Policy Framework in Telecommunications Mergers and Acquisitions: a Comparative Analysis of Merger Review of the Fcc and the Doj/Ftc
POLICY FRAMEWORK IN TELECOMMUNICATIONS MERGERS AND ACQUISITIONS: A COMPARATIVE ANALYSIS OF MERGER REVIEW OF THE FCC AND THE DOJ/FTC
By
SEUNG EUN LEE
A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY
UNIVERSITY OF FLORIDA
2005
Copyright 2005
by
Seung Eun Lee
For my parents who have been with me with endless love and support throughout this journey.
ACKNOWLEDGMENTS
It has been a long journey since I first started my academic career as a graduate student and even since I went to Washington, D.C. last summer to obtain documents from the federal government agencies. I would like to thank Ms. Janie Ingalls and Ms. Leona
Johnson at the Antitrust Document Group in the Department of Justice and Ms. Pat
Foster and Mr. John Cunningham at the Federal Trade Commission.
My special thanks go to my advisor and mentor Dr. Bill Chamberlin, Joseph L.
Brechner Eminent Scholar of Mass Communications. He has been with me every step of the way, encouraging, supporting, and believing in me. Having a mentor like him was like having another parent who protected me during my lonely journey in a foreign country. I learned a lot from him both as a student and as a human being. I thank him for all he did for me from the bottom of my heart. I am also indebted to my committee members for their unique contributions and expertise. This research has been guided by
Dr. Sylvia Chan-Olmsted specializing media management and economics and Dr. Justin
Brown specializing telecommunications law and policy. It was such an honor to have
Prof. Jeffrey Harrison, who is an expert in antitrust law and economics with his J.D.,
M.B.A., and Ph.D. in Economics, on my supervisory committee.
I would also like to thank Jody, Dawne, Rachel, Nissa, and other colleagues in the
Marion Brechner Citizen Access Project. Dr. Jin Young Tak, Dr. Chang-Hoan Cho, Dr.
YouJin Choi, Dr. Hyojin Kim, Hyunjung Yun, and the Korean Gators in the College of
Journalism and Communications are the people I would like to acknowledge.
iv Last but not least, no words can express enough my gratitude for my parents and two wonderful brothers Yoonsoo and Younsung. No matter what I do or where I am, they have always stood with me trusting and supporting me. I owe all I am today to my parents. I am always proud of being their daughter. Guiding and inspiring me by living their own good examples, they are God’s loving presence on Earth to whom I will always turn.
v
TABLE OF CONTENTS
page
ACKNOWLEDGMENTS ...... iv
LIST OF TABLES...... xi
LIST OF FIGURES ...... xiii
ABSTRACT...... xiv
CHAPTER
1 INTRODUCTION ...... 1
Mergers and Acquisitions...... 1 Dual Jurisdiction in Telecommunications and Media Mergers...... 4 Different Standards of the DOJ/FTC and the FCC...... 6 Purpose of the Study and Research Questions ...... 7 Organization of Dissertation...... 9
2 THEORETICAL FRAMEWORK...... 11
Theories of Mergers and Acquisitions...... 11 Mergers Defined...... 11 Motivations for Mergers and Acquisitions...... 12 Efficiency ...... 13 Market power ...... 15 Diversification...... 16 Agency problem ...... 18 Horizontal Mergers...... 19 Non-horizontal Mergers ...... 21 Vertical mergers ...... 22 Conglomerate mergers ...... 24 Antitrust Law and Economics ...... 27 Relevant Antitrust Statutes...... 27 The Sherman Act...... 27 The Clayton Act ...... 29 Antirust Theories...... 30 Market power, demand elasticity, and supply elasticity ...... 31 Barriers to entry...... 32
vi Structure-conduct-performance paradigm...... 33 Regulation of the Telecommunications and the Media Industries ...... 37 Relevant Statutes...... 38 The Communications Act of 1934 ...... 38 The Telecommunications Act of 1996 ...... 39 The Public Interest and Competition...... 40 Mergers in the Telecommunications and the Media Industry ...... 48 Deregulation ...... 48 Globalization ...... 49 Vertical Integration...... 50 Economies of Scope ...... 51 Network Effects...... 51 Relevant Literature Review ...... 53
3 MERGER REVIEW PROCESS...... 56
Premerger Notification ...... 56 Evaluation of Mergers: Dual-Agency Review ...... 58 Merger Review of the Department of Justice and the Federal Trade Commission....60 Review Standard under Section 7 of the Clayton Act...... 60 Merger Guidelines...... 60 Review of Horizontal Mergers ...... 62 Market definition...... 62 Product market definition...... 62 Geographic market definition...... 65 Calculating market shares and market concentration...... 65 Potential adverse competitive effects of mergers...... 67 Entry analysis ...... 67 Efficiencies...... 68 Failure and exiting assets ...... 69 Review of Non-horizontal Mergers...... 70 Vertical mergers ...... 70 Conglomerate mergers ...... 73 Merger Review of the Federal Communications Commission...... 74 Review Standard under the Communications Act...... 75 Merger Review of the FCC ...... 76 Merger Enforcement and Remedies ...... 80
4 RESEARCH METHOD...... 85
Selection of Merger Cases...... 85 Frame of Analysis...... 89 Comparison: Merger Review of the DOJ/FTC and the FCC ...... 91 Merger analysis ...... 91 Merger conditions analysis...... 93 Consistency of the standards...... 95 Public Interest Standard of the FCC...... 96
vii Public interest factors...... 96 Necessity of the dual-agency review...... 96
viii Merger guideline factors ...... 185 Other factors and principles ...... 188 Merger conditions ...... 190 Overall review standards and conclusion...... 191 Electronic Merger Analysis ...... 195 TCI and Liberty Media...... 196 DOJ review...... 197 FCC review ...... 199 Comparison ...... 200 Time Warner and Turner...... 201 FTC review...... 203 FCC review ...... 205 Comparison: ...... 207 Westinghouse and Infinity...... 208 DOJ review...... 208 FCC review ...... 210 Comparison ...... 213 Clear Channel and AMFM ...... 214 DOJ review...... 214 FCC review ...... 216 Comparison ...... 218 Univision and HBC ...... 218 DOJ review...... 219 FCC review ...... 221 Comparison ...... 224 Summary...... 225 Merger guideline factors ...... 225 Other factors and principles ...... 227 Merger conditions ...... 228 Overall review standards and conclusion...... 229 Merger Conditions...... 231 Categories of Merger Conditions ...... 231 Comparison...... 234 The DOJ and the FCC ...... 234 Industry sectors and merger type ...... 238 Consistency of the Standards...... 243
6 THE PUBLIC INTEREST STANDARD...... 247
Public Interest Analysis of the FCC ...... 247 Overall Standard...... 247 Specific Tests and Analyses ...... 248 Foreign carrier entry order ...... 248 Transitional market analysis...... 249 Comparative practice analysis...... 250 Market-by-market evaluation...... 250 Merger-specific benefits and efficiencies ...... 251
ix Public Interest Factors ...... 253
7 CONCLUSION...... 258
Discussion of Research Findings...... 258 Review Standards ...... 259 Merger Conditions...... 261 The Public Interest Standard ...... 264 The FCC’s Role as the Sector-specific Regulator ...... 265 Implications of the Study...... 273 Significance of the Study...... 273 Limitations of the Study and Suggestion for Future Research...... 275
APPENDIX MERGER CONDITIONS...... 277
LIST OF REFERENCES...... 337
BIOGRAPHICAL SKETCH ...... 348
x
LIST OF TABLES
Table page
4-1 List of Mergers...... 88
5-1 Relevant Markets and the Review Standards...... 194
5-2 Relevant Markets and the Review Standards...... 230
5-3 Merger Conditions Imposed on 15 Cases ...... 240
A-1 GTE-Southern Pacific (the DOJ conditions)...... 277
A-2 GTE-Southern Pacific (the FCC conditions) ...... 279
A-3 AT-McCaw (the DOJ conditions) ...... 280
A-4 AT&T-McCaw (the FCC conditions) ...... 281
A-5 BT-MCI (the DOJ conditions) ...... 282
A-6 BT-MCI (the FCC conditions) ...... 283
A-7 AT&T-TCI (the DOJ conditions)...... 285
A-8 ATT-TCI (the FCC conditions)...... 287
A-9 SBC-Ameritech (the DOJ conditions)...... 288
A-10 SBC-Ameritech (the FCC conditions) ...... 290
A-11 Bell Atlantic-GTE (the DOJ conditions)...... 295
A-12 Bell Atlantic-GTE (the FCC conditions) ...... 300
A-13 AT&T-MediaOne (the DOJ conditions) ...... 305
A-14 AT&T-MediaOne (the FCC conditions)...... 307
A-15 AOL-Time Warner (the DOJ conditions) ...... 309
A-16 AOL-Time Warner (the FCC conditions) ...... 311
xi A-17 WorldCom-Intermedia (the DOJ conditions)...... 313
A-18 WorldCom-Intermedia (the FCC conditions) ...... 315
A-19 Cingular-AT&T Wireless (the DOJ conditions) ...... 316
A-20 Cingular-AT&T Wireless (the FCC conditions)...... 320
A-21 TCI-Liberty (the DOJ conditions)...... 322
A-22 Time Warner-Turner (the FTC conditions)...... 323
A-23 Westinghouse-Infinity (the DOJ conditions) ...... 326
A-24 Westinghouse-Infinity (the FCC conditions) ...... 328
A-25 Clear Channel-AMFM (the DOJ conditions)...... 329
A-26 Clear Channel-AMFM (the FCC conditions)...... 331
A-27 Univision-HBC (the DOJ conditions)...... 332
A-28 Univision-HBC (the FCC conditions)...... 336
xii
LIST OF FIGURES
Figure page
2-1 Types of Merger...... 20
2-2 The Structure-Conduct-Performance Model of Industrial Organization...... 34
3-1 Relevant Market...... 63
4-1 Merger Conditions...... 94
6-1 Public Interest Factors in Merger Review...... 257
xiii
Abstract of Dissertation Presented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy
POLICY FRAMEWORK IN TELECOMMUNICATIONS MERGERS AND ACQUISITIONS: A COMPARATIVE ANALYSIS OF MERGER REVIEW OF THE FCC AND THE DOJ/FTC
By
Seung Eun Lee
August 2005
Chair: William F. Chamberlin Major Department: Mass Communication
In most industries, a proposed merger that is likely to raise anti-competitive concerns is subject to a regulatory approval from federal antitrust law enforcement agencies, such as the Department of Justice (DOJ) or the Federal Trade Commission
(FTC). In the telecommunications and the electronic media industries, merging companies have the additional burden of obtaining regulatory approval of the Federal
Communications Commission (FCC). In other words, a proposed merger in the telecommunications and the media industries usually requires dual review by both a federal antitrust agency (i.e., the DOJ/FTC) and a sector-specific regulatory authority
(i.e., the FCC). With regard to this dual jurisdiction in mergers involving telecommunications and electronic media service providers, questions have arisen as to how the review standards of the two agencies differ and whether the sector-specific jurisdiction of the FCC in merger review is necessary given that all proposed mergers are subject to the DOJ/FTC investigation under federal antitrust law.
xiv The purpose of this study was to explore the underpinnings of the differences between the DOJ/FTC and the FCC in merger review. This project also aimed to examine how the public interest standard of the FCC addressed the unique characteristics of the telecommunications and the electronic media industries and, thus, contributed to legitimize its sector-specific jurisdiction in merger review.
Examining fifteen mergers and acquisitions (M&A) cases that have been challenged as a violation of Section 7 of the Clayton Act, this study found that the review standard of the FCC was different from that of the DOJ/FTC in terms of the review criteria and the merger remedies as reflected in the conditions imposed on mergers. The study identified the public interest factors that the FCC considers in reviewing each merger. By presenting evidence of the FCC’s distinct perspective in overall merger review standard, merger conditions, and its own public interest inquiry, this study demonstrated that the standards are distinct and different enough to legitimize the dual- agency review. Specifically, the findings from the analysis verified the complementary role of the DOJ/FTC as a federal antitrust enforcement agency and the FCC as a sector- specific agency.
xv CHAPTER 1 INTRODUCTION
This chapter provides the background of this study. Second, this chapter states the
purpose of the study along with the research questions. Lastly, this chapter describes the
organization of the study.
Mergers and Acquisitions
With the advent of new technologies, the telecommunications and the electronic
media industries have undergone an era of convergence, creating large-scale integration
of all elements of the industries, including content and service providers as well as
distributors.1 Convergence of radio and television broadcasting, cable, telephony, and
computer services has been facilitated by business consolidations such as mergers and
acquisitions (M & A) among telecommunications and media companies. Like firms in
other industries, telecommunications and media companies also have often sought to
merge with or acquire other companies to gain a competitive advantage through the
strategic combination of resources and to efficiently expand business into new markets.
Although M & A activities are motivated by external factors, such as rapid industry
consolidation, intensifying global competition, and increasingly complex and rapidly
changing technologies one of the most influential factors on firms’ strategic decisions to
1 THOMAS F. BALDWIN, D. STEVENS MC VOY, & CHARLES STEINFIELD, CONVERGENCE: INTEGRATING MEDIA, INFORMATION AND COMMUNICATION. Thousand Oaks, CA: Sage (1996). The authors identify the elements of the full service networks as information providers and distributors; designers and manufacturers of the equipment and software; the builders and operators of the networks; and the users. They define convergence as the process of creating integrated broadband systems that closely ally elements of all the industries.
1 2
M & A is the law and regulatory framework.2 The recent deregulatory environment has significantly fostered mergers and other business alliances in the media and telecommunications industry. Most notably, the enactment of the Telecommunications
Act of 19963 triggered competition among previously separated local and long distance telephone companies. In addition, a number of restrictions on media ownership have been weakened or eliminated either by courts or the Federal Communications Commission
(FCC). For example, the FCC relaxed the national television station ownership rule that prohibits any entity from controlling television stations the combined audience reach of which exceeds 35 percent of nationwide television households, by increasing its limit to
39 percent.4 Further, local cable-broadcast cross ownership restriction was repealed,
thereby permitting a single entity to own or control both a network of broadcast television
stations and a cable television system in the same area.5 In this deregulatory environment,
2 See, e.g., MICHAEL A. HITT ET AL., STRATEGIC MANAGEMENT: COMPETITIVENESS AND GLOBALIZATION, Mason, OH: Thomson (6th ed. 2004) (identifying the factors affecting firms’ strategic decisions to M&A); See also DONALD DEPAMPHILIS, MERGERS, ACQUISITIONS, AND OTHER RESTRUCTURING ACTIVITIEs, San Diego, CA: Academic Press (2001). 3 Pub. L. No. 104-104, 110 Stat. 56 (1996) (codified in scattered sections of 47 U.S.C.). 4 47 C.F.R. § 73.3555 (2004). The Telecommunications Act increased the limit from 25 percent to 35 percent. The FCC increased the limit to 45 percent in response to the court decision in Fox Television Stations v. Federal Communications Commission, 280 F.3d 1027 (D.C.Cir. 2002) (holding The FCC’s decision to retain the rules was arbitrary, capricious, and contrary to law. The court remanded the ownership rule to the FCC for further consideration). In the 2004 Consolidated Appropriations Act, the Congress downward the FCC’s 45 percent limit to 39 percent. Consolidations Appropriations Act, 108 Pub. L. No. 199, 118 Stat. 3 (2004). 5 68 Fed. Reg. 13236 (2003) (eliminating the cable-broadcast cross ownership rule in response to a court decision vacating the rule and directing the Commission to repeal the rule). See Fox Television Stations v. Federal Communications Commission, 280 F.3d 1027 (D.C.Cir. 2002) (holding The FCC’s decision to retain the rules was arbitrary, capricious, and contrary to law. The court instructed the FCC to vacate the cross-ownership rule).
3
the past decade has witnessed creation of global media conglomerates resulting from
mega-mergers.6
A merged company can increase its market power in a given industry, and thus, in
general, mergers may present threats to competition, depending on the type of merger and
the size and market power of the firms involved. Accordingly, a proposed merger that is
likely to raise antitrust concerns is subject to a regulatory approval from federal antitrust
law enforcement agencies such as the Department of Justice (DOJ) or the Federal Trade
Commission (FTC). Since the jurisdiction of the DOJ and the FTC overlaps in terms of
the public enforcement of the federal antitrust law and merger review, they have
developed a clearance procedure for notifying each other before conducting an
investigation. If both are found to be pursuing the same inquiry, the two agencies decide
which will handle and scrutinize the transaction.7 The agencies’ merger review pursuant to the U.S. antitrust laws have stood as a protector of the competitive process that underlies the free market economy. An antitrust analysis, undertaken either by the DOJ or the FTC (DOJ/FTC),8 focuses on whether the effect of a proposed merger may be
substantially to lessen competition as provided in Section 7 of the Clayton Act.9
6 For example, the merger of America Online, Inc. and Time Warner, Inc., the largest transaction in history with transaction value of $164.7 billion, was approved in 2000. See also Barney Warf, Mergers and Acquisitions in the Telecommunications Industry, 34(3) GROWTH AND CHANGE, 321 (2003) (finding a significant increase in the number of mergers and acquisitions in the telecommunications industry in 1990s). 7 The decision is made generally based on a consideration of factors such as the expertise, and staff availability of the agencies. HERGER HOVENKAMP, FEDERAL ANTITRUST POLICY, § 15.1, St. Paul, Mn: West Group (2d ed. 1999). 8 Since the general antitrust review is conducted either by the DOJ or the FTC, this paper refers to the authority as DOJ/FTC. 9 Section 7 of the Clayton Act, an antitrust statue governing mergers and acquisitions, provides, in pertinent part, that no person . . . shall acquire . . . the whole or any part of the assets of another person . . . where in any line of commerce . . . in any section of the country, the effect of such
4
Dual Jurisdiction in Telecommunications and Media Mergers
In the telecommunications and the media industries, however, merger review is
different from that in other industries: a proposed merger usually requires dual review by both a federal antitrust agency (i.e., DOJ/ FTC) and a sector-specific regulatory authority
(i.e., FCC, which is an expert agency governing the media and telecommunications industry).10 In other words, while firms in most industries can merge on approval of the
DOJ/FTC, merging parties in the telecommunications and the media industries have the
additional burden of obtaining regulatory approval of the FCC. The FCC has concurrent
jurisdiction with the DOJ/FTC under the Clayton Act to disapprove mergers that may
substantially lessen competition11 and under its sector-specific authority pursuant to the
Communications Act.
Both the DOJ/FTC and the FCC focus their reviews on what they believe to be a merger’s effect on competition. Nevertheless, the agencies’ respective statutory mandates for approving a proposed merger differ. The DOJ/FTC reviews mergers pursuant to
Section 7 of the Clayton Act and focuses solely on economic considerations. Meanwhile,
the FCC analyzes mergers under the public interest standard of the 1934 Communications
acquisition may be substantially to lessen competition, or tend to create a monopoly. 15 U.S.C. § 18 (2005). 10 The FCC has the jurisdiction for the electronic media and the telecommunications industries, whereas federal antitrust agencies such as the DOJ and the FTC have industry-wide authority. In contrast to the federal antitrust agencies’ general regulatory regime that govern all industry sectors, regulation by the FCC is called sector-specific in this study. 11 Under Sections 7 and 11 of the Clayton Act, the FCC has the authority to disapprove acquisition of common carriers engaged in wire or radio communications or radio transmissions of energy Section 11 of the Clayton Act, 15 U.S.C. § 21(a) (2005): See also Section 7 of the Clayton Act, 15 U.S.C. § 18 (2005).
5
Act with special consideration of the particular industry.12 The telecommunications and the media industries are unique and important infrastructures because products and services provided in these industries are related to content, ideas, and information with significant social and political influence. It is the FCC’s responsibility to make sure that no transfers of control create a conglomerate so large and so dominate that it has harmful effects on competition.13 In addition, the goal of the FCC regulation in telecommunications and media, in general, is to serve the public interest by protecting a variety of regulatory principles including diversity of media ownership and viewpoints and emphasis on service to local communities (localism) as well as competition.
Accordingly, the FCC’s public interest standard is broader than the DOJ/FTC, in that the
FCC’s analysis includes, but is not limited to, an analysis of the potential competitive effects of the transaction, as informed by traditional antitrust principles.14
12 See United States v. FCC, 653 F.2d 72, 81082 (D.C. Cir. 1980) (en banc) (The Commission’s determination about the proper role of competitive forces in an industry must therefore be based, not exclusively on the letter of the antitrust laws, but also on the ‘special considerations’ of the particular industry.) 13 Mergers in the Telecom Industry: Hearing before the Committee on Commerce, Science and Transportation, U.S. Senate, 106th Cong., 1st Session (November 8, 1999). 14 Although the Commission’s analysis of competitive effects is informed by antitrust principles and judicial standards of evidence, it is not governed by them, which allows the Commission to arrive at a different assessment of likely competitive benefits or harm than antitrust agencies may find based solely on antitrust laws. See In the Matter of Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations by Time Warner Inc. and America Online, Inc., Transferors, to AOL Time Warner Inc., Transferee, Memorandum Opinion and Order, CS Docket No. 00-30 16 16 F.C.C.R. 6547, 6555, at para. 21. (2001) [hereinafter AOL-Time Warner Order]; See also FCC v. RCA Communications, 346 U.S. 86, 96-97 (1953) (To restrict the Commission’s action to cases in which tangible evidence appropriate for judicial determination is available would disregard a major reason for the creation of administrative agencies, better equipped as they are for weighing intangibles by specialization, by insight gained through experience, and by more flexible procedure.); Equipment Distributors’ Coalition, Inc., v FCC, 824 F.2d 937, 947-48 (1st Cir. 1993) (public interest standard does not require agency to analyze proposed mergers under the same standards that the Department of Justice . . . must apply).
6
Different Standards of the DOJ/FTC and the FCC
The dual jurisdiction over mergers in the media and the telecommunications industries is noteworthy especially when the outcomes of the reviews of the two agencies are markedly different. For example, in reviewing the merger between Bell Atlantic and
NYNEX15 -- the combination of two competitive local telecommunications carriers -- the
DOJ and the FCC reached opposite conclusions. While the DOJ issued a two-sentence press release stating that it would not challenge the transaction,16 the FCC declared that the Bell Atlantic-NYNEX merger would harm competition. Thus, the FCC concluded that the merger could not proceed absent the imposition of serious conditions that the
FCC believed would mitigate the potential public interest harm in local telephone competition in the Northeastern United States.17 Further, noting the rapid changes in the telecommunications market caused by the implementation of the Telecommunications
15 At the time of the merger, NYNEX was a local exchange carrier providing telecommunications services in New York, New Hampshire, Vermont, Maine, Massachusetts, Rhode Island, and parts of Connecticut, serving approximately 18 million persons with 17.7 million access lines. Bell Atlantic provided telecommunications services, including voice and data transport and calling services, network access, directory publishing and public telephone services, to customers in New Jersey, Pennsylvania, Delaware, Maryland, Virginia, West Virginia, and Washington, D.C., serving approximately 20 million customers with 20.6 access million lines. In the Applications of NYNEX Corp., Transferor, and Bell Atlantic Corp., Transferee, for Consent to Transfer Control of NYNEX Corp. and Its Subsidiaries, Memorandum Opinion and Order, 12 F.C.C.R.. 19985, 19993-94 (1997) [hereinafter Bell Atlantic-NYNEX Order]. 16 United States Department of Justice, Antitrust Division Statement Regarding Bell Atlantic- NYNEX Merger (Apr. 24, 1997), available at http://www.usdoj.gov/opa/pr/1997/April97/173at.htm. 17 See In the Applications of NYNEX Corp., Transferor, and Bell Atlantic Corp., Transferee, for Consent to Transfer Control of NYNEX Corp. and Its Subsidiaries, Memorandum Opinion and Order, 12 F.C.C.R.. 19985 (1997).
7
Act, the Commission set out a comprehensive framework for future telecommunications mergers.18
Another example of the two agencies’ different approaches to mergers is demonstrated by the merger between AT&T and Comcast Corporation. Announced in
July 8, 2001, this merger would combine the largest cable operator with the third largest cable operator in the United States. It was the second largest deal in media history in terms of transaction value ($72 billion). Closing its investigation of the merger, the DOJ announced that it would not challenge it.19 The FCC, however, concluded that the merger would result in harm to the public interest, particularly in light of the fact that AT&T already had a 27.6 percent interest in Time Warner Entertainment, the second largest cable operator in the U.S. Consequently, the Commission conditioned the merger on the full divesture of AT&T’s interests in Time Warner.20 This example of substantial difference in merger review of the DOJ and the FCC illustrates the complex and unpredictable nature of dual-agency review of telecommunications and media mergers.
Purpose of the Study and Research Questions
With regard to this dual jurisdiction, questions arise as to how the review criteria of the agencies differ, and whether the sector-specific jurisdiction of the FCC is even necessary, since all proposed mergers are subject to DOJ/FTC investigation under federal antitrust law. The purpose of this project is to explore the underpinnings of regulatory differences in competition policy framework of the agencies with regard to their merger
18 Id. 19 United States Department of Justice, Justice Department Will Not Challenge Merger of Comcast and AT&T Broadband (press release), November 13, 2002. 20 In the Matter of Applications for Consent to the Transfer of Control of Licenses from Comcast Corporation and AT&T Corp., Transferors, to AT&T Comcast Corporation, Transferee. 17 F.C.C.R. 23246 (2002).
8
review. The telecommunications and the electronic media industries are two different sectors that have been regulated by the FCC under the Communications Act. Given that both the telecommunications and the electronic media industries have gone through rapid changes in competitive dynamics in markets, especially since the implementation of the
Telecommunications Act, this study further aims to examine to the extent the standards of
review of the agencies are consistent over the years and across the two different industry
sectors.
In addition, this study attempts to examine how the FCC, through the public
interest standard, addressed the unique characteristics of the telecommunications and the
media industries, and, thus how this standard may justify the FCC’s sector-specific
authority in merger policy. This evaluation will help to answer the question as to whether
there should be dual-agency review in media and telecommunications mergers. With
these research objectives, this study analyzes ten telecommunications mergers and five
electronic media mergers that the DOJ/FTC challenged as a violation of Section 7 of the
Clayton Act.
Specifically, the research questions this study attempts to answer include:
How is the competition framework of the FCC different from that of the DOJ/FTC as reflected in the review standards in mergers and acquisitions involving telecommunications and electronic media service providers?
How do the merger remedies of the agencies differ, particularly as reflected in the conditions imposed on mergers?
To what extent are the standards of review of the agencies consistent over the years and across the two different industry sectors of telecommunications and electronic media?
What factors or principles constitute the public interest as applied by the FCC in the merger review?
9
How does the public interest standard contribute to justify the sector-specific regulation of the FCC?
This comparative analysis of merger cases has implications for research in
competition policy with regard to mergers and acquisitions in the telecommunications and the media industries. This analysis will present how the broad regulatory objectives of competition and the public interest are narrowly defined in association with specific values, and how those two principles are applied as specific regulatory standards in merger proceedings. This analysis, then, will also have implications for companies in the telecommunications and the media industries. As mergers are a strategic response of firms to the changes in the technological, economic, and regulatory environment, the impact of a merger reaches not only to the merging parties but also all other firms in the same industry. Further, past mergers impact today’s competitive environment by changing the entire market structure. In addition, firms tend to replicate previous mergers in terms of strategy. In this respect, a comprehensive study of the mergers that have been challenged by antitrust agencies is significant, since the study identifies and examines the factors considered by the regulatory bodies when evaluating those mergers that have potential anticompetitive effects.
Organization of Dissertation
This study is organized into seven chapters. This first chapter has presented the focus of the study, including an outline of the research questions. The second chapter will describe the theoretical and legal background of this study, including theories related to antitrust law and economics as well as the theoretical underpinnings of the regulation of the media and the telecommunications industries. The second chapter also will discuss the literature relevant to the scope of this study to demonstrate how this study adds to the
10 existing body of knowledge. The third chapter will then explain the merger review process of the DOJ/FTC and the FCC. The fourth chapter will articulate the method for answering the research questions.
The results of the analysis will be presented in the fifth and sixth chapters. More specifically, the fifth chapter will compare the two agencies’ merger review standards, merger conditions, and the consistency of the standards over the years and across the two industry sectors. Focusing on the public interest standard of the FCC, the sixth chapter will discuss what factors or principles constitute the public interest in the context of merger proceedings. The seventh chapter will discuss the results of this study and answer whether the public interest standard of the FCC as the sector-specific agency is distinct enough to legitimize the current competition policy regime of dual-agency review in merger proceedings. Finally, the last part of the seventh chapter will present the limitations of the study and suggestions for future research.
CHAPTER 2 THEORETICAL FRAMEWORK
This chapter provides the theoretical framework for this study. The first part of this chapter describes theories of mergers and acquisitions. This part defines types of mergers as well as theories of merger motivations. The second part of this chapter summarizes
basic antitrust law and economics relevant to the scope of this study. The third part
describes regulation of the telecommunications and the media industries with a focus on
the public interest and competition principle under the Communications Act and the
Telecommunications Act. In addition, in the fourth part, the industry-specific merger
drivers are discussed. The last part of the chapter provides the relevant literature review.
Theories of Mergers and Acquisitions
Mergers Defined
Firms strategically seek to merge with or acquire other firms to increase market
power, expand business, or achieve synergies.1 A merger is a strategy through which two
firms agree to integrate their operations on a relatively coequal basis.2 There are few true
mergers because one party is usually dominant. Generally, mergers occur through either
stock or asset purchase of one firm by another.
An acquisition is when one firm buys a controlling, or 100% interest in another
firm with the intent of using a core competence more effectively by making the acquired
1 See next section entitled Motivations for Mergers and Acquisitions for further discussion of the motivations for mergers and acquisitions. 2 MICHAEL A. HITT ET AL., STRATEGIC MANAGEMENT: COMPETITIVENESS AND GLOBALIZATION 204 (6th ed. 2004).
11 12
firm a subsidiary business within its portfolio. While most mergers are friendly
transactions, acquisitions include unfriendly takeovers.3
In general, the terms merger and acquisition are used interchangeably to mean any transaction that forms one economic unit from two or more previous ones. In many cases a merger for antitrust purposes also is broadly defined, meaning merely the purchase by one firm of some or all of the assets of another firm.4 Section 7 of the Clayton Act, an antitrust statue governing mergers and acquisitions, provides, in pertinent part, that no
person . . . shall acquire . . . the whole or any part of the assets of another person . . .
where in any line of commerce . . . in any section of the country, the effect of such
acquisition may be substantially to lessen competition, or tend to create a monopoly.5 In this study, the author uses this broad definition of a merger in antitrust law, which includes the purchase by one firm of the whole or part of the assets of another firm. A firm that attempts to acquire or merge with another company is called an acquiring company. An acquired company, or target, is the firm that is purchased by the acquiring company.
Motivations for Mergers and Acquisitions
There are several theories regarding why firms choose to merge with or acquire other companies. In reality, most of mergers and acquisitions result from different motivations. Some of the motivations are also viewed as benefits of mergers to merging parties. M&A is pursued as a business strategy to overcome entry barrier in markets by lowering risk rather than developing a new product, and thereby making a speedy
3 Id. 4 HERBET HOVENKAMP, FEDERAL ANTITRUST POLICY: THE LAW OF COMPETITION AND ITS PRACTICE § 12.1 (2d ed. 1999). 5 15 U.S.C. § 18 (2005).
13 presence to markets. Common drivers of M&A identified in the literature include efficiency, market power, diversification, and agency problems that refer to situations where M&As are planned by managers who seek self-interest instead of their shareholders’ value.
Efficiency
According to efficiency theory, firms merge to achieve synergy. Synergy refers to the notion that the combination of two businesses can increase firms’ competitive strength and create greater shareholder value than if they are operated separately.
Similarities or complementarities between the acquiring and target firms are expected to result in the combined value of the companies exceeding their worth as separate firms.6
By definition, synergy will not be achieved by one firm unilaterally without a combination of existing businesses.7 Synergy usually implies that gains accrue to the acquiring firm through two sources: operating synergy and financial synergy. First, operating synergy consists of both economies of scale and economies of scope. The theory of economies of scale generally states that a firm’s marginal cost of production decreases as the firm’s operation increases.8 In other words, as a firm grows and production units increase, the firm will likely to have a better chance to decrease its costs.
As such, scale economies are achieved when more units of a good or a service can be produced on a larger scale, yet with less input costs. Economies of scale are most evident in very high fixed-cost industries such as utilities, pharmaceutical, chemical, and
6 MARK L. SIROWER, THE SYNERGY TRAP: HOW COMPANIES LOSE THE ACQUISITION GAME, Free Press: New York (1997). 7 Joseph Farrell and Carl Shapiro, Scale Economies and Synergies in Horizontal Merger Analysis, 68 ANTITRUST LAW JOURNAL 688 (2001). 8 WILLIAM BAUMOL & ALAN BLINDER, ECONOMICS: PRINCIPLES AND POLICY (2d ed, 1982).
14
telecommunications. Beside production, scale economies may be present in other
functional areas of a business such as advertising and promotion, distribution, and
research and development.9
Achievement of operating synergy may also imply economies of scope. Economies
of scope refer to cost savings of a firm resulting from successfully transferring some of
its capabilities and competencies that were developed in one of its business to another
service or product. 10 Economies of scope appear when cost savings can be realized by a
single firm producing several outputs jointly, as compared to many firms each producing
them separately.11 For example, an automobile manufacturer may utilize its skills to
develop lawn mowers and motorcycles. Economies of scope also can occur outside of the
production area. Distribution systems and intangible assets like brand names can be the
source of economies of scope if they are used for more than one product.12 The sharing of
specialized know-how is another important source of economies of scope.13
Second, financial synergy – in contrast to financial synergy – refers to the impact of
mergers and acquisitions on the cost of capital of the acquiring firm or the newly formed
9 MICHAEL PORTER, COMPETITIVE STRATEGY: TECHNIQUES FOR ANALYZING INDUSTRIES AND COMPETITORS, NY: Free Press (1980); Anju Seth, Value Creation and Acquisitions: A Reexamination of Performance Issues, 11(2) STRATEGIC MANAGEMENT JOURNAL 99 (1990). 10 MICHAEL A. HITT, R. DUANE IRELAND, & ROBERT E. HOSKISSON, STRATEGIC MANAGEMENT: COMPETITIVE AND GLOBALIZATION, Mason, OH: South-Western, at 174 (2004). 11 J. Panzar and R. Willig, Economies of Scope, 71 AMERICAN ECONOMIC REVIEW, 268 (1981); Alvin J. Silk and Ernst R. Berndt, Scale and Scope Effects on Advertising Agency Costs, MARKETING SCIENCE (1993). 12 Harbir Sigh & Cynthia A. Montgomery, Corporate Acquisition Strategies and Economics Performance, 8 STRATEGIC MANAGEMENT JOURNAL 377 (1987) 13 David J. Teece, Towards an Economic Theory of the Multiproduct Firm, 3 JOURNAL OF ECONOMIC BEHAVIOR AND ORGANIZATION 39 (1982).
15 firm resulting from the merger or acquisition.14 Empirical studies show contradictory findings regarding mergers’ effect on financial synergy.15 Overall, merging parties frequently cite an argument of improved synergy to justify their decision for merger.
Although some studies found an impact on synergy by mergers, those effects appeared to be consistent with stock market performance rather than a company’s actual performance.16
Market power
A second argument that often drives mergers and acquisitions is market power.
Market power is the ability of a market participant or a group of market participants to control the price, and/or the quantity of the products sold, thereby generating extra-
14 DONALD DEPAMPHILIS, MERGERS, ACQUISITIONS, AND OTHER RESTRUCTURING ACTIVITIEs, San Diego, CA: Academic Press (2001) 15 See, e.g., Sayan Chatterjee, Types of Synergy and Economic Values: The Impact of Acquisitions on Merging and Rival Firms, 7 STRATEGIC MANAGEMENT JOURNAL, 119 (1986) (finding financial synergy could be achieved through mergers); but see RICHARD RUMELT, STRATEGY, STRUCTURE, AND ECONOMIC PERFORMANCE, Boston, MA: Harvard Business School Press (1986) (finding no evidence for financial synergies); Zsuzsanna Fluck &Anthony W. Lynch, Why Do Firms Merge and Then Divest? A Theory of Financial Synergy, 72 JOURNAL OF BUSINESS, 319 (1999) (finding that the merged conglomerates are less valuable than stand-alones despite the financial synergies). Glenn R. Hubbard & Darius Pahila, A Re-examination of the Conglomerate Merger Wave in the 1960s: An Internal Capital Market View, 54 JOURNAL OF FINANCE (3) 1131 (1999) (finding that firms involved in conglomerate mergers in 1960s were more likely to financially distressed than firms involved in related mergers). 16 See, e.g., Katherin Schipper and Rex Thompson, Evidence on the Capitalized Value of Merger Activity for Merging Firms, 11 JOURNAL OF FINANCIAL ECONOMICS 85 (1983) (finding significant positive abnormal performance associated with the announcement of acquisition); Debra K. Dennis & John J. McConnell, Corporate Mergers and Security Returns, 16 JOURNAL OF FINANCIAL ECONOMICS 143 (1986) (showing stock market valued mergers positively); John G. Matsusaka, Takeover Motives During the Conglomerate Merger Waves, 24 RAND JOURNAL OF ECONOMICS 257 (1983) (finding the announcement effect of mergers on positive abnormal returns).
16
normal profits.17 The market power theory suggests that firms merge to improve their
monopoly power to set prices at levels not sustainable in a more competitive market.
According to the Horizontal Merger Guidelines issued by the DOJ and the FTC,18 market power for a seller means the ability to maintain prices profitably above competitive levels for a significant period of time. Market power for a buyer, or for a coordinating group of buyers, is the ability to depress the price paid for a product to a level that is below the competitive price and thereby depress output. Indeed, mergers in the airline industry in the late 1980s did result in higher ticket prices.19 Market power
usually results from the size of a firm and its resources and capabilities to compete in the marketplace. Market power may lead some firms to engage in anticompetitive conduct.20
Dominant market power enables firms to earn significant abnormal profits without fear of
competition from new market entrants.21
Diversification
Another commonly-referred driver of mergers and acquisitions is diversification.
Firms strategically use M&A to diversify their product lines. Firms’ decisions to enter a
17 Market power is the power to force a purchaser to do something that he would not do in a competitive market… It has been defined as the ability of a single seller to raise price and restrict output. Eastman Kodak Co. v Image Technical Services, Inc. 504 U.S. 451, 464 (1992). 18 1992 Horizontal Merger Guidelines, 57 Fed. Reg.41552 (Sep. 10, 1992); 4 Trade Reg. Rep. (CCH) 13, 104, §0.1 The DOJ and FTC jointly issued the merger guidelines that contains standards and rules of merger review. See infra Chapter 3 for further discussion of the merger guidelines. 19 Han E, Kim & Vijay Signal, Mergers and Market Power: Evidence from the Airline Industry, 83(3) AMERICAN ECONOMIC REVIEW 549 (1983). 20 See, e.g., James M. Ferguson, Tying Arrangements and Reciprocity: An Economic Analysis, 30 LAW & CONTEMP. PROBS. 552 (1965) (noting how the anticompetitive nature of tying arrangements and reciprocal dealings depends on the market power of the firm). 21 See, e.g., B. Eckbo, Mergers and Market Concentration Doctrine: Evidence from the Capital Market, JOURNAL OF BUSINESS 241 (1985); Robert C. Feenstra, Deng-shing Huang, & Gary G. Hamilton, A Market-power Based Model of Business Groups, 51 JOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATIONS 459 (2003).
17
new market different from their current line of business often involve risks and
uncertainties. It is considered that M&A is more efficient strategy for a firm to make a
quick presence in a new market and successfully change its current portfolio of business
with lower risk than developing a product internally.22
Corporate diversification may have both costs and benefits, and may either enhance
or diminish firm value.23 In the context of diversification strategies, studies identified the
directions of M&A. The relatedness or unrelatedness of M&A is defined based on the
similarities and connections between merging firms’ businesses. For example, a merger
with a firm in a highly related industry is referred to as a related merger. Empirical
studies showed mixed findings regarding the difference of related and unrelated
diversification in terms of their effect on the firm’s performance. Some research has
found that a company using a related diversification strategy outperformed unrelated-
diversified firms by exploiting economies of scope between its business units.24 Further,
research has shown that the more related the acquired firm is to the acquiring firm, the
22 Michael A. Hitt, Robert E. Hoskisson, R. Duane Ireland & Jefferey S. Harrison, Effects of Acquisitions on R&D Inputs and Outputs, 34 ACADEMY OF MANAGEMENT JOURNAL 693 (1991). 23 While some research found diversification enhances firm value (e.g., Charles J. Hadlock, Michael Ryngaert, & Shawn Thomas, Corporate Structure and Equity Offerings: Are there Benefits to Diversification? 74(4) JOURNAL OF BUSINESS, 613 (2001); J. Stein, Internal Capital Markets and the Competition for Corporate Resources, 52 JOURNAL OF FINANCE, 531 (1997)), other studies found that diversification diminishes firm value (e.g., B. Wernerfelt and C. Montgomery, Tobin’s q and the Importance of Focus in Firm Perspective, 78 AMERICAN ECONOMIC REVIEW 246 (1998); L.H.P Lang & R. M. Stulz, Tobin’s q, Corporate Diversification, and Firm Value, 102 JOURNAL OF POLITICAL ECONOMY 1248 (1994)) 24 See, e.g., R.A Bettis, Performance differences in related and unrelated diversified firms 2 STRATEGIC MANAGEMENT JOURNAL 379 (1981); Harbir Singh and Cynthia A. Montgomery, Corporate Acquisition Strategies and Economic Performance, 8 STRATEGIC MANAGEMENT JOURNAL, 377 (1987); R. Rumelt, STRATEGY, STRUCTURE, AND ECONOMIC PERFORMANCES (rev. ed). Boston, MA: Harvard Business School Press (1986).
18 greater is the probability that the acquisition will succeed.25 On the other hand, some studies showed no performance differences in related and unrelated M&As.26
Agency problem
Another theoretical perspective that explains the drivers of mergers and
acquisitions is the agency theory, which has its roots in the studies on the separation of
ownership and control in a corporation. Agency theory states that M&As are planned and
accomplished by managers who seek self-interest instead of their stockholders’ value.27
When a firm generates positive cash flow, management may either reinvest the cash in the firm or distribute it to shareholders. According to the agency theory, managers, acting in their own self-interest, may seek to diversify either through M&A or other ways because the activity is expected to (1) increase their compensation, power, and prestige based on the notion that executives of larger firms tend to have higher levels of compensation, power, and prestige,28 or (2) make the managers’ positions more unique
25 See, e.g., J. Anand & H. Singh, Asset Redeployment, Acquisitions and Corporate Strategy in Declining Industries, 18 STRATEGIC MANAGEMENT JOURNAL 99 (1997) (finding that horizontal acquisitions, through which a firm acquires a direct competitor, and related acquisitions tend to contribute to more to the firm’s strategic competitiveness than acquiring a company that operates in product markets quite different from those in which the firm competes). 26 See, e.g., Anju Seth, Value Creation in Acquisitions: A Reexamination of Performance Issues, 11 Strategic Management Journal 99 (1990); M. H. Lubatkin, Merger Strategies and Stockholder Value, 8 STRATEGIC MANAGEMENT JOURNAL 39 (1987). 27 Eugene F. Fama, Agency Problem and the Theory of the Firm, 88(2) JOURNAL OF POLITICAL ECONOMY, 288 (1980). 28 See, e.g., C. Smith & R. Watts, The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation, 32 JOURNAL OF FINANCIAL ECONOMICS 263 (1992); M.C. Jensen & K.J. Murphy, Performance Pay and Top Management Incentives, 102 JOURNAL OF POLITICAL ECONOMY 1248 (1990); M.C. Jensen, Agency Costs of Free Cash Flow, Corporate Finance and Takeovers, 76 AMERICAN ECONOMIC REVIEW 323 (1986); P. Wright, M. Kroll, and D. Elenkov, Acquiring Returns, Increase in Firm Size, and Chief Executive Officer Compensation: the Moderating Role of Monitoring, ACADEMY OF MANAGEMENT JOURNAL. (2002).
19
and valuable through investments that require their particular skills and experience.29
Contrary to this perspective, however, others have found no evidence to support the agency problem.30
In conclusion, among those merger drivers, some motivations such as efficiency
may result in benefits to the merging parties, while market power may threaten
competition in the relevant markets. Indeed, mergers may present harm to competition,
depending on the type of merger and the size and market power of the companies
involved. Mergers are generally classified into horizontal mergers and non-horizontal
mergers, depending on the relationship between the firms.
Horizontal Mergers
Horizontal mergers take place when one firm acquires another firm selling the same
or similar products in the same geographical market. For example, a merger of two TV broadcast stations is a horizontal merger. In short, the firms were direct competitors before the merger (e.g., firm A and B or C and D in the Figure 2-1)
29 See. e.g., R. Morck, A. Schleifer, & R. Vishny, Do Managerial Objectives Drive Bad Acquisitions? 45 Journal of Finance 31 (1990); A. Schleifer & R. Vishny, Managerial Entrenchment, the case of Manager Specific Investments, 25 JOURNAL OF FINANCIAL ECONOMICS 124 (1990). 30 See, e.g., David c. Hyland and J. David Diltz, Why Firms Diversify: An Empirical Examination, FINANCIAL MANAGEMENT, Spring, 51 (2002) (finding firms with lower managerial ownership are more likely to diversify).; John G. Matsusaka, Corporate Diversification, Value Maximization, and Organizational Capabilities, 74(3) JOURNAL OF BUSINESS, 409 (2001) (suggesting diversification is not entirely an agency phenomenon, but a value-maximizing strategy).
20
Stages of Production Other Industries in Industry 1 A B E (e.g., production)
2
(e.g., distribution)
3 C D F (e.g., exhibition)
Figure 2-1. Types of Merger. Adapted from Barry R. Litman, The Motion Picture Industry, p. 306 (1998).
Horizontal mergers might serve useful economic purposes for the merging parties.
Horizontal mergers can create efficiencies through joint operations, including decreased
costs of production or distribution.31 Economies of scale are achieved through substantial
multi-plant economies, since horizontal mergers increase the number of plants that are
controlled by a single management.32 Nevertheless, horizontal mergers are thought to
have the greatest potential anticompetitive effects because firms that once competed with
each other combine as a single unity, and thus eliminate direct competition between
competitors in the market. As a result, the post-merger firm ordinarily has a larger market
share than either of the partners had before the merger, and, thus, increasing the
concentration of the market. Consequently, horizontal mergers receive the most intense
scrutiny by regulatory agencies. In evaluating a proposed horizontal merger, federal
31 Since the merging parties are competitors in the same product market, efficiencies may arise from sharing similar and related resources including synergy through knowledge transfer. See, e.g., Husein Tarniverdi & N. Venkatraman, Knowledge Relatedness and the Performance of Multibusiness Firms, STRATEGIC MANAGEMENT JOURNAl (in press). 32 HERBERT HOVENKAMP, FEDERAL MERGER POLICY §12.1. See also supra text accompanying note 8 in ch.2 for economies of scale.
21
antitrust agencies generally apply rules summarized in the Horizontal Merger
Guidelines.33 An important part of merger analysis under these guidelines involves
estimating the effect of a proposed merger on market concentration. The principal
concern of merger policy is whether the merged firm will have market power of sufficient
size to enable the company to act like a monopolist and to raise prices unilaterally.34
Another antitrust concern is that horizontal mergers may also facilitate collusion,
including coordinated pricing, among the remaining competitors.35
Non-horizontal Mergers
While horizontal mergers directly remove on competitor from a market and
increase the market share of the merged firm, non-horizontal mergers involve firms that
do not compete with each other. Accordingly, it is a general presumption of current antitrust enforcement that non-horizontal mergers do not present the same overt threat to competition as horizontal mergers. In non-horizontal mergers, the direct threat of monopoly or oligopolistic collusion36 does not exist, since the number of competitors
within the market remains the same. However, non-horizontal mergers may restrain
competition in other ways. Non-horizontal mergers include vertical mergers and
conglomerate mergers.
33 1992 Horizontal Merger Guidelines, supra note 18 in ch. 2. 34 Joseph Farrell & Carl Shapiro, Horizontal Mergers: An Equilibrium Analysis, 80(1) AMERICAN ECONOMICS REVIEW 107 (1990) (suggesting that mergers that generates no synergy raise price). 35 1992 Horizontal Merger Guidelines note the potential adverse competitive effects of merger arising from coordinated interaction. Coordinated interaction is comprised of actions by a group of firms that are profitable for each of them only as a result of the accommodating reactions of the others. See 1992 Horizontal Merger Guidelines, supra note 18, §2.1. 36 An oligopoly is an economic condition where only a few companies sell similar products. Oligopoly markets often exhibit the lack of competition, high prices, and low output of monopoly markets. See United States v. E.I. du Pont de Nermours & Co. 351 U.S. 377 (1956).
22
Vertical mergers
A firm is vertically integrated whenever it performs for itself some function that
could otherwise be purchased on the market. Vertical integration exists when a company produces its input or owns its own source of output distribution.37
Vertical integration through mergers occurs when one firm purchases either a buyer or a
supplier with the result that the acquiring firm expands into a new market. An example of
a vertical merger is when a company that produces programming (e.g., a cable network
such as CNN) merges with a company that distributes the programming (e.g., a cable
system operator such as Cox Communications) (e.g., a merger between firm A and C or
between B and D in the Figure 2.1). Vertical mergers may be either upstream or
downstream. Upstream mergers occur when a buyer acquires a supplier (e.g., when Cox
acquires CNN). Downstream mergers occur when a supplier acquires a buyer (e.g., when
CNN acquires Cox).
By merging with a buyer or supplier, a firm integrates into different stages of the
production-distribution process. Accordingly, vertical integration is commonly used to
achieve efficiency and gain market power over competitors. Significant efficiency is
achieved through a reduction of distribution costs by internal transactions that eliminate
market transactions with other outside buyers or sellers.38 Furthermore, the
anticompetitive impact of a vertical merger is usually less than in a horizontal merger
because a vertical merger does not reduce the total number of firms operating at any
37 MICHAEL A. HITT, R. DUANE IRELAND, & ROBERT E. HOSKISSON, STRATEGIC MANAGEMENT: COMPETITIVE AND GLOBALIZATION, Mason, OH: South-Western, at 179 (2005). 38 A Darr & I. Talmud, The Structure of Knowledge and Seller-buyer Networks in Markets for Emergent Technologies, 24 ORGANIZATIONAL STUDIES 443 (2003) (addressing that another benefit of a vertical merger is to protect a firm’s technology from imitation by rivals).
23
single level in the market. As the former FTC Chairman Robert Pitofsky indicated, it is difficult to identify rules defining the legality of vertical mergers because of the anticompetitive effects of vertical mergers are more uncertain while their efficiencies are more frequent.39 Nevertheless, vertical mergers may result in anticompetitive consequences associated with vertical integration. Of significant concern is the
foreclosure effect. The traditional market foreclosure theory, which was accepted in
leading court cases in the 1950s through the 1970s, viewed vertical mergers as harming
competition by denying competitors access to either a supplier or a buyer.40 Foreclosure
occurs when the patronage or custom of an acquired firm is no longer available to
competitors of an acquiring firm. If the acquiring firm supplies the acquired firm, other
suppliers may be deprived of the ability to sell to that firm. Similarly, if the acquiring
firm purchases from the acquired firm, competitors of the acquiring firm will be
deprived, to a greater or lesser degree of the ability to obtain needed supplies from the
acquired firm. The foreclosure theory has received strong criticism from the Chicago
School, which argued vertical mergers were most likely procompetitive or competitively
neutral.41 Perspectives regarding competitive harm in vertical mergers are mixed.42
39 Robert Pitofsky, Proposals for Revised United States Merger Enforcement in a Global Economy, 81 GEO. L. J. 195, 201 (1992). 40 See, e.g., Brown Shoe Co. v. United States, 379 US 294 (1962); THOMAS E. SULLIVAN & JEFFREY L. HARRISON, UNDERSTANDING ANTITRUST AND ITS ECONOMIC IMPLICATIONS Ch. 7 (4th ed. 2003); William S. Comanor, Vertical Mergers, Market Powers, and the Antitrust Laws, 57(2) AMERICAN ECONOMIC REVIEW 254 (1967) 41 Robert H. Bork, THE ANTITRUST PARADOX: A POLICY AT WAR WITH IT SELF. New York: Basic Books (1978); Martin K. Perry, Vertical Integration: The Monopsony Case, 68(4) American Economic Review 561 (1978). 42 While some scholars found anticompetitive harm in vertical merger ( e.g., Gilles Chemla, Downstream Competition, Foreclosure, and Vertical Integration, 12(2) JOURNAL OF ECONOMICS AND MANAGEMENT STRATEGY 261 (2003); Micahel H. Riordan, Anticompetitive Vertical Integration by a Dominant Firm, 88(5) AMERICAN ECONOMIC REVIEW 1232 (1998); and CC de
24
Conglomerate mergers
A conglomerate merger is defined as between firms with unrelated products.43 By definition, conglomerate mergers involve firms that are not competitors and that do not have a significant buyer-seller relationship with each other. Consequently, the efficiencies that can be obtained from conglomerate mergers may not be as large as the efficiencies generated from horizontal mergers that include multi-plant economies or cost reduction in production and distribution. Likewise, conglomerate mergers do not result in efficiencies of the same magnitude as vertical mergers that facilitate distribution savings through internal transactions44 Nevertheless, conglomerate mergers are recognized to
create benefits including infusion of capital, improving management efficiency, and
transfer of technical and marketing know-how and best practices across industry lines.45
In conglomerate mergers, there are no direct anticompetitive effects since merging
parties do not compete in the same market before the merger, There is no change in
market structure, market share, or the level of concentration: conglomerate mergers
merely change the ownership of firms in the markets. Nevertheless, conglomerate
Fontenay & JS Gans, Can Vertical Integration by a Monopsonist harm consumer welfare? 22(6) INTERNATIONAL JOURNAL OF INDUSTRIAL ORGANIZATION 821 (2004)), others found vertical mergers improve welfare (e.g., Laurent Linnemer, Backward Integration by a Dominant Firm, 12(2) JOURNAL OF ECONOMICS AND MANAGEMENT STRATEGY 231 (2003); and John S. Hughes & Jennifer L. Kao, Vertical Integration and Proprietary Information Transfers 10(2) Journal of ECONOMICS AND MANAGEMENT STRATEGY 277 (2001)). 43 FTC v. Procter & Gamble Co., 386 U.S. 568 (1967) (a pure conglomerate merger is one in which there are no economic relationships between the acquiring and the acquired firm.) 44 HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY §13.2 (1999). 45 Department of Justice, Address by William J. Kolasky, Conglomerate Mergers and Range Effects: It’s a long way from Chicago to Brussels, Nov 9 (2001).
25
mergers have secondary effects on competition and market structure.46 For example,
through a conglomerate merger, a firm can cross-subsidize products.47 That is, products
from the position in one market are used to sustain a fight for market share in another
market. Consequently, several theories have been used to challenge conglomerate
mergers. Reciprocity is one of the traditional theories.48 Reciprocity, or reciprocal
dealing, occurs when firm A agrees to purchase a product from firm B only on the
condition that firm B purchases a different product from firm A (e.g., a silicon chip
manufacturer may purchase computers for its office use from a computer firm that
purchases silicon chips from it). A merger between two firms may increase the reciprocal
dealing between those two firms: neither may buy from outside competitors. Since those
competitors, or suppliers, may be foreclosed from supplying products to the two firms,
courts and regulatory agencies are concerned with a firm using its size to influence
suppliers or buyers to deal with the newly acquired firm in a manner which actually
exploits the firm size and structure.49
Another theory used to challenge conglomerate mergers focuses on diminished
competition resulting from a loss of a potential competitor. This potential competition
theory is the newest, and currently the most popular theory, for challenging conglomerate
46 Dimitri Giotakos, Article: GE/Honeywell: A Theoretic Bundle Assessing Conglomerate Mergers Across The Atlantic, 23 U. PA. J. INT’L ECON. L. 469 (2002) (identifying competitive impacts of conglomerate mergers). 47 Friedrich Trautwein, Merger Motives and Merger Prescriptions, 11 STRATEGIC MANAGEMENT JOURNAL, 283 (1990). 48 THOMAS E. SULLIVAN & JEFFREY L. HARRISON, UNDERSTANDING ANTITRUST AND ITS ECONOMIC IMPLICATIONS Ch. 7 (4th ed. 2003). 49 See, e.g., FTC v. Consolidated Foods Corp., 380 U.S. 592 (1965) (Condemning the conglomerate merger on the theory that they would facilitate reciprocity). See also James M. Ferguson, Tying Arrangements and Reciprocity: An Economic Analysis, 30 LAW & CONTEMP. PROBS. 552 (1965) (noting how the anticompetitive nature of tying arrangements and reciprocity depends on the market power of the firm).
26
mergers.50 Mergers involving potential competitors are acquisitions between firms that
are not in competition with each other but which are potential entrants in the market of
the other. This theory focuses on the market about to be entered and the incumbent
companies already in it. The theory suggests that competition might be diminished if a
potential competitor, which industry participants had thought might actually enter the
market through less anticompetitive means, instead simply acquired a company already in
that market.51 Examples of less anticompetitive means include de novo entry, where a
firm enters a market without an acquisition of an existing competitor, and a toehold entry, through purchase of a smaller competitor.
The merger involving a potential entrant may be anticompetitive because the
potential entrant sitting on the sidelines of a market helps keep prices lower in the market
in two ways. First, the firms in the market may believe that the potential competitor will
enter the market if they raise prices. Thus the existence of potential competition creates a
restraining effect on prices.52 Second, even if the firms in that market do not believe the
outside firm will enter, that firm may actually enter if the other companies raise their
price. Consequently, the new entrant will increase overall supply in the market, and will
50 THOMAS E. SULLIVAN & JEFFREY L. HARRISON, UNDERSTANDING ANTITRUST AND ITS ECONOMIC IMPLICATIONS Ch. 7 (4th ed. 2003). 51 United States v. Marine Bancorporation, Inc., 418 U.S. 602, 625 (1974)); FTC v. Procter & Gamble Co., 386 U.S. 568 (1967). 52 See, e.g., Mats A. Bergman & Niklas Rudholm, The Relative Importance of Actual and Potential Competition: Empirical Evidence from the Pharmaceuticals Market, 51(4) JOURNAL OF INDUSTRIAL ECONOMICS, 455 (2003) (finding the price of the incumbent product is lowered by potential competition); Margaret A. Peteraf & Randal Reed, Pricing and Performance in Monopoly Airline Markets, 37 J.L. & ECON. 193 (1994) (analyzing the price-lowering effect of potential competition on an airline monopoly market); Steven A. Morrison & Clifford Winston, Empirical Implications and Tests of the Contestability Hypothesis, 30 J.L. &ECON. 53 (1987) (finding evidence of potential competition in airline industry).
27 help drive prices down.53 Based on these general merger theories, this study now turns to further discussion of antitrust law and economics directly related to mergers and acquisitions.
Antitrust Law and Economics
Relevant Antitrust Statutes
An antitrust statutory provision that is directly related to mergers and acquisitions is Section 7 of the Clayton Act.54 The Clayton Act has its roots on the Sherman Act, generally regulates combinations to monopolize55 and combinations in restraint of trade.56
The Sherman Act
In 1890, Congress passed the Sherman Antitrust Act to prevent trusts from creating unfair restraints on trade or commerce and reducing marketplace competition. Section 1 of the Sherman Act (Section 1), reads that: every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several
States, or with foreign nations, is declared to be illegal.57 With this broad language,
Congress left it to the courts to determine what types of business behavior would be
53 Alberta Gas Chemicals, Ltd. v. E.I. du Pont de Nemours & Co., 826 F.2d 1235, 1253-54 (3rd Cir. 1987). 54 15 U.S.C. § 18 (2005). 55 15 U.S.C. § 1 (2005). The section reads as follows: Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and on conviction thereof, shall be punished by fine not exceeding $ 10,000,000 if a corporation, or, if any other person, $ 350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court. 56 15 U.S.C. § 2 (2005). 57 15 U.S.C. § 1 (2005).
28 prohibited under Section 1. Over the years, courts developed two categories of antitrust
analysis: per se and rule of reason.58 Per se offenses are presumed to be violations of
Section 1. Price-fixing agreement and group boycotts are examples of per se antitrust violations. Meanwhile, there are other business activities for which anticompetitive
behavior is not so clearly defined. For such situations, courts use the rule of reason
approach to ascertain whether the business behavior’s pro-competitive benefits outweigh
any anticompetitive effects.59 In Standard Oil Co. v. United States,60 the Supreme Court
advanced a broad rule of reason approach, under which only unreasonable restraints were
illegal. This standard permits courts to weigh competitive factors resulting in approval of
several mergers. After some cases where the Court upheld mergers,61 many believed that
the Sherman Act did not sufficiently enjoin mergers that are likely to have
anticompetitive effects. That is, the Sherman Act would prevent mergers only where the
58 THOMAS E. SULLIVAN & JEFFREY L. HARRISON, UNDERSTANDING ANTITRUST AND ITS ECONOMIC IMPLICATIONS Ch. 7 (4th ed. 2003). 59 See Chicago Bd. of Trade v. U.S., 246 U.S. 231, 238 (1918) (discussing the rule of reason approach). Justice Brandeis wrote: The true test of legality is whether the restraint imposed as merely regulates and perhaps thereby promotes competition, or whether it is such as may suppress or even destroy competition. To determine that question the Court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint, and its effect, actual or probable. The instrument of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose of end sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences. Id.; See also National Society of Professional. Engineers v. United States, 435 U.S. 679, 690-92 (1978). (stating that the rule of reason approach attempts to balance the anticompetitive effects of a restraint on trade against its procompetitive benefits to determine its impact on competition). 60 221 U.S. 2 (1911). 61 E.g., United States v. U.S. Steel Corp, 251 U.S. 417 (1920); United States v. Columbia Steel Co, 334 U.S. 495 (1948).
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firms actually intended to, and did, accomplish a monopoly. Congress responded to the
Court’s permissive treatment in Standard Oil with new legislation, the Clayton Act.
The Clayton Act
In 1914, Congress passed section 7 of the Clayton Act in response to the rule of
reason standard used by the Supreme Court in Standard Oil Co. v. United States.62
However, the original provision of the section 7 of the Clayton Act was also easily
circumvented, as it applied only to stock purchase. If a company acquired the assets of
another company rather than its stock, the merger was still tested under the more lenient
rule of reason under the Sherman Act. Furthermore, the Clayton Act only applied to
mergers that lessened competition between competing firms. It failed to reach vertical
mergers or other nonhorizontal mergers when the merging firms were not in competition with each other. Even if the merger lessened competition between the post merger firm
and other business in the market, the Clayton Act did not apply.
Congress amended section 7 in 1950, concerned with the rising tide of industrial concentration. New section 763 regulate mergers and acquisitions by stating that no
person ... shall acquire ... the whole or any part of the assets of another person ... where in
any line of commerce ... in any section of the country, the effect of such acquisition may
be substantially to lessen competition, or tend to create a monopoly. Section 7 was
designed to reach both horizontal and vertical acquisitions. It is a statute designed to
prevent the potential for anticompetitive activity before it occurs,64 and to allow courts to
62 221 U.S. 2 (1911). 63 15 U.S.C. § 18 (2005). 64 United States Department of Justice, Statement of Joel I. Klein, Before the Committee on the Judiciary, United States Senate, Concerning Mergers and Corporate Consolidation, June 16, 1998.
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enjoin mergers with only a showing of a reasonable probability of anticompetitive
effects.65 Unlike the Sherman Act, Section 7 of the Clayton Act does not require actual
proof of the effect of anticompetitive or monopolistic behavior. Only a reasonable
probability of detriment to market competition will satisfy Section 7. The reasonable
probability standard allows the Government and private litigants great latitude in the
merger review process.66
The Supreme Court in Brown Shoe v. U.S.67 outlined modern antitrust analysis.
Although the Court did not set forth a definitive test for antitrust merger analysis, it
established that economic principles should be the guide in Section 7’s application.68
Nonetheless, this paper only focuses on merger proceedings by regulatory agencies such
as Department of Justice, the Federal Trade Commission, and the Federal
Communications Commission. Further discussion of antitrust economics mostly
considered by the antitrust agencies is followed.
Antirust Theories
Antirust agencies’ merger analysis is based on consideration of various factors
included in the Merger Guidelines. Underlying economic concepts in the Merger
65 See, e.g., U.S. v. E.I. du Pont de Nemours & Co, 353 U.S. 586 (1957). 66 In FTC v. Proctor & Gamble Co., the Supreme Court explained Section 7’s rationale: The core question [under Section 7] is whether a merger may substantially lessen competition, and [that] necessarily requires a prediction of the merger’s impact on competition, present and future. [Section 7] can only deal with probabilities, not with certainties...If the enforcement of [Section 7] turned on the existence of actual competitive practices, the congressional policy of thwarting such practices in their incipiency would be frustrated. 386 U.S. 568, 577 (1967). 67 370 U.S. 294 (1962). 68 According to the Court, mergers shall be evaluated with several factors in mind. Id. at 321-22. Two such factors are: (1) how concentrated the particular industry is, and (2) whether the particular industry had seen a recent trend toward domination by a few leaders or had remained fairly consistent in its distribution of market shares among the participating companies.
31
Guidelines include the relevant market definition based consideration of elasticity of
demand and supply, measurement of market power, and analysis of barriers to entry.
Market power, demand elasticity, and supply elasticity
The 1992 Horizontal Merger Guidelines analyze market power in terms of the
relevant product and geographical markets or service offered by each of the merging
firms. The Guidelines require the Department of Justice to define the market for each
product, where firms could effectively exercise market power through collusion. That
market is one in which a hypothetical firm could impose a small but significant and nontransitory increase in price above current or future competitive levels.69 Generally, the
Department uses 5% hypothesized price increase (five-percent test).
In analyzing whether a firm could exercise market power, the Guidelines evaluate
both cross-elasticity of demand and elasticity of supply. Cross-elasticity of demand is a
measure of the substitutability of products from the point of view of buyers. It measures
the responsiveness of the consumer demand for one product to changes in the price of a
different product. It can be expressed as:
% change Qx ------% change in Py
where Qx is the quantity of product X and Py is the price of product Y.70 A high cross-
elasticity of demand indicates that the products are good substitutes and should be
69 1984 Department of Justice Merger Guidelines § 2, 49 Fed. Reg. 26,823 (1984). 70 THOMAS E. SULLIVAN & JEFFREY L. HARRISON, UNDERSTANDING ANTITRUST AND ITS ECONOMIC IMPLICATIONS Ch. 7 (4th ed. 2003).
32 included in the same market. Supply elasticity, on the other hand, is the measure of the responsiveness of producers to price increase.
In terms of demand elasticity, the hypothetical firm cannot effectively exercise market power if a price increase would cause: (1) consumers to switch to other products, or (2) consumers to switch to the same product manufactured by other firms in other areas. As for supply elasticity, the Department considers the hypothetical firm cannot effectively exercise market power if a price increase would cause producers of other products to shift and produce products in the relevant market, either by modifying the use of present facilities, shifting the production of the present facility or by constructing new facilities.
Barriers to entry
Entry refers to an introduction of new capacity into a market by a firm not previously in the market. For antitrust purposes, a barrier to entry is some factor in a market that permits firms already in the market to earn monopoly profit while deterring outsiders from coming in. The definition was developed by economist Joe Bain.71 Under this definition, a merged firm’s economies of scale (ability of an established incumbent with high output and lower cost) are a significant barrier to entry for new firms. In particular, potential entrants are faced with substantial start-up costs as compared with the incumbent firm. The 1992 Horizontal Merger Guidelines principally incorporate
Bain’s definition of barriers to entry.
The alternative definition, developed by economist George Stigler and the Chicago
School, maintains that an entry barriers are costs that prospective entrants must incur at
71 Joe Bain, BARRIERS TO NEW COMPETITION: THEIR CHARACTER AND CONSEQUENCES IN MANUFACTURING INDUSTRIES (1962).
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or after entry that those already in the market did not have to incur when they entered.72
This perspective focuses on the process entry rather than the market as an evolving entity.
Common factors referred to as sources of barriers to entry include: the risk and size
of the investment; the government’s entry restriction and regulation (e.g., the FCC
regulations have largely determined the conditions of entry into broadcast, cable, and
telephony market); advertising expenditure and customer loyalty (e.g., because of brand
loyalty, new rivals, seeking to sell as much as existing firms, may need to advertise more
than existing firms); and product differentiation.73
Structure-conduct-performance paradigm
Industrial organization economists have extended the theory of market structure74
in order to make it a more useful tool for analyzing actual industrial markets, and
developed the Structure-Conduct-Performance (S-C-P) paradigm. The hypothetical
linkage among theses three concepts, structure, conduct (or behavior), and performance is that the structure (e.g., number of sellers, ease of entry, etc.) of a market explains or determines to a large degree the conduct or behavior (e.g., pricing policy, advertising, etc) and the performance (e.g., efficiency, technical progress) of the market is simply an
evaluation of the results of the conduct (Figure 2-2).
72 GEORGE J. STIGLER, THE ORGANIZATION OF INDUSTRY 67 (1968). 73 Harold Demsetz, Barriers to Entry, 72(1) AMERICAN ECONOMIC REVIEW 47 (2001). 74 The theory of market structure consist of models of perfect competition, monopoly, oligopoly, and monopolistic competition. See Viscusi, Vernon, and Harrington, Jr., ECONOMICS OF REGULATION AND ANTITRUST (3d ed. 2000).
Figure 2-2. The Structure-Conduct-Performance Model of Industrial Organization. Adapted from W. Kip Viscusi, John M. Vernon, and Joseph E. Harrington, Jr., Economics of Regulation and Antitrust p.62 (3d ed. 2000)
In empirical studies, a number of different concepts and variables have been used to
analyze structure of a market and firms’ conduct and performance. First, variables used to
define the structure of a market include: the number of sellers and buyers in a market
(i.e., market concentration); barriers to entry; the extent to which market firms are vertically integrated; the degree of product differentiation (i.e., the extent to which the firms in a market have created a brand preference among consumers); and conglomerateness (i.e., the extent to which market competitors are owned by large economic conglomerates with deep pockets capable of outspending market competitors through cross-subsidization).75
Second, conduct refers to the behavior of the firms in a market with respect to
pricing (i.e., whether prices are set independently or in collusion), production and
75 Michael O. Wirth and Harry Bloch, Industrial Organization Theory and Media Industry Analysis, 8(2) JOURNAL OF MEDIA ECONOMICS 15 (1995); See also FREDERIC M. SCHERER & DAVID ROSS, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE, Boson, MA: Houghton Mifflin (3d ed. 1990).
35
advertising strategies, R&D and innovation, investment in production facilities (i.e., how
firms decide on the budget and the actual level of expenditure), and legal tactics.76
Third, market performance are analyzed through the concepts such as firm
profitability, efficiency, and the extent to which firms contribute to stable full
employment and to an equitable distribution of income. In particular, media policy
makers may pay attention to the extent to which the firms contribute to the diversity of
ideas.77
The S-C-P paradigm has had broad implications for antitrust policy, especially for
merger policy. The paradigm has meant that mergers can be challenged strictly on the
basis of market structure. In other words, under this perspective, the merger’s impact on
structure was thought to speak for itself.78 The S-C-P paradigm has come under relentless
criticism, primarily by economists form the University of Chicago.79 Overall, the
literature attacking the S-C-P paradigm creates an important argument that industry
concentration is not harmful in and of itself.80 Further, critics contended that performance
and conduct often affect market structure.81 The most significant development in
industrial organization since the Chicago School attacks on the S-C-P paradigm has been
a much increased interest in strategic behavior by business firms. Meanwhile, the new
76 See Id. 77 Id. 78 E.g., United States v. Philadelphia Nat. Bank., 374 U.S. 321 (1963); Brown Shoe Co. v. United States, 370 U.S. 294 (1962). 79 THOMAS E. SULLIVAN & JEFFREY L. HARRISON, UNDERSTANDING ANTITRUST AND ITS ECONOMIC IMPLICATIONS Ch.7 (4th ed. 2003). 80 E.g., Elizabeth Grantiz and Benjamin Klein, Monopolization by Raising Rivals’ Costs: the Standard Oil Case, 39 J.L. & ECON. 1 (1996). 81 PAUL R. FERGUSON & G. J. FERGUSON, INDUSTRIAL ECONOMICS: ISSUES AND PERSPECTIVES, NY: New York University Press (2d ed. 1994).
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strategic literature in early 1980s shares in common with the S-C-P paradigm the notion
that market structure, entry barriers, and the market position of the strategizing firms are
all important in determining whether a particular anticompetitive strategy is plausible.82
Despite the criticism, the S-C-P paradigm provides useful analysis framework for
merger policy. The may substantially lessen competition standard of Section 7 of the
Clayton Act requires courts or the agencies to consider whether a merger may be
anticompetitive after it has occurred. The merger review is based on the notion that
market conditions are conductive to anticompetitive conduct, and that the merger changes
the structure in a way that increases the likelihood of such conduct.83 In general, the
underlying notion in antitrust merger review is that the conditions associated with market
structure can be changed through government intervention to improve firms’ conduct and
market performance. When government policy seeks to change the structure of a market
to improve conduct of a firm, it is referred to as a structural remedy. Policies designed to
directly influence conduct of a firm by constraining firm behavior are referred to as
conduct remedies, or behavioral regulation.84
82 Strategic entry deterence by dominant firms can be one example. A firm can do this through such devices as over-investing in excess capacity which will be very expensive to carry in the event of new entry, but also will enable the firm to increase output and drop its prices immediately if other firm’s entry occurs. Likewise, a firm might be able to deter entry by raising its rival’s costs. For example, a dominant firm having many intellectual properties might threaten every new entrant with litigation alleging infringement. Firms in product differentiated market might use proliferation of brands, or the ability to vary their products on short notice to make new entry relatively unattractive. HERBET HOVENKAMP, FEDERAL ANTITRUST POLICY § 1.7 (2d ed. 1999). 83 HERBET HOVENKAMP, FEDERAL ANTITRUST POLICY § 1.7. (2d ed. 1999). 84 Antitrust Division of the U.S. Department of Justice, Antitrust Division Policy Guide to Merger Remedies, Oct. 2004, available at http://www.usdoj.gov/atr (last visited April 10, 2005); See also Michael O. Wirth and Harry Bloch, Industrial Organization Theory and Media Industry Analysis, 8(2) Journal of Media Economics 15 (1995)
37
With regard to the electronic media and telecommunications industry, both
structural regulation and behavioral regulation have been used in trying to foster
competition and diversity in communications.85 Structural regulation most often means controls over ownership in mass media. For example, the national television multiple ownership rule prohibits any entity from controlling television stations the combined
audience reach of which exceeds 45 percent of nationwide television households.86
While structural regulation governs industry structure, especially ownership, behavior regulation controls conduct of the players in the industry. For example, broadcasting companies are subject to regulations on indecent programming87 and children’s programs.88
Regulation of the Telecommunications and the Media Industries
This section discusses the legal and theoretical background of regulating the
telecommunications and the media industries. After describing two major statutes in the
85 See, e.g., Daniel L. Brenner, Ownership and Content Regulation in Merging and Emerging Media, 45 DePaul L. Rev. 1009 (1996); see also Chiristian. DeFrancia, Ownership Controls in the New Entertainment Economy: A Search for Direction, 7 Va. J.L. & Tech. 1 (2002). 86 47 C.F.R. § 73.3555(d) (2005). 87 47 C.F.R. § 73.4165 (2005). See, e.g., In the Matter of Enforcement of Prohibitions Against Broadcast Indecency in 18 U.S.C. §1464, Report and Order, GC Docket 92-223, FCC 93-42, adopted January 19, 1993. 8 F.C.C.R. 704, 58 F.R. 5937, January 25, 1993. (adopting regulations to establish the times of day during which indecent programming may not be broadcast on radio and television stations); See also FCC v. Pacifica Foundation, 438 U.S. 726 (1978) (upholding the FCC’s power to punish a broadcaster for airing indecent content). 88 47 C.F.R. § 73.4050 (2005). See, e.g., In the Matter of Policies and Rules Concerning Children’s Television Programming; Revision of Programming and Commercialization Policies, Ascertainment Requirements, and Program Log Requirements for Commercial Television Stations, Report and Order, MM Dockets 90-570 and 83-670, FCC 91-113, adopted April 9, 1991. 6 F.C.C.R. 2111, 56 F.R. 19611, April 19, 1991 (adopting rules limiting the number of minutes that commercial broadcast licensees and cable operators may air during children’s programming)
38
communications industries, the section discusses specific regulatory goals of the public
interest and competition.
Relevant Statutes
The Communications Act of 1934
The objective of the Communications Act of 193489 was to make available,
efficient, nation-wide and world-wide wire and radio communication service with adequate facilities at reasonable charges.90 Communications is defined broadly, to include
the transmission of writing, signs, signals, pictures, and sounds of all kinds…., including
all instrumentalities, facilities, apparatus, and services incidental to such transmission.91
The Communications Act established the public interest, convenience, and neccesity as the central guiding principle for the regulation of commiunications.92
The Act is divided into six subchapters. Subchapter I creates and defines the
structure and jurisdiction of the FCC. Telephony is covered primarily in subchapters II
and IV. The Act describes the FCC’s authority extending to all interstate and foreign
communication by wire or radio. The Act goes on to cover telephony and radio broadcast
in detail, but the Commission’s jurisdiction is not limited to any particular technology.
The Supreme Court has concluded that new communications technologies fall within the
FCC’s ancillary jurisdiction.93
89 The Communications Act of 1934, 48 Stat. 1064 (1934) (codified as amended at 47 U.S.C. 151-163). 90 47 U.S.C. § 151 (2005). 91 47 U.S.C. § 152(a) (2005). 92 The public interest standard is found in several sections of the Communications Act. See, e.g., 47 U.S.C. 303, 307(a), 307(c), 309(a) (2005). 93 United States v. Southwestern Cable Co., 392 U.S. 157, 172 (1968) (upholding FCC jurisdiction over cable TV on the ground that the regulatory authority of the FCC is not restricted
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The Telecommunications Act of 1996
The Telecommunications Act of 199694 was the major rewrite of the nation’s
telecommunications laws since the Communications Act of 1934. It was signed into law
on February 8, 1996 with the promise of opening every sector of the telecommunications
industry to competition. Telecommunications is defined as the transmission between or
among points specified by the user, of information of the user’s choosing, without
changing in form or content the information as sent and received.95 The
Telecommunications Act relaxed greatly or eliminated all together many longstanding
regulations, deregulating much of the telecommunications and the media industries to
promote competition and reduce regulation in order to secure lower prices and higher
quality services for American telecommunications customers and encourage the rapid
deployment of new telecommunications technologies.96 The Act allowed cable
companies to enter telephone business, telephone companies to enter the video
programming business, and local and long distance telephone companies to enter each
other’s markets.
to those activities and forms of communication that are specifically described by the Act’s other provisions) The decision is consistent with 47 U.S.C. 154(i) (empowering the FCC to deal with the unforeseen…to the extent necessary to regulate effectively those matters already within the boundaries); See also FCC v. Pottsville Broad., 309 U.S. 134, 138 (1940) (Underlying the whole [Communications Act] is recognition of the rapidly fluctuating factors characteristic of the evolution of broadcasting and of the corresponding requirement that the administrative process possess sufficient flexibility to adjust itself to these factors.) PETER W. HUBER, MICHAEL K. KELLOGG, & JOHN THORNE, FEDERAL TELECOMMUNICATIONS LAW, New York: Aspen Law & Business § 3.3.2. (1999) 94 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996) (codified in scattered sections of 47 U.S.C.) 95 47 U.S.C. § 153(43) (2005). 96 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996).
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Despite the Telecommunications Act’s new reliance on competition over telecommunications regulation, it explicitly reaffirmed the FCC’s role in promoting the public interest.97 The Act also explicitly reaffirmed antitrust law’s role in media merger
review.98
The Public Interest and Competition
The telecommunications and the electronic industries are peculiar infrastructure
because they serve as primary media for the circulation of ideas and information, with
unique capacity for social and political influence.99 Researchers have found evidence that
the communications industies are capable of a variety of effects, including setting the
public’s political agenda,100 influencing political knowledge and political participation,101
and affecting individual’s behavior.102 Due to unique charactersistic of the
communications industry, the communications policy decisions are likely to affect the
political and social disposition of the public. Thus communications policy decisions face
a burden more complex than in other policy areas.
97 47 U.S.C. § 257(b) (2005). 98 47 U.S.C. § 152(b)(1) (2005). The Telecommunications Act provides that nothing in this Act ... shall be construed to modify, impair, or supercede the applicability of any of the antitrust laws. 99 Robert B. Horwitz, The Irony of Regulatory Reform: The Deregulation of American Telecommunications (1989); Phillip M. Napoli, The Unique Nature of Communications Regulation: Evidence and Implications for Communications Policy Analysis, 43 JOURNAL OF BROADCASTING AND ELECTRONIC MEDIA 565 (1999) 100 E.g., M.E. McComb & D.L. Shaw, The Agenda-setting Function of Mass Media, PUBLIC OPINION QUARTERLY (1972); F.L. Cook, T.R. Tyler, E.G. Goetz, et al, Media and Agenda Setting: Effects on the Public, Interest Group Leaders, Policy Makers, and Policy, 47(1) PUBLIC OPINION QUARTERLY 16 (1983). 101 E.g., D.A. GRABER, PROCESSING THE NEWS: HOW PEOPLE TAME THE INFORMATION TIDE (1984). 102 E.g., Surgeon General’s Scientific Advisory Committee on Television and Social Behavior, Television and Growing up: The impact of televised violence: Report to Surgeon General, United States Public Health Service, 1972.
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One of the central principles of communications policy is the public intesrst. The
public interest principle has been described as being at the heart of democratic theories of
government.103 Since its first apearance in the Radio Act of 1927,104 the public interest standard is the primary guiding principle of both the Communications Act of 1934 and the Telecommunications Act of 1996. The Supreme Court has upheld the public interest standard as the touchstone of the broad requlatory power for the FCC.105 The Court
recognized the public interest standard as a supple instrument for the exercise of discretion by the expert body which Congress has created to carry out its legislative policy.106 Nevertheless, the standard has faced the criticism because of the term’s
ambiguity and vagueness.107 Some, however, have aruged that this ambiguity was by
design. It was conteded that the uncertainty surrounding the new and techonologically
complex medium compelled the Congress to adopt a somewhat vague standard to
facilitate administrative flexibility and responsiveness.108 The ambiguity of the public
interest standard can accommodate the likelihood of rapidly changing economic and
techonological environment within the communciations industry and can allow the
103 PHILLIP M.NAPOLI, FOUNDATIONS OF COMMUNICATIONS POLICY: PRINCIPLES AND PROCESS IN THE REGULATION OF ELECTRONIC MEDIA, Cresskill, NJ: Hampton Press, at 63 (2001). 104 Radio Act of 1927, Pub. L. No. 69-632, 44 Stat. 1162 (1927) (repealed 1934). 105 National Broadcasting Company, Inc. v. United States, 319 U.S. 190 (1943). 106 Federal Communications Commission v. Pottsville Broadcasting 309 U.S. 134, at 138. (1940). 107 Willard D. Rowland, The Meaning of the Public Interest in Communications Policy, partII: Its Implementation in Early Broadcasst Law and Regulation, 2(4) Comm L.& Pol’y 363 (1997); THOMAS STREETER, SELLING THE AIR, A CRITIQUE OF THE POLICY OF COMMERCIAL BROADCASTING IN THE UNITED STATES, Chicago, University of Chicago Press (1996); PHILLIP M.NAPOLI, FOUNDATIONS OF COMMUNICATIONS POLICY: PRINCIPLES AND PROCESS IN THE REGULATION OF ELECTRONIC MEDIA, Cresskill, NJ: Hampton Press, at 67 (2001) 108 Robert Corn-Revere, Economics and Media Regulation, in A. Alexander, J. Owers, & R. Carveth(eds.) MEDIA ECONOMICS: THEORY AND PRACTICE, 77-90, Hillsdale, NJ: Lawrence Erlbaum (1993); Erwin G. Kransnow & Jack N. Goodman, The Public Interest Standard: The Search for the Holy Grail, 50(3) FED COMM L.J. 605 (1998).
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regulatory agnecy to excerise its discretion in making determinations about how to best
regulate the complex means of communications.109
The notion of serving the public interest was associated from the start with stable,
broadly available commercial communications services, and government was responsible
for monitoring socially significant audiences, arenas, and services that the market serves
poorly.110 The Commmunications Act established that the communciations sector would be heavily regulated to the end of promoting valuable services as efficiently as possible to
the public. Memgers of the public, seen as potential customers, would not be deprived of
services by having business that are not viable take up spectrum that belong to the nation.
Although the public interest is central to communications policy, regulatory traditions about how the public interest concept developed and was applied in the
electronic media and the telecommunications industries differ. First, as for the electronic
media industry, the public interest principle has its roots in the public trustee model in
broadcast regulation. The notion of scarcity was a guiding principle of the regulation of
the broadcasting media, meaning that broadcasters were public trustees of a scare
resource – the electromagnetic spectrum that was owned by the public.111 As the
109 PHILLIP M.NAPOLI, FOUNDATIONS OF COMMUNICATIONS POLICY: PRINCIPLES AND PROCESS IN THE REGULATION OF ELECTRONIC MEDIA, Cresskill, NJ: Hampton Press, at 68 (2001) 110 PATRICIA AUFDERHEIDE, COMMUNICATIONS POLICY AND THE PUBLIC INTEREST: THE TELECOMMUNICATIONS ACT OF 1996, New York: Gilford Press at 12 (1999). 111 Physical scarcity doctrine, established by the Supreme Court’s 1945 opinion in NBC v. United States, 319 U.S. 190 (1943), posits that broadcasting frequencies constitute a distinctly finite natural resource that must be rationed in special ways. The doctrine has been the primary rationale under which the Supreme Court has distinguished over-the-air broadcasting from print permitting regulation of both speakers and speech in the former, not the latter. See Thomas W. Hazlett, Physical Scarcity, Rent Seeking, and the First Amendment, 97 COLUM. L. REV. 905 (1997) (criticizing the physical scarcity doctrine).
43
Supreme Court indicated in Red Lion Broadcasting Co. v. FCC,112 broadcasters possess the most limited First Amendment113 rights as speakers among medium owners.
Althougth the scarcity rationale has been questioned by several scholars,114 the mass media licensing has provided the basis for government regulation, allowing regulation of content to provide programming to serve the public interest. Accordingly, the broadcasting media has been subject to a host of government regulations that may be classified into four general categories:115 (1) content regulations;116 (2) political access measures;117 (3) restrictions on ownership;118 and (4) minority-preference licensing
112 In Red Lion Broadcasting Co. v. FCC, 395 U.S. 367 (1969), the Supreme Court held that the unique nature of the medium, specifically the scarcity of electromagnetic spectrum, required the licensing authority to ensure that the broadcast spectrum was used productively to serve the public interest. Id. at 390. (upholding the FCC’s now repealed fairness doctrine and the related personal attack and political editorial rules). 113 U.S. CONST. amend. I. The First Amendment, in pertinent part, provides Congress shall make no law… abridging the freedom of speech. 114 See, e.g., Hazlett, supra note 111 (arguing that the physical scarcity doctrine can be criticized, and that the First Amendment implication of the doctrine is the chilling effect on broadcast speech); Matthew L. Spitzer, The Constitutionality of Licensing Broadcasters, 64 N.Y.U.L. REV. 990 (1989) (rejecting a government property rationale on the ground that government ownership of the entire broadcast spectrum would itself be unconstitutional, and favoring private property rights in broadcast spectrum, with only limited government regulation). 115 R. Randall Rainey, S.J. & William Rehg, S.J., The Marketplace of Ideas, the Public Interest, and Federal Regulation of the Electronic Media: Implications of Habermas’ Theory of Democracy, 69 S. CAL. L. REV. 1923 (1996). 116 See, e.g., 47 U.S.C. § 303a, 303b (2005) (requiring the FCC to provide standard for children’s television programming and to consider whether a licensee complied with the standard in broadcast license renewal); 47 C.F.R. § 73.1910 (providing that broadcasters have certain obligations to afford reasonable opportunity for the discussion of conflicting views on issues of public importance: the Fairness Doctrine, repealed in 1987). 47 C.F.R. § 73.1920 (requiring licensee to notify victim of on air personal attacks and to provide victim with opportunity to respond on air: the Personal Attack Rule, repealed in 2000). 117 See, e.g., 47 U.S.C. § 312(a)(7) (2005) (allowing FCC to revoke a license for willful or repeated failures to allow reasonable access to broadcast air time to candidates for federal elective office: the Equal Opportunities Rule); 47 U.S.C. §315(a) (2005) (mandating that broadcasters who provide political candidates with use of station must also allow equal opportunities to competitor candidates).
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guidelines.119 Cable operators have been regulated in a similar manner.120 Over the years,
the impact of concentration of media ownership on competition and the diversity have
been a critical issue in public interest in mass media.
In the telecommunications industry, the public interest principle has been developed along with the regulation of public utility companies. Under the 1934
Communications Act, telephony was operated as a utility, a service available to everyone at reasonable rates. The regulation has been concerned with provision and operation of the physical infrastructure, the network, and access to that network: in other words, the regulation of the conduit, not content or programming.121 The content carried by
telecommuncations networks has been considered a private matter and has been
unregulated. Typically, telecommunicatons service operators are subject to license
obligations including the responsibility to provide non-discriminatory access (i.e.,
common carriage). As common carriers, they are required to provide consistent quality of
servcies at reasonable prices with the public interest obligation to provide universal service.122 Universal service came to mean, over years of regulation, connecting each
118 See, e.g., 47 C.F.R. § 73.658 (2005) (restricting certain licensee-network contracts and regulating prime-time broadcasting schedules); 47 C.F.R. § 73.3555 (2005) (prohibiting a broadcast licensee owing stations that reach more than 45 percent of the nationwide audience). 119 See, e.g.,Commission Policy Regarding the Advancement of Minority Ownership in Broadcasting, 92 F.C.C.2d 849, 853-55 (1982) (giving minority ownership preferences to limited partnerships in which the general partner held controlling interest and met minority qualifications). 120 See, e.g., 47 C.F.R. § 76.205 (2005) (applying 47 U.S.C. § 312’s Equal Opportunities Rule to cable); and 47 U.S.C. § 533 (2005) (restricting multiple ownership of cable and broadcast stations). 121 Colin R. Blackman, Convergence between Telecommunications and other Media, 22(3) TELECOMMUNICATIONS POLICY 163 (1998). 122 47 U.S.C. § 151 (2005). For the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States, without discrimination on the basis of race, color, religion, national origin, or
45
customer to all, at reasonable and fairly standard prices, especially including rural and
other high-cost service areas, the disabled and the poor.123 Telecommunications
regulators have also traditionally controlled market entry, service pricing, and technical
regulations to ensure interoperability of equipment.
It should be noted that the two concepts of universal service in the
telecommunications regulation, and public trustee in broadcasting, cannot be equated.
The concept of a public trustee in broadcasting was established in the context of spectrum
scarcity and the objective of ensuring programming met a range of usually national, social, political, and cultural objectives.124 Meanwhile, universal service has to do with
access to telecommunications networks: it does not necessarily address access to content
or service.125
Over the years, throughout the era of deregulation, the public interest was reconstrued to mean an open market environment that could be maintained with a
minimun of government inteference.126 Central to this position is the assumption that the
sex, a rapid, efficient, nationwide, and world-wide wire and radio communication service with adequate facilities at reasonable charges, for the purpose of national defense, for the purpose of promoting safety of life and property through the use of wire and radio communication, and for the purpose of securing a more effective execution of this policy by centralizing authority heretofore granted by law to several agencies and by granting additional authority with respect to interstate and foreign commerce in wire and radio communication. 123 PATRICIA AUFDERHEIDE, COMMUNICATIONS POLICY AND THE PUBLIC INTEREST: THE TELECOMMUNICATIONS ACT OF 1996, New York: Gilford Press at 17 (1999); Mark Cooper, Universal Service: A Historical Perspective and Policies for the 21st Century, Washington D.C: Benton Foundation and Consumer Federation of America (1997). 124 Colin R. Blackman, Convergence between Telecommunications and other Media, 22(3) TELECOMMUNICATIONS POLICY 163 (1998). 125 Id. 126 PATRICIA AUFDERHEIDE, COMMUNICATIONS POLICY AND THE PUBLIC INTEREST: THE TELECOMMUNICATIONS ACT OF 1996, New York: Gilford Press at 26 (1999).
46
public interest in communications policy issues can arise from economic efficiency and
consumer sovereignity.127 As the former FCC Chairman Fowler states:
Communications policy should be directed toward maximizing the services the public desires. Instead of defining public demand and specifying categories of programming to serve this demand, the Commission should rely on the broadcasters’ ability to determine the wants of their audiences through the normal mechanism of the marketplace. The public’s interest, then, defines, the public interest.128
With fully developed economic sectors and technologies under this public interest
framework, competition has arisen as prominent principle that constitutes the public
interest. Especially with the implementation of the Telecommunications Act of 1996,
promoting competition in the telecommunications and media markets has been
established as a central goal of the FCC.129 The FCC’s goal for competition has been to
support the Nation’s economy by ensuring that there is a comprehensive and sound
competitive framework for communication services. The Supreme Court also has noted
that the FCC’s interest in promoting competition is an important government interest.130
127 PHILLIP M.NAPOLI, FOUNDATIONS OF COMMUNICATIONS POLICY: PRINCIPLES AND PROCESS IN THE REGULATION OF ELECTRONIC MEDIA, Cresskill, NJ: Hampton Press, at 84 (2001); MONROE E. PRICE, TELEVISION, THE PUBLIC SPHERE, AND NATIONAL IDENTITY, New York: Oxford Univeristy Press (1995). 128 Mark S. Fowler and Danniel L. Brenner, A Marketplace Approach to Broadcast Regulation, 60 TEXAS L. REV. 1, 3-4 (1982). 129 Written Statement of Michael K. Powell, Chairman of the Federal Communications Commission on Competition Issues in the Telecommunications Industry, Before the Committee on Commerce, Science, and Transportation, United States Senate, Jan 14, 2003. 130 Federal Communications Commission v, RCA Communications, Inc, 346 U.S. 86, 93-95 (1953) (noting that there can be no doubt that competition is a relevant factor in weighing the public interest.)
47
Competition overlaps another policy objective of diversity131 in terms of the degree to which they are both concerned with maximizing the number of distinct participant in the marketplace of idea.132 While diversity-motivated policies are typically intended to affect media content, the competition concept reflects a strictly economic approach to the issue of marketplace participants.133 In fact, most of the studies in media competition focus on the market concentration based on the number of firms and their market share.134 In addition, several studies have found that the market competition enhanced diversity meaning that the more the number of firms in the market, the more the number and types of available programming and services.135
131 The Supreme Court has found that decentralization of information production serves values that are central to the First Amendment, noting that the widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public. Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622, 663 (1994) (quoting United States v. Midwest Video Corp., 406 U.S. 649, 668 n.27 (1972)). 132 The Supreme Court has noted that the FCC’s interest in promoting widespread dissemination of information from a multiplicity of sources is an important governmental interest. Abrams v. United States, 250 U.S. 616, 630 (1919). 133 PHILLIP M.NAPOLI, FOUNDATIONS OF COMMUNICATIONS POLICY: PRINCIPLES AND PROCESS IN THE REGULATION OF ELECTRONIC MEDIA (2001). 134 See, e.g., Sylvia M. Chan-Olmsted & Barry R. Ltiman, Antitrust and Horizontal Mergers in the Cable Industry, 1(2) JOURNAL OF MEDIA ECONOMICS 3 (1988); Robert G. Picard, Measures of Concentration in the Daily Newspaper Industry, 1 JOURNAL OF MEDIA ECONOMICS 61 (1988); Alan B. Albarran & John Dimmick, Concentration and Economics of Multiformity in the Communications Industries, 9(4) JOURNAL OF MEDIA ECONOMICS 41 (1996); Sylvia M. Chan- Olmsted, Market Competition for Cable Television: Reexamining Its Horizontal Mergers and Industry Concentration, 9(2) JOURNAL OF MEDIA ECONOMICS 25 (1996). 135 See, e.g., Heikki Hellman & Martti Soramaki, Competition and Content in the U.S. Video Market, 7(1) Journal of Media Economics 29 (1994); Sylvia M. Chan-Olmsted, From Sesame Street to Wall Street: An Analysis of Market Concentration in Commercial Children’s Television 40(1) JOURNAL OF MEDIA ECONOMICS 30 (1996); Hyun S. Bae, Product Differentiation in Cable Programming: The Case in the Cable National All-news Networks, 12 JOURNAL OF MEDIA ECONOMICS 265 (1999); Shu-Chu Sarrina Li & Chin-Chih Chiang, Market Competition and Programming Diversity: A Study on the TV Market in Taiwan, 14(2) JOURNAL OF MEDIA ECONOMICS 105 (2001); Richard van der Wurff and Jan van Cuilenburg, Impact of Moderate and Ruinous Competition on Diversity: The Dutch Television Market, 14(4) JOURNAL OF MEDIA ECONOMICS 213 (2001).
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Mergers in the Telecommunications and the Media Industry
The electronic media and telecommunications industry as a whole is one of the
most technologically innovative and globalized sector of the world economy. The
economic nature of the industry, with high fixed costs and low marginal costs, has long
facilitated mergers and acquisitions.136 In addition, with the advent of the high speed
Internet services, technological convergence accelerated the mergers and acquisitions among media and telecommunications service providers. M&As are especially attractive
for media and telecommunications firms for a variety of reasons. Those industry-specific
merger drivers include: deregulation, globalization, vertical integration, economies of
scope, and network effects.
Deregulation
The pro-competitive Telecommunications Act of 1996 has radically changed the
market structure of the traditional mass media and telecommunications industries. By
eliminating regulatory barriers that block competition among local phone companies,
long distance carriers, and cable television companies, the act allowed for a more
competitive environment in the media and telecommunications industry.137 A variety of
ownership restrictions have also been relaxed. For example, the FCC relaxed the national
television multiple ownership rule that prohibits any entity from controlling television
stations when the combined audience reach of exceeds 35 percent of television
136 Barney Warf, Mergers and Acquisitions in the Telecommunications Industry, 34(3) GROWTH AND CHANGE, 321 (2003). 137 Kuo-Feng Tseng & Barry Litman, The Impact of the Telecommunications Act of 1996 on the Merger of RBOCs and MSOs: Case Study: The Merger of US West and Continental Cablevision, 11(3) JOURNAL OF MEDIA ECONOMICS 47 (1998).
49
households nationwide, by increasing the limit to 45 percent.138 Further, the local cable-
broadcast cross ownership restriction was repealed, thereby permitting a single entity to
own or control both a network of broadcast television stations and a cable television
system in the same area.139
Globalization
The telecommunications industry has emerged as one of most international sectors
of business with the development of a global grid of fiber optics and satellite services. An
industry can be defined as global if there is some competitive advantage to integrating
activities on a worldwide base.140 Privatization and a series of international reciprocal agreements have facilitated globalization in the telecommunications market.141 Global
alliances through mergers and acquisitions create benefits for telecommunications firms,
allowing them to capture a developed customer base in other nations and quickly
establish a market leadership. For example, to enter the growing U.S.
telecommunications market, Deutsche Telecom has tried to acquire Qwest
Communications in 2000. Other global strategic alliances include Concert, which is the
138 47 C.F.R. § 73.3555(d) (2005). The Telecommunications Act increased the limit from 25 percent to 35 percent. The FCC increased the limit to 45 percent in response to the court decision in Fox Television Stations v. Federal Communications Commission, 280 F.3d 1027 (D.C.Cir. 2002) (holding The FCC’s decision to retain the rules was arbitrary, capricious, and contrary to law. The court remanded the ownership rule to the FCC for further consideration) 139 68 FED. REG. 13236 (2003) (eliminating the cable-broadcast cross ownership rule in response to a court decision vacating the rule and directing the Commission to repeal the rule). See Fox Television Stations v. Federal Communications Commission, 280 F.3d 1027 (D.C.Cir. 2002) (holding The FCC’s decision to retain the rules was arbitrary, capricious, and contrary to law. The court instructed the FCC to vacate the cross-ownership rule). 140 Sylvia Chan-Olmsted & Mark Jamison, Rivalry through Alliances: Competitive Strategy in the Global Telecommunications Market, 19(3) EUROPEAN MANAGEMENT JOURNAL 317 (2001). 141 Id.
50
alliances between British Telecom, MCI, Portugal Telecom, and Telefonica, and Global
One, which is the alliances between Sprint, Deutsche Telecom, and France Telecom.
Vertical Integration
While theories of vertical integration indicate both a procompetitive impact such as
efficiency and an anticompetitive impact such as foreclosure, vertical integration has long
been one of the major competitive concerns of antitrust courts in the media industry,
tracing back to United States v. Paramount. 142 In Paramount, the Supreme Court held
the vertical integration of production, distribution, and exhibition achieved by the five
major film studios to be an unlawful restraint on trade. Because of the complementary
nature of the content production and content distribution, vertical integration between
content and conduit in the media industry is likely to have significant strategic
implications for firms.
Vertical integration allows one company to own or control the stages of the
production and distribution of a particular program (i.e., allowing self-dealing)143 The same company can then use its various properties to promote the program. Self-dealing has several distinct advantages. Self-dealing often reduces the overall cost of program production,144 which is likely to result in lower price.145 In addition, common ownership
142 334 U.S. 131 (1948). 143 David Waterman, CBS-Viacom and the Effects of Media Mergers: An Economic Perspective, 52 Fed. Comm. L.J. 531, 536 (2000). 144 National Telecommunications and Information Administration, an agency of the U.S. Department of Commerce, asserts that vertical integration allows the cable companies to avoid the transaction costs of obtaining programming. National Telecommunications and Information Administration, Video Program Distribution and Cable Television: Current Policy Issues and Recommendations, NTIA Technical Report 88-233 (1988). 145 Ahn & Litman (1997) compared the consumer welfare of vertically integrated cable MSOs with that of nonintegrated MSOs in terms of subscription fees and program diversity. They found out the consumer welfare is enhanced as vertical integration increase up to an optimal threshold,
51 often reduces the risk that a competing network will pick up a particular program.
Finally, ideas for programs are more effectively circulated between network executives and program producers and vice versa. However, those self-dealing tend to foreclose independent content producers from access to what remains one of the few most viable distribution outlets. An example of anticompetitive impact of the vertical integration has been well illustrated in the 1994 merger of Liberty Media (a video programming producer) and Tele-Communications Inc. (a multiple cable system operator).146
Economies of Scope
Economies of scope refers to producing multiple products with the same resources.
Benefits of economies of scope can be significantly achieved in the media industry.
Through mergers and acquisitions, media companies strategically use repurposing, which means using already existing media content owned by a corporation in another medium owned by the same company.147 Media mergers allow companies to repackage existing properties and create cross-promotions.148 Merged companies can use their vast resources to cross-channel promote original and special events programming.
Network Effects
In the telecommunications industry, there are substantial advantages for both firms and consumers to be part of a large network of users relying on a common set of standards because technical and behavioral standards reduce the need repeatedly to
after which consumer welfare declines. Hoekyun Ahn & Barry R. Litman, Vertical Integration and Consumer Welfare in the Cable Industry, 41(4) Journal of Broadcasting & Electronic Media 453 (1997). 146 See infra Ch.5 for further discussion of the TCI-Liberty merger. 147 Nicholas Negroponte, Being Digital, New York: Knopf (1995). 148 Keith Conrad, Media Mergers: First Step, 49 Fed. Comm. L. J. 675, at 681 (1997).
52 negotiate the rules governing interaction.149 Network effects occur when the customer’s value of a product increases with the number of people using that same product or a complementary product.150 If the attractiveness of a network increases as it enlarges, consumers will tend to choose the larger network, which will make it even larger and even more attractive. These positive feedback is due to increasing returns to consumption and can lead to a market tipping towards a single company or standard.151 A classic example of tipping is the video tape recorder market, in which Betamax became extinct after consumers flocked to VHS.
Since characteristics of network industries make them prone to dominance by a single firm, the network effect has been an antitrust concern in mergers and acquisitions.
In the merger of America Online and Time Warner, for example, the FCC noted that the market in text-based instant messaging is characterized by strong network effects, which means a service’s value increases substantially with the addition of new users with whom other users can communicate. The Commission further concluded that AOL’s market dominance in text-based messaging, coupled with the network effects and its resistance to interoperability, establishes a very high barrier to entry for competitors that contravenes the public interest in open and interoperable communications systems, the development of the Internet, consumer choice, competition and innovation.152
149 Robert M. Entman and Steven S. Wildman, Reconciling Economic and Non-economic Perspectives on Media Policy: Transcending the Marketplace of Ideas, 42(1) Journal of Communications, 5 (1992). 150 United States Department of Justice, Network Effects in Telecommunications Mergers, address by Constance K. Robinson, Aug 23, 1999. 151 William E. Cohen, Competition and Foreclosure in the Context of Installed Base and Compatibility Effects, 63 Antitrust L. J. 535 (1996). 152 AOL-Time Warner Order, 16 F.C.C.R., at 6603 (2001).
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Relevant Literature Review
Merger review by federal agencies (the FCC and the DOJ/FTC) in the
communications industry has been discussed in several law review articles. Three studies
have addressed the dual-agency review of telecommunications mergers in light of
administrative proceedings. First, Curran153 described current merger review authorities
(i.e., federal, state and international) and argued that one agency should have sole
authority over telecommunications mergers. Discussing some commentators’
suggestions, he insisted that the FCC should be a single authority for merger review.
Barkow and Huber154 also suggested modification of the current dual-agency
review process. By comparing the FCC’s procedural approach to merger reviews with
that of the DOJ, the authors argued that the FCC is biased toward regulation whereas the
DOJ tends to favor a free market.155 Criticizing the FCC’s reliance on adjudications,
instead of formal rulemaking, the authors concluded that FCC’s merger review should be
conducted openly and directly in general rulemaking proceedings.
Discussing advantages and disadvantages of dual-agency review, Weiss and
Stern156 argued that dual jurisdiction should be retained, subject to modification. They
suggested two alternative models. Their first approach is the Hart-Scott-Rodino
153 D. Curran, Rethinking federal review of telecommunications mergers. 28 OHIO N.U. L. REV. 747 (2002). 154 Rachel E, Barkow and Peter W. Huber, A Tale of Two Agencies: A Comparative Analysis of FCC and DOJ Review of Telecommunications Mergers, 2000 U CHI LEGAL F 29 (2000). 155 The authors argue that the FCC clings to the belief that it can promote competition most effectively by actively interfering with market transactions and conditioning merger approvals to produce what it believes will be procompetitive results. Id. at 55-56. 156 J. Weiss and M. Stern, Serving Two Masters: The Dual Jurisdiction of the FCC and the Justice Department over Telecommunications Transactions, 6 COMMLAW CONSPECTUS 195 (1998).
54
Premerger Program (or Clearance Process) of the DOJ/FTC,157 where the agencies have a
nine-day window to decide which agency will review the transaction. Under this model,
the authors argued, the agencies would coordinate their review to limit the costs to
industry created by two separate agency inquiries. The second model attempted to involve adopting a review approach similar to the Section 271 application process158
where the FCC conducts the agency review and the DOJ submits comments.
Similarly, Shelanski159 asserted that the substantive role of the FCC in merger
review has mostly shifted to general antitrust authorities at the DOJ and the FTC. The
author argued that the changes in the legal and economic environment of U.S.
telecommunications created the conditions necessary for a significant reduction in
regulation of telecommunications carriers, and that the transition to regulation via general
competition policy were likely to continue in the future. While these studies deal with the merger review process of the two agencies, and assert the necessity of some modification
of the merger review process, one study by Berresford160 focuses on explaining and
describing how the accepted standards of the FCC for analyzing merger can be applied to
mergers involving mobile radio telecommunications services.
Although these studies address the merger review process, no study has undertaken
a systematic approach with an organized frame of analysis to compare the agencies’
157 See infra Ch.3. for further discussion of Hart-Scott-Rodino Premerger Program of the DOJ/FTC. 158 Section 271 of the 1996 Telecommunications Act provides a mechanism by which Bell Operating Companies can enter the long distance market in their service area by meeting a set of competitive criteria. 159 Howard A. Shelanski, From Sector-specific Regulation to Antitrust Law for US Telecommunications: the Prospects for Transition, 26 TELECOMMUNICATIONS POLICY 335 (2002). 160John Berresford, Mergers in Mobile Telecommunications Services: A Premier on the Analysis of Their Competitive Effects, 48 Fed. Comm. L.J. 247 (1996)
55 review of mergers. In addition, the law review articles address only selected merger cases that support the author’s particular arguments. Especially, the first three articles focus on merger proceedings as a matter of administrative procedure that needs to be modified.
Further, each study’s conclusion is different regarding whether a sector-specific authority in merger proceedings is necessary. Finally, these studies focus only on the selected telecommunications mergers without including media merger cases.
Accordingly, this study attempts to systematically compare the merger review of the DOJ/FTC and the FCC. It analyzes the standards of merger review and merger conditions for mergers that have been challenged as violation of section 7 of the Clayton
Act.
CHAPTER 3 MERGER REVIEW PROCESS
Merger proceedings by federal agencies consist of three distinct processes: premerger notification and filing, substantive evaluation of the potential impact of a proposed merger, and merger enforcement after an evaluation. This chapter discusses the merger review process of the Federal Trade Commission/Department of Justice and the
Federal Communications Commission. The first part of the chapter explains the procedure of premerger notification. The second part describes dual-agency jurisdiction
in telecommunications and media mergers. Then merger proceedings by each agency –
the DOJ/FTC and the FCC – are discussed in detail. Finally, the last part of this chapter
provides procedures in merger enforcement and remedies including merger conditions.
Premerger Notification
Merger review under the federal antitrust law starts with pre-merger notification
pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (HSR Act).1 The
HSR Act, among other things, requires merging companies to provide pre-merger notification of their intention to merge to the Federal Trade Commission and the Antitrust
Division of the Justice Department if the proposed merger falls within specific parameters.2 The parties must then wait a specific period, usually 30 days before they
1 15 U.S.C. § 16(a) (2005). 2 Those parameters are: 1) that at least one of the two firms involved must have assets or net sales of $100 million or more; and 2) the acquiring firm foresees holding either $15 million or 15 percent of the acquired company’s assets. Id.
56 57 may complete the transaction. Small acquisitions that are less likely to raise antitrust concerns are excluded from the Act’s coverage.3
The primary purpose of the statutory scheme is to provide the antitrust enforcement agencies with the opportunities to review mergers and acquisitions before they occur.4
Much of the information for a preliminary antitrust evaluation is included in the notification filed with the agencies by the parties to the proposed transactions.5 The HSR has helped to decrease the amount of litigation associated with merger suits, bringing speedier results to those potentially or actually harmed by the merger.6 Nevertheless, the
HSR is criticized for replacing traditional litigation with far-reaching regulations by being overly costly, and for impeding the progress of some harmless mergers on effort to prevent the formation of harmful mergers.7
After a premerger notification is filed, either DOJ or the FTC analyzes a proposed merger under the Merger Guidelines. Since the jurisdiction of the DOJ and FTC overlaps, the two antitrust agencies have developed clearance procedures for notifying each other
3 The notification requirement applies to mergers that result an acquirer holding an aggregate total amount of the voting securities and assets of the acquired party in excess of $200 million… no transaction resulting in an acquiring person holding $50 million or less of assets or voting securities of an acquired person need be reported. Federal Trade Commission, Introductory Guide I to the Premerger Notification Program, available at http://www.ftc.gov. See also §7A(a)(3) of the Clayton Act. (15 U.S.C. § 18a(a).) 4 FTC and DOJ, Annual Report to Congress, Pursuant to Subsection (j) of Section 7A of the Clayton Act, Hart-Scott-Rodino Antitrust Improvements Act of 1976 (Twenty-Fifth Report), Fiscal Year 2002. 5 However, if either agency determines during the waiting period that further inquiry is necessary, it is authorized by Section 7A(e) of the Clayton Act to issue a request for additional information and documentary material. 6 Thomas E. Sullivan & Jeffrey L. Harrison, Understanding Antitrust and Its Economic Implications Ch. 7 (4th ed. 2003): See also William J. Baer, Reflections on Twenty Years of Merger Enforcement Under the Hart-Scott-Rodino Act, 65 Antitrust L.J. 825 (1997). 7 See, e.g., Joe Sims & Deborah P. Herman, The Effect of Twenty Years of Hart-Scott-Rodino on Merger Practice: A Case Study in the Law of Unintended Consequences Applied to Antitrust Legislation, 65 Antitrust L. J. 865 (1997).
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before deciding which agency will review a proposed merger.8 For example, the FTC
used to review the mergers involving broadcasting and cable companies whereas the DOJ
used to evaluate the mergers involving telecommunications companies. In 2002, the
agencies have agreed to allocate full responsibility over mass media and
telecommunications mergers to the DOJ.9
Evaluation of Mergers: Dual-Agency Review
In the telecommunications and the media industries, merger reviews are different
from those in most other areas in that the proposed merger requires dual review not only
by the DOJ/FTC (i.e., federal antitrust law enforcement agency) and but also by the
Federal Communications Commission (i.e., sector-specific regulatory authority). In other
words, merging parties in the media and the telecommunications industries have the
additional burden of regulatory approval from the FCC. For the FCC approval, the
merging parties are required to file with the Commission the application of transfer of
license. It is commonly found that the DOJ/FTC announces the result of a merger review
before the FCC publishes its decision on the same transaction.
Although both the DOJ/FTC and the FCC have a role in analyzing the competitive
impact of proposed mergers, the review standards of the agencies differ. The DOJ/FTC
examines whether a merger may substantially lessen competition, 10 applying the rules
provided in the Merger Guidelines. If the DOJ/FTC believes that a proposed transaction may substantially lessen competition, it may seek an injunction in a federal district court to prohibit consummation of the transaction. The DOJ/FTC, as one of the parties in an
8 H. Hovenkamp, Federal Antitrust Policy § 15.1 (2d ed. 1999). 9 See FTC Press Release, FTC and DOJ Announce New Clearance Procedures for Antitrust Matters, March 5, 2002, http://www.ftc.gov/opa/2002/03/clearance.htm. 10 See 15 U.S.C. § 18 (2005).
59
antitrust enforcement action, has the burden of proof that the merger will substantially
lessen competition.11 Since both the DOJ and the FTC are law enforcement agencies, and
do not regulate in a particular substantive area, they do not take action to improve on a proposed merger.
Meanwhile, the FCC’s review encompasses an examination of anticompetitive effects but also evaluates the potential impact of the proposed transaction on the
objectives of the Communications Act.12 The FCC reviews mergers under the broad
public interest standard.13 Accordingly, parties seeking the FCC approval of a merger
have the burden of proof that their merger is in the public interest, which the FCC has
interpreted to require proof that the merger will enhance competition.14 If the FCC finds that the public interest harm of a proposed merger outweigh the public interest benefit, the Commission may either disapprove the merger or approve it on conditions. Merger review process of the DOJ/FTC and that of the FCC are discussed in detail in the following sections.
11 U.S. Department of Justice, Statement of Jole I. Klein, Consolidation in the Telecommunications Industry, Before the House Committee on the Judiciary, June 1998. 12 In the Matter of Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from; MediaOne Group, Inc., Transferor, To AT&T Corp.Transferee., CS Docket No. 99-251 15, Memorandum Opinion and Order, F.C.C.R. 9816 at 9811 para.10 (comparing FCC standards to those employed by Department of Justice) [hereinafter AT&T- Media One Order]; In the Matter of Applications of AT&T Corp. and Tele-Communications, Inc. for Transfer of Control of Tele-Communications, Inc. to AT&T Corp., CC Docket No. 98-178, Memorandum Opinion and Order [hereinafter AT&T-TCI Order], 14 F.C.C.R. 3160, 3168-69 para.14 (1999). 13 See infra part 4 of this chapter or chapter 6 for the FCC’s merger review under the public interest standard. 14 See id.
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Merger Review of the Department of Justice and the Federal Trade Commission
After receiving notice from the merging parties and conducting discovery pursuant
to the Hart-Scott-Rodino Antitrust Improvement Act of 1976,15 the Department analyzes
mergers under the Merger Guidelines.16
Review Standard under Section 7 of the Clayton Act17
The DOJ/FTC analyzes media and telecommunications mergers as it does most
mergers: under § 7 of the Clayton Act, which prohibits acquisitions where in any line of
commerce or in any activity affecting commerce . . . in any section of the country the
effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.18 Enforcement under the Clayton Act, by its terms, is prospective and
predictive: it is concerned with competitive effects that may occur, and it allows the
agency to challenge a merger before it is consummated.19
Merger Guidelines
The Antitrust Division of the Department of Justice issued first issued Merger
Guidelines (Guidelines) in 1968, which were revised in 1982 and 1984. Although the
Guidelines reflect the Department’s merger enforcement standards, they are without the
force of law since they were not enacted by statute or formal rulemaking.20 The
underlying theme of the Guidelines is that mergers should not be condemned unless they
15 15 U.S.C. § 18a(a) (2005). 161984 Non-horizontal Merger Guidelines, 49 Fed. Reg. 26,823 (1984), and 1992 Horizontal Merger Guidelines, 57 Fed. Reg. 41,552 (1992). 17 15 U.S.C. § 18 (2005). 18 15 U.S.C. § 18 (2005). 19 U.S. Department of Justice, Statement of Joel I. Klein, Concerning Mergers and Corporate Consolidation, Before the Committee on the Judiciary, United States Senate, June 1998. 20 THOMAS E. SULLIVAN & JEFFREY L. HARRISON, UNDERSTANDING ANTITRUST AND ITS ECONOMIC IMPLICATIONS § 7.09 (4th ed. 2003).
61
facilitate collusion, or increase or enhance market power to proportions of a monopoly or oligopoly, maintaining prices about competitive levels, for example.21 Therefore, the
Guidelines focus on the structure of the market and conducts of firms within the market.
The Guidelines include exhaustive definitions of relevant markets (i.e., relevant product
market and geographic market) and market power.22
The Guidelines governing non-horizontal mergers (i.e., vertical and conglomerate
mergers) are the 1984 Non-horizontal Merger Guidelines issued by the DOJ. The
Guidelines covering horizontal mergers are the 1992 Horizontal Merger Guidelines
jointly issued by the DOJ and the FTC. Although the 1992 Guidelines only govern
horizontal mergers, they contain a more elaborate analysis of market definition23 and entry barriers.24 Thus the DOJ/FTC may utilize the analysis of the 1992 Horizontal
Merger Guidelines such as market definition, barriers to entry, and efficiency analysis in
all mergers in conjunction with the substantive analysis of the 1984 Non-horizontal
Merger Guidelines.25 The analysis of mergers under the Horizontal Merger Guidelines is
discussed first, and the review of non-horizontal mergers under the Non-horizontal
Merger Guidelines is followed.
21 1984 Department of Justice Merger Guidelines, 49 Fed. Reg. 26,823 § 1 (1984). 22 1992 Horizontal Merger Guidelines § 1. 23 1992 Horizontal Merger Guidelines § 1. 24 1992 Horizontal Merger Guidelines § 3. See also supra Ch.2 for barriers to entry. 25 Herbet Hovenkamp, Federal Antitrust Policy, § 13.5 (2d ed. 1999); the Introductory part of the 1992 Horizontal Merger Guidelines provides, [o]riginally issued as Section 4 of the ‘U.S. Department of Justice Merger Guidelines,’ June 14, 1984. All other sections of the 1984 Merger Guidelines have been superseded by the Horizontal Merger Guidelines issued by April 2, 1992, and revised April 8, 1997, by the U.S. Department of Justice and the Federal Trade Commission, available at http://www.usdoj.gov/atr/public/guidelines/2614.htm.
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Review of Horizontal Mergers
To review horizontal mergers, the DOJ/FTC evaluates various factors including the degree of concentration in the relevant market, potential adverse competitive impact of a merger, barriers to entry, efficiencies, and failing firm defense.
Market definition26
A merger review first determines the relevant markets in which threats to competition may occur. A calculation of post-merger market share of the merging firms and the impact of a merger on the relevant market concentration differ depending on how to define the relevant market. The relevant market consists of the relevant product market and the relevant geographic market.
Product market definition.27 To aid in product market definition, the Department of Justice has promulgated the five-percent test.28 The determination of whether two products are part of the same product market is based on whether a small but significant and nontransitory (i.e., usually 5 %) price increase by all of the sellers of Product A would cause a large enough consumers to shift to Product B that the price increase would prove unprofitable for the sellers of Product A. If an increase in price for all of a product group would cause consumers to shift to substitutes then the increase would not be profitable and the product market is too narrowly defined. The agency will then add the next best substitute to the prevalent product market and will continue this process until there is no sufficiently attractive substitute to which consumers could shift. At that point, the product market is defined. In other words, the agency will include all products in the
26 Horizontal Merger Guidelines, § 1. 27 Horizontal Merger Guidelines, § 1.1. 28 See United States Department of Justice, Merger Guidelines - 1984 (introductory statement), reprinted in 4Trade Reg. Rep. (CCH) Par. 13,103, at 20551.
63 relevant markets that are close substitute products and exclude all other products that are weak substitutes or unrelated (Figure 3-1).
Relevant Market
A B A B C cross-elasticity
C D
Figure 3-1. Relevant Market. Adapted from Barry R. Litman, The Motion Picture Industry, p.303 (1998).
For example, if price increase in orange juice (product A in the figure) causes consumers to shift first to fruit punch (product B) and then to soda (product C), all of these products are included in the same product market. However, if there is no consumer shift to bottled water (product D), then water is not included in the same product market.
In this case, the relevant market is likely to be beverage market, (i.e., including all A, B, and C) which is a separate market from bottled water market. (D in the Figure 3.1)
The example of how the definition of the relevant product market can affect the approval of a merger can be illustrated with Federal Trade Commission v. Staples.29 The court upheld the FTC’s challenge to a proposed merger between two office supply superstores, Staples and Office Depot. The merging parties argued that the product market was the sale of office product overall, asserting that the two companies together
29 970 F. Supp. 1066 (D.D.C. 1997). As with many antitrust cases, the definition of the relevant product market in this case is crucial. In fact, to a great extent, this case hinges on the proper definition of the relevant product market. at 1973. THOMAS E. SULLIVAN & JEFFREY L. HARRISON, UNDERSTANDING ANTITRUST AND ITS ECONOMIC IMPLICATIONS § 7.09 (4th ed. 2003).
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accounted for only 5.5 percent of the total consumable office supply sales in North
America. However, the Commission had narrowed the definition of the relevant product
market to the sale of consumable office supplies through office supply superstores. Under
this definition, after the merger, Staple-Office Depot would have a dominant market
share in 42 markets with 100 percent market share in 15 of those.30
The court upheld the FTC’s market definition. Although these products are also
sold by other retailers (e.g. Wal-Mart and Best Buy), the court concluded that there was a
low cross-elasticity of demand between consumable office products sold by the
superstores and the same products sold by non-office superstore retailers. That means, if
there is a price increase in Staple, while consumers would shift to other office superstores
such as Office Depot or Office Max, they are not necessarily likely to shift to non-office superstore retailers such as Wal-Mart.31 Based on this narrower definition of product
market, the court determined it was likely that the merger would lessen competition
substantially in some geographic market and create a monopoly in others. As such, the
narrower the market is defined, the more likely that the merger leads to the higher
concentration in the market.
30 970 F. Supp. 1066, at 1081. 31 The FTC has argued that a slight but significant increase in Staples-Office Depot’s prices will not cause a considerable number of Staples-Office Depot’s customers to purchase consumable office supplies from other non-superstore alternatives such as Wal-Mart, Best Buy, Quill, or Viking. On the other hand, the Commission has argued that an increase in price by Staples would result in consumers turning to another office superstore, especially Office Depot, if the consumers had that option. Upholding the FTC’s market definition, the Court found that the sale of consumable office supplies through office supply superstores is the appropriate relevant product market for purposes of considering the possible anti-competitive effects of the proposed merger between Staples and Office Depot… because a significant number of superstore customers do not turn to a non-superstore alternative when faced with higher prices in the one firm markets. Id. at 1080.
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Geographic market definition.32 The DOJ/FTC will determine the relative
geographical market in which firms to the merger produce or sell. Basically, the same procedure for relevant product market is followed for the relevant geographic market.
The agency will identify the geographical area in which the hypothetical producer of all output could maximize profits by a small but significant nontransitory price increase. If buyers could respond to a price increase by receiving supply from producers outside the immediate area, the geographical market is too narrow and the agency will include the outside locations until it identifies the area in which a hypothetical monopolist could maximize profits by increasing price.
Calculating market shares and market concentration33
Once the relevant markets are defined, the DOJ/FTC will calculate market shares
for all firms identified as market participants based on the total sales or capacity currently
devoted to the relevant market. After calculating market shares, the agency will focus on
the concentration of the market and any increase in concentration caused by a merger.
Market concentration is a function of the number of firms in a market and their respective
market shares. Accordingly, the greater the concentration within the market, the more
likely that collusion will exist. Similarly, the greater percentage of the market controlled
by a firm, the more likely that an output restriction will be profitable.34 The agency uses
the Herfindahl-Hirschman Index (HHI) of market concentration in order to determine the concentration that currently exists and the increased concentration that will result from a
32 Horizontal Merger Guidelines, § 1.2. 33 Id. § 1.4. -1.522. 34 THOMAS E. SULLIVAN & JEFFREY L. HARRISON, UNDERSTANDING ANTITRUST AND ITS ECONOMIC IMPLICATIONS § 7.09 (4th ed. 2003).
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merger. The HHI is calculated by summing the squares of the individual market shares of
all participants in the relevant market. The agency divides the spectrum of market
concentration as measured by the HHI into three categories that can be broadly
characterized as (1) unconcentrated (HHI below 1,000), (2) moderately concentrated
(HHI between 1000 and 1800), and (3) highly concentrated (HHI above 1800).
In evaluating horizontal mergers, the agency will consider both the post-merger market concentration and the increase in concentration resulting from the merger. Market concentration is a useful indicator of the likely potential competitive effect of a merger.
The general standards for horizontal mergers are as follows:
Post-merger HHI below 1000 (unconcentrated markets). Mergers in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.
Post-merger HHI between 1000 and 1800 (moderately concentrated markets). Mergers producing an increase in the HHI of less than 100 points in moderately concentrated markets are unlikely to have adverse competitive consequences and ordinarily require no further analysis. Mergers producing an increase in the HHI of more than 100 points in moderately concentrated markets potentially raise significant competitive concerns depending on other factors set forth in the sections 2-5 of the Guidelines (e.g. potential adverse competitive effects of mergers, entry, efficiencies, and failing assets).
Post-merger HHI above 1800 (highly concentrated markets). Mergers producing an increase in the HHI of less than 50 points, even in highly concentrated markets, are unlikely to have adverse competitive consequences and ordinarily require no further analysis. Mergers producing an increase in the HHI of more than 50 points in highly concentrated markets potentially raise significant competitive concerns, depending on the factors set forth in sections 2-5 of the Guidelines (e.g. potential adverse competitive effects of mergers, entry, efficiencies, and failing assets.). It will be presumed that mergers producing an increase in the HHI of more than 100 points are likely to create or enhance market power or facilitate its exercise.
As market shares and concentration data provide only the starting point for
analyzing the competitive impact of a merger, the agency will take into account other
factors which affect competition when analyzing a merger.
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Potential adverse competitive effects of mergers35
Under the Guidelines, the agency will evaluate whether a lessening of competition
through either coordinated interaction or unilateral effects exists. First, a merger may
diminish competition by enabling the firms selling in the relevant market more likely to
engage in coordinated interaction that harms consumers.36 Coordinated interaction is
comprised of actions by a group of firms that are profitable for each of them only as a
result of the accommodating reactions of the others. This behavior includes tacit or
express collusion.
Second, a merger may diminish competition even if it does not lead to increased
likelihood of successful coordinated interaction.37 The agency evaluates unilateral
behavior of the merging firms by investigating whether the firms will be likely to alter
their behavior unilaterally following the acquisition by elevating price and suppressing
output.
In addition to potential adverse impact of a merger through either a coordinated
interaction or unilateral behavior, the agency also evaluates other factors that are related
to competition. One of the significant factors is the barriers to entry.
Entry analysis38
The Merger Guidelines note that a merger is not likely to enhance market power, if other firms’ entry into a market is so easy that market participants, after the merger, could not profitably maintain a price increase above premerger levels. Such entry by other firms
is believed to deter an anticompetitive merger in its incipiency. Entry is found easy if
entry by other firms into a market would be timely,39 likely,40 and sufficient41 in its
magnitude, character and scope to deter the competitive effects of concern. In markets
where entry is that easy (i.e., where entry passes these tests of timeliness, likelihood, and
sufficiency), the merger raises no antitrust concern and ordinarily requires no further
analysis. Entry analysis is a central part of merger evaluation, with the assumption that
even a single firm market will perform competitively if entry is easy.42
Efficiencies43
As the 1992 Guidelines indicate, the primary benefit of mergers to the economy is
their potential to generate efficiencies. Meanwhile, the DOJ/FTC notes that even when
efficiencies generated through a merger enhance a firm’s ability to compete, a merger
may have other effects that may lessen competition and ultimately may make the merger anticompetitive. Consequently, the agency considers only merger-specific efficiencies:
those efficiencies likely to be accomplished with the proposed merger and unlikely to be
accomplished in the absence of either the proposed merger or another means having
39 The Guidelines provide that entry into a market is timely only if following a merger, committed entry can be achieved within two years from initial planning to significant market impact on price. The Guidelines adopt a two year standard for entry analysis. Id. 40 Under the Guidelines, entry into a market is likely only if a new entrant would be profitable at premerger prices. If a potential firm is able to acquire market share and profits within the two year period, entry is likely. Id. 41 The Guidelines states that entry into a market is sufficient only if a potential competitor would be able to successfully offer a product or service within the two year limitation. Id. 42 U.S. Department of Justice, Address by William J. Kolasky, Sound Economics and Hard Evidence: The Touchstones of Sound Merger Review, Before the American Bar Association Section of Antitrust Law and The Association of the Bar of the City of New York, June, 2002. 43 Horizontal Merger Guidelines, § 4.
69 comparable anticompetitive effects. In contrast, Vague, speculative, or otherwise unverifiable efficiency claims will not be considered by the agency.44
Failure and exiting assets45
Throughout the history of antitrust merger cases, courts have implied that certain situations, such as acquisition of undercapitalized or failing companies, may justify mergers that otherwise would be invalidated.46 The rationale underlying the failing company defense was to protect the interest of the creditors, employees, and stockholders who, without the merger, would suffer substantial loss.47
Under the Guidelines, accordingly, the agency notes that a merger is not likely to
create or enhance market power or to facilitate its exercise, if imminent failure48 of one of the merging firms would cause the assets of that firm to exit the relevant market. In those
44 Id. 45 Id. § 5. 46 See, e.g., International Shoe Co. v. FTC, 280 U.S. 291 (1930) (finding that the acquired firm was in serious financial trouble and that there was a good chance its assets would be sold): United States v. General Dynamics Corp., 415 U.S. 486 (1974) (noting that the recent market share of the acquired firm overstated its long-term market share and there was no claim that the merger would somehow strengthen the acquired firm); United States v. International Harvester Co., 564 F.2d 769 (7th Cir. 1977) (finding a company’s weakened financial condition placed it at a competitive disadvantage with competitors); See also Edward O. Correia, Reexamining the Failing Company Defense, 64 ANTITRUST L.J. 683 (1996). 47 THOMAS E. SULLIVAN & JEFFREY L. HARRISON, UNDERSTANDING ANTITRUST AND ITS ECONOMIC IMPLICATIONS § 7.09 (4th ed. 2003). 48 The Horizontal Merger Guidelines §5.1 provides the failing firm defense: A merger is not likely to create or enhance market power or facilitate its exercise if the following circumstances are met: 1) the allegedly failing firm would be unable to meet its financial obligations in the near future; 2) it would not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act; 3) it has made unsuccessful good-faith efforts to elicit reasonable alternative offers of acquisition of the assets of the failing firm that would both keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger; and 4) absent the acquisition, the assets of the failing firm would exit the relevant market. A similar argument can be made for failing divisions as for failing firms. § 5.2 of the Guidelines provides the failing division defense. See 1992 Merger Guidelines § 5.2.
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circumstances, post-merger performance in the relevant market may be no worse than
market performance had the merger been blocked and the assets left the market.
In sum, under the Horizontal Merger Guidelines, the agency evaluates a merger
based on the factors such as relevant markets, market concentration, potential adverse
competitive impact, entry, efficiencies, and failing assets. The last two factors are
defenses merging parties can use to mitigate the potential anticompetitive impact of a
proposed merger.
Review of Non-horizontal Mergers
Some factors considered in the Horizontal Merger Guidelines also apply to non-
horizontal mergers.49 In addition, the DOJ/FTC applies rules provided in the non- horizontal mergers in evaluating vertical mergers or conglomerate mergers.
Vertical mergers
In determining whether to challenge a vertical merger, the agency considers whether a vertical integration through merger may interfere with competition by: (1) creating objectionable barriers to entry, (2) facilitating collusion, or (3) evading rate regulation.50 In addition, the Department will consider expected efficiencies.51
Barriers to entry from vertical mergers.52 The DOJ/FTC will challenge vertical
mergers if the agency finds there are objectionable entry barriers. It is generally assumed
49 1984 Non-horizontal Merger Guidelines § 4. originally issued as Section 4 of the U.S. Department of Justice Merger Guidelines, June 14, 1984. All other sections of the 1984 Merger Guidelines have been superseded by the Horizontal Merger Guidelines issued by April 2, 1992, and revised April 8, 1997, by the U.S. Department of Justice and the Federal Trade Commission, available at http://www.usdoj.gov/atr/public/guidelines/2614.htm. 50 Non-horizontal Merger Guidelines, § 4.2. 51 The Department considers expected efficiencies under Section 3.5 of the Horizontal Merger Guidelines. 52 Non-horizontal Merger Guidelines, § 4.21.
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that if the degree of vertical integration between the two markets is so extensive, then
entrants to one market (the primary market, e.g. content production) also would have to
enter the other market (secondary market: e.g. content distribution).53 Nevertheless,
barriers to entry are unlikely to have an anticompetitive effect on the primary market
when that market does not have the concentration necessary to facilitate collusion or
monopolization. The agency is unlikely to challenge mergers: (1) if the unintegrated market can supply two firms of the minimally efficient size needed to compete in the market,54 (2) if firms can easily enter the secondary market,55 (3) unless the HHI on the
primary market is over 1,800,56 or (4) unless other factors indicate effective collusion is
particularly likely.57
Facilitating collusion through vertical mergers.58 In addition to barriers to entry,
the DOJ/FTC considers likelihood of facilitating collusion through vertical mergers. As
for the potential threat by facilitating collusion, the agency considers the factors such as
(1) vertical integration to the retail level, and (2) elimination of a disruptive buyer. First,
as for vertical integration to the retail level,59 the agency is unlikely to challenge vertical
mergers on the ground that they facilitate collusion unless (1) the upstream supply market
53 This competitive problem could result from either upstream or downstream integration, and could affect competition in either the upstream market or the downstream market. In the text, the term primary market refers to the market in which the competitive concerns are being considered, and the term secondary market refers to the adjacent market. Non-horizontal Merger Guidelines, Id. n.30. 54 Id. § 4.211. 55 Id. § 4.212. 56 Id. § 1.4. -1.522. 57 Id. § 4.213. 58 Id. § 4.22. 59 Id. § 4.221.
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has enough concentration to make collusion likely, and (2) there is a likely
anticompetitive effect.60
Second, as for the elimination of a disruptive buyer,61 the DOJ/FTC notes that the
elimination by vertical merger of a particularly disruptive buyer in a downstream market
may facilitate collusion in the upstream (i.e., supply) market. If upstream firms view sales
to a particular buyer as sufficiently important, they may deviate from the terms of a
collusive agreement between upstream firms. The merger of such a buyer with an
upstream firm may eliminate that rivalry, making it easier for the upstream firms to
collude effectively. The agency may challenge a merger with a disruptive retail buyer if
that buyer had enough market power with the upstream supplier to force the upstream
firm to deviate from a pricing agreement. However, the agency is unlikely to challenge
these mergers unless the HHI of the upstream market is over 1,800 or other factors indicate that effective collusion is possible.
Evasion of rate regulation. 62 The DOJ/FTC will consider challenging upstream
mergers by monopoly public utilities subject to rate regulation if the merger would allow
the monopolist to disguise the costs of supplies from the upstream firm. In mergers with
upstream firms that have no independent markets by which to measure the true cost of the
60 The reduced ability to monitor prices at retail level that results form vertical integration is unlikely to have an effect on the upstream market unless the market is so concentrated that a type of cartelization can occur. The HHI of the upstream market must be above 1,800 unless other factors indicate collusion is likely to occur. Additionally, a large portion of the upstream product must be sold through vertically integrated outlets after the merger. Even when these two conditions exist, the DOJ is unlikely to challenge such mergers unless individual evaluation shows a likely anticompetitive effect. Id. 61 Id. § 4.222. 62 Id. § 4.23.
73 supply, monopolists can inflate prices off to the regulator and on to the consumers as legitimate cost justifying rate increase.
Conglomerate mergers
Conglomerate mergers do not have direct anticompetitive impacts because the merger does not eliminate competition between firms in the same market. Nevertheless, the Guidelines note that conglomerate mergers have secondary effects on competition and market structure.63 They can reduce future competition by eliminating a potential entrant and they may give the merged firm a decisive edge in financial resources that it can use to erect entry barriers or to engage in predatory conduct.
The agency considers the following factors:
Market concentration.64 The DOJ/FTC is unlikely to challenge mergers unless the
HHI of the acquired firm’s market is above 1,800, and unless other factors show that effective collusion is particularly likely.
Ease of entry.65 When other firms can reasonably and effectively enter the acquired firm’s market, the elimination of one potential entrant has less anticompetitive effect. If firms that do not sell the relative product could easily and effectively enter the market, the merger is unlikely to be challenged.
Acquiring firm’s entry advantage to potential entrants. 66 If more than a few firms have the same or comparable advantage in entering the acquired firm’s market, their existence will negate the anticompetitive effects of the merger. The agency is
unlikely to challenge a potential competition merger when these other firms exist with
similar entry advantage ascribed to the acquiring firm.67
Market share of the acquired firm.68 When the acquired firm has a market share
of 5% or less, a merger with that firm is unlikely to be challenged by the DOJ/FTC, since such toehold acquisitions have the procompetitive effects of a new entry. Meanwhile, the agency is likely to challenge mergers when the acquired firm has a market share of 20%
or more, so long as the three previous conditions are met (i.e., market concentration, ease
of entry, and acquiring firm’s entry advantage).
In sum, the DOJ/FTC merger review focuses on the economic evidence in markets
as provided in the Merger Guidelines.69 The DOJ/FTC review media and telecommunications mergers under the same principles that the agencies use in other industries. Meanwhile, the Federal Communications Commission, the sector-specific regulatory body, applies the public interest standard, which is discussed in the following section.
Merger Review of the Federal Communications Commission
The Federal Communications Commission has concurrent jurisdiction with
DOJ/FTC under Sections 7 and 11 of the Clayton Act to disapprove mergers that may be substantially to lessen competition, or to tend to create a monopoly.70 Nonetheless, the
67 Other things being equal, the agency is increasingly likely to challenge a merger as the number of other similarly situated firms decreases below three and as the extent of entry advantage over non-advantaged firms increases. Id. 68 Id. § 4.134. 69 U.S. Department of Justice, Address by William J. Kolasky, Sound Economics and Hard Evidence: The Touchstones of Sound Merger Review, Before the American Bar Association Section of Antitrust Law and The Association of the Bar of the City of New York, June, 2002. 70 15 U.S.C. § 18, 21(a) (2005).
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Commission states that its merger review needs not rely upon the Clayton Act because the Commission’s review under the Communications Act is sufficient.71
Review Standard under the Communications Act
The two central license provisions in the Communications Act that apply to media and telecommunications mergers are Sections 214(a) and 310(d). The test in § 214(a) for license transfers is the present or future public convenience and necessity.72 The standard in § 310(d) is the public interest, convenience, and necessity.73 The Commission’s public interest test under Sections 214 and 310 focuses on what the Commission believes to be competitive effects.74
While the antitrust analysis undertaken by the DOJ focuses solely on whether the effect of a proposed merger may be substantially to lessen competition,75 the
Communications Act requires the FCC to make an independent public interest
71 See, e.g., MCI-WorldCom Order, 13 F.C.C.R. at 18032-33, para.12 (1998); Bell Atlantic- NYNEX Order, 12 F.C.C.R. at 20006 para. 35; Application of Pacific Telesis Group and SBC Communications, Inc, for Consent to Transfer Control of Pacific Telesis Group, Memorandum Opinion and Order, 12 F.C.C.R. 2624, 2631 para. 13 (1997) [hereinafter SBC-PacTel Order] (refusing to exercise the FCC’s statutory authority under the Clayton Act in these cases because the Commission’s jurisdiction under the Communications Act is sufficient to address all questions regarding the competitive effects of the proposed transfer, including the issue of whether the transfer may substantially lessen competition or tend to create a monopoly.) The D.C. Circuit has held that the FCC has discretion whether to assert its Clayton Act authority. See United States v FCC, 652 F2d 72, 82-83 (D.C. Cir. 1980). 72 no carrier shall . . . acquire or operate any line, or extension thereof, or shall engage in transmission over or by means of such additional or extended line, unless and until there shall first have been obtained from the Commission a certificate that the present or future public convenience and necessity require or will require the construction, or operation, or construction and operation, of such additional or extended line . . . 47 U.S.C. § 214(a) (2005). 73 no construction permit or station license . . . shall be transferred, assigned, or disposed of in any manner . . . except upon application to the Commission and upon a finding by the Commission that the public interest, convenience, and necessity will be served thereby. 47 U.S.C. § 310(d) (2005). 74 Rachel E. Barkow and Peter W. Huber, A Tale of Two Agencies: A Comparative Analysis of FCC and DOJ Review of Telecommunications Mergers, 2000 U CHI LEGAL F 29 (2000). 75 15 U.S.C. § 18 (2005).
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determination, which includes evaluating public interest benefits or harm of the merger and its likely effect on future competition.76 To find that a merger is in the public
interest, therefore, the Commission must be convinced that it will enhance competition.77
Merger Review of the FCC
Strictly speaking, there is no effective discipline of standards -- such as the Merger
Guidelines -- which the FCC relies on for merger review. Generally, the Commission’s
analysis is informed by antitrust principles78 and broad aim of the Communications Act.79
The FCC also relies on the Commission’s own prior merger rulings.
The broad aims of the Communications Act include, among other things, ensuring the existence of a nationwide communications service, available to everyone; implementation of Congress’s procompetitive, deregulatory national policy framework designed to open all telecommunications markets to competition; the preservation and advancement of universal service; and the acceleration of private sector deployment of advanced services.80 For telecommunications services, the Commission’s public interest
analysis may entail assessing whether the merger will affect the quality of the services or
will result in the provision of new or additional services to consumers.81 For electronic
media, the FCC considers, among other things, whether the proposed merger will further the statutory goals of providing the widest possible diversity of information sources and
76 See WorldCom-MCI Order, 13 F.C.C.R. at 18032-33 paras.12-13; Bell Atlantic-NYNEX Order, 12 F.C.C.R. at 19987 para 2. 77 Bell Atlantic-NYNEX Order, 12 F.C.C.R. at 19987 para 2. 78 United States v. FCC, 652 F.2d at 81-82, 88. 79 E.g., AOL-Time Warner Order, para 22; AT&T-TCI Order, 14 F.C.C.R. at 3168-69 para 14; WorldCom-MCI Order, 13 F.C.C.R. at 18030-31 para 9. 80 AOL-Time Warner Order, para 22; AT&T-TCI Order, 14 F.C.C.R. at 3168-69 para 14; WorldCom-MCI Order, 13 F.C.C.R. at 18030-31 para 9. 81 AOL-Time Warner Order, para 22; WorldCom-MCI Order, 13 F.C.C.R. at 18030-31.
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services to the public82 and promoting competition in the delivery of diverse sources of
video programming . . .83
In conducting its public interest inquiry, the Commission examines four overriding
questions: (1) whether the transaction would result in a violation of the Communications
Act or any other applicable statutory provision; (2) whether the transaction would result
in a violation of the Commission’s rules; (3) whether the transaction would substantially
frustrate or impair the Commission’s implementation or enforcement of the
Communications Act and/or other related statutes, or would interfere with the objectives
of the Communications Act and/or other related statutes; and (4) whether the transaction
promises to yield affirmative public interest benefits. 84
The Commission’s analysis follows a series of steps, some of which are based on
what the DOJ reviews under the Merger Guidelines.85 First, the Commission begins its
inquiry by defining the relevant product markets and geographic markets.86 In identifying the relevant markets, the FCC may rely on either judicial precedents and/or the 1992
Horizontal Merger Guidelines’ five percent test.87 When using the judicial definition of the relevant markets, the FCC adopts reasonable interchangeability test in Brown Shoe
82 47 U.S.C. § 521(4) (2005). 83 47 U.S.C. § 523(a) (2005). 84 AT&T-MediaOne Order, 15 F.C.C.R. at 9820-21 para 9; Applications of Ameritech Corp and SBC Communications Inc, for Consent to Transfer Control of Corporations Holding Commission Licenses and Lines Pursuant to Sections 214 and 310(d) of the Communications Act and Parts 5, 22, 24, 25, 63, 90, 95 and 101 of the Commission’s Rules (SBC-Ameritech Order), 14 F.C.C.R. 14712, 14737 para 48. (1999). 85 Rachel E. Barkow and Peter W. Huber, A Tale of Two Agencies: A Comparative Analysis of FCC and DOJ Review of Telecommunications Mergers, 2000 U CHI LEGAL F 29, at 44-45 (2000). 86 The Merger of MCI Communications Corp and British Telecommunications plc, Memorandum Opinion and Order, 12 F.C.C.R. 15351, at 15357-58 P11 (1997) (BT-MCI II Order) 87 See supra Ch.2 for the relevant market definition.
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Co., Inc. v. United States.88 The FCC relied on the judicial precedents in reviewing
AT&T-McCaw merger. 89
Second, the Commission identifies the current and potential participants in each relevant market, especially those that are likely to have a significant competitive effect.90
The Commission also compares the relevant market’s degree of concentration before and after the merger. The Commission usually relies on the HHI, the concentration index also used by the DOJ/FTC.
Third, the FCC evaluates the merger’s effects on competition in the relevant markets.91 In analyzing conditions in the relevant market and the capabilities and incentives of the competitors in it, the Commission basically follows the steps taken by the DOJ. However, this step requires more industry-specific expertise than that of the
DOJ, since the Commission conducts the public interest inquiry in this stage.92
88 The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it. The relevant product market is the line of commerce within which there is interchangeability of use between a service or product and a reasonable substitute for it, given consideration of price, use, and quality. Brown Shoe Co. v. United States, 370 U.S. 294, 324-25 (1962); United States v. FCC, 652 F.2d 72, 97 (D.C. Cir. 1980); General Electric Co., 4 F.C.C.R. 8207, 8208-09 (1989). 89 We are guided by the applicable judicial precedents, which begin with an antitrust analysis of the relevant markets or submarkets in which competition may be threatened. In re Applications of Craig O. McCaw, Transferor, and American Telephone and Telegraph Company, Transferee, For Consent to the Transfer of Control of McCaw Cellular Communications, Inc. and its Subsidiaries, Memorandum Opinion and Order, 9 F.C.C.R. 5836, para 7 (1994) [hereinafter AT&T – McCaw Order]. 90 The Merger of MCI Communications Corp and British Telecommunications plc, Memorandum Opinion and Order, 12 F.C.C.R. 15351, at 15357-58 P11 (1997) (BT-MCI Order II) 91 BT-MCI Order II, 12 F.C.C.R., at 15357-58 para 11 (1997). 92 In SBC Communications Inc. v. Federal Communications Commission, F.3d 1484 (D.C. Cir. 1995), the court upheld the FCC’s approach of weighing several potentially competition-altering factors in analyzing the merger.
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Noting that the same consequences of a proposed merger that are beneficial in one
sense may be harmful in another, the Commission scrutinizes whether the public interest
benefits of the proposed merger outweigh the public interest harm.93 As for the potential
public interest harm, the examples of factors the Commission generally examines include
(1) whether there is diminished innovation, (2) whether the likelihood for the firms’ coordinated interaction (e.g. price fixing agreement) increases after the merger, (3) whether the merger has any negative effect on potential competition, and/or (4) whether there is a history of anticompetitive conduct of a party to a merger.94 The Commission
also scrutinizes whether the proposed merger increases a potential discrimination of the
merged company against unaffiliated service providers and their customers.95
In analyzing the public interest benefits of the merger, the Commission considers efficiencies (e.g., financial saving, economies of scale, etc.), ease of entry, and failing
company factors as the Merger Guidelines suggest. In this step, especially, the
Commission analyzes whether the merger will result in merger-specific efficiencies such
as cost reductions, productivity enhancements, or improved incentives for innovation.96
For example, the FCC, in reviewing AT&T-TCI merger, found that the merger was likely
93 AOL-Time Warner Order, 16 FCC 6547, 6553 para. 17. 94 AOL-Time Warner Order, 16 FCC 6547, 6553 para. 17. 95 See, e.g., AOL Time Warner Order, 16 FCC 6547, 6581 para. 80. (addressing competitive concerns) AOL Time Warner will have both the ability and the incentive to: (a) discriminate against unaffiliated ISPs on its own cable network; (b) facilitate discrimination against unaffiliated ISPs on other cable operators’ networks by leveraging control over Time Warner video programming to obtain exclusive or preferential carriage rights for AOL’s high-speed Internet access service on those networks; (c) limit consumers; access to the widest possible array of content on the Internet by denying unaffiliated content providers placement on AOL Time Warner’s high-speed Internet access service and denying unaffiliated ISPs access to AOL Time Warner content; and (d) discriminate against alternative high-speed platforms by withholding AOL Internet access service from high-speed platforms that compete with cable. 96 BT-MCI Order II, 12 F.C.C.R. 15351, at 15357-58 para 11 (1997).
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to result in some public interest benefits associated with accelerated deployment of
broadband services.97 Beneficial effects need not directly counteract the harmful effects,
so long as the merger is in the public interest overall. The Commission will analyze
whether the merger will enhance competition and thus improve current status of the
industry as a whole.98 For example, the FCC approved the SBC and Ameritech merger
under a variety of conditions aimed at promoting advanced services (e.g., high-speed
Internet access) to rural and urban consumers and improving residential service for low- income customers.99 Therefore, given that the FCC’s standards include antitrust analysis
as well as public interest harm and benefits of a merger, its standards are broader than
criteria of the DOJ/FTC.
Merger Enforcement and Remedies
At the end of the analysis both the DOJ/FTC and the FCC will determine what they
believe will be a merger’s effect on competition. If the agencies find either a positive or
negligible effect, then the merger will be approved. If, however, the agencies find the
merger will decrease competition, the remedial action is followed by the agencies to
eliminate the merger’s anticompetitive effects, or at least to reduce them enough to make
the merger procompetitive or neutral on the whole.100 The most common form of such
remedial action by the agencies is to require changes in the merger as a condition of
97 AT&T-TCI Order, 17 F.C.C.R. 23246, 23249 98 Rachel E. Barkow and Peter W. Huber, A Tale of Two Agencies: A Comparative Analysis of FCC and DOJ Review of Telecommunications Mergers, 2000 U CHI LEGAL F 29 (2000). 99 Applications of Ameritech Corp and SBC Communications Inc, for Consent to Transfer Control of Corporations Holding Commission Licenses and Lines Pursuant to Sections 214 and 310(d) of the Communications Act and Parts 5, 22, 24, 25, 63, 90, 95 and 101 of the Commission’s Rules (SBC-Ameritech Order), 14 F.C.C.R. 14712, 14762 P 104 (1999). 100 Antitrust Division of the United States Department of Justice, Antitrust Division Policy Guide to Merger Remedies, Oct 2004.
81 approval. Both the DOJ/FTC and the FCC commonly approve a merger subject to conditions, such as the divesture of certain assets.
As for the DOJ/FTC, the agencies may issue an injunction against the company seeking the merger or reach a remedial agreement with the parties pursuant to the
Antitrust Procedure and Penalties Act.101 If the agencies find that a merger will substantially lessen competition, it typically seeks to negotiate a consent agreement with the parties. The purpose of a decree is to restore the market to roughly competitive posture it would have had but for the merger.102 Usually, the decrees are structural, requiring divesture of certain assets of merging parties. The Department of Justice, on behalf of the United States, files an antitrust proceeding within the district court.103
Simultaneously the DOJ also files with the district court a Competitive Impact Statement
and a proposed consent decree (i.e., Proposed Final Judgment).104 Before entering a proposed consent decree, the court must determine that the decree has met the statutory standard of being in public interest.105 However, the test is limited to ensuring that the
101 United States Department of Justice, Address by Joel I. Klein, Making the Transition from Regulation to Competition: Thinking about Merger Policy during the Process of Electric Power Restructuring, Jan, 1998. See generally Antitrust Procedure and Penalties Act, 15 U.S.C. § 16 (2005). 102 Id. 103 15 U.S.C. § 16(b) (2005). The proposal for consent judgment is called Proposed Final Judgment. 104 Competitive Impact Statements usually describe: (1) the nature and purpose of the proceeding; (2) a description of the practices or events giving rise to the alleged violation of the antitrust laws; (3) an explanation of the proposal for a consent judgment, including an explanation of any unusual circumstances giving rise to such proposal or any provision contained therein, relief to be obtained thereby, and the anticipated effects on competition of such relief; (4) the remedies available to potential private plaintiffs damaged by the alleged violation in the event that such proposal for the consent judgment is entered in such proceeding; (5) a description of the procedures available for modification of such proposal; and (6) a description and evaluation of alternatives to such proposal actually considered by the United States. 105 15 U.S.C. § 16(e) (2005).
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government has met its public interest responsibilities, that is, determining that the
Proposed Final Judgment falls within the range of the government’s antitrust enforcement
discretion. 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 reaches of the public
interest.106 The court may reject the agreement of the parties as to how the public interest
is best served only if it has exceptional confidence that adverse antitrust consequences will result.107 Then the Proposed Final Judgment will become the Final Judgment.
The FCC, when necessary, can attach conditions to a transfer of licenses and
authorizations in order to ensure that the public interest is served by the transaction.108
Section 214(c) of the Communications Act authorizes the Commission to attach to the certificate such terms and conditions as in its judgment the public convenience may require.109 Similarly, section 303(r) of the Communications Act authorizes the
Commission to prescribe restrictions or conditions that may be necessary to carry out the
provisions of the Act.110 Indeed, unlike the DOJ/FTC, the Commission’s public interest
106 United States v. Bechtel. Corp., 648 F.2d 660, 666 (9th Cir. 1981); See also United States v. Western Electric Co., 900 F.2d 283, 309 (D.C.Cir. 1990) 107 United States v. Mid-American Dairymen, Inc., 1977-1 Trade Ca. (CCH) 61,508 at 71,980 (W.D. Mo. 1997), citing Sam Fox Publishing Co. v. United States, 366 U.S. 683, 689 (1961). 108 See 47 C.F.R. § 1.10; AOL-Time Warner Order, 16 F.C.C.R. at 6556, para 25; WorldCom- MCI Order, 13 F.C.C.R. at 18031-32 para 10. 109 47 U.S.C. § 214(c). See WorldCom-MCI Order, 13 F.C.C.R. at 18031-32 P10; Bell Atlantic- NYNEX Order, 12 F.C.C.R. at 20002 para 30 n.59 (citing Atlantic Tele-Network, Inc. v. FCC, 59 F.3d 1384, 1389-90 (D.C. Cir. 1995). 110 47 U.S.C. § 303(5). See WorldCom-MCI Order, 13 F.C.C.R. at 18032 P10 n.36 (citing FCC v. Nat'l Citizens Comm. for Broadcasting, 436 U.S. 775 (1978) (broadcast-newspaper cross- ownership rules properly adopted pursuant to section 303(r)); United Video, Inc. v. FCC, 890 F.2d 1173, 1182-83 (D.C. Cir. 1989) (syndicated exclusivity rules adopted pursuant to section 303(r) authority).
83 authority enables it to impose and enforce certain types of conditions that result in a merger yielding overall positive public interest benefits. 111
Conditions can take many forms. Generally, these conditions can be classified as structural or behavioral.112 As an ultimate form of structural remedy, conditions may require divestitures that will lower the market share of the merged company.113 Other structural conditions may include the requirements that certain activities be conducted through separate subsidiaries,114 or the requirement to open the merged company’s facilities to competitors.115
Conditions also can be behavioral, such as requiring disclosure of information concerning any misconduct.116 Behavioral requirements are obviously more burdensome on an agency because the parties’ compliance must be monitored, and noncompliance must be addressed. Structural conditions, however, heavily impact the involved companies, which might be reluctant to agree to such onerous conditions. This requires a
111 See AOL-Time Warner Order 16 F.C.C.R. at 6557, papa 25; WorldCom-MCI Order, 13 F.C.C.R. at 18034-35 para 14. 112 John Berresford, Mergers in Mobile Telecommunications Services: A Premier on the Analysis of Their Competitive Effects, 48 FED. COMM. L.J. 247 (1996). See also supra text accompanying note 82 for structural and behavioral remedies. 113 See, e.g., Bell Atlantic-NYNEX order, paras. 22-23 (1995) (in cellular mergers that result in the merged company having interests in both cellular systems in a geographic market, the Commission requires that one interest be divested). 114 For a description of the costs and benefits of separate subsidiary requirements, see Amendment to the Commission’s Rules Concerning Maritime Communications, First Report and Order, 10 F.C.C.R.. 8419, paras. 19-21 (1995). Independent of any transfer or merger, the Commission has authority under 218 and 303 (g) of the Communication Act to investigate and regulate the corporate structure of companies within its jurisdiction. 47 U.S.C. 218, 303(g) (1994). See also PETER W. HUBER, MICHAEL K. KELLOGG, & JOHN THORNE,, FEDERAL TELECOMMUNICATIONS LAW, New York: Aspen Law & Business § 7.5.4.7 at 641 (1999) (The Commission may control which carriers compete ... and under what corporate structures.). 115 See, e.g.,unaffiliated ISPs’ open access to AOL Time Warner cable systems in AOL-Time Warner Order,16 F.C.C.R. at 6678-79 paras. 320-22. 116 See, e.g., In re MCI Comm. Corp. & British Tel. plc, Declaratory Ruling and Order, 9 F.C.C.R.. 3960 (1994).
84 delicate balance of the type of conditions imposed and the extent of each condition’s reach.117
Although merger conditions apply only to the two companies merging, the impact is significant. Structural conditions may alter the merged company’s position in an industry sector118 or change how the company can operate. Behavioral merger conditions may directly affect how the merged company must deal with competitors.119 In addition, mergers happening today impact the outcome of mergers in the immediate future.120
Thus, merger conditions affect the whole industry by directly influencing the market structure and the merged company’s behavior.
117 Blumensaadt, Comment: Horizontal and Conglomerate Merger Conditions: An Interim Regulatory Approach for a Converged Environment 8, COMMLAW CONSPECTUS 291 (2000) 118 See, e.g., In re Application of WorldCom, Inc. and MCI Communications Corp. for Transfer of Control of MCI Communications Corp. to WorldCom, Inc., 13 F.C.C.R.. 18025 (1998) (ordering divestiture of certain internet backbone assets). 119 See, e.g., Bell Atlantic-NYNEX Order, 12 F.C.C.R.. 19985 (mandating certain performance standards for network performance and OSS, as well as interconnection pricing and unbundled network elements). 120 A good example of this impact is the case of the blocked MCI WorldCom-Sprint merger on the heels of the MCI-WorldCom merger. Here the MCI-WorldCom merger resulted in higher levels of concentration in the long-distance telephony market and FCC Chairman Kennard said approval of the subsequent MCI WorldCom-Sprint merger would be a surrender. See Statement of FCC Chairman Kennard on Proposed Merger of MCI WorldCom, Inc. and Sprint Corp., FCC News, Oct. 5, 1999, available at http://www.fcc.gov. The FCC also explicitly reiterates this principle in its Bell Atlantic-NYNEX Order when it states that future applicants bear an additional burden in proving their merger will be in the public interest because the present merger reduced the number of incumbent local exchange carriers. Bell Atlantic-NYNEX Order, 12 F.C.C.R. at 19994, para. 16.
CHAPTER 4 RESEARCH METHOD
This chapter describes the research method of this study. The first part of this chapter describes the procedure for selecting the merger cases. It also describes the kind of documents examined in each merger case selected. The second part of the chapter, then, presents the specific framework of analysis by which these mergers were analyzed in order to answer each research question, described previously in Chapter 1.
Selection of Merger Cases
As a case study, this research aims to provide inductive typologies in which the author stars with research questions and examine cases in the light of the questions.1 This study will examine a total number of 15 M&A transactions involving telecommunications and electronic media service providers. This number represents 10 telecommunications mergers and five electronic media mergers. The scope of this study is limited to those mergers (1) that have been challenged by the DOJ/FTC as a violation of Section 7 of the Clayton Act, and (2) on which the FCC released pubic documents such as Memorandum Opinion and Order (MO&O). With regard to DOJ/FTC merger review, only challenged mergers may be publicly reviewed. That is, most of the relevant documents of a proposed M&A are confidential unless the DOJ/FTC challenges the transaction and files an antitrust suit after an investigation. From both the Antitrust
Division of the Justice Department and the Competition Bureau of the Federal Trade
1 DAVID DE VAUS, RESEARCH DESIGN IN SOCIAL RESEARCH, SAGE Publications: Thousand Oaks, CA, at 226 (2001).
85 86
Commission, the author obtained a complete list of mergers since 1955 that have been
challenged by the agencies as a Section 7 violation. The author then used this list to
determine all the transactions involving telecommunications and electronic service
providers.2 Among the mergers involving telecommunications and electronic media services providers, the author found a total number of 19 cases on which the FCC also published public documents.3
In identifying telecom mergers and media mergers, the author relied on the relevant
product market definition of the DOJ/FTC in review of each merger. The agencies’
documents on a proposed merger only focus on the anticompetitive effect of the
transaction on the relevant product market, regardless of how many product markets in
different industry sectors the merging parties are currently serving. For example, the
merger of AT&T Corp. (a telecommunications service provider and cable multiple
system operator at the time of the merger) and MediaOne Group, Inc. (a cable multiple
system operator) was classified as a telecommunications merger, because the DOJ found
the relevant market at issue to be broadband Internet content market.4 As such, the cases
were identified as telecommunications mergers, if the relevant market identified by the
DOJ involves the markets for telephone and Internet access services. The other cases
2 As for other relevant industry sectors, the DOJ/FTC also challenged several mergers involving publishers, outdoor advertising companies, or computer related service providers. However, since those industry sectors are not regulated by the FCC, no dual review is required for those mergers. Accordingly, those transactions are out of the scope of this study. 3 The FCC did not produce official documents (e.g., Memorandum Opinion and Order) on certain mergers, especially on some radio station mergers, although the DOJ challenged those transactions. In those cases, because of the unavailability of the FCC documents, the challenged mergers were not included in this study. Excluding those cases, the author found out 19 merger cases on which both agencies produce the merger review documents. 4 See United States v. AT&T Corp. and MediaOne Group, Inc., Competitive Impact Statement, 65 Fed. Reg. 38584 (2000).
87 included were electronic media mergers, where the relevant markets at issue were identified as a media service sector, such as broadcast radio, television, and multichannel video programming distribution (MVPD) including cable and direct satellite broadcasting. The author found a total number of 10 cases that belong to telecommunications mergers. Then, for the purpose of comparison of how the agencies’ treatment of telecom mergers and media mergers are different, the author additionally selected five electronic media mergers. Among a total number of 9 media merger cases found from the list,5 the author selected five cases based on the transaction value. Based on the assumption that the amount of a deal is directly related to the size and economic impact of the proposed merger, the author selected the five mergers with the highest transaction value.6 (
List of Mergers)
5 These cases include: Tele-Communication Inc.-Liberty Media (1994), TeleCable Corp.-Tele- Communications Inc. (1995), Westinghouse Electric Corp.-Infinity Broadcasting Corp. (1996), Time Warner Inc.-Turner Broadcasting System, Inc (1997), CBS Corporation-American Radio Systems Corp. (1998), SBI Holdings Corp.-SFX Broadcasting, Inc. (1998), Clear Channel- AMFM (2000), Fox Television Stations, Inc.-Chris-Craft Industries (2001), and Univision Communications, Inc.-Hispanic Broadcasting Corp. (2003). 6 To select the five mergers based on the transaction value, this study used the SDC Platinum Mergers and Acquisition Database published by Thompson Financial Securities Data. This online database provides information on all M&A transactions involving at least 5% of the ownership of a company where the transaction was valued at $1 million or more or where the value of the transaction was undisclosed. The M&A database includes domestic transactions since 1979 as well as international transactions since 1985. The mergers with the highest transactions values are: Clear Channel-AMFM ($23.1 billion), Time Warner Inc.-Turner Broadcasting System, Inc ($6.8 billion), Westinghouse Electric Corp.-Infinity Broadcasting Corp. ($4.7 billion), Univision Communications, Inc.-Hispanic Broadcasting Corp. ($3.5 billion), and Tele-Communication Inc.- Liberty Media ($3.4 billion).
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Table 4-1. List of Mergers Industry sectors Transferee Transferor DOJ/FTC* FCC** Southern Pacific GTE 5/4/83 6/2/83 Company MCI BT Forty-Eight Communications 6/15/94 7/14/94 Company Corp. Telecommunications McCaw Cellular AT&T Corp. Communications, 8/26/94 9/19/94 Inc. Tele- AT&T Corp. Communications 12/10/98 2/18/99 Inc. SBC Ameritech Communications 3/23/99 10/6/99 Corporation Inc. Bell Atlantic GTE 5/7/99 6/16/00 Media One Group, AT&T Corp. 5/26/00 6/6/00 Inc. America Online, Time Warner Inc. 12/14/00 1/11/01 Inc. Intermedia WorldCom, Inc. Communications, 11/17/00 1/17/01 Inc. Cingular Wireless AT&T Wireless 10/25/04 10/26/04 Corp. Services, Inc. Tele- Communications Liberty Media 4/28/94 8/1/94 Inc. Turner Time Warner Inc. Broadcasting 2/3/97 10/9/96 System, Inc. Westinghouse Infinity Electronic Media 11/12/96 12/26/96 Electric Corp. Broadcasting Corp. Clear Channel Communications AMFM, Inc. 8/29/00 8/7/00 Inc. Univision Hispanic Communications, 3/26/03 9/8/03 Broadcasting Corp. Inc. *: date the DOJ filed a complaint **: date the FCC approved the mergers
For the purpose of analysis, this study examined the agencies’ public documents regarding merger review. As for the federal antitrust review by the DOJ/FTC, prior to
89
2002, the FTC reviewed cable and mass media mergers, while the DOJ reviewed
telecommunications mergers. In 2002, however, the DOJ and the FTC agreed to allocate full responsibility over the media and telecommunications mergers to the DOJ.7 As for
the DOJ merger review, the author examined documents such as the Complaints,
Competitive Impact Statement, Proposed Final Judgment, Final Judgment, Public
Comments on a Proposed Merger and the Agency’s Response to the Comments, and
press releases. Regarding the FCC’s merger analysis, the author reviewed Memorandum
Opinion and Orders, Separate Statements of Commissioners, if any, as well as press
releases. The Public Interest Statements from merging parties were also examined.
Frame of Analysis
To compare the review standard of the DOJ/FTC and the FCC, it should be noted
that the nature and characteristics of the agencies’ documents are different. With regard
to the FCC, its Memorandum Opinion and Orders provide an entire picture of the merger
review process, including major issues considered by the FCC as well as public comments filed by private parties on a proposed transaction. The MO&O details the competitive impact of the merger and concerns regarding both potential harm and benefits to the public interest addressed by the Commission, commentators, and merging
parties.
Meanwhile, the DOJ/FTC documents only reflect a portion of the entire
investigation. The primary objective of the DOJ/FTC public documents -- such as the
Complaint, Competitive Impact Statement, and Proposed Final Judgment -- is to file an
7 See FTC Press Release, FTC and DOJ Announce New Clearance Procedures for Antitrust Matters, March 5, 2002, http://www.ftc.gov/opa/2002/03/clearance.htm.
90
antitrust suit pursuant to the Antitrust Procedure and Penalties Act.8 Thus, public documents of the DOJ/FTC only focus on the market in which the agencies found there would be substantial anticompetitive impact, the nature of that impact, and the proposed remedy to mitigate the impact. Accordingly, the documents do not mention aspects of the merger that do not involve a competitive harm. For example, when the DOJ reviewed a merger of Bell Atlantic and GTE,9 two telecommunication carriers that provide local,
long distance, and international telephone service -- both wireline and wireless, the DOJ
found an anticompetitive impact of the transaction only in the wireless mobile telephone
market. Thus, the subsequent proceedings and filed documents only regard the merger’s
anticompetitive impact on the wireless mobile telephone market. That means two things.
First, the DOJ/FTC documents address only negative aspects of the merger. In general,
positive aspects or procompetitive impact of a proposed merger, including efficiencies,
are not addressed. Second, the DOJ/FTC documents do not discuss certain relevant
markets or services provided by the merging parties, in which no anticompetitive impact
was found (e.g., local telephone service, in the Bell Atlantic-GTE example).
Because the DOJ/FTC documents do not provide the entire picture of the merger
analysis, a comparison with the FCC’s merger review must be limited to those factors the
DOJ/FTC documents reveal. For instance, although the FCC documents discuss in detail
both the public interest harm and benefits of a proposed merger, a direct comparison with
the DOJ/FTC may be conducted only with the FCC’s analysis of public interest harm.
The analysis of the harm parallels the information the DOJ/FTC provides in the
Complaint, Competitive Impact Statement, and Proposed Final Judgment (i.e., RQ 1, 2,
8 15 U.S.C. § 16 (2004). See supra Ch. 3. text accompanying footnote 209 9 See Complaint, United States v. Bell Atlantic Corp. (D.C.C. 1999).
91 and 3). The FCC’s analysis of the public interest benefits are discussed separately in order to show the FCC’s role in merger review as a sector-specific regulatory authority
(i.e., RQ 4 and 5).
As such, the analysis of this project is two-fold. The first part of the analysis is to compare the merger review of the DOJ/FTC and the FCC. With respect to each merger, the author will compare the agencies’ merger review standards (RQ1) and the conditions imposed (RQ2). The author also will compare whether the agencies’ standards are consistent over the years and across industry sectors (RQ3). The second part of the analysis focuses on the public interest standard of the FCC. The author aggregates the public interest factors found in the FCC’s merger reviews (RQ4), and examines the how the FCC articulated the principle of the public interest. This will assist in the evaluation of whether the FCC’s public interest analysis is unique enough to legitimize the
Commission’s separate review of mergers (RQ5).
Comparison: Merger Review of the DOJ/FTC and the FCC
Merger analysis
RQ1 asks how the merger review standards of the two agencies differ. In comparing the approaches of the agencies, this study examines how the agencies analyzed each merger in terms of certain factors such as the Merger Guideline factors, other rules, or principles.
First, this study uses the factors found in the Merger Guidelines10 as units of analysis. In other words, the study examines the extent to which the two agencies were similar or different in analyzing each merger in terms of Merger Guideline factors. This
10 1984 Non-horizontal Merger Guidelines and 1992 Horizontal Merger Guidelines. See Ch 3.
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study uses the 1992 Horizontal Merger Guidelines and 1984 Non-horizontal Merger
Guidelines as a frame of reference. As discussed in the previous chapters, although the
1992 Horizontal Merger Guidelines govern horizontal mergers, they are quite general and
theoretically cover all types of mergers. Accordingly, non-horizontal mergers (i.e.,
vertical and conglomerate mergers) are reviewed under the relevant market definition,
entry barrier, and efficiency criteria stated in the Horizontal Merger Guidelines in
conjunction with the substantive analysis of the Non-horizontal Merger Guidelines.11
Four factors were retrieved from the Horizontal Merger Guidelines: (1) market definition, (2) market concentration, (3) adverse competitive effects of mergers, (4) entry analysis.12 These factors are applied to all types of mergers by the antitrust agencies.
Furthermore, additional three factors were found in the Non-horizontal Merger
Guidelines. Those additional factors considered by the agencies in reviewing vertical or
conglomerate mergers include: (1) facilitating collusion, (2) evasion of rate regulation (in
reviewing vertical mergers), and (3) elimination of potential competition (in analyzing
conglomerate mergers). All of these seven criteria are used to examine how the two
agencies analyzed each merger.
In addition to the Merger Guideline factors, this study also will identify and
examine those factors, rules, or principles applied in each agency’s merger review.
After describing the agencies’ review standards for each merger under these
factors, this study will determine whether the standards of the agencies are
complementary or consistent. The consistency of review standard between the agencies
11 See supra ch. 3 for the factors considered under the Merger Guidelines. 12 The author excluded two factors in the Horizontal Merger Guidelines -- efficiencies and the failing firm defense from this comparison, because the DOJ public documents do not reveal these positive factors that mitigate the anticompetitive impact of a proposed merger.
93
will be classified into three groups: (1) complementary; (2) complementary with
substantial difference; and (3) consistent. First, the author will determine that the two agencies’ standards are complementary if the FCC either reached different conclusion
from that of the DOJ/FTC, or reached the same decision on different grounds.
Second, the author will determine the agencies’ standards are complementary with
substantial difference if (1) the FCC covers the markets that the DOJ identified as the
relevant markets, (2) the FCC also scrutinizes the merger’s effect on additional markets
that the DOJ did not address in the public documents, and (3) the FCC finds significant
harm to the public interest in those markets. Those additional markets where only the
FCC found anticompetitive harm will be called the FCC-only markets.
Lastly, the author will determine the review standards are consistent if the FCC
reached the same conclusion on the same grounds as the DOJ. That is: (1) the FCC
analyzes the merger’s effects on the same relevant markets as the DOJ identified, (2) the
FCC does not find any additional harm in the markets, mostly because it analyzed the
merger as modified by the DOJ consent decree, and (3) the FCC conditions basically
reiterates what the DOJ adopted in the consent decree.
Merger conditions analysis.
This study also examines the extent to which the two agencies’ conditions on each
merger are different or complementary (RQ2). This study classifies all the merger
conditions into 10 categories based on the activities involved in each requirement:
divestiture, governance, separate operation, provision of services, structural non-
discrimination, behavioral or conduct-related non-discrimination, misuse of information
(confidentiality), transparency, compliance, and activities other than those that fit the
other nine. These conditions can form a continuum to the extent each requirement is
94 designed to affect purely structure of a company or a market to a point where only conducts or behaviors of a company are affected. (Figure 4-1).
Other Compliance Misuse of Info Non- Non- Governance Divestiture Activities (Confidentiality) discrimination discrimination (Conduct) (Structural) e.g. open access
Provision of Services (line of Transparency business, Separate service Operation offerings, etc)
Figure 4-1. Merger Conditions
First, the most structure-oriented remedy is to require merging parities to divest certain assets owned by the companies. All related provisions regarding divestiture procedures -- such as appointment of trustees13 and the preservation of asset/hold separate order14 -- will be included in this category. Second, the governance provisions include all conditions relating to the relationship between top-level managers and shareholders.
Third, separate operation conditions include all conditions that prohibit a merging company from having any role in management or operation of one of the subsidiaries of the merging partner company in the absence of divestiture requirement. Fourth, various
13 Usually, a trustee is created to divest any remaining assets that have been required to be divested before consummation of a merger. See, e.g., United States v. Cingular v. AT&T, Final Judgment (D.D.C., 2004) IV-V. 14 In most of the cases, the DOJ’s divestiture provisions also contain the preservation of assets/hold separate order, that require the merging parties to preserve, maintain, and continue to support the assets to be divested, and to keep the divestiture assets separate and apart from other operations of the merging companies until accomplishment of the divestiture. See, e.g., United States v. Cingular v. AT&T, Final Judgment (D.D.C., 2004) VIII.
95
conditions regarding a company’s service/product offerings and line of business will be
included in the provision of service category.15
Fifth, the structural non-discrimination conditions include conditions that prohibit
the merging companies from discriminating against competitors by restricting access to
their facilities. Thus conditions such as open access or equal access requirements are
included in this category. Sixth, the agencies in many merger cases prohibit against unreasonable discriminatory conducts against unaffiliated companies or competitors, in terms, price, or conditions, in favor or the affiliates. These conditions will be classified into the behavioral or conduct-related non-discrimination category.
For more conduct-oriented remedies, the agencies adopt the conditions requiring confidentiality or prohibiting against misuse of certain information (misse of information).
The agencies may also require the merging companies to file certain reports or information (transparency). Ninth, the compliance requirements include provisions stating that authorized representatives of the agencies are permitted to inspect all relevant records, or conditions requiring the merging parties’ compliance with other rules. All other provisions will be included in the other activities category. Based on this categorization, this study will examine to what extent the merger remedies of the two agencies differ.
Consistency of the standards
RQ3 asks to what extent the review standards of the DOJ/FTC and the FCC are consistent over the years and across the two industry sectors. The merger cases examined in this study include transactions approved in 1983 through in 2004. Over the years, there
15 E.g. The FCC required the AT&T-McCaw to provide local and long distance services on a bundled or packaging basis. United State v. AT&T, Final Judgment (D.D.C. 1994)
96
have been the changes in the marketplace arising from technological development and
deregulatory environment. Therefore, the author examines whether the review criteria
and standard of the each agency is consistent, or whether there are any evolving standards
throughout the years. In addition, the study also examines whether each agency’s review
standards are consistent across the industry sectors. The author also examines how the
issues and concerns in the telecom mergers are different from those in the media mergers.
Public Interest Standard of the FCC
Public interest factors
To examine what constitutes the public interest in merger review (RQ4), the
author examines whether the FCC adopted any kind of public interest test in analyzing each merger. In addition, this study attempts to find public interest factors. The author aggregates all public interest benefits addressed in the FCC’s merger review to examine what factors or principles constitute the public interest.
Necessity of the dual-agency review
Finally, this study integrates the findings throughout the study, and examines to what extent the FCC’s merger review under the public interest standard is unique or complementary to what the DOJ/FTC does (RQ5). Summarizing the findings, the author concludes whether the FCC’s analysis is unique enough to justify a dual review in merger analysis, which requires sector specific regulation by the FCC in addition to federal antitrust investigation by the DOJ/FTC.
.
CHAPTER 5 MERGER ANALYSIS
This chapter compares the merger analysis of the DOJ/FTC and the FCC. Merger review standard and merger conditions are also compared. The first part of this chapter
examines how the two agencies analyzed the ten telecommunications mergers and five
media mergers (RQ1). Then, this chapter examines how the two agencies’ merger
remedies differ, by categorizing and comparing conditions imposed on those fifteen
mergers (RQ2). Finally, this chapter summarizes to what extent the two agencies’ review
standards are consistent over the years and across the different industry sectors (RQ3).
Telecommunications Merger Analysis
Ten telecommunications mergers are discussed in chronological order: GTE-
Southern Pacific, BT-MCI, AT&T-McCaw, AT&T-TCI. SBC-Ameritech, Bell Atlantic-
GTE, AT&T-MediaOne, AOL-Time Warner, WorldCom-Intermedia, and Cingular-
AT&T Wireless. For each merger, information on the merging companies and major
issues of the transaction are briefly introduced. Then, the DOJ/FTC review and the FCC
review are analyzed focusing on the units of analysis including the seven Merger
Guideline factors. Finally, the last section compares the review standard of the agencies
and determines to what extent the agencies’ standards are consistent or complementary.
GTE and Southern Pacific
On October 15, 1982, GTE Corporation (GTE) and Southern Pacific Company (SP)
executed an agreement under which GTE would acquire the telecommunications
97 98 enterprises of SP, including Southern Pacific Communications Company (SPCC) and
Southern Pacific Satellite Company (SPSC).
At the time of the agreement, the principle interexchange1 telecommunications network in the U.S. was a network consisting of a joint venture of the Long Line
Department of the American Telephone and Telegraph Company (AT&T) and the various local operating companies, including the Bell Operating Companies (BOCs)2 and
approximately 1500 other non-Bell, or independent operating companies, commonly
knows as the partnership.3 At the time of the agreement, GTE, through its ownership of the GTE Operating Companies (GTOCs) was the largest of the independent telephone companies in the United States.4 GTE provided both exchange services (i.e., local
1 Interexchange services, simply termed as long distance telephone services, are telecommunications services that connect calls between different local exchange areas or local cellular service areas. United States of America v. AT&T corp., Proposed Final Judgment and Competitive Impact Statement, 59 Fed. Reg. 44158, 44168 (1994). 2 Bell Operating Companies were created as a result of the historic AT&T case, of which the Final Judgment required divestiture of AT&T into 22 Regional BOCs. See United States v. American Telephone & Telegraph Co., No. 74-1698 (D.D.C.). On August 24, 1982, the AT&T case was terminated upon entry by the United States District Court for the District of Columbia of an agreed upon modification to the Final Judgment in United States v. Western Electric Co., No. 82-0192 (D.D.C.). That Modified Final Judgment (AT&T decree or the MFJ) mandated a basic restructuring of the telecommunications industry, consisting of, among other things: (1) the divestiture by AT&T, of the exchange telecommunications and exchange access functions of 22 of the Bell Operating Companies (BOCs), (2) injunctive provisions designed to ensure that the divested BOCs did not disadvantage any competitor of AT&T engaged in the provision of interchange telecommunications services or information services, (3) injunctive provisions requiring the phased-in provision of equal exchange access by the BOCs to all interexchange carriers and information service providers, and (4) line-of-business restrictions for the divested BOCs barring them from providing interexchange services or other services, except exchange telecommunications, customer premises equipment, and printed directory advertising, that were not natural monopoly services actually regulated by tariff. United States v. Western Electric Co., Competitive Impact Statement in Connection with Proposed Modification of Final Judgment, 47 FR 7170, 7170 (February 17, 1982). 3 United States v. GTE Corporation, Proposed Final Judgment and Competitive Impact Statement, 48 Fed. Reg. 22020 (1983). 4 Taken as a whole, GTE’s landline telephone companies comprised the largest independent telephone systems in the U.S., serving approximately 16,085,000 telephones in 31 states. See In
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telephony) and interexchange telecommunications services (i.e., intercity, or long
distance telephony). GTE provided interexchange telecommunications services to their
customers over the facilities which they own and which they interconnected with the
partnership network. Since 1971, firms other than GTE and the other members of the
partnership had been authorized by the FCC to provide interexchange telecommunications services. Commonly known as Other Common Carriers (OCCs), these firms operated their own interexchange transmission facilities which were interconnected with the facilities of local operating companies. In order to provide interexchange services for their customers, OCCs must gain access to the facilities of the local operating companies providing exchange telecommunications in the areas in which their customers are located. At the time of the agreement, competition had yet to occur within the markets for local telecommuncations in the U.S, although some degree of competition had been introduced to all segments of the interexchange telecommunications industry after the divestiture of AT&T. Local operating companies, or Local Exchange Carriers (LECs), enjoyed a monopoly within their franchised serving areas, subject to regulation, including regulation of their rate-of-return on investment, by the states.5 Accordingly, LECs had the power to control the price of, and exclude
competition for, the provision of exchange access to interexchange carriers.
the Matter of Application of GTE Corporation and Southern Pacific Company for Consent to Transfer Control of Southern Pacific Communications Company and Southern Pacific Satellite Company, 94 F.C.C.2d. 235 (1983), 235, at para.3. 5 United States v. GTE Corporation, Complaint, Civil Action no. 83-1298, (D.D.C. 1983). para. 8
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The other merging party, Southern Pacific, through its subsidiary, operated as an
OCC, and was the second largest interexchange carrier, providing voice and data
interexchange telecommunications, other than the partnership, in the U.S.6
DOJ review
The United States filed a civil antitrust Complaint alleging that GTE’s proposed
acquisition of SPCC and SPSC would violate Section 7 of the Clayton Act, by
substantially lessening competition in the market for interexchange telecommunications.
Instead of addressing the Merger Guideline factors such as market concentration,
entry analysis, and facilitating collusion, the DOJ focused on the competitive concerns
arising from the interface between local regulated monopoly markets and the more
competitive markets for interexchagne telecommunications service. The DOJ found that,
when a single firm provides both local, regulated telecommunications and interexchange
telecommunications services in a given market, its control over local exchange monopolies gives it the ability to foreclose or impede competition in the provision of interexchange telecommunications in that market. Therefore, the DOJ found, vertical integration by local telephone operating companies would create the incentive and ability, through abuse of monopoly power over local distribution facilities and through evasion of rate-of-return regulation7 and cross-subsidization, for the leverage of monopoly power in
regulated markets to impede competition in potentially competitive markets.8
6 Id. at para. 12 7 Because of the monopoly status in the local markets, GTOCs and other operating companies were constrained in the rate of return on investment they could earn from the provision of monopoly exchange telecommunications services. Therefore, the DOJ found, GTE and GTOs had an incentive to seek a supra-competitive return on investment in assets used to provide services. According to the DOJ, by misallocating costs among various classes of regulated and unregulated services, and, where possible, assigning those costs properly attributable to unregulated services
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To resolve the anticompetitive concerns alleged in Complaint, the DOJ consent
decree required GTE to maintain a total separation - in assets, operations, and personnel -
between the acquired companies and all GTE local telephone operating companies. The
consent decree also required GTE to offer equal and nondiscriminatory exchange access,
on an unbundled, tariffed basis, to all long-distance telephone carriers.9
FCC review
The FCC analyzed the merger of GTE and Southern Pacific and concluded that the
transaction as conditioned would serve the public interest, convenience, and necessity. In reaching the conclusion, the FCC analyzed the proposed merger in three respects: (1) financial qualifications, (2) the competitive impact of the merger, and (3) the effect on satellite authorization policy. First, in terms of the financial qualifications, the FCC considered whether GTE had the financial resources to acquire and finance SPCC and
SPSC without adversely impacting its ability to reasonably maintain and expand its present local telephone network. After reviewing relevant information, the FCC found
GTE possessed both the financial capability and the motivation to infuse necessary capital into SPCC/SPSC to make these companies viable competitors of AT&T.10
Second, having determined that GTE was qualified to acquire and foster the growth of SPCC and SPSC, the FCC then examined the alleged anticompetitive aspects of the
to the rate base of the company providing the regulated service, two results would be achieved: (1) the captive regulated rate-payer is forced to underwrite the cost of services not provided to him, and (2) the unregulated service is offered at a price held artificially below its true cost. See United States v. GTE Corporation, Complaint, Civil Action no. 83-1298, (D.D.C. 1983). Para. 16. 8 United States v. GTE Corporation, Proposed Final Judgment and Competitive Impact Statement, 48 Fed. Reg. 22020 (1983). 9 Id. 10 In the Matter of Application of GTE Corporation and Southern Pacific Company for Consent to Transfer Control of Southern Pacific Communications Company and Southern Pacific Satellite Company, 94 F.C.C.2d. 235 (1983), 245, at para.26.
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proposed merger. The FCC first determined the relevant market as all interexchange
telecommunications services in the U.S.11 As for the market concentration, the FCC
found the respective market shares of GTE and SPCC in the relevant market were very
small. In addition, the Commission recognized there had been many recent successful
entrants in the exchange telecommunications market and numerous other potential
entrants into the markets. Accordingly, the FCC concluded the acquisition would not
increase substantially concentration in the relevant market, or given the present of AT&T,
allow the merged company to obtain market power.12 As to the adverse competitive
impact of the merger, the Commission did not find reason for concern that the proposed
merger was likely to give SPCC/SPSC a preference over other interexchange carriers,
especially under the DOJ consent decree and the FCC policy.13 Under the Commission’s
Access Charge Plan,14 GTE as well as other exchange carriers were required to file tariffs
utilizing the same rate structure for similar access services in order to ensure each carrier
has complied with the anti-discrimination provisions of the Communications Act.15
Considering those factors, the FCC determined there would be adequate safeguards in
place to ensure that GTE does not favor SPCC/SPSC over any other carrier for like
access services.
11 Id. at 250, paras. 40-42. 12 Id. at. para. 44. 13 See id. at 255, para.54. Under the DOJ Final Judgment, GTE agreed that is telephone operating companies would provide equal access local exchange access to interexchange carriers. See United States v. GTE Corporation, Proposed Final Judgment and Competitive Impact Statement, 48 FR 22020 (1983). 14 MTS and WATS Market Structure, FCC 82-579, released February 28, 1983 (Access Charge Order). 15 47 U.S.C. § 202(a) (2004).
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Third, as for the effect on satellite authorization policy, the FCC noted that GTE
and SPSC would collectively operate only 13.27 percent of the total number of satellite currently authorized, and found no basis for concern that the merger would result in impermissible concentration of limited spectrum resources.16
The FCC granted the application for license transfer on the condition that SPCC
and SPSC maintain their accounting records separate from those of other GTE companies
and affiliates.17 The merger conditions also required that GTE-SP include the state of
Hawaii in any interexchange telecommunications service offering that is available on the
United States Mainland to metropolitan areas equivalent in size to the Honolulu
metropolitan area in the same rate structure which applies on the U.S. Mainland.18
Comparison
For the GTE-SP merger, both the DOJ and the FCC identified the interexchange telecommunications market as the relevant market. The DOJ focused on the anticompetitive concerns that can rise from monopoly status of local exchange carriers.
Especially, the DOJ focused on the potential harm related to the vertical aspect of the merger: discrimination against other competitors and evasion of rate regulation. Other factors such as market concentration, entry analysis, facilitating collusion, and elimination of potential entrants were not addressed in the public documents.
Turing to the FCC, while the Commission considered factors such as the market concentration, adverse competitive impact, entry analysis, and evasion of rate regulation, other factors such as facilitating collusion and were not addressed. The FCC did not find
16 94 F.C.C.2d. 235 (1983), 260-261, at para.65-66. 17 Id. at 261, para. 71. 18 Id.
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anticompetitive harm in the same market where the DOJ found a significant adverse
competitive impact because the FCC analyzed the merger on assumption that the merged company would comply with the DOJ consent decree. The FCC rule (i.e., Access Charge
Order) was another criterion used to reach that conclusion. This shows that the FCC
considers sector-specific factors -- rules and policy of the FCC that relate to a merger --
in addition to the Merger Guideline factors the DOJ applies to all mergers. As for the
merger conditions, while the DOJ consent decree focuses on the structural separation of
the merged companies, the FCC conditions include more sector-specific condition such
as providing telecommunications services to Hawaii in same rates which applies to the
U.S. Mainland.
AT&T and McCaw
On August 16, 1993, AT&T Corp. (AT&T) announced a plan to purchase McCaw
Cellular Communications, Inc (McCaw). At the time of merger, AT&T was the largest
provider of long distance telephone service in the United States, providing interexchange
(i.e., long distance) service to both wireline and cellular telephone customers. AT&T was also the largest supplier of the cellular infrastructure equipment used by cellular carriers to provide that service in the United States and North America. AT&T, along with the next two largest suppliers -- Motorola and Ericsson -- accounted for the vast majority of the installed base of cellular infrastructure equipment in the United States.
McCaw was the leading operator of conventional local and regional cellular services in the United States, with ownership interests in cellular systems serving
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approximately 22 percent of all of the cellular subscribers in the United States.19 McCaw also provided AT&T long distance services to its cellular customers.
DOJ review
On July 15, 1994, the DOJ filed a civil antitrust Complaint, against AT&T and
McCaw, alleging that the proposed merger would violate Section 7 of the Clayton Act, by decreasing competition in the three relevant markets: (1) the market for cellular services,
(2) the market for cellular infrastructure equipment, and (3) the market for interexchange
(i.e., long distance) services to cellular subscribers.20
The DOJ found the concentration of the three markets was already high.21 As for the adverse competitive impact, the DOJ identified an adverse competitive impact of the merger in each of the three relevant markets, focusing on the harm arising from the vertical integration of AT&T and McCaw.
First, the DOJ found the competition might lessen in the market for cellular services, in which the FCC licensed cell carriers to provide services, because the merger would combine McCaw, a cellular service provider, with AT&T, the leading supplier of cellular infrastructure equipment. Through that vertical integration, AT&T would gain
the incentive to harm McCaw’s competitors that use AT&T cellular equipment, to
McCaw’s advantage, by exploiting AT&T’s control over the costs, capabilities and
19 These systems included the following cities: New York, Los Angeles, Miami, Dallas, Houston, San Francisco, Philadelphia, Pittsburgh, Seattle, Portland, St. Louis and Kansas City.McCaw owned and operated a number of these systems in partnership with companies with whom it competes in other service areas, including AirTouch Communications, Inc. and BellSouth Corporation. United States v. AT&T (D.D.C. 1994), Complaint. para. 12. 20 United States v. AT&T (D.D.C. 1994), Complaint, para. 32. 21 Id. at. para. 28.
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capacity to those locked-in22 equipment customers. Thus, the combined AT&T-McCaw
would have the incentive and the ability to either raise its cellular service rivals’ costs or,
through the threat of doing so, reduce its rivals’ incentive to compete. In either event, the
DOJ found, the likely outcome is increased prices and lower quality service to consumers
of cellular service.
Second, the DOJ found the adverse competitive impact of the merger in the market
for cellular infrastructure equipment in North America, by providing AT&T with access
to competitively sensitive and proprietary information of McCaw’s principal equipment
supplier, Ericsson.23
Finally, the DOJ determined the competition might decrease in the market for
interexchange services to cellular subscribers served by McCaw, because the merger
would combine AT&T, the largest interexchange carrier in the United States with
McCaw, one of only two cellular service providers in many markets; and would combine
the two largest providers of interexchange service to cellular service customers in many
areas served by McCaw. The DOJ narrowly defined the relevant product market as the
22 Once a cellular carrier has made the decision to deploy a particular vendor’s cellular infrastructure equipment in a particular system, that carrier becomes locked in to that vendor’s equipment and must either continue to purchase equipment and software from that same vendor or incur the substantial costs of replacing the deployed switches and radio base stations of the incumbent vendor. As cellular systems grow, so also does the cost of switching vendors. 59 Fed. Reg., at 44168; See also Eastman Kodak Co. v Image Technical Service, Inc. 504 U.S. 451 (1992). 23 This information relates to planned expansions, new service offerings and other efficiency enhancing upgrades. McCaw’s competitors could well decide to forgo or limit their expenditures of resources in these areas if they believe that they will not enjoy the competitive benefit of such expenditures because McCaw will have immediate access to their competitive plans. As a result, consumers of cellular service are likely to pay higher prices and receive lower quality service. 59 Fed. Reg., at 44168.
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provision of interexchange services to cellular subscribers.24 The DOJ noted that
customers use cellular phones to meet their needs away from conventional wireline
telephones; access to interexchange services over landline telephones is inconsistent with
the needs motivating cellular phone usage and thus is not a good substitute. Cellular
subscribers can only access interexchange service providers that have exchange access to that cellular system, according to the DOJ.
The relevant geographic markets were cellular service areas in which McCaw offers bundled cellular and interexchange services.25 Each of these markets was highly
concentrated. Among Bell Company cellular systems providing equal access,26 AT&T
was the dominant interexchange carrier, with more than 70 percent of subscribers, with
MCI and Sprint sharing nearly all of the remainder. McCaw was generally the exclusive
provider of interexchange service to customers of its systems that do not provide equal
access. Due to the lack of effective competition in the cellular service markets, McCaw
had been able to deny its cellular customers the ability to select their interexchange
service provider.27 In those markets in which McCaw’s systems were not controlled by a
Bell Company that was subject to equal access requirements, McCaw provided
interexchange service to its cellular customers on an exclusive basis (typically reselling
AT&T service), and did not generally allow its customers to access other interexchange
24 59 Fed. Reg. at 44169. 25 These areas included New York, Miami, Tampa, Minneapolis, Seattle, Pittsburgh, New Orleans, Portland and Sacramento. Id. 26 Cellular companies that are affiliates of Bell Operating Companies (Bell Companies) are required to provide equal access to interexchange carriers under the consent decree that broke up the Bell System. United States v. Western Elec. Co., 578 F. Supp. 643, 647 (D.D.C. 1983) In systems operated by Bell Companies subject to equal access requirements, interexchange service was provided by the interexchange carrier of the customer’s choice. Id. 27 Id. para. 26.
108 carriers directly. Therefore, the DOJ found the merger might lessen competition substantially in the markets for the provision of interexchange service to cellular subscribers.
The DOJ agreed with AT&T and McCaw on a consent decree that would resolve the its antitrust concern in the three markets. First, to prevent harm in the cellular service market, the consent decree provided mechanisms to insure that AT&T could not use its position as the incumbent supplier to those McCaw competitors that were locked in to
AT&T’s equipment to discriminate against them in favor of McCaw.28
Second, to prevent anticompetitive harm to the cellular infrastructure equipment market, the consent decree restrained McCaw from providing certain confidential information of other cellular infrastructure equipment suppliers to AT&T’s manufacturing division.29
Finally, to address concerns in the interexchange markets, the consent decree required McCaw cellular systems to provide equal access to interexchange competitors of
AT&T, which was not provided in most McCaw systems, thereby increasing competition in the provision of interexchange services to cellular customers.30
28 These mechanisms include: separate subsidiary requirements and restrictions on the flow of certain confidential information within the combined AT&T/McCaw entity; obligations on AT&T to continue to deal with its customers on terms in place prior to the merger and on terms not less favorable than those offered to McCaw; obligations to assist and not interfere with an incumbent customer’s changing infrastructure suppliers; and a buy-back obligation that would reduce the lock-in effect by lowering the cost for a competitor/customer to switch suppliers in the event that AT&T fails to comply with its obligations to its customers under the judgment. 59 FR, at 44159-66. 29 Id. 30 Id.
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FCC review
The FCC, approving AT&T and McCaw merger, concluded that the procompetitive
aspects of the merger, as conditioned in its opinion, outweighed the anticompetitive
aspects and that the merger was in the public interest.
The FCC identified three relevant markets: (1) local cellular services in MSAs
(Metropolitan Statistical Areas) and RSAs (Rural Service Area);31 (2) manufacture of
cellular network equipment for use in North America; and (3) interexhange services in
the United States. First, in the market for local cellular services in MSAs and RSAs, the
FCC found the trends toward competition in these markets. The Commission noted that
even after the proposed merger, there would be two cellular licenses in each MSA and
RSA, as well as many potential competitors because of low barriers to entry.
Second, as for the cellular network equipment market, despite the high
concentration of the market, the FCC found no competitive harm because there were
many potential entrants. That is, the FCC found there were numerous companies that
have entered the network market in the U.S., or could do so with relative ease if AT&T
increased prices for its cellular equipment. The current and future market share of AT&T-
McCaw in the network equipment market did not cause the Commission great concern.32
Meanwhile, the FCC found the lock-in effect and potential for aftermarket discrimination to be significant impediments to cellular carriers that have existing network contracts with AT&T. Thus, the FCC imposed as a condition on the grant of the application, a
31 MSA (metropolitan statistical area) is a U.S. Census Bureau term. When the FCC began issuing cellular radio licenses, it divided the United States into RSA and MSA markets. An MSA is one of the 305 urban cellular telephone service areas as defined by the FCC. An RSA (rural service area) is one of the 428 rural cellular telephone service areas as defined by the FCC. 32 AT&T – McCaw Order, 9 F.C.C.R., at 5868-71 para 50-56 (1994).
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requirement that there be no unreasonable discrimination in the provision of products and services by AT&T/McCaw against purchasers of networks.33
Third, as for the interexchange services market, the FCC found no significant competitive harm based on the McCaw’s insignificant share of the market for interexchange services. The FCC determined the proposed AT&T/McCaw merger,
insofar as it was a horizontal combination of suppliers of cellular interexchange services,
would have only a minimal impact on the long distance industry.34 In addition, McCaw’s
current financial status, and its future financial prospects - if it remained an independent
company - might not permit it to construct a significant amount of additional
interexchange facilities. The FCC found no public interest to be served by treating
McCaw’s relatively de minimis presence in the current interexchange services market as
a significant factor in the consideration of the proposed merger.
With respect to this market – the markets for interexchange services - the DOJ and the FCC reached different conclusions, since this is the market where the DOJ found significant anticompetitive impact due to the market definition different from that of the
FCC. For the DOJ, the third relevant market was much narrower than the relevant market the FCC looked at. While the FCC identified the market as interexchange market, the
DOJ narrowed down this relevant market as the provision of interexchange services to cellular subscribers in areas served by McCaw and therefore concluded the proposed
33 Id. at para 182. 34 The FCC found that the merger would increase the HHI by less than 40 points. According to the Merger Guidelines, even in a highly concentrated market, a horizontal merger that produces an increase in the HHI of less than 50 points generally does not raise significant antitrust concerns. at 5857.
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merger is the combination of the two largest carriers in such markets.35 Meanwhile, the
FCC adopted a broader definition of interchange service market and viewed all
interexchange services to comprise one market. The Commission found that there was no significant difference between making an interexchange call from a wireline telephone
and from a cellular phone. For the FCC, there appeared to be some substitution occurring
between interexchange calls from cellular units and those from wireline telephones. That
means, those calls belong to one market – the entire interexchange market. Accordingly,
McCaw held only insignificant market share (i.e., a toe-hold merger) under this broader market definition.
Concluding that potential anticompetitive aspects of the merger required certain remedies, the FCC imposed a set of conditions. Among the conditions imposed were:
A requirement that all contracts between the cellular and manufacturing divisions of AT&T/McCaw for the development of proprietary products be in writing;36
A requirement that AT&T/McCaw abide by the consumer proprietary network information obligations to prevent the information from falling into the other’s hands;37
A prohibition against unreasonable discrimination against competitors with regard to existing contracts for the sale of cellular network equipment and services;38 and
A requirement that AT&T/McCaw abide by the Commission’s affiliate transaction rules.39
35 AT&T – McCaw Order, 9 F.C.C.R., at 5868-71 para 50-56 (1994). 36 Id. at 5894. 37 Id. at 5886. 38 Id. at 5893. 39 Id. at 5900.
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Comparison
In AT&T-McCaw merger, the DOJ and the FCC reached different findings with regard to the relevant market definition and the evaluation of the impact of the merger on the relevant market. As for the relevant markets, both the DOJ and the FCC identified three relevant markets. Both agencies agreed on identifying two of the markets – the cellular services market and the equipment market. However, the FCC’s definition of the other relevant market (i.e., the market for interexchange service) was broader than the
DOJ’s definition (i.e., the market for interexchange service to customers served by
McCaw). This difference led the Commission to find no significant competitive harm in the market because McCaw’s market share was relatively insignificant in the entire interexchange market.
Regarding the market concentration, both the DOJ and the FCC relied on HHI to examine the current market concentration. However, the two agencies’ conclusions with respect to the competitive environment of the relevant markets were different. The DOJ noted a high concentration in the three relevant markets and determined that entry was not easy. Meanwhile, the FCC, despite the high concentration, noted the increasing trend toward competition and also found numerous potential entrants in cellular service market based on lower entry barrier.
Other Merger Guideline factors such as collusion, evasion of rate regulation, elimination of potential competitor were not addressed by either agency. As for adverse competitive impact of this vertical merger, both the DOJ and the FCC was concerned about lock-in effect, which led the two agencies to impose the conditions to mitigate the harm. Because the DOJ consent decree contained the equal access requirement and separation requirement, the FCC decided not to impose those conditions.
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MCI and BT Forty-Eight
The merger of the MCI Communications Corporation (MCI) and British
Telecommunications (BT) stemmed from a 1994 joint-venture agreement between MCI
and BT, which was an acquisition by BT of 20 percent of MCI’s stock. In November
1996, BT and MCI had agreed to enter into a full merger, where MCI should be merged
into a wholly-owned subsidiary of BT. The new parent company, BT, would be renamed
Concert plc.
At the time of merger, MCI was the second largest long distance
telecommunications carrier in the United States, and the fifth largest telecommunications
carrier in the world.40 Its principal long distance domestic and international competitors
in the United States were AT&T Corporation, the largest carrier, and Sprint Corporation,
the third largest carrier. BT, formerly a government-owned monopoly, was privately held
at the time of the merger. It was by far the largest telecommunications carrier in the
United Kingdom, and was the fourth largest telecommunications carrier in the world in
terms of traffic. BT was the dominant telecommunications carrier in the U. K., providing
almost all local services and having high market shares in long distance domestic and
international services. Indeed, BT had more than ten times the total sales revenues of
Mercury Communications Ltd., its only substantial competitor in long distance service.41
Thus, the transaction between MCI and BT would result in vertical affiliation between
the dominant telecommunications carrier in the U.K. and the second largest long distance
provider in the U.S.
40 Complaint, United Sates v. MCI Communications and BT Forty-Eight Company (D.D.C. 1997), para. 17. 41 Id. at para. 19.
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DOJ review
The DOJ filed a civil antitrust suit, alleging the merger of MCI and BT would
violate Section 7 of the Clayton Act, resulting in harm in the two relevant markets -- the
markets for (1) U.S.-U.K. international telecommunications services and (2) for seamless
global telecommunications services,42 -- thereby depriving U.S. consumers of the benefits of competition.43
In the first relevant markets for U.S.-U.K. international telecommunications
services, the DOJ identified three kinds of harm arising from vertical effects of the
merger. First, the DOJ found that BT would have increased incentives and the ability,
using its dominant position in the U.K., to favor MCI and to disfavor its U.S. competitors
in international telecommunications services. That would make competitors’ offerings
less attractive in quality and price than those of MCI, and lessen the ability of MCI’s
rivals to compete effectively in these services, according to the complaint. The DOJ
noted that international telecommunications services were generally provided on a correspondent basis, meaning that providers in different countries enter into commercially negotiated bilateral agreements with one another to complete each other’s
traffic. The DOJ found MCI could receive various forms of favorable treatment from BT
with respect to its international correspondent services between the U.S. and the U.K.44
42 Seamless global telecommunications means international telecommunications and enhanced telecommunications services available from one provider that retain the same quality, features, characteristics, and capabilities throughout the world. Seamless global telecommunications can include enhanced virtual private networks and data networks. Compliant, United Sates v. MCI Communications and BT Forty-Eight Company (D.C.C. 1994). 43 Competitive Impact Statement, 59 Fed. Reg. 33009, at 33015. 44 For example, BT could favor MCI or disfavor its competitors with respect to the prices, terms and conditions on which international services are provided, as well as the quality of provisioning
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In addition, the DOJ found that BT’s ownership interest in MCI would increase
BT’s incentive to provide MCI confidential, competitively sensitive information that BT
obtained from other U.S. carriers through their correspondent relationships with BT.45
The DOJ also found that, allowing MCI access to competitively valuable information about its competitors would also increase the risk of collusion.
Finally, the DOJ also alleged that the merger would give BT the increased incentive and ability to send its international switched traffic to the U.S. exclusively, or largely, to MCI. Such diversion of traffic could harm competition among international telecommunications service providers in the U.S. and U.S. consumers, by increasing the net settlement payments that other U.S. carriers must make to BT.46
The DOJ found anticompetitive harm in the second relevant market, the market for
seamless telecommunications services provided in the U.S. According to the DOJ, BT
would have increased incentives and the ability, using its dominant position in the U.K.,
to disfavor their U.S. competitors in seamless global telecommunications services in
various ways, lessening the ability of the competitors to develop and offer new seamless
global services and compete effectively in these services.47
of those services, and could provide to MCI advance information about planned changes to its network. Id. 45 In order to use BT’s correspondent line services and to negotiate terms of use, U.S. international telecommunications providers must provide BT various types of competitively sensitive information, including private line customer identities, service requirements, plans for the introduction of new services, changes in existing services, and future traffic projections. If BT were to share this information with MCI, then MCI could gain an anticompetitive advantage over its U.S. competitors. 59 Fed. Reg. 33009, at 33017. 46 The correspondent agreements governing switched services establish an accounting rate per minute of traffic, for each type of traffic sent over a particular international route. The carriers in each country pay half the accounting rate (the settlement rate) to their foreign correspondents for each minute of traffic completed. Id. 47 Id.
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Seamless global telecommunications services, by their nature, must be offered on a
consistent basis in all the major countries where customers are located.48 Thus, the DOJ
noted, nondiscriminatory access to the telecommunications networks in these countries is
essential for any provider of these services. The DOJ concluded that BT could
discriminate in favor of MCI, using its vertically integrated position in the U.K.,
alongside a virtual monopoly in local services and a dominant position in long distance
domestic and international services.49
Considering potential adverse competitive impacts of the merger, the DOJ consent decree required the merging parties to report information including prices, terms and conditions of interconnection and other arrangements between BT and MCI to enable competitors to more easily detect particular types of discrimination.50 The DOJ consent
decree also prohibited the parties from inappropriately using any confidential information
they obtain from competitors.51
The DOJ focused on the dominant position of the merging parties in each country
(i.e.,, market concentration) and recognized the vertical aspects of the merger might
facilitate collusion, discriminating against other competitors. Entry analysis was not
revealed in the documents. Other factors such as evasion of rate regulation or elimination
of potential competition were not discussed in the DOJ public documents.
48 The DOJ noted that seamless global telecommunications services would be made available by a single provider using an integrated international network of owned or leased facilities, and would have the same quality, features, characteristics, and capabilities wherever they are provided. Id. 49 Id. at 33018. 50 Id. at 33011. 51 Id. at 33012.
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FCC review
On August 21, 1997, the FCC approved the merger of MCI and BT subject to
conditions and safeguards that it said would ensure the merger would enhance
competition in the U.S. The FCC evaluated the proposed merger considering rapid
changes in domestic and international regulations and market conditions. Because the
1996 Telecommunications Act and the World Trade Organization’s Basic Telecom
Agreement52 were in the early stages of implementation, the FCC said, there was
considerable uncertainty concerning how quickly and to what extent regulatory and
market conditions in various telecommunications markets would change.53 As a result of
this uncertainty about the pace with which competition would develop in various
telecommunications markets, the FCC noted that the Commission must be particularly concerned about mergers between companies that are potential rivals, especially where one of the merging parties is or was the incumbent monopoly provider.54 Given these
regulatory and market uncertainties, the Commission noted that it would scrutinize closely the proposed mergers of potential competitors, and would strictly enforce the
Commission’s requirement that the applicants demonstrate that, on balance, the proposed
merger would be procompetitive and thus serve the public interest, convenience, and
52 The WTO Basic Telecom Agreement was signed by 69 countries on February 15, 1997. Most of the world’s major trading nations committed to move from monopoly provision of basic telecommunications services to open entry and pro-competitive regulation of these services. In the Matter of the Merger of MCI Communications Corporation and British Telecommunications plc, 12 F.C.C.R. 15351 (1997), at 15355-6. 53 Id. at 15355. 54 Our concern is heightened by our awareness that, as regulatory barriers to entry fall, firms that might ‘otherwise compete directly may, as one possible strategic response, seek to cooperate through merger.’ In the Matter of the Merger of MCI Communications Corporation and British Telecommunications plc, 12 F.C.C.R.. 15351 (1997), at 15355 (quoting Bell Atlancit-NYNEX Order at P.3.)
118 necessity. Applying the transitional market analysis,55 the FCC examined the likely competitive effects of the merger both during implementation of the 1996 Act and as that implementation alters market structure.56 More specifically, the FCC examined relevant markets as they exist today and as the Commission expects they will exist after the 1996
Act and the WTO Basic Telecom Agreement had been implemented. Those likely market participants include both actual competitors57 and precluded competitors.58 From the universe of actual and precluded competitors, the FCC then identified those likely market participants that have, or are likely to speedily gain, the greatest capabilities and incentives to compete most effectively and soonest in the relevant market.59 Further, the
FCC recognized that, in evaluating proposed mergers in telecommunications markets that
55 As applied in the Bell Atlantic-NYNEX Order, in order to evaluate proposed mergers properly in the context of an evolving marketplace and to take account of the uncertainties surrounding the pace and extent of the development of competition, the transitional markets framework identifies as most significant market participants not only firms that already dominate transitional markets, but also those that are most likely to enter soon, effectively, and on a large scale once a more competitive environment is established. The Commission sought to determine whether either or both of the merging parties are among a small number of these most significant market participants, in which case its absorption by the merger would, in most cases, if not offset by countervailing positive effects, harm the public interest in violation of the Communications Act. 12 F.C.C.R.. 15351, at 15369. See Bell Atlantic-NYNEX Order, at P.7. See also WorldCom-MCI Order, 13 F.C.C.R. at 18038, para. 20 56 12 F.C.C.R., at 15369. 57 The FCC defined actual competitors as those firms that are now offering the relevant products in the relevant geographic markets and that we expect to be doing so as the 1996 Act become more fully implemented. See Bell Atlantic-NYNEX Order, at P 59. Because the BT-MCI merger involved a foreign carrier, the FCC expanded this definition to include those current competitors that the Commission expected would continue to offer the relevant product as both the 1996 Act and the WTO Basic Telecom Agreement were more fully implemented. See12 F.C.C.R., at 15369. 58 Precluded competitors are firms that are most likely to have entered the relevant markets, but, until recently, have been prevented or deterred from market participation by barriers that the 1996 Act seek to lower. See Bell Atlantic/NYNEX Order, at P 60. Because this merger involves a foreign carrier, BT, the FCC also considered firms that had been prevented or deterred from participating in international and foreign markets by barriers to entry that the WTO Basic Telecom Agreement sought to lower. See12 F.C.C.R., at 15369. 59 Id. at 15372.
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are subject to such change and uncertainty, the Commission would necessarily be making
predictions about future market conditions and the likely success of individual
competitors.60
In addition to the public interest analysis that applies to the review of all mergers,
the FCC examined this merger, that involved a foreign-owned carrier, under the market
entry rules as articulated in the Foreign Carrier Entry Order.61 Therefore, the FCC’s
analysis of this merger was two-fold: general public interest analysis that applies to all the mergers and an additional analysis under the FCC’s market entry rules that applies to a merger involving a foreign-owned telecommunications carrier.
First, in the general public interest analysis, the FCC concluded that, on balance,
the merger of BT and MCI would serve the public interest, convenience, and necessity.
As for the relevant markets, the FCC identified three end-user markets, and six input markets. First, the FCC identified three relevant end-user markets that are likely to be affected by the merger of BT and MCI: (1) U.S. local exchange and exchange access service, (2) U.S.-U.K. outbound international service, and (3) global seamless services.62
The last two markets are equivalent to what the DOJ identified as relevant markets for this merger. In addition, the FCC identified six relevant input markets: (1) international transport between the U.S. and U.K., (2) U.K. cable landing station access, (3) U.K.
60 Id. 61 Market Entry and Regulation of Foreign-affiliated Entities, Report and Order, 11 F.C.C.R. 3873, 3897 (1995), (Foreign Carrier Entry Order). 62 12 F.C.C.R., at 15376.
U.K. originating access services.64 The FCC identified MCI as among the most
significant market participants in each of the relevant end-user markets and in one input
market (international transport facilities between the U.S. and the U.K.).65 In addition, the
Commission found that BT was among the most significant market participants in each of
the relevant input markets and was a significant participant in the market for U.S.-U.K. outbound international services.
For each relevant market, the FCC examined both the horizontal and vertical effects of the merger. As for the horizontal effects of the merger, the FCC found that the merger was unlikely to have anticompetitive effects on any of the three relevant end-user
markets, reaching different conclusion with regard to the two markets where the DOJ
found a potential anticompetitive impact of the merger.66 The FCC further concluded that
the merger was likely to enhance competition in two of the three relevant markets -- the
market for U.S. local exchange and exchange access services and the market for global
seamless services. Especially for the global seamless service market, the FCC noted that
the competition in those markets requires significant resources.67
The Commission also found that, with the exception of the international transport market, the merger would not increase or slow the decrease of market power in the six
63 Backhaul describes a high capacity private line used to carry traffic between a cable landing station, where the vast majority of international calls enter the United Kingdom, and a carriers’ international switch or point of presence in the U. K. Id. at 15393. para. 106. 64 Id. at 15376. 65 Id. at 15381. 66 Id. at 15402. 67 Id.
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relevant input markets.68 As to the international transport market, the Commission found that, although the merger of BT and MCI would lead to some increased concentration of transport facilities between the U.S. and the U.K. in the short term, there were mitigating factors. Those factors include: BT/MCI’s agreement to share its existing capacity with new entrants, and the expected substantial increase in international transport capacity over the next two years that should mitigate any increase in market power resulting from this increase in concentration in international transport facilities.69
In the analysis of the vertical effects of the merger, the FCC found that the merger might give BT an added incentive to discriminate in favor of its U.S. affiliate in the U.S.-
U.K. outbound international services market. The Commission found, however, that BT’s
ability to discriminate would be adequately constrained, because of the regulatory
safeguards70 in the near term, and the increased competition in the longer term.
In addition to the general public interest analysis, the second part of the FCC
review was the application of the Commission’s market entry rules established in the
Foreign Carrier Entry Order71 to BT’s entry into the U.S. market. Determining whether
BT’s entry into the U.S. market complies with the FCC rules, the Commission applied a
two-prong test. First, the FCC determined whether the U.K. offered U.S. carriers
effective competitive opportunities in each of the communications market segments that
BT sought to enter in the United States (Effective Competitive Opportunities (ECO)
68 Id., at 15403. 69 12 F.C.C.R., at 15408. 70 The FCC recognized the U.K. had taken a leading role in adopting regulatory policies that seek to introduce competition into all telecommunications markets. 12 F.C.C.R., at 15429. 71 Market Entry and Regulation of Foreign-affiliated Entities, Report and Order, 11 F.C.C.R. 3873, 3897 (1995), (Foreign Carrier Entry Order).
122 analysis).72 Second, after the ECO analysis, the FCC also considered other factors that are relevant to the Commission’s overall public interest analysis for foreign carrier entry.
Those factors included whether BT offered U.S. carriers cost-based accounting rates,73 and concerns raised by the Executive Branch.74 Considering these factors in addition to the ECO analysis under the foreign carrier entry rules, the FCC determined BT’s entry into the U.S. market was consistent with the public interest.
The FCC recognized that certain commitments75 and safeguard ensure that the
merger would have procompetitive effects and that competition on the U.S.-U.K. route
would set a standard for the world. Thus, the FCC approved the merger on condition that these commitments should be ensured.
72 Under the ECO analysis, the FCC first examines the legal or de jure ability of U.S. carriers to enter the destination foreign country and provide international facilities-based service (legal ability to enter). Next, the FCC reviews the actual or de facto conditions of entry in the relevant foreign markets, including the terms and conditions of interconnection, competitive safeguards, and the regulatory framework. The Commission reviews the overall effect of these four elements on the opportunities for viable operation as a facilities-based carrier in the foreign market. If, however, any one of the factors of the effective competitive opportunities test is completely absent, the FCC will deny authority to provide facilities-based service on that route, unless other public interest factors warrant a different result. See Foreign Carrier Entry Order, 12 F.C.C.R., at 3890-2. 73 Id. at 15453-6. 74 As required in the Foreign Carrier Entry Order, the FCC also considered certain Executive Branch concerns (including national security, law enforcement, or foreign policy concerns) regarding BT’s entry into the U.S. market. Id. at 15455-8. 75 For example, the FCC noted that BT recently had agreed to accept a settlement rate of 7 cents per minute, one of the lowest in the world, to terminate U.S.-outbound calls in the U.K. In addition, the FCC recognized that MCI had committed to support the equal access initiatives of the European Union. Under equal access, customers would have the option of pre-subscribing to carriers other than BT for U.K.-outbound long distance and international calls. Currently, such customers must dial special access codes on a call-by-call basis to use BT’s competitors. MCI also acknowledged that the FCC could take enforcement action against MCI if BT fail to comply with European Union equal access requirements as implemented by the U.K. Accordingly, the Commission conditioned its grant of the license transfer upon MCI’s non-acceptance of BT traffic originated in the U. K. to the extent BT is found to be in non-compliance with U.K. regulations implementing any European Union equal access requirements. Id. at 15625.
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The Commission also found that, given BT’s market power in the United Kingdom.
MCI should be regulated as a dominant carrier on the U.S.-U.K. route.76 Finally, the
Commission conditioned its approval upon compliance with the provisions of the agreement of May 22, 1997, among BT, MCI, the U.S. Department of Defense, and the
Federal Bureau of Investigation.77 The agreement addresses the national security and law enforcement concerns of the Executive Branch.
Comparison: In the merger of BT and MCI, the DOJ and the FCC demonstrated different approaches. While the DOJ consistently relied on the Merger Guideline Factors, the FCC as the expert agency scrutinized this merger considering the particular circumstances (i.e., uncertainties in the marketplace after the enactment of the 1996
Telecommunications Act, and the fact this merger involved a foreign carrier seeking to enter the U.S. market).
As for the relevant market, the DOJ identified two markets where the anticompetitive harm would arise from the proposed merger: the markets for international telecommunications and for seamless global telecommunications market. The FCC, while identifying three end-user markets and six input markets that would be affected by the merger, reached a different conclusion with regard to the international telecommunications markets and seamless global telecommunications markets. That is, the FCC found elimination of BT as a potential competitor might bring no harm to the
76 Id. at 15472. Carriers regulated as dominant on a particular route due to a foreign carrier affiliation are required to do the following: (1) file tariffs on no less than 14-days notice, (2) maintain complete records of the provisioning and maintenance of basic network facilities and services procured from the foreign carrier affiliate, (3) obtain Commission approval before adding or discontinuing circuits, and (4) file quarterly reports of revenue, number of messages, and number of minutes of both originating and terminating traffic. 47 C.F.R. § 63.10(c). 77 12 F.C.C.R., at 14373-4.
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market for U.S.-U.K. outbound international service. In addition, the FCC determined
that the merger would be likely to make the merged company a more effective provider
of global seamless services, a market that required significant resource at the time of the
merger.
Although there was no significant difference in the two agencies’ approach in
evaluating market concentration, the FCC’s analysis framework was broader in that they
considered not only the market structure but also the participants in the market at the time
of the merger and after the implementation of the 1996 Act and the WTO Basic Telecom
Agreement. The agencies agreed on the adverse competitive impact of the merger,
especially on the vertical effect (i.e.,, discrimination against non-affiliates, raising rival’s
costs, and facilitating collusion). Entry analysis and the evasion of rate regulation factor
were not revealed in the documents. Finally, identifying current and future market
participants, the FCC apparently relied on the potential competition framework that the
DOJ did not address in the public documents. Additional factors such as the FCC’s ECO
analysis under the foreign carrier entry rules clearly demonstrated the FCC’s distinct role
in merger review as the expert agency in the communications.
The conditions also reveal some different roles of the two agencies. While the DOJ consent decree focused on the transparency and confidentiality requirements that are designed to prohibit the merging parties from discriminating competitors, the FCC conditions requires more sector-specific commitment to the improvement of the U.K-
U.S. telecommunications rout (e.g., the FCC required the merged company to make available MCI’s facilities in the U.S. to other carriers; and Commission also required
MCI not to accept BT traffic originated in the U.K. to the extent BT would be found to be
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in non-compliance with the U.K. regulations implementing the European Union’s equal
access requirement).
AT&T and TCI
On June 24, 1998, AT&T Corporation (AT&T) and Tele-Communications Inc.
(TCI) entered into agreement that would merge TCI with a wholly owned subsidiary of
AT&T in a $48 billion transaction. At the time of merger, AT&T was the largest provider
of long distance telecommunications services in the United States, as well as the largest
provider of mobile wireless telephone services. TCI was the second largest cable system
operator in the nation. In addition, TCI, through its wholly owned subsidiary, Liberty
Media Corporation, held a partial interest in Sprint PCS, one of the principal competitors
to AT&T’s mobile wireless telephone business in a large number of markets throughout
the country.
DOJ review
The DOJ complaint alleged that AT&T’s acquisition of the 23.5 percent equity
interest in one of its principal competitors (i.e., Sprint) might substantially lessen
competition in the sale of mobile wireless telephone services. The DOJ defined mobile
wireless telephone services as the relevant product market. The relevant geographic
markets were those areas in which AT&T was one of the two cellular licenses, and in
which Sprint PCS was a PCS licensee.78 In each of the geographic markets, AT&T was one of two licensed cellular service providers, and Sprint PCS provided mobile wireless telephone services pursuant to a PCS license. AT&T was the largest or second largest
78 Those areas include metropolitan areas of New York City; Los Angeles; Dallas-Fort Worth; San Francisco-Oakland-San Jose; Miami-Ft. Lauderdale; Minneapolis-St. Paul; Seattle; Pittsburgh; Denver; Portland, OR; Sacramento; Salt Lake City; Las Vegas; and at least 18 other metropolitan markets. Complaint, United States v. AT&T (D.D.C. 1998), para 16.
126 provider of mobile wireless telephone services in those markets. The DOJ found those markets were highly concentrated (i.e., most of the relevant markets have pre-merger
HHIs well over 2500).79
As for harm to competition, the DOJ first found competition generally in the sale of mobile wireless telephone services in those relevant geographic markets would be lessened substantially because of the high level of concentration in mobile wireless telephone markets. Further, the DOJ found actual and potential competition between
AT&T and Sprint PCS in mobile telephone markets would substantially be lessened. In light of the fact that AT&T and Sprint PCS services appeared to be close substitutes for one another for a significant segment of customers, the Department was concerned that the acquisition of a substantial portion of the equity of Sprint PCS by AT&T could reduce AT&T’s incentive to compete aggressively in those areas in which Sprint PCS was a significant rival and thereby lead to higher prices or reduced service quality for mobile wireless telephone services.
The DOJ found that, entry into the relevant markets sufficient to mitigate the competitive harm resulting from this acquisition was unlikely within the next two years.
For the next two years, the DOJ said, the only potential entrants would be firms using the spectrum already allocated for PCS by the FCC. For these reasons, the DOJ concluded that the merger may substantially lessen competition in the provision of mobile wireless telephone services in those markets where AT&T is one of two cellular licenses and where Sprint PCS also provides mobile wireless telephone services.80
79 64 Fed. Reg. 2506, 2511. 80 Id. at 2511.
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As for the merger conditions, the DOJ consent decree required the merging parties
to execute a complete divesture of the Sprint PCS stock.81 AT&T and TCI agreed to
direct a proposed trust to divest enough Sprint PCS stock. In addition, the DOJ required a
hold separate relationship between AT&T and its Sprint PCS holdings during the pre- divesture period.82 Finally, the DOJ required all economic benefits of the Sprint PCS
holding to inure exclusively to the benefits of the holders of Liberty Media Tracking
Shares, and prohibited AT&T from engaging in any transaction that would transfer such benefits to AT&T.83
FCC review
The FCC found the proposed merger might affect markets for mobile telephone
services. Focusing on Commercial Mobile Radio Service (CMRS) markets,84 the
Commission found the merger would violate the CMRS spectrum cap that limited the
amount of CMRS spectrum that could be licensed to a single entity within a particular
geographic area.85 Because TCI owned 20 percent or more of the equity of Spring PCS
tracking stock, the FCC concluded that AT&T’s acquisition of TCI’s interest violated the
CMRS spectrum cap and might not encourage competition between AT&T-TCI and
81 Id. at 2508-9. 82 Id. at 2512. 83 Id. at 2506, 2508-9. 84 CMRS includes, inter alia, cellular service and personal communications service. See 47 C.F.R. § 20.9 85 To promote competition and address concerns about anticompetitive behavior in CMRS markets, the Commission adopted a CMRS spectrum cap in 1996. Specifically, one of the Commission’s rules prohibited an entity from having an attributable interest in a total of more than 45 MHz of licensed cellular, broadband PCS, and Specialized Mobile Radio (SMR) spectrum regulated as CMRS with significant overlap in any geographic area. Ownership of 20 percent or more of equity or outstanding stock, among other things, was considered an attributable interest. 47 C.F.R. § 20.6.
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Sprint in CMRS markets. Therefore, the Commission conditioned the approval on
AT&T-TCI transferring ownership of the Sprint PCS stock to a trust prior to consummation of the merger based on the assumption that the merging parties comply with the DOJ settlement agreement.86 Concurring with DOJ’s consent decree, the FCC required that AT&T and TCI submit the proposed trust agreement for the Commission review. Additionally, the FCC consent was conditioned on AT&T-TCI ensuring that the economic interests arising from ownership of the Sprint PCS tracking stock during the divestiture period were directed only to the shareholders of the Liberty Media Group tracking stock, consistent with the terms of the DOJ consent decree.87
In addition to this mobile telephony market (CMRS), the FCC reviewed three additional markets in approving this merger. The FCC briefly mentioned the Commission found no direct adverse competitive impact in Multichannel Video Programming
Distribution market,88 Local Exchange and Exchange Access market,89 and residential
Internet access market. Especially for the local exchange and exchange access markets,
86 14 F.C.C.R., 3211, paras. 107-8. 87 14 F.C.C.R., 3212, para. 110. 88 Multichannel Video Programming Distributors (MVPDs) deliver video programming via distribution systems to their subscriber’s television sets. MVPDs include cable, direct broadcast satellite (DBS), multichannel multipoint distribution services (MMDS), and satellite master antenna television (SMATV) providers. Id. at 3171, para 20. 89 The Communications Act defines local exchange carrier as any person that is engaged in the provision of telephone exchange service or exchange access. See 47 U.S.C. § 153(26). The term telephone exchange service means (A) service within a telephone exchange, or within a connected system of telephone exchanges within the same exchange area operated to furnish to subscribers intercommunicating service of the character ordinarily furnished by a single exchange, and which is covered by the exchange service charge, or (B) comparable service provided through a system of switches, transmission equipment, or other facilities (or combination thereof) by which a subscriber can originate and terminate a telecommunications service. 47 U.S.C. § 153(47) (2004). The term exchange access means the offering of access to telephone exchange services or facilities for the purpose of origination or termination of telephone toll services. 47 U.S.C. § 153(16) (2004).
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the Commission noted TCI’s minimal presence in local markets. Recognizing incumbent
Local Exchange Carriers (LEC) dominate the markets, the Commission determined that
AT&T and TCI were potential entrants in those markets. The FCC found that
combination of complimentary assets – last mile assets of the cable company (TCI) and
brand name, experience, financial resources of AT&T – would provide an alternative to the incumbent LEC’s service more quickly and efficiently than either could do separately.90 For the residential Internet access market, the FCC also found that the
combination of the two companies would facilitate a quicker rollout of high speed internet access service.
Comparison
In AT&T/TCI, the DOJ found that anticompetitive impacts might arise from the merger in the market for mobile wireless telephone services. The FCC’s relevant market, which was the mobile telephone service markets (CMRS), was equivalent to the DOJ’s relevant market. In addition, the Commission reviewed the probable competitive impact of the merger on additional three relevant markets. As long as the market for mobile telephone service was concerned, the DOJ applied the Merger Guidelines factors such as
HHI,91 adverse competitive effects, and entry analysis. On the other hand, the FCC was
more concerned that the merger would violate the Commissions’ CMRS spectrum cap
rather than it was with Merger Guideline factors. Nevertheless, both agencies had the
same market definition and anticompetitive concerns that led to merger conditions
requiring transferring of Sprint PCS stock to a trustee. Other factors, such as potential
90 14 F.C.C.R., 3230-1. 91 See supra Ch. 3 for further discussion of the Herfindahl-Hirschman Index (HHI).
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collusion, evasion of rate regulation, elimination of potential competitors, were not
addressed by both agencies.
As for the three additional markets identified by the FCC, the Commission
considered public interest benefits of the proposed merger. For example, the FCC found
the merged company would be a strong competitor to incumbent LECs, and
complementary skills and assets of AT&T and TCI would result in efficiencies, synergy
and, finally, consumer benefits such as lower prices and enhanced quality of services.
Merger conditions reflected in the DOJ consent decree and the FCC Order were consistent and complementary to each other. Based on the assumption that the merging parties abide by the DOJ consent decree, the FCC conditioned the approval on
AT&T/TCI transferring ownership of the Sprint PCS stock to a trust, which was basically
reflected in the terms of the DOJ consent decree.
SBC and Ameritech
On May 10, 1998, SBC Communications, Inc (SBC) and Ameritech Corporation
(Ameritech) entered into a purchase agreement, whereby SBC would acquire Ameritech in exchange for SBC stock valued at approximately $58 billion dollars at the time of the agreement. SBC and Ameritech were two of the remaining five Regional Bell Operating
Companies (RBOCs) created in 1984 by the consent decree settling the United States’ antitrust case against American Telephone & Telegraph Co (AT&T).92 SBC and
Ameritech each provided local exchange telephone services in distinct regions, and also
provided wireless mobile telephone services, including cellular mobile telephone
services, both within and outside of their local exchange service regions.
92 Complaint, United States v. SBC (D.D.C. 1999), para. 10.
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At the time of agreement, SBC was the second largest RBOC in the United States, with approximately 43 million total local access lines. SBC provided local telephone services to retail customers in Arkansas, California, Connecticut, Kansas, Missouri,
Nevada, Oklahoma, and Texas as well as cellular mobile telephone services or other wireless mobile telephone services in those states.93 Before the agreement between the two companies, SBC had also entered into an agreement as of January 19, 1999, to acquire Comcast Cellular Corporation (Comcast), which would give SBC all of
Comcast’s cellular telephone systems. By acquiring Comcast’s cellular telephone
systems, SBC would become a provider of cellular mobile telephone services in the
additional areas in Delaware, Illinois, Indiana, New Jersey and Pennsylvania. The
acquisition of the Comcast cellular systems would add about 800,000 subscribers to
SBC’s total wireless subscribers nationwide.
Ameritech was then the fourth largest RBOC in the United States, with
approximately 24 million total local access lines. Ameritech provided local telephone
service to retail customers in Illinois, Indiana, Michigan, Ohio, and Wisconsin, and also
provided cellular mobile telephone service in these states, as well as in some states
93 SBC also provided cellular mobile telephone services or other wireless mobile telephone services in some areas outside its local exchange service region, including the District of Columbia and areas within the states of Illinois, Indiana, Maryland, Massachusetts, Rhode Island, New York, Virginia, and West Virginia. SBC, through its Cellular One cellular systems out of region and its in-region Southwestern Bell, Pacific Bell, Nevada Bell and SNET cellular or other wireless mobile systems, was the nation’s third largest wireless mobile telephone service provider, serving areas with a total population of about 82 million, and it had about 6.5 million subscribers nationwide. Complaint, United States v. SBC (D.D.C. 1999), para. 10.
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outside its local exchange service region including Missouri and Hawaii. Ameritech was
also a major wireless mobile telephone service provider.94
DOJ review
The United States filed a civil antitrust complaint on March 23, 1999, alleging that
the proposed acquisition of Ameritech by SBC would violate Section 7 of the Clayton
Act, by lessening competition in the markets for wireless mobile telephone services in
seventeen cellular license areas in Illinois, Indiana and Missouri. That is, the DOJ found
this acquisition would affect fourteen markets where competing cellular systems were
owned by SBC and Ameritech, as well as three additional markets where competing
cellular systems were owned by Ameritech and Comcast, which SBC was acquiring
under a January, 9, 1999 agreement. These seventeen markets, which had a total
population of approximately 11 million, were referred to as the Overlapping Markets.95
SBC and Ameritech were the only two providers of cellular mobile telephone services, and the two primary providers of all wireless mobile telephone services, in fourteen cellular license areas in the states of Illinois, Indiana, and Missouri, which the DOJ referred to as the SBC/Ameritech Overlapping Markets.96 In addition, in three cellular
license areas in the state of Illinois, referred to as the Comcast/Ameritech Overlapping
Markets, the cellular systems owned by Ameritech and Comcast were the only two
94 Ameritech had about 3.2 million subscribers nationwide. Complaint, United States v. SBC (D.D.C. 1999), para. 11. 95 Complaint, para.3. 96 Id.
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providers of cellular mobile telephone services, and the two primary providers of all
wireless mobile telephone services.97
The DOJ identified the relevant product market as a market for wireless mobile telephone service, and defined the relevant geographic market as each Overlapping
Market. Relying on the HHI for market concentration, the DOJ found that already a high
level of concentration in the provision of wireless mobile telephone services existed in
the Overlapping Markets.98 The DOJ found that there were potential adverse competitive
effects of the merger in terms of the market concentration. Specifically, the DOJ
recognized the fact that SBC and Ameritech were direct competitors in the markets for
wireless mobile telephone services in the SBC/Ameritech Overlapping Markets.
Similarly, SBC and Comcast were direct competitors in the markets for wireless telephone services in the Comcast/Ameritech Overlapping Markets. Therefore, the DOJ
said, SBC’s acquisition of Ameritech would cause the level of concentration among firms
providing wireless mobile telephone services in the Overlapping Markets to increase significantly. The DOJ found, if SBC and Ameritech were to merge, the competition between SBC and Ameritech and between Comcast and Ameritech in wireless mobile telephone services in these markets would be eliminated, and competition overall for
wireless mobile telecommunications services would be substantially lessened in the
Overlapping Markets by SBC’s acquisition of Ameritech. As a result of the loss in
competition between SBC and Ameritech, and between Comcast and Ameritech, there
would be an increased likelihood both of unilateral actions by the combined firm in these
97 Id. 98 Id. at para.17.
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markets and of coordinated interaction among the limited number of remaining competitors that could lead to anticompetitive results.99
In addition, the DOJ also determined that it is unlikely that entry within the next
two years into wireless mobile telephone services in the Overlapping Markets would be
sufficient to mitigate the competitive harm resulting from this acquisition, if it were to be
consummated.100
The DOJ and SBC agreed on a consent decree that would resolve the DOJ’s
antitrust concern by requiring SBC and Ameritech to divest one of the two cellular
telephone systems in each of 17 markets.101 This was one the largest divestiture packages
involving a merger ever required by the DOJ’s antitrust division.102 As for the cellular systems to be divested, the DOJ and SBC also agreed on a Hold Separate Order, which required the merging parties to ensure that the divestiture cellular systems to continue to
be operated as separate, independent, ongoing, economically viable and active
competitors to the other cellular systems and all other wireless mobile
telecommunications providers in the same area.103
FCC review
While the DOJ found adverse competitive impact of the merger in the market for
wireless mobile telephone services, the FCC determined the merger would not result in
harm to wireless markets subject to divestiture of cellular properties as required by the
99 Id. at para. 18. 100 Id. at para. 22. 101 64 Fed. Reg. 23099, 23101-2. 102 Press Release, Justice Department Requires SBC to Divest Cellular Properties in Deal with Ameritech and Comcast, March, 23, 1999. 103 64 Fed. Reg., at 23104-5.
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DOJ.104 Instead, the FCC focused on the effects of the merger on the markets for local telephony service. Finding the potential significant public interest harm in the markets for
Local Exchange and Exchange Access Service, the FCC approved the merger subject to significant and unprecedented conditions.105
The FCC first identified as the relevant market the market for the Local Exchange and Exchange Access Service, which the Commission found consisted of two distinct relevant product markets: (1) residential consumers and small businesses (mass market), and (2) larger business market.106 Applying the transitional market analysis,107 the FCC found the merger would result in a harm to public interest by: (1) denying consumers of
telecommunications the benefits of future competition between the merging firms (i.e.,
SBC and Ameritech),108 (2) undermining the ability of regulators and competitors to
implement the procompetitive, deregulatory framework for local telecommunications that
104 In re Applications of Ameritech Corp., Transferor, and SBC Communications Inc., Transferee, For Consent to Transfer Control of Corporations Holding Commission Licenses and Lines Pursuant to Sections 214 and 310(d) of the Communications Act and Parts 5, 22, 24, 25, 63, 90, 95 and 101 of the Commission’s Rules, 14 F.C.C.R. 14712, 14927. 105 Press Release, FCC Approves SBC-Ameritech Merger Subject to Competition-enhancing Conditions, Oct 6, 1999, 1999 FCC LEXIS 4876. 106 In re Applications of Ameritech Corp., Transferor, and SBC Communications Inc., Transferee, For Consent to Transfer Control of Corporations Holding Commission Licenses and Lines Pursuant to Sections 214 and 310(d) of the Communications Act and Parts 5, 22, 24, 25, 63, 90, 95 and 101 of the Commission’s Rules, 14 F.C.C.R. 14712, paras. 66-101. The FCC distinguished mass market consumers form larger business consumers because the services offered to one group may not be adequate or feasible substitutes for services offered to the other group, and because firms need different assets and capabilities to target these two markets successfully. Mass market customers have a different decision-making process than do larger business customers. Id. at para. 102. 107 12 F.C.C.R. 15351, at 15369. See supra note 55 for further discussion of the transitional market analysis. See Bell Atlantic/NYNEX Order, at para.7. See also WorldCom/MCI Order, 13 F.C.C.R. at 18038, para. 20 108 The FCC found that the merger would cause a public interest harm by eliminating SBC and Ameritech as among the most significant potential participants in the mass market for local telephony markets in each other’s regions. 14 F.C.C.R. at 14745-14761.
136 was adopted by Congress in the Telecommunications Act of 1996,109 and (3) increasing the merged entity’s incentives and ability to raise entry barriers to, and otherwise discriminate against, entrants into the local markets in its region.110 Yet, the FCC found that there would be some pubic interest benefits of the proposed merger including increase efficiencies in cost savings and revenue enhancement.111
As for the wireless mobile telephone markets, the FCC found (1) mobile telephone services, (2) paging/messaging services, and (3) two-way wireless data services constitute relevant product markets. First, as for the mobile telephone services, which is the market where DOJ found antitrust harm arises, the FCC found competition would not be harmed in the wireless markets subject to divestiture required by the DOJ consent decree. In the
second and third markets, the FCC found no basis for concern that the proposed merger
would harm competition in those paging/messaging services markets, and two-way
wireless data services markets.112
109 The FCC analyzed the effect of the proposed merger on the ability of regulators and competitors to use comparative analyses of the practices of similarly-situated independent incumbent LECs to implement the Communications Act in an effective manner. Such comparative practices analyses, or benchmarking, provide valuable information regarding the incumbents’ networks to regulators and competitors. In past incumbent LEC mergers, the Commission recognized that the declining number of independently-owned major incumbent LECs limits the effectiveness of benchmarking for regulators in carrying out the goals of the Communications Act. See Bell Atlantic-NYNEX Order, 12 F.C.C.R. at 19994, para. 16; SBC- SNET Order, 13 F.C.C.R. at 21292, para. 21 (We remain concerned about the consolidation among large LECs as a general matter.). See also SBC-PacTel Order, 12 F.C.C.R. at 2624, para. 32. The FCC determined that, by further reducing the number of separately-owned large incumbent LECs, the SBC-Ameritech merger would significantly harm the ability of regulators and competitors to rely on comparative practices analysis to carry out their obligation under the Communications Act. See 14 F.C.C.R. at 14769-14795. 110 See 14 F.C.C.R. at 14795-14826. 111 Id. at 14846-14854. 112 Id. at 14928.
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The FCC determined that its conditions of the merger were in the public interest.
The 30 conditions adopted by the FCC were designed to accomplish five central public interest goals:
Promoting equitable and efficient advanced services deployment113 Ensuring open local markets114 Fostering significant out-of-region competition115 Improving residential phone services116 Ensuring compliance with and enforcement of the conditions.117
Comparison
For the SBC-Ameritech merger, the direct comparison of the merger analysis factors is impossible since the focus of the analysis of the two agencies is different. While the DOJ found anticompetitive harm in the wireless telephone market, and required the divestiture of the wireless properties of the merging parties, the FCC did not specifically address the concerns in wireless markets on the assumption that the merger was consistent with the terms of the DOJ consent decree. Rather, the FCC focused on the local telephone markets, and found significant potential harm to the public interest in those markets (FCC-only market.) Thus, this case demonstrates that the two agencies’ standards are complementary.
The DOJ focused on the market concentration, while it addressed all factors such as adverse competitive harm, entry analysis, and facilitating collusions. Other factors such
113 For example, the conditions include a provision that requires non-discriminatory rollout of xDSL services for areas of low-income households. Id., at Appendix 75-78. 114 E.g., a requirement of multi-state interconnection and resale agreement, Id. at 124-125. 115 E.g, a provision that requires the merging parties to provide local service, in 30 markets in which SBC-Ameritech currently does not operate an incumbent LEC. Id. at 155-164. 116 E.g., a provision prohibiting the merging parties from a minimum monthly or a minimum flat- rate charges on long distance calls. Id. at 163-166. 117 E.g. a provision requiring an establishment of a Compliance Program and engagement of an independent auditor. Id. at.174-191
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as evasion of rate regulation and elimination of potential competition were not addressed
in the public documents regarding this merger.
Applying the transitional market analysis to the local telephone service markets, the
FCC used an in-depth analysis of the current and future market participants. The FCC relied on the potential competition framework that the DOJ did not address in the public documents.
The merger conditions also reveal some different roles of the two agencies. While the DOJ consent decree focuses on the divestiture of the wireless assets of the merging parties, the FCC conditions requires more sector-specific commitment to fostering competition in the local telephone markets, deployment of the advanced services, and improvement of residential phone services.
Bell Atlantic and GTE
On July 28, 1998, Bell Atlantic Corporation (Bell Atlantic) and GTE Corporation
(GTE) entered into a merger agreement. At the time of the agreement, Bell Atlantic was one of the remaining five Regional Bell Operating Companies (RBOCs) created in 1984 by the consent decree settling the United States’ antitrust case against American
Telephone & Telegraph Co. Bell Atlantic was one of the largest RBOCs in the United
States, with approximately 42 million total local telephone access lines.118 Bell Atlantic
118 Bell Atlantic provided local telephone services to retail customers in Connecticut, Delaware, the District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia, and West Virginia, as well as cellular mobile telephone services in those states. Bell Atlantic also provided cellular mobile telephone services in some areas outside its local exchange service region, including areas within the states of Arizona, Georgia, North Carolina, New Mexico, South Carolina, and Texas. Complaint, United States v. Bell Atlantic (D.D.C. 1999), para 1-2. 10-11.
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was a 50 percent partner in PrimeCo, L.P. (PrimeCo), a firm that provides wireless mobile telephone services in many areas of the country.119
GTE was the largest non-RBOC local telephone operating company in the United
States.120 GTE was a major wireless mobile telephone service provider with about 4.8
million subscribers nationwide. GTE also entered in to an agreement, dated April 2,
1999, to acquire certain cellular mobile telephone businesses from Ameritech Mobile
Phone Service of Illinois, Inc., and Ameritech Mobile Phone Services of Chicago, Inc.,
(Ameritech) for $ 3.27 billion, which would make GTE a provider of cellular mobile
telephone services in additional areas in Illinois and Indiana. The acquisition of the
Ameritech cellular businesses would add about 1.7 million subscribers to GTE’s total
number of wireless subscribers nationwide.121
Bell Atlantic and GTE each provided local exchange services in distinct regions,
and they also provide wireless mobile telephone services, including cellular mobile
telephone services and PCS,122 both within and outside of their local exchange service
regions.
119 Through its 50 percent partnership in PrimeCo, Bell Atlantic provided wireless service in the states of Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Louisiana, Michigan, Minnesota, Mississippi, New Mexico, North Carolina, Ohio, Oklahoma, Texas, Virginia, and Wisconsin. Bell Atlantic was the nation’s fourth largest wireless mobile telephone service provider, with about 6.6 million subscribers nationwide. See id. 120 GTE provided local telephone service to retail customers in Alabama, Alaska, Arizona, Arkansas, California, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington, and Wisconsin, and it also provides wireless mobile telephone service in most of these states. See id. 121 See id. 122 Initially, wireless mobile telephone services were provided principally by two cellular systems in each MSA and RSA license area. In 1995, the FCC allocated additional spectrum for the provision of Personal Communications Services (PCS), a type of wireless telephone service that
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DOJ Review
The DOJ filed a civil antitrust complaint on May 7, 1999, alleging that the
proposed acquisition of GTE by Bell Atlantic would violate Section 7 of the Clayton Act
by lessening competition in the markets for wireless mobile telephone services in the
Overlapping Wireless Markets.123 Specifically, the DOJ identified the markets for
wireless mobile telephone services as the relevant product market. The DOJ then
identified as the relevant geographic markets each Overlapping Wireless Market, which
consisted of the PCS/Cellular Overlap Areas and the Cellular Overlap Areas. In the PCS/
Cellular Overlap Areas, Bell Atlantic had a 50 percent interest in PCS PrimeCo, a firm
that provides personal communications services (PCS) in 61 Metropolitan Statistical
Areas (MSA) and Rural Service Areas (RSAs) where cellular mobile telephone services
are provided by GTE, or by a firm that GTE has an interest in or will acquire. In the
Cellular Overlap Areas, competing cellular mobile wireless telephone businesses were
owned in whole or in part by Bell Atlantic and GTE. These areas were identified in the
Complaint as the Overlapping Wireless Markets.124
The DOJ found that there would be potential for adverse competitive impact in
each Overlapping Markets. First, as for the Cellular Overlaps Areas, the DOJ noted that
GTE and Bell Atlantic were direct competitors.125 The cellular businesses owned in
whole or in part by Bell Atlantic and GTE were the only two providers of cellular mobile
telephone services, and the two primary providers of all wireless mobile telephone
includes wireless mobile telephone services comparable to those offered by cellular carriers. See 64 Fed. Reg. 32523, 32532. 123 Complaint, paras. 17-21. 124 Id. at para. 2. 125 Id. at para. 5.
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services, in the Cellular Overlap Areas. Therefore, given a high level of concentration in
the provision of wireless mobile telephone services already existing in each of the
Overlapping Wireless Markets, the DOJ found that Bell Atlantic’s acquisition of GTE
would cause the level of concentration among firms providing wireless mobile telephone
services in each of the Overlapping Wireless Markets to increase significantly.126
Second, as for the PCS/Cellular Overlap Areas, the DOJ found anticompetitive
concerns arising from the increased market concentration after the merger. GTE and
PrimeCo, and Ameritech and PrimeCo, were direct competitors in wireless mobile
telephone services in those areas.127 In each of the Overlapping Wireless Markets, the
wireless businesses owned or to be owned in whole or in part by Bell Atlantic and GTE
competed to sell the best quality service at the lowest possible rates and were among each
other’s most significant competitors. In each of the PCS/Cellular Overlap Areas, the
cellular businesses to be acquired or owned in whole or in part by GTE and the PCS
business owned by PrimeCo were two of a small number of providers of wireless mobile
telephone services. Therefore, if GTE and Bell Atlantic merged, and GTE completed its
acquisition of the Ameritech cellular businesses, the PCS/Cellular Overlap Areas would
become significantly more concentrated, and the competition between PrimeCo and GTE
or Ameritech in wireless mobile telephone services in these markets would be eliminated.
126 The DOJ found, in the Cellular MSA Overlap Areas, Bell Atlantic’s and GTE’s individual market shares, measured on the basis of the number of subscribers, exceeded 35 percent. The combined market share of GTE and Bell Atlantic in the provision of wireless mobile telephone services, measured by the number of subscribers, was in the range of 75 to 95 percent, taking into account other operational wireless mobile competitors. As measured by the Herfindahl- Hirschman Index (HHI), concentration in these markets was already in excess of 2800, well above the 1800 threshold at which the Department normally considers a market to be highly concentrated. After the merger, the HHI in these markets would be in excess of 5500. Complaint, United States v. Bell Atlantic (D.D.C. 1999), paras 16-19. 127 Id. at para. 6.
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The DOJ determined, as a result of the loss in competition between the PrimeCo and
GTE or Ameritech cellular businesses, there would be an increased likelihood both of unilateral actions by the combined firm in these markets to increase prices, diminish the quality or quantity of service provided, or refrain from making investments in network improvements, and of coordinated interaction among the limited number of remaining competitors that could lead to similar anticompetitive results. Therefore, the DOJ found, the likely effect of the merger of Bell Atlantic and GTE was that prices would increase, and the quality or quantity of service together with incentives to improve network facilities would decrease, in the provision of wireless mobile telephone services in the
PCS/Cellular Overlap Areas.
In addition, the DOJ determined that it would be unlikely that entry within the next two years into wireless mobile telephone services in the Overlapping Wireless Markets would be sufficient to mitigate the competitive harm resulting from this acquisition.128
Other factors such as facilitating collusion and evasion of rate regulation were not addressed in the public documents.
The DOJ agreed with Bell Atlantic and GET on a consent decree that required the two firms to sell one of their two interests in overlapping wireless telephone systems in
65 markets in nine states.129 This was one of the largest divestiture packages involving a
merger ever required by the Department’s Antitrust Division.130
128 Id. at para. 22. 129 Final Judgment, 64 Fed. Reg. 32523. 130 Press Release, Justice Department Requires Bell Atlantic and GTE to Divest Wireless Businesses in order to Proceed with Merger, May 7, 1999.
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FCC review
The Commission approved the merger subject to enforceable merger conditions
and the spinning of substantially all of GTE’s nationwide Internet business into a separate
public corporation.131 To ensure that the transaction did not violate the
Telecommunications Act prohibition on providing long distance services without the
necessary authorization,132 Bell Atlantic and GTE voluntarily proposed to spin-off GTE’s
internet assets and offered a set of pro-competitive conditions.
For this merger review, the FCC first analyzed whether the merging parties’
proposal violated the section 271 of the Telecommunications Act.133 This section of the
Act forbids a Bell Operating Company, such as Bell Atlantic, from providing long
distance services to customers in its service territory before it demonstrates that its local
phone market is open to competitors. After examining the compliance with the section,
the FCC analyzed the public interest harm and benefits of the merger.
First, as to the compliance with section 271, the FCC found the transaction would
not violate the section with the voluntary proposal of the merging parties.134 To comply
with the section 271, the merged company voluntarily agreed to spin-off GTE’s internet assets and offered a set of pro-competitive conditions.135
131 In re Application of GTE Corp. and Bell Atlantic Corp., 15 F.C.C.R. 14032 (2000). 132 47 U.S.C. 271(a) (2004). 133 Id. 134 See SBC- Ameritech Order, paras. 26-95. 135 For example, the merging companies agreed to transfer substantially all of GTE’s Internet business into a separate public corporation to be known as Genuity. GTE also agreed to exit various long distance businesses in the section 271-restricted Bell Atlantic states before closing the merger. See id.
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Second, as to the harm to the public interest, the FCC first identified the markets
for local exchange and access services as the relevant product markets. The Commission
noted that those local telephone markets consist of two distinct markets: (1) residential
consumers and a small business market (mass market) and (2) larger business market.136
The FCC defined the relevant geographic market consisted of the geographic markets for
those services in which one or both of the merging parties provided service.137 In those
relevant markets, the FCC applied the transitional market analysis,138 and found the
proposed merger of this RBOC and a major incumbent LEC would threaten to harm
consumers of telecommunications services in three ways.
Elimination of potential competition: The merger would remove GTE as one of the most significant potential participants in the local telecommunications mass markets within Bell Atlantic’s region, thus substantially reducing the prospect of competition in those markets.139
Adverse impact on regulatory efficacy: The merger would reduce the Commission’s ability to implement the market-opening requirements of the 1996 Act through comparative practice oversight (benchmarking) methods. Contrary to the deregulatory and competitive purposes of the 1996 Act, this would increase the duration of the entrenched firms’ market power and raise the costs of regulating them and make it more difficult for the Commission to achieve the Act’s deregulatory objective.140
Adverse impact on the deployment of advanced services: The merger would increase the incentive and ability of the merged entity to discriminate against its rivals, particularly with respect to the provision of advanced telecommunications services, a result that is likely to frustrate the Commission’s ability to foster advanced services as it is directed to do by the 1996 Act.141
136 Id. para. 102. 137 Id. para. 103. 138 See supra note 55 for explanation of the transitional market analysis. See also Bell Atlantic- NYNEX Order, at para. 7; WorldCom-MCI Order, 13 F.C.C.R. at 18038, para. 20 139 Id. paras. 97-126. 140 Id. paras. 127-172 141 Id. paras. 173-208.
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While analyzing the public interest benefits of the transaction, the FCC concluded
that the asserted benefits of the proposed merger did not outweigh the significant harm.142
Nevertheless, the FCC found the proposed merger would produce some public interest
benefits to the market for wireless communications.143 This is the market where the DOJ
found the merger would result in some anticompetitive impact.144 Meanwhile, the FCC, noting that the national coverage in wireless communications markets was becoming more vital to compete effectively, found that the merger would promote competition in those wireless markets by extending the reach of a major nationwide service provider in the business.
The FCC noted that the wireless service areas of the merging parties would be largely complementary and the companies would employ compatible technologies. The
FCC further determined that the combination of these wireless businesses would produce cost savings and operating efficiencies by reducing the companies’ collective dependence on costly roaming agreements.145 Finding those public interest benefits, the Commission
determined the merger would be procompetitive and granted the companies’ applications
to transfer control of GTE’s wireless licenses to Bell Atlantic on the condition that they
comply with the Commission’s cellular cross-ownership rules146 and CMRS spectrum
142 For example, The FCC determined that the merging companies had not met their burden of demonstrating that the proposed merger will produce a public interest benefit by promoting competition in the provision of Internet backbone services or the long distance market. Id. at para. 213. 143 Id. para. 376. 144 United States v. Bell Atlantic, Competitive Impact Statement, 64 Fed. Reg., at 32532. 145 Id. paras. 376-393 146 The rules prohibit an entity from holding attributable interests in both cellular licenses in any cellular service area. 47 C.F.R. § 22.942. Under the terms of the DOJ consent decree, the parties committed to eliminate the 19 cellular-cellular overlaps that would be created by the merger.
146 cap rules.147 Accordingly, Bell Atlantic and GTE were required by the DOJ and as a
condition of the FCC Order to divest one of the cellular telephone licenses in ninety-six
Metropolitan Statistical Areas and Rural Service Areas where the two companies have wireless licenses that overlap geographically.
As for other public interest benefits, the FCC determined that a small portion of the
merging companies’ claimed cost-saving efficiencies, including consolidation
efficiencies, implementation of best practices, faster and broader roll-out of new services,
and benefits to employees and communities, were merger-specific, likely, and
verifiable.148 Assuming the merged firm’s satisfactory compliance with their voluntary proposals, the FCC adopted a set of conditions that can be categorized as follows: promoting advanced services deployment;149 enhancing the openness of in-region local telecommunications markets;150 fostering out-of-region local competition;151
Determining that the fulfillment of these commitments would achieve compliance with the Commission’s cellular-cross ownership rules, the FCC conditioned the grant of the application on the consummation of the divestiture of those cellular properties prior to the consummation of the merger. See id. paras. 385-386. 147 Under the FCC’s rule, a single entity is generally permitted to hold an attributable interest in up to 45 MHz of CMRS spectrum in urban areas; in rural areas, an entity is generally permitted to hold up to 55MHz of spectrum. 47 C.F.R. 20.6(a). 148 Id. appendix. VII. Paras. 209-244. 149 Among a set of conditions, for example, the FCC required the companies to target their deployment of xDSL services to include low-income groups in rural and urban areas. The condition was intended to ensure that the merged firm’s rollout of advanced services would reach some of the least competitive market segments and would be more widely available to low- income consumers. See para. 278. 150 E.g., As a means of ensuring that the merged company’s service to other telecommunications carriers will not deteriorate as a result of the merger and the larger firm’s increased incentive and ability to discriminate, the FCC required the companies to file publicly performance measurement data for each of its in-region states with the FCC, and make such data available over the Internet, on a monthly basis (carrier-to-carrier performance plan). See para. 279. 151 E.g., The FCC required the merging companies to spend at least $500 million to provide competitive local service and associated services outside of the Bell Atlantic and GTE legacy service areas between the merger closing date and the end of the 36th month thereafter. See para. 319
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improving residential phone service;152 and enforcement of the Merger Order.153
The FCC concluded that these commitments were sufficient to alter the public interest balance such that the proposed transaction was, overall, in the public interest.
Comparison
The Bell Atlantic - GTE merger shows the complementary nature of the two
agencies’ standards, since the focus of the analysis of each agency was different. While
the DOJ found anticompetitive harm in the wireless mobile telephone market, and
required the divestiture of the wireless properties of the merging parties, the FCC focused
on the local telephone market where the Commission found the most significant pubic
interest harm arises (FCC-only market). Especially with the wireless mobile telephone
markets, while the DOJ found the anticompetitive effect of the merger, the FCC found
some public interest benefits and a procompetitive impact of the transaction. It is because
the FCC noted that the competitive harm would be mitigated by the compliance with the
terms of the DOJ consent decree, and that the merging companies’ complementary
resources and technologies were essential to expand the national coverage in the wireless
market.
Reviewing the merger, the DOJ focused on evaluating market concentration, while
it addressed all Merger Guideline factors such as adverse competitive harm, entry
152 E.g., In order to ensure that the benefits of the merger extend to low-income residential customers throughout all of the Bell Atlantic’s and GTE’s regions, the FCC required the merged firm to offer each of its in-region states a plan to provide discounts on basic local service for eligible customers, such as a low-income Lifeline universal service plan (Enhanced Lifeline Plans) See para. 325. 153 E.g. the FCC require the establishment of independent audit that will provide a systematic evaluation of the merging parities’ compliance with the conditions. See para 336.
148 analysis, and facilitating collusions. Other factors such as evasion of rate regulation and elimination of potential competition were not addressed in the public documents.
Applying the transitional market analysis to the local telephone service markets, the
FCC showed the in-depth analysis of the current and future market participants. The FCC apparently relied on the potential competition framework that the DOJ did not address in the public documents. Compliance with the sector-specific statue such as the
Telecommunications Act and agency rules was also an important criterion for analysis.
The merger conditions also reveal some different roles of the two agencies. While the DOJ consent decree focuses on the divestiture of the wireless assets of the merging parties, the FCC conditions includes more sector-specific requirements to foster out-of- region local telephone competition, promote advanced service deployment, and improve residential phone services.
AT&T and MediaOne
At issue in the merger of AT&T Corp. (AT&T) and MediaOne Group. Inc.
(MediaOne) was the rapidly growing market for broadband Internet services. In the late
90’s, the vast majority of residential users of the Internet accessed it via dial-up modems; their computer relied on a standard telephone line to connect to an Internet Service
Provider (ISP) which in turn connects the user to the Internet and any proprietary or exclusive content offered by the ISP as a part of its service. This service generally allows users to send and receive data at rates of up to 56 kilobits per second or less and is referred to as narrowband access. A rapidly growing number of residential users were accessing the Internet through broadband networks and technologies, which allowed the
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transmission of data at dramatically higher speeds and thereby enabled new types of
content and services to be delivered to consumers.154
In order to provide residential broadband service, an ISP must have access to transmission facilities capable of carrying data at a high rate between the facilities of the
ISP and individual homes. The two principal types of transmission facilities used today to
provide this access to residential customers are the networks owned by cable companies
(i.e. cable modem) and local telephone companies (i.e. DSL). Cable companies originally designed their networks to provide video programming to customers’ homes, but in
recent years many cable companies have upgraded their networks to provide the
capability of two-way data transmission needed for residential broadband Internet
service.
On May 6, 1999, AT&T and MediaOne agreed to merge in a transaction valued at
roughly $56 billion. At the time of agreement, AT&T was the largest long-distance
telephone company in the United States, one of the largest wireless telephony providers,
and a growing local telephony provider with nationwide ambitions. In addition, AT&T
was also one of the top ten narrowband Internet service provider via AT&T WorldNet,
and the second-largest cable multiple system operator (MSO) in the U.S.155 AT&T also controlled Excite@Home Corp. (Excite@Home), the largest provider of residential
broadband service over cable systems. AT&T held approximately a 26 percent equity
interest in Excite@Home and a majority of its voting stock. Excite@Home had exclusive
154 Broadband users receive data at rates up to 25 times greater than the data transmission rate currently provided by narrowband access using standard dial-up modems. United States v. AT&T Corp., Proposed Final Judgment and Competitive Impact Statement, 65 Fed. Reg. 38584, 38588- 9 (2000). 155 United States v. AT&T Corp. Amended Complaint, (D.D.C. 2000). para. 4.
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contract rights to provide residential broadband service over the cable facilities of its
three principal equity holders, AT&T, Comcast Corporation, and Cox Communications,
Inc., which collectively accounted for more than 35 percent of the nation’s cable
subscribers.156 Excite@Home also provided residential broadband service over the cable
facilities of a significant number of other cable system operators nationwide.
The other merging party, MediaOne, was the seventh largest cable MSO in the
United States. MediaOne owned cable systems in major metropolitan areas in several
states including California, Georgia, and Florida. MediaOne also held a 25.51 percent equity interest in Time Warner Entertainment (TWE). TWE owned and operated numerous cable systems, and held interests in a number of cable programming networks, including Home Box Office (HBO), Cinemax, and Court TV.
MediaOne also controlled ServiceCo, LLC. (ServiceCo.),157 the second largest
provider of residential broadband over cable systems in the United States, using the trade
name Road Runner. MediaOne owned approximately 34 percent of Road Runner.158
Based on this ownership, many important Road Runner decisions required only the
concurrence of MediaOne and Time Warner.159 Road Runner had exclusive contract
rights through December, 2001 to provide residential broadband service over the cable
facilities of its two principal cable parents, MediaOne and Time Warner, which
156 Id. at para. 6. 157 ServiceCo was a limited liability company owned by several Time Warner related entities, MediaOne, and subsidiaries of Microsoft Corporation and Compaq Computer Corporation. Id. at para. 8. 158 Approximately 25 percent of Road Runner through a direct ownership interest in the holding company that owns Road Runner and additional indirect ownership through MediaOne’s interest in TWE. Id. at para. 8. 159 Id.
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collectively accounted for more than 25 percent of the nation’s cable subscribers. Road
Runner also provided residential broadband service over the cable facilities of several
other cable system operators.
As a result of the AT&T-MediaOne merger, AT&T would have substantial equity and management rights in both Excite@Home and Road Runner -- two firms that, combined, served a significant majority of residential broadband users in the U.S.
DOJ review
The United States filed a civil antitrust complaint on May 25, 2000 alleging that the proposed acquisition of MediaOne by AT&T would violate Section 7 of the Clayton Act by lessening competition in the nationwide market for the aggregation, promotion, and
distribution of residential broadband content and services.160
The DOJ first determined a relevant product market affected by this transaction was the market for aggregation, promotion, and distribution of broadband content and services. Broadband content (i.e., content that either requires broadband speeds or is much superior when viewed at broadband speeds) contains much larger quantities of data than narrowband content, such as high quality streaming video and various forms of interactive entertainment. AT&T and Time Warner (a co-owner of Road Runner) were substantial providers of content and services which were or could be delivered to end users through residential broadband Internet facilities. Excite@Home, Road Runner, and other residential broadband service providers and portals can substantially enhance or detract from a content provider’s ability to reach large numbers of customers.161 In
160 United States v. AT&T Corp. Amended Complaint, (D.D.C. 2000). 161 A portal generally is an Internet site containing a first page as well as several subsequent pages, that users see with a high degree of frequency. These pages aggregate links to a variety of
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addition, content providers seek network services such as caching that will facilitate the
distribution of their data so as to enhance to quality and accessibility of their content.162
Therefore, the DOJ noted, broadband content providers seek favorable data distribution arrangements, as well as favorable terms for aggregation and promotion of their content, in order to attract more customers.
At the time of the merger agreement, of the seven largest cable MSOs, five contracted with Excite@Home or Road Runner to provide residential broadband service over their cable facilities. Excite@Home and Road Runner together served the vast majority of subscribers who received residential broadband Internet service over cable facilities, and a significant majority of all residential broadband subscribers. Further,
Excite@Home and Road Runner were positioned to become two of the most important providers of the aggregation, promotion, and distribution of residential broadband content. By virtue of the large number of subscribers to their residential broadband services, both firms would be able to significantly assist or retard the competitive efforts of broadband content providers, by granting or withholding aggregation, promotion, and
types of content and services, and facilitate users’ efforts to find content and services by providing search engines, tree and branch indexes, and prominent links to Internet content and services, as well as proprietary content and services. Most ISPs, including Excite@Home and Road Runner, include the first page of their portal as the default start page (i.e., the first screen a user seek upon access). There are also portals, such as Yahoo and Lycos, that are not affiliated with major ISPs. Many customers access content and service providers through portals and therefore content providers seek prominent links by which to promote their content and draw users to their sites. The more favorable the placement of a link (e.g., first page rather than subsequent pages, a link that includes a larger share of the screen, etc.), the greater the content provider’s likely audience, advertising revenues, and profitability. 65 Fed. Reg., at 38589-90. 162 Caching stores a content provider’s content at various locations throughout the country, closer to end users, thereby improving speed and performance. This is a particularly important service for broadband content providers who must rely on the rapid delivery of large quantities of data in order to provide the most attractive content. Id. at 38590.
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distribution services, or through the prices, terms, and conditions by which such services
are provided.163
The DOJ considered adverse competitive impact of the merger with regard to
AT&T’s control over Road Runner. That is, the proposed acquisition would give AT&T complete ownership and control of the assets and holdings of MediaOne, including
MediaOne’s ownership interest in Road Runner. AT&T’s control over Road Runner and access to sensitive competitive Road Runner information combined with its control over
Excite@Home and access to confidential Excite@Home information could facilitate
collusion and coordination between Excite@Home and Road Runner in ways that would result in a substantial lessening of competition in the market for aggregation, promotion, and distribution of residential broadband content.
As for the market concentration, the DOJ found that, if the proposed merger were consummated, concentration in the market would be substantially increased, and competition between Excite@Home and Road Runner in the provision of such services may be substantially lessened or even eliminated. The DOJ determined that, through its control of Excite@Home and substantial influence or control of Road Runner, AT&T would have substantially increased leverage in dealing with broadband content providers,
which it could use to extract more favorable terms for such services. As for the entry
analysis, the DOJ found that, because of the merging companies’ ownership affiliations
and exclusive contracts with many of the largest cable MSOs, it was unlikely that other
163 Id. at 38589-90.
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providers of residential broadband services would be able to enter and attract comparable
numbers of subscribers in the near term.164
The DOJ Final Judgment required AT&T to divest the 34 percent of its equity
interest and significant management interest in ServiceCo, the nation’s second-largest
provider of residential broadband services, which operates under the trade name Road
Runner.165
FCC review
Noting that cable companies were upgrading their systems to provide a full range of video, data, and voice services, the FCC reviewed the merger of AT&T and MediaOne in the context of an unprecedented convergence of communications services, including a trend toward consolidation in communications industries generally and the cable industry in particular.166 The FCC concluded that the merger, subject to certain conditions, would serve the public interest, convenience, and necessity. In reaching the conclusion, the FCC
considered five relevant markets to be affected by the proposed merger: broadband
Internet services, video programming, cable equipment, local exchange and exchange
access service, and mobile telephone service. While the FCC found some harm to the
public interest in the video programming markets, the Commission determined that there
were no significant harm in the other four provisions of services.
164 Id. 38590. 165 Id. 38584. 166 In the Matter of Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from MediaOne to AT&T, Memorandum Opinion and Order, 2000. 15 F.C.C.R. 9816, at para.2.
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First, for the broadband Internet services, the FCC reviewed the impact of the
merger on the provision of broadband Internet services to residential customers.167 As to the market where the DOJ found a potential adverse competitive impact of the merger, the FCC found no significant public interest harm based on the consideration of (1) the
DOJ consent decree and (2) growing competition in the market. That is, noting that the
DOJ had entered a proposed consent decree with the merging parties, pursuant to which the merged company would divest its interests in Road Runner, the FCC applied the
public interest test to the facts of the proposed transaction as modified by the proposed
consent decree.168 In addition, the FCC found there was significant actual and potential
competition from both alternative broadband providers and from unaffiliated ISPs that
might gain access to the merged firm’s cable systems. Accordingly, the FCC found no
significant public interest harm in the broadband arena, and declined to impose
conditions in that regard.169
In one of the other four relevant markets, the FCC found potential harm to the public interest in the video programming market. Without a precise definition of relevant markets, the FCC considered the proposed merger’s impact on video programming sold by program networks to multichannel video programming distributors (MVPD), who then deliver the networks via distribution systems to their subscriber’s television sets.170
In the proposed merger, the FCC recognized, the nation’s largest cable operator, AT&T, would acquire the nation’s fourth largest cable operator, MediaOne, which held a 25.5
167 15 F.C.C.R., at para.102. 168 Id. 169 Id. at para. 5. 170 MVPDs include cable, direct broadcast satellite (DBS), multichannel multipoint distribution services (MMDS), and satellite master antenna television (SMATV) providers. Id. para. 36.
156 percent interest in the nation’s second largest cable operator, Time Warner
Entertainment, LP (TWE).171 The FCC found that the post-merger AT&T would have attributable ownership interest in cable systems serving approximately 51.3 percent of the nation’s cable subscribers and 41.8 percent of MVPD subscribers nationwide.172 The
FCC noted the concern that the merged company would be able to exercise excessive market power in the purchase of video programming.173
The FCC also examined the application of the Commission’s horizontal ownership rules,174 program access rules175 and channel occupancy rules176 to the merged entity’s provision of video programming and Internet services. The FCC concluded that the merger would violate the cable horizontal ownership rules, which prohibited a single cable company from serving more than 30 percent of the nation’s MVPD subscribers,
171 Counting owned and operated systems alone, MediaOne was the fourth largest cable operator in the U.S. Under the cable ownership attribution rules, MediaOne was the second largest cable operator because TWE’s subscribers were attributable to MediaOne by virtue of MediaOne’s 25.5 percent ownership interest in TWE. See 47 C.F.R. § 76.503 n.2. Thus, this merger in fact linked the top three cable operators, AT&T, MediaOne, and TWE. See id. 172 15 F.C.C.R, at para.38. 173 See id. at paras. 30-31. 174 Designed to address threats to diversity and competition in the video programming marketplace, the horizontal ownership rules provide that no cable operator may serve more than 30 percent of MVPD subscribers nationwide. 47 C.F.R. § 76.503. 175 47 C.F.R. §§ 76.1000-76.1004 (preventing vertically integrated programming suppliers from favoring affiliated cable operators over unaffiliated MVPDs in the sale of satellite-delivered programming). The FCC found the rules did not apply to terrestrially delivered programming distributed b the merged company. See 15 F.C.C.R., at 79-80. 176 47 C.F.R. § 76.504 (providing that a cable operator may not devote more than 40 percent of its activated channels to the carriage of affiliated programming networks). AT&T found that the merger would cause channel occupancy rule violations in four systems. However, AT&T stated that it had adjusted the channel line-ups in all four systems such that there will be no channel occupancy violations when the merger closes. Accordingly, the FCC found the proposed the merger would not result in any violation of the rules given AT&T’s adjusted channel line-ups. (quoting Letter from Douglas G. Garrett, Senior Regulatory Counsel, AT&T, to Magalie Roman Salas, Secretary, FCC, dated Mar. 17, 2000, Transmittal of Letter from Douglas G. Garrett, Senior Regulatory Counsel, AT&T, to Deborah Lathen, Chief, FCC Cable Services Bureau, dated Mar. 17, 2000). See 15 F.C.C.R., at paras. 84-85.
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since the merged firm without divestitures would have served 41.8 percent of the nation’s
MVPD subscribers. Accordingly, the FCC gave a conditional approval to the merger,
requiring AT&T to divest certain properties to come into compliance with the FCC’s
horizontal ownership rule.177
On the potential public interest benefit side, the FCC found that the combination of
the merging parties’ complementary assets and capabilities would allow them to compete more effectively against incumbent LECs in the provision of local telephony and new services than they could alone or through contractual agreement.178 Accordingly, the FCC
concluded that the positive public interest benefits promised by the proposed merger were
sufficient to support the Commission’s approval of AT&T and MediaOne merger subject
to the conditions stated above.
Comparison
In reviewing AT&T and MediaOne merger, the DOJ found an anticompetitive
impact of the merger in broadband Internet content markets, considering that most of the
Merger Guideline factors such as market concentration, adverse competitive impact, and
entry analysis. The FCC found no significant competitive harm in the broadband Internet
service market because the Commission analyzed the merger as modified by the DOJ
consent decree that required the merged company to divest its interest in Road Runner.
Declining to impose conditions with respect to broadband Internet service, the FCC
177 The FCC required AT&T to select one of three divestiture alternatives to reduce their MVPD national subscribership to 30 percent: (a) divest MediaOne’s 25.5 percent interest in Time Warner Entertainment, LP (TWE); (b) insulate its ownership interest in TWE by ending involvement in TWE’s video programming activities, which entails selling AT&T’s programming interests, including Liberty Media Group; or (c) divest ownership interests in other cable systems such that they would have attributable ownership interests in cable systems serving no more than 30 percent of MVPD subscribers nationwide. 178 15 F.C.C.R., at 154-178.
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focused instead on the video programming markets (FCC-only market). The
complementary nature of the two agencies’ merger review standards is well illustrated in
this FCC-only market. In reaching conclusion that the merger would have significant
public interest harm in video programming markets, the Commission considered various factors including market concentration, adverse competitive impact, entry analysis, and elimination of potential competition. In addition, compliance of the FCC rules such as horizontal ownership limits was an important criterion. Neither agency considered evasion of rate regulation.
As for the merger conditions, both agencies required the merging parties to reduce the current ownership interests.
America Online and Time Warner
On January 20, 2000, America Online, Inc (AOL) and Time Warner Inc. (Time
Warner) agreed to merge in a stock-for-stock transaction whereby each would become a wholly owned subsidiary of AOL Time Warner. The proposed merger was, at the time of announcement, the largest corporate merger in history.179 The combination was
remarkable not only for its size, but also for the nature of the companies and the assets
they control.180 The proposed merger attracted substantial public interest and came under
scrutiny by several bodies including the U.S. Congress, the FTC, the FCC, and the
European Commission.
179 See, e.g., AOL and Time Warner In Record $ 350 Billion Merger, COMM. DAILY, Jan. 11, 2000, at 1; Steven Burke, AOL. Time Warner Merger: A New Model For Partnerships, CMP’S TECHWEB, Jan. 10, 2000, at http://www.techweb.com/wire/finance/story/1NV2000010S0008: Paul Kagan Assoc., Inc., AOL: You've Got Time Warner, Kagan, BROADBAND, Jan. 10, 2000. 180 AOL-Time Warner Order, 16 F.C.C.R. 6547, 6549 at para 2.
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AOL, at the time of agreement, provided interactive service, web brands, Internet
technologies, and electronic commerce services.181 AOL operated two Internet Service
Providers (ISPs): AOL, the nation’s leading ISP, and CompuServe. In addition, AOL operated various web brands.182
Time Warner operated a variety of businesses, including cable television systems.
and cable television networks, such as HBO, Cinemax, CNN, TNT, and the TBS
Superstation.183 Some of Time Warner’s cable systems, HBO, Cinemax, and Warner
Bros.’ filmed entertainment business belong to Time Warner Entertainment Company,
L.P. (TWE), a limited partnership.184 Time Warner was the majority owner of Road
Runner (the trade name of ServiceCo, LLC), the second largest provider of cable
broadband ISP service in the U.S. serving more than 1.1 million subscribers. Road
Runner had an exclusive contract to provide cable broadband ISP service via Time
Warner’s cable systems through December 2001. Touted as a marriage of a new media
giant with a traditional media giant, the merger would join the largest ISP in the U.S.
with the nation’s second largest cable operator.185
181 16 F.C.C.R. 6547, 6557 at para 27. 182 Those web brands include: Digital City, Inc; ICQ; the Netscape Netcenter and AOL.com Internet portals; the Netscape Communicator client software (including the Netscape Navigator browser; AOL MovieFone, the nation’s top movie listing guide and ticketing service; and Nullsoft, Inc., developer of the Spinner, Winamp, and SHOUT cast brands. Id. 183 In addition to cable systems and networks, Time Warner’s business included: magazine franchises, including Time, People, and Sports Illustrated; copyrighted music that is produced and distributed by record labels such as Warner Bros. Records, Atlantic Records, Elektra Entertainment, and Warner Music International; and film, television, and animation libraries owned or managed by Warner Bros. and New Line Cinema. Id. 184 In the Matter of America Online, Inc., a Corporation, and Time Warner Inc., a Corporation, Complaint, para. 3. 185 16 F.C.C.R. 6547, 6551 at para 8.
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FTC review
The Federal Trade Commission issued a Complaint alleging that the AOL-Time
Warner merger, as proposed, would violate Section 7 of the Clayton Act, by substantially
lessening competition in three relevant markets: (1) the market for broadband Internet
access, (2) the market for residential broadband Internet transport services, or last mile access,186 and (3) the market for interactive television (ITV) services.187
First, as for the broadband Internet access markets, the FTC identified as the relevant market as the provision of residential broadband Internet access service in Time
Warner cable services areas and the United States.188 Because AOL was the dominant
narrowband ISP, the FTC noted that its narrowband customer base would position AOL
to become a significant broadband ISP competitor as well. Time Warner provided
broadband Internet access through Road Runner. AOL and Road Runner were two of the
most significant broadband ISP competitors in Time Warner cable areas. Accordingly,
the FTC found the relevant markets were likely to become highly concentrated as a result
of the merger, and the merger would increase the ability of the combined firm to
unilaterally exercise market power in Time Warner cable areas and throughout the U.S.
186 In order to provide broadband Internet access services, an ISP must have access to broadband transmission facilities that can carry data at high speeds between the ISP’s facilities and the homes of individual subscribers. Cable systems and digital subscriber lines (DSL) are the two principal types of facilities that provide last mile access for broadband ISPs to residential users. In the Matter of America Online, Inc., a Corporation, and Time Warner Inc., a Corporation, Complaint (D.D.C. 2000), para. 9. 187 In the Matter of America Online, Inc., a Corporation, and Time Warner Inc., a Corporation, Complaint. paras. 20-37. 188 Id. at paras. 21-22.
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Moreover, new entry was not likely to be timely or sufficient to prevent the merged firm
from exercising market power.189
Second, as for the market for broadband Internet transport services, the FTC first identified as the relevant market the provision of broadband Internet transport service in
Time Warner cable areas and the United States.190 The FTC noted that cable systems and
digital subscriber lines (DSL) are the two principal means of providing last mile access
for broadband ISPs to the customers. At the time of merger, AOL’s principal means of
providing broadband access to its subscribers was through DSL, and every broadband
subscriber it signed represents a lost revenue opportunity for cable broadband providers,
according to the FTC. Thus, the Commission found AOL’s merger with Time Warner
would reduce its incentives to promote and market broadband access through DSL in
Time Warner cable areas. This would, the FTC determined, adversely affect DSL rollout
in those areas and nationally, and would increase the merged firm’s ability to exercise
unilateral market power in those areas. Further, the FCC found entry into the relevant
markets would not be timely, likely, or sufficient to prevent the anticompetitive effects of
the merger.191
Third, the FTC examined the merger’s effects on the markets for the provision of
ITV service in Time Warner cable areas and the United States.192 The FTC noted that
189 Id. at paras. 23-25. 190 Id. at paras. 26-27. 191 Id. at paras. 28-30. 192 Id. at paras. 32-33. Interactive Television (ITV) combines television programming and internet functionality, and requires special hardware and software to blend data with video signals for display on a television screen. The first-generation technology, which is now on the market, uses a separate set-top box that sits between the cable set-top box and the television and contains a
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ITV combines television programming with Internet in terms of functions. The FTC
determined that, thus, cable television lines had distinct competitive advantage over DSL in providing ITV services to broadband customers. AOL launched AOL TV, a first
generation ITV service, and was well positioned to become the leading ITV service,
according to the FTC Complaint. After the merger, the FTC said, the merged firm would
have incentives to prevent or deter rival ITV providers from competing with AOL’s ITV
services. Thus, the FTC concluded that the merger could enable AOL to exercise
unilateral market power in the market for ITV services in Time Warner cable areas,
which also would affect the ability of ITV providers to compete nationally.
The FTC Consent Agreement provided several conditions to remedy those potential
antitrust concerns. First, as for the harm in the broadband Internet access markets, the
FCC Consent Agreement imposed a set of provisions that required the merged company
to provide non-discriminatory access of any ISPs to its cable systems.193 Second, as to the
harm in ITV markets, the Consent Agreement required that AOL Time Warner not
interfere with content194 passed along the bandwidth contracted for by unaffiliated ISPs, or discriminate on the basis of affiliation in the transmission of content that AOL Time
modem for connection to the internet by telephone. The next generation of ITV likely will have a broadband internet connection. Id. at para. 15. 193 The Consent Agreement required, among other provisions: that AOL Time Warner make available to subscribers at least one unaffiliated ISP on Time Warner’s cable systems before AOL itself begins offering service; that AOL Time Warner allow two other unaffiliated ISPs onto its cable systems within 90 days after AOL’s commencement of service; and that AOL Time Warner negotiate in good faith for non-discriminatory access to its cable systems with any ISPs requesting such access. In the Matter of America Online, Inc. and Time Warner, Inc., Decision and Order, See II.A-E (2001). 194 The FTC Consent Agreement construes the term content to include interactive signals and interactive triggers. See In the Matter of America Online, Inc. and Time Warner, Inc.,Decision and Order, Section I.R. (defining content as data packets carrying information including, but not limited to, links, video, audio, text, e-mail, message, interactive signals, and interactive triggers.).
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Warner has contracted to deliver to subscribers over their cable systems.195 Third, as for the harm in the markets for broadband transport services, the FTC ordered the merged company market and offer AOL’s DSL services in the same manner and at the same retail price in Time Warner cable areas where affiliated, cable-based Internet access service is available as in those areas where affiliated, cable-based Internet access service
is not available.196
FCC review
On January 11, 2001, the FCC approved the AOL and Time Warner merger subject
to a set of conditions. The Commission examined the merger’s potential effects on (1)
high speed Internet services, (2) services based on instant messaging, (3) video
programming services, (4) interactive television services, and (5) competition among
MVPDs.
First, as for the high speed Internet services, the FCC identified residential high
speed Internet access services in local cable service areas as relevant markets, which the
Commission perceived was consistent with the FTC’s relevant market.197 Without
195 In the Matter of America Online, Inc. and Time Warner, Inc., Decision and Order, See III.A-E (2001). 196 In the Matter of America Online, Inc. and Time Warner, Inc., Decision and Order, See IV.A-B (2001). 197 The FCC noted residential high-speed Internet service constitutes a discrete market that must be considered separate from the residential narrowband market because high speed-service includes features unavailable over narrowband and consumers face costs in switching high-speed platform. 16 F.C.C.R.6575. The FCC further noted that the FTC, in the complaint underlying its order approving the AOL-Time Warner merger, identified the relevant geographic markets as Time Warner cable service areas and the United States. FTC Complaint at 5. We construe the FTC’s reference to the United States to denote non-Time Warner, local cable service areas throughout the United States, and we therefore perceive no inconsistency between the FTC’s delimitation of the relevant geographic markets and our own. We further note that both the FTC’s definition of the relevant geographic markets and ours recognize that the competitive effects of the merger will differ between Time Warner cable service areas and other service areas. 16 F.C.C.R., at 6578, para 74.
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addressing market concentration and entry analysis, the FCC focused on the adverse
competitive impact of the merger. That is, the FCC noted the merger would give AOL
Time Warner the ability and incentive to harm consumers in the residential high-speed
Internet access services market by blocking unaffiliated ISP’s access to Time Warner
cable facilities and by otherwise discriminating against unaffiliated ISPs in the rates,
terms and conditions of access.198 If left unremedied, the FCC said, harm would frustrate
or impair objectives of the Communications Act, including the continued development of
the Internet and the deployment of advanced services to all Americans.199 The FCC noted
that the FTC consent decree required the merged company to negotiate in good faith with
any unaffiliated ISP seeking access to its cable systems. Thus, the FCC reiterated that
condition. Further, the FCC imposed additional conditions relating to the provision of
residential high-speed Internet access over Time Warner’s cable systems. Those
provisions include: choice of ISPs,200 first screen,201 billing,202 technical performance,203 and right to disclose contracts to the FCC,204 and enforcement procedures.205
198 16 F.C.C.R., at 6583, para 80. 199 Id. 200 AOL Time Warner was required to allow customers to select any ISP by a method that does not discriminate in favor of AOL affiliates on the basis of affiliation. 16 F.C.C.R., 6601, para 126. 201 AOL Time Warner was required to allow all unaffiliated ISPs to control the content of their customers’ first screen. The condition also provides that AOL Time Warner shall not require unaffiliated ISPs customer to go through an affiliated ISP to reach the unaffiliated ISP. Id. 202 The condition required AOL Time Warner to allow ISPs to directly bill the subscribers to whom they have sold their high-speed Internet access services, if they choose to do so. Id. 203 The condition required AOL Time Warner to offer the technical performance standards that it provide to its affiliated ISPs in a non-discriminatory manner to unaffiliated ISPs. Id. 204 The condition provided that AOL Time Warner shall not enter into any contract with any ISP for connection with AOL Time Warner’s cable systems that prevents that ISP from disclosing the items of the contract to the FCC under the FCC’s confidentiality procedures. Id.
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Second, as for the Instant Messaging, the FCC identified as the relevant market
NPD (the names and presence database) services -- interactive communications which
depend on NPD for real time communications between and among users.206 An IM
providers’ NPD consists of a database of its users’ IM names, their Internet addresses, as
well as a presence detection function, which indicates to the provider that a certain user is
online, and allows the provider to alert other users to this information.207
The FCC considered market concentration, entry, and adverse competitive impact
of the merger with regard to the market in text-based instant messaging, and emphasized
that the market was characterized by strong network effects.208 The FCC found AOL’s
market dominance209 in text-based messaging, coupled with the network effects and its resistance to interoperability, establishes a very high barrier to entry for competitors that contravenes the public interest in open and interoperable communications systems.210 The
FCC further determined that the merger, by bringing Time Warner’s cable Internet platform and content library under AOL’s control, would give AOL Time Warner a
205 With respect to any dispute concerning AOL Time Warner’s compliance with these conditions, the FCC outlined a number of procedures. See id. 206 16 F.C.C.R., 6612-13. 207 Id. 208 i.e., a service’s value increases substantially with the addition of new users with whom other users can communicate. See supra Ch. 2 for further discussion of network effects. 209 The FCC found that the largest IM provider -- AOL -- dominates the market, and even if the second largest provider -- Microsoft -- did grow to rival AOL, the result would be merely a duopoly, not the healthy competition that exists in electronic mail. 16 F.C.C.R. , at 6617, para. 162-3. 210 The FCC said new entry into the IM business does not necessarily indicate competition because of the network effects and first mover advantages which AOL benefits from. New entry may indicate competition, especially in a stable, mature business. IM is not such a business, however, and . . . [t]he smaller providers may be able to attract customers . . . [b]ecause their offerings are unlikely to tempt a significant number of mass market users, however, they do not challenge AOL directly or significantly.16 F.C.C.R., at 6616-7. para 162.
166 significant and anticompetitive first-mover advantage in the market for advanced, IM- based high-speed services (AIHS). Accordingly, the FCC concluded the merger would frustrate key principles of the Communications Act including further development of and
healthy competition in the Internet and Interactive services.211
The FCC imposed a condition that was precisely and narrowly aimed at preventing the specific harm the proposed merger will cause in the IM markets.212 The FCC
condition gave AOL an incentive to interoperate by forbidding it from providing streaming video AIHS (advanced, IM-based high-speed services) applications until it demonstrates that it satisfied one of three procompetitive options outlined by the FCC.213
Third, as for the video programming market, the FCC examined the proposed merger’s impact on video programming sold by program networks to MVPDs. The
Commission concluded the merger would not result in significant public interest harm. In reaching the conclusion, the FCC examined whether the merger would create public
211 16 F.C.C.R., 6611-12, para 150. Section 230(b) of the Communications Act provides that it is a policy of the United States to promote the continued development of the Internet and other interactive computer services and other interactive media and to preserve the vibrant and competitive free market that presently exists for [the] Internet and other interactive computer services, unfettered by Federal or State regulation. Finally, Congress has charged the Commission with encouraging the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans. (quoting 47 U.S.C. § 230(b)(1), (2) and 47 U.S.C. § 157). 212 16 F.C.C.R., at 6626, para. 189 213 The three options are: (1) AOL Time Warner may show that it has implemented an industry- wide standard for server-to-server interoperability; (2) AOL Time Warner may show that it has entered into a contract for server-to-server interoperability with at least one significant, unaffiliated provider of NPD-based services. Within 180 days of executing the first contract, AOL Time Warner must demonstrate that it has entered into two additional contracts with significant, unaffiliated, actual or potential competing providers; or (3) AOL Time Warner may seek relief by showing by clear and convincing evidence this condition no longer serves the public interest, convenience, or necessity because there has been a material change in circumstances. 16 F.C.C.R., at 6627-29, paras. 192-195.
167 interest harm with respect to electronic programming guides (EPGs),214 the carriage of broadcast signals,215 or AOL Time Warner’s post-merger ownership interest in DirecTV, the nation’s largest DBS provider.216
Fourth, as for the interactive television (ITV) services, the FCC examined the mergers impact on ITV services in Time Warner cable system service areas. The FCC found that AOL Time Warner would have the potential ability to use its combined control of cable system facilities, video programming and the AOLTV service to discriminate against unaffiliated video programming networks in the provision of ITV services.
Nevertheless, in light of the terms of the FTC consent decree, the FCC concluded that discrimination by the merged entity was not likely to cause a public interest harm.217
Fifth, as for the MVPD markets, the FCC examined the merger’s effect on the video services provided by MVPDs. In reaching the conclusion that the merger would not present any public interest harm affecting MVPD services, the FCC considered two respects: (1) common ownership of DBS and cable MVPDs;218 and (2) the program
214 EPGs are on-screen directories of programming delivered through various means, including cable plant, telephone lines, and over-the-air broadcast signals. Original-generation EPGs are not interactive, but rather continually scroll programming listings. These EPGs are generally delivered as discrete video programming channels. Newer, interactive EPGs, however, allow users to sort and search programming, give program descriptions, provide reminders of upcoming programming, and take users to programming they select. The purchasers of EPGs are MVPDs such as cable and DBS operators, and, potentially, through set-top boxes, individual consumers. 16 F.C.C.R., at 6630, para. 204. 215 Based on records, the FCC concluded that the merger would not create AOL Time Warner’s ability or incentive to refuse carriage of broadcasters’ signals. Id. at para 209. 216 The FCC found that AOL’s ownership interest in DirecTV does not violate the FCC’s horizontal ownership rules. Id. at 6634, para. 210. 217 It appears that the terms of the FTC Consent Agreement will, at present, substantially address concerns about the availability of alternatives for the distribution of unaffiliated video programming networks’ ITV services. Id. at 6637, para 217. 218 The FCC found the merged entity’s indirect interest in DirecTV does not rise to the level of ownership that ordinarily triggers scrutiny by the Commission, and need not examine whether the
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access issue.219 Despite the conclusion, if the merged firm increases its ownership interest
in DirecTV, the FCC said it would reserve discretion to decide whether the increased
ownership interest poses a threat to DBS/cable competition. Accordingly, as a condition
of this merger, the FCC required the merging companies to notify the Commission in
writing of any transactions that increase their ownership interest in DirecTV within 30
days of the transaction.220
In addition to reviewing the merger’s impact on those five relevant markets, the
FCC examined the potential harm with regard to the merging companies’ relationship
with AT&T.221 The FCC considered whether the merger would increase the likelihood of coordinated action by AOL Time Warner and AT&T. The FCC found that the merger would enable AOL Time Warner to obtain preferential access on both Time Warner and non-AOL Time Warner cable systems to provide AOL’s residential high-speed Internet
access services. The FCC determined that among all non-AOL Time Warner cable
operators, AT&T, the nation’s largest cable operator, would be particularly likely to
afford preferential access rights to AOL as a result of the merger. Because AT&T was the
nation’s largest cable operator, such preferential treatment for AOL would exacerbate the
common ownership of both a DBS and a cable MVPD provider raises public interest concern. Id. 6648-49. paras. 248-250. 219 The rules were designed to prevent vertically integrated programming suppliers from favoring affiliated cable operators over unaffiliated MVPDs in the sale of satellite-delivered programming. 47 C.F.R. § § 76.1000-76.1004. The FCC found that the record did not support a finding that the merger would enable or increase the likelihood of harm to competing MVPDs with respect to the sale of video programming. 16 F.C.C.R., 6650, para 252. 220 16 F.C.C.R., 6649. para. 251. 221 As a result of its merger with MediaOne, AT&T acquired a 34.67 percent direct interest in Road Runner, the nation’s second largest broadband ISP, and a 25.5 percent interest in TWE. Time Warner owned the remaining 74.49 percent of TWE. 16 F.C.C.R., 6654, para. 259.
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harm to competition for residential Internet access service that would result from the
merger, according to the FCC.222
Comparison
The AOL-Time Warner merger demonstrates the complementary nature of the two agencies’ review standards because the focus of each agency was different with each other. The FTC found anticompetitive effect of the merger on three relevant markets: (1) broadband Internet access; (2) broadband Internet transport services; and (3) ITV. The
first two markets defined by the FTC are consistent with one of the FCC’s relevant
markets: residential high speed Internet services. As for this market, the FCC analyzed
the merger as modified by the FTC consent decree. The FCC reiterated the FTC
conditions and then impose additional conditions to merging companies with regard to
the Internet service market. As for the ITV market, since the FTC imposed conditions,
the FCC found no significant harm in the market, and declined to impose conditions with regard to this market.
Instead, the FCC conducted a detailed analysis of the merger’s impact on the market for instant messaging services (FCC-only market). Examining the probable impact of the merger, the FCC considered an industry-specific factor –network effects.223 The FCC noted that AOL benefits from the network effects and the first mover advantage in IM services markets. In addition, the merger’s compliance with the
policy goal of the Communications Act to promote the continued development of the
Internet and interactive services was important to the FCC.
222 16 F.C.C.R., at 6652, para 257. 223 See supra ch. 2 for further discussion of network effect.
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In analyzing the adverse competitive impact of the merger, both agencies focused on harm related to firms’ conduct (e.g. discrimination against competitors or non- affiliated companies) rather than considering the factors related to the market structure itself (e.g. market concentration, and entry analysis). While market concentration, adverse competitive impact, entry analysis, facilitating collusion were addressed in both agencies’ documents, other factors such as evasion of rate regulation and elimination of potential competition were not found in the documents.
The merger conditions imposed by two agencies were complementary in two respects. First, as for the relevant markets where the FTC imposed conditions, the FCC either reiterated the FTC conditions or imposed additional ones that are precisely and narrowly aimed at preventing the specific harm the proposed merger will cause. Second, the FCC imposed sector-specific conditions to remedy harm in the FCC-only market (i.e.,
IM services) where the FTC did not address any significant anticompetitive issues.
WorldCom and Intermedia
The issue in the merger of WorldCom, Inc. (WorldCom) and Intermedia
Communications Inc. (Intermedia) was the impact of the transaction on the markets for the Internet backbone services. An Internet backbone provider (IBP) aggregates the connections between smaller networks into a large network of networks, known generally as the Internet, served by that backbone.224 The hierarchical structure of the Internet dramatically reduces the number of direct and indirect interconnections that have to be negotiated, created and managed. One impact of the hierarchical structure of the Internet
224 Large IBP networks are able to use high-capacity long-haul transmission facilities to interconnect their own customers with each other. In addition, these IBPs can establish interconnections with other IBPs to provide access to the ultimate network of networks in which customers of one IBP are able to connect with customers of another network. See United States v. Worldcom, Inc., Competitive Impact Statement, 66 Fed. Reg. 2929, 2936 (2001).
171 is that a large IBP controls the physical path of access to a large base of customers.225
Large IBPs (Tier 1 IBPs) typically connect with each other through private, unpaid peering connections. In contrast, smaller IBPs are frequently customers -- either transit customers of Tier 1 IBPs or paid peering customers -- or have lower quality interconnection because they peer only at public interconnection points. These arrangements for connectivity between IBPs are, in effect, resold as a bundle when an
IBP offers to provide general Internet connectivity (i.e., the kind of arrangement typically
sold by an IBP to its dedicated access customers), and the terms of these IBP-
interconnection arrangements are important determinants of an IBP’s ability to compete
for sales of the bundled product. IBPs with less traffic that must purchase a significant
amount of their connectivity to other IBPs operate at a substantial cost disadvantage
compared to Tier 1 IBPs, which tend to rely exclusively on peering.226
On September 5, 2000, WorldCom and Intermedia entered into an agreement whereby WorldCom would acquire Intermedia. At the time of agreement, WorldCom
225 There are a variety of relationships in interconnection. Mass market customers typically pay an ISP for the right to connect, typically using the shared public telephone infrastructure, to the ISP's network and through it to all the networks to which the ISP is connected directly or indirectly. Corporate customers typically pay an ISP for a dedicated connection to the ISP’s network, and to the other networks to which it is connected. Likewise, the relationship between an ISP and an IBP typically involves the ISP buying access to the IBP's own network and through it to the other IBP networks and, thus, to the ISPs who chose to connect first to the other IBPs. In contrast, the connectivity IBPs offer to each other is more variable. Some IBPs interconnect over private facilities, sharing the cost evenly and without regard to the balance of traffic flowing in each direction, but agreeing only to deliver packets addressed to users on their own network (and those of their customers). Such a relationship is often referred to as a private peering agreement. Peering stands in stark contrast to transit agreements where one IBP offers another IBP interconnection on the same kinds of terms as it offers connectivity to other customers, i.e., the ability to interconnect with the transit provider's customers and the customers of any other network to which the IBP is connected. Intermediate arrangements, such as paid peering and peering only at public interconnection sites, also occur between IBPs. See United States v. Worldcom, Inc., Competitive Impact Statement, 66 Fed. Reg. 2929, 2936 (2001). 226 66 Fed. Reg. 2936-7.
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was one of the largest global telecommunications providers, with operations in more than
65 countries in the Americas, Europe, and the Asia-Pacific, and more than 22 million
residential and business customers worldwide.227 WorldCom’s UUNET subsidiary was by far the largest provider of Internet backbone services in the world. UUNET offered a
wide range of retail and wholesale Internet backbone services, including dial-up (i.e.,
through shared modem banks) and dedicated Internet access (i.e, through direct
connections to the customer), as well as value-added services such as web site hosting,
applications hosting, and Internet security services.
Intermedia Communications, Inc. was a broad-based, integrated
telecommunications provider that primarily offered local and long distance voice and
data communications solutions to business and government customers. Intermedia also
operated a significant nationwide Internet backbone network, offering a broad suite of
dedicated and dial-up Internet connectivity services to Internet Services Providers (ISPs),
businesses and government customers.228 Intermedia also owned a controlling stake in
Digex, Inc., a leading provider of managed web site hosting and related services. The
proposed merger would combine two leading providers of Internet backbone services.
DOJ review
On November 17, 2000, the United States filed a civil antitrust Complaint alleging
that the proposed acquisition of Intermedia by WorldCom would violate Section 7 of the
Clayton Act by substantially lessening competition in the market for Tier 1 Internet backbone services.229
227 United States v. WorldCom Inc.. Complaint, (D.D.C. 2000), para 8. 228 Id. at para 11-12. 229 Id. at para. 13.
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The relevant product market affected by this transaction was the provision of
Internet connectivity by Tier 1 IBPs in the United States.230 As for the market
concentration, the DOJ first noted that WorldCom’s subsidiary, UUNET was by far the
largest Tier 1 IBP by any relevant measure and was already approaching dominant
position in the Internet backbone market.231 Although far smaller than UUNET,
Intermedia was also a significant provider of Internet backbone to dedicated Internet
access customers. The DOJ found the 15 largest backbones represented approximately 95
percent of all U.S. dedicated Internet access revenues.
As for the adverse competitive impact of the proposed merger, the DOJ recognized
that given UUNet’s current position in the IBP market, a significant increase in UUNet’s
size relative to other IBPs would create an unacceptable risk of anticompetitive behavior.
To reach the conclusion, the DOJ focused on the network effects.232 The DOJ noted that
the smaller IBP might suffer greater harm than the larger IBP from a failure to achieve
interconnection, since that failure would adversely affect the cost and quality of a larger
proportion of the communications of the smaller IBP’s customers than of the
communications of the larger IBP’s customers.233 In this respect, the DOJ was concerned that UUNet might be able to charge higher prices for interconnection to another IBP,
230 Id. at para. 26. 231 Based upon a study conducted by the Department of Justice in February 2000, UUNET’s share of all Internet traffic sent to or received from the customers of the 15 largest Internet backbones in the United States was about 37 percent, more than twice the share of the next-largest Tier 1 IBP, Sprint. See United States v. WorldCom Inc., Competitive Impact Statement, 66 Fed. Reg. 2929, 2937. 232 See supra Ch. 2 for network effects and market tipping. 233 In an extreme case, when an IBP might grow to a point at which it controls a substantial share of the total Internet end user base, and its size greatly exceeds that of any other network, the dominant IBP may be able to tip the market. By degrading the quality or increasing the price of interconnection with smaller networks it could obtain advantages in attracting customers to its network.
174 convert non-paying IBPs to paying IBPs, avoid giving better prices to small IBPs, or lower the quality of interconnection to the smaller IBPs. The DOJ’s concern was the likelihood of a tipping of the Internet backbone market towards monopoly.234
As to the entry analysis, the DOJ found that entry into the Tier 1 Internet backbone services market would not be timely, likely, or sufficient to remedy the proposed merger’s likely anticompetitive harm.235 For these reasons, in the market for the provision of Internet connectivity by Tier 1 IBPs, the DOJ concluded that the WorldCom-
Intermedia merger as proposed may substantially lessen competition in violation of
Section 7 of the Clayton Act. Accordingly, the DOJ consent decree required the merged company to divest all of the Intermedia assets, except for the voting interest in Digex to an acquirer acceptable to the DOJ.236
FCC review
On January 17, 2001, the FCC approved the WorldCom-Intermedia merger subject to certain conditions, finding that the proposed merger -- as modified by the DOJ consent decree -- would not result in any harm to the public interest.
Without a precise definition of the relevant market, the FCC first recognized the potential adverse competitive harm in the Internet backbone market would be mitigated by the DOJ consent decree that required the divestiture of all the Intermedia assets with the exception of the Digex web-hosting business. The FCC noted that the merger, so
234 See United States v. WorldCom Inc., Competitive Impact Statement, 66 Fed. Reg. 2929, 2937. 235 Id. 236 Although the proposed Final Judgment permits WorldCom to retain Intermedia’s interest in Digex, it prohibits UUNET from acquiring Intermedia’s Internet backbone connectivity network, business, customer relationships and traffic. See United States v. WorldCom Inc., Competitive Impact Statement. Id.
175 conditioned, would result in no changes in market concentration, with the exception of
web-hosting, where the increase would be minimal.237
The FCC also considered U.S. international services market. At the time of merger,
WorldCom was regulated as dominant carrier on the U.S.-Brazil route.238 Although the
FCC found no anti-competitive impact in any U.S. international services market, the FCC determined that Intermedia and its subsidiaries would now be subject to regulation as dominant carriers on the U.S.-Brazil route, due to their proposed affiliation with
WorldCom.239
As for the public interest benefits, the FCC found WorldCom’s acquisition of
Intermedia’s web-hosting business Digex was likely to serve the public interest by
237 The FCC found that there were numerous horizontal competitors in the provision of web-hosting services, including MCI WorldCom, AT&T, Cable & Wireless, Concentric Network, Data Return, EDS, Exodus Communications, Frontier/Global Center, Globix, GTE, IBM, Intel, Level 3 Communications, Navisite, PSINet, Qwest Communications International, and US Internetworking. The FCC noted that several of these competitors owned Internet backbone networks and could provide sufficient Internet connectivity for purposes of web-hosting if WorldCom degraded service to web-hosting companies that competed against Digex. See In the Matter of Intermedia Communications Inc., Transferor, and WorldCom, Inc., Transferee, for Consent to Transfer Control of Corporations Holding Commission Licenses and Authorizations Pursuant to Sections 214 and 310(d) of the Communications Act and Parts 21, 63, 90, 101, 16 F.C.C.R. 1017, 1020, para 10 238 Carriers regulated as dominant on a particular route due to a foreign carrier affiliation are required to do the following: (1) file tariffs on no less than 14-days notice, (2) maintain complete records of the provisioning and maintenance of basic network facilities and services procured from the foreign carrier affiliate, (3) obtain Commission approval before adding or discontinuing circuits, and (4) file quarterly reports of revenue, number of messages, and number of minutes of both originating and terminating traffic. See 47 C.F.R. § 63.10(c). 239 47 C.F.R. § 63.10(a); see also MCI WorldCom, Inc., 13 F.C.C.R. 22532 (1998) (regulating then-MCI WorldCom as dominant on the U.S.-Brazil route).
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combining complementary resources of two companies, and increasing competition for
next-generation data services provided to business customers.240
Comparison
In this case, the agencies’ standards are very consistent in that: (1) The FCC reviewed the same relevant market (i.e., the markets for Internet backbone services) as that of the DOJ in light of the terms of the DOJ consent decree; (2) The FCC document did not reveal any further public interest test in detail; (3) The FCC found no significant harm in the relevant market mainly because it reviewed the merger as modified by the
DOJ consent decree; and (4) the FCC reiterated the DOJ consent decree.
The agencies’ relevant market definitions are consistent, although the FCC document did not identify the relevant market in detail. Considering market concentration, adverse competitive impact, and entry analysis, the DOJ focused on the competitive concerns arising from the network effects. Although this was not addressed in the Merger Guidelines, the DOJ specifically considered this sector-specific factor.
Since the FCC reviewed the merger as modified by the DOJ consent decree, the
Commission documents did not reveal a detailed analysis of the adverse competitive impact and entry analysis except for market concentration. Finding that there were at least 15 leading participants in the web-hosting business, the FCC determined the merger would not result in a significant increase in the market. Other factors such as facilitating collusion, evasion of rate regulation, and elimination of potential competition were not addressed in either agency’s documents.
240 WorldCom’s acquisition of Digex will quickly provide WorldCom with resource it currently lacks. 16 F.C.C.R. 1017, 1023, para 14.
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The agencies also were consistent in terms of the merger conditions. Since the DOJ
consent decree required a divestiture of Intermedia’s assets, the FCC declined to impose
additional conditions except for one. That is, as a sector-specific regulatory agency, the
FCC imposed an additional condition that Intermedia would be regulated as dominant in
the provision of service on the U.S.-Brazil route.
Cingular and AT&T Wireless
On February 17, 2003, Cingular Wireless Corp. (Cingular), a wireless joint venture
between SBC Communications (SBC) and BellSouth Corporation (BellSouth), entered
into an agreement to acquire AT&T Wireless Services, Inc. (AT&T Wireless) under
which the two companies would combine their mobile wireless services businesses.
Cingular, formed in 2000 by SBC and Bell South, was the second-largest provider of
mobile wireless voice and data services in the U.S. by the number of subscribers at the
time of agreement.241 AT&T Wireless, spun off from AT&T Corporation in 2001, was
the third-largest U.S. mobile wireless services provider by number of subscribers at the
time of agreement.242
DOJ review
The United States filed a civil antitrust Complaint on October 25, 2004, alleging that the proposed acquisition of AT&T Wireless by Cingular would violate Section 7 of the Clayton Act by lessening competition in the markets for mobile wireless services.
Regarding the relevant markets, the DOJ determined mobile wireless telecommunications services and mobile wireless broadband services are the relevant
241 United States v. Cingular Wireless Corp. Complaint, (D.D.C. 2004), para. 7. 242 Id. para. 10.
178 product markets (collectively, mobile wireless services.)243 The DOJ determined the relevant geographic markets in which the transaction would substantially lessen competition in mobile wireless telecommunications services and mobile wireless broadband services are the markets effectively represented by the FCC spectrum licensing areas.244
As for the anticompetitive effects in each relevant geographic market for the mobile wireless telecommunications services, the DOJ found that either Cingular or AT&T
Wireless had the largest market share, and in all but one, the other was the second-largest
mobile wireless telecommunications services provider. Relying on HHI, the DOJ noted
the wireless telecommunications markets were already highly concentrated.245 If
Cingular’s proposed acquisition of AT&T Wireless was consummated, the relevant geographic markets for mobile wireless telecommunications services would become substantially more concentrated, and the competition between Cingular and AT&T
243 Mobile wireless telecommunications services include both voice and date services provided over a radio network and allow customers to maintain their telephone calls or data sessions without wire, such as traveling. Mobile wireless broadband services offer data speeds four to six times faster than the data offerings through wireline service provider’s network. Id. para. 19. 244 The DOJ found the relevant geographic markets, where the transaction would substantially lessen competition for mobile wireless telecommunications services, were represented by the following FCC spectrum licensing areas: Oklahoma City, Oklahoma (CMA 045), Topeka, Kansas (CMA 179), Pittsfield, Massachusetts (CMA 213), Athens, Georgia (CMA 234), St. Joseph, Missouri (CMA 275), Connecticut RSA-1 (CMA 357), Kentucky RSA-1 (CMA 443), Oklahoma RSA-3 (CMA 598), Texas RSA-11 (CMA 662), and Shreveport, Louisiana (BTA 419). The other relevant geographic markets, where the transaction would substantially lessen competition for mobile wireless broadband services, were represented by the following FCC spectrum licensing areas: Dallas-Fort Worth, Texas (CMA 009), Detroit, Michigan (BTA 112), and Knoxville, Tennessee (BTA 232). Id. paras. 22-23. 245 The DOJ found that concentration in these markets ranged form approximately 2600 to more than 5300, which was well above the 1800 threshold at which the DOJ considers a market to be highly concentrated. The DOJ found the post-merger HHI would range from approximately 4400 to more than 8000, with increase in the HHI as a result of the merger ranging from approximately 1100 to more than 3500. 245 Competitive Impact Statement, United States v. Cingular Wireless Corp., 69 Fed. Reg. 65633, at 65636.
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Wireless in mobile wireless telecommunications services would be eliminated in these
markets. As a result, the DOJ found, the loss of competition between Cingular and AT&T
Wireless would increase the likelihood of unilateral actions by the merged firm in the
relevant geographic markets to increase prices, diminish the quality or quantity of
services provided, refrain from or delay making investments in network improvements,
and refrain from or delay launching new services.246
In the relevant geographic markets for mobile wireless broadband services, the DOJ
noted, Cingular and AT&T Wireless either launched or were likely soon to launch mobile
wireless broadband services. Each had the available spectrum necessary to offer mobile
wireless broadband services and had business plans to offer these services in these
markets. As a result, the DOJ determined that the loss of competition between Cingular
and AT&T Wireless would increase the likelihood of unilateral actions by the merged
firm in these relevant geographic markets to increase prices, diminish the quality or
quantity of services provided, refrain from or delay making investments in network
improvements, and refrain from or delay launching mobile wireless broadband
services.247 Therefore, the DOJ concluded that Cingular’s proposed acquisition of AT&T
Wireless would likely result in substantially less competition in mobile wireless telecommunications markets and in mobile wireless broadband services markets.
As for the entry analysis, the DOJ noted that entry by a new mobile wireless services provider in the relevant geographic markets would be difficult, time-consuming, and expensive, requiring the acquisition of spectrum licenses and the build-out of a
246 Id. paras. 26-28. 247 Competitive Impact Statement, United States v. Cingular Wireless Corp., 69 Fed. Reg. 65633 (2004), 65635-65637.
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network.248 Therefore, the DOJ concluded that new entry would not be timely, likely, or sufficient to thwart the competitive harm resulting from Cingular’s proposed acquisition of AT&T Wireless.
The DOJ entered into a consent decree with the merging companies, approving the merger subject to the companies’ divesting business units in five markets, divesting spectrum in three markets, and either selling or making passive certain of their minority investments in other wireless telecommunications carriers in fiver markets.249 For the
DOJ review, factors such as market concentration, adverse competitive impact, entry
analysis were discussed, while the other factors such as facilitating collusion, evasion of
rate regulation, and elimination of potential competition were not addressed.
FCC review
In analyzing the Cingular-AT&T Wireless merger, the FCC noted that the
transaction presents the Commission for the first time with the challenge of examining a
proposed merger between two large national wireless carriers that was largely horizontal
in nature.250 In addition, the FCC also noted the proposed transaction marked a turning
point because it was the first large license-transfer proceeding since the removal of prophylactic thresholds, including a Commercial Mobile Radio Services (CMRS)
248 Id. at 65636. 249 The Divestiture requirements include: divestiture of AT&T Wireless’s entire mobile wireless business in five markets, divestiture of AT&T Wireless’s spectrum in three markets, and divestiture of minority interest in the five markets where either of the merging companies owns a minority interest in another mobile wireless service provider. Final Judgment, United States v. Cingular Wireless Corp., 69 Fed. Reg. 65633 (2004), 65640-65645. 250 In the matter of Applications of AT&T Wireless Services, Inc. and Cingular Wireless Corporation; For Consent to Transfer Control of Licenses and Authorizations, 19 F.C.C.R. 21522 (2004), 21522 at paras. 3-4.
181 spectrum aggregation limit.251 Thus, for the first time in the wireless sector, the FCC articulated and applied the public interest standard by undertaking a case-by-case analysis of a large transaction without the presence of a bright-line rule related to spectrum
aggregation.252
With respect to Cingular’s proposed acquisition of AT&T Wireless, the
Commission analyzed the market for mobile telephony services and concluded that the acquisition generally would not likely cause competitive harm in most mobile telephone
markets.
The FCC identified the relevant product market as the market for mobile telephony
services, which include both mobile voice and data services. The FCC’s relevant market -
251 See 47 C.F.R. § 20.6, repealed January 1, 2003. The Commission had employed a CMRS spectrum limit to encourage new entry and prevent undue concentration of limited resources in the developing mobile telephony sector. Another rule that has been eliminated includes the Cellular Cross-Interest Rule which states that an entity that that actually controls a licensee for one channel block in a [cellular geographic service area (CGSA)] may not have a direct or indirect ownership interest of more than 5 percent in the licensee, . . . or entity that actually controls a licensee for the other channel block in an overlapping CGSA. 47 C.F.R. § 22.942. In the Rural Report and Order, the FCC decided to eliminate the Cellular Cross-Interest Rule in favor of the case-by-case analysis used in reviewing the competitive effects of all assignment and transfer of control applications, pursuant to section 310(a) of the Communications Act. See Facilitating the Provision of Spectrum-Based Services to Rural Areas and Promoting Opportunities for Rural Telephone Companies to Provide Spectrum-Based Services, WT Docket No. 02-381, Report and Order and Further Notice of Proposed Rulemaking, FCC 04-166, at 36, 39 PP63-64, 68 (rel. Sept. 27, 2004) [hereinafter Rural Report and Order] (We believe that no cross interest or transaction should be presumptively prohibited in RSAs and that we should consider such proposals under an approach that is consistent with the same case-by-case analysis that is employed in all other CMRS contexts). 252 The Commission found that reliance on case-by-case review for aggregations of spectrum and cellular cross interests is a better approach than utilizing a prophylactic rule, because the public interest is better served by the benefits of case-by-case review with its greater degree of flexibility to reach the appropriate decision in each case, reduced likelihood of prohibiting beneficial transactions or levels of investment both in urban and rural areas, and ability to account for the particular attributes of a transaction or market. Rural Report and Order, at 36, para. 67. The FCC has performed such review of these markets in the context of the general case-by-case analysis of this transaction, and has made individual judgments regarding any potential harm and the need for any remedies in these markets. In the matter of Applications of AT&T Wireless Services, Inc. and Cingular Wireless Corporation; For Consent to Transfer Control of Licenses and Authorizations, 19 F.C.C.R. 21522 (2004), paras. 3-4.
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- the combined market for mobile telephony services -- is equivalent to the DOJ’s relevant market -- mobile wireless communications market. The FCC’s relevant geographic market was identified as each local market, which was also consistent to the
DOJ’s relevant geographic markets.
The FCC analyzed many factors regarding both horizontal and vertical effects of
the merger on the mobile telephone markets. First, as for the likely horizontal effects of
the merger, the FCC considered various factors as follows:
substitutability of products and services,253 possible competitive responses by rival carriers,254 spectrum aggregation,255 network effects on the merged company,256 and penetration rates in local markets.257
Second, the FCC also analyzed the possible vertical effects of the merger, specifically with respect to the impact of the merger on roaming. The Commission
253 The FCC found Verizon Wireless, T-Mobile, and Nextel were significant future threats to Cingular and AT&T Wireless’ customer base, and effective substitutes for the offerings of the merging companies. Id. paras. 134-137. 254 The FCC determined that, if the merged entity attempted to raise prices or engage in other exercise of market power, other market participants would have the ability to reposition their offerings in response. Id. paras. 134-137. 255 Considering spectrum holdings as a part of analysis, the Commission conditioned that the approval of the transaction on the fulfillment of the merged firm’s divestiture of post-transaction spectrum holding in excess of 80 MHz in a number of areas. The condition was intended to make spectrum available to strengthen an incumbent competitor or allow new entry in those markets. Id. paras.138-141. 256 Because of the nature of telecommunications and the magnitude of the increase in Cingular’s size, the FCC considered the potential network effects of the merger. Network effect arises when the value of a product increases when the number of consumers who purchase it. See CARL SHAPIRO & HAL VARIAN, INFORMATION RULES, Boston, MA: Harvard Business School Press, 1999, at 13. See also supra ch.2. The Commission found the network effects do not weigh heavily in the effect of this particular transaction. Because all mobile networks interconnect to each other, the Commission found it was unlikely that a mobile network with more subscribers would be more attractive to additional customers simply because of its size. See id. at paras.142-145. 257 Considering the penetration rates in each local markets, the FCC concluded that existing service providers would have the capacity to attract customers and increase output should the merged company attempt to exercise market power. Id. at para.146.
183 concluded that the proposed merger would not adversely affect the availability of roaming services or roaming rates.258
Considering those factors in undertaking a case-by-case analysis for each geographic market (i.e. market-specific analysis), the FCC concluded that anti- competitive effects were unlikely in all but 22 of the Commission’s 734 Cellular Market
Areas, where the merger would cause significant competitive harm that exceeds the likely public interest benefits of the merger in those areas.259 In conclusion, the Commission conditioned its consent on the merging companies taking certain actions in 22 local mobile telephony markets to mitigate the anti-competitive effect of the merger in those markets. Those actions include divestiture of operating unit divestitures in 16 markets, 260 spectrum divestitures in two markets, 261 and the treatment of partial interests in four
258 Roaming occurs when the subscriber of one wireless carrier travels beyond the home area and utilizes the facilities of another wireless carrier to get services. The FCC found the provision of automatic roaming services had become increasingly competitive over time, and two major carriers would remain post-merger, which should be sufficient to ensure the continued availability of roaming services at competitive rates to Cingular’s potential roaming partners. Id.at paras. 165- 182. 259 Id. at paras. 192-196. 260 For the 16 markets where there would have been high market share for the merged entity and fewer competing carriers than in most other markets, the Commission conditioned its consent on the divestiture of the AT&T Wireless operating units in these markets, including the spectrum associated with such operating units. The 16 markets include: Oklahoma City, OK; Sherman- Dennison, TX; Owensboro, KY; Arkansas RSA No. 3 (Sharp); Arkansas RSA No. 4 (Clay); Arkansas RSA No. 5 (Cross); Arkansas RSA No. 6 (Cleburne); Arkansas RSA No. 7 (Pope); Connecticut RSA No. 1 (Litchfield); Kentucky RSA No. 1 (Fulton); Mississippi RSA No. 2 (Benton); Mississippi RSA No. 4 (Yalobusha); Missouri RSA No. 14 (Barton); Oklahoma RSA No. 3 (Grant); Texas RSA No. 6 (Jack); and Texas RSA No. 11 (Cherokee). Id. para. 254. 261 In two local markets, the Commission required the companies to divest 10 MHz of spectrum throughout the license area to ensure that competing carriers in these urban markets will have access to sufficient spectrum to compete effectively against the merged entity. The two markets are Detroit, MI, and Dallas, TX. Id. para. 255.
184 markets.262 The Commission also conditioned its consent on the parties fulfilling two commitments in their applications: additional spectrum divestiture;263 and limits on
Cingular’s acquisition of spectrum in an upcoming auction.264
In addition to the in-depth analysis of the wireless telephony market, the FCC also analyzed the effect of the merger on intermodal competition between wireless and wireline telephone services. The Commission considered whether the merger diminishes intermodal competition for mass market voice telecommunications services, and concluded that any potential public interest harm arising from the loss of AT&T Wireless as an independent competitor was mitigated by the current level of wireless-wireline competition.265
Comparison
In this transaction, the two agencies analyzed the mobile wireless markets based on the identical relevant market definition. While the DOJ found anticompetitive harm in the mobile wireless markets, the FCC concluded that generally the merger was not likely to result in competitive harm in most markets.
With the consistent market definition, both the DOJ and the FCC incorporated the
Merger Guideline factors, such as market concentration, adverse competitive impact, and entry analysis into their considerations. Other factors such as facilitating collusion,
262 In four additional local markets, the companies were required to convert certain non-passive, minority equity interests of AT&T Wireless in competing mobile telephony carriers to passive interests. The four markets are: Shreveport, LA; Pittsfield, MA; St. Joseph, MO; and Louisiana RSA No. 1 (Claiborne). Id. para. 265. 263 Cingular and AT&T Wireless indicated that they would divest of any post-transaction spectrum holding in excess of 80 MHz. Id. para. 256-264. 264 The companies indicated that they would not apply to bid in Auction No. 58 (Broadband PCS) for any licenses in any BTA in which Cingular controls, or has a 10-percent or greater interest in, 70 MHz or more of cellular and/or PCS spectrum. Id. para. 267. 265 Id. paras. 237-246.
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evasion of rate regulation, and elimination of potential competition were not addressed.
Meanwhile, the FCC went on to consider non-Merger Guideline factors, including
substitutability of products and services, possible competitive responses by rival carriers,
spectrum aggregation, network effects on the merged company, and penetration rates in local markets. The FCC applied the market-specific analysis based on the consideration of these non-Merger Guideline factors.
Both the DOJ consent decree and the FCC conditions required three kinds of conditions: business divestiture, spectrum divestiture, and treatment of minority interest.
Nonetheless, conducting the market-specific analysis for each geographic market, the
FCC required those actions in 22 markets, whereas the DOJ required those in 13 markets.
In addition, the FCC imposed a sector-specific condition that prohibited the merged company from bidding on upcoming PCS spectrum auction.
Summary
Previous section described how the DOJ/FTC and the FCC analyzed ten telecommunications mergers. The standards of review of the agencies are compared in terms of the factors considered by the agencies – including Merger Guideline factors as well as other principles -- and merger conditions imposed on each merger.
Merger guideline factors
The agencies analyzed each merger considering various factors including those in the Merger Guidelines: definition of relevant market, market concentration, adverse competitive effects of a merger, entry analysis, facilitating collusion, evasion of rate regulation, and elimination of potential competition.
First, as for the relevant markets, in most of the mergers, the relevant markets that the agencies identified were consistent except for AT&T and McCaw.
186
(
shows the relevant markets of each merger.) In AT&T-McCaw, the DOJ identified as one of the relevant markets the provision of interexchange to cellular
subscribers served by McCaw, and found the AT&T and McCaw were two largest providers of interexchange service to cellular service customers in many areas served by
McCaw. Meanwhile, with regard to the provision of similar services, the FCC’s relevant
market was broader than that of the DOJ. That is, the FCC identified the interexchange
services in the U.S. as the relevant market. In the entire interexchagne market, the FCC
found, McCaw held only insignificant share of the market. Accordingly, the FCC
concluded that no public interest to be served by treating McCaw’s relatively de minis
presence in the current interexchange services market as a significant factor in the
consideration of the merger.
In the other nine cases, the two agencies’ market definitions were consistent. Those
nine cases further can be classified into two groups, depending on whether the FCC found significant harm in additional markets that the DOJ did not addressed. Those additional markets are what this study calls the FCC-only markets, where only the FCC found certain anticompetitive effects of a merger, whereas the DOJ did not discuss the market in the public documents.
Five mergers among the nine cases belong to first group: (1) the relevant markets identified by both agencies were consistent, and (2) the FCC had no additional FCC-only markets. Those cases are: GTE-Southern Pacific (markets for interexchange services),
BT-MCI (markets for U.S.-U.K. international telecommunications, and markets for seamless global telecommunications), AT&TCI (markets for mobile wireless telecommunications), WorldCom-Intermedia (markets for Internet backbone services),
187 and Cingular-AT&T Wireless (markets for mobile wireless telecommunications). In these five cases, both the DOJ and the FCC were scrutinizing the same relevant market.
The remaining four cases belong to the second group, in that (1) the relevant markets identified by both agencies were consistent, but (2) the FCC had additional FCC- only markets. Those cases are: SBC-Ameritech, Bell Atlantic-GTE, AT&T-MediaOne, and ATO-Time Warner. In SBC-Ameritech and Bell Atlantic-GTE, the DOJ found adverse competitive impacts of the merger in mobile wireless markets. Meanwhile, the
FCC found no significant impact in mobile wireless services. Instead, the Commission found anticompetitive impacts in local telephone markets. In AT&T-MediaOne, the DOJ found anticompetitive harm in the market for broadband content and services, whereas the FCC found those harm not in those broadband markets, but in the market for video programming. In AOL-Time Warner, the DOJ found harm in the markets for broadband
Internet access, broadband Internet transport, and ITV services, while the FCC found harm in the market for Instant Messaging. In these four cases, the FCC independently identified FCC-only markets and found anticompetitive effects of a merger in those markets.
Among the other Merger Guidelines factors, in most of the cases, the agencies considered market concentration, adverse competitive impact, and entry analysis. As for the market concentration, in most of the cases, the DOJ strictly relied on the HHI and focused on the current market concentration. Meanwhile, the FCC examined not only the current market concentration, but also other future status of the market concentration, considering mitigating factors, such as the trends toward the competition (e.g., AT&T-
McCaw) and regulatory safeguards promoting competition (e.g., BT-MCI).
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The facilitating collusion factor was also considered in some cases (e.g., BT-MCI).
The evasion of rate regulation factor was only discussed in GTE-Southern Pacific. As this
factor is related to the monopoly status of local telephone companies,266 it seems that this
factor was not considered in later cases since opening of local telephone markets after the implementation of the 1996 Telecommunications Act. The elimination of potential competition factor was considered by both agencies in most of the merger cases.
Although this factor is one of the Merger Guideline factors, the FCC more frequently considered this factor than the DOJ/FTC, relying on the doctrine of potential competition.
Especially in BT-MCI, SBC-Ameritech, and Bell Atlantic-GTE, the FCC applied the transitional market analysis identifying both current and future participants in the markets.
Other factors and principles
While the DOJ mostly relied on the Merger Guideline Factors, the FCC considered non-Merger Guideline factors or principles, applying several factors that were not found
in the DOJ analysis.
Overall, in conducting its public interest inquiry, the FCC examined four overriding
questions: (1) whether the transaction would result in a violation of the Communications
Act or any other applicable statutory provision; (2) whether the transaction would result in a violation of the Commission’s rules; (3) whether the transaction would substantially frustrate or impair the Commission’s implementation or enforcement of the
266 The DOJ/FTC considers challenging upstream mergers by monopoly public utilities subject to rate regulation if the merger would allow the monopolist to disguise the costs of supplies from the upstream firm. In mergers with upstream firms that have no independent markets by which to measure the true cost of the supply, monopolists can inflate prices off to the regulator and on to the consumers as legitimate cost justifying rate increase. Non-horizontal Merger Guidelines, § 4.23. See supra Ch. 3.
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Communications Act and/or other related statutes, or would interfere with the objectives of the Communications Act and/or other related statutes; and (4) whether the transaction would yield affirmative public interest benefits. 267
Most of all, the Commission examined whether a merger would frustrate key
principles of the Communications Act and other related statutes. For example, the FCC
found AOL-Time Warner merger would impair further development of and healthy
competition in the Internet and interactive computer services with regard to the market
for Instant Messaging services.268
The Commission also considered the FCC rules and policies, including the CMRS
spectrum cap (AT&T-TCI), horizontal ownership rules (AT&T-MediaOne, and AOL-
Time Warner), program access rules (AT&T-MediaOne, and AOL-Time Warner), and
cellular cross-ownership rules (Bell Atlantic-GTE). In addition, the FCC conducted
various types of analysis including transitional market analysis (SBC-Ameritech, and
Bell Atlantic-GTE), effective competitive opportunities analysis with regard to foreign
carrier entry (BT-MCI), market specific analysis (Cingular-AT&T), and comparative
practice analysis (SBC-Ameritech and Bell Atlantic-GTE). One factor that is specific to
the telecommunications sector, such as network effects, also was considered in evaluating
267 SBC-Ameritech Order, 14 FCC Rec 14712, 14737 para 48. (1999); Bell Atlantic- GTE Order; AT&T-MediaOne Order, 15 F.C.C.R. at 9820-21 para 9; AOL-Time Warner Order; WorldCom- Intermedia Order; and Cingular-AT&T Wireless Order. 268 16 F.C.C.R., 6611-12, para 150. [c]ongress expressed its preference for similar policies with respect to the Internet. Section 230(b) of the Communications Act provides that it is a policy of the United States ‘to promote the continued development of the Internet and other interactive computer services and other interactive media’ and ‘to preserve the vibrant and competitive free market that presently exists for Internet and other interactive computer services, unfettered by Federal or State regulation.’ Finally, Congress has charged the Commission with ‘encouraging the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans.’ (quoting 47 U.S.C. § 230(b)(1), (2) and 47 U.S.C. § 157).
190 the impacts of the mergers such as WorldCom-Intermedia, AOL-Time Warner, and
Cingular-AT&T.
Since the markets for telecommunications have been rapidly changing with the development of technologies and deregulatory environment, the FCC considered both current and future status of the markets. In BT-MCI Order, for example, the FCC examined not only the impact of the merger on markets as they currently existed, but also evaluated the likely effects of the merger on markets as they would exist after the local competition provisions of the 1996 Act were fully implemented. Accordingly, a potential competition doctrine was widely adopted across cases when the Commission was identifying current and future market participants in the relevant markets (e.g., BT-MCI,
SBC-Ameritech, and Bell Atlantic-GTE)
Merger conditions269
The DOJ consent decree, in most cases, required the merging companies to divest certain properties. Meanwhile, the FCC conditions were more narrowly tailored to serve the sector-specific regulatory goals under the Communications Act. For example, the
FCC’s sector-specific conditions include: providing telecommunications services to
Hawaii at the same rates as in the U.S. mainland (GTE-Southern Pacific), promoting advanced services deployment in low-income areas (SBC-Ameritech and Bell Atlantic-
GTE), improving residential phone services (SBC-Ameritech and Bell Atlantic-GTE), and improving U.S.-U.K. international rout (BT-MCI).
269 See infra Ch. 5 for more detailed analysis of the merger conditions.
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Overall review standards and conclusion
The author found that the ten merger cases can be classified into three groups based
on to what extent the two agencies’ standards are consistent: (1) complementary; (2)
complementary with substantial difference; (3) consistent. The first group includes five
merger cases where the review standards can be called complementary because the
FCC’s review standards demonstrated sector-specific considerations that are different
from the standards of the DOJ/FTC. Specifically, the FCC either reached different
conclusion from that of the DOJ, or reached the same decision on different grounds with
respect to the identical relevant markets. The differences arose from three reasons:
differences in identifying the relevant markets, application of distinct factors and
standards, or the FCC’s consideration of the merger as modified by the DOJ consent
decree. These cases are: AT&T-McCaw, GTE-Southern Pacific, BT-MCI, AT&T-TCI,
and Cingular-AT&T Wireless.
In AT&T-McCaw, while the DOJ found that the impact of the merger would be anticompetitive, the FCC reached different conclusion because the Commission identified one of the relevant markets more broadly than the DOJ did. In addition, the FCC found an increased trends toward competition and the existence of potential entrants in those relevant markets, and concluded the merger would not result in significant harm in those markets. In GTE-Southern Pacific, both the DOJ and the FCC analyzed the merger’s effect on the market for interexchange telecommunications. While the DOJ found that the merger would lead to anticompetitive harm, the Commission did not find reason for
192 concern -- especially in light of the DOJ consent decree and the FCC policy. 270 In BT-
MCI, both agencies analyzed the effects of the merger on U.S.-U.K. international telecommunications markets and on seamless global telecommunications markets. Unlike the DOJ, the FCC did not believe the merger would create anticompetitive harm in those markets, given mitigating factors such as reduction in regulatory barriers to entry and commitments made by BT-MCI with respect to this market.271 Further, the FCC concluded the merger would enhance competition in global seamless telecommunications markets since the competition in those markets requires significant resources. In AT&T –
TCI, both the DOJ and the FCC believed there would be significant anticompetitive effects of the merger in the mobile wireless telephone markets. Unlike the DOJ, however, the FCC reached that conclusion by considering that the AT&T – TCI merger would violate the CMRS spectrum cap.272
Second, among the remaining five of ten mergers, four cases demonstrated that the two agencies’ standards are complementary with substantial difference since the FCC
270 Under the Commission’s Access Charge Plan, GTE as well as other exchange carriers were required to file tariffs utilizing the same rate structure for like access service in order to ensure each carrier has complied with the anti-discrimination provisions of the Communications Act. Considering those factors, the FCC determined there would be adequate safeguards in place to ensure that GTE did not favor SPCC/SPSC over any other carrier for like access services. In addition, as for the merger’s effect on satellite authorization policy -- noting that GTE and SPSC would collectively operate only 13.3 percent of the total number of satellite currently authorized - - the FCC found no basis for concern that the merger would result in impermissible concentration of limited spectrum resources. 271 BT-MCI agreed to take various steps to share its capacity with new entrants. 12 F.C.C.R., at 15404-5. 272 To promote competition and address concerns involving anticompetitive behavior in CMRS markets, the Commission adopted a CMRS spectrum cap. Specifically, one of the Commission’s rules prohibits an entity from having an attributable interest in a total of more than 45 MHz of licensed cellular, broadband PCS, and Specialized Mobile Radio (SMR) spectrum regulated as CMRS with significant overlap in any geographic area. Ownership of 20 percent or more of equity or outstanding stock, among other things, is considered an attributable interest.47 C.F.R. § 20.6.
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covers what the DOJ didn’t. Specifically, in these four cases: (1) the FCC covered the
DOJ’s relevant market in analyzing each merger, (2) the FCC also scrutinized the merger’s effect on additional markets that the DOJ did not discussed in the documents,
and (3) the FCC found significant anticompetitive harm in those markets (i.e., FCC-only
markets). These cases are: SBC-Ameritech, Bell Atlantic-GTE, AT&T-MediaOne, and
ATO-Time Warner (See
).
In SBC-Ameritech and Bell Atlantic-GTE, the DOJ believed there would be adverse competitive impacts of the merger in mobile wireless markets whereas the FCC found anticompetitive impacts in local telephone markets. In AT&T-MediaOne, the DOJ
found that the merger would lead to anticompetitive harm in the market for broadband
content and services, whereas the FCC was concerned about those harm in the market for
video programming. In AOL-Time Warner, the DOJ believed there would be harm in the
markets for broadband Internet access, broadband Internet transport, and ITV, while the
FCC found that the merger would create harm in the market for Instant Messaging. In these four cases, the FCC independently identified FCC-only markets and found the
probability of anticompetitive effects of a merger in those markets. These four cases
show the focus of each agency was substantially different. This finding indicates the
complementary nature of each agency’s standard, and also implicates that the FCC’s
authority and standards as sector-specific regulatory agency in the field of
telecommunications are significantly different from the standard of federal antitrust
agencies such as DOJ/FTC.
Finally, in the remaining one case of ten analyzed, WorldCom-Intermedia, the two
agencies’ review standards were consistent in that the FCC reached the same conclusion
194 on same grounds as the DOJ. That is: (1) the FCC analyzed the merger’s effects on the same relevant market as the DOJ identified, (2) the FCC did not find any additional potential harm in the market because it analyzed the merger as modified by the DOJ consent decree, and (3) the FCC conditions basically reiterated what the DOJ required in the consent decree.273
This study now turns to five electronic media merger cases to compare to what extent the merger review standards of the two agencies were consistent in analyzing the mergers involving electronic media companies.
Table 5-1. Relevant Markets and the Review Standards. FCC-only market indicates the relevant market where only the FCC found certain anticompetitive effects of a merger, whereas the DOJ did not discuss the market in the public documents. Relevant Markets Review Standards Mergers DOJ/FTC FCC GTE- Interexchange Complementary Southern Pacific AT&T- Cellular service Complementary McCaw Cellular infrastructure equipment
Interexchange to cellular Interexchange services subscribers
BT-MCI U.S.-U.K international telecommunications Complementary
Seamless global telecommunications AT&T-TCI Mobile wireless Complementary
SBC- Mobile wireless Complementary Ameritech with substantial - Local exchange difference (FCC-only market)
273 Although the FCC found no anticompetitive impact in any U.S. international service markets, the FCC determined that Intermedia and its subsidiaries would now be subject to regulation as dominant carriers on the U.S-Brazil route, due to their proposed affiliation with WorldCom.
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Table 5-1. Continued Relevant Markets Review Standards Mergers DOJ/FTC FCC BellAtlantic- Mobile wireless Complementary GTE with substantial - Local exchange difference (FCC-only market) AT&T- Broadband content and services Complementary MediaOne with substantial - Video programming difference (FCC-only market) AOL-Time Broadband Internet Broadband Internet Complementary Warner access with substantial Broadband Internet difference transport ITV - Instant Messaging (FCC-only market) WorldCom- Internet backbone Consistent Intermedia Cingular- Mobile wireless Complementary AT&T Wierelss
Electronic Merger Analysis
Five electronic media mergers are discussed in chronological order: TCI-Liberty
Media, Time Warner-Turner, Westinghouse-Infinity, Clear Channel-AMFM, and
Univision-Hispanic Broadcasting. For each merger, information on the merging companies and the major issue of the transaction are briefly introduced. Then, the
DOJ/FTC review and the FCC review are analyzed, focusing on the units of analysis used in the previous section, including the seven Merger Guideline factors. Finally, the last part of this section compares the review standard of the agencies, and determines to what extent the agencies’ standards are consistent or complementary.
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TCI and Liberty Media
On October 8, 1993, TeleCommunications, Inc. (TCI) and Liberty Media
Corporation (Liberty) announced that TCI and Liberty would enter into a combination.
At the time the merger was announced, TCI was the largest cable multiple systems
operator (MSO) in the United States, with financial and management interests in cable
systems serving more than 10.2 million subscribers. 274TCI’s share represented
approximately 18 percent of all subscribers and 19.3 percent of homes passed
nationwide.275 Liberty was a large cable MSO, with financial and management interests
in cable systems serving 2.9 million subscribers, approximately 5.4 percent of all
subscribers nationwide.276
In addition, both TCI and Liberty had substantial financial stakes in several
suppliers of video programming services. TCI had financial or management interests in
programming vendors such as Discovery Communications, Inc. (which supplied the
Discovery Channel, The Learning Channel and YOUR CHOICE TV), E! Entertainment
Television, Reiss Media Enterprises (which supplied Request Television), Home
Mountain Prime Sports Network, and Turner Broadcasting Systems, Inc. (which supplied
several networks such as CNN, Headline News, The Cartoon Network, WTBS, and
TNT).277 Liberty had financial or management interests in several programming vendors,
274 In the Matter of Tele-Communications, Inc. and Liberty Media Corporation, Applications for Consent to Transfer Control of Radio Licenses, 9 F.C.C.R. 4783, 4783 (1994) 275 Id. 276 Id. 277 TCI also had substantial interests in direct-to-home satellite delivery of multichannel subscription television service, with both a substantial C-band satellite business and a partnership
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such as BET Holdings, Inc., Video Jukebox Network, Inc., Court TV, Encore Media
Corp., International Family Entertainment, Inc. (which supplied the Family Channel and
Cable Health Club), Home Shopping Network, Inc., QVC Network, Inc., Prime Sports
Network and more than a dozen regional sports channels.278
As a result of the proposed merger, TCI-Liberty would serve more than 13 million subscribers, or about a quarter of the cable subscribers in the U.S., and have financial interests in a wide range of programming services, including a number of the most popular and widely-carried services.
DOJ review
On April 26, 1994, the United States filed a civil antitrust complaint alleging that the proposed merger would violate Section 7 of the Clayton Act, by substantially lessening competition among (1) video programming providers and (2) multichannel subscription television distributors (MSTD).279
As for the relevant market, the DOJ identified two markets: (1) video programming
provided to MSTDs in the U.S., and (2) multichannel subscription television distribution
in the areas of the U.S. in which TCI and Liberty control cable systems. The DOJ
interest in Primestar Partners, L.P., a Ku-band satellite multichannel subscription television service. 9 F.C.C.R. 4783, 4783 (1994) (quoting July 21, 1994 letter from Kathryn M. Fenton, Esq. to Martin L. Stern, Competition Division, Cable Services Bureau). 278 9 F.C.C.R. 4783, 4783 (1994) (quoting Liberty Comments in CS Docket No. 94-48 at 7-10 (June 29, 1994) 279 A multichannel subscription television distributor (MSTD) is an entity that provides multiple channels of video programming to consumers on a subscription or fee basis, as differentiated from local broadcast television stations which individually provide a single channel at no charge within their broadcast areas. MSTDs deliver programming to consumers utilizing various methods, including cable, multichannel multipoint distribution (MMDS), satellite master antenna television (SMATV), direct-to-home satellite, or the facilities of common carrier telephone companies or their affiliates. United States v. Tele-Communications, Inc., Proposed Final Judgment and Competitive Impact Statement, 59 FR 24723, 24726. This is an equivalent term to a MVPD (a multichannel video programming distributor).
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Complaint did not discuss market concentration and entry analysis in the public documents. Instead, the Complaint focused on the adverse competitive impact of the merger based on the vertical aspect of the merger. That is, the DOJ noted that TCI and
Liberty, in addition to operating cable systems, each have substantial financial interests in video programming services provided to cable systems and other MSTDs. The DOJ found that the merger of TCI and Liberty would create a vertically integrated firm with substantial power both as a MSTD and as a video programming provider. TCI and
Liberty together would effectively control access to about one-fourth of cable subscribers and would be affiliated with eight of the twenty most widely distributed cable programming services.280 This substantial integration, the DOJ stated, was likely to increase abilities and incentives to restrain competition in two ways. First, the merged firm could discriminate against competitive video programmers in favor of its affiliated programmers by refusing to carry programs or by denying similar terms or conditions.
The discrimination would make it significantly more difficult for such competitive programmers to operate profitably or to compete effectively against the merged firm’s programming services. Second, the merged firm could deny access to or discriminate in terms of access to its programming to competing MSTDs, making it more difficult for competitive distribution systems to obtain programming necessary to compete effectively against the merged firm’s MSTDs.
The DOJ consent decree enjoined the merged company from (1) discriminating against unaffiliated video programming offered by such providers, where the effect of such discrimination was unreasonably to restrain competition; and (2) discriminating
280 Id.
199 against unaffiliated MSTDs in the sale or license of video programming, where the effect of such discrimination was unreasonably to restrain competition.281
FCC review
The FCC approved the merger of TCI and Liberty on August, 1, 1994 without any conditions, based on the conclusion that the proposed merger would serve the public interest, convenience and necessity. Without identifying the relevant markets, the FCC went on to address potential competitive impacts of the merger with regard to the cable
television industry.
The FCC examined whether the merger would permit the merged company to
increase or create market power or otherwise increase the ability to engage in
exclusionary or predatory pricing. Considering the facts of the case, especially the history
of the two companies, the FCC concluded the merger raised no competitive concerns.
The FCC noted that Liberty was created in 1991 as part of a restructuring of TCI
assets.282 The FCC stated that it was well established under federal antitrust law that corporate consolidations generally do not create competitive concerns.283 Applying this
281 These injunctions applied with respect to the conduct of organizations under the merging companies’ control. 59 Fed. Reg., at 24723. The DOJ Final Judgment notes that discriminatory conduct can take a variety of forms depending on individual circumstances, and may include, but is not limited to, discrimination in: (1) pricing; (2) channel assignment; (3) tiering or packaging of programming services; (4) promotional activities; and (5) signal quality. 59 Fed. Reg., at 24727. 282 The companies stated that TCI’s management decided in 1990 to create Liberty because they believed that Congress or the Commission might increase regulation of the cable television industry and that such regulation might require divestiture by TCI of a significant portion of its interests. In early 1991, TCI assigned to Liberty most of TCI’s interests in cable programming services (except for its interests in TBS and one other programming service) and some of TCI’s interests in certain cable television operating companies. 9 F.C.C.R. 4783, 4784, at para 7. 283 See 9 F.C.C.R. 4783, at 4777. The FCC noted that, for example, in United States v. Citizens & Southern National Bank, the Supreme Court found that a merger of two jointly-controlled banks did not violate section 7 of the Clayton Act because the proposed acquisition would not alter past or present competitive conduct or relationships and because there was no realistic prospect that the denial of these acquisitions would lead the defendant banks to compete with each other. 422
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reasoning, the FCC found that the proposed merger would not affect the current state of
competition in the cable television industry because the firms were commonly controlled
and pursued complementary and coordinated business strategies.284 In sum, because TCI
and Liberty had operated more like corporate affiliates and only as separate, independent
corporations to a limited extent, the FCC found that the license transfers would not
eliminate any existing competition between the merging parties or facilitate their ability
to engage in anticompetitive conduct. Moreover, no party filed petitions to deny or sent comments related to these applications. Accordingly, the FCC concluded that the proposed merger would not adversely affect the competitive status quo.285
Comparison
In TCI-Liberty, the DOJ documents did not show a detailed discussion of the
Merger Guideline factors related to the market structure such as market concentration and entry analysis. Rather, the DOJ focused on the factors related to conduct of the merging companies, finding that the merged firm could discriminate against competitive video programmers and MTSDs.
Although the FCC documents did not show precise definition of the relevant markets, the Commission discussed the merger’s effect on competition in the cable
U.S. 86 (1975). The FCC also relied on Ball Memorial Hospital v. Mutual Hospital Insurance, Inc., 784 F.2d 1325 (7th Cir. 1986). In this case, the Seventh Circuit found that a proposed merger between two affiliated insurance companies did not violate section 7 of the Clayton Act because the two affiliates had previously acted as one company and it was therefore appropriate to treat them as if they had been one corporation all along. According to the court, because the affiliate merger would not change the conditions of competition in the market, the merger of firms that were jointly controlled does not call for close scrutiny. Id. at 1337. 284 The FCC found that, in particular, the record reflected that the same five shareholders control stock having over 75 percent voting power in Liberty and approximately 55 percent voting power in TCI. Moreover, the FCC noted, the record showed that since the creation of Liberty, TCI and Liberty have closely cooperated in the pursuit of common business strategies. 9 F.C.C.R. , 4788, paras. 26-27. 285 9 F.C.C.R., at 4788, para. 31.
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industry. Therefore, it seems that the DOJ’s two relevant markets are consistent to what
the FCC looked at in its evaluation of the TCI-Liberty merger. Other Merger Guideline
factors, such as market concentration and entry analysis were not addressed. Rather, the
FCC relied on the antitrust law to reach the conclusion that the merger would not result in
significant competitive harm. While the DOJ consent decree prohibited the merged
company from discriminative conducts, the FCC did not impose any conditions.
Time Warner and Turner
On September 22, 1995, Time Warner, Inc. (Time Warner) and Turner
Broadcasting Systems, Inc. (Turner) entered into an agreement for Time Warner to
acquire the approximately 80 percent of the outstanding shares in Turner that it did not
already own. At the time of announcement, Time Warner was the largest producer of
Cable Television Programming Services sold to MVPDs throughout the United States.286
Time Warner’s primary Cable Television Programming Services included Homed Box
Office (HBO) and Cinemax, and their multiplexed versions.287 Time Warner’s HBO, the
largest Cable Television Programming Service measured on the basis of subscription revenues, was viewed by MVPDs as a marquee or crown jewel service, i.e., those
286 Time Warner’s subscription revenues from the sale of Cable Television Programming Services to MVPDs in 1995 were approximately $ 1.5 billion, and its total revenues from Cable Television Programming Services in 1995 were approximately $ 1.6 billion. In the Matter of Time Warner, Inc., and Turner Broadcasting System, Inc., 123 F.T.C. 171, para 3. (1997). 287 Other Cable Television Programming Services that were controlled by or affiliated with Time Warner included E! Entertainment Television, Comedy Central, and Court TV. Id.
202 services necessary to attract and retain a significant percentage of their subscribers.288 As a cable system operator, Time Warner was also the nation’s second largest MVPD.289
Turner was one of the largest producers of Cable Television Programming Services in the U.S.290 Turner’s Cable Television Programming Services included Cable News
Network (CNN), Turner Network Television (TNT), TBS Superstation (WTBS), which were viewed by MVPDs as marquee or crown jewel services, i.e., those services necessary to attract and retain a significant percentage of their subscribers.291
The other companies, TeleCommunications, Inc. (TCI) and Liberty Media Corp.
(Liberty)292 had, directly or indirectly, approximately a 24 percent existing interest in
Turner. By trading their interest in Turner for an interest in Time Warner, TCI and
Liberty would have acquired approximately a 7.5 percent interest in the Fully Diluted
Equity of Time Warner, or approximately 10 percent of the outstanding shares of Time
Warner (Turner-Time Warner acquisition).293 In September 1995, in anticipation of and
288 Id. para. 4. 289 Time Warner currently served, either directly or indirectly, approximately 11.5 million household in the United States, which were approximately 17 percent of all of the households in the United States that purchase Cable Television Programming Services from MVPDs 290 Turner’s other Cable Television Programming Services included Cartoon Network, Turner Classic Movies (TCM), CNN International USA (CNNI USA), CNN Financial Network (CNNfn), and services emphasizing regional sports programming. Turner’s subscription revenues from the sale of Cable Television Programming Services to MVPDs in 1995 were approximately $ 700 million, and its total revenues from Cable Television Programming Services in 1995 were approximately $ 2 billion. Id. at para. 8. 291 Id. at para. 9. 292 On October 8, 1993, TCI and Liberty announced that the companies would enter into a merger. TCI was the largest cable multiple systems operator (MSO) in the United States, with financial and management interests in cable systems serving more than 10.2 million subscribers. Liberty was a large cable MSO, with financial and management interests in cable systems serving 2.9 million subscribers, approximately 5.4 percent of all subscribers nationwide. Id. at paras. 11- 17. 293 Id. at para. 21.
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contingent upon the Time Warner-Turner and TCI-Time Warner acquisitions, TCI,
Turner, and Time Warner entered into two long-term mandatory carriage agreements
formally referred to as the Programming Services Agreements (PSAs). Under the terms
of these PSAs, TCI would be required, on all of its cable television systems, to carry
CNN, Headline News, TNT, and WTBS for a 20-year period. The price to TCI would be
85 percent of the average price paid by the rest of the industry for these services.294
FTC review
In its complaint, the FTC found the proposed merger would violate Section 7 of the
Clayton Act, by substantially lessening competition in the relevant markets. The FTC identified two relevant markets: (1) the markets for the sale of Cable Television
Programming Services to MVPDs in the U.S., and (2) the markets for the sale of Cable
Television Programming Services to households in each of the local areas where either
Time Warner or TCI operated as MVPDs.
First, in the markets for the sale of Cable Television Programming Services to
MVPDs, the FTC found that the markets was highly concentrated295 and the entry into
the market was difficult, and would not be timely, likely, or sufficiently to prevent
anticompetitive effects.296 Second, in the markets for the sale of Cable Television
294 Id. at para. 23. 295 The FTC found that the post-acquisition HHI for the sale of Cable Television Programming Services to MVPDs in the U.S. measured on the basis of subscription revenues would increase by approximately 663 points, from 1,549 to 2,212. These points would increase further if Time Warner converts WTBS from a superstation to a cable network charging subscriber fees. Post- acquisition Time Warner would be the largest provider of Cable Television Programming Services to MVPDs in the U.S. and its market share would be in excess of 40 percent. Id. at para. 31. 296 Id. at para.33. See supra ch.3 for further discussion of entry analysis pursuant to the Merger Guidelines.
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Programming Services to households, the FTC also found that the markets were highly concentrated297 and entry was difficult.298
As for the adverse competitive impact, the FTC found that the merger would enable
Time Warner to increase prices on its Cable Television Programming Services sold to
MVPDs, directly or indirectly (e.g., by requiring the purchase of unwanted
programming), through its increased negotiating leverage with MVPDs, including
through conditioning purchase of one or more marquee or crown jewel channels on
purchase of other channels. The FTC also found that Time Warner would increase those
prices by raising barriers to entry by new competitors or to repositioning by existing competitors, by preventing such rivals from achieving sufficient distribution to realize economies of scale.299 The FTC further determined that the merger would result in anticompetitive impacts by denying rival MVPDs and any potential rival MVPDs of
Time Warner competitive prices for Cable Television Programming Services, or charging
rivals discriminatorily high prices for Cable Television Programming Services.300
297 The FTC found that the post-acquisition HHI in the sale of Cable Television Programming Services by MVPDs to households in each of the local areas in which Respondent Time Warner and Respondent TCI sell Cable Television Programming Services would be unchanged from the proposed acquisitions and would remain highly-concentrated. Id. at para. 32. 298 The FTC found that the entry into the markets would not be timely, likely, or sufficiently to prevent anticompetitive effects. Id. at para. 33. 299 The FTC determined that those effects were likely because: (1) Time Warner had direct financial incentives as the post-acquisition owner of the Turner Cable Television Programming Services not to carry other Cable Television Programming Services that directly compete with the Turner Cable Television Programming Services; and (2) TCI had diminished incentives and diminished ability to either carry or invest in Cable Television Programming Services that directly compete with the Turner Cable Television Programming Services because the PSA agreements require TCI to carry Turner’s CNN, Headline News, TNT, and WTBS for 20 years, and because TCI, as a significant shareholder of Time Warner, would have significant financial incentives to protect all of Time Warner's Cable Television Programming Services. Id. at para. 38. 300 Id.
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Having found those anticompetitive harm, the FTC Consent Order required TCI
and Liberty to divest their Time Warner shares to a separate company.301 The FTC also
required future TCI-Time Warner carriage agreements to contain an option for TCI to
terminate carriage every five years. Further, Time Warner was barred from discriminative
conduct.302 Finally, the Consent Order required Time Warner’s cable systems to carry a rival to CNN.
FCC review
Subsequent to the filing of the original application of license transfer, Time
Warner, Turner, and TCI entered into a proposed Consent Agreement with the FTC. An amended application was then filed with the FCC, incorporating a revised ownership structure that was consistent with the proposed Consent Agreement 303 Accordingly, the
FCC analyzed the amended application as modified by the FTC Consent Agreement, focusing on transfer of the license of television station WTBS, Channel 17, Atlanta,
Georgia from Turner Broadcasting to Time Warner. In reaching the conclusion that the merger was in public interest, necessity, and convenience, the FCC analyzed the merger with regard to whether the merger would comply with three FCC rules: the horizontal ownership rule, the program access rule, and the cable-broadcast cross-ownership rule.
301 The separate company would not vote any stock in Time Warner and various structural provisions would be incorporated into the ownership arrangement to minimize TCI’s influence and control over Time Warner. 123 F.T.C., Decision and Order, II. 302 Time Warner was barred from discriminating in the price of its programming to rival MVPDs. Time Warner was also barred form discriminating in carriage decisions against rival programmers seeking carriage on Time Warner’s cable systems. Id. 303 In re Application of Turner Broadcasting Systems, Inc. and Time Warner, Inc. for Consent to the Transfer of Control of License of Television Station WTBS(TV), Atlanta, Georgia. 11 F.C.C.R. 19595, 19596, at para 2.
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First, regarding the horizontal ownership rule,304 the FCC found that the new ownership structure of Time Warner as amended by the FTC Consent Agreement, sufficiently separated the interests of TCI and Time Warner so that the FCC was no longer concerned that the merger would violate the rule.305
Second, as to the program access rules,306 based on the evidence on the records, the
FCC concluded that no violation of the program access rules occurred as a result of the merger.307
Third, the FCC noted that control by Time Warner of WTBS, coupled with its ownership rule, would contravene the FCC’s cable-broadcast cross-ownership rule,
304 At the time of merger, the FCC horizontal ownership rules prohibited a person or entity from reaching more than 30 percent of all homes passed by cable nationwide. 47 C.F.R. § 76.503(a). This rule was adopted in compliance with the mandate of Section 613(f)(1)(a) of the Communications Act. 47 U.S.C. § 533(f)(1)(A); See also Implementation of Sections 11 and 13 of the Cable Television Consumer Protection and Competition Act of 1992, Horizontal and Vertical Ownership Limits, Second Report and Order, 8 F.C.C.R. 8565 (1993)(Second Report and Order). Because a federal district court had ruled that Section 533(f)(1)(A) was unconstitutional, in Daniels Cablevision v. United States, 835 F. Supp. 1, 10 (D.D.C. 1993) (Daniels), in the Second Report and Order the Commission stayed the rule pending a final judicial resolution of the court’s decision. The Commission’s horizontal ownership rule also was challenged in court in Time Warner Entertainment Co., L.P. v. FCC, No. 94-1035 (filed Jan. 14, 1994). On appeal of Daniels, the court consolidated the challenge to the constitutionality of the statutory provision with the pending challenge to the Commission’s rule. Time Warner Entertainment Co., L.P. v. FCC, 93 F.3d 957 (D.C. Cir. 1996). The FCC determined that, notwithstanding the stay, the application reflected an effort to comply with the existing rule and was reviewed in that light. 11 F.C.C.R., at 19598, para. 6. 305 Under the FTC Consent Agreement, TCI would transfer its Time Warner shares to a separate company. The separate company was barred from voting any stock in Time Warner and other structural provisions minimized TCI’s influence and control over Time Warner.123 F.T.C., Decision and Order, II 306 Section 628(c) of the Communications Act and Commission rules prohibit discrimination by a vertically integrated (i.e., cable-affiliated) satellite cable programming vendor or by a superstation vendor in the prices, terms and conditions of sale of programming. This prohibition applies to discrimination among or between cable operators or other MVPDs. The regulations generally apply to cable networks in which cable operators have an attributable interest. See 1992 Cable Act § 628(b). See also 47 C.F.R. §§ 1001-1003. 307 11 F.C.C.R., 19610, para. 35 (noting that allegations of any future discrimination resulting from the sale of Time Warner and Turner programming would be addressed under the rules at the appropriate time).
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which prohibited common ownership of a cable system and a television broadcast station
with a predicted Grade B contour that covered any portion of the community served by
the cable system.308 Consequently, the FCC granted Time Warner a 12-month wavier,
instead of the 18-month wavier requested by Time Warner, of the cable broadcast cross-
ownership rules to provide time to divest the cable system involved.309
Comparison:
In Time Warner-Turner, documents showed the two agencies applied different factors when considering whether to approve the merger. Applying the Merger Guideline factors such as market concentration and entry analysis, the FTC examined the merger’s
effect on the market for Cable Television Programming Services to MVPDs and the
markets for Cable Television Programming Services to households. Discriminatory
conduct of the merged company was the major concern.
Without precise definition of the relevant markets, the FCC examined the effects of
the merger as modified by the FTC Consent Agreement, focusing on the television
stations license transfer as part of the Time Warner-Turner merger. Unlike the FTC that
found a potential anticompetitive harm in the cable programming markets, the FCC found
a potential anticompetitive effect on television and cable markets if the merging parties did not divest of the properties in order to comply with the broadcast-cable cross ownership rule. Thus, the market for broadcast television services can be called an FCC- only market.
In evaluating the merger, the FCC focused on responding to commenting parties’
allegations of harmful aspects of the merger, and examined whether the merger complied
with the statutes and related FCC rules. Because the FTC required a set of conditions
including divestiture and the prohibition of certain discriminating conducts, the FCC
imposed no serious conditions. The FCC examined the sector-specific factors such as the
rules and regulations under the Communications Act, which were not addressed in the
FTC documents.
Westinghouse and Infinity
On June 20, 1996, Westinghouse Electric Corp. (Westinghouse) agreed to purchase
Infinity Broadcasting Corporation (Infinity) for approximately $ 4.9 billion. At the time
of agreement, Westinghouse, through its subsidiary, CBS Inc., was a large nationwide operator of radio broadcast stations. Westinghouse owned 41 radio stations across the
U.S., including four located in the Philadelphia metropolitan area and two located in the
Boston metropolitan area. Infinity owned 42 radio stations across the U.S., including two located in the Philadelphia metropolitan area, and four located in the Boston metropolitan area.310 The acquisition would give Westinghouse control more than 40 percent of the radio advertising revenues in Philadelphia and in Boston.
DOJ review
The United States filed a civil antitrust complaint alleging that the proposed merger
of Westinghouse and Infinity would violate Section 7 of the Clayton Act, by substantially
lessening competition in the sale of radio advertising time in the Philadelphia and Boston
metropolitan areas.311
The DOJ first identified the provision of advertising time on radio stations in the
Philadelphia Metro Survey Areas (MSA) and in the Boston MSA as the two relevant
310 United States v. Westinghouse, Complaint, para. 1 (1996). 311 Id. at paras. 25-26.
209 markets.312 Defining the relevant markets, the DOJ noted the characteristics of the radio advertising markets. That is, radio stations, which negotiate prices individually with advertisers, can identify advertisers with strong radio preferences.313 Consequently, radio stations could charge different advertisers different rates. Because of this ability to price- discriminate between different customers, the DOJ found that radio stations might charge higher prices to advertisers that view radio as particularly effective for their needs, while maintaining lower prices for other advertisers. As for the market concentration, the DOJ found that Westinghouse’s market shares would rise to approximately 45 percent in
Philadelphia and to more than 40 percent in Boston after the proposed merger. Relying on the HHI, the DOJ determined that the substantial increases in concentration due to the merger were likely to reduce competition and lead to higher prices and lower quality of service in each of these markets.314 The DOJ also found that the new entry into the
Philadelphia or Boston radio advertising market was highly unlikely in response to expected price increases by the merged parties in either or both of these markets.315
312 Id. at paras. 9-15. These MSAs were the standard geographical units for which Arbitron, a company that surveys radio listeners, furnishes radio stations, advertisers and advertising agencies in Philadelphia and Boston with data to aid in evaluating radio audience size and composition. Id. at para. 9. 313 The DOJ noted that many local and national advertisers purchase radio advertising time in Philadelphia and Boston because they find such advertising preferable to advertising in other media to meet certain of their specific needs. The DOJ found that, for such advertisers, radio time: may be less expensive and, on a per-dollar basis, more cost-efficient than other media at reaching the advertiser's target audience (individuals most likely to purchase the advertiser’s products of services); may reach target audiences that cannot be reached as effectively through other media; or may offer promotional opportunities to advertisers that they cannot exploit as effectively using other media. Id. at paras. 11-13. 314 The DOJ found that the pre-merger HHI in Philadelphia was approximately 1876, which would rise to 2800 after the merger, with a change of about 924. In Boston, the pre-merger HHI was approximately 1875, which would rise to 2638 after the merger, with a change of about 763. Id. at para. 17. 315 Id. at para. 24.
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Regarding the expected adverse competitive impact, the DOJ noted that the acquisition
would give Westinghouse the ability to raise prices and reduce quality because the direct competition between the Westinghouse and the Infinity stations would be eliminated by the proposed merger, and because advertisers seeking to reach male listeners between the ages of 18 and 54 would have inferior alternatives to the merged entity.316
The DOJ Consent Decree required the divestiture of a radio station in both Boston
and Philadelphia, leaving Westinghouse with five stations in each city.317 The consent
decree also included orders intended to preserve assets and hold them separate until they
could be sold.318 Further, the consent decree required the merging companies to give the
DOJ prior notice regarding future radio station acquisitions and future joint sales
agreements, local marketing agreements or comparable arrangements in Philadelphia and
Boston.319
FCC review
On December 26, 1996, the FCC approved applications to transfer control of
Infinity to Westinghouse. In doing so, the Commission denied challenges to the merger
316 Id. 317 Those stations were WBOS-FM in Boston and WMMR-FM in Philadelphia. United States v. Westinghouse, Final Judgment, 61 FR 63861, (1996) 318 The DOJ Consent Decree required the defendants to ensure that, until the divestitures mandated by the Final Judgment had been accomplished, WMMR-FM and WBOS-FM would be operated independently as viable, ongoing businesses, and kept separate and apart from Westinghouse’s and Infinity’s other Philadelphia and Boston radio stations, respectively. Philadelphia. United States v. Westinghouse, Final Judgment, 61 FR 63861, 63864 (1996). 319 Id. at 63866.
211 filed by several parties and examined the merger with regard to the Commission’s broadcast multiple ownership rules.320
Without precise identification of the relevant markets, the FCC examined the merger as modified by the DOJ Consent Decree, and found that the merger did not pose unacceptable risk to competition in the relevant radio markets.321 The FCC examined whether the merged entity would comply with the Commission’s local radio ownership rules.322 The Commission found that the company would comply with the rules in both
the Chicago and Dallas/Fort Worth radio markets either through the proposed divestiture
of stations or through assigning the proposed stations to trusts.323 Consequently, the
320 The FCC denied challenges to the merger filed by Spectrum Detroit, Inc. and Alexander J. Serafyn and the Ukrainian Congress Committee of America, Inc. The Commission also denied Spectrum Detroit, Inc.’s challenge to Westinghouse’s request for a permanent one-to-a-market rule waiver. Additionally, a motion for stay of consideration of the merger filed by Serafyn and the Ukrainian Congress Committee was dismissed. In re Applications of Stockholders of Infinity Broadcasting Corp. and Westinghouse Electric Corp., 12 F.C.C.R. 5012, 5017, para.2 (1996). 321 Id. 322 At the time of merger, the radio local ownership rules, as mandated by the Telecommunications Act of 1996, imposed numerical restrictions on the number of radio stations in the same service and on the number of radio stations overall which might be commonly owned in any given local radio market. Under the radio local ownership rules, as amended by the Telecommunications Act of 1996, in a radio market with 45 or more commercial radio stations, a party might own up to eight commercial radio stations, no more than five of which are in the same service; in a market with 30 to 44 commercial radio stations, a single entity might own up to seven commercial radio stations, no more than four of which are in the same service; in a market with 15 to 29 stations, a party might own up to six stations, no more than four of which are in the same service; and, in markets with 14 or fewer stations, one owner might hold up to five stations, no more than three of which are in the same service, except that no one entity might control more than 50 percent of the stations in a market. Implementation of Sections 202(a) and 202(b)(1) of the Telecommunications Act of 1996, FCC 96-90 (Mar. 8, 1996). See also Telecommunications Act of 1996, Section 202(b). Pub. L. No. 104-104, § 202(b), 110 Stat. 56 (1996). 323 Westinghouse and Infinity filed applications to divest stations in Chicago and Dallas-Fort Worth so that the merged entity would comply with the numerical limitations of the local radio ownership rules. To ensure its ability to do so, Westinghouse and Infinity also filed applications to assign stations in these markets to insulated trusts. 12 F.C.C.R., para. 57.
212 approval was conditioned on compliance with radio local ownership rule either by divestiture or by assigning the stations to trusts.324
In addition, the Commission also approved related conditional waivers of the broadcast multiple ownership rules such as one-to-a-market rule.325 Westinghouse currently controlled radio and television stations in nine of the markets -- New York, Los
Angeles, Chicago, Philadelphia, San Francisco, Detroit, Boston, Baltimore and
Washington, D.C -- where it would acquire Infinity radio stations. In three of these markets -- Boston, Baltimore and Washington, D.C. -- Westinghouse controlled radio- television combinations. The FCC granted Westinghouse temporary, conditional one-to- a-market waivers to acquire and hold additional Infinity radio stations in these three markets for a period ending six months after the Commission issued its decision in the television ownership proceeding.326 In granting the waivers, the FCC applied the case-by- case standard327 that requires the Commission to consider five factors: (1) the benefits of a joint operation; (2) the types of facilities that Westinghouse owned in each of the
324 The FCC approved these trust applications for limited six-month periods, in order to allow Westinghouse and Infinity a reasonable period of time to complete the required divestiture of station and to terminate the trust agreements. 325 Section 73.3555(c) of the FCC Rules, the one-to-a-market rule, generally proscribed common ownership of a television and radio station in the same market. 326 Id. at 5056, para. 92. 327 In Second Report and Order in MM Docket No. 87-7 (Second Report and Order), 4 F.C.C.R. 1741, recon. granted in part (Second Report and Order Recon.), 4 F.C.C.R. 6489 (1989), the FCC established three standards for waiver of the rule. Under these standards, the Commission presumptively favors waiver requests involving stations combinations serving the top 25 markets where there remain at least 30 separately owned, operated and controlled broadcast licenses or voices after the proposed combination is consummated (top 25 markets/30 voices standard). Id. at 1751-52. Second, under the failed station standard, the Commission presumes that the public interest also will be served in cases involving acquisition of failed broadcast stations, that is, stations that had not been operating for a substantial period of time or that are in bankruptcy. Id. at 1752-53. Third, waiver requests not eligible for consideration under either the top 25 markets/30 voices standard or the failed station standard are evaluated under the more rigorous case-by-case standard. Id. at 5056, para.16.
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markets; (3) the other media outlets that Westinghouse owned in each of the markets; (4)
the economic status of the stations; and (5) competition and diversity in the markets.328
The FCC found that permitting Westinghouse to acquire additional radio stations from
Infinity would not unduly affect competition and diversity in those markets, given the limited duration.
In the remaining six markets -- New York, Los Angeles, Chicago, Philadelphia,
San Francisco and Detroit -- Westinghouse was previously granted temporary twelve- month one-to-a-market waivers for radio-television combinations that resulted from its acquisition of CBS in November 1999.329 The FCC granted Westinghouse’s request to
convert the temporary waivers to permanent waivers in these six markets. Additionally,
due to the merger of Infinity and Westinghouse, Westinghouse would acquire additional
Infinity radio stations in each of these six markets, and was granted conditional one-to-a-
market waivers to hold the added Infinity stations in these six markets for a period ending
six months after the Commission has issued a decision in the television ownership
proceeding.330
Comparison
The regulatory response of the Westinghouse-Infinity merger demonstrates the two
agencies’ focus on this merger were different. Considering Merger Guideline factors such
as market concentration, and entry analysis, the DOJ examined the effects of the merger on two relevant markets. The DOJ found probable adverse competitive impacts of the
328 Id. 329 The Commission previously granted Westinghouse temporary one-to-a-market waivers in connection with its acquisition of CBS for radio-television combinations in New York, Los Angeles, Chicago, Philadelphia, San Francisco and Detroit. Stockholders of CBS Inc., 11 F.C.C.R., at 3772. 330 12 F.C.C.R., at paras. 34-48.
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merger especially with regard to the price increase in radio advertising markets.
Meanwhile, the FCC examined the merger in light of the Commission’s radio ownership rules. Although the FCC examined the merger as modified by the DOJ Consent Decree,
the FCC conducted more detailed analysis as a sector-specific regulatory body when
applying five factors in granting one-to-a market waivers. Both agencies required the
divestiture of radio stations. Further, the DOJ cautioned Westinghouse against
involvement in any significant financial investment, joint sales agreement or local
marketing agreement with other stations in the same markets.
Clear Channel and AMFM
On October 2, 1999, Clear Channel Communications, Inc. (Clear Channel) and
AMFM, Inc. (AMFM) entered into an agreement, worth $23.8 billion, that involved
AMFM merging into a wholly-owned subsidiary of Clear Channel. At the time the
agreement was announced, Clear Channel was one of the three largest radio broadcast
companies in the United States.331 AMFM was also one of the three largest radio
broadcast companies in the United States.332 The Clear Channel and AMFM merger would create the largest radio broadcast company in the U.S.
DOJ review
Attempting to resolve the DOJ’s competitive concerns, prior to its investigation and
filing of the DOJ’s complaint, Clear Channel and AMFM sold 85 radio stations in 24
markets to buyers approved by the Justice Department.333 The companies, however, did
331 For 1999, the company reported net television and radio revenues of approximately $ 1.4 billion. United States v. Clear Channel, Complaint, para. 8 (2000). 332 For 1999, the company reported radio group net revenues of approximately $ 1.7 billion. Id. para. 9. 333 Id. at para. 10.
215 not sell enough radio stations in the Allentown, Denver, Harrisburg, Houston, and
Pensacola Metropolitan Survey Areas (MSA), to satisfy the DOJ.334 The United States filed a civil antitrust complaint on August 29, 2000, alleging that the proposed merger would violate Section 7 of the Clayton Act by substantially lessening competition in the provision of radio advertising time in several areas of the U.S.335
The DOJ identified the sale of radio advertising time as the relevant product market. Allentown, Denver, Harrisburg, Houston, and Pensacola MSA (Divestiture
Cities) were each a relevant geographic market. Having determined the relevant markets, the DOJ found possible adverse competitive impacts of the merger based on the market concentration. The complaint alleged that the merger would further concentrate markets that were already highly concentrated. The DOJ found that Clear Channel’s market share in each of the Divestiture Cities would exceed 41 percent, and in some markets would be more than 69 percent, after the merger.336
Furthermore, the complaint alleged that the merger would eliminate head-to-head competition between Clear Channel and AMFM for advertisers seeking to reach specific
334 The DOJ found that radio stations in the Allentown, Denver, Harrisburg, Houston, and Pensacola Metro Survey Areas (MSA) generated almost of all of the companies’ revenues from the sale of advertising time to local and national advertisers. Id. at para. 10. An MSA is the geographical unit for which Arbitron, a company that surveys radio listeners, provides data to radio stations, advertisers and advertising agencies to aid in evaluating radio audience size and composition. Advertisers use this data in making decisions about which radio station or combination of radio stations can deliver their target audiences in the most efficient and cost- effective way. Id. at para.11. 335 The merger also involves the combination of two out-of-home advertising (e.g., billboards and bulletins) providers. The DOJ complaint also alleged harm in the provision of out-of-home advertising. However, as out-of home advertising services are not under the FCC jurisdiction, this aspect of the merger was not included in this study. 336 Using the HHI, the DOJ found that the merger would result in concentration in each of these markets from about 2262 to 6231 points, well above the 1800 threshold at which the United States normally considers a market to be highly concentrated. Id. at para. 21.
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audiences.337 As a result, the prices for advertising time on radio stations in the
divestiture cities would likely increase, and services would likely decline, according to
the DOJ’s complaint. In addition, the DOJ found that entry into the relevant markets
would not be timely, likely or sufficient to mitigate the competitive harm resulting from
this merger.338
The Final Judgment required the merging companies to divest 14 radio stations in
the five Divestiture Cities to preserve competition in the sale of radio advertising time in
these markets.
FCC review
The FCC approved Clear Channel-AMFM merger on August 14, 2000. To satisfy
the FCC’s local radio ownership rules and radio-television cross-ownership rules, and the
concerns of the FCC and the DOJ about the competitive impact of the merger, the
merging parties proposed to divest 122 radio stations in local radio markets in 37 areas to either third party buyers or insulated trust. Accordingly, the FCC’s merger analysis was
focused on the compliance with those ownership rules, and the approval was conditioned
on the divestiture or the assignment to the trust of radio stations in the 37 areas.
Specifically, the FCC examined whether Clear Channel would be in compliance
with the local radio ownership and the radio-television cross ownership rules and the
337 Advertisers select radio stations to reach a large percentage of their target audience based upon a number of factors, including, inter alia, the size of the station’s audience, the characteristics of its audience, and the geographic reach of a station’s signal. Many advertisers seek to reach a large percentage of their target listeners by selecting those stations whose audience best correlates to their target listeners. The DOJ found that several Clear Channel and AMFM stations in the Divestiture Cities were competing head-to-head to reach the same audiences and, for many local and national advertisers buying time in those markets, the stations were close substitutes for each other based on their specific audience characteristics. Accordingly, the DOJ determined that the proposed transaction would eliminate such competition. Id. at paras. 22-25. 338 Id. at para. 26-27.
217 level of economic concentration would not impair competition.339 First, with respect to
the local radio ownership rule,340 the FCC considered the combined advertising revenue share of the proposed stations group in the relevant Arbitron radio market, post-merger market structure (based on HHI), and market conduct.341 The FCC analyzed the merger in light of the divestiture requirement of the DOJ consent decree and the divestiture proposal of the merging companies. Consequently, the FCC found that the merger complied with the local radio ownership rule. Second, regarding the radio-television cross ownership rule, the FCC also determined that the merger complied with the rules in light of the divestiture requirements of the DOJ consent decree and the commitment by the merging parties. Therefore, the approval of the merger was conditioned on the divestiture or the assignment to the trust of 122 radio stations in 37 areas.342
339 In the Matter of the Applications of Shareholders of AMFM, Inc. and Clear Channel Communications, Inc., 15 F.C.C.R. 16062, 16065, at para.5. (2000). 340 At the time of merger, the FCC’s local radio ownership rules restricted the number of radio stations in the same service and the number of stations overall that may be commonly owned in any given local radio market. A local radio market was defined by the area encompassed by the mutually overlapping principal community contours of the stations proposed to be commonly owned. 47 C.F.R. § 73.3555(a); see Implementation of Sections 202(a) and 202(b)(1) of the Telecommunications Act of 1996, 11 F.C.C.R.12368 (1996). Under the rules, as amended by the Telecommunications Act of 1996, in a local radio market with 45 or more commercial radio stations, a single entity may own up to eight commercial radio stations, no more than five of which are in the same service; in a market with 30 to 44 commercial radio stations, one owner may hold up to seven commercial radio stations, no more than four of which are in the same service; in a market with 15 to 29 stations, a single owner may own up to six stations, no more than four of which are in the same service; and in markets with 14 or fewer stations, one owner may hold up to five stations, no more than three of which are in the same service, except that no single entity may control more than 50 percent of the stations in a market. 47 C.F.R. § 73.3555(a)(1). 341 Id. at 16071, para. 20. 342 The 37 areas include: Albany, NY, Allentown, PA, Austin, TX, Biloxi-Pascagoula, MS, Cedar Rapids, IA, Cincinnati, OH, Cleveland, OH, Columbia, SC, Dallas-Ft. Worth, TX, Daytona Beach, FL, Denver-Boulder, CO, Des Moines, IA, Ft. Pierce, FL, Grand Rapids, MI, Greensboro- Winston Salem-High Point, NC, Greenville-Spartanburg, SC, Harrisburg, PA, Houston, TX, Jackson, MS, Jacksonville, FL, Los Angeles, CA, Miami, FL, Melbourne, FL, New Haven, CT, Orlando, FL, Pensacola, FL, Phoenix, AZ, Providence, RI, Raleigh-Durham, NC, Richmond, VA,
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Comparison
In Clear Channel-AMFM, both the DOJ and the FCC looked at radio markets,
although the FCC document did not reveal a precise definition of the relevant markets.
The review standards of the two agencies were different. That is, in evaluating the merger, while the DOJ applied on the Merger Guideline factors including market concentration, adverse competitive impact, and entry analysis, the FCC focused on the compliance with the FCC radio broadcast ownership rules. Both agencies required the merging parties to divest certain radio stations to remedy the anticompetitive harm.
Univision and HBC
On June 11, 2002, Univision Communications, Inc. (Univision) and Hispanic
Broadcasting Corp. (HBC) entered into an agreement in which Univision would acquire
HBC. At the time of agreement, Univision was the largest broadcaster of Spanish- language television programming in the U.S., consisting of two broadcast networks,
Univision and Telefutura, and one cable channel, Galavision.343 It also had several other
Spanish-language media operation, including Internet sites and services, music recording,
distribution, and publishing. Univision also owned a significant equity interest in
Entravision Communications Corp. (Entravision), another leading Spanish-language media company. Entravision owned or operated approximately fifty-five radio stations in twenty-four geographic markets in the U.S. Entravition also owned or operated forty-nine television stations as a major affiliate for Univision’s two broadcast networks. Univision had significant governance rights over Entravision, including the right to place
San Diego, CA, San Francisco, CA, San Jose, CA, Shreveport, LA, Springfield, MA, Stamford- Norwalk, CT, and Waco, TX. 15 F.C.C.R., 16079-16083. 343 United States v. Univision, Complaint, para. 8. (2003)
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representatives on Entravision’s Board of Directors and the right to veto important
strategic business decisions.344
HBC, another merging party, was the largest Spanish-language radio broadcaster in
the United States. HBC owned and operated more than sixty radio stations in eighteen
geographic markets in the U.S.345 HBC’s other businesses include a marketing group and interactive online services.
DOJ review
The United States filed a civil antitrust complaint on March 26, 2003, alleging the
Univision-HBC merger would violate Section 7 of the Clayton Act, by substantially lessening competition in the sale of advertising time on Spanish-language radio stations in many geographic areas throughout the U.S.346
The DOJ Complaint identified as the relevant product market the provision of
advertising time on Spanish-language radio stations. Regarding the relevant geographic
market, the DOJ found that HBC and Entravision compete directly against each other to
provide advertising time on Spanish-language radio in the following Metro Survey Areas
(MSAs): Dallas, TX; El Paso, TX, Las Vegas, NV; McAllen-Brownsville-Harlingen, TX;
Phoenix, AZ; and San Jose, CA. The DOJ determined that these five MSAs (Overlap
Markets) were the relevant geographic markets.
With regard to the market concentration, the DOJ found that Spanish-language
radio in the Overlap Markets was highly concentrated, with HBC and Entravision’s
344 Id. at para, 2. 345 In 2001, its revenues were over $240 million, nearly all of which were generated from the sale of Spanish-language advertising time. Id. at para. 9. 346 Id. at para. 29.
220 combined share of advertising revenue in the various geographic markets ranging from approximately 70 percent to 95 percent of the relevant market.347
As for the possible adverse competitive impact of the merger, the DOJ first noted that Entravision was one of a few Spanish-language radio companies competing with
HBC in each Overlap Market, and the two companies were significant competitors against each other. The DOJ complaint alleged that given Univision’s significant ownership stake and governance right in HBC’s principal competitor, Entravision, the acquisition of HBC by Univision would lessen competition substantially. That is,
Univision’s ability to influence or control competitively significant Entravision decisions would lessen the incentives of both companies to compete aggressively against each other and would result in higher prices and lower service quality in the relevant markets.348
Further, the DOJ determined that entry into the relevant geographic markets would not be timely, likely, or sufficient to mitigate the competitive harm likely to result from this acquisition.349
347 Using the HHI, the DOJ found that concentration in these markets would increase significantly as a result of the acquisition, with post-acquisition HHIs from approximately 5500 points to approximately 9200 points, well above the 1800 threshold at which the DOJ normally considers a market to be highly concentrated. Id. at para. 21. 348 Id. at para. 22-26. The DOJ found that Univision’s right to place directors on Entravision’s board and the right to veto certain strategic business decisions (namely any Entravision issuance of equity or debt, or acquisitions over $25 million) gave it a significant degree of control or influence over Entravision and would likely impair Entravision’s ability and incentive to compete with Univision/HBC. Further, the DOJ found, Univision’s approximately 30 percent equity in Entravision also would substantially reduce competition between Univision/HBC and Entravision. That is, Univision/HBC would have reduced incentives to compete against Entravision for advertisers seeking a Spanish-language radio audience because Univision/HBC, as a substantial owner of Entravision stock, would benefit even if a customer chooses Entravision rather than HBC. Id. 349 Id. at para. 27.
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As set forth in the proposed Consent Decree, the DOJ stated that it would not
oppose the merger of Univision and HBC, if (1) Univision’s interest in Entravision was
converted to a new class of Entravision nonvoting stock with no rights to designate
members or otherwise influence the Entravision Board of Directors; (2) Univision’s total
equity interest in Entravision was reduced to 15 percent of the total equity (both voting
and nonvoting) within three years, and 10 percent of total equity (both voting and
nonvoting) in six years; and (3) specific proposed nonvoting shareholder approval rights
associated with the new class of nonvoting stock were removed. The DOJ also set forth
specific provisions meant to further ensure that Univision was insulated from
participating in Entravision’s radio business.350
FCC review
The FCC granted a conditional approval of the transfer of the licenses held by HBC
to Univision. In reaching the conclusion that the merger would serve the public interest,
convenience and necessity, the FCC considered whether the proposed merger would
comply with the Commission’s radio-TV cross-ownership rule and local radio ownership
rule.
First, regarding the FCC’s radio-TV cross-ownership rule,351 the Commission noted
that as a result of the attributable relationship between Univision and Entravision’s
350 Section VII of the DOJ Final Judgment identifies certain conduct that is permitted. For example, officers or directors of Univision were allowed to hold or sell Entravision stock but might not acquire any additional Entravision stock. See United States v. Univision, Final Judgment, Section VII. 351 Under the numerical ownership/voice count restrictions of the radio/television cross- ownership rule, a party may own one television station and up to six radio stations in any market where at least 20 independently owned media voices remain in the market after the proposed transaction. 47 C.F.R. § 73.3555(c)(2)(i)(A). If, under the Commission’s local television ownership rule, a single entity could own two television stations in the market, it may hold either two television and up to six radio stations or one television and seven radio stations in that
222 television stations, new radio-TV combinations would have to be created in some areas.352 The FCC determined that all of the combinations of radio-TV would have to comply with the voice count/numerical ownership restrictions of the radio-television of
the cross-ownership rule.353
Second, with regard to the radio multiple ownership rule, the FCC found that
HBC’s ownership of radio stations would violate the FCC’s new local radio ownership rule in two markets,354 were the new rule effective.355 The FCC noted that the U.S. Court of Appeals for the Third Circuit stayed the effective date of the new rules on September
market. Id. § 73.3555(c)(2)(i)(B). Second, a party may own one television station and up to four radio stations in any market where at least 10 independently owned media voices remain in the market after the proposed transaction. Id. § 73.3555(c)(2)(ii). Third, a party may own one television station and one radio station regardless of the number of independent voices remaining in the market. Id. § 73.3555(c)(2). 352 New radio-TV combinations would be created in Las Vegas, NV (one TV and three radios); El Paso,TX (two TVs and three radios); Albuquerque, NM (two TVs and five radios); Harlingen- Westlaco-McAllen-Brownsville, TX (one TV and three radios); and Monterey-Salinas (one TV and one radio). The FCC found that all of these combinations meet the voice count/numerical restrictions of the radio/television cross-ownership rule. 18 F.C.C.R. 18834, at para.9. 353 Id. 354 The FCC found that in the Houston-Galveston, TX, radio metro market, which contained more than 45 radio stations, Univision would control a six FM/one AM combination. Univision, therefore, would own one more FM than would be permissible under the FCC’s new rules. Likewise, in the Albuquerque, NM, radio metro market, which contained only 43 radio stations, Univision would control a five FM combination, also one in excess of the amount that would be permissible. Id. at para. 10. 355 On July 2, 2003, the FCC released the 2002 Biennial Review Order, completing a comprehensive review of the previous broadcast multiple and cross-ownership rules. In the 2002 Biennial Review Order, the Commission stated that it would retain the numerical ownership tiers of the previous radio multiple ownership rule, but that the current contour-overlap methodology for defining radio markets and counting stations in the market is flawed as a means to protect competition in local markets, and that the current rule improperly ignores competition from noncommercial radio stations in local markets. The Commission replaced the previous signal contour method for defining a local radio market with a new method based on the Arbitron radio metro market, and decided to count noncommercial radio stations in the market. See 2002 Biennial Regulatory Review -- Review of the Commission’s Broadcast Ownership Rules and Other Rules Adopted Pursuant to Section 202 of the Telecommunications Act of 1996, FCC 03- 127 (released July 2, 2003) (2002 Biennial Review Order)
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3, 2003.356 Accordingly, the FCC approved the merger on condition that the merged firm divest the radio stations in the two markets within six months of the Court lifting the stay, or when the new local radio ownership rule becomes effective.357
In addition to considering the two broadcast ownership rules, the FCC denied a
petition to deny the merger filed by National Hispanic Policy Institute (NHPI) that
challenged the ownership structure of HBC and post-merger Univision.358 In denying the petition, the FCC applied the two-step test pursuant to the Communications Act, and found that the petitioning party did not satisfy the two prongs.359
The FCC also denied other filings by Elgin FM Limited Partnership and SBS that
contended that the merger would diminish the diversity of sources available to Spanish-
language speakers.360 The FCC conditioned its approval upon the representations made by Univision in the applications regarding its interest in Entravision;361 upon divestiture
356 Prometheus Radio Project v. Federal Communications Commission, No. 03-3388 (3d Cir. Sept. 3, 2003) (per curiam). 357 18 F.C.C.R., para.10- 11. 358 Id. at paras. 13-51 (concluding that Clear Channel does not have an attributable interest in HBC, and would not have an attributable interest in Univision after the merger). 359 Section 309(d) of the Communications Act provides for a two-step test. 47 U.S.C. § 309(d). First, the petition to deny must set forth specific allegations of fact sufficient to show that...a grant of the application would be prima facie inconsistent with [the public interest]. Id. § 309(d)(1); Gencom Inc. v. FCC, 832 F.2d 171, 181 (D.C. Cir. 1987) (Gencom); and Astroline Communications Co. v. FCC, 857 F.2d 1556, 1562 (D.C. Cir. 1988) (Astroline). Second, the Commission will formally designate an application for hearing in accordance with Section 309(e) of the Communications Act when, based upon the totality of the evidence, there is a substantial and material question of fact concerning whether grant of the application would serve the public interest. 47 U.S.C. § 309(d)(2); Gencom, 832 F.2d at 181; and Astroline, 857 F.2d at 1562. 360 18 F.C.C.R., paras. 52-65 (finding that the wide variety of programming alternatives and the ease of entry into the Spanish-language format do not indicate that the Spanish-speaking audience consitutues a separate, insular diversity or competition market). 361 See id. at para, 69.The FCC’s conditional approval rested upon Univision’s representation that its voting stock interest in Entravision following consummation would be less than five percent, which included stock held by officers and directors of Univision; that the total debt and equity held by Univision following consummation would not exceed 33 percent of the total asset value
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of radio stations in Albuquerque and Houston;362 and upon notification of the
Commission should the Consent Decree between Univision and the U.S. Department of
Justice expire, terminate, or otherwise be amended.
Comparison
In Univision-HBC, the review standards of the two agencies were different. While
the DOJ focused on the harm in the relevant radio advertising markets, the FCC
considered both radio and television markets, and determined that the merger would
comply with the radio-TV cross-ownership rules.
While the DOJ applied the Merger Guideline factors including market
concentration, adverse competitive impact, and entry analysis, the FCC focused on the
compliance with the broadcast ownership rules. The FCC analyzed the merger in light of
the terms of the DOJ consent decree and found no additional significant harm under the
current FCC rules. Nonetheless, because of the changes in media markets and regulatory
environment, the FCC found the merger would violate the new ownership rule if it were
effective.
While both agencies intended to limit the Univion’s control of Entravision, the
FCC additionally conditioned the merger upon compliance with the Commission’s
ownership rules.
of Entravision, which included debt and equity held by officers and directors of Unvision; and that Univision, prior to consummation, would divest itself of any class of stock permitting it to designate members to, or otherwise influence the Entravision Board of Directors. Id. para. 48. 362 The FCC required the divestiture as may be necessary to come into compliance with the rules adopted by the Commission in its 2002 Biennial Order within six months in the event that the stay pending appeal in Prometheus Radio Project v. Federal Communications Commission, No. 03-3388 (3d Cir. Sept. 3, 2003) (per curiam) is lifted or the local radio ownership rules adopted in the 2002 Biennial Review Order otherwise go into effect Id. at para. 69.
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Summary
Previous section described how the DOJ/FTC and the FCC analyzed five electronic
media mergers. The standards of review of the two agencies are compared in terms of the
factors considered by the agencies – including Merger Guideline factors as well as other
principles -- and merger conditions imposed on each merger.
Merger guideline factors
Both the DOJ/FTC and the FCC analyzed each merger considering various factors.
The DOJ/FTC consistently analyzed the merger in light of the Merger Guideline factors,
whereas the FCC focused on whether the merging party complies with the Commission’s
rules under the Communications Act. Among all the Merger Guideline factors, the
DOJ/FTC documents consistently discussed the merger considering market
concentration, entry analysis, and adverse competitive impact. The other factors such as
facilitating collusion and elimination of potential competition were not addressed by the
DOJ/FTC public documents. The evasion of rate regulation factor also was not addressed,
since this factor is related to monopoly public utility companies rather than electronic
media companies.
Regarding the relevant markets, the DOJ/FTC identified the markets related to
MVPDs (i.e. cable programming) in two mergers (TCI-Liberty and Time Warner-
Turner) and the markets related to radio services (i.e. the sale of radio adverting time) in
three cases (Westinghouse-Infinity, Clear Channel-AMFM, and Univision-HBC).
The FCC documents did not include precise definitions of the relevant markets for each merger. Since the discussion was focused on the merger’s compliance with the
FCC’s rules, the author determined the FCC’s relevant markets based on the factors indicating specific markets. For example, in TCI-Liberty, while the DOJ’s relevant
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markets were the provisions of video programming services and multiple subscription
television distribution, the FCC discussed the cable industry, which the author found is
consistent to the DOJ’s relevant markets. In Time Warner-Turner, the DOJ’s relevant
markets were cable programming provided for MVPDs and those programming provided
for cable customers. Meanwhile, the FCC discussed the merger in light of the broadcast
television license transfer, considering horizontal ownership rules, program access rules,
and cable-broadcast cross-ownership rules. Therefore, the author determined that the
FCC’s market included both cable and broadcast television, while the DOJ focused only
on the cable services. In the remaining three mergers where the DOJ’s relevant markets
were the sale of radio advertising time (Westinghouse-Infinity, Clear Channel-AMFM,
and Univion-HBC), the FCC also discussed the merger with regard to the radio
ownership rules. Thus, the author determined that the relevant markets of the DOJ/FTC
and those of the FCC are consistent in those three radio mergers.
Consequently, the five merger cases can be classified into two groups. The first
group includes four cases where the relevant markets of the both agencies are consistent.
Those cases are: TCI-Liberty (video programming and distribution in cable),
Westinghouse-Infinity (radio), Clear Channel-AMFM (radio), Univion-HBC (radio). In
the remaining case, Time Warner-Turner, the FCC’s relevant market was broader in that
it included not only cable but also broadcast television markets that the DOJ did not
address in the public documents. Especially with regard to the cable-broadcast cross
ownership rule, the FCC found the merger as proposed would violate the rule. Thus the provision of broadcast television services can be called the FCC-only market.
2> illustrates the relevant markets identified in the five media merger cases.
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Other Merger Guideline factors such as market concentration and entry analysis were consistently considered by the DOJ/FTC to reach the conclusion that the merger would lessen competition in the relevant markets. Market concentration and entry analysis were addressed in four cases, all except for TCI-Liberty. In TCI, the DOJ document did not discuss those factors. Rather, the DOJ focused on a potential discriminative conduct by merged company against competitors.
With regard to adverse competitive impact, in all of the five cases, the DOJ/FTC was concerned about unilateral behavior of the merging firms that could lead to the price increase and reduced service quality by using the market power and by discriminating other competitors. Discrimination against competing companies in favor of affiliates was the major anticompetitive concerns of the DOJ/FTC.
Other factors and principles
While the DOJ mostly relied on the Merger Guideline factors, the FCC considered non-Merger Guideline factors or principles that could not be found in the DOJ documents.
In conducting its public interest inquiry, the FCC focused on whether the merging party would comply with the Commission’s rules and regulations in four cases. Those cases are Time Warner-Turner (horizontal ownership rule, program access rule, and cable-broadcast cross-ownership rule), Westinghouse-Infinity (radio local ownership rule, one-to-a market rule), Clear Channel-AMFM (radio local ownership rule, radio-TV cross-ownership rule), and Univision-HBC (radio local ownership rule, radio-TV cross ownership rule).
Unlike those four cases that focused on the compliance with the current FCC rules,
TCI-Liberty case showed that the FCC considered the corporate history of the two
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companies to reach the conclusion that the proposed merger represented a corporate reconsolidation of businesses based on the antitrust case law that corporate consolidation generally do not create competitive concerns.
In addition, the FCC applied the two-step test as provided by the Communications
Act, when granting the waivers of the media ownership rules in Westinghouse-Infinity. In granting the waivers, the FCC applied the case-by-case standard that requires the
Commission to consider five factors: (1) the benefits of joint operation; (2) the types of
facilities that Westinghouse owned in each of the markets; (3) other media outlets that
Westinghouse owned in each of the markets; (4) the economic status of the stations; and
(5) competition and diversity in the markets.
Merger conditions
In the media merger cases, the DOJ consent decree contained a wide variety of
conditions than the FCC. In four cases, the DOJ required either divestiture of or lessening
equity interest in certain assets of the merging parties. Those cases are: Time Warner-
Turner, Westinghouse-Infinity, Clear Channel-AMFM, and Univision-HBC. In the other
case, TCI-Liberty, the DOJ prohibited the merged firm from discriminatory conducts
without imposing any divestiture requirement.
The DOJ prohibited the merging companies from specific discriminatory conducts
in two cases: prohibition on discriminating against unaffiliated programming providers or
MVPDs (TCI-Liberty and Time Warner-Turner), amendment of channel carriage
agreement between merging parties (Time Warner-Turner), and a requirement of carrying
certain channel of competitors (e.g., requirement to carry a rival to CNN in Time Warner-
Turner).
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The FCC analyzed the mergers as modified by the DOJ/FTC consent decrees. The
Commission found no significant violation of the Commission’s rules in TCI-Liberty.
Meanwhile, in the other four cases, the FCC imposed additional divestiture requirement
for the merging companies in order to comply with the FCC’s ownership rules.
Overall review standards and conclusion
The author found that the five merger cases can be classified into two groups based
on to what extent the two agencies’ standards are consistent: (1) complementary; and (2)
complementary with substantial difference. The first group includes four merger cases where the review standards can be called complementary because the FCC’s review standards demonstrated sector-specific considerations that are different from the standards of the DOJ/FTC. These cases are: TCI-Liberty, Westinghouse-Infinity, Clear
Channel-AMFM, and Univision-HBC where the FCC relied on the Commission’s media ownership rules as review criteria.
The remaining one case, the Time Warner-Turner merger, belonged to the second group because the two agencies review standards were complementary with substantial difference. More specifically, the FCC had the FCC-only market where only the
Commission found certain anticompetitive concern. In the Time Warner-Turner, the FCC additionally looked at broadcast television markets and found that the merger would violate the broadcast-cable cross-ownership rule (
Relevant Markets and the
Review Standards).
In analyzing each merger, the DOJ consistently relied on the Merger Guideline
factors such as market concentration, entry, and adverse competitive impact. Meanwhile,
the FCC’s main criterion was the merging parties’ compliance with the Commission’s
rules and regulations under the Communications Act, including a variety of ownership
230 rules and program access rule. Although the media ownership rules have been kept changing over the years, applying those rules in the merger analysis as a critical criteria indicates that one of the FCC’s concerns has been to ensure a diversity of voices in the markets.
One of the most critical concerns of the DOJ/FTC was discriminatory conduct that could rise from a combination of programming providers and distributors (MVPDs). The
DOJ/FTC noted that common ownership of both content and conduit was likely to result in discrimination against unaffiliated or independent programming providers. This concern is closely related to the unique characteristic of the media products; benefits of vertical integration can be significantly achieved through the combination of the content production and content distribution.
In addition, the FCC also examined the petitions to deny a merger filed by various parties to consider further anticompetitive impacts of the proposed merger.
Table 5-2. Relevant Markets and the Review Standards. The FCC-only market indicates the relevant market where only the FCC found certain anticompetitive effects of a merger, whereas the DOJ did not discuss the market in the public documents. Relevant Markets Review Standards Mergers DOJ/FTC FCC
TCI-Liberty Video programming Cable Complementary provided to MSTDs (i.e. cable)
Multichannel subscription television distribution (i.e. cable)
Time Warner- Cable television Broadcast Complementary Turner programming to MVPDs television-Cable with substantial (the FCC-only difference Cable television market) programming to households
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Table 5-2. Continued Relevant Markets Review Standards Mergers DOJ/FTC FCC
Westinghouse- Radio (advertising time) Complementary Infinity
Clear Radio (advertising time) Complementary Channel- AMFM Univision- Radio (advertising time) Complementary HBC
Merger Conditions
Categories of Merger Conditions
While the DOJ/FTC issued consent degrees putting conditions on all of the 15 proposed mergers in this study, the FCC imposed conditions on thirteen of the mergers.
The Commission approved the two mergers, TCI-Liberty and Time Warner-Turner, without any conditions. As stated in Chapter 4, all the merger conditions were classified
into ten categories based on the activities involved in each merger decree.363 Those
categories are: divestiture, governance, separate operations for selected company
functions, provision of services, structural non-discrimination, behavioral or conduct-
related non-discrimination, misuse of information, transparency, compliance, and
activities other than those that fit the other nine.364
These conditions can form a continuum from requirements designed to affect
purely structural aspects of a company or market to a point where only conduct and
363 See supra ch. 4 for the classification of the activities required in the merger conditions. 364 See Appendix for all the requirements and conditions imposed on each merger and the categories the activities were classified into. The summary of conditions imposed on each merger is illustrated in
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behavior of the companies are affected. The most structure-oriented remedy was to
require merging parties to divest assets owned by the companies. The assets consolidated
in a merger may be tangible (e.g., telecommunications network infrastructure) or
intangible (e.g., intellectual properties). Through the analysis of the fifteen telecom and
media merger cases, the author identified three types of assets that were required to be
divested by either agency: (1) business operating units, meaning all types of assets used
by merging companies in operation of their businesses (e.g. divestiture of certain radio
stations in three radio mergers such as Westinghouse-Infinity, Clear Channel-AMFM,
Univision-HBC), (2) spectrum licenses (e.g., divestiture of licenses for certain spectrum
used for wireless mobile telecommunications services in wireless mergers such as
Cingular-AT&T Wireless), and (3) equity interests (e.g. transferring Liberty’s Sprint
tracking stock to a trustee in AT&T-TCI).
illustrates types of conditions that were imposed on each merger by
the two agencies. First, a divestiture requirement was imposed on ten merger cases.
Second, the conditions related to corporate governance were only found in GTE-SP (i.e., the FCC ordered the merged company to have the CEO and the President of GTE Corp. as interlocking directors). Third, the conditions requiring a separate operation were imposed in eight merger cases. For example, in AT&T-McCaw, the DOJ required separate operation and marketing of the companies’ wireless services. In AT&T-
MediaOne, the FCC prohibited AT&T from having any role in the management or operation of iNDEMAND, one of the MediaOne’s programming networks.
Fourth, conditions relating to the service offerings were found in five cases. The examples include: an inclusion of an interexchange service in Hawaii in the same rate
233 structure which applies on the U.S. mainland (GTE-SP); and providing local and long distance services on a bundled or packaging basis (AT&T-McCaw). Fifth, the conditions requiring structural non-discrimination were found in six cases. Most of those conditions required open access, or equal access, to the merging companies’ facilities. For example, in BT-MCI, the FCC required the merging companies to make available MCI’s backhaul facilities in the U.S. to other carriers. In AOL-Time Warner, both the FTC and the FCC ordered the companies to open their cable systems to competitor ISPs.
Sixth, merger requirements limiting non-structural discriminatory practices were also frequently found. Most of those stipulations were prohibitions against unreasonable discrimination against competitors or unaffiliated companies, in the terms, prices, or conditions favoring affiliates of the companies involved in the merger. The examples include: the offering of the technical performance standard that Time Warner provides to its affiliated ISPs in a non-discriminatory manner to unaffiliated ISPs (AOL-Time
Warner); and negotiating in good faith an interconnection and/or resale agreement (Bell
Atalntic-GTE).
The seventh of the categories of conditions occured in two cases, when, the agencies adopted confidentiality requirements prohibiting the misuse of information. For example, AT&T and McCaw were prohibited from sharing certain confidential information within the combined company (AT&T-McCaw). The DOJ prohibited BT and
MCI from using any confidential information obtained as a result of BT’s correspondent relationship with other U.S. international telecommunications service providers (BT-
MCI).
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Eighth, transparency requirements were adopted in six mergers. For example, in
both SBC-Ameritech and Bell Atlantic-GTE, the FCC required the merging parties to file
with, or report to, the Commission a variety of information or records with regard to the
companies’ current operation measurement and service plans.
Ninth, requirements meant to insure compliance with other rules or regulations
were frequently found across all the mergers. The DOJ consent decree provides that
authorized representatives of the DOJ were permitted to inspect all relevant records to
insure compliance with the agreement . The merging parties were required to comply
with specified rules (e.g., compliance with the agreement with the executive branches
regarding the security and confidentiality in BT-MCI, or compliance with the radio
ownership rules in Westinghouse-Infinity, Clear Channel-AMFM, and Univision-HBC).
Lastly, there were certain conditions that didn’t belong to any of the nine categories.
For example, the FCC required implementation of an alterative dispute resolution mediation process to resolve carrier-to-carrier disputes regarding local services in SBC-
Ameritech and Bell Atlantic-GTE. The Commission also required the merging companies
to continue to participate in the Network Reliability and Interoperability Council.
Comparison
The DOJ and the FCC
Overall, the DOJ consent decrees included more structure-oriented remedies than
the FCC orders. Among the fifteen mergers, the DOJ consent decree contained divestiture
requirements in ten cases.365 Meanwhile, the FCC order adopted divestiture conditions in
365 Those cases are: AT&T-TCI, SBC-Ameritech, Bell Atlantic-GTE, AT&T-MediaOne, WorldCom-Intermedia, Cingular-AT&T Wireless, Time Warner-Turner, Westinghouse-Infinity, Clear Channel-AMFM, and Univision-HBC.
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six merger cases,366 all in situations where the DOJ also required divestiture. Thus,
among the ten mergers that contain the divestiture condition, both the DOJ and the FCC required the divestiture in six mergers, whereas only the DOJ required the divestiture in four cases.367
Those four cases explicitly show the difference of the two agencies in imposing
conditions to mitigate the potential anticompetitive effects of a merger. While the DOJ
adopted the divestiture requirement – the most structural-oriented remedy- on those cases,
the FCC imposed either a set of more conduct-oriented conditions (SBC-Ameritech, Bell
Atlantic-GTE, and WorldCom-Intermedia) or no conditions at all (Time Warner-Turner).
In fact, SBC-Ameritech and Bell Atlantic-GET were two of the largest divestiture
packages involving a merger ever required by the DOJ’s antitrust division.368 In these two cases, the DOJ only imposed the divesture requirement without other conduct-related remedies. In contrast, the FCC adopted a set of conditions that are more conduct-oriented than the divestiture remedies. Examples are: separate operation (e.g., establishment of the separate affiliates to provide all Advanced Services, provision of services (e.g., offering local telephone services in out-of-territory markets), structural non-discrimination (e.g., providing unaffiliated telecom carriers with access to the OSS enhancements), conduct oriented non-discrimination (e.g., negotiating in good faith an interconnection and/or
366 Both the DOJ and the FCC imposed the divestiture condition in AT&T-TCI, AT&T- MediaOne, Cingular-AT&T Wireless, Westinghouse-Infinity, Clear Channel-AMFM, and Univision-HBC. 367 Only the DOJ imposed the divestiture condition in SBC-Ameritech, Bell Atlantic-GTE, WorldCom-Intermedia, and Time Warner-Turner. 368 Justice Department requires SBC to divest cellular properties in deal with Ameritech and Comcast, DOJ, Press Release, Mar 23, 1999. See also Justice Department requires Bell Atlantic and GTE to divest wireless businesses in order to proceed with merger, DOJ, Press Release, Dec 6, 1999.
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resale agreement), transparency (e.g., filing state-by-state service quality reports with the
FCC), and other activities (e.g., implementation of an alternative dispute resolution mediation process to resolve carrier-to-carrier dispute regarding local services).
The different perspective and role of the two agencies also are demonstrated in the six cases where both the DOJ and the FCC adopted divestiture requirements. Although both the DOJ consent decree and the FCC order contained the divestiture requirement in those mergers, the properties that were required to be divested by both agencies did not overlap except for one case, AT&T-TCI, where the FCC basically reiterated the DOJ consent decree.369 In the remaining five cases, the divestiture assets identified by the DOJ and the FCC were not completely identical. For example, in Cingular-AT&T Wireless, the DOJ required the divestiture of wireless assets in thirteen geographic markets.
Meanwhile, the FCC conducted a detailed market-by-market analysis to find the effects of the merger on each market and ordered the merging parties to divest wireless assets in
22 markets.370 In Clear Channel-AMFM, while the DOJ required the divestiture of
fourteen radio stations in five markets, the FCC ordered the divestiture of 122 stations in
37 markets. Given that the FCC divestiture requirements included markets the DOJ didn’t
address in consent decree, the FCC merger remedies were complementary to those of the
DOJ.
Another difference between the two agencies’ standards can be found in the FCC
conditions that were designed to address the merger’s adverse impact on regulatory
369 See 14 F.C.C.R., 3235, paras. 157-8 (requiring AT&T to transfer Sprint PCS holdings to a trustee, and to ensure any economic interest arising in connection with the Sprint PCS stock to the benefit of the shareholders of Liberty Media Group). 370 Among those 22 markets in which the FCC required divestiture, only eight markets were those included areas that fall within the 13 markets involved in DOJ-mandated divestitures.
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efficacy. For example, in SBC-Ameritech and Bell Atlantic-GTE, the FCC was
concerned that the mergers would undermine the ability of regulators who rely on the
comparative practices analysis (bench marking), by reducing the number of separately-
owned large incumbent LECs. The FCC stated that the comparative analysis provided
valuable information about the incumbent telecommunications carriers’ networks to regulator and competitors in carrying out the goals of the Communications Act.371
Accordingly, in approving the mergers, the FCC required the merging companies to file a
variety of reports and information with the Commission.372 Further, in BT-MCI, in a
merger involving a foreign telecommunications carrier, the FCC conditioned its approval
on compliance with the merging parties’ agreement with executive branches that
addressed the confidentiality and security related issues.
The FCC’s sector-specific concerns are also reflected in the conditions to promote
an equitable offering of services and an efficient deployment of new technologies. In
GTE-Southern Pacific, the FCC required the merging companies to include the state of
Hawii in any interexchange telecommunications service offering in the same rate structure that applies on the U.S. Mainland. Further, in Bell Atlantic-GTE, the FCC imposed the condition that requires non-discriminatory rollout of DSL(Digital Subscriber
Line) services to low income areas. Although these conditions were not directly related to
371 See, e.g., SBC-Ameritech, 14 F.C.C.R., para 57. See also Bell Atlantic-GTE, 15 F.C.C.R., at para 127-128. 372 This information will be made available on an Internet website and will provide the Commission, state commissions, and CLECs, new tools to verify and benchmark SBC- Ameritech’s performance … SBC-Ameritech, 14 F.C.C.R., Appendix C, VII.23 (requiring the merging companies to implement the Carrier-to-Carrier Performance Plan). In addition, the FCC also required the SBC-Ameritech to file a tariff for an enhanced Lifeline plan in the SBC- Ameritech Service Area and state-by-state service quality reports on a quarterly basis, and to report ARMIS local service quality data on a quarterly basis. These conditions were also imposed on Bell Atlantic-GTE merger.
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curing the specific harm of the merger, they were designed to accomplish the broader
goal of meeting the public interest standard under the Communications Act.
While the FCC based some of its merger requirements on the public interest
provisions of the Communications Act, the DOJ remedies were directly tailored to
specific violations of the Clayton Act charged in its complaint. The DOJ’s merger
analysis and remedies are fact-intensive, mostly focusing on (1) what competitive harm
the violation has caused or likely cause, and (2) how the proposed relief will remedy that
particular competitive harm.373 In addition, the DOJ prefers structural remedies to
conduct remedies in merger cases because they are relatively clean and certain, and generally avoid costly government entanglement in the market.374 On contrary, the DOJ
notes, a conduct remedy typically is more difficult to craft, more cumbersome and costly
to administer, and easier than a structural remedy to circumvent.375 Indeed, this research
demonstrates that the FCC imposed more conduct-oriented conditions than the DOJ.
Industry sectors and merger type
There was no significant difference in the types of merger conditions across the two
industry sectors—telecommunications and media--examined. Rather, the differences
showed up in how the agencies handled different types of mergers. That is, divestiture
remedies were adopted in most of the mergers where the agencies were concerned with
the anticompetitive effects of horizontal mergers, whereas more conduct-oriented
conditions were imposed on the mergers involving potential harm arising from mergers
that led to vertically consolidated companies (Table 5-3).
373 U.S. Department of Justice, Antitrust Division, Antitrust Division Policy Guide to Merger Remedies, Oct 2004. at para. 4. available at://www.usdoj.gov/atr.(last visited April, 2005). 374 Id. at 8. 375 Id.
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Among the ten mergers where the DOJ adopted the divestiture remedy, eight of them were horizontal mergers: SBC-Ameritech (two large providers of local and long distance telecommunications services), Bell Atlantic-GTE (two large providers of local and long distance telecommunications services), AT&T-MediaOne (two large cable
MSOs), WorldCom-Intermedia (two leading providers of Internet backbone services),
Cingular-AT&T (the largest and the third largest providers of mobile wireless telecommunications services), Westinghouse-Infinity (two radio broadcast companies),
Clear Channel-AMFM (two radio broadcast companies), and Univision-HBC (two radio broadcast companies). Further, among the six mergers when both the DOJ and the FCC adopted the divestiture requirement, five were horizontal mergers (AT&T-MediaOne,
Cingular-AT&T Wireless, Westinghouse-Infinity, Clear Channel-AMFM, and Univision-
HBC).
With regard to the mergers where the vertical effects concerned agencies, both the
DOJ and the FCC adopted more conduct-oriented remedies than structurally oriented remedies. Among the five cases where the DOJ did not adopt the divestiture remedy, four of them involved cases where the department was concerned with anti-competitive harm caused by vertical integration: AT&T-McCaw (AT&T’s cellular infrastructure equipment and McCaw’s cellular services), BT-MCI (MCI’s facilities in the U.S. and MCI’s telecommunications services), AOL-Time Warner (AOL’s ISPs and Internet based services and Time Warner’s cable networks for broadband Internet access), and Time
Warner-Turner (Time Warner’s cable networks and Turner’s programming services).
Especially, in AOL-Time Warner, the largest corporate merger in media history, both agencies imposed a set of conduct-oriented conditions, without divestiture requirement,
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given the potential the agencies anticipated arising from the vertical integration of the
Internet content provider and the conduit. The summary of findings are illustrated in
Conditions Divestiture O ■ O Governance ■ Separate O ■ O ■ O ■ Operation Provision of O ■ ■ ■ Services Non- O O ■ ■ discrimination (Structural) Non- O ■ O ■ ■ discrimination (Conduct) Misuse of O ■ O Info Transparency O ■ O ■ ■ Compliance O O ■ O O ■ Others ■
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Table 5-3. Continued Mergers Bell AT&T- AOL- WorldCom Cingular- Atlantic- MediaOne Time -Intermedia AT&T GTE Warner Wireless Agencies DOJ FCC DOJ FCC FTC FCC DOJ FCC DOJ FCC
Conditions Divestiture O O ■ O O ■ Governance Separate ■ O ■ Operation Provision of ■ O ■ Services Non- ■ ■ discrimination (Structural) Non- ■ O ■ discrimination (Conduct) Misuse of Info Transparency ■ O ■ Compliance O ■ O ■ O O ■ O ■ Others ■
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Table 5-3. Continued Mergers TCI- Time Westing- Clear Univision- Liberty Warner- house- Channel- HBC Turner Infinity AMFM Agencies DOJ FCC FTC FCC DOJ FCC DOJ FCC DOJ FCC
Conditions (X) (X) Divestiture O O ■ O ■ O ■ Governance Separate O O ■ Operation Provision of Services Non- discrimination (Structural) Non- O O discrimination (Conduct) Misuse of Info Transparency Compliance O O O ■ O ■ ■ Others
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Consistency of the Standards
Throughout all of the fifteen merger cases, the DOJ/FTC review was consistent in
that the analysis of each merger was soundly based on the Merger Guideline factors. In
contrast, the FCC’s standard was more flexible and broader than applying the Merger
Guideline factors, encompassing a variety of factors. The FCC review has no established
standard except that it consists of the Commission’s response to public comments and the
FCC’s own review under the public interest standard.
Overall, in conducting its public interest inquiry, the FCC examined four overriding
questions: (1) whether the transaction would result in a violation of the Communications
Act or any other applicable statutory provision; (2) whether the transaction would result in a violation of the Commission’s rules; (3) whether the transaction would substantially frustrate or impair the Commission’s implementation or enforcement of the
Communications Act and/or other related statutes, or would interfere with the objectives of the Communications Act and/or other related statutes; and (4) whether the transaction promised to yield affirmative public interest benefits. 376 However, since each merger is unique with the facts of the case, the factors or principles the FCC applied in merger analysis were different case-to-case throughout all the fifteen mergers.
Over the years, the DOJ/FTC consistently analyzed the mergers pursuant to the
Merger Guidelines. Nonetheless, because of the changes in the markets and regulatory environment, the factors it considered in the telecommunications merger—distinguishing that from the media mergers—analysis also changed. For example, the evasion of rate
376 SBC-Ameritech Order, 14 F.C.C.R. 14712, 14737, at para 48. (1999); Bell Atlantic- GTE Order; AT&T-MediaOne Order, 15 F.C.C.R., at 9820-21, para 9; AOL-Time Warner Order; WorldCom-Intermedia Order; and Cingular-AT&T Wireless Order.
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regulation factor was related to the monopoly public utility companies such as local
telephone companies before the passages of the 1996 Telecommunications Act. Since the
implementation of the Act, however, local telephone companies lost their monopoly
status in their local markets, opened since 1996 to competitors. Therefore, it would seem
logical that this factor would be no longer apply in the mergers in the telecommunications
sector, and in fact the factor did not appear after 1996.
With the changes in markets over the time, the FCC adopted detailed analyses considering the evolving markets for telecommunications and electronic media services.
For example, approving SBC-Ameritech merger and Bell Atlantic-GTE merger in 1999,
the Commission conducted a transitional market analysis.377 As this analysis by the FCC
examines the merger in the context of evolving market place, the potential competition
doctrine was adopted when the FCC was identifying current and future market
participants. In addition, the FCC has once conducted a detailed market-by-market
analysis using a variety factors to examine the effects of the merger on each geographic
market. Thus, in approving the merger of Cingular and AT&T Wireless in 2004, the FCC
noted that the merger was the first large transaction since the removal of the FCC’s
Commercial Mobile Radio Service (CMRS) spectrum aggregation limit.
Across the telecommunications and media industry sectors, the DOJ/FTC merger review was consistent in that the analysis was always based on the Merger Guidelines
factors. Nevertheless, the DOJ/FTC also considered an industry-specific factor not in the
Merger Guidelines in reviewing one telecommunications merger. In WorldCom-
Intermedia, the merger of two large Internet backbone service providers, the DOJ
377 12 F.C.C.R. 15351, at 15369.
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considered the anticompetitive harm arising from the network effects.378 With regard to
the media mergers, in approving Time Warner-Turner merger, the combination of a
MVPD and a cable video programming service provider, the FTC noted that the common
ownership of both content and conduit would likely result in discrimination against
unaffiliated or independent programming providers.
The FCC’s analysis of the telecommunications merger was different from that of
the electronic media mergers. For telecommunications mergers, the FCC considered a
variety of factors while conducting an extensive analysis. The FCC considered the
Commission’s rules and policies, including CMRS spectrum cap (AT&T-TCI),
horizontal ownership rules (AT&T-MediaOne, and AOL-Time Warner), program access
rules (AT&T-MediaOne, and AOL-Time Warner), and cellular cross-ownership rules
(Bell Atlantic-GTE). In addition, the FCC conducted various types of analysis including
transitional market analysis (SBC-Ameritech, and Bell Atlantic-GTE), effective
competitive opportunities analysis with regard to foreign carrier entry (BT-MCI), market specific analysis (Cingular-AT&T), and comparative practice analysis (SBC-Ameritech, and Bell Atlantic-GTE). Factors specific to the telecommunications sector, such as
network effects, were also considered in evaluating the impacts of the mergers such as
WorldCom-Intermedia, AOL-Time Warner, and Cingular-AT&T.
For media mergers, most of the FCC’s discussion was brief, focusing on the mergers’ compliance with the FCC’s media ownership rules: Time Warner-Turner
(horizontal ownership rule, program access rule, and cable-broadcast cross-ownership
rule), Westinghouse-Infinity (radio local ownership rule, one-to-a market rule), Clear
378 See supra ch.2 part 4 (Mergers in the Telecommunications and the Media Industries) for discussion of the network effects.
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Channel-AMFM (radio local ownership rule, radio-TV cross-ownership rule), and
Univision-HBC (radio local ownership rule, radio-TV cross ownership rule). Despite the recent changes to the ownership rules, the FCC’s concern so far has been to ensure
enough voices in the media market to secure diversity.
CHAPTER 6 THE PUBLIC INTEREST STANDARD
This chapter summarizes the specific tests or analyses conducted by the FCC in its
public interest inquiry of each merger. Then the factors that constitute the public interest
in the context of merger review are presented.
Public Interest Analysis of the FCC
Overall Standard
Overall, in conducting its public interest inquiry, the FCC examined four overriding
questions: (1) whether the transaction would result in a violation of the Communications
Act or any other applicable statutory provision; (2) whether the transaction would result in a violation of the Commission’s rules; (3) whether the transaction would substantially frustrate or impair the Commission’s implementation or enforcement of the
Communications Act and/or other related statutes, or would interfere with the objectives of the Communications Act and/or other related statutes; and (4) whether the transaction would yield affirmative public interest benefits.1
The FCC recognized that particular mergers are likely to benefit competition in
some relevant markets and harm competition in other relevant markets. The FCC
employed a balancing process that weighed probable public interest harm against
probable public interest benefits.2 The FCC determined, however, that a significant harm
1 See, e.g., SBC-Ameritech Order, 14 F.C.C.R. 14712, 14737 para 48. (1999); Bell Atlantic- GTE Order; AT&T-MediaOne Order, 15 F.C.C.R., at 9820-21, para 9; AOL-Time Warner Order; WorldCom-Intermedia Order; and Cingular-AT&T Wireless Order. 2 See, e.g., BT-MCI Order, 12 F.C.C.R., at 15356, para. 10.
247 248 to competition in one market will not likely be outweighed by marginal benefits to competition in other markets.3 For this balancing procedure, the FCC has applied several tests and analyses.
Specific Tests and Analyses
Foreign carrier entry order
In BT-MCI, which involves a foreign telecommunications carrier, the FCC applied the Commission’s market entry rules established in the Foreign Carrier Entry Order4 to
BT’s entry into the U.S. market. Determining whether BT’s entry into the U.S. market complies with the FCC rules, the Commission applied a two-prong test. First, the FCC considered whether the U.K. offered U.S. carriers effective competitive opportunities in each of the communications market segments that BT sought to enter in the United States
(Effective Competitive Opportunities (ECO) analysis).5 Second, the FCC considered other factors that were relevant to the Commission’s overall public interest analysis for foreign carrier entry. Those factors included whether BT offered U.S. carriers cost-based accounting rates,6 and whether concerns raised by the Executive Branch were effectively
3 For example, the FCC balanced the relevant expected beneficial and harmful competitive effects, taking into account the relative size and importance of the markets involved, and the impact on U.S. consumers. See id. 4 Market Entry and Regulation of Foreign-affiliated Entities, Report and Order, 11 F.C.C.R. 3873, 3897 (1995), [hereinafter Foreign Carrier Entry Order]. 5 Under the ECO analysis, the FCC first examines the legal or de jure ability of U.S. carriers to enter the destination foreign country and provide international facilities-based service (legal ability to enter). Next, the FCC reviews the actual or de facto conditions of entry in the relevant foreign markets, including the terms and conditions of interconnection, competitive safeguards, and the regulatory framework. The Commission reviews the overall effect of these four elements on the opportunities for viable operation as a facilities-based carrier in the foreign market. If, however, any one of the factors of the effective competitive opportunities test is completely absent, the FCC will deny authority to provide facilities-based service on that route, unless other public interest factors warrant a different result. See id. at 3890-2. 6 BT-MCI Order, at 15453-6.
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addressed.7 Considering these factors in addition to the ECO analysis under the foreign
carrier entry rules, the FCC determined BT’s entry into the U.S. market was consistent
with the public interest.
Transitional market analysis
Given the regulatory and market uncertainties in late 1990s since the passage of the
telecommunications Act of 1996, the FCC applied the transitional market analysis in
approving BT-MCI (1997), SBC-Ameritech (1999), and Bell Atlantic-GTE (1999).
In order to evaluate proposed mergers properly in the context of this evolving
marketplace and to take account of the uncertainties surrounding the pace and extent of
the development of competition, the FCC identified as most significant market
participants not only firms that already dominate transitional markets, but also those that
are most likely to enter soon, effectively, and on a large scale once a more competitive
environment is established.8 The Commission sought to determine whether either or both of the merging parties were among a small number of these most significant market participants, in which case its absorption by the merger will, in most cases, if not offset by countervailing positive effects, harm the public interest in violation of the
Communications Act.9 The underlying theory of this approach is the potential
competition doctrine in antitrust law.
7 As required in the Foreign Carrier Entry Order, the FCC also considered certain Executive Branch concerns (including national security, law enforcement, foreign policy or grade concerns) regarding BT’s entry into the U.S. market. Id. at 15455-8. 8 See, e.g., BT-MCI Order, at 15369; SBC-Ameritech Order, at 14743; Bell Atlantic-GTE Order, at para.99. 9 See, e.g., BT-MCI Order, at 15369; SBC-Ameritech Order, at 14743; Bell Atlantic-GTE Order, at para.99.
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Comparative practice analysis
In approving SBC-Ameritech and Bell Atlantic-GTE, the FCC analyzed the effect of the proposed mergers on the ability of regulators and competitors to use comparative analyses of the practices of similarly-situated independent incumbent LECs to implement the Communications Act in an effective manner. The FCC noted that such comparative practices analyses, referred to by some commentators as benchmarking, provide valuable information regarding the incumbents’ networks to regulators and competitors seeking to promote and enforce the market-opening measures required by the 1996 Act and the rapid deployment of advanced services.10
The FCC’s analysis discussed: (1) the need for comparative practices analyses to offset the informational disadvantage of regulators and competitors; (2) the impact of a reduction in the number of comparable firms on benchmarking’s effectiveness; (3) examples of the use of comparative practices analysis by regulators and competitors to evaluate practices of the large incumbent LECs both prior to and following the 1996 Act;
(4) the adverse impact of the proposed mergers on the effectiveness of comparative practices analyses; and (5) the present inadequacy of other alternatives to large incumbent
LEC benchmarks.11
Market-by-market evaluation
In approving the merger of Cingular-AT&T Wireless, the FCC conducted a detailed analysis of the merger’s effect on wireless markets. The FCC noted that a calculation of the HHI, which is frequently used by the DOJ merger review under the
Merger Guidelines, is only the beginning of the Commission’s analysis of the
10 SBC-Ameritech Order, at 14761; Bell Atlantic-GTE Order, at para.127-172. 11 Id.
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competitive effects of the merger.12 Thus, the FCC undertook a general assessment of factors beyond concentration that are important to determining likely competitive effects
of the merger. For each wireless market, the FCC considered: (1) the number of rival
carriers that offer competitive nationwide service plans as well as regional and local
plans; (2) the spectrum holdings of each of the rival carriers identified in (1) above; (3)
the geographic coverage of their respective networks; (4) the combined entity’s post-
transaction market share; (5) the share of spectrum suitable for the provision of mobile
telephony services controlled by the combined entity; and (6) whether additional
spectrum suitable for the provision of mobile telephony services will be made available
in the Commission’s particular spectrum action.13
Merger-specific benefits and efficiencies
With regard to the claimed benefits of a particular merger, there are several criteria
the FCC applies in deciding whether, and, how claimed benefit should be considered and
weighed against potential harm. First, the claimed benefit must be merger-specific. This means that the claimed benefit must be likely to be accomplished as a result of the merger but unlikely to be realized by other means that entail fewer anticompetitive effects.14 For
example, in SBC-Ameritech, the FCC found that each company could expand
12 Cingluar-AT&T Order, at para. 184. 13 Id. at para. 190. 14 AT&T-MediaOne Order, para.178 (finding that the merger will create an entity that has the ability and the incentives to expand its operations and provide facilities-based competition against incumbent LECs more effectively than either party alone could.); See also SBC-Ameritech Order, 14 F.C.C.R. at 14,825, para. 255 (Public interest benefits also include any cost saving efficiencies arising from the merger if such efficiencies are achievable only as a result of the merger...); See also Cingular-AT&T Order, at para. 205; AOL-Time Warner Order, at 6666, para. 282.
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geographically or offer the product on its own but for the merger. Thus, the FCC rejected
several benefits claimed by the merging companies.15
Second, the claimed benefit must be verifiable. Because much of the information relating to the potential benefits of a merger is in the sole possession of the merging companies, they are required to provide sufficient evidence supporting each claimed benefit to allow the FCC to verify the likelihood and magnitude of the claimed benefit.16
Third, the Commission applied a sliding scale approach in evaluating benefit claims.17
Under this approach, the FCC stated, where potential harm appears both substantial and likely, the merging parties’ demonstration of claimed benefits also must reveal a higher degree of magnitude and likelihood than we would otherwise demand.18
The public interest benefits may include efficiencies. The FCC has noted that beneficial efficiencies include only those that are merger-specific (i.e., those that would not be achievable but for the proposed merger).19 Thus, the Commission has held that
efficiencies that can be achieved through means less harmful to the public interest than
the proposed merger cannot be considered true merger benefits. The Commission has
further stated that efficiencies are particularly significant if they improve market
15 Each company individually could expand its respective wireless footprints through other acquisitions or joint ventures that do not threaten equivalent public interest harm. Each company could offering out-of-region Internet services today… SBC-Ameritech Order, 14 F.C.C.R., at 14854, para. 347 16 AT&T-MediaOne Order, at para. 154; SBC-Ameritech Order, at 14,825, para. 255; Bell Atlantic-GTE Order, at para. 241. 17 See Cingular-AT&T Order, at para.206; SBC-Ameritech Order, at 14,825. See also DOJ/FTC Merger Guidelines § 4 (The greater the potential adverse competitive effect of a merger ... the greater must be cognizable efficiencies in order for the Agency to conclude that the merger will not have an anticompetitive effect in the relevant market.). 18 Id. 19 AOL-Time Warner Order, at 6666, para. 282; SBC-Ameritech Order, at 14,847; Bell Atlantic- GET Order, at 239-241.
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performance in a relevant market and thereby reduce the harm otherwise presented by the
proposed merger.20
The FCC noted that, in SBC-Ameritech, although some benefits of efficiency such
as cost savings may be merger-specific, verifiable, and even likely, the benefits may not
necessarily be passed through to consumers in the form of lower prices or new or
improved services.21 The FCC further recognized that it will more likely find marginal
cost reductions to be cognizable than reductions in fixed cost. The Commission justified this criterion on the ground that, in general, reductions in marginal cost are more likely to
result in lower prices for consumers.22
Public Interest Factors
While the FCC makes findings related to pertinent antitrust policies in evaluating each merger, the Commission has a broader responsibility to consider other factors as
well.23 Based on the FCC’s discussion of the public interest benefits for each merger, this
study found the factors the Commission considered in its public interest inquiry.24 Those factors can be classified into four categories: economic factors, technology factors, regulatory factors, and social factors25 (Figure 6-1).
20 Id. 21 SBC-Ameritech Order, 14 F.C.C.R. at 14,849, para. 328. 22 The FCC noted that the reductions in fixed cost may be result of decreases in output, not the result of efficiencies generated from the particular merger. See, e.g., Cingular-AT&T Order, 19 F.C.C.R. para.205; SBC-Ameritech Order, at 14,847; Bell Atlantic-GET Order, at 240. 23 TCI-Liberty Order, 9 F.C.C.R., 4785, para 18. 24 This study only focused on the public interest benefits the FCC found likely to outweigh the harm to the public interest, excluding the public interest benefits claimed by the merging companies but rejected by the FCC. 25 These factors are necessarily mutually-exclusive. For example, the public interest benefits such as the universal service deployment can belong to either technology or social factors. The author included it as a social factor because the universal service has long been recognized as the policy
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First, the economic factors indicate the public interest benefits that are related to
improvement of firms’ performances and abilities to accelerate overall competition in
markets. In evaluating mergers, the FCC examined whether the merger would result in
efficiency benefits. Efficiency benefits are the pro-competitive benefits of a merger that
improve market performance, and, thereby, are likely to benefit consumers through, for
example, lower prices, improved quality, enhanced service or new products.26 Thus,
efficiency benefits should lead to a broadened range of consumer choices, more price
competition, and increased responsiveness to consumer needs and desires on the part of
competing carriers and potential entrants.27 In particular, the FCC examined whether a
proposed merger would yield in the merger-specific efficiencies, especially focusing on
the efficiencies through cost-savings28 and synergies generated from the combination of
complementary assets and skills of two companies.29 The FCC has noted that these
goal of serving all American on a non-discriminatory basis rather than deploying technologies that are considered as new and advanced at the time of mergers. 26 AT&T-McCaw Order, 9 F.C.C.R., 5872, para. 57 27 Id. 28 See, e.g., Cingular-AT&T Order, at para.205; SBC-Ameritech Order, at 14,847; Bell Atlantic- GET Order, at 240. 29 AT&T-TCI Order, at para.147-8 (in addition to gaining access to AT&T’s capital resources, TCI also will have instant access to AT&T’s expertise and established telephony brand to support the combined entity’s new product offerings…TCI will be contributing a residential wireline network and architecture that currently serve millions of homes…We find that the merger will create an entity that has incentives to expand its operations and provide … and will be able to do so more quickly than either party alone could.); AT&T-McCaw Order, at para. 57 (AT&T and McCaw will each be able to rely on the other’s significant technological capabilities.); WorldCom-Intermedia Order, at para 14 (WorldCom’s acquisition of Digex will more quickly provide WorldCom with resources it currently lacks.).
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efficiencies are likely to make the merged companies stronger competitors in the relevant markets.30
Second, technology factors include the public interest benefits relating to the
deployment of new technologies or advanced services. The FCC examined whether
mergers would create an entity that has the ability and incentive to contribute to the
deployment of advanced services: upgrade of cable systems and deployment of new broadband and local telephony services;31 accelerated expansion and consistency of
advanced features in the wireless service markets;32 incentives for continued technical
and service innovations in the cellular service business;33 and accelerated transformation
of traditional media products to digital platforms and accelerated deployment of new
services34
Third, the FCC considered factors related to a merger’s effect on regulatory
efficacy. In certain mergers, such as SBC-Ameritech and Bell Atlantic-GTE, the FCC
analyzed the effect of the proposed mergers on the ability of regulators and competitors
to use comparative analyses of the practices of similarly-situated independent incumbent
LECs to implement the Communications Act in an effective manner. With regard to the
30 WorldCom-Intermedia Order, at para 14 (the merger is likely to serve the public interest because . . . making WorldCom a stronger competitor in the provision of next generation communications service . . . ) 31 AT&T-TCI Order, at para 147. (We also find that the merger offers the potential, at least in most areas where TCI has enough subscribers to warrant the expense of two-way-up-grades, to create greater customer choice among video-and content-enriched high-speed Internet access services.) 32 SBC-Ameritech Order, at 14,847 33 AT&T-McCaw Order, at para. 57. 34 See, e.g., AOL-Time Warner Order, at paras. 306-7 (we recognize the potential for the merged firm to expedite Time Warner’s deployment of IP telephony and to allow Internet video streaming.)
256 foreign carrier’s entry into the U.S. market, in BT-MCI, the executive branches’ concerns regarding security and the compliance with the U.S. law also were considered.
Lastly, social factors, in the context of merger review, included the diversity of ownership and viewpoint. In the five electronic media mergers analyzed in this study, the
FCC focused on the mergers’ compliance with the FCC media ownership rules. At issue were the diversification of ownership35 and the diversity of viewpoint available to viewers and listeners indicated as no shortage of media outlets and the wide variety of programming alternatives.36 Merging companies’ commitment to deployment of the universal service, 37 and corporate responsibility38 also were considered as significant public interest benefits by the FCC.
In conclusion, these are factors that the FCC used to evaluate public interest benefits in the context of merger review. As illustrated in , the underlying policy goal of these factors was the acceleration of competition, which the Commission contends leads to the public interest benefits of lower prices, improved quality of products, and enhanced services. While some economic factors such as efficiencies were also considered by the DOJ/FTC, the consideration of overall factors by the FCC indicates that the Commission has a broader standard as the sector-specific regulator.
These factors are summarized in .
35 Westinghouse-Infinity Order, para. 44.; Clear Channel-AMFM Order, 15 F.C.C.R.. 36 Univision-HBC Order, at para. 65. 37 AT&T-TCI Order, at paras. 137-139 (…AT&T’s commitment to providing telecommunications services to all Americans on a non-discriminatory basis…We do not persuaded that the merger threatens our universal service goals….) 38 Id. at para. 142 (The records sufficiently demonstrates that AT&T has a good records of corporate responsibility and service)
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Public Interest Economic Factors Technology Factors
Regulatory efficacy Diversity Foreign carriers’ compliance Universal service with the U.S. law Corporate responsibility Consumer Benefits
Lower prices Improved quality Enhanced services
Figure 6-1. Public Interest Factors in Merger Review
CHAPTER 7 CONCLUSION
Discussing the findings of this study, this chapter concludes that the public interest standard of the FCC is unique and distinct enough to legitimize the current competition policy regime of dual-agency review in merger proceedings, which necessitate the sector- specific authority of the Commission. Then, this chapter discusses the implications of this study. The last part of this chapter presents the limitations of the study and suggestions for future research.
Discussion of Research Findings
The telecommunications and the electronic media industries have been considered a unique and peculiar infrastructure, based on the notion that the products and services provided by these industries are related to contents, ideas, and information with significant social and political influence. This notion has been the underlying rationale for the dual-agency review by the DOJ/FTC and the FCC in mergers involving telecommunications and electronic media service providers. With regard to this dual jurisdiction in such mergers, questions have arisen as to how the review standards of the two agencies differ, and whether the sector-specific jurisdiction of the FCC in merger review is necessary, given that all proposed mergers are subject to the DOJ/FTC investigation under federal antitrust law.
The purpose of this study was to explore the underpinnings of the differences between the DOJ/FTC and the FCC in merger review. This project also aimed to examine how the public interest standard of the FCC addressed the unique characteristics of the
258 259 telecommunications and the electronic media industries and, thus, contributed to justify the sector-specific jurisdiction in merger review. With these research objectives, this study analyzed 15 mergers and acquisitions involving telecommunications and electronic media service providers that have been challenged by the DOJ/FTC as violation of
Section 7 of the Clayton Act.
Review Standards
RQ1 of this study asks: how is the competition framework of the FCC different from that of the DOJ/FTC as reflected in the review standards in mergers and acquisitions involving telecommunications and electronic media service providers?
To answer RQ1, this study compared the review standards of the FCC with those of the DOJ/FTC. The study found that, throughout all the 15 merger cases, the DOJ/FTC review was consistent in that the analysis of each merger was soundly based on the
Merger Guideline factors. Most of the DOJ/FTC analysis, as reflected in public documents, focused on identifying the relevant markets, calculating market concentration, analyzing ease of entry, and determining adverse competitive impacts of a merger.
In contrast, the FCC’s standard was more flexible and broader than the DOJ/FTC, since the FCC considered a variety of additional factors or principles. The FCC review has no established standard except that it consists of the Commission’s response to public comments -- including the petitions to deny a merger -- filed by a wide variety of interested parties, and the FCC’s own review under the public interest standard. Overall, in conducting its public interest inquiry, the FCC examined four overriding questions: (1) whether the transaction would result in a violation of the Communications Act or any other applicable statutory provision; (2) whether the transaction would result in a violation of the Commission’s rules; (3) whether the transaction would substantially
260 frustrate or impair the Commission’s implementation or enforcement of the
Communications Act and/or other related statutes, or would interfere with the objectives of the Communications Act and/or other related statutes; and (4) whether the transaction would yield affirmative public interest benefits. The FCC considered a variety of factors including the merger’s compliance with the FCC’s rules such as the ownership rules, program access rules, spectrum cap rules, and foreign carrier entry rules.
The author found that the 15 merger cases can be classified into three groups based on the extent to which the two agencies’ standards are consistent: (1) complementary; (2) complementary with substantial difference; and (3) consistent. First, nine cases demonstrated the two agencies’ standards were complementary. These cases are: AT&T-
Liberty, Westinghouse-Infinity, Clear Channel-AMFM, and Univision-HBC. In these cases, the FCC either reached a different conclusion from that of the DOJ, or reached the same decision on different grounds with respect to the identical relevant markets. The differences arose from three reasons: differences in defining the relevant markets, the application of distinct factors and standards, or the FCC’s consideration of the merger as modified by the DOJ consent decree.
Second, among the remaining six merger cases, five cases demonstrated that the two agencies’ standards are complementary with substantial differences since the FCC covered what the DOJ did not. Specifically, in these five cases: (1) the FCC also examined the merger’s effect on the DOJ’s relevant market in analyzing each merger, (2) the FCC independently scrutinized the merger’s effect on additional markets that the DOJ did not discuss in the documents, and (3) the FCC found significant anticompetitive harm
261
in those markets (FCC-only markets). These cases are: SBC-Ameritech, Bell Atlantic-
GTE, AT&T-MediaOne, AOL-Time Warner, Time Warner-Turner.
Third, in only one case, WorldCom-Intermedia, where the agencies’ review
standards consistent in that the FCC reached the same conclusion on the same grounds as
the DOJ. Thus, the mergers that belong to the first and the second groups demonstrate
that the FCC scrutinizes mergers with a unique standard, as the sector-specific regulatory agency, that is complementary to the criteria of the DOJ/FTC under federal antitrust law.
Merger Conditions
RQ2 of this study asks: how do the merger remedies of the agencies differ,
particularly as reflected in the conditions imposed on mergers? To examine the differences in merger conditions imposed by the DOJ/FTC and the FCC, this project classified all the merger conditions into ten categories based on the activities involved in
each requirement: divestiture, governance, separate operations for selected company
functions, provision of services, structural non-discrimination, behavioral or conduct-
related non-discrimination, misuse of information, transparency, compliance, and
activities other than those that fit the other nine categories.
Overall, the DOJ consent decrees included more structural-oriented remedies than
the FCC orders. Among the fifteen mergers, the DOJ consent decrees contained
divestiture requirements in ten cases.1 The FCC orders adopted divestiture conditions in
only six merger cases2 where the DOJ also required divestiture. In the four cases where
1 Those cases are: AT&T-TCI, SBC-Ameritech, Bell Atlantic-GTE, AT&T-MediaOne, WorldCom-Intermedia, Cingular-AT&T Wireless, Time Warner-Turner, Westinghouse-Infinity, Clear Channel-AMFM, and Univision-HBC. 2 Both the DOJ and the FCC imposed the divestiture condition in AT&T-TCI, AT&T-MediaOne, Cingular-AT&T Wireless, Westinghouse-Infinity, Clear Channel-AMFM, and Univision-HBC.
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only the DOJ adopted the divestiture requirement, which is the most structure-oriented
remedy, the FCC imposed either a set of more conduct-oriented conditions (SBC-
Ameritech, Bell Atlantic-GTE, and WorldCom-Intermedia) or no conditions (Time
Warner-Turner).3 This study also found that more divestiture conditions were imposed on mergers where the agencies were concerned with potential harm arising from the horizontal effects of the merger, whereas more conduct-oriented conditions were imposed on mergers with potential harm arising from the vertical effects of the merger.
The FCC’s sector-specific concerns were reflected in conditions that addressed the merger’s adverse impact on regulatory efficacy, or promotion of equitable offering of services, and/or efficient deployment of new technologies. These findings indicate that the FCC adopts merger conditions to enhance competition and to serve the broad aim of the public interest under the Communications Act, whereas the DOJ remedies are directly tailored to the specific Section 7 violation, as charged in the merger investigation. This implies that the FCC plays a unique and distinct role as the sector-specific regulator.
Consistency of the Standard
RQ3 of this study asks: to what extent are the standards of review of the agencies consistent over the years and across the two different industry sectors of telecommunications and electronic media?
To answer this question, this study examined ten telecommunications mergers and five media mergers approved in 1983 - 2004. Throughout the years and across the two industry sectors, the standard of the DOJ/FTC was consistent, pursuant to the Merger
3 See supra ch.5 part 3 (Merger Conditions) for summary of findings with regard to the merger conditions.
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Guidelines.4 However, the evasion of rate regulation factor, which only applies to
monopoly public utilities (i.e., local telephone companies before the passage of the
Telecommunications Act of 1996), may no longer apply to mergers in the telecommunications industry, since the 1996 Act opened the local monopoly market to competition.
Unlike the DOJ/FTC, the FCC showed some flexibility with regard to the factors it
considered in each merger. With the changes in markets over the time, the FCC adopted
detailed analyses, such as the transitional market analysis, considering the evolving
markets for the telecom and electronic media services. While the FCC considered various
factors and conducted an extensive analysis in evaluating the ten telecommunications
mergers examined in this study, the Commission’s discussion of five media mergers was relatively concise, mostly focusing on the merger’s compliance with the Commission’s media ownership rules.
The flexibility in the level of scrutiny for each merger may be partly because of the
FCC’s review process. Since the FCC’s review considers both public comments and the
Commission’s own analysis, it is likely that the mergers with more comments and petitions are subject to a higher level of scrutiny. Furthermore, as criticized by one of the
FCC commissioners, there is no established FCC standard for distinguishing between the
license transfers that take place due to a merger that trigger extensive analysis by the full
Commission and those that do not.5 In fact, the Commission annually approves thousands
4 See supra ch. 5 part 4 (Consistency of the Standard) 5 Separate Statement of Commissioner Harold Furchtgott-Roth, in SBC-Ameritech Order, at 15192.
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of license transfers without any scrutiny or comment, while others receive minimal
review, and only a few are subject to intense regulatory scrutiny.6
In certain telecommunications mergers, a sector-specific factor such as the network effect was considered by both the FCC and the DOJ (AOL-Time Warner, WorldCom-
InterMedia, and Cingular-AT&T Wireless). Meanwhile, in the FCC’s review of the media mergers, the compliance with the ownership rules was discussed in light of the diversity (e.g. Univision-HBC, and Westinghouse-Infinity).
The Public Interest Standard
RQ 4 of this study asks: what factors or principles constitute the public interest as applied by the FCC in the merger review? Analyzing the FCC’s review of each merger, this study showed that the FCC employed a balancing process that weighed potential public interest harm against potential public interest benefits. Then focusing on the
FCC’s discussion of the potential benefits of each merger, this study found that the FCC adopted a particular pubic interest analysis that has not been found in the DOJ/FTC’s federal antitrust merger review.
Specific tests employed by the FCC included the test under the Foreign Carrier
Entry Order (including Effective Competitive Opportunities’ analysis in BT-MCI), the transitional market analysis (BT-MCI, SBC-Ameritech, and Bell Atlantic-GTE), the
Comparative Practice Analysis (SBC-Ameritech, and Bell Atlantic-GTE), and the market-by-market evaluation (Cingular-AT&T). In determining whether the public interest benefits outweighed the public interest harm in each merger, the FCC consistently stated that the claimed benefits must be merger-specific and verifiable. The
6 Id.
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FCC also made clear that, in SBC-Ameritech and Cingular-AT&T Wireless, the claimed
benefits must show a higher magnitude and likelihood than the Commission would otherwise demand if the potential harm appeared substantial and likely (the sliding-scale
approach).
In addition to these specific measurements of the public interest, the dissertation
suggests factors that constitute the public interest in context of merger reviews based on
what was found in the FCC’s discussion of the public interest benefits of each merger.
Those factors are economic factors (e.g, merger-specific efficiencies, cost savings,
synergies generated from a combination of complementary assets or skills of two
companies), technology factors (e.g., technological innovations and deployment of
advanced services), regulatory factors (e.g., regulatory efficacy and the compliance with
the rules regarding foreign carriers’ entry to the U.S. markets), and social factors (e.g., diversity of ownership and viewpoint, universal service, and corporate responsibility).
The underlying goal in these factors is the acceleration of competition, which leads to the public interest benefits of lower price, improved quality, and enhanced services.7
The FCC’s Role as the Sector-specific Regulator
RQ5 of this study asks: how does the public interest standard justify the sector-
specific jurisdiction of the FCC in merger review? All of the findings above, taken
together, suggest that the public interest standard of the FCC is distinct enough to
legitimize its sector-specific authority in merger review.
This study confirmed that the antitrust analysis undertaken by the DOJ/FTC
focuses solely on whether a proposed merger would harm competition. The FCC’s
7 See supra ch.6. part2 (Public Interest Factors) and Figure 6-1.
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analysis is not, however, limited by traditional antitrust principles. The competition
framework and the public interest analysis of the FCC also encompassed the broad aims
of the Communications Act,8 which include, among other things, a preference for
preserving and enhancing competition in relevant markets, preserving and advancing
universal service,9 accelerating private sector deployment of advanced services,10 ensuring a diversity of license holdings or viewpoints,11 and generally managing the
spectrum in the public interest.12
Specifically, this study shows the FCC’s standard as the sector-specific regulator
was distinct and different from the DOJ/FTC in three respects: (1) overall review
standards, (2) merger conditions, and (3) the FCC’s public interest inquiry. First,
comparing the overall merger review standards of the agencies, this study found that the
FCC’s standard was different from the DOJ/FTC in identifying the relevant markets,
implementing diverse factors and principles, conducting detailed analysis based on the
sector-specific factors, and finding additional anticompetitive harm in the FCC-only
markets. This study further identified five merger cases that have the FCC-only markets,
which strongly suggests that the FCC’s unique criteria under the public interest
framework pursuant to the Communications Act are complementary with substantial
difference to the DOJ/FTC’s criteria pursuant to general antitrust principles. The FCC’s
jurisdiction under the Communications Act gives the Commission more flexibility and
8 See 47 U.S.C. 157 nt. 254, 332(c)(7), Telecommunications Act of 1996, Preamble. 9 See, e.g., GTE-Southern Pacific, AT&T-TCI, SBC-Ameritech, and Bell Atlantic-GTE. 10 See, e.g., AT&T-TCI, SBC-Ameritech, Bell Atlantic-GTE, and AOL-Time Warner. 11 See, e.g., Time Warner-Turner, Westinghouse-Infinity, Clear Channel-AMFM, and Univision- HBC. 12 See, e.g., AT&T-McCaw, AT&T-TCI, SBC-Ameritech, Bell Atlantic-GTE, and Cingular- AT&T Wireless.
267 more precise enforcement tools that the Commission has under the Clayton Act.13 Indeed, although the FCC has the authority for merger review both under the Clayton Act and the
Communications Act, the Commission declined to exercise the Clayton Act authority.14
This study confirmed that antitrust agencies’ substantially lessening competition standard pursuant to the Clayton Act do not contemplate the sector-specific issues or policy goals.
Second, another difference between the DOJ/FTC review and that of the FCC was also found in merger conditions. The FCC adopted a wide rage of conduct-oriented conditions, whereas the DOJ/FTC imposed more structure-oriented remedies. As the DOJ indicated, conduct-oriented remedies have the direct and indirect costs associated with monitoring the merged firm’s activities and ensuring adherence to the conditions.15 These costs would be burdensome to federal antitrust enforcement agencies such as the
DOJ/FTC that review mergers and acquisitions in all industries.
On the other hand, the FCC, as the sector-specific regulatory agency, monitors the efficacy of the conditions or safeguards imposed in its decisions, as well as the DOJ/FTC
13 See, e.g., 47 U.S.C. §§ 201-05, 207-09, 211, 213-13, 218-20, 312, 503. 14 See, e.g., BT-MCI Order, 12 F.C.C.R.. 15364-5, para. 28 (refusing to exercise the FCC’s statutory authority under the Clayton Act because [the Commission’s] public interest authority under the Communications Act to consider the impact of the proposed transfer on competition is sufficient to address the competitive issues raised by the proposed merger… including the issue of whether the transfer may substantially lessen competition or tend to create a monopoly.) See also MCI-WorldCom Order, 13 F.C.C.R.. at 18032-33, para.12 (1998); Bell Atlantic-NYNEX Order, 12 F.C.C.R. at 20006 para. 35; Application of Pacific Telesis Group and SBC Communications, Inc, for Consent to Transfer Control of Pacific Telesis Group, Memorandum Opinion and Order, 12 F.C.C.R. 2624, 2631 para. 13 (1997) (refusing to exercise the FCC’s statutory authority under the Clayton Act in these cases). The D.C. Circuit has held that the FCC has discretion whether to assert its Clayton Act authority. See United States v FCC, 652 F2d 72, 82-83 (D.C. Cir. 1980) (deferring to the FCC’s expertise given the complex technical nature of the issues involved in the grant of authority to intervenor company). 15 Antitrust Division of the U.S. Department of Justice, Antitrust Division Policy Guide to Merger Remedies, Oct 2004.
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measures.16 Since the FCC has the responsibility to monitor the conduct of firms in the
telecommunications and the electronic media industries, even without imposing certain
conditions at the time of the approval, the FCC stated that the Commission would closely
monitor the broadband deployment of the merging parties in AT&T-TCI.17
In addition, the FCC’s merger conditions include the provisions to promote the
broad aim of the Communications Act, although the conditions may not be directly
related to the particular harm in the merger. For example, the FCC conditions regulate the
service offerings of the merged companies (e.g., requirements of expansion of certain
service to specific areas in GTE-Southern Pacific, SBC-Ameritech, and Bell Atlantic-
GTE). These examples demonstrate the FCC, pursuant to its the public interest authority,
imposed narrowly-tailored, transaction-specific conditions that ensure the public interest
is served by the transaction.18 Indeed, the FCC’s public interest authority enables it to
impose conditions that could result in a merger yielding overall positive public interest benefits.19
Since the FCC imposes conditions that include requirements that are not directly
related to the particular harm associated with the merger, the Commission has been
criticized for using merger conditions as a backdoor mechanism to impose its regulatory
16 See, e.g., AT&T-McCaw Order, at para 7 (The FCC will have the opportunity to monitor the post-merger conduct of AT&T-McCaw and to adopt additional measures should they prove necessary.); BT-MCI Order (separate statement of Commissioner Andrew C. Barrett) 17 AT&T-TCI Order, 14 F.C.C.R., at 3208, para. 96.; AT&T-MediaOne Order, 15 F.C.C.R., at 9821, para.10. 18 Cingular-AT&T Wireless Order, 19 F.C.C.R., para. 43. 19 See AOL-Time Warner Order, 16 F.C.C.R. at 6657m para 25.
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agenda, preferring adjudications to formal rulemaking.20 However, it seems that merger
conditions serve as an efficient regulatory tool in the telecommunications and the media
industries. Given the nature of the industries that are subject to the rapidly changing
technologies, the FCC may face the challenge of dealing with convergent technologies
that do not easily fit into the current regulatory scheme. Furthermore, in today’s
information marketplaces -- where competition is driven by innovation and speedy
decisions -- time and costs involved in formal rulemaking may place burdens on
companies attempting to survive in the environment. In this respect, merger conditions provide a viable alternative to de facto rulemaking for companies in the telecommunications and the media industries.21 Nevertheless, it also should be noted that
this approach helps resolve specific problems rather than industry-wide issues.
Third, the FCC’s unique role as the sector-specific agency in merger review is also
demonstrated in its own public interest inquiry, which requires the consideration of
various public interest factors with implementation of particular tests and analyses. In this
process, the FCC admits to making predictions about future market conditions and the
likely success of individual competitors.22 In making these predictions, the FCC is not
bound by the rules of evidence that apply in the antitrust merger review by the DOJ/FTC.
Rather, as the Supreme Court indicated, the FCC must be able to consider intangibles.23
20 Rachel E. Barkow and Peter W. Huber, A Tale of Two Agencies: A Comparative Analysis of FCC and DOJ Review of Telecommunications Mergers, 2000 U CHI LEGAL F 29, at 67 (2000). 21 PETER W. HUBER, MICHAEL K. KELLOGG, & JOHN THORNE,, FEDERAL TELECOMMUNICATIONS LAW, New York: Aspen Law & Business § 7.5.4.7 (1999). 22 BT-MCI Order, 12 F.C.C.R., at 15372, para. 42. 23 FCC v. RCA Communications Inc., 346 U.S. 86, 96-97 (1953) (To restrict the Commission’s actions to cases in which tangible evidence appropriate for judicial determination is available would disregard a major reason for the creation of
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Under this sector-specific authority, the FCC’s public interest analysis of a merger
encompasses the consideration and prediction of future competition.24
In contrast, the DOJ/FTC play a role different than that of industry policy makers or regulators that try to move industries in a certain direction or dictate particular market results: the DOJ/FTC are law enforcers.25 The Justice Department’s primary role is to be watchdog to ensure the protection and enhancement of competitive markets rather than a regulator.26 Because of the dual jurisdiction in the telecommunications and the electronic media industries, the nature of the competition is shaped not only by antitrust rules, but by regulatory policies that govern the interactions of firms inside the industries.27
administrative agencies, better equipped as they are for weighing intangibles by specialization, by insight gained through experience, and by more flexible procedure. In the nature of things, the possible benefits of competition do not lend themselves to detailed forecast)Id.: See also FCC v. WNCN Listeners Guild, 450 U.S. 582, 594-95 (1981) (The Commission’s decisions must sometimes rest on judgment and prediction rather than pure factual determinations. In such cases complete factual support for the Commission’s ultimate conclusions is not required, since a forecast of the direction in which future public interest lies necessarily involves deductions based on the expert knowledge of the agency: citing and quoting FCC v. National Citizens Committee for Broadcasting, 436 U.S. 775, 814 (1978) and FPC v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 29 (1961) ) 24 See, e.g., BT-MCI Order, SBC-Ameritech Order, and Bell Atlantic-GTE Order (applying the transitional market analysis). 25 Comparative Merger Control Analysis: Six Guiding Principles for Antitrust Agencies-New and Old, Address by William J. Kolasky, Antitrust Division of the United States Department of Justice, Mar 18, 2002. 26 International Telecommunication Union, Workshop on Competition Policy in Telecommunications: The Case of the United States of America, § 5.3.1, Geneva, Nov 2002 (It [the Justice Department] is not, however, a sheepdog that constantly herds regulated entities toward policy goals.) 27 AT&T-TCI Order, 14 F.C.C.R., at 3169, para.14.
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Although some scholars argued that dual-agency review is unnecessary,28 the
findings of this study demonstrate the necessity to retain the current regime of dual-
agency review. With regard to the DOJ/FTC authority, the agencies’ merger review
pursuant to the U.S. antitrust laws has protected the competitive process that underlies the
free market economy. As proven in this study, the DOJ/FTC standard is consistent under
the Merger Guideline based on sound economics and hard evidence.29 One of the
elements of sound decision making is a sound analytical framework grounded in
economic science.30 The Merger Guidelines took giant steps toward basing merger policy
on economic science.31 The consistency in standards based on sound economics that is
confirmed by this study further continues to apply across industry sectors, enabling antitrust agencies to implement inter-industry bench mark. Through the process, the agencies’ merger review is intended to enhance consumer choice and promote competitive prices, so that society as a whole benefits from the best possible allocation of
resources. Furthermore, the DOJ/FTC -- as the federal agencies charged with the
responsibility of enforcing the antitrust laws -- have made it a high priority to enforce the
antitrust laws with respect to international operations and to cooperate wherever
28 D. Curran, Rethinking Federal Review of Telecommunications Mergers, 28 OHIO N.U.L.REV. 747 (2002) (arguing one agency should have sole authority over telecommunications mergers); Howard A. Shelanski, From Sector-specific Regulation to Antitrust Law for US Telecommunications: the Prospects for Transition, 26 TELECOMMUNICATIONS POLICY 335 (2002) (arguing that the changes in the legal and economic environment of US telecommunications are in fact creating the conditions necessary for significantly reducing regulation of telecommunications carriers and that the transition to regulation via general competition policy should continue). 29 United States Department of Justice, Sound Economics and Hard Evidence: The Touchstones of Sound Merger Review, Address by William J. Kolasky, June 14, 2002, at 2. 30 Id. 31 Charles A. James, Address before the United States Department of Justice Antitrust Division, on the occasion of the 20th Anniversary of the 1982 Merger Guidelines, June 10, 2002.
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appropriate with foreign authorities regarding such enforcement.32 Although the federal
antitrust laws have always applied to foreign commerce, that application is particularly
important today. Throughout the world, the importance of antitrust law as a means to
ensure open and free markets, protect consumers, and prevent conduct that impedes
competition is becoming more apparent.33 Thus, the role of the DOJ/FTC as federal
antitrust authorities is important in merger review.
With regard to the FCC authority, this study demonstrated that the FCC’s merger
review under the public standard is distinct enough to justify the necessity of the
Commission’s jurisdiction as the sector-specific authority in merger review. Most of all,
the FCC’s review standard is broader than the DOJ/FTC’s standard, encompassing the
public interest as well as competition. The FCC’s analysis is not limited by traditional
antitrust principles. The competition framework and the public interest analysis of the
FCC also encompasses the broad aims of the Communications Act.34
Although Congress has revisited the question of the FCC’s jurisdiction in merger
review twice within the past 10 years, Congress neither abolished the FCC’s authority
under the Clayton Act nor altered the obligation that any license transfer must serve the
public interest.35
32 United States Department of Justice & Federal Trade Commission, Antitrust Enforcement Guidelines for International Operations, April 1995, available at http://www.usdoj.gov/atr/public/guidelines/internat.htm (last visited on April 2005). 33 Charles A. James, supra note 31. 34 See 47 U.S.C. 157 nt. 254, 332(c)(7), Telecommunications Act of 1996, Preamble. 35 Harold Feld, The Need for the FCC Merger Review, American Bar Association Forum on Communications Law, available at http://www.abanet.org/forums/communication/comlawyer/fall00/feld.html (last visited on Apr. 2005). The 1992 Cable Act specifically left the existing merger review regime intact. See Cable Television Consumer Protection and Competition Act of 1992, 102 Pub. L. 385, 106 Stat. 1460 (1992).
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Further, in light of a First Amendment regime grounded on the assumption that the
government should not regulate the content of expression, structural regulation has been
used as alternative regulatory tool. Structural regulation has been implemented as a
method of control over the media industries to enhance diversity and promote
competition. As a structural regulation, merger review is a precise tool to promote the
public interest. Furthermore, in the current deregulatory environment, with dramatic
reduction in legal restrictions on ownership concentration, the FCC’s merger review
plays a far more vital role to monitor for market failure. In the absence of well-crafted
ownership restriction rules, it is the FCC’s responsibility to make sure that no transfer of
control creates a conglomerate so large and so dominate that it has harmful effects on
competition.36
In an age of unprecedented convergence of communications services,37 merger
review remains a critical tool for the FCC in carrying out its statutory authority to promote competition and serve the public interest. Consequently, the current regime of dual-agency review in telecommunications and electronic media merger should be retained.
Implications of the Study
Significance of the Study
Incorporating the principles from antitrust law with economics and policy in the field of telecommunications and electronic media, this study provides implications for research in competition policy with regard to mergers and acquisitions in the
36 Mergers in Telecom Industry: Hearing Before the Committee on Commerce, Science and Transportation, U.S. Senate, 106th Cong., 1st Session (Nov. 8, 1999). 37 AT&T –MediaOne Order, 15 F.C.C.R., at 9818.
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telecommunications and the media industries. No other study has undertaken a systematic
comparison of the agencies’ merger review standards and merger conditions via an
organized frame of analysis that comprehensively reviews all public documents of the
Antitrust Division of the Department of Justice, the Competition Bureau of the Federal
Trade Commission, and the Federal Communications Commission.
First, this project presented how the broad regulatory objectives of competition and
the public interest are narrowly defined and applied to actual marketplace in the context
of merger review. The analysis showed what specific values constitute the broad principle of competition and the public interest, and how it is applied as specific regulatory standards.
Second, by presenting evidences of the FCC’s distinct perspective in overall merger review standard, merger conditions, and its own public interest inquiry, this study provides the answers to whether the dual jurisdiction in a merger proceeding should be
retained. Specifically, the findings from the analysis verify the complementary role of the
DOJ/FTC as federal antitrust enforcement agency and the FCC as the sector-specific
agency.
Third, by analyzing mergers challenged by antitrust law enforcement agencies as
violations of antitrust law, this project also provides some strategic implications to
telecom and media companies. This study identified and examined specific factors, values, and tests considered by both regulatory bodies in finally approving challenged mergers involving significant potential anticompetitive impact on the relevant markets.
In summary, the public interest benefits of a proposed merger should be merger- specific and verifiable. In addition, the potential public interest benefits should increase
275 where the potential public interest harm are considered substantial. Further, the agencies require efficiency benefits to be merger-specific, and consider synergies generated from the merger is related to the reduction in marginal costs rather than fixed costs. Finally, mergers may need to be planned in consideration of the potential competition doctrine of antitrust law, as the agencies consider competition in the context of the transitional market, given the rapid changes in today’s telecommunications and electronic media industries.
Limitations of the Study and Suggestion for Future Research
This study has some limitations based on the availability of the public documents of the agencies and the characteristics of those documents. To compare the agencies’ approaches to each merger, the study examined the mergers on which both the DOJ/FTC and the FCC produced public documents. The FCC did not produce public documents on all the mergers challenged by the DOJ/FTC. This leads to a reduction in number of merger cases examined in this study. In addition, the only publicly available documents of the DOJ/FTC are the Complaint, the Competitive Impact Statement, and the Final
Judgment that focus on the negative aspects of the merger. Thus, it was impossible to examine the agencies’ evaluation of competitive benefits such as efficiencies.
As a case study, this research has a limitation in terms of the validity. This study analyzed ten telecom mergers and additionally included five electronic media mergers for comparison purposes. Although the ten telecommunications mergers are all the cases on which the agencies’ documents are available, for a more accurate generalization of the findings of this research, future study will need to examine more cases including all electronic mergers.
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In addition, in identifying the industry sectors as telecommunications and electronic media, this study relied on the DOJ/FTC’s relevant market definition. Future research might examine whether another approach with different industry classifications will result in different findings. It also will be valuable to examine whether merger conditions imposed really do what they are supposed to do.
APPENDIX MERGER CONDITIONS
Table A-1. GTE-Southern Pacific (the DOJ conditions) Categories Goals/Subjects Action Items Separate Corporate Prohibition on transferring to and from the Operation Separation acquired entities any assets, operations, or internal line of business separation Prohibition on maintaining for the acquired of the entities (1) common directors, officers, or acquired employees, (2) common facilities or assets, entities (3) or common books of accounts, costs, or form the expenditure GTOCs and Prohibition on the joint provision of the telecommunication services and the supporting sharing of propriety customer information, administrati network engineering data, or research and ve development, and limiting authority over operations the acquired entities to the highest-level of GTE GTE officials Service Prohibition on GTE’s marketing of the acquired Corporation entities’ services through the GTOCs Submission of an annual report on the compliance with the separation requirements Provision of The Partnership Prohibiting GTE from providing interexchange Service (settlement telecommunications services and procedure information services between AT&T and the largest independent telephone company) Future Restrictions on GTE’s ability to expand its Acquisition presence in the interexchange telecommunications industry through future acquisitions
277 278
Table A-1. Continued Categories Goals/Subjects Action Items Non- Equal Access Requirement that each GTOC provides to all discrimin interexchange carriers, information service ation providers, on unbundled, tariffed basis, (Structural) exchange access, information access, and exchange services for such access that is equal in type, quality, and price for all such interexchange carriers and information service providers. Non- Prohibition on discriminating between the discrimin services offered by any GTE affiliates and ation those offered by other persons, especially (Fair dealing/ with respect to interconnection, technical Conduct) information, exchange access services, and planning for new facilities or services Transparency Submission to the DOJ procedures for ensuring compliance with the equal access and non- discrimination obligations requirements Submission to the DOJ procedures for ensuring compliance with the requirements Compliance Enforcement Steps to be taken to ensure that, after entry, its employees become familiar with the terms of the Final Judgment and GTE’s policy regarding compliance with the requirements Divestiture may be required upon application of the DOJ if there is a finding by the court that GTE has engaged in a pattern of substantial violations of the requirements in the Final Judgment
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Table A-2. GTE-Southern Pacific (the FCC conditions) Categories Goals/Subjects Action items Governance May have the CEO and the President of GTE Corp. as interlocking directors Seperate SPCC and SPSC required to maintain their Operation accounting records separate from those of other GTE companies and affiliates Non- SPCC and SPSC required to obtain services discrimin from other GTE companies or affiliates ation on the basis of an arms length (Fair dealing/ relationship which reflects the terms, Conduct) prices, and conditions which would be available to any non-affiliated common carrier Provision of Inclusion of the state of Hawaii in (1) any Services interexchange telecommunications service offering, (2) point-to-point private line service, and (3) all the SPRINT service provided by SPCC that are available on the U.S. Mainland to metropolitan areas equivalent in size to the Honolulu metropolitan area in the same rate structure which applies on the U.S. Mainland
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Table A-3. AT-McCaw (the DOJ conditions) Categories Goals/Subjects Action Items Seperate AT&T and McCaw operated with separate Operation officers and personnel, and separate books, financial, and operating records Separate operation and marketing of their wireless services Non- Providing customers with local cellular service discrimin under price and terms that do not require ation customer to obtain interexchange service (structural) from AT&T Permitting customers automatically to route and to reach other interexchange carriers without the use of access code or any charges Permitting customers to designate the interexchange carrier of the customers’ choice AT&T’s providing to all interexchange carriers exchange access on an unbundled basis on terms not less favorable than those offered to McCaw Non- Prohibition on discriminating in favor of discrimin AT&T (1) in providing technical ation information about the cellular systems or (Fair its customers (2) in the interconnection dealing/C or use of the McCaw cellular system’s onduct) service and facilities, etc. Obligations to assist and not interfere with an incumbent customer’s changing infrastructure suppliers Buy-back obligation that lowers the cost for a competitor/customer to switch suppliers in the event that AT&T fails to comply with its obligations to its customers Use of Providing customer information to unaffiliated Informati interexchange carriers for use solely in on connection with marketing Restrictions on the flow of certain confidential information within the combined AT&T- McCaw (i.e., non-public information of its unaffiliated wireless infrastructure equipment customers) Compliance
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Table A-4. AT&T-McCaw (the FCC conditions) Categories Goals/Subjects Action Items Seperate AT&T directors apart from all matters Operation involving AT&T/McCaw’s television business Non- Prohibition against unreasonable discrimin discrimination against competitors with ation regard to existing contracts for the sale of (Fair dealing/ cellular network equipment and services Conduct) Entering written contracts for the development of proprietary products before AT&T- McCaw begins developing such products Prohibition against unreasonable discrimination in supplying proprietary products and services Provision of Providing current and future customers with Services the option to obtain McCaw’s local cellular service and AT&T’s interexchange service on an unbundled basis May provide local and long distance services on a bundled or packaging basis provided that the end-to-end rate shall not be less than the rate charged the general public and resellers for the air- time portion alone Use of Abiding by the consumer propriety network Informati information obligations currently on applicable to AT&T Transparency Abiding by the FCC’s affiliate transaction rules that require companies to record affiliate transactions ii their book of account/ Filing revisions to Cost Allocation Manual
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Table A-5. BT-MCI (the DOJ conditions) Categories Goals/Subjects Action Items Use of Confidentiality No use of any information that is identified as Informati (no misuse of proprietary by U.S. telecommunications on information) service providers and is obtained by BT from such providers as the result of BT’s provision of interconnection in the U.K. No use of any confidential, non-public information obtained as a result of BT’s correspondent relationships with other U.S. international telecommunications service providers Transparency Transparency Disclosing certain kinds of information (e.g., (disclosure of price, terms and conditions on which information) telecommunications services are provided to the merged company pursuant to interconnection arrangement, and information about planned and authorized changes in BT’s U.K. network that would affect interconnection arrangements with any licensed operator.
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Table A-6. BT-MCI (the FCC conditions) Categories Goals/Subjects Action Items Non- Equal Access MCI’s non-acceptance of BT traffic originated discrimin in the U.K. to the extent BT is found to ation be in non-compliance with U.K. (Fair dealing/ regulations implementing the European Conduct) Union’s equal access requirement Access to Facilities Making available MCI’s backhaul facilities in the U.S. to other carriers Transparency Keeping records Maintaining complete records on the (on facilities provisioning and maintenance of and services) network facilities and services it procures available to from BT inspection Filing reports Filing of (1) monthly circuit status reports for U.S.-U.K. circuits, (2) notification of each addition of circuits on the U.S.- U.K. route, (3) quarterly reports of revenue, number of messages and number of minutes of traffic for U.S.- U.K route, and (4) a circuit status report on the U.S.-U.K route. Compliance Compliance with Obtaining prior Commission approval with safeguard in regard to any proposed change in BT’s BT-MCI I ownership or voting interest in MCI (JV) until Filing an application stating that MCI shall not final rules accept special concessions from any regarding foreign carrier or administration with dominant respect to traffic or settlement revenue carrier flows between the U.S. and any foreign regulation are country effective
Regulated as a dominant carrier on the U.S.- U.K. route License and License and authorizations subject to the authorization outcome of all final rules of general subject to applicability adopted in the other rules Commission’s Foreign Participation proceeding
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Table A-6. Continued Categories Goals/Subjects Action Items MCI subject to the outcome of all rules of general applicability relating to DBS licenses and the outcome of any pending applications for review of MCI’s license grant. Executive branch (1)All facilities for network management Concern related to domestic U.S. telecommunications infrastructure shall be in the U.S. (2)Prevention of the improper use of the merging companies’ facilities for unauthorized electronic surveillance and unauthorized access to Customer Proprietary Network Information (3) Protecting confidentiality and security of electronic surveillance orders and authorizations and certifications related to subscriber records and information (4)Ensuring security (e.g. Implementing certain measures requiring personal security clearance, and the prevention of access by unauthorized personnel to secure or sensitive network facilities and offices)
285
Table A-7. AT&T-TCI (the DOJ conditions) Categories Goals/Subjects Action Items Divestiture Divestiture of Reducing Liberty’s holdings of Sprint PCS to Sprint PCS 10% or less of the outstanding Sprint Interest PCS stock; The trustee divesting the remainder of Liberty’s Sprint Holdings Trustee’s power and authority to accomplish the divestiture All decisions regarding the divestiture of Liberty’s Spring Holdings made by the trustee without discussion with AT&T No divestiture in a private sale without a premerger notification Prohibition against financing in connection with the divestiture to the purchaser of Liberty’s Spring Holdings Prohibition against influencing the trustee’s accomplishment of the divestiture. The trustee serving at the cost and expense of Liberty Creation of a Trust Transferring Liberty’s Sprint Holdings to a trustee Submission of the name of the nominee for trustee to the DOJ for approval Separate Liberty Governance Economic interest arising in connection with operation and Liberty’s Sprint Holding inuring to the Economic benefits or the holders of Liberty Media Interest Tracking Shares Prohibition against AT&T’s engaging in any transaction that would transfer such benefits to AT&T Abiding by AT&T Policy Statement Regarding Liberty Tracking Stock Matters
286
Table A-7. Continued Categories Goals/Subjects Action Items Amendment to the certificate of incorporation and bylaws of Liberty Forming a Capital Stock Committee Prohibiting Liberty from purchasing additional shares of Spring PCS Tracking Stock without the prior written consent of the DOJ Hold Separate Restriction on Liberty’s ability to acquire any relationship interest in AT&T’s wireless business
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Table A-8. ATT-TCI (the FCC conditions) Categories Goals/Subjects Action Items Divestiture Transferring ownership of TCI’s Sprint tracking stock to a trust AT&T-TCI directing any economic interest arising in connection with the Sprint PCS tracking stock to the benefit of the shareholders of Liberty Media consistent with the DOJ consent decree
288
Table A-9. SBC-Ameritech (the DOJ conditions) Categories Goals/Subjects Action Items Divestiture Divestiture of Schedule for the divestiture of Cellular System Cellular Assets Interest Compliance with the FCC rules (spectrum aggregation rule, and cellular cross- ownership rule) Kinds of Cellular System Assets subject to divestiture Public notice of the availability of the Cellular System Assets for sale Providing access to the Cellular Systems Assets and all information relevant to the sale with all prospective purchasers and the DOJ No interference with any negotiation by any purchaser Cooperate with the purchaser with regard to intellectual property that cannot be transferred without the consent of the licensor Preservation of all records of efforts made for the divestiture Appointment of Notification to the DOJ and the court to Trustee appoint trustee to divest any remaining assets required to be divested before consummation of the merger Power and authority of the trustee/ Paying costs and expenses by the merging companies Using best effort to assist the trustee Trustee needed to preserve all records and information with regard to all efforts made for the divestiture
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Table A-9. Continued Categories Goals/Subjects Action Items Transferring to the trustee the authority to manage and operate any remaining Cell Systems Assets that have not been divested within the time specified for completion of divestiture No attempt to influence the trustee regarding the operation and management of the cellular systems. Preservation of Each of the Cellular System Assets kept Asset/Hold separate and apart from the operation of Separate the other cellular systems until Order accomplishment of the divestiture Use of all efforts to operate the cellular systems as ongoing, economically viable and active competitor to other companies until accomplishment of the divestiture No action that would impede or jeopardize the sale of the Cellular Systems Assets Appointment of persons to oversee the merging companies’ compliance with the conditions Affidavits Providing affidavit to the DOJ as to the fact and manner of the merging companies’ compliance with the conditions (including all actions taken) Compliance Authorized representatives of the DOJ Inspection permitted to inspect all relevant records Submission of reports upon requested by the DOJ No divulgement of information by the DOJ to any third parties Financing No financing of any purchase by an acquirer Notification Notification of the proposed divestiture to the DOJ Providing additional information regarding the divestiture and proposed purchaser as requested by the DOJ Retention of Retention of Jurisdiction by the court Jurisdiction
290
Table A-10. SBC-Ameritech (the FCC conditions) Categories Goals/Subjects Action items Seperate Provisioning of interim line sharing to the Separate Advanced services affiliate Separate Affiliate The affiliates being regulated by the FCC as for non-dominant carriers Advanced Substantial weight to the performance of the Services affiliates in setting annul bonuses Sunset provision (termination of the requirement) Provision of Discounted Discounted surrogate line sharing charges to Services Surrogate unaffiliated providers of Advanced Line Sharing Services Charges Non- Non-discriminatory rollout of xDSL services to discriminator Low Income Urban/Rural Pool. y Rollout of xDSL Services Uniform and Deployment of uniform, electronic OSS Enhanced including uniform interfaces OSS Restructuring OSS Restructuring OSS charges by eliminating flat- Charges rate monthly charges for access to its facilities Most-Favored Making available to telecom carriers any Nation service arrangement that an incumbent Provisions LEC develops for an SBC-Ameritech for Out-of- affiliate Region and Making available to telecom carriers any In-Region interconnection arrangement Arrangement s
291
Table A-10. Continued Categories Goals/Subjects Action Items < Fostering Out- Offering local services in out-of-territory of-Region markets Competition >
Out-of-Territory Competitive Entry (Nation- Local Strategy) < Improving Prohibition of mandatory, minimum monthly or Residential flat-rate charges on Inter-LATA calls Phone Services>
Inter-LATA Services Pricing Non- Access to Loop Providing unaffiliated telecom carriers with discrimin Information non-discriminatory access to local loop ation for information (Structura Advanced l) Services Collocation Filing a collocation tariff and/or offered Compliance amendments to interconnection agreement Retaining independent auditors Refund of nonrecurring collocation costs to telecom carriers Shared Transport Offering shared transport in SBC-Ameritech in Ameritech Service Areas States Installation of new cables in a manner that will provide telecom carriers a single point of interconnection
292
Table A-10. Continued Categories Goals/Subjects Action Items Non- Advanced Services Providing telecom carriers options for ordering discrimin OSS components used to provide Advanced ation Services (Fair dealing/ Providing unaffiliated telecom carriers with Conduct) access to the OSS enhancements OSS discounts OSS Assistance to Designation of OSS experts to assist qualifying Qualifying CLECs with OSS issues CLECs Multi-state Negotiating in good faith an interconnection Interconnecti and/or resale agreement covering the on and provision of interconnection arrangement, Resale services, and/or UNEs in two or more Agreements SBC-Ameritech States. Unbundled Loop Offering the unbundled loop carrier-to-carrier Discount promotion Resale Discount Offering the resale carrier-to-carrier promotion UNE Platform Offering UNE platform promotion Promotion Offering of UNEs Keeping UNE available to telecom carriers in the SBC-Ameritech Service Area Access to Cabling Offering a trial with one ore more interested, in Multi-Unit unaffiliated CLECs to identify the Properties procedures and costs required to provide CLECs with access to cabling within multi-dwelling unit premises where SBC- Ameritech controls the cables. Transparency Loop Conditioning Filing cost studies and proposed rates for Charges and conditioning xDSL loops Cost Studies Carrier-to-Carrier Performance Plan
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Table A-10. Continued Categories Goals/Subjects Action Items Shared Transport Filing tariffs and/or offering amendments in Ameritech containing standard terms and conditions States for inclusion in interconnection agreements to make available to customers of SBC-Ameritech’s unbundled local switching Enhanced Lifeline File a tariff for an enhanced Lifeline plan in the Plans SBC-Ameritech Service Area Additional Service File a state-by-state service quality reports on a Quality quarterly basis Reporting Report on a quarterly basis ARMIS local service quality data Compliance Carrier-to-Carrier Performance Plan < Ensuring Establishment of a Compliance Program to Compliance ensure implementation of the merger with & conditions Enforcement of These Conditions>
Compliance Program Independent Engagement of an independent auditor to Auditor conduct an examination engagement resulting in a positive opinion regarding SBC-Ameritech’s compliance with the merger conditions Engagement of an independent auditor to perform an agreed-upon procedures engagement regarding compliance with the separate Advanced Service affiliate requirements of Section I of the conditions
294
Table A-10. Continued Categories Goals/Subjects Action Items Enforcement Obligation to pay for non-performance specially required by the conditions Other Activities Alternative Implementation of an alternative dispute Dispute resolution mediation process to resolve Resolution carrier-to-carrier disputes regarding local Through services Mediation NRIC Participation Continued participation in the Network Reliability and Interoperability Council (NRIC) Sunset Termination of conditions Effect of Effect of Conditions with regard to state law Conditions and the FCC’s authority
295
Table A-11. Bell Atlantic-GTE (the DOJ conditions) Categories Goal/Subject Action Items Divestiture Divestiture of Schedule of the divestiture of Wireless System Cellular Assets Interest Compliance with the FCC rules (spectrum aggregation rule, and cellular cross- ownership rule) Kinds of Wireless System Assets subject to divestiture Public notice of the availability of the Wireless System Assets for sale Providing access to the Wireless Systems Assets and all information relevant to the sale with all prospective purchasers and the DOJ No interference with any negotiation by any purchaser Cooperate with the purchaser with regard to intellectual property that cannot be transferred without the consent of the licensor Preservation of all records of efforts made for the divestiture Appointment of Notification to the DOJ and the court to appoint Trustee trustee to divest any remaining assets required to be divested before consummation of the merger Power and authority of the trustee/ Paying costs and expenses by the merging companies Using best effort to assist the trustee Trustee needed to preserve all records and information with regard to all efforts made for the divestiture
296
Table A-11. Continued Categories Goals/Subjects Action Items Transferring to the trustee the authority to manage and operate any remaining Wireless Systems Assets that have not been divested within the time specified for completion of divestiture No attempt to influence the trustee regarding the operation and management of the cellular systems. Hold Separate Each of the Wireless System Assets kept Order separate and apart from the operation of the other cellular systems until accomplishment of the divestiture Use of all efforts to operate the cellular systems as ongoing, economically viable and active competitor to other companies until accomplishment of the divestiture No action that would impede or jeopardize the sale of the Wireless Systems Assets Appointment of persons to oversee the merging companies’ compliance with the conditions Affidavits Providing affidavit to the DOJ as to the fact and manner of the merging companies’ compliance with the conditions (including all actions taken) Compliance Authorized representatives of the DOJ Inspection permitted to inspect all relevant records Submission of reports upon requested by the DOJ No divulgement of information by the DOJ to any third parties Financing No financing of any purchase by an acquirer Notification Notification of the proposed divestiture to the DOJ
297
Table A-11. Continued Categories Goals/Subjects Action Items Providing additional information regarding the divestiture and proposed purchaser as requested by the DOJ Retention of Retention of Jurisdiction by the court Jurisdiction Categories Goal/Subject Action Items Divestiture Divestiture of Schedule of the divestiture of Wireless System Cellular Assets Interest Compliance with the FCC rules (spectrum aggregation rule, and cellular cross- ownership rule) Kinds of Wireless System Assets subject to divestiture Public notice of the availability of the Wireless System Assets for sale Providing access to the Wireless Systems Assets and all information relevant to the sale with all prospective purchasers and the DOJ No interference with any negotiation by any purchaser Cooperate with the purchaser with regard to intellectual property that cannot be transferred without the consent of the licensor Preservation of all records of efforts made for the divestiture Appointment of Notification to the DOJ and the court to appoint Trustee trustee to divest any remaining assets required to be divested before consummation of the merger Power and authority of the trustee/ Paying costs and expenses by the merging companies
298
Table A-11. Continued Categories Goals/Subjects Action Items Using best effort to assist the trustee Trustee needed to preserve all records and information with regard to all efforts made for the divestiture Transferring to the trustee the authority to manage and operate any remaining Wireless Systems Assets that have not been divested within the time specified for completion of divestiture No attempt to influence the trustee regarding the operation and management of the cellular systems. Hold Separate Each of the Wireless System Assets kept Order separate and apart from the operation of the other cellular systems until accomplishment of the divestiture Use of all efforts to operate the cellular systems as ongoing, economically viable and active competitor to other companies until accomplishment of the divestiture No action that would impede or jeopardize the sale of the Wireless Systems Assets Appointment of persons to oversee the merging companies’ compliance with the conditions Affidavits Providing affidavit to the DOJ as to the fact and manner of the merging companies’ compliance with the conditions (including all actions taken) Compliance Authorized representatives of the DOJ Inspection permitted to inspect all relevant records Submission of reports upon requested by the DOJ No divulgement of information by the DOJ to any third parties
299
Table A-11. Continued Categories Goals/Subjects Action Items Financing No financing of any purchase by an acquirer Notification Notification of the proposed divestiture to the DOJ Providing additional information regarding the divestiture and proposed purchaser as requested by the DOJ Retention of Retention of Jurisdiction by the court Jurisdiction
300
Table A-12. Bell Atlantic-GTE (the FCC conditions) Categories Goals/Subjects Action items Seperate < Equitable & Establishment of the separate affiliates to Operation efficient provide all Advanced Services advanced Providing all Advanced Services through one or services more separate affiliates deployment> Provisioning of interim line sharing to the Separate Advanced services affiliate Separate Affiliate The affiliates being regulated by the FCC in for accordance with the structural, Advanced transactional, and nondiscrimination Services requirements of 47 U.S.C. 272(b), (c), (e), and (g). Sunset provision (termination of the requirement) Provision of Discounted Discounted surrogate line sharing charges to Services Surrogate unaffiliated providers of Advanced Line Sharing Services Charges Non- Non-discriminatory rollout of xDSL services to discriminator Low Income Urban/Rural Pool. y Rollout of xDSL Services
301
Table A-12. Continued Categories Goals/Subjects Action Items Uniform and Deployment of uniform, electronic OSS Enhanced including uniform interfaces OSS Most-Favored Making available to telecom carriers any Nation service arrangement that an incumbent Provisions LEC develops for an SBC-Ameritech for Out-of- affiliate Region and Making available to telecom carriers any In-Region interconnection arrangement Arrangement s < Fostering Out- Offering local services in out-of-territory of-Region markets Competition >
Out-of-Territory Competitive Entry (Nation- Local Strategy) < Improving Prohibition of mandatory, minimum monthly or Residential flat-rate charges on Inter-LATA calls to Phone residential customers Services> Inter-LATA Services Pricing Non- Access to Loop Providing unaffiliated telecom carriers with discrimin Information non-discriminatory access to local loop ation for information (Structural) Advanced Services Collocation, Filing a collocation tariff and/or offered Unbundled amendments to interconnection Network agreement Elements, Retaining independent auditors and Line Refund of nonrecurring collocation costs to Sharing telecom carriers Compliance
302
Table A-12. Continued Categories Goals/Subjects Action Items Access to Cabling Installation of new cables in a manner that will in Multi-Unit provide telecom carriers a single point of Properties interconnection Non- Advanced Services Providing telecom carriers options for ordering discrimin OSS components used to provide Advanced ation Services (Fair dealing/ Providing unaffiliated telecom carriers with Conduct) access to the OSS enhancements OSS discounts OSS Assistance to Designation of OSS experts to assist qualifying Qualifying CLECs with OSS issues CLECs Multi-state Negotiating in good faith an interconnection Interconnecti and/or resale agreement covering the on and provision of interconnection arrangement, Resale services, and/or UNEs in two or more Agreements SBC-Ameritech States. Unbundled Loop Offering the unbundled loop carrier-to-carrier Discount promotion Resale Discount Offering the resale carrier-to-carrier promotion UNE Platform Offering UNE platform promotion to telecom Promotion carriers Offering of UNEs Keeping UNE available to telecom carriers in the SBC-Ameritech Service Area Access to Cabling Offering a trial with one ore more interested, in Multi-Unit unaffiliated CLECs to identify the Properties procedures and costs required to provide CLECs with access to cabling within multi-dwelling unit premises where SBC- Ameritech controls the cables.
303
Table A-12. Continued Categories Goals/Subjects Action Items Transparency Loop Conditioning Filing cost studies and proposed rates for Charges and conditioning xDSL loops Cost Studies < Ensuring Open Reporting of performance in 20 measurement Local categories Markets>
Carrier-to-Carrier Performance Plan Enhanced Lifeline Filing a tariff for an enhanced Lifeline plan in Plans the SBC-Ameritech Service Area Additional Service Filing a state-by-state service quality reports on Quality a quarterly basis Reporting Report on a quarterly basis ARMIS local service quality data NRIC Participation Continued participation in the Network Reliability and Interoperability Council (NRIC) Compliance Voluntary payment based on the performance < Ensuring Establishment of a Compliance Program to Compliance ensure implementation of the merger with & conditions Enforcement of These Conditions>
Compliance Program
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Table A-12. Continued Categories Goals/Subjects Action Items Independent Engagement of an independent auditor to Auditor conduct an examination engagement resulting in a positive opinion regarding SBC-Ameritech’s compliance with the merger conditions Engagement of an independent auditor to perform an agreed-upon procedures engagement regarding compliance with the separate Advanced Service affiliate requirements of Section I of the conditions Voluntary Voluntary incentive payment structure, which Payment could expose the merged company to Obligations significant financial liability, if the merged firm fails to satisfy an obligation in a timely manner. Enforcement Obligation to pay for non-performance specially required by the conditions Sunset Termination of conditions Effect of Effect of Conditions with regard to state law Conditions and the FCC’s authority Other Activities Alternative Implementation of an alternative dispute Dispute resolution mediation process to resolve Resolution carrier-to-carrier disputes regarding local Through services Mediation
305
Table A-13. AT&T-MediaOne (the DOJ conditions) Categories Goals/Subjects Action Items Divestiture Divestiture of the ServicCo interest either pursuant to the Operating Agreement or implementing an alternative plan approved by the DOJ Seperate Ensuring that (1) the management of the Operation ServiceCo Interest will be kept separate and apart from the operation of AT&T and its affiliates, and (2) all records and competitively-sensitive information associated with ServiceCo will be kept separate and apart from records and information associated with AT&T’s and its affiliates’ other businesses AT&T and MediaOne prohibited from (1) attempting to influence any decision by ServiceCo regarding its offering of residential broadband services to any customer other than AT&T’s, MediaOne’s and Time Warner’s cable system, (2) attempting to influence any decision by ServiceCo relating to the content or services provided by any person other than Time Warner to ServiceCo subscribers, and (3) impeding ServiceCo’s ability to obtain additional capital from other direct or indirect holders of equity in ServiceCo. Appointment of a person or persons to oversee the ServiceCo Interest, who will have complete managerial responsibility for the ServiceCo Interest
306
Table A-13. Continued Categories Goals/Subjects Action Items Non- Prohibiting merging parties, without prior discriminat consent of the DOJ, AT&T, MediaOne, ion and their affiliates, from entering into (1) (Fair any contractual arrangement with Time dealing/co Warner to jointly offer any Residential nduct) Broadband Service, (2) any contractual arrangement with Time Warner that has the purpose or effect of preventing the merging companies or Time Warner from offering Residential Broadband Services in any region or to any group of customers, or (3) any arrangement with Time Warner that has the purpose or effect of preventing: (a) AT&T, MeidaOne, their affiliates or Time Warner from including any services in any Cable Modem Service offered by AT&T, MediaOne, their affiliates, or Time Warner, or (b) AT&T, MediaOne, and their affiliates from granting preferential treatment in any Cable Modem Service offered by AT&T, MediaOne, or their affiliates to services offered by any person other than Time Warner The DOJ shall consent to a proposed contractual arrangement unless it will not substantially lessen competition in any market Compliance
307
Table A-14. AT&T-MediaOne (the FCC conditions) Categories Goals/Subjects Action Items Divestiture Divestiture The Video Condition requires AT&T and MediaOne, by May 19, 2001, to either (1) divest their interests in TWE, (2) terminate their involvement in TWE’s video programming activities or separate divest their interests in other cable systems, such that they will have attributable ownership interests in cable systems serving no more than 30% of MVPD subscribers nationwide AT&T shall file with the Cable Services Bureau, within six months after the merger’s closing, a written document stating which one of the three compliance options specified in the Video Condition it has elected. If the merging companies have not complied with the Video Condition by the May 19, 2001 deadline, then the companies shall place into an irrevocable trust for the purpose of sale the assets that it must divest Separate Safeguards relating AT&T and MediaOne shall comply with the Operation to Video conditions set forth below (safeguards Programmin relating to TWE, Liberty, etc) until the g companies have (1) divested their interests in TWE, (2) terminated their involvement in TWE’s video programming activities, or (3) divested their interests in other cable systems, such that they will have attributable ownership interests in cable systems serving no more than 30% of MVPD subscribers nationwide. Safeguard relating No officer or director of AT&T shall also be an to TWE officer or director of TWE. No officer, director, or employee of AT&T shall, directly or indirectly, influence or attempt to influence, or otherwise participate in, the management or operation of the Video Programming activities of TWE.
308
Table A-14. Continued Categories Goals/Subjects Action Items Safeguard relating To the extent that there is a director, officer, or to Liberty employee of Liberty that also is a director or officer of AT&T (Joint Director or Officer), the Joint Director or Officer may not, directly or indirectly, influence or attempt to influence, or otherwise participate in, matters relating to the Video Programming activities of AT&T AT&T shall take all necessary steps to ensure that the Joint Director or Officer does not participate in, or have access to information, documents, or other materials of any kind concerning, the Video Programming related activities of AT&T’s cable systems No employee, officer, or director of AT&T may communicate with the Joint Director or Officer concerning the Video Programming related activities of Liberty or the Video Programming related activities of AT&T’s cable systems. Safeguards relating AT&T shall take all necessary steps to ensure to that any directors it appoints to the Cablevision Cablevision Board of Directors are and Rainbow recused from any and all involvement in the management or operation of Rainbow. No employee, officer, or director of AT&T shall, directly or indirectly, influence or attempt to influence, or otherwise participate in, the management or operation of Rainbow. No officer, director, or employee of AT&T shall, directly or indirectly, influence or attempt to influence, or otherwise participate in, the management or operation of iN DEMAND or the MediaOne Video Programming Interests Compliance Compliance Appointment of a Corporate Compliance Inspection Officer and an Independent Auditor
309
Table A-15. AOL-Time Warner (the DOJ conditions) Categories Goals/Subjects Action Items Provision of Broadband Internet AOL Time Warner required to make available Services Access to subscribers at least one unaffiliated IPS provided by Earthlink on Time Warner’s cable systems before AOL itself begins Alternative Service offering service Provider AOL Time Warner required to allow two other offering unaffiliated ISPs onto its cable systems within 90 days after AOL’s commencement of service in Identified Cable Divisions (Alternative Cable Broadband Service Agreement) AOL Time Warner required to allow three other unaffiliated ISPs onto its cable systems within 90 days after AOL’s commencement of service in other Time Warner Cable Divisions (Alternative Cable Broadband Service Agreement) Non- Broadband Internet AOL Time Warner required to make same level discrimin Access of services and network flow monitoring ation data available to non-affiliates (Self-dealing/ AOL Time Warner required to negotiated in Conduct) Alternative Service good faith for non-discriminatory access Provider to its cable systems with any ISPs offering requesting such access ITV and other No interference with content being used by any Internet non-affiliated ISP Services No interference with ITV services provided by any non-affiliates No discrimination on the basis of affiliation in the transmission of content that AOL Time Warner contracted to deliver to subscribers
310
Table A-15. Continued Categories Goals/Subjects Action Items Broadband Offering and marketing AOL’s DSL services in Transport the same manner and at the same price in Time Warner cable areas where affiliated, cable-based Internet access service is available as in those areas where affiliated, cable-based Internet access in not available Transparency Broadband Internet Notification obligation under the Alternative Access Cable Broadband Service Agreement
Alternative Service Provider offering Compliance Broadband Internet The FTC may appoint a trustee that have the Access authority to enter into the Alternative Cable Broadband Service Agreement if AOL Time Warner fails to enter into the Alternative Service Agreement Provider offering Monitor Trustee The FTC’s appointment of a Monitor Trustee to monitor compliance with the FCC Order Power and authority of the trustee (e.g. complete access to personnel, books, records, and facilities) Cost and expenses paid by AOL Time Warner Trustee Provisions The FTC’s appointment of a trustee to enter into Alternative Cable Broadband Service Agreement with non-affiliated ISPs if AOL Time Warner fails to enter into agreement Compliance report Compliance report to the FCC
311
Table A-16. AOL-Time Warner (the FCC conditions) Categories Goals/Subjects Action Items Provision of Choice of ISPs Allowing customers to select a Participating Services ISP by a method that does not discriminate in favor of AOL affiliates on the basis of affiliation First Screen Allowing all unaffiliated ISPs to control the content of their customer’s first screen. AOL Time Warner may not require an unaffiliated ISPs customer to go through an affiliated ISPs to reach the unaffiliated ISP IM conditions AOL Time Warner may not offer any IM-based high speed services (AIHS), including streaming video applications that uses a Names and Presence Directory (NPD) over the Internet via AOL Time Warner broadband facilities until the company demonstrates that it has satisfied one of the three pro-competitive options outlined by the FCC: (1) showing that it has implemented an industry-wide standard for server-to- server interoperability, (2) showing that it has entered into a contract for server-to- server interoperability with at least one significant, unaffiliated provider of NPD- based services. Within 180 days of executing the first contract, AOL Time Warner must demonstrate that is has entered into two additional contracts with significant, unaffiliated, actual or potential competing providers, or (3) seeking relief by showing by clear and convincing evidence this condition no longer serves the public interest, convenience, or necessity Non- Open Access AOL Time Warner required to open its cable discrimin systems to competitor ISPs pursuant to ation the FTC consent agreement (Structural)
312
Table A-16. Continued Categories Goals/Subjects Action Items Non- Billing Participating ISPs must be allowed to directly discrimin bill the subscribers to whom they have ation (Fair sold their high-speed Internet access dealing/ services, if they choose to do so conduct) Technical Offering the technical performance standards Performance that it provides to its affiliated ISPs in a non-discriminatory manner to unaffiliated ISPs No exclusive or AOL Time Warner may not enter an agreement anticompetiti with AT&T that gives any AOL Time ve contract Warner ISP exclusive access to any AT&T cable system Contractual AOL Time Warner may not enter an agreement relationship with AT&T that affects AT&T’s ability to with AT&T offer any rates, terms or conditions of access to ISPs that are not affiliated with AOL Time Warner Transparency Rights to Disclose AOL Time Warner may not enter into any Contracts to contract with any ISP for connection with the FCC AOL Time Warner’s cable system that prevents that ISP from disclosing the terms of the contract to the FCC under the FCC’s confidentiality procedures Notification to the FCC of any transactions that increase the merged company’s ownership interest in General Motors Corp. and/or Hughes Electronics Corp. Compliance Enforcement Enforcement procedure procedure
313
Table A-17. WorldCom-Intermedia (the DOJ conditions) Categories Goals/Subjects Action Items Divestiture Divestiture of the Schedule for the divestiture of Intermedia Intermedia Assets Assets Public notice of the availability of the Cellular System Assets for sale Providing access to the Intermedia Assets and all information relevant to the sale with all prospective purchasers and the DOJ No interference with any negotiation by any purchaser No hiring of any Intermedia employee for 12 months following the closing of the merger Cooperate with the purchaser with regard to intellectual property that cannot be transferred without the consent of the licensor Preservation of all records of efforts made for the divestiture Prohibition against any action that will impeded in any way operation, sale, or divestiture of the Intermedia Assets Divestiture shall made to an acquirer that has the capability to compete effectively in the provision of Internet backbone and access services
314
Table A-17. Continued Categories Goals/Subjects Action Items Power and authority of the trustee/ Paying costs and expenses by the merging companies Using best effort to assist the trustee Trustee needed to preserve all records and information with regard to all efforts made for the divestiture No attempt to influence the trustee regarding the operation and management of the cellular systems. Preservation of Intermedia kept separate and apart from the Assets operation of WorldCom until accomplishment of the divestiture Use of all efforts to operate Intermedia as ongoing, economically viable and active competitor to other companies until accomplishment of the divestiture Prohibition against removing or disposing of any of the Intermedia Assets No action that would impede or jeopardize the sale of Intermedia Assets Compliance Authorized representatives of the DOJ Inspection permitted to inspect all relevant records Submission of reports upon requested by the DOJ No divulgement of information by the DOJ to any third parties Affidavits Providing affidavit to the DOJ as to the fact and manner of the merging companies’ compliance with the conditions (including all actions taken) Financing No financing of any purchase by an acquirer Notification Notification of the proposed divestiture to the DOJ Providing additional information regarding the divestiture and proposed purchaser as requested by the DOJ Retention of Retention of Jurisdiction by the court Jurisdiction
315
Table A-18. WorldCom-Intermedia (the FCC conditions) Categories Goals/Subjects Action Items Compliance Dominant carrier Regulated as dominant in their provision of services on the U.S.-Brazil route Compliance with Divestiture of Intermedia’s assets in accordance the DOJ with the DOJ consent decree consent decree
316
Table A-19. Cingular-AT&T Wireless (the DOJ conditions) Categories Goals/Subjects Action Items Divestiture Divestiture of the Definition of the Divestiture Assets (Which Divestiture means Wireless Business Divestiture Assets Assets, Spectrum License Divestiture Assets, and Minority Interest, including any direct or indirect financial ownership or leasehold interests and any direct or indirect role in management or participation in control therein) Schedule for the divestiture of the Divestiture Assets Public notice of the availability of the Divestiture Assets for sale Providing access to the Divestiture Assets and all information relevant to the sale with all prospective purchasers and the DOJ No interference with any negotiation by any purchaser Cooperate with the purchaser with regard to intellectual property that cannot be transferred without the consent of the licensor
317
Table A-19. Continued Categories Goals/Subjects Action Items Divestiture of the In five markets where the merging companies Minority Interest own a minority interest in another mobile wireless service provider, the companies are required to divest those interests. Retention allowed in three markets with the approval of the DOJ if the companies demonstrate the retained minority will become entirely passive and will not significantly diminish competition. In the event retention of any Minority Interests are approved, the merging companies is prohibited from obtaining any additional equity interest in such entity Full divestiture of the interests are required in the remaining two markets Divestiture shall made to an acquirer that has the capability to compete effectively in the provision of mobile wireless services Appointment of Notification to the DOJ and the court to appoint Trustee trustee to divest any remaining assets required to be divested before consummation of the merger Power and authority of the trustee/ Paying costs and expenses by the merging companies Using best efforts to assist the trustee Trustee needed to preserve all records and information with regard to all efforts made for the divestiture Trustee needed to file a monthly reports No attempt to influence the trustee regarding the operation and management of the cellular systems.
318
Table A-19. Continued Categories Goals/Subjects Action Items No objection to a sale by the Trustee on any ground other than the trustee’s malfeasance Until the Divestiture Assets have been divested to an acquirer approved by the DOJ, the Trustee shall have sole and complete authority to manage and control the Divestiture Assets and shall not be subject to any control or direction by the merging companies Preservation of Until the divestiture required by the proposed Assets Final Judgment have been accomplished, the merging companies and the Management Trustee shall preserve, maintain, and continue to support the Divestiture Assets, take all necessary steps to manage the Divestiture Assets in order to maximize their revenue, profitability, and viability so to permit expeditious divestitures in a manner consistent with the proposed Final Judgment Appointment of the Management Trustee The Wireless Business Divestiture Assets kept separate and apart from other operations of the merging companies until accomplishment of the divestiture Use of all efforts to operate the Wireless Business Divestiture Assets as ongoing, economically viable and active competitor to other companies until accomplishment of the divestiture Prohibition against any action that would jeopardize the sale of the Divestiture Assets Affidavits Providing affidavit to the DOJ as to the fact and manner of the merging companies’ compliance with the conditions (including all actions taken) Keeping all records of all efforts made to preserve and divest the Divestiture Assets
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Table A-19. Continued Categories Goals/Subjects Action Items Submission of reports upon requested by the DOJ No divulgement of information by the DOJ to any third parties Financing No financing of any purchase by an acquirer Notification Notification of the proposed divestiture to the DOJ Providing additional information regarding the divestiture and proposed purchaser as requested by the DOJ Retention of Retention of Jurisdiction by the court Jurisdiction
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Table A-20. Cingular-AT&T Wireless (the FCC conditions) Categories Goals/Subjects Action Items Divestiture Divestiture of the Definition of the Divestiture Assets (Which Divestiture means Operating Units, Spectrum Assets Holdings) Schedule for the divestiture of the Divestiture Assets No interference with any negotiation by any purchaser In the event retention of any Minority Interests are approved, the merging companies is prohibited from obtaining any additional equity interest in such entity Appointment of Filing the proposed Trustee with the FCC to Trustee appoint trustee to divest any remaining assets required to be divested before consummation of the merger Power and authority of the trustee/ Paying costs and expenses by the merging companies Using best efforts to assist the trustee Trustee needed to preserve all records and information with regard to all efforts made for the divestiture Trustee needed to file a report with the Wireless Telecom Bureau Until the Divestiture Assets have been divested to an acquirer approved by the FCC, the Trustee shall have sole and complete authority to manage and control the Divestiture Assets and shall not be subject to any control or direction by the merging companies
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Table A-20. Continued Categories Goals/Subjects Action Items Appointment of the Management Trustee The merging companies and trustee are required to abide by the DOJ consent decree Treatment of Partial Converting partial non-passive interests held Interests into partial passive interests in four markets Retention allowed in three markets with the approval of the FCC if the companies demonstrate the retained minority will become entirely passive and will not significantly diminish competition. Provision of Limit on future Restriction on Cingular’s participation in a Services business future spectrum auction
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Table A-21. TCI-Liberty (the DOJ conditions) Categories Goals/Subjects Action Items Non- TCI and Liberty are restrained, with respect to discrimin each MSTD they control, from ation discriminating against any video (Fair dealing/ programming provider not affiliated with Conduct) Bell Atlantic-GTE in the selection, terms or conditions of carriage of video programming offered by such distributor controlled by TCI and Liberty TCI and Liberty are restrained, with respect to any video programming provider they control, from refusing to sell or license, or from selling or licensing only on a discriminatory basis, any video programming service for distribution by any competing MSTD TCI and Liberty are restrained, with respect to any MSTD or any video programming provider in which they have financial interest but they do not control, from seeking or supporting any conduct prohibited above provisions. Compliance Compliance Authorized representatives of the DOJ Inspection permitted to inspect all relevant records Submission of reports upon requested by the DOJ No divulgement of information by the DOJ to any third parties Retention of Retention of Jurisdiction by the court Jurisdiction
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Table A-22. Time Warner-Turner (the FTC conditions) Categories Goals/Subjects Action Items Divestiture Divestiture TCI and Liberty required to divest interest in Time Warner and Turner-related businesses to the separate company by combining those interests in the separate company, distributing the separate company stock to the holders of Liberty Tracking Stock (Distribution) TCI and Liberty required to use their best efforts to ensure that the separate company’s stock is registered for public stock markets TCI and Liberty required to make all regulatory filings The Separate The separate company to be bound by the FTC Company Order and the company’s board of (Hold separate) directors are subject to the prior approval of the FTC No director or employee of TCI or Liberty shall concurrently serve as an director or employee of the separate company No attempt for TCI and Liberty to influence any other person’s vote of the separate company stock Limits on the separate company’s ownership interest in Time Warner TCI and Liberty required to use their best efforts to obtain appropriate IRS ruling
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Table A-22. Continued Categories Goals/Subjects Action Items Non- Programming TCI and Time Warner prohibited from entering discrimin Service into any new Programming Service ation Agreement Agreement that requires carriage of any (Fair dealing/ Turner Video Programming Service on Conduct) TCI’s cable systems for six months after the merger closing date Limit on duration of any Programming Service Agreement
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Table A-22. Continued Categories Goals/Subjects Action Items For subscribers that a competing MVPD services in the Service Overlap Area, Time Warner is required to provide any Turner Video Programming Service Programming Service to that competing MVPD at carriage terms no less favorable than Carriage Terms offered by Turner to the similarly situated MVPDs Time Warner is prohibited from (1) requiring a financial interest in any National Video Programming Service as a condition for carriage on one or more Time Warner cable TVs, and (2) discriminating in video programming distribution on the basis of affiliation in the selection, terms, or conditions for carriage of video programming provided by a non-Time Warner National Video Programming Vendor Management Collection of information regarding the Time Information Warner cable service (e.g., types of programming, the average carriage rates, etc) and providing those information to each member of Time Warner’s Management Committee on a regular basis Time Warner is required to carry at least one independent Advertising-supported News and Information National Video Programming Service Compliance Compliance Inspection Notification
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Table A-23. Westinghouse-Infinity (the DOJ conditions) Categories Goals/Subjects Action Items Divestiture Divestiture Divestiture of the WMMR-FM Assets and the WBOS-FM Assets to one or two acquirers acceptable to the DOJ Public notice of the availability of the WMMR- FM Assets and the WBOS-FM Assets for sale Providing access to the Assets and all information relevant to the sale with all prospective purchasers and the DOJ No interference with any negotiation by any purchaser Appointment of Notification to the DOJ and the court to appoint Trustee trustee to divest any remaining assets required to be divested before consummation of the merger Power and authority of the trustee/ Paying costs and expenses by the merging companies Using best efforts to assist the trustee Trustee needed to preserve all records and information with regard to all efforts made for the divestiture, and to file a monthly report with the companies, the DOJ and the court No attempt to influence the trustee regarding the operation and management of the cellular systems. The trustee required to file with the court a report if the trustee has not accomplished the divestiture. The court shall enter an order which shall include extending the tern of the trustee’s appointment
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Table A-23. Continued Categories Goals/Subjects Action Items Prohibiting Westinghouse and Infinity from removing or disposing of any of the WMMR-FM Assets or the WBOS-FM Assets No action that would impede or jeopardize the sale of the Assets Compliance Authorized representatives of the DOJ Inspection permitted to inspect all relevant records Submission of reports upon requested by the DOJ No divulgement of information by the DOJ to any third parties Affidavits Providing affidavit to the DOJ as to the fact and manner of the merging companies’ compliance with the conditions (including all actions taken) Financing No financing of any purchase by an acquirer Notification Notification of the proposed divestiture to the DOJ Providing additional information regarding the divestiture and proposed purchaser as requested by the DOJ Retention of Retention of Jurisdiction by the court Jurisdiction
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Table A-24. Westinghouse-Infinity (the FCC conditions) Categories Goals/Subjects Action Items Divestiture Prior to consummation of the transaction, Westinghouse and Infinity are required to have collectively divested themselves of sufficient stations, or consummated the assignment of stations to the Chicago Stations Trust and the Dallas Fort Worth Stations Trust so that the merger will result in Westinghouse Electric Corporation controlling no more than eight stations, no more than five of which are in the same service, in Chicago and Dallas/Fort Worth
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Table A-25. Clear Channel-AMFM (the DOJ conditions) Categories Goals/Subjects Action Items Divestiture Divestiture Divestiture of the Radio Assets (14 stations in the 5 Divestiture Cities) to one or two acquirers acceptable to the DOJ Public notice of the availability of the Radio Assets for sale Providing access to the Assets and all information relevant to the sale with all prospective purchasers and the DOJ No interference with any negotiation by any purchaser The divestiture shall be made to an acquirer (or acquirers) that has the intent and capability of competing effectively in the radio broadcasting business Notification to the DOJ and the court to appoint trustee to divest any remaining assets required to be divested before consummation of the merger Appointment of Power and authority of the trustee/ Trustee Paying costs and expenses by the merging companies Using best efforts to assist the trustee Trustee needed to preserve all records and information with regard to all efforts made for the divestiture, and to file a monthly report with the companies, the DOJ and the court No attempt to influence the trustee regarding the operation and management of the cellular systems.
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Table A-25. Continued Categories Goals/Subjects Action Items Preservation of Use of all efforts to operate the Radio Assets as Assets/ separate, ongoing, economically viable Hold Separate and active competitors to other stations in Order the Divestiture Cities until accomplishment of the divestiture Providing sufficient working capital to maintain the Radio Assets as economically viable and competitive ongoing businesses Prohibiting Clear Channel and AMFM from removing or disposing of any of the Radio Assets No action that would impede or jeopardize the sale of the Assets Clear Channel’s and Infinity’s employees with primary responsibility for sales, marketing and programming of the Radio Assets to be divested shall not be transferred or reassigned to any other station Appointment of a person or persons to oversee the Radio Assets who will be responsible for the companies’ compliance with the Final Judgement Affidavits Providing affidavit to the DOJ as to the fact and manner of the merging companies’ compliance with the conditions (including all actions taken) Financing No financing of any purchase by an acquirer Compliance Authorized representatives of the DOJ Inspection permitted to inspect all relevant records Submission of reports upon requested by the DOJ No divulgement of information by the DOJ to any third parties Providing additional information regarding the divestiture and proposed purchaser as requested by the DOJ Retention of Retention of Jurisdiction by the court Jurisdiction
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Table A-26. Clear Channel-AMFM (the FCC conditions) Categories Goals/Subjects Action Items Divestiture Divestiture of 122 stations in local radio markets in 37 areas either to third party buyers or to an insulated trust so at the time of the merger Clear Channel will be in compliance with the FCC’s rules
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Table A-27. Univision-HBC (the DOJ conditions) Categories Goals/Subjects Action Items Divestiture Divestiture of Univision is required to reduce its equity stake Entravision in Entravision so that it owns no more Holdings than 15 percent of all outstanding Entravision stock by March 26, 2006, and no more than 10 percent by March 26, 2009. The divestitures of this stock may be made by any combination of open- market sale, public offering, private sale, or repurchase by Entravision. The stock may not be sold by private sale or placement to any Spanish-language radio broadcaster other than Entravision unless the Department agrees to such a transaction in writing. Appointment of Power and authority of the trustee/ Trustee Paying costs and expenses by the merging companies Using best efforts to assist the trustee Trustee needed to preserve all records and information with regard to all efforts made for the divestiture, and to file a monthly report with the companies, the DOJ and the court No attempt to influence the trustee regarding the operation and management of the cellular systems. The trustee required to file with the court a report if the trustee has not accomplished the divestiture. The court shall enter an order which shall include extending the tern of the trustee’s appointment Affidavits Providing affidavit to the DOJ as to the fact and manner of the merging companies’ compliance with the conditions (including all actions taken) Compliance Designating an Antitrust Compliance Officer Inspection who supervises the review of current and proposed activities to ensure compliance with the Final Judgment
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Table A-27. Continued Categories Goals/Subjects Action Items Submission of reports upon requested by the DOJ No divulgement of information by the DOJ to any third parties Financing No financing of any purchase by an acquirer Notification Notification of the proposed divestiture to the DOJ Providing additional information regarding the divestiture and proposed purchaser as requested by the DOJ Notification Notification of the proposed divestiture to the DOJ Providing additional information regarding the divestiture and proposed purchaser as requested by the DOJ Retention of Retention of Jurisdiction by the court Jurisdiction Governance Exchange of Univision is required to exchange all of its Entravision Entravision Class A and Class C common Shares stock for a nonvoting equity interest with limited rights and to certify that the voting and director rights that Univision has held in connection with its Entravision stock has been eliminated. Entravision Univision and HBC are restrained from directly Governance or indirectly: (1) Suggesting or nominating any candidate for election to Entravision’s board or serving as an officer, director, manager, or employee of Entravision; (2) accessing any nonpublic information relating to the governance of Entravision; (3) voting or permitting to be voted any shares of Entravision stock that defendants own; (4) using or attempting to use any ownership interest in Entravision to exert any influence over Entravision in the conduct of Entravision’s radio business; (5) using or attempting to use any rights or duties under the television affiliation agreement or relationship to influence Entravision in the conduct of Entravision’s radio business; and (6) communicating to or receiving from Entravision any nonpublic
334
information relating to Entravision’s radio business.
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Table A-27. Continued Categories Goals/Subjects Action Items Permitted Conduct Individual managers, agents, and employees of the defendants are allowed to hold, acquire, or sell Entravision stock solely for personal investment. Officers and directors also may hold or sell Entravision stock but may not acquire any additional Entravision stock. Any Entravision stock held by these individuals is not subject to the stock-exchange or divestiture requirements of the proposed Final Judgment. Univision may acquire a majority of Entravision’s voting securities so long as the transaction is subject to the reporting and waiting requirements of the Hart- Scott-Rodino Antitrust Improvements Act of 1976 (15 U.S.C. § 18a), provided, however, that Univision cannot acquire or retain any interest in Entravision’s radio assets in any of the Overlap Markets as part of such a transaction without the approval of the Department, in its sole discretion.
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Table A-28. Univision-HBC (the FCC conditions) Categories Goals/Subjects Action Items Divestiture Divestiture divestiture of radio stations in Albuquerque and Houston, as may be necessary to come into compliance with the rules adopted by the Commission in its 2002 Biennial Order, or a showing that waiver of those rules is appropriate, within six months in the event that the stay pending appeal in Prometheus Radio Project v. Federal Communications Commission, (3d Cir. Sept. 3, 2003) (per curiam) is lifted or the local radio ownership rules adopted in the 2002 Biennial Review Order otherwise go into effect Governance/ Exchange of Univision is required to abide by the Economic Entravision representations made by Univision in the interest Shares applications of the license transfer regarding its interest in Entravision Compliance Notification of the Commission, should the Consent Decree between Univision and the U.S. Department of Justice expire, terminate, or otherwise be amended; the Commission may impose further requirements relating to ownership compliance as a result of the changed circumstances reported in such notification.
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BIOGRAPHICAL SKETCH
Seung Eun Lee received her B.A degree in English language and literature from
Ewha Womans University in Seoul, Korea. After obtaining her first Master of Arts degree in mass communications from Yonsei University, she worked as a researcher in journalism and communications at Samsung Press Foundation in 1997-1999. She
received her second M.A. degree in telecommunications focusing on media economics and management from Michigan State University at East Lansing.
Seung Eun went to the University of Florida with the alumni fellowship to pursue a
Ph.D. in journalism and mass communications. Her scholarship focused on law, economics, and competitive dynamics in the field of communications, mainly competition policy in the telecommunications and the electronic media industries. During her doctoral study, she also worked as a research/teaching assistant, and a researcher of the Citizen Access Project. After graduation she plans to pursue an academic career as a researcher in Korea.
