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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 re Applications of ) ) AMERITECH CORP., ) Transferor, ) ) AND ) ) SBC COMMUNICATIONS INC., ) CC Docket No. 98-141 Transferee, ) ) For Consent to Transfer Control of ) Corporations Holding Commission Licenses ) and Lines Pursuant to Sections 214 ) and 310(d) of the Communications Act ) and Parts 5, 22, 24, 25, 63, 90, 95 and 101 ) of the Commission's Rules ) MEMORANDUM OPINION AND ORDER Adopted: October 6, 1999 Released: October 8, 1999 By the Commission: Commissioner Ness issuing a statement; Commissioners Furchtgott-Roth and Powell concurring in part, dissenting in part, and issuing separate statements; Commissioner Tristani issuing a statement. TABLE OF CONTENTS Page I. INTRODUCTION. . . . . . 5 II. EXECUTIVE SUMMARY . . . . . .6 III. BACKGROUND. . . . . . . 8 A. The Applicants . . . . . . . 8 1. A Changing Industry . . . . . . .11 2. State of Local Competition in SBC and Ameritech Regions . . . . . . 12 B. The Merger Transaction and Review Process. . . . . . 18 1. Department of Justice Review. . . . . 19 2. State and International Review. . . . . . .20 3. Commission Review . . . . . 22 IV. PUBLIC INTEREST FRAMEWORK . . . . . . 25 V. ANALYSIS OF POTENTIAL PUBLIC INTEREST HARMS . . . . .30 A. Overview . . . . .30 B. Analysis of Competitive Effects. . . . . . 32 1. Competition Between SBC and Ameritech . . . . . 32 2. Local Exchange and Exchange Access Services . . . . .34 C. Comparative Practices Analysis . . . . . . 49 1. Need for Comparative Practices Analyses . . . . . . .51 2. Effect of Reduction in Number of Benchmarks . . . . .55 3. The Value of Comparative Practices Analyses . . . . .59 4. Adverse Effects of SBC/Ameritech Merger . . . . . . .69 5. Continued Need for Major Incumbent LEC Benchmarks . . . . . . .75 6. Conclusion. . . . . . .83 D. Increased Discrimination . . . . . . .84 1. Overview. . . . . 84 2. Analysis. . . . . 88 VI. ANALYSIS OF POTENTIAL PUBLIC INTEREST BENEFITS. . . . . .114 A. National-Local Strategy. . . . . . . 115 1. The Benefits are Not Merger-Specific. . . . . .119 2. Magnitude of the Claimed Benefits . . . . . . .131 B. Efficiencies . . . . .135 1. Cost Savings. . . . . 137 2. Revenue Enhancements. . . . . . 139 3. Long Distance . . . . . . .141 C. Other Product Markets. . . . . .141 VII. CONDITIONS. . . . . . 143 A. Open Process . . . . .144 B. Adopted Conditions . . . . . . .145 1. Promoting Equitable and Efficient Advanced Services Deployment. . . . . 148 2. Ensuring Open Local Markets . . . . .156 3. Fostering Out-of-Territory Competition. . . . . . . 166 4. Improving Residential Phone Service . . . . . .167 5. Ensuring Compliance with and Enforcement of these Conditions. . . . . . 170 C. Benefits of Conditions . . . . .175 1. Mitigating Harm from Loss of Potential Competition. . . . . . 176 2. Mitigating Harm from Loss of Benchmarks . . . . . . 177 3. Mitigating Harm from Potential Increased Discrimination . . . . . .178 4. Additional Benefits from Conditions . . . . . .180 D. Other Requested Conditions or Modifications to Proffered Conditions. . . . . 181 1. Separate Affiliate for Advanced Services. . . . . . 182 2. Requests Regarding Other Conditions . . . . . .198 VIII. OTHER ISSUES. . . . . 214 A. Wireless Services. . . . . 214 1. Wireless Service Offerings. . . . . .214 2. Relevant Markets. . . . . .215 3. Mobile Voice Telephone Services . . . . . 215 4. Two-way Wireless Data Services. . . . . . 217 5. Paging Services . . . . . .217 6. Other Competitive Issues. . . . . . .217 B. International Issues . . . . . .218 1. SBC Foreign Carrier Affiliations. . . . . 218 2. Ameritech Foreign Carrier Affiliations. . . . . . . 221 C. Alarm Monitoring . . . . . 223 1. Overview. . . . . . . 223 2. Analysis. . . . . . . 225 3. AICC Motion on Smith Alarm. . . . . .231 D. Cable Overbuild Issues . . . . .232 E. Service Quality Issues . . . . .234 F. Public Interest Issues Involving SBC's Acquisition of the Ameritech Licenses and Lines . . . . . . . . . . . . . . . . . . . 236 G. Requests for Evidentiary Hearing . . . . .239 IX. ORDERING CLAUSES. . . . . .243 APPENDIX A: Public Record Filings A. List of Commenters and Filings B. List of Participants in Public Forum on Merger Conditions APPENDIX B: Summary of Confidential Information and Conclusions [TEXT NOT AVAILABLE IN PUBLICLY RELEASED VERSION] A. Each Applicant's Plans to Compete Outside Its Home Region 1. Ameritech's Out-of-Region Plans 2. SBC's Out-of-Region Plans 3. Conclusion B. Additional Information Pertaining to the Analysis of Potential Public Benefits APPENDIX C: Conditions I.INTRODUCTION 1. In this Order, we consider the joint applications filed by SBC Communications Inc. (SBC) and Ameritech Corporation (Ameritech) pursuant to sections 214(a) and 310(d) of the Communications Act of 1934, as amended (Communications Act), for approval to transfer control of licenses and lines from Ameritech to SBC in connection with their proposed merger. Before we can grant their applications, SBC and Ameritech (collectively, Applicants) must demonstrate that their proposed transaction will serve the public interest, convenience, and necessity. After lengthy discussions with Commission staff and consideration of public comments in this proceeding, SBC and Ameritech supplemented their initial application by attaching to it proposed conditions representing a set of voluntary commitments. 1. We conclude that approval of the applications to transfer control of Commission licenses and lines from Ameritech to SBC is in the public interest because such approval is subject to significant and enforceable conditions designed to mitigate the potential public interest harms of their merger, to open up the local markets of these Regional Bell Operating Companies (RBOCs), and to strengthen the merged firm's incentives to expand competition outside its regions. We believe that the proposed voluntary commitments by SBC and Ameritech substantially mitigate the potential public interest harms while providing public interest benefits that extend beyond those contained in the original applications. 2. Specifically, we conclude in this Order that the proposed merger of these RBOCs threatens to harm consumers of telecommunications services by: (a) denying them the benefits of future probable competition between the merging firms; (b) undermining the ability of regulators and competitors to implement the pro-competitive, deregulatory framework for local telecommunications that was adopted by Congress in the Telecommunications Act of 1996; and (c) increasing the merged entity's incentives and ability to raise entry barriers to, and otherwise discriminate against, entrants into the local markets of these RBOCs . Furthermore, the asserted benefits of the proposed merger, absent conditions, do not outweigh these significant harms, as described herein. 3. The proposed conditions, however, change the public interest balance. We expect that with these conditions, competition in the provision of local exchange services, including advanced services, will increase both inside and outside the merged firm's region. Accordingly, assuming the Applicants' ongoing compliance with the conditions described in this Order, we find that the Applicants have demonstrated that the proposed transfer of licenses and lines from Ameritech to SBC serves the public interest, convenience, and necessity. II.EXECUTIVE SUMMARY 1. To implement the dismantling of the Bell System, seven Regional Bell Operating Companies were created in 1984. After the mergers of SBC with Pacific Telesis and Bell Atlantic with NYNEX, five RBOCs remain. The instant proceeding concerns the proposed transfer of licenses and lines attendant upon a proposed merger of two RBOCs, SBC and Ameritech. We conclude that, with the conditions adopted by this Order, the Applicants have demonstrated that the proposed transfer of licenses and lines from Ameritech to SBC will serve the public interest, convenience, and necessity. We also make the following determinations in support of this conclusion: § Harms The proposed merger of these RBOCs threatens to harm consumers of telecommunications services in three distinct, but interrelated, ways. 1) The merger will remove one of the most significant potential participants in local telecommunications mass markets both within and outside of each company's region. 2) The merger will substantially reduce the Commission's ability to implement the market-opening requirements of the 1996 Act by comparative practice oversight methods. Contrary to the deregulatory, competitive purpose of the 1996 Act, this will, in turn, increase the duration of the entrenched firms' market power and raise the costs of regulating them. 3) The merger will increase the incentive and ability of the merged entity to discriminate against its rivals, particularly with respect to the provision of advanced telecommunications services. This is likely to frustrate the Commission's ability to foster advanced services as it is directed to do by the 1996 Act. § Benefits The asserted benefits of the proposed merger do not outweigh the significant harms, detailed above. Specifically: 1) The Applicants have failed to demonstrate that the merger is necessary in order to obtain the benefits to local competition of the National-Local Strategy, a plan in which the merged firm will enter 30 out-of-region markets as a competitive LEC. 2) Only a small portion of the Applicants' claimed cost-saving efficiencies, including procurement savings, consolidation efficiencies, implementation of best practices, faster and broader roll-out of new products and services, and benefits to employees and communities, are merger-specific, likely and verifiable. 3) The only merger-specific benefits to product markets other than local wireline telecommunications markets, such as wireless services, Internet services, long distance and international services, and global seamless services for large business customers, relate to a somewhat increased pace of expansion and modest reductions in unit costs. Any benefits in these regards are both speculative and small. § Conditions On July 1, 1999, the Applicants supplemented their application by proffering a set of voluntary commitments that they agreed to undertake as conditions of approval of their proposed transfer of licenses and lines. Following a period of public comment regarding their proposed conditions, the Applicants substantially revised their commitments on August 27, 1999, and continued to refine those commitments in filings with the Commission on September 7, September 17, and September 29, 1999. Assuming satisfactory compliance, implementation of the attached final set of conditions will further the following goals: 1) promoting advanced services deployment; 2) ensuring that in-region local markets are more open; 3) fostering out-of-region competition; 4) improving residential phone service; and 5) enforcing the Merger Order. These commitments are sufficient to tip the scales, so that, on balance, the application to transfer licenses and lines should be approved. § Wireless SBC and Ameritech are required by the U.S. Department of Justice, and as a condition of this Order, to divest one of the cellular telephone licenses in seven Metropolitan Statistical Areas and seven Rural Service Areas where the two companies have overlapping cellular geographic service areas. § International The public interest will be served by transferring control of Ameritech's international section 214 authorizations to SBC, subject to the condition that SBC subsidiaries be classified as dominant international carriers in their provision of service on the U.S.-South Africa and U.S.-Denmark routes. § Alarm Monitoring Section 275 of the Communications Act does not require that the Ameritech BOCs lose their grandfathered right to be affiliated with an entity that is engaged in the provision of alarm monitoring services merely because the Ameritech BOCs will become affiliates of the SBC BOCs, which are not grandfathered. A forced divestiture of Ameritech's alarm monitoring subsidiary would be contrary to the intent of section 275. § Cable Section 652 of the Communications Act does not prohibit SBC from acquiring Ameritech's existing in-region cable overbuild operations. § Service Quality Any post-merger service quality concerns are adequately addressed by the Applicants' proffered commitments. § Character/Requests for Hearing Petitions to deny the applications do not raise a substantial or material question of fact that would warrant an evidentiary hearing regarding whether SBC or Ameritech possesses the requisite character to engage in a transfer of control of Commission licenses, or regarding any other matter related to this transaction. II. BACKGROUND 1 The Applicants 1. Ameritech Corporation. Ameritech, one of the original seven RBOCs formed as part of the divestiture of AT&T's local operations, is the primary incumbent local exchange carrier (LEC) serving Illinois, Indiana, Michigan, Ohio, and Wisconsin. Ameritech, through its operating companies, serves more than 20 million local exchange access lines, and had 1998 operating revenues in excess of $17.1 billion. 1. In addition to local exchange and exchange access services, Ameritech's operating companies provide a wide range of other services, including cellular, personal communications services (PCS), paging, security, cable television, Internet access, alarm monitoring and directory publishing services. Ameritech provides cellular services to more than 3.5 million customers in 42 cellular markets throughout its five-state region and in other markets in Missouri, Hawaii and Kentucky, as well as PCS service in the Cleveland, Cincinnati, and Milwaukee metropolitan areas. Ameritech also provides paging services to more than 1.5 million customers in its five- state region, and in two adjacent states, Missouri and Minnesota. Through its Ameritech Interactive Media Services, Inc. subsidiary, Ameritech provides Internet services and products to over 66,000 customers, while its cable television subsidiary, Ameritech New Media, Inc., provides competitive cable service to more than 200,000 consumers in over 75 communities in the Chicago, Cleveland, Columbus, and Detroit metropolitan areas. Ameritech's SecurityLink by Ameritech, Inc. subsidiary is North America's second-largest security monitoring provider with more than one million residential and commercial accounts. Finally, Ameritech has diverse overseas investments, which include direct or indirect financial interests in communications ventures in fifteen European countries, including Belgium, Denmark, Germany, Hungary, and Norway. 2. Ameritech's subsidiaries hold numerous Commission licenses and operate lines used in interstate and international communications, including domestic and international lines authorized under section 214, and various Title III licenses necessary to operate cellular, paging, PCS, experimental radio, business radio, mobile radio, and microwave services, as well as earth station authorizations. Through its subsidiaries, Ameritech is also authorized to operate international facilities-based and/or resale services originating outside the states in which Ameritech provides local exchange service. 3. SBC Communications Inc. SBC, another of the original seven RBOCs, became the primary incumbent LEC serving Arkansas, Kansas, Missouri, Oklahoma, and Texas following the AT&T divestiture. In April 1997, SBC acquired Pacific Telesis Group, another RBOC, which was the primary incumbent LEC in California and Nevada. In October 1998, SBC acquired Southern New England Telecommunications Corporation (SNET), which was the primary incumbent LEC for most of Connecticut. Together, SBC's operating companies serve more than 35.7 million local exchange access lines in its eight-state region. In 1998, SBC's operating revenues exceeded $28.7 billion. 4. In addition to providing local exchange and exchange access services, SBC provides wireless, Internet access, out-of-region interLATA, cable television and directory publishing services. SBC's principal wireless subsidiaries provide cellular, PCS, and paging services to more than 8.3 million subscribers throughout SBC's eight-state region and in several out-of-region markets. SBC's Personal Vision subsidiary (d/b/a SNET Americast) provides cable television service in Connecticut. 5. SBC also provides interexchange (long distance) service to more than 900,000 customers in Connecticut through its SNET subsidiary. In February 1999, SBC entered into an alliance with Williams Communications, Inc., in which SBC will acquire $500 million, or approximately ten percent, of Williams' shares, giving SBC access to Williams' nationwide fiber- based broadband network. Finally, SBC also holds international investments in communications ventures in France, Israel, Switzerland, the United Kingdom, Chile, Mexico, South Korea, Taiwan, and South Africa, as well as in two proposed trans-Pacific undersea cable systems linking China and Japan with the United States. 1. A Changing Industry 1. In 1982, the United States District Court for the District of Columbia entered a consent decree in an antitrust suit entitled United States v. AT&T Corp. The 1982 Consent Decree, also known as the "Modification of Final Judgment" (MFJ), when fully enforced in 1984, substantially dismantled what had formerly been an integrated end-to-end monopoly of U.S. telecommunications services, the Bell System. Before the MFJ, the Bell System provided local exchange telephone service to over 80 percent of all residential phone subscribers in the United States, and accounted for even higher shares of long distance service, phone plant equipment manufacture and customer premises equipment sales. For most Americans, the Bell System provided virtually all telecommunications needs. By fundamentally altering that environment, the MFJ, together with its underlying rationale, provides the central backdrop against which all telecommunications regulation takes place in this country, and, indeed, the measure against which we evaluate the merger before us. 1. The entry of the 1982 Consent Decree created SBC and Ameritech. The MFJ essentially divorced the Bell System's local exchange operations from its other lines of business by requiring the creation of seven regionally-based operating companies (i.e., the RBOCs). These RBOCs were created as holding companies for the local operating companies that had been owned by AT&T and were forbidden from selling long distance services and information services, and from manufacturing or selling telecommunications equipment. Both SBC and Ameritech therefore are creations of the MFJ, not an outgrowth of natural market forces. Necessarily, then, the rationale behind the 1982 Consent Decree frames most of the issues raised by their proposed merger. 2. To put it simply, the Bell System was broken up because of two firmly held beliefs. One belief was that competition, rather than regulation, could best decide who would sell what telecommunications services at what prices to whom. The other belief was that the principal obstacles to realizing that competitive ideal were the incentive and ability of dominant local exchange carriers, who typically controlled virtually all local services within their regions, to wield exclusionary power against their rivals. The Department of Justice, the federal courts, and this Commission concluded that a firm controlling access to virtually all local phone customers in its region was very likely to exclude those who would directly compete with it and to discriminate against those, such as long distance service providers and equipment manufacturers, who might offer competitive ancillary services that the local exchange carrier also sought to offer. Further, decades of experimentation with various regulatory regimes had taught that regulators could not fully monitor and control such exclusionary and discriminatory behavior. Rather, structural solutions in this case the divorce of AT&T from its local operating companies were vitally necessary. 3. The other seminal event in post-World War II telecommunications regulation was the enactment of the 1996 Act. When Congress passed the 1996 Act, it codified the standards and principles established by the Bell System break-up and set forth a framework that governs us today. Two aspects of the 1996 Act in particular drive our analysis of this license transfer application and the companies' subsequent proposed conditions. 4. First, Congress not only firmly ratified the pro-competitive thrust of the MFJ and embraced its rationale, but it extended the goals of the decree. The MFJ principally sought to further competition in ancillary fields, such as long distance, equipment manufacturing, and information services. Based in part on successful state experiments with limited introduction of local competition, the 1996 Act determined that it would also be U.S. telecommunications policy to foster competition nationally in the provision of local exchange and exchange access services to all telephone subscribers, including residential units. From the date of the enactment of the 1996 Act, this Commission, in conjunction with state public utility commissions, has been statutorily charged with opening up local markets to competition, on the specific premise that without regulatory oversight, the incumbent LECs would be able to discriminate against and exclude local rivals. 5. Second, Congress directed this Commission and the state commissions to achieve these competitive ends by deregulatory means. The 1996 Act introduced into our telecommunications law a clearly-stated duty of dominant LECs to interconnect with their competitors for example, to unbundle their networks and provide advance notice of changes in their network design, to permit rivals to resell incumbent LEC services at a discount, and to allow their competitors to collocate on their premises. Incumbent LECs must accommodate their rivals, not predate against them, and the process of accommodation is to be through commercial negotiation not regulatory fiat where possible. Thus, Congress instructed this Commission and state regulators to effectuate the transition from monopoly markets to competitive markets in a deregulatory manner. This means that regulations enforcing interconnection on fair and equitable terms should not impose detailed regulatory oversight on incumbents. Our mandate is to achieve competition, not to devise a complex regulatory regime. We assess this transfer of control application, and its associated conditions, against this mandate. 1. State of Local Competition in SBC and Ameritech Regions 1. At the time of its merger application in July 1998, SBC served 33.4 million access lines. SBC provided approximately 650,000 resold lines to competitors, commonly referred to as competitive LECs. Most of these access lines were in California, Texas, and Kansas. In addition, SBC provided 60,000 unbundled loops, most of which were in the former PacTel region -- 52,000 in California and 3,600 in Nevada, compared with only 330 in Texas. SBC also reported that it was providing approximately 353,000 interconnection trunks, greater than 90 percent of which were in California and Texas, and 343 unbundled switch ports. 1. SBC stated that there were more than 50 active competitors in its region and that it had entered into 374 interconnection and resale agreements, 93 percent of which were adopted without state arbitration. SBC noted 548 collocation arrangements (490 physical/58 virtual) in 173 wire centers, plus 443 pending arrangements. SBC stated that competitors had installed 547 switches (vs. approximately 2800 that SBC owns) and more than 6,500 route miles of fiber in its region. 2. At the time of its application, Ameritech served more than 20 million access lines. It provided approximately 635,000 resold lines to competitors, 92 percent of which were in three of its five states. Only six percent of these resold lines were in Wisconsin, and two percent were in Indiana. Ameritech reported provisioning 94,600 unbundled loops. Fifty-seven percent of these unbundled loops were in a single state, Michigan. Only 900 such lines had been unbundled in Wisconsin and no lines had been unbundled in Indiana. Ameritech also reported provisioning 180,000 interconnection trunks and "zero" unbundled switch ports. 3. Ameritech stated that there were more than 50 active competitors in its region, and that it had entered into 175 interconnection and resale agreements with 39 carriers. Ameritech reported 113 physical collocations and 166 virtual collocations in Ameritech wire centers, with 77 more scheduled for activation in the third quarter of 1998. According to Ameritech, this represents 23 percent of Ameritech wire centers, which serve 63 percent of business lines and 50 percent of residential lines in Ameritech's service area. Ameritech stated that competitors had installed 120 switches (vs. approximately 1500 that Ameritech owns) and more than 5,000 route miles of fiber in Ameritech's region. 4. Although Ameritech had only 60 percent as many access lines as SBC, Ameritech and SBC had an equivalent number of resold lines, and Ameritech had approximately 50 percent more unbundled loops, as of July 1998. As noted, however, not a single unbundled loop was reported in Indiana. SBC provided proportionately more interconnection trunks, but nearly two-thirds of those trunks were in California, and more than 90 percent were in Texas and California. Ameritech's provisioning of interconnection trunks was spread more evenly across its region. 5. Ameritech's supply to competitors of 635,00 resold lines and 94,600 unbundled loops represents about 3.5 percent of its 20 million access lines, whereas SBC's 650,000 resold lines and 60,000 unbundled loops represents approximately 2 percent of SBC's 33.4 million access lines. SBC estimated that, as of December 1998, it had provided 800,000 lines through resale, and facilities-based competitive LECs had self-provisioned an additional 600,000 lines. SBC counts the loss to facilities-based competitive LECs through a variety of means, including directory listings, 911/E911 databases, and telephone numbers ported to competitors. 6. In their Joint Reply to comments regarding proposed merger conditions, SBC and Ameritech assert that local communications markets have opened further, and competition has intensified, in the year since they filed their initial merger application in July 1998. Specifically, SBC and Ameritech state that they signed an additional 250 interconnection agreements during that year, and that competitors in Ameritech's region now serve 738,000 lines using their own facilities, 154,000 using unbundled network elements (an increase of 63 percent since the numbers reported in the merger application), and nearly one million lines through resale (an increase of 57 percent). SBC and Ameritech note industry estimates that are much more conservative than the Applicants' original estimates concerning competitors' deployment of switches i.e., more than 175 in SBC's region (compared with 547 estimated by SBC in its application) and more than 75 in Ameritech's region (compared with 120 estimated by Ameritech in its application). However, those sources also indicate greater fiber deployment by competitive LECs in SBC's region as of 1999 (more than 10,000 route miles versus 6,500 estimated by SBC). 7. It has been more than three and-a-half years since Congress passed the 1996 Act in an attempt to stimulate competition in local telephone markets. Competition has been slow to emerge, but there have been recent signs that momentum is building. For instance, the Commission's Local Competition Report notes that revenues of local service competitors increased from $2.2 billion at the end of 1997 to $3.6 billion at the end of 1998. The report estimates that competitive LECs are gaining market share, but that incumbent LECs retain 96 percent of local service revenues. Moreover, the Report indicates that competitive LECs have been most successful in the market for specialized services such as special access and local private line services, which are provided to business customers. Aggregate competitive LEC use of resold incumbent LEC lines predominates over their use of unbundled loops by a factor of approximately 10 to 1 and according to data provided by ILECs, 40 percent of the resold lines serve residential customers. In addition, facilities-based competitive LECs appear to have concentrated in more urbanized areas. 8. For its part, in response to the 1996 Act, SBC appears to have adopted an acquisition strategy. Within weeks of passage of the 1996 Act, SBC announced its agreement to merge with PacTel, one of the other six Baby Bells. Last year, SBC merged with SNET, the primary incumbent LEC in Connecticut. The instant merger would add a third Baby Bell to the original SWBT and PacTel. Congress may or may not have contemplated such horizontal moves when it replaced the MFJ with the 1996 Act, but Congress did signal a clear intent that the desire of BOCs to enter the long distance markets within their existing regions would provide a powerful incentive to open their local markets to competition. This is embodied in the so-called "carrot- and-stick" approach taken in section 271 of the Act, which requires satisfaction of a 14-point checklist for determining whether local markets are open to competition before a BOC may be allowed to originate in-region interLATA services within a particular state. 9. SBC and Ameritech have separately engaged in failed attempts to convince regulators that their local markets are open to competition within the meaning of section 271. This Commission denied SBC's application for in-region interLATA authority in Oklahoma in June 1997, finding that SBC had not met the threshold requirement under section 271 that SBC be providing access and interconnection to a facilities-based competing provider of local exchange service to residential and business subscribers (the "Track A" requirement under section 271). The Texas and California commissions issued orders in mid-1998 establishing collaborative processes among SBC, competitive LECs and commission staff to resolve outstanding issues regarding SBC's compliance with section 271 in those states. Those processes are ongoing and have resulted in significant progress with respect to operations support systems (OSS), performance measurements and penalties, collocation, and provision of unbundled network elements (UNEs). SBC states that it expects to receive section 271 approval for Texas and California first, and that approvals for its five remaining states would follow shortly thereafter. 10. This Commission denied Ameritech's application for in-region interLATA authority in Michigan in August 1997, citing deficiencies with respect to access to OSS, interconnection, and access to 911 and E911 services. Ameritech is not actively pursuing section 271 approvals in any of its states at this time as evidenced by the fact that Ameritech has not filed in any state section 271 proceedings since 1997. On January 21, 1999, the Illinois Commerce Commission issued an order dismissing its section 271 proceeding because of the staleness of the record. 11. All evidence suggests that competition has been slow to emerge in the territories of these Baby Bells and that not all geographic areas, and not all types of customers, are receiving the benefits of competition. Furthermore, this merger application comes at a critical juncture when competitive LECs may shortly be able to take advantage of more favorable market conditions resulting from: (1) recent court decisions; (2) final prices for interconnection, UNEs and resale that have been determined in state cost proceedings; and (3) extensive section 271 collaborative processes supervised by state commissions. A number of competitive LECs have noted in ex parte discussions with Commission staff that their original interconnection agreements with SBC and Ameritech expire this year, and that they are facing negotiation of "second- generation" interconnection agreements that will govern their relationships with these companies (or the combined company) over the next several years. With this background in mind, we turn in the following sections to discussion of the harms that are likely to result from this merger, which is proposed at a critical time in the evolution of local competition that Congress envisioned. 1 The Merger Transaction and Review Process 1. Proposed Transaction. Under the Agreement and Plan of Merger (Merger Agreement), dated May 10, 1998, Ameritech would become a first-tier, wholly-owned subsidiary of SBC in a stock-for-stock merger. Following the merger, SBC would own all the stock of Ameritech, and SBC itself would be owned 57.5 percent by the pre-merger stockholders of SBC and 42.5 percent by the pre-merger stockholders of Ameritech. 1. Together, SBC and Ameritech would serve more than 55.5 million local exchange access lines, representing approximately one-third (31.9 percent) of the nation's total access lines. SBC and Ameritech as a combined company would have more than 200,000 employees and annual revenues in excess of $45 billion, based on December 1998 statistics from both companies. In other words, SBC and Ameritech combined would be the second largest telecommunications company in the country behind only AT&T, as measured by revenues. Based on the extensive breadth of SBC's and Ameritech's operations, their proposed merger requires the approval of several government agencies, including the DOJ, state public utility commissions, the European Commission, and this Commission. 1. Department of Justice Review 1. The DOJ reviewed the proposed transaction as part of the pre-merger review process under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. On March 23, 1999, DOJ, pursuant to a proposed consent decree, required the Applicants to divest cellular properties in overlapping geographic areas. This condition was deemed necessary to prevent a substantial lessening of competition as a result of the merger in "markets for mobile wireless services in Illinois, Indiana, and Missouri." Recognizing further that Ameritech planned to provide wireline service in St. Louis, and that "no one else is providing such service in St. Louis," DOJ required that Ameritech's, not SBC's, cellular assets be divested in St. Louis, and that the purchaser of these assets "has the capability of competing effectively in the provision of local exchange telecommunications services and long distance telecommunications services in the St. Louis area." On April 5, 1999, Ameritech announced that it was selling twenty cellular holdings to a joint venture of GTE Consumer Services Inc. (GCSI), a subsidiary of GTE, and Georgetown Partners, which would eliminate all cellular overlaps. 1. State and International Review 1. The proposed merger of SBC and Ameritech also requires the approval of, or notification to, a number of state governing bodies and the European Commission. The status of these proceedings is summarized below. 1. Ohio. Pursuant to the laws of Ohio, the Applicants filed for approval of their proposed transaction from the Public Utility Commission of Ohio (PUCO). On April 8, 1999, PUCO approved with conditions the proposed merger pursuant to a stipulated settlement agreement negotiated among several parties. The conditions imposed by PUCO, among other things, require that the Applicants: (1) freeze residential rates through January 2002; (2) compete for residential and business customers in four markets outside of Ameritech's current service territory; (3) improve service quality; (4) increase infrastructure investment; (5) maintain current employment levels for two years; and (6) offer a promotional rate for unbundled loops and resold service for a certain period of time linked to Ameritech's loss of residential access lines to competitors. PUCO also required the combined entity to make available in Ohio the level of interconnection it obtains as a new entrant outside its service territory or which it provides in another state as an incumbent. Finally, SBC and Ameritech agreed to meet certain competitive, operations support systems, and service quality benchmarks, or face monetary penalties. 2. Illinois. On July 24, 1998, pursuant to Illinois law, the Applicants filed a joint application requesting approval of their proposed reorganization from the Illinois Commerce Commission (ICC). The ICC held numerous formal hearings on the application, and approved the merger on September 23, 1999, subject to several conditions. The conditions imposed by the ICC address, among other things, performance measurements and associated penalties, enhanced operations support systems, shared transport, most-favored nation interconnection arrangements, residential xDSL service deployment, service outages and associated penalties, network infrastructure investment, 911 practices, and updated cost studies and cost allocation manuals. In addition, for three years, the combined company is required to allocate 50 percent of the net merger-related savings in Illinois to competitors and retail customers. The ICC also relied on a series of voluntarily commitments by the Applicants that, among other things, require the combined firm to retain Ameritech's brand identity and regional employment levels, make charitable and community contributions and establish community enrichment programs in the state (e.g., a consumer education fund, a community technology fund, and community computer centers). 3. Nevada. On July 29, 1999, the Public Utilities Commission of Nevada (Nevada PUC) ordered SBC to submit its proposed merger to the commission for review and approval. SBC thereafter filed a special application with the Nevada PUC seeking either authorization to acquire Ameritech or a finding by the Nevada PUC that it lacks jurisdiction over the transaction. The Applicants and the Nevada PUC staff subsequently agreed to a settlement agreement that was approved by the Nevada PUC on September 1, 1999. Pursuant to the stipulated agreement, no merger-related transaction costs will be passed on to Nevada ratepayers and, among other things, the merged firm must keep the Nevada PUC apprised of its implementation of any FCC merger conditions, retain the Nevada Bell brand identity, and buy locally where possible. 4. European Commission. In a June 1998 letter to the Applicants, the European Commission's Merger Task Force confirmed that the proposed merger would not conflict with applicable antitrust guidelines. 5. Others. In addition to these governing bodies, the Applicants sought approval of or made notification to: (i) certain state public utilities commissions in connection with Ameritech's authorizations to provide intrastate interexchange service in all 45 out-of-region states and local exchange service in eight out-of-region states; (ii) certain local franchising authorities in jurisdictions in which Ameritech has received franchises for competitive cable systems; and (iii) certain regulatory authorities in select European countries in which SBC or Ameritech holds investments. 1. Commission Review 1. As noted above, SBC and Ameritech filed joint applications on July 24, 1998, pursuant to sections 214(a) and 310(d) of the Communications Act, requesting Commission approval of the transfer of control to SBC of licenses and lines owned or controlled by Ameritech or its affiliates or subsidiaries. Following the Commission's Public Notice of July 30, 1998, thirty-five parties filed timely comments supporting or opposing the application, or petitions to deny the application. Nine parties, including the Applicants, filed reply comments. In addition, the Commission held a series of three public forums at which a number of parties, including (a) the Applicants, (b) states, consumer groups, community organizations, and industry participants, and (c) economists, could present their views on the proposed merger. 1. On October 2, 1998, the Bureau adopted a protective order under which third parties would be allowed to review confidential or proprietary documents that SBC or Ameritech submitted. Commission staff also requested, and obtained, the Applicants' consent to review the documents that SBC and Ameritech had submitted to DOJ as part of its Hart-Scott-Rodino review process. 2. In January, 1999, Commission staff requested additional documentation and information from the Applicants. The supplemental request, among other things, sought documents and information on the following subjects: (1) Applicants' out-of-region entry activities; (2) Applicants' brand name awareness; (3) perceived demand for end-to-end telecommunications services; (4) Applicants' investment projects; (5) plans for implementing the Applicants' National-Local Strategy; (6) the profitability of serving out-of-region residential and small business customers; and (7) the relationship between the companies' National-Local Strategy and section 271 authorizations. The Applicants filed certain of the Hart-Scott-Rodino documents, and other confidential documents, with the Commission under seal, with a redacted version placed in the public record. The portion of this Order that discusses confidential documents that were used in the Commission's decision-making process has been issued under seal as Appendix B. 3. On April 1, 1999, FCC Chairman William Kennard notified the Applicants that Commission staff had raised a number of significant issues with respect to potential public interest harms and questions about the claimed competitive and consumer benefits of their proposed transaction. Accordingly, Chairman Kennard invited SBC and Ameritech and other interested parties to explore with Commission staff, on a cooperative and public basis, whether it would be possible to craft conditions that would address the public interest concerns raised by the Application. 1. Accepting the Chairman's invitation, representatives of SBC and Ameritech held a series of discussions with Commission staff to explore the possibility of the Applicants strengthening their application by agreeing to certain voluntary public interest commitments. During this time, Commission staff also met with other interested parties who expressed views on the severity of potential public interest harms and possible mitigating conditions. 1. On May 6, 1999, the Common Carrier Bureau held a public forum where Commission staff and representatives of SBC and Ameritech reported on the progress of discussions and received further input on the need for, and composition of, any potential conditions. Interested parties also expressed opinions on potential conditions through record submissions. 2. Based on the input received from Commission staff and third parties, SBC and Ameritech supplemented their initial Application by submitting on July 1, 1999 an "integrated package of conditions" which they claimed would satisfy potential public interest concerns and lead to Commission staff support of their Application. More than 50 parties filed timely comments and 14 parties filed reply comments addressing the Applicants' proposed commitments. SBC and Ameritech subsequently clarified their commitments on August 27, 1999, and in further ex parte filings in September. II. PUBLIC INTEREST FRAMEWORK 1. Pursuant to sections 214(a) and 310(d) of the Communications Act, the Commission must determine whether the Applicants have demonstrated that the public interest would be served by transferring Ameritech's numerous licenses and lines used in interstate or foreign communications to SBC. As discussed below, we must weigh the potential public interest harms of the proposed transaction against the potential public interest benefits to ensure that the Applicants have shown that, on balance, the merger serves the public interest, convenience and necessity. 1. Section 214(a) of the Communications Act generally requires carriers to obtain from the Commission a certificate of public convenience and necessity before constructing, acquiring, operating or engaging in transmission over lines of communication, or before discontinuing, reducing or impairing service to a community. In this case, section 214(a) requires the Commission to find that the "present or future public convenience and necessity require or will require" SBC to operate the acquired telecommunications lines, and that "neither the present nor future public convenience and necessity will be adversely affected" by the discontinuance of service from Ameritech. Section 310(d) provides that no construction permit or station license may be transferred, assigned, or disposed of in any manner except upon a finding by the Commission that the "public interest, convenience, and necessity will be served thereby." The Commission therefore must determine that the proposed transfer of licenses from Ameritech to SBC "serves the public interest, convenience, and necessity" before it can approve the transaction. 2. The public interest standard of sections 214(a) and 310(d) involves a balancing process that weighs the potential public interest harms of the proposed transaction against its potential public interest benefits. The Applicants bear the burden of proving, by a preponderance of the evidence, that the proposed transaction, on balance, serves the public interest. In applying this public interest test, the Commission considers four overriding questions: (1) whether the transaction would result in a violation of the Communications Act or any other applicable statutory provision; (2) whether the transaction would result in a violation of Commission rules; (3) whether the transaction would substantially frustrate or impair the Commission's implementation or enforcement of the Communications Act, or would interfere with the objectives of that and other statutes; and (4) whether the merger promises to yield affirmative public interest benefits. In summary, the Applicants must demonstrate that the transaction will not violate or interfere with the objectives of the Communications Act or Commission rules, and that the predominant effect of the transfer will be to advance the public interest. 3. The Commission's analysis of public interest benefits and harms includes, but is not limited to, an analysis of the potential competitive effects of the transaction, as informed by traditional antitrust principles. While an antitrust analysis, such as that undertaken by the DOJ in this case, focuses solely on whether the effect of a proposed merger "may be substantially to lessen competition," the Communications Act requires the Commission to make an independent public interest determination, which includes evaluating public interest benefits or harms of the merger's likely effect on future competition. In order to find that a merger is in the public interest, therefore, the Commission must "be convinced that it will enhance competition." 4. In the AT&T/TCI Order, we explained that competition in the telecommunications industry is shaped not only by antitrust rules, but also by regulatory policies that govern interactions among industry participants. For example, no industry can be effectively governed by antitrust rules unless some other rules specify the industry participants' property rights. In telecommunications markets the ground rules necessary to permit competition are frequently supplied by regulatory policy. Accordingly, our public interest evaluation necessarily encompasses the "broad aims of the Communications Act." These broad aims include, among other things, the implementation of Congress's pro-competitive, deregulatory national policy framework designed to open all telecommunications markets to competition, the preservation and advancement of universal service, and the acceleration of private sector deployment of advanced services. Our public interest analysis may also entail assessing whether the merger will affect the quality of telecommunications services or will result in the provision of new or additional services to consumers. In making these assessments, the Commission considers the trends within, and needs of, the telecommunications industry, as well as the factors that influenced Congress to enact specific provisions of the Communications Act. 5. Following passage of the 1996 Act, local telecommunications markets have been undergoing a transition to competitive markets, so a transaction may have predictable yet dramatic consequences for competition over time even if the immediate effect is more modest. Therefore, when a transaction is likely to affect local telecommunications markets, our statutory obligation requires us to assess future market conditions. In doing so, the Commission may rely upon its specialized judgment and expertise to render informed predictions about future market conditions and the likelihood of success of individual market participants. 6. Where necessary, the Commission can attach conditions to a transfer of lines and licenses in order to ensure that the public interest is served by the transaction. Section 214(c) of the Communications Act authorizes the Commission to attach to the certificate "such terms and conditions as in its judgment the public convenience and necessity may require." Similarly, section 303(r) of the Communications Act authorizes the Commission to prescribe restrictions or conditions, not inconsistent with law, that may be necessary to carry out the provisions of the Act. Indeed, unlike the role of antitrust enforcement agencies, the Commission's public interest authority enables it to rely upon its extensive telecommunications regulatory and enforcement experience to impose and enforce certain types of conditions that tip the balance and result in a merger yielding overall positive public interest benefits. 7. In addition to its public interest authority under the Communications Act, the Commission shares concurrent antitrust jurisdiction with DOJ under the Clayton Act to review mergers between common carriers. In this case, because our public interest authority under the Communications Act is sufficient to address both the competitive issues raised by the proposed merger and its likely effect on the public interest, we decline to exercise our Clayton Act authority for the proposed transaction. 8. As noted in the AT&T-TCI Order, many transfer applications on their face show that the merger would yield affirmative public interest benefit and would not violate the Communications Act or Commission rules, nor frustrate or undermine policies and enforcement of the Communications Act. Such cases do not require extensive review and expenditure of considerable resources by the Commission and interested parties. This is not the case with respect to this proposed transaction. We analyze the potential public interest harms and benefits of this proposed merger, absent conditions, in the next sections. II.ANALYSIS OF POTENTIAL PUBLIC INTEREST HARMS 1 Overview 1. We conclude that the proposed merger, considered without supplemental conditions, threatens our ability to fulfill our statutory mandate in the following three ways. 1. First, the proposed merger between SBC and Ameritech significantly decreases the potential for competition in local telecommunications markets by large incumbent LECs. The merger eliminates SBC and Ameritech as significant potential participants in the mass market for local exchange and exchange access services in the other's regions. Both firms have the capabilities and incentives to be considered most significant market participants in geographic areas adjacent to their own regions, and in out-of-region markets in which they have a cellular presence. This finding is based partly on our analysis of the plans of Ameritech to expand into St. Louis (in SBC's territory) which would have occurred but for the merger, and SBC's plans to expand into Chicago (in Ameritech's territory). As incumbent LECs, each firm is one of only a few potential entrants with the necessary systems, such as billing and operations support, required to provide local exchange services to residential and small business customers on a large scale. They also bring particular expertise to the process of negotiating and arbitrating interconnection agreements between incumbent and competitive LECs. In adjacent markets, each Applicant has an array of nearby switches that can be used to provide local exchange services in the other's traditional operating territories. Moreover, in out-of-region markets in which either Applicant has a cellular affiliate, it also has a base of customers to whom it can offer wireline local exchange services, potentially bundled with cellular and other offerings. Finally, in both adjacent and cellular out-of-region markets, SBC and Ameritech have brand recognition with mass market customers that would provide a strong and often unique advantage in providing competitive wireline services. 2. Second, the proposed merger frustrates the ability of the Commission (and state regulators) to implement the local market-opening provisions of the 1996 Act. The merger of SBC and Ameritech two of the six remaining major incumbent LECs (the RBOCs and GTE) would have an adverse impact on the ability of regulators and competitors to implement the competitive goals of the 1996 Act by deregulatory means. Comparing the practices of independent firms can assist federal and state regulators in defining incumbent LEC obligations and in discovering new approaches and solutions to open markets to competition under sections 251 and 271 and state law. Such comparative practice analyses (or "benchmarking") depend upon having a sufficient number of independent sources of observation available for comparison. Indeed, the development of the local competition that exists today can be attributed largely to comparative practice analyses of experiments and developments in various states and among various incumbent LECs, as indicated by examples in the Comparative Practices Analysis section of this Order (see infra Section V.C.). 3. Significant differences between the major incumbent LECs and other carriers preclude the use of other carriers as alternative benchmarks. Large incumbent LECs differ greatly from smaller incumbent LECs, competitive LECs and foreign LECs in regulatory treatment, structure and operation. Furthermore, statistical parity comparisons cannot be used as a substitute for all forms of incumbent LEC benchmarking. The decreased ability to employ comparative practice analysis that would result from the proposed merger ultimately would force regulators and competitors to replace benchmarking with more intrusive and costly methods of regulation, frustrating the goals of the 1996 Act and this Commission of opening markets and easing regulation, to the detriment of the public interest. We and our state colleagues would be forced to adopt more regulations of greater complexity, while competitors would be prevented from gaining valuable information that could help them succeed in breaking down entry barriers. 4. Moreover, the merger's elimination of Ameritech as an independently-owned RBOC is likely to reduce significantly the amount of innovation that regulators and competitors could observe and analyze. Ameritech frequently has taken an approach at the holding-company level that is different from the other RBOCs, examples of which are detailed in the Comparative Practices Analysis section (see infra Section V.C.). These differences by Ameritech in one state have allowed regulators and competitors to induce market-opening behavior from other incumbent LECs in other states. Another harm of the merger is that the larger combined entity will have a greater incentive to unify the practices of its separate operating companies to affect the outcome of both best practices and average practices benchmarking by regulators and competitors, resulting in an overall loss of diversity at the operating-company level. The proposed merger of SBC and Ameritech would also directly increase the incentive and ability of remaining incumbent LECs to coordinate their behavior to resist market-opening measures. As the number of relevant independently-owned incumbent LECs shrinks to a small few, the probability of coordination significantly increases. 5. Third, while it would diminish regulatory efficacy, the proposed merger also would increase the incentives and ability of the larger merged entity to discriminate against rivals in retail markets where the new SBC will be the dominant incumbent LEC. The merger will lead the merged entity to raise entry barriers that will adversely affect the ability of rivals to compete in the provision of retail advanced services, interexchange services, local exchange and exchange access services, thereby reducing competition and increasing prices for consumers of those services. The increase in the number of local areas controlled by SBC as a result of the merger will increase its incentive and ability to discriminate against carriers competing in retail markets that depend on access to SBC's inputs in order to provide services. For example, if SBC discriminates against a competitive LEC attempting to enter Houston, it will raise this rival's costs. This competitive LEC will have less capital to spend on common research, product development, and marketing costs, making the competitive LEC a less effective competitor in other areas such as Chicago because of its overall higher costs. Prior to the merger, SBC would not realize the benefits in Chicago from such conduct. After merging with Ameritech, which is the incumbent LEC in Chicago, SBC would realize such benefits. Because SBC after the merger would realize more of the gains from what are presently "external" effects, it would have a greater incentive to engage in discrimination than the combined incentives that the two individual companies would have had in their smaller regions. 6. Any likelihood of increased discrimination and heightened entry barriers causes particular concern in the retail market for advanced services, given the Commission's ongoing efforts to encourage innovation and investment in these emerging markets. Competitors' requests for the type of interconnection and access arrangements necessary to provide new types of advanced services are continually evolving and provide ample scope for incumbents to discriminate in satisfying these requests. The combined entity has an increased incentive to discriminate against a competitor such as Sprint ION that is seeking to enter markets on a national basis, because the merged firm will realize the benefits over the larger combined area in its control. Likewise, once an incumbent LEC has authority to provide interLATA services within its region, it has an incentive to discriminate against the termination of its competitors' calls that originate in that region in order to induce callers at the originating end to choose the incumbent LEC as their interexchange service provider. SBC after the proposed merger will have a much larger "in-region" area, and thus will terminate a greater number of calls from in-region customers. The larger merged firm would therefore have a greater incentive to engage in discrimination, which is likely to be particularly acute with respect to advanced or customized access services where such discrimination would be most difficult to detect. 7. In short, absent stringent conditions, we would be forced to conclude that this merger does not serve the public interest, convenience or necessity because it would inevitably retard progress in opening local telecommunications markets, thereby requiring us to engage in more regulation. Standing alone, without conditions, the initial application proposed a license transfer that would have been inconsistent with the approach to telecommunications regulation and telecommunications markets that the Congress established in the 1996 Act, ratifying the fundamental approaches enshrined in the MFJ. For that reason, we conclude that it would be inconsistent with the public interest, convenience and necessity to permit this license transfer in the absence of significant and enforceable conditions. The remainder of Part IV explains these conclusions in detail. 1 Analysis of Competitive Effects 1. Competition Between SBC and Ameritech 1. We begin our review of the proposed merger of SBC and Ameritech by examining the merger's likely effects on interactions between the merging firms, which represents one prong of our analysis of potential public interest harms. Until recently, carriers seeking to compete with incumbent LECs in local exchange and exchange access services markets had been prevented or deterred from entering due to legal, regulatory, economic and operational barriers. As such, these markets are currently undergoing a transition to competitive market conditions, as envisioned by the 1996 Act. Accordingly, as the 1996 Act is being implemented and local markets are opening to competition, it is necessary to use an analysis of competitive effects that accounts for the transitional nature of these local markets. This "transitional market" analysis is relevant to the examination of a merger under the Communications Act because the Act requires this Commission actively to promote the development of competition in telecommunications markets, not merely to prevent the lessening of competition, which is the policy objective of antitrust laws. 1. As explained in the WorldCom/MCI Order, our framework for analyzing these transitional markets reflects the values of, and builds upon, but does not attempt to copy, the "actual potential competition" doctrine established in antitrust case law. Under the actual potential competition doctrine, a merger between an existing market participant and a firm that is not currently a market participant, but that would have entered the market but for the merger, violates antitrust laws if the market is concentrated and entry by the nonparticipant would have resulted in deconcentration of the market or other pro-competitive effects. As the case law indicates, one obstacle facing parties bringing an actual potential competition case is to demonstrate that the acquired firm would have entered the relevant market absent the merger. The transitional markets framework set forth in the Bell Atlantic/NYNEX Order, which is well- tailored to the Commission's unique role as an expert agency and its statutory obligation to promote competition and to open local markets, identifies as "most significant market participants" not only firms that already dominate transitional markets, but also those that are most likely to enter soon, effectively, and on a large scale once a more competitive environment is established. The Commission seeks to determine whether either or both of the merging parties are among a small number of these most significant market participants, in which case its absorption by the merger will, in most cases, if not offset by countervailing positive effects, harm the public interest in violation of the Communications Act. 2. In this portion of the Order, we focus on the probable effects of SBC's acquisition of Ameritech on the provision of local exchange and exchange access services. In analyzing the competitive effects of the instant merger, we take into account that SBC and Ameritech, until recently, have been effectively precluded from competing in each other's local markets. We therefore examine the ability and incentive of both SBC and Ameritech to enter each other's previously closed market. We conclude therefore that it is appropriate to utilize the "transitional markets" analytical framework of the Bell Atlantic/NYNEX Order to determine whether this merger would result in a potential harm to the public interest in the provision of local exchange and exchange access services in SBC's or Ameritech's regions. 1. Local Exchange and Exchange Access Services a) Summary 1. We conclude that the merger causes a public interest harm by eliminating SBC and Ameritech as among the most significant potential participants in the mass market for local exchange and exchange access services in each other's regions. In the mass market for local exchange services, we conclude that both firms are most significant market participants in geographic areas adjacent to their own regions, and in out-of-region markets in which they have a cellular presence. We base this finding partly on our analysis of the plans of Ameritech to expand into St. Louis, and SBC's plans to expand into Chicago. In the larger business market for local exchange and exchange access services, SBC and Ameritech are only two of a larger number of actual and potential competitors in each other's regions. The merger would thus be less likely to have competitive effects leading to public interest harms in these markets. The exposition of our analysis of these competitive effects issues is necessarily truncated. Because much of the information concerning the parties' business plans has been submitted under a blanket of confidentiality, accordingly, a good deal of the information on which we rely here is explained only in Appendix B, to which access must be restricted. a) Relevant Markets 1. As the Commission explained in the BELL ATLANTIC-NYNEX Order, we begin our analysis of the proposed merger by defining the relevant product and geographic markets. We then consider whether the merger frustrates the Communications Act's goal of encouraging greater competition in relevant local markets. 1. Product Markets. We analyze the competitive effects of this merger on the provision of local exchange and exchange access services. As we explained in the WorldCom/MCI Order, to define relevant product markets we can identify and aggregate consumers with similar demand patterns. For purposes of analyzing the competitive effects of this merger on these services we identify two distinct relevant product markets: (1) residential consumers and small business (mass market); and (2) medium-sized and large business customers (larger business market). We distinguish mass market consumers from larger business customers because the services offered to one group may not be adequate or feasible substitutes for services offered to the other group, and because firms need different assets and capabilities to target these two markets successfully. 1. Geographic Markets. As we explained in the WorldCom/MCI Order, we aggregate into a relevant geographic market those customers facing similar choices regarding a particular relevant product or service in the same geographic area. In the instant merger proceeding, we focus on competition within metropolitan areas because all out-of-region expansion plans contemplated or undertaken by either Applicant targeted customers in metropolitan areas, as discussed in Appendix B. Indeed, at present and for the next few years, any local exchange and exchange access competition in both relevant product markets is likely to be confined to metropolitan areas. Any loss of potential competition by merger is therefore likely to affect primarily specific metropolitan areas. We focus on individual metropolitan areas because each may attract different levels of competition, and certain competitors, including the Applicants, may have particular strengths or unique assets in one metropolitan area compared with another. For instance, in St. Louis, Ameritech has advantages as a competitive LEC based on its cellular presence and as an incumbent LEC in an adjacent area. These considerations are relevant as we analyze the potential public interest harms below. 2. We reject arguments that we should modify or limit our geographic market definition. For example, the Applicants assert St. Louis and Chicago are the only geographic areas where they arguably would compete against each other. Although we agree with Applicants that the geographic areas of St. Louis and Chicago raise competitive concerns for local exchange and exchange access services, as discussed below, other metropolitan areas warrant examination. Some commenters contend that the relevant geographic market is everywhere SBC and Ameritech could have competed had they pursued their competitive LEC business independently of each other. Similarly, the Texas Office of Public Utility Counsel maintains the relevant market is the combined serving areas of SBC and Ameritech, rather than St. Louis and Chicago. The Texas Office of Public Utility Counsel further argues that, if telecommunications customers have locations nationwide, marketing managers will eventually consider the relevant market as a national market. We find that using our above stated approach, our analysis will include, but not be limited to, examination of these areas. We, therefore, find there is no need to modify our market definition, as the results of our analysis would be identical using any of these geographic market definitions. a) Market Participants 1. To analyze the probable effects of this merger on the relevant product and geographic markets, we first identify significant market participants. We note that incumbent LECs are still dominant within their regions, and therefore are included in the list of most significant market participants within their respective in-region markets. Next we consider, among other things, whether, but for the merger, either of the merging parties would be a significant potential competing provider of local exchange and exchange access services in the other's markets. We examine each of the merging firm's capabilities and incentives to provide local exchange and exchange access services outside the region in which it is an incumbent LEC, with particular emphasis on analyzing existing plans and any past attempts to do so. We then turn to an analysis of other firms that may be considered most significant market participants in the relevant markets to determine the competitive impact of the loss by merger of one of the Applicants as an independent entity. 1. As described in the Bell Atlantic/NYNEX Order, we identify the most significant market participants from the universe of actual and precluded competitors based on an analysis of the firms' capabilities and incentives to compete effectively in the relevant market. Of particular interest are those market participants that are likely to be at least as significant a competitive force as either of the merging parties. In determining the most significant market participants from the universe of actual and precluded competitors, we identify the market participants that have, or are most likely to gain speedily, the greatest capabilities and incentives to compete most effectively and quickly in the relevant market. 2. In prior merger orders, the Commission set out the various capabilities it considers in identifying the most significant potential competitors in local exchange and exchange access markets. Those capabilities include whether the firm: (1) has the operational ability to provide local telephone service (i.e., know how, and operational infrastructure, including sales, marketing, customer service, billing and network management); (2) could quickly acquire a critical mass of customers; (3) has brand name recognition, a reputation for providing high quality and reliable service, an existing customer base, or the financial resources to get these assets; and (4) possesses some significant unique advantages, such as a cellular presence in the relevant market. 3. In order to determine the likelihood that a firm that is not currently serving a relevant market nevertheless will enter this market in the future, we consider industry trends that may lead a firm currently serving one product, customer, or geographic segment to expand to other relevant markets. For instance, in a number of recent merger applications before the Commission, prior applicants have pointed to consumers' demand for "one-stop-shopping," and/or end-to-end-service that is in part justifying these Applicants' merger plans. In order to meet these demands, firms providing one service may choose to expand their offering to provide a whole range of products or expand to other geographic regions. 4. We consider all available evidence demonstrating that precluded competitors would likely have entered relevant markets. For instance, Applicants' plans or attempts to enter the relevant markets represent probative evidence of each Applicant's own perception that it possesses the capabilities and incentives necessary to be a significant participant in the market. We likewise look at unsuccessful plans to enter a relevant market in the past. Although a "failed" attempt might suggest that a firm is not a significant market participant, we would consider all relevant circumstances, including changes in market conditions that might facilitate successful subsequent entry and the strategic business consequences to a firm of failing to enter into a relevant market. Finally, the lack of entry plans does not eliminate a firm from being considered a significant market participant; rather, we consider whether the firm has the capabilities, and is likely to have the incentive, to become a significant market participant soon. 5. Applying this analysis to the instant merger, we find that eliminating Ameritech and SBC as actual or potential participants in the mass market for local exchange and exchange access services in each other's regions results in a substantial public interest harm by frustrating the achievement of the Communications Act's objective of fostering greater competition in these markets. This harm must be outweighed by compensating benefits if the license transfer is to be approved. (1) Mass Market 1. We find that, with respect to the mass market for local exchange and exchange access services, SBC and Ameritech have the capabilities and incentives to make each firm a most significant market participant in particular markets in each other's regions. First, as described in Appendix B, prior to the announcement of the proposed merger, SBC and Ameritech had plans to enter other incumbent LECs' regions, including each other's. Second, as incumbent LECs, SBC and Ameritech have certain advantages when expanding out-of-region that other potential local service market entrants lack. 1. Ameritech's Out-of-Region Plans. We find that Ameritech is not only a most significant market participant in SBC's territory but also, as described in Appendix B, had both the incentives and capabilities to become a significant market participant in the St. Louis mass market for local exchange and exchange access service. The fact that Ameritech, prior to merger negotiations, had not begun offering commercial local wireline services out-of-region to the general public does not establish that Ameritech lacked the capabilities and incentives to expand. As described in greater detail in Appendix B, we find that, but for the merger, Ameritech would have implemented Project Gateway and entered the St. Louis residential market. In project Gateway, Ameritech's cellular company in St. Louis planned to offer local service as part of a bundle first to residential, and then to small business customers. Applicants concede that uncertainties created by the planned merger were among the reasons for placing Project Gateway on hold. In addition, in testimony before the Illinois Commerce Commission, Ameritech admitted that it would have proceeded with the launch of Project Gateway had it not been for the merger. Specifically, Ameritech's internal documents show that the firm had already announced its intention to enter SBC's St. Louis market, and was actively implementing those entry plans at the time the merger was announced. Once the proposed merger was announced, Ameritech suddenly abandoned these plans. 2. Ameritech offers conceivable reasons for canceling Project Gateway besides the merger, but many or all of them had existed for a long time without causing it to be cancelled. Also, whatever the merits of these reasons, none of them is described in contemporaneous documents as the reason, or even a reason, for the cancellation. Indeed, there is no stated reason for the cancellation and no statement of a simultaneous event provoking cancellation in the documents Ameritech has provided to us. What did, in fact, occur simultaneously with the cancellation of Project Gateway was the agreement of Ameritech and SBC to merge. We conclude that Project Gateway was cancelled because SBC and Ameritech preferred to merge rather than compete in the mass market for local exchange and exchange access services in St. Louis and perhaps elsewhere. 3. Although Ameritech minimizes the competitive significance of its own independent entry absent the merger, the preponderance of the evidence demonstrates that Ameritech's portrayal is self-serving. Ameritech argues Project Gateway was resale-based, producing less competition than facilities-based entry. Next, Ameritech claims it lacked strong brand name recognition in St. Louis. Ameritech also argues it had problems implementing and launching the service in St. Louis because of difficulties interfacing with SBC's operations support systems (OSS). Lastly, Ameritech states it had difficulty pricing a bundle of services that would attract customers in St. Louis. 4. We disagree with Ameritech that its entry into St. Louis would have had a limited impact on that market. We find that absent the merger, it is highly likely that Ameritech ultimately would have made Project Gateway facilities-based. Although Ameritech initially relied on resale, this is typical of initial entry moves by competitive LECs. A competitive LEC's entry by resale may be a necessary first step to facilities-based competition. It is not per se a disavowal of it. In fact, Ameritech's documents indicate that it was considering facilities-based competition when it achieved sufficient scale to justify the related expenditure in capital, and that it began several steps that, if completed, would have made it a facilities-based competitor in St. Louis. Furthermore, we find that Ameritech's assertion that it lacks brand name recognition in St. Louis has no credibility. Ameritech had been aggressively promoting and providing its cellular service in St. Louis, under the Ameritech brand name, for many years. Ameritech's own documents show that it believed it had a strong brand name in St. Louis and that its brand name would enable it to compete effectively in the local service market there. Finally, it is significant to our analysis that SBC considered Ameritech to be a potential facilities-based provider of local service to the Missouri consumer market with strong brand name recognition. Therefore, we conclude that Ameritech is a significant market participant in the mass market for local exchange and exchange access services in St. Louis. 5. SBC's Out-of-Region Plans. The evidence indicates that SBC is a potential entrant for mass market local exchange and exchange access service in Ameritech's region. The evidence in the record indicates that SBC had plans to enter the mass market in Chicago, building off its cellular base in that city, and could thus be viewed as a potential entrant into this market. Support for this argument comes from SBC's own statements. For instance, in October 1996, SBC's James S. Kahan testified in the California SBC/PacTel merger proceeding that SBC had certain entry advantages in the Chicago market and therefore it "would make sense to enter the local exchange market in Chicago but not in Los Angeles." Kahan stated: In Chicago, we have an extensive wireless network consisting of 10 switches and over 600 cell sites. That network also includes extensive backbone network of microwave, leased facilities, and connections to a SONET ring. This network is supported by a sophisticated billing system, a responsive care unit, as well as sales and distribution marketing, accounting, finance, installation and maintenance and other personnel who reside in and understand the Chicago market. In addition, we have a well recognized brand name since we operate under the Cellular One name in Chicago. We also have a large existing customer base to which we send bills every month and to whom we could market services. 6. We conclude that SBC was a significant potential entrant into Ameritech's region; SBC disagrees. SBC argues that Rochester, New York, was a first experiment in out-of-region competition in local services, and that the experiment failed, ending out-of-region planning. Nevertheless, we base our conclusion in part on our analysis of the ability of SBC to pursue out- of-region opportunities using, in this instance, its out-of-region cellular assets. In addition, although it had no existing plans to enter out-of-region territories at the time of the merger, SBC's internal documents indicate the company contemplated such entry when the competitive landscape became clear, as discussed in Appendix B. Therefore, we conclude that SBC had the incentives to make it a significant potential market participant in the mass market for local services in out-of-region markets such as Chicago. Significantly, Ameritech also perceived SBC's potential entry into Chicago as a competitive threat to Ameritech. 7. Capabilities and Incentives. The Applicants' own plans, as well as the Commission's independent analysis, indicate that SBC and Ameritech each have the operational capabilities necessary to enter out-of-region markets. In general, each has the requisite access to the necessary facilities, "know how," and operational infrastructure such as customer care, billing, and related systems that are essential to the provision of local exchange services to a broad base of residential and business customers. These systems are required whether entry occurs through resale, use of UNEs, or some other form of facilities-based entry. SBC and Ameritech also possess special expertise as incumbent LECs that each could bring to the interconnection negotiation and arbitration process when entering out-of-region markets because of their intimate knowledge of local telephone operations and experience negotiating interconnection agreements with new entrants. 8. Moreover, in a number of areas, Ameritech and SBC have the additional advantage of adjacency, or a cellular presence, or both. Each company has an array of switches and switching locations that have capacity (or can be readily upgraded) to provide switching to contiguous territories. Thus, where they are contiguous, SBC or Ameritech can lease or build transport from their existing switches to a newly entered market more readily than other potential local service providers because of proximity to the newly entered market and their understanding of the requirements for local exchange services. Finally, both Ameritech and SBC have brand recognition in contiguous regions because of extensive advertising in media markets that cross these regions. Ameritech's research, for example, shows its brand recognition in St. Louis is so high that it essentially proves Ameritech is one of the "top two" telecommunications brand names among consumers in the market. The cellular assets that Ameritech and SBC possess in each other's regions also provide unique advantages for out-of-region entry. For instance, a cellular presence provides a ready customer base for expanding into wireline local telephony. 9. We therefore reject Applicants' claim that they should not be considered most significant market participants in out-of-region markets. Given the depth and breadth of Ameritech's expansion plans, we find it likely that Ameritech would have expanded into other SBC markets, in addition to St. Louis, but for the merger. We find it significant that Ameritech viewed Project Gateway as a "testbed" in which it could learn about competing with incumbent LECs in local service and long distance service, customer demand for bundles, and how to implement local and other services in a new area. Project Gateway, had it not been cancelled by Ameritech so that it could merge with SBC, would have given Ameritech insights and experience for later use about how best to enter additional out-of-region markets. One potential means for entry for Ameritech was to build on its larger business expansion plans, as described below. We also find that SBC may have expanded into Ameritech markets, such as Chicago, using its cellular bases spread throughout Ameritech's region. 10. As for other significant market participants, the dominance of each incumbent LEC in its own region makes it a most significant competitor in its own region. We also reaffirm our finding in prior decisions that the three largest interexchange carriers, AT&T, MCI (now MCI WorldCom), and Sprint are among the most significant participants in the mass market for local exchange and exchange access services. We find that these firms each have the capabilities, incentives, and stated intentions to serve the mass market for local exchange services. All three firms already have a substantial base of residential customers of their long distance services and established brand names resulting from their marketing of these services. Thus, these firms are among the best positioned to provide local services to residential customers. Further, their stated intentions to begin serving the mass market for local services underscores their position as being among the most significant competitors. Nevertheless, in certain regions, such as adjacent territories or cellular markets, where incumbent LECs have brand name and/or customer base advantages similar to those enjoyed by the interexchange carriers with their customers, incumbent LECs have the additional advantage of their experience in providing local services to mass market customers as incumbent LECs. 11. Other firms, currently serving or planning to serve the mass market for local exchange and exchange access services out-of-region, are not yet included in the list of most significant market participants. Competitive LECs have begun serving residential markets but do not yet have the existing customer base and brand name that enable AT&T, MCI, and Sprint, as well as certain incumbent LECs, to become most significant competitors. (1) Larger Business Market 1. We find that the larger business local exchange market has a number of market participants with similar incentives and capabilities as an incumbent LEC expanding out-of-region. As the Commission found in earlier orders, incumbent LECs still dominate the market for local exchange and exchange access services sold to larger business customers in their regions and are therefore most significant market participants. We recognize, as we observed in the WorldCom/MCI Order, that in contrast to the relative lack of competition incumbent LECs face in the market for local services sold to mass market customers, incumbent LECs face increasing competition from numerous new facilities-based carriers in serving the larger business market. We note that this competition lessens the potential public interest benefits of SBC or Ameritech expanding out-of-region in the larger business market for local exchange and exchange access services. 1. As with the mass market, incumbent LECs have significant capabilities and incentives to expand into the market for larger business customers out-of-region. Prior to the merger Ameritech was offering out-of-region services to its larger business customers, and had already entered several metropolitan areas in SBC's territory as part of its Managed Local Access (MLA) Program. In its MLA program, Ameritech offered local service in a number of out-of- region states to its largest business customers. Ameritech began to implement MLA in 1997. As of February 2, 1999, Ameritech had negotiated interconnection agreements and was certificated to provide local service as a reseller and/or facilities-based carrier in three SBC states California, Missouri, and Texas. Ameritech asserts that it cancelled the program in June 1998 because it was unable to win customers. The Commission nevertheless agrees with the commenters that argue that Ameritech is a significant potential entrant in the larger business markets in California, Missouri, and Texas. We base this conclusion on our analysis of the ability and incentive of Ameritech to expand out-of-region to serve larger business. The MLA program provides evidence of the incentives of Ameritech to expand out-of-region, if not the ability to do so. 2. Although both SBC and Ameritech are significant market participants in the larger business market for local exchange and exchange access services, unlike in the mass market for local exchange and exchange access services, a large number of other firms may have similar capabilities and incentives expanding out-of-region to serve larger business customers. As we have noted, the larger business market for local exchange and exchange access services differs from the mass market. Larger business customers in general tend to be more sophisticated and knowledgeable purchasers of telecommunications services than mass market customers. A significant difference between the mass market for local services and the larger business market for local services is that larger business customer purchases are not limited to a single local metropolitan geographic area; rather, they purchase simultaneously in numerous local markets. Ameritech's MLA program and the Applicants' National-Local Strategy are examples of how larger business customers' purchasing patterns are targeted by following larger business customers out-of-region. Finally, broad-based brand name recognition and mass advertising are less important in attracting larger business customers. As a result, many more firms are entering the larger business market successfully than are entering the mass market for local exchange services, and the merger is therefore less likely to have adverse public interest effects in the larger business market for local services. a) Analysis of Merger's Effects 1. We seek to determine whether the merger of Ameritech and SBC is likely to cause a public interest harm by reducing the level of competition in any relevant local market. One of the major purposes of the Act, that we seek here to further, is to lower the entry barriers that gave incumbent LECs monopoly control over the local services offered to customers in their regions. The Act's goal was to introduce competition in these markets to the ultimate benefit of customers, both as entrants attempted to win consumers' business with lower prices and improved services, and as incumbents were forced in turn to respond to the entrants or lose customers. The realization of this goal is jeopardized if the incumbent and one of the most significant competitors in its region choose to merge instead of compete. This is true even if this competitor has not yet entered during the transitional period while entry barriers are being eliminated, as the merger will eliminate future entry and any corresponding competitive restraint this would place on the incumbent. 1. In the instant merger analysis, we conclude above that both SBC and Ameritech have the capabilities and incentives to expand into the mass market for local exchange and exchange access services in geographic markets adjacent to their own regions or ones in which they have a cellular presence. SBC and Ameritech are thus among the most significant potential competitors in these markets in each other's regions. Therefore, the merger of SBC and Ameritech would lessen competition in these markets, resulting in a potential public interest harm. In the larger business market for local exchange and exchange access services, we conclude above that SBC and Ameritech are among a significant number of actual and potential competitors in each other's regions. Therefore, the merger would be unlikely to lessen competition in these markets and we find little corresponding public interest harm. (1) Competitive Effects on Mass Market Local Services 1. St. Louis. In our analysis of the ability and incentives of incumbent LECs to expand out-of-region, we focus on the advantages that incumbent LECs have when expanding into adjacent regions or regions in which they already have a cellular presence. In St. Louis, Ameritech enjoys both advantages. Indeed, as discussed above, Ameritech did have plans to enter the St. Louis market. We therefore focus our discussion first on the St. Louis market, before turning to other general regions. 2. We find that the merger will result in the elimination of Ameritech as a significant market participant in the mass market for local services in St. Louis. Consequently, the proposed merger will reduce the level of competition in this market, and thereby result in a significant public interest harm. As discussed above, we base this conclusion on the following. First, until the merger was negotiated, Ameritech was entering the mass market for local services in St. Louis. Second, we find that Ameritech was among the most significant competitors to SBC in St. Louis. We base this finding on our conclusion that Ameritech, as an incumbent LEC, has the operational experience to be able to offer local exchange services on a large-scale in out-of-region markets. In addition, Ameritech had a number of advantages for entering St. Louis, including its St. Louis wireless customer base and brand reputation, and its adjacency to St. Louis. The only other most significant potential market participants in the mass market for local services in St. Louis are the major interexchange carriers, with their ability to capitalize on their brand name and existing customer base. We conclude, therefore, that the merger will eliminate Ameritech as one of a very limited number of most significant market participants in the mass market for local services in St. Louis, and thereby will result in a public interest harm. 3. We therefore concur with DOJ's conclusions that Ameritech planned to begin offering wireline local exchange services to mass market customers in St. Louis prior to the merger announcement, as well as the absence of other firms with similar intentions. Nevertheless, we conclude that the divestiture of Ameritech's cellular assets required by DOJ, standing alone, does not mitigate the public interest harms outlined in this section. As discussed above, the public interest standard that governs the Commission's review is broader than the antitrust analysis undertaken by the DOJ. In particular, we find that the merger may delay the future development of competition or lessen its eventual impact, contrary to the intention of the 1996 Act. Specifically, we find that the merger will result in a significant public interest harm in the provision of local exchange services to the mass market in St. Louis and elsewhere, despite the divestiture of Ameritech's cellular assets. 4. We reach this conclusion based on our analysis of the capabilities, incentives, and intentions of Ameritech to expand into St. Louis, and our corresponding finding that GTE Consumer Services Incorporated (GCSI), the purchaser of Ameritech's St. Louis cellular assets is not likely to be as significant a competitor to SBC's residential wireline services as was Ameritech. First, we note that GCSI meets the requirement specified in DOJ's Proposed Final Judgment, if it "has the capability of competing effectively in the provision of local exchange telecommunications services and long distance telecommunications service in the St Louis Area." This specific language clearly indicates that DOJ only wishes to require that GCSI demonstrate the capability to use these assets to provide local services in St. Louis, but not the specific intention to so use them. We note that although GCSI has the capability of providing local services in the St Louis Area, based on the record before us, it lacks the adjacency, incentive and stated intention to provide wireline local exchange services in St. Louis that in combination with its brand name recognition gave Ameritech its advantages in entering the St. Louis market. It is therefore unlikely that GCSI could demonstrate the same incentive, and intention to provide wireline local exchange services for mass market customers in St. Louis as Ameritech. We therefore conclude that the merger leads to a public interest harm in the St. Louis market despite the divestiture of Ameritech's cellular assets, although divestiture to a firm with the ability to extend the wireless business to a genuine wireline threat does mitigate the significance of the harm. 5. Other Regions. We further find that, as elaborated in Appendix B, the fact that SBC had no current plans to enter any mass market for local exchange and exchange access services out-of-region, and the fact that Ameritech's plans focused on St. Louis, do not preclude a finding that each was a significant potential mass market participant in other regions. We base this finding on the transitional market analysis articulated in the Bell Atlantic/NYNEX Order, stating that in transitional markets such as the local markets examined here, the Commission may consider future entry in its analysis of the competitive effects of a merger. As discussed in Appendix B, Ameritech was expanding elsewhere into SBC's region as part of its MLA program. Combining the MLA foothold in the larger business market in these regions with the benefits of Ameritech's experience as an incumbent LEC, along with additional experience that it would have accrued as a competitive LEC in St. Louis, we find that Ameritech had the capabilities and incentives to further expand into the mass market for local services in SBC's region. The divestiture of Ameritech's cellular assets in St. Louis does not provide any assurance that the purchaser will expand beyond St. Louis as Ameritech was likely to have done. Although SBC would not have adjacency benefits in most of Ameritech's region, combining its experience as an incumbent LEC with its cellular assets, notably in Chicago, but also elsewhere in Ameritech's region, we find that SBC had the capabilities and incentives to expand into the mass market for local services in Ameritech's region. 6. Therefore, we find that the merger of SBC and Ameritech results in the loss of a most significant potential competitor in the provision of mass market local exchange services in portions of each other's regions, resulting in a potential public interest harm. The harm is significant because both firms are among a very few that are poised on the edge of an entrenched monopolist, with genuine abilities to challenge that monopolist. These harms, although real and substantial, nevertheless may not be enough, in and of themselves, to justify prohibiting the merger. Neither firm was likely to enter most of the other's territory. Throughout both territories, at least three interexchange carriers are also significant actual or potential entrants. The divestiture of Ameritech's wireless St. Louis operation to GTE somewhat mitigates the merger's effects in that city. Were the loss of each firm's entry into the other's territory the only public interest harm produced by this merger, the overall balance would be much closer. (1) Effects on Larger Business Market 1. With respect to the provision of local exchange access services to larger business customers, we find that, absent the merger, Ameritech is likely to have followed a number of its large business customers in a number of out-of-region states in SBC's territory, as documented by Ameritech's plans to offer local exchange services via its MLA program, and that SBC had the capabilities and incentives to expand out-of-region in a similar fashion, despite the absence of concrete plans. We also find that there are a number of significant competitors equally competitive with SBC and Ameritech in these markets. Therefore, although SBC and Ameritech are significant market participants, we do not find that their elimination, as a result of the merger, would substantially frustrate the goals of the Act and harm the public interest in the provision of local exchange and exchange access services sold to larger business customers. 1 Comparative Practices Analysis 1. In this section, we analyze the effect of the proposed merger on the ability of regulators and competitors to use comparative analyses of the practices of similarly-situated independent incumbent LECs to implement the Communications Act in an effective, yet minimally intrusive manner. Such comparative practices analyses, referred to by some commenters as "benchmarking," provide valuable information regarding the incumbents' networks to regulators and competitors seeking, in particular, to promote and enforce the market-opening measures required by the 1996 Act and the rapid deployment of advanced services. Without the use of this tool, regulators would be forced, contrary to the 1996 Act and similar state laws, to engage in less efficient, more intrusive regulatory intervention in order to promote competition and secure quality service at reasonable rates for customers. We find that the proposed merger of SBC and Ameritech would pose a significant harm to the public interest by severely handicapping the ability of regulators and competitors to use comparative practices analysis as a critical, and minimally- intrusive, tool for achieving the Communications Act's objectives. 1. The Commission's public interest test considers, among other things, "whether the merger . . . would otherwise frustrate our implementation or enforcement of the Communications Act and federal communications policy." In past incumbent LEC mergers, the Commission has recognized that the declining number of independently-owned major incumbent LECs limits the effectiveness of benchmarking for regulators in carrying out the goals of the Communications Act. In the Bell Atlantic/NYNEX Order in particular, the Commission observed that, as the number of independent large incumbent LECs declines, regulators and competitors lose the ability to compare policies and performance among major incumbents that have made divergent management or strategic choices. Consequently, in allowing the Bell Atlantic/NYNEX merger, the Commission expressly cautioned that "further reductions in the number of Bell Companies or comparable incumbent LECs would present serious public interest concerns." The Commission went on to warn that "future applicants bear an additional burden in establishing that a proposed merger will, on balance, be pro-competitive and therefore serve the public interest, convenience and necessity." The Applicants have not overcome that burden. 2. Following the concerns expressed in the Bell Atlantic/NYNEX Order, and SBC's prior acquisitions of Pacific Telesis and SNET, we must consider the effect that a further reduction in the number of large incumbent LECs would have on the ability of regulators and competitors to use comparative practices analyses as a deregulatory means to advance the pro- competitive goals of the Communications Act. We find, as the Commission concluded in the Bell Atlantic/NYNEX Order, that the major incumbent LECs (RBOCs and GTE), because they are of similar size and face similar statutory obligations and market conditions, remain uniquely valuable benchmarks for assessing each other's performance. It follows that a reduction in the few remaining major incumbent LECs would restrict the flow of information to regulators and competitors that otherwise could be used to promote innovative market-opening solutions or to identify and curtail unreasonable and discriminatory behavior. 3. As discussed in greater detail below, we find that the proposed merger's elimination of Ameritech as an independent major incumbent LEC will significantly impede the ability of this Commission, state regulators and competitors to use comparative practices analyses to discover beneficial, pro-competitive approaches to open telecommunications markets to competition and to promote rapid deployment of advanced services. More specifically, the loss of Ameritech as an independent source of strategic decisions and experimentation, and the increased incentive for the merged entity to reduce autonomy at the local operating company level as a result of the merger, would severely restrict the diversity that regulators and competitors otherwise could observe and, where pro-competitive, endorse. By further reducing the number of major incumbent LECs, the merger also increases the risk that the remaining firms will collude, either explicitly or tacitly, to conceal information and thereby hinder regulators' and competitors' benchmarking efforts. We therefore conclude that the proposed merger of SBC and Ameritech would impede the ability of regulators and competitors to make effective benchmark comparisons, which would force more intrusive, more costly, and less effective regulatory measures contrary to the 1996 Act's deregulatory aims and the interests of both the regulated firms and taxpayers. The loss of this more efficient method of oversight can only serve to further entrench the large incumbent LEC's substantial market power. 4. Our analysis of the effect on comparative practices analysis of SBC's acquisition of Ameritech discusses: (1) the need for comparative practices analyses to offset the informational disadvantage of regulators and competitors; (2) the impact of a reduction in the number of comparable firms on benchmarking's effectiveness; (3) examples of the use of comparative practices analysis by regulators and competitors to evaluate practices of the large incumbent LECs both prior to and following the 1996 Act; (4) the adverse impact of the proposed SBC/Ameritech merger on the effectiveness of comparative practices analyses; and (5) the present inadequacy of other alternatives to large incumbent LEC benchmarks. 1. Need for Comparative Practices Analyses 1. For regulators and competitors, comparative analyses of the practices and approaches of a variety of similarly situated incumbent LECs can render valuable information regarding network features, capabilities and costs. The 1996 Act requires regulators to oversee the opening of local telecommunications markets to competition and to promote rapid deployment of advanced services under circumstances in which regulators possess far less accurate and less complete information than incumbent LECs about the capabilities and constraints of existing networks. Without such information, regulators and competitors may not be able to make informed decisions regarding the feasibility and costs of certain interconnection or access arrangements, particularly when disputes arise over the introduction of new, unproven technologies or services. The incumbent LEC's superior knowledge also gives it a decided advantage over competitors in negotiating prices, terms and conditions for interconnection or network access. 2. In addition, incumbent LECs, which are both competitors and suppliers to new entrants, have strong economic incentive to preserve their traditional monopolies over local telephone service and to resist the introduction of competition that is required by the 1996 Act. More specifically, an incumbent LEC has an incentive to: (1) delay interconnection negotiations and resolution of interconnection disputes; (2) limit both the methods and points of interconnection and the facilities and services to which entrants are provided access; (3) raise entrants' costs by charging high prices for interconnection, network elements and services, and by delaying the provisioning of, and degrading the quality of, the interconnection, services, and elements it provides. An incumbent LEC has similar, and probably greater, incentive to deny special accommodations required by competitive LECs seeking to offer innovative advanced services that the incumbent may not even offer. As noted at the outset, this view of the incumbent LECs' incentives and abilities is the fundamental postulate of the basic cornerstones of modern telecommunications law the MFJ and the 1996 Act. 3. Given these incentives to resist competitive entry, independent incumbent LECs, absent collusion, are likely to adopt different defensive strategies to forestall competitive entry, and each particular strategy will reveal information to regulators and competitors. One incumbent LEC may claim, for example, that a particular form of interconnection is infeasible, while a second may resist the unbundling of a particular network element, and a third may oppose the collocation of specific types of equipment within its central offices. In such situations, the behavior of other major incumbent LECs can be used as benchmarks to evaluate the outlying incumbent's claims. Competitors, in negotiating and implementing access and interconnection arrangements, could point to the conduct of one incumbent to rebut another incumbent's assertion that a particular service is not feasible or must be structured or priced in a particular manner. Comparative practices analysis does not require this Commission to assume the more expensive and intrusive posture of imposing arduous reporting requirements and dictating how networks should be organized and operated. Comparing the practices of a large number of similarly-situated incumbents provides a minimally-intrusive means for regulators and competitors to counterbalance the incumbents' superior knowledge of the possible technical arrangements for collocation, unbundled access, and interconnection, as well as the costs associated with such arrangements. 1. The ability to analyze a wide variety of approaches among the major incumbent LECs is especially crucial for regulators and competitors in implementing the provisions of the 1996 Act that mandate competitive access to facilities and services. As regulators seek to open local telecommunications markets and promote advanced services deployment using deregulatory means, they benefit greatly from observing diverse strategic decisions and experimentation among the incumbents. The Applicants themselves acknowledge that the introduction of local competition has "both accelerated and been accompanied by rapid technological developments." Comparative practices analyses are perhaps the regulators' and competitors' best means of staying abreast of such rapid technological advances, particularly in assessing the technical feasibility of novel access and interconnection configurations vital for the provision of new services and technologies. 2. In analyzing comparative practices, regulators and competitors generally use two broad methods of comparison "best-practices" and "average-practices" benchmarking. It is not unusual, however, for comparative practices analyses to involve a combination of these approaches. 3. Best-Practices. Under "best-practices" benchmarking, a regulator compares behavior across a group of similarly situated, independent firms in order to identify the best practice employed by a firm, or subset of firms. When individual incumbent LECs adopt a variety of techniques or technologies to provide a particular service, regulators and competitors can compare the costs and benefits of each technique to arrive at a "best practice," which presumptively could be promoted or required of all incumbents. If one or two incumbent LECs, for example, offered requesting carriers cageless collocation, this would call into question the claims of other incumbent LECs that cageless collocation threatened the reliability of the network. Alternatively, if several similarly-situated incumbent LECs provide widely varying estimates of the cost of providing a certain service, then the low cost estimate would call into question the accuracy of the higher cost estimates. 4. Average-Practices. Under "average-practices" benchmarking, a regulator gathers data from a number of firms in order to identify the prevailing standard or to calculate the average, which then could be used as a benchmark against which to evaluate an individual LEC's performance. Substantial deviation from the benchmark average can assist regulators and competitors in detecting substandard, and potentially unreasonable, behavior, such as poor service quality or unreasonable costs. Variations of this form of comparative practices analysis also can be used to monitor service quality or to detect unreasonable or discriminatory costs or practices. The Commission's calculation of the X-factor based on industry-wide increases in productivity, which was then applied to all "Price Cap LECs," is another use of average-practices benchmarking. To be effective, however, average-practices benchmarking requires data from a large number of independent, similarly situated incumbent LECs, none of which is large enough to dominate, or skew, the aggregate data. In such a situation, an individual LEC's action would have little impact on the average benchmark, and an incumbent LEC would have no incentive to deviate from its individually optimal behavior in order to affect that average benchmark. 5. Absent the ability to benchmark among major independent incumbent LECs, this Commission and state regulators would have no choice but to engage in highly intrusive regulatory practices, such as investigating the challenged conduct directly and at substantial cost to make an assessment regarding its feasibility or reasonableness. The increased need for such direct regulation would not only be more costly, but it would clash with the deregulatory goals of the 1996 Act. Furthermore, these more intrusive and costly regulatory alternatives are unlikely to be as effective as comparative practices analysis in implementing the pro-competitive mandates of the 1996 Act, given the rapid evolution of technology, the incumbent LECs' informational advantage and their incentive to conceal such information. 1. Effect of Reduction in Number of Benchmarks 1. In order to render a variety of policies and practices for regulators and competitors to observe and analyze, comparative practices analysis requires a large number of comparable independent sources of observation. For this reason, mergers between benchmark firms significantly weaken the effectiveness of this tool. Removing a benchmark firm through a merger reduces the independence of the sources of observation at three levels: (a) the holding company level, as policies of the acquired firm that conflict with those of the acquiring firm are eliminated; (b) the local operating company level, as the holding company's incentive to impose uniform practices throughout its expanded region increases; and (c) the industry level, as the incentives and capabilities of the few remaining major incumbent LECs to coordinate their behavior increase. In addition, the loss of an independent incumbent LEC will have a greater impact on reducing benchmarking's effectiveness the larger the region of the combined entity and the smaller the number of similarly-situated firms remaining following the merger. a) Effect at Holding Company Level 1. A merger of two large incumbent LECs obviously eliminates an independent source of observation at the holding company level. The combined entity is unlikely to continue with two sets of policies and practices where the dual policies conflict with one another. Instead, it is likely to eliminate any divergent approaches in favor of a standard policy (which may represent a choice between the two firms' positions or a compromise). The acquiring firm has a particularly strong incentive to eliminate conflicting policies of the acquired firm that would jeopardize its chosen strategy to resist competitive entry. Consequently, as the Commission explained in the Bell Atlantic/NYNEX Order, the result of the merger may be a reduction in the level of experimentation and variety of approaches observable to regulators and competitors. 1. When only a few similarly-situated benchmark firms remain, the harms to benchmarking increase more than proportionately with each successive loss of a firm as an independent source of observation. As the number of independent sources of observation declines, there is less likelihood that a significant "maverick" will emerge to undertake a strategic or management decision that departs from the other incumbents, and that may establish a best practice in the industry. Moreover, the best observed practice is likely to become worse simply because there are fewer observations. Finally, as the number of independent sources of observation decreases, deviations from average practices can be identified less confidently as unreasonable and punishable. 2. Having a significant number of independent points of observation is especially crucial for regulators and competitors in decisions regarding new services and innovative technologies. Such decisions are likely to entail forecasting the expected benefits, costs, timing, and problems associated with the provision and maintenance of such services and innovations. Although it is impossible to make such predictions with certainty, the existence of numerous major incumbent LECs increases the information available to regulators in evaluating whether or when to require the new service or innovation, and in setting rates. Conversely, having few major incumbent LECs to serve as independent points of observation can undermine the credibility of such determinations. a) Effect at Operating Company Level 1. A merger of two holding companies also is likely to reduce the relative autonomy of their local operating companies and hence the overall level of experimentation and diversity for decisions that were made at the operating company level. Holding companies typically impose certain constraints on their operating companies. Accordingly, when two holding companies with distinct policies merge and adopt one common set of policies, the decisions made by the operating companies of the acquired holding company will become more closely correlated with the decisions made by the operating companies of the acquiring holding company. Furthermore, the expansion in the combined entity's service region results in a greater incentive to shift more decisions from the operating company level to the holding company level. 1. As a holding company's size increases, the cost it incurs when one of its operating companies' practices is used as a benchmark against the rest of the company also increases. For example, if each of the merging firms previously had five local operating companies, then each of these holding companies would have been concerned only with the cost of adopting a benchmark practice for its four other operating companies. Following the merger, however, the holding company would have to consider the cost of adopting this benchmark practice for a total of nine other operating companies. Accordingly, as a holding company acquires more operating companies and its service region expands, it