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 Verizon and MCI on August 3, 2005.
The Advisory Opinion was filed at the Commission on September 16, 2005. The Advisory Opinion employs the approach embodied in antitrust laws, including the Department of Justice and Federal Trade Commission's 1992 Horizontal Merger Guidelines, including their April 8, 1997 revisions (the Guidelines).76
The Advisory Opinion finds no significant adverse consequences arising from this transaction. The Advisory Opinion notes that "Verizon has a relatively minor presence in the relevant markets for both mass market (facilities-based) long distance and enterprise services."77 The Advisory Opinion further notes that "MCI dominates neither of those highly competitive industries" and also notes that "entry barriers are relatively minor."78 The Advisory Opinion concludes that "MCI has a minimal share of the relevant market(s) for facilities-based local exchange services, and its absence will have inconsequential effects on price and output levels." The Advisory Opinion also finds that "the merger will not adversely affect competition for DS1 and DS3 special access services supplies to enterprise customers."79
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."80 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."81
For this transaction, the Advisory Opinion notes that "the applicants' market share in all of the relevant markets need not be precisely determined."82
6.1. Mass Market Local Exchange
The Advisory Opinion, following standard antitrust 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 Verizon of MCI's facilities-based services, the merger will not have adverse effects upon competition in those local markets in which MCI does not offer special access service to private line customers.83
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 inputs competitively supplied and focused on the commercial level at which critical supply constraints could be assessed. Following that precedent, the Advisory Opinion notes that MCI "does not offer facilities-based local mass market services"84 and that "many other CLECs also supply that readily available service."85 Therefore, the Advisory Opinion concludes that within the relevant market,86 the merger will not have adverse effects upon competition."87
In general, the Applicants support the determinations reached in the Advisory Opinion. Concerning mass market telecommunications services, the Applicants argue that: "the relevant question is whether Verizon's acquisition of MCI will have any incremental adverse effect."88
Applicants further argue that the "evidence is uncontroverted that MCI's mass market business is in an irreversible decline."89 The Applicants, in particular, argue that MCI's UNE-P business is in decline due to a "confluence of technological, market and regulatory changes."90
The Applicants also support the Advisory Opinion in its decision to exclude resellers from its market analysis. The Applicants note that "the availability of facilities necessary to provide local mass market service, rather than the number of retail providers currently operating in the market, determines the total output of local mass market services."91 Thus, "as a non-facilities based provider, MCI's provision of local service ... to mass market customers does not affect industry output, and that, hence, the transaction does not adversely affect competition in the mass market."92
The Applicants also argue that intermodal competition further mitigates any competitive concern. In particular, the Applicants note the rise of VoIP, and the announcement that Google will provide VoIP, and that eBay recently purchased Skype, a VoIP service provider."93 The Applicants argue that "the record demonstrates that customers are actually turning to various intermodal alternatives in significant numbers today."94
TURN argues against acceptance of the Advisory Opinion, claiming that it "very seriously misunderstands the nature and likely result of the proposed Verizon/MCI merger"95 stating that it "suspects that the AG [Attorney General] did not examine and does not understand [TURN's] evidence."96
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.97 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.98
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 Verizon's wireline losses are significant and that they are attributable to intermodal competition.99
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.100
Telscape argues that to protect for "potential anti-competitive impacts," the Commission should require Verizon to "offer a basic two-wire residential loop product at a reduced wholesale price."101 In particular, Telscape proposes that as a condition of the merger, Verizon would offer UNE-L at a 50% discount.
CALTEL argues that the merger will produce a competitive "disaster."102 CALTEL recommends that the Commission adopt conditions that it argues will prevent or mitigate significant adverse consequences. In particular, CALTEL recommends adoption of two general conditions:
· The Commission should implement a price cap plan for Verizon's wholesale network elements.
· The Commission should require Verizon to provide fair interconnection prices, terms and conditions for IP facilities and capabilities.103
Level 3 proposes one merger condition concerning mass market issues.104 Level 3 argues that in order to ensure that the merger does not harm emerging competition in the market for IP-enabled services, such as VoIP, customers should not be forced to buy traditional local phone service or VoIP service from the ILEC in order to obtain DSL.105 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 customers 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"106
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 cite the availability of competitive alternatives to local mass-market telephone service as a reason for approving the merger. Qwest argues that without the availability of "stand-alone" DSL, the VoIP alternative will not be widely available.107
ORA argues that the transaction will have an adverse impact on mass-market customers.108 ORA presents a HHI analysis and claims that the analysis shows that the transaction will have serious anti-competitive impacts.109 ORA further argues that intermodal competition is "speculative." It proposes a series of measures to maintain competitive choices, including requirements that Verizon offer DSL line sharing at TELRIC-based UNE rates and that Verizon offer "stand-alone" DSL.110
Concerning VoIP competition over DSL, ORA states that "By forcibly linking services to its DSL subscription - that is, forcing a bundle of additional services on customers who want only DSL service - Verizon leverages its market power as a monopoly holder of local access and last mile facilities."111 Additionally, ORA cites New York Attorney General Elliott Spitzer in his analysis of the Verizon-MCI merger dated April 29, saying "Verizon customers wishing to use competitors' VoIP, instead of Verizon's wireline service, will have to choose between securing broadband services from a local cable operator, typically at a higher cost than DSL service - or continuing to purchase the bundled Verizon wireline/DSL product, and adding the cost of a competitor's VoIP on top of that."112 ORA continues: "The availability of stand-alone DSL becomes crucial to competitive choice to the extent the Joint Applicants are correct in their claims that VoIP represents a genuine `intermodal' challenge to their dominance in the local exchange telecommunications marketplace."113
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, MCI does not have significant local facilities and its provision of local service does not affect industry output, and that therefore the transaction does not adversely affect competition in the mass market.
In addition, MCI has elected to exit the local market, and thus it no longer provides price constraining competition to Verizon. Speculation that MCI 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 MCI provides no facilities-based services in local mass markets (and therefore zero market share), and has no plans to offer service to local mass market customers, facilities-based or otherwise, in the future, then the acquisition of MCI will produce no 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 did not examine and does not understand [the] evidence;"114 and charging that "Other AG conclusions make no sense..."115
Most importantly, TURN's argument does not diminish the relevancy of the Advisory Opinion's straightforward analysis: If MCI is providing no telecommunications services in a market except through the resale of a Verizon service that the FCC is in the process of eliminating, then consolidation with Verizon 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 consolidating and converging industry, consumers must have unfettered access to competitive VoIP services.
Applicants state that the transaction "is in keeping with the wider industry trend toward convergence and consolidation, which will allow companies to create the capabilities necessary to offer the full array of products and services customers ...demand." 116 Applicants argue that "competition in the provision of communications services has expanded well beyond traditional wireline boundaries, such that customers of all types have choices among various types of service providers to meet their communications needs."117
Applicants further state that the transaction will "simply allow MCI and Verizon to use one another's strengths to become a stronger competitor in the evolving, increasingly intermodal, communications industry."118 We agree with Applicants that industry consolidation and convergence have "fundamentally changed the playing field and the nature of competition for wireline carriers,"119 and that "VoIP has rapidly become an important source of communications competition."120
Therefore, we agree with Qwest, ORA and Level 3 that customers' access to competitors' VoIP over Verizon's DSL service is crucial to protecting consumer choice 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.
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 Verizon 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, undermining the benefits to consumers that Applicants claim would occur as a result of this transaction.
Intervenors' recommendation that Verizon 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 Verizon is using market power to limit consumers' access to competitive VoIP providers or other lawful content using Verizon's DSL broadband service, there is no compelling reason to place conditions on Verizon's ability to bundle its own VoIP product with other advanced services over DSL.
Thus we will order that as a condition of approving this transaction, no later than February 28, 2006 Verizon shall cease and desist from forcing customers to separately purchase traditional local phone services as a condition of purchasing Verizon's DSL service. We further order that no later than February 28, 2006 Verizon 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 Verizon cease forcing customers to separately purchase traditional local phone service as a condition for obtaining DSL, which we believe is critical to the Applicants' own argument that intermodal competition is a significant check on anti-competitive outcome, we adopt none of the restrictions and/or mitigation measures proposed that concern mass-market services. Therefore, we find that if the Applicants' cease forcing customers to separately purchase traditional local phone service as a condition for obtaining DSL, then the transaction will not have any anti-competitive effects on mass market local 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 in concentration."
The Advisory Opinion concludes that the merger will have "minimal effects in concentration levels"121 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. "MCI is a facilities-based provider of long distance services, while Verizon supplies its long distance customers through resale operations."122 The Advisory Opinion applies the WorldCom/MCI reasoning to this transaction, and finds that the retail services offered by Verizon 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."123
The Advisory Opinion also notes that the "FCC has repeatedly determined that competition among long distance suppliers is both substantive and national in scope."124 The Advisory Opinion explicitly rejects the claims that "there are California "submarkets" for long distance services."125
In addition, the Advisory Opinion notes that Verizon "does not have a national long-haul network of its own."126 Moreover, even if "Verizon were to move all of the long-distance services it currently purchases from other carriers onto MCI's network, it would not have a significant impact on those wholesale carriers."127 Furthermore, Verizon competes at the retail level with many other suppliers of mass-market long distance services who face minimal entry costs..
Finally, the Advisory Opinion addresses the arguments of Intervenors who claim that the vertical integration of Verizon and MCI networks will have an anti-competitive effect in the long-distance services market. The Advisory Opinion states that the "gist of their theory here is that the wholesale carriers supplying long distance service to Verizon would be disadvantaged once the company moves all of its long distance services onto MCI's network."128 The Advisory Opinion notes that there is no evidence that the loss of traffic will harm these carriers, for Verizon's purchases account for only about 3 percent of total industry revenues.129 Moreover, if the merger leads to efficiencies for Verizon and MCI, the Advisory Opinion finds this "neither surprising nor troubling" and notes that the goal of antitrust policy is the "protection of competition, not competitors."130
The Applicants support the analysis of the Advisory Opinion on this matter. Although the bulk of the Applicants' analysis focuses on the mass market for local service, they repeat the argument of the Advisory Opinion131 and further argue that MCI, the mass market business of which is in decline, cannot provide "price constraining competition to Verizon absent the transaction, and hence the transaction has no adverse competitive effect."132 Finally, the Applicants argue that consumer surveys "show that wireless service has displaced 60 percent of long distance and 36 percent of local calling in households that have wireless phones."133
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 failed to "demonstrate that the proposed merger will not harm competition for residential services other than primary network access connections."134 It is, however, difficult to find an analysis by TURN on point because it objects to the market definitions in the Advisory Opinion. TURN does not specifically address the long distance market in its briefs. Although TURN addresses this market in its reply testimony, it notes that this market is "rapidly disappearing."135
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"136 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, Verizon does not have significant long distance facilities 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, MCI has also elected to exit this market, and thus it no longer provides price constraining competition to Verizon. Speculation that MCI 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 are not significant. In particular, since Verizon's purchases of long distance wholesale services amount to only 3 percent of total industry revenues, we see no anti-competitive outcomes arising from its consolidation with MCI.
Furthermore, we find that evidence provided by the Applicants concerning the migration of mass market long distance services to wireless services convinces us that intermodal competition is already present in this market.
In summary, we find that the preponderance of the evidence in the record supports the conclusion of the Advisory Opinion that this merger will have "minimal effects" on concentration levels in this market; and no credible evidence exists that supports a finding that the merger will have an anticompetitive outcome in this market. We therefore conclude 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 Verizon and MCI "will not adversely affect competition in this sector."137
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"138 and finds that the "relevant geographic market is the United States."139
The Advisory Opinion notes that the Applicants:
... have focused on different sectors of the enterprise services market. MCI is a leading supplier to national customers that require long distance and complex or merged services. Verizon is a regional provider of local voice and traditional data services.140
The Advisory opinion cites an independent analysis by Lehman Brothers to confirm this analysis, estimating that:
for 2005, AT&T's share [of large enterprise and medium sized businesses] will be 15.5 percent, SBC will have 13.1 percent, MCI will have 11.8 percent; Verizon's share will be 10.1 percent, Sprint's 5.9 percent; Qwest's 5.7 percent; BellSouth's 5.5 percent; Level 3's 1.2 percent; XO's 0.9 percent; and the rest of the industry, including systems integrators and CLECs will have 30.4 percent.141
Based on this and other evidence, the Advisory Opinion concludes that "Although we lack detailed data, it appears that the industry is relatively unconcentrated."142
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.'143 Subsequent entry by the BOCs, cable companies, and other well-financed firms further increased market competitiveness."144 The Advisory Opinion also notes that the "FCC concluded in the 2005 Triennial Review Remand Order that the market was "competitive."145 Based on these considerations, the Advisory Opinion concludes tentatively that "the merger will not cause undue increases in concentration levels."146
The Advisory opinion also finds that it is unlikely that the merger would "facilitate collusion"147 and finds that a strategy of mutual forbearance with SBC "would have little likelihood of success."148 In particular, the Advisory Opinion finds the Intervenors' scenarios on collusion and mutual forbearance implausible in light of the heterogeneity of the size, geography, and services demanded in this market.
The Advisory Opinion then concludes:
Therefore, although additional data is required to fully assess post-merger competition in the enterprise market, we tentatively conclude that this merger will not adversely affect competition in this sector. We analyze separately the impact of this merger on special access."149
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 "loss of MCI as an independent bidder for enterprise services is not economically or competitively meaningful, given that Verizon and MCI do not currently compete for the same enterprise customers to a meaningful degree."150 They further argue that the market is highly competitive with numerous and significant competitors.151 In addition, they claim that customers in this market "are sophisticated purchasers who typically employ competitive procurement practices."152 The Applicants conclude that "it is not necessary for the Commission to find that intermodal alternatives are part of this market in order to determine that the transaction does not adversely affect competition for enterprise services."153 Nevertheless, the Applicants' witness presented substantial testimony on the present competition in this particular market, both intra and intermodal, and concludes that "the acquisition will not be harmful to enterprise customers."154 In particular, in this segment, the Applicants find that IXCs, Global Network Service Providers (such as Deutsche Telekom), Systems Integrators (such as Lockheed Martin and EDS and Equipment Providers (such as Cisco), CLECs, DLECs and Cable companies, and wireless providers all compete and will prevent anti-competitive outcomes.155
ORA argues that the merger will have anti-competitive consequences for enterprise markets. ORA argues that "MCI is a direct competitor of Verizon in the enterprise market, and there is no basis for concluding that, absent the merger, Verizon would not be as aggressive a competitor for enterprise business as it has been for consumer business."156 ORA cites the rapid growth that Verizon has achieved since its entry into the enterprise markets.
TURN argues that the enterprise market is concentrated and that the Applicants have failed to make a case supporting the merger. TURN argues that "Applicants have not furnished any data that would allow the Commission to understand just how concentrated this market will become should the merger be approved."157 TURN concludes that it "would be utterly irresponsible for regulators to allow the proposed merger to proceed without having any information whatsoever regarding how concentrated the enterprise market will become should the merger be approved ..."158
We reach the conclusion that the merger will not adversely affect competition in this sector.
The enterprise market has been highly competitive for some time, and evidence indicates that it is not highly concentrated. Although the Advisory Opinion stated that additional data would be required to fully assess 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 conclusions, we conclude that this merger will not produce an anti-competitive outcome.
Although Verizon and MCI operate in the same enterprise market, as stated above, they focus on different sectors of this market. Thus, despite ORA's allegation, Verizon and MCI are not direct competitors. As a result, the merger will not restrict the supply of telecommunications services in any way, but will instead create a competitor with a wider range of service offerings.
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 Applicants' evidence concerning the range of firms and intermodal competitors is particularly extensive.159 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 the Applicants have 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.160
6.4.1. Advisory Opinion finds "potential entry here should be sufficient ... to counteract any potential anticompetitive effects."
The Advisory Opinion states that the principal "competitive issue raised by this merger is whether it will enhance the ability of the surviving firm to exercise market power over special access DS1 and DS3 services."161 The Advisory Opinion concludes that "potential entry here should be sufficient ... to counteract any potential anti-competitive effects."162
The Advisory Opinion notes that "Verizon provides special access predominantly on a wholesale basis to other carriers."163 The Advisory Opinion notes that although MCI does not market its services as "special access," it does offer an equivalent service called "Metro Private Line."
Based on an analysis of data at a very granular level, the Advisory Opinion finds:
First, the available data reveals that only a very small number of buildings in Verizon's California territory served by MCI are subject to any potential reduction in competition. Second, the majority of the MCI-lit buildings are in Verizon's California service areas where other CLECs operate within close proximity; this facilitates the ability of other firms to replace MCI as a competitor in serving these buildings.164
The Advisory Opinion then examines the construction timing of laterals and fiber rings. Based on this analysis of data, the Advisory Opinion concludes that:
Thus, potential entry here should be sufficient within the Merger Guidelines to counteract any potential anticompetitive effects of the merger on special access DS1 and DS3 Services.165
Applicants argue that very few of MCI's fiber rings are in Verizon territory. They were built to connect customers who are largely in metropolitan Los Angeles and San Francisco, which are both in SBC territory. As a result, Applicants claim that "MCI does not provide a significant level of special access services in Verizon California's service areas."166
The Applicants claim that in the few areas where there are overlapping facilities, there are many other competitors, thus no monopoly rents may be secured.167 The Applicants note that "MCI's facilities in Verizon California's region are overwhelmingly located in areas that meet the FCC's criteria for determining that it is economic for competing carriers to deploy new facilities and where competitors have in fact deployed fiber facilities.168
The Applicants claim that special access is competitive not only in the MSAs that the FCC has declared competitive, but at the building level as well. The Applicants state that "nearly half of MCI's lit buildings are already connected to at least one other competitor's fiber."169 The Applicants also cite with approval the Advisory Opinion's point of the ease of competitors to construct a "service lateral" to serve customers.170
ORA, in response, argues that evidence shows that "once MCI and AT&T no longer submit separate competitive bids, the wholesale price discount from special access rates will decrease on average by over 15% -- resulting in an overall increase in special access rates."171
Intervenors argue that the elimination of competition between MCI and Verizon will hamper competition and the ability of CLECs to get deeply discounted services. They argue that special access markets are highly concentrated,172 and in many instances, the only competition to Verizon in its service area for competitive access is MCI or AT&T. Intervenors are concerned that unless regulators take appropriate steps, carriers needing special access/private line will not have any competitive alternative from which to purchase services.173 Qwest and CALTEL claim that the removal of MCI (and AT&T) will remove competitive pressures on Verizon's special access pricing.174 CALTEL asks that the Commission cap intrastate access rates for five years and recommends that the FCC do the same.175
Level 3 testifies:
Obviously, competitors cannot effectively compete in an environment where it depends upon the one remaining supplier who is free to engage in anti-competitive conduct and set market prices. Eliminating the sole alternative provider of special access will make it unnecessarily expensive for carriers to reach Tier II and Tier III markets. That in turn will make it more difficult for consumers to obtain the affordable, high speed communications and data services they seek, which in turn makes those markets less economically viable for companies to do business.176
As a remedy, Level 3 recommends that the Commission order the merged entity to divest overlapping facilities177 and to adopt regulations concerning the service offerings of the merged firm.178
Qwest argues that MCI's alternative network facilities play a disciplining role with respect to Verizon's special access prices.179 Qwest states that MCI (and AT&T) exerts competitive pressure on the special access market not only because of their competing facilities but also because with their high volumes of traffic and their ability to threaten to expand their facilities as an alternative to purchasing special access from Verizon.180 This constrains monopoly pricing in two ways: it gives an incentive to the monopoly to avoid by-pass and to avoid the presence of another facilities-based supplier competing for the monopoly customers in that location.181 Qwest recommends that the Commission should find that the merger does not meet the requirements of § 854 unless Verizon and MCI agree:
· To divest MCI's facilities and customers that overlap those of Verizon in the state;
· That Verizon will continue to offer intrastate and interstate special access, private line or its equivalent service at the lowest rates currently offered by either Verizon or MCI;
· That Verizon not favor MCI or any other post-merger affiliate ...
· That, post merger, Verizon/MCI will offer to competitors in California any services or facilities that it purchases from other incumbent local exchange carriers ... at the same rates, terms and conditions ...
· That, post merger, Verizon and MCI will give its wholesale customers in California a "fresh look" right to terminate their contracts ...182
We find no reasonable basis upon which to reject the Attorney General's conclusion that there is little overlap of facilities and 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. The analysis indicates that MCI serves only a very small number of buildings in Verizon's California territory with its own facilities.
MCI fiber facilities in Verizon California s service territory are overwhelmingly located in areas that meet the FCC's criteria for determining that it is economic for competing carriers to deploy new facilities and where competitors have in fact deployed fiber facilities. In the limited number of Verizon California wire center clusters where both Verizon and MCI have fiber facilities, there is at least one competitor other than MCI which has also deployed fiber facilities. In all but one of these clusters more than one additional competitor has deployed fiber.
At the level of individual wire centers, there are, on average, more than three competitors with fiber facilities deployed in wire centers in which Verizon and MCI fiber facilities overlap. Each of these overlapping wire centers is located in MSAs that the FCC has declared to be substantially competitive, as reflected in its treatment of MSAs under its pricing flexibility rules.
Finally, due to low barriers of entry, loss of MCI as an independent competitor in the market for special access services would have no impact on the current constraints on Verizon s pricing.
In contrast to the detailed and convincing review and sound analysis conducted by the Attorney General and supplemented by Verizon, the Intervenors failed to engage this issue and analysis on a substantive level. In particular, although Qwest proposes that MCI serves as a price discounter of special access that disciplines the entire market, Qwest provides no explanation of how MCI can provide such market discipline in Verizon's territory where it has very few facilities and is hardly in the market. Such a result defies logic. According to Qwest's own evidence, MCI has never negotiated the terms of any Verizon tariff plan in California.183 Qwest's "evidence" concerned negotiations regarding special access services provided outside California that took place almost twenty years ago, and was thoroughly rebutted by Applicants in their reply brief and by the evidence submitted concurrently. Nor did Qwest offer anything to controvert the facts on which the AG opinion rests - i.e., that MCI serves only a handful of buildings with its own fiber in Verizon California's region and that there are no barriers to entry in those areas. Qwest's claims that the draft decision committed error by relying on the AG opinion are thus baseless.
As a result, we find no merit to the arguments of ORA, CALTEL, Level 3 and Qwest concerning special access, and no rational basis for adopting the restrictions that they propose. There is no rational basis for either rejecting or modifying the Advisory Opinion's findings that no merger conditions are necessary in this market. We therefore conclude that the proposed merger will have no anticompetitive impact in this market.
6.5. Internet Backbone
The Advisory Opinion concludes that a relevant market for Internet backbone services can be defined.184 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 Verizon's Internet access services into MCI's Internet backbone, but that they have not alleged specific competitive effects for either the access or backbone service.185 The Advisory Opinion, however, finds that "both of those markets are unconcentrated and will remain so after the merger."186
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 Verizon is a vertically integrated ISP that also provides Internet backbone services, while MCI is a Tier 1 IBP and is not involved in retail broadband service markets.187
The Advisory Opinion finds that the market for ISP services is "highly unconcentrated, and will remain so post-merger."188 The Advisory Opinion notes that post-merger, "the combined firm would account for at most only 9.5% of the total Internet traffic in North America."189 The Advisory Opinion also concluded "the combined Verizon-MCI would not have the market share necessary to successfully engage in anticompetitive activities in such an unconcentrated Internet backbone market."190
The Advisory Opinion discusses the contention of Intervenors, specifically Pac-West, that combining Verizon with MCI, a Tier 1 peering provider would raise prices for IP-based services or induce degraded services. The Advisory Opinion finds these scenarios "unlikely" and notes that the mechanism by which these outcomes would occur is not explained.191 The Advisory Opinion finds even the "hypothesized motivation to predatorily degrade rivals' ISP traffic" to be "unclear."192
The Applicants strongly support the conclusion of the Advisory Opinion that the transaction will not adversely affect Internet backbone services.193 The Applicants state that:
While Verizon will become a Tier I Internet backbone provider after it acquires MCI, that status, in itself, says nothing about whether Verizon would have market power ... the transaction will have little effect on concentration levels in the Internet backbone market, because Verizon currently has a very limited Internet backbone.194
The Applicants argue that in light of their low market share, any attempt by them to engage in anticompetitive actions would "expose the merged company to retaliation by other providers who collectively carry more than 90% of the Internet traffic in North America.195 The Applicants conclude by arguing that Verizon and MCI "would not have a rational incentive to engage in the anticompetitive behavior hypothesized by these intervenors ..."196
CALTEL and Covad (joint testimony), Cox, and ORA claim that following the transaction, Verizon will lack the incentive to exchange Internet traffic through peering arrangements with other backbone providers on reasonable terms (as it now does), and that the Commission should order it to continue to do so.197 In addition, ORA, CALTEL and Covad (joint testimony), Level 3 and Pac-West claim that, post-transaction, Verizon would engage in discrimination, in terms of price and quality, for Internet traffic it exchanges with other networks.198
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. Post-transaction, MCI will remain the fourth largest IBP, with less than a 10 percent share of the traffic. MCI will face competition from SBC/AT&T, Sprint, Qwest, SAVVIS, AOL, and others. Thus, we conclude that this transaction will not adversely affect the market for Internet backbone services or ISPs.
The scenarios painted by CALTEL, Covad, Cox, Pac-West, Level 3, and ORA concerning possible discriminatory treatment and anticompetitive pricing have no basis in fact. Indeed, in light of the small percentage of the Internet backbone that the merged company will control, discriminatory actions by the merged company would invite retaliation and therefore eliminate any incentive to engage in such behavior, which would jeopardize Verizon's access to 90% of the Internet.199 For similar reasons, there are no incentives for the combined company to selectively downgrade packets exchanged with competitive networks.
Thus, we reach the same result as the Advisory Opinion - the proposed merger will not produce anticompetitive outcomes in this area.
76 Advisory Opinion, p. 7.
77 Advisory Opinion, p. 11.
78 Advisory Opinion, p. 11.
79 Id.
80 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.
81 Advisory Opinion, pp. 10-11.
82 Advisory Opinion, p. 11
83 The Advisory Opinion addresses special access markets separately, which is discussed below.
84 Advisory Opinion, p. 11.
85 Id.
86 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.
87 Advisory Opinion, p. 13.
88 Joint Applicants Opening Brief, p. 15.
89 Joint Applicants Opening Brief, p. 16.
90 Joint Applicants Opening Brief, p. 17.
91 Joint Applicants Opening Brief, p. 20.
92 Joint Applicants Opening Brief, p. 22.
93 Joint Applicants Opening Brief, p. 23.
94 Joint Applicants Opening Brief, p. 28.
95 TURN Opening Brief, p. 61.
96 TURN Opening Brief, p. 62.
97 TURN Opening Brief, p. 63.
98 See TURN Opening Brief, p. 41.
99 TURN, Opening Brief, p. 56.
100 TURN, Opening Brief, p. 20.
101 Telscape, Opening Brief, p. 2.
102 CALTEL, Opening Brief, p. 1.
103 CALTEL, Opening Brief, p. 8. We discuss CALTEL's recommendation concerning special access below.
104 Level 3, Opening Brief, p. 19. Level 3 proposes several special access competitive conditions and several general mitigating conditions. They will be discussed separately.
105 Level 3 Ex. 1. at 35
106 Level 3 Ex. 1 at 33
107 Qwest, Opening Brief, p. 46.
108 ORA, Opening Brief, p. 26.
109 ORA, Opening Brief, p. 25.
110 ORA, Opening Brief, pp. 54-55.
111 ORA 4, p. 5.
112 Id.
113 ORA 4, p. 7.
114 TURN Opening Brief, p. 62.
115 Id.
116 Joint Application of Verizon Communication, Inc. and MCI, Inc. p. 13.
117 Joint Application of Verizon Communication, Inc. and MCI, Inc. pp. 28-29.
118 Joint Application of Verizon Communication, Inc. and MCI, Inc. at 12
119 Verizon/MCI 22 at 20.
120 Verizon/MCI 22 at 39
121 Advisory Opinion, p. 13.
122 Id.
123 Advisory Opinion, p. 15.
124 Advisory Opinion, p. 13.
125 Advisory Opinion, p. 14.
126 Id.
127 Id.
128 Id.
129 Id.
130 Id.
131 See Joint Applicants Opening Brief, p. 21.
132 Joint Applicants Opening Brief, p. 22.
133 Verizon/MCI 22, ¶ 34.
134 TURN, Opening Brief, p. 46.
135 TURN 1, p. 168.
136 Advisory Opinion, p. 13.
137 Advisory Opinion, p. 18.
138 Advisory Opinion, p. 15.
139 Advisory Opinion, p. 16.
140 Advisory Opinion, p. 16, footnotes omitted.
141 Advisory Opinion, pp. 16-17, footnotes omitted.
142 Advisory Opinion, p. 17.
143 Advisory Opinion, p. 17, footnote omitted.
144 Id.
145 Advisory Opinion, p. 14, citing In re Unbundled Access to Network Elements, Order on Remand, WC Dkt. No. 04-313 the TRRO, at ¶ 36, n. 107
146 Id.
147 Id.
148 Advisory Opinion, p. 18.
149 Advisory Opinion, p. 18.
150 Joint Applicants Opening Brief, p. 30 citing Ex. Verizon/MCI 22 ¶ 102.
151 Joint Applicants Opening Brief, p. 30.
152 Joint Applicants Opening Brief, p. 31 citing Ex. Verizon/MCI 22 ¶ 126.
153 Joint Applicants Opening Brief, p. 31.
154 Verizon/MCI 22, p. 83.
155 Verizon/MCI 22, pp. 64-83.
156 ORA, Opening Brief, p. 26.
157 TURN, Opening Brief, p. 55.
158 Id.
159 See Verizon/MCI pp. 64-83.
160 Advisory Opinion, p. 10.
161 Advisory Opinion, pp. 18-19.
162 Advisory Opinion, p. 21.
163 Advisory Opinion, p. 19.
164 Advisory Opinion, p. 21
165 Id.
166 Joint Applicants Opening Brief, p. 33.
167 Verizon/MCI Exhibit 5, pp. 79-81.
168 Joint Applicants Opening Brief, p. 34, citing Ex. Verizon/MCI 22 at ¶ 142.
169 Joint Applicants Opening Brief, p. 36.
170 Id.
171 ORA, Opening Brief, p. 29.
172 Level 3 Exhibit 1, p. 11.
173 Level 3 Exhibit 1 at 12 and CALTEL Opening Brief, p. 16.
174 Qwest Exhibit 1 at 11 and CALTEL Exhibit 2, pp. 35-36.
175 CALTEL, Opening Brief, p. 18.
176 Level 3 Exhibit 1 at 15-16.
177 Level 3 Opening Brief, p. 8.
178 Level 3, Opening Brief, p. 13.
179 Qwest, Opening Brief, p. 11.
180 Qwest, Opening Brief, pp. 9-10.
181 Qwest Exhibit 1 at 13 and Qwest Opening Brief at 9
182 Qwest, Opening Brief, p. 49.
183 Applicants' Reply Brief, pp. 19-23
184 Advisory Opinion, p. 10.
185 Advisory Opinion, p. 21.
186 Id.
187 Advisory Opinion, p. 22.
188 Advisory Opinion, p. 23.
189 Id.
190 Advisory Opinion, p. 23.
191 Advisory Opinion, pp. 23-24.
192 Advisory Opinion, p. 24.
193 Joint Applicants Opening Brief, p. 41.
194 Joint Applicants Opening Brief, pp. 41-42.
195 Joint Applicants Opening Brief, p. 42.
196 Joint Applicants Opening Brief, p. 43.
197 CALTEL 1 (including Covad) at 45-48; Cox 1, pp. 13-14.
198 ORA 1 at 70-71; CALTEL 1 (including Covad) pp. 45-46; Level 3 Ex. 1 pp. 28-31; Pac-West 1 pp. 25-28.
199 Advisory Opinion, p. 24.
