[Federal Register Volume 60, Number 187 (Wednesday, September 27, 1995)]
[Notices]
[Pages 49861-49920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23636]
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DEPARTMENT OF JUSTICE
Antitrust Division
[Civil Action No. 94-01555 (HHG), D.D.C.]
United States v. AT&T Corporation and McCaw Cellular
Communications, Inc.; Public Comments and Response on Proposed Final
Judgment
Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.
16 (b)-(h), the United States publishes below the comments received on
the proposed Final Judgment in United States v. AT&T Corporation and
McCaw Cellular Communications, Inc., Civil Action 94-01555 (HHG),
United States District Court for the District of Columbia, together
with the response of the United States to the comments.
Copies of the response and the public comments are available on
request for inspection and copying in Room 200 of the U.S. Department
of Justice, Antitrust Division, 325 7th Street, NW., Washington, DC
20530, and for inspection at the Office of the Clerk of the United
States District Court for the District of Columbia, United States
Courthouse, Third Street and Constitution Avenue, NW., Washington, DC
20001.
Constance Robinson,
Director of Operations, Antitrust Division.
United States District Court for the District of Columbia
In the Matter of: United States of America, Plaintiff, v. AT&T
Corp. and McCaw Cellular Communications, Inc., Defendants. Civil
Action No. 94-01555 (HHG). Received July 25, 1995.
Response to Public Comments to the Proposed Final Judgment
Pursuant to the requirements of the Antitrust Procedures and
Penalties Act, 15 U.S.C. 16 (b)-(h) (1994) (``APPA''), the United
States of America hereby files its Response to Public Comments to the
proposed Final Judgment in this civil antitrust proceeding. The United
States has reviewed the comments on the proposed Final Judgment and
remains convinced that its entry is in the public interest.
A proposed Final Judgment, Stipulation and Competitive Impact
Statement have been filed with this Court.\1\ The proposed Final
Judgment is subject to approval by the Court after the expiration of
the statutory sixty-day public comment period and compliance with the
Antitrust Procedures and Penalties Act, 15 U.S.C. 16 (b)-(h).
\1\ See 59 FR 44,158 (1994).
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I. Compliance with the APPA
The APPA requires a sixty-day period for the submission of public
comments on the proposed Final Judgment, 15 U.S.C. 16(b). The United
States has received four comments\2\ and a response
[[Page 49862]]
to those comments from AT&T,\3\ all of which are filed with this
response. Upon publication of the comments and this response in the
Federal Register, pursuant to 15 U.S.C. 16(d) of the APPA, the
procedures required by the APPA will be completed. The United States
will then move the Court for entry of the proposed Final Judgment, and
the Court may then enter it.
\2\ Comments objecting to the proposed decree were submitted to
the Department by Bell Atlantic and NYNEX (jointly), SBC
Communications Inc. (``SBC''), BellSouth Corp. (``BellSouth'') and
the Ad Hoc Association Long Distance Carriers (``Ad Hoc IXCs''). SBC
requested permission from the Court to file supplemental comments on
January 17, 1995; however, that request has not been granted by the
Court. SBC's supplemental comments request that the decree be
clarified and modified to provide that pending conversion of the
McCaw systems to equal access, AT&T is prohibited from (1) expanding
its calling areas, and (2) advertising its existing interLATA
calling areas so as to disadvantage cellular systems that are
competing with the McCaw systems. SBC also believes that AT&T should
be required to restrict the scope of such calling areas pending
conversion to equal access. AT&T's response to these comments
asserts that it has not expanded the McCaw calling areas, and that
the purpose of the proposed decree is not to establish identical
calling areas with those of the Bell Operating Companies (BOCs).
Further, AT&T maintains that to impose additional requirements
pending the completion of its conversion to equal access this fall
would simply encourage additional frivolous complaints with no
competitive benefit and could delay the conversion of its cellular
systems to equal access. The Department believes that the changes
proposed by SBC are inappropriate, and that the scheduled conversion
of the McCaw systems will achieve the competitive benefits sought by
the proposed decree.
\3\ Defendant's Response to the Public Comments on the Proposed
Final Judgment, submitted to the Department of Justice on March 15,
1995.
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Under the APPA, the primary responsibility for enforcing the
antitrust laws and protecting the public interest in competitive
markets rests with the Department of Justice.\4\ In carrying out its
responsibilities, the Department has very broad discretion in
prosecuting alleged antitrust violations and determining appropriate
relief for the settlement of cases.\5\ Before entering a proposed
consent decree, the Court must determine that the decree is in the
public interest, 15 U.S.C. 16(e).\6\ That test, however, is limited to
ensuring that the government has met its public interest
responsibilities--that is, determining that the proposed Final Judgment
falls within the range of the government's antitrust enforcement
discretion.\7\
\4\ United States v. Waste Management, Inc., 1985-2 Trade Cas.
(CCH) para. 66,651 at page 63,045 (D.D.C. June 6, 1985).
\5\ United States v. Microsoft, Nos. 95-5037, 95-5039, slip op.
(D.C.Cir. June 16, 1995); United States v. Mid-America Dairymen,
Inc., 1977-1 Trade Cas. (CCH) para. 61,508 at page 71,980 (W.D. Mo.
May 17, 1977) (citing Sam Fox Publishing Co. v. United States, 366
U.S. 683, 689 (1961) and Swift & Co. v. United States, 276 U.S. 311,
331-32 (1928)).
\6\ This determination can be properly made on the basis of the
Competitive Impact Statement and this Response. The additional
procedures of 15 U.S.C. 16(f) are discretionary, and a court need
not invoke any of them unless it believes that the comments have
raised significant issues, and that further proceedings would aid
the court in resolving those issues. See H.R. Rep. 93-1463, 93d
Cong. 2d Sess. 8-9 reprinted in 1974 U.S.C.C.A.N. 6535, 6538.
\7\ United States v. Microsoft, Nos. 95-5037, 95-5039 slip op.
(D.C.Cir. June 16, 1995); United States v. Western Electric Co., 993
F.2d 1572, 1577 (D.C. Cir. 1993).
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II. Background
The transaction giving rise to the government's complaint was the
acquisition by AT&T Corp. (``AT&T'') of the stock of McCaw Cellular
Communications Inc. (``McCaw'') in exchange for AT&T stock valued at
$12.6 billion. The transaction was the largest acquisition in the
history of the telecommunications industry. Immediately upon the
announcement of the transaction, the Department received complaints
from competitors of McCaw and cellular equipment customers of AT&T
expressing concerns as to the possible anticompetitive effects of the
proposed transaction.
The Department commenced an extensive investigation of the
acquisition during which these complaints were thoroughly examined. The
Department received more than one million pages of documents from AT&T,
McCaw, other cellular service providers including the BOCs, and AT&T's
cellular equipment competitors. In addition, the Department conducted
more than a dozen on the record interviews with employees and officers
of AT&T and McCaw and interviewed dozens of persons in various
positions in the wireless industry.\8\
\8\ In order to complete the transaction, AT&T needed the
approval of the FCC for the transfer to it of McCaw's radio
licenses. After the Department completed its investigation of the
transaction and filed the proposed consent decree with the district
court, the FCC approved the license transfers. Applications of Craig
O. McCaw and AT&T, File No. ENF-93-44, Memorandum Opinion and Order,
FCC 94-238 (Sept. 19, 1994). The Court of Appeals recently affirmed
the FCC action after considering some of the same issues that were
raised by the commenters in this proceeding. SBC Communications Inc.
v. FCC, Nos. 94-1637, 94-1639, slip op. (D.C. Cir. June 23, 1995).
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AT&T is the largest domestic long distance provider with about 60%
of the overall interexchange market and a higher percentage of the
cellular long distance market.\9\ McCaw is one of the largest cellular
mobile telephone providers and owns interests in systems that provide
service to about 17% of cellular customers.\10\ McCaw's systems all
operate in the ``A Block'' of the cellular spectrum that was originally
assigned by the FCC to non-local exchange carriers.\11\
\9\ AT&T Response at 57.
\10\ AT&T Response at 9.
\11\ The ``B Block'' spectrum was awarded to the local telephone
companies serving the areas covered by the cellular licenses. After
these licenses were issued, the local exchange carriers were
permitted to purchase the systems of the nonwireline carriers in
areas where they did not have the wireline licenses, and the BOCs
and GTE then acquired a substantial portion of these licenses as
well. See Cellular Communications Systems, 86 FCC 2d 469, 493-95
(1981); 47 C.F.R. Sec. 22.901(d) (1994).
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Cellular carriers provide mobile telephone service using
transmitters that are located in multiple ``cell sites'' to establish
radio connections with the customers' terminal equipment. These cell
sites are linked to centralized mobile telephone switching offices
(``MTSO's'') by either fixed microwave radio links or landline
transmission facilities. In general, calls to telephones within the
service area of the cellular system are completed over connections from
the MTSO to the local landline telephone company that are arranged for
by the cellular provider.
Calls originating on the cellular system to telephones outside the
cellular service area, with some exceptions, are transported from the
MTSO to an interexchange carrier either through direct trunks or
through the switched network of the local telephone company. These long
distance calls are generally charged to the customer separately from
the cellular service and are provided either as a service rendered to
the customers directly by the interexchange carriers or as a resold
service provided by the cellular carrier. Prior to its acquisition by
AT&T McCaw mostly provided long distance service by reselling AT&T
services, which it procured at wholesale rates. McCaw also did not
offer its customers their choice of interexchange carriers, except in
those systems which it jointly owned with a BOC.
Under the Modification of Final Judgment entered in United States
v. Western Electric Co. (``MFJ''),\12\ the BOCs are required to provide
equal access to all interexchange carriers for the origination and
termination of interexchange calls. Interexchange calls under the MFJ
are those which transit the boundary of an exchange area or ``LATA.''
The LATAs applicable to the BOC's cellular systems have been modified
by numerous waivers granted by the Court. Pursuant to a request made by
the BOCs, the District Court has recently ruled on a waiver request for
the BOCs to provide interexchange services from cellular systems.\13\
\12\ United States v. American Tel. and Tel. Co., 552 F. Supp.
131 (D.D.C. 1982), aff'd mem. sub nom. Maryland v. United States,
460 U.S. 1001 (1983).
\13\ United States v. Western Electric Co., Civ. No. 82-0192
(D.D.C. April 28, 1985) (``April 28 Order'').
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III. The Complaint and Proposed Final Judgment
The Complaint alleges that the proposed acquisition by AT&T of
McCaw violates Section 7 of the Clayton Act, as amended, 15 U.S.C.
Sec. 18, in the markets for cellular service, cellular infrastructure
equipment, and interexchange service to cellular subscribers. On the
same day that the complaint was filed, the Department also filed a
proposed Final Judgment that would mitigate the anticompetitive
consequences of the transaction in each of these markets.
First, the proposed Final Judgment contains provisions that
substantially mitigate the incentive and ability of the merged AT&T-
McCaw to disadvantage other cellular companies which compete against
McCaw. It requires that
[[Page 49863]]
McCaw's wireless systems be maintained in a separate subsidiary from
AT&T and restricts the flow of certain confidential information between
these entities and within the AT&T unit that sells cellular
infrastructure equipment. It obligates AT&T to continue to deal with
unaffiliated cellular equipment customers on terms established prior to
the acquisition, and on terms not less favorable than those offered to
McCaw after the acquisition. In addition AT&T is required to assist,
and not to interfere with, an incumbent customer's decision to change
infrastructure suppliers, and to buy back network equipment sold to a
competitor/customer if AT&T fails to comply with its obligations to
that customer under Section V of the judgment. The decree does not,
however, prohibit AT&T from using information relating to its own
interexchange customers to market cellular services.
Second, to mitigate the anticompetitive concerns in the cellular
interexchange market, the proposed Final Judgment requires McCaw
cellular systems to provide equal access to interexchange competitors
of AT&T, which McCaw did not provide prior to the acquisition in its
systems (other than systems jointly owned by McCaw and a BOC). The
provisions of equal access on these systems will increase competition
in interexchange services to cellular customers. Finally, the proposed
Final Judgment restrains McCaw from providing certain confidential
information related to its cellular infrastructure equipment suppliers
to AT&T's manufacturing division to prevent anticompetitive harm to the
cellular infrastructure equipment market.
IV. Comments on the Proposed Decree
A. Concerns That the Vertical Relationship Created by Merging AT&T's
Manufacturing Business With McCaw Will Have Anticompetitive Effects on
McCaw's Cellular Competitors
The Joint Bell Atlantic and NYNEX Comments (``Joint Comments'')
argue that the merger of the manufacturing business of AT&T with the
McCaw cellular operations will have anticompetitive effects on cellular
markets that are not sufficiently mitigated by the terms of the
proposed decree. These alleged effects are primarily the result of the
``lock-in'' that occurs when a cellular system operator purchases a
cellular switch and associated radio equipment from a manufacturer.
Once a cellular operator selects a manufacturer, it must purchase
upgrades and additional equipment from the same manufacturer, as other
manufacturers' equipment will not function with the existing equipment.
The interfaces between the switches, radios, and software are today
generally proprietary. Thus, the cellular operator cannot change
equipment vendors without replacing most or all of the system's
equipment, and is to an extent ``locked-in'' to the manufacturer for
further purchases of radio equipment to expand or enhance its
services.\14\
\14\ To a somewhat lesser degree, the cellular operator may also
face a ``lock-in'' effect with regard to the purchase of additional
switches within a cellular operating area, since there are
proprietary interfaces between switches that are more efficient than
the open interfaces that have been standardized by the industry.
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The Joint Comments allege that the injunctive provisions of the
proposed decree intended to remedy the lock-in problem are not
sufficient, and that in order to prevent anticompetitive harm the
government should either (1) require the divestiture of McCaw, (2)
require the divestiture of AT&T's cellular equipment business, or (3)
require AT&T, along with other injunctive relief, to build switches and
other equipment pursuant to publicly available standards and to license
the use of any necessary intellectual property so that third parties
could manufacture and sell equipment fully compatible with AT&T
equipment.\15\ The provisions of the proposed Final Judgment are
insufficient, according to Bell Atlantic and NYNEX, because AT&T can
engage in certain anticompetitive activities that would be difficult to
police and punish. They state ``AT&T can raise equipment prices in a
disparate fashion without an appearance of discrimination.'' \16\ and
``AT&T can restrict or delay equipment customers' access to important
new features or technologies without detection.'' \17\ Finally,
although the decree prohibits the transfer of commercial information of
AT&T's equipment customers to McCaw, NYNEX and Bell Atlantic maintain
that the prohibitions are inadequate because they allow such
information to go to senior officers of AT&T's manufacturing unit, who
may use that information for the benefit of McCaw.\18\
\15\ Joint Comments at 2. The Joint Comments argue that such
relief is appropriate because evidence exists that AT&T has engaged
in efforts to thwart the development of open standards for cellular
equipment sponsored by other industry manufacturers. Joint Comments
at 3. In order to comply with such a requirement, AT&T would
presumably have to design and implement an additional open interface
which would allow other manufacturers' radio equipment to work with
its switches, and possibly would also need to disclose proprietary
engineering data about its current system design. The imposition of
such a requirement would necessarily involve the Department and the
Court in determinations of numerous technical and controversial
issues of system design and is unnecessary in light of the ability
of the proposed decree to alleviate the potential problems
associated with the acquisition.
\16\ Joint Comments at 4. Apparently, the concern is that AT&T
will be able to selectively alter prices of cellular infrastructure
equipment so as to disadvantage the cellular systems it competes
with in a manner that would not violate the proposed decree or would
not be detectable by the parties or the Department.
\17\ Joint Comments at 5.
\18\ Joint Comments at 6.
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AT&T has responded to the Joint Comments largely by contending that
the ``lock-in'' effect is much less significant than alleged by McCaw's
cellular competitors. In fact, AT&T claims to face intense competition
for its cellular equipment business, even where it is the incumbent
supplier.\19\ In addition, AT&T argues that courts have rejected
``lock-in'' as a basis for establishing market power and, therefore,
additional relief cannot be predicated on its alleged impact.\20\ AT&T
maintains that the telecommunications equipment market is very
competitive and that because it is a significant market for AT&T,\21\
it has very incentive to bend over backwards to satisfy its customers.
Finally, AT&T contends that the proposed decree adequately protects
competing cellular systems from anticompetitive conduct since it
expressly enjoins each type of anticompetitive activity of concern to
the Department, and also contains provisions that reduce the alleged
``lock-in'' effect and that increase AT&T's incentives to abide by the
restrictions contained in the decree.
\19\ AT&T notes that there have been several ``swap-outs'' of
recently installed infrastructure equipment in the last few years
and that progress in the development of open standards for
interconnecting different manufacturers' equipment is lessening
whatever barriers currently exist to switching between different
vendors' products. AT&T Response at 19-23.
\20\ AT&T Response at 5, 35-40.
\21\ AT&T maintains that its $10 billion manufacturing business
is too important to it to risk engaging in predatory conduct against
its customers. AT&T Response at 5.
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The Department concluded that certain competitors of McCaw were
``locked-in'' to AT&T cellular equipment and, therefore, disagrees with
AT&T's attempts to minimize this problem. However, the Department has
concluded that the provisions contained in the proposed Final Judgments
combined with other market factors would constrain AT&T's ability to
impede competition in cellular markets. As described in the CIS, the
proposed decree contains provisions aimed specifically at preventing
anticompetitive abuse by AT&T of
[[Page 49864]]
cellular systems which use AT&T equipment and which compete against
McCaw systems. Misuse of nonpublic information is prohibited by section
V.A of the decree to prevent McCaw from gaining access to information
AT&T obtains as an equipment vendor to its wireless competitors. The
details of how these provisions will be implemented are to be set forth
in the implementation plan required by Section VII.A to be filed with
the Department. Section V.A.4.b assures that nonpublic information of
unaffiliated wireless infrastructure equipment customers is not misused
by AT&T as a result of any proprietary development work it performs for
these customers.
The proposed Final Judgment also contains provisions that will
prevent AT&T from raising the costs of McCaw's wireless competitors
that are currently using AT&T equipment. Section V.B.1 requires AT&T to
provide its unaffiliated cellular infrastructure equipment customers
with the following products and services, in accordance with the same
pricing and business practices that prevailed prior to August 1, 1993:
(a) Technical support and maintenance; (b) installation, engineering,
repair and maintenance services; (c) additional switching and cell site
equipment to be deployed in that system; (d) upgrades and other AT&T
cellular infrastructure equipment developed for use with these systems;
and (e) spare, repair or replacement parts. AT&T also may not
discriminate in favor of McCaw cellular systems or McCaw minority owned
cellular systems in the way in which such products or services are made
available to cellular systems that compete with McCaw or McCaw minority
owned cellular systems. If AT&T discontinues offering any cellular
infrastructure equipment service, part or product, it must either
arrange an alternative source of supply for the product or, if
unsuccessful, provide any affected cellular carrier with the licenses
to use (and rights to sublicense) whatever technical information is
necessary to provide such services, parts or products (to the extent
AT&T is able to do so), so that the carrier can obtain the service,
part or product from another source.
The proposed decree will also prevent AT&T from discriminating
against McCaw wireless competitors that are using AT&T equipment by
failing to provide or develop new products and features. If AT&T
engages in the development of new features or functions for use with
AT&T equipped cellular systems that are not intended for a single
customer, AT&T shall disclose such enhancements to unaffiliated
carriers at the same time it discloses them to McCaw or McCaw minority
owned cellular systems, and shall make them available to unaffiliated
customers at the same time it makes them available to McCaw.
Section V.D contains provisions that would make it easier for
customers that desire to replace AT&T equipment to do so. In the event
that a customer has deployed or contracted to deploy an AT&T equipped
cellular system prior to the entry of the judgment, and the customer
wishes to redeploy the AT&T equipment (e.g., to facilitate its
replacement) or to replace or supplement it with another manufacturer's
equipment, AT&T is required to provide reasonably necessary technical
assistance and cooperation to allow the customer to accomplish such
replacement or redeployment and to permit inter-operation of the AT&T
equipment with the new manufacturer's equipment.
To provide additional assurance that AT&T will abide by these
requirements, Section V.E provides that AT&T will be required to buy
back the cellular infrastructure equipment it has sold to an
unaffiliated customer that competes with McCaw if the Department
determines that it has violated any of its duties under Section V of
the decree.
Finally, Section III requires that, so long as the judgment is in
effect, McCaw and McCaw affiliates that are involved in the operation
of wireless systems and the provision of local wireless services shall
be maintained as corporations or partnerships separate from AT&T, and a
structural separation plan is to be filed for approval by the United
States pursuant to section VII.A. McCaw and McCaw affiliates are to
maintain their own officers and personnel, and books, financial or
operating records, and to retain all wireless service licenses and
title and control of the wireless infrastructure equipment used by its
systems, and the responsibility for the operation of their wireless
services. It may not delegate substantial responsibility for such
business activities to AT&T.
Although the Department recognizes that some forms of
discrimination feared by the BOCs may be hard to detect and prove,
McCaw's cellular competitors are very sophisticated customers of
infrastructure equipment and are well informed about the quality and
prices of equipment provided to the industry. They therefore are able
to identify and report any conduct that might violate the decree. In
view of the likelihood of detection and the severe sanctions that would
befall AT&T's manufacturing business if an investigation were to
determine that it had discriminated against its equipment customers to
advantage its affiliate wireless services business, the Department
considers the likelihood of such conduct by AT&T to be minimal.\22\ If
prohibited conduct should occur, the proposed decree provides adequate
authority to correct such abuses so that any substantial damage to
competition would be punished.
\22\ It is also not in AT&T's business interest to treat its
existing equipment customers unfairly as AT&T must compete against
other equipment manufacturers for new business (including the sale
of PCS equipment) to these same customers.
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The proposed final judgment contains substantial constraints on the
operation of AT&T's equipment business. These constraints were
formulated after extensive consultation with, among others, the firms
that are now objecting to the settlement. Other constraints suggested
by the commenters were considered and rejected, such as development of
an open interface, which the Department believed would not be feasible
in the short term, would require the cooperation of other equipment
suppliers not parties to this transaction, and in any event would not
alleviate the ``lock-in'' of customers who had already installed AT&T
equipment.
The Department believes that the constraints contained in the
proposed decree are sufficient to alleviate the potential harms to
McCaw's cellular competitors from this acquisition and, therefore,
additional relief is unwarranted.
B. The Effect on Competition From the Combination of McCaw's and AT&T's
Cellular Long Distance Businesses
As stated in the CIS, the merger will ``foreclose competition
between the two largest providers of interexchange service in the
highly concentrated markets in which McCaw currently provides
interexchange service to its cellular customers.'' 59 FR 44,169 (1994).
NYNEX and Bell Atlantic argue that the antitrust violation resulting
from the acquisition of AT&T's strongest competitor for cellular long
distance is not cured by the proposed decree because the decree's equal
access provisions cannot make up for the loss of McCaw itself as an
independent long distance provider. Although McCaw provided long
distance services to its cellular customers primarily by reselling
services procured from interexchange carriers (mainly AT&T), it also
deployed some of its own interexchange facilities. The Joint Comments
state that ``McCaw's long distance network was already significantly
completed at the state and regional levels * * *
[[Page 49865]]
particularly the Pacific Northwest and Florida.'' \23\ The Joint
Comments also allege that the evidence developed in their private case
showed that AT&T regarded McCaw as a potentially powerful interexchange
competitor.\24\
\23\ Joint Comments at 7.
\24\ Bell Atlantic and NYNEX filed a private suit against AT&T
that raised issues common to the Department's action. They suggest
that the Justice Department should review the record in their case.
Although the Department has reviewed selected materials from that
case, it was not necessary, in light of the extensive investigation
that the government conducted in connection with this transaction,
that the entire record of the private litigation be reviewed.
Subsequent to filing their comments, Bell Atlantic and NYNEX reached
a settlement with AT&T and dismissed their action.
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AT&T responds to the concerns raised in the Joint Comments by
maintaining that there really is not a cellular long distance market
separate from the overall long distance market, and that in an overall
long distance market, McCaw is not a significant competitor. AT&T
argues that, in any event, the proposed decree mitigates the effect of
the acquisition on long distance competition by imposing on McCaw's
cellular systems equal access requirements that are more stringent than
those to which AT&T stated publicly it would commit and assures that
the acquisition will create competition for the first time in the
provision of long distance services used by McCaw's customers.\25\
\25\ AT&T Response at 6-7.
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The Department agrees with the comments of BellSouth and NYNEX that
the acquisition of McCaw by AT&T without the proposed decree would have
substantially reduced cellular long distance competition. Although
McCaw resold AT&T long distance service, it was free to use another
interexchange carrier, or to build its own facilities, and, thus, was
in competition with AT&T just as other resellers compete with AT&T. The
Department investigation showed that McCaw has insisted that its
customers for cellular services use its long distance services, and has
refused customers' requests to use alternative long distance providers'
services, thereby preventing the customer from establishing a separate
relationship with an interexchange carrier. McCaw's customers in
geographic areas where the other cellular carrier was not providing
equal access were only able to choose between McCaw's cellular service
combined with its interexchange service or the competing cellular
carrier and the long distance services offered by that system. Where
the competing cellular carrier offered equal access to long distance
carriers, its customers were able to choose among a number of
interexchange carriers including AT&T. In such markets, AT&T held a
predominant share of the long distance business and was clearly
competing at the retail level with McCaw's package of cellular and long
distance services.
The Department found that in areas where both McCaw and AT&T long
distance services were offered, McCaw's long distance service differed
in rates and calling areas from AT&T's. Particularly in the case of
large business customers, AT&T offered discounts for cellular long
distance services that were not available to McCaw's customers. In some
instances, AT&T encouraged corporate customers to purchase cellular
services from an equal access carrier in order to obtain AT&T long
distance offerings which included the ability of employees to access
the corporations's private network services from their cellular phones,
a feature not available from McCaw. If after AT&T and McCaw merged
their operations, and McCaw had been permitted to continue its refusal
to allow equal access to other interexchange carriers, there would have
been many areas in which competition would have been lessened, as
customers would have had fewer alternatives and AT&T-McCaw would have
had less incentive to offer competitive long distance services to
cellular customers.
The Department disagrees with Bell Atlantic and NYNEX, however, on
whether the stringent equal access conditions contained in the decree
are sufficient to remove the adverse effect on long distance
competition from the AT&T-McCaw acquisition. The Department believes
that the decree, on balance, will enhance competition in long distance
services. By giving the other interexchange carriers access to McCaw's
cellular exchange customers for the first time, the Department expects
the proposed decree to offer substantial new opportunities for reducing
the concentration in the provision of long distance cellular service.
Many of McCaw's ``captive'' customers are presumably customers of other
long distance carriers who will now have the option of using the same
carrier for cellular and wireline interexchange calling.
The equal access requirement also removes a possible impediment to
competition in the overall long distance market by assuring that AT&T
will not be the only interexchange carrier able to offer its customers
the ability to combine its cellular long distance service with its
landline long distance services to obtain volume discounts or to offer
additional services to employees using cellular phones, such as private
network services. Thus, the Department believes that subject to the
terms of the proposed decree, the acquisition will not adversely affect
competition for long distance cellular services.
C. Concerns Relating to Use of Competitively Sensitive Information
About AT&T's Customers
The Joint Comments and SBC Comments contend that allowing McCaw to
use information regarding AT&T's cellular long distance customers in
marketing cellular services will cause serious anticompetitive harm.
Use of this information allegedly will permit McCaw to target its
marketing effort on the BOCs' customers that have the most attractive
usage patterns.\26\ AT&T strenuously defends its right to use
information regarding its own cellular long distance customers for
marketing other services, including wireless services. AT&T maintains
this is consistent with the FCC's policies on the use of customer
information.\27\
\26\ SBC comments at 9-10, 14.
\27\ AT&T Response at 50-58.
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The Department believes that interexchange carriers preselected by
a customer in an equal access process should be able to use the
interexchange usage information they obtain from serving those
customers to market other services or equipment. All the interexchange
carriers (not just AT&T) providing services to customers of the BOCs'
and McCaw's wireless exchange systems will naturally accumulate
information about their customers' interexchange usage patterns.
D. The Application of the Decree to Cellular Properties Where McCaw Has
Only 50% Ownership
BellSouth comments on the provision that imposes obligations on
systems in which McCaw is a 50-50 partner with BellSouth and in which
McCaw has only ``negative control,'' i.e., the ability to veto actions
with which it disagrees. BellSouth argues that the proposed decree
should not be construed to apply to such systems, arguing that in such
situations, McCaw ``would lack `the power to direct or to cause the
direction of the management and policies' of the cellular system.''\28\
\28\ BellSouth Comments at 13.
---------------------------------------------------------------------------
The Department rejects this suggested clarification from BellSouth.
The purpose of the decree language applying the equal access
requirements to systems with ``negative control'' was in part intended
to avoid a situation where the BOCs and AT&T are 50-50 partners in a
system and both claim that they do
[[Page 49866]]
not have the authority to implement equal access and nondiscrimination
requirements. BellSouth's proposal would create exactly this situation,
where both parties could seek to avoid responsibility for such conduct.
E. Concerns Regarding Alleged Disparities Between the Terms of the
Proposed AT&T-McCaw Decree and the MFJ
BellSouth argues that the Court should not consider the entry of
the proposed AT&T-McCaw decree until after it has acted on the generic
wireless waiver and determined whether the BOCs wireless operations are
subject to the interexchange prohibition of the MFJ.\29\ Since the
Court has denied BellSouth's motion seeking to have the Court find that
the MFJ is not applicable to wireless, and ruled on the BOCs' motion
for an interexchange wireless waiver,\30\ this point is now moot.
\29\ BellSouth Comments at 2.
\30\ April 28 Order.
---------------------------------------------------------------------------
BellSouth also contends that the proposed decree is deficient by
not covering possible future AT&T wireless ventures in the PCS spectrum
band. It argues that PCS and cellular services will be competitive with
each other and that there is no justification for applying the equal
access obligations only to McCaw's cellular systems. The basis for
BellSouth's concern is that the MFJ waiver under which it would be
permitted to provide interexchange services from wireless exchange
systems requires that such systems provide equal access regardless of
whether they operate on the cellular or PCS spectrum band.
The Department believes that it was correct in not extending the
proposed decree's equal access obligations to include possible PCS
operations of AT&T. The equal access provisions of the proposed decree
are intended to remedy the effects of the acquisition on cellular long
distance competition in the geographic markets where McCaw and AT&T
competed prior to the acquisition. Absent this provision, AT&T would
have been able to control the use of McCaw's exchange access facilities
which constituted about half of the spectrum available for mobile
services in those markets. Under the FCC regulations, McCaw's use of
one of the cellular frequency blocks in those markets substantially
restricts the ability of AT&T to acquire PCS spectrum in those
geographic markets. If AT&T were to acquire any PCS spectrum for use in
the McCaw markets, it would not be as a result of this acquisition. In
addition, it is not possible at this time, to predict if the services
to be offered using the smaller PCS spectrum bands will be directly
competitive with the services of the cellular carriers.
Both the Joint Comments and SBC Comments complain the McCaw is not
prohibited from providing interexchange routing from its cellular
switches while the waiver that would permit the BOCs to provide
interexchange services from wireless systems prohibits such a function.
SBC maintains that because it would be limited under the wireless
interexchange waiver to the resale of switched services, they would be
effectively prohibited from obtaining the efficiencies from the
implementation of MTSO to MTSO trunking of interexchange calls.\31\
Although the Department agreed to permit McCaw to provide interexchange
routing, the proposed decree would only permit such a function if it
could be offered to all interexchange carriers on a nondiscriminatory
basis. It is our understanding that this function cannot presently be
implemented so that it would be equally available to all interexchange
carriers, and AT&T equal access plan for its wireless systems contains
no indication that AT&T intends to provide interexchange routing. If
McCaw, in the future, develops such a capability, the Department will
determine in its review of changes to the equal access plan whether it
will in fact be nondiscriminatory.
\31\ SBC Comments at 20-22.
---------------------------------------------------------------------------
The Joint Comments and SBC also maintain that the AT&T-McCaw decree
is inappropriate as it does not impose the same requirement for a
separate sales force as is required under the BOCs'
wirelessinterexchange waiver of the MFJ.\32\ The complaint seems to
substantially misread the requirements of the proposed decree. The
decree requires that AT&T maintain the McCaw cellular operations in a
separate subsidiary, which will have responsibility for the marketing
of cellular services. It does permit certain joint marketing of
cellular and interexchange services, as long as the services are not
offered as packages with interdependent pricing of the two services.
Essentially the same approach was incorporated in the BOCs' wireless
interexchange waiver, except that the BOCs were not required to put
their interexchange operations in a separate subsidiary from their
cellular businesses.
\32\ Joint Comment at 13; SBC Comments at 23-25.
---------------------------------------------------------------------------
BellSouth argues that the proposed decree permits the provision of
``local cellular service in 19 areas that are larger than those
available to the BOCs'' cellular system under the MFJ.\33\ The Joint
Comments specifically complain that the AT&T McCaw decree permits a
broader calling area in the Pittsburgh, PA-West Virginia region than
Bell Atlantic is permitted to serve under the MFJ.\34\ The BellSouth
and Joint Comments also assert that while AT&T-McCaw is automatically
given the benefit of any waiver expanding the calling areas under the
MFJ, the BOCs have not been given equal treatment regard to the
expanded calling areas provided for in the proposed AT&T-McCaw
decree.\35\ Finally, the Joint Comments complain that Section IV(G) of
the AT&T-McCaw decree provides a procedure whereby AT&T can apply for
relief from the Department if there is not sufficient demand for
interexchange access from any of its cellular systems.\36\ Under this
procedure, the provision of access could be centralized to encompass
more than a single LATA.
\33\ BellSouth Comments at 10.
\34\ Joint Comments at 13.
\35\ BellSouth Comments at 11-12.
\36\ Joint Comments at 14-15.
---------------------------------------------------------------------------
AT&T maintains that the BOCs are in a fundamentally different
position than McCaw, in light of their control of the wireline
bottleneck facilities that are used in connection with most cellular
calls, and, therefore, terms of the AT&T/McCaw decree need not be the
same as the MFJ.\37\ Since the BOCs and AT&T submitted their comments,
the Court has acted on the BOC's request for an MFJ waiver to permit
them to provide interexchange services from wireless exchange systems.
In that proceeding the Court denied the broader relief sought by the
BOCs which they had argued, in part, should be granted based on the
impending competition they would be facing after the merger of AT&T and
McCaw. In view of this development the BOCs' ``disparity'' complaints
have already been addressed.
\37\ AT&T Response at 8-9.
---------------------------------------------------------------------------
The purpose of this proceeding is to decide whether the proposed
Final Judgment is in the public interest in alleviating concerns raised
by the AT&T/McCaw transaction, not whether the MFJ places the BOCs at a
competitive disadvantage vis-a-vis a non-BOC cellular provide.
Therefore, the Department believes that the complaints raised by
BellSouth and SBC are irrelevant. In any event, BellSouth and SBC
remain free under the provisions of the MFJ to Requests appropriate
waivers modifying the cellular exchange areas.
[[Page 49867]]
F. Concerns Raised by AD Hoc Interexchange Carriers.
The comments of the Ad Hoc IXCs relate to alleged past
anticompetitive conduct at AT&T and, thus, do not raise any issues
germane to the competitive effects of the transaction that was the
subject of the government's complaint. Therefore, we will not respond
to those comments here, although we will consider the statements
contained therein in connection with our other responsibilities for
enforcing the antitrust laws.
V. Conclusion
After careful consideration of the comments, the United States
continues to believe that, for the reasons stated herein and in the
Competitive Impact Statement, the proposed Final Judgment is adequate
to remedy the antitrust violations alleged in the Complaint. There has
been no showing that the proposed settlement constitutes an abuse of
discretion by the United States or that it is not within the zone of
settlements consistent with the public interest. Therefore, entry of
the proposed Final Judgment should be found to be in the public
interest and it should be entered.
Respectfully submitted,
Dated: July 25, 1995.
Anne K. Bingaman,
Assistant Attorney General.
Constance K. Robinson,
Director of Operations.
Donald J. Russell,
Chief, Telecommunications Task Force.
Nancy Goodman,
Assistant Chief.
Luin P. Fitch,
Patrick J. Pascarella,
Attorneys.
U.S. Department of Justice, Antitrust Division, 555 4th Street,
N.W., Washington, D.C. 20002, (202) 514-5621.
Attachments
1. Defendants' Response to the Public Comments on the Proposed
Final Judgment.
2. Comments of Bell Atlantic Corporation and NYNEX Corporation
on Proposed Final Judgment in United States v. AT&T Corp. and McCaw
Cellular Communications, Inc.
3. Comments of BellSouth Corporation on Proposed Final Judgment.
4. Comments of SBC Communications Inc. on Proposed Final
Judgment.
5. Comments and Objections of the Ad Hoc IXCs to the Proposed
Final Judgment Between the United States, AT&T Corp. and McCaw
Cellular Communications, Inc.
United States District Court for the District of Columbia
In the matter of: UNITED STATES OF AMERICA, Plaintiff, v. AT&T
CORP. and McCAW CELLULAR COMMUNICATIONS, INC., Defendants. Civil
Action No. 94-01555 (HHG).
TO: THE JUSTICE DEPARTMENT
Defendants' Response to the Public Comments on the Proposed Final
Judgment
At the Justice Department's request, defendants AT&T Corp.
(``AT&T'') and McCaw Cellular Communications, Inc. (``McCaw'')
respectfully submit their joint response to the public comments on the
Proposed Final Judgment (``Proposed Decree'') \1\--for inclusion in the
response that the United States files hereafter.
\1\ Pursuant to 15 U.S.C. Sec. 16(d), comments have been filed
by SBC Communication Corporation (``SBC''), by BellSouth Corporation
(``BellSouth''), by Bell Atlantic Corporation and NYNEX Corporation
(``Bell Atlantic/NYNEX''), and by the Ad Hoc Interexchange Carriers
(``Ad Hoc IXCs'').
---------------------------------------------------------------------------
Introduction and Summary
This Tunney Act proceeding presents an antitrust issue that is both
very narrow and very straightforward. The Proposed Decree settles the
challenges to the AT&T-McCaw merger that are raised in the Complaint
that the Justice Department simultaneously filed under Section 7 of the
Clayton Act. In determining whether this Proposed Decree is in the
``public interest,'' the question is whether the Proposed Decree is
virtually certain to harm competition or whether the Justice Department
otherwise acted irrationally, in bad faith, or contrary to its duties
to the public in settling its claims on these terms. See United States
v. Western Electric Co., 993 F.2d 1572, 1577 (D.C. Cir. 1993). As
explained in detail below, it is patent that no such determinations
could be made and that the Proposed Decree can now be approved
summarily, especially given the extensive public records that already
exist on the competitive effects of this merger.
The overriding fact is that the Department agreed to the Proposed
Decree because the Department concluded that the AT&T-McCaw merger can
produce substantial procompetitive benefits and that the provisions of
the Proposed Decree are adequate to prevent each of the threats to
competition that the Department believed might otherwise result from
the merger. These conclusions are rational. Indeed, they are
unassailable.
Foremost, the AT&T-McCaw merger will promote competition and
benefit consumers in many significant respects. The Justice Department,
the FCC, and the California and New York state utility commissions
previously found--and no commentor here disputes--that the merger will
foster competition in cellular and other local telecommunications
markets which the divested Regional Bell Operating Companies
(``RBOCs'') and other local exchange carriers (``LECs'')
``traditionally have provided on a monopoly basis.'' \2\ For example,
the merger will offset some of the RBOCs' immense advantages in
providing cellular services and enable the debt-laden McCaw to
``compete more vigorously with the BOCs'' by strengthening McCaw
financially, by giving it a strong brand name, by enhancing its
customer support, technological, and marketing capabilities, and by
enabling AT&T-McCaw efficiently to offer one-stop-shopping and engage
in ``cross-selling.'' \3\ As the Department stated, the merger, as
conditioned by the Proposed Decree, will bring the ``benefits of
competition to millions of consumers of cellular telephone service'' by
leading to ``lower prices'' and ``better service.'' DOJ Press Release,
pp. 1-2 (July 15, 1994). In addition, the preservation of McCaw as an
independent firm with no affiliation with landline monopolies will
further foster the development of cellular alternatives to landline
bottleneck monopolies if and when that becomes economically and
technologically feasible.\4\
\2\ Applications of Craig O. McCaw and AT&T, File No. ENF-93-44
(``AT&T-McCaw FCC Proceeding''), Memorandum Opinion and Order (``FCC
Order''), para. 60, FCC 94-238 (Sept. 19, 1994), appeals pending sub
nom. Southwestern Bell Corp. v. FCC, Nos. 94-1637, 94-1639 (D.C.
Cir.); see Joint Application of the American Telephone & Telegraph
Company, et al., Decision 94-04-042, pp. 30-31 (Cal. Pub. Utils.
Comm'n Apr. 6, 1994) (``California PUB Decision''); Joint Petition
of AT&T, Ridge Merger Corporation, and McCaw Cellular
Communications, Inc., Case 93-C-0777, Order Asserting Jurisdiction
and Approving Transaction, p. 6 (N.Y. Pub. Serv. Comm's Dec. 31,
1993) (``N.Y.P.S.C. Order'').
\3\ FCC Order, Paras. 57-60, see California PUC Decision, pp.
30-33.
\4\ FCC Order, para. 60; accord N.Y.P.S.C. Order, p. 6.
---------------------------------------------------------------------------
Those are all the reasons that the Department had argued in 1982,
and Judge Greene then found, that it would be ``antithetical to the
purposes of the antitrust laws'' and detrimental to the public interest
to prohibit AT&T from participating in local cellular markets through
alliances with firms like McCaw or otherwise.\5\ Conversely, as was
also recognized in 1982, there is no realistic possibility that such a
merger could otherwise harm competition. AT&T and McCaw do not directly
compete in any market, and neither controls a bottleneck monopoly that
[[Page 49868]]
could be leveraged into an adjacent market. To the contrary, AT&T's
long distance and manufacturing businesses and McCaw's cellular
business each depend on access to different sides (or aspects) of the
LECs' local exchange monopolies.
\5\ United States v. AT&T, 552 F. Supp. 131, 175-76 (D.D.C.
1982) (``MFJ Opinion''), aff'd sub nom. Maryland v. United States,
460 U.S. 1001 (1983).
---------------------------------------------------------------------------
In this regard, while the Department's Complaint raised two basic
challenges to the merger, defendants believe--as Professors Lawrence
Sullivan, Robert Willig, and Douglas Bernheim previously testified
before the FCC--that each of these theories is unsound as a matter of
law, fact, and economics, and that the merger could not be found to
violate Section 7 of the Clayton Act if there were a trial in this
case. In all events, because the provisions of the Proposed Decree
enjoin even these theoretical threats to competition, it patently was
reasonable for the Department to settle each of its challenges to the
merger under the terms of the Proposed Decree.
First, the Department's complaint alleges that the merger could
lead AT&T to use its position as a telecommunications equipment
manufacturer to harm competition in those cellular services markets
where McCaw's rival (an RBOC or GTE) uses AT&T cellular equipment. In
particular, while the manufacture of telecommunications equipment is an
intensely competitive business, the Department's Compliant alleges that
the RBOCs and GTE will nonetheless be ``locked-in'' to AT&T for the
purchase of certain types of cellular equipment during an interim
period and that the merger would give AT&T an incentive to raise the
costs, or degrade the services, of the RBOCs and GTE during this
interim ``lock-in'' period.
However, there is substantial, indeed overwhelming, evidence that
there in fact is no ``lock-in.'' Further, even if there were, it would
be suicidal for AT&T to engage in the hypothesized predatory conduct.
That would cause the customers (GTE and the RBOCs) on whom AT&T's $10
billion manufacturing business depends to, in the Second Circuit's
words, ``retaliat[e]'' by ``shifting'' present and future purchases of
cellular and landline equipment alike to AT&T's competitors--which is
why courts have rejected indistinguishable ``lock-in'' claims when they
were raised in prior case. See Fruehauf Corp. v. FTC, 603 F.2d 345, 355
(2d Cir. 1979).
In any case, the Proposed Decree removes any possible doubt on this
issue and precludes any claim that it is likely, much less virtually
certain, that the merger would lead AT&T's manufacturing unit to engage
in the predatory conduct that the Department had feared. The Proposed
Decree not only expressly enjoins each type of predatory conduct that
the Department has hypothesized, but also contains other provisions
that both further reduce the alleged ``lock'in'' and otherwise
dramatically reinforce AT&T's overwhelming incentives to treat all its
equipment customers equally and to satisfy their needs.
Second, the Department's Complaint also alleges that the merger
would cause McCaw to use market power over local cellular radio service
to favor AT&T's putatively ``dominant'' long distance service and
thereby reduce horizontal competition in a purported ``market'' for the
provision of ``cellular long distance service.'' \6\ However, there is
overwhelming evidence that there is no such competition between AT&T
and McCaw today and no such market. McCaw now provides all the long
distance services that originate on its cellular systems (which
represent less than 0.1% of national long distance usage), and it does
so by reselling the same AT&T long distance services that are provided
to landline customers. Because AT&T had further independently committed
that McCaw will begin offering presubscription and other basic features
of equal access to all long distance carriers following the merger, the
merger would have promoted competition in long distance markets, and
reduced AT&T's role, even if there had been no decree.
\6\ The Department similarly raised the concern that McCaw's
market power as a cellular equipment buyer might enable it to impede
``upstream'' equipment manufacturing competition by sharing
nonpublic information of AT&T's cellular equipment competitors with
AT&T. The Proposed Decree contains structural and injunctive
provisions to bar any such conduct as well.
---------------------------------------------------------------------------
In any case, here, too, the Proposed Decree removes any doubt on
this score. It imposes equal access obligations on McCaw cellular
systems that go far beyond those to which AT&T had voluntarily
committed, and assures that the merger will create competition for the
first time in the provision of long distance services used by McCaw's
customer.
Indeed, that the Department acted reasonably in settling its two
challenges on these grounds is vividly confirmed by the conduct of the
only two commentors who discuss the adequacy of the Proposed Decree to
address the Department's concerns: Bell Atlantic and NYNEX. As their
joint comments note, they had filed a private antitrust suit that
sought to enjoin the merger on each of the two grounds alleged in the
Department's Complaint. However, Bell Atlantic and NYNEX thereafter
abandoned their horizontal long distance claim, and then (on the eve of
trial) they dismissed the vertical manufacturing claim with prejudice
after AT&T and these RBOCs entered into a settlement agreement.
Finally, none of the other comments even challenge the sufficiency
of the Proposed Decree to prevent either of the potential competitive
harms addressed in the Department's Complaint. Rather, they seek to use
this proceeding collaterally to attack the 1982 Decree that broke up
the Bell System (``MFJ'') and otherwise to challenge Procompetitive
features of the AT&T-McCaw merger that the Department appropriately did
not challenge.
Most prominently, three of the RBOCs (SBC, NYNEX, and Bell
Atlantic) claim that the Decree will not be in the public interest
unless a provision is added that bars AT&T-McCaw from directly
marketing cellular service to AT&T long distance customers who are
existing cellular customers of RBOCs. The RBOCs recognize that AT&T has
many satisfied customers, and the RBOCs fear that the ``power of the
AT&T-McCaw brand'' and the ability to offer attractive services may
cause cellular customers who have presubscribed to AT&T's long distance
service to choose to obtain cellular service from AT&T if it engages in
this direct marketing.
However, extending these choices benefits consumers, and courts
have thus uniformly held that it is procompetitive for integrated firms
to be free to offer new services to customers of their existing
offerings and that this is a legitimate efficiency that all multi-
product firms enjoy. The RBOCs overlook that the antitrust laws protect
competition, not the RBOC's selfish interests as competitors. Further,
the RBOCs' claims are hypocritical because the ability of AT&T-McCaw to
make such offers could only marginally offset some of the immense other
advantages that the RBOCs enjoy by reason of their bottleneck
monopolies and these RBOCs are seeking to preserve advantages for
themselves, not create ``parity.''
In addition, despite Judge Greene's prior rejections of these
claims, the RBOCs also continue to argue that the approval of the
Proposed Decree should be conditioned on removal of the MFJ's ban on
their provision of interexchange services to wireless customers, and
they claim that a series of additional ``equal access'' restrictions
should be imposed on AT&T-McCaw in the interest of ``parity'' unless
the Court removes the MFJ's restriction. While some of the RBOCs'
individual claims here rest on misunderstandings of the Proposed
[[Page 49869]]
Decree, the short answer to the RBOCs is that they are properly subject
to different restrictions from AT&T-McCaw because the RBOCs have
bottleneck landline monopolies and AT&T-McCaw to not--as Judge Greene
and now the FCC have repeatedly held.
Background
This is an unusual Tunney Act proceeding in that the AT&T-McCaw
merger has been the subject of extensive prior proceedings before the
FCC, the New York Public Service Commission, the California Public
Utilities Commission, judge Greene (in the MFJ section I(D) waiver
proceeding), and a federal court in Brooklyn. These proceedings created
extensive records regarding the competitive effects of the merger, and
it is thus possible to highlight the salient facts about the cellular
service, equipment manufacturing, and long distance markets--with
citations to affidavits and other filings from the prior proceedings.
1. McCaw's Cellular Service and the Reasons for the Merger
McCaw Cellular Communications, Inc., its wholly-owned subsidiaries,
and its 52%-owned LIN Broadcasting subsidiary (collectively referred to
as ``McCaw'') have interests in a number of cellular radio, paging,
air-to-ground, and other mobile radio services. In particular, McCaw
has interests in cellular systems that collectively serve about 17% of
the nation's cellular subscribers. McCaw has small minority interests
in a number of these systems (e.g., St. Louis), has what could loosely
be referred to as joint control with an RBOC or successor to an RBOC in
others (San Francisco Bay, Kansas City, Los Angeles, Houston, and
Galveston), and has a majority and unilateral controlling interest in a
number of others (e.g., Seattle, Portland, Denver, Las Vegas,
Minneapolis, Miami, Tampa, Jacksonville, Dallas, Oklahoma City,
Pittsburgh, and New York City). The systems in which McCaw has
``unilateral'' control serve about 13% of the nation's cellular
subscribers.
All of McCaw's interests are in ``A'' Block cellular systems that
were initially reserved for ``nonwireline carriers.'' Each system
further competes with the RBOC or other LEC with the local telephone
monopoly in that area. As shown in the Appendix to this filing, the
dispersed nature of McCaw's systems means that it competes with only a
fraction of the systems of any one RBOC or LEC (and with an even
smaller fraction of any one AT&T-equipped cellular system that
individual RBOCs or LECs have).
Because McCaw entered this business as a start-up company, it
inherently faced severe disadvantages in competing with the well-known,
well-financed, and technologically adept affiliates of RBOCs and other
LECs. In this regard, while the FCC imposed separate subsidiary
requirements on RBOC cellular systems, the FCC's regulations place no
significant restrictions on the RBOCs' financing of their cellular
operations, and these regulations further allow the RBOCs to use their
well-known trade names in marketing cellular services and jointly to
advertise cellular and monopoly landline service. See Cellular
Communications Services, 86 FCC 2d 469, 493-95 (1981); 47 C.F.R.
Sec. 22.901(d)(1).
One disadvantage arises because cellular systems require
interconnections with landline exchange monopolies, and substantial
portions of the revenues of cellular systems are remitted to local
telephone monopolies to compensate them for terminating cellular-
originated calls. RBOCs previously used this monopoly power to
frustrate cellular competitors (see United States v. Western Elec. Co.,
673 F. Supp. 525, 551 (D.D.C. 1987)), and McCaw had to expend time and
resources obtaining appropriate interconnections.\7\
\7\ See AT&T-McCaw FCC Proceeding, AT&T's and McCaw's Opposition
to Petitions to Deny and Reply to Comments (``AT&T-McCaw FCC Opp.'')
(Dec. 2, 1993), Affidavit of James L. Barksdale, para. 15
(``Barksdale FCC Aff.''); United States v. Western Elec. Co., Civ.
No. 82-0192 (D.D.C.), Memorandum in Support of AT&T's Motion for a
Waiver of Section I(D) of the Decree Insofar as It Bars the Proposed
AT&T-McCaw Merger (May 31, 1994) (``AT&T's Section I(D) Mem.''),
Affidavit of James Barksdale and Wayne Perry, para. 7 (``Barksdale/
Perry Section I(D) Aff.'').
---------------------------------------------------------------------------
These disadvantages, in turn, were radically compounded by the
regulatory preferences that the RBOCs and other LECs received. Whereas
McCaw generally had to pay fair market value for initial licenses in
each licensing area, the FCC reserved one of the two cellular licenses
(the ``B'' Block license) for an affiliate of the RBOC or other LEC
that had the landline monopoly in the Metropolitan Statistical Area
(``MSA'') or Rural Service Area (``RSA'') in question, such that the
RBOCs generally acquired ``B'' Block cellular licenses at no cost.\8\
Second, because RBOCs provide landline exchange services in contiguous
areas throughout their regions, the FCC's regulations also meant that
RBOCs automatically received licenses in the contiguous MSAs and RSAs
that comprise natural mobile markets. By contrast, McCaw and other
nonwireless carriers had to incur large amounts of debt to acquire
their licenses and consolidate them in contiguous areas.\9\ Even today,
there are many areas in which RBOCs have established cellular systems
that serve areas that are larger than McCaw or their other ``A'' Block
competitors.\10\
\8\ See Barksdale FCC Aff., para. 15; Barksdale/Perry Section
I(D) Aff., para. 16.
\9\ See Barksdale FCC Aff., Paras. 16-17; Barksdale/Perry
Section I(D) Aff., para. 17.
\10\ See Barksdale FCC Aff., Paras. 15-17; Barksdale/Perry
Section I(D) Aff., Paras. 16-18.
---------------------------------------------------------------------------
Third, the FCC gave the RBOCs and other ``B'' Block carriers
substantial headstarts--of one to three years--over their ``A'' Block
competitors. In particular, the FCC granted the RBOCs these headstarts
in face of claims by ``A'' Block competitors that the RBOCs would
thereby have an initial monopoly over the customers with the greatest
demand for cellular service, thereby both allowing the RBOCs to earn
monopoly profits during the headstart period and forcing their
nonwireline competitors to seek to dislodge existing customers of an
incumbent monopolist when the ``A'' Block systems became
operational.\11\
\11\ See Barksdale FCC Aff., Paras. 15, 17; Barksdale/Perry
Section I(D) Aff., Paras. 16-18.
---------------------------------------------------------------------------
The net result of these disadvantages is that McCaw (as well as
other nonwireline carriers) had to borrow heavily to acquire and
consolidate its licenses, to construct its systems, and to finance each
system's operations for a period of many years after it commenced
operations. One reflection of the significance of these disadvantages
is that every significant nonwireline carrier other than McCaw ended up
selling its ``A'' Block licenses to RBOCs or other LECs, which
eliminated the ``independent'' cellular systems that the FCC sought to
create and meant that RBOCs and GTE control ``A'' Block systems serving
some 60% of the nation's population.\12\ In the case of McCaw, it
became a highly-leveraged firm with some $5.7 billion in debt and a
debt ratio of over 70%.\13\ Further, McCaw is saddled with an
additional, unique obligation. It cannot retain some of its most
significant properties--the New York City, Houston, Los Angeles, and
Dallas interests of McCaw's 52%-owned LIN subsidiary--unless McCaw can
raise what is likely to be in excess of $3 billion required to purchase
the remaining 48% of LIN in 1995.\14\
\12\ See Barksdale FCC Aff., para. 17; Barksdale/Perry Section
I(D) Aff., para. 18.
\13\ See Barksdale FCC Aff., Paras. 13, 19; Barksdale/Perry
Section I(D) Aff., para. 14.
\14\ See United States v. Western Elec. Co., Civ. No. 82-0192
(D.D.C.), AT&T's Reply in Support of Its Motion for a Waiver of
Section I(D) of the Decree Insofar As It Bars the Proposed AT&T-
McCaw Merger (July 18, 1994), Supplemental Affidavit of Wayne Perry,
Paras. 2-4; AT&T Section I(D) Mem., Affidavit of Alex J. Mandl,
Paras. 3, 25 (``Mandl Section I(D) Aff.'').
[[Page 49870]]
---------------------------------------------------------------------------
Against this background, McCaw determined that just as other ``A''
Block nonwireline carriers had exited the business, it could not be an
effective competitor with RBOCs, other LECs, and other participants in
emerging wireless businesses unless it formed an alliance with a
financially strong firm like AT&T.\15\ In particular, McCaw had
concluded that it could not obtain the billions of dollars that it
needed to maintain and enhance its cellular and other mobile systems at
an acceptable cost in traditional debt and equity markets.\16\ McCaw
further determined that an alliance with AT&T would otherwise
strengthen McCaw. It would provide technological strengths that McCaw
lacks, and McCaw identified a number of service improvements that an
alliance with AT&T would permit. AT&T has a strong brand and
relationships with satisfied customers of other AT&T offerings, Phone
Stores, and other marketing resources that would enable McCaw to market
its services more efficiently and effectively. AT&T further has unique
customer care and support resources (and standards of quality)--as
reflected in the Baldridge Award that AT&T's Universal Card received
and its revolution of the credit card business.\17\
\15\ See Mandl Section I(D) Aff., Paras. 17-21.
\16\ See Barksdale/Perry Section I(D) Aff., Paras. 19-20; Mandl
Section I(D) Aff., para. 18.
\17\ See Barksdale FCC Aff., Paras. 12, 25; Barksdale/Perry
Section I(D) Aff., para. 24; Mandl Section I(D) Aff., para. 20.
---------------------------------------------------------------------------
AT&T found the merger with McCaw attractive for these, and other,
reasons.\18\ AT&T determined that the quality of the cellular service
provided by McCaw and its competitors alike had been poor, and
transmission quality (as well as blockage rates) is not what it could
be.\19\ Customer education, care, and satisfaction had been low--as
reflected in the higher industry churn rates. Fraud is such as serious
problem that it absorbs some 8% of industry revenues. AT&T perceived an
immense opportunity to improve the quality of McCaw's service and to
offer cellular services that adhere to the high quality standards that
the use of the AT&T name warrants. In this regard, AT&T believed that
satisfied customers of other AT&T services (e.g., long distance, CPE,
the Universal Card) would find an AT&T cellular service very
attractive, and that AT&T's relationship with these customers would
enable AT&T-McCaw to market cellular service them at a lower cost.
Further, while cellular today is not a substitute for the landline
exchanges, it could conceivably develop into a substitute hereafter,
and AT&T believed that an alliance with McCaw could cause that to
happen more rapidly.\20\
\18\ See Mandl Section I(D) Aff., para. 20.
\19\ See Mandl Section I(D) Aff., Paras. 20-24, 26.
\20\ See Mandl Section I(D) Aff., Paras. 21-24.
---------------------------------------------------------------------------
Entry in cellular was also attractive to AT&T in light of the
unrelenting efforts of the RBOCs to obtain (through legislation or
otherwise) premature removals of the MFJ's core long distance
restriction: i.e., before the RBOCs lose the ability to leverage local
bottleneck monopolies. While premature removal of the restriction would
allow RBOCs to use their local monopolies to capture large percentages
of the long distance business, AT&T believed that these harms could be
somewhat reduced if AT&T were providing cellular service.
While there are today only two cellular service licensees in each
market, the FCC is now in the process of licensing an additional five
carriers to provide ``personal communications services'' or PCS
services.
2. Long Distance Service
Since it commenced its operations, McCaw has provided the ``long
distance'' as well as the ``local'' services of its cellular
subscribers. In particular, with the exception of the McCaw cellular
systems that are ``BOCs'' within the meaning of the MFJ, no cellular
system in which McCaw has an interest has provided equal access, and
its customers generally have been unable to reach other interexchange
carriers on 1+ or a 10XXX basis. Rather, subscribers have used a
``McCaw'' long distance service, which McCaw has offered by reselling
long distance services obtained from AT&T under a long-term service
contract.\21\ As RBOCs have correctly stated in proceedings under the
MFJ, the long distance rates that McCaw has generally charged are the
same ``retail'' MTS rates that AT&T charges.\22\
\21\ McCaw owns private microwave facilities that are used for
certain connections of cell sites and cellular switches (``MTSOs'')
or between MTSOs serving contiguous areas. These facilities are
overwhelmingly intraLATA, and the few facilities that cross LATA
boundaries provide connections within systems or between contiguous
systems and generally serve the same functions as interLATA
facilities that RBOC cellular systems are permitted to lease in
areas where they are authorized to provide cellular services on a
multiLATA basis pursuant to MFJ waivers.
\22\ See Barksdale/Perry Section I(D) Aff., Paras. 10-11.
---------------------------------------------------------------------------
The RBOCs have emphasized in their marketing literature and
activities that they offer presubscription and the ability to
presubscribe not only to the interexchange carrier of the customers
choice, but also to particular services (e.g., AT&T's SDN or MCI's
VNET).\23\ AT&T believes that McCaw's failure to offer presubscription
makes McCaw's cellular services less attractive. Shortly after the
August 16, 1993 announcement of the merger, AT&T committed to Congress
and to the FCC that McCaw would offer presubscription after the merger
is consummated.\24\
\23\ See AT&T's Further Opposition to RBOC's Motion to Exempt
``Wireless'' Services from Section II of the Decree, pp. 19-23 (May
3, 1993).
\24\ See Transcript of Hearing of U.S. Senate Committee on
Commerce and Transportation, p. 102 (Sept. 8, 1993) (testimony of
AT&T Chairman Robert Allen) (``It would be our intent to give all of
our cellular subscribers equal access to any interexchange carrier
they wish''); AT&T McCaw FCC Opp., pp. 54-55; FCC Order, para. 64.
---------------------------------------------------------------------------
There are several hundred firms that resell long distance services
of AT&T, Sprint, MCI, WilTel, and other facilities-based interexchange
carriers. There are numerous such firms whose long distance revenues
from resale are substantially in excess of the approximately $38
million in long distance revenues that McCaw had in 1993.\25\
\25\ See AT&T-McCaw FCC Opp., p. 52.
---------------------------------------------------------------------------
3. The Competitive Telecommunications and Wireless Equipment
Manufacturing Markets
Following AT&T's January 1, 1984 divestiture of the RBOCs,
competition in the manufacture of telecommunications equipment
intensified, and the divested RBOCs established relationships with
multiple suppliers and played them off against one another. AT&T's
share of the RBOCs' purchases of ``landline'' switching products,
transmission equipment, transmission media, and other
telecommunications products thus has dropped from over 90% before
divestiture to less than 40% today. AT&T competes for these sales in a
global market with Northern Telecom (of Canada), Siemens (of Germany),
Alcatel (of France), Ericsson (of Sweden), NEC (of Japan), and many
other firms.
AT&T Network Systems, and each of its business units, critically
depend on sales to the seven RBOCs and GTE. Of AT&T Network Systems'
approximately $10 billion in 1994 external sales, roughly $6 billion
were to the seven RBOCs and GTE and roughly $5 billion were to the
seven RBOCs. The seven RBOCs regularly use their leverage as purchasers
of landline equipment to seek to affect AT&T's behavior in other areas.
Cellular and other wireless infrastructure equipment is a critical
and rapidly growing segment of
[[Page 49871]]
telecommunications equipment manufacturing. Of AT&T's approximately
$1.25 billion in anticipated 1994 sales, approximately $650 million was
to the seven RBOCs and GTE; nearly $500 million was to the seven RBOCs,
and over $130 million was to Bell Atlantic and NYNEX.\26\ In addition
to cellular infrastructure equipment, AT&T's wireless infrastructure
unit is actively developing equipment for use in providing PCS. Total
domestic PCS equipment sales are estimated to amount to billions of
dollars by 1997.
\26\ By contrast, McCaw's principal supplier of cellular
infrastructure equipment is Ericsson.
---------------------------------------------------------------------------
Cellular infrastructure equipment (which includes cell sites and
MTSOs) is manufactured and sold in a worldwide market in which AT&T
competes with Ericsson, Motorola, Northern Telecom (NTI), Nokia,
Siemens, Hughes, and others. The competitiveness of the markets is
reflected in shifts in market positions from year to year, with
Motorola having lost share (until it rebounded in 1994), and AT&T and a
recent new entrant (Nokia) having gained. AT&T has estimated worldwide
shares of cellular infrastructure equipment sales between 1988 and 1993
as follows:
----------------------------------------------------------------------------------------------------------------
Ericsson Motorola AT&T NTI Nokia Other
Year (percent) (percent) (percent) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
1988.............................. 33.0 25.0 7.9 6.0 0.0 28.1
1989.............................. 33.0 25.0 9.9 6.0 0.0 26.1
1990.............................. 33.0 25.0 10.5 6.0 2.0 23.5
1991.............................. 33.0 25.0 17.1 6.0 5.0 13.9
1992.............................. 34.2 19.0 14.1 6.9 7.8 18.0
1993.............................. 34.7 18.5 14.3 6.1 8.6 17.8
----------------------------------------------------------------------------------------------------------------
Percentages of sales of the specific cellular equipment
manufactured to the U.S. AMPS and related standards used in North
America, South America, and certain Asian countries have been estimated
by AT&T as follows:
----------------------------------------------------------------------------------------------------------------
Ericsson Motorola AT&T NTI Other
Year (percent) (percent) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
1988........................................... 20.0 35.0 24.2 5.0 15.8
1989........................................... 21.0 33.0 26.1 5.0 14.9
1990........................................... 23.0 29.0 24.3 5.0 18.7
1991........................................... 25.0 26.0 35.0 5.0 9.0
1992........................................... 28.8 20.0 29.9 5.0 16.3
1993........................................... 28.2 19.5 34.3 5.0 13.0
----------------------------------------------------------------------------------------------------------------
Swap-Outs of Equipment. A cellular carrier typically will make
procurement decisions in a cycle in which it requests bids and
proposals to meet its needs over a period of years. A cellular carrier
will issue a request for proposals and purchase an initial integrated
system of MTSOs and associated cell sites from the successful vendor.
Thereafter, the carrier buys new cell sites and upgrades and
supplemental equipment from that vendor until (1) the vendor's
equipment or support fails to be satisfactory to the cellular carrier,
or (2) new technological developments provide a basis for a substantial
overhaul of the existing network system. In either instance, a ``swap-
out'' can result. In fact, there have been a large number of instances
in which cellular carriers have replaced, in whole or in part, the cell
sites and other cellular infrastructure equipment of their incumbent
vendors with those of another manufacturer.
In particular, cellular carriers have ``swapped out'' one vendor's
cell sites and MTSOs and replaced them with another's long before the
equipment was obsolete when the carrier was not satisfied with the
original vendor's performance. For example:
--In 1988, McCaw swapped out recently-installed AT&T cellular equipment
in Florida. It relocated the AT&T cell sites and switches to other
markets.
--U S West is in the process now of replacing AT&T Series II equipment
in Phoenix and four other markets in Arizona with Motorola equipment.
--Ameritech recently swapped out a system in St. Louis.
--GTE has swapped out Motorola equipment and replace it with AT&T
equipment in a number of markets.
--In 1993, McCaw swapped out Motorola equipment in Dallas and replaced
it with Ericsson equipment.
--In 1994, McCaw swapped out Northern Telecom equipment in Minneapolis
and replaced it with AT&T equipment.
--Southwestern Bell is in the process of swapping out Motorola
equipment in Boston.
--BellSouth recently announced that Hughes will replace its existing
vendors in many systems.
Notably, while the Department is correct (Competitive Impact Statement,
p. 8) that the rapid growth in cellular services has meant that
aggregate investment in cellular equipment in each market is greater
today than it was previously, the costs per subscriber of a swap-out
have remained constant, or even declined. Moreover, carriers who ``swap
out'' existing equipment can recover all or most of the current value
of that equipment by relocating the equipment to other markets, by
selling the equipment themselves, or, most frequently, by negotiating
substantial buy-back or credit arrangements with the new supplier.
Further, in addition to these complete ``swap-outs,'' a cellular
carrier can replace an existing supplier's equipment in part by
purchasing new equipment to serve part of an existing service area or
certain customers in an area. These ``partial'' swap-outs are made
increasingly possible by developments that have allowed calls to be
handed off between switches of different manufacturers. In particular,
a standard (IS-41) was developed for an interface between two different
manufacturers' MTSOs. While initial versions of IS-41 (Rev. O and Rev.
A) did not allow all calling features to follow the call, the current
version of IS-41 (Rev. B) allows key features to do so, and the
[[Page 49872]]
subsequent version approved in 1994 (Rev. C) would allow for transfer
of nearly all existing features.
Manufacturers are further constantly making proposals to replace
incumbent vendors in whole or in part. Indeed, this is a significant
aspect of ongoing competition between manufacturers in the equipment
market. Consequently, even when swap-outs end up not occurring,
carriers have used the threat of complete or partial swap-outs to
obtain more favorable pricing and other commitments from AT&T and other
suppliers. For example, in 1993 (after the AT&T-McCaw merger was
announced), a large AT&T cellular infrastructure customer negotiated
new contracts in which it would obtain additional price discounts and
other valuable rights if it continued to purchase cell sites from AT&T
in markets that already had AT&T MTSOs and cell sites. Similarly, other
price protection clauses have been demanded by customers, and agreed to
by AT&T, since the AT&T-McCaw merger was announced.
In this regard, one RBOC recently requested proposals that would
cap its purchase of AT&T's equipment in a major market. It sought
proposals from Motorola and others to provide cell sites and MTSOs that
would be used to provide digital cellular service in portions of the
cellular service area and that would rely on IS-41 connections for
handoffs with AT&T MTSOs in that area. AT&T then made a counterproposal
to provide the digital capability by upgrading the already-installed
AT&T equipment to digital.
Other pending or impending developments will make swap-outs even
easier for cellular carriers. The imminent improvements in IS-41 will
make partial swap-outs easier, especially as more and more features are
offered through centrally located advanced intelligent network
(``AIN'') computers, not MTSOs. Finally, because RBOCs and other AT&T
equipment customers have increasingly requested an ``open'' interface
between cell sites and MTSOs, AT&T is proposing an industry standard
interface for these connections and will, once any such standard is
adopted, manufacture equipment that will enable customers to mix and
match different vendors' cell sites and MTSOs. While these efforts were
underway previously, this undertaking was a publicly-announced feature
of AT&T's settlement with Bell Atlantic and NYNEX.\27\
\27\ See Joint Press Release of AT&T, Bell Atlantic, and NYNEX
(Nov. 7, 1994).
---------------------------------------------------------------------------
In AT&T's internal assessment of the merger with McCaw, AT&T
recognized that the merger could have a severe negative effect on its
manufacturing businesses unless AT&T demonstrated its continued
reliability as a supplier. In particular, AT&T personnel believed that
some RBOCs might have strong adverse reactions to an AT&T alliance with
McCaw and retaliate by swapping out AT&T in some cellular markets and
by buying less landline and wireless equipment. Accordingly, AT&T
personnel launched elaborate programs both to bend over backwards to
preclude any RBOC concerns about unfair treatment and to communicate
the conviction and assurance that the McCaw alliance would not affect
AT&T Network Systems' commitment to meet all its customers' needs.\28\
\28\ AT&T's manufacturing subsidiary strengthened AT&T's already
rigorous existing procedures for safeguarding any information that
cellular (and other) purchasers' equipment have designated as
confidential or proprietary. When RBOCs responded adversely to the
merger announcement by threatening to swap out AT&T's cellular
infrastructure equipment, AT&T negotiated more favorable
arrangements with them.
---------------------------------------------------------------------------
4. The Prior Proceedings
The AT&T-McCaw merger could not be consummated until it received
the prior approvals of the FCC and the state utility commissions in
California, New York, and other states, and a waiver of Section I(D) of
the MFJ. In these proceedings, RBOCs not only raised the same
challenges to the merger that are resolved by the Proposed Decree, but
also sought to use the proceedings to force modifications of the MFJ's
restrictions on the RBOCs or to obtain conditions that would nullify
procompetitive features of the merger in order to achieve ``parity''
for RBOCs. Each body rejected these claims.
Each regulatory body found that the merger would serve the public
interest by promoting competition in wireless and other local
telecommunications services that are offered by RBOCs and other local
telephone monopolists (and Judge Greene granted the Section I(D) waiver
because the Rufo standard for modifying consent decrees \29\ was met).
Each regulatory body further found that the merger, as conditioned, can
realistically have no adverse effects on competition in any market,
that the merger would otherwise benefit the public in a number of ways,
and that there was no basis to impose conditions that nullify these
benefits to create ``parity for parity's sake.'' \30\ Similarly, Judge
Greene rejected RBOC efforts to consolidate the Section I(D) waiver and
Proposed Decree with the RBOCs' pending request for MFJ relief.\31\
\29\ See Rufo v. Inmates of Suffolk County Jail, 112 S. Ct. 748
(1992).
\30\ See, e.g., FCC Order, Paras. 32, 57-61, 68-70, 90, 97-100,
104-05; California PUC Decision, pp. 12-16, 37; N.Y.P.S.C. Decision,
pp. 6-7.
\31\ See United States v. Western Elec. Co., Civ. No. 82-0192,
Opinion, pp. 22-26 (D.D.C. Aug. 25, 1994) (``Section I(D) Waiver
Opinion''), aff'd, No. 94-5252 (D.C. Cir. Feb. 17, 1995).
---------------------------------------------------------------------------
Argument
While four sets of comments have been filed on the Proposed Decree,
only one (Bell Atlantic/NYNEX) even suggests that the Decree does not
reasonably address the competitive concerns raised in the Department's
Complaint. Otherwise, the commentors challenge the Decree because it
does not address other concerns that they have. Part I will demonstrate
that the Proposed Decree's provisions are palpably in the public
interest. Part II will demonstrate that the extraneous other claims are
out of order and challenge procompetitive features of the merger.
I. The Provisions of the Proposed Decree Are in the Public Interest
No commentor has claimed that the Proposed Decree is itself
virtually certain to harm competition.\32\ Nor has any commentor
claimed that the Proposed Decree is not a reasonable settlement of the
two claims that the Department raised in its Complaint. Indeed, the
only comments that even address these issues are those of Bell
Atlantic/NYNEX. Yet they make no attempt to show that the Proposed
Decree is outside `` `the reaches of the public interest.' '' United
States v. Western Elec. Co., 900 F.2d 283, 306 (D.C. Cir. 1990)
(quoting United States v. Bechtel Corp., 648 F.2d 600, 666 (9th Cir.
1981)). Indeed, Bell Atlantic/NYNEX's comments here merely summarize
the arguments that these commentors had intended to advance in a
private antitrust suit that they brought against the AT&T-McCaw merger
in federal court in Brooklyn. However, in
[[Page 49873]]
that private suit, Bell Atlantic/NYNEX first abandoned their horizontal
long distance claims (after the district court in Brooklyn criticized
them) \33\ and then (on the eve of trial) dismissed their manufacturing
claims with prejudice after settling them with AT&T-McCaw--which
vividly confirms that the Justice Department acted reasonably in
settling its claims rather than litigating the lawfulness of the
proposed merger.
\32\ BellSouth has used its comments here to repeat its claims
(from the Generic Wireless proceeding under the MFJ) that the
imposition of equal access requirements on cellular systems is
contrary to the public interest. Quite apart from the fact that
these claims have been previously rejected by the Department, Judge
Greene, and now also the FCC (FCC Order, para. 68), BellSouth
ignores that the Proposed Decree would impose no such provisions or
obligations in the unlikely event that BellSouth's claims were
accepted in the pending MFJ proceeding. In that event, just as RBOCs
could provide cellular-originated calls to anyone in the world with
no equal access duty under the MFJ, McCaw cellular systems would
have that same right under Section X(A) of the Proposed Decree.
\33\ See Bell Atlantic Corp. v. AT&T Corp., No. 94-CV-3682
(ERK), Transcript of Cause for Civil Hearing, pp. 27-28, 45-46
(Sept. 13, 1994).
---------------------------------------------------------------------------
However, because Bell Atlantic and NYNEX have not withdrawn these
aspects of their comments, AT&T-McCaw will briefly reiterate why the
Department's settlement is reasonable. In reality, each of the
antitrust challenges to the merger rests on legal theories that are
novel, that have been rejected in other indistinguishable contexts, and
that would prevent procompetitive benefits of the merger--which is why
the Department and Judge Greene previously stated that restriction on
AT&T's entry into cellular radio would be detrimental to the public
interest.\34\ In any event, while the merger, in AT&T's view, could not
have been found to violate Section 7 of the Clayton Act if there were a
trial, the Proposed Decree specifically enjoins each of the
hypothetical threats to competition raised in the Department's
Complaint.
\34\ See MFJ Opinion, 552 F. Supp. at 175-76; United States v.
Western Elec. Co., Civ. No. 82-0192 (D.D.C.), Response of the United
States to Public Comments on Proposed Modification of Final
Judgment, pp. 72-73 (May 20, 1982); id., Brief of the United States
in Response to the Court's Memorandum of May 25, 1982, p. 49 (June
14, 1982).
---------------------------------------------------------------------------
A. The Justice Department Reasonably Settled Its Challenges to the
Putative ``Horizontal'' Combination of AT&T's and McCaw's Long Distance
Businesses
One of the two claims raised in the complaint is that the merger
would enable McCaw to use its alleged market power as one of two
cellular carriers (and its undisputed ability to program its cellular
switches to prevent long distance carriers from reaching McCaw's
customers) to favor AT&T and reduce competition in competitive long
distance markets. In this regard, the Department also alleged that the
merger would eliminate competition between the two largest participants
in various ``cellular long distance markets'' and that the merger would
lead to increased long distance prices or reduced output.
However, while the provision of equal access by McCaw and other
cellular carriers is indisputably in the public interest, AT&T submits
that the horizontal allegations in the Department's Complaint could not
have been proven at trial and that it plainly was reasonable for the
Department to settle these claims under the provisions of the Proposed
Decree.
First, contrary to the Department's allegation, the merger does not
eliminate long distance competition between AT&T and McCaw. There has
never been any such competition. AT&T has been unable to offer
interexchange services to McCaw cellular customers, for McCaw has not
provided equal access, but has provided the interexchange services used
by its customers (by reselling AT&T services). Conversely, McCaw has
not offered long distance service to any other customers, for it has
not competed with AT&T in providing interexchange service to any
cellular customers (or landline customers) of RBOCs or any other
carriers. In short, no cellular or other customers today can choose
between AT&T and McCaw for their long distance service.\35\
\35\ The Department and Bell Atlantic/NYNEX suggest that there
is ``indirect'' competition between AT&T and McCaw long distance
services in the sense that any cellular customer who subscribes to
McCaw cannot obtain retail interexchange services from AT&T. But
there is no evidence that the existence of this attenuated and
indirect alleged ``competition'' had any effect on the price of long
distance services offered by McCaw, and, by affording McCaw
customers equal access to the carrier of their choice, the merger
allows McCaw customers a choice of long distance carriers for the
first time.
---------------------------------------------------------------------------
In this regard, rather than eliminate existing competition, it was
clear long before this suit was filed that the AT&T-McCaw merger would
create competition for McCaw cellular customers for the fist time by
enabling them to choose long distance services other than the AT&T long
distance services that McCaw resold under its own name. In particular,
shortly after the August 16, 1993 announcement of the merger, AT&T
committed to Congress and to the FCC that McCaw cellular systems would
offer each customer the ability to presubscribe to the interexchange
carrier of his or her choice and that the McCaw cellular systems would
be reconfigured so that local cellular service is provided, on an
unbundled basis, in geographic areas that are always comparable, and
generally identical, to those applicable to the RBOCs under the MFJ.
See p. 17 & n.24, supra. In this regard, in approving the merger, the
FCC stated that it expected AT&T to comply with these commitments,\36\
and the FCC relied on the increased choices that McCaw cellular
customers would thereby receive in finding that the public interest
would be ``served'' by the merger.\37\
\36\ See FCC Order, para. 70.
\37\ See FCC Order, para. 57.
---------------------------------------------------------------------------
Second, even if AT&T and McCaw had previously competed, AT&T
submits that the Department could not have proven at trial that the
merger could lessen long distance competition in a ``cellular long
distance service market'' or otherwise. The reality is that AT&T and
other long distance carriers provide the same long distance services at
the same price to landline and cellular long distance customers.
Because McCaw provides less than 0.1% of long distance services
nationally and does so by reselling AT&T service, there is no
possibility that the AT&T-McCaw merger would increase the price or
reduce the output of long distance services used by cellular or other
customers. In particular, even if AT&T could attempt to increase long
distance prices to cellular customers alone, those customers could
readily turn to other long distance carriers, including carriers that
today serve only landline customers. These facts both show that there
is no ``cellular long distance market'' and establish, in all events,
that there is no threat to competition.
The Department's suggestion that there is a separate ``cellular
long distance market'' rests on the ground that cellular customers pay
a premium for mobility--an airtime charge of up to 40 cents per minute
for use of the cellular system, which is incurred whenever the customer
places or receives any call, be it long distance or local. However,
that is the charge imposed on the customer by the cellular system, and
the long distance rates charged by long distance carriers for long
distance service are the same, regardless of whether the customer
accesses a long distance network from a cellular phone or from a
landline phone. Thus, the Department's suggestion ultimately rests on
the ground that the demand of cellular customers is less elastic than
that of landline customers: i.e., that even though cellular customers
do not pay higher rates for long distance calls than do landline
customers, cellular customers may well be willing to do so.
However, even if true, that does not establish that the cellular
subclass of all long distance customers is a separate market. All
services and products (be they corn flakes or long distance) are used
by subclasses of customers who would be willing to pay more than the
market rate, but these subclasses of customers do not constitute
separate
[[Page 49874]]
antitrust markets unless suppliers could in fact single them out to
charge higher prices.\38\ There has been no allegation that long
distance carriers could charge higher prices for calls originating on
cellular telephones, and the fact that none do (despite the less
elastic demand of these customers) is potent evidence that charging
them higher rates is infeasible for regulatory, practical, and other
reasons.\39\
\38\ See Department of Justice Federal Trade Commission
Horizontal Merger Guidelines, 4 Trade Reg. Rep. (CCH) para. 13,104,
Sec. 1.12 at 20,573 (1992) (``Merger Guidelines'').
\39\ See AT&T-McCaw FCC Proceeding, AT&T's and McCaw's Response
to Comments on Hart-Scott-Rodino Materials (July 1, 1994), Affidavit
of Robert D. Willig and B. Douglas Bernheim: An Analysis of the
Alleged Anticompetitive Effects of the AT&T-McCaw Combination, pp.
12-13.
---------------------------------------------------------------------------
More fundamentally, such price increases could not be maintained
because cellular customers receive the same long distance services
provided to landline customers. Even if AT&T had a monopoly on long
distance calling by cellular customers, it could not impose even a
``small but significant and nontransitory increase in price,'' for
cellular customers (or carriers) could then subscribe to the long
distance services used by landline customers. The reality is that
because the same long distance services are used by landline and
cellular carriers alike, any long distance carrier can easily supply
interexchange services to cellular systems, and would do so if
incumbent long distance providers sought to raise prices above
competitive levels. In turn, because McCaw represents less than 0.1% of
total long distance calling and was indistinguishable from hundreds of
other resale long distance carriers,\40\ the merger of AT&T and McCaw
would not have any effect on competition in long distance markets or on
the price or output of long distance services used by cellular or any
other customers even if AT&T and McCaw had competed, as they had not.
Indeed, in this circumstance, the Department's Merger Guidelines,\41\
the nation's antitrust authorities,\42\ and judicial decisions \43\ all
agree that a merger threatens no harm to competition.
\40\ Indeed, as the FCC found, McCaw was far less likely to
develop into a major facilities-based long distance carrier than
other resellers. McCaw's current debt of $5.7 billion (and debt
ratio of over 70%), its need to raise over $3 billion in 1995 merely
to retain some of its most important properties, and its need to
raise additional untold billions to acquire PCS licenses all made it
improbable in the extreme that McCaw ``would be able to embark on
any large-scale investment in interexchange facilities in the
foreseeable future.'' FCC Order, para. 30 & n.73.
\41\ See Merger Guidelines, Sec. 3.0 at 20,573 (where entry is
easy, ``the merger raises no antitrust concern and ordinarily
requires no further analysis'').
\42\ See, e.g., Phillip E. Areeda, Herbert Hovenkamp & John L.
Solow, IIA Antitrust Law 257 (1995) (``Of course, whichever market
definition is employed, relative ease of entry by other firms should
always be taken into account. The one course that would be clearly
wrong would be to define the market as A alone while ignoring the
ease of entry from B producers'').
\43\ See, e.g., Rothery Storage & Van Co. v. Atlas Van Lines,
Inc., 792 F.2d 210, 218 (D.C. Cir. 1986) (``Because the ability of
consumers to turn to other suppliers restrains a firm from raising
prices above the competitive level, the definition of the `relevant
market' rests on a determination of available substitutes'');
Vollrath Co. v. Samni Corp., 9 F.3d 1455, 1461-62 (9th Cir. 1993)
(``No matter how the market is defined * * * the ease of entry into
it and the number of potential participants on every level of it
abundantly demonstrates that [market power] would never be
possible'').
---------------------------------------------------------------------------
Finally, in all events, the provisions of the Proposed Decree
constitute a palpably reasonable settlement of the Department's claims
and are in the public interest. They impose equal access,
nondiscrimination, and antibundling requirements that go considerably
beyond the voluntary commitments that AT&T made. They require the
balloting of all existing customers; they prohibit any wide area
calling plans in which discounted rates are offered only when local and
long distance services are ``bundled'' through wide area calling plans
or otherwise; and they contain detailed other provisions designed to
afford all interexchange carriers an equal opportunity to serve McCaw
customers. These provisions reasonably assure that McCaw customers will
hereafter have choices other than the AT&T long distance services that
McCaw has resold these customers and that all interexchange carriers
will have access to McCaw's cellular customers.
B. The Proposed Decree Represents a Reasonable Settlement of the
Department's Vertical Manufacturing Allegations
The other allegation advanced in the Department's Complaint is that
the merger could lead AT&T to use its position as a cellular equipment
supplier to engage in predatory conduct that could impede competition
in certain local cellular service markets: i.e., those in which McCaw
competes with a cellular carrier that uses AT&T cellular equipment. In
advancing this claim, the Justice Department acknowledged that
telecommunications manufacturing generally, and cellular equipment
manufacturing in particular, are intensely competitive businesses in
which AT&T and other manufacturers are dependent on the RBOCs, GTE, and
other LECs, and in which a carrier has a choice of multiple vendors
when it is installing or replacing (``swapping out'') a system. See pp.
17-23, supra.
However, the Department claims there is a short-term interim period
in which individual LECs are nonetheless dependent on AT&T's
manufacturing unit for certain essential inputs to their cellular
service and that the merger would give AT&T-McCaw the ability and
incentive to exploit this short term ``monopoly power'' to disadvantage
these companies in those markets where they compete with McCaw. In
particular, the Department alleged that (1) those RBOCs and GTE that
purchased AT&T cellular systems (i.e., MTSOs and cell sites) in fairly
recent years would incur such substantial costs if they sought to
replace this AT&T equipment in whole or in part that they are ``locked-
in'' to AT&T for upgrades to these systems during an interim period,
and (2) the merger would give AT&T the incentive to exploit this lock-
in by charging RBOCs inflated prices for the new cell sites and
switching software needed to expand or enhance their systems, by
providing them inferior service, by sharing their confidential
information with McCaw, or by discriminating in favor of McCaw.
It was patently reasonable for the Department to settle these
claims under the provisions of the Proposed Decree. The competitive
theories are exceedingly tenuous ones, and the Department, in AT&T's
view, could not have proven a violation of Section 7 of the Clayton Act
at trial. In all events, the Proposed Decree contains prophylactic
injunctions--backed by unusual and severe sanctions--that would
prohibit each of the kinds of predatory misconduct that the Department
fears, that further would reduce the alleged lock-in, and that thus
reduce even the tenuous risks of predatory conduct that harms
competition.
The Risks of Competition Harm Were Virtually Nonexistent Even in
the Absence of a Decree. Foremost, the Department's allegations
represent an exceedingly novel theory for challenging a vertical
merger. The theory is not supported by the Department's merger
guidelines.\44\
[[Page 49875]]
Professors Lawrence Sullivan, Robert Willig, and Douglas Bernheim
submitted testimony that rejected the hypothesized harms to
competition.\45\ Further, this basic theory was rejected as a matter of
law in the only case in which it has been raised under Section 7 of the
Clayton Act: Fruehauf Corp. v. FTC, 603 F.2d 345 (2d Cir. 1979).
\44\ The Department's guidelines provide for challenges to
vertical mergers in only three narrow circumstances, none of which
is present here. The first is when the vertical merger would
substantially raise entry barriers because two markets would (as a
consequence of the merger) be so integrated that entrants to one
market would also have to enter the other market simultaneously. See
U.S. Dept. of Justice 1984 Merger Guidelines Sec. 4.21 (reprinted in
4 Trade Reg. Rep. (CCH) para. 13,103 (1984)). The second is where
the vertical merger would facilitate collusion in an upstream market
either by permitting vertically integrated manufacturers more easily
to monitor price in retail markets or by eliminating a particularly
disruptive buyer in a downstream market. See id., Sec. 4.22. The
third is where the vertical merger involves a regulated monopoly
utility and would enable it to evade rate regulation. See id.,
Sec. 4.23.
\45\ See AT&T-McCaw FCC Proceeding, AT&T-McCaw Opp., Affidavit
of Lawrence A. Sullivan, pp. 2-3, 6-11, 17-19, 22-24; id., Affidavit
of Robert D. Willig & B. Douglas Bernheim: An Analysis of the
Alleged Anticompetitive Effects of the AT&T-McCaw Combination, pp.
36-55.
---------------------------------------------------------------------------
Fruehauf concluded that even if a manufacturer in an otherwise
competitive market will have market power over the supply of particular
essential products during a short time period (there due to an assumed
shortage), a vertical merger cannot be found to create a ``reasonable
probability'' of harm to competition in violation of Section 7 of the
Clayton Act \46\ based merely on the theory that the merger gives the
manufacturer an incentive to use that power to discriminate in favor of
a merger partner and against its competitors. 603 F.2d at 355. To the
contrary, the Second Circuit held that it was ``highly unlikely'' that
the manufacturer would then engage in such opportunistic misconduct,
for it would recognize that (1) The other customers could thereafter
``retaliat[e]'' and ``could cause it greater economic harm'' by
``shifting to competing suppliers not only their [future] purchases of
the [allegedly `locked-in' product] but of other products presently
bought from [the manufacturer],'' and (2) such predatory conduct
``would invite antitrust damage actions.'' Id. at 355. In this regard,
AT&T is aware of no case that supports challenging a vertical merger on
such grounds.\47\
\46\ It is well settled that a merger cannot violate Section 7
unless there is a ``reasonable probability'' that it will ``lessen
competition'' (i.e., harm consumers) in a relevant market and that a
``mere possibility'' of these harms is insufficient. See, e.g.,
Brown Shoe Co. v. United States, 370 U.S. 294, 323 & n.39 (1962).
\47\ In prior challenges to the merger, RBOCs have relied on the
Supreme Court's decision in Eastman Kodak Co. v. Image Technical
Services, Inc., 112 S. Ct. 2072 (1992). But Kodak was not a case to
enjoin a merger under Section 7 of the Clayton Act on the theory it
was likely to lead to harm to competition. Rather, it was a case
under Sections 1 and 2 of the Sherman Act in which an independent
photocopy repair service firm challenged a tie-in in which Kodak had
concededly in fact excluded independent firms from the equipment
repair market by refusing to supply them spare parts for Kodak
copying machines. The RBOCs ironically have relied on the Supreme
Court's rejection (by a vote of 6-3) of Kodak's attempt to defend
against otherwise unlawful exclusionary conduct by arguing that, as
a matter of law, no consumer could be harmed by Kodak's conduct.
Kodak had contended that the market for original sales of
photocopiers was competitive, and that interbrand competition in
this market meant, as a matter of law, that Kodak could not have
market power in a separate ``aftermarket'' for repair of machines
and could thus not use that power to exploit consumers. The Supreme
Court held that while this latter claim might be correct as a matter
of fact, it could not be sustained purely as a matter of law ``in
the absence of any evidentiary support.'' Id. at 2087. The Supreme
Court reasoned that while ``large-volume, sophisticated purchasers''
could be presumed to take steps to protect themselves from
exploitative behavior in the ``aftermarket,'' smaller,
unsophisticated consumers might lack the necessary information and
buying power to take protective steps before they need repairs and
will ``tolerate some level of service-price increases before
changing equipment brands'' ``[i]f the cost of switching is high.''
Id. at 2086-87.
Here, the only relevance of Kodak is that it undercuts any
``lock-in'' claims. RBOCs epitomize the large sophisticated
customers who can, under Kodak, be presumed to protect themselves
from exercises of ``market power'' after initial purchases are made.
Indeed, RBOCs vigorously negotiate supply contracts prior to large
purchases and use threats of complete or partial swap-outs to
renegotiate those supply contracts both before and after the AT&T-
McCaw merger was announced.
---------------------------------------------------------------------------
In this case, AT&T's manufacturing subsidiary has far less ability
to engage in the hypothesized misconduct than did the firm in Fruehauf
and radically greater competitive economic and legal incentives not to
do so. Indeed, this case is a much clearer one than Fruehauf in that
the provisions of the Proposed Decree preclude any reasonable risk of
the competitive harms that the Department initially feared and palpably
are within the broad reaches of the public interest.
The Claimed ``Lock-In'' Is Tenuous, and, in AT&T's View,
Nonexistent. First, while AT&T would have overwhelming economic and
legal incentives not to engage in the hypothesized conduct even if it
could, AT&T will not have anything remotely approaching ``monopoly''
power over ``essential inputs'' required by RBOCs or other LECs even in
the immediate future. In this respect, RBOCs epitomize large
sophisticated purchasers who can and do protect themselves against
exploitative behavior in ``aftermarket'' transactions and who have done
so since the merger. Eastman Kodak, 112 S. Ct. at 2086-87.
Further, the assertions that RBOCs and other cellular equipment
customers are ``locked-in'' to AT&T is, in AT&T's view, unsustainable
and could not have been proven at trial. It is true that some RBOCs
(and GTE) acquired AT&T cellular equipment in the past and that they
will need to purchase more cellular equipment to expand and improve
their systems in the future. However, there is no basis for any
allegation that the costs of switching cellular infrastructure
equipment suppliers are so prohibitive that these customers are
absolutely locked-in to AT&T and have no choice except to buy new cell
sites, MTSOs, and upgrades from it in existing markets.
The short answer to this allegation is that cellular carriers can,
and regularly do, swap out an incumbent equipment supplier when they
are dissatisfied with its performance, even when the equipment had been
recently purchased. See pp. 19-21, supra. RBOCs and other LECs use
threats of complete swap-outs or partial swap-outs (through use of IS-
41 interface) to extract more favorable terms from AT&T and other
independent suppliers. See pp. 21-22, supra. This practical experience
refutes any theoretical claim that switching costs are ``prohibitive''
or that it is harmful to competition for cellular carriers to incur
those costs. These are grounds on which the FCC rejected the RBOC's
lock-in claims.\48\
\48\ The FCC stated as follows:
[W]e are unpersuaded by the BOCs' arguments about ``lock-in'',
which occurs when a cellular service provider is unable to switch to
the equipment of a different manufacturer for technical or financial
reasons. As an initial matter, we find the argument unpersuasive
because, at the same time the BOCs complain of the technical and
financial impediments to switching equipment suppliers in their
systems, they allege that AT&T/McCaw will replace McCaw's Ericsson
equipment with AT&T equipment. If the difficulties of switching are
so great, we doubt that AT&T/McCaw will be able to rush to switch
equipment. On the other hand, if AT&T/McCaw could switch so readily,
we find it difficult to believe that the BOCs would have much
greater difficulty in switching their systems if AT&T/McCaw product
or product servicing quality dropped. More importantly, the advent
of the recently-adopted IS-41 standard of the Telecommunications
Industry Association, which facilitates the use of different
suppliers' equipment within the same cellular system, should reduce
the cost of switching cellular equipment providers and,
consequently, any potential ``lock-in'' effect. Finally, affiants on
both sides of the debate agree that the merger of AT&T and McCaw
will not enhance AT&T's ability to discriminate or exploit ``lock-
in.''
FCC Order, para. 98 (footnotes omitted).
---------------------------------------------------------------------------
In addition, the facts on which a lock-in is claimed will
themselves dissipate rapidly over time. Industry efforts are underway
to establish an open and satisfactory cell-site-to-MTSO interface that
will enable cellular customers to obtain cell sites and switches from
different vendors (see pp. 22-23, supra), and the IS-41 interface
(allowing incompatible switches in a single market) has recently been
improved so that virtually all existing features can be handed off with
calls. See p. 21, supra. Further, with each passing day, recently-
purchased cellular systems are further depreciated, and the other
[[Page 49876]]
provisions of the Proposed Decree (facilitating re-location and sales
of a carrier's cell site equipment and requiring AT&T's cooperation in
a partial swap-out) will further reduce existing costs of switching
suppliers. A procompetitive merger cannot be held unlawful and enjoined
based on short term conditions that are dissipating.
Competition Otherwise Precludes the Hypothesized Predatory Conduct.
Even if AT&T's manufacturing arm could have some degree of ``market
power'' over certain customers in an interim period, it is even clearer
here than it was in Fruehauf that it is ``highly unlikely'' that the
merger will lead to predatory misconduct that harms competition in
local wireless markets. The competition that AT&T's manufacturing unit
faces in equipment manufacturing generally--and its dependence on RBOCs
and GTE--creates a greater inhibition on discrimination against those
firms than was present in Fruehauf.
Quite simply, competition means that AT&T's manufacturing arm has
overwhelming incentives not to engage in any conduct that degrades any
customer's service or that discriminates in favor of McCaw--or that
even creates an appearance of such misconduct. The consequences of such
conduct for AT&T's manufacturing arm would not merely be severe, but
devastating. It would not merely assure AT&T's replacement with another
cellular equipment vendor at the end of the claimed ``lock-in'' period.
Cellular carriers can and do swap out a vendor whenever they are
dissatisfied with its performance, regardless of whether the incumbent
vendor is thought to have engaged in actionable or provable misconduct
(see pp. 19-20, supra), so AT&T would then risk immediately being
replaced in those markets. Further, as in Fruehauf, the discriminatory
misconduct would also lead RBOCs and other customers to ``retaliat[e]''
by refusing to purchase other products that they ``presently'' purchase
from AT&T. Compare Fruehauf v. FTC, 603 F.2d at 355 (emphasis added).
For example, if such discrimination by AT&T were even suspected, RBOC
wireless subscribers would refuse to buy AT&T's PCS equipment (which
they would use to compete with McCaw in many markets) and which should
be a multibillion dollar market given the imminent issuance of PCS
licenses. Even more significant, RBOCs and GTE could then also buy less
landline equipment.
In this regard, in contrast to Fruehauf, moreover, McCaw's
competitors are not ``insubstantial'' customers of AT&T Network
Systems. Compare Fruehauf, 603 F.2d at 354. To the contrary, McCaw's
competitors (RBOCs and GTE) accounted for some $6 billion of Network
Systems' $10 billion in 1994 revenues, and it would be devastating if
any significant portion of these sales were lost to competitors.
That market forces preclude any substantial concerns was explained
in detail by the FCC when it rejected the RBOCs' claims that the
competitiveness of equipment manufacturing markets creates potent
disincentives for any of the conduct that the RBOCs purport to fear:
We believe that market forces will largely eliminate AT&T's
ability to discriminate unreasonably. AT&T/McCaw cellular affiliates
by themselves are not a large enough consumer of AT&T products to
make it profitable for AT&T/McCaw to provide poor products or
service to other customers, especially customers with the market
power and sophistication of the BOCs, who have the choice of buying
from other cellular equipment suppliers. Moreover, if unhappy with
AT&T/McCaw's cellular products or servicing of those products, the
BOCs also could shift their purchases of wireline network equipment
to other suppliers. These threats to AT&T/McCaw's equipment sales
create a powerful incentive for AT&T/McCaw to offer all of its
cellular equipment customers, not just its cellular affiliates,
quality products and services. As we have previously stated, AT&T's
sales could otherwise decline as the fact of discrimination became
known.\49\
\49\ FCC Order, para. 97 (footnotes omitted). For the same
reasons, the FCC found it unlikely that AT&T Network Systems would
engage in the misuse of proprietary information. Id., para. 112.
On that basis, the FCC found that the ``market forces combined with the
threat of litigation [if administrative duties are breached] will
adequately deter AT&T/McCaw from discriminating in favor of its
cellular affiliate, even in the subtle ways described by [the RBOCs],''
and that the merger, as conditioned by the FCC, cannot realistically
---------------------------------------------------------------------------
have any adverse effect on competition.\50\
\50\ FCC Order, para. 100.
---------------------------------------------------------------------------
The Proposed Decree's Provisions Enjoin the Hypothesized
Misconduct. The provisions of the Proposed Decree reduce even the
slight risks that exist. It requires that McCaw be maintained as a
separate corporation with separate officers and personnel who cannot
delegate responsibility for the operation of McCaw's cellular systems
to AT&T and that McCaw obtain services and products from AT&T under
filed tariffs or by contract. Further, the Proposed Decree contains
detailed provisions enjoining each kind of predatory misconduct that
RBOCs purport to fear.
First, the Proposed Decree requires AT&T's manufacturing subsidiary
to treat its customers in the same way it would have if no merger had
occurred. It requires AT&T to continue to provide each of its existing
equipment customers with additional equipment, upgrades, technical
support, maintenance, spare parts, and all other related products and
services ``in accordance with the same pricing and other business
practices that prevailed prior to August 1, 1993'' (a date before the
merger was announced). Sec. V(B)(1) (emphasis added).\51\ Any deviation
from pre-merger practices in the timing of delivery of cell sites, in
the provision of upgrades and support, and in the manner in which
prices are determined would violate this prohibition.
\51\ AT&T is further prohibited from ``discriminat[ing] in favor
of McCaw * * * in the way in which such services or products are
made available'' to other cellular carriers. Sec. V(B)(1). And if
AT&T discontinues the offering of any such product or service, it is
required to seek to arrange an alternative source of supply or
provide the carrier with whatever licenses and technical information
are required to provide the product or service. Sec. V(B)(2).
---------------------------------------------------------------------------
Second, the Proposed Decree prohibits AT&T from discriminating
against McCaw's competitors in the development of new features and
functions. If AT&T develops new features or functions that are intended
for more than one customer prior to the date the AT&T-McCaw Decree is
entered, it must make them available to all affiliated customers at the
same time as it does to McCaw. Sec. V(C)(1). If AT&T develops features
or functions for McCaw that are technologically applicable only to
McCaw's network or proprietary to McCaw, it must provide all other
carriers with the opportunity to contract for such features and
functions on the same or more favorable terms. Sec. V(C)(2-3).
Third, the Proposed Decree contains detailed protections against
any misuse of competitive information that AT&T might obtain in the
course of providing equipment to unaffiliated cellular carriers. It
requires AT&T to establish separate sales and marketing teams to serve
McCaw and unaffiliated cellular carriers and separate equipment
development teams for proprietary equipment development work.
Sec. V(A)(4). It prohibits AT&T from disclosing ``Nonpublic
Information'' of an unaffiliated equipment customer ``for any reason''
to McCaw (including any system in which McCaw has only a minority
interest), to any McCaw personnel, to any person marketing any McCaw
service or AT&T telecommunications service, or to any of the marketing,
sales, or equipment
[[Page 49877]]
personnel that market to or perform development work for AT&T or McCaw.
Sec. V(A)(1).
Fourth, the Proposed Decree requires AT&T to facilitate the
replacement of its equipment, in whole or in part, with integrated
systems of switches and cell sites of competing manufacturers if AT&T's
existing customers wish to do so. AT&T must waive any contractual
provisions granting it rights of prior notice or consent if the
customer chooses to redeploy AT&T equipment to a new location, and must
provide all reasonably necessary technical assistance and cooperation
to help the customer replace its equipment and operate AT&T's system in
conjunction with systems of AT&T competitors in whole or in part.
Sec. V(D).
The AT&T-McCaw Decree contains elaborate compliance and enforcement
provisions. For example, in addition to penalties for imprisonment or
fines for contempt of court, the Proposed Decree provides that if the
Department determines that AT&T has violated any of the Decree's
requirements in its dealings with McCaw cellular competitors who
purchased AT&T equipment prior to the Decree's entry, the Department
will have the authority to require AT&T to ``buy back'' that equipment
at the original purchase price, less depreciation calculated on the
straight line basis with useful lives of ten years for switches and
eight years for all other hardware--irrespective of any shorter
depreciation schedule actively used by any carrier. Sec. V(E). The
Department would have ``sole and unreviewable discretion'' to make that
determination, and AT&T ``irrevocably waive[s] any right it may have to
appeal, contest, or otherwise challenge any adverse determination.''
Id.
Bell Atlantic/NYNEX appear to concede that these provisions mean
that it is improbable that AT&T's manufacturing or other personnel
would engage in any misconduct that is detectable and provable. They
are thus reduced to suggesting that AT&T's manufacturing arm could
engage in subtle misconduct that would degrade their cellular service
but that would not be ``detectable.'' However, anything that degrades
an RBOC's cellular service is by definition detectable by it (otherwise
it could have no competitive consequences), and anything that is
detectable in this way can be the subject of complaints and potentially
of proof and adverse findings. Indeed, the only way that AT&T
conceivably engage in misconduct that would degrade an RBOC's service
in markets where it competes with McCaw, but that would not be
provable, would be if AT&T engaged in the identical misconduct in every
market in the country in which AT&T supplies cellular equipment,
including the vast majority of AT&T-equipped systems that do not
compete with McCaw. See Appendix (attached hereto). Obviously, AT&T has
powerful disincentives to engage in such conduct in these other areas
for no benefits to McCaw could offset harm to AT&T.
Procompetitive Effects of the Merger. For all these reasons, the
provisions of the Proposed Decree--and sanctions availble--reduce the
already tenuous risks that AT&T would engage in the hypothesized
misconduct. See Fruehauf, 603 F. 2d at 355; Emhart Corp. v. USM Corp.,
527 F.2d 177 (1st Cir. 1975). Furthermore, the Department was also
entitled (and required) to weigh the fact that, in addition to the
remote threat that AT&T could use its manufacturing position to impede
competition in local cellular markets, the merger would otherwise
promote competition and benefit consumers in these same local cellular
markets and potentially landline services as well. See pp. 2-3, 24,
supra. In short, there is no question that the Department acted
rationally in not seeking to enjoin an otherwise procompetitive merger
and in instead settling its vertical manufacturing claim.
II. The Ad Hoc IXC's and RBOCs' Claims That the Proposed Decree Should
Be Modified To Create ``Parity'' Are Outside the Scope of This
Proceeding and Constitute Hypocritical Attempts To Nullify
Procompetitive Features of the Merger
The foregoing discussion establishes that, if anything, the
provisions of the Proposed Decree go far beyond what is reasonable to
address the Department's concern that the combined AT&T-McCaw could use
their positions in cellular services or in manufacturing to harm
competition in adjacent markets. Nothing more need be said to establish
that the Proposed Decree is in the public interest.
However, four of the RBOCs and a group of switchless resellers of
interexchange services (the ``Ad Hoc IXCs'') claim that the Proposed
Decree is contrary to the public interest because it does not contain
other provisions that address a different set of purported competitive
concerns that these commentors have, but that the Department does not.
These RBOCs claim that AT&T-McCaw could enjoy ``advantages'' over their
cellular businesses by reason of the MFJ's restriction on RBOCs and
AT&T's putatively ``dominant'' position in interexchange services. On
this basis, the RBOCs contend that the Proposed Decree will not be in
the public interest unless ``parity'' is achieved by (1) barring AT&T-
McCaw from using names, addresses, and usage information of AT&T's long
distance customers to market cellular services to any individuals who
are cellular customers of RBOCs, and (2) granting the RBOCs' motion for
``generic wireless'' relief from the MFJ's long distance restriction
and imposing the same equal access restrictions on AT&T-McCaw as apply
to the RBOCs cellular systems under the MFJ. Similarly, the Ad Hoc IXCs
appear to fear that the combined AT&T-McCaw could extend AT&T's long
distance ``dominance'' by converting McCaw's cellular systems into
alternatives to the landline exchange monopolies.
The short answer to these claims is that they go beyond the
violations alleged in the Department's Complaint and they therefore
cannot be raised in this Tunney Act proceeding. See 15 U.S.C.
Sec. 16(e). The Department's Complaint alleged only that the combined
AT&T-McCaw could use power in manufacturing and cellular services to
impede competition in adjacent markets. Although RBOCs have previously
raised (and the FCC rejected) it, the Complaint does not make the
allegation that the RBOCs and Ad Hoc IXCs make: that AT&T's putatively
dominant position in long distance services could give it advantages in
cellular markets. The Department's failure to pursue these claims is
not reviewable in a Tunney Act proceeding.\52\
\52\ See U.S.C. Sec. 16(e); S. Rep. No. 298, 93d Cong., 1st
Sess. 3 (1973); In re IBM Corp., 687 F.2d 591 (2d Cir. 1981)
(Justice Department's decision to dismiss competitive claims is not
reviewable under the Tunney Act).
---------------------------------------------------------------------------
Further, even if the Department's decision not to pursue these
claims could be reviewed, there is not the slightest doubt that the
Department's determination was reasonable and, indeed, was compelled by
the antitrust laws. Because AT&T neither has a bottleneck over long
distance services nor controls any facilities or information that is
essential to cellular carriers or their customers, the four RBOC's and
Ad Hoc IXCs' claim is not that AT&T has power over them or their
customers that it could exercise to distort free choice in cellular
markets. Rather, it is that AT&T's position in long distance RBOCs
``[b]ecause of MFJ requirements'' (Bell Atlantic/NYNEX, p. 10), that
the RBOCs may lose certain customers and profits because of these AT&T
advantages, and that the ``public interest'' therefore requires
``parity.''
[[Page 49878]]
However, it is elementary that ``the purpose of antitrust policy *
* * is not to make competitors equal, or to avoid all forms of
advantage; the antitrust laws are for the protection of competition,
not competitors.'' Environmental Action, Inc. v. FERC, 939 F.2d 1057,
1061 (D.C. Cir. 1991). As Judge Greene has elsewhere held, the
antitrust laws are not intended ``to assure positive results for
[individual] competitors'' but to ``protect the competitive process.''
United States v. Western Electric, 698 F. Supp. 348, 363 (D.D.C. 1988).
Further, it is sheer hypocrisy for the RBOCs to complain about a
lack of parity and about the MFJ. The Department has previously found
that the MFJ has not competitively disadvantaged the RBOCs in competing
with McCaw.\53\ To the contrary, the RBOCs' exchange monopolies have
given their cellular businesses immense regulatory and other advantages
over McCaw and other nonwireline carriers, and the RBOCs' newly-found
interest in ``parity'' is simply an attempt to nullify legitimate
efficiencies of the merger that could offset some of the advantages
that the RBOCs have received from their bottleneck monopolies. In this
regard, Judge Greene and now even the FCC have repeatedly rejected the
RBOCs' claims that the MFJ's restrictions could either be removed from
the RBOCs (or be imposed on firms that have no bottleneck monopolies)
in the name of ``parity.''
\53\ See United States v. Western Elec. Co., Civ. No. 82-0192
(D.D.C.), Memorandum of the United States in Response to the Bell
Companies' Motions for Generic Wireless Waivers, pp. 18-19 (July 25,
1994) (``DOJ Generic Wireless Memorandum'').
---------------------------------------------------------------------------
In this regard, all of the specific claims that the RBOCs and Ad
Hoc IXCs advance constitute challenges to procompetitive features of
the merger.
A. The RBOCs' Proposal for a Marketing Restriction Is Both Antithetical
to the Antitrust Laws and Hypocritical
The four RBOCs' principal claim is that the Proposed Decree would
be anticompetitve and contrary to public interest unless a new
marketing/solicitation restriction were added that barred AT&T-McCaw
from using the names, addresses, and long distance usage information of
AT&T's long distance customers to market cellular service to any
individual who is also an existing cellular customer of an RBOC. E.g.,
SBC, pp. 6-15; Bell Atlantic/NYNEX, pp. 10-12. The RBOCs assert that
AT&T-McCaw would otherwise obtain ``anticompetitive'' advantages from
its ``dominance'' in long distance service, that the customer
information in question is the RBOCs' ``property'' which the Proposed
Decree (and the MFJ) elsewhere protect, and that it was thus
``inexplicable'' and ``inconsistent'' for the Department to allow AT&T-
McCaw to use this information.
These claims are not merely baseless. They are transparent attempts
to prevent competition for RBOC customers and to preserve advantages
that the RBOCs derive from their control over bottleneck local
telephone monopolies.
The Claims Are Antithetical to Antitrust. First, the marketing
restrictions that the RBOCs seek are antithetical to the antitrust
laws. As courts have uniformly held and as the RBOCs have elsewhere
argued, the ability of a firm to offer new services (e.g., cellular) to
customers of its own services (e.g., long distance) is procompetitive
and beneficial to consumers. Here, moreover, the ability of AT&T-McCaw
to engage in this ``cross-selling'' is one of the principal ways in
which the merger would create genuine efficiencies and consumer
benefits that would offset advantages the RBOCs derive from their local
exchange monopolies.
In particular, AT&T provides an array of telecommunications
services and products to actual or potential cellular customers--long
distance services, cellular and other CPE, computers, and the AT&T
Universal Card (a combined telephone calling/credit card). The
relationships that AT&T has with these customers will enable the
combined AT&T-McCaw both to identify actual or potential customers of
cellular services and to inform them about AT&T cellular service at
very low cost: e.g., through inserts in billing envelopes, direct
mailings, or the like.\54\ In this regard, because AT&T has provided
high quality services, superior customer support, and attractive
prices, the AT&T brand is a strong warranty of quality, and there may
be many existing AT&T customers who would value receiving an ``AT&T
cellular service'' offering that same quality and who would choose to
do so if AT&T engages in this direct marketing to its customers.
\54\ Contrary to the RBOCs' suggestions (see SBC, Affidavit of
John T. Stupka, para. 7), the Proposed Decree prohibits AT&T from
providing long distance services on more favorable terms to cellular
customers of McCaw than to other cellular customers (see
Sec. IV(F)(1)), so AT&T could not make ``targeted offers'' for long
distance services that would not be available to RBOCs' cellular
customers.
---------------------------------------------------------------------------
At the same time, contrary to the RBOCs' suggestions (e.g., Bell
Atlantic/NYNEX, pp. 10-11), such marketing efforts would not and could
not themselves cause any customer to switch to AT&T. Rather, they would
merely be an efficient, low-cost way for AT&T to give its own long
distance (and other) customers information about AT&T cellular service
and the choice whether to use it or not. Those customers who are
satisfied with the RBOC cellular service, who believe it will be
improved, or who otherwise do not regard the AT&T-McCaw cellular
offering as more attractive would say ``no'' to the AT&T offer.
Conversely, those customers who value dealing with AT&T, who were
dissatisfied with RBOCs, and who perhaps have dealt with them only
because of doubts about McCaw, might say ``yes'' to the AT&T offer. In
either event, consumers will benefit from the solicitation because
additional choices will have been extended to them efficiently and
because rivalry for their business will increase.
In this regard, these RBOCs have elsewhere admitted that they are
seeking to block these AT&T marketing efforts in order to protect the
RBOCs' customer bases and profit margins, not to benefit consumers and
competition. In particular, when NYNEX and Bell Atlantic unsuccessfully
sought this same restriction on AT&T-McCaw at the FCC, these RBOCs
claimed that the ``power of AT&T-McCaw brand'' and the ability to offer
cellular packages that contain this same warranty of quality could
cause the RBOCs to lose significant percentages (``10% to 25%'') of
their existing customers ``in the first year.'' \55\ These assertions
are likely hyperbole, for it is difficult to believe that even a
slothful monopolist could have offered such poor service and so
alienated its customers that so many would immediately switch to AT&T-
McCaw. However, the RBOCs have one and only remedy under the antitrust
laws if they have created such a situation. It is to compete on the
merits and to seek to retain customers, and to win back any that are
lost, by improving the quality of their cellular services, reducing
their price, or otherwise making their own cellular offerings more
attractive. That would benefit consumers, and it is extraordinary that
RBOCs would suggest that an antitrust court should seek to protect an
RBOC's customer base and profits from competition.
\55\ See AT&T-McCaw FCC Proceeding, Petition of NYNEX
Corporation and Bell Atlantic Corporation for limited
Reconsideration, p. 7 (Oct. 19, 1994).
---------------------------------------------------------------------------
Similarly, SBC makes the anticompetitive and paternalistic
assertion that many of its customers would be better off if they were
protected from competition because they spend ``as little [sic] as''
$100 a
[[Page 49879]]
month and are thus not ``sophisticated.'' SBC, p. 13. In particular,
SBC contends that these customers would not know to respond to AT&T's
solicitations by seeking better ``offers'' from competitors.\56\ Quite
apart from the fact that the antitrust laws reject this paternalism,
SBC ignores that the RBOCs are always free themselves to make these
``better offers'': e.g., by reducing the price or improving the value
of their services, by making ``counter offers'' to any customers who
seek to terminate cellular service to go elsewhere, or by making
targeted offers to ``win back'' customers who leave. Again, that is the
competition that the antitrust laws seek to foster, and SBC's argument
is an admission that it is seeking restrictions that would harm
consumers and diminish rivalry.
\56\ See Southwestern Bell v. FCC, Nos. 94-1637 & 94-1639 (D.C.
Cir.), Brief for Appellant SBC Communications Inc., p. 29 (Dec. 28,
1994).
---------------------------------------------------------------------------
It is for these reasons that federal courts have uniformly held
that restrictions on customer solicitations are alien to the antitrust
laws. For example, courts of appeals have held that the antitrust laws
cannot be used to enjoin or punish a firm's use of customer lists to
market services even when the lists may have been misappropriated from
a competitor in violation of state unfair competition laws \57\--as
AT&T's lists of its own long distance customers were not. These courts
hold that the customer solicitation ``enhance[s] rivalry rather than
reducing it,'' that it benefits consumers to receive additional
choices, and that while regulatory statutes and ``unfair competition
laws'' may place some constraints on these activities, the antitrust
laws cannot, for they are designed to protect competition, not
competitors.\58\
\57\ See, e.g., Northwest Power Products, Inc. v. Omark
Industries, Inc., 576 F.2d 83 (5th Cir. 1978) (rejecting claim that
it violated antitrust laws for dealer and new distributor to
conspire to take away plaintiff old distributor's customers by
hiring a contingent of its employees, together with a customer
list); accord Seaboard Supply Co. v. Congoleum Corp., 770 F.2d 367,
375 (3d Cir. 1985).
\58\ See Northwest Power Products, 576 F.2d at 88-91 (noting
that the challenged conduct, even if unfair, ``enhanced rivalry
rather than reducing it,'' and holding that ``the purposes of
antitrust law and unfair competition law generally conflict. The
thrust of antitrust law is to prevent restraints on competition.
Unfair competition is still competition and the purpose of the law
of unfair competition is to impose restraints on that competition.
The law of unfair competition tends to protect a business in the
monopoly over the loyalty of its employees and its customer lists,
while the general purpose of the antitrust laws is to promote
competition'') (emphasis added).
---------------------------------------------------------------------------
Indeed, courts have thus uniformly held that it raises no issue
under the antitrust laws when, as here, a large integrated firm uses
its own customer lists to market new services (like cellular) to
existing customers of its own services (like long distance). In
particular, it is well-settled that when no essential facilities are
involved, it is efficient and procompetitive for a large multi-product
firm to take advantage of its integration in the same way a smaller
multi-product firm would. See Berkey Photo, Inc. v. Eastman Kodak Co.,
603 F.2d 263 (2d Cir. 1979). On this basis, courts have held that it is
procompetitive and raises no issue under the antitrust laws when even a
local gas monopoly uses lists of its own gas customers to advertise and
market related products (there, gas vent dampers) because no essential
facilities are involved and the conduct constitutes a legitimate and
procompetitive efficiency of integration, not an abuse of monopoly. See
Catlin v. Washington Energy Co., 791 F.2d 1343, 1345-48 & n.1 (9th Cir.
1986) (rejecting claim of a group of suppliers of vent dampers that the
gas company ``should be barred from permitting its merchandising
division to use the list [of gas company customers] to advertise vent
dampers to the detriment of competit[ors] in the vent damper market'')
(internal quotation omitted).
In this regard, the RBOCs' contention that AT&T is a ``dominant''
long distance carrier with ``market power'' is both erroneous and
irrelevant. The claims are erroneous because the RBOCs' claims rest on
FCC findings that were made in 1982 and that have no current
validity.\59\ The reality is that AT&T faces up to 35 long distance
competitors in each RBOC cellular system. Whereas AT&T believes that
its share of cellular-originated long distance calling is not
materially different from its share of switched long distance calling
(currently 57.8% of minutes),\60\ the fact is that each AT&T long
distance customer freely chose AT&T in a competitive market. In all
events, the RBOCs' claims are irrelevant, for the foregoing cases
squarely hold that it is procompetitive and beneficial to consumers for
even ``the dominant firm in any market * * * [to] create demand for
[its] new products'' by marketing new services to its existing
customers.\61\
\59\ The RBOCs rely on the fact that AT&T is classified as a
``dominant'' carrier because the FCC previously found AT&T to
possess market power. However, AT&T was so classified in 1982. Since
that time, the FCC has eliminated price cap and other economic
regulations of AT&T's 800 and large business services (Baskets 2 and
3). See Competition in the Interstate Interexchange Marketplace, 6
FCC Rcd 5880, 5893-96, 5908 (1991) (Basket 3); id., 8 FCC Rcd 3668,
3671 (1993) (Basket 2). In addition, based on its finding of
``adequate competitive alternatives,'' the FCC recently announced
its intention to remove all commercial long distance services from
Basket 1. See Revisions to Price Cap Rules for AT&T Corp., CC Docket
No. 93-197, 1995 FCC LEXIS 250, para. 26 (Jan. 12, 1995). The FCC
has retained price cap regulation of AT&T's residential services
only because the FCC stated that it cannot determine (one way or
another) whether AT&T has market power in these segments of the long
distance market. See Competition in the Interstate Interexchange
Marketplace, 6 FCC Rcd at 5908 (``there are unresolved issues and
insufficient information in the record about the competitiveness of
Basket 1 operator services''); Price Cap Performance Review for
AT&T, 8 FCC Rcd 6968, 6970 (1993). Finally, AT&T has now shown that
it has no such market power and should be classified as
``nondominant.'' See Motion for Reclassification of American
Telephone & Telegraph Company as a Nondominant Carrier, CC Docket
No. 79-252 (FCC, filed September 22, 1993).
\60\ The FCC has reported that, in the third quarter of 1994,
some 71% of telephone lines were presubscribed to AT&T, but it has
only 57.8% of total minutes. The discrepancy reflects that customers
who make no, or few, long distance calls disproportionately select
AT&T, which gives it a higher percentage of presubscribed lines that
AT&T has of actual long distance calling. Similarly, whereas the
Department has found that in excess of 70% of cellular customers
select AT&T (Competitive Impact Statement, pp. 12-13), that figure
does not reflect the percentage of cellular-originated calls or
minutes that AT&T carries.
\61\ Foremost Pro Color, Inc. v.Eastman Kodak Co., 703 F.2d 534,
546 (9th Cir. 1983). Accord Berkey Photo, 603 F.2d at 273-76; Catlin
v. Washington Energy, 791 F.2d at 1345-48.
---------------------------------------------------------------------------
In this regard, whereas regulatory agencies have authority to adopt
solicitation restrictions, the FCC has also concluded that it promotes
competition and benefits consumers to allow AT&T to market other
products or services to its long distance customers. For example, at a
time in which AT&T's long distance market share was 90%, the FCC held
that AT&T could use lists of its long distance customers and their
usage information to market CPE and enhanced services to any customer
who did not notify AT&T that it did not wish to receive such
solicitations,\62\ and the FCC extended the same regulation to AT&T's
marketing of cellular service in the order approving the AT&T-McCaw
merger.\63\ In this regard, the FCC found that the ability of AT&T-
McCaw to engage in joint marketing and ``cross-selling'' is one of the
principal ways in which the merged entity can compete more effectively
with the local RBOC monopoly and that the RBOCs' ``parity for parity's
sake'' arguments are contrary to the Communications Act as well as the
antitrust laws.\64\
\62\ See Amendment of Section 64.702 of the Commission's Rules
and Regulations, 104 FCC 2d 958, 1089 (1986).
\63\ See FCC Order, para. 83.
\64\ See FCC Order, Paras. 32, 83.
---------------------------------------------------------------------------
The RBOCs' Claims Are Hypocritical. The RBOC pleas for ``parity''
are not only anticompetitive, but also hypocritical, for they are
simply seeking to preserve (and extend) advantages that the RBOCs
received because of their
[[Page 49880]]
local exchange monopolies. These monopolies meant that the RBOCs
received ``B'' Block cellular licenses at no cost in their franchised
monopoly territories, that they received one to three year headstart
monopolies over nonwireline competitors which guaranteed the RBOCs the
exclusive right initially to sign up the best cellular customers, and
that the RBOCs are able to ``piggy back'' (SBC, p. 12) on the local
exchange monopoly through use of common trade names and joint
advertisements and the receipt of monopoly financing. See pp. 10-12,
supra. These factors help explain why every significant nonwireline
carrier (save McCaw) was forced to sell out to RBOCs, and why McCaw has
the $5.7 billion debt, and marketing weaknesses, that led to the
merger. See pp. 12-13, supra. The RBOCs previously defended this lack
of ``parity.'' See pp. 10-13, supra.
In this regard, if there were any basis for Bell Atlantic/NYNEX's
prediction that they could immediately lose significant numbers of
customers to AT&T-McCaw, the only possible explanation would be that
these RBOCs have acquired and retained many of their customers solely
because of the foregoing advantages. In particular, that prediction
could be accurate only if these RBOCs had obtained and retained these
customers solely by exploiting fears about McCaw's weaknesses and
competence and the benefits of dealing with large, experienced
telecommunications carriers, not because these RBOCs in fact provided
high quality and competitively-priced services.
Further, the RBOCs' proposal is hypocritical for the added reason
that they have elsewhere argued the precise opposite of what they here
urge. As noted above, there are conditions in which the FCC has the
authority to impose the kinds of marketing/solicitation restrictions
that RBOCs seek, and the RBOCs have opposed the adoption or
continuation of these restrictions on the RBOCs' offerings. The RBOCs
have argued to the FCC on the basis of Catlin and other authorities
cited above that it is procompetitive for RBOCs to be free to use their
monopoly local exchange customer lists and usage information to market
competitive enhanced services and CPE to their customers.\65\ Indeed,
the RBOCs succeeded, on that basis, in overturning FCC regulations that
previously barred these direct solicitations.\66\ In each instance, the
RBOCs are able to market their CPE and enhance services to local
exchange customers who currently use other vendors for those
competitive offerings and who are, in the RBOCs' words, a ``joint''
customers of an RBOC and an independent CPE and enhanced services
vendor.
\65\ For example, in defending against ``competitive equity''
challenges to the Commission's regulations that allow RBOCs to use
their customers' names and usage information (``CPNI'') to market
``enhanced services,'' the RBOCs, citing Catlin, ``argue[d] that
their access to CPNI is no different from an unregulated company's
access to its customer records and should therefore be permitted.''
Computer III Remand Proceedings, 6 FCC Rcd. 7571, 7608 (1991).
\66\ See Furnishing Customers Premises Equipment by the Bell
Operating Telephone Companies, 2 FCC Rcd 143, 152-53 (1987)
(removing restrictions on RBOCs' use of local customer information
in marketing CPE); Amendment of Section 64.702 of the Commission's
Rules and Regulations (Third Computer Inquiry), 104 FCC 2d 958, 1091
(1986) (removing restrictions on RBOCs' use of local exchange
customer information to market enhanced services), recon., 2 FCC Rcd
3072, 3094-95 (1987), recon., 3 FCC Rcd 1150, 1162-63 (1988),
recon., 4 FCC Rcd 5927 (1989), vacated and remanded, California v.
FCC, 905 F.2d 1217 (9th Cir. 1990), on remand, 6 FCC Rcd 7571, 7609-
14 (1991), vacated and remanded in part and affirmed on this ground,
California v. FCC, 39 F.3d 919, 930-31 (9th Cir. 1994).
---------------------------------------------------------------------------
Even more pertinently, the RBOCs seek the same rights in cellular.
While FCC cellular regulations have barred RBOCs from using local
exchange customers' information in marketing cellular service (47 CFR
Sec. 22.901(d)), the RBOCs are seeking to overturn these restrictions
and obtain the same rights to use their customers' information in the
marketing of cellular radio service that AT&T possesses.\67\
\67\ See, e.g., Petition of Bell Atlantic, NYNEX, and
Southwestern Bell for Investigation and for Order to Show Cause pp.
3, 12-14, FCC File No. MSD 93-13 (Jan. 27, 1993) (arguing that these
and other Part 22 restrictions on RBOCs should be removed).
---------------------------------------------------------------------------
The RBOCs also argue that AT&T would not have independent long
distance customer relationships with RBOCs cellular subscribers if the
MFJ did not bar RBOCs from providing interexchange services and require
them to provide equal access. But that claim is irrelevant and
erroneous. The plaintiffs in Catlin and the RBOCs' CPE and enhanced
services competitors were legally barred from providing the monopoly
gas and exchange services, but courts and the FCC nonetheless held that
it was efficient and procompetitive for the monopolies in Catlin (and
the RBOCs) to use their customer lists in marketing competitive
products and services. Those principles apply a fortiori in the case of
AT&T, for its long distance services are competitive.
More fundamentally, the RBOCs' arguments simply confirm the wisdom
of the MFJ. The MFJ restrictions on the RBOCs have been upheld by Judge
Greene, the Court of Appeals, and the Supreme Court precisely because
of the substantial likelihood that RBOCs would otherwise use their
bottleneck monopolies to impede long distance competition, harm
consumers, and thwart the objectives of the antitrust laws. The RBOCs
are here seeking to prevent AT&T-McCaw from competing more effectively
with the RBOCs' cellular services by claiming that they would now have
long distance monopolies if the MFJ did not exist. That shows that the
MFJ promotes competition in cellular as well as long distance services.
The Information at Issue Is the Customers' Property, Not the
RBOCs'. The RBOCs also claim that information that AT&T possesses
consists of ``property'' or ``trade secrets'' that the Proposed Decree
(and the MFJ) elsewhere protect, and that the Department acted
inconsistently by allowing AT&T-McCaw to use AT&T's long distance
customer information in marketing cellular services. There is no basis
for this claim. The information that AT&T has consists of the names,
addresses, and long distance usage information of AT&T's own long
distance customers who freely choose AT&T services and who allow AT&T
to use the information to offer other products or services. In this
regard, the pertinent FCC regulations recognize that this information
is the customer's not any carrier's, and the customer controls how the
information is to be used. By contrast, the only information that the
Proposed Decree protects is the nonpublic information of cellular
carriers in their capacity as customers of equipment manufacturers.
Preliminarily, there is no basis for the RBOCs' insinuations that
AT&T's long distance arm has the lists and cellular usage information
of the RBOCs' cellular customers. Lists of RBOC cellular customers and
usage information are not provided to AT&T or any other long distance
carrier when cellular systems ``cut over'' to equal access or
otherwise. For example, to the extent that long distance carriers mail
out marketing literature to cellular customers, they do so by providing
the literature to independent agents who receive the customer lists
from the RBOCs and who mail out the long distance carrier's literature.
That has been the practice under the MFJ, and the Proposed AT&T-McCaw
Decree similarly limits the use of McCaw's cellular lists to the
marketing of long distance services. Proposed Decree, Sec. IV(C).
Conversely, when a cellular customer selects an individual
interexchange carrier, that customer's name, address,
[[Page 49881]]
and long distance (but not local cellular) usage information is
forwarded to the long distance carrier to whom the customer
subscribes.\68\ Long distance carriers, in turn, are free to use that
information to offer their long distance customers any other products
or services, be they CPE, enhanced service, or cellular service,
subject only to FCC regulations. Notably, contrary to these RBOCs'
assertions (e.g., SBC, p. 8), the same rule applies under the Proposed
Decree. If a McCaw cellular customer subscribes to Sprint, MCI, or any
other AT&T competitor, that firm obtains the foregoing information from
its customers and is free to use that information in offering other
products or services, including cellular service or substitutes for
cellular service (e.g., PCS), subject only to FCC regulations.
\68\ SBC concedes the point, for it is reduced to making
contrived arguments to the effect that AT&T could make guesses about
whether a particular AT&T long distance customer is an ``above-
average'' cellular customer of an RBOCs. See SBC, p. 9. For example,
SBC states that many cellular customers (an alleged 75%) who make
over 275 minutes of long distance calls a month are above average
local cellular users--meaning that 25% of even the heaviest long
distance users are below average cellular customers. Conversely, as
SMC's charts show, there are a significant percentage of ``above
average'' customers (50%) that make few long distance calls (120
minutes) and a significant percentage of ``above average'' cellular
customers (10%) that make no long distance calls. See id., Stupka
Aff., Attach. A. That reflects the reality that long distance
calling represents a small fraction (an average of 10% according to
the RBOCs) of total cellular usage.
---------------------------------------------------------------------------
Further, the FCC regulations reject these RBOCs' claims that any
information about their cellular customers is the RBOCs' property and
hold, to the contrary, that the uses of the information should be
controlled by the customer, not by any carrier. In particular, the FCC
regulations applicable to AT&T provide that, upon a customer's request,
AT&T must (1) make that customer's usage and other information
available to AT&T competitors, and (2) prohibit AT&T personnel involved
in marketing cellular service (or CPE and enhanced services) from using
the customer's name, address, and long distance usage information.\69\
\69\ See Furnishing of Customer Promises Equipment and Enhanced
Services by AT&T, 102 FCC 2d 655 (1985); Amendment of Section 64.702
of the Commission's Rules and Regulations (Third Computer Inquiry),
104 FCC 2d 958 (1986), recon., 2 FCC Rcd 3072 (1987), recon., 3 FCC
Rcd 1150 (1988), recon., 4 FCC Rcd. 5927 (1989), vacated in part on
other grounds, California v. FCC, 905 F.2d 1217 (9th Cir. 1990). See
also FCC Order, para. 83. Further, just as the FCC recognized that
customers should control uses of information, the FCC stated that
``[i]f a cellular carrier could prove that AT&T/McCaw
misappropriated [customer information] or misused such information
entrusted to it, that carrier would have a remedy through the
Commission complaint process or the courts.'' FCC Order, para. 83.
---------------------------------------------------------------------------
Against this background, there is no basis for the RBOCs' claims
that the absence of a restriction on AT&T's solicitation of its own
customers is inconsistent with other provisions of the Proposed Decree
that protect cellular carriers' and cellular manufacturers' trade
secrets and other nonpublic information. In particular, the RBOCs refer
to the Proposed Decree's provisions that prohibit AT&T's manufacturing
arm from disclosing to McCaw nonpublic information about its
competitors' cellular systems (and that prohibit McCaw from giving
AT&T's manufacturing arm nonpublic information of other cellular
equipment manufacturers).
But there is no inconsistency. In each event, it is the customer
who controls dissemination of information. An RBOC cellular carrier is
the customer of AT&T's manufacturing arm, and the Proposed Decree
prohibits AT&T from disclosing to McCaw nonpublic information about the
RBOC cellular system which the RBOC owns and has a legal right to
protect, which is provided to AT&T under contractual provisions
requiring that it not be disclosed to competing cellular carriers, and
which (in the Department's view) the RBOC is required to continue
providing AT&T by virtue of the alleged ``lock-in.'' AT&T and McCaw
readily agreed to these provisions because each unit of AT&T will
always safeguard nonpublic information that customers (or suppliers)
provide AT&T in confidence.\70\ Competition requires all suppliers to
protect customers' proprietary information (and vice versa), so the
Proposed Decree merely enjoins AT&T and McCaw to behave as all firms
behave in competitive markets.
\70\ Further, because it is the Department's view that some of
the information in question could not directly be exchanged between
competing cellular carriers without facilitating collusion between
carriers (see United States v. Container Corporation of America, 393
U.S. 333 (1969)), the Proposed Decree provides that AT&T cannot pass
such information on to McCaw even if the RBOCs consent.
---------------------------------------------------------------------------
By contrast, the names, addresses, and long distance usage
information of AT&T's long distance customers are not information from
or about the RBOCs' cellular system. Rather, it is information about
AT&T's customers which those individual long distance customers provide
to AT&T by freely choosing AT&T's long distance service. Further, those
customers can decide not to receive cellular or other solicitations
from AT&T and are also free to reject any such solicitations from AT&T
and are also free to reject any such solicitations (and to change long
distance carriers). There is no competitive or other basis to prohibit
AT&T from marketing cellular or other services to those customers who
allow these solicitations. To the contrary, as explained above, that
would be anticompetitive and harmful to consumers.
B. The RBOCs' Other Attempts to Obtain ``Parity'' Are Spurious
Challenges to the MFJ
In addition to the foregoing claims, the four RBOCs also argue that
the Proposed Decree is not in the ``public interest'' because it does
not otherwise achieve strict ``parity'' between the RBOCs and AT&T-
McCaw. In particular, while the Proposed Decree's equal access
provision and interexchange services restriction on McCaw eliminate
``disadvantages'' of which the RBOCs formerly complained--e.g., McCaw's
ability to offer the ``City of Florida'' and other such ``bundled''
wide area calling plans--the RBOCs object that there are a number of
respects in which the Proposed Decree otherwise contains different
provisions from the MFJ. On the basis, these RBOCs claim that the
Proposed Decree will not be in the public interest unless the MFJ's
interexchange services restriction on RBOC wireless services is first
removed and the Court adopts identical equal access and long distance
restrictions for AT&T-McCaw and for RBOCs.
These claims are baseless. While many of the RBOCs' claims are
based on misinterpretations of the Proposed Decree, Judge Greene (and
the FCC) have repeatedly held that the public interest patently does
not require ``parity'' between AT&T-McCaw and the RBOCs and that the
RBOCs are properly subjected to different restrictions under the MFJ
because they alone have bottleneck monopolies.
Foremost, Judge Greene has so held in a number of decisions under
the MFJ. In particular, the RBOCs have repeatedly sought to modify the
MFJ's long distance and other restrictions by claiming that doing so
was necessary to enable them to compete with AT&T and others on equal
terms. In each case, Judge Greene flatly rejected these claims on the
ground that the RBOCs have bottleneck monopolies that can be used to
impede long distance competition and AT&T and others do not.\71\
\71\ See, e.g., United States v. Western Elec. Co., 627 F. Supp.
1090, 1098-1104 (D.D.C. 1986) (shared tenant services); United
States v. Western Elec. Co., 592 F. Supp. 846, 868 (D.D.C. 1984)
(BellSouth NASA waiver).
---------------------------------------------------------------------------
Further, the FCC has now agreed with Judge Greene. In particular,
the FCC
[[Page 49882]]
rejected the same arguments that these RBOCs here press in its order
that approved the AT&T-McCaw merger. The FCC held that ``the rationale
for the MFJ's limitations on the BOCs--the existence of a long-
entrenched exchange service bottleneck encompassing virtually every
home and business in the BOCs' territories--does not apply to AT&T/
McCaw,'' that there is no competitive or other public interest reason
for imposing additional restrictions on AT&T/McCaw, and that neither
the antitrust laws nor the Communications Act permits the creation of
``parity for parity's sake.'' \72\
\72\ FCC Order, para. 32 (footnote omitted).
---------------------------------------------------------------------------
Nor is there any merit to the four RBOCs' startling claim that the
Proposed Decree is ``contingent'' on removal of the MFJ's interexchange
services restriction on RBOC cellular systems and the adoption of
``parity.'' BellSouth, p. 4; see SBC, p. 19. The proposed Decree says
no such thing. The reason is that while the Department has urged
(erroneously in AT&T's view) this modification of the MFJ under certain
conditions, the Department recognized that AT&T opposed this proposal
and that it would not be granted unless the Court concluded the
proposal satisfied the standard set forth in Section VIII(C) of the
MFJ. Further AT&T is a party to the Proposed Decree, and it would not
have agreed to it if it were conditioned on modification of the MFJ.
Indeed, in arguing otherwise, the four RBOCs rely on the
Department's assertion in the Competitive Impact Statement that the
equal access provisions in the Proposed Decree are ``modeled on'' the
MFJ and ``largely identical to the conditions recommneded by the United
States for provision of interexchange cellular service by the Bell
Companies.'' Competitive Impact Statement, p. 15 (emphasis added).
However, as the Department has made explicit, the two sets of
conditions are identical only insofar as each is designed to prevent
cellular carriers from using market power in cellular services to deny
cellular customers the ability to select their interexchange services
provider,\73\ and it is also the Department's view that the RBOCs'
control of landline exchange monopolies require additional restrictions
that apply to the RBOCs alone.\74\
\73\ See Competitive Impact Statement, pp. 14, 16-17; DOJ
Generic Wireless Memorandum, pp. 19-21.
\74\ DOJ Generic Wireless Memorandum, pp. 40-42.
---------------------------------------------------------------------------
The foregoing facts dispose of all the RBOCs' claims of lack of
``parity.'' However, many of the RBOCs' specific claims rest on
misunderstandings of the AT&T-McCaw Decree, and each of them is
otherwise meritless.
Interexchange Traffic Routing. First, three of the RBOCs (SBC and
Bell Atlantic/NYNEX) object that the Proposed AT&AT-McCaw Decree allows
McCaw's switches to perform ``interexchange traffic routing,'' \75\ but
the Department has not proposed that the RBOCs be able to perform this
function. This claim is baseless.
\75\ I.e., sorting long distance calls by destination and
routing them to different circuits depending on the destination of
the call.
---------------------------------------------------------------------------
Preliminarily, it is not the case that the Proposed Decree
unqualifiedly allows interexchange traffic routing by McCaw. To the
contrary, it allows McCaw to perform this function for AT&T only if
McCaw is able to offer to do so for other interexchange carriers on the
same terms and conditions. Proposed Decree, Sec. IV(D)(1). Further,
while McCaw believes that it will perform these routing functions
during the life of the Decree, it has no plans to engage in
interexchange traffic routing in the immediate future or to do so on
the scale hypothesized by the RBOCs. Compare SBC, pp. 20-21.
Further, the difference in treatment between AT&T-McCaw and the
RBOCs is abundantly justified. Because McCaw does not own the
bottleneck landline access facilities that connect its MTSOs to
interexchange carrier networks, there is no risk that McCaw's provision
of interexchange traffic routing functions could lead to discrimination
against competing interexchange carriers in access to essential
facilities or to cross-subsidization of competitive services with
monopoly revenues. By contrast, if an RBOC cellular system were
authorized to provide functions from its MTSOs, its control of local
bottlenecks would enable it to discriminate at will in pricing and
provisioning monopoly exchange facilities. In particular, because its
MTSO would then become part of its interexchange network, it could then
preferentially provide itself bottleneck facilities on the ground that
those facilities are not performing access functions, but are part of
its ``competitive'' long distance business.
In this regard, it is revealing that the only way the RBOCs can
claim that they should be allowed to provide these interexchange
traffic routing functions is by claiming, once again, that
interexchange carriers are not dependent on RBOCs for the access
facilities connecting interexchange carrier points of presence
(``POPs'') to MTSOs, but can obtain these access facilities from their
parties. See SBC, pp. 21-22. However, that assertion is false--as AT&T
and MCI have elsewhere demonstrated.\76\
\76\ See United States v. Western Elec. Co., Civ. No. 82-0192
(D.D.C.), AT&T's Reply to the Response of the Bell Companies to
AT&T's Supplemental Comments on the Motion for a Generic
``Wireless'' Modification of the Decree's Interexchange Services
Restriction, pp. 3-5 (Nov. 23, 1994); id., Transcript of Oral
Argument Concerning Generic Wireless Waiver Request, pp. 49-54 (Dec.
14, 1994).
---------------------------------------------------------------------------
Sales Agency. The RBOCs next object that, whereas the Department's
generic wireless proposal requires RBOCs to have separate sales forces
for cellular services, the Proposed AT&T-McCaw Decree (the RBOCs claim)
allows AT&T's long distance arm ``to perform all marketing of local and
long-distance cellular services for McCaw.'' SBC, p. 25; see Bell
Atlantic/NYNEX, p. 13. However, that claim is based on a misreading of
the Proposed Decree.
The Proposed Decree requires that McCaw be maintained as a separate
corporation that is responsible for ``the operation * * * and the
marketing'' of its wireless systems, that McCaw cannot ``delegate
substantial responsibility for the performance of [these functions] to
AT&T,'' and that McCaw cannot provide or market long distance service
after a system converts to equal access. Sec. III(C). Because the
ability of AT&T to use its long distance and other personnel to market
cellular service and to engage in joint marketing of local cellular and
long distance services through these other channels is a major
procompetitive efficiency of the merger (see pp. 51-58, supra), the
Proposed Decree also provides that AT&T is allowed to act as McCaw's
``agent'' in marketing cellular service and in jointly marketing long
distance and cellular service. However, this ``agency'' provision does
not mean AT&T can perform all marketing for McCaw. The Decree requires
McCaw to retain its own independent retail marketing outlets and sales
channels.
Customer Location Databases. Bell Atlantic/NYNEX further claim that
the Proposed Decree is unlike the MFJ in that it purportedly does not
require McCaw to provide interexchange carriers with nondiscriminatory
access to McCaw's customer location databases. However, this claim,
too, rests on a misunderstanding of the Proposed Decree. Although the
Proposed Decree's definition of MTSO may not include customer location
databases (compare Bell Atlantic/NYNEX, p. 3 with Proposed Decree,
Sec. II(W)), the Proposed Decree requires that all interexchange
carriers obtain ``customer location information for use
[[Page 49883]]
in routing calls'' in the ``same manner'' and under the same ``terms
and conditions'' as does AT&T. Proposed Decree, Sec. IV(D)(1).
Boundaries After Equal Access Conversions. The Proposed Decree
provides that after individual McCaw cellular systems convert to equal
access, each system generally will be limited to the same local calling
areas as apply to RBOCs under the MFJ. However, several RBOCs object
that McCaw would be authorized to provide cellular service in 19
multiLATA areas in which RBOCs do not currently have MFJ waivers to
provide cellular service. BellSouth, pp. 10-11; Bell Atlantic/NYNEX,
pp. 13-14. The Decree contains this exception because McCaw has been
licensed to serve the MSAs that comprise these areas and McCaw has
established a single integrated cellular system that serves MSAs in the
remote LATAs through one or more central switches that are located in a
different LATA.
But there is no lack of ``parity'' in these areas, and no possible
claim that this feature of the Proposed Decree is virtually certain to
impede competition. Quite apart from the fact that there are many areas
in which the RBOCs' cellular systems serve larger areas than do the
competing McCaw systems, the overriding fact is the RBOCs are not
licensed to serve the same MSAs that comprise any of these 19 multiLATA
local cellular calling areas or otherwise have had no occasion to seek
a comparable waiver under the MFJ for these areas. Further, each of
these 19 areas is comparable in size and other characteristics to areas
in which RBOCs have received MFJ waivers in the past, and the criteria
that Judge Greene has applied under the MFJ would, in AT&T's view,
support a waiver in each such area. For this reason, AT&T would not
oppose an RBOC request for an identical MFJ waiver if an RBOC were to
have reason to seek one. Finally, AT&T has also stipulated that the
Justice Department can challenge any of these calling areas if it
hereafter determines that they are too large.
Decree Duration. Next, BellSouth objects that whereas the MFJ has
no fixed termination date, the Proposed Decree provides that it expires
after ten years. However, these differences merely reflect the reality
that no one can predict when the conditions that led to the MFJ--the
RBOCs' control over bottleneck local exchange monopolies--will end. By
contrast, the Proposed AT&T-McCaw Decree is premised on the alleged
``lock in'' of certain cellular carriers to AT&T equipment and the
alleged absence of effective competition with today's cellular
carriers. Given the rapid rate at which cellular equipment becomes
obsolete and the imminent licensing of PCS systems, it can confidently
be predicted that the conditions that gave rise to the Proposed Decree
cannot last another ten years (and will almost certainly disappear much
earlier). Further, because there is no statute of limitations on
challenges to mergers, the Department will have the authority at the
end of ten years to seek other injunctive relief against the merger in
the unlikely event that conditions could then so warrant.
The Proposed Decree's Inapplicability to PCS. Similarly, BellSouth
complains that the MFJ restrictions apply to all RBOC services
(including PCS), but that the Proposed Decree applies only to ``McCaw
Cellular Systems.'' But here, too, these differences merely reflect the
different competitive reasons for the two decrees. The restrictions on
AT&T-McCaw are predicated on the alleged lack of effective competition
among today's cellular systems, and if and when PCS systems are
implemented, they will compete with today's entrenched cellular systems
and provide alternatives to them. By contrast, the MFJ restrictions on
RBOCs rest on the RBOCs' control over bottleneck landline monopolies
that connect interexchange carriers to end user customers, and just as
cellular systems have not created alternatives to landline exchanges to
date, there is no basis for predicting that PCS systems will do so.
However, if they do, the RBOCs will be entitled to removal of the MFJ's
restrictions.
Purportedly Different Modification Standards. BellSouth and Bell
Atlantic/NYNEX also complain that the two decrees have different
modification provisions. In particular, they state that the Proposed
Decree allows McCaw to move for modifications that parallel any waivers
that the RBOCs obtain under the MFJ by making a competitive and public
interest showing (Sec. X), that McCaw can obtain rights to provide
access to interexchange carriers at centralized points upon a similar
showing (Sec. IV(G)), but that there is ``no apparent way for McCaw's
relief to inure to the benefit of its competing Bell cellular company''
(Bell Atlantic/NYNEX, p. 15). However, just as AT&T-McCaw can seek
modifications of the Proposed Decree that are parallel to any MFJ
waivers, the RBOCs are free to seek modifications of the MFJ that
parallel any modifications or waivers that are obtained under the AT&T-
McCaw Decree. Whether modifications or waivers of either decree are
granted depends on whether the necessary competitive and public
interest showings are made.
BellSouth's Challenge to Definition of ``Control''. Finally,
BellSouth challenges the Proposed Decree's definition of ``control,''
apparently because BellSouth fears the provisions of the Proposed
Decree that govern ``McCaw Cellular Systems'' could be held applicable
to the Los Angeles and Houston systems in which BellSouth and McCaw
have what could loosely be described as ``joint control.'' However,
this ``joint control'' was held sufficient to make these cellular
systems ``BOCs'' under the MFJ, and it would be neither anomalous nor
inappropriate if the systems were held to be ``McCaw Cellular Systems''
under the Proposed Decree. Further, the assertions that BellSouth and
McCaw each have only ``negative'' control in these systems is not
accurate. McCaw has the ability to cause management changes in these
systems (over BellSouth's objection) if it can persuade the independent
tie-breaking director to side with McCaw, and BellSouth has the same
ability to impose changes over McCaw's objection if the independent
director votes with BellSouth.
C. The Ad Hoc IXCs Are Challenging Procompetitive Features of the
Merger
Finally, comments have been filed by the Ad Hoc IXCs, a group of
switchless interexchange resellers who own and operate no facilities,
but make money solely through arbitrage. They have used their comments
here--as they did in prior filings before the FCC and before Judge
Greene in the Section I(D) waiver proceeding--to repeat allegations
that AT&T has violated regulatory or contractual commitments in its
dealings with these resellers. AT&T believes that these allegations
will be rejected in the pending cases and appeals that the Ad Hoc
resellers cite, but the short answer to them is that they do not
implicate the antitrust laws,\77\ much less issues raised in the
Department.
\77\ For example, in the case cited (Central Office Telephone,
Inc. v. AT&T, No. 91-1236 (D. Or.)), the District Court dismissed
the plaintiff's antitrust claims and allowed only breach of contract
and tort claims.
---------------------------------------------------------------------------
Stripped of its rhetoric, moreover, the comments of the Ad Hoc IXCs
have only a single substantive objection to the Proposed Decree: that
it does not prohibit the combined AT&T-McCaw from offering alternatives
to today's landline exchange monopolies if and when it becomes
economically and technologically possible for cellular systems to do
so. However, as Judge Greene and the Department have previously
concluded, that would be a procompetitive development and it would be
antithetical to the antitrust laws to prevent AT&T from doing so.
[[Page 49884]]
Similarly, as the FCC and the New York PSC have found, the merger means
that these procompetitive developments are more likely.
Conclusion
For the reasons stated, the Proposed Decree is in the public
interest within the meaning of the Tunney Act.
Respectfully submitted,
Mark C. Rosenblum,
John J. Langhauser, 295 North Maple Avenue, Basking Ridge, NJ 07920,
(908) 221-2000
David W. Carpenter,
Peter D. Keisler,
David L. Lawson, One First National Plaza, Chicago, Illinois 60603,
(312) 853-7237
Attorneys for AT&T Corp.
Appendix--Extent of Competition Between McCaw and Individual LECs
----------------------------------------------------------------------------------------------------------------
Number of
majority-owned Total number Number of
Total number systems that of AT&T- systems with
Majority owner* of majority- compete with equipped AT&T equipment
owned systems McCaw majority- majority-owned that compete
owned systems systems with McCaw
----------------------------------------------------------------------------------------------------------------
Ameritech....................................... 24 0 22 0
Bell Atlantic................................... 28 2 10 1
BellSouth....................................... 43 6 9 2
General Cellular Corporation.................... 8 0 1 0
GTE (Contel & Mobilnet)......................... 76 13 61 12
Independent Cellular............................ 7 4 7 4
NYNEX........................................... 13 1 12 1
Pacific Northwest Cellular...................... 5 0 5 0
PacTel Corporation.............................. 5 0 1 0
Southern New England Telecommunications......... 5 0 5 0
Southwestern Bell (SBMS)........................ 30 4 13 3
United States Cellular.......................... 35 6 2 0
U S West........................................ 25 16 4 2
Vanguard........................................ 16 0 1 0
---------------------------------------------------------------
Total..................................... 320 52 153 25
----------------------------------------------------------------------------------------------------------------
*Majority ownership consists of a greater than 50% interest.
Comments of Bell Atlantic Corporation and NYNEX Corporation on Proposed
Final Judgment in United States v. AT&T Corp. and McCaw Cellular
Communications, Inc.
Bell Atlantic Corporation and NYNEX Corporation submit these
comments in response to the Department of Justice's public notice and
invitation for comments on the Proposed Final Judgment in United States
v. AT&T Corp. and McCaw Cellular Communications, Inc., Civil Action
No. 94-01555 (HHG). 59 Fed. Reg. 44158 (Aug. 26, 1994).
Bell Atlantic and NYNEX have filed a private action pursuant to
Section 7 of the Clayton Act challenging the lawfulness of the AT&T-
McCaw merger. Bell Atlantic Corp. et al. v. AT&T Corp. et al., No. CV
92-3682 (ERK) (E.D.N.Y.). Although we do not propose to present in this
Tunney Act proceeding all the claims that we have raised in the private
action, we summarize briefly below some of our concerns about the
effectiveness of the proposed decree, concerns that we intend to
develop fully in the upcoming trial in New York. Moreover, because the
extensive pretrial and trial record of that case may inform the
Department's and the Court's consideration of the proposed decree, AT&T
should be directed to make available to all interested parties in this
proceeding the full record of the New York case, including the trial
proceedings that are scheduled to begin on November 1, 1994.
I. The Proposed Decree Does Not Sufficiently Rectify the Antitrust
Violation Caused by the AT&T-McCaw Merger
Bell Atlantic and NYNEX believe that the proposed decree is
fundamentally inadequate to protect against the anticompetitive effects
of the AT&T-McCaw merger alleged in the Department's Complaint and
summarized in the Competitive Impact Statement.
A. The Vertical Effects
The antitrust violation that results from combining AT&T's cellular
equipment business with McCaw's cellular service business can be cured
only by a structural remedy--one that either eliminates AT&T's
equipment lock-in power or uncouples that power from the economic
incentive to exploit it. An effective structural remedy would require
the combined AT&T-McCaw (1) to divest McCaw (thereby removing AT&T's
incentive to suppress competition in local cellular service markets);
or (2) to divest AT&T's cellular equipment business (thereby removing
the source of AT&T's lock-in power over its equipment customers); or
(3) as one of several components of effective injunctive relief, to
build switches and other cellular infrastructure equipment pursuant to
publicly available standards, and to license the use of any necessary
intellectual property, so that third parties can manufacture and sell
equipment fully compatibly with AT&T equipment (thereby permitting
meaningful competition in equipment markets and loosening AT&T's lock-
in power).
Divestiture is the most straightforward structural solution. While
AT&T's equipment customers would remain locked-in to their supplier,
divestiture would ensure that their supplier does not also become their
direct competitor. By keeping the power and the incentive to abuse it
in separate hands, divestiture would best protect against the
[[Page 49885]]
anticompetitive harms threatened by the vertical aspects of the AT&T-
McCaw merger.
Opening equipment interfaces would attempt to attack AT&T's lock-in
power at its source. If effectively implemented, that solution might
enable other manufacturers to build equipment that could operate
compatibly with AT&T switches, thereby weakening AT&T-McCaw's power to
restrain competition in cellular service markets. Evidence to be
presented in the New York private action will demonstrate that AT&T has
developed and successfully pursued a covert policy, revealed in its own
documents, of thwarting industry-wide open interfaces as part of a
strategy to deter competition. The evidence will also show that
competing manufacturers of cellular network equipment--including
Motorola, one of AT&T's largest equipment competitors, and ADC Kentrox,
a small but ambitious new entrant--have a strong interest in uniform
and open industry standards and are prepared to build to such standards
in direct competition with AT&T as soon as the currently proprietary
interfaces are opened up.\1\
\1\ If the Department were prepared to consider a modification
of the proposed decree designed to open equipment interfaces and
alleviate AT&T's lock-in power, it should incorporate provisions
specifically requiring AT&T to (1) support in industry standards
bodies, and participate actively in the development of, industry-
wide open equipment interfaces that would allow non-AT&T cellular
network equipment to perform as well as equipment connected through
AT&T's proprietary interfaces; (2) to publish and continue to
support its proprietary interfaces; (3) to license on reasonable
terms the patents and other intellectual property that a third party
would need to build equipment fully compatible with AT&T equipment;
and (4) to offer its customers equipment built either to industry-
wide or AT&T open interfaces by a reasonable date certain.
---------------------------------------------------------------------------
The Proposed Final Judgment does none of these things. Instead of
devising an effective structural solution, the decree attempts to
address the merger's serious anticompetitive problems exclusively
through conduct restrictions. But the proposed decree's general
provisions--prohibiting discrimination and requiring the merged entity
to operate under the same pricing and other business practices in
effect prior to the merger--do not address many of the key competitive
concerns and, as to those that are addressed, are far too vague to be
enforceable at any reasonable cost or to deter potentially injurious
anticompetitive conduct.
Our evidence in the private action will demonstrate that AT&T-McCaw
can inflict anticompetitive injury without engaging in detectable
discrimination or otherwise violating the provisions of the proposed
decree. Among the problems are the following:
1. AT&T can raise equipment prices in a disparate fashion without
an appearance of discrimination. AT&T does not publish fixed prices for
its equipment; rather, its prices vary widely depending on a range of
supposedly customized hardware and software features and capacities.
AT&T will find it all too easy to justify higher prices to McCaw's
competitors on the theory that they have ``unique'' equipment needs.
Since the decree does not require AT&T to make public the terms of its
equipment contracts--and since the contracts themselves forbid its
customers from doing so--McCaw's competitors will have no basis for
determining whether they are being discriminated against unreasonably.
Moreover, AT&T can unfairly advantage McCaw by raising prices across
the board to all its equipment customers. Because McCaw currently uses
predominantly non-AT&T equipment, an increase in AT&T equipment prices
will not hurt McCaw as much as its competitors. Any incidental impact
on McCaw of an AT&T price increase is, in any event, merely an
intracorporate accounting entry having no effect on the combined AT&T-
McCaw's financial position. Only intrusive cost-based equipment price
controls could effectively protect competitors and subscribers from
unreasonable pricing by AT&T.
2. AT&T can restrict or delay its equipment customers' access to
important new features or technologies without detection. Because its
customers lack detailed information concerning the quality and quantity
of resources that AT&T has devoted to meeting their equipment and
software needs, they cannot hope to demonstrate that AT&T's refusal to
supply equipment or software on a timely basis results from
discrimination.
3. The decree nowhere prohibits AT&T from discriminating in favor
of its non-McCaw allies in cellular service markets. The combined AT&T-
McCaw plans to establish nationwide cellular alliances with other
operators in markets not served by McCaw. In each such market, AT&T
will be free under the decree to discriminate in pricing and service to
favor the competitors of its locked-in customers.
4. The decree's terms cannot legislate the kind of cooperative
behavior that lies within AT&T's broad commercial discretion. Going the
extra mile is not an enforceable standard of conduct, and yet it is
often critical to an equipment customer's competitive success. AT&T's
economic interests no longer justify taking the discretionary extra
step to enhance the competitive position of McCaw's rivals, and nothing
in the decree does or can require it to do so.
5. Although the proposed decree prohibits AT&T from disclosing the
confidential information of its equipment customers directly to McCaw,
Proposed Decree Sec. V(A)(1)(a), it expressly allows senior officers of
AT&T's manufacturing unit--the very employees with authority to
allocate developmental resources and personnel--to receive precisely
such confidential information, and it nowhere forbids them from using
that information for the competitive benefit of McCaw. Id.
Sec. V(A)(1)(c). Moreover, even assuming that an effective Chinese Wall
can be erected between AT&T and McCaw, a remedy of that sort can aspire
only to prevent improper dissemination of information, not misuse of
information in the hands of AT&T manufacturing employees who already
have it. No regulation can effectively bar AT&T's employees from
considering such information in promoting the overall economic
interests of their own employer.
6. The proposed decree specifically permits AT&T to perform
``proprietary development'' for McCaw (Secs. II(Y), V(A)(4)(b),
V(C)(3)), and it affirmatively prohibits AT&T from disclosing to
unaffiliated cellular operators the nature of any such proprietary work
for McCaw (id. Sec. V(A)(1)(b)). These provisions will enable AT&T to
reserve exclusively for McCaw the most promising operating improvements
and new features, thereby placing other operators at a critical
technological disadvantage in local cellular service markets.
B. The Horizontal Effects
As the Department correctly observed in the Competitive Impact
Statement, the AT&T-McCaw merger will ``foreclose competition between
the two largest providers of interexchange service in the highly
concentrated markets in which McCaw currently provides interexchange
service to its cellular customers.'' 59 Fed. Reg. at 44169. Before the
merger, McCaw competed primarily by purchasing long-distance service in
bulk at wholesale from a facilities-based carrier--predominantly AT&T--
and reselling to its customers at a higher retail price. Apart from its
role as a major reseller, however, McCaw also had been developing its
own facilities-based long distance network in further competition with
AT&T. In fact, before AT&T arrived as a suitor, McCaw had proclaimed
its intention to construct a nationwide cellular network, consisting of
both
[[Page 49886]]
owned and leased facilities, that would allow it to serve the whole
country independent of other carriers. McCaw's long distance network
was already significantly completed at the state and regional levels,
with large regional clusters in some of the country's most active
markets, particularly the Pacific Northwest and Florida. Its growth
strategy mirrored the strategy that MCI and Sprint used to mount their
challenge to AT&T.
The public record in the New York private action reveals that
before the merger AT&T saw McCaw as a potentially powerful long
distance competitor. For example, a May 1991 internal memorandum warned
that McCaw's plans for ``a nation wide network to link cellular systems
* * * should strike terror into the heart of AT&T communications. What
McCaw is planning is a separate national network that could as time
goes by * * * siphon traffic from our long distance network.''
Similarly, an AT&T strategic study, also in May 1991, concluded that
non-RBOC cellular providers like McCaw ``have linked their own switches
to bypass interexchange carriers and provide interlata service'' and
that such providers ``could threaten AT&T's core long distance
business.
AT&T's answer to this looming competitive threat was to eliminate
it. The merger utterly destroys McCaw as AT&T's most significant
cellular long distance competitor, enhancing AT&T's existing market
power and intensifying concentration in markets already exceptionally
concentrated. There can be no doubt that the merger substantially
lessens competition in violation of Section 7 of the Clayton Act. It
also nips in the bud McCaw's ambitious plan to establish a nationwide
long distance network of its own in further competition with AT&T.
The antitrust violation that results from merging AT&T's and
McCaw's directly competing cellular long-distance businesses is not
cured by the proposed decree. On the contrary, a key provision of the
decree actually codifies the violation. It specifically requires McCaw,
``on a phased-in basis and no later than 21 months following the
commencement of this action, [to] cease providing Interexchange
Services.'' Proposed Decree Sec. IV(B).
The Department may believe that its support of generic wireless
relief will mitigate the merger's anticompetitive horizontal effects by
allowing the entry of seven additional cellular long distance
competitors. But AT&T seeks to frustrate even that objective by
opposing the requested relief and subjecting it to a more rigorous
standard of review. AT&T should be required, as a condition for
approval of a decree that eliminates an important long distance
competitor, to support, or at least not to oppose, additional entry to
the extent supported by the Department of Justice.
The proposed decree's ``equal access'' provisions (Proposed Decree
Secs. IV(B)-(D)) do not make up for the loss of McCaw itself as an
independent long distance provider. McCaw currently offers consumers in
its service areas an important additional choice. In New York, for
example, cellular subscribers can choose from among AT&T, MCI, or
Sprint if they select NYNEX/Bell Atlantic as their local cellular
provider. Alternatively, subscribers can choose McCaw for cellular
long-distance service by selecting McCaw as their local cellular
provider. Because a subscriber drawn to McCaw is a retail long distance
customer lost to AT&T, MCI, or Sprint, McCaw's presence as a long
distance competitor exerted downward competitive pressure on retail
cellular long distance rates. McCaw's disappearance as a long distance
provider will deprive consumers of a potentially attractive alternative
source of supply and will tend to increase cellular long distance
prices.
II. The Proposed Decree Does Not Prevent AT&T From Abusing
Competitively Sensitive Information Acquired in Its Capacity as the
Dominant Cellular Long Distance Carrier
Aside from the proposed decree's fundamental inadequacies, we urge
the Department to address a glaring but unexplained omission that
threatens serious anticompetitive harm. As developed by SBC
Communications, Inc., in its separate comments in this proceeding, the
decree unjustifiably allows AT&T to exploit, to the competitive
disadvantage of Bell company cellular providers in McCaw markets, the
highly sensitive customer information that AT&T acquires as the
dominant provider of cellular long distance service to the Bell
companies' local cellular customers. We agree with SBC's comments on
this issue.
Because of MFJ requirements, AT&T has access to detailed
information concerning the cellular telephone usage patterns of each
Bell Atlantic and NYNEX customer that selects AT&T as its long distance
carrier. Armed with that valuable information, and in the absence of
any decree provisions to the contrary, AT&T can concentrate its
marketing of McCaw services on our best cellular customers, effectively
expropriating without charge one of our most valuable assets. We would
never voluntarily turn over to our direct competitor our customer lists
and usage information. It is simply indefensible to allow the combined
AT&T-McCaw to target its local cellular service marketing at our best
customers on the basis of information acquired solely in its capacity
as the dominant cellular long distance carrier.
It is no answer to say that these are AT&T customers and that AT&T
should be free to use its own customer information. These are joint
customers. The only thing that AT&T provides is long distance service,
but long distance usage is not the only information that AT&T would use
to market McCaw's cellular service. The critical information is that
these subscribers, in addition to being long distance customers of
AT&T, are cellular customers of Bell Atlantic and NYNEX. Although we
obviously cannot object to AT&T's use of information about our joint
customers' long distance usage to market its long distance service, we
can and do object to its opportunistic use of information about their
cellular usage to market McCaw cellular service.
Allowing AT&T to exploit this information offers no public
benefits. On the contrary, AT&T's ability to use our customer lists as
a free-rider burdens competition in much the same way as patent
infringement--one competitor's incentive to market its service
aggressively will soon evaporate if another can gain the full advantage
of those efforts without incurring any cost of its own. The proposed
decree itself embraces that view. It specifically provides that McCaw
shall provide customer lists to unaffiliated long distance carriers
``for use solely in connection with marketing their Interexchange
Services.'' Proposed Decree Sec. IV(C). The absence of a comparable
restriction on AT&T's use of equivalent information about Bell company
customers is an anomaly that should be corrected.
We accordingly endorse SBC's proposed addition of a new Sec. IV(J).
III. The Proposed Decree Embodies Other Unexplained Inequities That
Should be Eliminated
A. Interexchange Routing
As SBC persuasively explains, the proposed decree would allow AT&T-
McCaw to engage in interexchange routing, even though Bell cellular
companies are barred by the MFJ from providing such service and the
Department has opposed giving Bell companies relief from that
restriction in the generic wireless proceeding. We
[[Page 49887]]
agree with SBC's analysis of this unexplained disparity and with the
proposed alternative solutions.
We note in addition that permitting this inequity to persist would
give AT&T an additional incentive to behave anticompetitively. For
example, it could create new wireless long distance offerings that
depend on the provision by local wireless carriers of access services
that include interexchange routing. McCaw would be able to offer the
new long distance service to its cellular customers because it has
authority to provide interexchange routing; Bell company customers, by
contrast, would be excluded because the Bell cellular companies lack
such authority and therefore cannot participate in the new service. The
disparity should be eliminated to prevent the inevitable competitive
distorations that will otherwise result.
B. Sales Forces
We agree with SBC that there is no justification for requiring Bell
companies to establish redundant sales forces for local services and
wireless long distance services, while imposing no similar
inefficiencies on AT&T-McCaw. If such a condition is upheld in the
generic wireless proceeding, a similar requirement should be added to
the AT&T-McCaw decree.
C. Other Disparities That Warrant Correction
The proposed decree would create several additional inconsistencies
between AT&T-McCaw and its Bell company competitors. Each is
unexplained, and each should be eliminated to avoid unwarranted
competitive dislocations.
1. Under the proposed decree, McCaw is expressly permitted to
aggregate its Pittsburgh system with its properties in West Virginia to
create a non-equal-access calling area. Proposed Decree Sec. II(Q)(xix)
(defining McCaw's Pittsburgh LATA to include the West Virginia MSAs).
By contrast, Bell Atlantic whose Pittsburgh cellular system competes
head-to-head with McCaw's, is barred from creating the same aggregated
calling area. A disparity of this sort confers on McCaw an unwarranted,
and presumably unintended, competitive advantage. It should be
corrected, either by extending the same privilege to Bell Atlantic or
by eliminating Sec. II(Q)(xix) from the proposed decree.
2. Under the proposed decree, McCaw automatically benefits from any
enlargements of the Bell company LATAs, which apply to McCaw ``as if''
it were a Bell operating company. Proposed Decree Sec. II(Q). But the
reverse is not true. The 19 geographic waivers provided to McCaw in
Sec. II(Q) do not extend to the Bell companies. If there is a cogent
reason for this one-way ratchet, it is not set forth in the Competitive
Impact Statement. To avoid causing needless competitive imbalances,
similar waivers should be granted to the competing Bell wireless
companies. At a minimum, the Department and AT&T-McCaw should state
their commitment on the record of this proceeding to supporting
parallel geographic waivers for the Bell companies.
3. The proposed decree does not require McCaw to open up its
customer location databases. It defines McCaw's ``MTSO'' as the Mobile
Telephone Switching Office ``and the equipment used therein.'' Proposed
Decree Sec. II(W). The Department's proposed wireless waiver, by
contrast, defines a Bell company MTSO to include customer location
databases, ``wherever located,'' that facilitate call completion
services (Sec. VIII(L)(1)(a)), and it provides that ``MTSO functions
used to provide this service shall be available to other carriers,
including interexchange carriers'' (Sec. VIII(L)(2)(e)). This disparity
likewise is not explained. It too should be corrected, either by
conforming the wireless waiver to the AT&T-McCaw decree or by
conforming the AT&T-McCaw decree to the wireless waiver. There is no
reason for differing treatment of direct wireless competitors.
4. Under the proposed decree, if there is insufficient demand for
access to a McCaw cellular system within particular LATAs, McCaw may
request from the Department a certification that would allow it to
provide access to interexchange carriers at ``centralized points''
instead of providing equal access handoffs in each LATA. Proposed
Decree Sec. IV(G). No similar relief is available to Bell companies,
and there is no apparent way for McCaw's relief to inur to the benefit
of its competing Bell cellular company. The differing treatment is
unjustified and unexplained. It should be eliminated.
Respectfully submitted,
Mark L. Evans,
Miller & Chevalier, Chartered, 655 Fifteenth Street, N.W., Suite 900,
Washington, D.C. 20005, (202) 626-6010.
Attorney for Bell Atlantic and NYNEX.
October 25, 1994.
Of Counsel
James R. Young,
John Thorne,
S. Mark Tuller,
Robert H. Griffin,
Attorneys for Bell Atlantic.
Raymond F. Burke,
Gerald E. Murray,
Attorneys for NYNEX.
BILLING CODE 4410-01-M
[[Page 49888]]
[GRAPHIC][TIFF OMITTED]TN27SE95.000
BILLING CODE 4410-01-C
[[Page 49889]]
In the United States District Court for the District of Columbia
In the matter of: United States of America, Plaintiff, v.
Western Electric Co., Inc., et al., Defendants. Civil Action No. 82-
0192 (HHG).
Comments of BellSouth Corporation on Proposed Final Judgment
Introduction
BellSouth Corporation (``BellSouth'') submits these comments on the
proposed Final Judgment, United States v. AT&T Corp., Civ. No. 94-01555
(D.D.C. filed July 15, 1994) (``Proposed Final Judgment''), pursuant to
the Tunney Act, 15 U.S.C. Sec. 16(b)-(h). BellSouth believes that the
Court cannot fully evaluate the competitive effects of the merger
between AT&T Corporation (``AT&T'') and McCaw Cellular Communications,
Inc. (``McCaw'') without first considering the motions of BellSouth and
the other Bell Operating Companies (``BOCs'') for generic wireless
relief.\1\ BellSouth further believes that the Court should decide that
it is inappropriate to extend equal access obligations and
interexchange restrictions to the BOCs' wireless services and,
therefore, to AT&T/McCaw's wireless services. If the Court decides
otherwise, it should, at a minimum, ensure that the BOCs and AT&T/McCaw
are bound by identical restrictions and obligations. Finally, BellSouth
believes that the term ``McCaw Cellular Systems'' should be clarified
to specify that it does not include cellular franchises in which McCaw
does not possess affirmative control.
\1\ BellSouth has filed a motion for an order declaring that the
equal access and interexchange restrictions of Section II of the
Decree entered in United States v. American Tel. & Tel. Co., 552 F.
Supp. 131, 226-34 (D.D.C. 1982), aff'd mem. sub nom., Maryland v.
United States, 460 U.S. 1001 (1983) (``MFJ''), do not apply to the
BOCs' wireless facilities, or, in the alternative, for a waiver of
those restrictions. Southwestern Bell also has sought a waiver of
Section II's restrictions insofar as they may apply to the BOCs'
wireless facilities. All of the BOCs have joined in a motion for
narrower wireless relief. These motions re fully briefed and ripe
for decision.
---------------------------------------------------------------------------
Comments
1. The Court Should Decide the BOCs' Motion for Generic Wireless Relief
Before Deciding Whether the Proposed Final Judgment is in the Public
Interest
The Tunney Act requires the Court to ``determine [whether] the
entry of [the proposed final] judgment is in the public interest.'' 15
U.S.C. Sec. 16(e). Central to this inquiry is the likely competitive
impact of the Proposed Final Judgment. Id. In BellSouth's view, the
Court cannot fully evaluate the competitive impact of this Proposed
Final Judgment without first considering the BOCs' motions for generic
wireless relief. Only then will the Court have a clear view of the
competitive landscape. In particular, the Court cannot determine
whether the Proposed Final Judgment adequately protects competition
without first deciding whether the wireless operations of the BOCs are
subject to (and should remain subject to) the interexchange prohibition
and equal access restrictions of Section II of the MFJ.
The local calling area restrictions and the equal access
obligations of the Proposed Final Judgment are premised on the
assumption that similar restrictions will apply to the BOCs' wireless
franchises. According to the United States, ``[t]he equal access
arrangements prescribed by Section IV are modeled on the analogous
provisions of the Modification of Final Judgment * * * [and] are
[purportedly] largely identical to the conditions recommended by the
United States for provision of interexchange cellular service by the
Bell Companies.'' Competitive Impact Statement at 15, United States of
America v. AT&T Corp., (D.D.C. filed Aug. 5, 1994) (``CIS''). Indeed,
the United States previously has acknowledged that ``the BOCs' generic
wireless waiver request * * * raises a number of issues in common with
the AT&T-McCaw transaction.'' Memorandum of the United States in
Support of AT&T's Motion for a Waiver of Section I(D) of the Decree at
3, United States v. Western Elec. Co., Civ. No. 82-0192 (D.D.C. filed
July 15, 1994). The United States considered the BOCs' motions for
generic wireless relief together with the Proposed Final Judgment in
order to reach a consistent result and encouraged the Court to decide
the two issues consistently. Transcript of Hearing, July 21, 1994, at
50-51, United States v. Western Elec. Co., Civ. No. 82-0192 (D.D.C.
filed July 21, 1994).
The Proposed Final Judgment reflects the United States' view that
the local calling area restrictions and the equal access obligations
imposed on AT&T are contingent upon similar restrictions and
obligations being applied to the BOCs' wireless services. Section X
provides as follows:
If BOC Wireless Systems are relieved in whole or in part of any
or all of the comparable equal access or nondiscrimination
obligations of the MFJ as a result of legislation, judicial orders,
or agency orders that vacate, modify, supersede, or interpret the
provisions of the MFJ, the provisions of Article IV of this final
judgment shall be modified or vacated to provide the same relief to
AT&T or McCaw upon their showing that competitive conditions do not
require a different obligation for AT&T and McCaw and that this
modification is equitable and in the public interest.
Proposed Final Judgment Sec. X. Moreover, although the Department of
Justice (the ``Department'') and AT&T have agreed to permit AT&T/McCaw
to offer ``Local Cellular Service'' in many areas larger than those
authorized for the BOCs, the definition of ``Local Cellular Service
Areas'' will automatically change to conform to the size of any areas
in which the BOCs are permitted ``to provide cellular exchange services
without any equal access obligation under the provisions of the MFJ.''
Proposed Final Judgment Sec. 11(Q).
The appropriateness and scope of the BOCs' local calling area
restrictions and equal access obligations are now squarely before the
Court. All the BOCs have filed motions for generic wireless relief.
BellSouth has asked the Court to declare that the equal access
obligations and interexchange restrictions of the MFJ do not apply to
wireless services; BellSouth and Southwestern Bell have asked the Court
to waive those equal access obligations and interexchange restrictions
to the extent they apply to wireless services; and all of the BOCs have
requested narrower wireless relief. Given that the local calling area
restrictions and equal access obligations of the Proposed Final
Judgment are contingent upon the MFJ's similar restrictions, the Court
should examine the MFJ's restrictions before examining the restrictions
of the Proposed Final Judgment. The BOCs' motions some of which were
first filed with the Department in 1991, are fully briefed and ripe for
decision. Now that the AT&T/McCaw merger has been completed, there is
no conceivable justification for considering the Proposed Final
Judgment before deciding the BOCs' long pending motions.
Indeed, it is difficult to understand how the Court could
appropriately review the Proposed Final Judgment without first
considering the BOCs' generic wireless waiver motions. The Court, in
essence, is reviewing the discretion of the Attorney General; ``its
task [is] to determine whether the Department of Justice's explanations
[are] `reasonable under the circumstances.'' ' United States v. Western
Elec. Co., 993 F.2d 1572, 1577 (D.C. Cir. 1993). The Department,
however, found it necessary to review the merger and the BOCs' generic
wireless waiver motions together to reach a consistent result; and its
[[Page 49890]]
position on the Proposed Final Judgment assumes that the Court will
order the relief the United States has proposed in response to the
BOCs' generic wireless waiver motions. The proper scope of generic
wireless relief for the BOCs is for the Court to decide, however, not
for the Department of Justice. Accordingly, to evaluate whether the
Department's explanations of its support for the Proposed Final
Judgment are reasonable, the Court must at least ascertain whether it
agrees with the wireless relief the Department has supported for the
BOCs.
Moreover, this is the first time the Court has had to address
squarely the question of whether it is the public interest to impose
equal access in wireless markets. The Department maintains that the MFJ
requires it, and the BOCs have always offered it, but the Court has
never squarely held that the MFJ requires equal access in wireless
markets. See BellSouth Reply at 3-8. More important, the Court has
never decided whether the extension of equal access to wireless markets
is in the public interest. Wireless services were not at issue in the
MFJ case. Compare Complaint para. 29C, United States v. AT&T, No. 74-
1698, with Plaintiff's Third Statement of Contentions and Proof (Jan.
10, 1980). Thus, in the Tunney Act proceedings in connection with the
approval of the MFJ, the Court did not consider whether the public
interest required the application of equal access to wireless
facilities. In view of the Department's assumptions regarding the
application of equal access to the BOCs' wireless facilities in its
explanation of the Proposed Final Judgment, the Court should first
decide the BOCs' motions for generic wireless relief and then determine
whether the Department's position on the merger is reasonable in light
of the relief ordered by the Court on the generic wireless waiver
motions.
II. The Court Should not Impose an Equal Access Paradigm on the
Wireless Market
The Proposed Final Judgment is premised on the notion that AT&T/
McCaw and BOCs' cellular franchises should be governed by similar
rules. While BellSouth believes that the Proposed Final Judgment would
not achieve such a result, see infra pp. 10-12, it agrees with the
notion that a single paradigm should govern wireless markets: there
should not be one set of rules for BOCs and another for non-BOCs.
BellSouth, however, disagrees with the proposition that wireless
markets should be divided into limited local calling areas with each
local provider obligated to provide equal access to the entrenched
interexchange providers.
The Department has taken the view that the equal access obligations
of the BOCs under the MFJ should apply to their wireless operations.
The Proposed Final Judgment would impose equal access on McCaw's
cellular systems as well. As a result of the Department's regulatory
initiatives under the MFJ and in the Proposed Final Judgment, a
substantial portion of cellular subscribers would be forced to buy
wireless services in separate ``local'' and ``long distance''
components. Unconstrained competitors would have little incentive not
to charge their own subscribers a separate fee for the ``long
distance'' component of their service because AT&T/McCaw and the BOCs
would not be permitted to sell integrated service. As a result,
customers would pay two per-minute charges on all but the shortest
distance wireless calls. Thus, by adopting artificially narrow market
definitions at the outset and crafting decree restrictions to fit them,
the Department would create regulatory boundaries to constrain the
market to fit its artificial definition.
Such a vertical division of wireless markets is unjustified. As
AT&T's own consultants have noted, the local/long distance division is
an artificial regulatory construct. Excerpt from Michael E. Porter,
``Competition in the Long Distance Telecommunications Market: An
Industry Structure Analysis'' at 7 (Oct. 1987) (attached as Exhibit 13
to Affidavit of Donald G. Kempf, Jr., Bell Atlantic Corp. v. AT&T
Corp., Civ. No. 94-3682 (E.D.N.Y. filed Sept. 8, 1994)). The equal
access requirements of the Federal Communications Commission (the
``FCC'') and the Decree were designed to permit the development of a
competitive landline telephone system to the extent possible.
Competition in local telephone service was not thought to be possible
because it was thought to be a natural monopoly and was a legal
monopoly by state law in many states.\2\ To ensure that these
``bottlenecks'' were not used to prevent competition in the telephone
service generally, providers of local monopoly telephone service were
obligated to provide nondiscriminatory access to these ``essential
facilities.'' United States v. American Tel. & Tel. Co., 552 F. Supp.
at 160-65, 188.
\2\ Experience has proven incorrect the assumption that local
landline telephone service is a natural monopoly. See Memorandum of
Bell Atlantic Corporation, BellSouth Corporation, NYNEX Corporation,
and Southwestern Bell Corporation in Support of Their Motion to
Vacate the Decree at 53-67, United States v. Western Elec. Co., Civ.
No. 82-0192 (D.D.C. filed July 6, 1994).
---------------------------------------------------------------------------
Wireless facilities, on the other hand, are not bottleneck or
essential facilities. See, e.g., AT&T's Opposition to the Motions for
``Generic'' Wireless Waiver of the Decree's Core Provisions at 18 n.22,
United States v. Western Elec. Co., Civ. No. 82-0192 (filed Aug. 10,
1994). Competitive alternatives exist. In every area of the country,
there are two facilities-based cellular providers. Consequently, there
is no antitrust justification for requiring equal access in wireless
markets. BellSouth Reply at 26-28. The empirical data show why: equal
access already has cost wireless subscribers hundreds of millions of
dollars. BellSouth Reply at 22. This is not surprising given the fact
that the interexchange market, which is dominated by AT&T, is more
concentrated, and less competitive, than wireless markets. BellSouth
Reply at 17-21.
AT&T's motivation for accepting limited calling areas and equal
access obligations is no mystery. Like MCI, AT&T support equal access
because it allocates a portion of the wireless market to the entrenched
interexchange carriers and confines wireless providers to small,
inefficient local calling areas. AT&T provides over 70 percent of all
``interexchange'' service to wireless customers who are subject to
equal access, CIS at 12-13, and controls over 80 percent of the
business of BellSouth's subscribers. BellSouth Reply at 18. If equal
access is imposed in wireless markets, AT&T is sure to dominate the
resulting wireless long distance market just as it dominates the
landline interexchange market.
If the Court determines that no equal access requirement should be
imposed in wireless markets, AT&T/McCaw will have to compete on equal
terms with other wireless providers who are not members of the
interexchange oligopoly. The FCC has noted industry estimates that
there likely will be more than 60 million wireless subscribers by the
year 2002. Second Report and Order, In the Matter of the Commission's
Rules to Establish New Personal Communications Services, 8 F.C.C. Rcd
7700, 7710 (1993), recon. Memorandum Opinion and Order, FCC 94-144
(June 13, 1994). The long distance traffic generated by wireless
providers might, in time and absent equal access, eventually provide a
challenge to the tripartie domestic long distance cartel. This is what
AT&T hopes to prevent.
Thus, not surprisingly, AT&T has argued that its own acceptance of
local calling areas and equal access obligations should lead the Court
to
[[Page 49891]]
deny the BOCs' motions for generic wireless relief. Furthermore, AT&T
has foreshadowed its ultimate gambit. It hopes that this Court will
create momentum which will cause the FCC to impose a vertical market
allocation on the wireless industry as a whole. Memorandum in Support
of AT&T's Motion for a Waiver of Section I(D) of the Decree Insofar As
It Bars the Proposed AT&T-McCaw Merger at 71, United States v. Western
Elec. Co., Civ. No. 82-0192 (D.D.C. filed May 31, 1994). Indeed, AT&T
already is citing the Proposed Final Judgment to the FCC as a
justification for saddling the entire industry with an equal access
requirement. Comments of AT&T at 5, In the Matter of Equal Access and
Interconnection Obligations Pertaining to Commercial Mobile Radio
Services, CC No. 94-54 RM-8012 (F.C.C. filed Sept. 12, 1994). Such a
market paradigm will ensure that AT&T retains its dominant share of
interexchange telecommunications services.
According to the Department, ``the market power of each cellular
duopolist'' justifies an equal access requirement. Memorandum of the
United States in Response to the Bell Companies' Motions for Generic
Wireless Waivers at 3, United States v. Western Elec. Co., Civ. No. 82-
0192 (filed July 25, 1994) (``U.S. Response''). See also, id. at 19-20.
This justification rings hollow. If any anticompetitive harm resulted
from providing integrated wireless services, the Department, which, by
its own account, has been closely investigating this market since 1991,
surely would have sued McCaw and other non-BOC providers under the
antitrust laws for refusing to permit interexchange carriers``equal
access'' to their wireless systems. The Department's reticence in this
regard is understandable. The antitrust laws do not require that owners
of non-essential facilities offer equal access. BellSouth Reply at 27-
28. The unrefuted empirical data emphatically demonstrate why: in
wireless markets, consumers are better off without equal access. Id. at
22.
In many areas of the country, moreover, cellular competitors have
been joined by providers of Enhanced Specialized Mobile Radio
(``ESMR'') service, which competes directly with cellular service. Id.
at 15. In addition, in six weeks the FCC will begin licensing several
additional wireless competitors in each area in which cellular services
are provided. On December 5, 1994, the FCC will auction spectrum for
broadband Personal Communications Service (``PCS'') providers.
Experience with PCS demonstrates that it will compete directly with
cellular. Id. The fact that competing alternatives are available to
wireless customers, and that many more soon will be, demonstrates that
it is not in the public interest to extend equal access to the BOCs'
wireless operations, and apart from correcting the competitive
imbalance created by the MFJ, it is not in the public interest to
impose equal access on AT&T/McCaw.
Deciding that there is no basis specific to the BOCs and AT&T/McCaw
for imposing equal access on their wireless systems, moreover, would
clear the slate for uniform action by the FCC. At the urging of MCI,
the FCC has announced that it will consider adopting an equal access
requirement for cellular services similar to that which applies to
landline services. The FCC's broad public interest inquiry should not
be fettered by the reality of existing (but unjustified) equal access
obligations on some market participants.
III. The Court Should Ensure the Terms of Competition Between the BOCs
and AT&T/McCaw are Equal
If the Court nonetheless artificially divides the wireless market
into separate local and long distance components and requires equal
access, it should, at a minimum, ensure that the conditions of
competition for the BOCs and AT&T/McCaw are equal. The Proposed Final
Judgment, however, would give AT&T/McCaw preferences over the BOCs,
even if the Court ultimately adopted the Department's view of the
proper scope of generic wireless relief for the BOCs.
For example, the Proposed Final Judgment would apply only to AT&T/
McCaw's cellular systems (excluding cellular digital packet data
services). Proposed Final Judgment at Sec. IV. The Department, on the
other hand, supports equal access and local calling areas for other
wireless services which may be provided by the BOCs, such as broadband
PCS. U.S. Response at 27-45. There is no conceivable justification for
this disparity.
McCaw is also permitted to provide local cellular service in1 9
areas larger than those available to the BOCs. Proposed Final Judgment
Sec. II(Q). Again, there is no conceivable justification for this
discriminatory treatment. Nor does the Department offer one, noting
only that the Department reserves the right to seek an order confining
AT&T/McCaw to LATA boundaries in the future. CIS at 24. The Department
supports equal access restrictions for AT&T/McCaw for the same reasons
it recommends them for the BOCs. Thus, it makes little sense to
restrict the BOCs to LATAs while permitting AT&T/McCaw to provide
service within multi-LATA clusters without equal access.
Furthermore, AT&T/McCaw will be permitted to provide facilities-
based interexchange service to its wireless subscribers. The Department
would permit the BOCs only to resell interexchange service and to
purchase no more than 45 percent of such service from any one
interexchange carrier. Id. at para. 2(1). These additional restrictions
are flagrantly anticompetitive. They could prevent BOC cellular systems
from purchasing a sufficient volume of service from a single provider
to obtain the highest possible discounts; they ensure that AT&T will
control a significant portion of the BOCs' wireless interexchange
traffic; and they prevent full, facilities-based interexchange
competition. Reply of the Bell Companies to Comments on Their Motion
for a Modification of Section II of the Decree to Permit Them to
Provide Cellular and Other Wireless Services Across LATA Boundaries at
36-40, United States v. Western Elec. Co., Civ. No. 82-0192 (D.D.C.
filed Sept. 2, 1994). One hardly needs to be an accomplished analyst to
discern from AT&T's financial statements that it is not in need of a
set aside.
AT&T/McCaw also enjoys the benefits of a ``most-favored-nation''
clause which will permit them to obtain relief from the Proposed Final
Judgment in the event that the BOCs are permitted to offer wireless
service in expanded calling areas or without an equal access
requirement. Proposed Final Judgment Secs. II(Q), X. The BOCs, quite
inexplicably, would have no reciprocal right. This disparity is
exacerbated by Section X of the Proposed Final Judgment, which is more
lenient than either the standard announced in Rufo v. Inmates of
Suffolk County Jail, 112 S. Ct. 748, 760 (1992), or Section VIII(C) of
the MFJ. As a result, AT&T/McCaw is guaranteed any benefits of relief
obtained by the BOCs, but the BOCs will be denied the benefits of
relief obtained by AT&T/McCaw unless they can satisfy a more stringent
standard for relief. If the Department views this as ``equal
treatment,'' then it obviously considers some participants to be ``more
equal'' than others.
There also is no justification for including a 10 year expiration
provision in the Proposed Final Judgment. Neither the MFJ, which is
over 12 years old, nor the equal access requirements the Department
proposes to apply to the BOCs' wireless services (see U.S. Response)
include any expiration provision. Inasmuch as the Department has
justified imposing equal access on the BOCs and AT&T for the same
[[Page 49892]]
reasons and intends that the obligations be equivalent, it would be
illogical and unfair to include an expiration provision in the Proposed
Final Judgment.
IV. The Term ``McCaw Cellular System'' Should Be Clarified
BellSouth also requests that the Proposed Final Judgment be
clarified to specify that the term ``McCaw Cellular System'' includes
only cellular franchises in which McCaw has affirmative control.
Section II(T) defines ``McCaw Cellular System'' as any cellular system
``in which McCaw controls, directly or through its affiliates, a direct
or indirect voting interest of more than fifty percent (50%), or the
right, power or ability to control, * * *'' ``Control'' is defined in
Section II(K) as ``the power to direct or cause the direction of the
management and policies of a corporation or a partnership, whether
through ownership of voting securities, by contract, or otherwise.''
Read together, these definitions appear to limit the requirements
of Section IV to those cellular systems in which McCaw has affirmative
control, or the power to direct the company to implement AT&T's
obligations under the Proposed Final Judgment. A system in which AT&T/
McCaw has the power to veto actions with which it disagrees (negative
control), but lacks affirmative control, should not be subject to
Section IV's requirements. For example, if AT&T/McCaw owned 50 percent
of the voting interests in a cellular system and a second firm owned an
identical interest in that system, that system should not be considered
a ``McCaw Cellular System'' for purposes of the Proposed Final Judgment
because McCaw would lack ``the power to direct or to cause the
direction of the management and policies'' of the cellular system. In
such a circumstance, McCaw could not unilaterally direct the
partnership to take any actions, including to ensure compliance with
the Proposed Final Judgment.
This issue is not one of theoretical interest. AT&T/McCaw is a
partner of BellSouth's and owns negative control of cellular systems in
Houston, Galveston, and Los Angeles, In each case, the system is
governed by a partnership in which McCaw and BellSouth each own a 50
percent voting interest. BellSouth requests that the Court remove any
lingering uncertainty over the proper construction of the Proposed
Final Judgment by specifying that the term ``Control'' only describes
affirmative control and that the term ``McCaw Cellular Systems,''
therefore, does not include cellular franchises in which McCaw
possesses negative control.
Conclusion
The Court should decide the BOCs' motions for generic wireless
relief before deciding whether the proposed consent decree is in the
public interest. In that context, the Court should decide that the
market for wireless services should not be burdened with equal access
obligations and interexchange restrictions. If the Court nonetheless
decides to the contrary, it should ensure that the terms of competition
for the BOCs and AT&T/McCaw are equivalent. Finally, the Court should
clarify that the term ``McCaw Cellular Systems'' does not include
cellar systems in which McCaw does not possess affirmative control.
Respectfully submitted,
By:
Richard W. Beckler,
(Bar No. 262246)
Stephen M. McNabb,
(Bar No. 367102)
Michael P. Goggin,
(Bar No. 428288), Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue,
NW., Washington, DC 20004-2604, Telephone: (202) 662-0200, Telecopier:
(202) 662-4643
Walter H. Alford, John F. Beasley, William B. Barfield,
Bellsouth Corporation, Suite 1800, 1155 Peachtree Street, NE., Atlanta,
GA 30309-3610, Telephone: (404) 249-2641
Attorneys for Bellsouth Corporation
Dated: October 25, 1994.
United States District Court for the District of Columbia
In the matter of: United States of America, Plaintiff, v. AT&T
Corp. and McCaw Cellular Communications, Inc., Defendants. Civil
Action No. 94-01555 (HHG).
To: The Department of Justice
Comments of SBC Communications Inc. on Proposed Final Judgment
Pursuant to 15 U.S.C. Sec. 16(d), SBC Communications Inc.
(``SBC'')\1\ files these Comments in partial opposition to the proposed
Final Judgment in this case. The proposed settlement addresses most of
the competitive concerns raised by the merger of AT&T and McCaw
Cellular Communications, Inc. (``McCaw''), and should be approved in
substantial part. But the Final Judgment would not solve one aspect of
a core problem the Department of Justice (``Department'') has
identified: AT&T's ability to favor McCaw by misusing confidential
information acquired in AT&T's capacity as a supplier of services to
cellular carriers and their customers. The Department has insisted on
considerable safeguards against disclosure of confidential information
AT&T/McCaw acquires as a supplier or buyer of network equipment. Yet
the Final Judgment would do nothing to prevent AT&T from advantaging
McCaw, and disadvantaging competition, by disclosing confidential
information AT&T acquires as a long-distance carrier.
\1\ SBC Communications Inc. was formerly knows as Southwestern
Bell Corporation.
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Moreover, the proposed settlement cannot be reconciled with
statements the Department of Justice has made about Bell company (or
``BOC'') provision of interLATA wireless services SBC disagrees with
the Department's suggested conditions on wireless relief for the Bell
companies. But if the Court finds the Department's reasoning persuasive
in that context, the very same reasoning requires imposition of
additional conditions on the AT&T/McCaw merger This Court should be
unable to conclude that conditions like a ban on interexchange routing
and sales force separation would promote competition if applied to BOC
wireless systems, without finding that they would do the same if
applied to AT&T/McCaw.
Introduction
While the McCaw acquisition marks a dramatic expansion of AT&T's
wireless business, AT&T occupied a commanding position in wireless even
before it decided to spend about $12 billion to become the nation's
largest cellular carrier. Indeed, one cannot understand the competitive
risk presented by AT&T's entry into local cellular services without
appreciating AT&T's central place in all other aspects of wireless
communications.
1. Wireless Long Distance
The Department freely acknowledges that AT&T remains the nation's
dominant long-distance carrier. See Proposed Final Judgment and
Competitive Impact Statement; United States of America v. AT&T Corp.
and McCaw Cellular Communications, Inc., 59 FR 44,158, 44,166 (1994)
[hereinafter Competitive Impact Statement]. AT&T's entrenched position
is particularly evident in wireless. Due to the Modification of Final
Judgment (MFJ), customers of BOC-affiliated cellular systems are
required to buy their cellular long-distance service separately
[[Page 49893]]
from local service.\2\ AT&T is the long-distance carrier for more than
70 percent of these customers. 59 Fed. Reg. at 44,169. Moreover, while
McCaw and other non-Bell company cellular carriers can and do resell
interexchange services to their customers, they buy their wholesale
service from AT&T in the vast majority of cases. See id.
\2\ See United States v. AT&T, 552 F. Supp. 131, 227 (D.D.C.
1982) (MFJ Sec. II(D)(1)), aff'd sub nom. Maryland v. United
States, 460 U.S. 1001 (1983).
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For Bell company cellular providers, a customer's selection of AT&T
means that AT&T will obtain some of the BOC affiliate's most
competitively sensitive confidential information. The MFJ prohibits BOC
affiliates--including SBC's affiliate, Southwestern Bell Mobile Systems
(SBMS)--from providing long-distance services. Largely as a result of
this barrier to competition up to 90 percent of all SBMS customers
choose AT&T. Stupka Aff. para. 4. SBMS must provide AT&T with these
customers' names, addresses, and telephone numbers. In addition, once
AT&T begins to carry an SBMS customer's calls, it can collect usage
information (including the location and telephone number of the party
called, the duration of the call, and personal calling patterns) for
that customer.
All of this non-public information has tremendous potential value
in marketing cellular services. As explained in the attached affidavit
of John T. Stupka, the information AT&T gains as a long distance
carrier allows it to identify the particular customers who are the
highest-volume users of SBMS local cellular services. These customers
could be targeted for direct solicitation, and those solicitations
could be tailored to the customer's historic calling patterns with
SBMS. See Stupka Aff. Paras. 5-8. In other words, MFJ constraints
guarantee AT&T a window into SBMS's most sensitive customer
information, and a unique ability to access and potentially steal away
SBMS' most valued customers.
2. Equipment and Software
Cellular customers depend upon AT&T products and services even when
they place local calls. AT&T is the nation's largest manufacturer of
switches, cell site radios, and related network equipment used by
cellular telephone systems. Competitive Impact Statement, 59 Fed. Reg.
at 44,166-67. More important than AT&T's naked market share, however,
is the so-called ``lock-in'' effect. See generally Eastman Kodak Co. v.
Image Technical Servs., 112 S.Ct. 2072, 2087 (1992). As the Department
has found, cellular providers that have purchased equipment from a
particular manufacturer are locked into that manufacturer when they buy
new equipment for the same service area. If they choose AT&T equipment
for a particular system, cellular carriers either have to keep buying
from AT&T or undertake a disruptive and expensive replacement of
existing AT&T equipment with that of another manufacturer.\3\ The same
is true for the complex and expensive computer software needed to
operate this equipment, and for ongoing software upgrades that enhance
performance and allow new services.
\3\ With cell sites costing $750,000, and switches approximately
$7 million, changing manufacturers is extremely expensive. SBMS
estimates that it would cost over $1.2 billion to replace all the
AT&T equipment it currently uses. Stupka Aff. Paras. 16-18.
---------------------------------------------------------------------------
Moreover, as an equipment supplier, AT&T has access to the most
sensitive proprietary information of its customers. The Department has
explained that cellular equipment manufacturers, in performing routine
maintenance, software upgrades, and other services, have access to
system usage patterns and similar day-to-day operating information.
Likewise, AT&T and other equipment suppliers are aware of plans for
system expansions and new services and features, since their
cooperation is essential to effect them. 59 Fed. Reg. at 44,168.
3. The McCaw Acquisition
On September 19, 1994, AT&T committed to paying $12 billion for the
nation's largest cellular provider. With its LIN Broadcasting
subsidiary, McCaw serves roughly 3.4 million wireless callers. SBMS, by
comparison, has about 2.6 million cellular customers. Stupka Aff. para.
1. NcCaw has ownership interests in over 114 markets nationwide, and
competes directly against SBMS in Dallas, San Antonio, Corpus Christi,
Oklahoma City, Wichita, and Kansas City. Id.
Before the McCaw acquisition, AT&T was unable to use the sensitive
information it gains as a long-distance carrier to take customers from
SBMS and other cellular providers. AT&T likewise had no incentive to
favor one equipment customer over another. But that is no longer the
case. AT&T now has the ``ability and incentive to use its position as
equipment supplier to McCaw's wireless competitors to disadvantage
those customers/competitors vis-a-vis McCaw.'' Competitive Impact
Statement, 59 Fed. Reg. at 44,171. Similarly, AT&T now has the ability
and incentive to use the information it obtains in providing long
distance to BOC cellular customers to capture those customers for
McCaw. These critical facts should inform consideration of the proposed
Final Judgment.
I. The Proposed Decree Would Allow AT&T To Use Confidential Information
It Gathers as the Dominant Interexchange Carrier To Obtain a
Competitive Advantage in Cellular Services
The Department correctly concluded that the AT&T/McCaw merger, by
bringing together the dominant long-distance carrier and a major
supplier of interLATA wireless services, would ``[d]ecreas[e] actual
and potential competition in the market for interexchange services to
cellular subscribers.'' Competitive Impact Statement at 44,166. The
Department therefore insisted on equal access obligations that, in its
view, will cure this problem. See id. at 44 169-71.
The Department also properly found that preserving competition in
the cellular services market requires restrictions on use of
confidential and competitively sensitive information AT&T/McCaw
acquires as a supplier of equipment and software to McCaw's rivals.
Accordingly, the proposed Final Judgment would limit distribution of
cellular carriers' confidential information within AT&T/McCaw, in an
effort to ensure that this information is not used for the benefit of
McCaw operations.
Specifically, the Final Judgment identifies particular categories
of information--such as cellular customer names, system subscribership,
and system usage--that ``if inappropriately disclosed or used [by AT&T/
McCaw], could cause competitive harm.'' Id. at 44,172 & n.10. AT&T's
equipment personnel are absolutely prohibited from disclosing this
information to persons who play a role in providing, marketing, or
developing AT&T or McCaw communications services. Id. at 44,172. The
Department considers information like customer lists and usage
information so competitively sensitive that AT&T equipment personnel
could not disclose it even if the affected AT&T customer were to
consent. Id.
The Department further concluded that new restrictions on AT&T/
McCaw are necessary to protect against misuse of information McCaw
obtains either in the course of interconnecting with long-distance
carriers or as a buyer of cellular equipment manufactured by AT&T's
competitors. The proposed Final Judgment thus contains provisions
forbidding McCaw from transferring this
[[Page 49894]]
information to AT&T, so that AT&T cannot obtain an unfair competitive
advantage as an equipment supplier or interexchange carrier. Id.
Finally, the Department concluded that allowing transfer of McCaw's
presubscription and usage information to AT&T would deny other
interexchange carriers ``a meaningful opportunity to market their
services to customers of McCaw Cellular Systems.'' Id. at 44,170. The
suggested settlement therefore prohibits McCaw from giving AT&T any
such information, except that McCaw can provide AT&T information about
its own long-distance customers if it gives other interexchange
carriers the same information about their customers. Id.
The Department's insistence on substantial safeguards to address
each of these problems makes it inexplicable that the proposed Final
Judgment would do nothing to address misuse of customer lists and other
confidential information AT&T acquires as the dominant interexchange
carrier. In each of the 58 markets where McCaw (including LIN) competes
against a Bell company cellular affiliate, MFJ restrictions and AT&T's
market dominance guarantee AT&T extensive access to much of the same
information (such as customer lists and usage information) that the
Department would unconditionally protect when AT&T acts as an equipment
supplier. And no matter how that information is obtained, AT&T now has
the incentive to use it in just the same way: to gain an
anticompetitive advantage in cellular services.
Consider the Dallas market, which is served by SBMS and McCaw.
Seventy-nine percent of SBMS customers in Dallas select AT&T as their
long-distance carrier. Stupka Aff. para. 6. SBMS therefore must give
the parent of its local competitor the names, telephone numbers, and
addresses of four out of every five SBMS customers, with the knowledge
that AT&T can estimate their local cellular usage and track their
calling patterns. Using the information it obtains as a long-distance
provider, AT&T can market McCaw services directly to the most valued
SBMS customers, without spending a penny on consumers who do not use
cellular telephones in Dallas, or even SBMS customers who use their
phone infrequently.
A recent SBMS study illustrates the value of the information AT&T/
McCaw acquires about SBMS's Dallas customers. The study showed that
roughly three-quarters of those SBMS customers who use at least 275
minutes of AT&T cellular long distance each month are above-average
users of SBMS local service, whereas less than 20 percent of the
lowest-volume AT&T users are above-average local cellular callers. See
id. para. 6 & Attachment A at 1. Further, a marketing program that
captured just 2,222 high-volume SBMS callers could win for AT&T/McCaw
as much cellular revenue as a campaign that, lacking inside
information, switched 40,000 low-volume SBMS customers. Id. para. 6 &
Attachment A at 2. AT&T/McCaw's unique ability to identify the highest-
volume cellular interexchange callers by name, address, and telephone
number would thus convey a powerful advantage in local cellular
marketing.
AT&T/McCaw also can use the SBMS customer lists and usage
information it acquires as a supplier of long distance to estimate
changes in the size and composition of SBMS's subscribership. It can
determine, for example, if an SBMS system is attracting new subscribers
relatively quickly, or loosing existing subscribers. By noting the
addresses and/or calling habits of new subscribers, AT&T/McCaw may even
be able to figure out which SBMS service or marketing initiatives
attract customers AT&T/McCaw would particularly like to claim for
itself. With this unique insight into SBMS's most closely guarded
proprietary information, AT&T/McCaw could respond to changes in SBMS
services and promotions literally on a day-to-day basis, and counter
those SBMS efforts. Id. para. 7.
SBMS and other Bell company cellular providers, by contrast, are
barred by the MFJ from providing long distance and do not receive
customer information from BOC local exchange operations. See 47 CFR
Sec. 22.901(d) (1994). BOC affiliates have ready means of identifying
competitors' customers or discerning their calling patterns. They
cannot instantly track their rivals' subscribership or target
competitors' customers for solicitation. Similarly, cellular carriers
that provide interexchange service only to their own customers have no
ability to acquire such information. Even cellular carriers (such as
Sprint/Centel) that are affiliated with an interexchange carrier will
not be able to obtain meaningful access to McCaw's customer
information, given that AT&T is certain to be the long-distance
provider chosen by the overwhelming majority of McCaw cellular
customers.\4\
\4\ Section IV.C of the proposed Final Judgment requires
disclosure of McCaw customer lists to unaffiliated long-distance
carriers, but those lists may be used only in marketing
interexchange services. See 59 FR at 44,162.
---------------------------------------------------------------------------
The Department's failure to insist on safeguards against misuse of
AT&T's unique information-gathering capability cannot be attributed to
any confidence that competition will constrain AT&T from abusing its
position in cellular long distance. The Competitive Impact Statement
points out that AT&T is the ``dominant supplier of interexchange
telecommunications service,'' 59 Fed. Reg. at 44,166, indicating the
Department's acceptance that AT&T has market power. See, e.g., MCI
Telecommunications Corp. v. AT&T, 114 S. Ct. 2223, 2226-27 (1994)
(noting longstanding regulatory distinction ``between dominant carriers
(those with market power) and nondominant carriers''). The Department
further explains that the long-distance market is an oligopoly
characterized by ``imperfect competition,'' 59 Fed. Reg. at 44,182-83,
and notes AT&T's extraordinarily high market share in the wireless
interexchange market, id. at 44,169.\5\
\5\ The FCC similarly has determined that AT&T ``may retain some
ability to control its prices'' for the residential and small-
business services used by most cellular customers who presubscribe
to a long-distance carrier, and has identified evidence that
regulation, not competition, holds down rates. Price Cap Performance
Review for AT&T, 8 FCC Rcd 5165, 5167 (1993). In addition, SBC and
others have demonstrated the absence of genuine competition to serve
wireless long-distance customers. See Motion of the Bell Companies
for a Modification of Section II of the Decree to Permit Them to
Provide Cellular and Other Wireless Service Across LATA Boundaries
and supporting affidavits, as well as Reply of the Bell Companies to
Comments on Their Motion for a Modification of Section II of the
Decree to Permit Them to Provide Cellular and Other Wireless Service
Across LATA Boundaries and supporting affidavits, filed in the case
of United States v. Western Elec. Co., No. 82-0192 (D.D.C.) on June
20, 1994 and September 2, 1994, respectively.
---------------------------------------------------------------------------
The Department's views about competition in local cellular services
also fail to explain the absence of protections in the Final Judgment.
The public interest demands appropriate safeguards against AT&T/McCaw's
misuse of a competitor's confidential information no matter what the
state of competition in the affected market. The Competitive Impact
Statement, for example, contains no discussion of competition in
cellular equipment and software markets. Yet the Department has
determined that competition and the public interest would be served by
a prohibition on sharing information McCaw obtains from its Swedish
equipment supplier with employees of AT&T's equipment business. Id. at
44,172. If the public interest is served by preventing anticompetitive
exploitation of confidential information AT&T/McCaw acquires as a
supplier of cellular equipment, as a supplier of local cellular
services, or as a buyer of
[[Page 49895]]
cellular equipment, the public interest must also require protections
against use of similar or even more sensitive information AT&T/McCaw
acquires as a supplier of cellular long distance.
Prohibiting AT&T/McCaw from using customer information it obtains
as a wireless long-distance carrier to market its own wireless services
will not undermine any pro-competitive aspects of the merger. This
leveraging of AT&T's dominant position in long distance would not
enable McCaw to provide higher-quality or lower-cost service, or
encourage investment in new technologies. Nor could it possibly assist
in the development of wireless telephony by increasing overall cellular
subscribership. Forbidding McCaw to piggy-back off AT&T's dominance in
long distance would merely encourage McCaw to win new customers by
offering higher-quality or lower-priced services, rather than barraging
its competitors' best customers with personalized solicitations.
AT&T has elsewhere opposed a ban on using interexchange customer
information to sell wireless services by arguing that the FCC has not
flatly barred use of this information to market customer premises
equipment (CPE) or enhanced services. See AT&T's and McCaw's Opposition
to Petitions to Deny and Reply to Comments at 83-84, AT&T Co. and McCaw
Cellular Communications, Inc., File No. ENF-93-44 (FCC filed Dec. 2,
1993). But these analogies are misplaced. The Commission relied on
customer-initiated restrictions in the CPE and enhanced services areas
because it anticipated that valuable customer information would mostly
relate to sophisticated businesses that can take care of themselves.\6\
The same cannot be said about cellular customer lists and usage
information. In Dallas, for instance, an SBMS customer who spends as
little as $100 per month falls within the group of high-volume callers
(25 percent of all callers) that accounts for the majority of cellular
revenues. See Stupka Aff. Attachment A at 3.
\6\ Furnishing of Customer Premises Equip. and Enhanced Servs.
by AT&T, 102 F.C.C.2d 627 693 (1985); Amendment of Sections 64.702
of the Commission's Rules and Regulations (Third Computer Inquiry),
104 F.C.C.2d 958, 1089-90 & n.313 (1986), reconsidered, 2 FCC Rcd
3035, further reconsidered, 2 FCC Rcd 3072 (1987), further
reconsidered, 3 FCC Rcd 1150 (1988), further reconsidered, 4 FCC Rcd
5927 (1989), vacated in part on other grounds, California v. FCC,
905 F.2d 1217 (9th CIr. 1990).
---------------------------------------------------------------------------
The Commission also reasoned in the enhanced services context that
use of confidential information would benefit all enhanced services
providers by ``mak[ing] consumers more aware of the benefits of
enhanced services.'' \7\ As already explained, this rationale has no
application here because AT&T would be marketing its own wireless
services to existing cellular customers.
\7\ Third Computer Inquiry, 3 FCC Rcd at 1163.
---------------------------------------------------------------------------
AT&T has further claimed that it should not be restricted in using
cellular interexchange customer information to market wireless services
because ``[t]he information is AT&T's.'' AT&T's and McCaw's Opposition
to Petitions to Deny and Reply to Comments at 83-84. Insofar as
customer lists are at issue, that assertion is wrong in the most basic
sense: AT&T obtains those lists only because the MFJ requires SBMS and
other BOC affiliates to turn them over. The Department, in fact, has
long recognized that BOC affiliates' customer lists are just that--the
property of BOC affiliates. In 1987, it rejected AT&T's claim of an
entitlement to full lists of BOC cellular customers, saying that
whether or not to grant such access is a matter within the discretion
of each BOC. Response of the United States Concerning its Enforcement
of the Modification of Final Judgment at 13-16, United States v.
Western Elec. Co., No. 82-0192 (D.D.C. filed May 27, 1987).
With respect to information about long-distance and cellular usage
that AT&T develops, AT&T's unrestricted ownership would extend no
further than the long-distance ``half.'' The MFJ may guarantee AT&T, as
the dominant interexchange provider, a unique chance to spy on BOC
cellular systems, but that cannot mean that AT&T/McCaw, as wireless
provider, has an unbridled right to exploit whatever cellular calling
information AT&T can acquire.
If accepted, moreover AT&T's argument would suggest an entitlement
to use all confidential customer information however it pleases. The
Department has clearly and correctly rejected that position with
respect to customer information McCaw and AT&T acquire as providers of
local wireless services and network equipment, and also with respect to
information McCaw obtains about its equipment suppliers and connecting
long-distance carriers. The rules governing use of non-public
information AT&T collects as a wireless interexchange provider should
be no different.
This Court need not be concerned that conditioning approval of the
Final Judgment on a modification prohibiting use of cellular carriers'
customer lists and similar information to sell McCaw services will put
the merger at risk. In connection with a suit by Bell Atlantic
Corporation and NYNEX Corporation to undo the AT&T/McCaw merger, AT&T
has already agreed to refrain temporarily from ``furnish[ing] to McCaw,
or us[ing] in marketing McCaw's services, lists of, or usage
information concerning, cellular customers of [Bell Atlantic and NYNEX]
who have presubscribed to AT&T's long distance service for their
cellular service.'' \8\ The condition here proposed by SBC would simply
extend this commitment to all McCaw competitors, and extend its
duration to match comparable provisions of the Final Judgment.
\8\ Bell Atlantic Co. v. AT&T Corp., No. CV 94-3682, Order at 2
(E.D.N.Y. Sept. 14, 1994). AT&T's agreement to this stipulation when
under the eye of a court contrasts with AT&T's failure to sign a
standard form contract governing access to SBMS systems, which
requires interexchange carriers to keep customer lists provided by
SBMS confidential. See Stupka Aff. para. 10.
---------------------------------------------------------------------------
SBC does not suggest that the Court should intervene to correct
every perceived shortcoming of the proposed settlement. But the Tunney
Act requires more than a simple `` `rubber stamp' '' of a proposed
decree. United States v. AT&T, 552 F. Supp. 131, 151 (D.D.C. 1982),
aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983). Where,
as here, the proposed decree and the Government's Competitive Impact
Statement reflect a failure to consider significant competitive
concerns and ``inconsistent * * * interpretations of the public
interest,'' the Court is obligated to step in. United States v. Bechtel
Corp., 648 F.2d 660, 666 (9th Cir. 1981), cert. denied, 454 U.S. 1083
(1981); cf. Office of Communication of the United Church of Christ v.
FCC, 707 F.2d 1413, 1424-26 (D.C. Cir. 1983) (rational decisionmaking
requires reasoned analysis of departures from precedent and
consideration of relevant factors and alternatives).
Accordingly, this Court should condition its approval of the
proposed Final Judgment on the addition of a new Section IV.J, as
follows:
J. AT&T shall not disclose to any person engaged in marketing
any McCaw or AT&T Wireless Service names, addresses, or telephone
numbers of, or usage information concerning, customers of a Wireless
Carrier unaffiliated with AT&T or McCaw, if AT&T obtains that
information in its capacity as a supplier of interexchange
telecommunications services (as defined in the MFJ). Members of
AT&T's management executive committee shall be permitted to receive
such information in connection with their capacities as members of
AT&T's management executive committee, but shall be bound by the
nondisclosure obligation set forth in this Section IV.J.
[[Page 49896]]
II. If Imposed on BOC Wireless Providers, Certain Additional Conditions
Should Be Imposed on AT&T/McCaw as Well
Whereas the above condition responds to AT&T/McCaw's unique
position as the dominant interexchange carrier and leading cellular
provider, two further conditions--tracking ones the Department of
Justice seeks for Bell company provision of interLATA wireless
services--may be necessary to promote fair competition between AT&T/
McCaw and BOC providers of wireless services.
The conditions discussed below would, in SBC's view, be
anticompetitive if imposed on the Bell companies or AT&T/McCaw. But the
Department's logic requires that they be applied to AT&T/McCaw if they
are imposed on the Bell companies. Indeed, the conditions would have to
be incorporated in the Final Judgment for acceptance of the
Department's position in pending MFJ proceeding to make sense.
A. The Sufficiency of the Recommended Conditions on the AT&T/McCaw
Merger Cannot Be Determined Until the Rules Governing McCaw's
Competitors Are Set
By urging equal access provisions that either reflect current MFJ
requirements or ``basically track those the United States has
recommended for the Bell Companies if they should be permitted to
provide wireless interexchange service,'' 59 FR at 44,170, the
Department has broadly accepted that parity between AT&T/McCaw wireless
systems and their BOC competitors will serve the public interest.\9\
Indeed, the Department attached its generic wireless filings to the
Competitive Impact Statement, making clear its view that MFJ
restrictions on the BOCs and the proposed conditions on AT&T/McCaw are
intertwined. See id. at 44,176-91.
\9\ Congress also has determined that consistent regulatory
treatment of cellular carriers serves the public interest. See 47
U.S.C. Sec. 332(c).
---------------------------------------------------------------------------
Yet, without any justification, the proposed settlement excuses
AT&T/McCaw from requirements the Department seeks to impose on Bell
company wireless operations. While this Court may not substitute its
own judgment for the Department's, it nevertheless must assure itself
that the Department has acted rationally in consenting to the proposed
decree, See United States v. Western Elec. Co., 993 F.2d 1572, 1577
(D.C. Cir. 1993). Just as an agency must explain departures from prior
policies in adjudications or rulemakings, the Department may not simply
ignore in this proceeding its inconsistent positions in the generic
wireless matter. See id. (likening Tunney Act and APA review);
Atchison, T. & S.F.R.R. v. Wichita Bd. of Trade, 412 U.S. 800 (1973)
(agency must explain departure from position taken in prior cases).
Moreover, the Department's reasons for changing course must be
affirmatively stated, and cannot be inferred by the Court. See Motor
Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43
(1983). Because the Competitive Impact Statement fails to knowledge,
must less explain, departures from the Department's position in the
generic wireless matter, this Court must itself determine whether the
public interest requires the imposition here of conditions like those
the Department seeks to place on the Bell companies.
There is an obvious corollary to this point. Because rejecting the
Department's proposed conditions in the generic wireless proceeding
would eliminate any cause to consider their analogues here, the Tunney
Act public interest determination would best be made after or together
with this Court's decision on wireless relief for the BOCs--and issue
that was fully briefed weeks ago.
We recognize that the Court recently found disposition of the
generic wireless waiver request unnecessary to address AT&T's motion
for a waiver of the MFJ to acquire McCaw. But that determination rested
on the reasoning that ``the only systems implicated by the AT&T
[waiver] request will remain subject to all of the restrictions which
the Regional Companies would eliminate by way of their wireless
motion.'' United States v. Western Elec. Co., No. 82-0192, slip op. at
25 (Aug. 25, 1994). No similar finding can be made here. Just as the
generic wireless proceeding will determine the rules under which all
Bell company cellular affiliates will operate, this Tunney Act
proceeding will set the rules for all but the few AT&T/McCaw systems
that (due to partial ownership by BOC affiliates) are already subject
to MFJ restrictions. It is appropriate to consider these parallel
matters in tandem.
B. If the Court Agrees With the Department That BOC Affiliates Should
Be Prohibited From Routing Calls Between MTSOs, the Final Judgment
Should Include a Similar Condition
Sections II(D)(1) and IV(F) of the MFJ prohibit the Bell companies
from directing long-distance calls to their destination. See United
States v. Western Elec. Co., 552 F. Supp. at 227, 228. If applied to
the BOCs' cellular systems and not AT&T/McCaw's, this prohibition will
have serious anticompetitive consequences.
A cellular system consists of dispersed radio transceivers
connected to one or more switching facilities known as mobile telephone
switching offices (MTSOs).\10\ Adjacent systems with large traffic
volumes between them are frequently joined by links from MTSO to MTSO,
permitting the cellular carrier to hand-off calls from one system to
the other as the caller crosses a service-area boundary. Such links
also can allow efficient delivery of cellular-originated calls placed
to a phone in a different area served by the same wireless provider.
Once installed, the dedicated lines have large capacities and the
marginal cost of carrying traffic over them is very low.
\10\ The MTSO controls the transfer of calls between cell sites,
between the cellular system and local telephone networks, and
between the cellular system and interexchange carriers.
---------------------------------------------------------------------------
Under the proposed settlement, AT&T/McCaw could realize the
efficiencies of inter-MTSO direct connections. McCaw would be free to
provide the interexchange routing necessary to send cellular traffic
over interLATA direct connections, as long as routing services are
offered on a nondiscriminatory basis. 59 Fed. Reg. at 44,162 (Final
Judgment Sec. IV.D.1); see id. at 44,160 (Final Judgment Sec. II.M,
defining ``exchange access'' to include ``the origination, routing, or
termination of interexchange calls''). Yet the Department opposes
giving the Bell companies similar relief from MFJ restrictions. The
Department seeks in the generic wireless proceeding to limit the Bell
companies to reselling the switched long-distance services of other
carriers. See 59 Fed. Reg. at 44,186. This restriction, if adopted by
the Court, would prohibit Bell company wireless providers from
constructing or even leasing dedicated lines between MTSOs, and self-
providing the necessary routing. AT&T/McCaw, in other words, would be
legally guaranteed a continuing edge over SBMS and its other Bell
company competitors.
That competitive advantage would be substantial. SBMS, for example,
estimates that it could carry all SBMS-originated calls between its
Dallas and Oklahoma City service areas over a single leased
interexchange line at a cost of $3200 per month, plus a one-time
capital cost of $2000. At retail rates, AT&T would charge more than
$30,000 per month to carry this same traffic between the two cities.
See Stupka Aff. Paras. 19-20. Even considering volume discounts that
SBMS might secure from AT&T, self-routing would still save
[[Page 49897]]
SBMS thousands of dollars each month, and those savings would be
reflected in lower charges to SBMS customers.
The Department has offered no reasonable justification for imposing
this extra expense of BOC affiliates and their customers. It defends
the switched resale condition as necessary to protect against
``discrimination aimed at favoring the BOC's service.'' 59 Fed. Reg. at
44,186. If the Department means discriminatory use of BOC local
exchange facilities, this cannot explain prohibiting inter-MTSO
routing. Sending calls from one MTSO to another does not involve any
use of the switched local exchange, but only MTSO functions and a
dedicated connection that typically can be acquired from any of several
providers.
If, on the other hand, the Department means discrimination with
respect to MTSO routing functions, there is no possible reason to treat
the BOCs differently from AT&T/McCaw. McCaw and BOC cellular systems
are physically alike in all relevant respects. Moreover, BOC affiliates
(like AT&T/McCaw) would be bound to perform interexchange routing on a
nondiscriminatory basis, if they could route calls at all. Compare 59
Fed. Reg. at 44,162 (Final Judgment Sec. IV.D.1, requiring McCaw to
provide routing for unaffiliated interexchange carriers on
nondiscriminatory terms) with id. at 44,185 (noting BOC commitment to
do same).
Imposing an inter-MTSO routing ban on Bell company wireless
providers therefore constitutes an irrational departure from the
Department's overall policy of establishing similar rules for AT&T/
McCaw and the BOCs, where they are similarly situated. The Competitive
Impact Statement offers no justification for treating AT&T/McCaw more
favorably than the Bell companies, and none can fairly be deduced.
Moreover, there appears to be no plausible rationale for denying Bell
company cellular customers the savings that would result from dedicated
connections between MTSOs.
Rejecting the Department's proposed limitation in the generic
wireless proceeding thus seems necessary. But if the Court were to
discern some overriding rationale that would support the Department's
position there, that same rationale would necessarily apply here. In
that case, the public interest would require that approval of the Final
Judgment be conditioned on addition of a new section, as follows:
Notwithstanding any other provision of this Final Judgment,
McCaw Cellular Systems shall not provide interexchange traffic
routing services in connection with the routing of traffic between
MTSOs.
C. If the Court Agrees With the Department That the BOCs Should Be
Required To Establish Redundant Sales Forces, the Final Judgment Should
Include a Similar Condition
In the generic wireless proceeding, the Department also has urged
the Court to require the Bell companies to maintain separate sales
forces, with separate managers, for local services and wireless long-
distance services. See 59 Fed. Reg. at 44,187; DOJ Proposed Generic
Wireless Order Secs. VIII(L)(3)(f), (g). If accepted, this proposal
would burden BOC affiliates with the needless expense of redundant
overhead, personnel, and administrative costs.
The Department suggests that this requirement is necessary to allow
the BOCs' competitors ``to compete on equal terms.'' Id. Competitors of
BOC cellular affiliates, however, are not required to carry unnecessary
marketing costs. Sprint/Centel, for example, can market its
communications services through a single sales force, even though its
operations (which include local and long-distance wireline service, as
well as wireless) are broader than any BOC's. GTE (a landline and
cellular carrier that does not offer wireless interexchange carriers
equal access) likewise sells local airtime and long distance through
the same sales force.
Further, if generic wireless relief is granted subject to an equal
access obligation, BOC wireless long-distance sales personnel will
comply with extensive non-discrimination requirements whether or not
they are part of a unified sales force. BOC long-distance salespersons
would inform customers of their right to choose an interexchange
carrier, would be denied special access to local customer information,
and (if the Court accepts the Department's proposed waiver in toto)
would offer local and long-distance wireless services separately. See
id. at 44,187.
It is impossible to see a rational reason for imposing mandatory
inefficiencies on BOC affiliates. But if there were one, it would have
to apply to AT&T/McCaw as well. AT&T/McCaw assuredly could realize
whatever ``unfair'' efficiencies or advantages would be available to
the BOCs through the maintenance of a unified sales force. The combined
AT&T/McCaw is the largest wireless carrier in the country, as well as
the largest interexchange provider. According to the Department, AT&T/
McCaw has market power in cellular services and is dominant in landline
and wireless long distance as well. No other wireless carrier could
employ joint marketing on a similar scale, and there is every reason to
believe that this advantage would allow AT&T/McCaw to extend its
current dominance even further.
Yet the proposed Final Judgment does not contain a sales force
separation requirement like the one the Department recommends for the
BOCs. Although A&T's and McCaw's operations must be separate, the Final
Judgment seems to erect no barrier to the use of a single sales force
within AT&T for local wireless, wireless long-distance, and land
services. The Department may be confused on this point, for it stated
in the generic wireless matter that AT&T/McCaw would be ``subject to
the same separation . . . restrictions'' as the BOCs. Id. at 44,187.
But in fact, the AT&T/McCaw settlement, on its face, would allow AT&T
to perform all marketing of local and long-distance cellular services
for McCaw, with the possible exception of administering some part of
interexchange carrier presubscription. See id. at 44,162-63 (Final
Judgment Secs. IV.B.3, IV.F); id. at 44,170 (discussing Sec. IV.F).
If imposing intentional inefficiencies on the BOCs somehow promotes
competition, equivalent conditions on AT&T/McCaw would surely do the
same. The Department evidently believes that this is so, given that the
Final Judgment's joint marketing provisions were intended to
``basically track [conditions] the United States has recommended for
the Bell Companies.'' Id. at 44,170. Therefore, should the Court find
the Department's proposed condition on the Bell companies appropriate
in the generic wireless proceeding, that finding should compel a
conclusion that the public interest requires equivalent separation of
AT&T/McCaw sales forces. SBC suggests the following new section
IV.F.1(f), modeled on the Department's generic wireless proposal:
f. Retail store agents of McCaw and other salespersons who
receive inquiries by prospective customers of McCaw Local Cellular
Services shall be a distinct group of individuals, with separate
managers, from any sales force that sells AT&T Interexchange
Services and from any sales force that sells AT&T landline
interexchange products or services.
Conclusion
The Court should approve the proposed decree, subject to the
modification recommended in Section I, above. The conditions on
interexchange routing and sales force separation suggested in Section
II of these Comments should be additional
[[Page 49898]]
prerequisites of approval if, but only if, the Court deems comparable
conditions necessary in the context of the Bell companies' motion for
generic wireless relief.
Respectfully submitted,
James D. Ellis,
Liam S. Coonan,
Paul G. Lane,
Paul K. Mancini,
175 East Houston, Room 1260, San Antonio, TX 78205, (210) 351-3449.
Martin E. Grambow,
1401 I Street, Suite 1100, Washington, DC 20006, (202) 326-8868.
Michael K. Kellogg,
D.C. Bar No. 372049.
Kellogg, Huber, Hansen & Todd,
1300 I Street, NW., Suite 500 East, Washington, DC 20005, (202) 326-
7900.
Counsel for SBC Communications Inc.
October 25, 1994.
United States District Court for the District of Columbia
In the Matter of United States of America, Plaintiffs v. AT&T
Corporation & McCaw Cellular Communications, Inc., Defendants. Civil
Act No. 94-01555 (HHG).
Affidavit of John T. Stupka
John T. Stupka, being duly sworn, deposes and says:
1. My name is John T. Stupka. I am President and Chief Executive
Officer of Southwestern Bell Mobile Systems, Inc. (``SBMS''), which is
headquartered in Dallas, Texas. SBMS provides cellular telephone
service as either the licensee or the general partner of the licensee
in a number of markets, including such major markets as Chicago,
Boston, Dallas, Washington, Baltimore, Kansas City and St. Louis. SBMS
provides cellular service to over 2.6 million customers. SBMS competes
directly with McCaw or Lin Broadcasting in Dallas, San Antonio, Corpus
Christi, Oklahoma City, Wichita and Kansas City.
2. I began my career with Southwestern Bell Telephone Company in
1974. In 1983, I was appointed Vice-President--Network for AT&T
Advanced Mobile Phone Service (AMPS). At divestiture, the southwest
region of AMPS became a wholly-owned subsidiary of Southwestern Bell
Corporation known as Southwestern Bell Mobile Systems. In December
1984, I became Executive Vice President--Network where I was
responsible for all of SBMS's network and engineering activities. In
November 1985, I became President and Chief Executive Office of SBMS
where I am responsible for the operation of twenty-eight metropolitan
cellular markets in addition to markets in twenty-six rural service
areas. In addition, since 1985, I have chaired the Technology Committee
for the Cellular Telecommunications Industry Association (CTIA) which
has been instrumental in fostering the development of intersystem
standards. I am also the current Chairman of the Board of the CTIA. I
have extensive knowledge and experience in operating cellular networks.
3. I am submitting this affidavit in support of the Comments of
Southwestern Bell Corporation on the Proposed Final Judgment regarding
the merger of AT&T and McCaw Cellular Communications, Inc. (``McCaw'').
I. AT&T as a Provider of Cellular Long Distance Service
4. In addition to being a provider of network equipment, AT&T is
the dominant provider of cellular long distance service. The equal
access obligations in the MFJ require SBMS customers to choose a long
distance carrier unaffiliated with SBMS to provide them long distance
service. There are as many as 35 separate carriers in some of SBMS'
markets. Nevertheless, between 70 and 90 percent of all SBMS customers
have chosen AT&T as their cellular long distance carrier. Through its
role as a provider of cellular long distance service, AT&T has access
to a wealth of confidential information about SBMS' customers.
5. SBMS customers receive both a bill from SBMS for local cellular
service and a bill from AT&T for their long distance usage. As a
result, AT&T has the name, address and telephone number of between 70-
90 percent of SBMS' cellular customers, including customers in those
markets where SBMS' direct competitor for cellular service is McCaw. In
addition, AT&T has the usage information (the number of the calling
party, the number of the called party, the duration of the call and the
usage patterns of each individual customer) on all long distance calls
placed by SBMS' cellular customers. AT&T could use this information to
identify SBMS' customers who use a large amount of long distance
service. Long distance usage is an excellent predictor of high cellular
usage.
6. SBMS has recently performed a study of the long distance usage
of its cellular customers in Dallas for April 1994. In this study, SBMS
determined that 79 percent of its Dallas customers have chosen AT&T as
their long distance carrier. SBMS then identified those SBMS customers
who have chosen AT&T as their long distance carrier and who were the
highest volume users of long distance service. Predictably, those same
customers were extremely high users of local cellular service as well.
In fact, as shown on Attachment A, the 2,222 highest users of AT&T long
distance service generated as much local airtime revenue as 40,000 of
the lowest long distance users.
7. With this information, McCaw could do a very targeted marketing
program of those top 2,222 users and significantly diminish SBMS'
revenue in Dallas. This marketing technique would be very strong. By
targeting high users, the wireless subsidiary of AT&T would not have to
offer special packages to the ubiquitous cellular customer. We estimate
that such a campaign could result in a loss of $1,000,000 a month in
local airtime revenue to SBMS. (See Attachment A). Any such targeted
marketing scheme would not be the result of superior management, but
only the result of AT&T's ownership of McCaw, coupled with its unique
position as a long distance provider to SBMS customers. AT&T can also
use this information to estimate changes in the size and composition of
SBMS' Dallas subscribership. With this unique insight into SBMS' most
closely guarded proprietary information, AT&T/McCaw could gauge the
effectiveness of changes in SBMS' services and marketing literally on a
day-to-day basis and counter those SBMS efforts.
8. A recent conversation illustrates the seriousness of this
problem. At a recent analysts' conference, I was approached by a
representative of a major investor in SBC stock. This representative
immediately commented that he was concerned that, once AT&T bought
McCaw, AT&T would be in a unique position to determine the identity of
its high long distance users and share that competitive information
with McCaw. He indicated that such a situation could result in
significant long term harm to SBMS and, therefore, SBC's stock value.
9. Prior to its acquisition of McCaw, AT&T had no incentive to
share competitively sensitive information concerning its customers with
any particular wireless company. The AT&T enterprise could not benefit
from McCaw or another carrier obtaining a competitive advantage over
SBMS. After the acquisition, AT&T will likely find itself better off
financially by favoring McCaw over SBMS and other service competitors.
10. The ability to negotiate commercial agreements to protect this
information is not to be presumed. When the Federal Communications
Commission (FCC) detariffed cellular interconnection with interexchange
[[Page 49899]]
carriers, SBMS drafted contracts incorporating much of the same
language from the tariffs into the agreements. (See Attachment B).
These agreements were sent to all interexchange carriers participating
in SBMS markets. The agreements incorporate language to protect the
confidentiality of SBMS' proprietary customer information. To date,
AT&T has not executed this agreement.
II. Equipment
11. In addition to the problems posed by the anti-competitive use
of proprietary customer information, the merger raises severe
competitive problems because AT&T is SBMS' supplier of cellular network
equipment, including switches, cell site equipment and related
software, and is the country's leading supplier of such equipment to
cellular carriers. AT&T can use its position as equipment supplier to
McCaw's competitors to create artificial competitive advantages for
McCaw.
12. This problem arises because once a decision is made to purchase
a particular supplier's system, all upgrades and other equipment must
be purchased from that supplier, both to assure quality and because, as
will be discussed below, the carrier is essentially ``locked-in'' to
that supplier's equipment in that particular market. Thus, the carrier
must rely upon the vendor for equipment to expand its system, for
prompt service, for updates to software and for new service features,
as well as new operating and maintenance capabilities.
13. AT&T could use its position as an equipment supplier to reduce
the competitiveness of McCaw's rivals in a number of ways. For example,
AT&T could increase the costs of software upgrades, delay delivery
times, or decrease technological and development support to McCaw's
rivals. In this business, a delay of even one week could be disastrous.
SBMS would have no effective recourse against AT&T if it takes any of
these actions. Suing AT&T would take years and could make things worse
since we need AT&T for prompt service and upgrades.
14. Since AT&T has not previously been a competitor of the BOC's
cellular affiliates, it had no incentive to delay service or upgrades
or to favor one purchaser over another. With the completion of the
merger, however, AT&T is now in direct competition with the BOC's
cellular affiliates and has the incentive to slow service and upgrades,
to the detriment of SBMS, and to the benefit of McCaw.
15. Even if SBMS was willing to forego the advantages of AT&T
equipment, it could not avoid these problems by switching to another
manufacturer's cellular equipment because it is effectively locked into
using AT&T equipment. There are three principal reasons for this.
First, the cost of installing a cellular system in a market of any size
is enormous. Second, even if a carrier decides to incur that cost,
making the change is very difficult and can create serious operational
problems. Third, it is not possible to mix equipment from different
manufacturers because of the ``closed architecture'' of equipment
manufactured for the U.S. market.
16. A brief discussion of the current cost of AT&T switches and
cell sites will demonstrate the enormous cost of changing equipment. A
large capacity AT&T switch costs approximately $7,000,000. We have more
than one such switch in several of our major markets. Only about
$185,000 of the equipment contained in a switch can be bought from a
vendor other than AT&T, and our engineers believe that for some items
we get better performance from AT&T than from other vendors' goods.
17. An average Series II cell site using AT&T equipment costs about
$750,000. Only about $29,000 of that could be purchased from other
vendors. The number of cell sites can be quite large; for example,
there are over 200 cell sites in Dallas and 20-30 new sites are being
added each year.
18. As these figures demonstrate, the costs of switching to
anotherequipment supplier would be enormous. To take SBMS' Dallas
network as an example, it would cost about $165,000,000 to change
(assuming we could negotiate a contract similar to our AT&T contract
with another vendor). Throughout all of our markets, it would cost
approximately $1,200,000,000 over the next 2-3 years to change
equipment to a vendor other than AT&T.
III. Network Efficiencies
19. SBMS conducted a sample of mobile originated calls between its
Dallas and Oklahoma City service areas during the month of September
1993. We then calculated the number of minutes of use during the
busiest hour and determined that the total number of minutes of use in
that hour could be carried over a single DSI facility leased from an
interexchange carrier. SBMS could obtain this circuit for a one time
capital cost of $2,000 and a $3,200 per month flat rate lease payment.
In fact, SBMS already has a leased facility in place to handle the
messaging necessary for intersystem handoff and IS-41 call delivery. It
might well be possible to carry all additional usage associated with
this voice traffic over the already existing facility. The same would
be true in many instances where the need for market-to-market
connectivity already exists for intersystem operations.
20. SBMS also multiplied the total number of minutes of use in a
month between these markets by AT&T's current retail rates. SBMS
determined that the number of minutes of mobile originated long
distance traffic between Dallas and Oklahoma City would, at AT&T retail
rates, generate revenue of $30,440.40. This is but one example of where
SBMS could significantly reduce the cost of long distance service to
its customers if SBMS were permitted to take advantage of the
efficiencies available to non-RBOC affiliated providers.
John T. Stupka,
Subscribed and sworn to before me on this 24th day of October,
1994.
Ms. S.R. Drifton,
Notary Public.
Notes
1. Southwestern Bell Mobile Systems (AT&T Long Distance Usage)
Chart was unable to be published in the Federal Register.
2. Southwestern Bell Mobile Systems (Customers Required To
Generate $1,000,000 of Revenue) Chart was unable to be published in
the Federal Register.
3. Southwestern Bell Mobile Systems (cumulative Total Revenue
and Customers Comparison) Chart was unable to be published in the
Federal Register.
Southwestern Bell Mobile Systems
July 15, 1994.
Dear Carrier,
As you may know the Federal Communication Commission (FCC) has
mandated that all Commercial Mobile Radio Service Providers cancel
any tariffs on file with the FCC. In response to the FCC's mandate
Southwestern Bell Mobile Systems, Inc. (SBMS) sought and received a
waiver from Judge Harold Greene to provide exchange access on an
untariffed basis ``provided that such exchange access shall be
provided to all interexchange carriers on the same terms and
conditions (including price)''. Thus, we will file to cancel
Southwestern Bell Mobile Systems, Inc. Tariff F.C.C. No. 1 pursuant
to which we provide cellular equal access service within our
operating areas.
In order to fully comply with Judge Greene's ``same terms and
conditions'' directive and to provide a smooth transition, SBMS has
decided to offer exchange access service pursuant to contract based
on the terms and conditions contained in our tariff. Thus, we have
incorporated the applicable terms and conditions of the tariff into
the attached ``Contract for Equal Access Service''. The terms and
conditions of the ``Contract for
[[Page 49900]]
Equal Access Service are identical for all interexchange carriers
(IXC).
Please execute both copies of the contract and return one copy
at your earliest convenience. To insure that there is no disruption
of service during any interim period prior to receiving an executed
copy of the ``Contract for Equal Access Service'', SBMS will
continue to provide access service on the terms and conditions
contained in the tariff, as incorporated into the ``Contract for
Equal Access Service'', provided you are not in violation of any
such term or condition--in which case SBMS will pursue appropriate
remedies and take appropriate action. If you are no longer
interested in receiving SBMS' exchange access service on these terms
and conditions please notify us and we will cancel your service and
reballot any customers currently presubscribed to you.
PLEASE NOTE THAT WE ARE CONTINUING TO PROVIDE YOU SERVICE BASED
ON THE TERMS OF THE TARIFF AS INCORPORATED IN THE ENCLOSED AGREEMENT
INCLUDING, BUT NOT LIMITED TO, YOUR AGREEMENT TO KEEP INFORMATION
CONFIDENTIAL AND TO USE IT ONLY IN THE PROVISION OF INTEREXCHANGE
SERVICE AND NO OTHER PURPOSE (SEE SECTIONS 3.1.11 AND 10). FURTHER,
THE CONFIDENTIALITY OBLIGATIONS UNDER THE TARIFF FOR INFORMATION
PROVIDED THEREUNDER SURVIVES THE CANCELLATION OF THE TARIFF. IF YOU
DO NOT AGREE WITH SUCH TERMS PLEASE NOTIFY US IMMEDIATELY ON 214-
733-6100.
Lisa Guarnacci
Equal Access Agreement Between Southwestern Bell Mobile Systems,
Inc. (``SBMS'') and __________ (``Carrier'')
WHEREAS, in the markets listed in Exhibit ``A'', SBMS is
offering Equal Access capability so that each SBMS cellular customer
in said markets may reach the presubscribed interexchange carrier
(``Carrier'') of their choice on a direct dialed basis (1+dialing
may be necessary in some markets) if the Carrier has chosen to
provide service in such markets; and
WHEREAS, Carrier has sufficient capacity to adequately serve the
cellular traffic of pre-subscribed cellular customers of SBMS by
providing interLATA telecommunications services and Carrier is
providing such services to customers of SBMS in the markets in
Exhibit ``A''.
WHEREAS, Carrier desires to participate in SBMS' Equal Access
offering; and
WHEREAS, SBMS is incurring substantial recurring costs to
provide Equal Access to Carrier.
NOW THEREFORE, in consideration of the mutual benefits accruing
to each party, the parties hereto agree as follows:
1. DEFINITIONS. For the purpose of this Agreement the following
definitions are applicable:
A. Casual calling--A subscriber not presubscribed to the
interexchange carrier providing the service, but using the
interexchange carrier's services on an occasional basis.
B. Company--Southwestern Bell Mobile Systems, Inc.
C. Customer--Customers which acquire cellular services from
Company, including those who acquire service at wholesale rates such
as resellers of the Company's cellular service.
D. InterLATA--Communications which traverse LATA boundaries.
E. Interexchange Service--the provision of voice or data traffic
across LATA boundaries.
* * * * *
Company, after thirty (30) days written notice may disconnect
Carrier from Company's Equal Access facilities and contact Carrier's
Customers to obtain a new designated interLATA telecommunications
service provider and/or withhold the provision of further
Unsolicited or Solicited Care, and/or take any other action provided
at law or in equity. Carrier is responsible for all reasonable and
necessary collection costs and fees incurred by Company, including
reasonable attorney's fees if Company must initiate legal
proceedings to collect any sums due hereunder and if a final order
directing Carrier to pay amounts is received by Company.
3.1.10 Carrier will follow and abide by all equal access
service provisions as outlined in Federal Communications Commission
Memorandum Opinion and Order in CC Docket No. 83-1145, released June
12, 1985, and Memorandum Opinion and Order in CC Docket 83-1145,
released November 14, 1985, and any present or future Orders, Rules
or Regulations of the Federal Communications Commission.
3.1.11 Company and Carrier recognize that any customer lists
which may be provided from one to the other in connection with, or
subsequent to, the balloting and allocation process is proprietary
information. Each of Company and Carrier agrees to use any such
customer list solely for the purpose of providing interexchange
communication services to such customers and shall be disclosed only
within Company and Carrier to those individuals with a need to know
in order to provide such service. Each of Company and Carrier agrees
to keep such customer list confidential and agrees not to sell,
transfer, assign, or otherwise disseminate the customer list to
anyone except for the purpose of providing such interexchange
services.
4 INTERCONNECTION
4.1. GENERAL
4.1.1 Carrier may interconnect with Company for the purposes of
serving Company's customers interLATA telecommunications services
requirements either by (1) local exchange carrier access tandem
connection or (b) direct connection.
4.2 LOCAL EXCHANGE CARRIER ACCESS TANDEM CONNECTION
4.2.1 Subject to the terms of this Agreement, Company will
provide to Carrier industry standard FGD signalling, protocol,
transmission, and testing.
4.2.2 Subject to the terms of this Agreement, Company will make
arrangements with the local exchange carrier to provide the
necessary Type II trunks to the local exchange carrier access tandem
to serve Carrier's requirements and provide for industry standard
equal access grade of service.
* * * * *
number or mobile number and the date of the call. Further, IXC
agrees not to solicit Customer account information for IXC Calls
made before one (1) year prior to the date of the Solicited CARE
request. IXC agrees to update its data base and populate its
customer account field to identify the Customer by the Customer
mobile number or account number to properly identify the Customer
for that period of time. IXC shall update its data base upon receipt
of the solicited CARE records so that subsequent requests for
solicited CARE will, if possible, request Customer information using
the correct account number or mobile number.
9.3 CARRIER DATABASE
9.3.1 IXC is solely responsible for updating its internal
customer data bases with any an all information received from SBMS.
SBMS assumes, and IXC acknowledges, that SBMS has no fiscal or
financial responsibility or liability regarding any information
contained on any Reconciliation Tape, or any form of Unsolicited
and/or Solicited CARE response and IXC's ability to bill or collect
for services reflected on the foregoing or for services rendered by
IXC on its network.
9.4 COSTS
9.4.1 IXC shall pay SBMS $.05 per message/record for each
response to a Solicited CARE request and $300.00 for each tape
containing the Solicited CARE records, and in the case of paper
transmittal, $.05 per message/record for the Solicited CARE record.
10. CONFIDENTIALITY
10.1.1 Any information and data of any nature, including, but
not limited to Customer name, PIC information, account information
from Casual Calling, Customer address, cellular account information,
SBMS data processing/billing information, technical, or other
Customer account information furnished by one part to the other in
connection with this Agreement or which is identified or labeled as
confidential or proprietary (``INFORMATION''), an all copies of such
INFORMATION shall be treated in confidence and protected and shall
be used and copies only for the exercise by the Receiving Party on
performing its obligations hereunder. Each party agrees to use any
INFORMATION received from the other party solely for the purpose of
providing interexchange service to the Customers and such
INFORMATION shall be disclosed within the Receiving Party only to
those with a need to know in order to provide interexchange service.
10.1.2 These restrictions on the use or disclosure of
INFORMATION shall not apply to any INFORMATION:
a. that is independently developed by the Receiving Party to
lawfully received free of restriction from another source having the
right to so furnish such INFORMATION;
b. after it has become generally available to the public without
breach of any obligation of confidentiality by the Receiving Party;
c. that at the time of disclosure was known to the Receiving
Party free of restriction as evidenced by documentation in such
Receiving Party's possession; or
[[Page 49901]]
d. that the Disclosing Party agrees in writing is free of such
restrictions.
10.1.3 Bith Parties shall retain copies of recorded information
relating to its performance in the same manner, and for the same
period, as it maintains such material for itself, subject to the
rules, regulations and orders of applicable regulators or other
lawful authority, and subject to such additional retention
guidelines as the parties may mutually establish.
11. ERRORS
11.1 Each Party shall bear its own expense or any error,
omission, mistake or failure to perform its respective duties
hereunder.
12. LIABILITY
12.1 In no event will SBMS be liable or any matter relating to
or arising out of this Agreement, whether based on an action or
claim in contract, tort, or otherwise, for all events, acts or
omissions which shall not exceed, in the aggregate, the actual costs
and expenses to correct SBMS' data processing error, if any, or to
provide additional solicited information. In no event will the
measure of damages include, nor will SBMS be liable for any amounts
for loss of income, profit or savings, or indirect, special,
incidental, consequential, or punitive damages of any IXC, or any
other party, including third parties.
13. AUDIT
A. Upon request, after adequate written notice, and during
normal business hours, SBMS will allow IXC to audit the SBMS records
which support the Market Share calculation for IXC and the cost
figures used by SBMS in calculating its Recurring Costs, provided
that IXC will not be entitled to see market share information or pro
rata cost information pertinent to other Participating
* * * * *
Certificate of Service
I, Austin C. Schlick, hereby certify that copies of the
foregoing Comments of SBC Communications Inc. on Proposed Final
Judgment have been served by hand or Federal Express on this 25th
day of October 1994 to the following:
Richard Liebeskind,
Assistant Chief, Communications and Finance Section, Room 8104, U.S.
Department of Justice, Antitrust Division, 555 4th Street, N.W.,
Washington, DC 20001, Attorney for the United States
John D. Zeglis,
Mark C. Rosenblum,
AT&T Corp., 295 North Maple Avenue, Basking Ridge, NJ 07920, Attorneys
for AT&T Corp.
Douglas I. Brandon,
McCaw Cellular Communications, Inc., 1150 Connecticut Avenue, N.W.,
Washington, DC 20036, Attorneys for McCaw Cellular Communications, Inc.
United States District Court for the District of Columbia
In the Matter of United States of America, plaintiff, v. AT&T
Corp. and McCaw Cellular Communications, Inc., Defendants. Civ.
Action No. 1:94-01555 (HHG).
Comments and Objections of the Ad Hoc IXCs to the Proposed Final
Judgment Between the United States, AT&T Corp. and McCaw Cellular
Communications, Inc.
The Ad Hoc IXCs, a group of non-dominant resale carriers,
respectfully submits its comments on the Proposed Final Judgment
(``Proposed Judgment'') drafted between the parties to this action, in
which the United States correctly raised antitrust concerns in
connection with the proposed merger between AT&T Corp. (``AT&T'') and
McCaw Cellular Communications, Inc. (``McCaw'').
I. Introduction
Through settlement of this action, the Justice Department hopes and
believes it has adequately protected the public from the foreseeable
anticompetitive effects of an AT&T-McCaw merger. However, when viewed
in light of AT&T's abysmal record of antitrust violations, it becomes
clear that neither the Proposed Judgment, nor any other arrangement
sanctioning the AT&T-McCaw merger, can possibly protect the public from
either the foreseeable or unforeseeable competitive abuses available to
AT&T as a result of this merger. Accordingly, this and any other
proposed AT&T-McCaw merger agreement should be rejected under the
Tunney Act as against the public interest.
II. The Proposed Judgment Is Not in the Public Interest
A consent decree settling an antitrust complaint must be drafted to
``preserv[e] free and unfettered competition as the rule of trade.''
Northern Pacific Railway Co. v. United States, 356 U.S. 1, 4 (1958).
Unless a colorable claim can be made that this standard is met in the
present case, the Proposed Judgment must be rejected as not ``within
the range of acceptability or . . . `within the reaches of public
interest.' '' United States v. American Tel. and Tel. Co., 552 F. Supp.
131, 150 (D.D.C.), aff'd sub nom., Maryland v. United States, 460 U.S.
1001 (1982), quoting United States v. Gillette Co., 406 F. Supp. 713,
716 (D. Mass. 1975).
The Proposed Judgment fails to adequately protect the public
interest primarily because it is based on the presumption that the
parties to the Judgment, and particularly AT&T, will comply with its
terms in good faith. The Justice Department is powerless to protect
competition unless AT&T voluntarily follows both the letter and the
spirit of the Proposed Judgment.
Had the complaint been issued against a corporation with little or
no history of antitrust abuses, the Justice Department's confidence in
the protective provisions of the Proposed Judgment might be warranted.
However, AT&T is no typical corporation. A brief review of AT&T's long
history of anticompetitive practices, and an explanation of the more
refined and clever tactics employed by the company today, demonstrate a
deeply entrenched corporate hostility toward free competition. Unless
and until AT&T reverses its unfairly competitive policies, the dominant
carrier should not be entrusted with the power and potentially
limitless opportunities for abuses that the AT&T-McCaw merger presents.
A. AT&T's Long History of Anticompetitive Practices
AT&T's history of antitrust problems dates back a century to 1878
when it litigated its first potential competitor out of business. The
Congressional Committee considering telecommunications reform
legislation during this past session (H.R. Report No. 103-559, Part 2,
103d Cong., 2d Sess. (1994)), points out that by as early as 1910,
AT&T's monopolistic goals were openly touted in its annual report:
This process of combination will continue until all telephone
exchanges and lines will be merged either into one company owning
and operating the whole system, or until a number of companies with
territories determined by political, business, or geographical
conditions, each performing all functions pertaining to local
management and operation will be closely associated under the
control of one central organization exercising all the functions of
centralized general administration.
Id. at 33.
By 1913, the Justice Department had to file its first Sherman Act
claim against AT&T. The Department then charged AT&T with unlawfully
combining to monopolize telephone message transmission in the Pacific
Northwest United States, Id. at 34-35. The litigation ended in 1914
with the Kingsbury Commitment, in which AT&T agreed to avoid various
anticompetitive act. Nevertheless and despite the Commitment, by 1925
AT&T was an entrenched nationwide monopoly. Id. at 33.
In 1949, The Department of Justice filed its second Sherman Act
complaint against AT&T. The complaint alleged that AT&T purchased all
its equipment needs from its subsidiary Western Electric, regardless of
price or quality. Id. at 38-40. To remedy AT&T's continued pattern of
anticompetitive conduct, DOJ sought to divest AT&T from its subsidiary.
However, AT&T's
[[Page 49902]]
influence and a change in administrations resulted in the Department's
enforcement of the law to be compromised.
DOJ backed off from its divestiture goal in the 1956 Consent
Decree, and instead meekly required AT&T and the Bell operating
companies to limit themselves to the offering of basic common carrier
communications services under tariff. As the House Judiciary Committee
Report recently noted:
[T]he 1956 consent decree had little relevance to the original
premise of the 1949 case: that the exclusive purchasing arrangement
between Western Electric and the rest of the Bell monopoly was
inherently anticompetitive and inflationary. This disappointing and
puzzling retreat of the Department from the original vigor of the
case brought in 1949 did not go unnoticed by the House Judiciary
Committee.
Id. at 40.\1\
\1\ A subsequent investigation into the consent decree
``uncovered an elaborate campaign to undermine the case,
orchestrated and executed by AT&T, in which AT&T enlisted the aid of
top officials in the FCC, the Defense Department, and the Justice
Department itself.'' Id. at 40. The findings were published in a
1959 report. Id.
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AT&T's commitment to the preservation of its monopoly dominance
resulted in the necessity for DOJ to file yet another antitrust
complaint against AT&T in 1974. This time, DOJ charged AT&T with
leveraging its monopoly position in local telephone exchange services
to unlawfully impede competition in the markets for interexchange
services, customer equipment and telecommunications equipment. Id. at
47. DOJ defined 30 specific acts which AT&T had committed in violation
of the antitrust laws. Id. at 48, in.18.
The 1974 action by the Department of Justice established an
unprecedented third attempt by the United States Government to stop
AT&T from continuing its unabated policy of anticompetitive conduct it
had commenced 100 years earlier:
The Bell System's anticompetitive conduct and behavior was
similar to actions attacked in the earlier Sherman Act suits. For
example, the Bell System was alleged to have discriminated against
its competitions in the quality of access it provided to its local
telephone network, by giving competing interexchange carriers
technically inferior connections and charging them greater access
charges, or by denying equipment manufacturers essential information
regarding the local exchange network. The Bell System was also
engaging in predatory cross-subsidization by artificially depressing
the prices it paid for Western Electric equipment and by allocating
Western Electric's costs to the ratemaking base borne by telephone
customers. The Department further asserted that the Bell System was
engaging in monopolistic self-dealing--for example, by requiring
affiliated local operating companies to acquire switching equipment
from Western Electric rather than a lower-priced or higher-quality
competitor.
Id. at 47-48.
The 1974 antitrust complaint ultimately led to the well-known 1982
Modification of Final Judgment (``MFJ''). The MFJ required AT&T, inter
alia, to divest its 22 Bell operating companies, and was designed to
put a final halt to AT&T's long history of anticompetitive acts. As the
discussion, infra, demonstrates, the MFJ has not done so.
B. The Recent Increase in AT&T Anticompetitive Practices
AT&T's anticompetitive practices have only become more refined and
sophisticated in recent years. Instead of openly repressing competition
in the marketplace, AT&T now adopts the disingenuous policy of publicly
supporting the notion of competition, but privately subverting its
competitors through a variety of unlawful tactics. AT&T has shown that
it will stop at nothing to suppress competition, including breaching
contracts, interfering with third party contractual relations, and
intentionally misrepresenting its intentions to customers and the
Federal Communications Commission. Nowhere are these tactics more
widely employed by AT&T than in its campaign to eliminate switchless
resellers such as the Ad Hoc IXCs from the marketplace for long
distance telecommunication services.
1. New Anticompetitive Tactics Employed Against Switchless Resellers
Each of the switchless resellers comprising the Ad Hoc IXCs started
in the telecommunications business in late 1989 or early 1990. Each
entered the industry after learning of the opportunity to resell AT&T's
Software Defined Network (SDN) services. Each of the resellers invested
substantial resources building customer bases. These customers were
then committed to use AT&T's long distance network as part of the Ad
Hoc IXCs' high dollar, high volume, long term contractual commitments
required by AT&T's tariffs. As a result of the money and effort
expended by the resellers, smaller end-users were able to earn larger
discounts, and AT&T was able to garner substantial revenues that
otherwise might have gone to competitor long distance carriers.
At first, AT&T recognized the value of resellers as a customer
base. However, AT&T reversed itself, and rather than viewing resellers
as a welcome source of revenue, decided that resellers undermined its
ability to offer higher tariffed long distance rates to small end-
users. As a result, AT&T embarked on a concerted campaign, through a
variety of means and tactics, to drive the Ad Hoc IXCs and other
companies like them out of business.
For example, AT&T exploited their role in the provisioning process
to the detriment of the resellers. AT&T refused to accept, lost, and
delayed large numbers of service orders placed with AT&T by the
resellers, which were to be used to hook up the resellers' own
customers. AT&T refused to timely and accurately bill large numbers of
their reseller customers, and in some cases engaged in double billing
of such customers.
AT&T also disparaged the competency of the Ad Hoc IXCs in the
marketplace. AT&T did this by attacking the customer base of the Ad Hoc
IXCs, through the use of its small competitors' proprietary information
databases to cross market reseller customers.
AT&T manipulated the tariffing processes, and attempted to create,
before the staff at the FCC, the image of the Ad Hoc IXCs and companies
like them as ``deadbeats,'' i.e., financially unsound entities, that
are poorly managed. AT&T then attempted to use this inaccurate picture
as justification for its use of its ``tariffed authority'' to terminate
their resold networks.
AT&T also stonewalled requests by some of the Ad Hoc IXCs to resell
AT&T's Tariff 12 services. AT&T's efforts to block the resale of Tariff
12 have been successful, as no Tariff 12 services were permitted to be
resold by switchless resellers.\2\
\2\ AT&T's tactics go well beyond the brief summary of actions
described herein. For example, AT&T has gone so far as to use third
party telemarketing companies to attack the customer base of small
reseller competitors.
---------------------------------------------------------------------------
Moreover, through these tactics, AT&T successfully divided the
market for end-users such that resellers and the smaller switch-based
carriers they resorted to for service, were excluded from the more
lucrative market for larger direct access customers. Thus, AT&T ensured
itself that it would dominate the large corporate customer market by
forcing resellers off the AT&T network, and onto Spring, Wiltel, or
other non-dominant carrier networks.
2. $13 Million Jury Verdict Against AT&T
This corporate policy toward resellers was recently put on trial in
the United States District Court for the District Of
[[Page 49903]]
Oregon in Central Office Telephone, Inc. v American Telephone and
Telegraph Company. Central Office Telephone, Inc. (``COT'') a
switchless reseller primarily active in the Pacific Northwest United
States, alleged that AT&T intentionally interfered with COT's business
by abusing its power as the dominant carrier in the telecommunications
industry. The testimony and documents presented during this trial, some
of which are summarized below and attached hereto, demonstrate extreme
lengths to which AT&T will go in order to snuff out competition.
The plaintiff's first witness was the founder of COT, Gordon
Rood.\3\ Mr. Rood testified at length about the numerous ways in which
AT&T intentionally set out to disrupt his company's business, and
undermine its ability to compete. AT&T exploited its role in the
provisioning, billing and servicing process to create the appearance
that COT was incompetent. When AT&T refused to clear up the problems it
created for COT's end users, the end users inevitably had no choice but
to switch to long distance carriers.
\3\ Relevant portions of the transcript of Mr. Rood's testimony
are attached hereto as Exhibit A.
---------------------------------------------------------------------------
Mr. Rood first testified how AT&T ensured that COT's customers
would not enjoy a smooth transition onto the SDN account. Tactics
employed by AT&T in the provisioning process included:
Failing to send carrier changes orders to the local
exchange company (exh. A at 265);
Doubling the time in which AT&T promised to provision new
orders from 30 to 60 days (id. at 233-34);
Randomly reducing the number of orders that COT could
offer from 6,000 down to 400 per month (id. at 225-26); and
Stalling the provisioning of COT customers to such an
extent that, by the third quarter of 1990, COT customers had to wait an
average of 6 months from the time SDN was ordered to the time it was
turned up; (id. at 273-74).\4\
\4\ By comparison, Mr. Rood testified that COT could get an
order provisioned by Spring within 10 days. Exh. At at 331, lines
12-16.
---------------------------------------------------------------------------
If and when COT's customers were eventually provisioned on SND,
their real problems began in the billing phase. AT&T created such
extensive and tangled billing glitches (which to the end user appeared
to be COT's fault) that COT was left with enraged customers who could
not afford to spend valuable time sorting out billing errors. These
billing tactics employed by AT&T included:
Refusing to give COT multi-location billing as promised,
such that COT could share a discount with a customer without costly and
time-consuming adjustments after billing (id. at 374-75);
Failing to provide call detail lists when billing COT's
customers, or delaying call detail for months after bills were sent out
(id. at 266-67);
Incorrectly crediting or debiting the account of one end-
user for amounts due from or to another end-user (id. at 298);
Failing to bill customers for network usage until several
months after the use, sometimes billing a customer for eight months of
use in one bill (id. at 303); \5\
\5\ In one case, Monarch Hotel received a $36 bill one month,
and the next bill received was for $10,000. Exh. A at 303. As a
result, Monarch Hotels refused to pay the bill, and cancelled its
account with COT. Id.
---------------------------------------------------------------------------
Adjusting customer balances with unexplained credits and
debits, causing major frustrations for customers (id. at 287-88);
Double billing COT customers after COT assumed
responsibility for billing its customers directly (id. at 298-99);
Miscalculating the amount of volume discounts that a
customer was owed (id. at 297);
Refusing and/or failing to properly divide the SDN
discount percentages between COT and the end-users, instead giving the
entire discount to the end-user and thus cheating COT out of profits
and cash flow (id. at 283-86);
Refusing to correct erroneous bills brought to AT&T's
attention (id. at 299, lines 11-13).
Finally, Mr. Rood testified to numerous ways in which AT&T
undermined COT's competitive edge. These unfairly competitive tactics
included:
Breaking its promise to provide COT with calling cards
containing the AT&T and COT logos, making it more difficult for COT's
business end-users to get SDN rates for calls made from out of the
office, and impossible to get SDN rates for calls made from out of the
country (id. at 215-218, 559-561);
Illegally ``slamming'' COT customers and converting them
to the higher tariffed service of AT&T (id. at 557);
Referring all resellers problems to one understaffed and
untrained office in Piscataway, New Jersey, where the AT&T employees
did not have the time, expertise, or customer familiarity to resolve
the problems experienced by COT and its end-users (id. at 255-57, 299-
300); \6\
\6\ AT&T told COT that their account was being transferred to
Piscataway, New Jersey because ``the SDN account was not for
resellers,'' and even acknowledged that COT ``wouldn't be getting
the same level of service that [it] had previously.'' Exh. A at 256,
line 24 to 257, line
---------------------------------------------------------------------------
Making a post-contract demand for a deposit from COT
before provisioning customer (id. at 261-62);
Refusing to join COT in explaining the provisioning and
billing problems to endusers (id. at 267-68).
The cumulative result of all these AT&T tactics was that COT lost a
large part of his customer base. Indeed, by the Fall of 1991, COT was
losing tens of thousands of dollars worth of customers every month. Id.
at 304-05.
After Mr. Rood explained the difficulties COT experienced,
testimony from a former AT&T employee, Spencer Perry, established that
COT's problems were all intentionally orchestrated by AT&T.\7\ Mr.
Perry testified that resellers of SDN were first considered by AT&T to
be a good source of revenue for the company,\8\ but that later they
were regarded with hostility and even referred to as
``cockroaches.''\9\ This reversal in AT&T policy occurred after AT&T's
Director of Distribution Strategy, Michael Keith, decided that SDN
resellers might erode AT&T's PRO WATS customer base. Id. at 1009, line
18 through p. 1010, line 6.\10\ To prevent this, Mr. Keith formed an ad
hoc committee on resellers in order to, in Mr. Perry's words, ``work on
ways . . . to change the SDN offer, so that the switchless resellers,
or the cockroaches . . . would not . . . buy the product.'' Exh. B at
1038, at lines 20-23.\11\
\7\ Mr. Perry was an AT&T employee for 14 years, reaching the
level of district manager for the account management district known
originally as the Carrier Service Center and later as the Channel
Development and Operations Center (``CDOC''). The relevant portions
of the trial transcript containing Mr. Perry's testimony in COT v.
AT&T are attached hereto as Exhibit B.
\8\ Specifically, Mr. Perry testified that AT&T was at first
``overjoyed'' by resellers (exh. B at 993), because customers ``were
walking in through the floor. It kind of reminded me of fish jumping
out of the ocean into your boat. You don't even have to drop the
line in.'' Exh. B at 994, lines 2-4.
\9\ Exh. B at 1038.
\10\ Mr. Perry explained the reasoning behind AT&T's sudden
hostility toward resellers:
[Y]ou would take a PRO WATS base of customers, and essentially
take those customers, and move them to a product SDN that was lower
priced. And that's referred to as base cannibalization. You are sort
of eating your own customers.
Exh. B at 1071, lines 7-11.
\11\ Mr. Perry also was instructed to find ways ``to kill the
arbitrage'' which Mr. Perry explained meant to eliminate the price
gap between the SDN and PROWATS tariff rates, the existence of which
enabled resellers to make a profit by aggregating smaller end-user.
See Exh. B at 1018, lines 9-19.
---------------------------------------------------------------------------
At Mr. Keith's behest, Mr. Perry and another AT&T employee prepared
a memorandum outlining ways in which AT&T could erect roadblocks to SDN
[[Page 49904]]
resale.\12\ The ideas contained in the memorandum were then discussed
at the first meeting of the ad hoc committee on resellers held on March
12, 1990. Id. at 1052-54. Seven AT&T officials attended the meeting,
most of whom took notes. Id. at 1055, lines 14-15; 1056, line 20
through 1057, line 2. According to Mr. Perry, it was in this and other
ad hoc committee meetings that AT&T formed its plans for destroying
---------------------------------------------------------------------------
resale that were ultimately used against COT and the Ad Hoc IXCs:
\12\ The purpose of the memorandum was explained in its
introduction:
The recent unprecedented demand for AT&T [SDN] service, for the
sole purpose of resale, has caused confusion in the marketplace, and
has resulted in a clogged provisioning system, thus denying service
to commercial customers. AT&T's interests may be well served in
delivering this service to established, switch-based inter-exchange
carriers. However, the current ability for switchless resellers to
arbitrage the service has significant negative consequences to AT&T.
This paper identifies tariffed elements and operational practices
that attract arbitrageurs. Revisions to these elements and practices
are listed in descending order of impact that would decrease the
attractiveness of the service to switchless resellers.
Exh. B at 1050, lines 8-12, and 1051, lines 6-16.
This document is currently unavailable due to a pending AT&T
remittitur motion. When available, this and other relevant documents
from the COT trial will be submitted in a supplemental appendix.
---------------------------------------------------------------------------
[O]ne of the things we were trying to do, was while making it
less attractive to resellers, we wanted to keep the viability to
commercial customers. And so, what we did, was we just listed ideas
on the board, and then later went back, and then segmented those
ideas, and tried to put some order to them, in terms of, you know,
basically categorize the ideas.
Exh. B at 1052, lines 4-10. Mr. Perry testified that after this first
ad hoc committee meeting ended, he was directed to gather the notes
taken by the participants to the meeting and destroy them, which he
did. Exh. B at 1056, line 3 through 1059, line 18.
By the Fall of 1990, AT&T's anti-resale policies devised by the ad
hoc committee were working very well. Indeed, Mr. Keith indicated his
confidence in AT&T's ability to thwart resale in a candid moment upon
Mr. Perry's departure from AT&T. Mr. Perry testified about the
encounter at the trial:
Well [Mr. Keith] had mentioned that when . . . he asked what was
I going to do . . . I sa[id] I wasn't sure. And he sa[id] well, I
hope you are not going into SDN resale. And I said, oh, why is that?
And he picked up a piece of paper, and he sa[id], with a one percent
provisioning rate, they won't be around much longer.
Exh. B at 1084, lines 11-17.
Mr. Keith, in deposition testimony offered at the trial,
essentially admitted that AT&T was working on ways of excluding
resellers from the SDN markert.\13\ Mr. Keith confirmed that, when
asked by an AT&T official how resale could be limited, Mr. Keith
answered in writing:
\13\ Relevant portions of Mr. Keith's testimony are attached
hereto as Exhibit C.
---------------------------------------------------------------------------
I don't really know at the moment. We are meeting weekly with
the SDN product team to find out. We want to make sure SDN serves
the top end of the market. There will probably be modifications to
the product that will insure this, but may not serve the resellers.
But no one knows exactly what these steps will be . . .
Id. at 1201, lines 1-6.\14\
\14\ Mr. Keith also confirmed the disparate treatment that
resellers received vis-a-vis larger corporate SDN customers. For
example, AT&T refused to give their salespersons any commissions for
sales to resellers. Id. at 1197. Moreover, unlike resellers, some
corporate customers were given permission to use the AT&T logo,
including for purposes of resale. Id. at 1199, 1202-03. Ironically,
Mr. Keith testified that it was his organization within AT&T that
was given responsibility for assisting resellers. See Exh. C at
1189, lines 9-18.
---------------------------------------------------------------------------
After a two week trial in which AT&T's anticompetitive tactics were
explained at length, the jury concluded that AT&T had unfairly and
intentionally excluded COT from reselling SDN as required by law and
contract. The jury awarded COT $13 million in damages.
3. Other Actions Pending Against AT&T
AT&T's anticompetitive vendetta against SDN and Tariff 12 resale
generated numerous lawsuits and continue to do so. Exhibit D to this
Opposition lists the known lawsuits that have been filed to date and
are pending against AT&T for its activities against SDN resellers like
the Ad Hoc IXCs. Exhibit E list the pending complaints against AT&T
that have been filed with the Federal Communications by two of the Ad
Hoc IXCs, with respect to AT&T's stonewalling of the resale of its
Tariff 12 services.\15\
\15\ These complaints are pending, and discovery in these
proceedings to date have produced documents which demonstrate AT&T's
motivation and intent to stop the resale of its services. Those
documents are subject to various protective orders, but two of the
companies comprising the Ad Hoc IXCs have requested a waiver of the
protective order for purposes of this submission. If that waiver is
granted, a supplemental appendix documenting AT&T's tactics will be
submitted.
---------------------------------------------------------------------------
4. AT&T's Unfair Business Practices Demonstrate the Hypocrisy of its
Present Endorsement of Free and Unfettered Competition
As part of the Proposed Judgment negotiated with the Department of
Justice, AT&T has once again endorsed the notion of free and unfettered
competition. This is not the first time AT&T has endorsed competition
in order to expand its dominance in the telecommunications market.
Indeed, the first step in AT&T's campaign against resellers, described
supra, was to win deregulation from the FCC. AT&T did so by expressly
and repeatedly promising to the FCC and to the public, that AT&T would
support competition, including long distance resale. Once it freed
itself of regulatory constraints. AT&T reneged on these promises and
initiated its efforts to put resellers out of business.\16\
\16\ This is particularly true with respect to its Tariff 12
services. For example, AT&T specifically represented to the FCC and
to Congress that its ability to provide customized services would
not violate the anti-discrimination provisions of the Communications
Act (47 U.S.C. Sec. 202(a)) and would not be anticompetitive,
because its Tariff 12 services could be resold. However, at the time
these representations were made, AT&T's corporate policy impact was
totally contrary to these representations, as AT&T's policy was that
no Tariff 12 services would be permitted to be resold if AT&T could
stop such resale. The documents discovered in the pending FCC
complaint proceedings demonstrate the contradictions between AT&T's
public representations and its internal anti-resale policies and
practices.
---------------------------------------------------------------------------
AT&T's pattern of publicly subscribing to notions of free
competition, but privately attempting to eradicate competitors through
unfairly competitive practices, must be taken into account here. To
justify its merger with McCaw, AT&T again has broadly supported free
and unfettered competition, and even claimed that its control of
additional communications facilities will increase access to the
market. In light of AT&T's prior pattern of conduct toward resellers,
these claims simply cannot be believed. AT&T is quick to embrace
notions of free and unfettered competition in order to garner the very
power that it needs to suppress small competitors, and expand its own
dominance in the telecommunications industry. There is little reason to
believe that AT&T's present promises to allow competition in the
cellular market are any more genuine than any of AT&T's previous pro-
competitive posturings.
C. Opportunities for Further Anticompetitive Practices Presented by an
AT&T-McCaw Merger
The discussion, supra, of the relentless and creative ways in which
AT&T pursued one segment of small long distance competitors, shows that
it is impossible to predict how AT&T will pursue these same long
distance competitors with its new found dominance of the existing
cellular phone segment of the industry and the platform that dominance
provides AT&T for future wireless telecommunications services of PCS
(see infra). The anticompetitive opportunities this merger will create
will be limited only by the collective
[[Page 49905]]
imagination of more AT&T ``ad hoc committees.'' There can be no doubt
that the anticompetitive effects that will inevitably result from an
AT&T-McCaw merger are clearly foreseeable and sharply defined against
such entrenched anticompetitive behavior. The ``protective'' provisions
of the Proposed Judgment will be powerless to prevent AT&T's unlawful
restraints on competition.
1. Expansion of AT&T's Long Distance Domination
In filings with the Federal Communications Commission (``FCC''),
AT&T has made no secret of the fact that it seeks to acquire the
cellular facilities of McCaw for use as wireless local access in order
to protect and expand its ``core'' long distance services business. The
AT&T-McCaw merger will only provide AT&T with the tools necessary to
protect its dominance and its ability to control and manipulate prices
in the marketplace.
2. Creation of an AT&T End-to-End Network
Any Proposed Judgment in the public interest must be drafted with
the recognition that AT&T's acquisition is designed to reintegrate its
interexchange services with its control of local access, in order to
create an end to end network in which AT&T will be able to bypass the
local exchange carriers through the McCaw facilities. The creation of
such a monolith was the very result that the MFJ was intended to
prevent due to its anticompetitive nature.
The marketplace reality is that none of AT&T's larger competitors
have the ability to compete with an AT&T that possesses the tools
necessary to bypass present local exchange access networks. MCI may in
six or more years have a wireless or wired presence in several major
cities.\17\ Competitive access providers exist only in small islands in
a few cities and have recently suffered a major setback in their
ability to expand on a more rapid and cost effective basis.\18\
\17\ Exhibit F--MCI press announcement, Washington, D.C.,
February 28, 1994.
\18\ Bell Atlantic Telephone Companies v. Federal Communications
Commission, Case No. 92-1619 Slip Op. (D.C. Cir. June 10, 1994),
vacated in part and remanded, Expanded Interconnection with Local
Telephone Company Facilities (FCC Docket No. 91-141), Report and
Order and Notice of Proposed Rulemaking 7F.C.C.R. 7369 (1992);
Memorandum Opinion and Order, 8F.C.C.R. 127 (1993).
Although the local exchange carriers one day likely will, under
the proper combination of government regulation and technological
advances, enter the interexchange market, as AT&T itself has
consistently and vociferously argued, that day is far from being
here. Hence, there is no need to accommodate AT&T's own attempts to
get a head start on such entry by acquiring the local access
facilities that will provide it with the capability to reestablish
its monolithic end-to-end network reach. Clearly none of AT&T's
competitors have a similar capability at this time, and will not
have such a capability for the foreseeable future.
---------------------------------------------------------------------------
In short, while the rest of the industry inches toward increasing
their competitive parity, AT&T is seeking to further entrench its
dominance by securing the assets necessary to put it so far ahead of
all other competitors as to make any effective future competitive
challenge impossible. If permitted to do so, the ``whale leading the
pilot fish'' symbolism used by Professor Huber soon will be
enshrined.\19\
\19\ See Huber, Kellogg and Thorne. The Geodesic Network II.
1993 Report on Competition in the Telephone Industry (1992) at 3.52.
---------------------------------------------------------------------------
3. Domination of the PCS Market
Most industry experts agree that over the next ten years, personal
communications services (``PCS'') technology will transform the way in
which the public communicates electronically. PCS will enable people to
be reached anywhere in North America over wired and wireless networks
with a single personal telephone number. PCS will also support two way
data, radio location, and image transmission.
Dr. Jerry Lucas, a leading expert in the telecommunications
industry, and publisher of Telestrategies Insight, predicts that, in
the event that AT&T acquires McCaw, AT&T will be in a position to
dominate the PCS market. In an article entitled ``The PCS Revolution
and Why AT&T Will Dominate It,'' Telestrategies Insight, July 1994, Dr.
Lucas analyzes the competitive prospects of leading companies in the
PCS market. Dr. Lucas concludes that AT&T is positioning itself to
dominate the PCS market through the AT&T-McCaw merger, and predicts
that AT&T ultimately will choose to control 60% of the PCS market. Id.
at 4.
To give a company such as AT&T, with its history of anticompetitive
abuses, the opportunity to dominate such an important emerging
technology, would be reckless. The FCC will be selling PCS spectrum at
the end of 1994, and AT&T-McCaw would be in the unique position of
having the financial and capital resources to ensure its total
domination of the PCS market before other companies have had an
adequate opportunity to evaluate their prospects for entering the
field. It is only by blocking the proposed merger that robust
competition in this emerging industry can be salvaged.
4. Inadequacy of the Proposed Final Judgment Protective Provisions
The Department of Justice undoubtedly believes the Proposed
Judgment provisions adequately protect the public from the antitrust
implications of an AT&T-McCaw merger. Unfortunately, the Proposed
Judgment is entirely inadequate, as AT&T easily will be able to
circumvent the anticompetitive spirit of the Judgment's protective
provisions.
For example, the Proposed Judgment contains provisions regarding
the ``Separation of McCaw and AT&T'' and ``Equal Access'' for other
long distance carriers (including, presumably, resellers like the Ad
Hoc IXCs). These provisions, which presumably were drafted with the
good intention of preventing AT&T from monopolizing all the long
distance needs of McCaw cellular telephone customers, will in no way
prevent AT&T from continuing the anticompetitive practices discussed
above.
Nor will these provisions fulfill the modest goals for which they
were designed. The ``Separation'' provision, for example, presumably
seeks to prevent AT&T from dictating how McCaw will operate its
business. However, the Proposed Judgment does allow AT&T to funnel
``general corporate overhead and administrative services to McCaw and
McCaw affiliates.'' This is exactly the type of control that AT&T will
seek to exploit, through liberal interpretations of corporate overhead
and creative offers of administrative services which will subtly enable
it through ``carrot and stick'' approach to get the operational control
over McCaw that the Proposed Judgment seeks to prevent.
Nor will the Equal Access provisions protect long distance
carriers. The Ad Hoc IXC and COT currently operate in an equal access
environment, but that hardly has guaranteed them the access to which
they were legally entitled. Indeed, AT&T successfully thwarted the
efforts of resellers to compete for large segments of the long distance
market through the covert tactics described above. There is no reason
to believe they will not repeat these actions once it has a foothold in
the cellular industry, despite the Equal Access provisions contained in
the Proposed Judgment.
III. Conclusion
AT&T's historic practices have proven, if anything, that they have
not earned the privilege of being entrusted with the means with which
to further its anticompetitive attempts to dominate and restrain
competition in the
[[Page 49906]]
telecommunication industry. AT&T must be required to first earn the
public's trust as the dominant carrier before being permitted to expand
its power and influence in the industry. As such, the AT&T-McCaw merger
should be rejected.
Indeed, the actions thusfar taken endorsing the merger, if followed
here, will be evidence of the Department's commitment to effectively
enforcing the laws of this country. Approving the AT&T-McCaw merger
will cheat the small businesses which have diligently fought to bring
more effective competition to the telecommunications industry, and the
small businesses and other small users who can only be properly served
by the smaller carrier community of that industry. The Proposed
Judgment cannot guarantee that these significant interests will be
preserved. To the contrary, history has demonstrated, and history is
repeating itself today, that AT&T will not allow the antitrust laws or
government decree to sidetrack its continued and unabated efforts to
remain dominant and controlling in its core line of business--long
distance telecommunications.
For the foregoing reasons, the Proposed Final Judgment must be
rejected as against the public interest.
Respectfully Submitted, The Ad Hoc IXCs
Charles H. Helein,
Their Counsel
Of Counsel: Helein & Waysdorf, P.C., Suite 550, 1850 M Street, N.W.,
Washington, D.C. 20036, (202) 466-0700.
Exhibit A--Excerpts of Trial Testimony of Gordon Rood, Central Office
Telephone, Inc. v. AT&T, Civil Action No. 91-1236-JE, United States
District Court, for the District of Oregon, June, 1994
A. Exhibit 5 is a photocopy of the information about the SDN
calling card, and how it would be laid out with our logo. And in the
lower left corner is an actual copy of the calling card that LaDonna
brought out as a sample. She put it down there, and she said here is--
and we made the copy together.
She said here are the instructions on how--what information we had
to provide them to get our logo printed. And she said this will have
the AT&T logo here, and we will have the Central Office Telephone logo
up here, and they will print the cart out.
MR. HALL: Excuse me, your Honor. May I instruct the witness not to
show the jury the exhibit until----
THE COURT: Okay.
BY MR. HALL:
Q. I didn't tell you. That is my fault, Mr. Rood. But don't show
the jury things you are looking at until the court has to admit it into
evidence.
We will offer that exhibit, your Honor.
THE COURT: What is the number?
MR. HALL: Exhibit 5.
MR. PETRANOVICH: No objection.
THE COURT: 5 is received.
(Exhibit 5 received.)
BY MR. HALL:
Q. I would like to ask if the blowup or the transparency can be put
up. That may be a little easier for the jury to see than what you were
showing them prematurely there.
Can you see that over there readily?
A. Yes, I think I can. It might be easier to look at this.
Q. Why don't you just describe for the jury quickly again what you
said about where the calling card information was located?
A. Okay. The lower left, the white portion on there, it was the
actual duplicate of the calling card sample that LaDonna brought out to
us. The instructions above are--tell you the different options for--one
says hot stamping. One was offset printing. One says exclusive customer
design.
Q. Now, when you were negotiating with LaDonna Kisor about entering
the AT&T agreement on SDN, what was the discussion with regard to
calling cards?
A. Calling card was one of the most important things we saw. The
SDN calling card was very similar to a standard AT&T calling card. You
accessed it through a normal telephone, with what we call zero plus.
You didn't have to dial an 800 number. One of the major benefits of it,
it gave a 45 percent savings off of the AT&T card.
Actually, there was a little bit more than that. But we--the
initial charge was 30 cents compared to about 75 cents. And the cost
per minute was considerably less. And it was also billed in six second
increments as opposed to full minute increments, so there was at least
a 45 percent savings off an average call using the SDN card compared to
a standard AT&T credit card.
Q. What did you consider the value of that calling card in relation
to prospective customers?
A. Oh, boy. It was really important. A lot of the customers we
dealt with had actually spent more money on calling cards, because they
would have a lot of salespeople traveling. And the savings, because it
was 45 percent, if a customer, for example, had a $1,000 phone bill,
and 500 of it was in calling cards, they could save 45 percent of the
500, where we might only safe them 22 percent on the other 500 of their
bill. So, it had a significant impact on customers in reduction of
their telephone expense.
Q. Okay. It's a little blurred there. There is the AT&T logo in the
upper, left-hand corner. Was your logo going to be on there?
A. Yes, she showed us where the logo--I wrote--those are my actual
numbers. I wrote--that's our logo with a globe, and Central Office
Telephone, and that is where we anticipated we would put our logo.
Q. Okay. Was the--was having the AT&T logo along with your logo on
your card of value to you?
A. Absolutely. It gave us what I considered almost instant
credibility with our customers.
Q. Okay. Now, did you ever get the AT&T calling card?
A. No. We never got their AT&T calling card. We submitted the
artwork to them. I took it--I hand-carried it down to one of the people
in their office that was on the account team. I think LaDonna was out
of town.
They called me up and said we need your artwork. I took it down to
the AT&T office here, and we never heard anything more. And a couple
months later, of course, our account--this was probably in December of
1989. And somewhere around January or February, since our account was
not yet turned up until April, we couldn't issue it, because it
wouldn't work.
And I asked LaDonna about the calling cards. And she says, well,
she said, you can't have them. AT&T credit card manager, I think she
said, had said the resellers weren't going to have use of the AT&T
calling, the SDN calling card.
Q. Okay. Would you distinguish between the resellers with the term
commercials?
A. Yes. A commercial account would be someone who purchased an SDN
account or account for their own use or
* * * * *
Q. Did you actually contemplate telemarketing at the time you were
considering going into this SDN program?
A. Yes, we contemplated all different services. Telemarketing is
one that we looked at. Actually, in 1990, in February of 1990, I met
with a telemarketer, with Jerry Oren, who was our customer service
manager. We talked about implementing--he was doing telemarketing
already on SDN for another company, and said that he could bring four
telemarketers over. But we were--we entered initial discussions about
doing some telemarketing.
Q. Okay. Might as well jump ahead here. Why did you not follow
through on that?
[[Page 49907]]
A. The reason we didn't follow through, was AT&T changed the number
of orders that we could offer. When we first signed up in October, they
told us that the--we could have up to 6,000 locations on a multiple
location, or multiple location billing account. If we ever exceeded
that, we could add another 6,000 by partitioning it, which was simply
adding a one-time fee of $10,000. We could actually have a second
partition to do that.
In looking at 75 accounts a month, we didn't think that 6,000 was
something that we would be reaching in the immediate future. But, there
was no limit put on to us up to that 6,000, as far as the number of
accounts that we could put up. But, in February, I believe, of 1990,
they came out, and they said we are going to restrict you to a maximum
of 400 accounts, orders per month. They--so, we abandoned our calls, at
that point, to do telemarketing, because telemarketers generally target
a lesser amount. We wanted to talk to customers doing $100 a month and
more.
Telemarketers would generally be talking to smaller businesses. I
didn't want to fill up my account with 400 orders for $40, when we had
these salespeople, and these plans to expand, and we would much rather
put on 400 orders of customers averaging five or $600 a month.
Q. Okay. We were on--we were talking in terms of the EVP split
here. Again, and that was a term related to MLB. Let me go back there
and try to discuss this more completely in terms of MLB versus LABO
through another chart. Can you look at Exhibit 250?
THE COURT. Excuse me. Before you go on, what does BSD stand for on
the chart up here?
THE WITNESS. BSD?
THE COURT: Up in the upper right.
THE WITNESS: Business service----
MR. HALL: Your Honor, I can ask some questions there.
Q. Would you please explain to the jury what business services
division customers means?
A. Business service division customers would be those
* * * * *
Mr. Petranovich. No objection.
The Court. 39 is received.
(Exhibit 39 received)
By Mr. Hall.
Q. Anyway, looking at Exhibit 68, will you tell us how it came
about that having started out to do this SDN part two program you just
told the jury about on October 30, 1989, you ended up in this March 8,
1990, agreement on something called MLCP?
A. Yes. In February of 1990, LaDonna Kisor came and told us that
they were having some difficulty in implementing some of the orders,
our initial contract, because it wasn't due to go in, had not been--our
initial contract has not been installed.
As I told you, that she told us originally, that it would take, for
subsequent orders, when we added customers to our network, it would
take about 30 days, but she said----
Q. Excuse me. When you say originally, are you referring back to
October 30?
A. I am referring to the original October '89. We were told that we
would have subsequent locations added in 30 days. She came out and told
us, in February, that they were having--they had a lot of orders from
other sources, other resellers. They were having some difficulty in
implementing the orders, and that actually, the implementation date,
phase would change from 45 to 60 days, which is a fairly long time.
When you go out and sell a customer service, and he said, yeah, gee,
that sounds good. I want it. And you say, I can't get you up for two
months or whatever.
Actually, in some cases, with this, she also told us that we would
now submit orders by a certain date each month. And she called them
windows. She gave us a schedule, and said that if you give us all your
orders by March 23, for example, then those orders will--would now be
implemented on the second following month from about the 11th to the
15th of the month. So, it was anywhere from 45 to 60 days. But, it also
meant that if we--if the window date was March 23, and we signed up a
new customer on March 25, two days later, we couldn't submit that
customer until the next month. And the next month the window might be
April 21, or April 19.
So, we would have to hold that customer's order for almost a month,
and then an additional time. It would take another 45 to 60 days. So,
in some cases, it could be almost 75 to 90 days before that customer
service was installed.
Q. How does that relate to MLCP?
A. Well, then that is why she came out, and she proposed
* * * * *
was interested in continuing to work on a full-time basis.
Q. Okay. Following your April 9, 1990, agreement, for the MLB EVP
six program there, what, what was your relationship to the business
services division in the Portland branch?
A. All right. LaDonna Kisor, at that point, continued and was still
our account team manager. She was the sales rep. And we had the account
team that we had, which consisted of Jan Bramlett and Lynn Rosen. They
had a technical person assigned, Ken Merlot. So, they had a whole
account team right here in Portland that we dealt with, that smoothed
out any technical difficulties that came out.
At that point, in earlier 1990, we were meeting on a weekly basis.
We actually, I think, every Wednesday afternoon at 2:00 o'clock,
LaDonna would come out, and we would give her orders. We would talk
about anything, so we had a very close relationship with our account
team at that point.
Q. Okay. Did that change?
A. Yes, it changed in May of 1990.
Q. Okay. And will you just tell the jury what happened?
A. AT&T decide that they were going to transfer all of the
resellers to Piscataway, New Jersey, for processing orders. And the
account representation, instead of being in Portland, would be in
Pleasanton, California, the western sales group there.
Q. How did you come to learn this?
A. LaDonna told us that this was going to happen, and she asked the
new sales executive, Trish North and her supervisor, who was Bob
Alpert, to come to Portland and do a transition. To have them explain
to us the new structure, the new method for in how our account was
going to be handled at AT&T. That was the 25th of May.
Q. Would you describe that meeting, who attended it, and what
occurred there?
A. Jerry Oren and I attended for our company. Trish North and Bob
Alpert, LaDonna Kisor was there, and they came into,--and they had an
agenda set for the meeting, a printed agenda, telling the things that
they were going to talk about in the meeting. And they discussed the
transition of our account to their new representation.
Q. Okay. What, what were you told, with regard to how AT&T would be
handling you from that point on? What were you told as to the support?
A. We were told we would process our orders through the office in
New Jersey. We were told that we would not be getting the same level of
service that we had been getting in the past. Bob Alpert told us that
the SDN account was not meant for resellers, and that we wouldn't be
getting the same level of service that we had previously.
Q. Okay. Was there, were there--were any names of any people
mentioned at that time at CDOC for you to contact?
A. Yes, they gave us the telephone numbers of several people. I
don't recall. I think Tony Parisi's name was
[[Page 49908]]
on that as a person that we would contact regarding processing the
orders. And there was also someone in the--Cynthia Alexander's group, I
believe. And you will have to--Jerry Oren, probably, since he was
dealing with those people, on a daily basis, he probably has those
names down. I don't recall them.
But we were given, actually given the telephone numbers of the
people that we would be talking to in Piscataway and in Pleasanton.
Q. You mentioned CDOC, and talking about Piscataway, and what did
you then know about what CDOC is or was?
A. I didn't know a heck of a lot. It was a channel development
operations group. And all I understood was that instead of being in the
business services division, we would be dealing with the people back
there. And that we would not have the account team that we had had at
that point. That it was going to be basically our responsibility to
process all of the paperwork, as opposed to some of the functions that
had been performed by the Portland account team.
* * * * *
A. This is a letter on July the 3rd of 1990 from Trish North as a
followup to their meeting, saying that AT&T had completed a credit
review, and based on that, they asked us for a $375,000 deposit.
Q. You'd indicated you'd worked with MCI earlier on before you got
into this SDN program in October. Had you had any troubles with credit
with them?
A. No, we had not.
Q. Okay. And you had worked, at the time this letter came to you,
with AT&T already under two different contracts?
A. Right. We'd already had--we already had three accounts. We had
the original SDN option 2, we had the multiple location calling plan,
which they came out and sold to us, and we'd already signed up and had
working the SDN option 6.
Q. I didn't ask you this before, but when you did the option 6 back
in April 9, 1990, was there any specific discussions with LaDonna Kisor
about whether there would be a deposit?
A. Yes. I had a credit background. We had been asked for a deposit
with MCI. I was--and I brought it up. I said, ``You know, LaDonna, I've
got to ask you this. I'm a little bit surprised that you haven't asked
us for a deposit.'' Her reply was that, well, she had written up a good
story about our company based on our history, and we had an account
with MCI. And with our vast experience in telecommunications industry,
she said a deposit wouldn't be required.
Q. But, in any event, you did get this letter in July, and did you
ultimately come down to a particular deposit figure for Trish North?
A. Yes. I had a telephone conversation. I was pretty upset at the
385,000 deposit, but I had a telephone conversation with an Alex Aja,
A-J-A, I believe. And I said--in fact, Trish North told me if there was
any questions regarding this, I should talk--gave me the telephone
number.
And I said, ``You know, I'm surprised that you are asking for a
deposit.'' I had given them a bank record showing our bank balances. I
gave them MCI as a reference. I actually had made out a--had a
completed financial statement. At the time they gave me the credit
applications, I said, ``Well, you know, let me give you a current
financial statement.'' And that was at the--our accountant's at that
point. So I wanted to give them current information. So I asked--I
asked him, I said, ``Well, what did you find out when you talked to our
banker or MCI?'' He says, ``We didn't talk to anyone.''
Q. In any event, did you come down to a number?
A. Yes. They agreed to talk to MCI, which they did. I
* * * * *
the problems is some of our customers may have 15 lines, and they would
have five lines up on the SDN and the other 10 aren't working. Some of
them would not have anything.
So our salespeople had to go back out to the customers, tell them
that we were having some problems, and we'd have to go to the terminal
block and actually physically make calls from each line to do the
verification to find out which numbers were actually up on SDN, if any
of them. It was very time consuming. The customers were peeved, if not
outright mad, because they had signed up for a service maybe four or
five months before and still weren't on it. They may be getting some
billing from us and some billing from someone else.
And it was--the orders weren't working. We found out that the
orders that we submitted in May that were supposed to be turned up in
July--and I forget. There was something like 40 of them or whatever--
that not one of those orders were turned up, not a one. And we called
Trish North and said, ``What happened? None of our July window went out
or what was the orders that we had submitted in May.''
She came back with a reply, someone forgot to send the orders to
the LEC, which is L-E-C. It stands for local exchange company. It's an
industry termination. So if we talk about LEC, we're talking about
local exchange company, L-E-C.
Q. Would that be like U.S. West?
A. U.S. West, GTE, Continental Telephone, whoever happens to be the
local serving telephone for that particular customer. So we were--we
were really concerned. We were concerned that our account was not
billing. Here we had given them enough orders to where we were
expecting, by the May or June time frame, that our account would be
billing $50,000 a month. And here on the July bill we only billed
$13,000.
We don't know what is happening. We know the orders aren't getting
up. So we were terribly sensitive about it. And we said, well, you
know, let's make sure we don't have any problems in August. This is
really getting terrible.
Q. Can I stop you here for a second? Before you go on to the next
month, did you ask AT&T to join with you or itself make some
explanation to your customers of why these problems were occurring?
A. Not in July, no.
Q. Okay. When was that?
A. Actually, in September we made an original request that we--and
the other thing that was happening, the accounts that were getting
billed weren't getting call detail, and they were getting a bill for
$200 or $1000 or $500, and there was no record of where they made their
calls. Well----
Q. Excuse me. Can you explain to the jury, especially in the
business setting now, because these customers are all business
customers, right?
A. Right.
Q. Can you explain in that setting what the value of the call
detail was to a business customer?
A. A business customer who doesn't know who in their organization
makes calls--you get a bill for $1,000 for telephone calls, you sort of
want to know where those calls went to and if the billing is correct.
They're dealing with a reseller, and this may be the first bill. So all
of a sudden they're getting a bill.
The call detail we knew--we had ordered the call detail, and
actually we didn't know and it wasn't explained to us, that the call
detail actually came under separate cover. And if it came within a week
or even----
Q. Excuse me.
A. --two weeks, that was probably timely. But by August and
September, we were told that the call detail wasn't going to be coming
out for several months yet for July and for August.
And we asked AT&T to--well, you know our customers aren't going to
[[Page 49909]]
believe us on this. So we asked--asked them if they would write a
letter with us explaining, you know, and they said no. So we wrote a
letter in September explaining that AT&T had--was going through a new
billing system on this and that the July and August call detail
wouldn't be out for several months yet and asked--now, we did have a
bill detail which came--was available to our office, but it showed most
of the same information, but it did not show the destination city. It
would say one--a call was made from this telephone number to 1-206. It
wouldn't tell you if it was Vancouver or Chehallis or Seattle.
And we would get copies of that and send that out, and that
satisfied some of our customers. But we did the best--we were in
constant daily communication with the billing office in Seattle getting
copies of this, trying to satisfy our customers, because the customers
simply won't pay their bill unless they know--most of them wouldn't.
Some of them were very good and paid it and relied on us, and in a
couple months the call detail came out maybe two weeks late, and that
was acceptable to the customer. But we were getting a lot of complaints
about the bill detail or call detail not coming with the account. When
it was two and three months, it was outrageous.
Q. Would you look at Exhibit 115, 115?
A. All right.
* * * * *
this point unless you're prepared to make a firm representation that
this will be connected up specifically with AT&T and somebody who can
explain it in more detail. I don't know whether you want this witness
to explain certain things that were going on that might relate to this
or just that you want the document in. But if you just want the
document in now, it's not sufficient. There's not a sufficient
foundation.
MR. HALL: All right, your Honor, we'll hold that back for a while,
then.
DIRECT EXAMINATION (continued)
BY MR. HALL:
Q. What was the provisioning rate for your company during the fall
of 19--well, let's start--let's say what was the provisioning rate, to
your recollection, for your company in the second quarter of 1990?
A. I--I don't have any statistics. What I can tell you is that our
entire July window didn't go up, our entire August window didn't go up.
We continued to have problems. Our analysis told us that during this
period that--we did an analysis of the dates that the orders went in.
And during 1990, the second and third quarter, or this period, that the
average installation on all of our accounts was over--was about six
months from the time that we submitted the order to the time it was
turned up.
Q. So, in other words, it would be 180 days from the time the
customer would order to when the customer actually got on line?
A. Yes. It's about 180 days. I would--we have some supporting
someplace.
Q. And what was the promise that was made at the time that you
entered the contract of April 9, 1990?
A. We had been told at that time that from the time we gave AT&T
the order, it would be 45 to 60 days.
Q. Okay. Can you look at Exhibit 139?
A. 139. All right.
Q. Okay. Is--can you identify this?
A. Yes. This is a document that we received from AT&T in the
discovery process.
Q. Okay. Can you--is that--can you identify that?
A. It says, at the top, the--
Q. Well, no. I'm not wanting you to read things. Do you know what
it is?
A. Yes. It's an alternate channel support group report on resellers
and implementation of orders.
Q. Okay. And is your company included in this listing?
A. Yes, we are.
Q. Okay. Can you--
A. On page 21.
Q. All right. And can you just summarize your understanding of what
this chart's about or this tabulation?
A. All right.
MR. PETRANOVICH: Your Honor----
MR. HALL: Just summarize----
THE WITNESS: Yes.
MR. PETRANOVICH: Your Honor, objection. We don't have this exhibit
entered into evidence yet. And we've got a question asking the witness,
as I understand it, to read from it.
THE COURT: Well, without reading from it, what does it purport to
be?
THE WITNESS: It--it's a document showing, in this case, Central
Office Telephone orders received by month and implementation.
BY MR. HALL:
Q. Okay. In connection with--does that include Central Office
Telephone Company's own orders, as well as other--
A. Yes. Page 21 specifically refers to Central Office Telephone.
MR. HALL: We'll offer that, Your Honor.
MR. PETRANOVICH: Your Honor, a few questions in aid of objection?
THE COURT: You may.
* * * * *
And she came back with an answer. I don't know if it one day or two
hours or two days. She said, ``The SAGE test failed.'' Quote. And this
is evidently--I don't know. It's a test that they say they have to
perform to make sure that your data's entered correctly. And if it--I'm
not an expert on the SAGE test, but that was the reason given to us for
our August window not turning up.
Q. Okay. Now, going on here, did you have any discussions during
this time fram--we're in the fall of 1990 now--with Trish North with
regard to the--the allocation of the discount under MLB that you'd
asked for?
A. Yes. Starting in August when the first billing went out,
actually under the 15 million minute commitment, we noticed that there
was no discounts allocated to headquarters except for a very small
amount, which would have represented only those calls that our company
made on our own account.
Q. When you say, ``headquarters,'' are you referring in this
instance to Central Office Telephone?
A. To Central Office Telephone's own physical operation in
Milwaukee, yes.
Q. All right. Okay. And so, having notice that there was no
discount allocations at headquarters, what did you do?
A. We called Trish. And she came back, and we determined that all
of the discounts were being given out to our end user customers, and
the 50 percent that our headquarters was supposed to get was not on the
bill.
Q. All right. Did she indicate she would make any steps--take any
steps with regard to this?
A. Well, she sent us--one of the things--we had several discussions
about the discounts--and there had been an error made where, we--we
were told that 50 percent of the expanded volume plan could be
allocated. Trish North informed us at this point that if we allocate 50
percent of the URP, the usage reduction plan. That was a 5 percent
discount.
Well, we explained before, we had very carefully calculated those
percentages that we could afford to allocate to our customers and still
be profitable. So it turned out that the 50-50 allocation would not
have been a correct allocation, simply because we were giving them not
only half of the 12 percent, but we were giving them half of our 5
percent, too, or 14 and a half percent. At the level we were at in
volume discounts, it wouldn't allow us to be profitable.
So we had a discussion about reallocating those discounts. And
Trish told us that we--you know, any change in that allocation had to
go in 10 days before the billing period. And we had our first
discussion, I think on August
[[Page 49910]]
29th. So we had first talked about changing that. And we asked her,
``Can you make an allocation other than a full percentage allocation?''
And we used an example. We're talking about a 47 and a half and 52 and
a half percent discount. And it took about a week, five or six days,
before Trish got back and said, ``No, if you're going to make any
allocation, it has to be in full percentage amounts. If you want
something, you're either going to have to go 47 or 53.''
Well, we had done some computing by this time. We had promised our
customers a 12 percent volume discount. And during--one of the
incentives of going to the option 6 was that during the first year,
regardless of where we were in the contract, we would get, for the
first year, a 24 percent expanded volume plan discount. So we promised
our customers 12 percent. We'll give you half of our expanded volume
plan, which is 24.
So we tried to comeup--in addition to that we had a 5 percent
discount, so our total discounts were 29 percent. We had promised our
customers 12 percent. So we came up, and on about the 8th of September,
which was still in the period to get it on the next billing, we asked
to allocate 42 percent to our customers and 58 percent to headquarters.
And 42 percent of 29 percent total comes out to 12.19 percent. So we
actually had to give them a slightly higher percentage than we had
promised, but that's the closest we could come to 12 percent and meet
our commitment to our customers the give them the 12 percent discount.
So we ordered a change in the discount allocation, from what was in
the computer of 50 percent, to 42 and 58.
Q. Okay. Now, did that change in allocation that you ordered at
that time--as I understand it, prior to this time, there had been no
allocation made whatsoever, is that correct?
A. All of the discounts were going to the end user customer, yes.
Q. Right. And what happened after this discussion?
A. Trish told us--reported that she had turned in the order to
change it and that it--the change would appear on the October 11th bill
for September usage.
Q. And did it?
A. No, it did not.
Q. Did it ever?
A. No, it never did.
Q. Okay. Did it ever appear to the day you left in September 30,
1992?
A. Well, we changed--because of all the billing problems, we had to
change our billing option. So----
Q. Excuse me.
A. They reported to us that in March of 1991, which was two months
after we changed to a different billing option as a matter of
survival--they told us, ``The compute took your changes,'' but they
were no longer doing our billing, so it didn't make any difference.
Q. Let's go----
A. I don't know that for a fact. they just told us that.
Q. Let's go briefly forward to that point. You say that you changed
finally to another form of billing. When was that?
A. We actually ordered, initially, the change at the end of October
when we again had a failure in getting the allocations out. Our
customers started leaving us. We'd had a--we'd had problems with the
implementation, we had problems with credit cards, we had problems with
the substitute on the credit card.
Now the billings were going out. And when AT&T had given all the
billings out, they were now sending adjustments on the bill without any
explanation to the customer. Because they had given the customer all of
our discounts, now they decided they had to make an adjustment on the
bill debiting the customer for an amount of money, which would get our
discounts back, and the adjustments they sent out were worng.
So our customers were just getting tired of it, and they started
cancelling their accounts. Our salespeople were getting irate. They
were losing their customers. They were spending all their time
resolving problems and not going out and selling new accounts. And so
we just said we've--the billing is just impossible. We can't do it. And
we said, ``We've got to go to network billing,'' which was a sort of a
traumatic thing, because it cost a lot of money to get it set up, and
it was going to take several months to get it done.
Q. I'd like to ask you if you'd tell the jury what the difference
is--just so they know. They're trying to follow this along here. We've
got this MLB and how it's supposed to operate and then MLCP as a
temporary parking place. Now we're up to--back to MLB efforts again
with Trish North. And I'm trying to get the distinction between the
network billing, which you're now going to talk about, and the prior
billing?
A. Okay. Network billing, AT&T would continue to carry the service,
but they would send us a magnetic tape. We signed up with a billing
company, computer company who was in the business of doing telephone
billing, and we signed up with them to transfer over other billings and
have them do our billings for us. But what it did is it increased
* * * * *
a major problem. All of our discounts had been allocated back to the
end user customer.
AT&T decided that they had to go back and do a debit on their
accounts. We'd asked them to just simply credit our account for what
should have been on there, but they said, ``No, we've got to bill the
customer.'' So they would issue a debit. They may issue a debit in
October for two previous months. There would be two debits to a
customer's account without explanation. These debits were computed
wrong.
In other words, let me give you an example. If our customer, say,
got--had $1,000, a bill, and they got, say, $290 in volume discounts,
actually the customer should have only had 120. Well, so AT&T would
say, okay. We have to issue a debit to that account for the difference
between the 290 we gave them and the 120. That, obviously, should be
$170. Well, they would issue a debit maybe for $138. It has no rhyme or
reason to be a correct amount to get our money back.
And almost none, that I know of, of the debits that they made were
computed correctly. Simply--they gave them all--they should have simply
multiplied 58 percent times the amount of the volume discount the
customer got. It was a pretty simple mathematical calculation. They
never--they never got it correct. So they kept doing that.
Some of our customers didn't understand them. They didn't call us.
They wouldn't pay them. Some of them said, no, you gave me a discount.
I'm not going to get it. They didn't understand it. And these bills
were just fouled with incorrect balances every month. It was taking--
customers quit. They'd say, ``You know, I like your service. I simply
can't spend four hours every month reconciling my AT&T phone bill or my
Central Office Telephone phone bill.''
So the balances were incorrect. Then we have some evidence that
Customer A would pay his bill, and it would be credited incorrectly to
Customer C's account. It was just a tangled web of incorrect billings
that went out. Those bills were fouled.
Well, when we went to network billing, we made one very good
decision. We decided not to try and bring forward the balance the AT&T
showed on these accounts, because there was no way--AT&T couldn't
explain it to us. There's no way we could explain it to our customers.
So when we started billing in February, we started and out as if the
customer owed no previous balance. We started out with zero. So we
didn't know where they really stood. There's no way of our
[[Page 49911]]
telling without some--and we're still dealing with the Seattle office.
And so there was an ongoing problem now, that we're--our customers
are still getting billed. We didn't want any more incorrect bills to go
out, so we tried to resolve the issue with AT&T to get them to correct
the bills so they would be to our customer--customer deserves a correct
billing. So we didn't bring back the fouled balances, so now we have
all those bills out there with balances on them as a result of all of
the incorrect billings from AT&T. So we just started out clean with our
network billing and started collecting that.
But now we have a problem that went on for months and months and
months of trying to get AT&T to correct these bills. They absolutely
refused to correct the bills. We had conversations. We started
withholding our payments to them. We said, ``We are not going to pay
any money until you get those bills corrected, because, you know, it's
jeopardizing our business and our customers.''
So we withheld--we withheld funds, and we had--we had conference
calls a month down the line in 1991. They--our billing--billing
responsibilities that I told you about that was handled in Seattle,
that got moved back to another department in New Jersey. These people
had no idea--the people that we dealt with in Seattle, Myrna Pharr and
Becky Zeller, were completely familiar with our account, all the
problems. Myrna Pharr was a supervisor. And she told us, she said, ``I
won't let them transfer this account til we get this cleared up.''
Well, that didn't happen. They transferred the accounts.
There was another problem that----
MR. PETRANOVICH: Your Honor, if I could just ask for maybe for Mr.
Hall to interpose a question every now and then. We're just getting a
narrative here that's sort of hard to follow. And if we could do this
on a question and answer basis, I think that would help everybody.
MR. HALL: I agree with that, Your Honor.
BY MR. HALL:
Q. Did you get to the point where you hired an outside person to
help you unscramble this?
A. Yes. AT&T wouldn't do it. We told them that we would do it. We
hired a person by the name of Griff Griffith, who had some computer
knowledge and expertise. We installed a special--we asked him what we
should install. We told him what the problem was, that we had all of
these bills that are incorrect. We want to get them and resolve the
balances. So we hired Griff Griffith to come up with a way of
identifying all of these bills.
Q. Okay. And did you get any satisfaction out of that arrangement
in terms of your AT&T negotiations?
A. No, we didn't. It took several months. We had to go back to
every single bill that had been sent to every
* * * * *
the SDN program?
A. Well, as I indicated, we had continued to have the problems of
getting the billings corrected. AT&T was refusing to do it. And we went
to network billing, but there was a new billing problem cropping up
that was destroying us. And that's called unbilled toll, or--we'd get a
report.
And what happened, our customers would be on the SDN network, but
for some reason their calls wouldn't be billed. And even though we were
doing a network billing, we were not getting identification of the
calls from our customers. Some customers were billing nothing, even
though they said they weren't getting a bill from anyone else. And so,
all of a sudden, a customer would get a bill, and it would be for eight
months of long distance service.
In September, particularly, Sam Allen, at the Monarch Hotel, called
me, and he got a bill for that month for the Monarch Hotel of nine- or
$10,000. The previous bill was $36. It had calls on it for eight
months. And he ordered all of his service canceled. Sam Allen owns the
Monarch Motor Hotel, the Sunnyside Inn, Days Inn, and the--he owns half
of the Best Western at the Meadows. He canceled all those services, and
said he would never do business with us again, and he wouldn't pay the
$12,000 or $10,000 that we showed owing on the bill even though some of
it was a current portion.
Mr. PETRANOVICH: Objection. Hearsay as to what Mr. Allen told Mr.
Rood.
The COURT: I didn't hear the very last part. The objection's
overruled as to the first part. He can testify he wouldn't do business
with you again, but I don't want you to go on beyond that as to what he
said.
THE WITNESS: All right.
BY MR. HALL:
Q. Mr. Rood, I think you, just at the end there during the
objection, were talking about the amount of the unbilled--the
outstanding billing with your--what you had. You can testify as to what
that was. What was the outstanding billing that Monarch had with you?
A. The outstanding bill on the----
Q. Yes.
A. On that one account?
Q. What they would have owed you, yes.
A. About $10,000.
Q. Okay. That was never paid to you?
A. There were a number of other accounts at the same time. World
One and Mark Gould in Florida. We also couldn't pay his account and
canceled. We had pretty close to 25- to $30,000 a month in
cancellations in the September time frame, because at this point we'd
had so many customers drop off, that our AT&T account was down in the
area of $100,000.
The way the discounts were set up, we were only--we weren't getting
enough money for it to be profitable. And with the cancellations, now,
we were getting on that, there was no way that we could salvage it and
make it profitably. And our salespeople, who were on commission, who
waited months and months and months after they made a sale to get a
commission, wouldn't sell AT&T. They absolutely--unless a customer
begged to go on AT&T, they wouldn't turn in an order for AT&T. They
absolutely--because their lives depended on it, and some of these
people were making only half of what they should have made as far as
their sales.
So they--at that time we had another account with U.S. Sprint, and
so they would sign them up on Sprint, but they wouldn't put anyone on
AT&T. So there's no way to sustain our AT&T program. And I just decided
that if I left AT&T build long enough, that eventually they would drive
away every customer that I had on it. So we made a decision to cancel
the account.
Q. After you canceled the account did AT&T demand of you close to a
million dollars?
A. Well, not--not right away. We had--we received a
* * * * *
AT&T people, for the termination notice that you just read to us, would
you describe the internal effect upon your company of the position that
you were in at this time?
A. Yes. This, we had--we were in total frustration with the entire
AT&T SDN problem. We had ongoing problems that weren't solved, and no
attempt was being made to solve them.
In spite of what they say, we did not see any real improvement in
the provisioning process. Part of that may have been due to the fact
that our salespeople would no longer sell it, because they couldn't get
their commissions. They could sell on our Sprint account and get the
account up and working in 10 days and start getting commissions. And
they would put them
[[Page 49912]]
on SDN, and they would have to wait six months before they started
making any money, and that wasn't fair to them.
We had the substantial billing problem with the multiple location
billing, which was never solved, and couldn't be resolved. We, we had
gone through this expensive thing of providing them with our database,
providing them with a complete analysis. We went down and broke every
single bill down, and showed them what our figures were, as far as why
we thought their bills were wrong, and they never would correct them.
They wouldn't look at it.
* * * * *
Q. Now, I think your testimony was, just after lunch, that there
came a time that you were told, in March of 1992, you were told by
AT&T, that they had got your system working, so that the allocations,
percentage allocations could be made as you directed, correct?
A. No, I didn't say that. I said that on April 9 of 1990, they told
us that our first customer had been installed on the network.
Q. Go back----
A. No one said to me, at that time, that your percentages are going
to be allocated correctly. That wasn't part of any discussion we had on
April----
Q. Is it your testimony today, that AT&T was never able to offer
you multi-location billing, such that you could share a discount with
your customer, 50/50, 48/50, 58/42, any way; is that your testimony
today?
A. It's my testimony today, that AT&T could have done it. That it
was in their option. It is my testimony that AT&T did not do it.
Q. Right.
A. Ever.
Q. But it's your testimony today, that as of the date of this
letter, AT&T could have delivered multi-location billing?
A. We were told they could.
Q. All right. And you believe that they could?
A. I certainly did.
Q. All right.
A. I probably would not have signed the contract, had we known that
they couldn't or wouldn't.
Q. Okay. Fair enough. Fair enough. That is one. You wouldn't have
signed the contract, if you had known that they could not deliver it?
A. Oh, absolutely.
Q. All right. Now, let's talk about some things that you were not
told that you think you should have been. How about the discount?
Excuse me. Not the discount, the deposit. You were eventually required
to place a deposit with AT&T, correct?
A. Yes, in July 3rd of 1990.
Q. All right. And is it your case here today, that you weren't told
that in October of '89?
A. We definitely were not told that in October of 1989.
Q. Now, are you telling me you weren't told, or it just wasn't
mentioned?
A. It wasn't--we weren't----
Q. No one mentioned it?
A. In October of '89, it wasn't mentioned.
Q. All right. No one mentioned it in October of 1989?
A. No, they did not.
Q. Okay. Let's spend some time on this deposit. Let's stop right
here. MCI required you to place a deposit?
A. Yes, they did.
Q. You, yourself, COT, required its customers, in appropriate
cases, to place a deposit?
A. In very few, but, yes, there were times that we had customers
place a deposit with us.
Q. You knew, from your years with AT&T, that occasionally AT&T
required its customers to place a deposit?
A. If you want to include Pacific Northwest Bell being AT&T at the
time, yes, that's fine, yes.
Q. Yes, Pacific Northwest Bell.
A. I knew occasionally Pacific Northwest Bell or AT&T required
deposits, yes.
Q. And it wouldn't have surprised you, on October 30, 1989, to be
told that you would have to place a deposit, correct?
A. No, it wouldn't have surprised me a bit.
Q. And if you had been told, you would have signed that contract
anyway, correct?
A. Providing I could have met the deposit requirements, yes.
Q. Okay. Well, we will get into the deposit requirements--well,
let's get to that right now.
* * * * *
asked about three separate increases that occurred?
A. Yes.
Q. Okay. I would like you to look at paragraph 22. Earlier, in your
cross-examination testimony, you mentioned the term slamming. Do you
see that in there?
A. Yes, that's the bottom sentence there.
Q. Okay. Was that one of your problems?
A. It was a problem. While it wasn't as significant as the other,
it did create a problem with our customers. Slamming is a process of
illegally converting a customer from one service to another. G.I.
Joe's, which was a large customer at the time, multiple location,
significant billing, and they were contacted by a telemarketer,
employed by AT&T, and without authority, slammed all locations.
All the time it took us to get them up on SDN, and whamo,
overnight, they were switched back to 1-288, and we lost the billing.
It was a nightmare. It took about four months. We lost the revenues. We
ended up losing the customers. The customer, of course, blames us for a
lot of things that happened, even though we are not involved.
But it took some time, two or three months, I think, to get the
customer converted back, and up on our service again. And so anytime
something changes, and a problem occurs, they have a tendency to relate
it to us. I--but this is one of the, one of the incidents. There is at
least half a dozen more, and there is slamming done by other carriers,
too, other than AT&T.
Q. Okay. Now, did this contribute, this slamming to your statement,
on cross-examination, about a total lack of trust?
A. That is another factor, yes. That is definitely a factor.
Q. And talking about that slamming, is this part of the types of
problems that you attempted to have AT&T write to your customers about?
A. I don't, I don't specifically recall. We, we had asked them--
most of these slamming incidents were coming in, say, 1991 or 1992, or
most--you know, that is when they became a problem. And we--it was in
1990 that they were denying to write letters. We didn't go back to
them. We knew what the answer would be.
Q. Okay. Let me ask you to look at paragraph 17. Okay. There's talk
in there, is there not, in paragraph 17, about the calling card again,
an NRA I?
A. Yes.
Q. Okay. Now, you have already testified that you had never got
that AT&T calling card. Tell us, if you will, about what--about the NRA
I. We have never gotten fully into that.
A. Well, I have got to relate the NRA I to the SDN calling card.
Q. Okay.
A. The whole thing is--the SDN calling card, I told you how
attractive it was. And you can make calls in the normal way that you
could with any AT&T calling card, and you would save at least an
average of about 45 percent per call. Had our logo.
And once we were told we had it, we went out and told our
customers, that we were signing up, it was going to be, you know, five
months before we were
[[Page 49913]]
on the network, but we told them about this calling card. And they are
going to have the SDN calling card and save this money. And it was good
for making international calls. It was also good from any U.S. direct
country. If you were in Germany, and that was a U.S.--you could
actually access that calling card from--I think there were 32 different
foreign countries that were on the USA direct list.
That was important to our customers. They had people out there that
traveled internationally and made calls to international locations. And
they came back, and they said that we were going to be denied use of
that calling card. Well, that was--the bad part about that, is the fact
that it caused us to have made a misrepresentation to our customer,
unintentional, but it was a misrepresentation. Because we told them, in
good faith, based on what we had, that we were going to have this card.
So, Donna suggested that we get an alternate card, under the tariff
called NRA I, Network Remote Access I. In this case, we would print the
cards up. It was not going to be good from any U.S. direct country,
because the only way you could access this card was an 800 number. So,
our--made it more difficult for our customers to use, because, number
one, they had to dial an 800 number, and then they had to put in their
identification, and they had to put in the number they were dialing,
and things like that.
But, they--we were also told that it would be good for making
international calls. So, it's a more difficult card to use. It's not
good from the foreign countries, and that probably didn't affect more
than five percent of our credit card users. But they--we had
considerably more than that that made international calls. And, it was,
again, reaffirmed, in the April 9 billing, that NRA I would be good for
making international calls.
So, we had these cards printed up. I think we printed up an initial
5,000 of them. Our logo on, numbers, signed them out to our customers,
and they weren't good until the network turned up. But when the network
was turned up, we gave them to our customers. And they went out, and
they immediately got calls. And the international calls were blocked.
The customers that we had issued the cards to, they never could make
calls, international calls.
And most of them--you just don't do that, because people don't
want--if they are going to have a service, they don't want to have to
carry two calling cards. So, we virtually were denied--those people
that wanted to make international calls, we were denied any income or
revenue from those people.
And, of course, if a company had 20 people and 10 of them made
international calls, they don't want to issue AT&T cards or MCI cards
to half their people, and give half to another. So, it virtually
destroyed our credit card program.
Q. Mr. Rood, I would like to ask you to take a quick squint at this
one chart that you were shown. I think there was one over here. Yes.
You were examined a little bit about this particular chart. And can you
see it?
A. I can see it, yes.
Q. I will stay out of your way here. On that particular chart, a
comparison is being made here between network billing and multi-
location billing. Is that a correct comparison, in your view, to have
the comparison between
* * * * *
Exhibit B--Excerpts of Trial Testimony of Spencer Perry, Central Office
Telephone, Inc. v. AT&T, Civil Action No. 91-1236-JE, United States
District Court, for the District of Oregon, June, 1994
* * * * *
were people that were going literally through the door requesting SDN
service, he was pretty happy, and so was I. We had made some
significant revenue commitments to AT&T marketing, meaning that we--we
said that we were going to bring in quite a bit more revenue then we
had the previous year, and, so--
Q. Just so the jury knows and we know, the previous year is 1988;
is that correct?
A. That's correct.
Q. Or are we talking--previously, we were talking about 1989?
A. That's correct. From 1985 up until 1989, the revenue for that
organization had been steadily decreasing. I believe in '85, it was
somewhere a little over a billion dollars, and by 1988, it had gone
down to less than half of that amount. So, it was a significant revenue
decrease that was happening over time, and it was about that time that
AT&T's corporate marketing department was looking for new revenues from
all of its sales folks and so forth, and, so, Walt, like I said,
performed the study over a period of time and essentially convinced his
management that we ought to go after the resell market, an when
switchless resellers came and wanted to buy the service, we were
overjoyed that there were people that wanted to buy the service and we
didn't have to go out and beat the bushes, so to speak, looking for
customers.
They were walking in through the door. It kind of reminded me of
fish jumping out of the ocean into your boat. You don't even have to
drop the line in.
Q. Well, were you given a revenue goal that you were to accomplish
based on this advent of the stichless resellers?
A. Yes, sir.
Q. What was that?
A. I believe the total revenue goal, and this is increased revenue,
not the total revenue, but increased revenue, I think we had to provide
somewhere in the neighborhood of 115-million dollars of new revenue to
the company, and I think about 90-some of it was targeted towards the
software defined network product.
Q. At that point, did you view the switchless resellers as
customers?
A. Absolutely.
Q. Now, you indicated that the switchless resellers were jumping
into the boat like fish a minute ago.
Tell me a time when your ability to handle this group of people
coming in was taxed.
A. Yes.
Q. Explain that.
A. Well, our organization--Wait Murphy's organization
* * * * *
was the operations center of this entire group. John Greco came out of
the staff group that was doing the channel development work. Channel
development was simply a term that was used by marketing to look at
alternate distribution channels to sell AT&T services.
Traditionally, AT&T sold its services via its own sales forces. It
peppered the television, media with ads. It was kind of hard to turn on
the television and not see an ad for AT&T with a telephone number. What
they were looking at was things like sales agents and non-traditional
ways of selling those services.
Anyway, those two groups merged. John Greco came from that Channel
Development Group, and when Michael came on board, where before I
reported as a third level directly to Walt Murphy who was a fifth
level, and we did not have a fourth level manager in that group. When
Keith came in, he was, of course, the fifth level, and John Greco then
stepped--sort of stepped in, and I wound up reporting to John so that I
no longer reported directly to the fifth level manager.
Q. Now, I am getting myself into another one here. You better
explain to the jury what these levels are.
A. All right. AT&T has--has a hierarchy of management that I think
ranges from, say, the first level, which
[[Page 49914]]
is the lowest level of management which might be considered like I
guess in the Army you might call it second lieutenant or something like
that, I suppose, all the way up to the chairman of the company who I
guess would be a ninth level or maybe tenth level. I don't know.
Q. Just to get it down to where you were, you were at what level at
this point?
A. I was at the third level.
Q. Mr. Greco at fourth?
A. Yes.
Q. And Mr. Keith was fifth?
A. Right, the level right below officer level.
Q. When you did this study--by the way, do you have that study that
you just talked about that you and Mr. Gengenback made?
A. No. I recreated it, but I don't have the actual study that we
did.
Q. How did you come about to recreate it?
A. I recreated it later on when I was executive director for the
Interchange Reseller Association. That chart--if you just, you know,
look at that chart, you can very quickly understand or you can explain
if you were explaining where the price difference between, say, SDN and
WATS, and you can look at that price gap, and you can very quickly
understand where the market opportunity for resellers existed.
* * * * *
Q. Did you show this chart to Mr. Keith?
A. Yes, I did.
Q. What was his reaction to the chart?
A. Well, when he looked at the--at the percentage difference, he
said that the AT&T's WATS base could be--could be eroded in no time.
Q. And did he give you any instructions when he made that remark as
to any further assignments for you?
A. Yes. Yes, he did. Later on, and I don't know if it was the same
day or perhaps a day later, but he essentially asked me to get with
Glenn Starr's people. Glenn was the product management--product manager
for SDN. He was the person in marketing responsible for the service--
you know, the service and its features and its profitability and all of
that. He was the top dog of SDN.
Q. Could you please look at Exhibit 243? I better give you--pardon
me. I'm sorry. I made a mistake, your Honor.
It's 248 A. I'm sorry.
A. Okay.
Q. Can you take a look at that for me and give me an idea as to
what that represents?
A. This is a organization chart, first quarter, 1990, of AT&T
Communications--of the AT&T Communications organization or a partial
organization chart.
Q. Does this describe the various groups that you have been talking
about today, such as product management, Mr. Starr's organization?
A. Pretty much so. It is a little bit off, but for the most part,
it does.
Q.Does it describe Mr. Keith's organization?
A. Yes, it does.
Q. Now, you mentioned that AT&T traditionally does direct selling.
Is the direct selling organization in there correctly--
A. Well, it shows up here, but it shows up at a level--the head of
the group shows up a level where--lower than what it really should be.
Q. Do you have a pen with you?
A. Yes.
Q. Okay. Could you angle the direct sales organization and start it
at a box higher or however you want to to do it so that it is
corrected.
A. (Complying).
Q. Okay. Why don't you initial that with ``S.P.'', your initials?
A. (Complying). Done.
Q. Okay. Now, Michael Keith: Is he the Director of Distribution
Strategies or was he at that time?
A. Yes, he was.
Q. That was Director of Distribution; correct?
A. Yes.
Q. Would you kindly write in ``strategy'' there?
A. (Complying). Okay. Initial that as well?
Q. Yeah. Thank you.
A. (Complying).
Q. Do you recognize all of the names on that document and the
positions in which they are indicated to occupy?
A. Yes, I do.
Q. All right. There is also a box in there about the so-called ad
hoc committee on resellers.
Can you tell me what the ad hoc committee on resellers.
Can you tell me what the ad hoc committee on resellers is or was,
just briefly?
A. Yes. You asked me what Michael Keith's reaction to that chart
that I showed him was, and indicated that--well, I guess I didn't
indicate, but he asked later on--
MR. PETRANOVICH: Objection, your Honor. We have a question, and
maybe we can get an answer to the question and then go on.
The COURT. Okay. Could you restate question?
Mr. HALL: Yes. I asked him to identify or just give me a brief
description on what this ad hoc committee on resellers was.
The WITNESS: It was an ad hoc group of people that was comprised of
people within Michael Keith's organization and Frank Ianna's
organization that got together on a couple of occasions to change the
SDN offer.
MR. HALL. All right. Your Honor, we will offer 243 A--248 A, I'm
sorry.
MR. PETRANOVICH: Few questions in aid of an objection, your Honor?
The COURT. You may.
MR. PETRANOVICH: On this chart that is 248 A, let's just look at
Michael Keith. You told us that his real title was Director of
Distribution Strategies; right?
The WITNESS: That's right.
MR. PETRANOVICH: Those people aren't on this chart?
THE WITNESS: That's correct. It says it is a partial organization
chart.
MR. PETRANOVICH: It's a partial organizational chart?
THE WITNESS: Correct.
MR. PETRANOVICH: Similarly, there are folks who reports to Mr.
Frank Ianna who are not on this chart?
THE WITNESS: That's right.
MR. PETRANOVICH: And I suppose there are others who report to Mr.
Blanchard; is that correct?
THE WITNESS: That's true.
MR. PETRANOVICH: This chart is as of what?
THE WITNESS: It says first quarter, 1990.
MR. PETRANOVICH: And that would be the end of March of 1990?
THE WITNESS: I suppose it would be as of the end of March.
MR. PETRANOVICH: Okay. Now, you have got or--I guess I don't want
to burden you with this, but this committee you just talked about, the
ad hoc committee on resellers--do you see that?
THE WITNESS: Um-hum (affirmative).
MR. PETRANOVICH: That ad hoc committee is your term; isn't it?
THE WITNESS: That's correct.
MR. PETRANOVICH: I have no other questions, your Honor, and with
notations that this doesn't describe the chart, I have no objections.
THE COURT: 248 is received, but I'm not clear: Is ad hoc--are you
the only one that uses that term or was that a term--let me ask it this
way: Was that a term that was used within AT&T at the time? Mr.
Petranovich asked you if that was your term.
THE WITNESS: I heard Mr. Petranovich use it this morning. So, he
has used it before.
THE COURT: We have heard it used here. When people say ``ad hoc
committee'', are we all going to be talking about the same thing?
THE WITNESS: I suppose. It never had a formal name because it
wasn't a
[[Page 49915]]
formal organization. It was a group of people that met, to my
knowledge, twice--only twice. So, that for that reason, I refer to it
as an ad hoc committee.
THE COURT: Okay.
THE WITNESS: We can call it anything that you like.
THE CLERK: Your Honor, just for clarification, they offered 248 A.
You said 248 is received.
THE COURT: 248 A is received.
THE CLERK: They already offered and received 248 D.
THE WITNESS: Your Honors, could I have some more water?
MR. HALL: Your Honor, we have a problem here because he has now
made some changes on that. If I can show it--I would like to project
it, but he has made a couple of changes on there, and the lady
operating the transparencies--if he would put it on for her some way.
THE WITNESS: If you have a grease pencil--
MR. URRUTIA: There should be a grease pencil there, your Honor.
Perhaps, Mr. Perry could make the same changes on the transparency.
THE COURT: That would be fine. Go ahead and put it on, and he can
come down.
Q. (by Mr. Hall) Go ahead and make the changes right on that
transparency.
THE WITNESS: (Approaching the projector). (Complying).
Q. (by Mr. Hall) I think the first one was Mr. Keith's title. That
is the easiest one.
A. (Complying).
Q. And then you said that that direct sales organization--we had
that one wrong.
Can you put a box to show it independently or whatever you want to
do?
A. First, his title wasn't director.
Q. Then strike that, if you don't mind.
A. (Complying).
Q. So, you are showing organization as being at a higher level,
then, than Michael Keith's; correct?
A. That's correct, and it was the business sales division is I
believe what it was called, the BSD.
Q. Then, that line between Mr. Nacchio and Gus Blanchard shouldn't
be there?
A. That's correct.
Q. Now, you mentioned product management.
Would you just tell the jury where those two organizations, CDOC
and product management, sit in this chart?
A. This is product management here.
Q. Mr. Starr's organization?
A. Well, actually, Frank Ianna had product management, and Glenn
Starr was fourth level who was the product manager for the SDN product.
Q. Okay. Then, what about CDOC?
A. CDOC was right here under Michael Keith, and as the counsel
said, there should be another box here that has some other staff
organization. Remember that I showed you there was the channel
development piece of this?
Q. Show yours there, please. You mentioned several names.
A. I am Spencer Perry.
A. Yeah. May I--well, I will just wait.
Q. Now, on this ad hoc committee, let's--why don't you resume the
stand there. Thank you.
A. Go back up here? Turn this off?
Q. No. Just resume the stand. We will take care of that part.
A. (Returning to the witness stand).
Q. You were starting to testify, I believe, that Mr. Keith had
asked you to take some further steps after you gave him this report
indicating what I think was price point comparisons for PRO WATS and
SDN and so forth.
What were the assignments that you were given?
A. Well, he asked me to get with Glenn Starr's people to change the
SDN offer to kill the arbitrage.
Q. Want to tell the jury what the arbitrage is?
A. ``Arbitrage'' is basically an economic term that explains a
situation where you can go into one market, let's say, and buy a
product or service or commodity at one price and, then, go into another
market and buy the same or similar commodity or service at a lower--
typically, a lower price and, then, go back up into the first market
and sell the commodity with a price spread and make some money doing
it, and, you know, there is--and that's classical arbitrage, as I
understand it.
Mr. HALL: Your Honor, may I pick up an exhibit over here?
THE COURT: Yes.
Q. (by Mr. Hall) I'm showing you Exhibit 243 which has already been
in evidence. I will put it over here. I don't know if you can see it at
this angle or not.
* * * * *
A. Correct.
Q. Okay.
A. And that would roll up to me.
Q. Okay. What is the next one?
A. Develop plans for SDN targeting and strategy to traditional
resellers and deflect cockroaches.
Q. Okay. Explain what that means?
A. Like I said earlier, we had a significant commitment to raise
our revenues selling SDN to traditional or switch based resellers. What
we were doing here--well, what, what this represents is really like a
parallel track of, of work that had to be done.
One was go out and sell SDN, and measure it with your folks, and
create a sales organization to go out to the traditional people. And,
at the same time, cockroaches was a term that a lot of people within
AT&T, basically smaller, lower level people, used to referred to
switchless resellers.
Q. Who specifically can you recall besides yourself there?
A. I used it. People in my organization. I think Ed may have used
it. John Greco used it. Several people. Marty Gitter used it. A lot of
people.
Q. Is Ed, Ed Gegenbach to whom you earlier referred?
A. Yes.
Q. I can't--what is the last line there? Actually, it's--
A. It's cut off. It may be on the--
Q. Okay. Account plans?
A. Account plans, yeah. It says account plans by segment. And hold
on just a second. Account plans by segment.
Q. Okay. Thank you very much. Can you resume the stand? Thanks.
A. Sure.
Q. Now, when you were talking to Mr. Greco, after you talked to Mr.
Keith, did you then make plans to call this meeting of this ad hoc
committee?
A. Well, shortly, shortly after the meeting with, with Keith, I got
more specific instructions. And I think it was shortly, like a day or
two later. I got specific instructions to, to organize a group to get
with, with Glenn Starr's people. Glenn again being the SDN product
manager. To, to get some of our people together, and his people
together in a meeting. And, and work on ways to, to change the SDN
offer, so that the switchless resellers, or the cockroaches, or
whatever, would not, would not buy the product.
Q. All right. Now, how did you go about meeting with Glenn Starr's
group?
* * * * *
you look down at--in this document--let's just read. If you please, do
for us the first line, and I will ask some questions.
A. The first line of the document?
Q. Yes, please.
A. Not the title, but the line of text?
Q. Yeah.
A. Okay. The recent unprecedented demand for AT&T software defined
network service, for the sole purpose of resale, has caused confusion
in the marketplace, and has resulted in a clogged provisioning system,
thus denying service to commercial customers.
Q. Okay. Now, you said that you and Mr. Gitter wrote this memo.
Where did you get your information about denying service to commercial
customers?
[[Page 49916]]
A. There was, there was a lot of talk, if you will, a lot of
discussion among the various managers involved in this. And you know,
we--I got both--well, I am going to speak for myself.
I got a general sense of what was going on, you know, the global
picture of what was going on, and--from various people. I hadn't
attended any meetings, or actually had seen any, any data, but there
was just a lot of what I would call scuttlebutt going on about, about a
lot of problems that were happening out across the country.
Q. Now, the commercial customers were under the--Mr. Blanchard's
group, were they not?
A. That's correct.
Q. Okay. Would you read on then the rest of that paragraph?
A. AT&T's interests may be well served in delivering this service
to established, switch-based inter-exchange carriers. However, the
current ability for switchless resellers to arbitrage the service has
significant negative consequences to AT&T.
This paper identifies tariffed elements and operational practices
that attract arbitrageurs. Revisions to these elements and practices
are listed in descending order of impact that would decrease the
attractiveness of the service to switchless resellers.
Q. Did you actually look at the SDN tariff to see areas where this
could be accomplished?
A. That wasn't the process that we used. I--as you described it.
Q. Okay.
A. I mean, if you like, I can describe the process Marty and I used
that culminated in this paper.
Q. All right.
A. What, what we did, was I believe it was in my office, where
Marty and I--we hashed out, in my office, and put--made notes on a--on
the white board there, of different, different things that could be
done to make the service less attractive to resellers.
And one of the things that we were trying to do, was while making
it less attractive to resellers, we wanted to keep the viability to
commercial customers. And so, what we did, was we just listed ideas on
the board, and then later went back, and then segmented those ideas,
and tried to put some order to them, in terms of, you know, basically
categorize the ideas.
And then further, we then listed, listed those, those ideas, in
what we thought were, was a, sort of rank order of effectiveness.
Q. Okay.
A. And then--just let me finish. And then I went back, and took
those things, and wrote, and created the paper.
Q. Okay. Did you take this paper with you to the meeting that you--
the policy group meeting?
A. I don't recall that I did or didn't. I, I believe I, I--we
handed it to John and perhaps Michael, but I don't recall taking it to
the meeting.
Q. All right. When you were at the meeting, did you do what you
said you just did with Marty Gitter, which is have a blackboard to put
down ideas?
A. Yes, sir. Well, it was a white board.
Q. Excuse me. Looking at the next page, there's this talk up in
there about the AT&T logo. So perhaps if you would read the first item
under billing. Not the first item, excuse me, the first paragraph.
A. Okay, yeah. When AT&T provides billing to the SDN end user,
switchless reselling is encouraged. The reseller is given additional
credibility when the AT&T logo appears on the end users bill. Potential
corrections include, and then there is a list of corrections.
Q. Okay. The very bottom bullet there, what does that say?
A. AT&T logo on end user bill for resellers.
Q. Are you acquainted with multiple location billing?
A. Yes, I am.
Q. Okay. Did multiple location billing, as an option under SDN,
result in these end users getting this very logo?
A. Yes, it did.
Q. Okay. Was that discussed?
A. At, at the meeting?
Q. Or at any time.
A. Obviously, Marty and I discussed it.
Q. Okay.
A. That was--the whole billing, the whole billing issue, I think,
was more--was, Marty was more expert on that than I was. So, I mean, I
think that, that these--most of the billing ideas here were Marty's.
Q. Okay. You can put the last one on to show signatures. I am not
going to ask any questions. That was signed by yourself and Marty?
A. It wasn't signed. It was just our names. We put our names down
there. It was a draft.
Q. All right. Would you turn to Exhibit 70, please.
A. Okay.
Q. That's what? Will you describe that document, please?
A. This is a summary of the items that, that this, the group, what
I call the ad hoc group, came up with, as a result of that meeting.
Q. Okay.
A. Of action items.
Q. Okay. When did you do this summary?
A. At the meeting.
Q. All right. Is this all in your own handwriting?
A. Yes, it is.
Mr. HALL: Okay. We will offer Exhibit 70, your Honor.
Mr. PETRANOVICH: No objection, your Honor.
The COURT: 70 is received.
(Exhibit 70 received)
By Mr. HALL:
Q. Can you put up the transparency on that one? Can you move it
over slightly there? Oh, that's a good idea. Thank you.
All right. If you will look at that document, up at the top, it's
got a whole bunch of names. Are these people that attended the meeting?
A. Yes, sir.
Q. All right. And at the right, you have got product management,
and it's bracketing Ianna, Starr and Brittele. Are these the gentleman
from that organization?
A. Correct.
Q. And the CDOC ones, I think you have got Keith, Greco, Gitter,
and yourself. So, seven of you at this meeting?
A. That's correct.
Q. And then on the left-hand side, you have got some descriptions,
tariff, policy, tariff. Can you explain the differences, why they are
there?
A. Yeah. All that does is just explain what kind of modification it
is, whether it's a tariff, a change--a change to the tariff, or a
change in AT&T operational policy. Some of the things, many of the
things that associate--are associated with delivering of product aren't
in the tariff. They are just policy. And so--
Q. Can you give us examples of those?
A. Sure. In most instances, billing, and how billing is
accomplished and so forth is not specified in the tariff.
Q. Is that -- does that include MLB?
A. Well, yes. That's correct. There is only one mention, that I
recall, of billing in the tariff with regard to SDN, and MLB wasn't one
of them. Wasn't it.
Q. All right. Then, when the meeting was completed, were you given
any instructions as to the notes? Let me ask you, first of all, were
any notes taken by others than yourself at the meeting?
A. Yes, sir, there were.
Q. Okay. and what instructions, if any, were given with regard to
those notes?
Mr. PETRANOVICH: Objection, your Honor. I would like a side bar.
THE COURT: Okay. You may step up.
THE CLERK: Jury need a stretch?
(Unreported discussion held at side bar)
By Mr. HALL:
Q. Mr. Perry, were there, at this meeting on March 12, 1990, were--
with
[[Page 49917]]
the people that you have noted up there, were there notes taken by
various people?
A. Yes, sir.
Q. Do you have any recollection of who was taking notes and who
wasn't?
A. Not exactly. I mean, I think probably most people were.
Q. All right. And when the meeting ended, were you asked to gather
the notes and to destroy them?
A. Correct, yes, sir.
Q. Okay. And who asked you?
A. I, I really don't recall. I mean, there was a meeting. A lot of
people were talking. A suggestion was made. I was sort of the de facto
secretary of the meeting, and I did.
Q. All right. Now, who was, who was--who presided at the meeting?
A. I can't say that anyone really presided over it. I think Michael
probably was, if--Michael Keith was the guy that was probably really
directing the meeting, so to speak. But, after the meeting got going,
it was just sort of kind of free form of ideas and so forth.
Q. All right. Now, did you immediately, meaning at the very minute,
destroy those documents?
A. No, sir.
Q. Okay. Now long was that meeting?
A. Oh, it, it--I think it went well into the late afternoon and
early evening.
Q. Okay. How do you know that?
A. I was starving by the time it was--
(Laughter)
The Witness. It was past my dinner time. I normally eat dinner
around 6:00 o'clock.
By Mr. Hall:
Q. Did you have any discussion with any people after the meeting?
A. Yeah, yes, I did. Marty and I, at the end of this meeting,
talked about it, about the meeting in the parking lot. And, and we
were, we were sort of--again, both working in Michael Keith's
organization, him being a new guy on the block, we were--we had sort of
talked about what we were doing, and, and how this guy probably, of all
the managers that we had ever come in contact with, was probably the
most gung-ho kind of guy to actually make things happen, to make them
happen very quickly.
Q. Okay. And at that time, did you--when did you destroy these
documents? I don't think you told us.
A. The next day.
Q. The next day. Did either you or Mr. Gitter express any concerns
about the consequences of what you were doing?
A. Well, yes. We both had come out of the AT&T external affairs
organization, that was before that, the state regulatory organization.
And we both had----
Mr. Petranovich. Objection, your Honor. If we could go one by one.
Mr. Gitter and Mr. Keith, or Mr. Perry, instead of both. I don't know
who is saying what.
The Witness. I am sorry. Mr. Gitter and I had both come from the
external affairs organization.
The Court. Okay.
The Witness. And, and during our tenure there, when the carrier
service center, later the CDOC, was part of that organization, we, we
both understood that the reason why that group wasn't part of
marketing, was because there were some, some potential--if this group
ever became part of marketing, that, that some things could happen that
weren't too kosher, that sort of went against the Federal
Communications Act.
And we discussed, and I think it was in his car or my car, that
this is some pretty serious business that we are doing, that we are
involved in. We had never, neither one of us had ever been involved in
this kind of activity in our careers.
By Mr. Hall:
Q. Let me go back to that meeting. One of the names you have got up
there--let's see. Where is that? Did you have any dealings with a Mr.
Joe Brittele from product management during the course of these
discussions?
A. Yes, Joe was, was a participant in the meetings.
Q. But he wasn't--he's now shown. Oh, yes. There he is. Okay. What
did Mr. Brittele have to say, with regard to these problems? Are there
any particular areas that he focused on?
A. Well, during the discussion, I think Joe was probably the most
animated of the people from product management at the meeting. And the
one thing that, that stood out, in my mind, was Joe is a character. Let
me say this. So that's how come I can kind of recall this.
But, when we were talking about deposits, you know, Joe made the
comment that, hey, these guys don't even have any skin in the game, so
that they should be made to put some money up front in the form of
deposits. And, you know, I recall Marty and Joe basically had most of
the discussion about the, the issue of instituting deposit
requirements.
Q. Okay. Now that you mentioned that last comment, were assignments
given to the various people that were at that meeting, to, to go out
and accomplish?
A. Yes, sir. What we did, was after we had come up with a list of
things, we then went back, as you asked, you know, you said, well, what
are the designations there, tariff and policy and so forth. And for the
most part, they were all product management issues to go off and chase,
so to speak.
Q. Okay. At this time, had there been some--were there * * *
* * * * *
A. Yes, I, I know what that meant.
Q. What did it mean?
A. Base cannibalization is the term you are referring to?
Q. Yes.
A. That was my understanding of what the main issue always was with
the switchless resale. And that was that you would take a PRO WATS base
of customers, and essentially take those customers, and move them to a
product SDN that was lower priced. And that's referred to as base
cannabilization. You are sort of eating your own customers.
Q. If you look at the second page there--excuse me--the name of
Central Office Telephone appears thereupon. Did you know--did you even
know Central Office Telephone at that time?
A. No, sir.
Q. Would you look at Exhibit 11, please.
A. Okay.
Q. Can you identify that document for us?
A. This appears to be a package that was put together by Susan
Early, that was a comprehensive communications package to the BSD sales
force.
Q. That is the direct sales force?
A. Correct.
Q. And was it----
* * * * *
A. I had just talked to my supervisor, Mary Upchurch, and she said
I better go tell Michael. And we went down the hall. And there were
some folks in his office. They left. I had a seat outside. The folks in
the office left. I went in, and, apparently, she had told him that I
was leaving. And we had a conversation. And he asked, he asked why I
was leaving, and I told him that I wasn't happy there. And we chatted
about that.
Q. Did you have any discussions as to the status of SDN resellers?
A. Well, he, he had mentioned that when, when he asked what was I
going to do, and I says I wasn't sure. And he says, well, I hope you
are not going into SDN resale. And I said, oh, why is that? And he
picked up a piece of paper, and he says, with an one percent
provisioning rate, they won't be around much longer.
Q. Could you identify that piece of paper?
A. No, sir.
Q. Then after that, I think you have already testified, you took
this job as the executive director of the inter-exchange Reseller's
Association?
[[Page 49918]]
A. Yes, sir, that day.
Mr. HALL: Okay. That's all I have, your Honor.
The COURT: It's time for lunch. Since we lost a little time getting
started this morning, I would like to
* * * * *
Exhibit C--Excerpts of Trial Testimony of Michael Keith, Central Office
Telephone, Inc., v. AT&T, Civil Action No. 91-1236-JE, United States
District Court, for the District of Oregon, June, 1994
Mr. URRUTIA: Your honor, we would offer 87 at this time.
Mr. PETRANOVICH: No objection, your Honor.
The COURT: 87 is received.
(Exhibit 87 received)
By MR. URRUTIA:
Q. Do you help your customers by giving their competitors hints on
how to stick it to them in the marketplace?
A. No, I don't see that as helping them. But I had a role to
service and help the resellers.
Q. That was your responsibility?
A. Yes.
Q. Other people in the company had other roles, perhaps, which
might include competing against them?
A. That's correct.
Q. But you, Michael Keith, or Mike Keith, and your organization
were supposed to help them?
A. That was one of my responsibilities, yes.
Q. And one of the men that worked for you is a guy named Jim
Murphy, right?
A. Yes.
Q. And Mr. Murphy wrote an article in this paper, that you reviewed
before it was published, called, quote, selling against a reseller,
unquote?
A. That's correct.
* * * * *
that has the interview with Mr. Barillari? I will spell it, B-A-R-I-L-
L-A-R-I?
A. No, I have not seen the tape.
Q. Are you aware of the fact that a videotape was done? You do know
who Mr. Barillari is, right?
A. Yes.
Q. He is one of your in-house lawyers?
A. That's correct.
Q. At least the one with authority on SDN reseller issues, right?
A. He would be one of the lawyers. I am not sure if that's his only
responsibility, yes.
Q. As far as those sales people were going, what you were telling
them, in this magazine that was especially for them, is that their
compensation was going to be affected by resellers, right?
A. What do you mean by that? I don't understand.
Q. Weren't you telling the folks in the field that if they sold to
resellers, that they were not going to get any commissions?
A. Oh, yes. That's correct.
Q. Mr. Perry testified yesterday, that part of his job was to go
out there in the branches and make the branches turn over resale
accounts to CDOC; is that right?
A. I asked John Greco to identify SDN resellers, because the
decision is that we will meet the needs of those customers through the
CDOC organization. So, working with the branches, both terms would get
together, and identify those people that are resellers, and that should
be serviced out of the CDOC branch.
Q. So, you would have given that responsibility to Mr. Greco?
A. Yes.
Q. And would you assume, in the ordinary course of business, he
would use those people who worked for him?
A. Yes.
Q. Like Spencer Perry and Marty Gitter to do that job?
A. That's correct.
Q. You formulated the corporate agenda for SDN resellers and had it
published in this, in this magazine, so the sales force would know
about it, right?
A. That's correct.
Q. Did you give an interview that was published in the June 11,
1990, edition of Network World?
A. Yes.
Q. And that document has been marked for identification as
Plaintiff's Trial Exhibit 93. Many say that AT&T was generally
surprised--excuse me--quote, many say that AT&T was generally
surprise--genuinely surprised at the quick expansion of aggregation--
aggregation. Has AT&T decided to take action against aggregation,
unquote?
Would you read your answer, please, Mr. Keith?
A. Quote, I don't feel there's been a radical change in our
attitude. However, we are starting to evaluate how we can realign our
strategies to make our products better suited for the marketplace. Our
principal theme is that we believe our sales force is the way we want
to reach our customers, not through service aggregators, end quote.
Mr. URRUTIA: Mr. Petranovich, we are going to skip to page 107,
Line 12.
Mr. McDERMOTT: We have got some on 98, don't we?
Mr. URRUTIA: Did I miss some on 98?
Mr. McDERMOTT: Lines four to 14. By Mr. URRUTIA:
Q. Okay, Thank you. We are going to go back to 98, and then we will
move forward.
Did you ever allow the commercial users of SDN to use the AT&T
globe?
A. There may be examples of that, yes.
Q. I mean, you have seen it right there on their newsletter,
haven't you?
A. I wouldn't doubt that I have seen it on customer newsletters,
yes.
Q. And if we see that globe on a newsletter, then we know that that
is an authentic document, as far as AT&T is concerned, right?
A. Yes.
Q. We will start on page 107, line 12.
Plaintiff's Exhibit 77, have you turned to it, Mr. Keith?
A. Yes.
Q. Now, this is a letter that you wrote to Gail McGovern, right?
A. That's correct.
Mr. URRUTIA: Your Honor, four our record, Plaintiff's Exhibit 77
has been received into evidence by Mr. Perry. It was the April 3, 1990,
memo.
Q. And it has all of the--or various recommendations, right, six
recommendations?
A. That's correct.
Q. Plaintiff's Trial Exhibit 93----
A. This is the second time he's asking?
Q. The second time Mr. Briere asked you.
A. Yes.
Q. On page five of the article.
A. Right, yes.
Q. Question, quote, what means can AT&T use to limit SDN reselling,
unquote?
A. Answer, quote, I don't really know at the moment. We are meeting
weekly with the SDN product team to find out. We want to make sure SDN
serves the top end of the market. There will probably be modifications
to the product that will insure this, but may not serve the resellers.
But no one knows exactly what these steps will be, end quote.
Q. Skip to page 128. Line 10.
Q. Do you recall the day that Spencer Perry left the employment of
AT&T?
A. It was in the fall of 1990.
Q. Did he come to see you?
A. Yes, he did.
Q. Mr. Keith, tell us what your bottom line assessment of
provisioning was, at the time you began working in CDOC?
A. It was a disaster. That is, the provisioning problem is the
fundamental problem that caused all the action in the case here. And at
this time, and it wasn't directed towards any class of customers.
Anyone asking for provisioning of switched access had a terrible time,
during this period, of
[[Page 49919]]
getting it in. And it took us a long period of time.
It was getting better by the time I was leaving in 1991. By better,
I mean with a set of predictability you could say that this order you
gave me will be completed in 45 days plus or minus 10 days. And that
was a better condition at the end of my tenure. At the beginning of my
tenure, I didn't even understand how bad it could be.
Q. Plaintiff's Exhibit 91 is in front of you. It's easier to read
out of the book.
A. That's fine.
Q. I think you said that this was a letter that you had written to
Gail McGovern?
A. That is correct.
Mr. URRUTIA: And your Honor, this is already in our record as 91.
It's been received, and it's the April 21 letter--excuse me. May 21,
1990, letter.
Q. Who is Gail McGovern?
A. Gail McGovern was my counterpart in the business unit that owned
the product SDN. So, her product chose the one that makes changes to
it.
Q. All right. And what does this letter consist of?
A. It consists of a series of recommendations and modifications to
the process of provisioning and the underlying service itself.
Q. Now, are you aware of whether commercial users of SDN were using
the AT&T globe to sell long distance services to third parties?
A. To third parties?
Q. Right.
A. They could. But if they were using it inside their own company,
they would use their own logo.
Mr. URRUTIA: And that concludes the designated depositions for Mr.
Keith.
Mr. URRUTIA: Do you have Mr. Greco's?
Mr. PETRANOVICH: Yes.
The COURT: Would you sell Greco for us, please?
Mr. URRUTIA: Sure. Spelled G-R-E-C-O. The deposition of Mr. John A.
Greco, Junior, was taken on February 26 of 1993. It was taken in the
offices of AT&T at 295 North Maple Avenue in Baking Ridge, New Jersey,
starting at 1:00 p.m. Mr. Hall was present for the Central Office
Telephone and took the deposition for Central Office Telephone, and I
believe Mr. Petranovich was present for AT&T.
Direct Examination
BY MR. URRUTIA:
Q. And it starts on page five. I want to go back to when you first
came into the SDN program and get the time frames established for your
involvement. When did you first become involved with SDN?
A. I guess when you are saying involved with SDN, it's parts of the
AT&T's offer, so my involvement, specifically, my job responsibility,
it's----
Exhibit D--Pending Federal Court Litigation Instituted by Resale
Carriers Against AT&T
1. AT&T v. NOS Communications, Inc. (counterclaim), Civil Action 92-
4172 (MTB) D.C.D.NJ
2. Target Telecom, Inc. v. AT&T, Civil Action No. 93-1851 (MTB)
D.C.D.NJ
3. Group Long Distance, U.S.A. v. AT&T, Civil Action No. 93-1851
(MTB) D.C.D.NJ
4. Communications Services of America v. AT&T, Civil Action No. 93-
1851 (MTB) D.C.D.NJ
5. Telecomp Technologies Network, Inc. v. AT&T, Civil Action No. 93-
1851 (MTB) D.C.D.NJ
6. Business Choice Network v. AT&T, Civil Action No. 93-1851 (MTB)
D.C.D.NJ
7. Telcom United North v. AT&T, Civil Action No. 93-2625 (HAA)
D.C.D.NJ
8. National Communications Association v. AT&T, Case No. 92 Civ.
1735 (LAP) D.C.S.D.NY
9. Envoy Communications, Inc. v. AT&T, Case No. 91-1333 (JE)
D.C.D.OR
10. Central Office Telephone, Inc. v. AT&T, Case No. 91-1236 (JE)
D.C.D.OR
11. Affinity Network, Inc. v. AT&T, Case No. 92-2836 (JSL)
D.C.C.D.CA
12. AT&T v. The People's Network, Inc. (counterclaim), Case No. 92-
3100 (AJL) D.C.D.NJ
13. Teledesign v. AT&T, Susan Robinson & Toby Ragsdale, Case No. H-
92-1414 D.C.S.D.TX Houston Div.
14. US Wats, Inc. v. AT&T, Case No. 93-CV-1038 D.C.E.D.PA--
Philadelphia Div.
15. Telexpress, Inc. v. AT&T, Case No. 93-0256 (AWT) D.C.C.D.CA
16. Paragon v. AT&T, Case No. 91-5057 (JSL) D.C.C.D.CA
17. SCG Financial Corporation, Inc. v. AT&T, Case No. CV-91-5057
(JSL) D.C.C.D.CA
18. Association of Long Distance Users, Ltd. v. AT&T, Case No. 4-93-
283 (D.C.D. Minn.--4th Division) (Stayed by Federal Court pending
outcome of FCC action.)
19. Cunningham Enterprises, Inc. v. AT&T (counterclaim), Case No.
90-4111 (TJM) (D.C.C.D.CA)
20. AT&T v. Equal Access Corp., Case No. CV-92 (WDK) (D.C.C.D.CA)
21. MJM Communications, Inc. v. AT&T, Case No. CV-92-1951 (JSL)
(D.C.C.D.CA)
22. National Communications Ass'n, Inc. v. AT&T, 93 CIV 3707
(D.C.S.D.NY)
23. Retco Enterprises, Inc. v. AT&T, Case No. H-91-2221 (D.C.S.D.
Tex.--Houston Div.) (Case settled July 1993)
24. Triad Communications Group v. AT&T, Case No. SACV-93-529 AHS
(D.C.C.D.CA)
25. Uni-Tel of Farmington, Inc. v. AT&T, Case No. 92-0963SC/AY
(D.C.D.NM) (Not active at this time)
26. Telegroup, Inc. v. AT&T, Case No. 94 CIV 4123 (D.C.S.D.NY)
27. ProGroup, Inc. v. AT&T, Case No. 94 CIV 4123 (D.C.S.D.NY)
Exhibit E--List of Pending Complaints Against AT&T That Have Been Filed
With the Federal Communications Commission by Two of the Ad Hoc IXCS
With Respect to AT&T's Stonewalling of the Resale of Its Tariff 12
Services
List of pending complaints against AT&T that have been filed with
the Federal Communications Commission by two of the Ad Hoc IXCs with
respect to AT&T's stonewalling of the resale of its Tariff 12 services.
1. Affinity Network, Inc. v. AT&T, Case No. E-92-96 (FCC, June 26,
1992)
2. NOS Communications, Inc. v. AT&T, Case No. E-92-101 (FCC, July
27, 1992)
Exhibit F--MCI Press Announcement, Washington, DC February 28, 1994
CONTACT:
CORPORATE NEWS BUREAU
1-800-289-0073
202-887-3000
SUSAN SUSS
NEXTEL COMMUNICATIONS
212-536-8770
BILL DORBELMAN
COMCAST CORPORATION
215-981-7550
MCI Will Invest $1.3 billion in Nextel to Offer Nationally Branded
Wireless Services
Network MCI Strategic Alliance With Nextel and Comcast Will Provide
First Digital Personal Communications Services
WASHINGTON, D.C., February 28, 1994--A strategic alliance formed
today by MCI, Nextel Communications, Comcast Corporation and Motorola
will begin offering MCI wireless personal communications services this
year. A $1.3 billion MCI investment in Nextel will accelerate this
first nationwide offering of advanced wireless voice and data
communications, featuring digital clarity and reliability, a single
telephone number that will work anywhere, and availability throughout
the country.
The companies said that their alliance will bring these enhanced
flexible services to consumers, business and government customers far
sooner than generally had been expected. The services will be marketed
jointly by MCI, Nextel and Comcast under the MCI brand name.
Nextel's license coverage and planned interoperability agreements
give the alliance the potential to reach 95 percent of the U.S.
population. Its first
[[Page 49920]]
digital network is already serving customers in the Los Angeles area
and will stretch across California within the next few months. With the
investment by MCI, plans are underway to accelerate construction in
most major cities.
``Wireless communication is becoming an integral part of our daily
lives, and demand is growing rapidly,'' said Bert C. Roberts, Jr., MCI
chairman and CEO, at a press conference in Washington, D.C. ``Customers
have been asking us to provide a totally portable communications
service that meets their needs any time, anywhere. This alliance means
that Nextel is the platform on which we will build an integrated
wireless strategy, and that we will be able to reach virtually every
American who wants wireless service.''
The strategic agreement will capitalize on the strengths of four
dynamic companies, each a leader in its field. MCI brings world-class
marketing assets--name recognition, customer base and distribution
channels--as well as the company's intelligent network. Nextel adds
licenses with extensive geographical coverage, planned interoperability
agreements and proven wireless products and services. Comcast
contributes its experience and know-how in operating cable and cellular
systems and will support the build-out and operation of Nextel systems.
And Motorola will provide its Integrated Radio Service (MIRS)
technology platform, as well as subscriber equipment. These combined
strengths will enable the companies to provide a wide array of advanced
wireless servicers to consumers, business and government customers over
a larger area than any other wireless service competitor.
``This alliance means that everyone else will be playing catch
up,'' said Morgan E. O'Brien, Nextel chairman. ``MCI's enormously
successful marketing and branding, and large customer base give us the
ability to extend beyond our core of business customers to serve
virtually anyone who could benefit from wireless communications. We are
delivering the first of these advanced wireless services on our all-
digital network in L.A., including wireless telephone, two-way paging
and dispatch radio.''
Under terms of the agreement, MCI will purchase approximately 17
percent of Nextel's stock, which will match Comcast's ownership. The
initial purchase, expected to occur in a few months, will consist of 22
million shares of Nextel stock at $36 per share. MCI has also committed
to purchase an additional 15 million shares at an average cost of $38
per share over the next three years, for a total investment of more
than $1.3 billion.
The announcement adds one more key component to networkMCI, the
company's strategic vision announced in January. When networkMCI was
unveiled, MCI highlighted its intent to form alliances with
communications and information industry leaders to provide innovative
new communications services. It identified wireless personal
communications services as an integral part of the networkMCI vision.
Roberts pointed out that the demand for wireless voice
communications is expected to grow from 15 million users today to 80-90
million users in the next 10 years. Data, paging and messaging
applications will further expand the total wireless market.
The companies said they will provide consumers, business and
government customers with MCI-branded services such as mobile calling
services, alphanumeric messaging, dispatching and data transmission,
all integrated in a single digital phone. The same telephone number
will work from anywhere in the United States.
Comcast has been increasing its presence in the telephony business
in recent years through its ownership and operation of cellular
properties in the Northeastern U.S. and cable/telephone operations in
the United Kingdom. As part of the alliance, MCI and Comcast have
entered into a shareholders' agreement with equal representation, and
together they will own approximately 35 percent of Nextel.
Comcast is proud to have been a catalyst for bringing this alliance
together,'' Brian L. Roberts, president of Comcast, said. ``We are
delighted that MCI will be joining us as both an operating partner and
an investor in Nextel. From the time of our original investment in
Nextel just 18 months ago, management's efforts have resulted in a near
tripling of the reach of its operations. In addition to marketing under
the MCI name, Comcast may market Nextel's under our own brand as
well.''
Handsets and infrastructure for the new system, both produced by
Motorola, provide improved functionality over earlier mobile services,
including digital voice, message and data services. Messages can be
displayed on phone screens. The phones also can be used as mobile data
receivers. Because it will be fully digital, the wireless services will
provide crisper voice and dataquality than current analog systems.
The new system will use Motorola's powerful new digital
communications technology, Motorola Integrated Radio System (MIRS).
Motorola Chief Executive Officer Gary L. Tooker said, ``The versatility
and spectrum efficiency of MIRS will open the door to a whole new world
of digital, personal communications services. As it will on other MIRS
systems around the world, this technology adds the power of messaging,
dispatch and data, to the same handset.''
The agreement is subject to appropriate regulatory review.
Certificate of Service
I, Charles H. Helein, attorney at Helein & Waysdorf, P.C. hereby
certify that I have this 25th day of October, 1994 caused the foregoing
document to be served by hand delivery upon:
Richard Liebeskind, Assistant Chief, Communications and Finance
Section, Room 8104, U.S. Department of Justice, Antitrust Division, 555
4th Street, N.W., Washington, D.C. 20001;
and by overnight mail upon the following:
John D. Zeglis, AT&T Corp., 295 North Maple Avenue, Basking Ridge, New
Jersey 07920
Douglas I. Brandon, McCaw Cellular Communications, Inc., 1150
Connecticut Avenue, N.W. Washington, D.C. 20036
Charles H. Helein
Certificate of Service
I, Kathy L. Cuff, hereby certify under penalty of perjury that I am
not a party to this action, that I am not less than 18 years of age,
and that I have on this day caused the Response to Public Comments to
the Proposed Final Judgment to be served by mailing a copy, postage
prepaid, to:
John D. Zeglis, Mark C. Rosenblum, AT&T Corp., 295 North Maple Avenue,
Basking Ridge, NJ 07920
Douglas I. Brandon, McCaw Cellular Communications, Inc., 1150
Connecticut Avenue, N.W., Washington, D.C. 20036
Kathy L. Cuff
July 25, 1995
[FR Doc. 95-23636 Filed 9-26-95; 8:45 am]
BILLING CODE 4410-01-M
