1 1 Before the 2 FEDERAL COMMUNICATIONS COMMISSION 3 Washington, D.C. 20554 4 In Re the Matter of: ) 5 COMMON CARRIER BUREAU PUBLIC ) 6 FORUM MCI WORLDCOM - ) 7 SPRINT PROPOSAL MERGER ) 8 Commission Meeting Room 9 FCC Building 10 455 Twelfth Street, S.W. 11 Washington, D.C. 12 Wednesday, 13 April 5, 2000 14 The parties met, pursuant to the notice of the 15 Commission, at 9:00 a.m. 16 APPEARANCES: 17 On behalf of the Common Carrier Bureau (CCB): 18 LARRY STRICKLING 19 Chief 20 ROBERT ATKINSON 21 Deputy Bureau Chief 22 MICHELLE CAREY 23 Chief, Policy and Program Planning Division 24 WILLIAM ROGERSON 25 Chief Economist 26 CLAUDIA FOX 27 Senior Attorney 28 Panel Members: 29 MICHAEL SALSBURY 30 Executive Vice President and General Counsel 31 JONATHAN SALLET 32 Chief Policy Counsel 33 MCI WorldCom 2 1 Panel Members: -- CONTINUE -- 2 RICHARD DEVLIN 3 Executive Vice President and General Counsel 4 VONYA McCANN 5 Senior Vice President of Federal External Affairs 6 Sprint 7 GENE KIMMELMAN 8 Co-Director, Washington Office 9 Consumers Union 10 REVEREND JESSE JACKSON 11 Rainbow PUSH 12 SANDY WAGNER 13 Vice President for Federal Regulatory Matters 14 JERRY HAUSMAN 15 Professor of Economics 16 Massachusetts Institute of Technology 17 DON FLEXNER 18 Partner, Boies, Schiller & Flexner 19 SBC 20 DAVID WHEELER 21 Vice President and Associate General Counsel 22 GTE 23 ANDREW MORLEY 24 Senior Vice President for Global Marketing 25 Level 3 26 DIRCK HARGRAVES 27 Counsel 28 TRAC 3 1 P R O C E E D I N G S 2 (9:00 a.m.) 3 MR. STRICKLING: I want to thank everyone for 4 attending today's public forum on the MCI-Sprint merger. 5 With me this morning at the podium are Bob Atkinson, Deputy 6 Bureau Chief for the Common Carrier Bureau, Michelle Carey, 7 Chief of the Policy Division in Common Carrier, Claudia Fox, 8 Senior Attorney and Team Leader on this project in the 9 Common Carrier Bureau, and Bill Rogerson who is our Acting 10 Chief Economist of the Bureau. He got a promotion from 11 Chief Economist of the Agency. But I am glad Bill is able 12 to work with us on this project. 13 This forum is an opportunity to aid Bureau staff 14 in understanding and fleshing out the critical issues raised 15 in the MCI-Sprint merger and to enable the Commission to 16 make an informed judgement about whether this transfer 17 serves the public interest. We set up three panels for this 18 morning, one on the long distance market, one on the 19 internet, and one on the public interest benefits raised by 20 the merger. Those will be the three issues we focus on 21 today, although obviously there are a host of other issues 22 that we are also examining as we review this record. 23 Everyone should have an agenda for this morning. 24 Our format will be somewhat informal. We really want to 25 have as much as possible a discussion among the 4 1 participants. Therefore, we are not going to have opening 2 statements of any great nature. And we would ask 3 participants to limit their remarks to three to five minutes 4 so that we can hear from everybody and get a good interplay 5 between the various participants in our panel. 6 There will be an opportunity for folks in the 7 audience to make comments or raise questions. If you would 8 like to participate in that, please pick up an index card 9 from the table at the back of the room, fill out your name 10 and the subject of your question or comment and return the 11 card to the back table. And we will have a period at the 12 end of the session this morning where we will call on folks 13 from the audience. 14 We would like to stick to our schedule as strictly 15 as we can. We ask everyone's cooperation in accomplishing 16 that. We will have a time keeper who will routinely remind 17 folks of time constraints. And we hope you all will be able 18 to follow her guidance in this. There will be a transcript 19 of the forum that will be placed in the public record and 20 will be available on our website in about a week. 21 I would like just before we start the first panel 22 to just ask Bob Atkinson, Deputy Bureau Chief, for some 23 remarks in terms of the nature of the analysis that the 24 Bureau and the Commission will be conducting in reviewing 25 this merger. Bob. 5 1 MR. ATKINSON: Thank you, Larry. Traditionally, 2 the FCC has applied a four-part test or process in 3 evaluating license transfer applications associated with 4 these sort of major transactions. And this has bene 5 consistently applied in the -- it is the burden of the 6 applicants to demonstrate compliance with satisfaction of 7 this four-part test by a preponderance of the evidence. 8 So the first question that is asked is would the 9 merged entity after the merger be in violation of the 10 Communications Act. The second question is somewhat related 11 which is would the merged entity be in violation of the 12 FCC's rules. Typically, those have included such things as 13 spectrum cap violations, anti-cable buy-out restrictions in 14 the '96 Act and things like that. And as you would note 15 from today's forum, we will not be directly addressing those 16 two questions. 17 But if any party or anybody here wants to raise 18 questions about whether the merged entity would be in 19 violation of the Communications Act or of the FCC's rules, 20 we would certainly appreciate some comment on that. 21 The third and fourth questions are really the 22 subject of today's forum. The third question is would the 23 combination of firms frustrate the FCC's ability to enforce 24 the Communications Act or to substantially impair its 25 efforts to achieve the goals of the Act. And this morning, 6 1 for example, the agenda -- the title of today's session is, 2 "How does the proposed merger affect the FCC's statutory 3 mandate to increase competition and minimize regulation in 4 the telecommunications market?" So that addresses very 5 specifically this third question. 6 The fourth and final question the FCC asks is 7 would affirmative public interest benefits be realized from 8 the merger that would not be achieved without the merger. 9 And that is essentially the third panel in today's session 10 which asks does the merger create public interest benefits 11 that could only be realized through the merger. 12 So that is the overall context in which we 13 evaluate merger, the license transfer applications that are 14 associated with mergers. It is a totally balancing of all 15 the factors. And at the end of the day if the judgement is 16 that the proposal is net in the public interest, then the 17 application would be approved. 18 But if the judgement at the end of the day by the 19 Commission is that there is not a positive public interest 20 benefit, then the merger -- then the transfers -- the 21 license transfers would not be made. So it is a balancing 22 of a variety of factors. Thank you. 23 MR. STRICKLING: Thanks, Bob. Let me introduce 24 our first panel. This panel will be focusing on the issues 25 raised by the merger as it reflects in the long distance 7 1 market. Representing the applicants this morning, from MCI 2 WorldCom, Michael Salsbury, Executive VP and General 3 Counsel, and Jonathan Sallet, Chief Policy Counsel. And 4 representing Sprint, Rich Devlin, Executive Vice President 5 and General Counsel, and Vonya McCann, Senior VP of Federal 6 Affairs. 7 Our other panelists represent a broad spectrum of 8 interests in this merger. From Rainbow PUSH Coalition, the 9 Reverend Jesse Jackson. From the Consumers Union, Gene 10 Kimmelman, Co-Director of the Washington Office. And from 11 SBC, Sandy Wagner, Vice President for Federal Regulatory 12 Matters, and Professor Jerry Hausman of MIT. 13 So let's kick it off. And we will turn I guess to 14 Michael Salsbury. If you could, give us a brief overview of 15 the issues you think are critically important for our 16 evaluation of the effects of this merger in the long 17 distance business. 18 MR. SALSBURY: Is this on? Good. I think that 19 our filings on the merger have attempted to make two or 20 three arguments that we feel are important for the 21 Commission's consideration of the application. First of 22 all, we describe a long distance marketplace that -- I think 23 to put it in simple terms, the genie is out of the bottle in 24 terms of competition. 25 Capacity is dramatically increasing in this 8 1 marketplace, primarily what are loosely termed the emerging 2 carriers, not AT&T, MCI WorldCom or Sprint. The competitors 3 are flooding into the marketplace. They are for the most 4 part well capitalized. And the number is increasing as we 5 see liberalization overseas that brings more and more 6 potential entrants into the marketplace. 7 Obviously, we have all read about some of the 8 discussions that have been taken place between American 9 carriers and foreign carriers. And the customer base is 10 increasingly very well educated, very price sensitive and 11 very willing to switch carriers. 12 We find as a result of that that the long distance 13 business is extraordinarily competitive. It is largely 14 deregulated by the Commission. There is no price 15 regulation. And we don't see how this merger will adversely 16 affect the level of competition in the marketplace. 17 Our competitors -- I shouldn't say our 18 competitors. Our opponents describe a world that frankly we 19 don't recognize. It is a world where people don't use 20 emerging carriers, where there is very few carriers in most 21 parts of the country. There are large parts of the country 22 without multiple carriers and where the larger carriers -- 23 larger long distance carriers have extraordinarily high 24 profit margins, in some cases well over 50 percent, some 25 approaching 90 percent according to their figures. 9 1 We don't recognize that world. And I think if the 2 world were that way, perhaps a lot of their arguments would 3 have some merit. But it isn't. I think the world is as we 4 describe it, tremendously competitive. There is very few 5 barriers to entry. 6 The Commission has noted that with all -- once you 7 have capacity, the next -- the barriers for entry for a 8 carrier are very, very small. And it is one where we see 9 the level of competition increasing, the consumers prices 10 falling and new innovation in the marketplace. So we feel 11 that this merger would not have an adverse impact on the 12 level of competition in the long distance business. 13 MR. STRICKLING: Thank you. Let me turn to some 14 of our other panelists for their reaction to those remarks. 15 Let me start first with Gene Kimmelman from Consumers Union. 16 Gene. 17 MR. KIMMELMAN: Thank you. There is no doubt that 18 the market is changing significantly. But one cannot 19 disregard the market at it exists and just focus on a 20 hypothetical future market. This area has been plagued by 21 promises and bigger promises and more enormous promises for 22 years that often are not achieved because it is difficult to 23 predict exactly where technology is headed, exactly where 24 prices are going, whether costs will go up or come down. 25 And certainly, in a reasonable time frame, it has been 10 1 enormously difficult to make those guesses. 2 So one has to start with the reality. The reality 3 is a highly concentrated long distance market for the 4 residential consumer business with AT&T, the dominant long 5 distance firm, MCI WorldCom and Sprint controlling 80 to 85 6 percent when you include their dial-around affiliates. 7 These levels of concentration run counter to the 8 perception of our antitrust laws and I would suggest counter 9 to the goals of the '96 Communications Act providing for 10 other competition. There is no doubt that this merger would 11 diminish choice for consumers among the largest players who 12 mass market advertise both their branded and their non- 13 branded services and are in an enormous position to 14 otherwise compete more aggressively against each other but 15 for this proposed merger. 16 So we don't dispute the notion that there are many 17 changes about to occur. We dispute the claim that it is so 18 obvious exactly what is about to occur. And what is really 19 obvious is what is, and that is a highly concentrated long 20 distance market. And it would be contrary to the public 21 interest to allow MCI, WorldCom and Sprint to combine. 22 MR. STRICKLING: Reverend Jackson. 23 REVEREND JACKSON: Thank you very much. The 24 concern of Rainbow PUSH is a matter of race profiling, 25 consumer and economic profiling and universal access. I 11 1 submitted to each of you maps from Chicago showing a 2 pattern. What the maps demonstrate is that MCI WorldCom's 3 network in Chicago has significantly expanded since the 4 merger. 5 New fiber has been laid in the city's loop. A 6 network has been extended to certainly the wealthy area, to 7 the lower side, to the west suburban corridor. There has 8 not been a single strand of fiber laid to serve the city's 9 southside, home to a large portion of the city's minority 10 residences and businesses. Also a significant number of low 11 income families. 12 As a result, southside residences and businesses 13 have been denied access to high speed data and other 14 advanced services available from this state of the art 15 technology. The maps paint a clear picture of the pattern. 16 We pleaded against this three years ago. And since that 17 time, the crisis has only been exacerbated. So please take 18 a look at the maps. And we can verify what fiber has been 19 laid -- excuse me. And it has just been impacted upon 20 people of color and poor people and residential areas 21 denying us access. 22 Secondly, the proposed merger will have an 23 increased concentration -- would result in increased 24 concentration in the international long distance market 25 raising rates for international calls. Right now calls to 12 1 Europe are cheaper than calls to Central America or Africa 2 or the Caribbean. 3 And so with the insensitivity that has been 4 expressed in essentially the redlining or the profiling of 5 people essentially by race and by class, we object strongly 6 until in fact they can prove and make a commitment to in 7 fact stop a pattern that we can document. 8 I might add lastly that what kind of exacerbates 9 it in Kansas City was Sprint's building, a one billion 10 dollar campus. Several minority business people are with us 11 here today. Less than one million of a percent in contracts 12 have gone to people -- to African American people. The 13 population there is about 30 percent. 14 And business constituents in California, the 15 California filing, Sprint reported it had awarded none of 16 its contracts, none, none to African Americans, none to 17 Asian Americans and 1.8 percent to Latino firms. MCI 18 WorldCom did not file any data on this minority contracting 19 record. 20 We likewise sent them a questionnaire that was not 21 responded to. So whether it is in the redlining or 22 profiling of the district impact upon the Caribbean and 23 Africa and South America as compared with Europe, whether it 24 is in contracts and businesses, we see the gap is in fact 25 getting wider. Thank you. 13 1 MR. STRICKLING: Thank you. As a resident of the 2 southside of Chicago myself, I will look forward to your 3 answers to the Reverend's questions. But first let me get a 4 response from SBC concerning some of the issues we should be 5 looking at as we analyze this long distance market. 6 MS. WAGNER: Larry, thanks. I think one of the 7 things -- the place we have to begin when contemplating this 8 merger is that by every quantitative measure, the 9 presumption of unlawfulness is not only there, it is there 10 in multiple times. If you take the long distance market in 11 toto, quantifiably measured, the likely competitive impacts 12 or the likely impacts on competition of this merger is more 13 than five times the effect necessary to conclude that the 14 merger is presumptively unlawful. 15 The same holds true in if you segment the market 16 by segment, mass market versus business and so forth. What 17 that does is it sets a threshold that is -- it sets an 18 aggressive threshold if you will for the applicants to 19 demonstrate substantial positive effects from this merger to 20 overcome that presumption. 21 And in SBC's opinion, the applicants have simply 22 failed to do that. They have raised a fairly modest showing 23 of benefits from things like MMDS, penetration and so on 24 that don't come close to overcoming the competitive harms 25 that this merger will have in an existing long distance 14 1 market. 2 Some of the other rationale that the applicants 3 raise to support their market is that in the first instance 4 speculative as Mr. Kimmelman pointed out. It is talking 5 about a market that is at best just beginning to 6 materialize. And that is this thing that applicants have 7 referred to as the all distance market. 8 I guess in a nutshell, applicants seem to be 9 relying on a set of not so much facts as speculation. The 10 purported benefits of the merger and also in and of 11 themselves speculative in nature to a large extent. We -- 12 in our view, the facts are the facts. And they pretty much 13 speak for themselves. There is a strong showing of a high 14 likelihood of competitive harm from this merger that simply 15 hasn't been overcome. 16 MR. STRICKLING: Well, in analyzing this market, I 17 mean, Mike Salsbury talked about the capacity increasing 18 rapidly, the few barriers to entry. How do we -- first off, 19 do you agree with those assessments of the market as Mike 20 described them? And if so, how do we take those into 21 account in looking at this merger? 22 MS. WAGNER: There is clearly some changes going 23 on in this marketplace. There is no argument about that. 24 There is new capacity being built. But fundamentally, the 25 capacity is being built in high density, high traffic areas. 15 1 And there is little new capacity, relatively little new 2 capacity coming on line anyplace other than that. 3 New entrant carriers depend heavily on the 4 incumbent carriers, the big three if you will, who have 5 ubiquitous nationwide networks for the completion of a 6 nationwide footprint. In other words, they procure capacity 7 largely from the big three to fill out what otherwise would 8 not be a ubiquitous nationwide footprint. 9 So there is -- it is that reliance on the big 10 three to create this kind of nationwide, multiple 11 facilities-based carriers that is troublesome in the context 12 of this merger. It is that reliance on the big three for 13 wholesale capacity essentially. 14 MR. STRICKLING: Mike, do you have a response to 15 that, the idea that it matters whether or not we have a 16 ubiquitous national provider with capacity as opposed to 17 capacity being developed in isolated pockets? 18 MR. SALSBURY: Well, again, as I said earlier, I 19 think that the opponents are talking about a world that 20 isn't today's world. If you look at the data that we 21 submitted, particularly the LATA study by Dr. Kelly, almost 22 every LATA in the country has three or more facilities-based 23 carriers setting aside in the post-merger worlds and not 24 taking into account the merger between MCI WorldCom and 25 Sprint. 16 1 So the suggestion that fiber is not being deployed 2 throughout the country is just wrong. Maybe a year ago, 3 that wasn't the case. And maybe they are basing their data 4 on a year or 18 months ago. But if you look at what is out 5 there today -- and I agree with Mr. Kimmelman, that is the 6 first place you would look is what is there today -- today 7 there is capacity almost across the country in every LATA. 8 It is relatively -- it is a commodity if you want 9 to add on. It is true that most carriers, including MCI 10 WorldCom and Sprint depend on other carriers to reach every 11 single LATA. AT&T is the only carrier I believe that goes 12 to every single LATA. But the vast majority of the new 13 carriers are building networks that hit virtually all the 14 households, is one percent or less of the households that 15 would not be today facing at least three facilities-based 16 carriers. 17 With respect to the market share points that were 18 made, there is no question -- again, we are not relying 19 entirely on the potential entry of the RBOCs. That is a 20 voluntary action that they will decide when they want to do 21 it. I would just say that if you look at the marketplace 22 today, yes, market shares are relatively concentrated. That 23 concentration has been falling rapidly over the last few 24 years as the emerging carriers develop their facilities and 25 their marketing. 17 1 Most of the growth in the business has been with 2 the emerging carriers. That if you look at AT&T's share 3 which has been falling dramatically over the last several 4 years, most of that business has gone to the emerging 5 carriers. And I think that it is hard to say that the new 6 entrants are depending solely on us and AT&T. I think that 7 they are building out their networks and putting facilities 8 into place. 9 You know, I think it is true that there an all 10 distance market developing. Again, I don't think this is 11 speculative. If our opponents use cell phones, they 12 probably have an all distance marketplace in their wireless, 13 an all distance product when they use their wireless phones. 14 I think that is coming to the wire line world probably this 15 year. 16 But as far as whether it is here today, I think 17 that is something that we are saying is going to be here 18 very soon. It is something that one would take into account 19 in accessing the competitive effect of this merger. But it 20 is -- I would agree that it is not here as we speak today. 21 i think it will be here within the year. 22 MR. KIMMELMAN: Could I just respond? 23 MR. STRICKLING: Gene. 24 MR. KIMMELMAN: I'll turn it over to you in a 25 second. I think when we scrutinize some of those claims 18 1 very carefully, leaving aside Reverend Jackson's point about 2 particular populations in particular communities which is a 3 significant point, looking at the here and now, let's look 4 at the residential long distance market. Is this an all 5 distance market? Is it about to become an all distance 6 market? And the reference was just to cell phones. 7 More and more people have cell phones. But look 8 at the Bureau's own statistics of usage for interLATA, 9 interstate long distance. Fifty percent of consumers 10 according to your own data are still making less then $4.50 11 dollars of interstate long distance calls per month on 12 average, half of the residential market. And those people 13 do not have cell phones almost across the board. Maybe 14 someday they will. 15 There is hardly robust competition for this half 16 of the market, not a little teeny segment, half of the 17 market. And so if the data is even correct that there are 18 three facilities-based carriers in many LATAs -- and I would 19 suggest that having one switch or two switches may not be 20 fully adequate to reflect full facilities-based competition, 21 that is not robust competition. We need more. There is not 22 enough. 23 And, therefore, the combination of the number 2 24 and number 3 firms in a highly concentrated market is 25 extremely problematic. 19 1 MR. STRICKLING: Gene, what would your prediction 2 be for the half of the market that is not making a lot of 3 calls as a result of the merger? 4 MR. KIMMELMAN: Well, the pattern has been 5 increased monthly charges before you ever pick up the phone, 6 minimum bill requirements. There is a lot of discounting 7 that is going on, but discounting most beneficial to the 8 high volume users, approximately the top 20 to 30 percent of 9 the market. There is no doubt that there is much more 10 robust competition at that end of the market. 11 For the bottom half, we don't see heavy emphasis 12 on price reductions. We have seen price increases. Now, 13 some of this can be addressed regulatorily as is currently 14 pending in access charge proceedings. But a lot of it 15 reflects on this market. The fact that there are 500 16 carriers is not new. 17 In the early '80s, there were almost 500 carriers. 18 Now, they were of a different nature. There was an awful 19 lot more resale going on. But the fundamentals of this 20 market have not changed that dramatically. There may be 21 some things on the horizon. I don't dispute that. But it 22 hasn't changed that dramatically in where AT&T's market 23 share has shifted. 24 It first shifted predominantly in the residential 25 market to MCI and somewhat to Sprint and then to some of the 20 1 companies that MCI has since merged with. And it is growing 2 among the emerging competitors. But a significant portion 3 of that are affiliates of MCI WorldCom and their dial-around 4 service. So the shift has not been as dramatic as 5 described. 6 MR. STRICKLING: Jonathan, do you want to respond 7 to that? I also want to give you a chance to respond to 8 some of the concerns raised by Reverend Jackson in his 9 comments, as well. 10 MR. SALLET: I will try to do both. Let me refer 11 first to the comments that Reverend Jackson made. And let 12 me make plain that we do not quarrel with the goals that 13 Reverend Jackson supports. But we do believe that his 14 concerns are misplaced when careful examination of the facts 15 is undertaken. And let me if I might go through some of the 16 aspects of that. 17 Reverend Jackson begins by talking about the 18 geographic location of fiber. As the Commission found in 19 the MCI WorldCom order, fiber has historically been laid to 20 serve large business customers. That is not a fact that is 21 unique to these companies. The Bell operating companies 22 have not used fiber as the means of deploying advanced 23 services to residential customers. 24 The fact of the matter is that because of the high 25 capacity of fiber and its expense, fiber is used in the 21 1 marketplace generally to supply the higher volume 2 requirements of large business. And for that reason, the 3 geographic location of fiber as the Commission found in the 4 previous order is not -- provides no evidence to suggest 5 discriminatory intent. It is simply proceeding on a plane 6 than is different than. 7 Now, there are, of course, barriers to reaching 8 residential neighborhoods with advanced services. But as 9 the people from the Common Carrier know, it is the view of 10 this company at least that those barriers are largely the 11 difficulty we have had entering local markets to deploy 12 other mechanisms of advanced service transmission including, 13 for example, DSL which is a -- one of the solutions now 14 being used in the residential market. 15 More to the point, and as we will discuss in 16 greater detail on the public interest discussion, one of the 17 positive aspects of this merger is the ability to deploy in 18 a national footprint, a broad band wireless service using 19 the MMDS spectrum that offers the ability to reached under- 20 served communities, business and residential customers, 21 particularly offers advantages in rural America in ways that 22 in many cases provide cost advantages precise to reach the 23 goal of additional deployment of advanced services. 24 The second point, the question of the pricing of 25 international long distance calls. As the Commission is 22 1 aware, particularly through its work in the International 2 Bureau, the pricing of international long distance calls has 3 as its most singly important variable the price of 4 settlement costs imposed on American consumers by foreign 5 telephone companies. 6 The FCC has done yeoman's work to bring those 7 charges down which are equivalent to access charges in the 8 domestic arena. But they have not come down uniformly and 9 at the same time. Our experience is that disparities in 10 pricing in international calling reflects the disparity in 11 the levels of settlement costs and not any other intent. 12 Indeed, we note speaking to Latin America and the 13 Caribbean specifically that considerably more cable is being 14 deployed from the United States to the Caribbean and in 15 Central and South America. For example, since the WorldCom 16 merger, at least five cable systems have been issued landing 17 licenses and executive construction contracts for the 18 Caribbean/Latin American route, a development which will 19 continue to bring benefits of competition. 20 Thirdly, in terms of other issues, we have filed 21 very recently, Reverend, the data in California. We had 22 received an extension to file the data and we have filed it. 23 As to the questionnaire, Reverend, I will just say that I 24 had not realized and did not know that there was a 25 questionnaire to which we had not responded. But we will 23 1 certainly go back after this hearing to try to find that and 2 look at the information. 3 But I would simply say to sum up these points, 4 that although the goals are important, it is very important 5 also to find the explanatory variables. And I believe in 6 these instances, the explanatory variables do not lay at the 7 feet of this company or the merging companies. 8 To speak somewhat more broadly to Gene's point, a 9 couple of points. And, you know, when one sits next to the 10 person to whom one reports, you know, one recognizes that 11 one may -- one's remarks may be added to. 12 But just a couple of points about this. In 13 thinking about the long distance market, the way that the 14 Commission has proceeded is to look to find all the barriers 15 to entry that would preclude people from responding to 16 changes in the marketplace. 17 In other words, the Commission doesn't look 20 18 years in the future. But neither does it feel that it must 19 look only at the competitors who are engaged in actions of 20 the precise kind they are engaged in today. Instead, using 21 normal approaches in this area, it looks to see what ability 22 would there be for people to respond to changes in the 23 marketplace. 24 The point that the Commission has made in the 25 past, the point that we make in our filings, that point that 24 1 is very straight forward is that capacity continues to grow, 2 that there are no barriers to entry in the long distance 3 market, that there is a tremendous opportunity for anyone to 4 enter the marketplace as we are seeing with the emerging 5 carriers increasing their market share. So that in 1998, 6 for example, they had over 20 percent of total toll service 7 revenue. 8 And that, in fact, as with the history of MCI, the 9 incentives will be for people who own capacity to deploy it 10 all times of the day which tends to mean the use of it for 11 not just business, but residential. So we feel that we have 12 dealt with and that the facts support the notion that there 13 would not be ways for competitors for respond. 14 Second point, Gene notes that there are other 15 proceedings going on in front of the Commission that deal 16 with some of the issues to which he alludes. On some of 17 those proceedings, we don't always take the views of 18 everybody else. 19 But we are certainly participating in them. And 20 we do regard them as the appropriate forum for dealing with 21 these issues because to the extent they are issues, we 22 regard them as cross-industry questions, not issues that are 23 merger specific and, therefore, issues we believe that 24 should not be dealt with in this particular procedural 25 context. 25 1 MR. STRICKLING: But if we stay focused on the 2 merger for a second, if I understand Gene's point, Gene's 3 point is that all of this growth in capacity, this growth in 4 competition hasn't been felt by this 50 percent of consumers 5 who don't make a lot of long distance calls. And I guess 6 the question before us today is will the merger have -- what 7 effect will the merger have on the competition for those 8 customers that Gene believes aren't getting all the benefits 9 of competition today. 10 MR. SALLET: One needs to look carefully at the 11 make-up of the market as a whole. I mean, one needs to 12 think about, for example, the extent to which these 13 customers are one of these two companies or whether they may 14 be in a disproportionate way customers of another company 15 that has been identified as a leading long distance provider 16 for historical reasons, just for historical reasons. 17 Secondly, one needs to link this, as well, to our 18 ability to aggregate demand from low volume users. One way 19 to solve in the marketplace problems that are perceived by 20 some with low volume users is to have companies that can 21 come in and provide both local and long distance, that is to 22 say to aggregate the demand that comes from those customers. 23 Our experience in New York where we are the 24 leading competitive entry demonstrates that there are price 25 savings that go to all customers who will come to us, 26 1 precisely because for the first time, we are in a position 2 to treat them not as people who make only a few dollars of 3 long distance calls, but as people who make a variety of 4 both local and long distance calls. 5 We think that is a very important way to address 6 both the specific concern and the broader problem that at 7 the moment, the local market is still dominated by incumbent 8 Bell operating companies. 9 REVEREND JACKSON: Mr. Chairman? 10 MR. STRICKLING: Reverend Jackson? 11 REVEREND JACKSON: You know, in baseball to 12 protect the very character of a league development and not 13 just a team dominance which would tend to destroy the 14 league. A team like the Yankees would seem to have 15 unlimited money and big city markets just overflow. And 16 they keep on winning because they simply buy up competition. 17 They simply buy the best players. 18 Sprint was seen as a catalyst to competition. 19 Sprint reduced the flat rate. And when they did, MCI 20 WorldCom and AT&T had to make an adjustment to the 21 marketplace. Now MCI WorldCom is making one of these George 22 Steinbrenner type moves, buying up a major force that has 23 benefitted consumers, benefitted the marketplace. 24 So in the one concern here is that when they buy 25 up Sprint, we lose a major relevant catalyst. There may be 27 1 many other copies, but Sprint is the one at the level that 2 becomes a source of stimulus really for MCI WorldCom and for 3 AT&T. That is one. 4 A second is that gentleman admitted the fiber has 5 been laid in the Loop and north. So he did not contradict 6 my proposition that it has not gone south. It is a chicken 7 and egg situation because if you build out where businesses 8 are, will businesses build where the fiber is? And so it 9 becomes, in fact, apartheid. 10 If there is more fiber headed to where businesses 11 can come to where they are not, there comes an incentive to 12 move in that direction. The big Chicago right now, for 13 example, about they are building a third airport because 14 right now the O'Hare is driving the economy more than the 15 Loop is because everything is moving northwest. Well, the 16 third airport southwest is Ballace Grove. One disincentive 17 to locate businesses there is lack of this infrastructure. 18 And so there is some need for these companies to, in fact, 19 take into account Ballace economic growth. 20 Again, I repeat why do we have all this fiber and 21 cable in Europe and not in Africa and the Caribbean and 22 South America? It raises reasons of fundamental bias. And 23 Europe has the first and best of it all and Africa, the 24 Caribbean, South America has what is left. 25 And if we are to come to a public interest forum, 28 1 we want to make certain that the price they pay for public 2 support is that they serve all of the public. But right now 3 they are not serving all of the public fairly and in a 4 balanced way. That is why we protest this merger. 5 MR. SALSBURY: Thank you. You made an interesting 6 point about Sprint as a pricing leader. I know, Professor 7 Hausman, your submission contains some information on the 8 role of Sprint perhaps as the maverick in pricing. Could 9 you elaborate a little bit on your views on that and how 10 that affects our view of this industry, particularly as we 11 look at the expanding capacity and as we try to analyze 12 barriers to entry? 13 PROFESSOR HAUSMAN: Can I actually talk about the 14 long distance market and competition, as well, or do you 15 just want me to answer that single question? 16 MR. STRICKLING: I can't control what you say. I 17 can only ask the questions. 18 PROFESSOR HAUSMAN: Well, I came here to talk 19 about long distance. I mean, if you don't want me to talk 20 about that. 21 MR. STRICKLING: No, go ahead. 22 PROFESSOR HAUSMAN: Okay, good. I would like to 23 start off at the beginning and at least get my two or three 24 minutes. I think from the Commission's point of view, as I 25 have said in a number of papers, it should be thinking of 29 1 consumer welfare. And here that could go with competition. 2 But I think the major point is that price is going 3 to be higher than they otherwise would be in the absence of 4 this merger. So I don't always agree with Mr. Kimmelman, 5 but I do agree with certain things he said today. And that 6 is especially for the 50 percent of low-use customers. I've 7 said this a number of times. 8 I am quite confident the prices are above the 9 competitive level. And this merger is going to make things 10 worse rather than better in ways that I will get to in a 11 second. 12 Now, to start with, I think that if you do look at 13 this merger in terms of market shares, absent extraordinary 14 circumstances, this merger should not take place. In my 15 view, Sprint and MCI have done economic analysis or no test 16 for these extraordinary circumstances. Okay? 17 Instead, they basically made a legal argument that 18 with no barriers to entry there is no market power that can 19 be said in five words. When I look at this, they do seem to 20 be close competitors. And I think the data bears that out. 21 And, in fact, as I will respond with my next affidavit, even 22 if one acts as if they are just equal competitors and not 23 the closest competitors, you still get a predicted price 24 increase of well above five percent, the teeth statistic of 25 well above seven. 30 1 So that it seems to me that there has been no 2 showing made that prices won't go up where if you look at 3 the background of this from economics, given the shares, you 4 would expect them to go up. 5 Now, what they have basically argued is that 6 because there are no barriers to entry, there is no market 7 power. That seems to me to have two implications. The 8 first is that if the FCC allows this to happen, I see now 9 reason using the same argument that AT&T and MCI should 10 merge. 11 If there are no barriers to entry, there is no 12 market power. Why not put MCI and Sprint together. We will 13 get up to 80 percent. But, of course, according to their 14 argument, that would be completely disciplined by the new 15 entrants. That seems to me just contrary to market facts in 16 which the new entrants, like QWEST and all, have been unable 17 to really ever break in with any significance, at least 18 according to my estimates and all, to these -- to many of 19 the customers in the market. So that is the first point. 20 The second point is that I think -- I forget the 21 gentleman's name, but the last speaker at the other table -- 22 that he was talking about the experience in -- excuse me, I 23 don't know. I am not a regular here. But he was talking 24 about their experience in New York. And I actually agree 25 with that. But I think it has a very different implication. 31 1 And that is that there are going to be bundles 2 offered. I don't agree with all distance at the current 3 time. But I do agree that there will be bundles offered of 4 local and long distance. And I see this as going from three 5 to two in terms of bundles, okay, that you are going to take 6 one of the companies out of the market. 7 I see absolutely no evidence at all that the so- 8 called -- the new emerging entrants are going to go into the 9 business of offering bundles. There has been no evidence of 10 that to date. So far as I know, QWEST isn't offering 11 bundles of local service. They are basically offering long 12 distance mainly to large customers. 13 So that when you look at long distance in that 14 context in terms of bundles, again, I think competition will 15 be less and prices will be higher. And I see no -- you 16 know, nothing that changes my mind on that. Okay. I am 17 getting to Larry's point. I just have one other point. 18 And that is that, again, if these people are 19 right, I once published an academic article on Michael 20 Jordan a couple of years ago. He is one of my favorite 21 guys. Okay. I really like to see Michael on TV. I don't 22 understand why MCI is spending 100 million dollars, which is 23 what they were reported to spend, in 1998 on Michael and 24 Bugs if there is no branding and there is no brand 25 recognition. How are they ever going to recover the 100 32 1 million dollars they spent on Michael and Bugs? 2 Okay. So that when we see these type of levels of 3 advertising, I think, you know, along with AT&T and Sprint, 4 as well -- so I always like to say I dated the dime lady 5 when i was in college -- you don't spend that kind of money 6 on this type of thing unless you expect to get it back. I 7 mean, why else are you spending hundreds of millions of 8 dollars in advertising? 9 This seems to me to be very much a differentiated 10 market. Okay? And just saying that there is all this 11 capacity being laid and that will discipline the market just 12 seems to me contrary to market fact. So then I will now get 13 to the Sprint and the innovation. 14 I agree fully with Reverend Jackson on this point. 15 It seems to me that Sprint has innovated all along. They 16 came out with the dime program. They came out with the 17 nickel program. And they have then forced MCI to go along 18 and AT&T has followed in the rear. So that these three 19 carriers have 80 percent. 20 Sprint and MCI's share have been almost completely 21 unaffected by the merging carriers as far as I can see 22 looking at the data. There has been no effect on Sprint and 23 MCI's share. AT&T has continued losing share over time. 24 But we are still talking about the three large carriers. 25 I don't necessarily call Sprint a maverick. That 33 1 is sort of a legal term. But I will say that Sprint has had 2 a lot of innovative effect. And I think taking them out, 3 especially for this branded end of the market, will have a 4 big effect. 5 And just to end up on that point, you could look 6 at all sorts of consumer goods in which there are store 7 brands. Almost everything we buy from toilet tissue to soda 8 to everything has store brands. And it is a very similar 9 situation I think to what is going on here, is some people 10 buy those brands. You know, they do well. The stores sell 11 them. They actually get a good profit margin on them. 12 Nevertheless, you see the branded products, be it 13 Coke, be it Pepsi, be it Kleenex, be it Charmin tissue, in 14 all those products, price is well above marginal cost. And 15 through heavy advertising, they are able to convince 16 consumers that that is a product that they want to buy. 17 Now, to an economists, it is a perfectly good thing. 18 I see this market being very similar to that. I 19 can't remember that I have ever seen a QWEST ad on TV or I 20 can't remember that I have ever seen an Excel ad on TV. I 21 am not saying that they don't exist. But I watch a fair 22 amount of TV and I haven't seen them. Yet I see ads all the 23 time for the big three. 24 They are actually selling a branded, 25 differentiated product. And I do not see, you know, 34 1 especially in the next two years which I think is the 2 correct horizon to look for a merger, the new emerging 3 carriers constraining them. 4 So I do believe that prices will be higher than 5 they otherwise would be in the absence of a merger. And I 6 think that is what the Commission should really look most 7 closely at. 8 MR. STRICKLING: Okay. We got capacity over here, 9 no barriers to entry. We've got branding. We've got 10 advertising. It seems to be two different views of the 11 market. Mike, how do you suggest we evaluate the branding 12 and advertising issues as we look at barriers to entry? 13 MR. SALSBURY: I guess I will come back to what I 14 opened with. And I suggest you look at the facts rather 15 than the assertions. I -- you know, I find it hard to 16 believe that one would say that they hadn't seen a QWEST ad 17 or an Excel ad. I'm sure Professor Hausman hasn't, but he 18 probably doesn't watch "60 Minutes" or the NCAA basketball 19 tournament where both had Excel and Broadwing and QWEST ads. 20 I don't think that anyone would honestly say that 21 those emerging carriers don't do television advertising. I 22 don't think anyone who knew the facts would honestly say 23 that we had spent 100 million dollars on Michael Jordan ads. 24 As we submitted in our reply, of the budget that MCI 25 WorldCom had on consumer advertising last year, more than 35 1 half of it, more than half of it was for unbranded, 2 unbranded services. 3 The bulk of the advertising in this marketplace by 4 the more established carriers is frankly to publicize 5 pricing plans and not to emphasize brands. If brands are so 6 important, why are the emerging carriers capturing a 7 disproportionate amount of the market share as time goes 8 along? 9 I would also add that, sure, Sprint's market share 10 of the residential market is around five or six percent. 11 And it has been around five or six percent for the last 12 several years. Yes, MCI's share of the residential market 13 is around 16, 17, 18 percent. It has been at that level for 14 the last several years roughly. 15 But what has happened in the marketplace is that 16 AT&T's share has dropped precipitously. And that share has 17 not gone to MCI WorldCom or to Sprint. It has gone to the 18 emerging carriers. Now, with respect to -- 19 MR. STRICKLING: Mike, could I ask are those 20 numbers true across the board when we speak of the mass 21 market, you know, the residential and single line business 22 customer as well as when we speak of all customers or 23 business customers? 24 MR. SALSBURY: When I look at the Commission's 25 statistics, the most recent of which were the 1998 36 1 statistics, it shows that during the 1997 -- actually, you 2 have to back up more and go maybe 1995 to 1998. If you look 3 at the fall in the market share that AT&T has had and the 4 rise in the market share of the other carriers, I think you 5 will see exactly what I am saying. But -- 6 MR. ROGERSON: Larry, could I ask just -- 7 MR. STRICKLING: Sure. 8 MR. ROGERSON: I think you nailed Professor 9 Hausman on the he hasn't watched enough TV apparently. But 10 that isn't really kind of what I found compelling in his 11 statements. The thing that really caught my interest was 12 his point that, oh, yes, there is all this capacity coming 13 on line. So we don't need to worry about current market 14 shares seems to imply -- you know, your same reasoning seems 15 to have improved too much perhaps. 16 Would you say the logic of your reasoning does 17 suggest that a merger of AT&T, MCI, Sprint and WorldCom 18 would be just fine because, after all, there is all this 19 capacity coming on line and the market is going to change 20 dramatically in six months so current market shares are 21 meaningless? I would actually like a specific answer to 22 that question. 23 MR. SALSBURY: And the specific answer is no. 24 MR. ROGERSON: Oh, so that would be a bad merger. 25 MR. SALSBURY: Well, the reason, let me explain 37 1 why if I could. 2 MR. ROGERSON: Okay. Yes. 3 MR. SALSBURY: We have never suggested that a 4 merger that would put -- create a carrier that exceeded the 5 Commission's dominance, the guidelines and create in effect 6 a dominate carrier in the marketplace would be a good 7 merger. This merger would not do that. And, therefore, we 8 don't see how under the Commission's rules that would create 9 a problem. 10 MR. ROGERSON: So I should look at current market 11 shares, that they are vitally important to prevent in terms 12 of measuring dominance, but they are meaningless in terms of 13 measuring competitive -- other aspects of competition other 14 than dominance? Is that what you are saying? 15 MR. SALSBURY: I am not sure because you are an 16 economist and I am not. So I hesitate to get into a -- 17 MR. ROGERSON: Well, you told me market shares 18 really matter for measuring dominance, but they don't matter 19 much for measuring your particular merger because you are 20 not dominant. It seems like a rather selective use of these 21 current market shares. Why wouldn't you use them to measure 22 the competitive effects of your merger if they are useful 23 for measuring dominance? 24 MR. SALSBURY: I think market shares are a 25 starting point in any competitive impact analysis. The 38 1 question is are there barriers to entry that would change 2 the market share analysis. I think it is a very different 3 thing to say if you have two carriers that would have 4 roughly 20 or 25 percent today of the residential 5 marketplace, looking out in the future, we could see fairly 6 rapid changes if we look at one state example where it is -- 7 the likely impact is that Bell Atlantic will acquire ten 8 percent of the market this year. Okay. This is what all 9 the analysts are saying. This is what Bell Atlantic is 10 saying. 11 I think it is hard to look at that situation where 12 you have one carrier with another carrier having three times 13 its market share roughly, AT&T, and another big entrant 14 coming in that will take roughly have the share and within a 15 year. 16 I think that is a very different world to me. I 17 agree market shares are starting in that point for the 18 analysis. But I think it is a very different world than 19 looking at creating a carrier that would have 80 percent of 20 the market. And to me, that is pretty basic. 21 I agree, I am not an economist. I am sure that 22 there are all kinds of theories and papers you can point to 23 that would suggest that your view is right. But I think 24 that really we are not contending that the -- a merger of 25 AT&T, MCI WorldCom and Sprint would not be -- create 39 1 severe -- 2 MR. ROGERSON: Well, let me -- I don't want to ask 3 you a theoretical question. Let me ask you just kind of a 4 common sense question. Do you think that if AT&T, MCI, 5 Sprint and WorldCom all merged that they would be able to 6 raise price by five percent make more money doing that? 7 MR. SALSBURY: I don't know. I would have to look 8 at, you know, the time. I think it is unlikely that they 9 would do it. 10 MR. ROGERSON: Oh, so they actually don't have 11 market. You think then they couldn't raise price -- 12 MR. SALSBURY: No, I think it is kind of like -- 13 MR. ROGERSON: -- because of all this capacity on 14 line. 15 MR. SALSBURY: I think it is unlikely that that 16 kind of merger could occur before our substantial RBOC entry 17 had occurred. And I think once you had substantial RBOC 18 entry, I think it would be very difficult for that combined 19 entity to raise prices. 20 MR. ROGERSON: But in today's world. In today's 21 world. 22 MR. SALSBURY: But, again, I am not advocating -- 23 excuse me. 24 MR. ROGERSON: Yes. 25 MR. SALSBURY: I am not advocating and I don't 40 1 think that is the merger that is before the Commission 2 today. What we are saying is for a host of reasons, 3 barriers to entry being the most important one and one that 4 is basically unrebutted by the opponents, the fact that 5 there are no substantial barriers to entry in this 6 marketplace suggests to us that given the relatively modest 7 shares in the residential market relative to the number one 8 carrier and relative to the emerging carriers, that one 9 would find -- be hard pressed to find that in a market share 10 analysis alone, this would be a troubling merger. 11 REVEREND JACKSON: Mr. Chairman? 12 MR. STRICKLING: Reverend Jackson? 13 REVEREND JACKSON: Just a comment that it seems to 14 me that there are private interests. You represent public 15 interests. And MCI WorldCom-Sprint needs the merger for 16 their profit and their growth. The customers don't need it. 17 They need it. The customers need the competition for 18 options. They need to reduce the competition for control. 19 You can become dangerously close to the capacity 20 to fix prices when the competition is reduced so very much. 21 This is a source of great anxiety. When these two dinosaurs 22 begin to wrestle, what happens to the others in the animal 23 kingdom is that the options are just reduced drastically. 24 The competition in our economy matters. 25 Secondly, the idea of Sprint and that big man on 41 1 the campus and the denial of opportunity for business 2 development matters. I wish you would have a hearing in 3 Kansas City where you can see for yourself away from this 4 place Sprint vis-a-vis the black and brown communities in 5 where they operate from. They operate, take this case. I 6 wish you would have a hearing in Kansas City to see Sprint 7 at that level of operation. 8 I would think that you look at MCI WorldCom and 9 look at Sprint's records on involvement in procurement and 10 auxiliary relationships. That also hits in the federal law, 11 EEOC, Office of Contract Compliance. In those levels, 12 compliance matters just as on the one hand long distance 13 pricing and fair competition matters. And please take that 14 into account. 15 MR. DEVLIN: Mr. Strickling, I need to respond to 16 that, please. 17 MR. SALSBURY: Rich Devlin. 18 MR. DEVLIN: Thank you very much. I think the 19 Reverend is wrong on his facts. He is wrong about 20 California not having a single minority contract. He is 21 wrong about our campus. When we built our campus and we are 22 in the process of building it in Kansas City, we established 23 very aggressive minority procurement goals. And at various 24 checkpoints, we were exceeding those goals. 25 Now, it turned out at one point in time within the 42 1 minority cottager, there was an under-utilization of African 2 American minority contractors. That was brought to our 3 attention and we remedied that problem. I would love to 4 have this hearing in Kansas City, sir. We are the largest 5 employer in Kansas City. We care deeply about our employees 6 and our community. And I resent the suggestion that we do 7 not care for the minority community. It is just wrong. 8 REVEREND JACKSON: Well, Kansas City, here we 9 come. Let's go. 10 MR. STRICKLING: Let us know when you set a date. 11 Gene, did you want to add something? 12 MR. KIMMELMAN: I thought that Mike made a number 13 of important points here. There is obviously a lot of churn 14 in this market. And I have gone through the data and I find 15 it more perplexing and raising more questions more questions 16 than answer it, especially in light of this fundamental 17 philosophical question and economic question of if this 18 merger is okay, why not a combination with AT&T, as well. 19 I think -- and I know Professor Hausman has some 20 interesting views on this. I am still finding it remarkable 21 that even with the switching, even with the lack of barriers 22 to entry, I still see the sizeable portion of switching 23 being among the three dominant, branded carriers. 24 There is significant minority going elsewhere for 25 some little bit of calling, unclear how much. Maybe MCI 43 1 WorldCom and Sprint can clarify a little bit more. I didn't 2 think their filing did. But it still strikes me as the bulk 3 is dominated by the three carriers. Maybe Professor Hausman 4 could elaborate. 5 PROFESSOR HAUSMAN: Yes. I mean, if you look at 6 the data and the reply of Sprint and MCI's economists, you 7 know, it sort of proves too much, again. That is much of 8 the argument in my view. What they show is that, you know, 9 using their definition of the major carrier, I think they 10 show in an 18-month period that "45 percent of the people" 11 are using this. Now, that just doesn't make economic sense. 12 I mean, I think it is a definitional problem 13 because otherwise that says since the generic carriers are 14 still only around 20 percent, that "25 percent of the 15 people" have tried them and don't like it, you know, which 16 again is contrary to the non-brand generic things. Since 17 these people are lower priced, they are lower priced and 18 everything else is equal, why don't you just use them? You 19 know, why wouldn't 90 percent of AT&T customers switch to 20 the generic carriers tomorrow since they could get a cheaper 21 price? 22 So I think that most of the switching or much of 23 the switching that goes on is among the three carriers. And 24 even their own data shows that Sprint and MCI are the 25 closest competitors to each other, you know, compared to 44 1 AT&T. So, you know, I think their own data just backs up 2 the econometrics. 3 This can't -- cannot in my view be a generic 4 market because if so, again, we cannot explain why there are 5 very large proportions of customers who would get a cheaper 6 price. I don't think anybody would disagree that there is 7 no quality difference in long distance anymore. The voice 8 quality is the voice quality. Yet we find very large 9 percentages of customers who would have a lower bill, you 10 know, just to rate their bill if they switched to one of 11 these generic carriers. 12 And the question is why don't they. Why doesn't 13 everybody buy store-brand tissue? Why doesn't everybody buy 14 store-brand pasta? It is chemically the same. It runs off 15 the same lines. You know, it is chemically the same 16 product. Nevertheless, you know, people don't do it. And 17 we see the same thing here. 18 So I think, again, as Mr. Kimmelman said, the 19 switching data and just consumer behavior, again, backs up 20 the fact that the generic carriers are not constraining the 21 big three here. 22 MR. SALSBURY: If I can respond. 23 PROFESSOR HAUSMAN: Oh, I would like to make one 24 other point, too, on this. Excuse me for interrupting. In 25 the last set of comments, New York was just brought up about 45 1 how Bell Atlantic is going to come in and, you know, pick up 2 ten percent of the market. 3 Again, if you take a two-year horizon, which I 4 think is the correct horizon to consider a merger -- it is 5 also consistent with merger guidelines -- there are not -- 6 there is not going to be enough BOC entry to do this. I am 7 going to talk about this in my affidavit. 8 So just picking New York as one example, there may 9 be a few other states, you know, in the meantime, but they 10 will not -- it is very unlikely, it is extremely unlikely 11 that there will be enough BOC entry to constrain the pricing 12 of the long distance carriers in most of the country. And 13 so just picking out New York and, you know, maybe Texas will 14 be next, whatever happens. I just don't see enough BOC 15 entry to constrain it. So I don't think that argument 16 should be used to allow the merger to go through. 17 MR. STRICKLING: Mike, I'll give you a chance to 18 respond. But let me ask you a question to set the stage, 19 too. Which as we look at these emerging carriers, and I 20 know that you can look at any particular area and you can 21 see that emerging carriers as a group may be acquiring a 22 certain share of the market. 23 But do we see that any individual carrier is 24 gaining a significant amount of share where they can step up 25 and really join the class of the other three national 46 1 branded providers? If you could, respond to that and then 2 respond to the other remarks that have been made. 3 MR. SALSBURY: The short answer is to your most 4 recent question, I am not -- I don't track that. I 5 certainly look at the ads and I look at the overall mix. 6 You would have to talk to our marketing people. I certainly 7 see QWEST being very active. 8 What we have seen and we have listed in our reply 9 is on the larger business marketplace, we have listed a 10 number of the really substantial wins by the new carriers. 11 Obviously, we don't track customer-by-customer win basis in 12 the residential market. But I do think that the data that 13 we submitted, again, I suppose, you know, economists will 14 look at any data and they will draw many different 15 conclusions. 16 But the data that we submitted shows the facts are 17 that there is substantial switching in the residential 18 marketplace and that customers of MCI WorldCom and Sprint 19 switch disproportionately not to each other, but to the 20 emerging carriers. Now, this is something that I think 21 people who do not -- are not active consumers in the 22 marketplace, I don't know about pasta, I don't know about 23 toilet tissue. I know something about telephone calls. 24 And I believe that most of the consumers, 25 certainly our consumers are highly educated, that they 47 1 switch in and out of carriers regularly. They do not just 2 sit with one carrier, at least not our customers. 3 There certainly is a group of customers that have 4 been with the largest established carrier every since 1984 5 and probably will stay with them. But if you look at the 6 consumer marketplace based on the data that we have 7 submitted, the actual facts, customers do switch back and 8 forth. They don't switch and then stay. They switch back 9 and forth. 10 The question is why would they stay with AT&T if 11 there was a lower price deal someplace else. Well, the fact 12 of the matter is some of them will always stay with AT&T. 13 Others respond to promotions. Believe it or not, customers 14 switch to AT&T. Some of our customers switch to AT&T. Some 15 of the emerging carriers customers switch to AT&T. 16 And guess what. Six months later, they may switch 17 back. There is an awful lot of activity in the marketplace. 18 Customers are highly educated. They have the information. 19 They are not confused I don't believe. We see that they are 20 acting in a highly economic, rational way. They go where 21 the cheapest price is at that moment in time. 22 And unlike switching local -- your local carrier 23 which is not easy to do in most -- and, in fact, impossible 24 in most places of the country. Switching your long distance 25 carrier takes a moment. You make a phone call and you can 48 1 switch. And because it is so easy, customers switch very, 2 very often. 3 REVEREND JACKSON: Mr. Chairman? 4 MS. WAGNER: Larry? 5 REVEREND JACKSON: I would submit to you that a 6 significant number of customers are not highly educated. 7 And that's why they must be protected. They are not highly 8 educated and they are manipulated by brand names, by 9 advertising, and in some instances by lack of access. The 10 whole idea of universal access is there are a lot of poor 11 people who tend not to use phones in the same way people who 12 are better off. 13 The fact of the matter is that those who come from 14 the recent immigrant populations tend to call back and forth 15 more because of family ties. So they call more at a higher 16 cost if they are calling the Caribbean or Africa or Latin 17 America. And I just want to make certain that in the mix of 18 things, that those who represent under-served markets who 19 essentially are less able to fend in the marketplace are 20 protected by the public interest of this discussion. 21 MR. KIMMELMAN: And in addition to those people, 22 Larry, there are highly educated consumers who think they 23 are making an economically rational choice. And when they 24 see 99 cents for ten minutes or 20 minutes, it sounds 25 wonderful. And then when they get their bill and they find 49 1 after they have switched that a bunch of their calls are one 2 minute and they are 99 cents and two minutes and 99 cents, 3 they switch again because it wasn't what they thought it 4 was. 5 As the Commission knows from numerous proceedings 6 in looking at proliferation of line items and bills and 7 various scams in calling plans, while there is a lot of good 8 information in the marketplace, there is a lot of bad 9 information in the marketplace. 10 And a lot of the cloud of confusion, a lot of the 11 intricacy here partially may reflect some fairly 12 sophisticated choosing and market differentiation on the 13 highly competitive end of the market. And part of it may be 14 a total cloud of annoyance, confusion, cacophony to lead one 15 back to a name brand and have one feel more comfortable with 16 that because one can't really figure out whether it is a 17 good deal or bad. 18 So I would suggest that the data are very 19 interesting in the submissions. I don't think they answer 20 the questions. I think they raise more questions why the 21 switching is occurring, what it truly reflects about the 22 nature of the market. And I would urge more detailed 23 analysis. 24 MR. STRICKLING: Okay. Sandy, did you have a 25 comment you wanted to make? 50 1 MS. WAGNER: Yes, thank you. I'm sorry. Larry, 2 the answer to your question about the next carrier is -- the 3 market share question is they have about 2.5 percent today 4 of this class of emerging carriers that collectively -- this 5 600 carriers or so in the market that collectively have 20 6 percent. The largest has about 2.5. 7 Market shares today are relatively stable among 8 the carriers. And the fact is is that the combination that 9 the Commission is contemplating now of these two companies, 10 if that were consummated that the two largest carriers, that 11 being AT&T and the new WorldCom, would return the combined 12 market share of the two largest carriers to the size of the 13 market share of that combination as it was in 1989 with the 14 next largest carrier having about 2.5 percent of the market. 15 MR. STRICKLING: Our time is up. But we will give 16 you all the last comment before we take our break, Mike or 17 Jonathan. 18 MR. SALLET: Well, I -- since there can't be 19 rebuttal, I will do it, Mike, until the next panel. I am a 20 little -- I understand what Sandy has just said. A couple 21 of points about that. 22 My understanding is that her company's position is 23 that there will be a new and strong entrant in the long 24 distance market in Texas in about 90 days. As we look at 25 the question of Bell entry around the country, as has been 51 1 essentially conceded, because of the national averaging 2 rules, Bell entry need not occur in every state to have a 3 sizeable impact on long distance competition. 4 We have been careful not to say one need make 5 assumptions about Bell entry in order to approve the merger. 6 But one needs to recognize the fact that entry in, say, New 7 York, Texas, California and Florida would represent 8 something on the order of 30 percent of all the access lines 9 used for long distance in the country and, as an example, 10 would have a big impact. 11 It is just interesting, of course, to hear the 12 talk about market shares from a company that has said that 13 it intend to be offering service within about three months 14 in the long distance market. 15 There are many market shares that are small. MCI 16 had a very small market share at one time, facing a single 17 competitor with a much larger market share than what is said 18 to be the combined market shares of Sprint, AT&T and MCI 19 today. And MCI succeeded. 20 We believe that the seeds for success are 21 available to these other companies, as well, not just 22 because they have capacity, not just because they have the 23 financial wherewithal to run branding advertisements on "60 24 Minutes." But also because as we have laid out in our 25 reply, the series of innovations that have come in long 52 1 distance have come from a variety of players including as we 2 talk about a series of emerging carriers in pricing 3 innovation and in new product innovation. They are bringing 4 that to the marketplace. 5 Two final points. When we -- switching data to 6 which Mr. Salsbury referred shows that customers of ours and 7 Sprint switch disproportionately to the emerging carriers, 8 demonstrating we think the importance of that market force 9 in disciplining the market. Because as we have also 10 explained in our reply comments, customer survey data 11 demonstrates again and again that customers say that price 12 is the most important single factor in choosing a long 13 distance company. 14 Now, Mr. Kimmelman raises a series of issues. I 15 think really the identification of some of those issues 16 demonstrates that they are not merger-specific and should be 17 dealt with by the Commission to the extent the Commission 18 thinks action is necessary in proceedings that include the 19 entire industry including AT&T, not merely these two 20 companies; issues, for example, about whether there is 21 confusion among customers; issues, for example, around the 22 use of some dial-around products. 23 These are not company-specific. They are not 24 merger-specific. They are issues that Mr. Kimmelman is 25 raising about the industry and should be resolved, 53 1 therefore, not in this proceeding, but in more generalized 2 proceedings that can reach all of the long distance 3 industry. 4 MR. STRICKLING: All right. Thank you. We will 5 end this panel at this time. We will take a ten-minute 6 break and resume promptly in ten minutes. 7 (Whereupon, a brief recess was taken.) 8 MR. STRICKLING: See, nothing ever starts on time 9 around here and people get used to that. So we are breaking 10 the mold. 11 MS. CAREY: I would like to remind everybody at 12 the end of the forum today, we will be having 40 minutes for 13 public questioning of the audience. If people have 14 questions, they should fill out an index card and the index 15 cards are available on the back table. And return the index 16 cards with your name and what your subject matter is and we 17 will call you. 18 I would like to introduce the internet panel. 19 Representing the applicants are the same representatives. 20 Representing GTE is David Wheeler, Vice President and 21 Associate General Counsel. Representing Level 3 is Andrew 22 Morley, Senior Vice President for Global Marketing and 23 Sales. I would like to start off the discussion by asking 24 how should the Commission evaluate the internet backbone 25 market and how should we measure market share. 54 1 MR. DEVLIN: If I may start on that, please. 2 Sprint is in an unusual position here today because two 3 years ago, we were on the other table when MCI and WorldCom 4 wanted to merge. And we were arguing that the combination 5 of the two could possibly tip the market in internet. 6 So I want to focus on the changes that have 7 occurred in those two years and help you understand how we 8 get comfortable with the notion that there is a very low 9 probability that tipping could occur. First of all, by any 10 measure, the internet has grown quite successfully in the 11 past two years. The number of users is up four-fold to 200 12 million worldwide. Traffic, up six to ten times. The 13 number of ISPs now exceed 5,000. 14 An essential difference was in 1998, there were 15 four tier-one carriers. And most of the traffic went 16 through those four tier-one carriers. These days, no one 17 even uses the term, "tier one", anymore. It is an obsolete 18 term. 19 But if you resurrected it for purposes of this 20 discussion, you would have at least seven companies there, 21 potentially 12. You would have MCI WorldCom, Cable and 22 Wireless, AT&T, GTE, PSI Net, Sprint, QWEST, possibly 23 Williams, Level 3, Broadwing, Frontier and Teleglobe. 24 The number of national backbone providers, up to 25 44. The number of public access points went from a handful 55 1 in 1995 to more than 40 today. And there has been 2 significant expansion appearing both among smaller ISPs and 3 by larger suppliers, larger providers. And in that regard, 4 MCI WorldCom added 15 peers and Sprint has added a number of 5 peers since 1998. 6 Our position is that it is these expansions of the 7 market, it is the private and public peering, the decrease 8 in transmission cost and technological developments that 9 make peering very unlikely. 10 Today, multi-homing is real. Multi-homing means 11 an ISP connects to more than one backbone at the same time 12 and can determine what percent of traffic it sends to the 13 particular backbone provider. In fact, it has doubled from 14 '99 over '98. Why has this occurred? Because transmission 15 rates have plummeted and because the cost of BGP-4 routers 16 have plummeted. 17 So that means that multi-homers can make dynamic 18 decisions around problems. So if you thought that a 19 dominate carrier was trying to degrade connections, you 20 could just route around. 21 Another thing, we have talked about the expansion 22 appearing. But the reality is it is actually becoming less 23 important. I know it is an odd notion that there is more 24 peering, but it is less important. But that is what is 25 happening because we have this decline in price, in transit, 56 1 in routers, and you have multi-homing. And you have 2 something called distribution storage services which is 3 where you bring the data locally. So you don't have to 4 traverse long networks. You don't have to traverse peering 5 connections. 6 The combination of those actually reduced the 7 importance of peering. And, indeed, an increasingly small 8 amount of traffic on Sprint's network actually comes through 9 peering connections. 10 Having said all that, Sprint has been very open 11 that we are prepared to address any concerns that public 12 policy-makers have about the combination of our network and 13 MCI WorldCom. I guess stated another way, Sprint is 14 prepared to divest its internet business if public policy- 15 makers believe that that is important and necessary. 16 MS. CAREY: I would like to ask Level 3 who is 17 relatively a new entrant in the backbone market whether you 18 agree that peering is less important. 19 MR. MORLEY: Absolutely not. Just to talk to 20 market share briefly, there is a number of ways to measure 21 market share. Market share is quite a bit uncertain in this 22 marketplace. You can look at revenues. One can look at the 23 number of customers that one has. One can look at the 24 amount of traffic that is carried over a provider's network. 25 If you look at the host -- there are a number of 57 1 ways to look at it. If you look at the market share of 2 combined Sprint and WorldCom entity, and the internet 3 backbone space would be anywhere from 45 percent to roughly 4 60 percent based on a number of different industry analysts. 5 I guess the -- but the point that -- the point of 6 market share is really not the issue here from a Level 3 7 perspective. And I would disagree with the comments that 8 peering is not important. For the Level 3 -- from the 9 standpoint of a new entrant in the internet market or a 10 smaller entrant, the single most critical issue to 11 maintaining a competitive environment in the internet 12 backbone space is open interconnection, period. 13 As in any network service, the value of the 14 internet backbone market is driven by the number of 15 customers that a provider has on its network and is able to 16 connect to. That's the genesis of the internet in its 17 infancy and what created the value of it, was that open 18 interconnection. 19 And given the high concentration of customers on a 20 small number of providers' networks, the dominant providers' 21 networks, without open nondiscriminatory interconnection to 22 those networks, a small provider or a new entrant is at a 23 competitive disadvantage and is unable to effectively 24 compete for customers. 25 So, you know, the merger between Sprint and 58 1 WorldCom creates a concentration of market power which is 2 likely unhealthy for the industry. And, therefore, some 3 kind of divestiture, as was suggested, of one of the two 4 internet backbones probably likely makes sense. 5 But that is not the issue. The issue is that a 6 system for real, open, nondiscriminatory interconnection has 7 to be put in place. And from -- and the merger -- this 8 merger could create market shifts, market imbalances, market 9 power shifts that could further exacerbate that issue. So 10 it makes the requirement for this kind of open 11 interconnection that much more important. 12 I guess the -- from Level 3's perspective, there 13 is a number of elements of what open interconnection would 14 entail. First of all, the first would be the establishment 15 of open, objective, measurable peering criteria by all 16 providers. The second would be that that peering criteria 17 would be published so that all providers would know what the 18 requirements are to peer with the dominant providers. 19 Thirdly, that each provider would publish the 20 people, the other providers that they peer with. And the 21 fourth would be the establishment of a mechanism to ensure 22 that providers adhere to their peering policy. And our 23 suggestion would be that this would be a system self- 24 regulation -- industry self-regulation with some kind of 25 third party arbitration process in the event of disputes. 59 1 That kind of open interconnection policy is 2 critical to maintaining and developing and ensuring a 3 competitive innovative market. There were a couple of -- so 4 bottom line, that peering is critical and open 5 interconnection is critical to competition in this market. 6 There were two -- 7 MR. STRICKLING: Andrew, before you go on, is the 8 industry moving to the environment you described as a matter 9 of self-regulation? And depending on how you view the trend 10 today, what do you see is the impact of the merger as either 11 hastening the move toward this model of self-regulation or 12 perhaps slowing it down or preventing it? 13 MR. MORLEY: Peering -- the industry has gone 14 through a couple of phases. In the beginning of this -- you 15 know, of the internet, open interconnection was the norm. 16 It was how the value of the internet was initially 17 developed. As dominant providers emerged, their willingness 18 to openly peer with people dramatically shifted. 19 And so -- and, you know, the reason for that is 20 once you have a critical mass and a large dominant share of 21 customers and endpoints, the value of your network and the 22 value of those customers is so significant and gives you 23 that market -- that dominant market position that there is 24 an incentive to not allow others to have equal access to 25 those customers. 60 1 Now, you can get access. And new entrants like 2 Level 3 can get access. But we typically have to pay for 3 that access like a customer even though in reality, we look 4 like a co-carrier. We look like, you know, a peered network 5 to that provider. That we have made progress -- Level 3 has 6 made progress in establishing peering with both WorldCom and 7 with GTE, two of the four dominant providers, as well as 8 with Cable and Wireless. 9 Those are, however, very difficult negotiations. 10 Those are very protracted negotiations. And I don't know if 11 it is coincidence, but progress always seems to coincide 12 with some type of regulatory scrutiny. So it is -- you 13 know, they are very, very protracted discussions. 14 And we, Level 3 right now still does not have 15 peering with Sprint. We have a comparable network to 16 Sprint. We carry traffic on our network. The same amount 17 of traffic that Sprint carries for us, we carry for Sprint. 18 We route traffic the same as Sprint does on our network. We 19 use our connection with Sprint to transfer traffic to 20 Sprint. Sprint uses that connection to transfer traffic to 21 Level 3. 22 And yet Level 3 pays Sprint as a retail customer 23 for that connection. Sprint pays nothing. So it is -- and, 24 you know, we have continually -- you know, Sprint has an 25 ambiguous peering policy. We -- despite our view that we 61 1 have met that policy, we have -- and repeatedly had 2 communication -- or attempted to have communication with 3 Sprint saying that we have met their policy, they come back 4 to us and give us ambiguous reasons for not peering such as 5 your traffic volume is insufficient, even though -- 6 insufficient for the additional cost, the incremental cost. 7 One, there is no incremental cost. Two, our 8 traffic volumes are six times the traffic volume that UU Net 9 requires for their peering policy. And they are the 10 dominant provider in the internet backbone space. So we are 11 -- you know, that is an indication of kind of the state of 12 the market, particularly as it applies to Sprint as one of 13 the dominant providers. 14 MS. CAREY: Andrew, let me give Rich an 15 opportunity to respond to some of your comments. 16 MR. MORLEY: Sure. 17 MR. DEVLIN: Thank you. I take it that means you 18 are in favor of the merger? 19 MR. MORLEY: I will leave it up to others to 20 decide whether or not the merger is a good thing and whether 21 or not divestiture of the internet backbone is required. 22 The real issue is interconnection. 23 MR. DEVLIN: Okay. Great. Four quick points. 24 The first is market share. I would agree with the statement 25 that there really is no accepted way to measure market 62 1 share. We have all heard of the expression, "Lies, damn 2 lies and statistics." Well, we can add internet market 3 share to the end of that list. 4 We think there is two ways -- again, there is no 5 great way to do it. There is problems with any way. But we 6 think revenues may be a reasonable surrogate. It will get 7 you close. Another way to look at it is in the connections 8 that one has with its peers and its customers, what the band 9 width is there. Under both of those tests, the combined 10 company would have less than 50 percent. But, again, this 11 is not an area where there is exact science. 12 On the notion of peering, which is now being 13 characterized as open interconnection, it would be useful 14 just to talk a second about what peering is. Peering is a 15 voluntary arrangement between two companies when they 16 believe that the cost to provide and exchange traffic is 17 roughly equivalent. And if it is roughly equivalent, it 18 makes no sense to exchange settlement dollars. 19 So peering is a pricing mechanism. It has nothing 20 to do with open interconnection. Open interconnection is 21 fully available through transit. And as we have talked 22 about before and demonstrated in our reply, the price for 23 these connections has just plummeted. 24 I think it is worthy to note that this issue, 25 while apparently important to Level 3, has nothing 63 1 whatsoever to do with the merger. What Level 3 is really 2 asking for is the Commission to institute an inquiry looking 3 at the industry's peering policies and would like to 4 prescribe rules. And if the Commission were inclined to do 5 that, it should look at it in a notice in common proceeding. 6 It was previously asked to do that and it declined 7 because that fundamentally would be regulating the internet. 8 And I don't think that is what the Commission wants. 9 Finally, the notion that we have comparable 10 networks, you know, we just see things differently. I think 11 Level 3 admitted in its reply comments that carriers have a 12 legitimate interest in avoiding free-riders. That is, 13 people who want to come on for free, but who dump 14 disproportionate cost on the other provider. 15 Level 3 acknowledged that and asserts that its 16 policy protects against that. So they drew a line one place 17 and we drew a line a different place. You know, that is 18 just the way this thing goes. Level 3 dumps more traffic on 19 us than we provide back to them. That is why we don't peer 20 with them. 21 MR. MORLEY: Can I just make a couple of comments 22 on that? 23 MS. CAREY: Okay. 24 MR. MORLEY: The last statement is just wrong. We 25 have equal balanced traffic between Level 3 and Sprint. If 64 1 the rationale for peering is balanced traffic between two 2 providers, why won't you peer with us? And it is not that 3 you have drawn a line in the sand. It is an ambiguous, 4 fuzzy -- you know, we have no idea -- we do not know what 5 your specific peering requirements are because you will not 6 tell us. 7 So will you tell us what your specific traffic 8 requirements are which is why in your last communication to 9 us you stated that you would not peer with us -- will you 10 tell us specifically what your requirements are -- your 11 traffic exchange requirements are to peer? 12 MR. DEVLIN: Thirty seconds and then maybe we can 13 move on to other issues. 14 MR. MORLEY: Well, let me talk about a few other 15 things. I mean, maybe the -- 16 MR. DEVLIN: Wait, you didn't want an answer? 17 MR. MORLEY: Well, another way to think about 18 market share is our customers will not buy from us unless we 19 peer. That in and of itself I think is -- with the dominant 20 providers, and the dominant providers really being the big 21 four, the big four being GTE, Sprint, Cable and Wireless and 22 WorldCom. That in my mind is a statement of market power. 23 MR. DEVLIN: It is still 30 seconds. I learned 24 this trick watching the Presidential debates. But, 25 unfortunately, I didn't have it in my pocket already. It 65 1 was in my notebook. So I am in the process of folding it 2 very quickly and putting it in my pocket and then taking it 3 out. 4 And I would say I have in front of me a letter 5 dated January 6th, 1999 to Ms. Laura Nolan, Carrier 6 Relations Manager, Network Planning and Development, about 7 Sprint's bilateral peering policy. It contains a copy of 8 the policy and asks that it be held in confidence. 9 MS. CAREY: I would like to ask GTE a question. 10 MR. MORLEY: But, I mean, that's absurd. 11 MR. ATKINSON: I would just like to actually 12 follow up really on part of Larry's original question and 13 what we have been hearing back and forth. Certainly, the 14 FCC has spent an awful lot of time over the years on trying 15 to -- dealing with interconnection issues on the 16 conventional telephone -- telecommunications network. And I 17 think it is true that the Commission has expressed a strong 18 desire never to get into that black hole with the internet. 19 So the real question, Andrew, is does this merger 20 increase -- does it really increase the likelihood of having 21 to get regulators involved in some fashion, state, federal 22 or -- 23 MR. MORLEY: Right. 24 MR. ATKINSON: -- international involved in the 25 internet which is clearly something I think that most people 66 1 would be fairly aghast at. 2 MR. MORLEY: Yes. And by the way, we are not 3 asking for regulation of the internet. We are asking for 4 self-regulatory policy. 5 MR. ATKINSON: But what happens if the self- 6 regulatory policy -- Larry's question was, you know, has -- 7 is the industry moving towards self-regulation because if it 8 isn't, then presumably it is moving in the other direction. 9 And which way is it going? 10 MR. MORLEY: I would say the industry is moving in 11 fits and starts towards self-regulation. But it is not 12 universal. And it is not -- and, you know, dominant 13 carriers can play the game. 14 But with regard specifically to the merger, there 15 is a couple of -- there is a number of points. First of 16 all, assuming there is -- there would be a divestiture of 17 either the unit backbone of the Sprint Link backbone, the -- 18 just the dislocation -- as in any merger, there is going to 19 be operational dislocations associated with that merger with 20 the spun off entity and, you know, being acquired by another 21 party. 22 That in and of itself as we have seen in prior 23 instances will allow for the opportunity for further 24 concentration amongst the dominant providers in the backbone 25 -- the internet backbone market. So that in my mind makes 67 1 it more imperative to put in place and to ensure some kind 2 of open interconnection to alleviate the issue of more 3 concentrated market share. 4 In addition, given the anticipated price that some 5 acquirer would pay for -- let's assume Sprint Link is the 6 divested entity. Given the anticipated, you know, value 7 that someone would pay for that, there is going to be an 8 incentive to continue not to peer with providers like Level 9 3 and continue to extract revenue from them and payments 10 from them to accelerate the return on investment in that 11 purchase. 12 Compound that with the fact that, again, the 13 operational dislocations of some type of acquisition by a 14 third party of the Sprint Link backbone would make it that 15 much more difficult and -- to -- for them to focus on these 16 peering issues and give them frankly an excuse to say we are 17 dealing with a merger, we can't enter into peering 18 discussions with you. 19 I think the thing to think about here is by 20 requiring some kind of open interconnection policy that 21 would be self-regulated by the two largest providers of the 22 internet backbone, you can create basically a de facto 23 standard and use this opportunity to essentially not have 24 to, you know, provide some kind of general rule-making or 25 that kind of a proceeding going forward. 68 1 MS. CAREY: David, GTE has been a major internet 2 backbone provider for many years. Do you agree with Rich 3 when he says that there has been significant changes in the 4 past two years such that those changes would alleviate any 5 harms arising from this merger? 6 MR. WHEELER: Boy, I am afraid my answer is going 7 to be a little boring compared to that heated debate that we 8 just had. I will say that I remember when Mr. Devlin was on 9 this side of the table and when I worked with his colleagues 10 in the MCI WorldCom proceeding to fashion the arguments that 11 the FCC accepted, the European Commission accepted and for 12 all intents and purposes, the Department of Justice 13 accepted. 14 I do agree with Mr. Devlin that the internet has 15 grown significantly since last time, that there is a lot of 16 good things that have happened to the internet since last 17 time, more customers, more ISPs, better access, all those 18 things we would expect to happen in a competitive market. 19 And thank God, Mr. Devlin was on this side of the table last 20 time to make sure that MCI divested internet MCI so that the 21 market remained competitive. 22 I don't agree though that there is enough that has 23 happened in the marketplace that changes the economics of 24 the situation. The fact of the matter is that the economics 25 are still the same. No matter how you slice or dice the 69 1 market share here, you know, whether one of them is perfect 2 or, you know, all of them aren't quite perfect, the fact of 3 the matter is that what you see repeatedly is that a 4 combination of Sprint and MCI shows that they will dominate 5 the internet backbone market. 6 Their own numbers even with regard revenues 7 indicate that they will be more than three times -- in 1999 8 terms, three times the next carrier in terms of revenue, 2.5 9 times in 2001 and more than two times in 2003. It is not 10 just sheer size. It is also sheer size relative to your 11 next participant. And they will be big. They will be very, 12 very big. And that is going to be a problem here for them. 13 The fact of the matter is that what they seem to 14 want to argue for is that since there is not a very good way 15 to define market share here -- and I will admit, there is 16 not a perfect way -- but, frankly, even the merger 17 guidelines recognize that revenues, although generally a 18 very good way to take a look at markets and market shares, 19 isn't necessarily perfect in and of itself and is willing to 20 consider other means of defining the market and looking at 21 market shares. 22 Their argument seems to be that somehow just 23 because there is not a perfect way to measure market share, 24 again, despite the fact that all the numbers seem to show 25 they dominate, that they should be able to win the day, that 70 1 there is nothing there that seems to indicate perfectly that 2 they will dominate the market. 3 Yet at the same time, they haven't put forward any 4 type of analysis of shifts that they don't dominate the 5 marketplace. And really, the burden is on them to come 6 forward and show an analysis that shows that they do not 7 dominate this marketplace once merged and that they won't do 8 it. 9 I mean, currently, their view is almost kind of an 10 Alice in Wonderland view of competition law, that somehow it 11 stands everything on its head, that the opponents have the 12 burden of somehow showing that some measurement is 13 absolutely perfect. We don't think that you have to show 14 that. What we do show is that all of these measurements 15 directionally show that there is a problem. 16 MS. CAREY: Could you talk specifically about 17 some of the ways in which they could exert their market 18 dominance? 19 MR. WHEELER: Sure. The main way is the same way 20 that we saw back in MCI WorldCom and the concerns that we 21 have there and as Andrew alluded to, also, is that you get 22 to such a large size that you essentially can sit there and 23 in negotiating with a smaller carrier with regard to 24 peering, tell them that you have to come to terms on my 25 terms or I can screw you up. And it can be done in any 71 1 number of ways. You could pass along higher prices. You 2 could force them to buy transit. You could start degrading 3 their service. 4 And degrading service is something that -- it 5 isn't something that has to be done intentionally. It is a 6 matter of slow rolling these interconnections because the 7 internet is growing so quickly that these interconnection 8 points, peering points have to be upgraded quickly. And, 9 you know, if you kind of drag your feet, you kind of slow 10 roll that, then you create congestion at those peering 11 points. And your customers don't get access to my customers 12 as well. Granted my customers don't get access to yours 13 either. But my customers don't have as much pain. 14 I mean, if I am a backbone that has 50 percent of 15 the market and you are a backbone that has eight percent of 16 the market, my customers only see degradation eight percent 17 of the time. Your customers see if 50 percent of the time. 18 And your customer might be somebody who is trying to develop 19 e-commerce, who needs access to my customers. 20 In the end because this market is growing so 21 quickly, your customers can't sit there that long and hope 22 somehow that you are going to be able to come to terms and 23 fix this problem. Eventually, they will come to me or they 24 will interconnect with me through multi-homing. But 25 eventually they all come to me because I am bigger and I can 72 1 give them a lot more of the internet than you can. 2 MR. ROGERSON: Mr. Wheeler, Mr. Devlin said that 3 perhaps the fact that most ISPs now multi-home means that, 4 you know, the argument you just outlined, why a big firm 5 might -- why it might be bad in a network industry -- 6 MR. WHEELER: Right. 7 MR. ROGERSON: -- doesn't really apply here 8 anymore because now ISPs routinely connect to all of you 9 anyhow. 10 MR. WHEELER: Well -- 11 MR. ROGERSON: Could you comment? First of all, 12 flesh that argument out for me and then tell me what you 13 think of it. 14 MR. WHEELER: Flesh his argument or flesh my 15 argument? 16 MR. ROGERSON: Yes, flesh his argument out for me 17 and then -- 18 MR. WHEELER: In that situation -- I will do my 19 best -- 20 MR. ROGERSON: And then -- yes. 21 MR. WHEELER: -- on that. As best as I can tell, 22 his argument is that because all ISPs are connected to all 23 the major backbones already, the ISPs won't feel any types 24 of degradation. G