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Merger Hangups

Progress Snapshot
Release 2.28 December 2006

by Scott Wallsten *

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The Federal Communication Commission’s review of the proposed $80 billion AT&T-BellSouth merger has been at an impasse for more than 200 days. Help may be on the way, however. The FCC general counsel recently ruled that Commissioner Robert McDowell could step in to break the 2-2 stalemate even though he had earlier recused himself. At this point the unrecusal, though controversial, seems to be the best remaining path forward.

The tortuous path of this mega-merger highlights the inherent flaws with the way the government reviews mergers of telecommunications companies.

It is crucial for the economy and consumers that the government carefully evaluate a proposed merger to ensure that it does not create the incentive and ability for the merged company to engage in nefarious, anticompetitive behavior.

But it is equally crucial for the economy that a merger investigation focus specifically on the merger itself, and not be sidetracked by other, unrelated matters. In particular, does the merger have the potential to harm competition, innovation, and ultimately consumers? And if the merger could harm consumers, what specific conditions on the merger could remedy those problems?

In most industries only one government agency—either the Justice Department of the Federal Trade Commission—evaluates proposed mergers. For example, the FTC recently investigated a merger between oil giants Chevron and Unocal without a follow-up review by the Department of Energy. It approved the merger after imposing conditions it deemed necessary for maintaining competition.

In telecommunications, by contrast, mergers must pass muster at both the Justice Department and the FCC. This dual review allows special interests to short-circuit the usual process for creating new laws and regulations and to pursue agendas completely unrelated to the merger.

The Justice Department approved the AT&T-BellSouth merger without any conditions, concluding that the merger posed no threat to competition. At the FCC, the investigation has devolved into a free-for-all for special interest groups to demand concessions that further their particular telecom agendas, whether or not those concessions have anything to do with the merger. AT&T and BellSouth, meanwhile, are eager to move the merger forward and may be increasingly willing to meet those demands.

Why is it so terrible to impose conditions unrelated to the economics of the merger? First, a condition imposed on one company can easily become public policy affecting all companies. Second, negotiations and concessions in merger proceedings happen behind closed doors. Policies that will affect millions of people and entire industries should be weighed carefully and debated transparently, not imposed on society because two firms were eager to consummate a merger and their opponents took advantage of this situation.

For example, recent arguments in the AT&T-BellSouth merger have focused heavily on network neutrality, which, if mandated, would regulate how providers of high-speed Internet connections can run certain aspects of their businesses. The point here is not to rehash the net neutrality debate. Suffice it to note that the outcome could have large implications for the industry and the economy.

Net neutrality proponents have so far had little luck convincing Congress to impose such rules and therefore want the Commission to demand strict net neutrality as a prerequisite to approving the merger. That’s the wrong way to resolve such an important issue.

Precisely because it is so important the FCC and Congress should debate net neutrality on its own merits. No serious analysis of the proposed merger, including the one done by the Justice Department, concludes that the merger would create new conditions that would require net neutrality regulation.

In addition, merger opponents want the Commission to create new price regulations on dedicated lines that serve large businesses and mobile providers. While there may be an economic case for rethinking these regulations, this is the wrong place and the wrong time. AT&T and BellSouth do not currently compete with each other over dedicated access, so the merger itself is unlikely to have much impact on that market. Any change in these regulations should result from a transparent regulatory proceeding, not from a side-deal to the current merger investigation.

Commissioner McDowell could ride to the rescue by carefully considering the likely impacts of this merger. But that would only help to stamp out the latest Washington brush fire.

In the long run we have to bring some sense to the telecom merger review process. Consumers should demand that any merger review focus on the merger itself and not become a platform for pursuing other, unrelated policy goals.

*Scott Wallsten is a senior fellow and director of communications policy studies at The Progress & Freedom Foundation. The views expressed here are his own, and are not necessarily the views of the PFF board, fellows or staff.



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