[Senate Hearing 109-34]
[From the U.S. Government Publishing Office]
S. Hrg. 109-34
SBC/AT&T AND VERIZON/MCI MERGERS--REMAKING THE TELECOMMUNICATIONS
INDUSTRY
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MARCH 15, 2005
__________
Serial No. J-109-8
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
David Brog, Staff Director
Michael O'Neill, Chief Counsel
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Brownback, Hon. Sam, a U.S. Senator from the State of Kansas,
prepared statement............................................. 52
Cornyn, Hon. John, a U.S. Senator from the State of Texas........ 5
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 3
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 4
prepared statement........................................... 81
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont,
prepared statement............................................. 83
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 1
WITNESSES
Capellas, Michael D., Chairman and Chief Executive Officer, MCI,
Inc., Ashburn, Virginia........................................ 11
Dorman, David, Chairman and Chief Executive Officer, AT&T Corp.,
Bedminster, New Jersey......................................... 9
Seidenberg, Ivan, Chairman and Chief Executive Officer, Verizon
Communications, Inc., New York, New York....................... 8
Whitacre, Edward E., Jr., Chairman and Chief Executive Officer,
SBC Communications, Inc., San Antonio, Texas................... 6
QUESTIONS AND ANSWERS
Responses of Michael Capellas to questions submitted by Senator
Kohl........................................................... 26
Responses of David Dorman to questions submitted by Senator Kohl. 30
Responses of Ivan Seidenberg to questions submitted by Senator
Kohl........................................................... 33
Responses of Edward Whitacre to questions submitted by Senators
Coburn, Schumer, and Kohl...................................... 41
SUBMISSIONS FOR THE RECORD
Capellas, Michael D., Chairman and Chief Executive Officer, MCI,
Inc., Ashburn, Virginia, prepared statement.................... 55
Dorman, David, Chairman and Chief Executive Officer, AT&T Corp.,
Bedminster, New Jersey, prepared statement..................... 66
Office of the Ohio Consumers' Counsel, Janine L. Migden-
Ostrander, Consumers Counsel, Columbus, Ohio, letter........... 85
Seidenberg, Ivan, Chairman and Chief Executive Officer, Verizon
Communications, Inc., New York, New York, prepared statement... 89
Whitacre, Edward E., Jr., Chairman and Chief Executive Officer,
SBC Communications, Inc., San Antonio, Texas, prepared
statement and attachments...................................... 93
SBC/AT&T AND VERIZON/MCI MERGERS--REMAKING THE TELECOMMUNICATIONS
INDUSTRY
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TUESDAY, MARCH 15, 2005
United States Senate,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 2:30 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Arlen
Specter, Chairman of the Committee, presiding.
Present: Senators Specter, Hatch, DeWine, Cornyn, Coburn,
and Kohl.
OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM
THE STATE OF PENNSYLVANIA
Chairman Specter. The hearing on the telecommunications
industry by the Judiciary Committee will now commence, the hour
of 2:30 having arrived.
Today, like virtually everyday in the Senate, is
complicated because we are taking up the budget, a scheduling
turn which was not known when this hearing was set. There are
five votes scheduled at three o'clock, so we will proceed as
best we can and have to recess during the course of the votes.
It is not a very unusual problem for our hearings and we will
just do the best we can.
This full Committee hearing was set in order to give all of
the members of the Judiciary Committee an opportunity to
participate and raise questions about this very, very important
subject. Customarily, it is a matter left in the hands of the
Subcommittee on Antitrust, and after making an opening
statement I will turn the gavel over to Senator DeWine, who is
the Chairman of the Subcommittee on Antitrust, and to the
ranking member, Senator Kohl. But I did want to begin the
session because of the importance of the subject.
There is no doubt that mergers and acquisitions are
sweeping America in so many, many industries. The
communications mergers are vitally affecting very basic service
for almost all American consumers, and the question which we
have to answer is whether there will be sufficient competition
for consumer protection.
A very lengthy statement which I have will be made a part
of the record without being read in order to economize on time
and I will make just a few brief introductory comments.
In January, SBC Communications, one of the Baby Bells,
announced plans to acquire AT&T. Shortly thereafter, Verizon
Communications, a successor to three Baby Bells, announced
plans to acquire MCI. Another Baby Bell, Qwest, also is bidding
to acquire MCI. SBC, Verizon and Qwest all provide local wire
line phone service to primarily residential and small
businesses. Verizon and SBC also have become major wireless
providers. MCI and AT&T continue to provide long-distance
services.
These mergers will reunite local phone service providers
and long-distance companies. In the meantime, new competitors--
cable companies, wireless providers, voice over Internet
providers--have come to compete without distinguishing between
local and long-distance service.
There are a number of important questions which the
Committee and Subcommittee will want to address. Are the other
modes of communication sufficient to put competitive pressure
on the merged companies? Second, will the merged companies and
other wireless companies be able to use their infrastructure to
prevent cable and voice over Internet companies from competing?
Even if they have access to the infrastructure, will cable
companies, independent wireless and voice over Internet
providers be strong enough to keep prices of residential and
small businesses low?
There has always been a concern since the founding days of
the Republic about the size of corporate America. Justice
Brandeis expressed it succinctly in Liggett v. Lee way back in
1933 when he said, quote, ``The general laws which have long
embodied severe restrictions upon size and upon the scope of
corporate activity were in part an expression for the desire
for equality of opportunity.'' A little later in the opinion he
really gets tough, saying, quote, ``Such is the Frankenstein
monster which has been created by their corporation laws.''
Going back to Jefferson, the warning was about, quote, ``banks
and corporations will grow up around the people and will
deprive them of their property.''
We do not live in the time of Jefferson and we do not even
live in the time of Brandeis, but we have to be concerned about
the tremendous acquisition of power and be sure that consumers
are adequately protected.
Shortly after I was elected to the Senate in 1980, the
Antitrust Subcommittee held a hearing and Assistant Attorney
General Baxter came in. And as is the way with Senate hearings,
soon there was just a witness and a Senator, and I had a
fascinating experience, fascinating for me, to be able to
question the Assistant Attorney General on Antitrust for about
two hours. Nobody else was interested. I think it is a record
which was unlistened to and unread.
But that was in the era when AT&T and Ma Bell and all the
Baby Bells were dismantled, a decision that gave me a lot of
qualms when it happened. And now we are here back with a
reconfiguration of a lot of moving parts. So these are big, big
issues and we want to take a look at them to see if they make
sense for America, for continued growth and opportunity and
jobs, and if they adequately protect the American consumer.
Let me yield at this time to my distinguished colleague,
Senator DeWine, who is Chairman of the Subcommittee.
STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE STATE OF
OHIO
Senator DeWine. Mr. Chairman, thank you very much for your
good statement and for holding this hearing to examine these
mergers. These deals have received really an unusual reception
in the press and within the industry, an unusually friendly
reception and one that I am not really sure is wholly deserved.
In fact, one might normally expect that mergers worth $23
billion, combining four of the country's leading phone
companies, would raise great concern among those who follow the
industry.
But recent changes in the telecommunications industry have
given an air of inevitability to these deals. Market pressures
and regulatory changes have significantly limited the options
of the long-distance carriers, so that AT&T has already
announced that it is exiting the market for residential
service, and MCI appears headed in the same direction. Under
these circumstances, it is not surprising that many have done a
quick analysis and concluded that these deals do not pose any
significant antitrust concerns.
However, Mr. Chairman, a quick analysis, whatever the
outcome, is really not enough and is not adequate. In fact, I
think that certainly there are some antitrust issues that
require more thorough examination. Perhaps the most obvious
area of concern is the so-called enterprise market, that sector
of the market comprised of large businesses with sophisticated
telecommunications needs. In this market sector, all four of
the merging parties currently compete, and so competition there
will be affected by these deals. There are also questions
regarding the impact of these deals on the markets for long-
haul capacity and the market for Internet backbone. These are
all areas that we should explore today.
Even beyond these specific market evaluations, however, is
the larger competition issue. Certainly, these mergers
represent a loss of competition among the phone companies, but
the remaining players will tell us that competition is
flourishing via different platforms, specifically that we will
have cable companies, wireless companies and companies that
provide voice over IP services. In other words, so-called
intermodal competition will protect competition in these
markets. This, I believe, is the key issue--the broader
competition issue that this Committee must examine most
thoroughly and must consider as the most obvious candidate for
Committee action.
For one thing, we must keep in mind that intermodal
competition, by definition, does not always provide the type of
direct competition that we are used to seeing. Wire line,
wireless, cable--these services are inherently different, much
like planes, trains and automobiles, all of which provide a
similar service, but in different ways, with different pluses
and minuses. Not all will always provide sufficient competitive
benefits for all consumers.
Further, in this context, we must discuss today whether or
not conditions are required in order to ensure that multiple
modes of competition are, in fact, available. For example,
voice over IP is a very promising product, but is not in and of
itself a separate facilities-based form of competition.
Instead, it is a type of service that is only available to a
consumer if he or she has broadband access, and currently that
access is only available from the phone company or the cable
company. In order for voice over IP to be a legitimate
competitor to the merged companies, must we require the phone
companies to sell DSL separately? These are important questions
and we must begin asking them today.
On a final note, Mr. Chairman, as you know, only the four
merging companies are represented here today. While we
anticipate that this hearing will provide the Committee with a
good base of knowledge regarding the deals, we all agree that
we cannot responsibly conclude our examination without hearing
directly from those who are critical of these deals.
Accordingly, with the consent of the Chairman and the full
Committee, on April 19 Senator Kohl and I are planning to hold
a follow-up hearing in the Antitrust Subcommittee with a panel
of non-company witnesses who have expressed concerns about
these mergers. That hearing, which will be essentially part two
of today's hearing, will help us to more fully examine these
mergers and explore the competitive impacts.
I thank the Chair.
Chairman Specter. Thank you very much, Senator DeWine.
Senator Kohl.
STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF
WISCONSIN
Senator Kohl. Thank you, Senator Specter.
We are witnessing the most fundamental reshaping of the
telecom industry in decades. In the space of a generation, we
have gone from the breakup of Ma Bell to what some fear may be
its re-creation, at least on a regional level. The breakup of
AT&T two decades ago unleashed an explosion of competition and
innovation. The competitive forces freed by the ending of the
phone monopoly led directly to the introduction of previously
unheard of technologies, ranging from the fax machine, the
cellular phone, e-mail, to the Internet itself.
Consumers benefitted from a blossoming of new choices and
services. Prices for phone services declined so dramatically
that what was once an unusual and expensive event--placing a
long-distance telephone call--became routine and almost cost-
free. The cost to American business of telecom services dropped
considerably, helping spur greater efficiencies and growth
throughout the economy.
We are now entering a brave new world of telecom
competition. The acquisition of AT&T by one of its Baby Bell
progeny, SBC, and the likely of acquisition of MCI by Verizon
will create two telecom giants, each dominating many services
throughout their regions. Should these mergers be consummated,
SBC and Verizon will have a market share of about 90 percent of
local residential consumers in their regions, 70 percent in
long distance, and about 40 to 50 percent in wireless.
These figures give us pause, but we live in an exciting
time in the telecom world where the pace of consolidation is
matched by the speed of innovation. AT&T and MCI are both
declining companies and have already withdrawn from marketing
most services to residential consumers. As a result, with the
important exception of the business market, there are few
remaining areas where SBC competes with AT&T or Verizon
competes with MCI.
In addition, new technologies are emerging--services such
as Internet-based telephone service and wireless connections to
the Internet which may challenge SBC and Verizon, if given a
chance. It is our responsibility to ensure that these emerging
new technologies have a real chance to succeed. The possible
benefits of new competition will drive growth throughout the
economy for decades to come.
We must insist that the promise of tomorrow's technology is
not stifled in its infancy by today's consolidation, and we
must seek to avoid the creation of a world where consumers are
left with only two choices for a bundle of telecom services--
the Baby Bell phone company and the cable company.
So we have two concerns with these mergers. First, will
this consolidation decrease the choices and increase the cost
to consumers and to business customers, both large and small?
And, second, how can we ensure that new technologies and new
services can get access to the SBC and Verizon networks?
A good place to start would be to require that the Baby
Bells offer consumers the choice of buying Internet access
without also requiring them to buy phone service. We expect to
recommend additional specific pro-competitive merger conditions
to the Justice Department and the FCC in the coming weeks.
Securing merger conditions such as these will help ensure that
the tremendous gains in telecom competition over the last 20
years are not lost in the midst of this industry consolidation.
One more comment. As the Senator from Ohio said, I believe
it is essential that our Committee hear from competitors and
consumers affected by these mergers. We are disappointed that
we will not hear any voices besides those of the merging
companies today, but instead we will need to return to this
topic in a few weeks so that all voices will be able to be
represented.
Thank you again, Mr. Chairman, and we look forward to
hearing the testimony today.
[The prepared statement of Senator Kohl appears as a
submission for the record.]
Chairman Specter. Thank you very much, Senator Kohl. That
sets the overall parameters.
Senator Cornyn, would you like to make an opening comment?
STATEMENT OF HON. JOHN CORNYN, A U.S. SENATOR FROM THE STATE OF
TEXAS
Senator Cornyn. Thank you, Mr. Chairman. Just briefly, of
course, I would like to welcome all the witnesses here today.
Mr. Whitacre is a constituent of mine and operates his
headquarters out of San Antonio, Texas, my hometown, so I
wanted to greet him, and all of you, and thank you for being
here today.
We understand that this is going to be the beginning of an
awfully long process which is primarily going to reside in the
FCC and the Department of Justice. So as I understand it, the
purpose of this hearing is to be able to understand from the
parties involved generally what the impact of these
consolidations are going to be on competition, which we
understand benefits consumers by keeping prices low, but also
on innovation, and I will have a few questions in that regard.
I will reserve the rest for my questions.
Thank you, Mr. Chairman.
Chairman Specter. Thank you very much, Senator Cornyn.
Without objection, Senator Leahy's statement will be made a
part of the record, and I will now transfer the gavel to
Senator DeWine.
Senator DeWine. [Presiding] Mr. Chairman, thank you very
much.
Well, we welcome our panel. Let me briefly introduce our
panel. Edward Whitacre is the Chairman of the Board and CEO of
SBC Communications. He has led SBC through the acquisitions of
Pac Bell, Southern New England Telephone, Comcast and
Ameritech. He began his career in 1963 as an engineer with SBC.
Ivan Seidenberg is Chairman of the Board and CEO of Verizon
Communications. He previously served as CEO of both Bell
Atlantic and NYNEX.
David Dorman is Chairman of the Board and CEO of AT&T. He
began his career as the 55th employee of then-fledgling long-
distance carrier Sprint, where he rose to become president.
Michael Capellas is the President and CEO of MCI. When he
joined MCI in 2002, he had previously served as president of
Hewlett-Packard and as Chairman and CEO of Compaq Computers.
We welcome all of you. Mr. Whitacre, you may start. Thank
you very much. We are going to go by five-minute rule. Let me
just say, gentlemen, that we have votes scheduled at three
o'clock. We have five votes scheduled at three o'clock. That
means that there will be a halftime at this hearing, so we will
have to take a break, but we are going to go as far as we can
go.
Mr. Whitacre.
STATEMENT OF EDWARD E. WHITACRE, JR., CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, SBC COMMUNICATIONS, INC., SAN ANTONIO, TEXAS
Mr. Whitacre. Thank you, Senator DeWine. The title of this
hearing--``Remaking the Telecommunications Industry''--is
appropriate, as demonstrated by the SBC/AT&T merger. Our merger
is a positive development for our customers, competition, and
for America's leadership in global communications.
We plan to bring together modern networks, innovative,
advanced products and services, talent and expertise, and a
rich tradition of customer service and reliability. And we are
going to ensure that the company which started it all more than
a hundred years ago will be part of it for many years to come.
Our merger comes as the U.S. telecommunications industry is
trying to get up off the mat. For the first time in a long
time, we see some light at the end of the tunnel, but the
journey through that tunnel has been pretty hard. Since 2000,
telecommunications service providers and equipment
manufacturers have lost more than 700,000 jobs. Annual capital
investment has declined by more than $70 billion. Companies
have lost more than $2 trillion in market capitalization.
Until just recently, SBC was losing 60,000 access lines
every week. And in all honesty, adverse regulation has
contributed to this downward spiral. So I think the natural
result is Wall Street is investing less and less in telecom,
telecom is investing less and less in its products and
services, and we can see some of the consequences. Today, the
U.S. is 11th in the world in broadband deployment. In short,
this industry is in turmoil, and that is why we decided to do
the SBC/AT&T merger.
The reasons for combining these two companies are clear.
First, while SBC has a strong presence in many local markets,
we do not have a global network or a national network of our
own. We lease one of those networks. AT&T has those assets and
they are very good.
Second, the next big thing in communications technology is
voice over Internet protocol, or voice over IP. It has already
opened the door to a host of new competitors. Dozens upon
dozens of cable companies and others are using voice over IP to
provide telephone service and they are winning a lot of
customers. SBC does not have a consumer voice over IP service,
but AT&T does. The combined company will have the resources and
incentives to compete with voice over IP in our region, outside
our region, and for business customers around the world.
The third reason for our merger is the opportunity it
creates for enhanced competition in the large-business customer
segment. While we at SBC have made some progress in this
market, it has been very slow going for us. AT&T will give us
the ability to compete more effectively nationally and
globally.
For these reasons, the SBC/AT&T merger will enhance
competition and should be viewed positively from an antitrust
perspective. For the most part, SBC and AT&T do not compete
head to head. This is certainly true in the mass market. Where
we do compete in the mid- to large-business space, customers,
will still have numerous choices from such diverse providers as
systems integrators, equipment manufacturers, and other phone
companies such as Verizon and Qwest.
When you assess this market without bias, it is clear that
no two companies can control this competitive and crowded space
even after these mergers as currently contemplated. The same
holds for access to the Internet by rural carriers. Our ability
and willingness to connect rural companies to SBC's IP backbone
will not change, and we anticipate no change in pricing to
these customers.
This merger is a logical step in the evolution of a
competitive industry that is light years removed from when the
last telecom law was enacted in 1996. Today, there are more
wireless subscribers in the U.S. than there are traditional
phone lines. Data traffic now exceeds voice traffic by a margin
of 11 to 1.
Cable companies will offer phone service to two-thirds of
American homes this year, and other competitors using IP-based
services continue to grow. On March 9, the Wall Street Journal
reported that America Online, AOL, will soon offer voice over
IP service to its 22 million U.S. subscribers. In that same
day's paper, Cox Communications said in a letter to the editor
that in some markets, including Orange County, California, 40
percent of consumers subscribe to Cox digital telephone and 82
percent of their phone customers use Cox for their long-
distance service.
None of this was envisioned when the Act was passed, which
is why we need the laws to catch up. We need rules to treat new
technologies with the lightest touch possible and which allow
the competitive marketplace to discipline retail prices. Such
reforms would spur much-needed innovation, investment and
growth--goals that I hope and believe this Committee shares.
Thank you, Senator.
[The prepared statement of Mr. Whitacre appears as a
submission for the record.]
Senator DeWine. Mr. Whitacre, thank you very much.
Mr. Seidenberg.
STATEMENT OF IVAN SEIDENBERG, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, VERIZON COMMUNICATIONS, INC., NEW YORK, NEW YORK
Mr. Seidenberg. Good afternoon, Mr. Chairman and Members of
the Committee. Thank you for the opportunity to be part of this
discussion on the state of competition in the restructuring
communications industry.
As you are aware, Verizon has announced its intention to
acquire MCI. This is a response to the dramatically different
competitive landscape we have in communications as the industry
restructures around new technologies and new markets.
Competing technologies now offer consumers a wide range of
choices for voice, data, and increasingly video services.
Likewise, large business customers can now choose a much wider
range of services from a growing universe of suppliers,
including telephone companies, systems integrators, software
providers, equipment makers and wireless companies. In fact,
earlier this month Microsoft announced a major foray into the
enterprise business with a software platform that embeds voice
as a free application, much like instant messaging today.
To compete in this dynamic environment, Verizon has sought
to differentiate our wireless and wire line services by
investing in spectrum, digital capabilities and broadband
technologies. Now, by acquiring MCI, we are taking the next
natural step by transforming ourselves around the evolving
needs of large business customers, a segment in which Verizon
has a negligible share today.
MCI and Verizon have complementary assets and capabilities.
Verizon has strong local assets and a solid presence among
local and regional customers. MCI has strong IP networks and
products, and a solid base of national and global customers.
Together, we will create a strong, new competitor with the
products, network reach and capital capacity required to
succeed in this part of the business.
This acquisition does not alter the dynamics that are
reshaping the consumer business, nor does it alter the current
universal service program or its funding. Long-distance and
local as stand-alone businesses are on the way to obsolescence
with or without these transactions.
However, is we look at this in terms of the future, it is
apparent that customers in all segments of the communications
market will benefit. Consumers will benefit because we will
have an advanced broadband platform capable of delivering next-
generation services in markets across the entire U.S.
Businesses will benefit because we will be a strong, stable and
secure supplier of advanced communications services. Federal
and state government customers will benefit because we will be
able to invest in the networks that are critical to their
public mission.
National security will benefit because we will continue to
strengthen the infrastructure that is a critical component of
government communications systems, including those used by the
Departments of Defense and Homeland Security. And, of course,
the U.S. economy overall will benefit because we will invest in
the new technologies so critical to job creation and leadership
in the global marketplace.
This transaction is about the future. Verizon and MCI will
be a national full-service company with the technology and
financial strength to deliver the broadband future and create
economic growth in our industry.
Thank you. I look forward to your questions.
[The prepared statement of Mr. Seidenberg appears as a
submission for the record.]
Senator DeWine. Mr. Dorman.
STATEMENT OF DAVID DORMAN, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, AT&T CORP., BEDMINSTER, NEW JERSEY
Mr. Dorman. Mr. Chairman and Members of the Committee,
thank you for inviting me to speak with you today about the
merger of SBC and AT&T.
There is much to look forward to and nothing to fear from
joining together these two companies. Together, we intend to
set the global standard for communications for years to come.
We will be able to bring advanced IP-based broadband services
to market more rapidly and to a wider range of customers than
either company could alone, heightening competition for voice,
data, wireless and video services.
The rapidly evolving telecom market has changed both
companies. SBC today is focused on broadband, video and
wireless, while AT&T is now focused on business enterprises,
government and wholesale customers. Most of you and your
parents and grandparents have known AT&T primarily as your
phone company serving residential consumers. That is not the
AT&T of today. The AT&T of today is a global networking
provider that enables large businesses, state and Federal
agencies and other customers to deliver voice, data, video and
Internet applications securely and reliably.
The reasons for this transformation are, I think, well
known to you. The telecom industry has experienced a very
difficult environment. Over-investment by many carriers,
tremendous over-supply, a wave of new technologies, an ever-
shifting regulatory environment, and even criminal behavior
have been experienced.
AT&T's traditional wireline services are being rapidly
supplanted by wireless services and Internet-based applications
such as voice over IP, and mass market customers are
increasingly demanding bundles of services that we are not well
positioned to provide. As a result, we determined last year
that we would no longer actively compete in the traditional
mass market, which includes residential customers and small
businesses, and that we would focus virtually all of our
attention on large-business, government and wholesale
customers.
Last summer, we aggressively and irreversibly implemented
our new plan, radically scaling back the operation of our
consumer unit and small business units, substantially reducing
head count, dismantling marketing and sales functions, retiring
support infrastructure and applications, and preserving only
those functions necessary to care for our declining number of
mass market customers.
The combination with SBC is thus largely a combination of
two companies with complementary assets, businesses and skills.
Bringing both together should provide a range of benefits. It
will create a world leader in advanced communications services
as the new company uses its increased efficiencies and
expertise in local, broadband, wireless and global networking
services to speed the transformation of the legacy networks
both at AT&T and SBC to a new integrated IP-based network.
It will reduce our costs and enhance our operations,
allowing us to offer better services and better value to all of
our customers. It will provide our government customers with
more reliable, more resilient and more efficient network
capabilities, and it will spur innovation, increasing the pace
and breadth of the work of our renowned AT&T Labs, with
benefits for all types of customers.
The merger, moreover, will not lessen competition; it will
enhance it. The improved ability of the combined company to
bring innovative and advanced services will spur others,
including cable, wireless and VoIP providers, to enhance their
own offers as well. The transaction will lead to greater
competition between the Bell companies themselves, and will
produce a leading global competitor.
The transaction will not harm competition in any market. In
the mass market, SBC is a leading provider of service in its
13-State region, but AT&T is no longer an active mass market
competitor in those States. The merger will also not impair
competition in the provision of services to business customers,
given the large number and diversity of competitors for
businesses, the sophistication of those customers and the
purchasing power and practices that they employ.
Nor is there any serious argument that the merger will
diminish competition in wireless, where AT&T is not currently a
provider, international, where SBC has a very limited share, or
in Internet backbone services, where many large providers
compete. Rather, the merger is a step forward in the evolution
of this industry, creating a healthy, competitive and
innovative American communications company.
In conclusion, I would like to thank you again for the
invitation to speak with you about the very significant
consumer and public benefits this merger will produce.
[The prepared statement of Mr. Dorman appears as a
submission for the record.]
Senator DeWine. Mr. Dorman, thank you very much.
Mr. Capellas.
STATEMENT OF MICHAEL D. CAPELLAS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, MCI, INC., ASHBURN, VIRGINIA
Mr. Capellas. Thank you, Mr. Chairman. My name is Michael
Capellas and I am the President and CEO of MCI. Obviously, over
the past 5 years, our industry has undergone a series of
fundamental changes in technology, in the market, in the
regulatory environment, and that technology will continue to
accelerate and the incredible potential of the Internet alone
guarantees even greater changes in the future.
I have been CEO of MCI for roughly two-and-a-half years. I
spent the prior 25 years in the computing industry as a
customer of telecommunications services and as a developer who
used the power of global networks to fuel innovations in the
software industry. I do believe in the power of this technology
and in the future of innovation. I have always liked to say
there has been a computer on the end of a network for a very,
very long time.
Many of the changes in the telecom industry are actually
being driven by broader movements in information technology.
First of all, there is a movement toward standardization. Basic
building blocks such as servers, storage and microprocessors
are simply now standard devices that are addresses on a network
and can reside anywhere.
Second, the rise of Internet commerce has accelerated the
adoption of software standards that enable different systems to
talk to each other. At the same time, new tools like Web
services allow developers to write applications across
different platforms.
Today's communications travel the networks in packets.
There is no difference between a voice or a data packet.
Whether you are making a phone call or purchasing an MP3 music
file, it is all the same. A packet is a packet is a packet.
The Internet-driven standards that allow these systems to
talk to each other have redefined network requirements.
Formerly, local, long distance and data traveled along separate
network paths. Now, there is the need for integrated
intelligent paths that can carry voice, data and streamed video
without the developer or end user needing to know or care how
the path is developed.
And one doesn't need to be a computer scientist to sort of
see this in everyday life. A Blackberry is a great example of a
device that can instant-message, make a phone call, get news or
sports, or stream a video, and this is integrated
communications at work.
MCI has been a global provider of communications. We
operate one of the industry's most expansive global IP backbone
and serve many of the most demanding applications in the world.
We serve major financial institutions, complex engineering and
manufacturing centers, and provide complex solutions for more
than 75 government agencies.
Many of these customers are the early adopters of this new
computing infrastructure and are led by some of the best and
brightest technologists. These customers have some common
requirements--high-end reliability and security, and then
global delivery, ease of adapting new technologies and new
applications, and low-cost infrastructures.
At the heart of all these requirements is the need to mesh
local access with wireless capabilities and the backbone
network. Much of today's network architecture was incubated at
MCI, in part due to the vision of Internet pioneer Vint Cerf.
It is know as the Internet Protocol, or IP. In its simplest
terms, IP allows applications, from wireless e-mail to video
streaming, to be rolled out without understanding or changing
the core network elements underneath it.
New technologies and new delivery methods are reshaping the
market. In addition, recent regulatory and legal decisions have
made a significant impact, particularly on the consumer
segment. The underlying economics have been fundamentally
altered. So where is MCI in this perfect storm of IP
convergence, market evolution and regulatory change?
Our plan is to leverage our IP network by refocusing on
large-business and government customers and deemphasizing our
consumer business. It would be virtually impossible to sustain
our traditional voice business based on circuit switch
technology.
MCI has also entered into an agreement with Verizon to
combine our strength. MCI owns a state-of-the-art IP backbone
network, but no significant first-mile facilities or wireless.
Verizon has extensive first-mile facilities and state-of-the-
art broadband. MCI has a large-enterprise and government
customer base which has remained loyal because we provide
world-class products and service quality. Verizon provides
local access to many of those same customers.
Some have asked how this merger will affect competition. In
my view, the combined company will benefit both consumers and
business users. It will deliver end-to-end network capability
and will provide innovation and next-generation applications.
Technology has changed the landscape. Significant
competition for consumers will come from alternate technologies
the merger will not affect, like cable and wireless. And the
same is true for business and Internet service markets.
Wireless and other technologies are redefining competition. In
addition, we are seeing the increased presence of broad-based
technology companies like IBM entering the traditional telco
market. This is the natural evolution of changing competition
as technologies converge.
In conclusion, Mr. Chairman, technological, marketplace and
regulatory changes are driving the forces behind the industry
restructuring. Traditional notions of long-distance companies
have become obsolete. The merger of MCI and Verizon is a
reflection of these fundamental changes. The merger will not
have an adverse effect on competition in any line of business.
On the contrary, it will strengthen MCI's ability to compete
and continue to innovate. Technology will, in fact, move on.
[The prepared statement of Mr. Capellas appears as a
submission for the record.]
Senator DeWine. Well, we thank you all very much. We have a
vote. We are now ten minutes into the vote, so we are going to
have to leave. If it is five votes, we are going to be a while,
so we will be back.
[The Committee stood in recess from 3:10 p.m. to 4:45 p.m.]
Senator DeWine. Well, let me call the hearing to order.
Thank you all for your patience. We apologize. We had five
votes and we are back.
Let me now turn to Senator Kohl for his questions.
Senator Kohl. Thank you, and likewise we apologize for the
delay.
For Whitacre and Mr. Seidenberg, we have heard a lot of
testimony today about the competition your companies will face
in the years ahead from new technologies. One important new way
for consumers to make phone calls is through a technology known
as VoIP, as you know--voice over Internet protocol. Making
phone calls using VoIP requires a high-speed Internet
connection--a service many consumers obtain from their
telephone company--but neither SBC nor Verizon will sell
consumers high-speed Internet service without also requiring
that the consumer also buy local phone service. This destroys
the incentive of the consumer to purchase VoIP phone service
and is therefore a significant obstacle to the deployment of
this technology. Would you be willing to commit as a condition
of approval of your merger to sell separate Internet service to
consumers without also requiring them to buy phone service?
Mr. Seidenberg, you will have the opportunity to respond
first, and then you, Mr. Whitacre. The question is would you be
willing to commit as a condition of approval of the merger to
sell separate Internet service to consumers without also
requiring them to buy phone service.
Mr. Seidenberg. Senator, I think we have already indicated
that on this question we would be providing to the market a
service. If I understand the question, in our industry we call
it, quote, ``naked DSL.'' So I think in the past we have always
provided DSL with a phone number. That is the way we provide
service. In the future, we are in the process of working
through the mechanics of offering a DSL line without a phone
number.
Now, your specific question is would I agree to a
condition. At this point in the process, sir, I would prefer
not to agree to any conditions, but I think on the point you
raise we are going to do exactly what you said.
I would also make one other point. You don't need a
broadband line to get voice over IP. There are companies today
that put adapters on that do that. So I think voice over IP
comes in a lot of flavors, one of which is over a broadband
line.
Senator Kohl. So you are saying you wouldn't want to be
quoted as agreeing to the merger based on that condition, but
you are moving in that direction?
Mr. Seidenberg. Yes, that is correct.
Senator Kohl. Mr. Whitacre.
Mr. Whitacre. Well, we are working the same way. There are
companies out now buying loops and they put their own equipment
and resell it. So, in essence, what you are suggesting is being
done. Now, would SBC do it? Of course, SBC would do it, but SBC
is not going to do it under the price of what it costs us to
provide it. We have been there and done that with something
called UNIP, which was very bad for this industry. We would be
willing to do that under the circumstances that it is not
underwater and there is a profit to be made for SBC
shareholders, too. So the answer is yes.
Senator Kohl. The answer is, yes, you would be willing to
condition the merger on that?
Mr. Whitacre. No, I wouldn't be willing to condition the
merger on that. But would we be willing to sell it? Of course,
and we are working toward doing just that.
Senator Kohl. All right. Mr. Seidenberg and Mr. Whitacre,
on February 17 the Washington Post reported that the FCC was
investigating complaints by a company called Vonage that local
phone companies were blocking or disrupting access to their
VoIP Internet phone service.
Has either of your companies ever intentionally done this?
Will you commit as a condition to approval of your merger not
to interfere with your customers' Internet connections so as to
degrade or block access to competing VoIP phone service?
Mr. Seidenberg. Senator, I got this question at the House
hearing and checked it out. I know of no case in which we are
blocking any traffic from Vonage, and as a normal course of
practice, we pass all this Internet traffic through. And just
to give you some comfort, we also buy access to AT&T and Ed's
network to put our Internet traffic over it. So we would have
no reason to block anybody else's traffic, when we are putting
our own on other people's network.
Senator Kohl. So you would approve as a condition of the
merger?
Mr. Seidenberg. Well, I don't like conditions. I guess at
this point in the process, we need to see the whole picture.
But as a matter of practice, sir, we are not doing anything
that would suggest we are blocking anybody's traffic.
Senator Kohl. Mr. Whitacre.
Mr. Whitacre. SBC would not block any Vonage traffic or
anybody else's, and has never done that, would not do that.
That is not the way we do business and it is just not going to
happen.
Senator Kohl. So you would agree to that as a condition of
the merger?
Mr. Whitacre. Well, you say ``condition.'' We are not going
to block anybody's traffic, Senator.
Senator Kohl. Okay, a last question and then we will turn
it over to Mr. DeWine.
Mr. Seidenberg and Whitacre, as you know, one important
possible alternative for consumers will be wireless connections
to the Internet. Using these connections, consumers can access
alternative phone providers such as VoIP and avoid the Bell
companies' connection to their homes. Cities and municipalities
such as Philadelphia have begun to build such wireless networks
and plan to offer it to their residents as a municipal service.
In your testimony today, you have spoken at length about
the promise of new technologies and how we should not worry
about these mergers because the deployment of these
technologies will create an abundance of new telecom
competition.
Yet, at the same time, we have noticed your companies
lobbying State legislatures around the country to stop cities
from building these new networks to deploy these very
technologies. Pennsylvania recently adopted such a law and
other States considering such laws include Illinois, Texas and
Florida.
So why have your companies been actively lobbying for such
State laws to ban the deployment of municipal wireless? Will
you commit to cease your efforts, should your mergers be
approved?
Mr. Seidenberg, we will give you the opportunity, of
course, which you so much desire, to answer first.
Mr. Seidenberg. Actually, I would like to go before Ed just
to make sure I get it in before whatever he says. I don't know
what he is going to say.
Look, we have squabbled a little bit with a few
municipalities and let me tell you why. First of all, we can't
stop anybody from putting any technology they put in. But,
generally, we find it unfair that municipalities that regulate
us, set our taxes, set our franchise fees, participate in
running our company in some fashion, also now want to compete
with us under a different set of rules. So every time we see
that happening, we point it out.
We would also make the point that in all these places where
municipalities want to get into this, with all due respect,
they don't do a very good job either, which then impacts us
because the cities usually come back to us and we need to spend
money to fix the things that have occurred. So we are not in
the business of stopping anybody from doing it, but where we
think the rules are unfair, we are going to point it out.
Senator Kohl. In Pennsylvania, the law was adopted at the
behest of your company's lobbying, is that correct?
Mr. Seidenberg. I am sorry?
Senator Kohl. In Pennsylvania, the Pennsylvania law was
adopted, as I understand it, as--
Mr. Seidenberg. But it didn't prohibit the municipality
from providing the service.
Senator Kohl. Right.
Mr. Seidenberg. It gave us a chance to jaw-bone about it,
but it didn't prohibit it from doing it.
Senator Kohl. Mr. Whitacre, where do you come from on this?
Mr. Whitacre. Mr. Seidenberg answered that as I would. They
are the ones that make the laws, the rules, charge franchise
fees, et cetera, et cetera, and then to compete against us
makes it an unfair competition. From a taxpayer's standpoint, I
really don't want my tax dollars to be used by a municipality
or a local government to build something in competition where
many other businesses already are. But as Ivan said, we can't
stop anybody from putting any technology out there.
Senator Kohl. So the lobbying of State legislatures around
the country to stop cities from building new networks to deploy
these new technologies is not an activity that you all engage
in, or you do engage in that?
Mr. Whitacre. Oh, we have engaged in that.
Senator Kohl. You do engage in that?
Mr. Whitacre. You bet.
Senator Kohl. Yes.
Mr. Whitacre. You bet we will. I mean, again, those
municipalities, those governing bodies regulate us and at the
same time they are competing with us. That makes no sense, so
we are certainly going to lobby against that. But can we stop
them? No, we can't. They can put one out there if they want.
Senator Kohl. Sure. They can do whatever they wish.
Mr. Whitacre. Sure.
Senator Kohl. Mr. Seidenberg, were you clear in your
response to that?
Mr. Seidenberg. I think so. I would like to clarify this.
My understanding is this is not a programmable activity on our
part. If we see something egregious, we go after it, but this
is not something that at every single place in the country we
have a policy that argues about it. It is only where we think
there is a big duplication of effort and it is unfair. So, yes,
we do it, but it is much more episodic.
Senator Kohl. Mike?
Senator DeWine. Mr. Whitacre and Mr. Seidenberg, the
biggest antitrust issue presented by these mergers appears to
be in the so called enterprise market. I would like to examine
the impact of these deals on small and mid-size businesses, the
companies served really most often by AT&T, MCI and their own
regional Bell.
It makes sense that you have so far focused on medium and
smaller accounts within your region. It also makes sense that,
post-merger, you will have a great deal of incentive to pursue
the major accounts even if they are out of your home region.
But what about pursuing the smaller and mid-sized business
accounts out of your region? Doesn't it make more sense to
leave those to the other regional Bell which already has a
relationship with them and the local facilities to serve them?
Why attempt to compete out of your region, where you would
need access to your competitor's network? And if that is the
case, aren't we moving from a situation where we have three
major competitors--AT&T, MCI and the local Bell--down to only
one? Isn't that a clear antitrust problem?
Mr. Seidenberg. Does Ed get this one first? Mr. Chairman,
do you want me to do this one first?
Senator DeWine. Well, you know, you went first last time.
Mr. Seidenberg. I think he should go first.
Senator DeWine. Do you think it is his turn?
Mr. Seidenberg. I think so.
[Laughter.]
Mr. Whitacre. You keep talking and I will forget the
question.
Doesn't it make more sense? There are many, many
competitors in that space that you are talking about. We
compete now against Verizon, as an example, against AT&T,
against MCI across the country in some medium, some small and
some enterprise businesses. There are many other people or
other companies in that business, though, that people don't
think about everyday. You can think of Cisco, you can think of
IBM, you can think of many manufacturers, you can think of
Qwest. You can go on and on, so the competition in that space
is not three; it is three times maybe, I don't know how many,
but it is many, many competitors in that space.
So it is not going down to three. There are many
competitors in that space and I think it makes sense on a
business case basis--on a case-by-case basis, you would have to
decide where you would compete, but certainly we would
anticipate doing that.
Senator DeWine. Mr. Seidenberg.
Mr. Seidenberg. Yes, Senator, I would just add this. I
think the way we would see it is the market is globalizing. So
a small-business customer in Pittsburgh or in Milwaukee or in
Nashville want a choice of suppliers, and I think Ed said it.
Small-business customers get services from cable companies in
the form of modems. They get service from wireless companies.
And with our combination with MCI--MCI has a network that
extends into many of these cities, so we would have the
capability of being a third or a fourth or a fifth supplier to
these accounts. Actually, I think it is just the opposite. With
our heft, muscle, brand, our operations focus and the assets
that MCI brings to the table, I think we are in a better
position to provide more choice for the small and medium
customer across the country. So I think we are just following
the natural evolution of the market.
Senator DeWine. Mr. Whitacre, the three I mentioned are the
three biggest, though, are they not?
Mr. Whitacre. You know, Senator, I don't know. We certainly
would be up there, but I think we often overlook the impact
these other companies have had. I mean, we are not talking
small companies. We are talking about companies that have
thousands and thousands of customers that are, I guess, below
this radar screen.
As far as the enterprise business goes, SBC is a small
player, a very small player. Mr. Dorman would have to answer
for AT&T, but we are quite small in the enterprise space. In
medium and small business, we are stronger in our region, but
we certainly have a lot of competition.
Senator DeWine. Does anybody else want to jump in here?
Mr. Seidenberg. If I might--I am sorry, guys, but I just
want to address something you said in your opening remarks. If
the nature of the question goes to how many telcos will provide
these services, then your point is fair that you can look at
one, two or three that do that. But the customer's dollar is
green and they don't care who they buy these services from.
So the fact is the market now has five, six, seven
different places to buy the services they used to buy just from
the telco. So as we move into these markets, we are dealing
with a very different base of competitive activity in these
areas.
Senator DeWine. Anybody else? Mr. Dorman.
Mr. Dorman. What we have found that happens on a local
basis is smaller companies that compete locally do a very good
job of serving small businesses in their home areas. Examples
of that are people like McLeod Communications up in the upper
Midwest has done a very good job and built a business of almost
$1 billion of revenue.
You have Broadwing, XO, Global Crossing, Level 3. Cox Cable
just announced that they had just passed 300,000 business
customers, and they just started selling to business customers
about two-and-a-half years ago. Time Warner Telecom is another
cable-affiliated company which has done very well in the
medium-business market.
So what we find competing nationally is, yes, we do see the
Bell company certainly competing in the region, but typically
there are at least five to seven other providers besides MCI
and ourselves. We didn't mention Sprint. Sprint is still a $7
billion-plus company in the long-distance and communications
space, and more than half of that comes from business
customers, about $4.5 billion, in fact.
So my perspective is that there is an abundance of choice
for business customers. Certainly, in the context of medium and
small customers there is even more. Large customers typically
buy more sophisticated things, but even there, there are five
to six competing providers. I think Ed mentioned IBM. In almost
every one of our large-customer bids these days, we see IBM,
EDS, CSC, even Lockheed as systems integrators offering
communications and IT services as a bundle. Recently, we lost
Bristol Myers Squibb to BT, British Telecom. So there are a
number of different competing players across the market.
Senator DeWine. Mr. Capellas and Mr. Dorman, as part of
your efforts to compete with the Bell companies in serving
enterprise customers, both of your companies purchase local
access facilities that would allow you to provide facilities-
based service to many business customers. Now that you are
planning to merge with Verizon and SBC, respectively, wouldn't
competition be best served by a divestiture of any of those
overlapping assets to other CLECs who could use them to compete
against the newly-merged entities?
Mr. Capellas. I think first, to put it in perspective,
about 52 cents on every dollar we spend has traditionally gone
for local access. In fact, we actually have very few facilities
which are local. That, in fact, is part of the reason for the
merger, but right now we have very, very limited local access
capabilities. So while no decision has been made on how we deal
with those, it is a very, very small part of our business.
Senator DeWine. Mr. Dorman.
Mr. Dorman. In the case of our direct overlap with SBC, we
do business in SBC's 13 States, as I recall, in over 100,000
different establishments or buildings. We have facilities
overlap with them in something like 2 percent of the cases
where we have a fiber into a building that they have service
into.
In most mergers, redundant facilities like that end up
becoming synergies anyway. So while not committing anything for
SBC looking into the future, I think that on a case-by-case
basis the major thing I would be concerned about is disrupting
customers. If you have a major data network for an American
Express and five of the locations happen to be in buildings
where you had fiber and SBC didn't and you had to convert them
over, I would just simply be wary of the impact on customers.
But rejecting that out of hand, I don't think is necessary. In
other words, it should be something that we would look at.
Senator DeWine. Let me move to another ramification of
these proposed mergers. Ever since the break-up of AT&T in
1984, we always could count on AT&T and MCI to be on the
opposite side of the fence from the Bells on public policy
disputes in front of Congress or at the FCC or in the courts.
Now, while many of those issues are now resolved, there are
many that will no doubt arise in the near future as we consider
possibly rewriting the Telecom Act and as we attempt to
navigate our way into an era of enhanced services.
Who is going to take the place of AT&T and MCI? As
policymakers, who will we look to for an alternative view now
if this takes place? And really to get into the crass business
and political reality of all of this, what if one or both of
the merged entities decides they don't like a decision at the
FCC or of the Congress? Really, there is no one else who has
the nationwide resources, the political heft or the large
constituencies in each State. Who is going to have the
resources to fight the merged entities in court or at the FCC?
Isn't that a practical problem?
Mr. Capellas. I think like lots of things, you can look at
it as an opportunity. If you look at where the innovation and
technology has been and the movement particularly in customer
requirements, the goal has become how do we take these what
should be complementary, seamless technologies and put them
together.
If you are a customer and you sort of look at local access,
wireless bundling, IP, the software access to reside it, the
customer's goal is to actually bring it together to a common
goal, and then to set standards across the industry which allow
that to happen, to allow these networks to talk to each other.
So maybe the new construct is how do we actually get an
industry consortium that drives standards that gains for
productivity so all these devices could talk to each other. So
as a practical matter, maybe the nature of the beast is no
longer in an open warfare, but actually in a set of
collaborative sort of efforts and consortia that allow these
standards to develop so we can actually take it to the next
level.
Senator DeWine. Herb.
Senator Kohl. Mr. Whitacre and Mr. Seidenberg, many
analysts see one of the biggest dangers to competition from
these deals is their effect on the business market. AT&T and
MCI are today vigorous competitors for the telecom business of
large and small enterprises throughout the Nation. The mergers'
critics are concerned that once the mergers are completed, the
combined SBC/AT&T and Verizon/MCI will prefer to concentrate
their marketing efforts on their respective regions and the
competition now offered by AT&T int the Verizon region and MCI
in the SBC region may well be lost.
Mr. Whitacre and Mr. Seidenberg, after these mergers will
SBC and Verizon continue MCI's and AT&T's efforts throughout
the Nation, or are the critics correct in fearing that your two
companies will engage in a divide-and-conquer strategy and that
the enterprise market will lose a strong competitor?
Mr. Whitacre. Well, Senator, SBC will continue to engage in
that kind of competitive activity across the United States. In
other words, where AT&T is, we will continue to compete. So the
critics are wrong in that case. I think it is a good thing for
the Nation. We will be able, from a stronger company, to do
more in that arena, not less, and the technology is going to
enable that. So from an SBC standpoint, of course, we will be
competitive all over the Nation.
Senator DeWine. Mr. Seidenberg.
Mr. Seidenberg. Senator, I agree exactly, and I think the
critics misunderstand something. If you take wireless, we have
built facilities across the country. We compete everyplace.
With respect to enterprise, we didn't have the physical
capabilities to go to every city in the country. With a
combination with MCI, it gives us access to the top 125, 150
MSOs across the country, and we will use the facilities of MCI
to compete aggressively in all those markets. Many of them are
not in what you would call our home market.
Senator Kohl. Although we have heard a lot about cable as
an alternative provider of phone services, isn't it true that
thousands of small businesses--supermarkets, gas stations, dry
cleaners--do not have cable service? So what alternatives will
these small businesses have after these mergers?
Mr. Whitacre. Senator, I would like to invite you to San
Antonio and take you down a few streets where those kinds of
businesses that you are talking about exist. I think the cable
companies have a plan; I think they have a business plan to
serve those kinds of people. I would like to show you what they
done. So, clearly, they are after that kind of customer. They
are doing it, and these businesses you talk about are going to
have alternatives. They have got many alternatives now; they
are going to have even more with cable. It is not just SBC
serving those. It is many other companies.
Senator Kohl. What do you think, Mr. Seidenberg?
Mr. Seidenberg. I agree with that, sir. It is the same
thing. Again, it is a question of how you define the market,
and as Michael Capellas said a minute ago, there is a very fine
line. If there is any distinction between a computer and a
phone network, you can hardly determine it anymore. A packet is
a packet.
So if you buy AOL service, you can buy a very cheap line
from Ed and then put all of your data over that AOL service and
Ed gets no revenue for it. So there is direct competition for
the lines. There is substitutable competition for the services.
These small-business customers, because of the explosion of
technology, have choices today they never had before.
Senator Kohl. Thank you.
Senator DeWine. I have a statement for the record from
Senator Sam Brownback which I would ask unanimous consent to be
made part of the record. Without objection, it will be made a
part of the record.
Mr. Whitacre, let me ask you a question about the SBC
consumer market. First, with regard to the consumer market and
SBC's territory, take a State like Texas. My understanding is
that in the State of Texas, the consumer long-distance market
share held by SBC is about 70 percent. Is that correct?
Mr. Whitacre. I don't know exactly, Senator, but that is in
the ball park.
Senator DeWine. That is in the ball park?
Mr. Whitacre. Yes.
Senator DeWine. How long has SBC been able to offer long-
distance service to its customers in Texas? Do you know?
Mr. Whitacre. I think about 3 years. I would have to check,
but it has been several years.
Senator DeWine. My understanding also is that AT&T holds
about 15 to 20 percent of the consumer long-distance market in
Texas. Does that sound about right?
Mr. Whitacre. I don't know, Senator. You would have to ask
Mr. Dorman.
Senator DeWine. Mr. Dorman, is that about right?
Mr. Dorman. I am not sure. It would be less than 20
percent, would be my expectation.
Senator DeWine. More than 10?
Mr. Dorman. Yes.
Senator DeWine. So if the merger were approved, the
combined companies would account for 80, 90 percent of consumer
long distance in Texas. Would that be right?
Mr. Dorman. Well, if you don't count wireless and you don't
count cable, if you talk traditional wireline long distance,
that fact might be true. But I suspect on the basis of actual
usage, if you included all the long distance originated on cell
phones, I don't think the number holds up as a percentage.
Senator DeWine. I want to be fair about this. What do you
think the percentage would be if you included those?
Mr. Dorman. I would bet that wireless originates about as
much long distance in Texas as wireline, maybe more.
Senator DeWine. So you would put it, then, at 45 percent,
approximately?
Mr. Dorman. That would be my guess.
Senator DeWine. Of that universe?
Mr. Dorman. Yes.
Senator DeWine. Let me ask an additional question, Mr.
Whitacre. What are SBC's market share goals for consumer long
distance in California?
Mr. Whitacre. I guess broadly put, we want to serve all our
customers. We are not the only company operating in California.
For example, Verizon is there. There are many competitors
there. The cable companies are quite strong and have recently
put out that they probably have a bigger share than we do where
we traditionally operated.
I think any business person who is truthful would like to
have as much share as they can get. As a practical matter, that
is a function of a lot of things--price, what you do. But
certainly we are trying to serve the consumers we have in
California with our long-distance service. That is a goal of
ours. We would like for all our customers to have SBC long
distance. They do not now.
Senator DeWine. What about in the Midwest, former Ameritech
States?
Mr. Whitacre. Senator, I can't recall the percentages. As
you know, we got in long distance much later, so our
percentages would be considerably smaller there. I would just
have to get you the correct number, but it would be much
smaller.
Senator DeWine. All right. When you do that, could you also
get Missouri, Oklahoma and Kansas?
Mr. Whitacre. Sure. I would be happy to do that.
Senator DeWine. Mr. Capellas, there is a great deal of
interest in the sale of your company. As we all know, there is
still a certain degree of uncertainty as to whether or not
Verizon or Qwest will be successful in their efforts to
purchase MCI. We certainly don't want you to disclose any
corporate secrets or anything you don't feel you can tell us
about, but can you tell us what the status is of MCI's
deliberations and when we might expect to see a decision?
Mr. Capellas. Well, we do have a signed merger agreement
with Verizon, and so that is the first order of business.
Senator DeWine. Right.
Mr. Capellas. There has been a process undertaken with
which, with the consent of Verizon, there could be some
additional discussions. That is a time period that ends on
Thursday, this coming Thursday, and so at this point there are
some deliberations between the teams. But we do have a signed
merger agreement and if there is any reason to reevaluate, if
the situation warrants, we will, but at this point we have a
signed merger agreement.
Senator DeWine. There was one report--and I may have read
it very quickly, but one report that Qwest's offer was a bigger
offer. Could you comment on that? That was a published report,
and again I may have not read all the fine points and there may
be fine points you would like to elaborate on.
Mr. Capellas. Every economic decision, no matter what it
is, has a balance of risk and reward and a balance of short
term and long term. So the real question here is when we
entered into our agreement with Verizon, the thing we were
looking for was the ability to compete in a market which was
changing--wireless capabilities, access economics, financial
strength. And, you know, it is the fiduciary responsibility to
take in all the considerations, and so again all those
considerations were taken in and our deal with Verizon was
really based on long-term ability to go to market.
Senator DeWine. Do you want to comment on Qwest?
Mr. Capellas. No. I don't think it would--there has been a
period open in which some conversations could take place, but I
would have nothing to add at this point.
Senator DeWine. Fair enough.
Mr. Whitacre, let me talk for a minute about jobs, and I
will put my hat on as U.S. Senator from Ohio for a moment, if I
could. There has been some discussion about job losses for your
company overall, and I wonder if you could comment on that and
also comment on what impact this might have for the State of
Ohio.
Mr. Whitacre. Well, Senator, for the past several years
SBC's workforce has decreased in size. It has decreased because
our revenues have been falling, our earnings have been falling.
That is part of the problem I addressed in my remarks with this
industry. It is an industry that has lost a lot of jobs because
of declining revenues.
Specifically, with the AT&T merger, we have said generally
about, it looks like, 13,000 jobs would be impacted across both
companies. But you have to remember SBC would normally lose by
attrition 12,000 a year; that is retirements, et cetera. So I
suspect with normal attrition, there is probably not much
change.
We are not doing this merger to continue to shrink. This is
about changing something in this industry and making these two
companies viable and being able to grow again. This is an
environment in which you would hope you could increase jobs if
it is successful, and you do something exciting for a business
that has been in the doldrums for quite some time.
As it impacts Ohio, I can't tell you specifically this
early in the talks because I don't know what AT&T has located
there. I know what SBC has, and I doubt if our workforce is
impacted significantly, if at all, in Ohio.
Senator DeWine. Let me take advantage of the fact that we
have the CEOs of four of the biggest phone companies in the
country here to ask a question that may not really have a
direct relationship to the merger, but I do have you here and I
think it is an important issue.
As we move and see more and more innovation in the
telecommunications arena and develop greater broadband
capability, I think it is extremely important that we work hard
to ensure that the disabled are not left behind. As we make
broadband and improve Internet applications, we should be able
to come up with better mechanisms to include the disabled in
the communications revolution.
Let me ask each one of you if you could address this
question, and that is what are you doing and what can we all do
as policymakers to take steps toward this specific goal? How
can we use all this technology to serve constituencies with
different needs and help customized products so that many
different people can use them?
Mr. Whitacre?
Mr. Whitacre. Well, I think the new technology is going to
enable us to do that, Senator. I can't speak to all the
specific ways, but certainly voice over IP lends itself much
more than circuit-switching does to uses of all people of the
United States, be it disabled, be it whatever.
I don't know some of the new uses. Perhaps some of the
other participants do, but I think it does give us the ability
to move things around, change things, switch things, have
broadband access, wireless broadband access, which certainly in
itself might be a terrific way for the disabled, and that is
right around the corner. So I think the era we are moving into
lends itself very much to do more in that, and SBC has always
been a greater supporter of that.
Senator DeWine. Mr. Seidenberg.
Mr. Seidenberg. Yes, sir, just two points. We have a good
record in this area. We have a disabilities center that we have
in the East. We opened one in the West, so we serve customers
directly out of these centers.
I would make the point that a company of our size and scale
has the financial capacity to address these markets. These
markets are important to us. People believe that, given our
brand and our position, that we should address these markets.
We have the financial capability to do so.
For the past 22 years, chasing all these new entrants in
the business, I don't ever remember a new company coming into
the marketplace and saying we are going to compete in the
disabled market. So I think that one of the things that we want
to do is to the extent that we can continue to create the
financial capacity to address the markets, the disabled market
is one we will always keep our eye on.
Senator DeWine. Mr. Dorman.
Mr. Dorman. I think the promise of being able to fungibly
take text and speech and voice and interact them is an
important attribute for various disabilities, the point being
if you can type, you can communicate. If you can speak, but not
see, you can be able to communicate your words and have them
translated into text for other people. So the mixing of media
between e-mail and voice is going on right now.
This so-called unified messaging capability, as Ed
suggests, comes together with voice over IP very nicely because
the interface is typically something as simple as a Web page,
where you can listen to your e-mail, you can listen to a voice
mail and you can translate. So we are moving that ahead. AT&T
actually holds a significant amount of intellectual property on
speech processing, which is a very important part of this.
Mr. Capellas. Just to echo Dave's point, we also have a
center in California which is for the hearing-impaired which
actually will take speech to text and text to speech. So if you
have a call that you can't hear, you will send it in, it will
be translated and go back.
I think there is tremendous progress being made in the area
of linguistics. Particularly for those who have English as a
second language, it can be deployed over networks and you see
that happening. There is voice activation and all the voice
activation that goes with it.
There is a new thing that is being deployed over networks
which is called pace-based training for those people who may
not have the same skills educationally to be able to actually
have educational programs at a different pace, which is
actually starting to revolutionize some things in education.
There is another one I think we can all do. When you create
an environment of a diverse workforce, you will find that those
attitudes actually create environments where people will think
of things that are not normal to them. I think just promotion
of diversity in your workplace probably does more to let the
creativity out than probably anything we can do, because
creative people will come up with creative ideas.
Senator DeWine. Good. Well, I appreciate your statements,
all four of you. This is something that this Subcommittee will
continue to look at. To state the obvious, the new technology
that you all are engaged in and what your business is all about
provides just wonderful opportunities for people today that we
couldn't have envisioned 10, 15 years ago, maybe even 5 years
ago. It presents just tremendous opportunities for people to
improve the quality of life, and we would encourage you to
continue to make that part of what you do and part of your
mission. Mr. Seidenberg, I think, speaks very well of looking
at that as part of the mission, being big enough to do it and
carry it out, and we appreciate it very much.
Senator Kohl.
Senator Kohl. Well, I think you guys have done a really
good job here. It has been informative. I think about the
National Press Club, which is an organization here in
Washington that has influential and important people like
yourselves to speak before the group. After the speech and the
questions, which are all quite serious, there is a final
question which is serious but somewhat humorous.
I would like to ask all four of you, in the event that this
merger goes through, which of you gets the dinner and the gold
watch and which of you gets the corner office?
[Laughter.]
Senator Kohl. I appreciate your answer.
[Laughter.]
Senator DeWine. We appreciate your answers very much. Thank
you very much. Well, we appreciate you being here. I think this
hearing has given us a good opportunity to examine some of the
important antitrust and competition issues raised by these
mergers.
As we have discussed, most of the antitrust issues really
appear to be in the enterprise market, and I anticipate that
the Antitrust Division will examine those and other antitrust
issues as it looks at these deals. Further, this hearing has
been useful in exploring some of the larger competition issues
regarding intermodal competition and whether that is going to
be sufficient to protect consumers and competition in the
future.
Clearly, this Committee is going to need to consider how we
can play a role in making sure that intermodal competition is a
part of the competitive landscape in the years ahead. Along
those lines, as I mentioned in my opening statement, the
Antitrust Subcommittee will hold a follow-up hearing on April
19. We will at that time hear from some of those who have
expressed concerns about the mergers. I hope that after hearing
from them, we will have a fuller understanding of some of these
complicated technical and telecommunications issues, and can
decide what steps to take moving forward.
Before I close this hearing today, I would like to thank
each of our witnesses for their patience. We were trying their
patience and everyone in the audience's patience here today,
and the press corps. We thank them. It has been a long day and
the hearing certainly did not proceed as smoothly as we would
have liked, but all of our witnesses have been very gracious,
very professional in their testimony, and really have greatly
contributed to this Committee and to this Congress'
understanding of the mergers and of the marketplace and how it
exists today. So we thank them for their time.
This hearing is adjourned, and we look forward to
continuing to explore the issues on April 19. Thank you.
[Whereupon, at 5:27 p.m., the Committee was adjourned.]
[Questions and answers and submissions for the record
follow.]
[Additional material is being retained in the Committee
files.]
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