants to lease the
unused capacity they may have
installed to a particular building—i.e.,
fiber strands that today lie dormant, that
would require substantial additional
investment to activate, and which quite
possible exceed the known demand in
the building to which they are
committed.
The DOJ correctly recognizes the
‘‘CLECs will typically build into a
particular building after they have
secured a customer contract of sufficient
size to justify the anticipated
construction costs for that building.’’
Complaint ¶ 28. In other words, the
most common arrangement is for
facilities to be installed only after a
customer has made a contractual
commitment of sufficient duration and
magnitude to justify the cost.
Remarkably, although the DOJ
recognizes this circumstance, it has
proposed a remedy that effectively
assumes the opposite.
In each of the buildings identified by
the DOJ, there are only two networks
available to customers (that of AT&T
and MCI and that of the incumbent).
Following the DOJ’s accurate
observation that competitors generally
do not deploy capital speculatively, it is
likely that AT&T and MCI constructed
their lateral connections only after
obtaining a contract with the customer
sufficient to recover the costs of
construction.25 As such, it is unlikely
that there is sufficient uncommitted
demand in any of these buildings to
justify a competitor incurring the cost to
access the building to become a ‘‘third’’
option.
One obvious question is why should
the DOJ presume that an entrant will
25 The FCC has found that large business
customers ‘‘demand extensive services using
multiple DS3s or OCn loops typically offered under
long-term arrangements which guarantee a
substantial revenue stream over the life of the
contract.’’ In the Matter of Review of the Section
251 Unbundling Obligations of Incumbent Local
Exchange Carriers, Report and Order on Remand, 18
FCC Rcd. 16978 at ¶ 303 (2003).
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precommit capital (to acquire a fiberlease from the defendants) to serve these
buildings without already having a
customer under contract, when the DOJ
recognizes more generally that an
entrant would not otherwise take such
a risk? Moreover, the economic
disincentive is even greater in these
buildings because the entrant knows
that the capital it would be committing
would be to acquire capacity at levels
that neither the incumbent (SBC and
Verizon) nor the largest competitors
(AT&T or MCI) were able to sell. The
DOJ’s Merger Remedies Guide
recognizes that ‘‘in markets where an
installed base of customers is required
in order to operate at an effective scale,
the divested assets should either convey
an installed base of customers to the
purchaser or quickly enable the
purchaser to obtain an installed
customer base’’ 26
Additionally, in its Merger
Guidelines, among the factors the DOJ
lists that are likely to ‘‘reduce sales
opportunities’’ to a post-merger entrant
is ‘‘any anticipated sales expansion by
incumbents in reaction to entry, either
generalized or targeted at customers
approached by the entrant, that utilizes
prior irreversible investments in excess
production capacity.’’ 27 Here, while the
‘‘divestiture asset’’ is unused capacity, it
is not even all the unused capacity the
post-merger firm will possess; so it is
hardly unthinkable that the merged firm
would not be easily able to eliminate
any sales opportunity for the
prospective entrant (assuming such a
sales opportunity could even exist on a
building-specific basis)—especially
given that the new entrant (even if it
acquired the unused capacity for free)
will still have to incur the costs of
negotiating building access, laying fiber
within the building, and lighting the
fiber. Yet, in this context, the DOJ has
not required the defendants to divest a
single customer—or even to waive the
termination penalties associated with
any contract that includes service in the
identified buildings.28
C. A 10-year Lease is Not a Divestiture
Above we emphasize the fact that
CLECs are unlikely to install capacity to
particular building until after the
customer is locked into a contract
suggests that the customer demand in
the buildings where AT&T has installed
26 Merger
Remedy Guide at 10.
Guidelines, Section 3.3.
28 So called ‘‘fresh look’’ requirements would at
least permit the customers using the productive
capacity that the DOJ is permitting the merged firms
to retain to consider shifting their demand to the
unused capacity that the DOJ would have the
merged firms divest.
27 Merger
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fiber are unlikely to be available to an
entrant because of the customer’s
contractual commitments. A second
implication is that an entrant is unlikely
to want to lease dark fiber from the
defendants (as assumed by the proposed
consent decrees) precisely because the
new entrant to the building will not
have its own pre-committed customers.
Whether the entrant leases the unused
capacity required to be divested by the
proposed settlement—or whether it
constructs the facility new, the
economic condition recognized by the
DOJ remains the same. Entrants are
unlikely to commit capital to serve an
individual building unless a customer
has already committed to cover the costs
of that capital expansion. The fact that
some dark fiber may have been obtained
through the proposed ‘‘divestiture’’ does
not substantially lessen this capital
expenditure—there remain significant
costs to access the customer and activate
the fiber so that it is capable of
providing services.
The DOJ appears unwilling to
appreciate the comparability between
capital expenditures incurred as
construction costs and capital
expenditures incurred as long-term
leasehold acquisition costs. The fact is
that competitors generally do not deploy
capital on speculation. If they do not
have a contract for a satisfactory level of
demand at a particular location, then
they typically will not spend capital to
provide facilities to that location.
The risk to invested capital used to
activate any leased fiber from the
defendants is particularly acute. The
DOJ’s consent decrees only require a
relatively short lease commitment of 10
years, without any renewal option. After
the lease expires, the merged companies
will once again control the assets
supposed to be ‘‘divested,’’ with the
entrant that has leased these facilities
having no clear option. In addition,
without full transfer of assets,
prospective lessees will have no rights
to access any building without first
obtaining permission from the landlord
or property manager of the building.
This, again, makes the ability of the
lessee to serve potential customers
contingent on its ability to overcome an
entry barrier that the DOJ has
recognized and that the defendants have
overcome.29 It is remarkable that the
29 There is a related, yet somewhat technical,
point that should also be considered. The merged
firms almost certainly each have route diversity
(e.g., fiber coming in the front door and going out
the back door). This is a valuable feature because
it allows the carrier to protect its customer against
service disruptions from fiber cuts (if the fiber
coming into the building is cut, the carrier can
simply ‘‘re-route’’ the customer’s communications
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DOJ would identify an entry barrier (like
building access), and then propose a
remedy to create new entry while
leaving the prospective entrant to still
negotiate that entry barrier.
D. The Remedy Is Not Clear and
Enforceable
Among the broad, ‘‘guiding
principles’’ in the Merger Remedy
Guide is the notion that an antitrust
remedy should be clear and enforceable.
This is also a new requirement for the
Court to analyze with respect to consent
decrees under the Tunney Act—whether
its terms are ambiguous, and therefore,
whether it is enforceable. The present
consent decree is so vague and
ambiguous as to be virtually
unenforceable.
As an initial matter, almost all—if not
all—of the critical provisions of these
consent decrees are subject to
subsequent agreement among the
parties. The elements of the divestiture
leases that are subject to ‘‘agreement’’
between the parties—pricing, splice
point access, and access to dark fiber
transport—are among the most
contentious issues in arbitrations held
pursuant to the Telecommunications
Act of 1996. History has shown that
competitive entrants are typically
unsuccessful ‘‘negotiating’’ with the Bell
companies, frequently having to resort
to binding arbitration under the
Telecommunications Act, 47 U.S.C. 252,
even to implement basic
interconnection and lease rights
guaranteed by the statute and the FCC’s
rules implementing the statute.30 The
PAFJs do not divest independent
operations that have the incentive and
ability to be willing wholesalers to other
competitive providers; rather, the
decrees portend the same seeds for
litigation that have plagued the
Telecommunications Act of 1996 for a
decade (and which ultimately produced
these mergers in the first instance).
through the diverse fiber strand). However, there is
nothing in the terms of the consent decrees that
requires the post-merger firm to provide ‘‘diverse’’
fiber. Rather, the decree only requires a minimum
of 8 strands to be divested. It appears that the postmerger firm could technically comply with the
decree, while limiting the prospective purchaser’s
ability to win sales by only divesting fiber strands
in the same sheath.
30 See The Role of Incentives for Opening
Monopoly Markets: Comparing GTE and RBOC
Cooperation With Local Entrants (1999) (ILECs that
do not cooperate with entrants attract less
competitive entry) available at https://
econpapers.repec.org/paper/wpawuwpio/
9907004.htm.
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IV. The Proposed Remedy Increase the
Likelihood of Coordinated Pricing
A. ILEC Exclusionary Contracts Are a
Barrier To Entry and Facilitate
Collusion Between Post-Merger SBC and
Post-Merger Verizon
COMPTEL has already shown that the
DOJ has not adequately described all the
barriers to entry in the Local Private
Line market. As we have noted, most
private lines include a transport
component as well as a loop
component.31 Moreover, most private
lines are purchased by carriers, which
combine these private lines with
intelligence and other network facilities
and features to create finished services
that are then sold to retail customers.
Thus, what little facilities competition
that exists in the special access/Local
Private Line market is provided by other
carriers for other carriers. The barriers
that these entrants—who compete
directly against SBC and Verizon—face
are enormous. The DOJ only lists some
of the ‘‘natural’’ economic barriers to
entry. There are other, artificial barriers
that have been erected by the Bell
companies, including defendants SBC
and Verizon.
The most notable features about the
special access market are that: (1) The
SBC and Verizon still maintain a
monopoly over the market; even the
competitive carriers with the largest
networks must buy over 90% of their
total special access circuits (Local
Private Lines) from the incumbents; (2)
in the most populous markets, SBC and
Verizon are no longer price regulated by
the FCC; and (3) almost all of the special
access circuits sold by SBC and Verizon
are sold under ‘‘optional pricing
plans.’’ 32
These optional pricing contracts are
relevant to this proceeding for three
reasons: (1) They are important to
understand in order to understand
proper geographic market definition; (2)
they are an ongoing barrier to facilitiesbased competitive entry into the Local
Private Line/special access market
because they severely foreclose access to
31 Indeed, AT&T has explained that 40,000 of its
local business customers require the lowest
capacity private line service—DS1 service. The vast
majority of these customers—about 65%—are
served via combinations of loops and transport. See
AT&T Presentation, CC Docket No. 01–338, October
7, 2002, at p. 10.
32 These ‘‘optional pricing plans’’ are an essential
feature of the special access market that needs to
be understood in order to understand why entry of
the proposed consent decrees is not in the public
interest. To this end, COMPTEL has included with
its comments a detailed analysis of SBC’s optional
pricing plan, prepared by former DOJ and FCC chief
economist Joseph Farrell. Dr. Farrell’s pricing plan
analysis is included as Appendix D to these
comments.
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customers and distort entry decisions;
and (3) the continued existence of these
contracts will make it even less likely
that the proposed remedy will allow a
new firm to take the place of AT&T—
even if all of AT&T’s in-region assets
were divested.
The key feature of these optional
pricing plans is that in order to get
‘‘discounts’’ on circuits for which they
have no competitive alternative (the vast
majority of their circuits) customers
(like the pre-merger AT&T and MCI, and
COMPTEL’s members) must commit to
purchasing the majority of their total
circuit volumes from the Bell
companies—including circuits for
which a cheaper competitive alternative
may be available. In other words,
because only the incumbent can supply
all of any customer’s Local Private Line
demand, the incumbent can condition
the availability of discounts on certain
circuits (majority, for which no
competitive alternative is available) on
the customer’s commitment to transfer
the ‘‘competitively sensitive’’ portion of
its demand to the incumbent.
In this respect, the optional pricing
plans—which are pervasive—act to
foreclose circuit demand from potential
competitors of the incumbents for Local
Private Line services.33 This feature—
contracts that foreclose sales
opportunities to rivals—is yet another
factor that the DOJ, in its Merger
Guidelines, has identified as making
post-merger entry less likely.34
However, the DOJ has chosen not to
eliminate this entry barrier for the
prospective IRU purchaser.
Another feature of these contracts is
that customers that cannot meet their
volume commitments must pay high
‘‘termination’’ penalties. While
customers do not like these contracts,
they have little choice but to sign
them.35 Because, as noted previously,
33 See, e.g., ‘‘Quantity-Discount Contracts as a
Barrier to Entry,’’ T. Randolph Beard, PhD, George
S. Ford, PhD, Lawrence J. Spiwak, Esq., Phoenix
Center Policy Paper No. 20 (November 2004).
Available at https://www.phoenix-center.org/
ppapers.html
34 ‘‘Factors that reduce sales opportunities to
entrants include * * * (b) the exclusion of an
entrant from a portion of the market over the long
term because of vertical integration or forward
contracting by incumbents * * *.’’ Merger
Guidelines, Section 3.3.
35 ‘‘Discount pricing plans offered by ILECs
further reduce the ability of CLECs to compete and
result in higher prices. Even where a CLEC may
offer a competing special access service (at a
substantial discount to the ILEC offering), WilTel
may not use that CLEC in many cases because it can
incur a lower incremental expense by committing
additional services to an existing ILEC plan even
though the overall unit cost from the ILEC may be
higher.’’ Declaration of Mark Chaney in support of
the Comments of WilTel at ¶ 6 filed with the
Federal Communications Commission in In the
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for the densest metro areas the FCC no
longer regulates the Bells’ special access
rates, the Bells have used this pricing
flexibility to raise their ‘‘month-tomonth’’ or non-OPP prices for special
access. The resulting effect is that
customers—almost all of whom are
retail competitors with the Bells (Local
Private Lines/special access circuits are
critical inputs to all wireline and
wireless telecommunications services)—
cannot afford to pay higher prices when
their competitors (including the Bell
affiliates) are purchasing at a
‘‘discount.’’ The word ‘‘discount’’ is in
quotations because the discounts are
discounts off the month-to-month tariff
price, so the Bell can still charge a
monopoly profit maximizing price
(through its OPP) by establishing a
‘‘supra-monopoly’’ price as the non-OPP
alternative.
The most important thing to consider
when trying to conceptualize how the
optional pricing plans work, is that the
incumbent—by exchanging ‘‘discounts’’
on products for which demand is
inelastic (customers have no alternative)
for commitments to not buy from
competitors on products for which the
customer could choose a competitor—
gets to set the minimum scale of entry
for his competitors. Thus the incumbent
can pick demand over a large
geographic region as the inelastic
product (on which discounts are
offered), or the incumbent could decide
to ‘‘discount’’ lower capacity circuits
(for which the incumbent’s ‘‘first
mover’’ status and scale/scope
economies give it a tremendous
advantage over new entrants) as the
basis on which it will foreclose demand
from rivals. Regardless, though, the end
result is that the incumbent is able to
raise the costs of its competitors by
expanding the scale on which they
would have to enter, or raising the size
of the discount they would have to offer
to make their customer indifferent
between buying from the incumbent,
and/or by limiting its competitors
ability to expand quickly (by foreclosing
demand).36
Matter of Special Access Rates for Price Cap Local
Exchange Carriers, WC Docket No. 05–25 on June
13, 2005.
36 See, e.g., Declaration of Michael D. Pelcovits on
Behalf of WorldCom (as MCI was formerly known)
at 7 filed with the Federal Communications
Commission in In the Matter of AT&T Petition for
Rulemaking to Reform Regulation of Incumbent
Local Exchange Carrier Rates for Interstate Special
Access Services, RM–10593. (‘‘Less than fully
exclusive contracts can similarly be exclusionary
where they tie up sufficient volume to prevent
smaller competitors from achieving minimum
viable scale.’’) Pelcovits also uses the following
example to explain the pricing disadvantage at
which competitors that cannot match the
incumbent’s scale or scope are placed: ‘‘Suppose
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Given that courts, as well, have
recognized the potential for
anticompetitive foreclosure effects in
these so-called ‘‘bundled rebate’’ or
‘‘bundled discount’’ plans, the DOJ
needs to determine what percentage of
the wholesale (carrier) and retail
markets for special access are foreclosed
by the contracts at issue. COMPTEL
believes this number will be
significant.37 The D.C. Circuit has held
that exclusionary conduct by a
monopolist is more likely to be
anticompetitive than ‘‘ordinary’’
exclusionary conduct achieved through
non-monopoly means (i.e., agreements
among competitors).38 Moreover, the
Third Circuit has held that contracts
almost identical to the Bell OPP’s, when
used by a monopoly, were
anticompetitive and exclusionary in
violation of the antitrust laws.39 The
Supreme Court has held that a market
share over 65% is sufficient to establish
a prima facie case of monopoly power.40
It is certainly the case that SBC and
Verizon would be considered
monopolies, pre-merger, in the special
access market—regardless whether the
market is defined as a building or
metropolitan area.41 Thus, an inquiry
the monopoly (pre-entry) price is $1.00 and the
customer buys 100 units. Further suppose that a
competitor is capable of providing 25 units at a
price of 99 cents, thereby threatening to undercut
the monopolist. In response, the monopolist could
offer the customer the choice of buying 75 units at
$1.05 per unit, or buying all 100 units for 99 cents
per unit. As a result, the customer now faces a price
from the monopolist for the 25 ‘‘in play’’ units of
$20.25, or 81 cents per unit. The competitor is
unable to meet this price, and is excluded from the
market.’’ Id. at 7–8.
37 SBC notes that the ‘‘overwhelming majority’’ of
its special access circuits are sold under term and
volume contracts. See n. 11, supra. Verizon has
stated that 85% of its access sales were under some
form of discount contract. Verizon Comments at 22
filed with the Federal Communications
Commission in WC Docket No. 05–25 on June 13,
2005.
38 United States v. Microsoft Corp., 253 F.3d 34,
70 (D.C. Cir. 2001) (Microsoft’s exclusionary
contracts violated Section 2 (of the Sherman Act)
‘‘even though the contracts foreclose less than the
40–50% share usually required in order to establish
a § 1 violation.’’)
39 LePage’s Inc. v. 3 M, 324 F.3d 141 (3d Cir.
2003) (‘‘The principal anticompetitive effect of
bundled rebates as offered by [the defendant] is that
when offered by a monopolist they may foreclose
portions of the market to a potential competitor
who does not manufacture an equally diverse group
of products and who therefore cannot make a
comparable offer’’).
40 American Tobacco Co. v. United States, 328
U.S. 781, 797 (1946).
41 Only 3 years ago, AT&T—the best-situated
special access customer (with the largest
competitive local network in any Bell region)—was
dependent on the incumbents for 93% of its DS1level transport and 65% of its DS3-level access. See
Reply Declaration of Janusz A. Ordover and Robert
D. Willig on Behalf of AT&T Corp., In the Matter
of AT&T Petition for Rulemaking to Reform
Regulation of Incumbent Local Exchange Carrier
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into what proportion of special access
services are sold under the contracts
described above should be sufficient to
have enough information to determine
that as long as the defendants are
allowed to use these contracts, the DOJ’s
proffered remedy has no legitimate hope
of restoring competition lost through the
mergers.
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B. The Proposed PAFJs Will
Affirmatively Facilitate Collusion
Between SBC and Verizon
However, there is one remaining
aspect to the contracts discussed above
that independently compels the DOJ to
reject the PAFJs and require a more
complete divestiture. The effect of the
contracts, post-merger, will be to
enhance the ability for the merged firms
to engage in interdependent
coordination. Post-merger each firm is
the other’s largest in-region competitor
and largest out-of-region supplier. This
new reality, in conjunction with the
OPP contracts—which enforce input
dependence on the dominant firm—
leads naturally to increased
coordination through the increased
ability of each dominant firm to monitor
each competitor for ‘‘cheating’’ and to
thereby better facilitate coordination.
The Competitive Impact Statements do
not address, let alone explain, how
coordinated effects will be prevented by
the very limited relief proposed by the
PAFJs. Effectively, four very large
competitors, two of whom (AT&T and
MCI) had every incentive to seek to
grow share and pursue entry have been
reduced to two historic monopolies
whose incentives are much more to
protect existing monopolies than they
are to aggressively compete.
C. The Proposed Settlements Should Be
Evaluated Together
There is no question that the
acquisition of AT&T and MCI by SBC
and Verizon, respectively, will
substantially lessen competition in the
provision and sale of ‘‘Local Private
Lines’’ (also known as ‘‘special access’’)
to the wholesale market, as well as voice
and data services that rely on Local
Private Lines, with the likely result that
prices for the Lines and services using
those Lines will increase ‘‘to levels
above that which would prevail absent
the merger(s). Complaints ¶¶1, 25, 33.
The Complaints conclude that, absent
relief, competition will be diminished
and prices will rise in both the
wholesale and retail local private line
markets. Complaints ¶25. Although the
DOJ has asked the Court to review the
Rates for Interstate Special Access Services, FCC
RM–10593, at ¶ 30.
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proposed settlements together, it has
ignored the important interrelationships
between the mergers and the level of
competition. The Tunney Act Reform,
however, does not allow this same
luxury. Rather, the DOJ is required to
demonstrate than ‘‘the impact of entry
of such judgment upon competition in
the relevant market or markets
* * * 42’’ resolves the anticompetitive
effects identified in the Complaints.
The DOJ, in its Merger Guidelines,
notes that a significant potential
anticompetitive effect of mergers occurs
when the mergers increase the ability of
the remaining firms in the market to
coordinate in ways that harm
consumers. The DOJ notes that
‘‘[c]ertain market conditions that are
conducive to reaching terms of
coordination also may be conducive to
detecting or punishing deviations from
those terms.’’ Merger Guidelines,
Section 2.1.
COMPTEL submits that these
conditions are fully satisfied in the case
of the present mergers and the PAFJs do
not remedy these conditions because
they do not restore the competitive
condition to pre-merger levels. The
complaints recognize that AT&T and
MCI are each among the largest
competitors to both SBC and Verizon.
Complaints at ¶ 8. The inescapable
conclusion from this fact is that postmerger, both SBCA and Verizon will be
the largest competitor to the other.
Significantly, however, each pre-merger
carrier (i.e., AT&T and MCI) has
explained to the FCC that it is bound by
volume discount contracts to SBC and
Verizon that effectively require that
each purchase most of its special access
services from its rival (SBC and Verizon)
or be harmed by the loss of discounts
based on regionwide commitments.43
What is even more important going
forward is that the contracts do not just
act to discourage the new ‘‘out-ofregion’’ competitors from using other
competitive carriers, but the contracts
act as a disincentive for the post-merger
out-of-region competitors to use their
own networks. Thus, the contracts serve
to cement the two post-merger firms’
interdependence, and provide a readymade excuse as to why they cannot/will
not compete aggressively on price in
either wholesale input markets or in
retail business or wireless markets.
Moreover, these commitment contracts
for wholesale inputs constitute a perfect
42 15
U.S.C. 16(e)(1)(B) (emphasis added).
generally, AT&T and MCI filings in FCC
RM–10593 and WC Docket No. 05–25. Attachments
4 and 5 are representative of the pre-merger firms’
concern over their dependence on SBC and Verizon
special access—a dependence that was only
magnified by the bundled rebate contracts.
43 See,
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mechanism to detect and punish
cheating in the retail market, as any
significant increase in inputs purchased
can indicate that the competitor is
experiencing an increase in retrial
demand as the result of a decline in
retail price.
Alternatively, the post-merger
dominant firms have no less of an
information advantage in wholesale
markets. Because the post-merger AT&T
and Verizon have such a significant
portion of wholesale demand under
such contracts, they are also in a
position to notice decreases in demand
from other wholesale customers at oldAT&T or old-MCI ‘‘on-net’’ locations.
Reduced purchases by other wholesale
market customers could easily and
efficiently alert the post-merger
incumbent to wholesale market
cheating.
Once the dominant firm has detected
wholesale or retail market cheating, it
can then perfectly signal, through either
price responses by its own CLEC in the
other Bell’s region, or through output
restrictions—quality disruptions from
its ILEC to the ‘‘maverick’’ CLEC.
Finally, these contracts ensure that the
post-merger firms have a governmentsanctioned defense to collusion.
Unlike the pre-merger AT&T and MCI,
these post-merger companies will never
complain about the unreasonable
restrictions these contracts place on
their ability to use competitive
facilities—they perfectly know this is
the intended effect of the contracts.
Moreover, they also know that if they
just stay ‘‘captive’’—as is reasonable—
then they can take any increase in
private line rates as a signal/excuse to
raise retail rates. Since they can expect
the same consideration where they are
the input monopolist and dominant
retail firm, they have an incentive to
provide the same consideration as an
out-of-region competitor. This is a
significant risk of harm to the public
interest, because most
telecommunications services that the
post-merger firms will sell in each
other’s ILEC regions (local, long
distance, voice, data, and wireless) rely
in large part on ‘‘Local Private Line’’
service as a critical input.
Finally, although it is pretty clear how
the existing contracts enhance both
firms’ incentives and ability to
coordinate post-merger, what may not
be so clear is how the feckless remedy
structure further enhances the ability of
the post-merger firms to limit
competition. The ‘‘divestiture assets’’
are most likely to be interesting/
valuable to a firm that already has a
significant network in the divestiture
market. As the DOJ explains,
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‘‘[p]urchasers that are already offering
similar services in or near the
metropolitan area are more likely to be
viable competitors than other potential
purchasers.’’ Competitive Impact
Statement at p. 6 of 12. Moreover, the
government strongly prefers a single
purchaser. Id. Finally, the terms of the
‘‘assets’’ themselves are fairly unique—
10 yr leases for non-revenue-producing
excess capacity; the ‘‘purchaser’’ would
still have to undertake significant
investment to use the assets by
obtaining building access, laying
additional inside wire/conduit, then
‘‘lighting’’ the fiber, and even after all
that, the government is not requiring the
defendants to let customers in the
affected buildings out of their contracts
so a purchaser could start earning
revenue immediately. Thus, because the
‘‘assets’’ are structured to be attractive to
a purchaser who has a greater ability to
‘‘warehouse’’ capacity then a ‘‘typical’’
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competitor,44 it seems likely that AT&T
and Verizon will be the natural higher
bidders for the excess capacity in each
other’s territory.
The further expansion of AT&T and
Verizon’s out-of-region presence in the
other’s in-region territory through the
addition of excess capacity only
increases the means for non-detectable
signaling and closer coordination. For
example, instead of cutting prices in
Verizon’s incumbent territory to signal
disapproval of Verizon’s pricing in
AT&T’s incumbent region, AT&T can
just take steps that make it look like it
is preparing to activate the excess
capacity in the discreet out-of-region
buildings. In fact, the parties may find
it useful to signal entirely through
44 ‘‘Because a single such connection may cost
hundreds of thousands of dollars to build and light,
CLECs will typically only build in to a particular
building after they have secured a customer
contract of sufficient size and length to justify the
anticipated construction costs for that building.’’
Competitive Impact Statement p. 5 of 12.
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discreet bids at the locations where DOJ
seems to expect price discrimination.
Conclusion
COMPTEL has demonstrated that the
PAFJs do not even begin to remedy, and
may even exacerbate, the public interest
harms caused by the elimination of the
two largest competitive carriers by the
two largest incumbent monopolies.
Accordingly, the Court will be required
to reject the PAFJs, because they cannot
satisfy the Tunney Act unless modified
to: (1) Include all of the acquired
competitors’ in-region assets as a whole
business—with customers, employees,
and assets; and (2) eliminate both postmerger firms’ ability to offer ‘‘bundled
rebate’’ style pricing to any customer,
including their own long-distance and
wire less affiliates.
Respectfully submitted,
Jonathan D. Lee, Mary C. Albert.
COMPTEL, 1900 M Street, NW., Suite 800,
Washington, DC 20036–3508, (202) 296–
6650.
BILLING CODE 4410–11–M
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Appendix B—Statement of Joseph
Farrell
sroberts on PROD1PC70 with NOTICES
April 25, 2005.
1. I am Professor of Economics and
Chair of the Competition Policy Center
at the University of California, Berkeley,
where I am also Affiliate Professor of
Business. In 1996–1997 I served as Chief
Economist at the FCC. In 2000–2001 I
served as Deputy Assistant Attorney
General and chief economist at the US
Department of Justice Antitrust
Division. I am Fellow of the
Econometric Society and former
President of the Industrial Organization
Society. From 2001 to 2004 I served on
the Computer Science and
Telecommunications Board of the
National Academics of Science. My
curriculum vitae is attached as
Appendix 1.
2. I have been asked by counsel for
Global Crossing to comment on likely
competitive effects on special access of
the proposed merger between SBC and
AT&T. Neither time nor data availability
permits a full analysis, but in this
declaration I identify some concerns
that, in my view, the Commission and
its staff should fully investigate. In
particular I offer a preliminary
economic analysis of region-wide
merger effects in the presence of
percentage-of-requirements contracts
such as I understand SBC uses in
special access.
3. Of most direct concern is the
elimination of the horizontal
competition between SBC and AT&T
where both offer facilities-based special
access to a building or other
appropriately granular geographic
market that is not so served by several
other carriers.1 While the granular
geographic market definition is the most
obvious, it must be supplemented (not
replaced) by a region-wide market
definition and analysis capable of
assessing the competitive effects of such
a loss of competition in the presence of
a loyalty or volume pricing program
such as I understand that SBC offers,
linking competition in different granular
markets. In addition, vertical concerns
arise, especially given the Commission’s
pending special access rulemaking. All
of these concerns demand much more
scrutiny in the light of adequate data,
which the Commission is well
positioned to demand and analyze, and
important parts of which SBC and
AT&T are likely to be uniquely
1 In their public interest statement, SBC and
AT&T suggest that the markets where both offer
special access are served by multiple others, but the
specific facts they cite concern geographic areas far
broader than buildings. A full inquiry into
appropriate granularity is evidently needed.
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positioned to provide. The
Commission’s rulemaking does not
substitute for competitive analysis of the
proposed merger.
Special Access Market
4. Firms such as Global Crossing build
facilities over which they offer business
customers a range of
telecommunications and data services.
In general however they do not build
facilities all the way to customers’
premises. Rather, they procure last-mile
connections, known as special access,
from ILECs such as SBC and in some
cases from competitive access providers
(CAPs), including AT&T.
5. In its region, SBC can offer special
access to essentially all major business
premises. No CAP can offer access to a
large percentage of such premises.
However, I understand that AT&T offers
special access connections to
substantially more buildings than can
any other CAP.2
6. I further understand that, whatever
may be the case in consumer markets,
intermodal (wireless or cable)
alternatives are not generally regarded
as viable alternatives to special access
by Global Crossing and similarly
situated firms, nor by their customers.
7. Unbundled network elements do
not generally offer a viable,
independently priced, alternative way
for Global Crossing or its customers to
acquire the last-mile connection,
because of the FCC’s decision not to
require unbundling of network elements
unless used primarily for local
competition.3
8. I also understand that the
Commission has treated special access
as a market in itself.4
2 I also understand that AT&T is a major reseller
of SBC special access. While the role of resellers in
competition is not straightforward, it certainly need
not be null, especially when incumbents offer
volume discounts, and the Commission should
investigate the extent to which resellers
collectively, and AT&T in particular, may constrain
SBC’s effective pricing in ways that promote
competition and consumer welfare.
3 Unbundled Access to Network Elements:
Review of the Section 251 Unbundling Obligations
of Incumbent Local Exchange Carriers, WC Docket
04–313, CC Docket 01–338, 2005 FCC LEXIS 912 at
64 (March 14, 2005).
4 See Special Access Rates for Price Cap Local
Exchange Carriers: AT&T Corp. Petition for
Rulemaking to Reform Regulation of Incumbent
Local Exchange Carrier Rates for Interstate Special
Access Services, 20 FCC RCD 1994 (2005);
Performance Measurements and Standards for
Interstate Special Access Services; Petition of U S
West, Inc. For a Declaratory Ruling Preempting
State Commission Proceedings to Regulate U S
West’s Provision of Federally Tariffed Interstate
Services; Petition of Association for Local
Telecommunications Services for Declaratory
Ruling; Implementation of the Non-Accounting
Safeguards of Sections 271 and 272 of the
Communications Act of 1934, as amended; 2000
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9. These considerations suggest that
special access is a relevant antitrust
product market. More subtle issues arise
in geographic market definitions, as I
discuss next.
Geographic Market Definition
Granular Analysis
10. From the point of view of final
demand-side substitution, the natural
and correct market definition is likely to
be extremely localized. A business
located in a certain building and
wishing to procure telecommunications
services is unlikely to substitute special
access to a different building in
response to a small but significant and
nontransitory increase in the price of
special access services to its building.
For a business with established
premises, such substitution would
involve costly relocation. Perhaps some
businesses seeking new premises might
seek out buildings to which special
access is more competitively supplied,
but it is unlikely that this effect would
be strong enough to change the
presumption that the correct geographic
market based on demand-side
substitution would be highly localized,
as is the case with many
telecommunications markets. For the
same reason, the direct customers of
special access (such as Global Crossing)
do not find special access to different
geographical points to be worthwhile
substitutes, as they are trying to serve
particular customers in particular
locations.
11. It is legitimate and often helpful
to aggregate such highly granular
markets when they face the same
competitive conditions. But of course
that condition can be affected by the
pattern and structure of competitor’s
pricing and other competitive behavior.
12. One natural form of competitive
behavior would be for SBC and any
CAPs who can provide special access to
a particular building to compete,
perhaps by bidding, on terms specific to
that building.
13. With that form of competition, the
geographic market definition based on
demand substitution by end users
would be the correct framework in
which to analyze the effects of a merger
such as this one between SBC and a
leading CAP.
Biennial Regulatory Review—Telecommunications
Service Quality Reporting Requirements; AT&T
Corp. Petition to Establish Performance Standards,
Reporting Requirements, and Self-Executing
Remedies Need to Ensure Compliance by ILECs
with Their Statutory Obligations Regarding Special
Access Services, 16 FCC Rcd 20896 (2001); Local
Exchange Carriers’ Rates, Terms and Conditions for
Expanded Interconnection Through Physical
Collocation for Special Access and Switched
Transport, 12 FCC Rcd 18730 (1997).
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14. In that framework, one would
identify geographic markets (buildings,
for instance) in which SBC does not
compete with AT&T, markets in which
SBC faces competition only from AT&T,
and markets in which SBC faces
competition from AT&T and from one,
two or more other CAPs. The analysis of
competitive effects would then proceed
separately for each of these classes of
highly granular market.
Regional Analysis
15. I understand that, today, SBC’s
pricing does not fully respond to such
granular competitive conditions,
building by building, and that SBC is
content to price well above CAPs where
it does face CAP competition and offers
substantial discounts in return for
region-wide commitments to give SBC
not simply a large amount of business
but a large share of the carrier’s
business. Thus Global Crossing reports
that:
sroberts on PROD1PC70 with NOTICES
‘‘Typically, SBC will structure volume
commitments in terms of a percentage of the
special access customer’s embedded base of
circuits, or its current annual spend. Special
access customers must commit to spend at
least 90% of their current spend in the
following year or maintain 90% of its
embedded circuit base with SBC in order to
be eligible for volume discounts,’’ 5
and that, as a result, ‘‘SBCV chooses not
to meet its competitors’ rates.’’ 6
16. Such a pricing practice links
special access pricing in different
buildings, and—while it persists—
argues for a region-wide market
definition because (as I explain below)
it can make region-wide concentration a
more important determinant of
competitive behavior and overall
pricing than concentration and entry
possibilities specific to a building or
route.
17. This does not mean that customers
can substitute across routes, nor that
only carriers who offer special access
region-wide (which indeed would mean
only SBC) are ‘‘in the market.’’ Rather,
a region-wide geographic market
definition is likely to be a sensible way
of summarizing the competitive impact
of CAP presence at multiple locations,
as I describe in a simple formal model
in the technical appendix below. In that
model I show how the price paid by
special access customers on SBC
monopoly routes (denoted p in the
model) depends on the percentage of
routes that are SBC monopolies. The
aggregate share of CAPs, or more
5 In the matter of SBC Communications Inc. and
AT&T Corp. Applications for Transfer of Control:
Comments of Global Crossing, at 14 (April 25,
2005).
6 Id. at 17.
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precisely the share of routes served by
CAPs in aggregate (denote q in the
model), turns out in that model to be a
constraint on SBC’s (discounted, i.e.,
effective) pricing p even on monopoly
routes, if SBC pursues a pricing strategy
of the kind described. It is in this sense
that a region-wide geographic market
definition is appropriate.
18. I do not suggest that my
simplified, incomplete formal model is
the final or only answer. Rather, it
illustrates that when a dominant firm’s
pricing policies link competition across
routes, a simple route-level competitive
analysis, which inevitably misses such
links, can readily yield wrong
predictions for pricing, while a regionwide competitive analysis can help by
incorporating analysis of such links.
Using Both Approaches
19. The analysis above indicates that,
to capture both the effects of limited
potential for end-user substitution
across addresses, and also the effects of
pricing practices that link (perhaps
quite widely separated) buildings,
intelligent geographic market definition
in this transaction involves using at
least two definitions: one highly
granular (perhaps as granular as
individual office buildings), the other
corresponding to the geographic scope
of SBC’s pricing practices, i.e., regionwide.7
20. These are not alternative means of
analysis. As always, definitions should
not pre-empt analysis; but an analysis
that uses geographic market definition
must consider both of these definitions
or risk overlooking important effects.
21. Because it is at least plausible (see
below) that SBC’s reported pricing
practices are exclusionary, it
presumably is comparably plausible that
the Commission’s separate inquiry into
the special access market will constrain
SBC’s ability to sustain those practices.
If so, then the granular, perhaps even
building-by-building geographic market
definition would become relatively
more appropriate. On the other hand if
SBC’s pricing practices survive (whether
or not because they are benign), the
region-wide geographic market
definition remains the natural way to
capture potentially important
competitive effects. Thus a choice of
one of these geographic market
definitions would pre-judge the
Commission’s treatment of SBC’s
pricing policies. (As I discuss below,
none of this is to suggest that the
pendency of the Commission’s special
7 I understand that this may correspond to RBOC
‘‘footprints’’ such as Ameritech’s not (yet) reflecting
mergers into the current SBC.
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access rule-making is a reason not to
consider the effect of this proposed
merger on the special access market.) In
this sense as well as the more
substantive sense above, the two
geographic market definitions must both
be pursued at this stage, and are not
alternatives in the sense that the
Commission can simply choose one.
22. SBC’s pricing policies might also
change as a result of changes in
competitive conditions over time, or
even as a result of a change in thinking
by SBC’s management. Thus, while it
would certainly be wrong to analyze the
merger only on a granular basis, as if
SBC’s actual current policies were off
the radar screen, it would also be wrong
to analyze the merger only on a regionwide basis, or as if those policies were
certain to be permanent.
Competitive Effects of SBC–AT&T
Merger in Special Access
Analysis With Granular Markets
23. For many office buildings inregion, SBC is at present the only
provider of special access. The merger
would nevertheless have a competitive
effect in those granular markets if the
merger eliminates an important
potential of entry by AT&T; that is, if
AT&T is an especially likely entrant.
AT&T is a large customer of special
access and supplier of enterprise
network services, and one likely
mechanism through which entry into
special access (that is, the construction
of special access facilities) could occur
is via the customer’s enterprise network
services provider deciding to build its
own facilites to bypass SBC’s special
access charges. It therefore is credible a
priori that AT&T would be an especially
likely entrant into granular special
access markets that are currently
monopolies. Such a view would be
reinforced if (a) the majority of nonILEC coinstruction of special access
facilites is by an enterprise network
services provider to its customer’s
premises, and (b) AT&T has a
persistently high share of the enterprise
network services market. Both of these
conditions are consistent with my
general understanding of the market, but
the data required to examine them in
detail is not publicly available; I urge
the Commission and its staff to obtain
this data and perform this analysis.
24. For a substantial number of other
buildings, I understand, AT&T and SBC
are the only two alternative providers of
special access. For businesses in such a
building, or for the telecommunications
carriers (such as Global Crossing) who
compete to serve them using special
access, this is a merger from duopoly to
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monopoly, which should surely raise a
very strong concern at the Commission.
25. As usual, such concerns could be
assuaged to some degree if entry were
likely to be timely and sufficient to
deter or repair any competitive
problems. Given the large sunk costs
involved, that it is unlikely to be the
case, but Commission analysis of
previous entry decisions by AT&T as
well as by others could confirm this.
26. There may be other buildings
where SBC and AT&T both offer special
access, and one other CAP (such as MCI)
does so; 8 as to such buildings, this is a
‘‘three-to-two’’ merger, which should
also raise significant concerns.9
27. If the granular market accurately
describes competition, then it should be
possible for the Commission to quantify
the likely effects of such changes. In
particular, it would be possible (with
suitable data from the parties) to study
average special access prices with and
without route-level competition.
28. However, such a study will
underestimate competitive effects—
perhaps drastically so—if SBC pursues
a geographically averaged pricing policy
supported by discount plans that link
competitive conditions across different
routes. In the extreme, if SBC prices
uniformly without regard to route-level
competitive conditions, but its overall
price level is sustained above the
competitive level by its localized
monopoly power in some routes, then
such a cross-section study would miss
the effect. Rather, in that case, one must
analyze competitive conditions across
as well as within granular markets to
understand these effects and correctly
predict the competitive consequences of
a merger, as I discuss next.
Analysis With Region-Wide Market
sroberts on PROD1PC70 with NOTICES
29. Presumably SBC implements its
discount plan in the expectation that it
will affect customers’ behavior. The
effect is that a customer will
(sometimes) pass up lower CAP prices
in a particular building in order to meet
its SBC volume commitment. That
behavior, or the pricing plan that
induces it, links competitive conditions
across the separate buildings or other
highly granular (what would otherwise
be) geographic markets. Customer
behavior then cannot be properly
understood, nor competitive conditions
examined, on a purely granular basis.
8 There may well be other buildings where MCI
provides the only competition to the ILEC, which
will be important in analyzing a merger involving
MCI.
9 By stopping here, I do not mean to suggest that
four-to-three mergers are unproblematic, but the
basic point should be clear by now.
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30. In the technical appendix, I offer
a simple preliminary model to help
understand the role of CAP competition
in constraining prices when the
dominant ubiquitous firm, SBC, offers
volume discounts large enough to be
tempting, based on share commitments
big enough to be constraining.
31. The model assumes that SBC’s
discounted price is constrained by
special access customers’ ‘‘break-out’’
option of instead buying from CAPs
wherever they offer a better price, and
paying SBC’s undiscounted price where
there are no CAPs (or where SBC offers
a better price on a granular basis,
although the model predicts, consistent
with what I understand is the evidence,
that this is not the pattern).
32. That break-out alternative is more
appealing the higher is the gap between
the percentage of buildings where there
are CAPs and the percentage of business
that a customer can give to CAPs
without losing its SBC volume discount.
As a result, the loss of a special access
competitor through merger makes the
break-out alternative less appealing
(given SBC’s volume threshold for
discounts) and thus allows SBC to raise
its discounted price without losing
business.
33. In the model, one can (recognizing
that it is very preliminary) calculate the
likely competitive effect of the loss of
CAP such as AT&T. In the model, that
effect is proportional to the change in
the fraction of buildings that are served
by one or more CAPs. That is, it is
proportional to the fraction (Dq in the
model) of buildings served, pre-merger,
by SBC and AT&T alone.
34. In this model, if one can assume
that SBC’s volume commitment
requirement and its undiscounted price
do not change with the merger, the
overall average price effect from the
merger is equal to that fraction Dq, times
the difference between SBC’s
undiscounted price and the CAP price.
This appears to be about as strong as, or
arguably stronger than, the average
competitive effect of the merger-tomonopoly aspects of the merger would
be in the granular mode of competition.
35. Because the model predicts that a
pricing policy like that attributed to SBC
can create very strong competition
among CAPs even at different locations,
it may make entry incentives very weak
even where SBC is charging prices well
above cost. If so, entry would be
unlikely to repair or deter
anticompetitive effects in a timely
fashion. Again, this is not an analysis
ready for prime time: Instead, it
illustrates why further analysis is
needed.
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36. Because the model is preliminary
and incomplete, and the necessary data
is not publicly available, I view it as
illustrating an at least initially plausible
region-wide mechanism through which
the loss of a special access competitor
causes a ‘‘unilateral effect’’ price
increase by the dominant firm, given
pricing policies broadly akin to SBC’s.
This buttresses the argument that the
Commission should carefully consider
region-wide geographic markets as well
as granular markets.
Special Access Competition, Special
Access Regulation, and Leverage
37. Whatever its legal status, any
suggestion that the Commission should
ignore competitive concerns in special
access because it has a pending
rulemaking on the topic makes no sense
from a general policy or economic
viewpoint. If the merger harms special
access competition, no decision likely to
be contemplated by the Commission in
the rulemaking proceeding can restore
such competition.
38. To be sure, the Commission might
find some policies to implement. But
most policies would be available with or
without the competition lost by merger,
so their availability does not change that
fact that losing competition is harmful.
39. Furthermore, if the rulemaking
proceeding might (or might be thought
apt to) involve price regulation of
special access, that will create (or
strengthen) incentives for leverage that
the merger would simultaneously
facilitate; such regulation could even be
prompted by the loss of special access
competition due to the merger.10
40. With greater horizontal market
power in special access, and with a
much stronger position in enterprise
network services following its
acquisition of AT&T, SBC will in any
event have increased incentives to raise
special access prices to downstream
enterprise network service providers (or
generally special access customers) such
as Global Crossing.
41. The effect of such a price increase,
holding fixed the retail price charged by
SBC’s downstream affiliate, would be in
part be to shift business from
independent downstream providers to
SBC’s downstream affiliate; this is more
likely to happen, and the alternative
outcome of the customers dropping out
of the market is less likely to happen, if
SBC’s downstream affiliate is larger and
more attractive to customers, as will be
10 I am not suggesting (see my article cited below)
that regulation of a bottleneck is the only condition
that leads to incentives for leverage into an
unregulated, competitive or potentially competitive
complement. Rather, it is one well-established
condition that predictably does so.
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(1 − ε ) p = [0.9] (1 − ε ) p + ε pc ; this yields ε = 1+ 9p
c
−1
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erc+(1¥e)r.
In reality, different customers may
make different choices, but for a simple
model, consider limit pricing by S so
that all customers choose the latter
option. (There would be no point in the
discount program if all customers chose
the former option.) At least given q and
p*, S presumably wants to maximize p,
subject to keeping customers on the
discount program, which implies:
11 For a recent discussion of a range of leverage
incentives, and the link with regulation of a
bottleneck, see Joseph Farrell and Philip Weiser,
‘‘Modularity, Vertical Integration, and Open Access
Policies: Towards a Convergence of Antitrust and
Regulation in the Internet Age,’’ Harvard Journal of
Law and Technology 17:1 (Fall 2003), 85–135.
12 As noted above, Global Crossing reports that
SBC’s volume commitment plans specify 90% of
previous-year in-region special access spend. In
order to meet such a commitment, assuming for
simplicity that there is no growth, the customer
would have to serve no more than a fraction e of
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(1 − θ ) p * + ( θ − ε ) pc
1− ε
Note that since the customer is offered
CAP service at q locations but will not
buy it at more than e of them, CAPs at
different locations actually compete
with one another. This is a possible
reason why, I understand, a single CAP
offering special access to a building
otherwise served only by SBC will price
well below SBC, not just below as
would presumably be the case
(adjusting for quality) without the
volume pricing.
From the formula for p one can derive
the effects on the average price paid if
a merger removes a CAP and q thus
falls, assuming that p* and e remain
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Technical Appendix: Pricing with
Share-Contingent Discounts
Consider the following market
structure. A dominant firm, S, offers
service at all locations. It sets a price p*
and a discounted price p that it gives to
each customer who buys at least a
fraction 1¥e of its volume from it.12
p . If p c ≈
Rivals (CAPs) collectively offer
service at a fraction q <1 of all locations.
They set a price rc; I discuss the
determination of rc below, but for
simplicity I assume that it is the same
for all CAPs.
Each customer needs to buy service at
a number of locations, and I assume that
service is available from CAPs
(collectively) at a fraction q of these
locations. I assume that the dominant
firm’s volume condition for the
discount, that the customer buy at least
a fraction 1¥e of its volume from S, is
binding, which means (assuming rc
service level rather than at the special
access level.11
44. Increased incentives for leverage,
in turn, will lead either to harm to
competition in downstream markets
such as enterprise network services, or
to vertical regulation to try to stop such
leverage, or quite possibly to both.
45. Opinions can differ on the right
degree of vertical restraint to impose on
dominant firms with incentives for
leverage, and I am not expressing a
position here on whether special access
prices should be regulated or whether
vertical regulation such as nondiscrimination should be imposed.
46. For the reasons above, I conclude
that (a) the proposed merger involves a
loss of direct horizontal facilities-based
competition in special access; (b) the
geographic market definition and the
competitive analysis involve
consideration of SBC’s pricing policies
for special access, and this could well
EN05AP06.018
the case post-merger. Thus this
component of the incentive will grow
stronger with the merger.
42. Another part of the effect will be
simply to raise market prices
downstream; this is likely to be the
primary effect if (as I understand)
customers face significant portability or
switching costs. This gives SBC more
profits, the larger the market share of its
downstream affiliate. Again, this
indicates that the incentive for price
increases to independent downstream
firms will grow with the proposed
merger. This incentive must be set
against the potential elimination of
double marginalization internally.
43. There may also be an incentive for
non-price discrimination, especially if
SBC fears that its special access pricing
may be regulated, since that will create
an incentive for regulatory bypass by
taking rents at the enterprise network
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of multiple CAPs at a building, so pc
will be decreasing in (q ¥ e)/q.
The net effect of the discount pricing
program on the average price paid is
thus not obvious from this preliminary
analysis, but to the extent that p* > pm
and/or that pc is below the average
oligopoly price that would emerge
under granular competition, the
program apparently exacerbates the
average competitive effect of a loss in q,
i.e. the average competitive effect of a
merger.
The model also seems to suggest that
such a program may be exclusionary, in
the sense of making entry even by an
equally efficient CAP unprofitable even
though the incumbent S prices well
above cost. The gross return to entry is
pc times the probability that a CAP will
make a sale. In the simple model, that
probability is e/q < 1. That is, despite
pricing well below the incumbent S, a
CAP will sometimes (perhaps often) lose
business to S. Although this is not a
deep or complete analysis, I believe it is
enough to establish that the possible
anticompetitive effect of such a pricing
plan is a question well worth
investigating, and that competitive
analysis of the proposed merger should
not assume with certainty that these
pricing practices will survive the
Commission’s policy response to such
an investigation.
Appendix C—Agreement
Whereas, Quest Communications
International, Inc., a Delaware
corporation (‘‘Qwest’’), and Allegiance
Telecom, Inc., a Delaware corporation
(‘‘Allegiance’’), have entered into an
Asset Purchase Agreement dated as of
December 18, 2003 pursuant to which
Qwest agreed to purchase substantially
all of the property, assets, licenses, and
rights that Allegiance uses to provide
telecommunications services to business
customers,
Whereas, Qwest intends to bide for
the assets of Allegiance at the
bankruptcy auction scheduled to be
held on February 12 and 13, 2004, in the
U.S. Bankruptcy Court for the Southern
District of New York,
Whereas, the United States
Department of Justice (‘‘Department’’)
has opened a preliminary inquiry into
Qwest’s proposed acquisition of
Allegiance to investigate whether
Qwest’s acquisition of Allegiance’s
assets used to serve telecommunications
customers in five Metropolitan
Statistical Areas—Denver, Colorado;
Minneapolis, Minnesota; Portland,
Oregon; Phoenix, Arizona; and Seattle,
Washington—located largely or wholly
within Qwest’s local exchange service
franchise areas (‘‘In-Region Assets’’)
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may tend substantially to lessen
competition in any relevant market,
Whereas, the Department has
identified no competitive concerns with
Qwest’s proposed acquisition of
Allegiance in Metropolitan Statistical
Areas located outside of Qwest’s local
exchange service franchise areas,
Whereas, Allegiance is in bankruptcy
and a prolonged delay in resolving its
status could be detrimental to
Allegiance’s customers, employees, and
business, as well as to competition in
the telecommunications business,
Whereas, Qwest and Allegiance desire
that the closing of a potential
transaction between Qwest and
Allegiance not be unnecessarily delayed
beyond April 8, 2004,
Whereas, Qwest and Allegiance desire
to reach an agreement with the
Department prior to the bankruptcy
auction regarding the Department’s
antitrust investigation and the
disposition of the In-Region Assets
should the Department conclude that
Qwest’s acquisition of the In-Region
may tend substantially to lessen
competition, and
Whereas, the Department believes that
the undertakings of Qwest and
Allegiance under the proposed Final
Judgment would be sufficient to remedy
any potential anticompetitive
consequence of Qwest’s acquisition of
Allegiance,
Now, therefore, Qwest, Allegiance,
and the Department agree that the
following provisions shall apply if the
U.S. Bankruptcy Court for the Southern
District of New York, pursuant to 11
U.S.C. 363, approves an agreement by
which Qwest acquires all, or
substantially all, of the assets of
Allegiance (‘‘the Transaction’’):
1. Qwest and Allegiance will not close
the Transaction prior to April 8, 2004.
2. If at any time after April 1, 2004,
the Department concludes that Qwest’s
acquisition of the In-Region Assets from
Allegiance may tend substantially to
lessen competition in any relevant
market, and the Assistant Attorney
General has authorized the filing of a
complaint in federal district court
alleging the same, Qwest and Allegiance
agree not to contest that determination
or any other allegations contained in the
Department’s complaint, provided that
Qwest and Allegiance shall have been
afforded a reasonable opportunity to
meet with and be heard by the Deputy
Assistant Attorney General or Assistant
Attorney General within the Department
responsible for this matter prior to such
determination being made.
3. In the event that the Department
determines that Qwest’s acquisition of
the in-region assets from Allegiance may
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tend substantially to lessen competition
in any relevant market, Qwest and
Allegiance hereby consent and agree,
pursuant to the terms of the Stipulation
attached hereto as Exhibit 1, to the entry
of a Final Judgment, in the form
attached hereto as Exhibit 2.
4. The Department will conduct its
investigation of Qwest’s proposed
acquisition of Allegiance via Civil
Investigative Demands (‘‘CIDs’’) rather
than Second Requests and will not
oppose the closing of the Transaction on
April 8, 2004, or any time thereafter.
5. Qwest and Allegiance will fully
comply with CIDs for documents and
interrogatories issued by the
Department, will produce the requested
information on a rolling basis, and will
use their best efforts to complete
production by March 5, 2004. Qwest
and Allegiance will produce any
individual issued a CID for oral
testimony, and will use their best efforts
to make any such individual available
within 10 days after issuance of the CID.
6. The Department will use its best
efforts to complete its investigation by
the later of (a) April 8, 2004, or (b) 30
days after Qwest and Allegiance have
both fully complied with CIDs for
documents and interrogatories issued by
the Department, but in the event that the
Department has neither closed its
investigation nor filed a complaint as of
the date the Transaction is
consummated, Qwest and Allegiance
will abide by the Hold Separate
provisions contained in Paragraphs
V.A–V.L. of the Stipulation, attached
hereto as Exhibit 1, until such time as
the Department notifies Qwest and
Allegiance that it has decided not to
challenge the proposed Transaction.
7. Until the Department competes its
investigation, Qwest and Allegiance
shall not, without the Department’s
consent, sell, lease, assign, transfer, or
otherwise dispose of any of the
Divestiture Assets, as defined in
Paragraph II.D of the Proposed Final
Judgment attached hereto as Exhibit 2,
except as in the ordinary course of
business.
William Kokasky,
Wilmer, Culter & Pickering, Attorney for
Qwest
Marimichael O. Skubel,
Kirkland & Ellis LLP, Attorney for Allegiance.
Lawrence M. Frankel,
Attorney, Telecommunications & Media
Section, Antitrust Division, United States
Department of Justice.
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United States District Court, District of
Columbia
United States of America, Plaintiff, v.
Qwest Communications International
Inc. and Allegiance Telecom, Inc.
Defendants.
Civil Action No.
Filed:
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Hold Separate Stipulation and Order
It is hereby stipulated and agreed by
and between the undersigned parties,
subject to approval and entry by the
Court, that:
I. Definitions
As used in this Hold Separate
Stipulation and Order:
A. ‘‘Acquirer’’ or ‘‘Acquirers’’ means
the entity or entities to whom
defendants divest the Divestiture Assets.
B. ‘‘Qwest’’ means defendant Qwest
Communications International Inc., a
Delaware corporation with its
headquarters in Denver, Colorado, its
successors and assigns, and its
subsidiaries, divisions, groups,
affiliates, partnerships and joint
ventures, and their directors, officers,
managers, agents and employees.
C. ‘‘Allegiance’’ means defendant
Allegiance Telecom, Inc., a Delaware
corporation with its headquarters in
Dallas, Texas, its successors and assigns,
and its subsidiaries, divisions, groups,
affiliates, partnerships and joint
ventures, and their directors, officers,
managers, agents, and employees.
D. ‘‘Divestiture Assets’’ means all
assets, tangible and intangible, acquired
by Qwest from Allegiance pursuant to
11 U.S.C. 363, that are used by
Allegiance to provide
telecommunications services in the InRegion MSAs, except for Excluded
Assets. The term ‘‘Divestiture Assets’’
shall be construed broadly to
accomplish the complete divestiture of
assets to ensure that the divested assets
are sufficient to operate a viable ongoing
telecommunications business and
includes, but is not limited to:
(1) All switches, routers, transport,
and associated collocation facilities
located in the In-Region MSAs, and
interconnection agreements used in
connection with the provision of
telecommunications services
(telecommunications herein includes
transmission using the IP protocol) to
customers in the In-Region MSAs, and
all interests, contracts and other
associated rights in those facilities, that
were acquired by Qwest from Allegiance
pursuant to 11 U.S.C. 363;
(2) All contracts with customers to
provide telecommunications services to
locations within the In-Region MSAs,
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18:22 Apr 04, 2006
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business and customer records and
information, customer lists, credit
records, deposits, accounts, and historic
and current business plans associated
with the provision of
telecommunications services to
customer locations in the In-Region
MSAs or with marketing to potential
customers in the In-Region MSAs;
(3) All types of real property and
personal property, equipment,
inventory, office furniture, fixed assets
and furnishings, supplies and materials
located in the In-Region MSAs;
(4) All licenses, permits and
authorizations issued by the Federal
Communications Commission or any
other federal, state or local regulatory
body used in the provision of
telecommunications services in the InRegion MSAs;
(5) All intellectual property rights that
are used to provide telecommunications
services in the In-Region MSAs.
Intellectual property rights comprise all
patents, licenses, sublicenses, trade
secrets, know-how, computer software
and related documentation, drawing,
blueprints, design, technical and quality
manuals, and other technical
information defendants supply to their
own employees, customers, suppliers,
agents or licensees, or other intellectual
property, including all intellectual
property rights under third party
licenses. Intellectual property rights will
be provided to the extent they are
capable of being transferred to a
purchaser either in their entirety, or
through a license or sub-license;
(6) All leases, contracts, agreements,
and commitments with third parties
used primarily in connection with the
provision of telecommunications
services in the In-Region MSAs; and
(7) All transport facilities physically
located in whole or in part within InRegion MSAs including all interests,
contracts, and associated rights acquired
by Qwest from Allegiance pursuant to
11 U.S.C. 363.
E. ‘‘Excluded Assets’’ means: (a) all
Excluded Customer Contracts; (b) all
transport facilities between MSAs
outside of the In-Region MSAs; and (c)
all Shared Systems.
F. ‘‘Excluded Customer Contract’’
means any single contract with a
customer (a) that covers
telecommunication services provided to
locations within, as well as outside, the
In-Region MSAs, (b) for which the
majority of the services are provided
outside the In-Region MSAs (with
‘‘majority’’ measured by an objective
measure approved by the United States
in its sole discretion), and (c) for which
it would be impossible or impractical
for Qwest and the Acquirer(s) to divide
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17215
the revenues and responsibilities under
the contract. The term also includes any
business and customer records and
information, customer lists, credit
records, accounts, and historic and
current business plans associated
exclusively with provision of service via
such contracts.
G. ‘‘In-Region MSAs’’ means the
following Metropolitan Statistical Areas
(MSAs): Denver, Colorado; Minneapolis,
Minnesota; Phoenix, Arizona; Portland,
Oregon; and Seattle, Washington.
H. ‘‘Shared Systems’’ means all
operating and related systems acquired
by Qwest from Allegiance pursuant to
11 U.S.C. 363 that (a) are predominantly
used in connection with the provision
of telecommunications services to
customers in markets outside of the InRegion MSAs, including, but not limited
to, order entry, provisioning, billing,
network monitoring, and other systems,
and (b) are not capable of being divided
between the divested and retained
businesses.
II. Objectives
The Final Judgment filed in this case
is meant to ensure defendants’ prompt
divestiture of the Divestiture Assets for
the purpose of remedying the effects
that the United States alleges would
otherwise result from Qwest’s
acquisition of the Divestiture Assets.
This Hold Separate Stipulation and
Order ensures, prior to such
divestitures, that the Divestiture Assets
remain economically viable and ongoing
business concerns that will remain
independent and uninfluenced by
Qwest, and that competition is
maintained during the pendency of the
ordered divestitures.
III. Jurisdiction and Venue
The Court has jurisdiction over the
subject matter of this action and over
each of the parties hereto, and venue of
this action is proper in the United States
District Court for the District of
Columbia.
IV. Compliance With and Entry of Final
Judgment
A. The parties stipulate that a Final
Judgment in the form attached hereto as
Exhibit A may be filed with and entered
by the Court, upon the motion of any
party or upon the Court’s own motion,
at any time after compliance with the
requirements of the Antitrust
Procedures and Penalties Act (15 U.S.C.
16), and without further notice to any
party or other proceedings, provided
that the United States has not
withdrawn its consent, which it may do
at any time before the entry of the
proposed Final Judgment by serving
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notice thereof on defendants and by
filing that notice with the Court.
B. Defendants shall abide by and
comply with the provisions of the
proposed Final Judgment, pending the
Judgment’s entry by the Court, or until
expiration of time for all appeals of any
Court ruling declining entry of the
proposed Final Judgment, and shall,
from the date of the filing of this
Stipulation with the Court, comply with
all the terms and provisions of the
proposed Final Judgment as though the
same were in full force and effect as an
order of the Court.
C. Defendants shall not consummate
the transaction sought to be enjoined by
the Complaint herein before the Court
has signed this Hold Separate
Stipulation and Order.
D. This Stipulation shall apply with
equal force and effect to any amended
proposed Final Judgment agreed upon
in writing by the parties and submitted
to the Court.
E. In the event (1) the United States
has withdrawn its consent, as provided
in Section IV(A) above, or (2) the
proposed Final Judgment is not entered
pursuant to this Stipulation, the time
has expired for all appeals of any Court
ruling declining entry of the proposed
Final Judgment, and the Court has not
otherwise ordered continued
compliance with the terms and
provisions of the proposed Final
Judgment, then the parties are released
from all further obligations under this
Stipulation, and the making of this
Stipulation shall be without prejudice to
any party in this or any other
proceeding.
F. Defendants represent that the
divestitures ordered in the proposed
Final Judgment can and will be made,
and that defendants will later raise no
claim of mistake, hardship or difficulty
of compliance as grounds for asking the
Court to modify any of the provisions
contained therein.
V. Hold Separate Provisions
Until the divestitures required by the
Final Judgment have been
accomplished:
A. Defendants shall preserve,
maintain, and continue to operate the
Divestiture Assets as independent,
ongoing, economically viable
competitive businesses, with
management, sales and operations of
such assets held entirely separate,
distinct and apart from those of Qwest’s
other operations. Qwest shall not
coordinate its marketing or terms of sale
of any products or services with those
sold under any of the Divestiture Assets.
Within ten (10) days after the entry of
the Hold Separate Stipulation and
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18:22 Apr 04, 2006
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Order, defendants will inform the
United States of the steps defendants
have taken to comply with this Hold
Separate Stipulation and Order.
B. Qwest shall take all steps necessary
to ensure that (1) the Divestiture Assets
will be maintained and operated as
independent, ongoing economically
viable and active competitors in the
telecommunications business; (2)
management of the Divestiture Assets
will not be influenced by Qwest (except
to the extent necessary to carry out
Qwests’s obligations under this Order or
as required by applicable law); and (3)
the books, records, competitively
sensitive sales, marketing and pricing
information, and decision-making
concerning production, distribution or
sales of products or services by or under
any of the Divestiture Assets will be
kept separate and apart from Qwest’s
other operations.
C. Defendants shall use all reasonable
efforts to maintain and increase the
sales and revenues of the services
produced or sold by the Divestiture
Assets, and shall maintain at current or
previously approved levels for 2005,
whichever are higher, all promotional,
advertising sales, technical assistance,
marketing and merchandising support
for Divestiture Assets.
D. Qwest shall provide sufficient
working capital and lines and sources of
credit to continue to maintain the
Divestiture Assets as economically
viable and competitive, ongoing
businesses, consistent with the
requirements of Sections V(A) and (B).
E. Defendants shall take all steps
necessary to ensure that the Divestiture
Assets are fully maintained in operable
condition at no less than its current
capacity and sales, and shall maintain
and adhere to normal repair and
maintenance schedule for the
Divestiture Assets.
F. Defendants shall not, except as part
of a divestiture approved by the United
States in accordance with the terms of
the proposal Final Judgment, remove,
sell, lease, assign, transfer, pledge or
otherwise dispose of any of the
Divestiture Assets.
G. Defendants shall maintain, in
accordance with sound accounting
principles, separate accurate and
complete financial ledgers, books and
records that records that report on a
periodic basis, such as the last business
day of every month, consistent with past
practices, the assets liabilities, expenses,
revenues and income of the Divestiture
Assets.
H. Defendants shall take no action
that would jeopardize, delay, or impede
the sale of the Divestiture Assets.
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I. Defendants’ employees with
primary responsibility for the operation
of the Divestiture Assets shall not be
transferred or reassigned to other areas
within the company except for transfer
bids initiated by employees pursuant to
defendants’ regular, established job
posting policy. Defendants shall provide
the United States with ten (10) calendar
days notice of such transfer.
J. Defendants shall appoint a person
or persons to oversee the Divestiture
Assets, subject to the approval of the
United States, and who will be
responsible for defendants’ compliance
with this section. This person shall have
complete managerial responsibility for
the Divestiture Assets, subject to the
provisions of this Final Judgment. In the
event such person is unable to perform
his duties, defendant shall appoint,
subject to the approval of the United
States, a replacement within ten (10)
working days. Should defendant fail to
appoint a replacement acceptable to the
United States within this time period,
the United States shall appoint a
replacement.
K. Unless informed otherwise by the
person with managerial responsibility
for the Divestiture Assets, Qwest shall
provide the Divestiture Assets at no
costs with the following: (a) Any
services provided via Shared Systems,
and (b) transport over interexchange
facilities acquired by Qwest from
Allegiance pursuant to 11 U.S.C. 363
that are not included in the Divestiture
Assets.
L. Defendants shall take no action that
would interfere with the ability of any
trustee appointed pursuant to the Final
Judgment to complete the divestiture
pursuant to the Final Judgment to an
Acquirer or Acquirers acceptable to the
United States.
M. This Hold Separate Stipulation
and Order shall remain in effect until
consummation of the divestiture
required by the proposed Final
Judgment or until further order of the
Court.
Dated:
Respectfully submitted,
For Plaintiff
United States of America
Lawrence M. Frankel,
D.C. Bar No. 441532, U.S. Department of
Justice, Antitrust Division, 1401 H Street
NW., Suite 8000, Washington, DC 20530,
(202) 514–4298.
For Defendant
Qwest Communications International Inc.
William Kolasky,
D.C. Bar No. 217539, Wilmer Cutler &
Pickering, 2445 M Street, NW., Washington,
DC 20037, (202) 663–6357.
For Defendant
Allegiance Telecom, Inc.
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Marimichael O. Skubel,
D.C. Bar No. 294934, Kirkland & Ellis LLP,
655 Fifteenth Street NW,, Washington, DC
20005, (202) 879–5034.
Order.
It is so ordered by the Court, this ll day
of llllll.
lllllllllllllllllllll
United States District Judge.
United States District Court District of
Columbia
United States of America, Plaintiff, v.
Qwest Communications International
Inc., and Allegiance Telecom, Inc.,
Defendants.
Civil Action No.
Filed: [Date Filed]
sroberts on PROD1PC70 with NOTICES
Final Judgment
Whereas, plaintiff, United States of
America, filed its Complaint on April,
2004,
Whereas, plaintiff and defendants,
Qwest Communications International
Inc. (‘‘Qwest’’) and Allegiance Telecom,
Inc. (‘‘Allegiance’’), by their respective
attorneys, have consented to the entry of
this Final Judgment without trial or
adjudication of any issue of fact or law,
and without this Final Judgment
constituting any evidence against or
admission by any party regarding any
issue of fact or law;
Whereas, defendants agree to be
bound by the provisions of this Final
Judgment pending its approval by the
Court;
Whereas, the essence of this Final
Judgment is the prompt and certain
divestiture of certain rights or assets by
the defendants to assure that
competition is not substantially
lessened;
Whereas, plaintiff requires defendants
to make certain divestitures for the
purpose of remedying the loss of
competition alleged in the Complaint;
and
Whereas, defendants have represented
to the United States that the divestitures
required below can and will be made
and that defendants will later raise no
claim of hardship or difficulty as
grounds for asking the Court to modify
and of the divestiture provisions
contained below;
Now therefore,. before any testimony
is taken, without trial or adjudication of
any issue of fact or law, and upon
consent of the parties, it is Ordered,
Adjudged and Decreed:
I. Jurisdiction
This Court has jurisdiction over the
subject matter of and each of the parties
to this action. The Complaint states a
claim upon which relief may be granted
against defendants under Section 7 of
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the Clayton Act, as amended (15 U.S.C.
18).
II. Definitions
As used in this Final Judgment:
A. ‘‘Acquirer’’ or ‘‘Acquirers’’ means
the entity or entities to whom
defendants divest the Divestiture Assets.
B. ‘‘Qwest’’ means defendant Qwest
Communications International Inc., a
Delaware corporation with its
headquarters in Denver, Colorado, its
successors and assigns, and its
subsidiaries, divisions, groups,
affiliates, partnerships, and joint
ventures, and their director, officer,
manages, agents, and employees.
C. ‘‘Allegiance’’ means defendant
Allegiance Telecom, Inc., a Delaware
corporation with its headquarters in
Dallas, Texas, it successors and assigns,
and its subsidiaries, divisions, groups,
affiliates, partnerships and joint
ventures, and their directors, officers,
managers, agents, and employees.
D. ‘‘Divestiture Assets’’ means all
assets, tangible and intangible, acquired
by Qwest from Allegiance pursuant to
11 U.S.C. 363, that are used by
Allegiance to provide
telecommunications services in the InRegion MSAs, except for Excluded
Assets. The term ‘‘Divestiture Assets’’
shall be construed broadly to
accomplish the complete divestiture of
assets to ensure that the divested assets
are sufficient to operate a viable ongoing
telecommunications business and
includes, but is not limited to:
(1) All switches, routers, transport,
and associated collocation facilities
located in the In-Region MSAs, and
interconnection agreements used in
connection with the provision of
telecommunications services
(telecommunications herein includes
transmission using the IP protocol) to
customers in the In-Region MSAs, and
all interests, contracts and other
associated rights in those facilities, that
were acquired by Qwest from Allegiance
pursuant to 11 U.S.C. 363;
(2) All contracts with customers to
provide telecommunications services to
locations within the In-Region MSAs,
business and customer records and
information, customer lists, credit
records, deposits, accounts, and historic
and current business plans associated
with the provision of
telecommunications services to
customer locations in the In-Region
MSAs or with marketing to potential
customers in the In-Region MSAs;
(3) All types of real property and
personal property, equipment,
inventory, office furniture, fixed assets
and furnishings, supplies and materials
located in the In-Region MSAs;
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(4) All licenses, permits and
authorizations issued by the Federal
Communications Commission or any
other federal, state or local regulatory
body used in the provision of
telecommunications services in the InRegion MSAs;
(5) All intellectual property rights that
are used to provide telecommunications
services in the In-Region MSAs.
Intellectual property rights comprise all
patents, licenses, sublicenses, trade
secrets, know-how, computer software
and related documentation, drawing,
blueprints, design, technical and quality
manuals, and other technical
information defendants supply to their
own employees, customers, suppliers,
agents or licensees, or other intellectual
property, including all intellectual
property rights under third party
licenses. Intellectual property rights will
be provided to the extent they are
capable of being transferred to a
purchaser either in their entirety, or
through a license or sub-license;
(6) All leases, contracts, agreements,
and commitments with third parties
used primarily in connection with the
provision of telecommunications
services in the In-Region MSAs; and
(7) All transport facilities physically
located in whole or in part within InRegion MSAs including all interests,
contracts, and associated rights acquired
by Qwest from Allegiance pursuant to
11 U.S.C. 363.
E. ‘‘Excluded Assets’’ means: (a) all
Excluded Customer Contracts; (b) all
transport facilities between MSAs
outside of the In-Region MSAs; and (c)
all Shared Systems.
F. ‘‘Excluded Customer Contract’’
means any single contract with a
customer (a) that covers
telecommunications services provided
to locations within, as well as outside,
the In-Region MSAs, (b) for which the
majority of the services are provided
outside of the In-Region MSAs (with
‘‘majority’’ measured by an objective
measure approved by the United States
in its sole discretion), and (c) for which
it would be impossible or impractical
for Qwest and the Acquirer(s) to divide
the revenues and responsibilities under
the contract. The term also includes any
business and customer records and
information, customer lists, credit
records, and accounts, and historic and
current business plans associated
exclusively with provision of service via
such contracts.
G. ‘‘In-Region MSAs’’ means the
following Metropolitan Statistical Areas
(MSAs): Denver, Colorado; Minneapolis,
Minnesota; Phoenix, Arizona; Portland,
Oregon; and Seattle, Washington.
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H. ‘‘Shared Systems’’ means all
operating and related systems acquired
by Qwest from Allegiance pursuant to
11 U.S.C. 363 that (a) are predominantly
used in connection with the provision
of telecommunications services to
customers in markets outside of the InRegion MSAs, including, but not limited
to, order entry, provisioning, billing,
network monitoring, and other systems,
and (b) are not capable of being divided
between the divested and retained
businesses.
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III. Applicability
A. This Final Judgment applies to
Qwest and Allegiance, as defined above,
and all other persons in active concert
or participation with any of them who
receive actual notice of this Final
Judgment by personal service or
otherwise.
B. Defendants shall require, as a
condition of the sale or other
disposition of all or substantially all of
their assets or of lesser business units
that include the Divestiture Assets, that
the purchaser of those assets agrees to
be bound by the provision of this Final
Judgment, provided, however, that
defendants need not obtain such an
agreement from the Acquirer(s).
IV. Divestitures
A. Defendants are ordered and
directed, within 75 calendar days after
the filing of the Complaint in this
matter, or five (5) days after notice of the
entry of this Final Judgment by the
Court, whichever is later, to divest the
Divestiture Assets in a manner
consistent with this Final Judgment to
an acquirer acceptable to the United
States in its sole discretion. The United
States, in its sole discretion, may agree
to an extension of this time period of up
to three thirty-day periods, not to
exceed ninety (90) calendar days in
total, and shall notify the Court in such
circumstances. Defendants agree to use
their best efforts to divest the
Divestiture Assets as expeditiously as
possible.
B. In accomplishing the divestiture
ordered by this Final Judgment,
defendants promptly shall make known,
by usual and customary means, the
availability of the Divestiture Assets.
Defendants shall inform any person
making inquiry regarding a possible
purchase of the Divestiture Assets that
they are being divested pursuant to this
Final Judgment and provide that person
with a copy of this Final Judgment.
Defendants shall offer to furnish to all
prospective Acquirers, subject to
customary confidentiality assurances,
all information and documents relating
to the Divestiture Assets customarily
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provided in a due diligence process
except such information or documents
subject to the attorney-client or workproduct privileges. Defendants shall
make available such information to the
United States at the same time that such
information is made available to any
other person.
C. Defendants shall provide the
Acquirer(s) and the United States
information relating to the personnel
involved in the production, operation,
development and sale of the Divestiture
Assets to enable the Acquirer(s) to make
offers of employment. Defendants will
not interfere with any negotiations by
the Acquirer(s) to employ any defendant
employee whose primary responsibility
is the production, operation,
development and sale of the Divestiture
Assets.
D. Defendants shall permit
prospective Acquirer(s) of the
Divestiture Assets to have reasonable
access to personnel and to make
inspections of the physical facilities of
the business to be divested; access to
any and all environmental, zoning, and
other permit documents and
information; and access to any and all
financial, operational, or other
documents and information customarily
provided as part of a due diligence
process.
E. Defendants shall warrant to all
Acquirers of the Divestiture Assets that
each asset will be operational on the
date of sale.
F. Defendants shall not take any
action that will impede in any way the
obtaining of necessary regulatory
approvals, or operation or divestiture of
the Divestiture Assets.
G. Defendants shall warrant to the
Acquirer(s) of the Divestiture Assets that
there are no material defects in the
environmental, zoning, licenses or other
permits pertaining to the operation of
each asset, and that following the sale
of the Divestiture Assets, defendants
will not undertake, directly or
indirectly, any challenges to the
environmental, zoning, licenses or other
permits relating to the operation of the
Divestiture Assets.
H. Unless the United States otherwise
consents in writing, the divestiture
pursuant to Section IV, or by trustee
appointed pursuant to Section V, of this
Final Judgment, shall include the entire
Divestiture Assets, and shall be
accomplished in such a way as to satisfy
the United States, in its sole discretion,
that the Divestiture Assets can and will
be used by the Acquirer(s) as part of a
viable, ongoing telecommunications
business. Divestiture of the Divestiture
Assets may be made to one or more
Acquirers, provided that in each
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instance it is demonstrated to the sole
satisfaction of the United States that the
Divestiture Assets will remain viable
and the divestiture of such assets will
remedy the competitive harm alleged in
the Complaint. The divestitures,
whether pursuant to Section IV or
Section V of this Final Judgment,
(1) Shall be made to an Acquirer (or
Acquirers) that, in the United States’s sole
judgment, has the intent and capability
(including the necessary managerial,
operational, technical and financial
capability) of competing effectively in the
business of telecommunications services; and
(2) Shall be accomplished so as to satisfy
the United States, in its sole discretion, that
none of the terms of any agreement between
an Acquirer (or Acquirers) and defendants
give defendants the ability unreasonably to
raise the Acquirer’s costs, to lower the
Acquirer’s efficiency, or otherwise to
interfere in the ability of the Acquirer to
compete effectively.
I. Upon the Acquirer(s)’s request and
upon commercially reasonable terms
and conditions, Qwest will, for a
reasonable transitional period following
divestiture, provide Acquirer(s) with (a)
any services provided via Shared
Systems; and (b) any interexchange
services or transport over interexchange
facilities acquired by Qwest from
Allegiance pursuant to 11 U.S.C. 363
that are not included in the Divestiture
Assets.
J. To the extent leases, contracts,
agreements, intellectual property rights,
licenses or commitments with third
parties that are acquired by Qwest from
Allegiance pursuant to 11 U.S.C. 363
and would otherwise be Divestiture
Assets are not assignable or transferable,
or such contracts (except for customer
contracts), agreements, rights, licenses
or commitments cover more than one
MSA, including at least one MSA that
is not an In-Region MSA, then Qwest is
not obligated to assign or transfer such
contracts, agreements, rights, licenses or
commitments. In that event, or in the
event that Qwest rejects any executory
contract pursuant to 11 U.S.C. 365
which the Acquirer deems necessary to
operate a viable ongoing
telecommunications business in the InRegion MSAs, Qwest shall use its best
efforts to obtain for the Acquirer the
equivalent of the services or other rights
that would have been provided but for
said non-assignment, non-transfer, or
rejection.
V. Appointment of Trustee
A. If defendants have not divested the
Divestiture Assets within the time
period specified in Section IV(A),
defendants shall notify the United
States of that fact in writing. Upon
application of the United States, the
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Court shall appoint a trustee selected by
the United States and approved by the
Court to effect the divestiture of the
Divestiture Assets.
B. After the appointment of a trustee
becomes effective, only the trustee shall
have the right to sell the Divestiture
Assets. The trustee shall have the power
and authority to accomplish the
divestiture to an Acquirer[s] acceptable
to the United States at such price and
on such terms as are then obtainable
upon reasonable effort by the trustee,
subject to the provisions of Sections IV,
V, and VI of this Final Judgment, and
shall have such other powers as this
Court deems appropriate. Subject to
Section V(D) of this Final Judgment, the
trustee may hire at the cost and expense
of defendants any investment bankers,
attorneys, or other agents, who shall be
solely accountable to the trustee,
reasonably necessary in the trustee’s
judgment to assist in the divestiture.
C. Defendants shall not object to a sale
by the trustee on any ground other than
the trustee’s malfeasance. Any such
objections by defendants must be
conveyed in writing to the United States
and the trustee within ten (10) calendar
days after the trustee has provided the
notice required under Section VI.
D. The trustee shall serve at the cost
and expense of Qwest, on such terms
and conditions as the United States
approves, and shall account for all
monies derived from the sale of the
assets sold by the trustee and all costs
expenses so incurred. After approval by
the Court of the trustee’s accounting,
including fees for its services and those
of any professionals and agents retained
by the trustee, all remaining money
shall be paid to Qwest and the trust
shall then be terminated. The
compensation of the trustee and any
professionals and agents retained by the
trustee shall be reasonable in light of the
value of the Divestiture Assets and
based on a fee arrangement providing
the trustee with an incentive based on
the price and terms of the divestiture
and the speed with which it is
accomplished, but timeliness is
paramount.
E. Defendants shall use their best
efforts to assist the trustee in
accomplishing the required divestiture.
The trustee and any consultants,
accountants, attorneys, and other
persons retained by the trustee shall
have full and complete access to the
personnel, books, records, and facilities
of the business to be divested, and
defendants shall develop financial and
other information relevant to such
business as the trustee may reasonably
request, subject to reasonable protection
for trade secret or other confidential
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research, development, or commercial
information. Defendants shall take no
action to interfere with or to impede the
trustee’s accomplishment of the
divestiture.
F. After its appointment, the trustee
shall file monthly reports with the
United States and the Court setting forth
the trustee’s efforts to accomplish the
divestiture ordered under this Final
Judgment. To the extent such reports
contain information that the trustee
deems confidential, such reports shall
not be filed in the public docket of the
Court. Such reports shall include the
name, address, and telephone number of
each person who, during the preceding
month, made an offer to acquire,
expressed an interest in acquiring,
entered into negotiations to acquire, or
was contacted or made an inquiry about
acquiring, any interest in the Divestiture
Assets, and shall describe in detail each
contact with any such person. The
trustee shall maintain full records of all
efforts made to the Divestiture Assets.
G. If the trustee has not accomplished
such divestiture within six months after
its appointment, the trustee shall
promptly file with the Court a report
setting forth (1) the trustee’s efforts to
accomplish the required divestiture, (2)
the reasons, in the trustee’s judgment,
why the required divestiture has not
been accomplished, and (3) the trustee’s
recommendations. To the extent such
reports contain information that the
trustee deems confidential, such reports
shall not be filed in the public docket
of the Court. The trustee shall at the
same time furnish such report to the
United States who shall have the right
to make additional recommendations
consistent with the purpose of the trust.
The Court thereafter shall enter such
orders as it shall deem appropriate to
carry out the purpose of the Final
Judgment, which may, if necessary,
include extending the trust and the term
of the trustee’s appointment by a period
requested by the United States.
VI. Notice of Proposed Divestiture
A. Within two (2) business days
following execution of a definitive
divestiture agreement, defendants or the
trustee, whichever is then responsible
for effecting the divestiture required
herein, shall notify the United States of
any proposed divestiture required by
Section IV or V of this Final Judgment.
If the trustee is responsible, it shall
similarly notify defendants. The notice
shall set forth the details of the
proposed divestiture and list the name,
address, and telephone number of each
person not previously identified who
offered or expressed an interest in or
desire to acquire any ownership interest
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17219
in the Divestiture Assets, together with
full details of the same.
B. Within fifteen (15) calendar days of
receipt by the United States of such
notice, the United States may request
from defendants, the proposed Acquirer
or Acquirers, and other third party, or
the trustee if applicable additional
information concerning the proposed
divestiture, the proposed Acquirer or
Acquirers, and any other potential
Acquirer. Defendants and the trustee
shall furnish any additional information
requested within fifteen (15) calendar
days of the receipt of the request, unless
the parties shall otherwise agree.
C. Within thirty (30) calendar days
after receipt of the notice or within
twenty (20) calendar days after the
United States has been provided the
additional information requested from
defendants, the proposed Acquirer or
Acquirers, any third party, and the
trustee, whichever is later, the United
States shall provide written notice to
defendants and the trustee, if there is
one, stating whether or not it objects to
the proposed divestiture. If the United
States provides written notice that it
does not object, the divestiture may be
consummated, subject only to
defendants’ limited right to object to the
sale under Section V(C) of this Final
Judgment. Absent written notice that the
United States does not object to the
proposed Acquirer or upon objection by
the United States, a divestiture
proposed under Section IV or Section V
shall not be consummated. Upon
objection by defendants under Section
V(C), a divestiture proposed under
Section V shall not be consummated
unless approved by the Court.
VII. Financing
Defendants shall not finance all or
any part of any purchase made pursuant
to Section IV or V of this Final
Judgment.
VIII. Hold Separate
Until the divestiture required by this
Final Judgment has been accomplished
defendants shall take all steps necessary
to comply with the Hold Separate
Stipulation and Order entered by this
Court. Defendants shall take no action
that would jeopardize the divestiture
ordered by this Court.
IX Affidavits
A. Within twenty (20) calendar days
of the filing of the Complaint in this
matter, and every thirty (30) calendar
days thereafter until the divestiture[s]
has been completed under Section IV or
V, defendants shall deliver to the United
States an affidavit as to the fact and
manner of its compliance with Section
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IV or V of this Final Judgment. Each
such affidavit shall include the name,
address, and telephone number of each
person who, during the preceding thirty
days, made an offer to acquire,
expressed an interest in acquiring,
entered into negotiations to acquire, or
was contacted or made an inquiry about
acquiring, any interest in the Divestiture
Assets, and shall describe in detail each
contact with any such person during
that period. Each such affidavit shall
also include a description of the efforts
defendants have taken to solicit buyers
for the Divestiture Assets, and to
provide required information to
prospective purchasers, including the
limitations, if any, on such information.
Assuming the information set forth in
the affidavit is true and complete, any
objection by the United States to
information provided by defendants,
including limitation on information,
shall be made within fourteen (14) days
of receipt of such affidavit.
B. Within twenty (20) calendar days
of the filing of the Complaint in this
matter, defendants shall deliver to the
United States an affidavit that describes
in reasonable detail all actions
defendants have taken and all steps
defendants have implemented on an
ongoing basis to comply with Section
VIII of this Final Judgment. Defendants
shall deliver to the United States an
affidavit describing any changes to the
efforts and actions outlined in
defendants’ earlier affidavits filed
pursuant to this section within fifteen
(15) calendar days after the change is
implemented.
C. Defendants shall keep all records of
all efforts made to preserve and divest
the Divestiture Assets until one year
after such divestiture has been
completed.
X. Compliance Inspection
A. For the purposes of determining or
securing compliance with this Final
Judgment, or of determining whether
the Final Judgment should be modified
or vacated, and subject to any legally
recognized privilege, from time to time
duly authorized representatives of the
United States Department of Justice,
including consultants and other persons
retained by the United States, shall,
upon written request of a duly
authorized representative of the
Assistant Attorney General in charge of
the Antitrust Division, and on
reasonable notice to defendants, be
permitted:
(1) Access during defendants’ office
hours to inspect and copy, or at the
United States’s option, to require
defendants provide copies of, all books,
ledgers, accounts, records and
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documents in the possession, custody,
or control of defendants, relating to any
matters contained in this Final
Judgment; and
(2) To interview, either informally or
on the record, defendants’ officers,
employees, or agents, who may have
their individual counsel present,
regarding such matters. The interviews
shall be subject to the reasonable
convenience of the interviewee and
without restraint or interference by
defendants.
B. Upon the written requests of a duly
authorized representative of the
Assistant Attorney General in charge of
the Antitrust Division, defendants shall
submit written reports or interrogatory
responses, under oath if requested,
relating to any of the matters contained
in this Final Judgment as may be
requested.
C. No information or documents
obtained by the means provided in this
section shall be divulged by the United
States to any person other than an
authorized representative of the
executive branch of the United States,
except in the course of legal proceedings
to which the United States is a party
(including grand jury proceedings), or
for the purpose of securing compliance
with this Final Judgment, or as
otherwise required by law.
D. If at the time information or
documents are furnished by defendants
to the United States, defendants
represent and identifying in writing the
material in any such information or
documents to which a claim of
protection may be asserted under Rule
26(c)(7) of the Federal Rules of Civil
Procedure, and defendants mark each
pertinent page of such material,
‘‘Subject to claim of protection under
Rule 26(c)(7) of the Federal Rules of
Civil Procedure,’’ then the United States
shall give defendants ten (10) calendar
days notice prior to divulging such
material in any legal proceeding (other
than a grand jury proceeding).
XI. No Reacquisition
Defendants may not reacquire any
part of the Divestiture Assets during the
term of this Final Judgment.
XII. Retention of Jurisdiction
This Court retains jurisdiction to
enable any party to this Final Judgment
to apply to this Court at any time for
further orders and directions as may be
necessary or appropriate to carry out or
construe this Final Judgment, to modify
any of its provisions, to enforce
compliance, and to punish violations of
its provisions.
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XIII. Expiration of Final Judgment
Unless this Court grants an extension,
this Final Judgment shall expire ten
years from the date of its entry.
XVI. Public Interest Determination
Entry of this Final Judgment is in the
public interest.
Date: _______
Court approval subject to procedures of
Antitrust Procedures and Penalties Act, 15
U.S.C. 16.
lllllllllllllllllllll
United States District Judge.
Appendix D—Reply Declaration of
Joseph Farrell
Before the Federal Communications
Commission
In the Matter of Special Access Rates for
Price Cap Local Exchange Carriers
[WC Docket No. 05–25]
AT&T Corp. Petition for Rulemaking to
Reform Regulation of Incumbent Local
Exchange Carrier Rates for Interstate
Special Access Services
[RM No. 10593]
Reply Declaration of Joseph Farrell on
Behalf of CompTel
I. Qualifications
1. I am Professor of Economics,
Affiliate Professor of Business, and
Chair of the Competition Policy Center
at the University of California at
Berkeley. Among other non-university
professional activities, I was Chief
Economist at the FCC in 1996–1997,
President of the Industrial Organization
Society in 1996, Editor of the Journal of
Industrial Economics in 1995–2000,
Deputy Assistant Attorney General and
chief economist at the Antitrust
Division of the U.S. Department of
Justice in 2000–2001, and member of
the National Academies of Science,
Computer Science and
Telecommunications Board in 2001–
2004. I am a Fellow of the Econometric
Society and a member of the Editorial
Board of the journal Information
Economics and Policy.
II. Overview
2. I begin by explaining why
incumbent termination charges and
certain kinds of optional volume or
loyalty discounts are likely to
exacerbate problems arising from wellknown barriers to entry, especially
when the inducement for customers to
subscribe to these optional plans
includes raising the price of the
alternative, e.g., setting excessive basic
rates for month-to-month service. I then
discuss the use of price and cost
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information for assessing competition in
this market, and comment in particular
on the Declaration of Dr. William
Taylor.
III. Effects of ILEC Contracts on
Competition
3. Economic and structural barriers to
competitive entry into the special access
market are well known and well
documented. Ordover and Willig
summarized several such barriers in a
declaration submitted along with
AT&T’s petition that launched this
proceeding.1 Special access services are
characterized by economies of scale and
sunk costs, as well as substantial
incumbent first-mover advantages such
as rights-of-way and building access. As
a result, competitive entry generally has
been restricted to the highest capacity
services provided in dense metropolitan
areas. Any further impediments to
entry, such as the ILEC contract
provisions I describe below, exacerbate
these inherent economic and
operational barriers.
4. Among such incremental
impediments to entry would be (a)
excessive charges (typically payable by
the customer) for terminating ILEC
service, (b) commitments to purchase
some minimum amount from the
incumbent, with substantial penalties
for non-compliance, and (c) any
provisions such as volume or loyalty
discounts under which a special access
consumer pays the ILEC more for
something else (such as service at
another location) if it uses an entrant
rather than ILEC special access in one
location. For many customers on a
discount plan, the basic month-tomonth tariff may be the next-most
preferred alternative. When the basic
month-to-month plan specifies prices
significantly above the competitive
level, these discounted prices (and
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1
2
3
4
discounted prices in other plans) can
also be above competitive levels.
Moreover, when a monopoly offers
proportional or relative discounts off its
undiscounted prices in order to induce
customers to agree to exclusionary
provisions, it has an incentive to set the
undiscounted price above even the
monopoly level (because, rather than
simply deterring demand, an increase
above the monopoly level steers
customers into the discount plans and
also brings the discount prices closer to
the monopoly level).2 Thus, even if they
have other efficiency rationales, such
pricing schemes put an additional
wedge into the incentive for the
customer to contract with a competitive
carrier whose long-run cost is below the
ILEC’s price.3 They thus weaken entry
as a constraint on an incumbent’s
overall price level, whether or not they
fall into standard antitrust categories
such as predatory pricing or tying.
5. ILECs have implemented such
pricing schemes in their special access
tariffs. SBC’s ‘‘Managed Value Plan’’
(‘‘MVP’’) Tariff is an example. The MVP
is an umbrella plan. Customers
purchasing a wide range of special
access products can include several
such purchases in the MVP, which
provides discounts in addition to term
and volume discounts contained in their
underlying tariffs from which customers
purchase the special access circuits that
they include in the MVP. The MVP
discounts increase each year (9% in the
1st year, 11% in the 2nd, 12% in the
3rd, 13% in the 4th, and 14% in the 5th
year). Carriers must spend at least $10
million annually on SBC special access
services to be eligible.4 The MVP
establishes a ‘‘Minimum Annual
Revenue Commitment’’ (MARC) that the
carrier must maintain with SBC for the
five-year term. The MARC is established
Current MVP
discount rate
(percent)
...............................................................
...............................................................
...............................................................
...............................................................
9
11
12
13
1 In the Matter of AT&T Corp. Petition for
Rulemaking To Reform Regulation of Incumbent
Local Exchange Carrier Rates for Interstate Special
Access Services, RM No. 10593. Declaration of
Janusz A. Ordover and Robert D. Willig in support
of AT&T’s Petition, at ¶ 38–45.
2 The economics of price-setting once a subset of
customers become entitled to a percentage discount
off a list price are analyzed by Borenstein, Severin,
1996. ‘‘Settling for Coupons: Discount Contracts as
Compensation and Punishment in Antitrust
Lawsuits,’’ Journal of Law & Economics, University
of Chicago Press, vol. 39(2), pages 379–404.
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Discount
earned in
previous 8
months
Percent of Remaining commitment due
$0
900,000
1,100,000
1,200,000
10.0
12.5
12.5
12.5
Professor Borenstein shows that such discounts do
not lower prices overall but rather implement a
transfer from non-discount customers to discount
customers, with almost no effect on average price
or on the seller’s profit. Moreover, if entitlement to
the discount is based on agreeing to exclusionary
terms, such arrangements further harm consumers
in the long run. In price flex areas, even basic tariffs
are unregulated, and the rates in these tariffs can
be, and have been, increased by the ILEC.
3 The basic economics here were explored in the
well-known article by Aghion, Philippe and Bolton,
Patrick. ‘‘Contracts as a Barrier to Entry,’’ American
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when the carrier joins the MVP by
taking a carrier’s previous three months’
billing for qualified services (defined as
virtually all SBC transport services)
multiplied by four.
6. Carriers receive the MVP discount
on services purchased up to their
MARC. The discount does not apply to
services purchased in excess of the
MARC unless the MARC is increased.
The MARC can be increased (semiannually, by a minimum of 5%), but
cannot be decreased during the term of
the MVP.
7. The MVP requires carriers to
purchase at least 95% of their SBC
transport services from SBC’s interstate
tariff, restricting their purchases of
UNEs to less than 5%. (Recent tariff
contract filings include a higher
requirement of 98%).5
8. If a carrier fails to meet the MARC,
it must either continue the contract and
pay a shortfall penalty equal to the
difference between its MARC and the
actual amount spent, or terminate its
contract and pay a termination penalty.
For example, if the carrier terminates
during year 3 of the plan, it pays 12.5%
of the MARC for the remainder of year
3 and the remaining years of the
agreement. The customer is also billed
for any nonrecurring charges that were
waived under the MVP agreement.
9. The termination penalty requires
repayment of all MVP discounts
received in the six months preceding
the termination date plus a specified
percentage of the MARC for the
remainder of the term (10% if in year 1
or year 5, otherwise 12.5%). The table
below lays out the termination penalties
for a carrier with a MARC of $20 million
that terminates its agreement at the
beginning of a year. The table assumes
that a discount was earned in each of
the previous 6 months.
Remaining
commitment
due
$10,000,000
10,000,000
7,500,000
5,000,000
Total
penalty
$10,000,000
10,900,000
8,600,000
6,200,000
Penalty
(in months)
6.0
6.5
5.27
3.7
Economic Review, June 1987, 77(3), pp. 388–401.
See also Joseph Farrell, ‘‘Deconstructing Chicago on
Exclusive Dealing,’’ Antitrust Bulletin, forthcoming,
available at https://repositories.cdlib.org/iber/cpc/
CPC05-053/. In particular, I explain there why
discounts to customers in return for signing
exclusive or exclusionary contracts may not make
the customers better off.
4 If the customer has a national footprint, it must
meet the $10 million minimum in each SBC region.
5 See e.g.. SWBT Tariff FCC No. 73, Section 41.31.
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Year in which termination occurs
Current MVP
discount rate
(percent)
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5 ...............................................................
14
10. The Remaining Commitment Due
is calculsted as the MARC over the
remaining years of the contract times
the penalty rate (labeled ‘‘% of
Remaining Commitment Due’’). The
total penalty is the sum of the
Remaining Commitment Due and any
discount earned in the previous 6
months. In the first two years of the
contract, the penalty amounts to more
than 50% of the annual MARC. In the
last year, it falls to about 15% of the
annual MARC. In addition to this
penalty, the customer may incur
termination penalties specified in the
underlying tariff for the services
included in the MVP. In some cases,
these penalties amount to 40% of the
monthly recurring rate over the
remaining term of the tariff.6
11. The MVP is structured in a way
that can make it unprofitable for a
competitor to win any modest portion of
a customer’s business, even if the
incumbent’s price exceeds the
competitor’s long-run cost. Essentially,
it sets up an automatic and sometimes
drastic price cut for any portion of the
customer’s business that the customer is
considering switching to a competitor.
For example, consider a customer that
spends $20 million on special access
services supplied by SBC. The customer
can either (1) sign the MVP contract and
purchase $20 million in special access
services from SBC or (2) purchase 20%
of its services from a CLEC and 80%
from SBC. In scenario (1), the carrier
receives an average of 11.8% discount
(ignoring discounting) from SBC over
the length of the contract,7 thus its total
expenditure is $17.64 million per year.
In scenario (2), the carrier would not be
able to enter into an MVP agreement
because the MARC is based on 100% of
historical revenues. Thus, for the 80%of
its special access requirements that it
purchased from SBC, the customer
would spend $16 million. The carrier
would save money in this scenario only
if the competitive carrier charged less
than $1.64 million for the remaining
20% of the customer’s demand, a
discount of 59% off SBC’s $4 million
price before MVP discounts.
6 Southwestern Bell Telephone Company, Tarffic
F.C.C., No. 72, 2nd Revised Page 7–68.3.5.
7 The 11.8% average discount is the arithmetic
mean of the discounts of 9%, 11% 12%, 13% and
14%, offered in each of the five years of SBC’s MVP.
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Discount
earned in
previous 8
months
Percent of Remaining commitment due
1,300,000
10.0
12. Once a MVP agreement is signed,
the marginal price of special access
services for special access spending up
to the MARC is zero, because a customer
that misses the MARC is required to
make up the shortfall by paying a
penalty. The marginal price if the total
spending is above the MARC is SBC’s
rate before the MVP discount is
deducted (unless the MARC is
increased). Because the MARC cannot
be decreased, a customer whose demand
does not grow cannot switch to a
competitive carrier for part or all of its
special access spending without
incurring significant penalties.
13. A customer with increasing
expenditures on special access may find
it economical to use a competitor to
serve its new demand. Consider the
example of a customer that entered into
an MVP agreement with a MARC of $20
million. Suppose that the customer
established business in a new area,
requiring special access services worth
$10 million in that area. The carrier
could either include this new demand
for special access service in its MARC,
increasing the MARC by $10 million,
and then receive the 11.8% average
discount on this new commitment; or
else it could go to a competitor that
would only need to offer the 11.8%
discount off SBC’s pre-MVP prices to
match the discount offered by the MVP
plan.
14. However, if this $10 million in
new growth in the network occurs at the
same time as a reduction of $2 million
in the customer’s original footprint, then
the situation changes. In this case, the
first $2 million of the new growth
would cost the customer nothing if it
used SBC, since the customer had a
commitment to spend $20 million on
SBC’s special access services. If all the
new business went to SBC, the MARC
could be increased to $28 million and
the discounted payment would be
$24.696 million. If the customer wanted
to use a non-ILEC provider for the entire
$10 million of new growth business, it
would still have to maintain the $20
million MARC commitment and, with
$18 million spent on special access
purchased from SBC, it would not
receive any MVP discount. Thus, it
would pay $20 million to SBC. Using
the non-ILEC provider would be lower
cost only if its total price for the new
growth was less than $4.7 million, a
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Remaining
commitment
due
2,000,000
Total
penalty
3,3000,000
Penalty
(in months)
2.0
53% discount off SBC’s (pre-MVP)
prices of $10 million. In other words,
the rival must beat a price that is less
than half of the ILEC’s pre-MVP price.
15. Thus in some circumstances a
customer switching a part of its business
to a non-ILEC provider could lose not
only the discount on the portion
switched, but also the MVP discount on
the portion that remained with the ILEC.
When the competitor cannot win the
entire business (if, for example, it has
loops to some but not all of the
customer’s locations), it is effectively
foreclosed from serving that customer.
16. As a result, the MVP and similar
pricing plans can have the effect of
requiring a competitive carrier to beat a
marginal price that is well below the
average price that special access
customers pay the ILEC. That is, the
ILEC can charge a price (11.8% below
its pre-MVP price) that is well above a
competitive carrier’s cost, and the
competitor will nevertheless find it
unprofitable to enter on a small scale,
because the customer is penalized on its
inframarginal SBC business for giving
marginal business to the competitor.8
17. The effects of the MVP are
magnified when the underlying tariffs
for the special access services purchased
by a customer contain similar discounts
and penalties. To illustrate, consider
Southwestern Bell Telephone
Company’s DS1 Term Payment Plan
(DS1 TPP).9 The base payment in the
TPP is circuit-specific—it requires
commitments to specific circuits for the
term of the contract. But competing
carriers often have a considerable
amount of customer churn. For such
customers, SBC offers an option (the
DS1 High Capacity Service Portability
Commitment) that waives the specific
8 Like many exclusionary strategies, this can be
defeated if entrants can realistically enter on a large
scale and serve all (or a sufficient set of) customers.
Thus it is exclusionary only if that is unrealistic.
It is my understanding that after years of
policymakers encouraging CLEC entry, CLECs still
directly address only a very limited set of buildings.
See Review of the Section 251 Unbundling
Obligations of Incumbent Local Exchange Carriers,
CC Docket No. 01–338, Report and Order and Order
on Remand and Further Notice of Proposed
Rulemaking, 18 FCC Rcd. 16978, 17155, n.856
(2003). (‘‘Both competitive LECs and incumbent
LECs report that approximately 30,000, i.e.,
between 3% and 5% of the nation’s commercial
office buildings, are served by competitor-owned
fiber loops.’’).
9 Tariff F.C.C. No. 73, Section 7.2.
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circuit termination penalties described
above, allowing customers to add and
remove circuits without penalty. Instead
of circuit-specific commitments, the
customer commits to a level of DS1
channel terminations. The Portability
Commitment lasts for three years. The
commitment level is 100% of the total
DS1 channel terminations in service in
the month preceding the start of the
agreement. This includes DS1 under
term commitments and month-to-month
arrangements.
18. Each month, the total number of
2, 3, 5, and 7 year DS1 TPP Channel
Terminations for the previous month
will be calculated and measured against
the commitment level. If this total is less
than 80% of the commitment level, then
the customer is billed a shortfall penalty
equal to the difference between 80% of
the CL and the actual number purchased
times the non-recurring charge. If this
total is more than 124% of the CL, then
the customer is billed an adjustment
factor equal to the difference between
124% of the CL and the actual number
purchased times the non-recurring
charge.10 The customer may increase its
CL by submitting a written request, and
is likely to do so given the ‘‘growth
penalty’’ that applies if it does not
promptly commit its unexpected
demand growth to SBC.
19. If the customer terminates the
Portability Commitment or wants to
decrease the CL prior to the end of the
3-year commitment, termination
liabilities apply. The termination
liability is calculated as the decreased
number of channel terminations
multiplied by the prevailing month-tomonth recurring rate multiplied by the
number of months remaining in the
portability commitment.
20. To supply a portion of the services
a customer has placed in the MVP
umbrella, a competitor may have to
reduce its rates to make up for payments
such as the shortfall penalty and/or
termination liability specified in the
DS1 TPP. These payments are in
addition to the penalties in the MVP.
Together, the penalties in all the tariffs
for services that a customer switches to
a competitor are likely to be high
enough to make the customer
unprofitable for the competitor to win,
even when the ILEC’s overall level of
prices for special access is above the
competitor’s long-run cost. Again, these
provisions, and others like them in the
various term and volume discount plans
offered by the ILECs artificially increase
a customer’s cost of switching, and raise
competitors’ costs of acquiring
customers.
21. It is a tempting fallacy to think
that optional discount plans cannot be
harmful simply because consumers
select them voluntarily. The claim that
voluntary discounts cannot harm
consumers assumes that basic month-tomonth rates are not affected, but in fact,
once an ILEC has contracted with some
of its customers for a percentage
discount off the month-to-month tariff,
it has an incentive to raise the latter
above the level that it would have
chosen otherwise.11 In the longer term,
exclusionary contracts can be expected
to harm competition and customers,
whether or not they decrease prices in
the short run.
IV. Dr. Taylor’s Analysis Cannot Show
That ILECs Lack Market Power
22. Dr. William Taylor has submitted
a report 12 arguing that price data show
that Verizon lacks market power. The
basic syllogism is that average revenue
per unit measures have fallen, hence
prices have fallen, hence there is no
market power. Unfortunately, each step
of this syllogism is fallacious. As a
preliminary matter, I examine Dr.
Taylor’s claim that the average revenue
per special access line has fallen over
time. Next, I examine the first part of his
syllogism, that reductions in the average
revenue per line imply that prices of
special access products have fallen.
Finally, I analyze the second part of his
syllogism, that reductions in price
imply the absence of market power.
1. Flaws in the Average Revenue per
Line as a Measure of Price
23. Dr. Taylor claims that ‘‘various
measures of average revenue per circuit
have fallen even as the demand for
special access services has
increased.’’ 13 After describing six
limitations 14 of his chosen price
measure, the average revenue per line,
he concludes: ‘‘Nevertheless, even with
those caveats, the picture that emerges
from the ARMIS average revenue per
line data is quite clear: Average revenue
per line has decreased over the 1996–
2004 period and decreased faster during
the pricing flexibility period (2001–
2004).’’ 15 Dr. Taylor did not include
11 See
Borenstien, supra.
of William E. Taylor on Behalf of
Verizon, In the Matter of Special Access Rates for
Price Cap Local Exchange Carriers, WC Docket No.
05–25. Henceforth, Taylor Declaration.
13 Taylor Declaration, at ¶ 9.
14 Taylor Declaration, at ¶ 15.
15 Taylor Declaration at ¶ 16.
12 Declaration
10 Because only 2, 3, 5, and 7-year commitments
are counted when the shortfall penalty is
calculated, the portability commitment penalizes
carriers who have a large portion of their DS1 in
month-to-month or 1-year commitments, thus
providing incentive to enter into longer contracts.
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sufficient information to verify his
calculations.
24. Dr. Taylor adjusted Special Access
Revenue as reported in the ARMIS
records to remove DSL revenues using
data he obtained from Verizon on its
DSL revenues for 2002–2004.16 These
DSL revenues are not part of the public
record, and Dr. Taylor does not include
the data he obtained from Verizon in his
Declaration. In addition, he removed
DSL revenues for years prior to 2000
based on the observed growth of DSL
revenues in the years of which he had
data. Without the underlying data, it
was not possible to judge whether his
calculations were correct or whether the
extrapolation was reasonable.
25. Dr. Taylor relied on the number of
access lines reported in ARMIS 43–08,
columns fj and fk.17 The ARMIS Report
instructions require carriers to calculate
the number of special access lines as
follows:
‘‘The number of 64 kbps or equivalent
digital special access lines terminated at the
customer designated premises: * * * Where
DS–3 or DS–1 service is provided without
individual 64 kbps circuit terminations,
multiply the number of DS–3 terminations by
672 and the number of DS–1 terminations by
24 when calculating the value for this
column.’’ 18
For DS1 and DS3 lines that are provided
with individual 64 Kbps circuit
terminations,19 the ARMIS data appear
to provide a reasonable measure of
capacity as represented by voice grade
equivalent lines. For DS1 and DS3 lines
that are provided without individual
circuit termination, the ARMIS data
would appear to overestimate the line
count since it assumes that the entire
capacity is used, whether or not it is, in
fact, used. That is, a customer who
needs only 12 DS0s worth of capacity,
but who but buys a DS1 because it is
less costly than 12 DS0s, is assumed to
purchase 24 DS0s if the ILEC is not
asked to provide individual circuit
terminations. Accordingly, the average
revenue per voice-grade equivalent is
artificially reduced.
26. I do not have the data to verify
this downward bias in Dr. Taylor’s
estimate of the ‘‘price.’’ Nor can I verify
that this bias has not increased over
time, contributing, at least in part, to Dr.
Taylor’s finding that the average
revenue per line has fallen over time.
Since data communications lines often
do not need individual 64 Kbps
terminations, and since data
16 Taylor
Declaration at ¶ 18.
Declaration at footnote 10.
18 FCC Report 43–08.
19 A 64 Kbps line is equivalent in capacity to a
voice grade circuit.
17 Taylor
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communications grew more rapidly
than voice communications during the
period at issue, there was likely an
increase in the fraction of lines for
which the ARMIS reporting requirement
resulted in an overcount of special
access lines. If so, the ARMIS line count
would grow at a faster rate than would
be warranted by the actual growth in
demand for capacity. The calculated
average revenue per ARMIS line would
then decline more quickly than the
average revenue per unit of capacity
actually demanded.
27. In sum, Dr. Taylor’s conclusions
regarding the decline of the average
revenue per line over time cannot be
verified with the data available to me.
There are sound reasons for believing
that at least a part of the reduction may
be due to ARMIS reporting conventions
but this portion of the reduction cannot
be quantified with the available data.
28. Much of Dr. Taylor’s analysis
focuses on ‘‘various measures of the
average revenue per circuit.’’ 20 Dr.
Taylor asserts that this is a reasonable
proxy for price: ‘‘Average revenue per
voice-grade equivalent circuit is a
reasonable measure of the price that
customers actually pay for the special
access service they receive.’’ 21
29. To calculate the average revenue
per voice-grade equivalent circuit, Dr.
Taylor divides the total revenue
obtained from the services in question
by the number of special access lines
obtained from ARMIS 43–08. As I have
indicated earlier, the ARMIS reporting
convention results in an overcount of
the demand for capacity, especially for
lines used for data communication.
30. The following illustrative example
demonstrates my earlier point that the
ARMIS measure of special access lines
overstates the appropriate measure of
capacity, and, as a result, contributes to
underestimating the price per unit
capacity actually paid by customers.
Suppose a DS1 is priced at $365 per
month, and a DS3 is priced at $2,290
per month.22 These prices are assumed
to remain constant in this example.
Therefore, the actual change in prices in
this example is zero.
31. Consider a consumer who initially
purchases 6 DS1 circuits for a total
charge of $2,190. If the consumer uses
all 144 voice-grade circuits in the 6
DS1s for voice traffic, the average
revenue per used circuit would be
$2,190/144 = $15.21. Suppose the
consumer’s calling volume increases,
20 Taylor
Declaration, at ¶ 9.
Declaration, at footnote 7.
22 These are standalone monthly rates charged by
SBC in California in July 2004, as reported in the
Declaration of M. Joseph Stith, WC Docket No. 04–
313, Attachment 1, page 13 of 20.
21 Taylor
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and 168 voice-grade circuits are now
needed to carry the new calling volume.
The consumer could order another DS1
for an additional $365, and use the
additional 24 voice-grade circuits to
carry the additional traffic.
Alternatively, the consumer could
replace the 6 DS1s with a DS3, set up
168 channel terminations on the DS3
and obtain the same quality of service
that he would have obtained on 7 DS1s.
The additional cost of the DS3 would be
only $100 ($2,290 for the DS3 less
$2,190 for the 6 DS1s already in place).
The DS3 would be less expensive than
7 DS1s, even though a large fraction of
the DS3 was left idle.
32. If the DS3 were provided with
individual circuit terminations, the
ARMIS record would reflect 168 special
access lines, and the average revenue
per unit would be $13.63 for a price
reduction of 10.4%. Thus this ARMIS
record would show a relatively modest
reduction in price even though no
prices had been reduced.
33. If the DS3 were provided without
individual circuit terminations, the
ARMIS record would reflect 672
terminations, and the average revenue
per line would be $3.41 for a much
larger apparent price reduction of
77.6%.
34. But recall that the actual change
in prices in this example is zero. The
change in prices as measured by the
average revenue per ARMIS line is
¥10.4% when channel terminations are
provided by the BOC. The change in
prices as measured by the average
revenue per ARMIS line is ¥77.6%
when channel terminations are not
provided by the RBOC. In this example,
the average revenue per line falls
regardless of the way in which ARMIS
records the number of lines demanded
by the customer, even though no prices
have fallen. In general, the change in
average revenue per ARMIS line will
understate the change in prices paid by
consumers, and in times of growing
demand, overstate the reduction (if any)
in the prices paid by consumers.
35. Dr. Taylor tries to correct for some
of the limitations of average revenue per
line by calculating separate average
revenues for DS1 and DS3 lines. Shifts
from DS1 to DS3 circuits do not affect
the average revenue per line for each
category, removing one flaw in the
average revenue measure. Dr. Taylor
found that: ‘‘DS–1 and DS–3 prices fell
dramatically for Verizon East between
2000 and 2001; in fact, they fell at a
much faster rate than would have been
required by the price cap formula.
Possible explanations include a national
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recession and the telecommunications
industry meltdown.’’ 23
36. But DS–1 and DS–3 lines are not
commodities supplied by price-takers
with upward-sloping supply curves. A
recession or a telecommunications
meltdown may lower demand but there
is no clear reason to believe it raises
demand elasticity or lowers the
incremental cost of supplying such
lines. A more natural ‘‘composition
effect’’ explanation of this price
reduction is available. Since DS1 lines
are sold at different prices (with lower
prices for longer term commitments and
larger volumes purchased), a shift in
demand from high price contracts to
low price contracts can result in a
reduction in average revenue per line
even though no prices were reduced.
The same plausible explanation applies
to DS3 lines. Thus one cannot conclude
that Dr. Taylor’s partial disaggregation
of all special access lines into DS1 and
DS3 lines repairs the flawed average
revenue measure.
37. For reasons described above,
when customers upgrade from multiple
DS0s to a DS1 or from multiple DS3s to
OCn services, the decrease in average
revenue per access line will
overestimate the price reduction, if any.
38. The limitations of measures
similar to the Average Revenue per
Special Access Line are well known.
Indeed, in his published work on the
long-distance market, Dr. Taylor pointed
out several flaws with a related measure
of price—the Average Revenue per
Minute (ARPM) for long-distance calls.
Dr. Taylor constructs a simple example
with two products in which ‘‘ARPM
declines despite the fact both of the
component usage prices have
increased.’’ 24 Dr. Taylor constructs
other simple examples to illustrate
deficiencies of average revenues as
measures of price, and points out that
‘‘while AT&T’s reported ARPM has
declined, competition has not brought
benefits of lower prices to low-volume
users.’’ 25
39. In his Declaration, Dr. Taylor
states that ‘‘[t]he fact that prices fell
much faster than GDPI–PI–X indicates
that competitive forces have constrained
LEC special access pricing, as
anticipated by the Commission’s pricing
flexibility decision.’’ 26 To reach this
conclusion, Dr. Taylor compares
changes in the Average Revenue per
23 Taylor
Declaration, at ¶ 29.
E. Taylor and J. Douglas Zona. ‘‘An
Analysis of the State Of Competition in LongDistance Telephone Markets.’’ Journal of Regulatory
Economics 11:227–255 (1997). Page 238.
Henceforth, Taylor and Zona.
25 Taylor and Zona, page 240.
26 Taylor Declaration at ¶ 17.
24 William
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Line to the changes in the Price Cap
Index (PCI). This is not a useful
comparison. ILECs are required to
compare an Average Price Index (API) to
the PCI, and report this comparison to
the FCC. Table 1 below, based on data
submitted by Verizon BNTR to the FCC,
shows that for special access lines taken
as a whole, the actual change in prices
is almost exactly equal to the reduction
required by the price cap plan, strongly
suggesting that the price cap was a
binding constraint on Verizon’s special
access prices, contrary to Dr. Taylor’s
suggestion that competition has driven
prices below the level required by price
cap regulation.
TABLE 1.—API AND PCI FOR VERIZON (BNTR)
2002
Total Special Access PCI ................................................................................................................
Total Special Access API ................................................................................................................
47.88
47.88
2003
45.73
45.73
2004
43.40
43.40
2005
43.47
43.33
Source: Verizon TRP Filings.
Moreover, rates in pricing flexibility
areas have increased,27 suggesting that
competitive carriers have not been able
to discipline the incumbents’ special
access prices in areas that have been
deemed competitive.
2. The Relationship between Trends in
Prices and Market Power
40. Dr. Taylor’s Declaration largely
focuses on attempting to show that
prices for special access have fallen over
time. He infers that Verizon does not
have market power. For instance, in his
Declaration he writes:
sroberts on PROD1PC70 with NOTICES
‘‘A careful analysis of that data does not
show that Verizon has been able to exercise
market power. On the contrary, prices for
individual DS1and DS3 services, as well as
average revenue per special access circuits
have fallen steadily for special access
circuits.’’ At 6.
‘‘Customers have benefited from additional
competition and pricing flexibility as
demonstrated by the continuing expansion of
demand volumes accompanied by continuing
falling prices.’’ At 4.
‘‘The NPRM entails a second analysis that
entails accessing the level of and changes in
the degree of competition in the markeplace,
‘‘short of conducting a burdensome market
power analysis’’, against which the
Commission warned in ¶ 72 of the NPRM.
Unfortunately, after that warning, the NPRM
(¶ 72–111) immediately sets out precisely the
information requirements and calculations
that would be necessary to undertake a
market power analysis for special access
services. Fortunately, however, the evidence
from recent trends in quantities and prices of
special access services makes such an
analysis unnecessary, as the primary price
and quantity data show no signs of the
exercise of market power by incumbent
providers.* * * Using a variety of data
sources, I show that various measures of
average revenue per circuit have fallen even
as the demand for special access services has
increased.’’ At 8–9. (Emphasis added).
27 Evidence supporting this point can be found in:
In the Matter of Special Access Rates for Price Cap
Local Exchange Carriers, WC Docket No. 05–25.
Comments of CompTel/ALts, Global Crossing North
America, Inc., and NuVox Communications, Pages
6–9.
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41. But even if Dr. Taylor were correct
that a decline in average revenue is a
reasonable proxy for a decline in price,
price reductions do not prove lack of
market power. Even a monopoly will
reduce price if marginal costs fall or if
demand becomes more elastic. In
addition a firm with decreasing, but still
very substantial, market power will
reduce prices for that reason.
42. While there are pitfalls in using
price-cost data to make references about
the state of competition, it is clear that
in any such endeavor it logically is the
relative levels of price and cost, not the
rate of change of price, that matter.
Moreover, the Commission is concerned
about whether prices are just and
reasonable, not (only) with determining
whether firms ‘‘lack market power.’’
43. In his published work on
competition in long distance markets,
Dr. Taylor has argued that competitive
prices will allow successful firms to
recover their forward-looking
incremental costs including an
acceptable return on its investment.28
He observed that the presence of high
operating margins supports the
conclusion that regulated competition
has not produced substantiall consumer
benefits.29 Dr. Taylor also recognizes
that lower prices and increased demand
can somtimes be mistakenly ascribed to
competition.30
44. In his Declaration in this
Proceeding, Dr. Taylor himself
recognizes the limitations of an analysis
of trends in prices without information
about costs. ‘‘Treating a small but
significant nontransitory increase in
price as an exercise of market power
assumes the initial prices is a
competitive market price. Suppose 10
years of price cap regulation had
constrained ILEC special prices to lie
below a competitive market level. In
that case, a significant and sustained
price increase when price cap regulation
was removed would be welfareincreasing rather than an exercise in
market power.’’ 31 Elsewhere in the
Declaration, Dr. Taylor states: ‘‘In
antitrust economics, this error—treating
an increase from the current price as an
exercise in market power—is called the
‘‘Cellophone fallacy’’* * *’’ 32
However, Dr, Taylor’s analysis does not
actually compare his measure of the
BOC’s special access prices to any
benchmark of cost.
45. Dr. Taylor’s comparison of the
average revenue per special access line
to this price reductions required under
price caps provides to useful
information on the relationship of prices
to costs.33 Under traditional price caps,
the price cap formula of inflation (or
GDP–PI) less increase in productivity in
the telecommunications sector (or the Xfactor) is intended to capture the
expected reduction in cost that would
be achieved by the regulated firm
operating efficiently. As Dr. Taylor
himself points out, actual price changes
may vary dramatically from the average
change embodied in the price cap, so
that differences between prices
(especially when they are
misrepresented by the average revenue
per line) and the price cap in the short
run may not contain useful information
on the state of competition, as indicated
by the price-cost margin.34 In the event,
the cap under the CALLS plan was
never intended to represent expected
changes in cost, and a comparison of
price changes to GDP–PI—X during the
CALLs period is not helpful in
determining whether prices are
converging to the relevant costs.
46. Dr. Taylor also suggests that
problem of allocating common costs
make direct price-cost comparison
impossible. This is correct if the costs of
special access are predominantly
common costs as between special access
31 Taylor
Declaration at 36.
Declaration at footnote 21.
33 See Figure 3, and the associated discussion.
Taylor Declaration, page 9.
34 Taylor Declaration at 31.
32 Taylor
28 Taylor
and Zona, page 230.
and Zona, page 229.
30 Taylor and Zona, page 237.
29 Taylor
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and other services, but not if a large
fraction of the cost is the cost of
customer-specific last-mile
infrastructure that the customer uses for
special access. Indeed, as I have argued
elsewhere,35 a core principle of
Telecommunications Act unbundling is
that the common-cost problem much
less severe if one is pricing network
elements such as loops than if one is
pricing services such as long-distance
access. I understand that special access
is essentially the full bundle of services
of the loop or similar last-mile
infrastructure (perhaps together with
transport).
47. The BOCs have not submitted
estimates of the forward-looking
economic costs of special access,
focusing instead on limitations of
available accounting costs in the ARMIS
records. However, forward-looking
economic costs can be estimated using
two reasonable approaches. First, UNE
rates for dedicated transport are often
based on forward-looking economic
costs calculated using an engineeringeconomics cost proxy model. I
understand that high capacity UNEs
(DS1s and DS3s) and perhaps especially
EELs are the functional equivalent of
special access, so directly relevant UNE
rates exist. Second, the rates charged by
a competitive provider of special access
services are unlikely to be
systematically below its forward-looking
economic cost. Thus UNE rates and
CLEC special access charges may be
useful benchmarks for comparing an
ILEC’s special access rates versus
forward-looking long-run cost.
48. The record in this proceeding
includes a substantial amount of
information on the relationship between
UNE prices and special access prices,
including:
22, 33–34). Additionally, mileage costs were
twice as high in price flex MSAs ($8/mile)
than under price caps ($3.90/mile).’’ 37
sroberts on PROD1PC70 with NOTICES
‘‘In comparing special access vs. UNE
prices, Worldcom found the jDS1 UNE loops
were about 18% less than comparable special
access prices and DS3 UNE loops 28% less.
The fixed portion of transport under UNEs
was about 10% less for DS1s and the fixed
DS3 transport UNE prices were actually
higher than special access. On the other
hand, major variances occurred on interoffice
mileage (average DS1 UNE per mile charge
was $1.52 vs. $13.72 for special access, and
for DS3s it was $23.35 vs. $57.84).’’ 36
‘‘In Atlanta, the mileage component of a
10-mile (UNE) EEL was $1.80, whereas
BellSouth charge $180 in mileage in MTM
special access prices or $80 under their
discount plan. Similar disparities are found
in Southwestern Bell and Ameritech (pp 21–
49. A study by Mr. Joseph Stith of
AT&T compares (a) special access rates
in price cap areas to the corresponding
rates in areas where the BOCs have been
granted pricing flexibility, (b) price cap
rates to the corresponding UNE rates,
and (c) price flexibility rates to UNE
rates. He finds that ‘‘for a 10-mile circuit
the Bells’ tariffed rates are on average,
significantly above their rates for
equivalent UNEs.’’ 38 Mr. Stith finds
similar results for zero-mile circuits.
50. In its Comments in this
Proceeding, BellSouth Submitted a
study by RHK showing that ILEC prices
substantially exceed either comparable
UNE rates or competitors’ rates.39 The
study reports that BellSouth’s average
special access prices are $240, $1,356
and $5,077 for DS1, DS3 and OCN
circuits. The average prices for
BellSouth’s UNE transport element for
DS1 and DS3 circuits are reported to be
$141 and $623, or about half the
corresponding special access prices. The
average prices charged by competitive
carriers for DS1, DS3 and OCN circuits
are reported to be $140, $700, and
$3,300, respectively, or about half the
corresponding Bell special access
prices. Since UNE prices are based on
estimated forward-looking costs and
since competitive carriers presumably
seek at least to cover their forwardlooking costs, the RHK study is
consistent with the conclusion that
BellSouth’s special access prices
considerably exceed forward-looking
costs.
51. The RHK study purports to show
that BellSouth has a small revenue share
for many categories of special access
services, yet it reports that BellSouth’s
prices for these services are significantly
higher than the prices charged by
competing carriers, and also
considerably higher than UNE rates. The
study does not explain why, in an
apples-to-apples comparison, BellSouth
is able to charge a substantial premium
over its competitors, and maintain
prices in excess of UNE rates based on
forward-looking costs.
52. The evidence thus suggests that
special access rates are often
significantly above corresponding UNE
rates. The UNE rates are based on
forward-looking cost, incorporating
(unlike competitive carriers’ pricing)
35 Joseph Farrell, ‘‘Creating Local Competition’’,
Federal Communications Law Journal 49:1,
November 1996, 201–215.
36 Henry G. Hultquist, Worldcom, Letter to
Marlene H. Dortch, 10/29/02, FCC, Docket CC 96–
98, 98–147, 01–338 (p. 7).
37 NuVox, Initial Comments, 10/4/04, WC 04–313,
p. 22.
38 Declaration of M. Joseph Stith, WC Docket No.
04–313, September 30, 2004. At 17.
39 Declaration of Stephanie Boyles, June 8, 2005.
WC Docket No. 05–25.
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ILEC-level economies of density. ILEC’s
special access rates are also
considerably higher than the rates
charged by competitive carriers.
Certification
I hereby certify, under penalty of perjury,
that the statements and information
contained in my declaration are correct and
true to the best of my knowledge.
Joseph Farrell,
29 July, 2005.
Attachment 3—Comments of Elliot
Spitzer, Attorney General, State of New
York, on the Proposed Final Judgments
In The United States District Court For
The District of Columbia
United States of America, Plaintiff, v.
SBC Communications, Inc. and AT&T
Corp. Defendants; Judge: Emmet G.
Sullivan
[Civil Action No. 1:05CV02102]
United States of America, Plaintiff, v.
Verizon Communications Inc. and MCI,
Inc., Defendants; Judge: Emmet G.
Sullivan
[Civil Action No. 1:05CV02103]
Comments of Eliot Spitzer, Attorney
General, State of New York, on the
Proposed Final Judgments
Pursuant to Section 2(b) of the
Antitrust Procedures and Penalties Act,
15 U.S.C. 16, Eliot Spitzer, the Attorney
General of the State of New York,
respectfully submits the following
comments on the Proposed Final
Judgments 1 (‘‘PFJs’’) in the above
referenced matters.
I. Introduction
The New York Attorney General
(‘‘AG’’) is charged with enforcing state
and Federal antitrust and consumer
protection laws. The AG advocates in
administrative and judicial proceedings
on behalf of New York State, consumers,
and the public interest generally. The
AG has long advocated on behalf of
competition in the telecommunications
sector in both the national and state
legal and regulatory area. The AG has
participated actively in numerous New
York Public Service Commission
proceedings to support competition in
New York State and has filed comments
there as well as at the FCC on a broad
range of telecommunications
1 Department of Justice, Antitrust Division,
United States v. SBC Communications Inc. and
AT&T Corp.; Competitive Impact Statement,
Proposed Final Judgement, Complaint, Stipulation,
70 FR 74334 (Dec. 15, 2005); Department of Justice,
Antitrust Division, United States v. Verizon
Communications Inc. and MCI, Inc.; Competitive
Impact Statement, Proposed Final Judgement,
Complaint, Stipulation, 70 Fed. Reg. 74350 (Dec.
15, 2005).
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sroberts on PROD1PC70 with NOTICES
competition issues over the years,
including comments with both agencies
regarding the proposed Verizon-MCI
merger.2
Through Verizon New York Inc.,
Verizon Communications Inc.
(‘‘Verizon’’) provides regulated and
unregulated telecommunications
services in New York, and is the
dominant provider in multiple service
markets from Maine to Virginia. MCI
Inc.’s (‘‘MCI’’) subsidiaries provide
telecommunications services on a
regulated and unregulated basis in New
York and, since before the breakup of
AT&T in 1984, MCI has played a key
competitive role in business, long
distance and local service markets.
While SBC Communications, Inc.
(‘‘SBC’’) has had only a limited
competitive presence in New York, it
provides regulated and unregulated
telecommunications services and is the
dominant provider in multiple service
markets in 13 states.3 AT&T Corporation
(‘‘AT&T’’) provides telecommunications
services on a regulated and unregulated
basis in New York and is the nation’s
largest provider of enterprise services,
while also establishing itself as a
leading long distance and local service
competitor.
Together, MCI and AT&T maintain
the most comprehensive local and longhaul facilities which are required by
major enterprise customers. Since the
Telecommunications Act of 1996, AT&T
and MCI have also established
themselves as the most successful
competitive local exchange carriers
(‘‘CLECs’’) in New York and nationwide.
Telecommunications are vital to New
York’s information-intensive economy,
which is the national and global center
of the financial services and other major
industries. For over a generation,
increased competition in
telecommunications has been the
driving force behind fair prices, high
quality, innovative offerings and greater
access to services. As a result of New
York City’s economic preeminence,
increased competition for
telecommunications services took hold
here before other parts of the state and
country, and has been the most robust.
The Tunney Act process can play an
essential role in ensuring that strong
competition continues in New York and
nationwide.
While the U.S. Department of Justice
(‘‘DOJ’’) attempts to downplay the role
2 See, e.g., https://www.oag.state.ny.us/
telecommunications/telecommunications.html.
3 Although SBC has chosen to adopt AT&T’s
name following its merger closing, we refer to the
two companies by their pre-merger identities to
avoid ambiguity.
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for the Court in reviewing the adequacy
of the PFJs, Congress has made this
Court the final arbiter of the propriety
of these mergers under the antitrust
laws. The Court must ‘‘determine that
the entry of such judgment is in the
public interest,’’ and, if it cannot so
find, it must reject the PFJ unless more
adequate provisions are made to protect
the public interest. 15 U.S.C. 16(e). See,
e.g., United States v. Microsoft Corp., 56
F.3d 1448, 1458 (D.C. Cir. 1995)
(‘‘Congress, in passing the Tunney Act,
intended to prevent ‘judicial rubber
stamping’ of the Justice Department’s
proposed consent decree[s]’’) (reversing
district court’s rejection of consent
decree on other grounds).
Taken together, these mergers will
change the face of the
telecommunications industry. Postmerger these two companies will
overwhelmingly dominate
telecommunications markets and will be
in a position to inhibit competition,
customer choice and innovation. The
remedies contained in the PFJs are
unlikely to constrain the merged
entities.
There are two key areas of concern.
First, the PFJs inadequately address
local private lines, which are of major
importance to business customers.
Second, the PFJs ignore the effect of the
mergers on Internet access. For the
reasons discussed below, this Court
should find that these mergers are not
in the public interest and reject the PFJs.
II. Local Private Lines
As DOJ acknowledges, the mergers
will lessen competition substantially for
Local Private Lines (‘‘LPLs’’), more
commonly know as ‘‘special access’’
lines. LPLs are dedicated point-to-point
circuits, that enable secure high-speed
voice and data transfer typically used by
businesses and other enterprises. LPLs
are especially critical for inter-office
communications in the financial
services industry, a key component of
New York’s economy.
A. The Mergers Will Eliminate FacilitiesBased Competition in the ‘‘Last Mile’’
The most critical component of an
LPL is the ‘‘last mile,’’ i.e., the last
stretch of the connection from the
carrier’s network to the commercial
building in which the customer is
located. As incumbent local exchange
carriers (‘‘ILEC’’), Verizon and SBC are
often the only carriers with access to
many buildings. CLECs must lease lastmile access from these incumbents if no
other provider has gained access to the
customer’s location, and if right-of-way
excavation or building entry costs
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17227
inhibit the CLEC from constructing a
new last mile connection of its own.
MCI and AT&T have made the most
significant inroads of all competitors to
Verizon and SBC in gaining access to
commercial buildings, by going through
the time-consuming and costly process
of laying their own competitive access
lines. MCI and AT&T also lease last mile
facilities from the ILECs to reach
customers in buildings not reached by
any CLEC. In many buildings in major
commercial centers nationwide, MCI
and AT&T have become key competitive
carriers, who offer customers seeking
LPL service a choice other than the
incumbent ILEC. Entry into the retail
special access market by CLECs other
than MCI and AT&T, via laying their
own last-mile connections, is negligible.
This retail competition by MCI and
AT&T will be eliminated by the
mergers.
B. The Mergers Will Eliminate
Discounted ‘‘Last Mile’’ Wholesale
Leasing
The ILECs lease bundled long-haul
and last-mile LPL facilities to CLECs at
significant large-volume discounts,
which only AT&T and MCI can take
advantage of because of their scale and
ability to make longer-term purchase
commitments. Thus, MCI and AT&T
have also been essential players
providing competition in the wholesale
market for last mile access. MCI and
AT&T have acted as price constrainors
on the ILECs. MCI and AT&T have also
resold the incumbent ILECs’ last mile
access to other, smaller CLECs at
discounted rates. Without this
secondary wholesale market offered by
AT&T and MCI, smaller CLECs will no
longer have access to these discounted
prices.
C. The Remedy Proposed by the PFJ for
the ‘‘Last Mile’’ Is Inadequate
In order to preserve some competition
in the retail market for last mile access,
the Verizon-MCI PFJ requires Verizon to
divest a miniscule number of MCIowned telecom facilities in individual
buildings where MCI is the only telecom
provider besides Verizon with last-mile
connections in the building. Likewise,
SBC would have to divest certain AT&T
assets according to a similar scheme.
These minimal divestitures will affect
only a handful of buildings in major
markets—a mere 17 in all of New York
City, and only 38 buildings throughout
all of New York State. Although Verizon
and MCI are competitors in many
hundreds of buildings in New York
State, DOJ has used an unduly narrow
permissive screen, which results in only
38 buildings receiving limited
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divestitures to address adverse
competitive effects of the mergers.
DOJ is missing the forest for the trees.
As a threshold matter, an individual
building cannot plausibly be a
geographic market for antitrust
purposes. Indeed, here, the buildings
are simply scattered commercial
locations amidst MCI’s existing network
in New York City and statewide. They
do not, themselves, form the critical
mass needed to build a network. Nor are
they network gateways or anchors that
might have distinctive value. In
consequence, any would-be competitor
who acquired the divested MCI facilities
serving these scattered buildings would
have neither the scope nor scale
necessary to stand in MCI’s competitive
shoes. It is, therefore, hard to see how
this remedy could have any significant
positive effect on competition beyond
the footprint of the handful of
individual buildings identified—
assuming that the divestitures can be
accomplished at all. Is the DOJ really
prepared to inform the Court that the
divestiture of access lines into these few
buildings will have a competitive
impact on pricing in general for LPL
access in either New York City or the
state generally? If not, the proposed
remedy is mere window dressing.
Moreover, under the PFJ, DOJ retains
the right, in its sole discretion, to
exclude assets and rights.4 Thus, even
the 38 buildings in New York state
could disappear from the Verizon-MCI
PFJ divestiture list if DOJ concludes that
any or all are not necessary to remedy
the competitive harm. In other words,
the remedy is written in disappearing
ink. Either the divestitures are needed to
remedy a likely antitrust violation or
they are not. Surely the Court cannot be
expected to decide that the public
interest is served by a decree that has
the potential for its divestiture remedies
to vanish.
III. Internet Access Issues
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The two proposed mergers raise
antitrust concerns relating to Internet
services, concerns that are not
sufficiently addressed by the PFJs.
The PFJs do not address whether
Verizon and SBC should be required to
permanently provide unbundled, standalone DSL service to all customers, nor
do the PFJs prohibit discrimination in
4 70 FR at 74365 (‘‘Lastly, with the approval of the
United States, in its sole discretion, and at the
purchaser’s option, the Divestiture Assets may be
modified to exclude assets and rights that are not
necessary to meet the aims of this Final Judgement.
This will allow for minor modifications of the
Divestiture Assets to exclude assets that may not be
necessary in order to remedy the competitive
harm.’’)
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favor of Verizon’s or SBC’s own services
in the use of their Internet backbone.
The risks associated with these trends
are real and will have serious adverse
effects on competition and the public if
unchecked.
These two transactions will result in
the two combined companies
controlling over fifty percent of the
nation’s Internet backbone.5 Recent
post-merger statements by the Chief
Executive Officers of Verizon and SBC
foreshadow the companies’ plans to
manage access to their Internet
backbone more restrictively, by, for
example, charging a premium for
priority access.6
A. DSL
1. Unbundled DSL
Both Verizon and SBC offer
consumers access to the Internet
through broadband connections known
as Digital Subscriber Lines (‘‘DSL’’).
DSL service is a dedicated high speed
digital connection to the Internet
provided over the traditional copper
telephone lines. Verizon and SBC offer
DSL service to their in-region small
business and residential customers over
these standard wireline connections.7
DSL is necessary for customers to use
telephone wires to access high speed
data services as well as voice over
Internet protocol (‘‘VOIP’’) services.
Typically, Verizon and SBC bundle DSL
with their wireline voice services. This
type of offering inhibits customers’
ability to choose a competing provider
for voice or data services.
For example, telephony using VOIP
has the potential to be a major
competitor to wireline telephone
services. But stand-alone VOIP requires
customers to secure broadband ‘‘last
mile’’ access from another provider,
typically via DSL. By only selling its
DSL service bundled with its monopoly
voice service, Verizon and SBC
discourage their customers from
choosing competitive VOIP providers.
The Verizon customer cannot give up
the Verizon voice service in favor of a
competitive VOIP provider while
keeping the customer’s Verizon DSL
broadband access. The negative effects
on competition are apparent, and
indeed, may snuff out VOIP’s
5 Nicholas Economides, The Economics of the
Internet Backbone, NYU Law and Economics
Working Papers, Paper 4, p. 377 (2004).
6 See, e.g., Arshad Mohammed, ‘‘SBC Head
Ignites Access Debate,’’ Wash. Post., Nov. 4, 2005
at D01.
7 While other variations of DSL, used primarily by
medium and larger business customers, do not
share a telephone line with voice traffic, these
comments focus on the residential and small
business DSL market.
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competitive potential before it even
takes off.
2. Verizon Offers Stand-Alone DSL Only
On a Limited Basis
In March 2005, the FCC ordered
Verizon and other carriers to allow their
existing customers who subscribe to the
carriers’ voice and DSL service to port
their phone numbers to a new voice
carrier.8 In response, Verizon informed
competing voice carriers that such
customers should be advised that
porting the number, and thus
terminating their Verizon voice service,
would cause their Verizon DSL service
to be disconnected as the two services
were inseparable.9 Subsequently, during
the FCC and DOJ review of the VerizonMCI merger, Verizon publicly expressed
a willingness to allow its existing
customers in the former Bell Atlantic
service territories to maintain their
Verizon DSL broadband service in the
event that they discontinued Verizon’s
telephone service.10 However, even this
option is not available to new Verizon
customers or those outside the former
Bell Atlantic service territories who seek
to subscribe to stand-alone DSL at the
outset.11 For these customers, the only
way to obtain VOIP with Verizon DSL
would be to subscribe initially to
Verizon’s voice telephony and DSL, to
pay the required connection charges,
and only thereafter to jettison the
unwanted voice service. This
8 FCC Docket Number WC 03–251, BellSouth
Emergency Request for Declaratory Ruling, FCC 05–
78, Memorandum Opinion and Order and Notice of
Inquiry, rel. March 25, 2005, 20 FCC Rcd 6830;
2005 FCC LEXIS 1817; 35 Comm. Reg. (P & F) 1063.
9 Verizon claimed that customer identification
issues prevented it from offering wireline and DSL
services independent of each other. By contrast,
Qwest Communications International Inc., the
smallest regional Bell operating company
(‘‘RBOC’’), has offered stand-alone DSL for quite
some time. See Yuki Noguchi, Merger Critics Seek
Telecom Regulation, Wash. Post, April 20, 2005, at
E5. The inference is inescapable that Verizon is
deliberately stalling so as to hinder competition
from other VOIP providers.
10 Matt Richtel, Some Verizon Customers to Get
Stand-Alone D.S.L., N.Y. Times, April 19, 2005, at
C7. In conjunction with the April 18, 2005
announcement, in a notice to CLECs, Verizon
explained that CLECs no longer had to alert
customers that porting would result in
disconnecting their DSL service. Instead, Verzion
said that CLECs should alert customers that DSL
service might be disconnected, and that the
customer should contact Verizon to determine how
to handle the service. There still seems to be some
ambiguity whether every existing Verizon customer
seeking stand-alone DSL will actually be able to do
so. Moreover, Verizon has not disclosed whether its
stand-alone DSL will be priced at a premium or at
a price comparable to that of the DSL component
of the bundled product.
11 E.g., those customers formerly served by GTE
before its acquisition by Bell Atlantic would not
have the option of stand-alone DSL.
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constitutes a significant anticompetitive
hurdle.
While retarding competitive entry by
VOIP providers in this manner, Verizon
has committed billions of dollars to
expand its fiber-to-the-premises (FTTP)
network. As this expansion is
completed, it will allow Verizon to
replace its DSL service with an array of
high speed products to better compete
with broadband and video services
offered by cable providers. Thus far,
however FTTP is available only in
limited areas.12 While the roll-out of
FTTP progresses Verizon has little
incentive to offer stand-alone DSL—
particularly when refraining from doing
so hinders VOIP providers from
competing against Verizon’s monopoly
voice product.
Indeed, Verizon’s own Annual Report
indicates that offering DSL and other
services on an unbundled basis is not
likely to be a high priority for Verizon
at all, as the bundles themselves give
Verizon a competitive advantage over
other service providers. Verizon’s 2004
Annual Report highlights the company’s
‘‘continuing initiatives to more
effectively package and add more value
to our products and services. Innovative
product bundles include local wireline
services, long distance, wireless and
DSL for consumer and business retail
customers. * * * These efforts will also
help counter the effects of competition
and technology substitution that have
resulted in access line losses in recent
years.’’ 13
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3. The FCC Required That Verizon and
SBC Offer Stand-Alone DSL
The significance of the stand-alone
DSL issue is demonstrated by the
merger conditions ordered by the FCC
and various state regulators. As part of
the approval of the Verizon/MCI and
12 News Release, Verizon Communications Inc.,
Verizon Brings Blazing-Fast Computer Connections
to 5 Long Island Communities, (April 11, 2005)
available at https://newscenter.verizon.com/
proactive/newsroom/release.vtml?id=90318
(‘‘Verizon customers in Massapequa, Wantagh,
Franklin Square, Port Washington and Oyster Bay
now can experience breathtaking high-speed
Internet access as the company begins to offer its
Verizon FiOSSM (FYE’-ose) Internet Service to
homes here.’’).
13 Verizon Communications Inc., 2004 Quarterly
Report (for the period ending September 30, 2004),
pp. 20–21 (2005). See also Verizon Communications
Inc., 2003 Annual Report, Exhibit 13 (2004) (noting
that decreases in certain revenue streams were
‘‘partially offset by increased demand for our DSL
services’’). Last year, Verizon noted that ‘‘[a]s of
year-end 2003, approximately 48% of Verizon’s
residential customers have purchased local services
in combination with either Verizon long distance or
Verizon DSL, or both.’’ Verizon Communications
Inc., 2003 Annual Report, p. 6 (2004). By September
30, 2004, that number had increased to 53%.
Verizon, 2004 Quarterly Report (for the period
ending September 30, 2004), p. 26 (2005).
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SBC/AT&T transactions, the FCC
required that the parties make standalone DSL available to customers in
region without requiring the purchase of
wireline telephone services for a period
of two years.14 While this condition
recognized the competitive value of
stand-alone DSL, the two year time
frame moots its effect. The scheduled
expiration of the requirements will not
only cripple VOIP as a competitive
voice telephone service; the mere
prospect of such an event is likely to
inhibit investment and growth mass
market VOIP providers.
The public interest should not depend
on whether Verizon and SBC decide to
offer stand-alone DSL of their own
volition after the two-year requirement
expires. Recognizing the advantage that
Verizon and SBC derive from offering
their DSL service only as a bundled
product, DOJ should have considered
whether Verizon and SBC are likely to
eliminate DSL on a stand-alone basis as
soon as the FCC’s merger conditions
expire. In approving the transactions,
DOJ should have required customer
access to unbundled services for longer
than two years as a condition of its
approval.
B. The Internet Backbone
1. The Mergers Will Increase Internet
Backbone Concentration
The combinations of Verizon with
MCI and SBC with AT&T will
dramatically increase concentration of
Internet backbone facilities, and will
enable Verizon and SBC to exert market
power over competing Internet service
providers (‘‘ISPs’’) and content
providers, to the detriment of
consumers.15 In recent statements,
executives of both Verizon and SBC
have stated that they intend to abandon
the established practice of equal access
for all Internet traffic by favoring their
14 FCC Docket No. 05–65, In the Matter of SBC
Communications and AT&T Corp. Applications for
Approval of Transfer and Control, FCC 05–185
Memorandum Opinion and Order, adopted October
31, 2005, rel. Nov. 17, 2005, 2005 FCC LEXIS 6385;
37 Comm. Reg. (P & F) 321; FCC WC Docket No.
05–75, In the Matter of Verizon Communications
Inc. and MCI, Inc. Applications for Approval of
Transfer of Control, FCC 05–184, Memorandum
Opinion and Order, adopted Oct. 31, 2005, rel. Nov.
17, 2005 FCC LEXIS 6386; 37 Comm. Reg. (P & F)
416. The New York Public Service Commission also
ordered Verizon to provide unbundled DSL, also for
a period of two years. New York State Public
Service Commission, Order Asserting Jurisdiction
and Approving Merger Subject to Conditions, Case
05–C–0237, Joint Petition (issued November 22,
2005).
15 The vast majority of Internet users in the
United States access the Internet infrastructure
through ISPs. While AOL is by far the largest ISP,
many smaller ISPs exist, some of whom have
customers only in limited regions. Nicholas
Economides, supra, p. 375.
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own services and charging premiums to
competing ISPs for providing
comparable service.16 All other traffic
would be subjected to lower grade
service. This prospect could have
significant anticompetitive impacts on a
number of Internet-based services, such
as those that rely upon video streaming,
and would alter the very nature of the
Internet.
The Internet backbone comprises high
speed hubs, to which customer data
packets, including electronic mail and
voice services, are sent by ISPs, and
high speed circuits that connect the
hubs to move data from one location to
another. In most instances, the data is
broken up into smaller packets to speed
delivery. Because the data packets
usually flow over multiple providers’
backbones before reaching their final
destinations, different providers’
backbones must interconnect to deliver
customer traffic.17 Thus, the Internet
backbone provides data transport and
routing services, moving the data to the
appropriate destinations with a
minimum of loss and delay.
The primary Internet infrastructure in
the U.S. has approximately ten major
backbones—often referred to as ‘‘Tier 1
providers’’—plus independent ISPs that
use this backbone to provide services to
customers.18 One source identifies MCI
and AT&T as two of the world’s top five
Internet backbones.19 According to In
Stat-MDR, a market research firm, ‘‘[a]t
the end of 2000, 10 backbone providers
generated 92 percent of all wholesale
ISP revenues’’ in the U.S.20 In Stat-MDR
found that the three top providers in
2002 were MCI with 44% of the Internet
backbone, Genuity with 12.5% and
Sprint with 9.4%.21 Based on those
numbers, these three providers alone
comprise two-thirds of the Internet
backbone market and yield an
Herfindahl-Hirshfeld Index of 2180
without including the remaining smaller
16 See e.g., Dionne Searcey and Amy Schatz,
‘‘Phone Companies Set Off Battle Over Internet
Fees,’’ Wall St. Journal, Jan. 6, 2006 at A1.
17 Nicholas Economides, supra, p. 375. For a more
detailed understanding of the Internet backbone see
Michael Kende, The Digital Handshake: Connecting
Internet Backbones, FCC Office of Plans and Policy
Working Paper No. 32 (September 2000) and
Nicholas Economides, supra.
18 Data about the Internet backbone are often
incomplete or outdated or do not specifically
identify whether the data are based on usage,
revenue or some other measure. The merging
parties were unable and/or unwilling to provide
current data during the review of the transactions.
19 Internet Backbone Lookup Page, https://
www.cybercon.com/backbone.html. The others are
Sprint, Qwest and Level 3.
20 ISP-Planet Staff, ISP Backbone Market Forecast:
Flat Through 2002 at https://isp-planet.com/
research/2002/backbone_020123.html.
21 Id.
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providers. This would be considered a
highly concentrated market.
Tier 1 Internet backbone providers
achieve interconnection of their
backbones through what is known as
‘‘peering.’’ Through peering, Tier 1
providers agree to afford each other the
ability to freely move data across
networks without fees in mutually
beneficial arrangements. Smaller
backbone providers, on the other hand,
are frequently considered free riders, as
they generate too little traffic to be
peering partners. Because Tier 1
providers generally do not consider nofee peering with small providers to be
sufficiently beneficial, smaller providers
often enter into fee-based agreements—
called ‘‘transit’’ arrangements—with
Tier 1 providers.
These fee-based arrangements for
interconnection are not necessarily
problematic in a competitive market.
However, if only a few providers control
backbone access, the resulting
opportunity for these few to hinder the
operations of smaller backbone
competitors by refusing to interconnect
with them, or by imposing onerous fees
or conditions on interconnecting, has
significant anticompetitive and public
interest implications. Those Tier 1
backbone providers would have both
the ability and incentive to, for example,
charge significantly higher fees,
prioritize their own data packets, block
certain ISP transmissions, or end their
cooperative relationships with smaller
backbones entirely.22
Consequently, regulatory action has
been necessary to preserve competition
when the Internet backbone was
threatened by earlier corporate
combinations and mergers. In 1998,
when WorldCom, the owner of Internet
backbone assets, proposed to acquire
MCI, then the owner of UUNet backbone
assets, the FCC required WorldCom to
divest its backbone assets to Cable &
Wireless.23 Similarly, when the FCC
considered the merger application of
Bell Atlantic and GTE (which resulted
in the formation of Verizon), the FCC
weighed the public interest impact of
the consolidation of companies’ Internet
backbone holdings. Indeed, the FCC
concluded that the merging parties had
‘‘not demonstrated any merger-specific
benefits to the market for Internet
backbone services.’’ 24Accordingly,
22 Kende,
supra, pp. 18–23.
Docket No. 97–211—Application of
WorldCom, Inc. and MCI Communications
Corporation for Transfer of Control of MCI
Communications Corporation to WorldCom, Inc.,
Memorandum Opinion and Order, FCC 98–225 (rel.
Sept. 14, 1998).
24 CC Docket No. 98–184—In re Application of
GTE Corporation, Transferor, and Bell Atlantic
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approval of the GTE/Bell Atlantic
merger was conditioned, in part, on
GTE’s divestiture of its Internet
backbone.25
Taken together, the Verizon-MCI and
SBC–AT&T mergers would significantly
increase concentration in the Internet
backbone market. Neither the FCC order
nor the PFJ gave serious consideration
to this critical issue, and to the effect of
these mergers on the Internet backbone.
2. Verizon and MCI’s Internet
Backbones 26
MCI, by its own acknowledgement,
owns ‘‘one of the most extensive
Internet protocol backbones.’’ 27
Recently, MCI reported that its
backbone network ‘‘has been recognized
for the fourth consecutive year * * * as
the world’s most connected Internet
backbone playing a critical role in the
movement of Internet traffic. Our
expansive IP footprint, coupled with our
direct interconnections, enables our
customers to reach more destinations
directly through our global Internet
backbone than any other
communications provider.’’ 28
MCI’s extensive backbone thus
represents an attractive, strategic asset.
According to MCI’s 2003 Annual
Report, MCI occupies:
a strategically important position within
the communications market . . . availability
due to the extremely rapid growth of Internet
usage resulting from the increasing
availability of high speed broadband access,
the decreasing cost of all types of Internet
access, the expanding volume of informative
and entertaining content, the continued
improvement in e-mail and instant
messaging, and the ever increasing number of
personal computers, and other devices for
accessing the Internet. Corporations and
government entities have responded by
developing additional applications to run
over the Internet that allow communications
and e-commerce transactions with customers,
communications with employees and the
transfer of data among offices and operating
units.29
Corporation, Transferee For Consent to Transfer
Control of Domestic and International Sections 214
and 310 Authorizations and Applications to
Transfer Control of a Submarine Cable Landing
License, Memorandum Opinion and Order, released
June 16, 2000, at ¶ 215.
25 CC Docket 98–184, supra, at ¶ 215 (footnote
omitted) (‘‘Although we agree with the Applicants
that the Internet backbone market is highly
concentrated, we nonetheless conclude that the Bell
Atlantic and GTE have presented insufficient
evidence regarding how their proposed merger
would alleviate such concentration and benefit
consumers of long-haul data services.’’).
26 We focus on the Verizon and MCI Internet
backbone as Verizon is the major ILEC in New York
State.
27 MCI, Inc., 2003 Annual Report 2 (2004).
28 MCI, Inc., 2004 Quarterly Report (for the period
ending September 30, 2004) 33 (2004).
29 MCI, Inc., 2003 Annual Report 15 (2004).
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Although public information
regarding Verizon’s current Internet
backbone ownership is incomplete,
there can be no doubt that the
opportunity to amass a dominant
Internet backbone position is a driving
force behind the company’s decision to
acquire MCI. As the companies stated in
their Application to the FCC:
The Verizon/MCI combination of product
offerings will provide a stronger, and
geographically broader, converged solution
for large enterprises. Verizon currently has
strong IP-based offerings, but they have
limited reach within its area footprint and
Verizon is not a major provider of IP-based
services. MCI’s core strength is its global
Internet backbone, which provides global IP
connectivity today, and will be able to
provide next-generation VoIP and other IPbased services worldwide tomorrow.30
But the consolidation of Verizon’s
assets with MCI’s Internet backbone also
holds significant risks of adverse
consequences to competition and
innovation. The issues related to
consolidation of the Internet backbone
were not raised by the parties in their
Joint Petition, which fails to identify: (1)
Whether Verizon already controls a
share of the Internet backbone, (2) the
share of the Internet backbone held by
MCI, and (3) the combined share of the
Verizon/MCI assets. These risks were
not addressed by DOJ in the VerizonMCI PFJ, nor by the FCC in its approvals
of the transactions. These omissions are
striking.
The Court should reject the VerizonMCI merger unless and until Verizon
provides the information needed to
make an informed decision regarding
the extent to which backbone
concentration will increase as a result of
the proposed merger with MCI. Based
on that information, together with
further public comment evaluating it,
the appropriateness of divestiture of
backbone assets should be assessed.
3. The Threat to Competition Is
Concrete
The consolidation of the Internet
backbone as a result of the mergers is
not an issue in the abstract. As the
combined Verizon/MCI and SBC/AT&T
move to offer more bundled product
packages over their backbones—such as
offering VOIP and video services—the
increased need for bandwidth may
strain their existing systems,
encouraging Verizon and/or SBC to give
priority to their own products. This
prioritization would disadvantage
consumers who use non-Verizon/SBC
Internet service providers to access
information and services that must
30 Application,
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Federal Register / Vol. 71, No. 65 / Wednesday, April 5, 2006 / Notices
travel across the Verizon and SBC
backbones.
The proposed combinations also
would adversely impact other Internet
backbone providers who lack the
capacity to offer the same panoply of
services. The more extensive offerings
would drive traffic to Verizon and SBC
and, moreover, increase the companies’
market share.
Vital public policy, therefore, requires
that Verizon’s acquisition of MCI’s
Internet backbone, and SBC’s
acquisition of AT&T backbone, when
combined with their current Internet
backbone holdings, not diminish either
consumers’ or competitors’ equal and
unfettered access to the Internet.
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4. The Mergers Risk Creating a
Discriminatory Internet Class Structure
There is a risk that, post-merger,
Verizon and SBC will have Internet
backbones that carry their own products
in first class, while competitors ride in
coach, pay more or never get to ride at
all. A combined Verizon/MCI entity
would be well positioned to create an
Internet infrastructure that restricts
access to the Internet backbone for
countless businesses, institutions and
individuals.31 At stake is nothing less
than the ability of Internet access
providers, such as Verizon and SBC, to
limit or diminish consumers’ access to
Google, Vonage or any other content or
service provider that does not pay its
fees. The resulting Internet ‘‘class
structure’’ would not only affect the
ability of smaller competitors to
participate in the marketplace of ideas
and services, it risks drastically altering
the character of the Internet. This would
not only reverse the cultural and
economic revolution that the Internet
has inspired, but also would change the
nature of the Internet, in which
participants compete based on the
quality of their content or services, not
on their ability to pay fees to the
backbone providers.
As demonstrated by recent Verizon
and SBC statements, this danger is a
likely near-term reality. Both SBC and
Bell South have publicly advocated a
two tiered Internet. SBC’s public
statements on the topic became more
frequent after its acquisition of AT&T
31 By way of example, there exists today a process
known as ‘‘tagging,’’ which allows a provider to use
rule-based and policy-based filtering to limit the
flow of data packets. If packets are ‘‘tagged,’’ the
network recognizes the class of service and priority
assigned it for real-time delivery to ensure a high
quality of service. Using tagging, Verizon could
assign a higher transit priority—first class status—
to data packets originating on its own system, while
relating a lower priority—coach status—to the data
packets from outside traffic that needs to access
Verizon’s Internet backbone.
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was approved.32 SBC Chairman Edward
E. Whitacre, Jr. is one of the most vocal
proponents of a tiered system, stating
that ‘‘Why should they be able to use
my pipes? The Internet can’t be free in
that sense, because we and the cable
companies have made an investment
and for a Google or Yahoo or Vonage or
anybody to expect to use these pipes
free is nuts.’’ 33 As an Amazon.com
representative said after hearing Mr.
Whitacre’s comments, ‘‘What Mr.
Whitacre’s interview revealed was, I
think he said two very distinct things.
One is that the service providers have
market power. * * * and part two was,
we intend to use it.’’ 34 Though Verizon
waited to clear all regulatory hurdles to
the merger with MCI before addressing
the issue, its position is in line with that
of SBC. Verizon Chairman Ivan
Seidenberg recently stated that, ‘‘We
have to make sure they don’t sit on our
network and chew our capacity.’’ 35
IV. The PFJs Undo Thirty Years of
Federal Telecommunication
Competition Policy
At least since DOJ commenced
antitrust enforcement action against the
national telephone monopoly, AT&T,
over thirty years ago, resulting in the
breakup of ‘‘Ma Bell’’ in 1984, the
Federal government has pursued a
policy to encourage competition in all
sectors of the rapidly changing
telecommunications industry. The PFJs
represent a significant step backwards,
and will likely lead to a more
monopolistic industry in the future.
MCI and AT&T have been the leading
competitors to the regional Bell
companies, Verizon and SBC, in the
twenty years since the AT&T monopoly
was broken up. However, as a result of
these mergers, Verizon and SBC will
become vertically integrated, dominant
providers of local, long distance,
wireless and Internet services to
business and residential customers in
large regions of the country. If these
mergers proceed without stronger
remedial protections, Verizon and SBC
will be free to recreate within their
regions the monopoly maintained by
AT&T prior to 1984.36 With the
32 Declan McCullagh, ‘‘Playing favorites on the
Net’’, CNET News.com (Dec. 21, 2005) https://
news.com.com/Playing+favorites+on+the+Net/
2100-1028_3–6003281.html.
33 Arshad Mohammed, ‘‘SBC Head Ignites Access
Debate,’’ Wash. Post., Nov. 4, 2005 at D01.
34 McCullagh, supra note 31.
35 Dionne Searcey and Amy Schatz, ‘‘Phone
Compnies Set Off Battle Over Internet Fees,’’ Wall
St. Journal, Jan. 6, 2006 at A1.
36 Despite Verizon’s and SBC’s assertions that
new technologies such as VOIP and cable
telephony, as well as wireless providers pose
significant competitive threats to the ILECs, it is
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elimination of Verizon’s and SBC’s
major competitors (MCI and AT&T),
prices can be expected to rise, and
telephone users, from large business
customers to small businesses and
residential customers, are likely to find
fewer service choices. DOJ should have
analyzed the national and regional
impact of both mergers together and, at
least, required divestiture substantial
enough to create a realistic opportunity
for industry participants to step into
MCI’s and AT&T’s competitive shoes.
Additionally, Verizon and SBC will
each have a powerful incentive to
refrain from competing in each other’s
territory and to focus on their respective
regions. The two telecommunications
mammoths will have more to gain by
selling each other limited LPL access,
than by engaging in rigorous
competition by installing their own lastmile loops in each other’s region. Even
without coordination, there is a
substantial risk that each will follow its
own economic interests by not
competing, as long as the other does the
same. This kind of tacit collusion or
mutual forebearance is highly
anticompetitive, whether or not the
parties actually agree to form a cartel.
The PFJs do nothing to counter this
substantial threat.
V. Conclusion
The Court should not give DOJ ‘‘a
pass’’ in its review of these important
mergers. The long term implications are
too important for too many people and
businesses in New York and, indeed,
throughout the country. Nothing in the
PFJs is likely to preserve effective
competition at any level in the affected
markets, or to prevent the harm to the
public that will follow the reduction in
competition. The proposed remedies
are, at best, cosmetic. Based on the
current state of affairs, the Court should
reject the PFJs as insufficient and
contrary to the public interest.
Dated: New York, New York, February 13,
2006.
Respectfully Submitted,
Eliot Spitzer,
Attorney General of the State of New York.
By:
Jay L. Hines,
Chief, Antitrust Bureau
Mary Ellen Burns,
Special Counsel, Public Advocacy Division.
Jay L. Himes,
premature to rely on such alternatives to substitute
for the competition that MCI and AT&T have
offered. These competitors do not play a significant
role in business markets, having inadequate market
share, reliability or security to handle sensitive data
traffic. Thus, they cannot be relied upon to restrain
Verizon or SBC from exercising market power after
the merger.
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Chief, Antitrust Bureau.
Susanna Zwerling,
Chief Telecommunications & Energy Bureau.
Peter D. Bernstein,
Keith H. Gordon
Jeremy R. Kasha.
Assistant Attorneys General of Counsel.
120 Broadway, New York, NY 10271, Tel
No.: (212) 416–8262, Fax No.: (212) 416–
6015.
[FR Doc. 06–3090 Filed 4–4–06; 8:45 am]
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Agencies
[Federal Register Volume 71, Number 65 (Wednesday, April 5, 2006)]
[Notices]
[Pages 17164-17232]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-3090]
[[Page 17163]]
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Part II
Department of Justice
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Antitrust Division
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Competitive Impact Statements and Proposed Consent Judgments--Response
to Public Comments; Notice
Federal Register / Vol. 71, No. 65 / Wednesday, April 5, 2006 /
Notices
[[Page 17164]]
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DEPARTMENT OF JUSTICE
Antitrust Division
Response to Public Comments on the Proposed Final Judgments in
United States v. SBC Communications, Inc. and AT&T Corp. and United
States v. Verizon Communications Inc. and MCI, Inc.
Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.
16(b)-(h), the United States hereby publishes the three comments
received on the proposed Final Judgments in United States v. SBC
Communications, Inc. and AT&T Corp., Civil Case No. 1:05CV02102 (EGS),
and United States v. Verizon Communications, Inc. and MCI, Inc., Civil
Case No. 1:05CV02103 (EGS), filed on March 21, 2006 in the United
States District Court for the District of Columbia, together with the
response of the United States to the comments. On October 27, 2005, the
United States filed separate complaints alleging that the proposed
acquisitions of AT&T Corp. (``AT&T'') by SBC Communications, Inc.
(``SBC'') and MCI, Inc. (``MCI'') by Verizon Communications, Inc.
(``Verizon'') would both violate section 7 of the Clayton Act, 15
U.S.C. 18, by substantially lessening competition in the provision of
local private lines (also called ``special access'') and other
telecommunications services that rely on local private lines in eleven
and eight, respectively, metropolitan areas--SBC/AT&T: Chicago; Dallas-
Fort Worth; Detroit; Hartford-New Haven, Connecticut; Indianapolis;
Kansas City; Los Angeles; Milwaukee; San Diego; San Francisco-San Jose;
and St. Louis; and Verizon/MCI: Baltimore; Boston; New York;
Philadelphia; Tampa; Richmond, Virginia; Providence, Rhode Island; and
Portland, Maine. To restore competition, the proposed Final Judgments,
if entered, would require the defendants in both actions to divest
assets in the metropolitan areas listed above in order to proceed with
the acquisitions. Public comment was invited within the statutory 60-
day comment period. The comment and the response of the United States
thereto are hereby published in the Federal Register, and shortly
thereafter these documents will be referenced in a Certificate of
Compliance with Provisions of the Antitrust Procedures and Penalties
and filed with the Court, together with a motion urging the Court to
enter the proposed Final Judgment. Copies of the Complaint, the
proposed Final Judgment, the Competitive Impact Statement, and other
papers are currently available for inspection in Room 200 of the
Antitrust Division, Department of Justice, 325 Seventh Street, NW.,
Washington, DC 20530, telephone: (202) 514-2481 and the Clerk's Office,
United States District Court for the District of Columbia, 333
Constitution Avenue, NW., Washington, DC 20001. (The United States's
Certificate of Compliance with Provisions of the Antitrust Procedures
and Penalties Act will be made available at the same locations shortly
after they are filed with the Court.) Copies of any of these materials
may be obtained upon request and payment of a copying fee.
J. Robert Kramer II,
Director of Operations, Antitrust Division.
In The United States District Court for The District of Columbia
United States of America, Plaintiff, v. SBC Communications, Inc. and
AT&T Corp., Defendants
[Civil Action No.: 1:05CV02102 (EGS)]
United States of America, Plaintiff, v. Verizon Communications Inc. and
MCI, Inc., Defendants
[Civil Action No.: 1:05CV02103 (EGS)]
Plaintiff United States' Response to Public Comments
Pursuant to the requirements of the antitrust Procedures and
Penalties Act, 15 U.S.C. 16(b)-(h) (``APPA'' or ``Tunney Act''), the
United States hereby responds to the public comments received regarding
the proposed Final Judgments in these cases. After careful
consideration of the comments, the United States continues to believe
that the proposed Final Judgments will provide an effective and
appropriate remedy for the antitrust violations alleged in the
Complaints. The United States will move the court for entry of the
proposed Final Judgments after the public comments and this Response
have been published in the Federal Register, pursuant to 15 U.S.C.
16(d).
On October 27, 2005, the United States filed the Complaints in
these matters alleging that the proposed acquisition of AT&T Corp.
(``AT&T'') by SBC Communications, Inc. (``SBC''), and the proposed
acquisition of MCI, Inc. (``MCI'') by Verizon Communications Inc.
(``Verizon''), would violate Section 7 of the Clayton Act, 15 U.S.C.
18.\1\ Simultaneously with the filing of the Complaints, the United
States filed proposed Final Judgments \2\ and Stipulations signed by
plaintiff and defendants consenting to the entry of the respective
proposed Final Judgments after compliance with the requirements of the
Tunney Act. Pursuant to those requirements, the United States filed
Competitive Impact Statements (``CISs'') in this Court on November 16,
2005; published the proposed Final Judgments and CISs in the Federal
Register on December 15, 2005, see United States v. SBC Communications
Inc. and AT&T Corp., 70 FR 74,334, 2005 WL 3429685; United States v.
Verizon Communications Inc. and MCI, Inc., 70 FR 74,350 2005 WL
3429686; and published summaries of the terms of the proposed Final
Judgment and CISs, together with directions for the submission of
written comments relating to the proposed Final Judgments, in the
Washington Post for seven days beginning on December 8, 2005 and ending
on December 14, 2005. The 60-day period for public comments ended on
February 13, 2006, and three comments were received as described below
and attached hereto.
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\1\ Because these matters raised similar issues, including
almost identical allegations of competitive harm and proposed
relief, the United States filed an uncontested motion to consolidate
them on November 1, 2005. That motion was granted by the Court.
Because the Complaints, Competitive Impact Statements, and proposed
Final Judgments in the two matters are virtually identical, the
documents will be referred to collectively. Moreover, because the
comments received by the United States generally relate to both
matters, this response will also refer to both, unless otherwise
indicated.
\2\ The United States filed amended proposed Final Judgments on
November 28, 2005. The amendments added appropriate procedural
recitals regarding the Court's public interest determination to both
proposed Final Judgments and corrected an error in the SBC/AT&T
proposed consent decree, conforming it to the parties' intent. The
SBC/AT&T Competitive Impact Statement reflects the correction to the
proposed Final Judgments. The corrected versions, not the original
versions, were published in the Federal Register. None of the public
comments addressed this aspect of the proposed Final Judgment.
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I. Background: The United States' Investigation and Proposed Resolution
On January 30, 2005, SBC entered into an agreement to acquire AT&T.
On February 14, 2005, Verizon entered into an agreement to acquire MCI.
Over the following eight and a half months, the United States
Department of Justice (``Department'') conducted an extensive, detailed
investigation into the competitive effects of the proposed
transactions. As part of this investigation, the Department issued
Second Requests to the merging parties, as well as more than 60 Civil
Investigative Demands to third parties. In response, the Department
received and considered more than 25 million pages of material. More
than 200 interviews were conducted with customers, competitors, and
other
[[Page 17165]]
individuals with knowledge of the industry. Two commenters here--
COMPTEL and ACTel--represented carriers who had complaints about the
proposed transactions; the investigative staff carefully analyzed their
allegations and submissions, as well as the views and data presented by
dozens of others. While the Department was reviewing these
transactions, the Federal Communications Commission (``FCC''),\3\
numerous state public utility commissions, and several state Attorneys
General conducted their own reviews. The third commenter, the Attorney
General of the State of New York, was one of the reviewing state
officials.
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\3\ The FCC approved the proposed mergers in orders adopted on
October 31, 2005, and released on November 17, 2005, including
voluntary commitments of the parties as conditions. Memorandum
Opinion and Order, In the Matter of SBC Communications Inc. and AT&T
Corp. Applications for Approval of Transfer of Control, FCC WC
Docket No. 05-65 (rel. Nov. 17, 2005), 2005 WL 3099626; Memorandum
Opinion and Order, In the Matter of Verizon Communications Inc. and
MCI, Inc. Applications for Approval of Transfer of Control, FCC WC
Docket No. 05-75 (rel. Nov. 17, 2005), 2005 WL 3099625 (collectively
``FCC Orders'').
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As part of the Department's investigation, it considered the
potential competitive effects of these transactions on numerous
products, customer groups, and geographic areas. For the vast majority
of these, the Department concluded that the proposed mergers were
unlikely to reduce competition. Indeed, the Department concluded that,
viewed as a whole, the transactions were likely to create substantial
efficiencies that could benefit consumers. For the most part, the
mergers combined firms with complementary strengths, assets, and
customer bases. Whereas SBC's and Verizon's strengths were in the
``mass market'' and small business segments, AT&T's and MCI's strengths
were in serving large enterprises; whereas SBC and Verizon had very
extensive local networks, AT&T and MCI had extensive national and
international networks. In areas of significant overlap, with the
exception of the markets alleged in the Complaints, there will remain,
post-merger, sufficient competitive alternatives such that no
anticompetitive effects are likely.
Because AT&T and MCI have among the most extensive local networks
of any competitive local exchange carriers (``CLECs'') in SBC's and
Verizon's regions, the Department devoted substantial time and
resources to analyzing those overlapping assets, and the products and
markets they implicated to determine whether the merger would likely
reduce competition.\4\ The Department sought extensive data from the
merging firms as well as dozens of CLECs regarding their local
networks, and the products provided over those networks. In every
metropolitan area of overlap, the Department found that there were
multiple CLECs with local networks offering products and services very
similar to the merging firms. Indeed, in most of the overlapping
metropolitan areas the acquired CLEC did not even have the most
extensive local network in terms of number of buildings connected or
miles of fiber-optic cable installed. And even in the few cases where
the acquired CLEC did have the most extensive local network, there were
ample other firms that have extensive networks and that continue to
grow those networks.
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\4\ Local networks typically are comprised principally of fiber-
optic cable running throughout the metropolitan area. Fiber
connecting aggregation points is often called ``transport'' fiber,
and fiber running from a central office or node to an end-user
building is often referred to as a loop or ``last-mile connection.''
These local networks are typically used to provide services to large
enterprise customers. As part of its investigation, the Department
interviewed scores of such customers, and received affidavits from
dozens of others. In general, customers had little competitive
concern regarding the proposed mergers and, indeed, many believed
they were likely to be beneficial.
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Nevertheless, the Department identified one limited competitive
problem: for hundreds of buildings, the transactions would combine the
only two firms that owned or controlled a direct fiber-optic connection
to the building, and for a subset of these buildings, entry (i.e.,
another carrier constructing its own fiber-optic connection) was not
sufficiently likely to offset the potential anticompetitive effect.
These fiber-optic connections are used to provide Local Private Lines
\5\ to wholesale and retail customers and value-added
telecommunications services that rely on Local Private Lines.
Accordingly, the Department filed Complaints alleging competitive harm
in this set of buildings and sought a remedy that would ensure that for
each of the buildings where there would otherwise be a reduction in
competition, there would be, post-merger, another carrier besides the
merged firm with a direct fiber-optic connection to the building. In
the Department's judgment, a divestiture of fiber-optic capacity to the
buildings of concern would remedy this potential loss of
competition.\6\
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\5\ ``A Local Private Line is a dedicated, point-to-point
circuit offered over copper and/or fiber-optic transmission
facilities that originates and terminates within a single
metropolitan area and typically includes at least one local loop.
Local Private Lines are sold at both retail (to business customers)
and wholesale (to other carriers). [SBC and Verizon refer] to Local
Private Line circuits as `special access.' Depending on how they are
configured, Local Private Lines can be used to carry voice traffic,
data, or a combination of the two. Local Private Lines may be
purchased as stand-alone products but are also an important input to
value-added voice and data telecommunications services that are
offered to business customers.'' Complaints ]] 13-14.
\6\ The modest nature of the competitive problem, as compared to
the overall value of the mergers, is illustrated by the fact that in
2004, Local Private Lines offered by AT&T in SBC's territory
accounted for less than 0.3 per cent of AT&T's total revenues. And,
the revenues attributable to the buildings at issue in this case
would be a fraction of that.
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As explained more fully in the Complaints and CISs, the proposed
transaction would lessen competition substantially for (a) Local
Private Lines and (b) voice and data telecommunications services that
rely on Local Private Lines in several hundred commercial buildings. To
restore competition, the proposed Final Judgments, if entered, would
require a divestiture of indefeasible rights of use (``IRUs'') \7\ for
lateral connections \8\ to the buildings in question along with
transport facilities \9\ sufficient to enable the IRUs to be used by
the purchaser to provide telecommunications services. Entry of the
proposed Final Judgments would terminate these actions, except that the
Court would retain jurisdiction to construe, modify, or enforce the
provisions of the proposed Final Judgments and punish violations
thereof.\10\
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\7\ ``An IRU (or indefeasible right of use) is a long-term
leasehold interest commonly used in the telecommunications industry
that gives the holder the right to use specified strands of fiber in
a telecommunications facility.'' CISs at 11.
\8\ A ``lateral connection'' is the last segment of the fiber-
optic cable to a building, running from the point of entry of the
building to the splice point with fiber used to serve different
buildings. CISs at 10.
\9\ ``Transport,'' as used in the industry, has no precise
meaning but generally refers to fiber-optic capacity to carry data
between aggregation points on a network. Often, it is used to refer
to ``interoffice transport,'' i.e., carriage of data between two
central offices (switching facilities). In the proposed Final
Judgments and CISs the term more broadly refers to facilities used
to carry data from the splice point of the lateral connection to the
purchaser's network. CISs at 9-11.
\10\ The SBC/AT&T merger closed on December 18, 2005, and the
Verizon/MCI merger closed on January 6, 2006. In keeping with the
United States' standard practice, neither the Stipulations nor the
proposed Final Judgment prohibited closing the mergers. See ABA
Section of Antitrust Law, Antitrust Law Developments 387 (5th ed.
2002) (noting that ``[t]he Federal Trade Commission (as well as the
Department of Justice) generally will permit the underlying
transaction to close during the notice and comment period''). Such a
prohibition could interfer with many time-sensitive deals or prevent
the realization of substantial efficiencies. Here, the magnitude of
the potential competitive harm from the mergers was relatively
small, but delaying the closing of the transactions by the several
months required for the Tunney Act public interest determination
could have costs tens, if not hundreds, of millions of dollars in
lost efficiencies from the transactions as a whole. In consent
decrees requiring divestitures, it is also standard practice to
include ``preservation of assets'' clauses in the decree and
stipulation to ensure that the assets to be divested remain
competitively viable. That practice was followed here. Proposed
Final Judgments Sec. VIII; Stipulations Sec. V. In appropriate
cases, particularly where a separate, distinct operating business is
to be divested, ``hold separate'' provisions are also included. In
the Proposed Final Judgments at issue here, no ``hold separate''
provisions were necessary or appropriate, as the divested assets are
not of a type that could meaningfully be ``held separate.''
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[[Page 17166]]
II. Legal Standard Governing the Court's Public Interest Determination
Upon publication of the public comments and this Response, the
United States will have fully complied with the Tunney Act. It will
then ask the Court to determine that entry of the proposed Final
Judgments would be ``in the public interest,'' and to enter them. 15
U.S.C. 16(e). In making its public interest determination, the Court
shall consider:
(A) the competitive impact of such judgment, including
termination of alleged violations, provisions for enforcement and
modification, duration or relief sought, anticipated effects of
alternative remedies actually considered, whether its terms are
ambiguous, and any other competitive considerations bearing upon the
adequacy of such judgment that the court deems necessary to a
determination of whether the consent judgment is in the public
interest; and
(B) the impact of entry of such judgment upon competition in the
relevant market or markets, upon the public generally and
individuals alleging specific injury from the violations set forth
in the complaint including consideration of the public benefit, if
any, to be derived from a determination of the issues at trial.
Id. section 16(e)(1). As the Court of Appeals has held, the Tunney Act
permits a court to consider, among other things, the relationship
between the remedy secured and the specific allegations set forth in
the government's complaint, whether the proposed Final Judgment is
sufficiently clear, whether enforcement mechanisms are sufficient, and
whether the proposed Final Judgment may positively harm third parties.
See United States v. Microsoft Corp., 56 F.3d 1448, 1458-62 (D.C. Cir.
1995).
The Tunney Act is not intended to impose on a court procedures that
would impair the utility of consent decrees in antitrust enforcement.
Thus, the Act is not to ``be construed to require the court to conduct
an evidentiary hearing or to require the court to permit anyone to
intervene.'' 15 U.S.C. 16(e)(2)(2006). In conducting its public
interest inquiry, ``[t]he court is nowhere compelled to go to trial or
to engage in extended proceedings which might have the effect of
vitiating the benefits of prompt and less costly settlement through the
consent decree process.'' 119 Cong. Rec. 24,598 (1973) (statement of
Sen. Tunney).\11\ Rather:
---------------------------------------------------------------------------
\11\ The public interest determination can be made on the basis
of the CISs and the United States' Response to Comments. The Tunney
Act authorizes the court to use various procedures to gather
additional information, 15 U.S.C. 16(f), but a court need not invoke
them unless it believes that the information already available is
insufficient to resolve any critical issues that the public comments
may have raised. See H.R. Rep. No. 93-1463, 93d Cong., 2d Sess. 8-9
(1974), as reprinted in 1974 U.S.C.C.A.N. 6535, 6538-39.
[a]bsent a showing of corrupt failure of the government to
discharge its duty, the Court, in making its public interest
finding, should * * * carefully consider the explanations of the
government in the competitive impact statement and its responses to
comments in order to determine whether those explanations are
---------------------------------------------------------------------------
reasonable under the circumstances.
United States v. Mid-America Dairymen, Inc., 1977-1 Trade Cas. (CCH) ]
61,508, at ] 71,980, 1977 WL 4352, at *9 (W.D. Mo. 1977).
A court's task under the Tunney Act is to review the negotiated
settlement of a dispute, not to devise a remedy for an adjudicated
antitrust violation. Accordingly, a court may not ``engage in an
unrestricted evaluation of what relief would best serve the public.''
United States v. BNS Inc., 858 F.2d 456, 462 (9th Cir. 1988) (quoting
United States v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir. 1981)); see
also Microsoft, 56 F.3d at 1460-62.\12\ Courts have held that:
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\12\ Cf. United States v. Gillette Co., 406 F. Supp. 713, 716
(D. Mass. 1975) (recognizing it was not the court's duty to
determine whether the proposed decree was the best settlement,
because the parties, not the court, settle the dispute).
[t]he balancing of competing social and political interests
affected by a proposed antitrust consent decree must be left, in the
first instance, to the discretion of the Attorney General. The
court's role in protecting the public interest is one of insuring
that the government has not breached its duty to the public in
consenting to the decree. The court is required to determine not
whether a particular decree is the one that will best serve society,
but whether the settlement is ``within the reaches of the public
interest.'' More elaborate requirements might undermine the
---------------------------------------------------------------------------
effectiveness of antitrust enforcement by consent decree.
Bechtel, 648 F.2d at 666 (emphasis added) (citations omitted).\13\
---------------------------------------------------------------------------
\13\ Cf. BNS, 858 F.2d at 464 (holding that the court's
``ultimate authority under the [Tunney Act] is limited to approving
or disapproving the consent decree''); Gillette, 406 F. Supp. at 716
(noting that the court is constrained to ``look at the overall
picture not hypercritically, nor with a microscope, but with an
artist's reducing glass''); see generally Microsoft, 56 F.3d at 1461
(discussing whether ``the remedies [obtained in the decree are] so
inconsonant with the allegations charged as to fall outside of the
`reaches of the public interest' '').
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The proper test of the proposed Final Judgment, therefore, is not
whether it is certain to eliminate every anticompetitive effect of a
particular merger or to assure absolutely undiminished competition in
the future. Court approval of a consent judgment must be subject to a
standard more flexible and less strict than the standard the court
would apply were it devising a remedy after an adjudication of
liability. Microsoft, 56 F.3d at 1460-61 (``[W]hen a consent decree is
brought to a district judge, because it is a settlement, there are no
findings that the defendant has actually engaged in illegal practices.
It is therefore inappropriate for the judge to measure the remedies in
the decree as if they were fashioned after trial.'' (citation
omitted)); see also United States v. AT&T Corp., 552 F. Supp. 131, 151
(D.D.C. 1982) (``[A] proposed decree must be approved even if it falls
short of the remedy the court would impose on its own, as long as it
falls within the range of acceptability or is `within the reaches of
public interest.' '') (quoting Gillette, 406 F. Supp. at 716), aff'd
sub nom. Maryland v. United States, 460 U.S. 1001 (1983); United States
v. Aclan Aluminum Ltd., 605 F. Supp. 619, 622 (W.D. Ky. 1985)
(approving the consent judgment even though the court might have
imposed a greater remedy had the matter been litigated).
The Court must evaluate the adequacy of the proposed decree as a
remedy for the antitrust violations alleged in the Complaint, not for
other supposed violations. The Tunney Act does not authorize the Court
to ``construct [its] own hypothetical case and then evaluate the decree
against that case.'' Microsoft, 56 F.3d at 1459. Because the ``court's
authority to review the decree depends entirely on the government's
exercising its prosecutorial discretion by bringing a case in the first
place,'' it follows that ``the court is only authorized to review the
decree itself,'' and not to ``effectively redraft the complaint'' to
inquire into other matters that the United States did not pursue. Id.
at 1459-60. The United States is entitled to ``due respect'' concerning
its ``prediction as to the effect of proposed remedies, its preception
of the market structure, and its view of the nature of the case.''
United States v. Archer-Daniels-Midland Co., 272 F. Supp. 2d 1, 6
(D.D.C. 2003) (citing Microsoft, 56 F.3d at 1461).
[[Page 17167]]
In 2004, Congress amended provisions of the Tunney Act, but the
amendments did not materially affect the scope or standard of review.
Where pre-amendment the Act provided a list of factors a court ``may''
consider in making its public interest determination, post-amendment
the court ``shall'' consider the listed factors. Compare 15 U.S.C.
16(e) (2004) with 15 U.S.C. 16(e)(1) (2006) (amended version). Of
course, even before the amendment courts were unlikely to choose to
ignore factors that were on the list, and thus of clear congressional
interest, merely because the statute used ``may'' rather than
``shall.'' The amendment also slightly modified the list of factors. It
added one new factor (whether the terms of the judgment are ambiguous,
15 U.S.C. 16(e)(1)(A), which the Court of Appeals had already made
clear was appropriate to consider, Microsoft, 56 F.3d at 1461-62);
modified a catch-all factor to limit its scope to competitive
considerations; \14\ and added ``upon competition in the relevant
market or markets'' to the list of impacts to be considered, 15 U.S.C.
16(e)(1)(B), as one would expect in an antitrust case. As for
procedure, the amendment added the unambiguous directive that
``[n]othing in this section shall be construed to require the court to
conduct an evidentiary hearing or to require the court to permit anyone
to intervene.'' 15 U.S.C. 16(e)(2).
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\14\ The language was modified to read ``any other competitive
considerations bearing upon the adequacy of such judgment that the
court deems necessary to a determination of whether the consent
judgment is in the public interest.'' 15 U.S.C. 16(e)(1)(A) (italics
indicate new language).
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In addition to amending the Tunney Act, Congress made findings. In
particular, it found that ``it would misconstrue the meaning and
Congressional intent in enacting the Tunney Act to limit the discretion
of district courts to review antitrust consent judgments solely to
determining whether entry of those consent judgments would make a
`mockery of the judicial function.' '' \15\ That finding seems entirely
correct. And, so far as we know, no court has ever construed the Tunney
Act to limit judicial review solely to whether the proposed judgment
would make a ``mockery of the judicial function.'' \16\ In any event,
Congress in 2004 did not change the applicable standard, but limited
itself to a finding purporting to clarify its intent of 30 years ago--a
finding that is not inconsistent with the case law's interpretation of
the Tunney Act.
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\15\ Antitrust Criminal Penalty Enhancement and Reform Act of
2004, Pub. L. No. 108-237, Sec. 221(a)(1)(B), 118 Stat. 661, 668
(2004).
\16\ ``[M]ockery of the judicial function'' echoes Microsoft's
``[a] decree * * * is a judicial act, and therefore the district
judge is not obliged to accept one that, on its face and even after
government explanation, appears to make a mockery of judicial
power.'' Microsoft, 56 F.3d at 1462 (emphasis added). The Court of
Appeals was, of course, not limiting Tunney Act review solely to
whether a decree makes a ``mockery of judicial power.'' It
explicitly stated that in a Tunney Act review, ``the court can and
should inquire * * * into the purpose, meaning, and efficacy of the
decree. If the decree is ambiguous, or the district judge can
foresee difficulties in implementation, we would expect the court to
insist that these matters be attended to. And certainly, if third
parties contend that they would be positively injured by the decree,
a district judge might well hesitate before assuming that the decree
is appropriate.'' Id. at 1462. A comparison of the Tunney Act as
amended, and the associated congressional findings, with Microsoft
perhaps suggests why Senator Hatch, then Chairman of the Senate
Judiciary Committee, said that ``this amendment essentially codifies
existing case law.'' 150 Cong. Rec. S3610, at S3613 (daily ed. Apr.
2, 2004).
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The purpose of the Tunney Act, both before and after amendment, is
clear: courts must determine that a proposed decree is in the public
interest before entering it, and must do so after the public has had an
opportunity to comment and the government has responded to any
comments. As part of that determination, a court should consider
certain factors listed in the Act relating to the competitive impact of
the judgment and whether it adequately remedies the harm alleged in the
complaint. But the scope of a court's review is not unlimited: The
Tunney Act does not permit a court to redraft the complaint, examine
possible competitive harm the United States did not allege, or engage
in a wide-ranging search for the relief that would best serve the
public.
III. Summary of Public Comments and Responses
During the 60-day public comment period, the United States received
comments from COMPTEL, ACTel, and the New York State Attorney General.
Upon review, the United States believes that nothing in the comments
warrants a change in the proposed Final Judgments or is sufficient to
suggest that the proposed Final Judgments are not in the public
interest. These comments, in large measure, do not address whether the
proposed remedy adequately redresses the competitive harm alleged in
the Complaints, but rather whether the United States should have
brought a different much broader case. The comments do include some
concerns relating to whether the proposed Final Judgments adequately
remedy the alleged harms. The United States addresses these concerns
below and explains how the remedy is appropriate.
A. ACTel
1. Summary of Comment
The Alliance for Competition in Telecommunications (``ACTel'') is a
group whose members include CLECs and interexchange carriers (``IXC'')
that buy Local Private Lines at wholesale from the merging
companies,\17\ and compete against the merging companies for retail
business customers. On February 9, 2006, ACTel submitted a comment
alleging that the proposed remedy ``cannot succeed'' and fails to meet
the Tunney Act standard. After some discussion of that standard,\18\
and a description of ACTel's view of the wholesale markets for Local
Private Lines, ACTel criticizes the proposed Final Judgments. ACTel
notes that whereas the Complaints allege harm to competition in the
provision of Local Private Lines, the remedy is focused on the
divestiture of (a) certain laterals to particular buildings, and (b)
sufficient transport to connect those circuits to the network of the
entity purchasing the divested lateral circuits. ACTel identifies what
it claims are three ``deficiencies'' in the remedy that will prevent it
from being effective.
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\17\ ACTel Comment at 3 (attached hereto as Attachment 1). ACTel
was formed in March 2005 by six competitive carriers ``to challenge
the Verizon/MCI and SBC/AT&T mergers'' and was an active complainant
in both the United States' and FCC's investigations of these
transactions. Competitive Carriers Challenge Telecom Mergers (Mar.
15, 2005), available at https://www.allianceforcompetition.com/
newsroom/release/050315-1.php.
\18\ ACTel states that the public interest determination here
``will constitute the first significant application of the Tunney
Act since Congress amended that statute in 2004.'' ACTel Comment at
4. However, since the effective date of the Tunney Act amendments--
June 22, 2004--at least 12 antitrust consent decrees have been
reviewed by courts, found to be in the public interest, and entered.
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First, ACTel notes that the proposed Final Judgements do not cover
all buildings for which the mergers will reduce the number of Local
Private Line competitors from ``2 to 1'' (i.e., buildings where only
the merging firms have last-mile connections). Relying on data
purchased from a third party, ACTel contends that the number of
buildings for which the United States seeks relief is at least two
orders of magnitude less than the number of buildings it believes
present a 2-to-1 problem. It thus contends that the ``Government's
remedy does not include all buildings that the Complaint purports to
cover,'' suggests that the ``Government needs to explain its
methodology,'' and argues that ``[i]f the Proposed Final Judgment does
not address all situations in which AT&T is
[[Page 17168]]
eliminated as the only facilities-based competitive alternative to SBC
for loops, the court must withhold its approval of the settlements.''
\19\
---------------------------------------------------------------------------
\19\ Id. at 12, 15.
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Second, ACTel contends that the proposed Final Judgments are
deficient because they address ``only the part of the Local Private
Line that connects to a building, not the part of the Private Line that
connects to a carrier's network.'' It argues that if the number of
suppliers of the ``transport'' part of the network (the part of a
circuit that interconnects carrier central offices) goes from two to
one, customers of Local Private Lines will still be subject to
competitive harm, and contends that the United States must look at
transport on a ``segment by segment'' basis. In short, ACTel contends
that the proposed remedy is ineffective because customers will ``still
be subject to the `2 to 1' choke hold because the Government's remedy
does not include transport (unless it is attendant to a divested loop
for a building).'' \20\
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\20\ Id. at 21.
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ACTel's third alleged deficiency is that the remedy addresses only
2-to-1 situations, whereas it believes there are ``many
`anticompetitive effects' in Private Line situations beyond `2 to 1'
loops.'' \21\ In particular, it argues that 4-to-3 and 3-to-2
situations also create a competitive problem here, and suggests that
the United States has done ``an about-face'' and engaged in a
``significant departure from established and documented procedures'' by
not alleging a competitive problem in those instances.\22\ Finally,
ACTel argues that a purchaser of the divested assets, even if it is a
``viable, ongoing telecommunications business'' may not be an effective
competitive substitute for AT&T and MCI at least in part because its
network would not be as broad, or its customer base as ``robust.'' \23\
ACTel concludes by suggesting alternate remedies to those contained in
the proposed Final Judgments including divestiture of ``all redundant
loop and transport circuits,'' releasing customers from their current
contracts, and prohibiting the merged firms from raising prices.\24\
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\21\ Id.
\22\ Id. at 23.
\23\ Id. at 24.
\24\ Id. at 25.
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2. Response
Tunney Act review principally addresses the adequacy of the remedy,
not the adequacy of the complaint.\25\ Most of the issues ACTel raises,
however, question the wisdom of the filed Complaints, and urge theories
of competitive harm that the United States did not believe were
supported by the evidence. Additionally, in a number of instances in
which ACTel claims to be challenging the adequacy of the remedy, ACTel
construes the Complaints far too broadly. For instance, ACTel misreads
the Complaints as identifying a competitive problem in all 2-to-1
buildings. The allegations in the Complaints do not reach all such
buildings, and therefore, whether the remedy addresses them is not a
proper subject for Tunney Act review. In any event, the United States
believes the proposed remedy is adequate to redress the likely
competitive harm from the mergers.
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\25\ See, e.g., Microsoft, 56 F.3rd at 1459 (``Congress surely
did not contemplate that the district judge would, by reformulating
the issues, effectively redraft the complaint himself.''); id.
(stating that the district judge may not ``reach beyond the
complaint to evaluate claims that the government did not make'');
BNS, 858 F.2d at 462-63 (The Tunney Act ``does not authorize a
district court to base its public interest determination on
antitrust concerns in markets other than those alleged in the
government's complaint.'') Nothing in the 2004 Tunney Act amendments
could be viewed as suggesting that the reviewing court should look
beyond the allegations in the complaint in determining whether the
proposed decree is in the public interest. Indeed, to do so could
result in the court substituting its prosecutorial judgment for that
of the United States. Were a court to reject a proposed decree on
the grounds that it failed to address harm not alleged in the
complaint, it would offer the United States what the Court of
Appeals for the D.C. Circuit referred to as a ``difficult, perhaps
Hobson's choice'': it would have to either redraft the complaint and
pursue a case it believed had no merit, or else drop its case and
allow conduct it believed to be anticompetitive to go unremedied.
Microsoft, 56 F.3d at 1456.
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a. Transport
In its investigation, the United States examined the extent of
AT&T's local networks in SBC's territory, and MCI's local networks in
Verizon's territory, which the acquired firms use to provide Local
Private Line and related services. In order to analyze the competitive
effects of the mergers, the United States also examined the other CLEC
networks in each metropolitan area of overlap. Using compulsory
process, the United States obtained highly-confidential maps of fiber-
optic networks and information about ``on-net buildings'' \26\ from
more than two dozen different CLECs. The United States found that there
were multiple CLECs with local networks in every metropolitan area
under consideration. Those networks vary in their scope and reach, but
several in each metropolitan area reach the highest volume locations,
especially central offices with sizable demand. Moreover, CLECs
typically continue to add new locations to their networks as demand
warrants.\27\
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\26\ An ``on-net'' building is a building for which a carrier
has built or acquired its own last-mile fiber-optic connection,
connecting the building to its network. Complaints ] 16.
\27\ The FCC reached a similar conclusion. See, e.g., FCC Orders
] 45 (``In many MSAs, some competitors appear to have more extensive
networks than [AT&T/MCI]. We conclude, therefore, that there are
existing competitors with local fiber networks that reasonably could
provide wholesale special access in MSAs where [AT&T/MCI] now
operates local facilities.'').
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Accordingly, the United States concluded that the mergers were
unlikely to create a ``metropolitan area-wide'' competitive problem, or
a competitive problem in the vast majority of buildings in any given
metropolitan area.\28\ Nevertheless, because there is considerable
differentiation in the buildings reached by different carriers
networks, particularly for end-user buildings, in a relatively small
number of buildings the acquired company is the only alternative to the
RBOC \29\ for a last-mile connection. The competitive problem created
by the mergers, therefore, involves this set of buildings.
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\28\ Indeed, for the vast majority of buildings in a given
metropolitan area the SBC or Verizon is the only firm with a last-
mile connection to the building. Complaints ] 15. Accordingly, the
merger results in no less of actual competitive options to that vast
majority of buildings.
\29\ The term ``RBOC'' refers to a regional Bell operating
company, such as SBC or Verizon.
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As ACTel correctly points out, however, the relevant product that
uses this connection or loop is Local Private Lines service (or value-
added services that rely on Local Private Line). What the Complaints
therefore allege is a likelihood of harm in the markets for Local
Private Lines, or services that rely on Local Private Lines, due to a
reduction from two to one in the number of providers of last-mile
connections. In other words, the market is Local Private Line, but the
merger-created bottleneck or competitive problem alleged in the
Complaints is the last-mile connection.\30\ In general, there is no
such bottleneck for transport, nor do the Complaints allege a
competitive problem specific to transport. Thus, contrary to ACTel's
contention, there is no ``inconsistency'' between the Complaints and
proposed Final Judgments in their treatment of transport nor are the
proposed Final Judgments deficient because they address ``only the part
of the Local Private Line that connects to a
[[Page 17169]]
building,'' not the transport part.\31\ It would be inappropriate to
suggest that the remedy is inadequate because it does not address a
competitive harm that the United States neither concluded was likely
nor alleged in its Complaints.\32\
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\30\ Similarly, the proposed Final Judgments focus on
divestiture of ``laterals'' and ``transport'' rather than Local
Private Lines because, as ACTel acknowledges, Local Private Line is
a product, not a specific asset. Any divestiture needs to identify
specific assets, rather than ``products,'' in order to avoid the
very ambiguity that would cause concern under the Tunney Act.
\31\ Indeed, contrary to ACTel's assertion (ACTel Comment at
16), the Complaints never even use the word ``transport.''
\32\ ACTel argues ``the Government must look at transport on a
`segment by segment' basis rather than via area-wide analysis.''
Indeed, the United States effectively did just that. Although the
United States' investigation revealed that the vast majority of
interoffice transport routes where AT&T or MCI is present would also
have competitive alternatives post-merger, the United States, like
ACTel, was concerned about any reduction of competitive options from
two to one that could potentially result. Because an interoffice
transport circuit is essentially a circuit to a central office
location, the United States chose to treat ``central offices'' as
any other building and analyzed Local Private Line connections to
them along with all other buildings connected to AT&T's and MCI's
networks. Ultimately, the United States identified only two SBC
central offices and three Verizon central offices where AT&T or MCI,
respectively, was the only connected CLEC and where entry was
unlikely. Consistent with the United States' approach to other 2-to-
1 buildings where entry was unlikely, these five central offices are
included in the proposed remedy and thus, to the extent that there
is a competitive problem for the small number of transport routes
from these central offices, the proposed Final Judgments will remedy
it.
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The divestiture remedy is focused on the assets that would be
necessary to replace the competition lost in the buildings where harm
was anticipated as a result of the mergers: those assets are the
laterals to the specific buildings that likely would be subject to
anticompetitive effects. As noted in the CIS, however, lateral's are of
little use if they are not connected to a network. Therefore, the
proposed Final Judgments also require the divestiture of IRUs for
transport facilities sufficient to connect the divested laterals to
locations mutually agreed upon by Defendants and the purchaser. This
will ensure that the purchaser can connect the laterals to its network
facilities and provide both Local Private Lines and any other
telecommunications services that rely on Local Private Lines that a
customer in the building may desire.
b. Omitted 2-to-1 Buildings
ACTel complains that the proposed Final Judgments do not cover all
2-2- buildings. However, it incorrectly suggests that it is
``impermissible by the express terms of the Complaint'' for the United
States to have excluded certain 2-to-1 buildings because the Complaints
allege harm in all 2-to-1 buildings. Nowhere do the Complaints state
that there would be competitive harm in all 2-to-1 buildings, nor would
the facts support such an allegation. One reason is that for some of
the 2-to-1 buildings entry would be likely in response to a post-merger
price increase. Indeed, the Complaints specifically list some of the
factors governing whether a CLEC will build fiber to a particular
building and state that ``entry may occur in response to a post-merger
price increase in some of buildings where [AT&T or MCI] is the only
connected CLEC.'' \33\ Similarly, the CISs also discuss entry, and
conclude that ``[w]hile entry may occur in some buildings where [AT&T
or MCI] is the only CLEC present in response to a post-merger price
increase, the conditions for entry are unlikely to be met in the
hundreds of buildings that are the subject of the Complaint[s].'' \34\
The Complaints did not allege, nor were intended to allege, harm in all
2-to-1 buildings; rather the ``subject of the Complaint[s]'' is the
subset of buildings where harm was likely and that were identified in
the proposed Final Judgments.
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\33\ Complaints ] 29. ACTel cites the Complaints on entry,
quoting the language ``entry is unlikely to eliminate the
competitive harm that would likely result from the proposed
merger.'' ACTel Comment at 15. That language recognizes that for the
hundreds of buildings identified in the proposed Final Judgments
entry is indeed unlikely, and a remedy is required. But ACTel omits
the preceding language that acknowledges that for some of the 2-to-1
buildings, entry may well occur. See Complaints ] 29. For these
buildings, a remedy is unnecessary.
\34\ CISs at 8.
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Ambiguity in the terms of a proposed judgment is a legitimate
subject for consideration under the Tunney Act. 15 U.S.C. 16(e)(1)(A).
ACTel contends that there is ambiguity ``due to discrepancy between the
number of buildings the Proposed Final Judgment identifies and what
publicly available data suggests in terms of the number of `2 to 1'
loop buildings affected by the mergers.'' \35\ This ``discrepancy,''
however, is not an ambiguity in the terms of the proposed Final
Judgments. The proposed Final Judgments very clearly specify the
buildings to be divested. It is true that although the Complaints
allege competitive harm in only a subset of 2-to-1 buildings, they do
not specifically list the buildings in that subset. However, the set of
buildings as to which the United States believed there was sufficient
evidence to support a conclusion of competitive harm, and which is the
subject of its Complaints, is the set of buildings identified in the
proposed Final Judgments filed simultaneously with the Complaints.
Thus, the question of whether the United States should have sought
relief in additional 2-to-1 buildings goes not to the adequacy of the
remedy, but rather to the United States' conclusions about where the
mergers might cause competitive harm, and it is therefore not a proper
subject for Tunney Act consideration.\36\
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\35\ ACTel Comment at 12.
\36\ Ultimately, the United States makes two kinds of judgments.
The first is whether and where a particular merger is likely to
cause competitive harm; the second is whether a remedy is likely to
be adequate to remedy the identified harm. The first is not a proper
subject for Tunney Act review, as it would require the Court to
substitute its prosecutorial judgment for that of the United States;
the second is indeed a proper subject for such review, as intended
by Congress. The United States' as to which 2-to-1 buildings pose a
competitive problem and therefore require a remedy is fundamentally
a judgment of the first kind, not the second.
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In any event, the United States believes that divestitures of
laterals to the set of buildings identified in the proposed Final
Judgments are sufficient to remedy any competitive harm that otherwise
would be likely to result from the mergers. In order to identify
buildings where the merging firms were the only carriers with a last-
mile connection (i.e., 2-to-1 buildings),\37\ the United States sought
and received, via compulsory process, ``on-net'' building lists from
AT&T, MCI, and over 30 other CLECs and compared those lists.\38\ The
United States then eliminated from the resulting list of 2-to-1
buildings those buildings where circumstances suggested that there was
no competitive problem. For instance, because where there is no likely
customer, there probably is no harm, the United States eliminated
vacant buildings, buildings where a subsidiary of the merging firms was
the only customer, and buildings with zero current demand for Local
Private Line or related services.\39\
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\37\ The United States' reasons for treating differently
buildings where at least two carriers would have a last-mile
connection post-merger, is discussed below. See infra section
III.A.2.c.
\38\ In its comment, ACTel suggests that the number of 2-to-1
buildings in each metropolitan area is in the thousands. Such
numbers are absurdly high. For instance, ACTel's estimate that there
are 6318 2-to-1 buildings in Los Angeles exceeds AT&T total number
of on-net buildings in that metropolitan area (much less 2-to-1
buildings) by more than twenty times. Contrary to ACTel's assertions
that the number of 2-to-1 buildings in each metropolitan area is in
the thousand buildings, the United States found that the total
number of 2-to-1 buildings in all the alleged metropolitan areas
combined barely reached 1,000 for the Verizon and SBC regions
respectively.
\39\ Of course, it is hypothetically possible that a building in
this category could have a competitive problem, for instance, if
post-merger a new customer moved into a vacant building. However,
Section 7 does not look to some hypothetical possibility of harm,
but rather to a likelihood of harm. See, e.g., New York v. Kraft
General Foods, Inc., 926 F. Supp. 321, 358-59 (S.D.N.Y. 1995)
(``Section 7 deals in `probability,' not `ephemeral possibilities.'
'') (quoting United States v. Marine Bancorp., Inc., 418 U.S. 602,
622-623 (1974))); Fruehauf Corp. v. F.T.C., 603 F.2d 345, 351 (2d
Cir. 1979) (``[T]here must be `the reasonable probability' of a
substantial impairment of competition to render a merger illegal
under Sec. 7. A `mere possibility' will not suffice.'') (citations
omitted).
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[[Page 17170]]
In addition, because entry is likely to occur in response to a
price increase for some set of the 2-to-1 buildings, the United States
considered the prospects for entry for each of the 2-to-1 buildings. As
noted in the Complaints, two of the most important factors in
determining whether entry is likely in a given building is the
proximity of competitive fiber to that building, and the capacity
required by the building.\40\ The United States sought and received
through compulsory process the fiber maps of more than two dozen CLECs.
Using mapping software, the United States compiled ``master''
electronic maps of each of the overlapping metropolitan areas. For each
of the hundreds of buildings in question, the United States identified
the distance to the nearest competitive fiber and compared that with
demand data for each of the buildings. From this, the United States was
able to make judgments about the likelihood of entry in each building.
The buildings it chose to include in the proposed Final Judgments are
those as to which the United States believed it could show that entry
was unlikely, and therefore that competitive harm would be likely.
Accordingly, the divestitures required by the proposed Final Judgments
reflect the set of 2-to-1 buildings where competitive harm was likely,
and should be adequate to remedy the mergers' likely anticompetitive
effects.
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\40\ Complaints ]] 27-28. The closer a building is to a
competitor's fiber, the less it is likely to cost that competitor to
install additional fiber to reach that building (since typically a
major component of the cost of installing fiber is the cost of
digging up city streets to lay new fiber-optic cable and that cost
increases with distance). The larger the demand for capacity in a
building, the greater the expected revenues. The decision of a
carrier whether to enter a building often turns on the extent to
which the expected revenue exceeds the construction cost. See also
CISs at 8.
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c. Anticompetitive Effects Beyond 2-to-1 Loops
ACTel alleges that the proposed remedy does not fix the ``many
`anticompetitive effects' in Private Line situations beyond `2 to 1'
loops'' \41\ such as buildings where the number of providers would go
from four to three to two. The Complaints, however, do not allege a
competitive problem as a result of reducing the number of competitors
serving a building from four to three, or three to two.\42\ Indeed,
ACTel acknowledges this, suggesting that the United States has done
``an about-face'' by not alleging a competitive problem in those
instances in its Complaints. Because the United States did not conclude
that there was likely to be a competitive problem in 4-to-3 or 3-to-2
buildings, there is no reason to have included such buildings in the
proposed remedy.
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\41\ ACTel Comment at 21.
\42\ ACTel's comment incorrectly cites the Complaints. It
alleges that ``according to the Complaint AT&T and MCI are the most
significant competitors for SBC and Verizon,'' ACTel Comment at 21,
and state that ``AT&T and MCI are the most significant and effective
competitors to the acquiring companies,'' Id. at 23. In both cases
it cites to paragraph 17 of the Complaints. Paragraph 17, however,
makes no such allegations. Instead, it makes the more limited
allegations that AT&T and MCI are, respectively ``among the leading
CLECs'' in the number of buildings connected to their networks, and
that for hundreds of buildings, the merging firms are the only two
carriers that own or control a direct building connection.
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In many markets, a merger reducing the number of competitors from
three to two or four to three is a competitive problem and the United
States does not hesitate to bring such cases. To conclude, however,
that a merger is anticompetitive simply because the number of
competitors is reduced from, e.g., three to two, is incorrect. Many
other considerations relating to market structure are also relevant.
Before coming to a judgment on the competitive effect of a merger, the
United states evaluates whether coordinated or unilateral effects are
likely,\43\ whether entry likely will occur, and whether a merger will
generate efficiencies.\44\ Here, given the particular structure of the
marketplace, in looking at buildings where the number of competitors
went from three to two or four to three, the United States was unable
to conclude that the mergers would significantly increase the risks of
coordinated interaction. Moreover, largely because the merging firms
were not especially close substitutes, the evidence did not support a
finding of likely unilateral anticompetitive effects in these
buildings. Finally, the fact that at least two CLECs has added the
buildings in question to their networks suggested that the
characteristics of the buildings (e.g., location, capacity demand) made
them susceptible to entry--significantly more so than the 2-to-1
buildings.\45\ Thus, after almost nine months of analysis, and
consideration of millions of pages of material and hundreds of
interviews, the United States determined that the evidence did not
support alleging a competitive problem in the 3-to-2 or 4-to-3
buildings in the SBC and Verizon territories; the likely competitive
problem is limited to the provision of Local Private Line and related
services in certain 2-to-1 buildings. That is the only competitive harm
alleged in the Complaints, and the only harm that the proposed Final
Judgments properly remedy.\46\
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\43\ United States Department of Justice & Federal Trade
Commission, Horizontal Merger Guidelines, (rev. Apr. 8, 1997) Sec.
2, available at https://www.usdoj.gov/atr/public/guidelines/hmg.htm.
\44\ Id. Sec. Sec. 3, 4. Thus, ACTel's contention that the
United States' decision to allege only a problem in certain 2-to-1
buildings is an ``about-face'' and represents a ``significant
departure from established and documented procedures'' is without
merit. Merger analysis is a complex, fact-specific, case-by-case
undertaking and one which cannot simply be resolved by looking only
at the change in concentration or the number of remaining
competitors in a market. See, e.g., id. Sec. 0 (``Because the
specific standards set forth in the Guidelines must be applied to a
broad range of possible factual circumstances, mechanical
application of those standards may provide misleading answers to the
economic questions raised under the antitrust laws.''); see also
United States v. Continental Can Co., 378 U.S. 441, 458 (1964)
(``Market shares are the primary indicia of market power but a
judgment under Sec. 7 is not to be made by any single qualitative
or quantitative test. The merger must be viewed functionally in the
context of the particular market involved, its structure, history
and probable future.'').
\45\ In arguing that the mergers present competitive problems in
Local Private Lines beyond the limited number of 2-to-1 situations
alleged by the United States, ACTel relies heavily on information it
and its members submitted to the Department and FCC. The Department
devoted significant time to analyzing this date. But based on this
analysis, as well its consideration of the large volumes of other
information gathered during the course of the investigation, the
Department could not draw the same conclusions as ACTel seeks to
draw. Nor, apparently, could the FCC. See. e.g., FCC Orders ] 46.
\46\ The FCC, which conducted its own in-depth analysis of the
transactions, reached a consistent conclusion. FCC Orders ] 40 (``We
find that the terms of the consent decree should adequately remedy
any likely anticompetitive effects in the provision of Type I
wholesale special access services.'').
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d. Divestiture Purchaser
ACTel does raise one point that goes directly to the adequacy of
the proposed remedy. It argues that a purchaser of the divested assets,
even if it is a ``viable, ongoing telecommunications business,'' may
not be an effective competitive substitute for AT&T and MCI at least,
in part, because its network would not be as broad, nor its customer
base as ``robust.'' It is, indeed, important for the success of the
proposed remedy that the divestiture buyer be able to replace the
competition that might otherwise be lost as a result of the merger. For
that reason, the proposed Final Judgments require that the purchaser,
and terms of the purchase, be subject to the United States' approval.
As the CISs note, in scrutinizing the proposed purchaser(s), ``the
United States will be particularly focused on the purchaser's ability
to be a viable competitor in offering Local Private Lines on both a
retail and/or wholesale basis.'' CISs at 9.
In each metropolitan area under consideration there are at least
several
[[Page 17171]]
CLECs with extensive networks, including, e.g., switches, fiber, dozens
or hundreds of``on-net'' locations. Those carriers are already
effective competitors in the metropolitan area. Where those carriers
are not currently effective is the specific buildings here the acquired
firm has fiber