Report No. CC-582 COMMON CARRIER ACTION July 14, 1994 FCC APPROVES BRITISH TELECOM INVESTMENT IN MCI The Commission today has cleared the way for a significant step in building the Global Information Infrastructure which has the potential of bringing U.S. consumers increased access to new telecommunications services at lower prices, spurring economic growth and providing additional employment opportunities. The Commission has determined that the terms and conditions of a $4.3 billion investment by British Telecommunications plc (BT) in MCI Communications Corp. did not result in a transfer of control of MCI to BT and, accordingly, prior FCC approval is not required. In finding no transfer of control, the Commission considered all of the terms and conditions of the Investment Agreement, particularly the provisions relating to each party's loss of rights, BT's participation on MCI's Board of Directors, and BT's voting and consent rights. The Commission also found that BT's 20 percent investment in MCI, even when combined with existing non-BT foreign ownership for a total of up to 28 percent foreign ownership, is consistent with, and permissible under, the foreign ownership rules of Section 310(b)(4) of the Communications Act. On June 2, 1993, BT and MCI announced their global alliance which entails (1) BT's acquisition of 20 percent of MCI; (2) MCI's acquisition of BT's telecommunications businesses in the Americas and BT's acquisition of MCI's telecommunications businesses outside of the Americas; and (3) creation of "NEWCO," a joint venture to develop enhanced telecommunications services for multinationals on a global basis. (The name of the joint venture was changed on June 15, 1994, to "Concert.") (over) - 2 - MCI is a publicly-traded U.S. corporation that owns or controls subsidiaries that hold domestic common carrier microwave licenses, international facility authorizations, cable landing licenses and other FCC licenses and authorizations. BT is the largest telecommunications operator in the United Kingdom, providing local, long-distance and international telephone service and telecommunications equipment for customers' premises. BT controls essentially all local termination points in the U.K. and is the dominant U.K. provider of international facilities- based services in a de facto duopoly. Although the Commission approved BT's investment in MCI, it did recognize the concerns raised about the incentives for potential discrimination by BT in favor of MCI over competing U.S. carriers in light of BT's investment, BT's significant market power in the U.K. and the territorial allocation provisions of the Investment Agreement. In addition, NEWCO (now Concert) will develop enhanced services for exclusive distribution by BT and MCI and these enhanced services will require access to BT's basic services network in the U.K. In response to this concern, MCI has formally committed to amending all its Section 214 certificates to incorporate a "no special concessions" clause that would prohibit it from accepting any special concessions from any foreign carrier with respect to traffic or settlement flows between the U.S. and any foreign country. The Commission set forth in the item specific examples of the types of activity that would be prohibited to MCI pursuant to the "no special concessions" clause. MCI will also maintain records on the provisioning and maintenance of facilities and services provided by BT to MCI, including services and facilities procured for NEWCO offerings, in the U.K. In addition, the Commission will require the modification of certain existing reporting requirements for MCI on its U.S.-U.K. route and will impose certain new requirements to enhance further the Commission's ability to monitor and enforce MCI's obligation to comply with its "no special concessions" obligation. For example, MCI will be required to make its monthly circuit status reports for U.S.-U.K. circuits publicly available on a quarterly (as opposed to a semi-annual) basis. MCI will also be required to file quarterly reports of revenue, number of messages and number of minutes of both originating and terminating traffic between the U.S. and the U.K. within 90 days of the end of each calendar quarter. - 3 - The Commission also ordered, among other things, that: -- MCI shall obtain prior Commission approval with regard to any proposed change in BT's ownership or voting interest in MCI; -- MCI shall conduct periodic surveys of its public shareholders to ensure continuing compliance with the maximum level of foreign ownership in MCI found not to be inconsistent with the public interest; -- Any and all amendments or modifications to the Investment Agreement must be filed with the FCC within 30 days; -- MCI shall file with the Common Carrier Bureau notification of each addition of circuits on the U.S.-U.K. route, specifying the joint owners; -- MCI shall obtain a written commitment from BT not to offer or provide any special concessions to NEWCO, relating to the provision of basic services. A copy shall be filed with the FCC 15 days prior to consummation of the transaction; and -- MCI shall file with the Common Carrier Bureau copies of all contracts, agreements and arrangements with BT that relate to the routing of traffic and settlement of accounts on the U.S.- U.K. route. The Commission concluded that MCI's commitments, combined with these reporting requirements and existing Commission regulation, address concerns about BT's potential leveraging of its market power to discriminate in favor of MCI over competing U.S. carriers. In this analysis, the Commission also recognized the importance of the relative openness of the U.K. regulatory framework in determining the adequacy of the safeguards to protect competition in the U.S. market. The Commission noted that the Investment Agreement restricts BT's ability to provide "core business" services in MCI's designated territory (The Americas and the Caribbean), and restricts MCI's ability to provide these services in BTs territory (the rest of the world). The provision applies not just to the distribution of NEWCO's products, but also to virtually any service, basic or enhanced, offered by the parties. The Commission found that, based on the number of existing and potential competitors in these markets, the lessening of competition among MCI, BT and NEWCO as a result of the territorial allocation would probably not have significant adverse impact on competition in those markets. (over) - 4 - The Commission said that the joint venture should offer a number of efficiencies, such as greater economies of scale, easier entry into new markets and the sharing of risks. It said significant consumer benefits may result both from the formation of the joint venture and from the introduction of its newly developed products into the marketplace, in particular product offerings responsive to the needs of large scale, high-end users, such as multinational corporations. Given that procompetitive benefits will likely flow from this transaction, that leveraging concerns are addressed by MCI's own undertakings and the imposition of certain reporting requirements, and that the territorial allocation provision will likely be of little competitive significance, the Commission concluded that the overall transaction was in the public interest. Action by the Commission July 14, 1994, by Declaratory Ruling and Order (FCC 94-188). Chairman Hundt, Commissioners Quello, Barrett, Ness and Chong, with Commissioner Barrett issuing a separate statement. - FCC - News Media contacts: Audrey Spivack and Rosemary Kimball at (202) 418-0500 Common Carrier Bureau contacts: Jennifer Warren and Diane Cornell at (202)418-1460.