AT&T and BellSouth: Why you should care

After its proposed merger with BellSouth, AT&T will in many ways be bigger and stronger than its monopolistic predecessor, Ma Bell.

Watchdog groups believe the outcome of a quiet political battle over which restrictions to impose on the AT&T and BellSouth merger will affect consumers for years to come.

When the AT&T monopoly was broken up in 1984 by antitrust regulators, it was divided into seven Bell operating companies. After this merger, there will be three companies. The new AT&T will become the nation's dominant phone company, controlling more than half the telephone and Internet access lines in the U.S.

In many ways, the new AT&T will be even stronger than the old Ma Bell because today's company competes in many more markets, including business and consumer data services and paid television. And therein lies the problem. A supersize AT&T, some worry, could have the ability to jack up wholesale line-leasing rates it charges to smaller carriers--a cost that would ultimately be passed on to consumers.

"When you create an entity that is this large, it makes future competition impossible," said Mark Cooper, research director for the Consumer Federation of America.

Certainly, such fears are tempered by the notion that the telecommunications industry has changed in the past 20 years. New phone competitors such as the cable TV operators have emerged, giving most Americans at least two choices for their broadband and phone services.

But as the cliche goes, the devil will be in the details of this $80 billion deal, which was first announced in March. Department of Justice and state regulators have already approved the merger, and the question now is what restrictions the Federal Communications Commission will place on the newly minted AT&T.

On Thursday, the five-member commission, which is split on the issue along party lines, delayed a vote on the merger. A fifth commissioner, a Republican named Robert McDowell, has a potential swing vote. But he has recused himself, because before joining the commission last June, he represented an industry group strongly opposed to the merger. Now, there's speculation that the general counsel for the FCC may instruct McDowell to un-recuse himself to break the deadlock.

"The most likely scenario is that McDowell will be asked to vote," said Blair Levin, who was chief of staff for former FCC Chairman Reed Hundt and is now a telecommunications industry analyst for Stifel, Nicolaus & Company. "And that will certainly change the negotiation and move things closer to an end game."

McDowell hasn't indicated publicly how he might vote if asked to participate, but some people believe his previous relationship with companies opposed to the merger has backed him into a corner.

"I'm quite certain he would prefer not to vote on this merger," Levin said. "But if he does vote, I'm sure there will be people on either side that criticize him for whichever way he votes."

Behind-the-scenes dominance At first glance, the AT&T and BellSouth merger doesn't appear to affect consumers directly. The companies offer telephone and DSL service in different regions of the country. And only in a few instances do they compete head-to-head for business customers, due to last year's merger between long-distance carrier AT&T and local phone company SBC Communications.

Instead, consumers will likely feel the impact of the merger indirectly, because a combined AT&T and BellSouth will have more control over the wholesale communications market. Together, AT&T and BellSouth would control more than half the access telephone infrastructure in the United States.

Why would that be a problem? Infrastructure companies such as EarthLink must lease lines to provide competitive broadband service. Since the 1996 Telecommunications Act, the government has regulated pricing and access to this infrastructure. But over the past decade, the FCC has steadily scaled back its regulation, leaving the phone companies to negotiate unregulated commercial rates directly with their competitors.

Opponents to the merger fear that a bigger AT&T could use its newfound dominance in the wholesale access market to jack up rates, forcing out of business competitors that use its so-called local access loops. And fewer competitors would mean fewer choices for consumers, they argue.

"If the merger is approved without any conditions, we won't be shut out of the game entirely," said Chris Putala, executive vice president for public policy at EarthLink. "We already have commercial arrangements with the phone companies. But as we look down the road toward renegotiating these arrangements, the fact that there is so much market consolidation makes this potentially more challenging in the future."

Cell phone services could also be affected.

For the most part, cell phone operators own only the communications network from their cell towers to customers' phones. From the cell tower, traffic is aggregated and sent over a leased wireline connection to the regular phone network, where it is ultimately terminated on a local wireline phone network or on another cell phone carrier's network.

Mobile operators must pay the phone companies that own these connections--AT&T, BellSouth, Verizon and Qwest--for access to their networks. This cost makes up a substantial portion of a mobile provider's operating budget.

In the U.S. today, two of the four major cell phone operators, Cingular Wireless and Verizon Wireless, are affiliated with companies that own these local and long-distance wired access networks. But because Verizon Wireless is owned by Verizon Communications and Vodafone, and Cingular is owned by AT&T and BellSouth, neither wireless carrier controls a significant portion of the so-called backhaul access network.

Because their parent companies do not have complete control of the mobile operator, they are less likely to raise those access rates. In effect, joint ownership has meant rate stability. But when the merger is complete, AT&T will control 100 percent of Cingular Wireless, and consumer advocates worry it will no longer have an incentive to keep these wholesale rates low.

So what will the FCC do?

The two Democratic commissioners, Jonathan Adelstein and Michael Copps, were angered by the Department of Justice's unconditional approval of the merger. In an effort to win Democratic votes, . In this proposal, AT&T agreed to extend many of the conditions that the commission had placed on its last merger, with SBC Communications. These conditions included freezes on wholesale rates for certain network assets, like wireless backhaul and the local phone infrastructure that companies such as EarthLink use to provide broadband service.

Specifically, AT&T said it would extend these conditions for two and a half years after the merger is completed. But opponents to the merger say the time frame AT&T has proposed isn't enough. In public comments filed to the FCC, CompTel, a group representing competitive communication carriers, suggested AT&T's conditions be extended for seven years to coincide with conditions the FCC has imposed on other recent mergers.

There's some precedent for that. Earlier this year, the FCC approved the acquisition of assets from the cable company Adelphia by Time Warner and Comcast with a set of conditions that will last six years from the close of the acquisition.

"Given that the level of market power at issue in this merger is greater than was the case with either Adelphia or DirecTV-Hughes mergers, and that the size of the affected market as well as the importance of that market to the economy are greater here than was the case with either the Adelphia or DirecTV-Hughes mergers, it makes sense for the conditions to extend for a longer period," Comptel argued in its comments.

But some analysts believe that the current set of conditions proposed by AT&T may be sufficient.

"If you look at the record since the AT&T/SBC merger, there doesn't appear to be a series of price increases or anticompetitive behavior," said telecom analyst Blair Levin.

That said, Levin acknowledged things could change once the deal goes through.

"Since the AT&T/SBC acquisition closed, the company has been looking to do another merger," he said. "And usually, companies are on their best behavior when they're looking for regulatory approval. So it could be too early to discuss the impact of recent mergers."

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