Mergers, Conditions, and the Missing Commissioner

The FCC today unanimously approved SBC’s acquisition of AT&T as well as Verizon’s purchase of MCI, ending a federal approval process that began early this year. For these mergers to take effect, now all that is needed is approval by a few remaining state regulators.

Symbolically, the mergers revolutionize the telecom industry–ending for all intents and purposes the 20-year split between long-distance and local portions of the industry, and he political warfare that went along with it. Yet, there was always less to the mergers than met the eye. Their effect on the marketplace will actually be quite limited. It been a few years since consumers looked to AT&T and MCI for telecom choice, moving instead to wireless and net-based alternatives. And with E-Bay and Google now playing on the telecom field, the significance of these mergers wi. (See “Ma Bells’ Retirement: No Big Deal“) And, with SBC’s announcement that it will change its own name to AT&T, even the cosmetic change is diminished.

Still, there’s a fair amount of gain to be had by integrating these firms into SBC and Verizon respectively. Yet, these gains will be limited, thanks to regulatory conditions placed on the deals. Each firm pledged to abide by restrictions demanded by the Commission, ranging from leasing lines toEven this will be limited, though, by 13 specified conditions, ranging from a freeze on UNE rates to maintaining “settlement free” peering policies for Internet backbone traffic (though the Commission found the mergers did not threaten competition in this market). The conditions even included special commitments regarding the state of Alaska.

The conditions were opposed by the two Republican members of the FCC, Chairman Kevin Martin and Kathleen Abernethy. Abernethy, in a scathing separate statement, wrote:

“I fear that many of [the potential gain from the mergers] will be delayed or compromised. In my judgment, the conditions included in the Orders before us require the merged companies to provide offerings that the market might not demand, to sacrifice synergies by needlessly treating their affiliates at arms’ length, and to maintain business relationships based on current assumptions even if those assumptions cease to reflect economic reality. Moreover, the companies will have to abide by these conditions while their most aggressive competitors–whether they use wireline, wireless, cable, or other, next-generation facilities–remain exempt.”

I have consistently opposed this kind of micromanaged regulatory oversight in situations where competitive forces discipline market behavior. In addition, it is difficult for me to understand how this approach is consistent with this Commission’s support for regulatory parity and competitive neutrality. It is no answer to say that the applicants have agreed to accept these conditions, and therefore they must certainly be good, or at least not all that bad. That position fails to take into account that such conditions are the quid pro quo that merger applicants must accept in order to get timely approval.”

Chairman Martin, for his part, reportedly fought hard for a clean approval of these deals, without regulatory underbrush. But arithmetic was not on his side. The problem was that he chairs a four-member commission, evenly spilt 2-2 between the parties. The crucial fifth seat–to go to a Republican–has been vacant for most of this year, with the Bush Administration yet to even put forth a nominee for the job.

Its unclear how damaging the conditions will be. Perhaps they will not prove to be significant. Yet, it is strange that the White House has been so inattentive to the FCC. Especially so since the Administration–following earlier accusations of telecom neglect–seemed to have placed broadband high on its economic agenda. Perhaps it has fallen off again. Hopefully, the situation will be remedied soon, before this evenly split Commission gets bogged down on even more consequential policy decisions to come.

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