January 20, 1999

THE CONSUMER CASE AGAINST THE
SBC-AMERITECH MERGER

Citizen Action Coalition of Indiana, founded in 1974, is a not for profit organization of over 300,000 individual members in Indiana. For more than two decades CAC has worked to empower citizens, promote economic and environmental justice and advocate public policies protective of consumers and the environment.

Citizen Action/Illinois is the state's largest public interest organization. Along with its tens of thousands of individual members, Citizen Action's 75 affiliated citizen organizations represent a diverse coalition of community groups, senior citizens, labor unions, minorities, health professionals, people with disabilities, social service agencies and progressive public officials. Citizen Action has long advocated for consumers on utility regulatory policy, both in the legislature and before state and federal agencies.

Citizens Utility Board was founded by the Illinois state legislature in 1983 to represent the interests of residential customers in utility matters before regulators, legislators, and the courts. CUB is an independent organization, funded entirely by the voluntary contributions of its 150,000 members and devoted exclusively to advocacy on behalf of residential consumers of electricity, gas, and telecommunications services.

Connecticut Citizen Action Group is Connecticut's oldest and largest consumer watchdog organization.

Consumer Federation of America is the nation's largest consumer advocacy group, founded in 1968. Composed of over 250 state and local affiliates representing consumer, senior citizen, low-income, labor, farm, public power, and cooperative organizations, CFA's purpose is to represent consumer interests before the congress and the federal agencies and to assist its state and local members in their activities in their local jurisdictions.

Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education and counsel about goods, services, health, and personal finance; and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumer's Union's income is solely derived from Sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees.

Cook County State's Attorney's Office is the second largest prosecutor's office in the nation. State's Attorney Richard A. Devine protects the public interest of Cook County residents who are customers and ratepayers of Ameritech.

The Indiana Office of Utility Consumer Counselor (OUCC) is an agency of the State of Indiana duly authorized to represent Indiana ratepayers in state and federal proceedings, including proceedings before the FCC. Indiana Code Sec. 8-1-1.1-9.1.

The Michigan Attorney General's intervention in this matter is authorized by MCL 14.28, MCL 14.01; MSA 3.211, and by her common law powers. This power to intervene can be exercised whenever she determines that the public interest so requires it. MCL 14.28; MSA 3.81. Numerous residents of the State of Michigan are customers and ratepayers of Ameritech. The interest of these customers and ratepayers is a public one, common among virtually every such customer and ratepayer in the State of Michigan.

The Michigan Consumer Federation was founded in 1991 to serve as an advocate for consumer interests in legislative and regulatory arenas. Its member organizations represent over 450,000 Michigan residents.

Missouri Office of the Public Counsel is a state agency established pursuant to §386.700 R.S.Mo. 1994 whose functions is to represent consumers of telecommunications services.

The Ohio Consumers' Counsel (OCC) is the statutory representative of Ohio's residential consumers in matters involving Ohio's public utilities.

Texas Office of Public Utility Counsel is the Texas state consumer agency designated specifically by State law to represent residential and small business consumer interest of the State. The agency advocates those interests before Texas and Federal regulatory agencies as well as the courts.

The Utility Reform Network (TURN) is a non-profit consumer advocacy organization that represents the interests of California's residential and small business customers of telecommunications utilities.

In every formal proceeding conducted at the state and federal levels to review the SBC-Ameritech merger, public interest and consumer advocacy organizations have concluded that the merger would be a severe blow to the development of competition in local telecommunications markets, particularly for residential consumers. These concerns have been echoed by the staffs of state public utility commissions and members of the Federal Communications Commission. These groups represent a broad array of geographically and institutionally diverse entities active in the largest states served by SBC and Ameritech, which represent over 80 percent of their telephone subscribers.

This white paper summarizes the consumer case against the merger based on the public interest group documents filed in the following state and federal proceedings.

In Re: Application of Ameritech Corp. And SBC Communications, Inc., For Consent to Transfer Control of Corporations Holding Commission Licenses and Authorizations Pursuant to Section 214 and 310 (d) of the Communications Act and Parts 5, 22, 24, 63, 90, 95 and 101 of the Commission's Rules, Federal Communications Commission (FCC), CC Docket No. 98-141

Texas Office of Public Utility Counsel (Texas)-Affidavits of William G. Shepherd, August H. Ankum, and Carol Szerszen

The Consumer Coalition (the Indiana Office of Utility Consumer Counselor, Michigan Attorney General, Missouri Office of Public the Counsel, Ohio Consumers' Counsel, Texas Office of the Public Utility Counsel, The Utility Reform Network)- Affidavits of Susan M. Baldwin and Helen E. Golding

Michigan Consumer Federation (Michigan)

Consumer Federation of America and Consumers Union Initial Comments (CFA/CU)

Consumer Federation of America, Consumers Union, and AARP (Reply Comments, CFA/CU/AARP)

Joint Application for Approval of Reorganization of Illinois Bell Telephone Company d/b/a/ Ameritech Illinois and Ameritech Illinois Metro, Inc. Into SBC Communications Inc., in Accordance with Section 7-204 of the Public Utility Act, before the Illinois Commerce Commission, Docket No. 98-055

Telecommunications Division of the Illinois Commerce Commission-Testimonies of Christopher L. Graves, Rasha Toppozada-Yow, Samuel S. McClerren, Judith R. Marshall, and Cindy L. Jackson

Government and Consumer Intervenors (GCI - the People of the State of Illinois, the People of Cook County, Citizens Utility Board)-Testimonies of Charlotte F. Terkeurst and Lee L. Selwyn

American Association of Retired Persons-Direct and Rebuttal testimony of Mark N. Cooper (AARP-Illinois, Direct, AARP-Illinois, Rebuttal)

In the Matter of the Joint Application of SBC Communications Inc., SBC Delaware, Inc., Ameritech Corporation and Ameritech Ohio for Consent and Approval of a Change of Control, before the Ohio Public Utilities Commission, Case NO. 9801082-TP-AMT

Preliminary Independent Staff Proposal Relative to the Issues Identified by the Public Utilities Commission of Ohio (Ohio Staff)

The Ohio Consumers' Counsel-Testimony of Susan Baldwin (Baldwin-Ohio)

AARP-Testimony of Mark N. Cooper (AARP-Ohio).

Public interest intervenors explain that there is a fundamental difference between the proposed merger and previous mergers between local telephone companies (Bell Atlantic-NYNEX, and SBC-PacTel) that have been approved. Different elements of this merger include:

• The competitive harm will be much greater because the merger is much larger and a valuable potential competitor will be lost from the dwindling number of highly qualified potential, local competitors (Shepherd, p. 4; Graves, p. 26).
  
• The failure of local competition to take hold and the failure of conditions placed on previous mergers to produce open local markets indicates much stronger underlying barriers to local competition than had been anticipated (Shepherd, p. 4; Terkeurst, pp. 42-48; Selwyn, pp. 39-40; Baldwin-Ohio, pp. 41-42).
  
• SBC's track record in retarding and opposing competition is much worse than the other Regional Bell Operating Companies (RBOCs) (Shepherd, p. 4; Baldwin and Golding, paras. 13-26; Selwyn, p. 47).
  
• The merger poses unique regional problems because the greater the market power at the regional and national levels, the less the likelihood that competitors will break through in the local market and the greater the likelihood that market power will extend into related markets (Terkeurst, pp. 60-61; AARP Illinois, pp. 17-19).
  
• The huge premium paid by SBC in this merger will create pressures to squeeze profits out of the acquired markets. Abusive and anticompetitive marketing practices are likely to result, as occurred in California after SBC acquired PacTel (Shepherd, p. 2; Consumer Coalition, p. 22; Selwyn, p. 10).
  
• The SBC-Ameritech merger sets off all the alarms that the FCC identified in approving the Bell Atlantic-NYNEX merger because, among other things, it eliminates a major local exchange company (LEC) competitor, threatens future competition and facilitates coordination among LECs (Selwyn, p. 20). It removes an important benchmark (Baldwin and Golding, paras. 24-25 and 30-36) because private parties have fewer companies with which to negotiate (Graves, p. 39) and regulators have fewer companies to use as standards for public oversight (Yow, p. 15).
  

This is a defining moment in the structure of the local telecommunications industry, with another merger (Bell-Atlantic-GTE) lined up right behind the SBC-Ameritech proposal (Shepherd, p. 4; Terkeurst, p. 7). Now is the time to reinforce, not abandon the commitment to local competition. The SBC-Ameritech merger would result in a market structure that is simply too concentrated to support effective competition. With a large regional monopoly, under the control of a vigorous opponent of competition in a highly concentrated industry, there is little chance that regulators can place conditions on the merger that could mitigate the resulting market power and harm to competition.

Public interest intervenors identify a range of anticompetitive problems caused by the merger and are concerned that the merger presents a significant potential harm to competition (Ohio Staff, p. 9). Actual competition will be lost in a number of markets as a result of the merger.

ACTUAL COMPETITION ELIMINATED: Ameritech was the most aggressive RBOC in a number of telecommunications markets and that competitive threat would be eliminated. SBC had entered Ohio as a long distance competitor (Ohio Staff, p. 14).

• Ameritech had begun to compete in St. Louis (Texas Brief, p. 8; Baldwin and Golding, paras. 54-58). Merger talks began shortly after Ameritech started its final trial of local competition in St. Louis (Baldwin and Golding, para. 59). Ameritech began to scale back its local competition efforts after the merger talks began (Consumer Coalition, p. 46; Selwyn, pp. 36-37).
  
• Ameritech had secured certification as a local competitor in a number of SBC states (Texas Brief, p. 18; Baldwin and Golding, paras. 54-58) and it was selling local service in Texas.
  

LIKELY COMPETITION DIMINISHED: Likely competition will be diminished as a result of the merger (Shepherd, p. 25; Baldwin and Golding, paras. 60-63; Selwyn, p. 31).

• SBC had formally identified Chicago as a likely market for entry in defending its takeover of PacTel. Now it claims it had changed its mind (Graves, p. 28; Selwyn, pp. 18-19).
  
• SBC had targeted other markets as well (Ohio Staff, p. 13) and was well suited to enter other contiguous markets (Graves, p. 40).
  

POTENTIAL COMPETITION REDUCED: Potential competition will be reduced significantly as a result of the merger (Shepherd, p. 25; Baldwin and Golding, paras. 45-63). As local telephone companies, SBC and Ameritech are the best candidates to create local competition by entering each other's service territory (Selwyn, p. 27; CAF/CU, pp. 20-24).

• These are local carriers with the expertise, experience in local telephony, in-place operating system, and the greatest knowledge of how to prevent or gain entry. They are uniquely equipped to enter each other's local markets (Graves, pp. 29-32).
  

SBC and Ameritech also have unique value as potential competitors in each other's service territory (Baldwin and Golding, paras. 60-63).

• SBC's territory is contiguous with that of Ameritech. Contiguity provides the best launch pad for entry through nearby facilities (AARP-Illinois, pp. 14-16; Graves, p. 40).
  
• Both SBC and Ameritech enjoy brand name recognition through their facilities in nearby market and their regional cellular activities (Graves, pp. 29-32; CAF/CU, p. 25).
  

In addition to the direct loss of actual and potential competition, which will slow down the development of a competitive market, public interest intervenors also demonstrate that the merger will make it more difficult for other competitors to enter into the home region of the larger, post-merger company. Since public policy is endeavoring to promote competition in the local telecommunications industry, the fundamental question is how will the merger affect the prospects for increasing competition in the local market? (Ohio Staff, p. 2).

• There is an important public policy distinction between implementing section 271, which is a legislative compromise on market opening, and effective competition, which is a higher standard that should apply to merger review (AARP-Ohio, p. 26; Selwyn, p. 50; Baldwin, p. 18).
  

LOCAL TELEPHONE COMPETITION: Because a monopoly in local markets throughout the region served by SBC and Ameritech persists, the loss of actual and potential competition is of critical importance (Graves, p. 41). The negative impacts of the merger on potential local competition are reinforced by strong concerns expressed about the problems that have been encountered in opening local markets to competition (Ohio Staff, p. 13; Graves, pp. 34-35).

The sheer size of the firm created by the merger dwarfs virtually all competitors in the industry (Szerszen, passim; Consumer Coalition, p. 13; Baldwin and Golding, paras. 61-62).

• SBC-Ameritech would own about one-third of all the local telephone lines in the country.
  
• No other incumbent local company would be even half as large as the "new" SBC unless, of course, the GTE-Bell Atlantic merger is approved. In that case two companies would dominate the national-local market with a combined share of over two-thirds of all local lines.
  
• The competitive local exchange companies (CLECs) are generally minuscule compared to the post-merger company.
  
• The major long distance companies, although similar in size, have few if any assets deployed to provide local service and little experience in local service.
  

REGIONAL TELEPHONE COMPETITION: The Regional Bell Operating Companies were formed during the break-up of the national monopoly because of the operational, geographic, and cultural similarities of sections of the country. With the expanded service territory and dramatically increased end-to-end business created by the merger, the "new" SBC would have greater ability to block entry of CLECs into its expanded market (Selwyn, pp. 37-38).

• A 55+ million-line company will dominate the midsection of the country with huge financial resources and a fully deployed ubiquitous network, which has not been opened to local competition (Michigan, p. 18). Combining companies that dominate neighboring regions makes it harder for new entities to enter the local market (Shepherd, p. 8; Ankum, pp. 21-28).
  
• By controlling both ends of the transaction, there is a greater ability to engage in strategic pricing and manipulation of service quality (Texas Brief, p. 4; Baldwin, p. 30; CFA/CU, pp. 24-26). SBC will keep more long distance calls within the company and be the local service provider at both ends of the call.
  
• Competitors and customers will have fewer companies to bargain with and play off against each other (Ankum, p. 5; Graves, p. 39).
  
• Regulators lose another source of information for evaluating incumbent behavior, which reduces their ability to oversee industry activity (Yow, pp. 15-17).
  
• The incumbent gains a vertical advantage in related markets by being able to purchase wholesale inputs such as high speed data connection or local switching from an affiliate or by being able to sell competitive services like Internet access to captive basic service customers (Texas Brief, p. 14; Ankum, pp. 11 and 26; CFA/CU, pp. 24-26; Baldwin, p. 31).

NATIONAL MARKET: Since SBC has declared a national-local strategy, regulators must consider local lines as a national market (Consumer Coalition, para. 30-32; Ankum, pp. 12-13).

• In the context of the national-local market, the merger would create a highly concentrated market by Department of Justice (DOJ) definitions as articulated in the Merger Guidelines. These guidelines identify markets with fewer than the equivalent of six equal sized competitors as highly concentrated. With the SBC-Ameritech merger, the national-local market would be down to the equivalent of five. Thus, the merger violates the DOJ Merger Guidelines by a wide margin (Shepherd, pp. 8-12; Selwyn, pp. 19-20; CFA/CU, pp. 5-7).
  
• The impact on the business market would be even greater than on the residential market. The merged company would have almost a 50 percent market share of national business lines, resulting in an even more concentrated market in that segment (Selwyn, p. 23).
  

While the local telephone service market is the largest and most difficult telecommunications market in which to promote competition, other markets are also a source of concern. The merger harms or fails to significantly improve the prospects for competition in the other markets listed below and the benefits it claims could be achieved in ways that do not harm competition (Terkeurst, p. 4).

CABLE TV SERVICE: Cable TV competition will be lessened because Ameritech had moved aggressively into this line of business (Consumer Coalition, p. 16). More than 80 situations in which Ameritech has built a second cable system to compete with the incumbent cable company are likely to be abandoned and certainly will not be pursued vigorously after SBC takes over Ameritech.

• SBC has made it clear that it does not want to be in the traditional cable business. It took PacTel out of cable after suggesting that it would not. It has sold off its own cable systems. When SBC merged with Southern New England Telephone (SNET), SBC would not commit to stay in cable in Connecticut and had to be ordered by the Department of Public Utilities to commit to stay in for two years. It retains the right to ask the DPU to change that commitment.

CELLULAR TELEPHONE SERVICE: Cellular competition will be reduced (Consumer Coalition, p. 14; Yow, p. 9). Offers to sell off local area operations of long established firms that are integrated into a national system raise questions about diminished competition, even if the overlap is eliminated (Yow, p. 11).

BUSINESS AND LONG DISTANCE MARKETS: To the extent that the national/local strategy would produce out-of-region competition, it would do so in the market segments that have the most competition to date (Consumer Coalition, p. 28; Terkeurst, pp. 61-63; Michigan, p. 6).

• In the local market, the SBC strategy first targets the largest businesses in the largest urban centers. These markets already have the most competition.
  
• In the long distance market, which is substantially more competitive than the local market, the LECs that have gained entry have not offered vigorous price competition.
  

The claim that competitors will have to retaliate in the face of SBC's national/local strategy is illogical and inconsistent with past behavior (Michigan, p. 5; Ohio Staff, pp. 13-14; Graves, p. 47; Terkeurst, pp. 52-55).

• Retaliatory entry has never been the historic response of the incumbent RBOCs. SBC is the best example (Consumer Coalition, pp. 26 and 30; Selwyn, p. 26).
  
• The idea that competitors need to be given a wake up call is inconsistent with efforts in the market (Terkeurst, p. 22).
  
• SBC is the only RBOC that was under significant attack from a sister RBOC. It never retaliated. Although it identified Chicago as an attractive market, it chose to merge with the incumbent rather than compete there.
  

The assumptions and conditions that SBC claims make its national/local strategy necessary are illogical and inconsistent (Consumer Coalition, pp. 42-43; Selwyn, p. 28). Intervenors reject the claims that the scale and scope of the merger are necessary to achieve economic efficiency (Consumer Coalition, para. 39).

• The merging companies claim that they are already beset with competition in their home service areas, but allowing them to merge will "jump start" local competition elsewhere (Selwyn, p. 52).
  
• SBC claims in its section 271 proceedings that it is not the big CLECs that are carrying local competition forward, but the small competitors. It then states in its merger proposal that it could not compete outside of its own service territories without becoming a huge local company that dwarfs virtually all potential competitors. SBC has grossly exaggerated and overstated the extent of competitive challenges it faces (Szerszen, pp. 13-18).
  
• Economies of scale can be achieved without the national/local strategy. Others have entered the large business market, which is the primary target of the strategy, without a national/local claim (Graves, p. 44). The merging companies intend to rely on multiple switches in the new markets and the purchase of unbundled loops from incumbents, which do not require the scale claimed.
  

By SBC's own reasoning, few, if any, viable competitors exist in the national-local market. It claimed the need to have virtually all the telecommunications business of the large firms headquartered in its home service territory. The merger will create a huge pool of financial resources with over $40 billion in revenue and economies of scale and scope to draw upon. No other entities could marshal these resources at this level to compete against the merged entity (Consumer Coalition, p. 26; Selwyn, pp. 22-24).

• If the home court advantage is as important as the merging partners claim, then allowing one company to lock up almost half the business lines in the country would create a huge obstacle to any second, national local competitor (Selwyn, p. 23).
  
• For the 50 percent of the nation's business lines that SBC would now command, virtually no competitor outside of the region possesses any of the traits the merging firms claim are necessary for successful competition.
  

Public interest intervenors note that SBC has earned a reputation "as the most energetic Baby Bell in resisting competition" (Shepherd, p. 13; Ohio-Staff, p. 14). A review of local competition proceedings (section 271) across the country bears this out (AARP-Ohio, pp. 31-32).

SBC REFUSES TO OPEN THE LOCAL MARKET: The current count on section 271 checklist items passed demonstrates that SBC has steadfastly refused to open its local market to competition (Ohio Staff, pp. 11-12; Selwyn, pp. 47-50; CFA/CU, pp. 10-20).

• In Texas, SBC has vowed to fight local competition to the "last lawyer" (Shepherd, Appendix 2, p. 16) and has boasted that it offers the "smallest welcome mat" of all the RBOCs (Shepherd, Appendix 2, p. 21).
  
• In California, the Public Utility Commission (PUC) staff credits SBC with passing only 4 of the 14 points. In Texas, it was credited with passing only 3. The final report by the California PUC staff and Texas indicate that progress is slow and will remain so (Baldwin, pp. 51-53).
  
• The merger makes it more difficult to implement opening (McClerren, pp. 21-23; Yow, p. 18; Terkeurst, pp. 48-52).
  

SBC ENGAGES IN ABUSIVE MARKETING TACTICS: Public interest intervenors have paid considerable attention to the abusive marketing experienced in California as a result of the SBC-PacTel merger (Graves, p. 36; Consumer Coalition, pp. 19-23). From the point of view of competition analysis, the important point is that the merger economics will place immense pressure on the company to squeeze profits out of the ongoing operations of the company (Ohio Staff, pp. 6-8; Selwyn, p. 10). SBC has paid a large merger premium along with huge bonuses to Ameritech management.

• The hard-sell mentality that SBC has applied in its other markets will subject consumers to aggressive and abusive marketing practices. Because SBC does not face competition, particularly in the residential sector, it can rapidly escalate pressures to sell services in that market segment (Terkeurst, pp. 28-33).
  
• Within months of the SBC-PacTel merger, California experienced a significant rise in complaints from consumer groups, labor unions, the Office of Ratepayer Advocate, and, ultimately, the Commission.
  
• Service also deteriorated after the PacTel merger as corporate attention focused elsewhere (McClerren, p. 6; Ohio Staff, p. 15; Michigan, pp. 16-17) and management talent is shifted to other activities (Selwyn, p. 63).
  

Regulators and antitrust officials have been presented with a vast array of empirical evidence that demonstrates that the merger will be a devastating blow to the feeble forces of competition that have been struggling to become established in the market for local exchange and exchange access service. Therefore, the merger should not be allowed to go forward.

A copy of the press release: Consumer Groups Unite to Oppose SBC-Ameritech Merger White Paper Outlines Potential Harm for Consumers

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