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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Applications for Consent to the ) Transfer of Control of Licenses and ) Section 214 Authorizations from ) ) Tele-Communications, Inc., ) CS Docket No. 98-178 Transferor ) ) To ) ) AT&T Corp., ) Transferee. ) MEMORANDUM OPINION AND ORDER Adopted: February 17, 1999 Released: February 18, 1999 By the Commission: Commissioner Furchtgott-Roth concurring and issuing a statement; Commissioner Tristani approving in part, dissenting in part, and issuing a statement. Table of Contents Paragraph I. Introduction. . . . . . . . . . . . . . . . . . . . . . 1 II. Background. . . . . . . . . . . . . . . . . . . . . . . 2 A. The Applicants. . . . . . . . . . . . . . . . . . . . . 2 B. The Merger Transaction and the Application To Transfer Licenses 9 III. Legal Standards . . . . . . . . . . . . . . . . . . . 13 IV. Analysis of Potential Public Interest Harms . . . . . 17 A. Multichannel Video Programming Distribution Service . 20 1. Open access to broadband facilities by MVPD competitors 24 2. Program access . . . . . . . . . . . . . . . . . . 31 3. Digital broadcast signal carriage. . . . . . . . . 41 B. Local Exchange Service and Exchange Access Service. . 44 1. Treatment of the merged entity as a LEC and/or incumbent LEC 51 C. Residential Internet Access Service . . . . . . . . . 60 1. Background . . . . . . . . . . . . . . . . . . . . 63 2. Summary of issues. . . . . . . . . . . . . . . . . 75 3. Discussion . . . . . . . . . . . . . . . . . . . . 92 D. Mobile Telephone Service. . . . . . . . . . . . . . . 97 E. Other Public Interest Issues. . . . . . . . . . . . . 113 1. Cross-subsidization and cost allocation. . . . . . 114 2. Tying. . . . . . . . . . . . . . . . . . . . . . . 123 3. Section 652 -- Prohibition on buy outs . . . . . . 130 4. Universal Service/deployment . . . . . . . . . . . 137 5. Labor issues . . . . . . . . . . . . . . . . . . . 140 6. Corporate responsibility . . . . . . . . . . . . . 142 V. Analysis of Potential Public Interest Benefits. . . . . . 145 VI. Additional Procedural Matters . . . . . . . . . . . . 149 VII. Conclusion . . . . . . . . . . . . . . . . . . . . . 154 VIII. Ordering Clauses. . . . . . . . . . . . . . . . . . . 155 I. INTRODUCTION 1. Tele-Communications, Inc. ("TCI") and AT&T Corp. ("AT&T) have applied for our consent to their proposed transfer of control to AT&T of certain licenses and authorizations controlled by TCI or its affiliates or subsidiaries. Based on the record, we find that AT&T and TCI (collectively, the "Applicants" or "AT&T-TCI") have demonstrated that the proposed transfers are in the public interest. We conclude that, with the conditions imposed by this Order, the merger of AT&T and TCI is likely to result in benefits for consumers, including a local telephony alternative to many residential customers now served only by incumbent local exchange companies ("LECs"), without creating competitive harm with respect to other services. Accordingly, we grant the transfer application subject to the following conditions: (1) that prior to consummation TCI transfer ownership of its Sprint PCS tracking stock to a trust that has been approved by the Commission; and (2) that the merged AT&T direct any economic interest arising in connection with the Sprint PCS tracking stock to the benefit of the shareholders of Liberty Media Group consistent with its proposed policy statement and with the terms of the Applicants' settlement agreement with the Department of Justice, as set forth in the proposed Final Judgment in United States v. AT&T Corp. and Tele- Communications, Inc., Case No. 98-3170 (D.D.C., filed Dec. 30, 1998). II. BACKGROUND A. The Applicants 2. AT&T. Principally, AT&T is a telephone company. More specifically, AT&T is the largest domestic and international long distance telecommunications carrier in the United States. It provides communications services to residential, business, and government customers, and operates in more than 250 countries and territories around the world. AT&T's revenues from communications services totaled $51.3 billion in 1997, of which $22.2 billion were derived from business long distance services and $23.9 billion from residential long distance services. 3. AT&T provides local exchange services to a relatively small number of customers. In particular, AT&T offers resold local exchange service to less than one-half of one percent of the total residential customers. AT&T also offers service to business customers. To expand its presence in markets for local exchange and exchange access services for business customers, AT&T acquired Teleport Communications Group Inc. ("Teleport"). Teleport provided residential local telephone service to only 12,000 customers nationwide. The Commission approved the transaction on July 23, 1998. At the time of its acquisition, Teleport was the nation's largest competitive local exchange carrier and had initiated the development of local telephone networks in 83 metropolitan areas in approximately 28 states throughout the United States. From these operations, through which it served the business market, Teleport had earned revenues of $494.3 million in 1997. 4. In addition to the foregoing wireline services, AT&T provides wireless mobile telephone services through its ownership and operation of AT&T Wireless Services Inc. ("AT&T Wireless"). Operating in numerous metropolitan markets throughout the United States, AT&T Wireless serves approximately 6.6 million customers. In 1997, AT&T Wireless generated revenues of approximately $4.4 billion. AT&T also provides Internet access service to approximately 1.25 million customers through AT&T WorldNet Service and CERFNet. AT&T WorldNet and CERFNet offer Internet access to residential and business customers through dial-up and dedicated connections. 5. TCI. Principally, TCI is a cable company. More specifically, TCI is a diversified corporation that holds a variety of interests through its subsidiaries, TCI Communications ("TCI-C"), Liberty Media Group ("Liberty Media"), and TCI Ventures Group. TCI-C is one of the largest providers of cable television service in the United States. Through its subsidiaries, TCI-C delivers a wide range of video programming, including local broadcast stations; national, regional, and local cable programming services; premium movie and pay-per- view channels; and sports programming services to homes and businesses nationwide. TCI-C controls a number of subsidiaries that together provide cable television service to approximately 12.7 million customers, passing approximately 20.9 million homes. TCI-C also holds minority interests in, or has joint ventures with, other cable television operators. These operators collectively provide cable television service to approximately 7.5 million additional customers, and pass approximately 13.2 million additional homes. In 1997, revenues from TCI-C's cable services operations totaled approximately $5.8 billion, which constituted 76% of TCI's total annual revenue. 6. TCI's Liberty Media Group subsidiary is an investor in, and manager of, entities engaged in the production, acquisition, and distribution of entertainment and informational programming and software, including multimedia products. The various business interests fall into four categories: movie services; general entertainment and information services; electronic retailing (which includes direct marketing, advertising sales relating to programming services, infomercials, and transaction processing); and sports programming services. 7. TCI's third subsidiary is TCI Ventures Group, a wholly owned subsidiary that is composed of an array of telecommunications investments. Through this business unit, TCI holds its non-cable, non- programming and international assets, including, of particular relevance to this proceeding, its investments in @Home and Sprint Corporation ("Sprint"). TCI Ventures Group holds a 39% equity interest and a 71% voting interest in @Home, which provides content-enriched, high-speed Internet services over cable television infrastructure. @Home began its commercial operation in September of 1996. Its primary offering allows residential subscribers to connect their personal computers via cable modems to their cable operator's hybrid fiber-coaxial cable ("HFC") network and receive data at higher speeds than are available with typical dial-up access services offered over standard analog lines of local exchange carriers. @Home transmits data between the cable plant and the public Internet using a proprietary backbone network that enhances the speed of transmission. @Home has reached affiliate agreements with 18 cable companies worldwide to deliver its high- speed Internet services. Considering other current and pending affiliations, @Home has potential access to more than 50 million homes, or approximately 50% of all homes passed by cable television plant in North America. As of December 31, 1998, @Home served more than 330,000 cable modem subscribers across North America. 8. Through TCI Ventures Group, TCI currently holds approximately 23.8% of the equity and approximately 2.38% of the voting interest in a class of Sprint stock that tracks the value of Sprint's personal communications service operating group ("Sprint PCS tracking stock"). On August 31, 1998, after a public notice period, the Commission approved Sprint's unopposed application for re-organization, whereby Sprint issued shares of this newly-created Sprint PCS tracking stock to TCI in exchange for TCI's partnership interest. This re-organization includes an initial public offering of additional shares of the Sprint PCS tracking stock. B. The Merger Transaction and the Application To Transfer Licenses 9. Proposed Transaction. On June 24, 1998, AT&T announced its agreement to merge with TCI. Under the terms of the agreement, and following a reorganization of certain of TCI's assets, AT&T will become the parent company of TCI. Through this merger, AT&T plans to integrate its telecommunications business with TCI's cable networks and thereby build a facilities-based local residential telecommunications network. The Applicants contend that the merger will expand and accelerate AT&T's ability to compete with incumbent local exchange carriers ("incumbent LECs") in providing local telephone service to residential customers. After a significant investment to upgrade TCI's cable facilities to allow two-way voice and data communications, Applicants submit, the merger will allow almost one-third of American households access to the upgraded high-capacity broadband networks. Applicants believe that the merger provides them an opportunity to give consumers an "unprecedented choice of communications, entertainment and advanced information services from one company with one easy connection." 10. Prior to the merger, and subject to shareholder approval, TCI plans to combine its Liberty Media Group with its TCI Ventures Group. The new business unit, called "Liberty Media Group," will combine the business operations of the two groups. Immediately prior to the merger, the new Liberty Media Group will transfer to TCI its investment in @Home, the National Digital Television Center, and its ownership of Western Tele-Communications, Inc. Subsequent to the merger, AT&T also plans to issue a separate tracking stock, called Liberty Media Group tracking stock, which is intended to reflect the performance of the assets and businesses of the new Liberty Media Group. Although AT&T will be the legal owner of the assets and the businesses of the new Liberty Media Group, the businesses of Liberty Media Group will continue to be managed by the executives of Liberty and TCI Ventures Group that were in office prior to the merger. 11. Federal Review. On September 14, 1998, AT&T and TCI filed joint applications under sections 214(a) and 310(d) of the Communications Act of 1934, as amended ("Communications Act"), requesting Commission approval of the transfer of control to AT&T of licenses and authorizations controlled by TCI or its affiliates or subsidiaries. The transfer would take place as a result of the proposed merger between AT&T and TCI, subsequent to which TCI would become a wholly-owned subsidiary of AT&T. On December 30, 1998, the Department of Justice ("DOJ") completed its review of the proposed merger between AT&T and TCI. Pursuant to a proposed consent decree, DOJ required Liberty Media to divest its ownership of Sprint PCS tracking stock to prevent the merger from reducing competition in mobile wireless services. 12. Local Franchising Authority Review. Applicants have completed initial regulatory filings with approximately 940 local franchising authorities. Pursuant to section 617 of the Communications Act, local franchising authorities with jurisdiction to review such transfers or sales of cable systems have 120 days to render a decision. III. LEGAL STANDARDS 13. As we explained in our decision approving the transfer of licenses and authorizations from MCI to WorldCom, before the Commission can approve the transfer of control of authorizations and licenses in connection with a proposed merger, we must find that the proposed transfers serve the public interest, convenience, and necessity. To make this finding, we must weigh the potential public interest harms and benefits. At a minimum, this requires that the merger does not interfere with the objectives of the Communications Act. 14. This analysis must include, among other things, consideration of the possible competitive effects of the transfer. Our public interest analysis is not, however, limited by traditional antitrust principles. In the telecommunications and cable industries for which we have statutory responsibility, as in most others, competition is shaped not only by antitrust rules, but by the regulatory policies that govern the interactions of firms inside the industries. An antitrust analysis -- such as that undertaken by the Department of Justice in this case -- focuses solely on whether a proposed merger will harm competition. Our public interest analysis, however, also encompasses the broad aims of the Communications Act. For example, an antitrust analysis of cable television service providers takes place against a backdrop of rules adopted by this Commission, as directed by Congress, that among other things limit the ability of cable operators to prohibit their competition from carrying certain programming. To apply our public interest test, then, we must determine whether the merger violates our rules, or would otherwise frustrate our implementation or enforcement of the Communications Act and federal communications policy. That policy is, of course, shaped by Congress and deeply rooted in a preference for competitive processes and outcomes. 15. The Applicants bear the burden of proving that the transaction serves the public interest. Where necessary, the Commission can attach conditions to the transfer of authorizations or licenses in order to ensure that the public interest is served by the transaction. When assessing the potential public interest effects of this transaction between AT&T and TCI, we limit our analysis to those issues that have been raised by the parties to the proceeding and those additional issues that may significantly affect the public interest. Finally, we weigh any potential competitive harms and benefits to determine whether the proposed transaction would promote the public interest. 16. For some mergers no inquiry is necessary. Indeed, the face of some merger applications may reveal that the merger could not frustrate or undermine our policies. This merger, although ultimately we judge it permissible, is not so simple. Parties have raised non-frivolous issues about whether this merger creates incentives or opportunities for the merged firm to violate or frustrate Commission rules and policies. We analyze the potential public interest harms and benefits of this merger in the next sections. IV. ANALYSIS OF POTENTIAL PUBLIC INTEREST HARMS 17. Consistent with our precedent, we begin our analysis of the competitive effects of the proposed merger by identifying the relevant product and geographic markets. We then consider whether the merger is likely to result in anti-competitive effects or other potential adverse public interest effects. 18. Parties opposing the merger of AT&T and TCI have alleged that the combination may harm the public interest. These allegations concern behavior that may or will occur in one or more of four relevant types of services: (1) multichannel video programming distribution ("MVPD"); (2) local exchange and exchange access; (3) residential Internet access; and (4) mobile telephony. Based on our own review of the record, we believe that the proposed transfers of licenses and authorizations are not likely to produce any adverse public interest effects with respect to any other services. Accordingly, we limit our analysis to the four services listed above. With one exception, neither the Commission nor commenters identified issues concerning other services provided by AT&T and/or TCI. Sprint alleged that the merger could have anticompetitive effects with respect to long distance service as a result of the merged firm's control of exchange access service. We address this concern in our analysis of local exchange and exchange access services. 19. We treat multichannel video programming distribution services, local exchange and exchange access services, Internet access service, and mobile telephony services as separate offerings, although we expect that some of these services may be offered on a bundled basis in the future. At present, such a bundled service offering is a new offering in some markets and nonexistent in many others. Accordingly, we do not conduct a separate analysis of bundled services as a discrete product. Rather, our competitive analyses of how the merger will affect each component of a bundled offering will analyze the competitive effects of the bundle as well. A. Multichannel Video Programming Distribution Service 20. No party alleges that the merger will eliminate an actual or potential significant competitor in markets for multichannel video programming distribution. However, some commenters are concerned that the merged company will have a competitive advantage over other multichannel video programming distributors ("MVPDs") because of its ability to deliver a comprehensive package of services in addition to cable service -- specifically, local and long distance service, mobile telephone service, and high-speed Internet access service. In light of the exorbitant, and arguably prohibitive, investment that would be needed to deploy competing facilities on the same scale, these commenters argue that we should approve the merger subject to the condition that competitors have a right of access to the merged entity's facilities, on reasonable terms, for the purpose of providing competing services. Other commenters are concerned that the merged company will attempt to evade the Commission's existing program access and pole attachment rules. In some cases, commenters believe the merged company should be subject to expanded regulatory restrictions, particularly with respect to program access. 21. The product we consider in this section is the services provided by MVPDs. This conforms with the Communications Act's definition of "multichannel video programming distributor." MVPDs include cable, direct broadcast satellite ("DBS"), multichannel multipoint distribution services ("MMDS"), and satellite master antenna television ("SMATV") providers. Although the relevant services are offered by MVPDs using different distribution technologies and may not be perfect substitutes for each other (e.g., DBS providers generally do not offer local broadcast channels, which cable, MMDS, and SMATV systems can provide), subscribers can often combine services (e.g., use an antenna to receive broadcast programming over the air when subscribing to DBS services) to obtain most of the functionality provided by other MVPDs. Consumers in a local cable franchise area cannot switch to alternative MVPD services that are not offered in the same local service area. For purposes of our public interest analysis, however, it is reasonable to treat all households facing similar competitive choices as being in the same market. TCI is the dominant provider of multichannel video programming services in those local areas in which it operates a franchised cable system. Consequently, to analyze the effects of this merger on competition between MVPDs, we focus on TCI's individual local franchise areas. 22. We conclude that the proposed merger is unlikely to produce adverse competitive effects in the provision of services from MVPDs. Although AT&T has operated as a retail provider of such services on a limited scale in the past, it is not doing so now. Even if it had plans to begin offering video programming services on a retail basis in the future, many other companies have comparable incentives and capabilities. AT&T is unlikely to quickly become a significant competitor in the distribution of multichannel video programming absent the merger. AT&T's current assets and capabilities do not provide it with an advantage compared to other firms that might be interested in deploying the necessary facilities; indeed, we have previously reported that DBS providers, wireless cable operators, SMATV systems, incumbent LECs, and electric utility providers are more likely sources for the development of competitive facilities. Accordingly, the proposed merger is unlikely to result in the loss of a significant source of current or future competition in MVPD services. 23. Nevertheless, commenters assert that the merger will further entrench whatever market power TCI currently enjoys in its franchise areas. To avoid or mitigate this enhanced market power, commenters ask us to adopt, for this merger, new rules regarding access to TCI's facilities, program access, and local station signal carriage. For the reasons discussed below, we decline each of these invitations to fashion new rules to confine a hypothetical increase in market power. 1. Open access to broadband facilities by MVPD competitors 24. EchoStar Communications Corporation ("EchoStar") asserts that the Commission should require AT&T-TCI to allow competing MVPDs to have access to TCI's broadband facilities, including inside wiring. It appears that Echostar seeks access to TCI's facilities to sell video services and possibly other services. EchoStar proposes that the Commission condition its approval on a requirement that the merged company make its facilities, including inside wiring in multiple dwelling units, available to competing MVPDs. U S WEST, Inc. ("U S WEST") argues that the anticompetitive potential of the merger would be so severe as to warrant requiring that AT&T-TCI comply with the Commission's rules on inside wiring and navigational devices even if they are overturned on appeal. According to U S WEST, these requirements were originally adopted, at least in part, because of the market power that cable operators currently possess. U S WEST asserts that the merger of AT&T and TCI threatens to solidify and increase TCI's existing market power and justifies such an obligation even if the general application of these requirements is overturned on appeal. 25. Ameritech asks the Commission to condition the merger on AT&T-TCI's commitment to provide non-discriminatory access to the merged company's utility poles, conduits, ducts, and rights-of-way in accordance with section 224 of the Communications Act. Ameritech believes the combination of AT&T's telecommunications conduits and TCI's "last mile" facilities would cause the merged entity to fall within the spirit, if not the letter, of the definition of "utility" contained in section 224(f) of the Communications Act, which governs the rates, terms, and conditions under which utilities must allow other service providers to attach plant to the poles and other infrastructure of the utility. Ameritech anticipates that AT&T-TCI might claim to be free of any obligations under section 224 due to the planned use of cable (i.e., non-utility) infrastructure, rather than traditional telephone facilities, for the provision of local exchange and other services. 26. AT&T-TCI respond that under Title VI of the Communications Act, the Commission cannot require TCI to open its cable systems to competing MVPDs. Moreover, they assert, such a condition would erode the merged company's incentive to upgrade TCI's existing cable plant to provide broadband services and telephony. 27. AT&T-TCI also contend that the merged company will comply with the Commission's rules, including inside wiring rules and navigational devices rules. They caution, however, that there is no public interest reason to force these rules on AT&T-TCI if they are overturned by the courts. AT&T-TCI argue that the condition proposed by Ameritech to require that the merged company provide non-discriminatory access to its utility poles, conduits, ducts, and rights-of-way in accordance with section 224 is unnecessary because sections 251(a) and (b) embody the same obligations and adequately address Ameritech's concerns. 28. Discussion. The merged entity will be subject to the inside wiring rules and navigational devices rules to the same extent as all other cable operators. We decline to condition our approval of the requested transfers on the stipulation that the merged entity will be subject to those requirements even if they are subsequently struck down by the courts. Nothing in the record warrants such a condition based solely on speculation that the inside wiring rules and navigational devices rules might be found to be invalid. Moreover, we cannot conclude that the evidence in the record would support the continued application of these rules to the merged firm, but not other cable operators, as a remedy for possible future harms associated with the merger. 29. Beyond affirming the general applicability of our rules to the merged entity, we will not require AT&T-TCI to grant other MVPDs access to TCI's broadband facilities for the purpose of providing multichannel video programming services. Commenters advocating such a condition rely on the open access rules applicable to common carriers and seek to expand those requirements beyond traditional common carrier functions. We continue to recognize and adhere to the distinctions Congress drew between cable and common carrier regulation. Under present law, neither cable operators nor common carriers providing cable service, other than on a common carrier basis, are subject to common carrier regulations under Title II of the Communications Act. 30. We further conclude that Ameritech's proposed condition regarding the applicability of section 224 of the Communications Act to AT&T-TCI is unnecessary. Section 224 provides that "a utility shall provide a cable system or any telecommunications carrier with nondiscriminatory access to any pole, duct, conduit, or right-of-way owned or controlled by it." The term "utility" includes local exchange carriers that own or control such facilities or rights-of-way and use them to any extent for wire communications. AT&T- TCI will be required to comply with section 224 wherever the company acts as a local exchange carrier and, therefore, a "utility" within the statutory definition. The fact that the company may use cable facilities to provide telephone exchange service does not alter this result. There is nothing in the plain language of the statute or the legislative history to suggest that the use of cable facilities to provide telephone exchange service would exempt a local exchange carrier from the requirements of section 224. Rather, the statutory provision applies to any "utility" that owns or controls poles, ducts, conduits or rights-of-way to ensure that its rates, terms, and conditions for pole attachments are just and reasonable. To the extent Ameritech seeks imposition of section 224 obligations on AT&T-TCI in areas where the company only provides cable service, we decline to impose section 224 obligations because we conclude the company is not acting as a "utility" within the meaning of section 224 when it provides only cable service. The Commission has never regulated cable companies that provide solely cable services as "utilities" under section 224 and sees no reason to do so in the context of this merger. 2. Program access 31. Various commenters urge the Commission to rule that AT&T-TCI will be subject to the Commission's program access rules with respect to TCI's provision of cable service and Liberty Media's investments in cable-affiliated programming vendors. The program access rules apply to programming vendors that are affiliated with cable operators, such as through common ownership, and to sales of cable programming that is delivered via satellite from a programming vendor to a cable operator. The Commission adopted its rules pursuant to section 628 of the Communications Act, through which Congress sought to minimize the incentive and ability of vertically integrated programming suppliers to favor affiliated cable operators over nonaffiliated cable operators or other MVPDs in the sale of satellite cable and satellite broadcast programming. Among other restrictions, the rules prohibit any cable operator that has an attributable interest in a satellite cable programming vendor from improperly influencing the decisions of the vendor with respect to the sale or delivery, including prices, terms, and conditions of sale or delivery, of satellite cable programming or satellite broadcast programming to any unaffiliated MVPD. The rules also prohibit vertically integrated satellite programming distributors from discriminating in the prices or terms and conditions of sale of satellite-delivered programming to cable operators and other MVPDs. In addition, cable operators generally are prohibited from entering into exclusive distribution arrangements with affiliated programming vendors. Those provisions of the program access rules that apply to "cable operators" apply equally to any common carrier or its affiliate that provides video programming directly to subscribers. 32. TCI and Liberty Media are subject to the Commission's program access rules because they are vertically integrated. Some commenters are concerned that AT&T-TCI might argue in the future that the program access rules should not apply to the merged company because of the post-merger operational separation between Liberty Media, which will continue to own interests in programming vendors, and AT&T Consumer Services, which will provide cable service. Ameritech is concerned not only about the proposed corporate structure but also about any future restructuring that might affect the merged company's ownership of Liberty Media. Ameritech recommends that the Commission reserve the right to review and approve any such restructuring. 33. To the extent that our program access rules apply only to programming delivered by satellite, some commenters ask the Commission to condition its approval of the merger by applying the current program access rules (or equivalent restrictions) to any programming that may be delivered terrestrially from Liberty Media programmers to AT&T-TCI cable systems. These commenters believe terrestrial delivery might be feasible once AT&T's existing facilities are combined with TCI's facilities. Certain commenters also argue that the Commission should require the merged entity to waive TCI's existing exclusivity agreements with programmers. Ameritech adds that AT&T-TCI should be required to forego any new exclusivity agreements for at least five years, regardless of whether the Commission's rules otherwise would permit such agreements. Consumers Union, Consumer Federation of America, and the Office of Communications, Inc., of the United Church of Christ ("Consumers Union") state that the Commission should require Liberty Media to charge market prices for its programming, regardless of whether it is engaging in unlawful price discrimination. Consumers Union claims that offering programming only at above-market prices would constitute an unfair method of competition, which is prohibited by the program access rules. CoreComm Limited ("CoreComm") asks the Commission to investigate the reported "preferred vendor" arrangements between Liberty Media and AT&T-TCI. 34. In response, AT&T-TCI state that nothing in the merger transaction would shield the merged company from the program access rules. They conclude that a condition therefore is unnecessary. AT&T- TCI object to any proposed conditions that would go beyond the Commission's current program access rules, arguing that there is nothing about the merger that would justify imposing a unique restriction on AT&T-TCI's entering into exclusive arrangements with programming vendors that are not vertically integrated and not covered by the rules. 35. Discussion. We affirm that the merger, as proposed, will not shield AT&T-TCI from the program access rules. Liberty Media will be a wholly owned subsidiary of AT&T, and transactions between the merged company and Liberty Media programmers therefore will fall within the scope of the Commission's program access rules. 36. We decline to prohibit, as a condition on this merger, Liberty Media's reported post-merger `preferred vendor' status with AT&T-TCI, as AT&T-TCI have explained such status. AT&T-TCI state that the arrangement will ensure that the terms and conditions offered by AT&T-TCI to Liberty Media for its programming are no less favorable than the terms offered by AT&T-TCI to other programming vendors. If an entity believes that this "preferred vendor" arrangement violates the program carriage or program access rules, or any other Commission rule, they are free to file a complaint detailing the alleged infraction. 37. The parties have not demonstrated that the merger provides a basis for imposing restrictions that are beyond the scope of the Commission's program access rules. We decline to apply the program access rules or equivalent restrictions to terrestrially delivered programming distributed by the merged company, in conformance with our recent decision in the Program Access Order. We recognize, however, that the integration of TCI's content with AT&T's coast-to-coast fiber optic network may provide the merged entity with the ability and the cost and quality incentives to migrate video programming from satellite to terrestrial delivery. Such a migration could have a substantial impact on the ability of alternative MVPDs to compete in the marketplace. As we indicated in the Program Access Order, we remain aware of the potential for this type of migration and the possible need to address it in the future. If it appears that the movement of programming from satellite to terrestrial delivery is frustrating the pro-competitive purposes of section 628, we will so notify Congress. 38. We further decline to condition the merger on the imposition of anti-exclusivity restrictions that are not required by the program access rules. If parties believe any existing exclusivity agreements violate the program access rules, the program access complaint process is the appropriate forum in which to resolve any such grievance. Commenters have not alleged that existing exclusivity arrangements are unlawful, and we do not find that this merger provides a basis for the Commission to declare unlawful TCI's future exclusivity agreements to the extent they conform with current rules. 39. We reject Consumers Union's proposal that the Commission mandate the sale of programming at "market" prices. Neither the merger nor the Commission's rules provide any basis for the imposition of a mandate that Liberty Media price its programming at any particular level, provided the pricing is not unlawfully discriminatory. 40. Finally, we will not condition the merger on any restriction on the merged company's right to restructure the ownership of Liberty Media beyond the Commission's usual requirement that companies seeking to transfer Commission licenses first obtain the Commission's approval. Assuming all license transfer requests are approved, our rules do not explicitly prohibit vertically integrated companies from restructuring their corporate relationships. If parties believe any future corporate restructuring is motivated by an unlawful or otherwise improper purpose, they may pursue such claims in a complaint detailing the alleged improprieties. 3. Digital broadcast signal carriage 41. The National Association of Broadcasters ("NAB") and the Consumer Electronic Manufacturers Association ("CEMA") are concerned about the impact of the proposed merger on the future of advanced digital television technologies ("DTV"). Considering that over two-thirds of the American public receive broadcast signals via cable, NAB and CEMA submit that the cable industry's commitment, in particular TCI's, to carry digital broadcast signals is essential to ensure the timely completion of digital broadcast deployment as mandated by both Congress and the Commission. To this end, NAB asks the Commission to condition approval of the merger on the requirement that the merged entity carry all local digital television broadcast signals to consumers' television sets without degradation. NAB argues that the imposition of must-carry obligations on the merged entity would advance the public interest by promoting competition among MVPDs through diversity of programming. CEMA asks the Commission to require the merged entity to respect TCI's commitments to Congress that its upgraded cable systems will carry digital broadcast signals irrespective of the formats in which they are broadcast and that TCI's digital set-top boxes will be able to convert television signals from any digital format to the current National Television System Committee ("NTSC") television standard so that they may be displayed on conventional, existing television sets. 42. AT&T-TCI argue that the Commission should reject NAB's proposed condition to mandate the carriage of digital broadcast signals. Asserting that the condition is beyond the scope of this merger proceeding, AT&T-TCI add that in response to expected consumer demand, TCI is currently negotiating digital carriage matters with several broadcasters. Given that the majority of broadcasters are not expected to commence DTV broadcasts until May 1, 2002, AT&T-TCI assert that there is no reason for the Commission to act in this proceeding. Furthermore, AT&T-TCI contend that expanded channel capacity achieved through system upgrades provides no basis for conferring a preferred status on broadcasters' digital feeds during the DTV transition period. They state that if broadcasters offer DTV programming that consumers want, the marketplace will ensure that the cable industry will respond. Similarly, AT&T-TCI assert that CEMA's proposal to condition the merger on commitments related to pass-through and conversion of all digital broadcast signals should be rejected. AT&T-TCI argue that given the complex and highly technical trade- offs involving technology, cost, quality, and spectrum efficiency, the transition to DTV is best handled by the marketplace. 43. Discussion. We find that digital broadcast signal carriage requirements should be addressed in the Commission's pending rulemaking proceeding and not here. The evidence in the record does not demonstrate that the proposed merger will adversely affect the development of digital broadcast signal carriage. Accordingly, this is like other cases where the Commission has declined to consider, in merger proceedings, matters that are the subject of rulemaking proceedings before the Commission because the public interest would be better served by addressing the matter in a broader proceeding of general applicability. We find no reason to depart from Commission precedent in this case and, therefore, impose no digital broadcast signal carriage requirements as a pre-condition to this merger. We note, however, that the merged entity, like other cable operators, will be subject to the rules eventually adopted in the pending rulemaking proceeding. B. Local Exchange Service and Exchange Access Service 44. The Communications Act defines "local exchange carrier" as any person that is engaged in the provision of telephone exchange service or exchange access. The term "telephone exchange service" means "(A) service within a telephone exchange, or within a connected system of telephone exchanges within the same exchange area operated to furnish to subscribers intercommunicating service of the character ordinarily furnished by a single exchange, and which is covered by the exchange service charge, or (B) comparable service provided through a system of switches, transmission equipment, or other facilities (or combination thereof) by which a subscriber can originate and terminate a telecommunications service." The term "exchange access" means "the offering of access to telephone exchange services or facilities for the purpose of origination or termination of telephone toll services." 45. In prior merger proceedings, we have concluded that local exchange and exchange access services both include at least two separate relevant product markets: a market for residential and small business customers (the "mass market") and another for medium-sized and large business customers (the "larger business market"). We see no reason not to follow the same reasoning in this proceeding. Consequently, we consider the possibility of adverse public interest effects in these two markets. In both cases, the relevant geographic market for local exchange and exchange access services is the local area, since a customer cannot substitute services provided to homes or businesses outside of the customer's local area for those available within the customer's local area. As we have discussed in the past, however, it is appropriate to aggregate in one geographic market those customers that have comparable choices among local exchange and exchange access service providers. The merger will permit AT&T to use TCI's cable system facilities to provide local exchange and exchange access service. Although TCI might be a potential entrant in markets outside of the areas served by its cable systems, for the purposes of this merger review, we see no special incentives, assets, or capabilities for AT&T-TCI outside of those service areas that warrant our attention. Accordingly, we will focus our analysis on the areas served by TCI's cable systems. 46. Mass Market Customers. TCI offers local exchange and exchange access services in four cities on a trial basis: San Jose, California; Hartford, Connecticut; Arlington Heights, Illinois; and Dallas, Texas. In January 1998, TCI announced plans to sell its Connecticut cable systems, including the local telephony business in Hartford. TCI currently has fewer than 5,000 customers in all four cities combined. The Applicants state that the overwhelming majority of TCI's local telephone subscribers are facilities based residential customers located in Hartford. Thus, the sale of TCI's Connecticut cable systems to Cablevision includes the bulk of its local residential telephone business. AT&T offers resold local exchange service to 325,000 customers in the same four states where TCI is conducting market trials, and also serves localities in Alaska, Georgia, Michigan, New York, and Texas. All of the relevant geographic markets, i.e., those where TCI is a franchised cable system operator, are dominated by the incumbent LEC, which has considerably more than 90% of the customers and revenue. 47. Although both TCI and AT&T may serve some of the same markets, it does not appear that the proposed merger will adversely affect the public interest by inhibiting the development of competition in local exchange and exchange access service to residential and small business customers. Before the AT&T- TCI merger was announced, TCI Chairman John Malone stated that TCI had backed away from its 1996 business plan to add local telephony to its residential service offerings. With the proposed sale of its largest telephony trial in Hartford, TCI has only a minimal presence in three local markets, two of which serve only multiple dwelling units ("MDUs"). The Commission has recognized previously that AT&T is one of only a few firms that currently possesses the experience, brand name assets, and financial resources that are essential for quick and substantial entry into the retail residential local exchange and exchange access markets. The Commission also concluded previously that cable systems do not have the same kind of brand- name reputation and expertise with respect to telecommunications services. Although some cable operators are successfully entering local exchange markets today, we do not believe TCI presently should be considered a "most significant market participant" for purposes of our competitive analysis. 48. We recognize that cable systems possess an important asset -- a "second wire" into most homes -- that may have permitted TCI in the long term to become a sustained and effective competitor for residential telecommunications customers. Here, however, the complementary nature of the merging firms' assets means that the combined firm will be able to provide an alternative to the incumbent LECs' services for residential customers far more quickly and effectively than either could separately. TCI possesses the "last mile" assets, while AT&T possesses a brand name, experience, and financial resources that improve TCI's ability to capitalize on its network assets. We are committed to ensuring that residential local exchange competition becomes a reality sooner rather then later. One way this may occur more quickly is through combinations of complementary assets by emerging entrants such as AT&T and TCI. 49. Larger Business Customers. Just as incumbent LECs dominate markets for local exchange and exchange access services sold to residential and smaller business customers, they also clearly dominate markets for providing service to larger business customers. AT&T and TCI, however, are entrants or potential entrants in these markets. AT&T is a more significant competitor in markets where Teleport was operating prior to its merger with AT&T. TCI may be a potential entrant in areas near its cable systems, but even in those cases, its base of operations is not primarily located in central business districts, where many of the largest customers are located. Moreover, there is no evidence in the record that TCI planned to offer local exchange and exchange access services to larger business customers. 50. As we explained in the AT&T-Teleport Order and SBC-SNET Order, incumbent LECs are facing increasing competition in markets for local exchange and exchange access services provided to business customers, and "numerous new entrants are rapidly entering this market, especially in central business districts in urban areas . . . ." Based on the record before us, we cannot conclude that both AT&T and TCI are uniquely situated potential entrants in that either possesses scarce assets or capabilities with respect to business markets for local exchange and exchange access services. Therefore, the combination of the two firms will not eliminate any such scarce assets or capabilities. Moreover, it appears that a number of other firms probably possess comparable assets and capabilities for providing business local exchange and exchange access services all over the country. For example, MCI WorldCom, Sprint, and Hyperion provide these services. Accordingly, we conclude that the proposed merger is unlikely to adversely affect the development of this competition. 1. Treatment of the merged entity as a LEC and/or incumbent LEC 51. Several commenters argue that the merged company should be subject to the most stringent non-discrimination, interconnection, and other requirements applicable to incumbent LECs. Various commenters express concern that the merger will allow AT&T-TCI to bring together sufficient market power, name recognition, and infrastructure to make it the functional equivalent of an incumbent LEC. Some commenters argue that AT&T-TCI and the incumbent LECs will control the only wires available to deliver local service, resulting in a duopoly and a bottleneck in the "last mile" of telecommunications wires to the homes and offices of end users. These commenters insist that the Telecommunications Act of 1996 ("1996 Act"), regulatory parity, or both require the Commission to regulate the merged company as an incumbent LEC under section 251(c) of the Communications Act. Section 251(c) applies only to incumbent LECs and imposes interconnection, unbundled access, and resale obligations that do not apply to non-incumbent LECs. Several of these commenters argue that section 251(h) provides the Commission with the authority to classify any LEC as a "comparable" carrier and thereby bring it within the scope of section 251(c). Alternatively, other commenters suggest that the Commission should condition the merger on compliance with requirements that are equivalent to those set forth in section 251(c), even if section 251(c) otherwise would not apply, and that such a condition could be imposed pursuant to the Commission's authority under section 310(d). 52. Various commenters argue that the Commission should require that AT&T-TCI be subject to sections 251(a) and (b) of the 1996 Act. Section 251(a) applies to all telecommunications carriers. It requires interconnection with the facilities and equipment of other telecommunications carriers and prohibits the installation of network features that are not compliant with the guidelines and standards established pursuant to sections 255 and 256. Section 251(b) applies to LECs and impose interconnection, resale, number portability, dialing parity, right-of-way access, and reciprocal compensation requirements. 53. Some commenters argue more generally that the Commission should require open access to the broadband infrastructure or impose other specific obligations. Sprint argues that AT&T-TCI will be able to disadvantage long distance competitors through the merged company's imposition of unreasonable or discriminatory exchange access fees where service is rendered to an AT&T-TCI local exchange customer. U S WEST suggests that where the merged firm elects to offer voice services over its broadband facilities, the Commission should require AT&T-TCI to commit that it will comply with any state rules concerning public telecommunications utilities -- whether or not the state decides to enforce those rules with respect to voice services delivered via cable broadband facilities. U S WEST argues that such a requirement is necessary to ensure regulatory parity and that such consistency should depend on the service offered rather than the technology used. In addition, U S WEST recommends that the merged entity be required to take affirmative steps to ensure that its customers understand that they are free to choose among long distance providers. Specifically, U S WEST suggests that AT&T-TCI should be required to comply with equal access obligations comparable to those applied to the Bell Operating Companies pursuant to section 251(g) of the 1996 Act. 54. AT&T-TCI counter that the Communications Act prohibits subjecting cable systems to any common carrier regulations unless those systems provide telecommunications service. AT&T-TCI concede that the merged entity will be subject to sections 251(a) and (b) with respect to telecommunications services delivered over a cable infrastructure, but they do not agree that Internet access service or any other services delivered over cable lines should be regulated pursuant to these provisions. AT&T-TCI note that the term "telecommunications" is defined as the transmission, between or among points specified by the user, of information of the user's choosing without change in the form or content of the information. Even when the acquired cable systems begin to provide telecommunications services, AT&T-TCI object to the notion that the merged firm should be treated as an incumbent LEC subject to the more stringent requirements of section 251(c). 55. AT&T-TCI also object to proposals by commenters seeking the imposition of specific obligations on the merged entity's future provision of local exchange service and exchange access service. For example, AT&T-TCI reject Sprint's argument concerning unreasonable or discriminatory access charges, asserting that as a new entrant and alternative to the incumbent LECs, AT&T-TCI will not have the market power to charge discriminatory rates. Moreover, Applicants state that the merged company will be subject to the section 201 and section 202 prohibitions against unreasonable pricing and unreasonable discrimination, as well as the interconnection and dialing parity requirements of section 251(a) and (b). AT&T-TCI state that if, at some point in the future, Sprint believes that the merged company imposes discriminatory access pricing, Sprint can ask the Commission to investigate its claim in the context of a section 208 complaint. AT&T-TCI also dismiss U S WEST's argument that the merged company should be required to comply with state regulations even if the state exempts voice services provided over cable facilities. 56. Discussion. The Communications Act requires that a provider of telecommunications services "shall be treated as a common carrier . . . only to the extent that it is engaged in providing telecommunications services." As the various systems of the merged entity begin to provide telecommunications services, they will become subject to the provisions of section 251(a). Section 251(b) will apply to the extent the merged entity acts as a local exchange carrier. 57. We find no basis for conditioning the merger on the merged firm's compliance with section 251(c). In order to classify AT&T-TCI as a "comparable carrier" under section 251(h), we would have to determine: (1) that the merged firm "occupies a position in the market for telephone exchange service within an area that is comparable to the position occupied by" an incumbent LEC, as the term "incumbent LEC" is defined in Section 251(h)(1); (2) that the merged firm "has substantially replaced" an incumbent LEC; and (3) that treatment of the merged firm as an incumbent LEC "is consistent with the public interest, convenience, and necessity and the purposes of [section 251]." There is no basis in the record to support a finding that the merged firm will satisfy the foregoing criteria. We therefore decline to treat the merged firm as a "comparable carrier" under section 251(h). If the Commission believes in the future that such treatment is warranted, the Commission may institute a proceeding for that purpose. Likewise, we conclude that there is no basis in the record for the imposition of the equal access obligations of section 251(g), as U S WEST requests. 58. Similarly, we will not condition the merger on a requirement that where the merged company elects to provide voice service, it must comply with state public telecommunications utility requirements regardless of whether the state applies such regulations to the delivery of voice services via cable broadband facilities. U S WEST does not adequately explain how such a requirement would remedy a merger-related issue. Furthermore, the interpretation and enforcement of state regulations are best carried out at the state level. 59. We find that Sprint's concerns regarding access fees do not warrant action in this proceeding. As we explained in the AT&T-Teleport Order, where Sprint made a similar argument, if AT&T-TCI attempted to charge unreasonably high access fees, "customers could switch to other access providers." C. Residential Internet Access Service 60. Many parties either oppose the proposed merger or filed comments in support of conditions they believe will address alleged public interest harms resulting from the merger. Since both AT&T and TCI, through its @Home affiliate, are Internet access providers (typically called Internet service providers, or ISPs) offering services to residential subscribers, this is an area where the proposed merger conceivably could threaten to diminish competition. Internet access services are provided to residential customers over a variety of media using a variety of technologies. The extent to which different types of Internet access services compete with one another and, therefore, constitute one or several distinct product markets, does not need to be resolved in this proceeding in order to address the potential public interest effects of the proposed merger on the provision of Internet access services to residential customers. 61. Although both AT&T and TCI also provide services as backbone providers (which we describe below), no party has suggested that the proposed merger will harm the public interest with respect to backbone services, and we see no reason to conclude that such harm will occur. Similarly, although both firms provide service to business customers, the parties have largely focused on the anticipated effects on residential customers, and we believe that the merger is unlikely to significantly affect business customers of Internet access services since there appear to be a number of equally capable providers of those services. 62. In this section of the order, we briefly explain what Internet access services are and how they are provided. Then we describe the parties' positions and the arguments they make. Finally, we conclude that the issues raised do not provide a basis for finding that the public interest would be better served by denying or conditioning the requested transfers. In addition, given that AT&T-TCI have stated that they will be maintaining their current arrangements with other ISPs, the proposed merger does not actually cause public interest harm that warrants conditioning or denying the requested transfers. Finally, as we concluded in our recent report to Congress on the Deployment of Advanced Telecommunications Capability ("Advanced Services Report"): We observe further that the record, while sparse, suggests that multiple methods of increasing bandwidth are or soon will be made available to a broad range of customers. On this basis, we see no reason to take action on this issue at this time. We will, however, continue to monitor broadband deployment closely to see whether there are developments that could affect our goal of encouraging deployment of broadband capabilities pursuant to the requirements of section 706. 1. Background 63. In April, 1998, we considered in detail several issues concerning the provision of Internet access services. We began by describing the Internet as "a loose interconnection of . . . tens of thousands of networks that communicate using the Internet protocol (IP)." The Internet supports the delivery of a range of services, such as the World Wide Web, e-mail, and file transfer protocol ("FTP"). With these services, customers can use their computers to communicate with other people who are using their computers, and these communications can support sophisticated interaction, including on-line banking, electronic commerce, video and audio file distribution, and the distant delivery of radio broadcasts virtually anywhere in the world. 64. In the April 10 Report, we identified and described five types of entities involved in Internet services: (1) end users; (2) access providers; (3) application providers; (4) content providers; and (5) backbone providers. The issues raised in this proceeding focus primarily on access providers (ISPs), which we said combine computer processing, information storage, protocol conversion, and routing with transmission to enable users to access Internet content and services. In doing this, ISPs receive communications from their customers' computers and route the communications to other computers connected either to their networks or other networks. 65. ISPs often combine their services with content that they provide themselves from their own servers, which may be content in which they have a proprietary interest. In other words, they often compete as content providers as well as ISPs. Those ISPs that combine proprietary content with Internet access are sometimes referred to as online service providers. America Online ("AOL"), Microsoft Network ("MSN"), and Prodigy Communications Corporation ("Prodigy") all provide content as online service providers; AOL is the largest ISP. AOL also provides its content independently from its Internet access service, but not vice versa (if a customer would like to purchase Internet access from AOL, he or she must also purchase the content). Some other content providers that are not ISPs but have large audiences include Yahoo!, Netscape (which AOL is purchasing), CNN Interactive, ESPN Sportszone, and Amazon.com. 66. Many ISPs, including AT&T and TCI, are also Internet backbone providers, which route traffic between Internet access providers and interconnect with other Internet backbone providers (who are serving other Internet access providers). Internet backbone providers typically lease capacity from nationwide and international long distance telecommunications providers. Although they compete with one another for ISP customers, Internet backbone providers have typically cooperated with one another by interconnecting their networks to offer their customers access to other end users and content providers that are connected to the Internet. 67. Dial-Up Internet Access Services. Most residential and small business consumers receive Internet access from ISPs offering relatively slow-speed access (typically 28-56 kilobits per second ("kbps")) via traditional "dial-up'' telephone services provided by LECs. Customers purchase the telephone services from LECs at standard tariffed prices and can use them for regular telephony applications as well as Internet access. Many customers purchase additional local telephone lines to provide the transport service for their Internet access services -- the local telephone service in this case is one part of the "telecommunications" by which "information services" are provided. This "last mile" transport capability is available independent of the choice of ISP -- it is an "open platform" -- and it typically costs between $13 and $29, with an average of nearly $20 per month. 68. With respect to dial-up Internet access services, as opposed to the underlying telecommunications service used for transmission, customers typically pay ISPs prices of $20 or less per month for relatively unlimited usage. In dial-up access arrangements, customers use modems located in their computers that are connected to twisted-pair copper telephone lines. The customer's computer communicates with the ISP's computer using voice-grade analog signals transmitted via standard telephone services (typically local exchange services), much as fax machines communicate using telephone lines. A number of customers obtain a higher-quality connection at speeds up to 128 kbps using Integrated Services Digital Network ("ISDN") services sold by LECs. ISDN services can be used to connect with a wide variety of ISPs, not just the ISP affiliated with the LEC providing the ISDN service. 69. AT&T is the largest provider of residential Internet access service that does not bundle content with its Internet access, and it is among the largest providers of dial-up Internet access service. TCI does not provide dial-up Internet access service. MCI-WorldCom is the leading provider of the facilities and transport services used to support dial-up services. Among other things, it owns the networks that are used to provide Internet access to customers purchasing dial-up services from AOL. Other, somewhat smaller dial-up Internet access providers include Erol's, MindSpring Enterprises, Inc. ("MindSpring"), and many LECs operating within their service territories. Finally, there are literally thousands of independent, often quite small, ISPs providing service in local communities throughout the entire nation. 70. Cable Modem Services. A number of cable systems have started offering Internet access services over their cable system facilities. These services provide Internet access with much higher transmission speeds than dial-up services. It appears that consumers can generally purchase high-speed cable modem services for $40-$60 per month. Included in this service are: (1) the underlying transport service over the cable network platform; (2) the Internet access service; and (3) proprietary content, much like that offered by AOL and other online service providers. As is explained in the Technical Issues section below, it appears that the cable ISP (such as @Home) typically supplies some of the critical equipment used to provide the data transport services over the cable system platform, and that this transport functionality may be intertwined with the Internet access functionality under current arrangements. Accordingly, it may not be accurate to think of the cable system operator as the provider of the transport functionality. 71. Cable modem service is offered to residential and some business customers using cable systems' shared media HFC networks. Inside subscribers' households, "splitters" are used to send separate signals to different coaxial cables going to televisions and computers. The coaxial cable that goes toward the customer's computer is connected to a cable modem, which, in turn, is connected to the computer through the use of an Ethernet connection like that typically used in corporate computer networks. Some cable modem services require the customers' computers to send signals (called the "return path") over traditional dial-up connections using modems. In these cases, the subscriber typically can receive signals at approximately 500 kbps, and send signals at 28-56 kbps. In more advanced cable modem networks, both directions of traffic are transmitted via the coaxial cable, which permits the connection to be open at all times. The more advanced cable modem services offer higher transmission speeds as well, often as high as 3000 kbps during off-peak use, although the return path typically remains constrained to less than 384 kbps. In some areas, the upstream bandwidth has been limited to 128 kbps due to high levels of demand. In sum, customers can receive over the HFC network both cable television programming and the cable modem service (content provided by the cable modem service provider, access to content provided by others, e-mail, and other Internet functionality). Moreover, many cable systems are also planning to offer telephone service in the future using the same network technology. 72. TCI's @Home affiliate provides cable modem services over both TCI networks and cable networks owned by other cable system operators; @Home is the ISP for these cable modem services. In a typical arrangement, @Home is the exclusive provider of Internet access and its proprietary content to the cable system, whether or not TCI-owned. @Home provides the servers, routers, and other Internet access support facilities and manages the use of the cable network for data delivery services. According to TCI, subscribers are provided with browsing and e-mail functionalities similar in nature to those offered by other ISPs, which permit those subscribers to send and receive e-mail and reach any available content on the World Wide Web, including proprietary content and services offered by AOL, Yahoo!, and others. In addition, @Home directly and through partnerships also offers unique content, including audio, video, and interactive functionalities. On January 19, 1999, @Home announced a merger with Excite, Inc. Asserting that it "remains committed to full and open access to the entire Web," @Home stated that the companies hope to accelerate broadband deployment and adoption by combining @Home's broadband platform with Excite's portal and narrowband reach. 73. In the Advanced Services Report, we concluded that most estimates indicate that cable television facilities are now being used to serve at least 350,000 residential customers for high-speed Internet access services, and that other estimates are as high as 425,000 to 700,000. It appears that @Home is the largest, but not the only, cable modem service provider. It also appears that cable modem service providers are generally not competing to offer services to many of the same customers. Instead, it appears that cable systems typically contract with only one cable modem service provider, and that provider actually manages data delivery over the cable facilities. Therefore, it does not appear that other cable modem service providers such as Road Runner, formed by Time Warner, are likely to be participants in markets served by @Home; that is, from a customer's perspective they are not competitors. Competition, where it takes place, is for the contract to supply the customer's cable system. 74. Deployment of High-Speed Internet Access Services Using Non-Cable Facilities. In the Advanced Services Report, we found that many other firms already are deploying or seeking to deploy high- speed Internet access services to residential customers using other distribution technologies, and that some of these firms may emerge as competitors in markets served by @Home. Incumbent LECs have been developing the capability through xDSL technology to deliver high-speed Internet access services over their twisted-pair wires connecting most homes to their networks. A number of LECs have begun offering high-speed Internet access in a large number of areas and currently serve approximately 25,000 residential consumers, according to one estimate. Similarly, competitive LECs are providing Internet access services to ISPs using their own facilities and facilities leased from incumbent LECs. In addition, there is now one satellite-based offering of high-speed Internet service that is targeted at residential customers, Hughes' DirecPC, which is providing Internet access at speeds of up to 400 kbps to customers in the forty-eight continental states who can put up an antenna with unobstructed reception to the south. In several cities, electric utilities or "wireless cable" companies are also providing high-speed Internet access services to the consumer market. Finally, a number of other companies, such as interexchange companies ("IXCs") and fixed mobile wireless telephony providers, and recent spectrum licensees are actively exploring entering residential markets for high-speed Internet access services. 2. Summary of issues 75. Opposition to the Proposed Merger and Requests for Equal Access Conditions. A number of parties, including LECs, IXCs, and ISPs, raise concerns focusing on the bundling of @Home content with the cable modem transmission services offered to residential customers. These parties argue that there is a significant risk that AT&T-TCI (through @Home) will have a substantial head start in the provision of high- speed Internet access and could develop an insurmountable position as a monopoly provider (or duopoly provider together with incumbent LECs) of broadband Internet access services to residential customers. Several parties argue that the proposed merger will increase the potential for monopolization because it will combine AT&T's size and financial strength with TCI's bottleneck cable facilities and @Home's exclusive arrangements with other cable system operators having bottleneck cable facilities. Other parties argue that the public interest will not be served by the nationwide facilities-based local residential telecommunications network that AT&T-TCI plan to build unless that network is subject to an "open and equal access requirement." Finally, some parties argue that as a matter of regulatory parity and technological neutrality, AT&T-TCI should be subject to the same interconnection, unbundling, and resale requirements as those imposed on incumbent LECs. As a result of the problems they foresee, all of these parties argue that the Commission should condition its approval of the requested transfers of licenses and authorizations on AT&T- TCI's providing: (a) "equal" or "open" access to competing ISPs; and (b) high-speed Internet access services unbundled from @Home's proprietary content. 76. AT&T-TCI's counter-arguments can be summarized as follows: (1) broadband Internet access services do not constitute a market separate from Internet access services generally; (2) the issues raised by parties opposing the requested transfers are outside the scope of this proceeding since the merger does not change the way in which @Home will operate; (3) the requested conditions cannot be imposed because the Commission lacks the necessary legal authority; (4) the requested conditions cannot be implemented in a technically feasible manner; and (5) economic analysis demonstrates that the requested conditions are likely to harm the public interest by delaying the deployment of broadband services. 77. Market for Broadband Services. AT&T-TCI contend that broadband services do not constitute a separate market, arguing that broadband and narrowband services must be included in any public interest analysis as reasonably substitutable services. AT&T-TCI argue that the fact that AOL has a lower growth rate in areas where @Home is providing service demonstrates that narrowband and broadband Internet access and content are substitutes and, accordingly, in the same market. They argue that the differences in speed between @Home's services and dial-up Internet access services are accompanied by higher prices and other disadvantages, making the two services relatively close substitutes. Moreover, AT&T-TCI provide evidence demonstrating that broadband services, such as the cable modem services offered by @Home, have very low penetration rates even among households where the service is available. Accordingly, AT&T-TCI argue for a market definition that includes, at a minimum, all ISPs. AT&T-TCI also contend that an econometric model showing that broadband services are offered at higher prices does not provide sufficient evidence, standing alone, to support AOL's allegation that there are separate narrowband and broadband markets for residential consumers. 78. A number of parties contend, however, that Internet access services constitute too broad a market definition; they argue that narrowband services are not reasonable substitutes for broadband services at current (and anticipated) levels of quality and price and, therefore, that broadband services are a separate market. They contend that residential broadband services appear to offer substantially higher quality to consumers than do narrowband services since they provide significantly faster data transmission rates, which have the potential to facilitate a wide range of new and improved services. AOL supports its argument with an econometric model and testimony from its economic expert concluding that broadband services constitute a separate market, based in part on the fact that such services are generally offered at significantly higher prices than narrowband services. 79. Effect of the Merger on Customers of Cable-Provided Internet Access Services. AT&T-TCI argue that the Commission has ruled that "concerns that, even if valid, would be present regardless of whether the transaction is consummated, . . . properly play no part in the Commission analysis." According to AT&T-TCI, the "equal access" arguments raised by commenters and opponents of the requested transfers would carry just as much force if the merger did not occur and, accordingly, that these issues are outside the scope of this proceeding. AT&T-TCI assert that "AOL's and MindSpring's claims relate to a cable Internet service that is offered by TCI today, entirely independently of the merger," and seek to bolster their argument by pointing out that the same issues were raised in the proceeding leading to the Advanced Services Report. 80. AT&T-TCI also argue that equal access conditions are completely unnecessary with respect to @Home's broadband services. They argue that @Home has no market power because these services are "in their infancy." Moreover, AT&T-TCI argue that there are many emerging substitutes for broadband services like those provided by @Home. AT&T-TCI conclude that @Home has very strong incentives to keep its prices low and its quality high and to ensure that its customers can easily and affordably access all of the content available on the Internet, including that offered by providers such as AOL, CNN, and Yahoo! 81. In response, opponents of the requested transfers argue that AT&T-TCI will have strong incentives to discriminate against competing ISPs and, ultimately, to deny interconnection in a bid to monopolize broadband services. A number of parties argue that the incentive and ability to discriminate against competing ISPs is heightened by the merger because it will permit more rapid deployment of broadband services, and AT&T's complementary services will make bundled offerings more attractive. Several parties argue that @Home and TCI already discriminate in manner that can only be explained as an effort to seek monopoly profits. Moreover, argue these parties, @Home has sufficiently strong first-mover advantages and favorable regulatory treatment such that it is possible that @Home will succeed at monopolizing residential markets for broadband services. 82. Legal Status of Internet Access Provided Via Cable System Facilities. AT&T-TCI argue that @Home's services are "cable services" as defined by the Communications Act because they are encompassed with the revised definition of such services that was included in the 1996 Act. They base their argument on the addition of the words "or use" to the definition of cable service so that cable service now means: "the one- way transmission to subscribers of (i) video programming, or (ii) other programming service [defined as information that a cable operator makes available to all subscribers generally], and . . . subscriber interaction, if any, which is required for the selection or use of such video programming or other programming service." Citing to legislative history, AT&T-TCI argue that, by adding the words "or use," Congress intended to include interactive services within the scope of the cable service definition. In their opinion, Internet access services (including associated services such as e-mail and World Wide Web browsing) are the kind of interactive services that are covered by the amended definition of cable service. According to AT&T- TCI, this conclusion means that the Commission may not impose any additional obligations beyond those specifically enumerated in Title VI of the Communications Act. 83. Many parties disagree with AT&T-TCI's contention that @Home's services are cable services. They argue that Internet access services do not meet the statutory definition of cable service under Title VI, but rather are information services or telecommunications services covered by Title II. BellSouth Corporation ("BellSouth") contends that @Home's services cannot meet the statutory definition of cable service because they are not offered in connection with basic cable services and sometimes are provided to customers that are not subscribing to basic cable service as required by Title VI. MindSpring argues that AT&T-TCI's interpretation of the Communications Act is contrary to the intent of Congress, as demonstrated by the fact that their interpretation would permit incumbent LECs to evade all of the market-opening provisions that were included in the 1996 Act by converting their services to packet-switched telephony offered over cable system facilities. 84. AT&T-TCI also argue that the interconnection, resale, and unbundling requirements of section 251(a)-(c) of the Communications Act cannot be applied to @Home's high-speed Internet access services even if those services do not fall within the definition of cable service under Title VI. Many other parties argue that @Home's services are local exchange services covered by section 251(a)-(b), and that the merged entity will qualify as an incumbent LEC for the purposes of section 251(c). U S WEST and MCI WorldCom argue that the Commission's determination that advanced services offered by LECs are telephone exchange or exchange access services means that AT&T-TCI will be providing services subject to Title II because those definitions apply without regard to the facilities used. Ameritech adds that the Commission's determination that the xDSL services offered by GTE Service Corporation ("GTE") in a recent tariff are interstate access services confirms that AT&T-TCI's high-speed data offerings will be telecommunications services even though they will be offered via cable system facilities. 85. A number of parties argue that the Communications Act's requirement that transfers of licenses and authorizations must be in the public interest provides the Commission with ample jurisdiction and authority to impose "equal access" conditions. U S WEST argues that a grant of the requested transfers would convey a "right not previously enjoyed," which the Commission may condition as required by the public interest. GTE argues that the public interest would not be served by permitting the requested transfers to go into effect before conducting a rulemaking to determine the status of cable-provided Internet access services and to require equal access for competing ISPs. 86. As a remedy for the feared monopolization of residential broadband Internet access services, many parties ask the Commission to impose one or more of the following conditions on the proposed transfer of licenses obligating AT&T-TCI to: (1) offer broadband Internet access services unbundled from content so that subscribers may purchase one without the other (and buy a substitute for the service not purchased from AT&T-TCI); (2) offer "equal" or "open" access to competing ISPs (so that the transmission service can be included with their content even if it is not available to subscribers as a separate service); (3) interconnect with other ISPs pursuant to the requirements imposed on telecommunications carriers and local exchange carriers by section 251(a)-(b) of the Communications Act; (4) provide competing ISPs with interconnection, unbundled elements, and resale pursuant to the section 251(c) obligations for incumbent LECs; or (5) provide capacity to competing ISPs pursuant to the leased access provisions of Title VI. Taking the opposite approach, BellSouth argues that the Commission should reverse its decision in the Advanced Services Order and NPRM and, instead, determine that high-speed Internet access services offered by incumbent LECs are not covered by the interconnection, unbundling, and resale requirements of section 251(a)-(c) of the Communications Act. 87. Technical Issues. Commenters have proposed various modifications to the AT&T-TCI network that, they assert, would enable the firm to provide access to other ISPs. These commenters and AT&T-TCI disagree, however, on the practicality and feasibility of the proposed modifications. In addition, there is disagreement on whether some of the proposed solutions would inhibit future new services and thus stifle innovation. AT&T-TCI argue that "equal access" conditions such as those advocated by opponents of the requested transfers are not technically feasible and would severely inhibit AT&T-TCI's ability to deploy broadband services. A number of parties disagree, however, and submit a variety of proposals that they claim demonstrate how equal access could be implemented. Ameritech argues that equal access is technically feasible, and that AT&T-TCI could add or modify "router/proxy servers" in the cable headends so that subscribers would be connected with the facilities of their preferred ISPs. AOL asserts that there are no meaningful technical obstacles that would prevent the deployment of the kind of "equal access" that it is seeking, and submits an example involving reconfiguration of the cable modem termination system and routers to include tables of IP blocks and router addresses corresponding to competing ISPs. MindSpring states that it currently has equal access arrangements with a cable overbuilder in Alabama. MindSpring has joined AOL in arguing that AT&T-TCI should be required to provide a data routing capability on an unbundled basis to competing ISPs, and has submitted a document entitled "Using cable modems to provide multiple-carrier networks" in support of its proposal. AOL also submits two documents that it argues "describe the technical terms mutually agreed upon by Canadian regulators and cable operators to afford multiple Internet service providers fair access to cable high-speed Internet access networks." 88. AT&T-TCI and @Home respond to the arguments and technical solutions advocated by MindSpring and AOL. They filed an affidavit from Milo Medin, Senior Vice President and Chief Technical Officer of @Home. Mr. Medin argues that there is only one technically feasible point of interconnection with competing ISPs, namely the Cable Modem Termination System ("CMTS"), and that interconnection at that point would not be technically feasible in practice because of capacity constraints and the shared bandwidth nature of the cable modem network. Moreover, Mr. Medin argues that an equal access solution like that advocated by AOL would likely require the abandonment of multimedia and dynamic services. Mr. Medin also argues that there are difficult issues related to capacity engineering, fault recovery, number assignment, customer provisioning, and other operational matters that are not addressed in the proposals submitted by AOL and MindSpring. In response to Mr. Medin's assertions, GTE acknowledges that the architecture and technology of the network planned by AT&T-TCI is not capable of supporting open and nondiscriminatory access without technical modification but suggests that the necessary modifications are feasible. Finally, in the record leading to the Advanced Services Report, documents were filed in support of arguments that the open network solutions purportedly achieved in Canada are based on flawed assumptions and are unworkable. The parties filing these documents argue that the proposals have not been tested, and that numerous operational issues have not been addressed. 89. Investment Incentives. According to AT&T-TCI, any equal access conditions such as those advocated by opponents to the requested transfers will impose substantial investment costs and expenses on @Home, which will only delay and diminish its deployment of broadband services to residential customers. AT&T-TCI argue that the only way that the equal access conditions advocated by commenters could be implemented is through investment-deterring rate regulation and cost allocation rules that would ensure that @Home's content was not cross-subsidized by the common transport provided by @Home to subscribers buying content from other providers. Moreover, argue AT&T-TCI, the advertising revenues provided by @Home's content are needed to offset the transmission costs incurred by providing cable modem service. 90. Other parties support AT&T-TCI's argument that equal access would harm the deployment of advanced telecommunications infrastructure. The National Cable Television Association ("NCTA") submitted a report by Bruce W. Owen and Gregory L. Rosston ("Owen-Rosston Report") making the same conclusion and arguing that "exclusive bundling" by @Home is needed to reduce risk and provide adequate revenue streams to support investment in broadband cable upgrades. Several members of the financial community who cover cable system securities also submit that the unbundling proposals sought by commenters would "dampen the willingness of the financial community to finance deployment of upgraded cable facilities, other broadband facilities and related equipment." Finally, AT&T-TCI argue that @Home's bundling of transmission and content is no different than the practices of many of its competitors, including AOL. 91. Several commenters or opponents of the requested transfers take issue with AT&T-TCI's assertion that equal access conditions would inhibit investment in broadband facilities and deployment of high- speed Internet access services. CompTel argues that providing access to other ISPs should produce additional revenue in competitive markets beyond that which would be realized through exclusive bundling with @Home. Moreover, argue these commenters, equal access conditions like those sought by commenters would provide for normal returns on the necessary investments, so AT&T-TCI would be opposed to them only if it anticipated making monopoly profits. MindSpring argues that equal access by competing ISPs reflects the operation of a competitive market, as evidenced by its arrangement with a cable overbuilder in Alabama. AOL submits a paper by Jerry Hausman in rebuttal to the Owen-Rosston Report submitted by AT&T-TCI, arguing that AT&T-TCI's tying of @Home content to its high-speed Internet access service proves that AT&T- TCI are seeking to prevent competition. Mr. Hausman further argues that the tying of @Home content with high-speed Internet access service will reduce overall investment in broadband data facilities and harm consumers through reduced choices and higher prices. 3. Discussion 92. Market Definition. We do not need to determine at this time whether narrowband and broadband Internet access services provided to residential and small business customers are sufficiently different to support the conclusion that they are in separate markets. As we explain in the following paragraphs, even if we were to assume that they are in separate markets, we would reach the same conclusion concerning the issues raised by parties opposing and commenting on the proposed merger. 93. Effect on Competition. To address the specific issues raised by parties opposing the merger or seeking conditions, we must first consider whether the merger is likely to produce any adverse competitive effects in residential markets for Internet access services. Currently, there are a large number of firms providing Internet access services in nearly all geographic markets in the United States, and these markets are quite competitive today. Accordingly, if all Internet access services were included in the market definition, we would conclude that the merger is unlikely to adversely affect the public interest in competitive markets for Internet access services. 94. Even if we were to consider a market defined to include only high-speed Internet access services, we would still conclude that the merger is unlikely to adversely affect the public interest in a competitive market. Although AT&T-TCI together might be able more quickly to deploy high-speed Internet access services and win a significant number of residential Internet access customers, it appears that quite a few other firms are beginning to deploy or are working to deploy high-speed Internet access services using a range of other distribution technologies. Moreover, even if broadband Internet access services were deemed to constitute a separate market from dial-up Internet access services, AT&T is not a more likely entrant than AOL or other leading ISPs (including the incumbent LECs, which have facilities of their own) that are currently providing services using narrowband transmission. Accordingly, the merger does not eliminate any scarce assets or capabilities; in fact, a partnership between AT&T and TCI is precisely the kind of arrangement by which AT&T (and other ISPs) could be expected to provide higher-speed Internet access services. Finally, while the merger is unlikely to yield anticompetitive effects, we believe it may yield public interest benefits to consumers in the form of a quicker roll-out of high-speed Internet access services. 95. We also note that AT&T-TCI have submitted the following statement concerning the availability of unaffiliated online services to TCI subscribers: Even if an online service provider cannot or does not want to enter into [an agreement providing TCI customers with unimpeded access to that provider], customers of TCI@Home, TCI's cable Internet service, can still access that provider through their TCI/IP connections using a "bring-your-own-access plan" like that actively marketed by AOL. TCI customers subscribing to AOL under the BYOA plan today can connect directly to AOL by "double clicking" on the AOL icon on their computer desktop. They do not have to "go through" @Home or view any @Home-provided content or screens. In fact, if they so desire, customers will be able to remove the @Home icon from their desktop completely. This will continue to be the case after the merger. Likewise, @Home's recently-announced purchase of Excite will not deprive consumers of their existing choice of portals. @Home subscribers will be able to access content through @Home's interface or through Excite's portal -- or through any other interface (Yahoo, Lycos, AOL, or others) they choose. Internet users who are not @Home subscribers will still be able to access and use Excite through www.excite.com, just as they do today. 96. We take this representation seriously, and as we have noted elsewhere, we will monitor broadband deployment closely. Based on this representation, we conclude nothing about the proposed merger would deny any customer (including AT&T-TCI customers) the ability to access the Internet content or portal of his or her choice. We further conclude that the open access issues would remain equally meritorious (or non- meritorious) if the merger were not to occur. Moreover, as we observed in the Advanced Services Report, multiple methods of providing high-speed Internet access appear to be emerging, and the Commission will monitor broadband deployment closely. Therefore, we find that the equal access issues raised by parties to this proceeding do not provide a basis for conditioning, denying, or designating for hearing any of the requested transfers of licenses and authorizations. D. Mobile Telephone Service 97. The proposed merger also affects markets for mobile telephone services. As described earlier, through TCI Ventures Group, TCI currently holds approximately 23.8% of the equity and approximately 2.38% of the voting interest in a class of Sprint stock that tracks the value of Sprint's personal communications service operating group ("Sprint PCS tracking stock"). Sprint is licensed to provide Commercial Mobile Radio Service ("CMRS") in numerous areas, including New York, New York; Los Angeles, California; Dallas-Fort Worth, Texas; San Francisco-Oakland-San Jose, California; and Miami-Fort Lauderdale, Florida. AT&T, through AT&T Wireless, also holds CMRS licenses throughout the country, including many of the same areas where Sprint provides service. 98. To promote competition and address concerns about anticompetitive behavior in CMRS markets, the Commission has adopted a CMRS spectrum cap limiting the amount of CMRS spectrum that can be licensed to a single entity within a particular geographic area. Specifically, section 20.6 of the Commission's rules prohibits an entity from having an attributable interest in a total of more than 45 MHz of licensed cellular, broadband PCS, and Specialized Mobile Radio ("SMR") spectrum regulated as CMRS with significant overlap in any geographic area. Ownership of 20% or more of equity or outstanding stock, among other things, is considered an attributable interest. 99. The Applicants acknowledge that AT&T's acquisition of TCI implicates the CMRS spectrum cap. As noted, TCI indirectly owns approximately 23.8% of the equity and approximately 2.38% of the voting interest in Sprint PCS tracking stock. Because TCI owns 20% or more of the equity of Sprint PCS tracking stock, under section 20.6 of the Commission's rules, TCI has an attributable interest in all licenses held by Sprint's PCS operating group. Because AT&T and Sprint have significant overlap in numerous service areas, AT&T's acquisition of TCI's interest in Sprint PCS tracking stock would cause AT&T to exceed the spectrum aggregation limit established by the CMRS spectrum cap in those areas. 100. AT&T and TCI have committed that they will comply with the CMRS spectrum cap by transferring ownership of the Sprint PCS tracking stock to a trust, subject to Commission consent. Additionally, AT&T and TCI have submitted documents related to this merger that have been filed by DOJ in the United States District Court for the District of Columbia (collectively "Proposed DOJ Settlement Agreement"). The Proposed DOJ Settlement Agreement resolves DOJ's concerns that AT&T's acquisition of TCI's Sprint PCS tracking stock may harm competition. According to the Proposed DOJ Settlement Agreement, AT&T and TCI will not consummate the merger until they transfer the Sprint PCS tracking stock into a trust administered by an independent trustee charged with divesting the stock according to a specific schedule. 101. Commenters addressing this issue agree that Commission consent to the transfer of TCI's licenses and authorizations should be conditioned on AT&T's and TCI's compliance with the CMRS spectrum cap and the divestiture of their interest in Sprint PCS tracking stock. SBC Communications, Inc. ("SBC") cites the extensive wireless service area overlap between Sprint and AT&T and contends that permitting this merger to go through without a fully developed and clearly defined compliance plan would "completely undermine the purpose of the CMRS spectrum cap." U S WEST contends that a prompt divestiture is appropriate and asks that any trust agreement contain restrictions that the Commission has previously required in other trust situations. 102. U S WEST also argues that even if AT&T-TCI comply with the CMRS spectrum cap by placing the stock into a trust administered by an independent trustee, the merged firm "will still retain a significant economic interest in favoring Sprint and disfavoring Sprint's competitors in its negotiation of wireless roaming agreements." U S WEST requests that so long as the merged firm retains an interest in Sprint PCS tracking stock, the Commission should require it to offer competitors the same terms and conditions for roaming that it offers Sprint. 103. Sprint also requests that approval of the Application be conditioned on a clear divestiture plan, but argues that a quick divestiture of Sprint PCS tracking stock could harm competition. According to Sprint, if AT&T-TCI quickly sell Sprint PCS tracking stock it could competitively harm Sprint by adversely affecting its ability to raise capital. Access to capital is extremely critical at this point, Sprint argues, because it is actively engaged in building out its PCS network, an endeavor that requires significant capital resources. Additionally, Sprint contends that when it negotiated the re-organization agreement with TCI that resulted in TCI acquiring 23.8% of the Sprint PCS tracking stock, TCI was a direct and significant competitor to AT&T, and had economic incentives to maximize the value of Sprint PCS tracking stock. These incentives, Sprint asserts, may change if AT&T, a competitor, acquires TCI. 104. Sprint requests that the Commission impose conditions to protect against the possible adverse effects of AT&T-TCI inundating the investment market with a large quantity of Sprint PCS tracking stock. Sprint requests that AT&T-TCI be required to place the Sprint PCS tracking stock into a trust, administered by an independent trustee, who would make an "orderly" disposition of the Sprint PCS interest within 10 years. Sprint also lists other conditions it urges us to impose on the activities of AT&T and the trustee. 105. Notwithstanding their commitment to comply with the CMRS spectrum cap, AT&T-TCI acknowledge that "sale of [TCI's Sprint PCS] stock in a short period following the restructuring would greatly increase the amount of [Sprint PCS] stock being offered in the marketplace and could create an amount of available stock in the public market that would impair Sprint's own ability to issue new PCS stock as a source of capital." The Proposed DOJ Settlement Agreement also recognizes the possible harm that a prompt divestiture may inflict upon Sprint's access to capital. 106. We recognize that requiring AT&T-TCI promptly to divest the Sprint PCS tracking stock at this time could impede Sprint's ability to provide service to the public and could violate contractual agreements between the parties. However, to permit AT&T-TCI to continue owning Sprint PCS tracking stock would violate the CMRS spectrum cap and may not encourage arms-length competition between AT&T-TCI and Sprint in CMRS markets. Therefore, balancing these considerations, we conclude that requiring AT&T-TCI to place the Sprint PCS tracking stock in a temporary divestiture trust before consummating this merger would best serve the public interest. 107. We condition our approval on AT&T-TCI transferring ownership of the Sprint PCS tracking stock to a trust prior to consummation of the merger. The trust must fully comply with Commission rules that permit grantors and beneficiaries of a trust to avoid attribution for CMRS spectrum cap purposes, and with the additional requirements discussed below. We further require that AT&T-TCI submit the proposed trust agreement to the Commission for review within 30 days after issuance of this Order or at least 10 days prior to consummation of the merger, whichever is earlier. The Commission must approve the proposed trust agreement before the Applicants can consummate the merger. We delegate authority to the Wireless Telecommunications Bureau to review and approve the proposed trust agreement in consultation with the Office of General Counsel. 108. There remains the question of the conditions under which the proposed trust may hold the Sprint PCS tracking stock. In the Proposed DOJ Settlement Agreement, AT&T-TCI agreed to direct the trustee to divest enough Sprint PCS tracking stock to cause the proposed trust to hold no more than 10% of the outstanding shares of Sprint PCS tracking stock on or before May 23, 2002, and to divest the remainder on or before May 23, 2004. We concur with DOJ's conclusion that this represents a reasonable divestiture period in this situation. This term appropriately balances the concern that a rapid divestiture may harm competition by adversely affecting Sprint's ability to raise capital to build out its network against the concern that a long divestiture period would harm competition. 109. We recognize that the proposed trust condition permits the trustee a significant period of time to effect a sale. To ensure that AT&T cannot exert influence over the trustee during this period, we require that the trust agreement provide that: (1) the trustee will have the sole power to accomplish the divestiture and, consistent with the terms of the Proposed DOJ Settlement Agreement, will do so in a manner reasonably calculated to maximize the value of the Sprint PCS tracking stock to the beneficiaries of the trust; and (2) all decisions regarding the divestiture shall be made by the trustee without consultation with AT&T. We find that these requirements, which are consistent with the terms of the Proposed DOJ Settlement Agreement, address Sprint's concerns and ensure that AT&T will not exert influence over the trustee that may harm competition. 110. We must also ensure that the economic benefits arising from the beneficial ownership of the Sprint PCS tracking stock do not flow to the merged AT&T. This could provide a disincentive for AT&T to compete vigorously with Sprint in CMRS markets. AT&T could also have an incentive to favor Sprint over other CMRS providers in some situations, such as negotiating roaming agreements. These concerns were raised by U S WEST. U S WEST requests that the Commission require Sprint and AT&T to share the terms and conditions of their mutual roaming agreements during the period in which AT&T retains an interest in Sprint PCS. There is no precedent for the imposition of the condition proposed by U S WEST, and we do not believe such a requirement is necessary in this case. Rather, to mitigate the possibility that AT&T will not compete fully with Sprint during the divestiture period, we concur with the DOJ conclusion that certain additional restrictions should be placed on AT&T. 111. Accordingly, we require that AT&T implement and enforce a representation it made to the Commission in the Application. Specifically, the Applicants stated that "AT&T will adopt a policy statement that its cash dividend policy will be to distribute, subject to the limitations in the AT&T Charter, dividends and distributions received by AT&T from businesses included in the Liberty Media Group to the holders of AT&T Liberty Media Group tracking stock." We condition our approval on AT&T's adoption of this policy statement. This will ensure that any economic interest arising in connection with Liberty Media Group's interest in Sprint PCS tracking stock, including but not limited to any interest or dividends earned or net proceeds received upon the disposition of the stock, shall be for the sole and exclusive benefit of the holders of Liberty Media Group tracking stock. AT&T may modify this provision only upon prior Commission approval. This requirement is consistent with a requirement imposed by the Proposed DOJ Settlement Agreement. 112. We find that the Applicants' compliance with these conditions is necessary to permit us to find that this transaction benefits the public interest. As discussed above, our approval is conditioned on AT&T- TCI transferring the Sprint PCS tracking stock into a trust prior to consummation of the merger. We require that AT&T and TCI submit the proposed trust agreement for our review within 30 days after issuance of this Order or at least 10 days prior to consummation of the merger, whichever is earlier. The Applicants cannot consummate the merger until we approve the proposed trust agreement. Additionally, our consent is conditioned on AT&T-TCI ensuring that the economic interests arising from ownership of the Sprint PCS tracking stock during the divestiture period are directed only to the shareholders of the Liberty Media Group tracking stock, consistent with the terms of the Proposed DOJ Settlement Agreement. E. Other Public Interest Issues 113. Commenters raise other issues regarding the merger's effect on the public interest. The issues discussed here do not revolve solely around one particular telecommunications service, but rather involve the merger's impact across several telecommunications services and the merger's effects on equity, as well as efficiency, issues. 1. Cross-subsidization and cost allocation 114. Commenters express concern that AT&T-TCI will use unregulated or imperfectly regulated cable service revenues to subsidize below-market or below-cost pricing of telephone and Internet access services. They fear that cable rates will increase unreasonably as a result and ask that the Commission impose cost allocation rules designed to prevent cross-subsidization. AT&T-TCI assert that cost allocation rules are unnecessary, because the merged entity will have neither the incentive nor the ability to engage in illegal cross-subsidization. Rather, AT&T-TCI submit the merged company will have an incentive not to raise cable rates in order to retain existing subscribers and attract new ones. AT&T-TCI also argue that predatory pricing practices would not make economic sense, because their effect would be to make the combined enterprise less profitable. Moreover, AT&T-TCI contend that the cross-subsidy concerns raised by the commenters are more appropriately addressed in an industry-wide rulemaking proceeding, not a merger proceeding involving a single cable provider. 115. The commenters are concerned that the merged company will use market power in the delivery of cable service to impose rates that exceed reasonable levels. The company could then use the additional revenues generated in this manner to subsidize the cost of other services, such as long distance telephone service and local exchange service, enabling the company to price these services at below-market rates, perhaps even at rates that do not cover the costs of the service. Such predatory pricing in competitive markets could give the company an advantage over its competitors. Commenters urge the Commission to adopt reasonable safeguards, such as cost allocation rules, to prevent the merged entity from engaging in such practices. 116. We address two potential forms of objectionable behavior -- the exercise of market power to charge unreasonable cable rates, and the use of revenues derived from such rates to subsidize other services, such as local exchange and long-distance service, and thereby gain an anticompetitive advantage for the sale of the other services. Although the Commission would view both practices with extreme disfavor and would take allegations of such conduct very seriously, for the reasons described below we decline to condition our approval of the requested license transfers on the adoption of cost allocation rules designed to prevent cross- subsidization. 117. First, any contention that the merger would create incentives to engage in such behavior is speculative at best. As we show below, opponents may fear either of two predatory pricing strategies. Each, however, is equally available to TCI pre-merger as it is to AT&T-TCI post-merger. If the merged firm will have an ability to cross-subsidize phone service or other telecommunications services from cable revenues, then TCI already possesses that ability, and so do most cable operators. There is no need to impose a merger condition on only one cable operator among many for an alleged harm that is not traceable to the merger. 118. We also doubt that either TCI now or AT&T-TCI after the merger have rational predation strategies available. Opponents may have either of two predation strategies in mind. The first we might call "simple predation." Cable monopolists, it is suggested, will take their monopoly profits after the sunset of cable rate regulation and use them to subsidize below-cost, below-competitive level telephone prices in order to monopolize local or long distance telephone services. There is, however, no reason to believe that sacrificing monopoly profits, should they be available, in cable to obtain monopoly profits, should they be attainable, in telephone service would be a profit-maximizing strategy. It appears unlikely that the merged firm would have any incentive to raise cable rates simply to subsidize other services and drive out competitors for those services. Moreover, the presence of extensive sunk facilities in both the local and interexchange markets suggests that the merged firm would be unable successfully to raise prices after the competitors were driven out of the market. Should parties believe the merged company is engaging in such predatory practices, existing federal and state laws prohibiting anticompetitive behavior already proscribe such pricing practices. 119. A second kind of predation strategy might be called "regulatory predation." Here a firm that enjoys market power in one product (e.g., cable), where government regulates the price of that product, could find it profitable to enter a business (e.g., telephone service) whose costs can be shifted to the regulated product's (cable's) production. This strategy works only if price regulation is based on a type of cost-of-service model that is not fully effective in policing the actual costs of the regulated service, such that the company can include improperly the costs of another service in the costs (and rates) of the regulated service. In theory, at least, this cost-shifting allows the firm to profit doubly. The price of the regulated service (cable) goes up as government observes its costs increasing. At the same time the firm, having shifted costs, can underprice rivals in the other (telephone) services. 120. We think regulatory predation is unlikely to occur for the following reasons. First, we agree with AT&T-TCI that the merged firm will have an economic interest in preserving and expanding TCI's existing cable subscriber base. This would allow the merged firm to maintain or increase TCI's current cable service revenues, as well as maximize the merged firm's direct access to customer households in order to increase its ability to market its new service offerings, such as local telephony and Internet access. By raising cable rates, the merged firm would risk losing potential customers who could subscribe to its new services. Second and equally important, most cable operators do not elect the cost-based rate of return form of rate regulation, but rather are subject to price-cap regulation. Under this system, an increase in a cable operator's costs does not necessarily constitute a basis for increasing permitted prices. Hence, a cost-shift would not necessarily yield "regulatory predation" possibilities. In addition, with or without the merger, such a regulatory cross-subsidization strategy would be available to TCI only in franchise areas where rates are now constrained by regulation. In some areas, TCI's systems are not regulated, either because they have been found to be subject to effective competition or because their rates have not been subjected to local franchising authority regulation or cable programming service tier ("CPST") complaints. In other systems, TCI may already be charging rates that are below those permitted by our regulations. In these systems, TCI's rates are not likely to increase when it merges with AT&T, because these rates presumably already have been established at levels that maximize TCI's profits. An increase in rates could result in a loss of subscribers and a possible decrease in profitability. Where rates are already constrained by market forces, regardless of the number of MVPD alternatives, neither the merger nor the sunset of upper tier rate regulation will relieve that price constraint, and neither event should lead to increased rates in such systems. 121. As a result of the sunset of upper tier rate regulation, it is possible that rates in some systems will increase if higher rates would result in increased profits. This would be true in any cable system, whether owned by TCI or another operator, in which rates have been set at levels that are lower than they would be absent rate regulation. It is not a merger-related outcome. Nor is there reason to believe that TCI or AT&T would benefit from dissipating profits on cable services to underwrite below-cost prices on telephony services. Further, the removal of upper-tier rate regulation, coupled with the predominance of price-cap regulation where price controls remain, means that a "regulatory predation" strategy will not be available to either TCI or AT&T-TCI. 122. Therefore, we decline to deny or condition the requested license transfer authorizations on the basis of speculation about cross-subsidization or the merger's effect on cable rates in some local franchise areas. We note, however, that the Commission's existing cost allocation rules will continue to apply to basic service tier rates after the sunset of upper tier regulation. Moreover, the merged company must comply with all existing federal and state laws and Commission regulations that prohibit predatory pricing and other anticompetitive behavior. The likelihood of cross-subsidization is not so substantial as to warrant denial or conditioning of the transfer requests. 2. Tying 123. Bundling (or tying) end user services. Some parties have asserted that the merged firm's ability to offer a wider range of services to consumers presents not an opportunity to increase consumer welfare, but a threat of anticompetitive, monopolistic behavior. They allege that the merged entity may harmfully condition purchase of one service on the purchase of another service in a manner that injures competitors and consumers. 124. The specific claims vary with the business interests of the opponent. Thus, Sprint, a principal long distance provider, fears that after the merger AT&T-TCI will have the ability to exploit its monopoly control over cable to force the cable subscriber to subscribe to the merged firm's offerings in competitive markets, e.g., long distance service. Sprint asks that the Commission prohibit AT&T-TCI from tying its monopoly cable service with its long distance and other competitive services. EchoStar, which offers direct broadcast satellite service but not telephone service, has the reverse perspective; the Commission should require that, post-merger, AT&T-TCI make available to consumers MVPD, advanced, and telephone services on a separate, unbundled basis, thus allowing consumers to turn to other distributors for their MVPD needs. U S WEST's fears are more wide-ranging: The merged company could bundle its bottleneck broadband transmission service with any or all of the numerous residential services under its wide corporate umbrella -- cable television, long distance voice, local voice, and wireless, as well as Internet services. It could require consumers to buy certain services only as a package, or it could manipulate its prices artificially to discourage buying the services individually. Such actions would reduce competition for each of the bundled services. GTE fears that the merged firm "would be able to exploit its advantage in the market for cable services and high-speed Internet access by forcing its customers to purchase a tied telephone service." MCI WorldCom, while supporting the merger, also cautions that the merged entity should not be permitted to condition purchase of its cable services on consumers' agreements to purchase other telephony services from AT&T-TCI. CoreComm similarly recommends that the Commission not approve the merger without "a commitment from the Joint Applicants that . . . they will not require any TCI subscriber to purchase AT&T's telephony or Internet access services as a precondition for purchase of TCI's multichannel video service." 125. For two reasons, we decline to impose any of these recommended conditions. First, a blanket ban on the bundling of services might well prevent competitively harmless transactions. Post-merger, AT&T- TCI may well have lower costs in billing and servicing customers that subscribe to several of its products. In such a case, by offering these products as a package at a price below that of the individual prices of the package's components when sold separately, the merged firm would both lower costs and pass at least some of those cost savings on to consumers. 126. Second, the merger does not alter either firm's ability to engage in a profitable strategy of anticompetitive tying. Therefore, we should continue to rely on competition or, in its absence, antitrust laws to protect against this danger, just as we did before the merger. AT&T-TCI could inflict competitive harm by offering a package of bundled products only if rivals could not offer a similar package -- that is, only if the merged firm enjoys a monopoly in one of the bundled services. There is simply no support in the record or in experience for the proposition that after the merger AT&T-TCI may have a monopoly in long distance voice, local voice, wireless, or Internet services. AT&T-TCI customers in every TCI franchise area will have alternative providers of each of those services. This leaves only cable service as a service over which AT&T- TCI may well have market or monopoly power post-merger. Yet, if the merged firm will have market power as a cable operator, TCI -- and every other cable firm that is not subject to effective competition within its franchise area -- already enjoys equivalent market power. Nevertheless, we have not been asked to impose a blanket rule prohibiting the bundling of cable services with other services in which a cable operator might have a financial interest. We are not persuaded that the merged firm is likely to follow an anticompetitive bundling strategy. Should the merged firm engage in anticompetitive tying of services to cable service, we will deal with that behavior forthrightly. 127. Discrimination against downstream competitors. Another leveraging concern is raised by U S WEST: A combined AT&T/TCI . . . would have the ability and incentive to use its control over broadband transmission to the home to discriminate against competitors in downstream markets. For example, AT&T and Teleport now compete with numerous other facilities- based rivals for the business of transporting data traffic on long distance and local service, respectively. Following a merger, AT&T-TCI would have the ability and incentive to steer all data traffic originating with its cable broadband customers onto transport facilities owned by AT&T or Teleport. Competing data transport providers thus would be precluded from a substantial segment of the market -- up to a third of the nation's households. 128. The harm U S WEST asserts here depends on speculation in two respects -- first, that the merged firm will, as a result of the planned TCI plant upgrades, achieve a monopoly over broadband transmission to the home and, additionally, that "up to a third of the nation's households" (i.e., every single residence in TCI's territories) will subscribe to that monopoly. On this record, we do not believe that AT&T- TCI will be successful in becoming the only firm within TCI's current territories to offer broadband transmission to the home or that, having done so, every resident in those territories will subscribe to that monopoly service. 129. In virtually every TCI franchise area, an incumbent local exchange carrier, at least two wireless providers, and the local electrical utility also have facilities that may prove to be viable platforms for residential broadband access. Should all these alternatives fail -- and AT&T thereby achieves both a monopoly and subscriptions to it from all within its service area -- both the Communications Act and the antitrust laws should be able to prevent AT&T from extending a monopoly to other competitive services. In the absence of a monopoly so successful, AT&T could not cause competitive harm by diverting data traffic onto its own transport facilities because the diversion would not be great enough to materially harm AT&T's rivals. Therefore, such diversion would be an unwise business strategy unless it were an efficient way to do business, in that it lowered the costs of transporting data. 3. Section 652 -- Prohibition on buy outs 130. Bell Atlantic and GTE assert that the buy out restriction of section 652 of the Communications Act prohibits AT&T from acquiring any TCI systems in areas served by Teleport, a competitive LEC acquired by AT&T in July 1998. In relevant part, section 652(a) prohibits local exchange carriers or their affiliates from acquiring directly or indirectly more than a 10% financial interest, or a management interest, in any cable operator within the local exchange carrier's "telephone service area." The term "telephone service area" is defined as an area where a common carrier provided telephone exchange service as of January 1, 1993. Bell Atlantic and GTE believe that Teleport provided telephone exchange service within the meaning of section 652 in certain areas that overlap with TCI's cable franchise areas. As a result, Bell Atlantic and GTE contend, AT&T's acquisition of TCI's systems in those areas would violate section 652. Bell Atlantic further contends that AT&T would not qualify for either an exception or a waiver of the buy out prohibition. Citing legislative history, Bell Atlantic points out that while there exist exceptions to the prohibition, the Conference Committee agreed "to take the most restrictive provisions of both the Senate bill and the House amendment in order to maximize competition between local exchange carriers and cable operators within local markets." 131. In response, AT&T-TCI contend that the merger does not violate section 652(a) in any area of the country and that commenters' arguments to the contrary are both factually and legally incorrect. As a factual matter, AT&T-TCI maintain that the buy out prohibition is inapplicable to Teleport because it "did not obtain peer status as a local exchange carrier" until June, 1994 -- after the operative statutory date of January 1, 1993. Although as of January 1, 1993, Teleport did provide "resale of NYNEX dial tone services" in New York City, AT&T-TCI contend that section 652 is not implicated since New York City is not within the service area of any TCI cable systems. In a subsequent ex parte filing dated January 21, 1999, AT&T provided more detailed information regarding the types of services Teleport provided in the New York metropolitan area as of January 1, 1993: (1) in Manhattan, Teleport used "two 5ESS central office-type switches" to provide private branch exchange ("PBX") services to Merrill Lynch and "about one dozen other customers in Manhattan;" (2) Teleport provided shared tenant service and earth station service in Staten Island; and (3) Teleport provided inter- and intra-LATA toll services in New York City. In an ex parte filing dated January 7, 1999, AT&T-TCI identified areas where Teleport provided service as of January 1, 1993, that overlap with TCI's or an affiliate's cable franchise areas. Specifically, Teleport provided private line and special access services in Boston, San Francisco, Los Angeles, Chicago, Dallas, Houston, and metropolitan New York (which AT&T-TCI identified as including Newark, Jersey City, and Princeton, New Jersey; Nassau County, New York; and all boroughs of New York City except the Bronx). According to information provided by AT&T-TCI, TCI operates cable systems in San Francisco, Los Angeles, Chicago and Dallas. Together