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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of Intermedia Communications Inc., Transferor, and WorldCom, Inc., Transferee, for Consent to Transfer Control of Corporations Holding Commission Licenses and Authorizations Pursuant to Sections 214 and 310(d) of the Communications Act and Parts 21, 63, 90, 101 ) ) ) ) ) ) ) ) CC Docket No. 00-206 MEMORANDUM OPINION AND ORDER Adopted: January 17, 2001 Released: January 17, 2001 By the Chief, Common Carrier Bureau; Chief, International Bureau; and Deputy Chief, Wireless Telecommunications Bureau: I. INTRODUCTION 1. On October 23, 2000, WorldCom, Inc. ("WorldCom") and Intermedia Communications, Inc. ("Intermedia") filed a joint application pursuant to sections 214 and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  214, 310(d), requesting Commission approval to transfer control to WorldCom of Commission licenses and authorizations held by Intermedia. In this Order, we approve the wireless, international and domestic wireline transfer of control application filed by WorldCom and Intermedia (collectively, the "Applicants"), pursuant to sections 214 and 310(d). Based on the record, we conclude that approval of the transfer of wireless licenses, international section 214 authorizations, and domestic blanket section 214 authorization from Intermedia to WorldCom will serve the public interest, subject to the condition that Intermedia and its subsidiaries shall be regulated as dominant in their provision of service on the U.S.-Brazil route. II. Background 3. WorldCom is a provider of facilities-based local, long distance, and international telecommunications services, as well as Internet and Internet-related services. WorldCom's subsidiary, UUNET, is a major provider of Internet backbone services. Intermedia provides integrated data and voice communications services, including frame relay services, Internet connectivity, private line data, local, long distance, international and systems integration services to approximately 90,000 business and government customers throughout the United States. In addition, Intermedia provides wholesale carrier services, and domestic long distance carriage and local termination and origination services for international telecommunications carriers. Intermedia also owns a controlling interest in Digex, Inc. (Digex), a publicly traded subsidiary that provides managed web-hosting services to businesses operating mission-critical, multi- functional websites. To facilitate the acquisition of Intermedia, WorldCom created Wildcat, a wholly-owned subsidiary of WorldCom that will merge into Intermedia. 4. On November 17, 2000, prior to the closing of the public comment period in this proceeding, the Department of Justice (Department) announced it had reached a settlement agreement with the Applicants to resolve antitrust concerns that the acquisition would result in higher prices and lower quality of services in the Internet backbone market. The agreement, detailed in a proposed consent decree, calls for WorldCom and Intermedia to divest, within six months after the close of the merger, all the "Intermedia Assets," defined as all business operations and assets of Intermedia except for the capital stock of Digex. On November 10, 2000, the Applicants notified the Commission of their agreement with the Department, and the Department's Hold Separate Stipulation and Order, which requires Intermedia to "preserve, maintain, and continue to operate the Intermedia Assets as an independent, ongoing, economically viable competitive business, with management, sales, and operations of such assets held entirely separate, distinct, and apart from those of WorldCom's operations" until WorldCom and Intermedia obtain the regulatory approvals required to close the divestiture. The Applicants noted that "[t]he Commission, of course, will have an opportunity to review the subsequent transaction [involving the sale of the Intermedia assets], as WorldCom must file an additional application to transfer control of the Intermedia assets to a third party, once that third party has been identified." 5. On December 6, 2000, the Commission received one comment concerning the transfer of control, a petition to deny submitted by AT&T. On December 19, 2000, the Applicants filed their reply comments. VI. discussion 7. Before the transfer of control of authorizations and licenses can be approved in connection with a merger, sections 214(a) and 310(d) require that we determine that the proposed transfers serve the public interest. We weigh the potential public interest harms against the potential public interest benefits, considering both the possible competitive effects of the proposed transfers and the broader aims of the Communications Act and federal communications policy. In particular, we consider: (1) whether the merger would violate the Communications Act; (2) whether the merger would violate Commission rules; (3) whether the merger would frustrate the Commission's efforts to enforce the Communications Act or substantially interfere with achievement of the objectives of the Act; and (4) whether affirmative public interest benefits would be realized as a result of the merger. Applicants bear the burden of proving by a preponderance of the evidence that the transaction serves the public interest. 8. We conclude that the pending merger, as modified by the proposed consent decree, will not result in a violation of the Communications Act or the Commission's rules and will not undermine the Commission's ability to enforce the Communications Act or substantially interfere with the objectives of that Act. In addition, we find that the proposed merger, specifically WorldCom's acquisition of Intermedia's web-hosting business, Digex, is likely to serve the public interest by increasing competition for next-generation data services provided to business customers. 1. Potential Public Interest Harms 9. Pursuant to the consent decree entered into with the Department, WorldCom must divest all the Intermedia assets with the exception of the Digex web-hosting business. Accordingly, we find that the merger, so conditioned, will result in no change in market concentration, with the exception of web-hosting, where the increase would be minimal. For this reason, we find that this transaction is not likely to result in any public interest harms. Further, we note that only a single commenter, AT&T, alleges there are any potential public interest harms associated with this merger. 10. We view the instant transaction as an "interim" transfer of licenses and authorizations that will not adversely impact the Commission's goals or violate Commission rules. Once a third-party purchaser is identified, we will review the subsequent transfer of control of the Intermedia assets to ensure the public interest is served and that the sale does not violate the Communications Act or Commission rules, frustrate Commission goals under the Communications Act, or is otherwise not in the public interest benefits. The Department's "hold separate" order requiring Intermedia to operate independently of WorldCom while WorldCom searches for a third party purchaser reduces WorldCom's incentive and ability to favor Intermedia in a manner that would harm competition. 11. AT&T urges the Commission to reject the application on the ground that the merger of WorldCom and Intermedia would have "obvious anticompetitive vertical effects" due to WorldCom's "near dominance of the Internet backbone market, and the need of web-hosting companies to interconnect with that backbone." According to AT&T, the merger would enable WorldCom to use its Internet backbone business to harm competitors who provide web-hosting services by degrading quality of service and raising the costs to those competitors associated with interconnecting to the Internet. As the Applicants point out, the Commission does not regulate Internet-related businesses such as web-hosting services. The Commission has in other proceedings, however, considered a merger's competitive effects on ancillary services that the Commission does not directly regulate. Assuming, without deciding, that it is appropriate to consider AT&T's claim in the instant proceeding, we reject AT&T's analysis. 12. Assuming for purposes of our analysis that AT&T is correct that WorldCom possesses "near dominance" over Internet backbone services, AT&T presents no evidence that such asserted "near dominance" would be sufficient to support a conclusion that WorldCom will be able to leverage its current Internet backbone market position in an anti-competitive way. As an initial matter, we note, as WorldCom points out, that WorldCom and Digex offer distinctly different types of web-hosting services and that their respective shares of web hosting business are small. Moreover, Digex's Form 10-K filed with the United States Securities and Exchange Commission for the year ended 2000 (Digex 10-K), identifies numerous horizontal competitors in the provision of web-hosting services, including MCI WorldCom, AT&T, Cable & Wireless, Concentric Network, Data Return, EDS, Exodus Communications, Frontier/Global Center, Globix, GTE, IBM, Intel, Level 3 Communications, Navisite, PSINet, Qwest Communications International, and US Internetworking. Several of these competitors own Internet backbone networks and could provide sufficient Internet connectivity for purposes of web-hosting if WorldCom degraded service to web-hosting companies that competed against Digex. Significantly, Digex's 10-K points out that Digex currently receives most of its capacity and network services from Intermedia and has found such facilities sufficient to compete. After the divestiture of Intermedia's assets, including the Internet assets, the Intermedia network would be available to serve any web-hosting customers disgruntled with the quality of Internet backbone service received from WorldCom. Moreover, web-hosting companies, including Digex and its competitors, require redundant Internet connectivity. If WorldCom were to raise price or degrade connection quality of Internet backbone service provided to rivals of Digex, WorldCom could very well lose customers of its backbone business because these customers would shift more business to the alternative backbone rather than adding customers to Digex's web-hosting business. Therefore, even assuming that the matter is appropriate to consider in this proceeding, we disagree with AT&T's analysis that the merger could grant Digex an "unfair" advantage and harm web-hosting competitors. 13. Similarly, we disagree with AT&T that the addition of Digex's web-hosting business will "entrench UUNet's near dominance of the Internet backbone." AT&T provides no support for this conclusory assertion. As the Applicants point out, even if all the Digex traffic were shifted to WorldCom, the incremental gain in traffic would likely be insignificant. Therefore, we reject AT&T's claim that the merger will have anti-competitive vertical effects. 14. We also find no basis in the record to conclude that the transfer of wireless licenses would result in anti-competitive effects. We received no comments on the proposed transfer of control of the wireless licenses. We therefore approve the transfer of wireless licenses specifically, the Common Carrier Microwave and Private Land Mobile licenses. 15. We find no basis in the record to conclude that the proposed merger would have anti- competitive effects in any U.S. international services market. We received no comments on the proposed transfer of control of Intermedia's international section 214 authorizations to WorldCom. Pursuant to section 63.18(h)(1) of the Commission's rules, Applicants have identified the foreign carrier affiliates of WorldCom, which will become the foreign carrier affiliates of Intermedia after the merger. Applicants certify that all of WorldCom's foreign carrier affiliates lack market power in their home markets, except Embratel S.A. ("Embratel"), a provider of intra-city and international transport communications services in Brazil. WorldCom is regulated as dominant on the U.S.-Brazil route, pursuant to section 63.10(a) of the Commission's rules and Commission order. Applicants state that Intermedia and its subsidiaries currently holding international section 214 authority accept dominant carrier regulation on the U.S.-Brazil route due to Intermedia's proposed affiliation with WorldCom. We conclude that it is in the public interest to authorize the transfer of control of the international section 214 authorizations held by Intermedia and its subsidiaries to WorldCom and find that Intermedia and its subsidiaries will now be subject to regulation as dominant carriers on the U.S.- Brazil route, due to their affiliation with Embratel. 1. Potential Public Interest Benefits 16. We find that the merger is likely to serve the public interest because WorldCom's acquisition of Digex will more quickly provide WorldCom with resources it currently lacks, making WorldCom a stronger competitor in the provision of next generation communications services to business customers. Therefore, we reject AT&T's claim that the proposed merger offers no "legitimate benefits." Applicants describe Digex as possessing "state of the art" web- hosting assets that complement WorldCom's current provision of "basic collocation and simple shared and dedicated web-hosting services, as well as some managed web-hosting services." Given this, we find it likely that the merger will improve WorldCom's ability to provide the support structure and automated systems necessary for providing mission critical hosting products and services for mid- to large-sized business customers. XVII. Conclusion 18. Because we find that the potential public interest benefits exceed any potential harms, we approve the transfer of the wireless licenses, and international and domestic wireline section 214 authorizations associated with this merger. XIX. ORDERING Clauses 20. Accordingly, having reviewed the Applications and the record in this matter, IT IS ORDERED, pursuant to sections 4(i) and (j), 214(a) and (c), 309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 214(a), 214(c), 309 and 310(d) that the application to transfer wireless licenses, and international and blanket domestic section 214 authorization filed by WorldCom and Intermedia in the above-captioned proceeding IS GRANTED. 21. IT IS FURTHER ORDERED that, pursuant to section 214 of the Communications Act of 1934, as amended, 47 U.S.C.  214, File Nos. ITC-T/C-20001023-00751, ITC-T/C- 20001023-00752 and ITC-T/C-20001023-00753 are hereby GRANTED and Intermedia and its subsidiaries are authorized to transfer control of their international section 214 authorizations to WorldCom, subject to the condition that Intermedia and its subsidiaries will be regulated as dominant in their provision of service on the U.S.-Brazil route pursuant to section 63.10(a) of the Commission's rules, 47 C.F.R.  63.10(a). 22. IT IS FURTHER ORDERED, that this grant is CONDITIONED on the merged entity's divestiture of Intermedia's assets in accordance with the Department of Justice Proposed Final Judgment and the Proposed Hold Separate Stipulation and Order referred to herein. 23. IT IS FURTHER ORDERED, that AT&T's "Petition to Deny," filed in this proceeding IS DENIED. 24. IT IS FURTHER ORDERED that this Memorandum Opinion and Order SHALL BE EFFECTIVE upon release in accordance with 47 C.F.R.  1.103. 25. IT IS FURTHER ORDERED that this action is taken under delegated authority pursuant to sections 0.51, 0.91, 0.131, 0.261, 0.291, and 0.331 of the Commission's Rules, 47 C.F.R.  0.51, 0.91, 0.131, 0.261, 0.291, 0.331. FEDERAL COMMUNICATIONS COMMISSION Dorothy T. Attwood Chief, Common Carrier Bureau Donald Abelson Chief, International Bureau James D. Schlichting, Deputy Chief, Wireless Telecommunications Bureau