How Competitive Carriers Are Affected by the Megamergers

The FCC and DOJ this week approved the mergers of SBC-AT&T and Verizon-MCI, opening a new chapter in the history of this industry.

To get the FCCs green light, these industry giants agreed to offer naked DSL, backbone peering, and net neutrality, and freeze special access and UNE rates.

(For more on these issues and what they mean, read the Q&A, A Buy-Side Attorney Comments on Merger Requirements, Special Access with attorney Colleen Boothby).

While the conditions SBC and Verizon agreed to to get clearance for these deals include some good news for competitive carriers, theres a question looming as to what will happen to CLECs and others that rely on these RBOCs to reach their customers after two or three years time.

As part of these merger approvals, the newly enlarged RBOCs agreed to freeze special access rates for 30 months after the mergers close and freeze UNE rates for two years after the mergers close. CLECs, which had been sweating over the prospect that their rates could go sky-high following the mergers, were pleased.

XO Communications CEO Carl Grivner says AT&T and MCI traditionally have offered far lower wholesale pricing for access than the RBOCs. But that could all have gone away quickly had the rate freezes not been a condition of the mergers. Surprisingly, the FCC this time took a balanced approach that actually considers the competitive ramifications of what the big incumbent telcos are doing.

One of the arguments that we fought very hard to make was [that] the existence of AT&T and MCI competing very hard against each other really had brought competition to key parts of the special access market, says Heather Gold, senior vice president of government relations at XO Communications. She adds it would have been nice if the freeze had been put in place indefinitely and applied to both new and existing customers, but she says the FCC can deal more with special access outside the merger requirements.

In addition to the rate freezes, competitive service providers such as XO and Eureka/InfoHighway were happy with the wire center recalculation rules laid out in the merger approvals.

Under TRRO, wire centers came off if there were so many fiber-based colocators in the end office, says Gold. And now SBC and Verizon have to go back and recalculate those wire centers as if, in SBCs case, AT&T was not a fiber colocator and, in Verizons case, MCI was not a fiber colocator.

Raul Martynek, president and CEO of Eureka/InfoHighway, says these merger conditions address many of the issues companies like his own have been espousing and also indicate the RBOCs dont see the CLECs as a significant threat. Instead, he says, the incumbent telcos are more worried about their cable TV competitors and possibly newcomers like Google and others in the residential market.

While celebrating these favorable requirements, CLECs still are holding out hope that the FCC will use the next 24 to 30 months to address special access beyond the freeze timeframe laid out in the merger conditions.

Attorney Colleen Boothby of Levine, Blaszak, Block & Boothby LLP, which represents the enterprise customers that buy communications services from the telecom industry, says special access rates are too high and that the merger conditions did nothing to address that.

By freezing AT&Ts and MCIs rates so that they still stay out there in the marketplace for CLECs and IXCs to buy that might get them the dollar level that they needed, says Boothby, who allied with the CLECs in asking the FCC for lower special access rates. But to freeze SBCs and Verizons rates when they are so outrageously high is not going far enough.

So the hope now is that the FCC which now includes two Republicans, two Democrats and one empty seat, which, when filled, likely will swing the balance even more toward the RBOCs will address special access and related issues in its open proceeding.

Theyve got this open investigation of the rules that apply to SBC and Verizon and all the other BOCs that give them a lot of flexibility in pricing because the commission assumed when they adopted the rules that competition was going to emerge just any minute! says Boothby. And that should be a pretty familiar refrain. Weve had about four or five years of FCC decisions saying: We can deregulate now because competition is going to show up just any minute now! Any minute were just going to turn that corner and the market will be fully competitive! And it hasnt happened.

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