Lessons from History: Conditions Cannot Fix AT&T/T-Mobile
Lessons from History: Conditions Cannot Fix AT&T/T-Mobile
Lessons from History: Conditions Cannot Fix AT&T/T-Mobile

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    In lieu of the Justice Department’s suit to block the planned combination of AT&T and T-Mobile, there has been some talk of the use of conditions imposed by the Federal Communications Commission (FCC) as an alternative.  

    However, history has shown that FCC conditions do not always produce the desired results. Corporations formed as a result of past mergers have sometimes simply ignored requirements, and the fines the FCC is capable of or willing to impose are simply not enough to compel telecommunications companies to act in a manner consistent with its goals.

    While mergers occur with some frequency, several major issues have prevented consistent enforcement of merger conditions. The FCC has, in recent years, been reluctant to initiate actions against corporations, even when conditions are being evaded or violated. Additionally, the very nature of the enforcement process makes it unlikely that penalties will be imposed. The sheer legal might of the large telecoms involved in these actions makes victory for the FCC (and the smaller companies who are so often harmed) improbable, and the conditions are often too complex to determine clearly that a violation has occurred (see the ongoing dispute between Comcast and Bloomberg). As such, in evaluating the efficacy of merger conditions as a method of shaping corporate behavior, it is helpful to examine a case in which the Commission overcame these obstacles and did enforce the conditions of a major transaction.

    The 1998 combination of Southwestern Bell (SBC) and Ameritech is particularly illustrative when considering the effectiveness of conditions on a large-scale transaction. In this deal, SBC, the Regional Bell Operating Company (RBOC) serving Texas, Oklahoma, Arkansas, Kansas, and Missouri, as well as California and Nevada (through the purchase of Pacific Telesis), purchased Ameritech, the RBOC for Illinois, Indiana, Ohio, Michigan, and Wisconsin. While the disparity in size between the pre-merger companies was not as massive as the difference between today’s AT&T (which started out as SBC) and T-Mobile, the resulting company was nothing less than massive, controlling over 53 million access lines. While the telecommunications market has changed dramatically since then, the events that occurred after the completion of the merger between SBC and Ameritech are a good indicator of what may happen if the AT&T/T-Mobile transaction is approved.

    The Memorandum Opinion and Order issued at the end of the FCC’s review of SBC/Ameritech expressed several concerns over possible anti-competitive outcomes, and the thirty conditions imposed were intended to protect consumers and smaller companies operating in SBC/Ameritech’s service region. SBC/Ameritech, however, simply decided to violate those conditions, and while the case against the company was strong, the Commission was unable to do enough to change the firm’s behavior. The company violated both the “Carrier-to-Carrier Performance Plan” and the “Shared Transport” conditions willfully, but the FCC’s fines were pitifully small, and clearly the threat of these penalties was not enough to force compliance. 

    Pursuant to the “Carrier-to-Carrier Performance Plan” condition, SBC/Ameritech was required to report to the FCC monthly performance data that “may have a particularly direct effect on SBC/Ameritech’s local competitors and their customers.” SBC/Ameritech was also liable for up to $1.125 billion in “voluntary” payments (read: fines) if certain performance conditions were not met. Both parts of this condition were enforceable for up to three years after the completion of the merger. 

    In early 2001, the Commission found that SBC/Ameritech had been filing performance reports using “misleading statistics and ‘apples to oranges’ comparisons… [and had] significantly overstated the accuracy of its filings.” For this willful violation of the Commission’s requirements, SBC/Ameritech was assessed a fine of just $88,000. This was an insignificant sum of money for a company with revenues in the tens of billions of dollars, and clearly could not compel compliance, rendering this condition section useless. The second section of the condition was similarly ineffective: SBC could have been liable for $1.125 billion in “voluntary payments” (fines), but ended up paying nowhere close to that amount. The fees for failing to meet performance conditions were calculated over three month periods for three years, and although the company did pay $6 million for a period four times, the total fine came nowhere close to the maximum allowed. Tellingly, SBC/Ameritech never escaped fines for a three-month period. Had the mandatory payments been larger the company may have moved more swiftly to meet its performance requirements, but instead the size of the fines rendered the condition useless. This merger condition was designed to protect smaller companies and consumers, but because SBC/Ameritech could simply avoid its obligations by paying relatively small fines, it failed to achieve the desired outcome.

    The second violated condition also would have, if followed, protected smaller local exchange carriers. The Commission required SBC to provide shared transport to other wireline companies in the Ameritech region at a price “substantially similar to (or more favorable than) the most favorable terms SBC/Ameritech offers to telecommunications carriers in Texas.” Ameritech had previously refused to provide shared transport, so this would have been a boon to smaller wireline companies (and through the effects of expanded competition, consumers). By October 2002, it was clear that SBC/Ameritech was not sufficiently providing this service, and a Forfeiture Order was issued. In the Order, the Commission found SBC/Ameritech to have “intentionally and affirmatively refused to offer shared transport” in the Ameritech states. According to the Commission, smaller firms were forced to expend time and money to get SBC/Ameritech to provide the services it was obligated to, resulting in both delayed shared transport availability and competitive harms.

    Issuing the Forfeiture Order was the right thing of the Commission to do, but there was one problem: the maximum fine the FCC could impose was just $6 million (AT&T has spent twice that lobbying for its merger with T-Mobile). The FCC was limited by statute to such a small number, and as such, SBC/Ameritech could make a business decision to violate the merger condition and put pressure on its competitors. The Commission, in the Memorandum Opinion and Order, noted that the combined company would have first year revenues of over $45 billion. If we assume a constant inflow of cash, it would have taken SBC/Ameritech about an hour to make that much money. Clearly, because the FCC was limited at the time to such a miniscule penalty, there was no way it could impose an effective merger condition.

    Problematically, the FCC has even less power to enforce merger conditions now than in 1999. Then, it was limited to $1.2 million per continuing violation (five continuing violations allowed the Commission to reach the $6 million final sum), but the current text of the Communications Act limits the Commission to $1 million per continuing violation. For a massive company like AT&T, a fine of that size would simply be a “cost of doing business” instead of an effective deterrent against actions the FCC wishes to discourage.

    Clearly, if the FCC could not effectively enforce merger conditions in 1999, and it has less power to do so today, there is no way it can be expected to be able to get the megacorporation formed by the proposed merger of AT&T and T-Mobile to act in a manner consistent with the its goals. As history has shown, conditions cannot mitigate the potential harms to competition and consumers that will result from this transaction. The only way for the FCC to protect consumers is for it to follow the Justice Department’s lead and reject the merger.