The Telecommunications Industry in 1993: the Year of the Merger
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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.