6. Does the Proposed Merger of the Parent Companies and Change in Control "Not Adversely Affect Competition?"
The Commission requested an Advisory Opinion from the Attorney General on the competitive effects of the proposed merger of SBC and AT&T.
The Advisory Opinion was filed at the Commission on July 22, 2005. The Advisory Opinion employs the approach embodied in anti-trust laws, including the Department of Justice and Federal Trade Commission's 1992 Horizontal Merger Guidelines and their April 8, 1997 revisions (the Guidelines).
The Advisory Opinion finds that "the merger may have the effect of raising average rates for DS1 and DS3 service."36 For all other products, however, it finds "that competitive effects in properly-defined markets for other relevant products - including those for mass market local exchange, mass market long distance, "enterprise," and Internet backbone services - will be minimal."37
Although the Advisory Opinion does not control the Commission's findings concerning the effects of the proposed transaction on competition, the Advisory Opinion is entitled to "great weight."38 In deference to this Advisory Opinion, we organize our discussion of the competitive effects of this merger following the analysis provided by the Attorney General. In particular, we examine the effect of this merger on 1) mass market local exchange; 2) mass market long distance; 3) enterprise services; 4) special access services; and 5) Internet backbone. In addition to following the structure of the Advisory Opinion, we will begin our examination of the effects of merger with the analysis contained in the Advisory Opinion.
The Advisory Opinion notes that the Guidelines require the calculation of changes that occur in the Herfindahl-Hirschman Index (HHI), a measure of concentration in local markets, because of the proposed transaction. The Advisory Opinion notes that "the relevance of the calculation is, however, highly dependent upon the structure of the industry, how rapidly it is changing, and the theory of competitive effects."39
For this transaction, the Advisory Opinion notes that "SBC has a relatively minor presence in the relevant markets for both mass market (facilities-based) long distance and enterprise services, AT&T dominates neither of those highly competitive industries, and entry barriers there are relatively minor. Similarly, AT&T has a nominal share of the relevant market(s) for facilities-based local exchange services, and its absence will have inconsequential effects on price and output levels."40 Thus, the Advisory Opinion concludes, "the applicants' market share in all of the relevant markets need not be precisely determined."41
6.1. Mass Market Local Exchange
The Advisory Opinion, following standard anti-trust analysis, finds that there is a relevant market for residential and small business (mass market) local exchange services and begins its analysis with this market.
6.1.1. Advisory Opinion finds merger "will not have adverse effects upon competition in local markets"
The Advisory Opinion concludes that because concentration levels in local exchange markets will be affected only marginally by the incorporation into SBC of AT&T facilities-based services, the merger will not have adverse effects upon competition in those local markets in which AT&T does not offer special access service to private line customers.42
The Advisory Opinion elects to follow the analytical framework set out in the WorldCom/MCI case by the FCC. In that case, the FCC excluded competitively-supplied inputs and focused on the commercial level at which critical supply constraints could be assessed. Following that precedent, the Advisory Opinion notes that AT&T "resells UNE-P services to a significant number of California mass market customers,"43 but notes that AT&T provides UNE-L service through its own local switches to "a relatively small number of customers."44 The Advisory Opinion further notes that UNE-P services are "readily available" from other CLECs.45 Therefore, the Advisory Opinion concludes that within the relevant market,46 the merger "will not have adverse effects upon competition." 47
In general, the Applicants support the determinations reached in the Advisory Opinion. Concerning mass market telecommunications services, the Applicants argue that: "the protesting parties have placed form over substance, focusing their criticisms on the size of SBC and AT&T. This narrow reasoning misses the point of reasoned competition analysis."48
Applicants further argue that the Attorney General properly analyzed the merger and correctly concluded that, "Despite their size, the two firms generally cater to different customer segments and the extent of overlap between their facilities-based services is relatively limited."49 Applicants cite the fact that, "this transaction will not remove an active competitor from any market segment, and because of AT&T's position in the market, it does not impose a price constraining force on SBC." 50
The Applicants also support the Advisory Opinion in its finding that the "the retail services provided by SBC are readily available and that the relevant market is limited to facilities-based long distance services, and that the merger will have minimal effects on concentration levels."51 The Applicants note that "although AT&T continues to serve its existing customers, it has stopped competing for mass market wireline customers. Thus, AT&T is not an active competitor, does not constitute a price constraining force, and its removal from the mass market will not have an adverse impact on the competitive environment."52
The Applicants also argue that intermodal competition further mitigates any competitive concern by ensuring the market will remain competitive. In particular, the Applicants state that "The combined organization will be one entity among many engaged in enhanced competition, which will occur not only because of the number of competitors, but also because of the diversity of competitors and their approaches."53 With intermodal competition, applicants continue: "there is virtually no customer without a wide variety of choices, and this merger will not change those market dynamics."54
TURN argues against acceptance of the Advisory Opinion, claiming that it "very seriously misunderstands the nature and likely result of the proposed SBC/ATT merger"55 stating that it "suspects that the AG [Attorney General] did not examine and does not understand [TURN's] evidence."56
TURN's evidence focuses on the calculation of the HHI. TURN argues that application of the Guidelines framework to the evidence in the proceeding suggests unacceptable increases in the HHI and faults the Advisory Opinion for its failure to conduct such an analysis.57 This, in TURN's view, indicates that the proposed merger would lead to unacceptable increases in market concentration that would likely increase Applicants' ability to exercise market power in most retail markets in California.58
In addition, TURN argues that Applicants' claims concerning intermodal competition are wrong, and that intermodal competition will not offer a viable competitive alternative to basic telephone services. In particular, TURN argues that the Applicants misled the Commission by implying that SBC's wireline losses are significant and that they are attributable to intermodal competition.59
In summary, TURN argues that the proposed merger will have adverse effects on local telecommunications markets and therefore the proposed merger is not in the public interest.60
ORA argues that the transaction will have an adverse impact on mass-market customers.61 ORA presents an HHI analysis that allegedly shows that the transaction will have serious anti-competitive impacts.62 ORA further argues that intermodal competition is "speculative." It proposes a series of measures to maintain competitive choices, including requirements that SBC offer DSL line sharing at TELRIC-based UNE rate and that SBC offer "stand-alone" DSL.63
Concerning VoIP competition over DSL, ORA supports Qwest's proposal that the merged entity be required to offer "stand-alone DSL on reasonable basis."64
Telscape argues for what it calls a very modest condition that, "SBC-CA offer a basic two-wire residential loop product at a reduced wholesale price that will enable facilities-based CLECs to compete on a level playing field with SBC-CA"65 In particular, Telscape proposes that as a condition of the merger, SBC-CA must offer UNE-L at a price at least 50% below the TELRIC rate.
CALTEL argues for mitigation of significant harmful effects that it claims will arise from the merger.66 In particular, CALTEL recommends adoption of two general conditions:
· The Commission should implement a price cap plan for SBC's wholesale network elements.
· The Commission should require SBC to provide fair interconnection prices, terms and conditions for IP facilities and capabilities.67
Level 3 proposes one merger condition concerning mass market issues.68 Level 3 argues that, "if an ILEC offers DSL service but requires customers of that service also to buy its traditional local phone service or its VoIP service, then those customer are effectively precluded from using competitive VoIP providers, unless they want to pay twice for voice service. Such a practice of tying together the service offerings is anti-competitive and should not be allowed."69
Qwest argues that the proposed merger should not be approved unless the Applicants provide "stand-alone" DSL service. In particular, Qwest notes that the Applicants trumpet the virtues and the importance of IP-based telephony as a competitive force that justifies approval of the merger. Qwest argues that, "Without standalone DSL, likely the only provider to succeed and put pressure on SBC's wireline business will be SBC itself."70
The Community Technology Foundation of California (CTFC) argues that, "Although Applicants repeatedly refer to the $14.95 introductory offer for SBC's DSL service, the evidence is that the $14.95 rate is only good for new customers for one year, and only for those customers who also sign up for SBC local voice service. For those residential customers who rely on SBC DSL, this means that VoIP is not a substitute for wireline telephone service but in addition to wireline telephone service." 71
We find no reasonable basis upon which to reject the Attorney General's Advisory Opinion. Further, we concur with the Attorney General's principal conclusion that the proposed transaction will have little effect in the local exchange market. In particular, we find the Advisory Opinion's focus on facilities-based competition in local markets appropriate and consistent with the approaches commonly used to review transactions such as this. As the Advisory Opinion notes, "AT&T provides `UNE-L' service through its own local switches to a relatively small number of customers,"72 thus, the transaction does not adversely affect competition in the local service mass market.
In addition, AT&T has elected to exit the local market, and thus it no longer provides price constraining competition to SBC. Speculation that AT&T may return to this market is unconvincing.
Similarly, we agree with the Advisory Opinion that HHI analysis does not provide relevant insight into the dynamics of this market, and is not needed to perform a competitive analysis. Indeed, since the Advisory Opinion finds that the relevant local market is that of facilities-based service providers to mass market customers, and since AT&T provides UNE-L facilities-based services in local mass markets to a "relatively small number of customers,"73 and has no plans to offer service to local mass market customers, facilities-based or otherwise, in the future, then the acquisition of AT&T will produce no significant increase in the HHI for this market.
As a result, TURN's criticism of the Advisory Opinion is particularly misguided. TURN's calculation of dramatic increases in the HHI arise from its definition of the local market to include "resold" or "UNE-P" services. TURN fails to recognize that the Advisory Opinion clearly links its restriction of the market to "facilities-based local services" to traditional competitive analysis that looks at whether a merged entity can manipulate the supply of the service, as well as to recent precedents used by the FCC in examining telecommunications markets that focus on facilities-based competition (which TURN argues do not apply). In addition, we also note that the FCC's competition policy supports just this type of facilities-based approach to competition, for it has recently eliminated UNE-P as a competitive entry mechanism in the TRRO decision and will phase out all pricing at UNE-P levels. Thus, in this regulatory environment, it would make little sense to include UNE-P resold service in any analysis of market shares, particularly on a forward going basis.
Rather than acknowledge this fundamental disagreement, TURN simply claims that "the AG advisory opinion does not appear to reflect a balanced review of all of the evidentiary record developed prior to July 22, 2005 in the California and Federal Communications Commission ("FCC") proceedings"74 and claims that the evidence that it offered "is essentially ignored in the advisory opinion."75
Most important, TURN's argument does not diminish the relevancy of the Advisory Opinion's straightforward analysis: If AT&T is providing no significant telecommunications services in a market except through the limited resale of SBC services through UNE-P, which the FCC is in the process of eliminating, then consolidation with SBC should not affect the supply of telecommunications service to the market in any way. Without an increase in the ability to restrict supply of telecommunication services in a market, the merged firm does not have an increase in market power.
Furthermore, we find that intermodal competition will continue to provide a check on future anticompetitive outcomes in the local exchange market, but for this to remain a viable check in a highly dynamic and converging industry, consumers must have unfettered access to competitive VoIP services.
Applicants state that the transaction will "result in increased innovation, lead to more rapid introduction of new services and prompt the development of services that would not otherwise exist."76 Applicants also state that, "the combined organization will be capable of delivering the advanced network technologies necessary to offer integrated, innovative, high-quality and competitively priced communications and information services to meet the evolving needs of customers worldwide."77
Applicants further state that "Competition from CLECs, wireless, and IP-based and broadband services is creating a new era fueling growth in innovative, lower cost services to business and consumers while traditional wireline offering steadily decline."78 We note that industry consolidation and convergence have fundamentally changed the playing field and the nature of competition for wireline carriers. Applicants draw attention to the fact that "intermodal competition also comes from other sources such as pure-play VoIP services from providers like Vonage, Packet8 and Skype," and that "these pure-play VoIP providers, along with other VoIP offerings, exert competitive pressure on traditional telephone services, and will continue to erode wireline market share."79
Therefore, we agree with CTFC, Qwest, ORA and Level 3 that customers' access to competitors' VoIP over SBC's DSL service is crucial to protect consumer choice and maintain competitive pressure on traditional telephone service as the industry consolidates, technology converges, and intermodal competition increases.
Ensuring access to advanced services, including competitive VoIP providers, over DSL broadband is also critical to this Commission's obligation to promote access to broadband and advance telecommunications services, lower prices, and broader consumer choice pursuant to Public Utilities Code §709. As Level 3 stated: "By tying together DSL service with its voice services, whether traditional local exchange service or VoIP, an ILEC discourages consumers from using VoIP competitors."80
Public Utilities Code §709 states that it is the policy of the State of California to assure the continued affordability and widespread availability of high-quality telecommunications services to all Californians; To encourage the development and deployment of new technologies; To assist in bridging the "digital divide" by encouraging expanded access to state-of-the-art technologies for rural, inner-city, low-income, and disabled Californians; To promote lower prices, broader consumer choice, and avoidance of anticompetitive conduct; To remove the barriers to open and competitive markets and promote fair product and price competition in a way that encourages greater efficiency, lower prices, and more consumer choice.
Thus, we believe this Commission has a compelling statutory interest in fostering intermodal competition in the local voice telephony market, as well as fostering access to advanced telecommunications services, such as VoIP. To the extent SBC forces consumers to separately purchase its traditional local phone service in order to obtain DSL, such a policy frustrates intermodal competition and access to advanced services, and undermines the benefits to consumers that would occur as a result of this transaction.
Intervenors' recommendation that SBC be precluded from bundling its own VoIP product with its DSL Internet service if it chooses to do so, however, has no reasonable basis. National telecommunications policy is clear that, in order to encourage investment in and development of emerging technologies, such as VoIP, these technologies should remain free from unnecessary regulation. The FCC has also occupied the field of regulation in this area, stating that, due to the inherently interstate nature of IP-telephony, VoIP services are under the exclusive jurisdiction of the FCC. Additionally, integrating and bundling advanced services offers benefits to consumers by reducing costs, fostering innovation and lowering prices.
Therefore, as long as there is no evidence that SBC is using market power to limit consumers' access to competitive VoIP providers or other lawful content using SBC's DSL broadband service, there is no compelling reason to place conditions on SBC's ability to bundle its own VoIP product with other advanced services over DSL.
Therefore we will order that as a condition of approving this transaction, no later than January 30, 2006 SBC shall cease and desist from forcing customers to separately purchase traditional local phone services as a condition of purchasing SBC's DSL service. We will further order that no later than
June 30, 2006 SBC shall submit an affidavit evidencing compliance with this condition of the merger.
In summary, consistent with the Attorney General's Advisory Opinion finding that the proposed transaction will not have adverse impacts on competition in local markets, we reject the recommendations of parties to deny the proposed transaction as anticompetitive. Moreover, with the exception of the requirement that SBC cease forcing customers to separately purchase traditional local phone service as a condition of obtaining DSL, which we believe is critical to SBC's own argument that intermodal competition is a significant check on an anti-competitive outcome, we adopt none of the restrictions and/or mitigation measures proposed that concern mass-market services.
6.2. Mass Market Long Distance
The Advisory Opinion then turns to an analysis of the competitive effects on the market for long distance telecommunications services sold to residential and small business customers.
6.2.1. Advisory Opinion finds long distance services "readily available" and that merger will "have minimal effects on concentration."
The Advisory Opinion concludes that the merger will have "minimal effects on concentration levels"81 on mass market long distance services.
The Advisory Opinion follows the reasoning of the mass market local market analysis, but here the situation is exactly reversed. "AT&T is a facilities-based provider of long distance services, while SBC offers long distance services through resale operations."82 The Advisory Opinion applies the WorldCom/MCI reasoning to this transaction, and finds that the retail services offered by SBC in this market are "readily available." The Advisory Opinion further concludes "that the relevant market is limited to facilities-based long distance services, and that the merger will have minimal effects on concentration levels."83
The Advisory Opinion also notes that the "FCC has repeatedly determined that competition among long distance suppliers is both substantial and national in scope."84 The Advisory Opinion explicitly rejects the claims that "there are California "submarkets" for long distance services."85
In addition the Advisory Opinion notes that it appears that SBC "has no in-region or out-of-region long distance facilities of its own."86 Moreover, "SBC competes at the retail level with many alternative suppliers."87
The Applicants support the analysis of the Advisory Opinion on this matter. Applicants cite page 3 of the Attorney General Opinion that "During the past ten years, elimination of entry barriers has facilitated widespread competition for long distance and other traditional products."88
In general, parties to this proceeding did not address the mass market for long distance services separately from that of mass market local exchange services. In an argument related to this issue, TURN argues that "the Applicants have plainly failed to demonstrate that the proposed merger will not result in a significant increase in market concentration or harm competition in this market."89 It is, however, difficult to find an analysis by TURN on point because it objects to the market definitions in the Advisory Opinion and does not specifically address the long distance market. Additionally, "TURN acknowledges that the market for `all other residential services' is more competitive than the market for primary network access connections." 90
We find no reasonable basis upon which to reject the Attorney General's Advisory Opinion that concludes that the merger will have "minimal effects on concentration levels"91 on mass market long distance services.
Once again, we find the Advisory Opinion's focus on facilities-based competition in local markets appropriate and consistent with the approaches commonly used to review transactions such as this. As the Advisory Opinion notes, SBC does not have significant long distance facilities (if any) and its provision of long distance service does not affect industry output, and that therefore the transaction does not adversely affect competition in the mass market for long distance services.
In addition, AT&T has also elected to exit this market, and thus it no longer provides price constraining competition to SBC. Speculation that AT&T may return to this market is unconvincing. Moreover, this telecommunications market sector has been open to competition for the longest time, and the change in market structure brought about by this merger is not significant.
In summary, we find much evidence in the record supporting the conclusion of the Advisory Opinion that this merger will have "minimal effects" on concentration levels in this market, and no evidence that supports a finding that the merger will have an anticompetitive outcome in this market. We find that by a preponderance of the evidence, the Applicants have show that the merger will have no anti-competitive effects in the mass market for long distance telecommunications services.
6.3. Enterprise Services
Following the FCC, the Advisory Opinion recognizes a separate market for large businesses and government users, which the FCC calls the enterprise market. The Advisory Opinion analyzes this market segment next.
6.3.1. Advisory Opinion finds merger tentatively concludes that "merger will not cause undue increases in concentration levels."
Concerning the market for enterprise services, the Advisory Opinion tentatively concludes that the proposed merger of SBC and AT&T "will not cause undue increases in concentration levels."92
The Advisory Opinion broadly defines the relevant product for enterprise customers "to include the full array of highly differentiated advanced information services that large businesses and government users demand"93 and finds that the "relevant geographic market is the United States."94
The Advisory Opinion notes that the Applicants:
... have focused on different sectors of this $99 billion market. AT&T is a leading supplier to national customers that require long distance and complex or merged services. SBC is a regional provider of local voice and traditional data services.95
The Advisory Opinion concludes that "Although we lack detailed data, it appears that the industry is relatively unconcentrated."96 The Advisory Opinion provides additional support for its conclusion based on multiple FCC determinations. The Advisory Opinion states that "the FCC found in 1990 that the enhanced services market was `extremely competitive.'97 Subsequent entry by the BOCs, cable companies, and other well-financed firms further increased market competitiveness."98 Based on these considerations, the Advisory Opinion concludes tentatively that "the merger will not cause undue increases in concentration levels."99
The Advisory Opinion also finds that it is unlikely that the merger would "facilitate collusion."100 The Advisory Opinion finds that:
"Coordination would, in fact, be difficult because the services offered by industry suppliers are heterogeneous, and customers `often obtain competitive prices through request for proposals from carriers.'. As in Baker Hughes, the `sophistication' of these large business customers is also `likely to promote competition.' In any event, this merger is particularly unlikely to enhance the possibility of coordinated conduct because the applicants now operate in entirely different product and geographic sectors of the market.101
In general, the Applicants support the findings of the Advisory Opinion and provide additional arguments in support of their view that the merger will not have anti-competitive effects in the enterprise market.
The Applicants argue that the "SBC's services and those offered by AT&T are complementary, rather than overlapping. SBC and AT&T typically sell different services to enterprises and typically succeed with different types of business customers."102 They further argue that the market is filled with "not only the traditional set of transport-oriented carriers (IXCs, RBOCs, and CLECs), but also newer entrants with alternative networks originally conceived to carry Internet traffic and cable-based video services; systems integrators combining the ability to provide managed services with expertise in putting together networks optimized to meet customer needs; and telephone and other communications equipment vendors and resellers offering products that in many cases are displacing traditional equipment and services."103
The Applicants also state that "The effects of intermodal competition extend to all market segments. As Dr. Aron described, intermodal competition is not just occurring in the mass market, but in the business segments as well. For example, businesses have begun to deploy IP-based private branch exchanges (IP-PBX) and IP-Centrex systems. In 2004, Ford, Boeing and Bank of America announced rollouts of IP phone systems, and studies indicate that other businesses are following suit."104
ORA argues that the merger will have anti-competitive consequences for enterprise markets. ORA states that "SBC made a `rational business decision' to acquire AT&T rather than pursuing a `de novo' strategy. The result of this decision however, is to reduce competition. By withdrawing from facilities-based competition and pursuing an acquisition, SBC has reduced competitive pressure on the market.105
TURN states that "it appears that SBC can more than `hold its own' when competing in the enterprise market absent the proposed merger."106 Moreover, TURN contends that SBC and AT&T are today competing directly. TURN disputes applicants' claim that they can list lots of other possible competitors claiming that such a list "is meaningless absent hard data that any of those competitors are able to capture any significant portion of the market now or, more importantly, will be able to do so in the future once the top existing competitors are allowed to merge"107
We reach the conclusion that the merger will not adversely affect competition in this sector.
The enterprise market has been recognized by the FCC as highly competitive for some time, and evidence in this proceeding demonstrates that it remains unconcentrated. Although the Advisory Opinion stated that additional data would be required to conduct a detailed analysis of post-merger competition in the enterprise market, the Attorney General tentatively concluded that this merger will not adversely affect competition in this sector. We find no reasonable basis upon which to reject the Attorney General's Advisory Opinion, and based upon the array of evidence in the record and multiple FCC findings concerning this market that support the Advisory Opinion's analysis, we conclude that this merger will not produce an anti-competitive outcome.
Although TURN urges us to consider more data, we conclude that the record contains sufficient evidence on which we can base a decision.
In particular, the Applicant's evidence concerning the number and range of firms and intermodal competitors is particularly extensive.108 Further, the string of FCC decisions, ending with the TRRO decision of this year, all finding that this market is highly competitive makes it implausible that the consideration of more data would do anything other than confirm the Advisory Opinion's conclusion. Thus, we find that SBC has demonstrated through a preponderance of the evidence that this merger will not have an anti-competitive effect in the enterprise market.
6.4. Special Access Services
The market for special access involves dedicated point-to-point facilities that are primarily high capacity (e.g. DS1 or greater) connections that can be used to connect an end user to an IXC s point of presence, to connect two end user locations, and to connect end users to CLEC, ISP, wireless or other competitive networks. The Advisory Opinion finds that there is a separate relevant market for the various special access services sold by the Applicants.109
6.4.1. Advisory Opinion finds "potential entry here should be sufficient ... to counteract any potential anticompetitive effects."
The Advisory Opinion states that the "merger may enable SBC to raise the average rates paid for DS1 and DS3 private network services."110
The Advisory Opinion starts with a review of recent history of activity by BOCs and CLECS. While BOCs' revenues have increased 16% over an eight-year period, CLECs' revenues have increased 67% oven an eight-year period. The Advisory Opinion notes that "Internal expansion by existing firms and widespread entry by a variety of CLECs have combined to meet the rapidly growing demand for special access services. With CLEC entry, the number of MSAs for which full (Phase 2) pricing flexibility was granted on channel terminations increased from none in early 2000 to 81 by November 2002. Despite this growth, special access prices remained almost constant between 1998 and 2001 on a per circuit basis."111
The Advisory Opinion finds that "Markets for special access services appear to be competitive for those customers requiring aggregate bandwidth in excess of two DS3 capacity or employing special access to make connections to long distance lines or MTSOs."112 The Advisory Opinion continues its analysis by stating that "The merger may increase special access rates for DS1 and DS3 private network users if a substantial percentage of customers have dispersed facilities and alternative suppliers are not available to all customers in the relevant market. Presumably, SBC charges a higher rate at locations where entry barriers could not be overcome by alternative suppliers, and the merger will increase the number of these less competitive locations. Assuming that SBC offers discounted service to multi-location customers who meet certain revenue or circuit-based volume commitments, the elimination of competition at locations where AT&T is now the only alternative supplier may raise the average service rate paid by all customers."113
The Advisory Opinion and the FCC use the same relevant geographic market for assessing these effects which for special access is the MSA level. The Advisory Opinion lists that SBC's share of statewide private line DS1 and DS3 wholesale revenues is 63.9% and 54.5% respectively. AT&T's corresponding shares are 5.5% and 8.6% respectively. These figures support the Advisory Opinion's belief that the merger may enhance SBC's market power.
The Advisory Opinion does go on to say that "Significant entry and widespread expansion by existing suppliers suggests, however, that alternative providers responding to nontransitory price increases could eventually supplant SBC at facilities previously served by AT&T."114
In conclusion, the Advisory Opinion recommends that:
To mitigate any adverse effects, we recommend that the Commission freeze for one year rates paid by current AT&T customers receiving DS1 or DS3 private network service. During that transition period, alternative suppliers can extend their networks to meet demand from existing customers that might otherwise be subject to a rate increase. At the same time, the relatively brief span of the transition period would minimize the distortions and disincentives resulting from the rate freeze.115
Applicants oppose the conditions suggested by Qwest, Level 3 and to a lesser extent the Attorney General. Applicants claim that "Qwest and Level 3's proposed special access conditions related largely to interstate special access services that are beyond the Commission's jurisdiction, and are not designed to address any intrastate anticompetitive effects of the merger. Although the Attorney General's proposed condition is more limited, that condition should also be rejected because, contrary to the Attorney General's conclusion, AT&T does not actively compete with wholesale access providers. As a result, the merger will not significantly change the level of competition that exists in the marketplace today."116
The Applicants take issue with the proposed conditions from Qwest and Level 3 that generally seek to secure low rates (customers should be able to receive the lowest rates offered by either SBC or AT&T and/or should be able to receive the same rates, terms and conditions that the post-merger SBC obtains from ILECs out-of-region), to provide for anti-discrimination (post-merger SBC should be prohibited from offering rates to AT&T or Verizon/MCI that have better terms than offered to others), and to be given a "fresh look" of its current contracts. The Applicants claim that there are three reasons to reject these proposals. "First, these proposed conditions involve interstate special [access] services that are not within the jurisdiction of this Commission. Second, none of the complaints raised by Qwest and Level 3 is specific to California. Thus, they bear no relation to the "adverse consequences" of a change of control under California law. Third, a series of FCC proceedings will address special access services and competitive issues, including pricing, provisioning and discrimination, and market power at the wholesale level. These proceedings encompass the issues raised by Qwest and Level 3, which are general complaints related to special access rather than complaints specifically-related to this merger.117
ORA states that "Despite SBC's. . . overwhelming dominance of the special access market. . . , AT&T has up to now been one of the strongest-if not the strongest-competitor to SBC."118
ORA goes on to say that "AT&T's departure from the special access market-and the absorption of its fiber optic "last mile" facilities into the SBC asset base-will serve to further cement SBC's all-but-monopoly control over these essential services and facilities."119
ORA endorses the one-year moratorium on rates paid by current DS1 and DS3 private line customers.
Qwest and Level 3 believe that AT&T provides pricing discipline to keep SBC's special access rates in check. Qwest and Level 3 also believe that AT&T affects the competitive balance by reselling special access. A loss of AT&T from the market will remove pricing discipline and a provider of resold service. To mitigate these concerns, Qwest and Level 3 seek the following conditions:
· Require SBC to offer all customers intrastate and interstate special access at the lowest rates currently offered by either SBC or AT&T
· Prohibit SBC from giving AT&T or Verizon/MCI better special access terms and conditions than those offered to others.
· Require SBC to offer competitors in California any services or facilities that the post-merger entity purchases from other ILECs out-of-region at the same rates, terms and conditions the post-merger entity obtains from ILECs out-of-region.
· Require SBC to give its wholesale customers a "fresh look" right to terminate their contracts without incurring termination liability.
· Require a "fresh look" at termination rights, and require public disclosure of all special access contracts between SBC and AT&T and its affiliates and to permit competitors to accept individual terms from these agreements without being required to accept all the terms.
We find no reasonable basis upon which to reject the Attorney General's conclusion that the merger may increase special access rates for DS1 and DS3 private network users, but that potential entry should be sufficient to counteract any anti-competitive outcomes.
A review of the Advisory Opinion's analysis of this issue shows that it is meticulous. The Advisory Opinion examined the competitive data at the level of specific buildings in those areas where facilities overlap. In addition to examining the presence of competitors at a very granular level, it also examined the locations of customers and fiber routes, concluding that the ability to construct fiber laterals make potential entry a real competitive threat. The level of granularity conducted by the Attorney General in this analysis is more extensive than any such analysis in a merger proceeding reviewed by this Commission in the past 10 years.
In contrast to the detailed and convincing review and sound analysis conducted by the Attorney General, the intervenors failed to engage this issue and analysis on a substantive level. We find no merit to the arguments of ORA, Level 3 and Qwest concerning special access, and no rational basis for adopting the conditions that they propose. As a result, there is no rational basis to reject the Advisory Opinion's recommendation to have a one-year freeze on rates paid by current AT&T customers receiving DS1 or DS3 private network service. With this condition, we find that any adverse effect of the merger on special access is sufficiently mitigated.
6.5. Internet Backbone
The Advisory Opinion concludes that a relevant market for Internet backbone services can be defined.120 Following the sequence in the Advisory Opinion, we next address the effects of this transaction on this market.
6.5.1. Advisory Opinion finds markets "are unconcentrated and will remain so after completion of the merger."
The Advisory Opinion notes that several parties to this proceeding have challenged "the integration of SBC's Internet access services into AT&T's Internet backbone, without alleging specific competitive effects in markets for either of those services."121 The Advisory Opinion, however, finds that "both of those markets are unconcentrated and will remain so after the completion of the merger."122
The Advisory Opinion states that the Internet combines three types of participants: end users, Internet Service providers (ISPs) and Internet backbone providers (IBPs). It notes that SBC is a vertically-integrated ISP that also provides Internet backbone services, while AT&T is a major supplier of Internet backbone services, and has about 1.2 million customers for its WorldNet and DSL services.123
The Advisory Opinion finds that the market for ISP services is "highly unconcentrated"124 The Advisory Opinion also finds that the "backbone market will remain `competitive' following the completion of this merger" which is consistent with the FCC's relevant market findings.125 The Advisory Opinion also notes that the FCC has "exclusive jurisdiction over Internet backbone services." 126
The Advisory Opinion discusses the contention of intervenors, specifically Pac-West and ORA, that combining SBC with AT&T, a Tier 1 peering provider would raise entry barriers or induce degraded services. The Advisory Opinion finds these scenarios "unlikely".127 The Advisory Opinion finds even the "hypothesized motivation for the surviving firm to predatorily degrade rivals' ISP service" to be "unclear."128
The Applicants support the conclusion of the Advisory Opinion that the transaction will not adversely affect Internet backbone services. The Applicants state that:
To begin with, this market segment is even less concentrated today than when the FCC approved the divestiture of MCI's Internet backbone facilities to the merging owners of the two top backbone providers, finding that Internet services were `competitive, accessible, and devoid of entry barriers.
The merger will not change the number of "Tier 1" Internet providers in the `highly unconcentrated' Internet backbone market segment. . .129
CALTEL and Cox seek a condition against de-peering. They argue that SBC should not be allowed to de-peer other Internet providers with whom SBC exchanges IP traffic presently. They recommend that SBC be required to honor all existing Internet peering arrangements and to offer extensions . . . for an additional five years at existing terms, conditions and prices.
We find no reasonable basis upon which to reject the Attorney General's Advisory Opinion that concludes that the Internet backbone and ISP markets are highly unconcentrated and will remain so after the merger. Thus, we conclude that this transaction will not adversely affect the market for Internet Backbone services or Internet Services Providers.
The scenarios painted by Intevenors concerning possible discriminatory treatment and anticompetitive pricing have no basis in fact. Indeed, in light of the Advisory Opinion's clear indication that both the Internet Service Provider market and the Internet backbone market are unconcentrated and will remain so after the merger, we reach the same result as the Advisory Opinion - the proposed merger will not produce anticompetitive outcomes in this area.
36 Advisory Opinion, p. 1.
37 Advisory Opinion, p. 1.
38 See, e.g., Moore v Panish (1982) 32 Cal.3d 535, 544 ("Attorney General opinions are generally accorded great weight"); Farron v. City and County of San Francisco, (1989) 216 Cal.App.3d 1071.
39 Advisory Opinion, pp. 16.
40 Id.
41 Advisory Opinion, p. 18
42 The Advisory Opinion addresses special access markets separately, and is discussed below.
43 Advisory Opinion, p. 19.
44 Id.
45 Id.
46 The Advisory Opinion deems the relevant market to include "facilities-based UNE-L and cable suppliers, but not resellers at the competitive retail level." Id.
47 Advisory Opinion, p. 18.
48 Joint Brief of Applicants SBC Communications and AT&T Corp., at 48
49 Joint Brief of Applicants SBC Communications and AT&T Corp., at 48-49; Advisory Opinion, p. 3
50 Joint Brief of Applicants SBC Communications and AT&T Corp., at 49
51 Joint Brief of Applicants SBC Communications and AT&T Corp., at 50; Advisory Opinion, p. 19
52 Joint Brief of Applicants SBC Communications and AT&T Corp., at 51.
53 Joint Application of SBC Communications Inc. and AT&T Corp., at 26-27.
54 Id.
55 TURN Opening Brief, p. 61.
56 TURN Opening Brief, p. 62.
57 TURN Opening Brief, p. 63.
58 See TURN Opening Brief, p. 41.
59 TURN, Opening Brief, p. 56.
60 TURN, Opening Brief, p. 20.
61 ORA, Opening Brief, p. 26.
62 ORA, Opening Brief, p. 25.
63 ORA, Opening Brief, pp. 54-55.
64 ORA, Opening Brief, p. 95.
65 Telscape, Opening Brief, p. 2.
66 CALTEL, Opening Brief, p. 1.
67 CALTEL, Opening Brief, p. 5. We discuss CALTEL's recommendation concerning special access below.
68 Level 3, Opening Brief, p. 19. Level 3 proposes several special access competitive conditions and several general mitigating conditions. They will be discussed separately.
69 Level 3, Opening Brief, p. 20.
70 Qwest, Opening Brief, p. 41.
71 CTCF, Opening Brief, p. 11-12.
72 Advisory Opinion, p. 17
73 Advisory Opinion, p. 17.
74 TURN Opening Brief, p. 105.
75 TURN Opening Brief, p. 106.
76 Joint Application of SBC Communications Inc. and AT&T Corp., at 2
77 Joint Application of SBC Communications Inc. and AT&T Corp., at 4
78 Joint Brief of Applicants SBC Communications and AT&T Corp., at 53-54
79 Joint Brief of Applicants SBC Communications and AT&T Corp., at 55-56
80 Level 3 , Opening Brief, p. 21.
81 Advisory Opinion, p. 18
82 Id.
83 Id.
84 Advisory Opinion, p. 18
85 Advisory Opinion, p. 19.
86 Id.
87 Id.
88 Joint Applicants Opening Brief, p. 49
89 TURN, Opening Brief, p. 86.
90 TURN, Opening Brief, p. 85.
91 Advisory Opinion, p. 19
92 Advisory Opinion, p. 21.
93 Advisory Opinion, p. 20,
94 Id.
95 Advisory Opinion, p. 21, footnotes omitted.
96 Advisory Opinion, p. 17.
97 Advisory Opinion, p. 21, footnote omitted.
98 Id.
99 Id.
100 Id.
101 Advisory Opinion, p22, footnotes omitted
102 Joint Applicants Opening Brief, p. 52
103 Joint Applicants Opening Brief, p. 53.
104 Joint Applicants Opening Brief, p. 56.
105 ORA, Opening Brief, p. 54.
106 TURN, Opening Brief, p. 93.
107 TURN, Opening Brief, p. 94
108 Joint Applicants, Ex. 78, pp. 59-72; Ex 79, pp. 66-73.
109 Advisory Opinion, pps. 14-15.
110 Advisory Opinion, p. 23
111 Advisory Opinion, pp. 23-24.
112 Advisory Opinion, p. 25.
113 Advisory Opinion, pp. 25-26
114 Advisory Opinion, p. 26
115 Advisory Opinion, p. 27
116 Joint Applicants Opening Brief, p. 81.
117 Joint Applicants Opening Brief, p. 82
118 ORA Opening Brief, p. 56
119 ORA Opening Brief, p. 57
120 Advisory Opinion, pps. 14-15.
121 Advisory Opinion, p. 27.
122 Id.
123 Id. Footnotes omitted
124 Advisory Opinion, p. 28.
125 Id.
126 Advisory Opinion, p. 27
127 Advisory Opinion, pp. 29.
128 Advisory Opinion, pp. 28-29.
129 Joint Applicants Opening Brief, pp. 66-67.
