THE TELECOMMUNICATIONS INDUSTRY IN 1993: THE YEAR OF THE MERGER

Erin M. Reilly

"Vision is trivial. Doing it is the hard part." join forces with cable television carriers, invest in - James L. Barksdale' cellular, and establish wireless consortiums. At the same time, AT&T has its eye on the local loop Experiencing unprecedented change in an era of where competition is intensifying and where the convergence, the telecommunications industry will RBOCs currently control ninety-eight percent of all 2 long remember 1993 as the year of the merger. The local service.' mergers of today permit the efficient and economical The pending union of AT&T and McCaw, a exchange of technology in an era where the liquida- $12.6 billion stock swap announced August 18, tion of billions of corporate dollars to acquire entire 1993,9 promises to create a nationwide wireless net- companies is no longer practical. The abundance of work that will result in formidable new competition recent mergers can be distinguished from the merg- to existing cellular operators. AT&T's proposed ers and acquisitions of the past decade in two re- merger, the fifth largest in United States history, 0 spects: 1) the majority of these mergers are "strategic establishes a combination of wireless and long dis- alliances, usually within the acquirer's own industry tance that is bound to shake up the $7.8 billion cel- and are aimed at creating an even stronger resulting lular industry.1 entity;"8 and 2) these mergers involve market shares The merger comes at a time when the other large rather than cash as "the currency of choice in most long-haul players, namely MCI and Sprint, have 4 deals." These deals are being forged out of a desire also decided to invest in cellular and wireless tech- to control information, data and services through do- nology. The technological investments of the three minion over both the medium and the means of dominant interexchange carriers ("IXCs") could re- distribution.' sult in significantly lower prices and new service op- Mergers such as that of AT&T-McCaw, if suc- tions for the consumer. The telecommunications cessful, promise to incite the Regional Bell Operat- companies are competing for what they see as the ing Companies ("RBOCs")' into unbridled competi- ultimate goal-"universal follow-me roaming"-a tion among themselves, as they attempt to challenge wireless phone service that can operate at any time AT&T's dominance over the long-distance market, and in any location.'2

' Anthony Ramirez, Deal May Quicken Pace of Wireless tion of AT&T's twenty-two Bell Operating Companies (BOCs) Revolution, N.Y. TIMES, Aug. 18, 1993, at D5. Mr. Barksdale is following divestiture in 1984. United States v. American Tele- the President and Chief Operating Officer of McCaw, and will phone & Telegraph Co., 552 F. Supp. 131 (D.C. Cir. 1982), be the head of AT&T's wireless operations. John T. Mulqueen, afl'd sub nom. Maryland v. United States, 460 U.S. 1001 Users Skeptical of Mega-Merger Payoff, COMM. WEEK, Aug. (1983). 23, 1993, at 146. 1 The local loop extends from the central office of the local 2 It has been described as a "feeding frenzy." Mary E. exchange to the end user and back to the exchange. In re Policy Thyfault, It's Your Call - A Second Communications Revolu- and Rules Concerning Rates for Dominant Carriers, Memoran- tion Will Offer Business True Freedom of Choice, INFO. WEEK, dum Opinion and Order, 8 FCC Rcd. 7474, para. 128 (1993). Jan. 3, 1994, at 13, (quoting John Loewenberg, CIO of Aetna B Thyfault, supra note 2, at 12. Information at Aetna Life & Casualty Co. in Hartford, Conn.) * Eileen Messmer & Bob Wallace, AT&T Grabs All of ' Gregory Zuckerman, At Long Last, M&A Activity Turns McCaw, NETWORK WORLD, Aug. 23, 1993, at 31. Positively Feverish, INVESTMENT DEALERS' DIGEST, Oct. 18, 10 Id. 1993, at 21. 1 Hyatt, AT&T Heads Home Again; For Consumers, 4 Id. at 21, 22. Josh Jack Egan, Merger Mania Entertains Hollywood, U.S. the Merger Could Offer a Wide Array of New Competition, NEWS & WORLD REP., Oct. 25, 1993, at 48. BOSTON GLOBE, Aug. 17, 1993, at 33. ' The current seven RBOCs are the result of the consolida- 12 Id. COMMLAW CONSPECTUS [Vol. 2

Bell Atlantic's proposed $26 billion stock swap to force the smaller competitors out of the game. with TCI, a merger of the giant regional phone com- Significantly, these mergers may reflect a desire on pany and the nation's largest cable television con- the part of many communications companies to re- glomerate, came to a halt on February 23, 1993, treat to the vertical integration practices that are when the two companies were unable to agree on a characteristic of the pre-divestiture Bell System.18 In price tag for the deal. The two companies announced their attempts to achieve sheer economic omnipo- that the Federal Communication Commission's tence over the rest of the industry, merging compa- ("FCC" or "Commission") recent decision to slash nies have the potential for substantial private advan- cable prices by seven percent significantly reduced tage at the expense of the public interest. If the value of TCI's cable properties.1" permitted, these mergers may succeed in stifling The proposed merger was an even larger bid for competition in the marketplace, rather than enhanc- digital-era dominance than that of AT&T-Mc- ing it-the very danger that Judge Harold Greene Caw,14 and had been labeled the boldest gamble yet sought to protect through the 1982 Modified Final on the coming convergence of computers, telecommu- Judgment ("MFJ"). 9 nications and the media." In its desire to bring This Comment seeks to explore the significance of about a revolution in home entertainment and infor- these mergers as the communications industry heads mation through digital technology, and to become a towards an era of convergence and technological programming powerhouse in the world of interactive revolution. Part I explains the technological innova- media, Bell Atlantic had hoped, and yet may succeed tions that have served as a catalyst for the mergers. with another partner, to set the standard for the cre- It then discusses the implications of both telephone ation of a modern communications company, the company ("telco") and cable mergers on the MFJ, likes of which the industry has never seen. 6 and the possibility of a reversal or revision of the This onslaught of mergers can be attributed to MFJ as AT&T attempts to regain its footing within several different factors. The wave of new technol- the local loop and the RBOCs seek access to the in- ogy, ranging from cellular and wireless to digital and terexchange marketplace. fiber optics, has spurred on this era of merger hyste- Part II examines the role that the AT&T-McCaw ria, compelling communications companies to pool merger is playing in the migration towards wireless both technological and economic resources in order communications and the impact this merger will to compete more effectively. However, the reason have on the cellular market and the bypassing of the provided for many of these mergers-to advance local loop. Part II also analyzes the effect that cable technological achievements and to speed up the arri- and telco mergers will have on the union of the two val of the "information superhighway" -may sim- industries, altering forever the landscape of the local' ply be an excuse for controlling the technology, be- exchange. It then discusses the abundance of other cause by doing so, mega-companies are more likely industry mergers of noteworthy significance, includ-

'" Sandra Sugawara & Paul Farhi, Bell Atlantic, TCI Call pliers, customers and competitors. Id. Off Merger, WASH. POST, Feb. 24, 1993, at Al. However, because some vertical mergers may be the result of 14 Linda Grant, A Surge in Shares Drives the Deals, U.S. internal expansion, a practice generally unchallengeable under NEWS & WORLD REP., Oct. 25, 1993, at 49. antitrust law, only those vertical mergers whose anticompetitive 6 Mark Landler & Bart Ziegler, Bell Ringer! How Bell At- practices outweigh possible advantages may be legally prohib- lantic and TCI Hooked Up-And What It Means for the Infor- ited. Id. at 344. mation Age, Bus. WEEK, Oct. 25, 1993, at 33-34. 1" United States v. American Telephone & Telegraph Co., 16 Id. at 36. 552 F. Supp. 131 (D.C. Cir. 1982), afPd sub nom. Maryland v. 17 Sugawara & Farhi, supra note 13, at Al. Bell Atlantic United States, 460 U.S. 1001 (1983). The MFJ modified the Chairman and CEO Raymond Smith stated that the proposed 1956 Consent Decree (United States v. Western Electric Co., merger with TCI would speed up the arrival of the information Civil Action No. 17-49, C.A. 82-0192 (D.C. Cir. 1956)) of a superhighway. Id. 1948 antitrust lawsuit against AT&T, which had limited the 18 See generally Louis Galambos, Theodore M. Vail and the company to providing regulated common carrier communications Role of Innovation in the Modern Bell, Bus. His. REV., Mar. services only, and precluded Western Electric from manufactur- 22, 1992. Vertical integration usually occurs when a company ing equipment other than that used by the Bell System. In es- acquires another company that is either a customer or supplier, sence, the terms of the MFJ restricted AT&T to providing in- an act which may substantially foreclose competition. ERNEST terexchange (long-distance) services. The RBOCs were GELLHORN, ANTITRUST LAW & ECONOMICS, IN A NUTSHELL permitted to provide exchange telecommunications and exchange SERIES 342-43 (3d ed. 1986). Because the newly merged entity access (local service) but were forbidden to enter the inter- no longer may have to engage in business with any other compa- exchange market. The MFJ effectively announced the era of nies, competition is altered among the acquiring company's sup- divestiture. 19941 TELECOMMUNICATIONS MERGERS ing MCI-British Telecom ("BT"), Sprint-Centel, digital information is numerically simplistic, this and Paramount-Viacom, and how their visions com- method of transmission is able to provide more effi- pare to that of AT&T. Part III examines the future cient and flexible networking than analog transmis- impact of such mergers, including the antitrust and sion," and thus, is replacing the current switching regulatory implications thereof, and the market reac- system of the telephone industry.2" The question is tion from the perspective of both competition and the not whether there will be a big future in wireless, consumer. but rather which companies will play a part."' This Comment concludes that the impact of these mergers will depend largely on their ability to 1. Cellular achieve results that will satisfy the general public, the FCC's universal service standard, and the public In the decade since its advent on the market, the interest standards, in terms of vigorous competition, cellular telephone has become more than a high-tech technologically sound service and increased savings business tool for those negotiating business in traf- to consumers. Of equal significance is the position fic;23 the cellular telephone has become both a pro- that Congress, the Department of Justice ("DOJ"), fessional and personal lifeline for many owners. and the court systems ultimately will adopt with re- Traditionally, cellular telephone service has relied gard to the antitrust implications of the mergers. upon the analog system, a method of modulating ra- dio signals, which produces inferior sound and has I. TECHNOLOGICAL AND HISTORICAL far less capacity than the digital systems preferred by 6 OVERVIEW some telecommunications companies. Industry reports confirm that approximately fifty A. Wireless Technology percent of all cellular users are making personal calls, although the majority of users still operate The development of wireless technology has pro- their cellular phones primarily for business pur- vided a wide variety of options for business users in poses. " In 1992, more than eleven million Ameri- the communications industry. Wireless communica- cans owned cellular phones, a growth of more than tions is made possible with the use of tiny devices forty-six percent from 1991.2" Operating costs have called microwave chips,20 and the majority of wire- decreased significantly, with average monthly bills less commodities utilize digital technology, a means down from $300 to $100 over the past two years.29 of encoding information in a communications signal The cost of the cellular hardware ranges from $20 to through the use of bits, or binary digits.2 Because $2,000.80 The disadvantages of the service are the in-

20 Aaron Zitner, Cutting the Cords: Area Firms Scramble to the time division multiple access system ("TDMA") favored by Become Players in New Wireless World, BOSTON GLOBE, Aug. such companies as McCaw and Southwestern Bell and formerly 24, 1993, at 35. by Ameritech. Charles F. Mason, Ameritech Drops TDMA, 21 These "bits" are expressed in the binary language of com- Says Technology is Inferior to Analog; Time Division Multiple puters as a series of "Os" and "ls." Philip Moeller, The Age of Access, TELEPHONY, July 26, 1993, at 8. The TDMA system Convergence, AM. JOURNALISM REV., Jan.-Feb. 1994, at 26. divides the specific time period on a particular frequency into The bits respond to the presence or absence of electrical energy different sections, with different phone conversations assigned to inside of the computer, and are assembled into larger groups of each section. Revolutionizing Communications; Either a Conve- information interpreted by the computer. Id. These larger bits nience or a Necessity, Cellular Technology May Be in 3.5 Mil- are known as "bytes," the size of which are ever-increasing, due lion Hands This Year, HFD-THE WEEKLY HOME FURNISH- to advances in computer technology. Id. INGS NEWSPAPER, June 8, 1992, at A4. An alternate digital 22 Mark Fleischmann, The Trouble With Multimedia, system, known as the code division multiple access digital system WASH. POST, Jan. 6, 1994, at T10. ("CDMA"), has been less thoroughly tested than TDMA and 2 Moeller, supra note 21. Switching is a term used to de- designates a special and distinct code at the opening of each con- scribe the activity performed by an exchange whereby a signal or versation. Id. The CDMA system would thus compel all signals telephone call is routed from one terminal located in a central other than the assigned conversation to bypass the subscriber's building in each community and connected to another terminal. antenna. Id. CDMA technology currently is supported by Bell Frank G. McKay, New Wave Coming in Data-Voice Switching; Atlantic, Pacific Telesis and U.S. West. See Mason, supra, at 8. 27 Artis, supra note 25, at 29. Telecommunications Switching, TELEPHONE ENGINEER & 25 MGMT., Oct. 15, 1984, at 71. Id. 2' Moeller, supra note 21. 29 Id. Perhaps equally as important, the availability of cellu- 25 Joanne Ball Artis, Cellular Phones Expand Reach, Bos- lar phones has altered highway travel forever, with users now TON GLOBE, Aug. 25, 1993, at 29. able to report accidents, traffic jams, and drunk drivers to fellow 26 Edmund Andrews, The AT&T Deal's Big Losers, N.Y. motorists, highway authorities and family members. Id. TIMES, Aug. 25, 1992, at Dl. One such favored digital system is 80 Id. COMMLAW CONSPECTUS [Vol. 2 trusive nature of the cellular telephone and the fact creased efficiency of the mobile services.3 5 The FCC that the cellular telephone owner must pay whether has predicted that PCS will "usher in an era of mo- they make or receive a call."1 bile telecommunications technology that will permit access to an array of voice, data, and video communi- cations services, regardless of where a subscriber 2. Personal Communications Services may be located."3 6 The Omnibus Budget Reconciliation Act of 1993 Personal communications services ("PCS") have ("1993 Budget Act") adopted by Congress on Au- been broadly defined as a family of mobile and port- gust 10, 1993, authorized the Commission to utilize able radio services that will enable individuals to competitive bidding procedures to award PCS li- communicate from any place at any time.32 While censes.3 7 Most significantly, in its First Report and cellular and enhanced specialized mobile radio ser- Order, the Commission permitted cellular licensees 8 vice providers have heretofore utilized analog trans- to compete for PCS licenses outside of their existing mission and currently are developing microcell appli- cellular service areas, or in any area where the cellu- cations, PCS uses the more efficient digital signals lar licensee serves less than ten percent of the popu- and will rely upon the development of microcell lation of the PCS service area."9 Many different technology in the 2 GHz microwave band.33 types of companies, including AT&T, McCaw" and PCS phones use different radio frequencies than MCI, are vying for the PCS licenses that the FCC cellular and more transmitters to minimize disrup- will auction off in 1995.41 tions, regardless of the user's location.3 ' Competition Although the experts tend to disagree on whether to existing cellular, paging and private radio services PCS will ultimately replace cellular,42 there is little may result in lower consumer prices as well as in- doubt that, priced correctly and transcending its cur-

31 Id. This is a situation that cellular carriers such as U.S. 17 Omnibus Budget Reconciliation Act of 1993, Pub. L. No. West have already begun to change. Briefs, NETWORK WORLD, 103-66, 107 Stat. 312 (1993). On September 23, 1993, the FCC Aug. 23, 1993, at 31. U.S. West has recently launched a pro- held hearings in order to establish rules and policies regarding gram entitled "Caller Pays" in Boise, Idaho, whereby cellular the award of PCS licenses and set the licensing term at ten customers will pay only for those calls made from their cellular years, with provisions for renewal expectancy similar to those phones. Id. Cellular callers will be informed that a toll will be already in place for cellular. Action in Docket Case, supra note assessed to them for any call made to a subscriber's cellular 36, para. 3. phone. Id. " The FCC defines cellular licensees as "entities which 82 Andrew C. Barrett & Byron F. Marchant, Emerging have an ownership interest of 20 percent or more in a cellular Technologies And Personal Communications Services: Regula- system." Action in Docket Case, supra note 36, para. 3. tory Issues, I CoMMLAW CONSPECTUS 4 (1993). PCS encom- 89 Id. Cellular licensees are also permitted to compete for passes a range of services, from pocket telephones and advanced one of the 10 MHz PCS channels in their existing service area, paging and data communications to handheld computers, and while local exchange carriers are given the same opportunity to has been compared to a new kind of mobile phone, smaller, bid for PCS as any other applicant, except insofar as they have lighter and cheaper to operate than the cellular phone. Laurent cellular holdings or licenses. Id. Belsie & Mark Trumbull, PCS Reaches Out For Cellular User, 40 AT&T PCS Vice President Lewis Chakrin has stated CHRISTIAN SCI. MONITOR, Sept. 14, 1993, at 8. The light- that AT&T will join McCaw in filing for PCS spectrum outside weight mobility of PCS will enable providers of the service to of McCaw's existing cellular markets. See generally McCaw/ offer a more portable, person-to-person communications service. AT&T Merger: Its Implications for PCS, PCS NEWS, Sept. 2, Barrett & Marchant, supra, at 4. 1993. 2' Id. Microcells are tinier and greater in number than those "' Since the Fall of 1992, MCI has been testing PCS and cells used in cellular telephones. Id. There are more cell sites, thus, microcells permit frequencies to be used more often, result- has "signed agreements in principle" with approximately 150 ing in an increased system capacity. Id. Microcell technology companies in order to create a nationwide PCS consortium. Id. makes the network more expensive to build, yet results in a Such companies include LECs, cable television companies (in- clearer signal and a lighter, more compact phone because the cluding Viacom, Jones Intercable and Times Mirror Cable), signal does not have as far to travel. Id. paging companies and utilities. David Baron, Rules for PCS Al- "4 Anthony Ramirez, A Wireless Telephone Venture Excites location Announced; FCC Announces Regulations for Radio Experts, Not Investors, N.Y. TIMES, Sept. 13, 1993, at D4. PCS Spectrum Distribution for Personal Communications Services, will be able to provide a variety of information services, includ- DIGITAL MEDIA, Oct. 21, 1993, at 21. The goal of the consor- ing voice mail, video, and data services, which are expected to tium is to compete against AT&T-McCaw and the RBOCs in rival cellular telephones. the burgeoning PCS industry. Id. 25 Barrett & Marchant, supra note 32, at 5. 42 The Arthur D. Little Company estimates that within the 3e Action in Docket Case-New Personal Communications decade half of all homes will possess at least one wireless device, Services Established (GN Dkt. No. 90-314), FCC News, Sept. and cellular phone subscribers will increase by 24 million sub- 23, 1993, at 1. scribers, up from the current figure of 11 million today. Id. 1994] TELECOMMUNICATIONS MERGERS rent definition as a consumer service or personal lators and consumers. At a minimum, the existence telephone number, PCS could effectively compete of DBS may compel cable companies to act less like with cellular service for business users. 4 Cellular a utility and to devote more effort to programming,5" may be more expensive than other wireless options and, ultimately, to merge with companies such as currently in place, such as radio networks, but it re- telcos in order to effectively compete. mains more flexible and better suited to handle large data transfers and interactive data communications than its radio counterparts." B. The Current Trend Toward Wireless The emergence of cellular and radio-based net- 3. Direct Broadcast Satellites works and other wireless communication options such as PCS will have a profound effect on the land- A direct broadcast satellite ("DBS") system is a scape of the business environment. The primary rea- radio communications system in which high-powered son for such an impact is the elimination of the need geostationary satellites are able to retransmit signals for the telephone, computer or facsimile user to be from earth directly to small "dishes" or earth sta- bound to his or her desk by copper or fiber cables. 1 tions that are mounted on subscribers homes or Telecommunications has begun the transition buildings.' 5 Since the first system began operating in from analog to digital technology, improving the 1983,46 DBS has become commercially feasible due speed and accuracy of transmitting data through the to the existence of relatively inexpensive receiving network in a process similar to that of "switching equipment, and thus, may be a viable alternative to from writing longhand to shorthand, packing more cable." Many practitioners in the cable industry an- punch in a given space."5 The significance of merg- ticipate that DBS ultimately will compete head-to- ers such as AT&T-McCaw lies in the blurring of head with cable, by cutting into the current number the regulatory borders between cable and telephone of cable subscribers, and by making it increasingly and wireless,58 and in encouraging other mergers or difficult for cable to compete with broadcasters for joint ventures to spring up between the local carriers 4 advertising. ' and cable television or cellular operators."' Such ac- DBS's initial subscribers will be the non-cable and tivity will inevitably increase competition and ulti- the satellite-based non-Television Receive Only mately enhance the benefit to the consumer with an households that are willing to install a satellite re- increase in the availability of service options. ceiver for DBS service, either because a cable opera- tor does not service their location, or because they are dissatisfied with the cable or the Television Re- C. Cable ceive Only programming offerings.' 9 DBS competi- tion is significant because it may reduce the ability of 1. Fiber Optics many cable companies to compete effectively with the telcos, and thus, preclude the necessity of the Fiber optics is a term for the transmission of digi- problematic cable rate regulation that is currently a tal information such as voice and data, whereby light topic of great concern among cable companies, regu- waves are modulated and transmitted over fibers of

'a Belsie & Trumbull, supra note 32, at 8. able to entrench itself in underserved rural locations, some Lynne Gregg, Mixed Signals From Wireless Communica- broadcasters believe that DBS will not entice current cable sub- tions, NETWORK WORLD, June 15, 1993, at 51. scribers unless such customers are largely dissatisfied, and that "" Lawrence P. Blaskopf, Defining the Relevant Product the 30% of households not currently subscribing to cable will be Market of the New Video Technologies, 4 CARDOZO L. REV. 7 unwilling to spend hundreds of dollars for a satellite service. (1985). The laser disc quality of DBS is specifically designed for Jessell, supra note 45, at 22. home reception. Harry A. Jessell, DBS; To Be or Not To Be, 50 From Utility to Programmer;After 'Tough' Retransmis- BROADCASTING & CABLE, Nov. 15, 1993, at 22. sion Deals, Fox V.P. Says Cable Must Change, COMM. DAILY, 46 T. Barton Carter et al., THE FIRST AMENDMENT & THE Oct. 8, 1993, at 4. "l Gregg, supra note 44, at 51. FIFTH ESTATE 509 (3d ed. 1993). 47 Id. at 509-11. 52 Dan Dorfman, Pro Pushes Telecommunications, USA ,8 Regional Rollout Planned; DBS Leaders Predict Satellite TODAY, Aug. 20, 1993, at 2B. Service Will Have Big Impact on Cable, COMM. DAILY, Mar. 53 Id. 25, 1994, at 5. " Matthew Katz, Multimedia: the Future of Information " Michael Elasmar, DBS! But Is It Viable?, SATELLITE Delivery to Homes and Businesses, LASERDISK PROF., Nov. COMM., July 1993, at 3A. Despite the fact that DBS should be 1993, at 14. See also Baron, supra note 41, at 21. COMMLAW CONSPECTUS [Vol. 2 fine glass5" surrounded by a metal sheath." This rate gouging, thus, one solution is for the cable in- high-tech fiber is becoming the cable of choice be- dustry to get into telephony. The quickest and most cause it has the greatest capacity of any known efficient way for the cable companies to gain access transmission medium 57 and is less susceptible to elec- to this valuable infrastructure, and thus ensure their trical interference. Fiber optics differs from coaxial own viability as effective competitors in this era of cable, most often used to connect television sets, be- convergence, is by merging with a telco.61 cause fiber optic cables do not conduct electricity, Cable operators, such as TCI and Time Warner whereas coaxial cable transmit electrical impulses.58 Entertainment, have articulated a vision in which As cable companies position themselves to enter high-capacity fiber optic cables will not only deliver the wireless and data-communications market, they games and programming, but will act as two-way will rely upon a combination of fiber-optic, coaxial paths for financial and database communications 2 and wireless transmission facilities. 9 Despite the fact from the home. As the technology that fuels and that most cable operators find themselves trailing the makes possible the mergers between cable and telco, RBOCs in their ability to provide traditional com- the potential for fiber optics, once unleashed, cannot munications services, cable companies possess a tech- be underestimated. nical advantage with high-bandwidth connections into residences, and are better positioned to enter the - 0 2. Cross-ownership The Chesapeake and Poto- wireless market of PCS. mac Decision"3 The mid 1990s may prove to be a watershed for the cable industry as, for the first time, competition On August 24, 1993, Bell Atlantic acquired the from the marketplace compels true pricing; the in- right to provide video programming in part of its dustry will continue to thrive and make money, but Virginia service area, by successfully striking down not with the same pervasiveness as in the past. Most the 1984 statutory telephone/cable television cross- cable companies cannot afford to invest in new infra- ownership ban. 4 structure, especially in the wake of the recent cable In essence, the C&P Telephone decision makes it

6 Moeller, supra note 21, at 24. TELECOM., Jan. 1994, at 95. 6 Sandra Sugawara, A Power Play for the Information 69 Eric Smalley, Cable Firms Plot Data Course; Obstacles Highway? Some Utilities Plan to Use Their Fiber-Optic Sys- Include Nationwide Coverage, PC WEEK, Dec. 13, 1993, at 45. tems to Rival Cable and Phone Firms' Projects, WASH. POST, The current practice of cable company networks is to run fiber Dec. 29, 1993, at Dl. optics from the cable central offices out to the neighborhoods " Fleischmann, supra note 22, at T10. One MCI specimen where coaxial distribution networks and drop lines connect to containing 40 fiber optic strands has the capacity to carry nearly customers. Id. Cable television companies intend to upgrade the 1.3 million phone conversations or 1,920 television channels. coaxial cables, ultimately replacing them with fiber optics. Id. Robert Samuelson, Lost on the Information Superhighway, 60 Id. Cox Cable, an early developer of PCS, is one of three WASH. POST, Dec. 16, 1993, at A25. In addition to having a companies awarded preference by the FCC in bidding for por- faster transmission rate, fiber optic cables have approximately tions of the radio spectrum being made available for PCS. eight thousand times the capacity of copper cables. Elisabeth 61 In so doing, cable companies will add the plain old tele- Geake, Lusting for Information? Possibility of Telecomputing in phone service ("POTs") component of wireless technology, to a the Future, NEW SCIENTIST, Jan. 16, 1993, at 44. fiber or coaxial broadband cable system. John Williamson, UK. " Sandra Sugawara, A Power Play for the Information Cable Telephony; A Window on the Future, TELEPHONY, Oct. Highway?, WASH. POST, Dec. 28, 1993, at Dl. Invented by 5, 1992, at S6. scientists at Corning, Inc., in 1970, fiber optic technology is fun- " George Mannes, Two-Way TV, VIDEO MAG., Jan. 1994, damental to the success of cable and telecommunications mergers at 46. because its huge bandwidth capacity facilitates delivery of virtu- " Chesapeake and Potomac Telephone Co. of Virginia v. ally any audio, video or computer service to homes and busi- United States, 830 F. Supp. 909 (E.D. Va. 1993), appeal nesses. Samuelson, supra note 57, at A25. Such resplendent tech- pending. nology makes fiber optics the true foundation for the information 64 Cross-ownership of content and distribution has tradition- superhighway. Id. However, some engineers do not necessarily ally been a legally volatile mixture. Michael Schrage, The Baby see fiber optics as the Holy Grail, because they believe that the Bells Go Hollywood, and We're Talking Deals, Baby, WASH. real power in the local infrastructure lies in the switching and in POST, Aug. 26, 1993, at B3. In 1984, when the cable industry the digital compression. Telcos also understand that the wiring was in its infancy, the FCC sought to protect the fledgling in- of subscribers with fiber optic cable is both expensive and often dustry through the 1984 Cable Act, which restricted cable-telco impractical, because laying fiber optic cable can cost as much as cross-ownership in order to prohibit telcos from supplying pro- $3,000 per subscriber, whereas laying a new cable line costs ap- gramming within their respective regions. Andrew C. Barrett, proximately $500 per subscriber. S. Ronald Foster, CATV Sys- Shifting Foundations: The Regulation of Telecommunications in tems Are Evolving to Support a Wide Range of Services; Deliv- an Era of Change, 46 FED. COMM. L.J. 39, 54 (1993). Ten ering Voice and Other Service Over Cable Television Systems, years later, the cable industry no longer requires such extensive 19941 TELECOMMUNICATIONS MERGERS possible for telephone companies across the country man Anti-Trust Act of 1914.70 Judge Greene was to seek full rights of free speech and to compete on fully aware that such an undertaking had enormous the same playing field as other mediums of mass implications, including the potential for private gain communications, including cable operators, 65 in pro- at the expense of the public interest.7 ' To this end, viding programming to consumers. Additionally, the he proposed a modification of AT&T's settlement C&P Telephone decision enabled local exchange with the DOJ that met his standard of an effective carriers ("LECs") to vie for a position as full- antitrust remedy; a remedy that "effectively opens fledged players, in the switched broadband the relevant markets to competition and prevents the marketplace. 66 recurrence of anticompetitive activity, all without im- The ruling by U.S. District Judge T.S. Ellis in- posing undue and unnecessary burdens upon other creases the effectiveness and the immediate impact of aspects of the public interest .... proposed mergers, and perhaps more importantly, The MFJ relegated AT&T to the field of inter- could result in providing the consumer with superior exchange carriage, with the former BO~s now choice, service and price options in the wake of in- divested of their parent company and broken up into 6 7 creased competition. It remains to be seen, how- the seven RBOCs and the twenty-two Bell Operat- ever, whether this decision ultimately will foster ing Companies ("BOCs").73 The new AT&T was healthy competition and reduced rates for consumers, free to enter into any business but electronic publish- or whether it will encourage monopolistic behavior ing, and while the BOGs would handle all in- on the part of merging cable and telephone compa- traLATA ("Local Access and Transport Area") nies. The full impact of the C&P Telephone decision traffic and services, AT&T would be responsible for may never be determined, however, if it is over- supplying all interLATA traffic in competition with turned on appeal. other IXCs, such as MCI and what is now called Sprint.' D. The Modified Final Judgment The MFJ also severely restricted the line of busi- ness activities of the BOCs. 5 The BOCs could sup- The 1982 Modified Final Judgment ("MFJ") ply or market but could no longer manufacture tele- was an attempt to curb perceived antitrust practices communications equipment or customer premises of AT&T,6" then "the largest corporation in the equipment ("CPE").7 6 The BOCs were permitted to world by any reckoning," 69 in violation of the Sher- provide exchange telecommunications services and protection, a fact that has prompted the FCC to reconsider its equipment in violation of section 2 of the Sherman Act. United cable-telco cross-ownership policy. Id. States v. American Telephone & Telegraph Co., 552 F. Supp. " David A. Irwin & Michael G. Jones, Bell Atlantic Court 131, 139 (D.C. Cir. 1982), af'd sub nom. Maryland v. United Case Wins 'MCI Execunet Award, WASH. TELECOM NEWS, States, 460 U.S. 1001 (1983). Sept. 6, 1993, at 3; The C&P court held that the cross-owner- 69 Id. at 151-152. ship ban violated Bell Atlantic's First Amendment right to free 70 15 U.S.C. §§ 1-7 (1988). expression. 830 F. Supp. 909. 7' 552 F. Supp. at 152. 66 Irwin & Jones, supra note 65, at 3. The significance of 72 Id. at 153. the C&P decision is extraordinary, as it further blurs the lines 73 Id. at 141-42, 200-01. between common carriage and mass media, and sets the stage for 74 Id. at 170-72, a possible future recognition of unobstructed First Amendment 186. rights for broadcasters as well as all other video programmers. 76 Since 1982, Judge Harold Greene has proven to be quite Ultimately, the government may be hard-pressed to continue to lenient on the RBOCs, and already has lifted one of the line of justify the "must carry" provisions of the Cable Act of 1992, business restrictions regarding information services, although the with the cable operators bound to comply with a complex system content of these services is still restricted. David A. Irwin, Court of rate regulations, while watching from the sidelines as telcos Decisions: AT&T/Dept. of Justice Settlement, TELECOMM. build state-of-the-art video distribution systems. Id. at 4. The REG. MONITOR, Nov. 1988, at 2-15, 2-22.2-22.3. Additionally, C&P decision was not about a mere transformation of the local in the first triennial review of the MFJ, Judge Greene found telephone company into the local cable company. Rather, this that the RBOCs should be permitted to enter into any non-tele- decision affects the ownership of content, and the battle is over communications field without the prior permission of the court. which company will own the software and programming trans- Id. mitted to the consumer's television set or personal computer. 71 United States v. American Telephone & Telegraph Co., Schrage, supra note 64, at B3. 552 F. Supp. 131, 190-91 (D.C. Cir. 1982), afl'd sub nom. Ma- 67 Cindy Skrzycki, Ruling Opens Cable TV Rivalry, WASH. ryland v. United States, 460 U.S. 1001 (1983). RBOCs are cur- POST, Aug. 25, 1993, at A6. rently forbidden to sell or manufacture any telecommunications " Specifically, the complaint alleged that AT&T had mo- equipment, a restriction that may change if H.R. 3626 passes. nopolized a broad variety of telecommunications services and See infra notes 184-185 and accompanying text. COMMLAW CONSPECTUS [Vol. 2 exchange access, but were forbidden to offer in- note that the 1982 settlement was a modification of terLATA or interexchange telecommunications the 1956 Consent Decree of a 1949 antitrust case services.77 against AT&T84 that limited AT&T to providing Since the imposition of the MFJ, the BOCs have regulated common carrier communications services.8" campaigned vigorously to eliminate these restric- The legal analysis of AT&T's settlement with the tions-a campaign that is in full force today. 78 Di- DOJ in 1956 is relatively obscure because the court vestiture permitted AT&T to enter into the field of did little more than "rubber stamp" the settlement, a data processing and computers," to maintain a high deed which prompted the enactment of the Tunney profit long-distance business,"' and to get rid of the Act.86 The 1956 Consent Decree, however, included bottleneck local exchange. Through its proposed neither the divestiture of Western Electric nor any merger with McCaw, AT&T is poised on the brink other structural relief originally requested by the of violating the MFJ restriction that limits AT&T 8 7 8 1 government. In 1982, Judge Greene specifically to providing services in the interexchange market. stated that the settlement history between AT&T The merger would give AT&T a firm grasp on vir- and the DOJ did "not foster a sense of confidence tually every important new technology, and would that the assessment of the settlement and its implica- ensure AT&T a key role in shaping the future of tions may be left entirely up to AT&T and the De- wireless, PCS and mobile computing. partment of Justice."88 For this reason, it appears Despite the DOJ opinion that AT&T cannot ac- likely that Judge Greene will assume an active role quire McCaw assets without first obtaining a waiver in determining the success of the AT&T-McCaw of the MFJ decree,82 AT&T's current position is that it is unnecessary to seek a reversal of the MFJ merger. provisions restricting the company to provision of in- It is the opinion of some that the best solution may terexchange services." be to unlock both the interexchange and the local in considering the current antitrust concerns of loop, thus precluding the necessity of enforcing the AT&T's merger with McCaw, it is significant to provisions of the MFJ while encouraging competi-

7 552 F. Supp. at 227, 229. This meant that the LECs had 81 552 F. Supp. at 226-27. to turn all signals over to the IXCs and remain confined to in- 82 Memorandum in Opposition to AT&T's Motion for traLATA service areas. The BOCs were dominated by equal ac- Waiver of Section 1(D), United States v. Western Electric Co., cess requirements, compelling them to provide exchange and in- Inc. (D.D.C. filed Jan. 5, 1994) (No. 82-0192 HHG). formation access on an unbundled, tariffed basis, equal in type, 81 AT&T Says McCaw Merger Will Go Through Despite quality and price, to all interexchange carriers and information MFJ Problem, COMMON CARRIER WEEK, Jan. 10, 1994, at 4. service providers. Id. AT&T responded to the filing by stating its belief that a waiver 7" The possibility that AT&T will find a position for itself of the MFJ is not required: "Even if a waiver were required, in the local loop has caused the RBOCs to declare that in the we would expect there would be no significant problem in get- interest of fairness and competition, the RBOCs should be per- ting it quickly approved .... We remain confident that there is mitted to enter the long-distance market. In 1993, five of the no impediment to closing the AT&T-McCaw merger by [mid- RBOCs-BellSouth, Bell Atlantic, Pacific Telesis, NYNEX and year]." Id. Southwestern Bell collectively petitioned the FCC to adopt rules 84 See infra notes 112-13 and accompanying text. facilitating their reentry into the interexchange business. Victor 8' United States v. Western Electric, Civil Action No. 17-49, J. Toth, Ending the RBOC Long Distance Quarantine, Bus. C.A. 82-0192 (D.D.C. 1956) ("1956 Consent Decree"). The COMM. REV., Oct. 1993, at 51. Ameritech filed separately and complaint alleged that the defendants had monopolized and con- the seventh RBOC, U.S. West, is apparently waiting to see how spired to restrain trade in the manufacture, distribution, sale and the others fare before taking any action of its own. Id. Bell At- installation of telephones, telephone apparatus, equipment, lantic already has filed a petition with Judge Greene seeking a materials and supplies, in violation of sections 1, 2, and 3 of the waiver of the current restrictions on interLATA traffic. David Sherman Act. 552 F. Supp. at 135-36. A. Irwin, Bell Atlantic/TCI Merger: How Government Will 80 15 U.S.C. § 16(b)-(d) (1988). Through the Tunney Act, Get Involved, WASH. TELECOM NEWS, Oct. 25, 1993, at 1-2. Congress sought to ensure that the DOJ's use of consent decrees This is rapidly becoming an era that will unleash the potential would promote the goals of antitrust laws and enhance public of wireless bypass, perhaps the single greatest threat to the Bells, confidence in the fair enforcement of these antitrust laws. 552 F. and thus the RBOCs would like to see an unbundling of services Supp. at 148. Congress did so by ordering disclosure by the to enable them to achieve diversification and to compete effec- DOJ of both the rationale and the terms of the proposed consent tively. Steve A. Sazegari, The Shape of Competition in the Local decree in order to reduce secrecy, and by requiring explicit judi- Loop, Bus. COMM. REV., Mar. 1992, at 47. cial determination that each decree was in the public interest, in "' Stanley Welland, Life After Divestiture, INFO. WEEK, order to avoid judicial "rubber stamping" of settlements. Id. at Jan. 6, 1992, at 48. 148-149. so See generally Jeff Kaplan, The Uncertain Future of Cen- 87 552 F. Supp. at 137-138. trex, NETWORK WORLD, Mar. 14, 1984. 88 Id. at 153. 19941 TELECOMMUNICATIONS MERGERS tion from all players on both sides of the exchange. 89 "anytime, anywhere communications."" The pro- Proponents of opening up the local exchange believe posed merger of AT&T and McCaw brings to the that it is in the best interest of the free marketplace existing cellular market the heretofore missing ele- and theorize that such action ultimately should result ment of long-distance, and ensures AT&T a key role in extending the best possible service in the form of in shaping the future of PCS and mobile computing. price breaks to the consumer.90 On the other hand, This investment promises to provide AT&T with the opponents believe that simply unlocking the local capability to deliver end-to-end wireless service, from loop will never make it ripe for competition because the end user's CPE to network services. 7 the dynamics of the local exchange make the vast The merger gives AT&T, better known for its majority of it fundamentally immune to competi- long-distance service, control over the nation's largest 9 tion," and because the FCC currently is too ab- cellular telephone company, while enabling McCaw sorbed to enforce any safeguards, structural or non- to market its wireless services under AT&T's name structural." and to utilize the vast resources of Bell Laborato- ries.9 8 The proposed merger would result in the

II. CURRENT DEVELOPMENTS - THE ownership of cellular operations in 105 markets na- 9 MERGERS tionwide, and would enable both companies to use their resources more efficiently. The recent wave of mergers suggests an environ- In addition, this merger will stimulate competition ment far different from that of the deal driven within the entire wireless industry. 0 Unquestion- 8 1980s," but underneath all the verbiage, these deals ably, AT&T has the best ability of any of the inter- still may reflect the traditional desire for market exchange carriers to capitalize on the growing user clout, albeit with a technological twist. These merg- interest in wireless services and products, because it ers are premised upon the gamble that emerging has been active in the wireless market for years and technologies "will reward those with the nerve to has experience in many different market segments.101 plug in.""' Although it remains to be seen whether The real significance of the merger inevitably lies in this merger frenzy will last, some believe that inves- the potential for increasing competition in the cellu- tors discouraged by current low interest rates will lar industry and the possibility of lower prices-all seek the higher returns that stocks have to offer, thus of which only can benefit the consumer. driving up share prices and continuing to fuel the Competitors' fears that AT&T is seeking to 5 re- present merger euphoria. enter the local telephone market may be unfounded, due to the fact that AT&T is unlikely to be able to A. The AT&T-McCaw Merger offer local telephone service directly to customers, be- cause McCaw's cellular networks traditionally are AT&T Chairman Robert Allen has a vision of not suitable for this task. 02 In order for AT&T to

89 Mike Moeller, No Turning Back, COMM. INT'L, Feb. the local loop. Id. 1994, at 14. " Toth, supra note 78, at 51. 90 Toth, supra note 78, at 51. 91 Grant, supra note 14, at 49. Today's players are using ' At the present time, the capital investment in both the lo- rapidly appreciating stock as currency, instead of the junk bonds cal loop and the switching equipment have made the market of and huge debt that characterized the mega-deals of the past dec- the LECs virtually unassailable. Chris L. Kelley, The Contest- ade. Id. In addition, much of this merger activity is concentrated ability of the Local Network; The FCC's Open Network Archi- solely in the industries of health care and telecommunications. tecture Policy, 45 FED. COMM. L.J. 89, 135 (1992). The local Id. loop is generally regarded as a natural monopoly because the 94 Id. principal resources needed to connect local end users to nation- 95 Id. wide central office switches prevent reproduction of the local net- Bart Ziegler, AT&T's Bold Bet, Bus. WEEK, Aug. 30, work. Paul Stephen Dempsey, Adam Smith Assaults Ma Bell 1993, with His Invisible Hands: Divestiture, Deregulation and the at 26. Need for a New Telecommunications Policy, 11 HAST. COMM.! "" Messmer & Wallace, supra note 9, at 31. ENT. L.J. 527, 593 (1989). The economic barriers to entering 98 Id. the local loop may be created not by the technology itself, but 99 Id. instead by the tremendous expenses required to create a new 100 Bob Brown, Long-Haul Carriers Plot Wireless Paths, system able to compete with the existing residential telephone NETWORK WORLD, Nov. 23, 1992, at 25-26. network. Id. It is Dempsey's belief that, at some point, a less 101 Id. at 25. costly alternative system may be derived from cable television, 102 Letter to the Editor, AT&T Local Services Are Not At two-way radio or satellites that will be able to compete within Hand, COMM. WEEK, Nov. 30, 1992, at 39. COMMLAW CONSPECTUS [Vol. 2 compete in the local market, AT&T will need to cre- MFJ, and would require a modification or waiver of ate a "modular, distributed network" that relies the decree before it could be approved." 0 BellSouth upon wireless technology and that functions "paral- stated that while it has no interest in obstructing the lel to the existing local exchange network." ' This AT&T-McCaw merger, it is seeking to ensure is not likely to come cheap,"" and AT&T officials "competitive equity and the ability to operate under themselves acknowledge that it will not be easy to the same rules.""' build a network that will make all of these new ser- On April 5, 1994, Judge Greene agreed with the vices possible.' 0 5 position adopted by the RBOCs and ruled that Industry analysts predict that the newly merged AT&T's purchase of McCaw "would indeed violate AT&T will not attempt to compete directly with lo- the plain and express language of the [MFJ] de- cal phone service systems that remain heavily regu- cree.""' However, Judge Greene's ruling left open lated, but will instead try to tap into certain seg- the possibility that he may yet approve the merger, ments of wireless consumers.' 0 6 To that end, AT&T once AT&T has clearly proven to him that the may produce wireless devices geared for specific bus- union with McCaw would be in the public iness users, such as taxi drivers and package interest."' 0 7 handlers.1 Where nearly all state regulatory agencies have Nonetheless, the RBOCs, particularly NY- approved the merger,"" and where the DOJ has NEX, 08 BellSouth and Bell Atlantic, remain vocal made it clear that AT&T must obtain a waiver of in their expectation that the AT&T-McCaw merger the MFJ before its merger with McCaw can be ultimately will provide wireless service that bypasses completed,"' it remains to be seen whether Judge the switches owned by the local exchanges.' 0 9 The Greene and the FCC will allow the AT&T/McCaw RBOCs want a reversal of the restrictions imposed merger to come to fruition. upon them through the MFJ so that they can com- pete on an equal footing with AT&T and the other B. The Bygone Bell Atlantic-TCI Merger IXCs in the interexchange services market. In an effort to compel AT&T to obtain approval Like AT&T, Bell Atlantic believes it can achieve from Judge Greene before merging with McCaw, its vision of becoming the world's best communica- BellSouth filed a petition with the U.S. District tions and information company." 6 On October 13, Court for the District of Columbia on December 2, 1993, Bell Atlantic, TCI1 7 and Liberty Media" 8 1993, arguing that such a merger would violate the announced a corporate union designed to create a

103 Id. sponse to BellSouth's Motion, at 4. o Hyatt, supra note 11, at 33. The most reasonable reading of section I(D) is that it ap- 100 Mulqueen, supra note 1, at 1. plies to any acquisition of the stock or assets of a BOC, 106 Hyatt, supra note 11, at 33. irrespective of when or how the stock or assets in question 107 Id. came to be owned by the BOC .... Moreover, the acqui- ... NYNEX is the parent company of New England Tele- sitions at issue here would result in AT&T and a Re- phone and New York Telephone. gional Company becoming partners in the provision of an 100 Hyatt, supra note 11, at 33. exchange and an exchange access service. 10 AT&T Says McCaw Merger Will Go Through, COM- Id. at 8. MON CARRIER WEEK, Jan. 10, 1994, at 4. The specific provi- ' DOJ's Response to Bellsouth's Motion, supra note 110, sion in contention is the MFJ prohibition of AT&T acquiring at 4. any assets of divested Bell Operating Companies. Id. See also "'s John Burgess & Sandra Sugawara, AT&T, McCaw DOJ's Response to BellSouth's Motion For a Declaratory Rul- Cellular Deal Is Blocked by FederalJudge, WASH. POST, Apr. ing, United States v. Western Electric Co., Inc. (D.D.C. filed 6, 1994, at Al, A6. Jan. 5, 1994) (No. 82-0192 HHG). BellSouth argues that be- 113 Id. cause McCaw has a minority interest in cellular properties in "" AT&T Says McCaw Merger Will Go Through Despite which Ameritech, Bell Atlantic, BellSouth, Pacific Telesis and MFJ Problem, COMM. DAILY, Jan. 7, 1994, at 3. SouthWestern Bell hold minority interest, AT&T cannot obtain "' See Memorandum in Opposition for AT&T's Motion financial interest in any of the RBOCs without first obtaining a for Waiver of Section 1(D), United States v. Western Electric waiver from this specific MFJ provision. Id. Co., Inc. (D.D.C. filed Jan. 5, 1994) (No. 82-0192 HHG). For its part, AT&T has insisted that prohibition applies only "1 Raymond Smith, COMM. WEEK, Jan. 3, 1994, at 25. 17 TCI is the largest cable television company world, to the reacquiring of local exchange assets held at the time of in the divestiture in 1984. AT&T Says McCaw Merger Will Go serving more than 20% of U.S. cable customers, with 1,200 cable Through, COMMON CARRIER WEEK, Jan. 10, 1994, at 4. How- systems serving 10 million subscribers in 48 states, Puerto Rico, ever, the DOJ disagreed, finding that AT&T's interpretation and the District of Columbia. The New Bell Atlantic: Wow! "strains the plain language of the (MFJ) . . . ." DOJ's Re- Merger With TCI, Liberty Media Changes Us Forever, BELL 19941 TELECOMMUNICATIONS MERGERS premier communications, information and entertain- another cable/telco merger is not far behind. The ment company." 9 The proposed $26 billion merger proposed deal undoubtedly benefitted Bell Atlantic was one of the largest in corporate history, with a by prompting the company to begin its quest to over- combined total of twenty-two million cable, wireless come legal and regulatory obstacles, such as seeking and phone customers spread across fifty-nine of the a federal waiver of the MFJ restriction that prohib- nation's top one hundred markets, and was expected its regional phone companies from interexchange to be completed in late 1994.120 The transaction ef- transmission. '" fectively would have combined TCI's cable proper- Some believe that the failure of this merger may ties and Liberty Media's programming assets with serve to check the recent wave of merger mania those of Bell Atlantic. among communications companies, many of whom This landmark deal would have resulted in a had felt pressure to compete with the high-profile much-needed upgrade to the local telephone infra- Bell Atlantic-TCI deal.' 26 Despite the deceleration structure, and a wealth of high-tech gadgets for the in large corporate mergers, increased competition consumer, including video-on-demand and home among telephone, cable and entertainment compa- shopping. 2' In addition, the two companies had ex- nies, as well as technology itself, inevitably will pro- pressed their intent eventually to provide nationwide vide those services sought to be achieved by the Bell broadband technology for business and home users Atlantic-TCI merger."' In addition, historically it as an alternative to the BOCs." 2 has been the small companies that have been the By uniting telephone, cable and wireless networks technological innovators and not the immense con- in both the national and international markets with glomerates who, if they do create a new product or cutting edge video-on-demand and new interactive service or technology, tend to sit on a discovery until 28 multimedia technologies, Bell Atlantic and TCI be- it suits their pecuniary purposes.' lieved their alliance would have accelerated the im- plementation of both the new "information super- C. Additional Telco Mergers highway" as well as full-service networks of new products and services. 2 But the reality may be that Two additionally notable telecommunications the failure of the proposed merge ultimately will mergers also took place in 1993, between MCI and benefit the consumer by keeping viable the competi- BT, and between Sprint and Centel, Inc. These tion between cable and video-on-demand offerings.'" 4 mergers reflect an effort to increase competition Although the merger with TCI did not come to within the interexchange market. Furthermore, by fruition for Bell Atlantic, it is unquestionable that pooling resources to add cellular and wireless com-

ATLANTIC WEEK, Oct. 18, 1993. area. This could have significant implications for the consumer 11. Liberty Media has extensive programming interests in in terms of price and viewing choice, in addition to the effect of the Black Entertainment Network, the Family Channel, QVC, cutting out any possible competition from smaller video and the Home Shopping Network and many sports programming cable service providers. channels. Id. The company also has a partial ownership interest 128 COMM. DAILY, Jan. 24, 1994, at 4. On January 20, in 17 cable companies serving some three million subscribers. Id. 1994, Bell Atlantic filed a petition with the DOJ requesting a 119 Id. waiver of the MFJ decree in order to provide long distance tele- 120 Id. phone service outside of its region and to deliver satellite pro- 121 Mary Thyfault, Cable Ready - Bell Atlantic-TCI gramming nationwide. Id. In its petition, Bell Atlantic indicated Promises Business a Much-Needed Upgrade to the Local Phone that the desired waiver would "let merged companies pursue Infrastructure, INFO. WEEK, Oct. 18, 1993, at 12. plans to compete aggressively with other telephone companies 122 Id. outside Bell Atlantic's region and with existing cable companies 12 Id. Bell Atlantic's Raymond Smith indicated that his inside its region." Id. Bell Atlantic needed this approval because company will complete fiber optic video network capabilities in the satellite distribution system used by programmers such as some areas within its region next year, and within Bell Atlan- TCI is considered to be a form of long-distance service. The tic's foremost 20 markets by 1998. Id. New Bell Atlantic: Wow! Merger with TCI Changes Us For- 12. This is because video-on-demand and cable offerings pro- ever, BELL ATLANTIC WEEK, Oct. 18, 1993. vide essentially the same service, although video-on-demand may 126 Sugawara & Farhi, supra note 13, at All. be marginally more expensive. Rich Brown, Executives Peer 127 Id. at Al. Into Future; Disagree Over Cost, Timing of Predicted 500 Channels, BROADCASTING & CABLE, Dec. 6, 1993, at 10. 128 Case in point: AT&T's Bell Laboratories developed the Therefore, because phone companies such as Bell Atlantic are concept of cellular in 1947, then sat on it until the first tests now able to provide video-on-demand, and because cable compa- were conducted to explore commercial applications in 1962. nies such as TCI provide cable services, a merger of the two Charles Maslin, Outline of the History of Cellular2, 1993, at 2 could result in a monopoly of the video market in a given service (citing A Brief History of Cellular (CTIA)). COMMLAW CONSPECTUS [Vol. 2 munications to their existing networks, these compa- rival, AT&T, due to its smaller infrastructure.18 nies have become more attractive to consumers of in- Like AT&T and Bell Atlantic, MCI also believes terexchange services. 2 These mergers arguably are in a "sweeping strategic vision" that will facilitate in response to actions taken by AT&T and the the company's attempt to deliver voice, data and RBOCs and are further indications of the trend to- video services over the MCI network. '" In an effort wards vertical integration. to step up competition in the local exchange market, MCI announced its intention in January of 1994 to invest $20 billion in its long-distance network over a 1. The MCI-British Telecom Merger six year period in order to increase the carrying ca- pacity of its current system, and to assemble new On June 2, 1993, MCI sold a twenty percent networks in twenty metropolitan areas. 40 stake in the company to BT for $4.3 billion in cash. While both MCI and some users expect MCI's Analysts have characterized the deal, which is to be plan ultimately to result in lower prices and greater completed by early 1994, as evidence of the need for quality, as with AT&T's plan, it remains to be seen major telecommunications players to create alliances whether the company's savings from access charges in order to compete effectively in the global 3 ° will be passed on to the consumer, and whether such marketplace. actions constitute vertical integration practices or The deal enables MCI and BT not only to com- truly are in the public interest. bine revenues-primarily from voice services-in or- der to compete on a more even footing with rival AT&T, but also to establish a customer base on both 2. The Sprint-Centel Merger sides of the Atlantic, something AT&T has yet to achieve.1"3' Pinning its hopes on the new digital wire- As of April 21, 1993, Sprint, the nation's third less technology of PCS networks expected to become largest long-distance carrier, and Centel, the Chi- a reality in 1994, MCI wants to use this new wire- cago-based cellular provider, effectively became one less technology as an access link into MCI's long- company with the creation of Sprint Cellular Co.'" distance network."3 2 In August 1993, an MCI Having acquired Centel for approximately $3 billion spokesperson indicated that after the FCC has allo- in stock, the merger strengthened Sprint by greatly cated the radio frequencies for PCS, MCI's main increasing its cash flow.'" 2 The merger made Sprint strategy for wireless communications was to assem- the first telecommunications company able to offer ble a consortium' 3 that would offer low-cost PCS customers a complete package of local, long-distance services.' The pending deal between AT&T-Mc- and cellular services.' 43 The question is, however, Caw could put pressure on MCI to invest in cellular does such seamless service represent vertical operations which MCI sold off to McCaw""8 in the integration? 1980s.' MCI has indicated its desire to invest in Sprint Cellular's President Dennis Foster stated cellular with much of the cash it will receive from its that the company would concentrate on expanding new partner, BT.' Although AT&T has taken the the choice of wireless services offered, including digi- lead in the wireless revolution, MCI, like Sprint, tal, personal telephone service, flexible rates, single should be able to move more quickly than its colossal billing and seamless service.144 Foster also indicated

12' Robin Gareiss, Users Like MCI Plan to Take On Local ISO Brown, supra note 100, at 26. Because MCI and Sprint Carriers,COMM. WEEK, Jan. 10, 1994, at 1. have smaller infrastructures than AT&T, if MCI and Sprint 130 MCI Gets 4.3 Billion in Cash; BT MCI Purchase, Pro- chose to integrate new wireless technologies into their networks, viding Cash Infusion And Global Partner,COMM. WEEK, June they should be able to do so more quickly than rival AT&T. Id. 3, 1993, at 1. , Gareiss, supra note 129, at 1. 1 Global Carriers: The Race Is On, DATA COMM. July 140 Id. Some believe the significance of this decision may ri- 1993, at 64. val that of Bell Atlantic and AT&T. Id. 122 Brown, supra note 100, at 25. 122 For further details of this consortium, see Baron, supra 141 Industry Update, NETWORK WORLD, Mar. 22, 1993, at 25. note 41. 184 Id. 142 John T. Mulqueen, Will Sprint-Centel Benefit Users, 125 Brown, supra note 100, at 26. COMM. WEEK, June 1, 1993, at 8. 12S Id. 14' Linda Wilson, Look, Ma, No Layoffs - Centel Uses 127 Kent Gibbons, AT&T To Acquire No. 1 CellularFirm; Automatic Dialers to Centralize Functions, Not Staff, INFO. McCaw Deal May Open a Wireless Era, WASH. TIMES, Aug. WEEK, Dec. 7, 1993, at 73. 17, 1993, at Al. 144 COMM. DAILY, Mar. 10, 1993, at 8. 19941 TELECOMMUNICATIONS MERGERS that Sprint Cellular would be looking to form alli- flated price of $10.1 billion. " ' The contest between ances with other companies, saying, "the future be- QVC and Viacom over Paramount provided the in- longs to innovative companies that can forge alli- dustry with powerful evidence of the lengths to ances quickly to develop and bring ideas to the which communications companies will go in order to market first and best."" 6 Ironically, Sprint sold off provide the films, game shows, and cable series to its cellular operation in the 1980s to none other than consumers via delivery-on-demand.' Centel, and through its recent merger is seeking to Paramount is such a desirable possession because recapture " the cellular market it gave away. " few companies are able to rival Paramount's wealth As with the AT&T-McCaw merger, analysts and of programming assets."' As John C. Malone, Chief some network business managers have indicated that Executive Officer of TCI has stated: "Over time, the this deal does not necessarily mean that any new ser- hardware (to deliver programming) will become ge- vices will be developed from the combined com- neric. The key is going to be programming pany.41 7 The idea that "nothing stands out" in terms software."' ' In the end, however, the contest was of immediate benefit to users has been a recurring simply a numbers game, with both Wall Street and theme chanted by many who view these telecommu- Viacom shareholders favoring the lower Viacom bid nications mergers as insignificant until the tangible because it offered more cash and thus greater protec- benefit to the consumer, whether in the form of 1 " 8 tion should Viacom stock perform poorly, ' which it product or savings, has been proven. 55 has.1 The Bell Atlantic-TCI deal made the Paramount- D. Additional Cable Mergers Viacom merger more interesting, permitting Viacom to raise concerns about the monopolistic intentions of Mergers such as Paramount-Viacom and U.S. TCI because TCI owns a one third interest in QVC West-Time Warner are clearly about one princi- and was a key financial backer in QVC's pursuit of ple-content; whoever owns it, controls it. Thus, the Paramount.15 6 QVC's failed deal, like that of Bell coveted deals with the major Hollywood studios over Atlantic-TCI is important because if QVC had suc- programming are considered to be lucrative, yet, be- ceeded in its efforts to capture Paramount, and if cause of the scarcity of the resource, acquiring the Bell Atlantic had completed the merger with TCI, programming rights to film and television perform- TCI would have had absolute control over content as ances can be quite expensive. well as infrastructure. Thus, arguably, Bell Atlantic- TCI would have been a vertically-integrated entity. 1. The Paramount-Viacom Merger

Nowhere is the desire to control the content sent 2. The U.S. West-Time Warner Merger over the superhighway more evident than in the bat- tle over Paramount. On February 15, 1994, after a On September 15, 1994, U.S. West acquired a bitter five-month battle with rival QVC, Inc., cable 25.51% interest in Time Warner, Inc., for $2.5 bil- television company Viacom, Inc."" acquired Para- lion in cash, providing U.S. West with vital access to mount Communications, Inc. for the arguably in- the vast cable,157 entertainment and media operations

145 Id. merable films over their wires, thus making video stores some- 146 Brown, supra note 100, at 26. what obsolete. Id. 147 Mulqueen, supra note 142, at 8. 15 Paul Farhi, Egos, Interactive Visions Fuel Bitter Para- 148 Id. mount Fight, WASH. POST, Feb. 2, 1994, at Fl. As "[tlhe owner , Viacom owns programming assets such as MTV and of one of Hollywood's Golden Age studios, Paramount is one of Showtime, in addition to cable systems which serve 1.2 million perhaps only six companies on earth capable of producing and households. Paul Farhi, Blockbuster, Viacom Plan to Merge, distributing American-made films and TV programs around the WASH. POST, Jan. 8, 1994, at Al. world." Id. "' Paul Farhi, Viacom's Bid Wins Paramount, WASH. 18 Id. POST, Feb. 16, 1994, at Al. 154 Paul Wiseman, QVC Stands Pat on Bid for Paramount, 18 Moeller, supra note 21, at 24. On January 7, 1994, the USA TODAY, Feb. 14, 1994, at B1. boards of both Viacom and Blockbuster Entertainment approved 185 Farhi, supra note 152. the details of their merger. Farhi, supra note 150, at Al. Last 18e Wiseman, supra note 154, at BI. Fall, Blockbuster committed $600 million to Viacom in the wake 157 Time Warner's cable division services 7.1 million cus- of the battle with QVC over Paramount, thus insuring a future tomers nationwide. A Cascade of Mergers and Alliances Make for itself when cable and telcos are capable of transmitting innu- 1993 A Watershed for Telecoms, INFO. NETWORKS, Jan. 10, COMMLAW CONSPECTUS [Vol. 2 of Time Warner. " ' In exchange for its program- intense scrutiny for the antitrust ramifications of ming, this merger provides Time Warner with a their proposed mergers. Congress, the FCC and the healthy cash infusion and an infrastructure already DOJ will be reviewing all aspects of mergers such as in place, and enables the company to utilize the ex- the AT&T-McCaw and the Paramount-Viacom un- pertise of U.S. West in constructing and operating ions for possible antitrust violations. One issue is 159 switched networks and telephone operations. whether mergers between cable and telcos support /The significance of the U.S. West-Time Warner free market competition or create "mega- merger is similar to that of the failed Bell Atlantic- monopolies.' 66 TCI proposal-the union of a cable or entertain- ment company's invaluable programming resources with that of the expensive infrastructure and expert 1. Antitrust Statutes operational capabilities of an RBOC.' 60 If the U.S. West-Time Warner alliance is successful in building The Sherman Act, enacted on July 2, 1890, pro- interactive networks to transmit communications, in- vides that "every . .. combination in the form of 16 formation and entertainment, ' the merger most trust or otherwise . . in restraint of trade or com- likely will secure an enviable position on the infor- merce among the several States or with Foreign Na- mation superhighway. tions is declared to be illegal."' 6 Section 2 of the Act states: "Every person who shall monopolize, or at- III. FUTURE IMPACT OF THE MERGERS tempt to monopolize, or combine or conspire with any other person or persons to monopolize any part The average time for completion of each of the of the trade or commerce among the several States, proposed mergers is estimated to take between nine shall be deemed guilty of a felony ...."'" Pursuant and twelve months, due to the need for approval to the Act, corporations engaged in illegal monopo- from the FCC and the DOJ, as well as from state lies may face up to ten million dollars in fines.'69 In regulatory agencies.' 62 In addition, under the Hart- practice, the Sherman Act has failed as an effective Scott-Rodino Act,"' parties seeking to engage in safeguard against mergers that might mar competi- mergers or joint ventures surpassing $100 million tion, because courts generally have interpreted the are required by law to notify the DOJ's antitrust di- Act to forbid mergers only where they were designed 170 vision and the Federal Trade Commission. 164 FCC to create a monopoly and intended to do so. Most 7 Commissioner Quello has said that although the mergers are able to survive such a feeble standard.1 ' FCC "must keep an open mind" to any opposition, a The Clayton Act, enacted on October 15, 1914, merger such as that of AT&T and McCaw "pos- provides that "[n]o person engaged in commerce or sesses great future potential for national and global in any activity affecting commerce shall acquire, di- growth."'"" rectly or indirectly, the whole or any part of the stock ... or assets of another person engaged also in A. Antitrust Concerns commerce or in any activity affecting commerce, where ... the effect of such acquisition may be sub- Both AT&T and Bell Atlantic have come under stantially to lessen competition or to tend to create a

1994, at 3. Is 15 U.S.C.S. § 1311 (1993). This Act supplements the 166 Barrett, supra note 64, at 46. Clayton Act of 1914 (15 U.S.C. § 12) and clarifies antitrust ter- 169 Id. minology and responsibilities of the DOJ agents involved in the 160 The FCC has granted an 18 month waiver of the cable enforcement of antitrust law. cross-ownership rules to U.S. West. A Cascade of Mergers and 164 Carla Lazzareschi & Jude Shriver, AT&T Will Buy Alliances Make 1993 A Watershed for Telecoms, INFO. NET- McCaw Cellular for $2.6 Billion, L.A. TIMES, Aug. 17, 1993, at WORKS, Jan. 10, 1994, at 3. Al. The government can approve, negotiate to restructure the 161 Id. deal, or sue to block it. Id. 16 AT&T has stated that by December 31, 1993, all states 1685 Id. with the single exception of California had approved the merger "I M.E.T., Sidebar; Don't Pop The Cork Yet, INFO. with McCaw, and that the only regulatory approvals remaining WEEK, Oct. 18, 1993, at 13. were DOJ's review of the antitrust implications of the merger 17 15 U.S.C. § 1 (1988 & Supp. IV 1993). and the FCC's review of applications for transfer of control of 'as 15 U.S.C. § 2 (1988 & Supp. IV 1993). McCaw radio licenses. BellSouth Wins and Loses; AT&T Says 169 Id. McCaw Merger Will Go Through Despite MFJ Problem, 170 GELLHORN, supra note 18, at 339-40. COMM. DAILY, Jan. 7, 1994, at 2. 171 Id. 1994] TELECOMMUNICATIONS MERGERS monopoly."1'72 The Clayton Act raised the relatively and the Fourth Circuit affirms the C&P decision, low standards set by the Sherman Act by making it the telco industry in essence will have slain their Go- possible to restrain mergers which "merely lessened" liath, thus easing their passage through the regula- competition. 7 Thus, the Clayton Act is more effec- tory approval process. tive than its predecessor, because the Act enables a H.R. 3626,80 entitled the "Antitrust Reform Act merger to be halted before any significant damage to of 1993," effectively would supersede the MFJ in 1 4 competition has occurred. 7 While the language of permitting the BOCs to provide interexchange tele- the two statutes taken together would appear to pre- communications through the acquisition and resale clude the existence of almost any merger, as a gen- of telecommunications equipment.' 8' The BOCs are eral rule, mergers can serve useful and legitimate so- pinning their hopes on the passage of H.R. 3626, cial and business purposes without impairing and should the bill prevail, AT&T may no longer be 175 competition. The task of antitrust merger law thus the only king on the interexchange throne. is to eliminate only those mergers whose adverse af- One central goal of the Clinton administration is fect on competition substantially outweighs its bene- 176 the development of the National Information Infra- fits. With a current crop of proposed mergers that structure ("Nil").182 If the Nil is any indication, it closely resemble vertically integrated entities-Para- is quite probable that "over the next three years, the mount-Viacom, U.S. West-Time Warner-and the federal government will move to a much more cen- possibility of another merger similar to Bell Atlantic- tralized, interventionist approach than that which TCI, the real question is whether the government has prevailed for the past 2 decades."' 83 Recent should allow this trend to continue. speeches by Vice President Gore support this conten- tion and signify that the approach taken by the Clin- 2. Legislative and Executive Action ton administration is anything but laissez-faire. In a December 1993 speech at the National Press Congress also is concerning itself with the anti- Club in Washington, D.C., Vice President Gore trust implications of these mergers, through the in- stated that the Clinton administration supported troduction of two bills, H.R. 3636 and H.R. 3626. long-term removal of judicial and regulatory re- The House Subcommittee on Telecommunications straints that prevent telecommunications companies and Finance currently is in the process of debating from entering each other's businesses."' Gore ac- H.R. 3636, the "National Communications Compe- knowledged, however, the necessity of balancing free tition and Information Infrastructure Act of 1993," a competition with regulations created to shield the bill that essentially would lift the 1984 Cable Act's public from potential monopoly abuses. 8 ' Gore ban on joint ownership of telephone and cable facili- stated that the Clinton administration's proposals to ties in the same service area. 7 7 Under H.R. 3636, reform the communications marketplace would be telephone companies would be able to provide video guided by five specific principles: 1) to encourage programming directly to subscribers in their tele- private investment; 2) to promote and protect compe- phone service area,'17 but also would have to provide tition; 3) to provide open access to the network; 4) to access and interconnection to alternate carriers such preserve and advance universal service in order to as cable companies. 17 9 If Congress passes H.R. 3636 avoid creating a society of information "haves and

172 15 U.S.C. § 7 (1988). 180 H.R. 3626, 103d Cong., 1st Sess. (1993). This bill is "' GELLHORN, supra note 18, at 342. sponsored by Representatives Brooks and Dingell. 174 Id. The Clayton Act was applicable to both vertical and 1 1 Id. § 101. This provision goes into effect 18 months after horizontal mergers. Id. the enactment of this Act. Id. Within five years the BOCs would " Id. at 334-35. be allowed to provide interstate telecommunications within their 178 Id. at 335-36. own territories, and after a one year period, the BOCs would be 177 H.R. 3636, 103d Cong., 1st Sess. (1993). Democratic permitted to manufacture or provide CPE. Id. § 102. Representative Edward J. Markey, Chairman of the House 182 NATIONAL TELECOMMUNICATIONS AND INFORMATION Subcommittee on Telecommunications and Finance, intends to ADMINISTRATION, U.S. DEPT. OF COMM., THE NATIONAL IN- hold hearings on the issue of media concentration and its impact FORMATION INFRASTRUCTURE: AGENDA FOR ACTION (Sept. 15, on consumers and competition. Markey also had intended to 1993). hold hearings on the implications of the Bell Atlantic-TCI 188 COMM. DAILY, Jan. 5, 1994, at 5. merger in particular. As of this writing, the Committee still was 18 Vice-President;NIl Regulatory Restraints to be conducting hearings on H.R. 3636. Judicial, 178 Id. § 102. Removed, INFO. NETWORKS, Jan. 8, 1994, at 10. 179 Id. 185 Id. COMMLAW CONSPECTUS [Vol. 2 have nots"; and 5) to encourage flexible and respon- 3. Agency Action - FCC sive government action so that the newly adopted regulatory framework can keep pace with the rapid In determining whether to approve these mergers, technological and market changes that pervade the the Commission must consider the eminent goals of telecommunications and information industries.'" 6 the public interest, universal service, fostering com- petition, and efficiently managing valuable spectrum. In another speech before the Academy of Televi- The Communications Act of 1934 is premised upon sion Arts and Sciences, Gore indicated the adminis- the phrase "the public interest, convenience and ne- tration's intent to open up the local telephone ex- cessity,"'' 92 a standard that the Commission must ad- changes, with the expectation that increasing here to in all of its decisions. The public interest is ' competition will result in continuing advancements an elastic standard that changes over time," and in technology, in the quality of services and in lower thus must be reevaluated in this era of telecommuni- costs.' 8 7 At the same time however, he emphasized cations convergence and momentous technological transformation. that the Clinton administration would "insist upon The question of whether the merger of technologi- safeguards to ensure that new corporate freedoms cal giants such as AT&T-McCaw and the formerly will not be translated into sudden and unjustified proposed Bell Atlantic-TCI are truly in the public rate increases for telephone consumers. "188 interest remains to be seen."' According to NBC Acting on the Clinton administration's desire to West Coast President, Donald Ohlmeyer, if the Bell rewrite the Communications Act of 1934 to include a Atlantic-TCI merger had been approved, "you [would have had] 2 guys deciding what 50 million new provision that would regulate entities such as ' 5 merged telco and cable companies,' 8" the Senate re- people are going to see .... That's kind of scary."" He may not be alone in his assessment. cently has proposed legislation that would implement The Communications Act of 1934 mandated the the first comprehensive revision of the Communica- FCC to "make available, so far as possible, to all the tions Act since its inception in 1934.190 One major people of the United States a rapid, efficient, Nation- problem with such a proposal, however, is that it is wide, and world-wide wire and radio communication nearly impossible to create a long-term, stable, regu- service with adequate facilities at reasonable charges latory environment when revolutionary technology ....""e Universal service is the public policy goal of and market merger frenzy make it "almost impossi- providing widespread availability of basic, quality ble to totally update the policy framework in one telephone service to every American household at a sweeping effort. ' "' reasonable price. 9' As basic telephone service is up-

'" Vice President Proposes National Telecommunications three essential aspects of telecommunication law: 1) it returns to Reform, THE WHITE HOUSE, OFFICE OF THE VICE PRESI- Congress primary responsibility for creating national communi- DENT, Jan. 11, 1994, at 1. See also Background on the Adminis- cations policy; 2) it provides the FCC with the legislative au- tration's Telecommunications Policy Reform Initiative, NA- thorization needed to effectively open up monopolistic markets to TIONAL TELECOMMUNICATIONS AND INFORMATION competition, while ensuring consumer protection; and 3) it em- ADMINISTRATION, (NTIA White Paper). In his January 11, phasizes the U.S.'s commitment to the goals of universal service 1994 speech before the Academy of Television Arts and Sciences, and to the ideal that all Americans should reap the benefits of Gore stated: "[in the information marketplace of the future, we the emerging technology revolution. Id. paras. 13-14. will obtain our goals of investment, competition and open access 191 COMM. DAILY, Jan. 5, 1994, at 5. only if regulation matches the marketplace. That requires a flex- 192 47 U.S.C. §§ 151, 302 (1988). ible, adaptable regulatory scheme that encourages the wide- 103 In re Limitations on Commercial Time on Television spread provision of broadband, interactive digital services." Vice Broadcast, Notice of Inquiry, 8 FCC Rcd. 7277, para. 6 (1993). President Proposes National Telecommunications Reform, THE '"" As of this writing, AT&T's application for transfer of WHITE HOUSE, OFFICE OF THE VICE PRESIDENT, Jan. 11, control of McCaw's cellular licenses is still pending due to re- 1994, at 7. quests from several RBOCs to extend the reply deadline to Jan. 187 Vice President Al Gore, Remarks at the Television 18, 1994. See In re Application for Consent to Transfer Control, Academy on the Administration's Vision of The National Infor- (AT&T & McCaw), ENF-93-44 (pending). Thus the Commis- mation Infrastructure (Jan. 11, 1994). sion has yet to state whether such a merger is in the public lea Id. interest. ISO Id. 195 'Shivers in Hollywood'; Violence Is an Issue in Critics' 190 Statement of FCC Chairman Reed Hundt before the Tour for NBC, COMM. DAILY, Jan. 11, 1994, at 5. Senate Committee on Commerce, Science and Transportation, '8* 47 U.S.C. § 1 (1988). Public Notice (Feb. 23, 1994), para. 1. Labeled "The Commu- 197 Warren G. Lavey, The Public Policies That Changed nications Act of 1994," proposed bill S.1822 attempts to reform the Telephone Industry Into Regulated Monopolies: Lessons 19941 TELECOMMUNICATIONS MERGERS graded and becomes obsolete in the wake of cellular market entry conditions, service quality and the pos- and fiber optic technology, the question becomes sible implementation of targeted subsidies, instead of where does universal service end, and with what monitoring issues such as cost and price for monop- 0" technological medium? Arguments such as spectrum oly local exchange services. Barrett believes that scarcity,198 traditionally offered by the FCC to jus- "[tlhe future role of regulators is likely to evolve tify its regulation of the broadcast industry, become more toward oversight of several multimedia broad- less credible as the profusion of technology becomes band providers and wireless PCS service more ubiquitous and the methods of transporting providers. '205 programming and information more abundant. 99 Referring to the difficult decisions on telecommu- The concept of universal service must not be lost nications regulation currently facing the FCC, Bar- along the "information superhighway," for then rett stated that the goal must be to "maintain bal- technology becomes a reward for only those who can anced regulatory policies.""" The question then afford to climb aboard. National Telecommunica- becomes, who has the capacity and the resources to tions and Information Administration ("NTIA") Di- regulate monopolistic entities such as Paramount- rector of International Affairs, Jean Prewitt, ques- Viacom and future mergers similar to the one pro- tioned: "[d]oes [convergence] hold promise for closing posed by Bell Atlantic and TCI? Many industry the gap or merely redefining the terms of telephone analysts do not believe that the FCC has the capacity efficiency for rich and poor? If that's true, we all or the resources to undertake such a monumental lose." '00 It ultimately will be up to the FCC to de- task,201 and at the moment, whether any regulatory 0 termine if, and to what extent, such mergers are con- body does is uncertain. ducted in accordance with the ideals of universal ser- Inevitably, the nation's telecommunications policy vice.2 0° Now that the future promises an abundance must adequately reflect and serve the "public inter- 20 9 of communications innovations, the challenge for the est, convenience and necessity," however, that Commission will be to tailor the old regulatory poli- standard may be rearticulated in 1994 and in the fu- cies, once premised on a system of communications ture. Through careful scrutiny of whether mergers scarcity, into more "appropriate reregulation."' ' 2 foster continued and healthy competition and satisfy The key to such regulation will lie in precisely iden- the venerable goal of universal service, Congress, the tifying to what extent regulators should intervene in Commission and the DOJ ultimately will determine 20 3 a medium rapidly approaching ubiquity. whether these mergers are in the public interest. FCC Commissioner Andrew C. Barrett sees the Should these mergers fall short of such standards, future role of regulators as focusing on competitive the odds are against successful governmental and

From Around 1915, 39 FED. COM. L.J. 174 (1987). See also mulate and administer a national universal service policy that is Statement of FCC Chairman Reed Hundt, supra note 190, consistent. Statement of FCC Chairman Reed Hundt, supra para. 18. note 190, paras. 18-19. 198 Spectrum scarcity is the conventional policy behind the 202 Paul Saffo, Looking Ahead to the Next Decade, COMM. idea that, because there is a limited amount of spectrum availa- WEEK, Jan. 3, 1994, at 52. ble for public use (necessarily because the government itself has 203 Id. chosen to limit the amount of spectrum offered for public con- 204 Barrett & Marchant, supra note 32, at 4. sumption), the government may chose to grant licenses to whom- 205 Id. ever it believes to be most worthy, i.e., whoever most completely 208 Rate Rules 'Oversold', COMM. DAILY, Jan. 10, 1994, at interest, convenience and necessity analysis. satisfies the public 3. the activities of the licensee of a The government may regulate 207 This task is arguably different from that presented to the broadcast or cable medium because the licensee is a "public trus- FCC at the time of divestiture because in 1994 there are more tee" of the airwaves or cable system, a mere operator, never in various kinds of heretofore unattempted truly an owner. Red Lion Broadcasting Co. v. FCC, 395 U.S. players engaging mergers, crossing the ownership boundaries of cable and telco in 367 (1969). an effort to converge different types of technology. Here, the 10 For a detailed discussion of the defects of the scarcity ra- FCC would be charged with regulating a multitude of vertically tionale, see Mark S. Fowler & Daniel L. Brenner, A Market- integrated entities, as opposed to one divested AT&T and seven place Approach to Broadcast Regulation, 60 TEx. L. REV. 207, 221-26 (1982). RBOCs. 200 U.S. As 'Developing Nation'" Telecommunications Gaps 20 Chairman Hundt has emphasized that both the FCC and Remain Major Hurdle Among Developing Nations, COMM. the states must have the regulatory flexibility and discretion to DAILY, Jan. 21, 1994, at 4. manage and supervise the transition to effective competition, in 20' While the proposed S. 1822 leaves the primary responsi- order to ensure that rates remain just and reasonable. Statement bility for defining universal service to the states, Chairman of FCC Chairman Reed Hundt, supra note 190, paras. 6, 29. 209 47 U.S.C. §§ 151, 302 (1988). Hundt believes that the states must work with the FCC to for- COMMLAW CONSPECTUS [Vol. 2 regulatory approval. licenses.21' In the short term, the proposed merger of AT&T- B. Impact On Competition McCaw threatens the cellular market share of the RBOCs and GTE, because the new AT&T would While the RBOCs may be the losers in the be a unified rival with sufficiently deep pockets and AT&T-McCaw merger, it is equally possible that geographic reach to produce advanced wireless ser- 21 the merger will provide the RBOCs with the oppor- vices throughout the United States. ' Over the long tunity that they have been seeking, namely to be per- haul, if wireless telephones are able to replace the mitted to enter the interexchange market from which traditional wired phone systems, it will be possible they have been barred since the divestiture of AT&T for AT&T to reach its customers by bypassing the in 1984. By extending its network directly to con- local exchanges and thus saving itself billions of dol- sumers through McCaw's cellular phone systems, lars in access fees, a savings that may or may not be 21 6 the RBOCs theorize that AT&T is developing a di- passed on to the consumer. rect link to the local exchange.210 The proposed The loss of access charges21 7 would deprive the union of AT&T and McCaw does more for the RBOCs and GTE of their biggest and most profita- RBOCs than all the years of battling Congress and ble source of revenue, 1 ' a blow which could result the courts since the late 1980s, for it provides the in a $1 billion loss in annual revenues for each Bells with quid pro quo ammunition in their quest RBOC, and a decrease of $300-400 million in an- to enter the interexchange arena.2 1' nual post-tax profits.21 9 If cellular and other compet- With one half of all cellular licenses originally re- itive technologies continue to find ways to bypass the served for the RBOCs,21 2 they have been able to in- local exchange, the RBOCs will soon experience an vest heavily in cellular services, all seven RBOCs acute cash flow reduction-one that the RBOCs be- ranking among the nation's ten biggest cellular com- lieve will disadvantage both the economy and the 22 0 panies.2"' Each of the RBOCs and GTE appear to consumers. have developed their own agendas for participating As both the Commission and the states promote in the explosive growth of the wireless communica- marketplace competition by knocking down de jure tions market. Industry executives note, however, that barriers into the local loop, they become more likely Bell Atlantic is close to a deal with BellSouth and to rid the RBOCs of the remaining vestiges of the many independent telephone companies to build a MFJ that effectively have prohibited them from nationwide consortium for advanced wireless ser- competing fully in other markets. 22 However, with vices, whose primary goal is to bid for PCS radio the RBOCs heavily entrenched in a local exchange

10 Ziegler, supra note 96, at 28. AT&T Chairman Robert ers believe this to be the primarily reason why price competition Allen attempted to assuage fears about the re-emergence of failed to develop in the cellular market as initially anticipated. AT&T into the local exchange markets by emphasizing that be- "' Edmund L. Andrews, The AT&T Deal's Big Losers, cause 99% of all cellular calls begin and terminate in the wired N.Y. TIMES, Aug. 25, 1993, at Dl, D3. local network, cellular service is secondary to the local ex- 214 Id. changes. Mulqueen, supra note 1, at 146. MCI Chairman Bert 215 Id. Roberts stated that even if AT&T does take away some local "' Id. It is equally possible the average customer may never traffic, the proper resolution would not permit the RBOCs ac- see any price reduction, despite the fact that this windfall to cess into the long-distance market, as this would recreate pre- AT&T and the other interexchange carriers may be significant. divestiture monopoly and would devastate, not foster, competi- 117 Access charges are paid to the LECs from the IXCs in tion. Nancy Hass, The Solomon Solution, FINANCIAL WORLD, order to enable local customers to complete long-distance calls on Oct. 12, 1993, at 32. At present, the overwhelming majority of the local network. Moeller, supra note 89, at 14. Currently, in- all local customers still make use of the LECs to complete their terexchange carriers are compelled to pay nearly forty cents out local calls, thus, Roberts sees no reason for any regulatory recon- of each dollar of revenue to the RBOCs for access. Id. These sideration until and unless these customers actually switch to an access charges and intra-lata toll calls account for 40-55% of alternative, non-LEC provider, such as an IXC. Id. LECs' telecommunications services revenues and 35-45% of total 211 Id. If AT&T is physically able to bypass the local loop revenues. Each RBOC could witness a 20% reduction in net- in extending its interexchange service directly to all of McCaw's work access and toll revenues over the next 5-10 years. Martyn cellular customers, the RBOCs argument that they should be F. Roetter, Ph.D., synopsis of The Future of the RBOCs: Col- permitted to offer service outside of the local exchange has lapse of the Cocoon, DR REP., July 1993. greater merit. 218 Id. "" In re Amendment of the Commission's Rules To Allow 219 Id. the Selection from Among Mutually Exclusive Competing Cel- 120 Hass, supra note 210, at 32. lular Applications Using Random Selection or Lotteries, Report "I FCC Chairman Reed E. Hundt approves of promoting and Order, 98 F.C.C.2d 175, paras. 30-41 (1984). Some observ- competitive entry into both the interexchange and the local ex- 1994] TELECOMMUNICATIONS MERGERS that is historically immune from competition,"'2 it is ries of the marketplace continues. 2 0 As the commu- the de facto barriers to entry that are fraught with nications industry experiences profound transforma- difficulties and will take more time to overcome. tion, two central implications for this current FCC Commissioner Barrett stated that "[i]t is communications revolution may be worthy of consid- 2 likely that the natural monopoly of the local ex- eration: 8' first, the future growth in communications change market eventually will evolve into a local lies not in people speaking to people, but rather, in multimedia and wireless services market, with multi- machines speaking to machines on behalf of their ple competitors."2'28 Barrett believes that advances in human owners; and second, within the. next decade technology make both the local exchange and wire- or so, the medium of communications will be less of less communications market fertile ground for com- a conduit between locations, and more of a destina- panies seeking new market recesses. 2 4 tion in and of itself-a place where professional and Addressing the prevailing fears that AT&T once personal interactions occur.232 An appropriate recog- again will become the pre-divestiture dinosaur it had nition of these basic premises may prove to be criti- been prior to 1984, there are compelling policy argu- cal in understanding the metamorphosis of the com- ments on both sides. On the one hand, the RBOCs munications marketplace. enjoy an extremely pervasive local monopoly, and to keep them from extending such a monopoly any fur- ther, perhaps they should be restrained from enter- C. Articulating The Vision For The User ing into areas such as data transmission, equipment manufacture and long-distance service.225 But 1. Wireless Technology equally as compelling is the argument that the RBOCs should be released from their regulatory re- With AT&T, MCI and Sprint all demonstrating straints as a means of keeping AT&T honest, and an interest in wireless technology, some believe that ensuring competition.226 Telecommunications mega- their strategic business decisions should increase 2 deals comprised of large cable companies, such as competition in the local loop. "' The fostering of lo- TCI, Time Warner and Viacom, involve cable com- cal competition may result in lower prices for both panies planning to use their cable networks to build long-haul and local services because wireless commu- their own interactive systems in conjunction with lo- nications may enable long distance carriers to reduce, cal access provider partners.22 7 Such plans require if not eliminate, the immense access fees they cur- the obtaining of PCS licenses, which will become rently pay to the local carriers.2 4 It is also hoped cheaper and easier if the cellular companies are for- that competition stimulated by the single-vendor ap- bidden to compete in the bidding for the licenses."" proach being pursued by such companies as AT&T, Computer and software conglomerates such as Bell Atlantic and MCI will cause a drop in costs and Microsoft, Apple, and IBM, can be counted on to an improvement in services.215 Users stand to benefit rival Bell Atlantic with cutting edge programming from the involvement of long-haul carriers in the systems.229 In addition, new challengers are bound to wireless market, because IXCs generally are more appear on the horizon, as the assault on the bounda- sophisticated about data services than are local carri-

change by lifting the remaining line-of-business restrictions of 228 Id. ,22 the MFJ, and by returning the primary regulation of the Id. 230 Id. RBOCs to the FCC. Statement of FCC Chairman Reed Hundt, supra note 190, paras. 14, 20-21. Hundt also supports. the I'l Saffo, supra note 202, at 52. RBOCs in their quest to provide interexchange services and 232 Id. Voice conversations account for less than one-half of equipment manufacturing, but over a period of time and subject all communications between the U.S. and Japan on AT&T's to adequate procedural safeguards that would preclude them long lines, with the majority of all traffic generated by facsimile. from wielding their market power in the local exchange to un- Id. dermine competition in new markets. Id. paras. 20-21, 23. Id" Moeller, supra note 89, at 14. '"4 Brown, supra note 100, at 49. "2 See Kelley, supra note 91 and accompanying text. MCI estimates that access m Federal Communications Commissioner Andrew C. Bar- charges paid to local exchange carriers currently account for ap- rett, Remarks at the Institute for International Research (Feb. 2, proximately forty-five cents of every dollar taken in by the com- 1993). pany. Gareiss, supra note 129, at 1. 114 Id. 235 Id. If MCI succeeds in its campaign to loosen regulations "' Robert Reno, Communications Policy Seems to Be On on the types of local services it may provide, the company Perpetual Hold, NEWSDAY, Aug. 26, 1993, at 46. predicts that business users in those cities soon to be serviced by 226 Id. its local network are likely to see a "double-digit" percentage

227 Landler, supra note 15, at 35. drop in local access costs by 1996. Id. at 61. COMMLAW CONSPECTUS [Vol. 2 ers.' 6 This interest by the primary IXCs, however, ogy? Despite the fact that long-distance companies does not necessarily translate into innovative techno- have laid over 95,000 miles of fiber optic cables logical gadgets for the telecommunications user, be- across the country, an expense of billions, few would cause historically most big ideas have originated with have a problem in justifying the wisdom of such an small companies that grew into significant market expenditure since these long lines already carry huge players, such as MCI and Sprint. volumes of traffic.2" Upgrading residences with fiber For the most part, however, it appears that man- optic cables may be harder to rationalize. While the agers of corporate networks are quite skeptical about upgrade is a necessary step in paving the way for the the wireless networking capabilities of the new information superhighway, it is an incredibly expen- AT&T.2 3 7 To these skeptics, this technology remains sive undertaking.245 Virtually all of the cost will be a novelty, characterized by minimal short-term im- borne by the private sector, with telcos and cable pact 2 8 and uncertain long-term advantages, and few companies estimated to spend as much as $50 billion expect AT&T to benevolently pass any access charge on the construction of advanced networks nationwide savings on to the user."3 9 Despite the fact that future within the next five years.24 ' services, such as PCS and mobile technology, prom- In addition, with the average American family ise to yield benefits to business users, as advocated by currently spending approximately $55 per month for Robert Allen in his "anytime, anyplace" communi- phone service and $31 per month for basic cable, 24° cations slogan, such visionary goals are often quite they may not want to pay additional fees for new difficult for the average user to understand, let alone innovations such as video-on-demand or interactive 2 ' articulate. " television. 47 If the convergence between cable and telecommunications companies succeeds, it is likely 2. Cable that the home television set will become a two-way conduit for more new programs, products, games and The recent C&P decision by Judge Ellis, permit- services than most consumers can imagine or, quite 2" ting Bell Atlantic to offer cable programming in the possibly, even desire. And for a society in which 49 Virginia area where the company provides local many cannot even program their VCRs, the ease phone service, provides the opportunity to increase with which these new technologies must be obtained competition in the video programming market and to and performed, with a minimum of effort and ex- curtail the effect of local cable monopolies.242 Be- pense, cannot be underestimated. cause the majority of local cable subscribers are Access to 500 channels and a wealth of informa- served by only one cable company in their service tion does not necessarily create an informed or proto- area, the significance of the C&P decision is that it is typical civilization, nor does it mean that the average ultimately about more choices for the consumer.243 viewer will choose to "motor along the information But is society willing to pay any price for technol- superhighway."' Because new technologies have a

206 Id. 248 Mannes, supra note 62, at 46. 207 Mulqueen, supra note 1, at 1, 146. 249 Moeller, supra note 21, at 25. 20 For his part, Sprint Chairman William Esrey viewed 250 In fact, the research has shown that the American public MCI's plan in the same positive light as all other local access neither wants nor cares about access to 500 channels. Don West plans made by telcos, cable, cellular and PCS companies, but & Kim McAvoy, Staking a Claim On the Future; Role of negated the possibility of any short-term impact. Gareiss, supra Broadcast TV. in a Multimedia World, BROADCASTING & note 129, at 1. CABLE, Apr. 19, 1993, at 20. One such example is GTE's ambi- 209 Id. tious Main Street project in Cerritos, CA, which offered interac- 40 Id. tive television services over the past four years. A test that GTE 241 David Burger, Everything Converging, But Toward claimed would "shape future telecommunications for the whole What End, COMM. WEEK, Aug. 30, 1993, at 1. country" can hardly be described as a success when few residents 242 Skrzycki, supra note 67, at A6. of the community have subscribed (only 350 out of Cerritos' :43 Id. 7300 cable subscribers are users) and most do not even get cable 44 Samuelson, supra note 57, at A25. TV. John Lippman, TV of Tomorrow' Is a Flop Today; 145 Id. One estimate sets the cost at $1000 per household, GTE"s California Experiment in Two-Way Cable Finds Few making the total cost of wiring all 96 million households in the Takers, Many Skeptics, WASH. POST, Sept. 1, 1993, at Fl. United States an outrageous $100 billion. Id. Others place the "Subscribers who have lived with GTE's high tech system report cost in the hundreds of millions. Electronic Superhighway Will they would rather rent movies from the video store because it is Be Costly, TELECOMM. ALERT, Jan. 3, 1994. cheaper, or sit down at the kitchen table to pay bills instead of 246 Id. entrusting the task to their televisions." Id. Project head Don 247 Id. Bache admitted that such projects are based primarily upon 19941 TELECOMMUNICATIONS MERGERS tendency to create chaos and confusion in the name to unite in order to break the chains of local of change and to necessarily retard progress by monopolies. breeding new economic, legal, technical and societal It is imperative, however, that the antitrust impli- problems, the impact of innovative technologies is cations of such mergers be thoroughly examined. If not immediately recognizable.251 Such long-term such mergers are merely unions bent on pursuit of repercussions indicate that taking the needs of the vertical integration undermining the public interest, user into account is absolutely critical to a successful they themselves are inherently monopolistic and can- communications revolution. Along the way to achiev- not be permitted to exist simply to destroy previously ing technological greatness, the human consumer existing monopolies. Because the task of antitrust must not be forgotten. As experimental products and merger law is premised upon the need to safeguard services vie for attention, it must be remembered that the free competition so essential to the preservation users also have a powerful stake in the multimedia 52 of our democratic, political and social institutions, future.1 the goal must be to approve only those mergers As one journalist eloquently noted, "[t]he whose benefits to the public outweigh their probable truth-both grim and hopeful-is that technology is adverse consequences. The issue ultimately 25 to be de- what we make of it and we are what we are. cided is whether the mergers discussed herein are in And the truth is, there is no way of knowing in the the public interest and, if so, whether they should be present, how successful or desirable this proliferation permitted to occur at all. of technology will prove to be to the consumer of the The manner in which the market and the individ- future. ual user respond to such mergers will be measured largely by the success achieved in the development of IV. CONCLUSION promising wireless communications services such as PCS, the timeliness with which the tangible benefits As the telecommunications industry undergoes ex- of such systems can be passed on to the consuming plosive changes, the significance of the aforemen- public and, ultimately, whether the corporate vision tioned mergers cannot be underestimated. The land- is truly aligned with the public interest. scape of the entire telecommunications industry This is no longer a POTS-plain old telephone stands to change, and with it, the regulations of the service-world. Today's common carriers must be past. While AT&T continues to be a dominant broad-based suppliers of all kinds of services. With- force, especially in the wake of its proposed merger out an infrastructure capable of supporting current with McCaw, current trends in the marketplace in- technology, cable companies may have to unite in or- dicate to some observers that perhaps the time has der to, compete. The rapid and pervasive abundance come for Congress, the governmental agencies and of proposed mergers between telephone, cellular and the court systems to divorce themselves from tradi- wireless communications companies, and major play- tional regulations designed to protect and foster com- ers within the cable, and film industries is evidence petition in a monopolized, or at least a heavily domi- that the telecommunications industry will be more nated telecommunications industry. Likewise, expansive within the next five years than heretofore perhaps it is time to lift completely the ban on cross- thought possible. ownership and to permit telcos and cable companies

speculation and said, "I don't know whether we can prove de- 252 Fleischmann, supra note 22, at TI0. mand exists for all these services." Id. i Id.; "For good or ill, couch potatoes are going to become 51 Samuelson, supra note 57, at A25. power potatoes." Mannes, supra note 62, at 46.