The Magnificent Seven: American Telephony's Deregulatory Shootout, 50 Hastings L.J
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Hastings Law Journal Volume 50 | Issue 6 Article 5 1-1999 The aM gnificent Seven: American Telephony's Deregulatory Shootout Jim Chen Follow this and additional works at: https://repository.uchastings.edu/hastings_law_journal Part of the Law Commons Recommended Citation Jim Chen, The Magnificent Seven: American Telephony's Deregulatory Shootout, 50 Hastings L.J. 1503 (1999). Available at: https://repository.uchastings.edu/hastings_law_journal/vol50/iss6/5 This Article is brought to you for free and open access by the Law Journals at UC Hastings Scholarship Repository. It has been accepted for inclusion in Hastings Law Journal by an authorized editor of UC Hastings Scholarship Repository. The Magnificent Seven: American Telephony's Deregulatory Shootout by JIM CHEN* Table of Contents I. High N oon .................................................................................. 1504 II. The Gunslingers, Then and Now ...................... 1506 A. The Opening Round ........................................................... 1507 B. The Magnificent Seven ...................................................... 1511 (1) POTS and PANS, Hedgehogs and Foxes ................... 1511 (2) Lord Low Everything Else ................. 1513 III. The Legal Mothers of Merger Mania ...................................... 1514 A. Statutory Starters .............. ............ 1515 (1) Section 251 and Allied Provisions ............................... 1516 (2) Section 271: BOC Entry into InterLATA Carriage .1519 * Professor of Law and Vance K. Opperman Research Scholar, University of Minnesota Law School <[email protected]>; Visiting Professor, Heinrich- Heine-Universit~t, DUsseldorf, Germany. This paper was presented in New Orleans on January 8, 1999, at the annual meeting of the Association of American Law Schools and on February 1, 1999, at the Chicago-Kent School of Law. This paper was also presented under the title Die Glorreichen Sieben: Wichtige Fusionen und Erwerbungen der Amerikanischen Telekommunikationsunternehmen,in Dtsseldorf on June 15,1999, with the kind sponsorship of the Deutsch-Amerikanische Juristen-Vereinigung e.V. Paradoxically, trying to present this paper in rudimentary German helped me sharpen my views of this complex topic. The financial support of the Deutsch-Amerikanische Vereinigung Steuben-Schurz e.V. enabled me to visit Germany. I owe a special debt of gratitude to Dean Dirk Olzen and his colleagues at Heinrich-Heine-Universit~t. Back in the United States, Daniel A. Farber, Gil Grantmore, David McGowan, and Philip J. Weiser provided helpful comments. Participants in a workshop held at Vanderbilt University Law School on December 2, 1999, helped me sharpen my final revisions. Tracey A. Holmes and Steven Purcell not only supplied capable research assistance but also exhibited commendable grace under extreme time pressure. Finally, although law review editors are rarely acknowledged in introductory footnotes, the forbearance and finesse demonstrated by Hastings Law Journal editor Rebecca A. E. Fewkes certainly warrant an exception-and my sincere gratitude. [1503] HASTINGS LAW JOURNAL [Vol. 50 (3) The Cable/Telephone Firewall .................................... 1521 (4) FCC Review of Telecommunications Mergers ......... 1523 B. Decisions, Decisions ........................................................... 1526 (1) Section 251: August and Everything After ............... 1527 (2) Section 254: Masters of Universal Service ................ 1532 (3) Section 271: The Firewall Still Stands ........................ 1533 C. The $90 Billion Question ................................................... 1536 IV. Merger Mania: A Succinct Strategic Scorecard ...................... 1538 A. Strategy No. 1: Horizontal BOC Mergers ....................... 1540 (1) The Bicoastal Squeeze .................................................. 1540 (a) SBC/PacTel .............................................................. 1541 (b) Bell Atlantic/NYNEX ............................................ 1542 (c) SBC/Ameritech ....................................................... 1544 (2) "Somewhere in Middle America"............................... 1547 (a) Qwest/US West ....................................................... 1547 (b) B ellSouth .................................................................. 1549 B. Strategy No. 2: Absorbing Independent LECs .............. 1550 C. Strategy No. 3: Avoiding BOC Missteps ......................... 1553 D. Strategy No. 4: From IX Dominance to LX Entry ........ 1555 (1) MCI WorldCom ............................................................ 1555 (2) Sprint .............................................................................. 1557 (3) AT& T ............................................................................. 1560 (a) AT&T/TCI ............................................................... 1561 (b) AT&T/MediaOne ................................................... 1563 E. One If by Air, Two If by Sea ............................................. 1565 (1) A ir ................................................................................... 1565 (2) Sea ...................................................................................1566 V. After the Gold Rush .................................................................. 1567 A. The Bell Scar ....................................................................... 1567 B. All the Commission's Ken ................................................. 1571 C. Other Voices, Other Rooms .............................................. 1575 Appendix A: Major U.S. Telecommunications Mergers Since 1996 .........................................................................................................1581 Appendix B: Major Legal Developments Affecting U.S. Telecommunications Mergers Since 1996 .......................................... 1583 I. High Noon The Telecommunications Act of 19961 promised the world. It has 1. Pub. L. No. 104-104, 110 Stat. 56 [hereinafter Telecommunications Act] (codified in August 1999] THE MAGNIFICENT SEVEN delivered considerably less. The Act's preamble promised that the Act would "promote competition and reduce regulation," "secure lower prices and higher quality services... and encourage the rapid deployment of new telecommunications technologies. ' 2 On its first occasion to review the Act's provisions on local and long-distance telephony, the Supreme Court spoke in far less glamorous terms. "[M]ost unfortunate," lamented the Justices, "for a piece of legislation that profoundly affects a crucial segment of the economy worth tens of billions of dollars," the Telecommunications Act "is in many important '3 respects a model of ambiguity or indeed self-contradiction. The most vociferous critics of telecommunications deregulation argue that the Act has produced nothing but a cascade of megamergers. Consumers Union, for instance, protests that as "telephone monopolies continu[e] to merge rather than compete," the Act "will not deliver on '4 its promise of broad-based competition and lower telephone prices." Implicit in this cry is the assumption that the telecommunications mergers that have occurred since 1996 have done little or nothing to reduce prices, spur innovation, or otherwise enhance consumer welfare. This Article will address questions of law and policy raised by these megamergers. The very fact that I will be discussing "telecommunications" as an industry distinct from broadcasting and other forms of mass communications is a signal that the Act has not succeeded in "opening all telecommunications markets to competition."5 Most of the commentary still focuses on "[t]he two most noteworthy and most controversial changes in the status quo, authorizing competition in local telephone markets and, reciprocally, '6 authorizing Bell operating company... entry into long distance." Part II of this Article will describe the most important changes in the competitive landscape since 1996. In particular, it will recount the rise of the seven firms that now dominate American telecommunications. The Magnificent Seven, as I shall call them, are SBC Communications, Bell Atlantic, BellSouth, Qwest (heir apparent to US West), AT&T, MCI WorldCom, and Sprint. The first four are scattered sections of 47 U.S.C.). 2. Id. at 56 (preamble); cf, e.g., 47 U.S.C.A. § 257(b) (West Supp. 1999) (instructing the FCC "to promote... policies and purposes... favoring diversity of media voices, vigorous economic competition, technological advancement, and promotion of the public interest, convenience, and necessity"). 3. AT&T Corp. v. Iowa Utils. Bd., 119 S. Ct. 721,738 (1999). 4. Consolidationin the TelecommunicationsIndustry, HearingBefore the Subcomm. on Antitrust, Business Rights & Competition of the Senate Judiciary Comm. (Testimony of Gene Kimmelman), 105th Cong., 1998 WL 767370 (Sept. 15,1998). 5. S.CONF. REP. No. 104-230, at 1 (1996) (emphasis added). 6. Glen 0. Robinson, The "New" Telecommunications Act A Second Opinion, 29 CONN. L. REv. 289,289 (1996). HASTINGS LAW JOURNAL [Vol. 50 Bell Operating Companies (BOCs); the last three are interexchange carriers (IXCs) with increasingly diversified business portfolios. Minor players from the parallel worlds of cable television and wireless telephony have remained just that, minor players. The only change is that the leading IXCs have incorporated these lines of business into larger strategies for cracking the BOCs' grip on local telephone markets. Part III describes certain