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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In re Applications of ) ) TELEPORT COMMUNICATIONS ) GROUP INC., ) Transferor, ) ) AND ) CC Docket No. 98-24 ) AT&T CORP., ) Transferee, ) ) For Consent to Transfer of Control of) Corporations Holding Point-to-Point) Microwave Licenses and Authorizations to) Provide International Facilities-Based and) Resold Communications Services ) MEMORANDUM OPINION AND ORDER Adopted: July 21, 1998 Released: July 23, 1998 By the Commission: Commissioner Furchtgott-Roth concurring and issuing a statement. TABLE OF CONTENTS Topic Paragraph No. I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . .1 II. BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . .3 A. Applicants . . . . . . . . . . . . . . . . . . . . . .3 B. The Merger Applications. . . . . . . . . . . . . . . .8 C. Legal Standards. . . . . . . . . . . . . . . . . . . 11 III. ANALYSIS UNDER PUBLIC INTEREST STANDARD . . . . . . . . . 13 A. Analytical Framework for Assessing Competitive Effects13 B. Relevant Markets . . . . . . . . . . . . . . . . . . 20 1. Product Markets . . . . . . . . . . . . . . . . 20 2. Geographic Markets. . . . . . . . . . . . . . . 21 C. Market Participants. . . . . . . . . . . . . . . . . 23 1. Local Exchange and Exchange Access Market . . . 24 a. Participants in the Provision of Local Exchange and Exchange Access Service to Residential and Small Business Customers. . . . . . . . . . . . . . . . . 24 b. Participants in the Provision of Local Exchange and Exchange Access Services to Larger Business Customers . . . . . . . . . 26 2. Participants in the Provision of Domestic Long Distance Services28 3. Participants in the Provision of U.S. International Telephone Service30 D. Analysis of Competitive Effects Due to Horizontal Aspects of the Merger.32 1. Overview. . . . . . . . . . . . . . . . . . . . 32 2. Local Exchange and Exchange Access Services . . 33 a. Residential and Small Business Customers . 33 b. Larger Business Customers. . . . . . . . . 35 3. Domestic Long Distance Services . . . . . . . . 40 4. U.S. International Telephone Service. . . . . . 41 E. Analysis of Competitive Effects Due to Vertical Aspects of the Merger42 F. Potential Public Interest Benefits . . . . . . . . . 47 G. Other Issues . . . . . . . . . . . . . . . . . . . . 49 IV. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . 56 V. ORDERING CLAUSES. . . . . . . . . . . . . . . . . . . . . 57 I. INTRODUCTION 1. In connection with a proposed merger between Teleport Communications Group Inc. (Teleport) and AT&T Corp. (AT&T), the merging parties have filed applications seeking authority, pursuant to Sections 214(a) and 310(d) of the Communications Act of 1934, as amended (Communications Act), and Section 63.18 of the Commission's rules, to transfer to AT&T control of Teleport's numerous communications licenses and authorizations. In accordance with the terms of Sections 214(a) and 310(d), AT&T and Teleport (collectively, Applicants) must persuade us that their proposed merger will serve the public interest, convenience, and necessity before we can grant their applications. In this case, the public interest analysis includes an analysis of the competitive effects of the transaction. 2. Based on the record and our analysis of the effects of combining Teleport's current business assets and capabilities with AT&T's in the relevant markets, we conclude that the merger is unlikely to have any meaningful negative effects on competition. Moreover, our analysis indicates that the two companies' assets and capabilities are largely complementary, so the proposed combination will likely permit swifter entry into local exchange and exchange access markets than would otherwise occur. Furthermore, it does not appear that this accelerated entry will come at the expense of losing one of a very limited number of firms uniquely situated to foster competition in relevant markets. Accordingly, we find that the merger of AT&T with Teleport is in the public interest and approve the Application. II. BACKGROUND A. The Applicants 3. AT&T is the largest long distance and international carrier in the United States. It provides communications services to residential, business, and government customers, and operates in more than 250 countries and territories around the world. AT&T's revenues from communications services totaled $51.3 billion in 1997, of which $22.2 billion was derived from business long distance services and $24 billion from residential long distance services. 4. In addition to the foregoing services, AT&T provides local exchange services to a relatively small number of customers. In particular, AT&T offers resold local exchange service to approximately 400,000 residential customers in eight states. AT&T also offers a local calling service to business customers entitled "Advanced Digital Link." This offering provides outbound local calling service in 49 states and outbound and inbound service in four states. AT&T reports that its total 1997 revenues for local services were approximately $68 million. 5. According to the Applicants, Teleport is the nation's largest competitive local exchange carrier (CLEC). In 1997, Teleport earned revenues of $494.3 million. It provides local exchange and exchange access services primarily to business customers located in urban areas and to a relatively small number of residents of multiple dwelling units in high-density markets. Teleport's principal business customers include telecommunications-intensive businesses, such as healthcare and educational institutions, governmental agencies, long distance carriers and resellers, internet service providers, wireless communications companies, and financial services companies. Teleport provides local service primarily through the use of its own local fiber optic facilities, broadband wireless capabilities, and rights-of-way, supplemented by resale of others' local services. Teleport operates in 83 markets in the United States, including 29 of the largest 30. 6. Teleport also provides long distance and international services, primarily through its subsidiary ACC Corp. (ACC). In 1997, ACC earned worldwide revenues of $372.6 million, of which $120.6 million were attributable to local, long distance and international calls billed in the United States. 7. Through its subsidiaries, Teleport holds Section 214 authorizations to operate as an international facilities-based and/or resale carrier between the United States and all foreign points. Teleport, through ACC, also holds licenses to operate six point-to-point microwave facilities in New York. Through another subsidiary, BizTel, Inc. (BizTel), Teleport holds licenses to operate more than 213 38.6-40.0 GHz point-to-point microwave facilities throughout the country. B. The Merger Applications 8. On January 8, 1998, Applicants executed an Agreement and Plan of Merger ("Plan of Merger") that calls for the transfer of control of Teleport to AT&T. Pursuant to the Plan of Merger, Teleport will become a wholly-owned subsidiary of AT&T in a stock-for-stock merger. Applicants state that the proposed merger will result in a change in the ultimate owners of Teleport, but will not involve any immediate change in the manner in which Teleport currently provides service to its customers. 9. In connection with the Plan of Merger, Applicants filed with the Commission, on February 3, 1998, a joint application requesting consent to the transfer of control to AT&T of various Section 214 authorizations held by Teleport or its subsidiaries. On the same day, Teleport filed with the Commission two other applications requesting consent to the transfer of control to AT&T of licenses (or applications for licenses) held by Teleport subsidiaries, ACC and BizTel. On February 18, 1998, Applicants, pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, filed a premerger notification with the Department of Justice. The Department of Justice completed its review without taking action against the proposed merger. In addition, Applicants sought approval for the merger from 24 state public utility commissions, 23 of which already have granted the necessary approvals. 10. Several parties filed timely comments opposing the applications or petitions to deny or dismiss those applications. These parties argue primarily that the applications are incomplete and/or that the proposed transfers of control would not be in the public interest because they would impair competition in the provision of telecommunications services. C. Legal Standards 11. Pursuant to Sections 214(a) and 310(d) of the Communications Act, the Commission must determine whether Applicants have demonstrated that granting a transfer of control of licenses and authorizations currently held by Teleport and its subsidiaries to AT&T would serve the public interest, convenience and necessity. The public interest standard of Sections 214(a) and 310(d) is a flexible one that encompasses the "broad aims of the Communications Act." These broad aims include, among other things, the implementation of Congress' "pro-competitive, de-regulatory national policy framework" for telecommunications, promotion of the competition policies of the Sherman and Clayton Acts, and enhancing "[a]ccess to advanced telecommunications and information services . . . in all regions of the Nation." The public interest analysis may also include an assessment of whether the merger will affect the quality of telecommunications services provided to consumers or will result in the provision of new or additional services to consumers. In evaluating whether the proposed transaction furthers the aims of the Communications Act, the Commission may consider the trends within, and needs of, the telecommunications industry, the factors that influenced Congress to enact specific provisions of the Communications Act, and the nature, complexity, and rapidity of change in the telecommunications industry. 12. The Commission's analysis of the competitive effects of the proposed transaction is informed by antitrust principles, but it is not governed by the scope of the antitrust laws. The applicants must demonstrate, inter alia, not merely that the merger will not "substantially . . . lessen competition . . . [or] . . . tend to create a monopoly," but that the "public interest, convenience, and necessity would be served by the [merger]." The Telecommunications Act of 1996 sets a clear national policy that competition leading to deregulation, rather than continued regulation of dominant firms, shall be the preferred means for protecting consumers. Mergers that increase market power or retard the decline of market power conflict with this policy by impeding the advent of competition and thereby maintaining, rather than decreasing, the need for continued regulation. In assessing mergers, we also consider whether any public interest benefits may result from the merger. Ultimately, we must determine whether the applicants have demonstrated that the proposed transaction, on balance, serves the public interest. III. ANALYSIS UNDER PUBLIC INTEREST STANDARD A. Analytical Framework for Assessing Competitive Effects 13. In our public interest analysis of the record in this proceeding, we begin by evaluating the current state of competition in the relevant markets, and the likely competitive effects of the proposed merger. In conducting this evaluation, we consider the likely effects of the proposed merger on competition both during implementation of the 1996 Act and as the 1996 Act's implementation alters market structure in the future. We also consider the likely effects of this proposed merger on international competition both now and as the liberalization commitments of the World Trade Organization's Basic Telecommunications Agreement (WTO Basic Telecom Agreement) take effect. We assess whether the proposed merger would impede competition in the relevant markets. 14. In conducting our public interest analysis of the competitive effects of the proposed merger, we generally follow the analytical framework adopted by the Commission in the Bell Atlantic/NYNEX Order and the BT/MCI Order. As the Commission noted in the BT/MCI Order, this analytical framework is based not only on prior Commission analyses of market power, but "is also embodied in the antitrust laws, including the Department of Justice and Federal Trade Commission 1992 Horizontal Merger Guidelines and the April 8, 1997 revisions of those guidelines." 15. As the Commission explained in Bell Atlantic/NYNEX and BT/MCI, the first step in analyzing a merger is to define the relevant product and geographic markets that may be affected by the merger. In doing so, we may, where appropriate, distinguish between "end-user" markets, where a final product or service is sold to end-user customers, and "input" markets, where the product or service is sold to firms that use it as an input in producing other products or services. 16. Once we have defined the relevant markets, we identify the market participants in order to understand the likely competitive effects of the transaction. To do this, we must focus on both the current and likely future competitive significance of the firms that are included in the market, just as the Department of Justice and Federal Trade Commission focus on likely future competitive significance when those agencies identify market participants and assign market shares for the purpose of assessing likely competitive effects. 17. When faced with a proposed merger that affects markets that are themselves in a process of rapid change, the best way to analyze the likely effect of the merger is to isolate the effect of the merger from all other factors affecting the development of the relevant markets over time. This is achieved by framing the analysis in a way that holds constant the effects of all changes in market conditions other than those directly caused by the merger. To do this, we also identify as market participants those firms that have been effectively "precluded" from the market. These "precluded competitors" are firms that are most likely to enter but have until recently been prevented or deterred from participating in the market by barriers to entry the 1996 Act seeks to lower. We then identify most significant participants based on an analysis of capabilities and incentives to compete effectively in the relevant market. 18. Next, we must evaluate the likely competitive effects of the proposed merger in each of the relevant markets. In the instant case, this requires us to examine both the likely competitive effects due to the "horizontal" aspects of the merger and the likely competitive effects due to the "vertical" aspects of the merger. We must examine competitive effects due to the horizontal aspects of the merger because, as described below, AT&T and Teleport participate in some of the same product and geographic markets. We must examine competitive effects due to the vertical aspects of the merger because, as also described below, AT&T uses in its long distance operations a service provided by Teleport, i.e., access to local exchange networks to originate or terminate long distance telephone calls. 19. Finally, we must weigh any potential competitive harms of the merger against its likely benefits. We do so to determine whether, on balance, the proposed transaction would promote the public interest. B. Relevant Markets 1. Product Markets 20. The relevant services provided by both Teleport and AT&T are local exchange and exchange access services, domestic long distance services, and U.S. international telephone service. The Commission has determined in prior proceedings that each of those services constitutes a distinct product market. We reaffirm those determinations and adopt them for purposes of this proceeding, because we find no close demand substitutes for local exchange and exchange access services, domestic long distance services, and U.S. international services. For purposes of this proceeding, therefore, we identify the following three relevant product markets: (1) local exchange and exchange access services; (2) domestic long distance services; and (3) U.S. international telephone service. We further find that, in this proceeding, it is reasonable to subdivide the local exchange and exchange access market into customer groups that demonstrate similar demand patterns. For purposes of this proceeding, we identify two such groups: (1) residential and small business consumers of local exchange and exchange access services, which we refer to as the mass market; and (2) medium- and large-sized business/government consumers of local exchange and exchange access services, which we refer to as the larger business market. We also identify, for purposes of analyzing potential competitive effects due to the vertical aspects of the merger, one relevant input product market, namely, exchange access service. 2. Geographic Markets 21. In the Bell Atlantic/NYNEX Order and the BT/MCI Order, the Commission determined that, for purposes of merger analysis, it may aggregate into a relevant geographic market those customers in the same geographic area that face similar competitive choices regarding a particular relevant product or service. With respect to local exchange and exchange access services, we recognize that discrete local areas may constitute separate relevant geographic markets, since customers in different local areas may well face different competitive alternatives. In this case, however, we conclude that we need not evaluate each discrete local area where Teleport is providing services, because we conclude that the merger is unlikely to have anticompetitive effects in the local market where Teleport has the greatest market share. Moreover, carriers in local markets generally face similar competitive conditions. For example, virtually all local markets are dominated by the incumbent local exchange carrier (LEC). 22. With respect to domestic long distance services, the Commission has previously stated that, in general, it would treat long distance services as a single national geographic market. We find nothing in the record in this proceeding to cause us to deviate from this approach in analyzing the likely competitive effects of the instant merger on the market for domestic long distance services. Accordingly, for purposes of this proceeding, we will adopt a national market as the relevant geographic market for domestic long distance services. With respect to U.S. international telephone service, the Commission seeks to determine whether the proposed merger will have anticompetitive effects on any U.S. international route. C. Market Participants 23. The second step in our competitive analysis is to identify actual and, where applicable, precluded participants in each relevant market. From the universe of such participants, we seek to identify, where appropriate, those that appear to be the most significant, based upon an analysis of both their capabilities and their incentives to compete effectively in the relevant market. 1. Local Exchange and Exchange Access Market a. Participants in the Provision of Local Exchange and Exchange Access Service to Residential and Small Business Customers 24. Although competitors have entered a few discrete local areas, incumbent LECs are the sole actual providers of local exchange and exchange access services to the vast majority of residential and small business customers in most areas of the United States. Thus, incumbent LECs remain the most significant actual providers of local exchange and exchange access services to residential and small business customers. 25. As for other significant market participants, the Commission, in the Bell Atlantic/NYNEX Order, found that AT&T, MCI, and Sprint were previously precluded competitors that were among the most significant potential participants in the market for local exchange and exchange access services provided to residential and small business customers, because each had "the capabilities and incentives to acquire a critical mass of customers in the relevant markets and to do so relatively rapidly." The Commission further found that facilities- based CLECs, such as Teleport, were not among the most significant market participants in this market, because they lacked the financial resources and brand name reputation necessary to enter the residential and small business market quickly. Finally, the Commission found that Bell Atlantic, as an adjacent incumbent LEC, was among the most significant market participants in at least parts of NYNEX's territory. We find that the record before us supports the same findings in this proceeding. b. Participants in the Provision of Local Exchange and Exchange Access Services to Larger Business Customers 26. Incumbent LECs also continue to dominate the larger business market for local exchange and exchange access services. In this market, however, in contrast to the market for residential and small business customers, incumbent LECs are facing increasing competition from numerous new entrants, including Teleport, that are building facilities as they seek to provide services to larger business customers. AT&T also has started offering local service for larger business customers through its Advanced Digital Link Service. 27. Recent statistics support the conclusion that incumbent LECs are facing increasing competition from new entrants in the market for local exchange and exchange access services to larger business customers. In 1996, for example, there were approximately 109 CLECs, with total revenues of $949 million, that were providing local exchange and exchange access services. CLEC revenues have been increasing rapidly, from 0.3 percent of total revenues in the local exchange and exchange access market in 1994 (when the only CLECs were competitive providers of exchange access services, commonly referred to as competitive access providers or CAPs) to approximately 1.0 percent in 1996. CLEC revenues grew by approximately 70 percent in 1996 and over 100 percent during 1997. Moreover, during this period, CLECs tripled fiber deployment from 0.4 million fiber miles at the end of 1994 to 1.3 million fiber miles (or approximately 10 percent of the 12.3 million fiber miles of incumbent LECs) at the end of 1996. In addition, between 1995 and 1997, the number of competitors with collocation arrangements in incumbent LEC central offices nearly doubled from 58 to 106, and the number of central offices with such arrangements increased from 176 to 611 (347 percent). Applicants state that, in each of Teleport's top ten markets, Teleport faces competition from five to twelve other operating CLECs, including Intermedia Communications, Inc., Metromedia Fiber Networks, Time Warner Communications, NEXTLINK, WorldCom, Inc., and e.spire. We find that, although incumbent LECs continue to dominate the local exchange and exchange access larger business market, numerous new entrants are rapidly entering this market, especially in central business districts in urban areas, and that any number of these other new entrants have both the capabilities and the incentives to compete effectively and will be "at least as significant a competitive force as either of the merging parties." 2. Participants in the Provision of Domestic Long Distance Services 28. Hundreds of firms compete in the market for domestic long distance services, which in 1997 generated revenues of approximately $88.6 billion. While AT&T remains the largest competitor in this market, its market share, measured by various means, has been steadily eroding since 1984. In addition to the four interexchange carriers (AT&T, MCI, Sprint, and Worldcom) that currently possess coast-to-coast fiber-optic networks, at least four other carriers (Qwest Communications International, Inc., IXC Communications, Inc., Williams Communications Group, Inc., and Level 3 Communications, Inc.) are in the process of constructing coast-to-coast fiber networks. Moreover, there are numerous regional facilities-based carriers and hundreds of carriers that provide long-distance services via resale or a combination of resale and owned facilities. Finally, when the five regional Bell Operating Companies (BOCs) meet the statutory requirements to enter this market in their regions, we expect them to be strong competitors. GTE and other non-BOC incumbents are actual participants in this market. 29. Teleport is also a participant in this market, albeit a new entrant. In 1997, Teleport's combined long distance revenues, including those of ACC, which it acquired in April 1998, totaled approximately $128 million, which represents approximately 0.14 percent of 1997 total long distance revenues. 3. Participants in the Provision of U.S. International Telephone Service 30. There are also hundreds of carriers that compete with AT&T and Teleport in the market for U.S. international services, which in 1996 generated revenues of approximately $17.7 billion. In 1996, there were 47 carriers providing U.S. international services by using their own facilities or lines leased from other carriers, with total market revenues of approximately $15.0 billion ($14.2 billion of which was attributable to telephone service). About three hundred additional carriers provided U.S. international telephone service on a purely resale basis, with total market revenues of approximately $3.5 billion. Additionally, the BOCs represent precluded competitors in this market, at least with respect to the provision of in-region international services. GTE and other non-BOC incumbent LECs are actual participants in this market. 31. With respect to the merging parties, AT&T's share of the international telephone service market, measured in terms of revenues, was 100 percent in 1984, but is now below 50 percent. Teleport is also a participant in this market, but not a significant one. The combined international telephone service revenues of Teleport and its subsidiary, ACC, was approximately $47 million in 1996. D. Analysis of Competitive Effects Due to "Horizontal" Aspects of the Merger 1. Overview 32. In this section, we assess the possible competitive effects due to the horizontal aspects of the proposed merger. As the Commission has explained in some detail in prior orders, a merger may have an anticompetitive effect due to its horizontal aspects if the merger enables the combined entity to achieve unilateral market power, or if it reduces the number of competitors in the relevant market so that the remaining firms can collectively exercise market power through coordinated interaction. Alternatively, a merger may have a procompetitive effect if, as a result of the merger, the merged entity can more quickly or effectively challenge a dominant firm possessing unilateral market power in the relevant market, or if the merged entity becomes a stronger maverick that can prevent or limit coordinated interaction. 2. Local Exchange and Exchange Access Services a. Residential and Small Business Customers 33. We find that the merger of AT&T and Teleport is not likely to result in any increase in unilateral market power or increase the possibility of coordinated interaction in the provision of local exchange and exchange access services to residential and small business customers. As noted above, neither AT&T nor Teleport currently has more than a de minimis market share in this market. More importantly, the merger of Teleport into AT&T will not eliminate a "most significant" market participant in the relevant market. In the Bell Atlantic/NYNEX Order, the Commission found that, although AT&T was a most significant market participant in the mass market, CAPs generally, and Teleport specifically, were not among the most significant participants in this market. There is nothing in the record of this proceeding to alter this conclusion. We thus conclude that AT&T's acquisition of Teleport will not eliminate a most significant participant in the mass market for local exchange and exchange access services. 34. We find that, instead of having an anticompetitive effect, the merger, by combining the complementary assets and capabilities of the merging parties, is likely to have a procompetitive effect in producing a competitor that can more quickly provide consumers with an alternative choice for local service. By combining AT&T's strong brand name and substantial base of residential, long distance customers with Teleport's substantial local facilities and expertise and knowledge in providing local services, the merged entity should be better situated than either AT&T or Teleport individually to compete more quickly for residential customers in multiple dwelling units in high density markets in the short run, and for broader groups of residential customers in the longer run. b. Larger Business Customers 35. We further conclude that the merger of Teleport and AT&T is not likely to result in any anticompetitive effects in the market segment for local exchange and exchange access services sold to larger business customers. Moreover, as we find in Section III.F. infra, we believe that a likely benefit of the merger is that the combined entity will be able to expand its local operations more quickly than either AT&T or Teleport could do so individually. 36. We find no evidence in the record suggesting that the merged entity will be able to exercise unilateral market power in the local larger business market segment, or that the merger would increase the likelihood of coordinated interaction. While we recognize the limited predictive value of current market share data in markets as dynamic as local telephone markets, we note that the combined entity's diminutive market share, immediately after the merger, clearly indicates that the entity will not possess unilateral market power. Although the record does not contain market share statistics for the individual markets at issue, Applicants' small market share in most markets is clearly demonstrated by the fact that, taken together, they accounted for only 0.8 percent of 1997 local revenue in larger business markets nationwide. Teleport's pre-merger share of revenues in the New York metropolitan area, the market where Teleport has had the most success to date, as a percent of total local revenues, was only about 3.5 percent in 1997, and the post-merger increase in market share will be insufficient to raise any competitive concerns. Similarly, given the continued dominance of incumbent LECs in local markets, and the small but growing market shares of the many new entrants into local larger business markets, it appears most unlikely that the merger would facilitate any exercise of coordinated market power. We thus conclude that the merger is not likely to confer unilateral market power on the combined entity or facilitate the exercise of coordinated market power. 37. We further conclude that the merger will not eliminate one among a limited number of most significant participants so as to impede the development of competition in providing local services to larger business customers. In this regard, as we noted above, local competition appears to be emerging most quickly in central business districts of major urban areas, where numerous new entrants are building or leasing facilities to compete for larger business customers. Also, as noted, AT&T states, for example, that in each of Teleport's ten top markets, there are between five and twelve operational CLECs against which Teleport must compete. In addition, by the end of 1996, CLECs had deployed more than 1.3 million fiber miles along more than 28,500 route miles, which represents approximately 10 percent of the incumbent LECs' total fiber deployment. 38. We note, as well, that the larger business markets for local exchange and exchange access services differ significantly from the residential and small business markets for such services. In the Bell Atlantic/NYNEX Order, the Commission concluded that, in addition to the incumbent NYNEX, there were only four most significant participants -- Bell Atlantic, AT&T, MCI and Sprint -- that could quickly and effectively enter the market for residential and small business customers in LATA 132. This finding was based on the particular advantages that these companies had in entering the mass market, including strong brand name recognition, experience with mass market advertising, an established residential customer base, and substantial financial resources. 39. In the market segment for local services to larger business customers, by contrast, we see many more firms entering successfully, and the capabilities and assets that the Commission cited in Bell Atlantic/NYNEX as prerequisites for successful entry in the mass market appear less essential to successful entry into the market for local services to larger business customers. Because larger business customers in general tend to be more sophisticated and knowledgeable purchasers of telecommunications services than residential or small business users, broad-based brand name recognition and mass advertising appear less important in attracting larger business customers. Moreover, although we found in the Bell Atlantic/NYNEX Order that CAPs' access to capital was limited relative to that of incumbent LECs or the major interexchange carriers and, thus, rendered them less significant participants in the mass market, CAPs have been reasonably successful in attracting capital sufficient to begin entry into and expansion of their core larger business market segment. As a result, unlike the residential market segment discussed in the Bell Atlantic/NYNEX Order, this market segment has a large number of market participants with similar incentives and capabilities. Thus, AT&T's acquisition of Teleport will not eliminate one among a limited number of most significant market participants, and the merger should not slow the development of competition in the provision of local services to larger business customers. We further find that, as described below, the merger is likely to enable the merged entity to more quickly mount a challenge to the dominant position currently held by incumbent LECs. 3. Domestic Long Distance Services 40. We conclude that the proposed merger between Teleport and AT&T will not have any anticompetitive effects in the market for domestic long distance services. More specifically, we find that the merger will not give AT&T unilateral market power in this market. In 1995, the Commission reclassified AT&T as a nondominant interexchange carrier, based on its finding that AT&T lacked unilateral market power in the domestic interexchange market. Since that time, AT&T's market share has continued to decline as new competitors have entered and as new fiber networks have been constructed. Because the merger will increase AT&T's market share by an inconsequential 0.1 percent, we find that we need not reconsider the conclusion in the AT&T Domestic Non-Dominance Order that AT&T lacks unilateral market power in this market. Moreover, because we find that Teleport, operating on its own, would have a minimal competitive impact on the long distance market, the merger should not increase the likelihood of coordinated interaction among competitors. We also conclude, for these same reasons, that it is not necessary to separately assess the merger's impact on specific consumer groups (i.e., mass market and larger business customers) in this product market, as we have done with regard to local exchange and exchange access services. 4. U.S. International Telephone Service 41. We find that the proposed merger will not have any anticompetitive effects on any U.S. international telephone route. The evidence in the record indicates that it is unlikely that the merger will significantly increase concentration on any international route. The only market for which Teleport or ACC report facilities-based (or facilities-resale) U.S. international telephone service revenue is the U.S.-U.K. (United Kingdom) route, which is one of the five largest outbound routes in terms of minutes billed in the United States. In 1996, ACC had reported U.S. billed IMTS revenue of $1.64 million on this route. AT&T's reported revenue on this route in 1996 was $477.04 million out of a total $699.19 million (68.22 percent). Thus, using 1996 figures, the combined entity would have revenues on this route of $478.68 million and a market share of 68.46 percent. This represents an increase in market share of only 0.24 percent. We do not believe that this increase in concentration raises anticompetitive concerns, particularly in light of the expected increases in capacity on this route identified by the Commission in the BT/MCI Order. ACC did not report any other facilities-based or facilities- resale income from any other route. We note that, as a pure resale carrier, ACC, together with Teleport, accounts for 0.25 percent of the total U.S. billed IMTS revenues in 1996. We find that the resulting increase in concentration in the provision of IMTS does not raise anticompetitive concerns. We also conclude, for these reasons, that it is not necessary to separately assess the merger's impact on specific consumer groups in this particular product market. E. Analysis of Competitive Effects Due to "Vertical" Aspects of the Merger 42. Applicants contend that their proposed transaction is predominantly a "vertical" merger because Teleport supplies a service, exchange access, which is an input that AT&T uses in providing long distance services to end-user customers. In the BT/MCI Order, the Commission explained that, in evaluating mergers that result in increased vertical integration, it must examine whether the merger will increase the ability or incentives of the merged firm to affect competition adversely in any downstream end-user market. The Commission went on to discuss a number of factors that might affect the incentives or ability of the merged firm to engage in strategies intended to raise rivals' costs. Of particular relevance here, the Commission noted that a vertically integrated firm's incentive to engage in such strategies would be significantly reduced if rivals of the merged firm "had adequate alternative sources of supply" after the merger. 43. In the instant case, the only allegation of an anticompetitive vertical effect of the merger, which is raised by Sprint, is that the merged entity may either raise the cost of exchange access services to its long-distance competitors or deny them such access altogether, which may harm competition in long-distance markets. The essence of this line of argument appears to be that, for specific business customers, Teleport is the only alternative to incumbent LECs in providing exchange access and that, after the merger, the merged entity will have an incentive to raise access rates to nonaffiliated long distance carriers to the level set by the incumbent LEC, thereby giving AT&T an advantage in competing for the business customer. 44. We find that Sprint has failed to prove its argument. The evidence in the record suggests that there are competing providers of originating access in most markets in which Teleport is competing, and that further entry appears likely. Since there are, or soon will be, other providers for originating exchange access services in these markets, it does not appear likely that Teleport could profitably raise prices to rival long distance companies since customers could switch to other access providers. Accordingly, we have no basis to conclude that the merger of AT&T with Teleport is likely to have any adverse competitive effects due to vertical aspects of the merger. 45. We also reject Sprint's argument that the merger would accelerate the pace of vertical integration by long distance companies and competitive access providers, thus reducing the availability of competitive access services. While there may be independent reasons why long distance carriers and competitive access providers may want to integrate vertically, we see no evidence in the record suggesting that such a desire is motivated primarily, or at all, by the announced merger of AT&T and Teleport. More importantly, as discussed above, we find that a primary benefit of the merger is that it will increase the competitive choices available to customers for services, including access, more quickly than would occur absent the merger. 46. Finally, because we conclude that the vertical aspects of the merger are not likely to produce any anticompetitive effects, we also reject Sprint's argument that the Commission should only approve the merger subject to the conditions that: (1) Teleport is maintained as a separate entity, and (2) Teleport is subject to nondiscriminatory access requirements. We note in this regard that the merged entity will remain subject to Sections 201 and 202 of the Communications Act, and any party that believes itself aggrieved by alleged discriminatory behavior can seek recourse from the Commission under Section 208 of the Act. F. Potential Public Interest Benefits 47. In this case, the applicants have not proffered evidence of any specific cost savings or quantifiable synergies that would result from the merger. They do contend generally, however, that combining Teleport's local facilities and its extensive experience in penetrating local markets with AT&T's brand-name recognition and marketing expertise, financial resources, and efficiencies from the merger will produce a substantially more formidable local competitor than either Teleport or AT&T could be alone. 48. Although Applicants have not quantified or substantially supported the public interest benefits that may result from the merger, we are persuaded that, as a result of the merger, the combined entity likely will be able to expand its operations and enter local markets more quickly than either party could do absent the merger. As the Commission specifically found in the Bell Atlantic/NYNEX Order, AT&T has a strong brand name reputation in the provision of telephone service to the mass market, as well as a substantial base of residential, long-distance customers. These capabilities will now be combined with Teleport's local facilities and expertise and knowledge in providing local services. Even though the record is sparse, we believe these benefits warrant approval of the merger in light of our finding that the merger is unlikely to result in any anticompetitive effects. G. Other Issues 49. Potential Harm to Residential Customers. Commenters contend that Applicants will target the business market to the detriment of residential consumers, particularly residential customers in low-income, predominantly minority communities. Inner City Press argues, therefore, that the proposed merger should be denied unless it will foreseeably result in benefits to a fair cross section of the residents of the affected markets. On the other hand, another public interest group, the Greenlining Institute and Latino Issues Forum, claims that the proposed merger is likely to have a positive impact on the development of local competition within the growing minority business market, given AT&T's past marketing performance within the minority community. 50. Although we find that the proposed merger may, at the outset, increase competition primarily in the more lucrative business markets, we disagree that the proposed merger will harm residential consumers. The record contains no evidence suggesting that the proposed merger will exacerbate the current disparity in the level of competition between the local mass market and the local larger business market. Moreover, in their applications, Applicants have explicitly identified a set of residential customers that will be served immediately, and thereafter, by the merged entity -- customers that live in "multiple dwelling units in high density markets." For these reasons, we reject the argument that the application should be denied based on its potential impact on residential consumers. 51. BellSouth also argues that the proposed merger will harm residential customers by transferring traffic from the public switched network to Teleport's facilities, thereby significantly reducing funds available to support universal service. We find no merit in this argument. Even as the provider of a private network, Teleport is required to make universal service contributions. Pursuant to Section 254(d) of the Communications Act, the Commission has held that "private service providers that offer their services to others for a fee" are required to contribute to universal service. 52. Certain commenters also assert that the proposed merger would harm the public interest because, as a result of the merger, AT&T would become the largest international and alternative local exchange carrier, giving it an advantage over other carriers. We reject this argument. As the Commission has previously noted, in determining whether a merger serves the public interest, the issue is not whether the merged entity will have competitive advantages over its rivals, but rather whether any such advantages will be so great as to impede the effective functioning of a competitive market. 53. AT&T's Shared Customer-Provided Access Policy. Ameritech objects to the proposed acquisition of Teleport because of AT&T's allegedly discriminatory and anticompetitive Shared Customer-Provided Access (SCPA) policy. This policy requires competing providers of dedicated access services to interconnect with AT&T by bifurcating their own networks and installing redundant sets of equipment in two different collocation spaces in AT&T's points-of- presence (POPs). Ameritech urges the Commission to either delay approval of the proposed merger until the Commission has granted the relief requested in certain pending complaint proceedings, or grant the merger application on the condition that AT&T agrees not to charge competing carriers rates for interconnection that are any greater than the costs incurred by AT&T to provide such interconnection to Teleport. 54. We conclude that approval of the applications should not be contingent on resolution of the pending complaints or subject to the condition proposed by Ameritech. The record shows that the concerns over the discriminatory aspects of AT&T's SCPA policy have been resolved by subsequent actions taken by the parties as part of formal complaint proceedings pending before the Commission. In those proceedings, AT&T has committed to modifying, on a prospective basis, its SCPA policy to eliminate the requirement that competing access providers have separated, dual facilities for dedicated access equipment located at AT&T's POPs. The only issues remaining between the parties relate to past damages claimed by Ameritech, what charges are appropriate, and whether space, power, and other amenities for access interconnection facilities in AT&T's POPs that are subject to the SCPA policy constitute Title II service and should be tariffed. Because AT&T has committed to abandon the practice that is the subject of Ameritech's complaint, we need not address the issue here. We expect, however, that AT&T will abide by its commitment to change its SCPA policy, as described above. 55. Other Alleged Misconduct by AT&T. Several commenters assert that we should disapprove the proposed merger or impose conditions on it because AT&T regularly engages in "slamming," deceptive advertising practices, and discriminatory pricing. We find that commenters' conclusory allegations regarding AT&T's service do not raise substantial and material questions of fact regarding AT&T's qualifications or the public interest benefits of the proposed merger, and that the public interest would not be served by our withholding action on the proposed merger. IV. CONCLUSION 56. For all the foregoing reasons, we conclude that Applicants have carried their burden of showing that the proposed merger will serve the public interest, convenience and necessity. Accordingly, we hereby grant the Applications. V. ORDERING CLAUSES 57. Accordingly, having reviewed the applications and the record in this matter, IT IS ORDERED, pursuant to Sections 4(i) and (j), 214(a), 214(c), 309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 214(a), 214(c), 309, 310(d), that the applications filed by AT&T Corp. (AT&T) and Teleport Communications Group Inc. (Teleport) in the above-captioned proceeding ARE GRANTED. 58. IT IS FURTHER ORDERED, pursuant to Sections 4(i) and (j), 214(a), 214(c), 309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 214(a), 214(c), 309, 310(d), that the above grant shall include authority for AT&T to acquire control of a) any authorization issued to Teleport's subsidiaries and affiliates during the Commission's consideration of the transfer of control applications and the period required for consummation of the transaction following approval; b) construction permits held by licensees involved in this transfer that mature into licenses after closing and that may have been omitted from the transfer of control applications; and c) applications that will have been filed by such licensees and that are pending at the time of consummation of the proposed transfer of control. 59. IT IS FURTHER ORDERED that all references to AT&T and Teleport in this Order shall also refer to their respective officers, directors and employees, as well as to any affiliated companies, and their officers, directors and employees. 60. IT IS FURTHER ORDERED, pursuant to Sections 4(i) and (j), 214(a), 214(c), 309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 214(a), 214(c), 309, 310(d), that the "Motion to Dismiss" of BellSouth, "Petitions to Deny" of Charles Fullenwiley, Keith Maydak, and Inner City Press/Community on the Move and Inner City Public Interest Law Project, the "Petition for Approval with Conditions to Protect the Public Interest" of BellSouth," the "Petition for Investigation and Other Relief of Sprint" and the "Petition to Allow a Supplemental Comment Period in Light of Announcement of Takeover of Telecommunications Inc." of Keith Maydak ARE DENIED. 61. IT IS FURTHER ORDERED, that this Memorandum Opinion and Order SHALL BE EFFECTIVE upon release, in accordance with 47 C.F.R.  1.103. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary SEPARATE STATEMENT OF COMMISSIONER HAROLD FURCHTGOTT-ROTH Re: For Consent to Transfer Control of Teleport Communications Group Inc. to AT&T Corp.; CC Docket No. 98-24 . I support today's decision approving the proposed merger between Teleport Communications Group and AT&T Corp. I concur in its results and explicitly approve of the decision not to impose any conditions on the merger. I write separately, however, to express my concerns with several aspects of the underlying reasoning and my unwillingness to adopt the proposed framework for analyzing mergers. Let me be clear, I recognize that much work has been put into this Order by the Commission staff and I applaud their efforts. In general, I find that they have done an exceptional job of analyzing the competitive effects of the merger in the relevant markets. Due to what I would characterize as poor internal Commission processing, however, this item was not formally circulated to the Commissioners until more than three months after it had cleared Department of Justice review. I voted for this item within 48 hours of receiving it, and I have prepared this statement as rapidly as possible. Under optimal circumstances, I would prefer to discuss the merits of the framework that we use here to approve this merger. For example, how exactly does the Commission's definition of relevant markets and its analysis of the competitive effects of the merger on those markets differ from the Department of Justice's analysis? To the extent that it is materially different, what is the Commission's express statutory authority or unique expertise to perform such a review? If the analysis is not materially different, then why is it not redundant for this agency to repeat an analysis that numerous experts at the Department of Justice already perform? Can the Commission's precluded competitor framework apply to a market that has already been deregulated and the largest competitors declared non- dominant? Under the precluded competitor framework, is our analysis of potential competitors too speculative -- especially since we do not seem to require the same type of evidence as the Department of Justice's merger guidelines would require of intent to enter the market by another means? Is there any limit on the additional Public Interest benefits that the Commission examines to determine whether a merger is in the public interest? Seeing this item for the first time after such an inordinate delay, however, is not the optimal circumstance. Had there been more of an opportunity for discussion, I may have been persuaded that these questions had been adequately addressed. Regrettably, that opportunity was not presented until too late in the process for an application that does not appear to raise any serious contentions. I do not support the Commission's use of the framework used in this item. I hope that we do not repeat its use in the future.