Study: Telecom mergers will raise costs to businesses

WASHINGTON – Proposed telecommunications mergers between SBC and AT&T and between Verizon and MCI will lead to a 15 percent price increase for large-business customers, an economist hired by competitors of SBC and Verizon said Tuesday.

The acquisitions, both announced this year, would remove AT&T and MCI as competitors of the two giant incumbent Bells, especially with telecom services provided to large office buildings, said Simon Wilkie, a former chief economist at the U.S. Federal Communications Commission (FCC) and an economist working for the Alliance for Competition in Telecommunications (ACTel).

The mergers could effectively shut down the current wholesale market for telecom network facilities provided by AT&T, MCI and the Bells to competing telecom providers, Wilkie said. “In the wholesale market, the two largest competitors with the Bell monopoly are AT&T and MCI,” he added. “By taking those out of the marketplace, you’ll have a dramatic increase in the wholesale prices that have to be paid for the competitors to reach the customers.”

ACTel, funded by a group of competing telecom carriers, and CompTel/ALTS, a trade group representing competitive local exchange carriers or CLECs, are asking the FCC and the U.S. Department of Justice (DOJ) to reject the two mergers. The two groups are not alone; in April the Consumer Federation of America, Consumers Union and U.S. Public Interest Research Group filed comments with the FCC opposing the mergers.

In May, a group called the Ad Hoc Telecommunications Users Committee, which counts 19 large U.S. companies as its members, said it objects to the mergers unless SBC Communications Inc. and Verizon Communications Inc. agree to some price controls. Membership of the group is secret, but the group claims to include 10 Fortune 100 companies.

Verizon, MCI and SBC disputed the ACTel study. “This material is entirely predictable, given the interests of those behind it,” said Verizon and MCI in a joint statement. “It ignores the facts, tries to create some new ones, and relies on 20-year-old assumptions. The Verizon-MCI transaction will benefit customers and the economy while allowing the new combination to compete effectively in a changing marketplace. Nobody can ‘control’ this new marketplace — there are many domestic and international players.”

SBC, in a filing to the FCC in May, said that preliminary information from Wilkie underestimated the number of direct CLEC connections to office buildings in SBC territory. “These numbers are faulty,” said SBC spokesman Michael Balmoris.

The early Wilkie information also neglected to consider that other CLECs could provide services to the business market after a merger, SBC said in the filing.

But Wilkie said no other CLECs besides MCI and AT&T are in the same position to provide low-cost telecom services to a large number of business customers. MCI and AT&T provide a large percentage of the competing network facilities in many U.S. cities, and because they bought a lot of excess network capacity from the Bells, they were able to negotiate low wholesale rates.

MCI and AT&T, larger than other competitors, have built competing network facilities in about 10 percent of office buildings in many U.S. cities, Wilkie said. “It took 20 years to put these facilities together,” he said. “No one else has the scale and scope of billions of dollars of transactions.”

Wilkie used Cleveland as an example of what would happen to the business market if the mergers go through. Cleveland has about 70,000 office buildings, and just over 3,000 of those are served by more than one telecom network, he said. The mergers would mean that fewer than 1,200 buildings would be served by network facilities owned by a competitor to incumbent SBC, he said.

The DOJ or FCC could impose some conditions on SBC and Verizon that could lessen the impact, Wilkie said. For example, the agencies could require the two large carriers to sell off parts of their networks to competitors, he said.

But the best way to ensure no negative effects is to deny the mergers, said Earl Comstock president of CompTel/ALTS. Even with some divestitures required, smaller CLECs will have a tough time competing with Verizon and SBC, he said.

“You’ve got to take into account there’s an entrenched customer base,” Comstock said. “They’re not going to divest their customers.”