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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Report No. CS 99-2 CABLE SERVICES ACTION February 17, 1999 CITING PRO-COMPETITIVE BENEFITS TO CONSUMERS, COMMISSION APPROVES AT&T - TCI MERGER The Commission has adopted an Order approving the transfer application of Tele- Communications, Inc. ("TCI") and AT&T Corp. ("AT&T") subject to the following conditions: (1) the transfer of TCI's ownership of Sprint PCS tracking stock prior to consummation of the merger to a trust pursuant to a trust agreement that has been approved by the Commission; and (2) AT&T's adoption of its proposed policy statement regarding its policy for distribution to Liberty Media Group shareholders of the economic benefits of its ownership of the Sprint stock. The Commission reviewed the four services affected by the proposed merger: multichannel video programming distribution ("MVPD"), local exchange and exchange access, Internet access, and mobile telephony. The Commission concludes that the merger, as conditioned, is likely to result in benefits for consumers, including a local telephony alternative for many residential customers now served only by incumbent local exchange companies, without creating competitive harm with respect to other services. The Commission received 31 comments and reply comments and numerous ex parte submissions regarding this merger. Key issues raised by the commenters and addressed by the Commission include: CMRS spectrum cap. The Commission will require the transfer of TCI's ownership of Sprint PCS tracking stock prior to consummation of the merger to a voting trust that will shield the merged company from the Commission's CMRS spectrum cap attribution rules. In addition, AT&T must adopt its proposed policy statement regarding the distribution to Liberty Media shareholders of dividends and other economic benefits associated with its ownership of the Sprint stock. Open access to broadband facilities for the provision of Internet services. Finding that the merger will not harm competition for Internet services, the Commission refrains at this time from imposing conditions with respect to open access to the merged company's broadband facilities. Regulation of the Merged Entity as a LEC or incumbent LEC. The Commission determines that, as the merged firm begins to provide telecommunications services, the systems offering such services will become subject to the requirements set forth in Section 251(a) of the Communications Act. To the extent the merged firm provides local exchange service, it will be subject to Section 251(b). The Commission rejects requests that AT&T-TCI be classified as a "comparable carrier" subject to the unbundling, resale, and other requirements of Section 251(c). Program access. The Commission affirms that the merger will not shield AT&T-TCI from the program access rules. Liberty Media will be a wholly owned subsidiary of AT&T, and the merged company therefore will fall within the scope of the rules. The Commission declines to impose program access restrictions beyond those specified by the rules. On October 22, 1998 and December 14, 1998, the Commission held en banc hearings on the merger. Action by the Commission February 17, 1999, by Memorandum Opinion and Order (FCC 99-24). Chairman Kennard, Commissioners Ness and Powell, with Commissioner Furchtgott- Roth concurring in the result and Commissioner Tristani approving in part and dissenting in part. Chairman Kennard and Commissioners Furchtgott-Roth and Tristani issuing separate statements. - FCC - News Media contact: Morgan Broman at (202) 418-2358. Cable Services Bureau contact: Royce Dickens at (202) 418-7200 TTY: (202) 418-7172 Statement of William E. Kennard Chairman of the Federal Communications Commission On ATT/TCI The Commission today approved the AT&T/TCI merger. Although the Justice Department proceeding is not yet complete and the company has not yet obtained all relevant franchise approvals, I am cautiously optimistic that, once these other entities conclude their reviews, the American people will benefit from this merger. That's why I voted for it. I am optimistic because the combined resources of AT&T and TCI surely will generate a very substantial effort to expand the choices now available to residential phone subscribers in TCI territories. These companies will launch an enormous undertaking to add telephone capabilities to cable services, thus fulfilling one of the goals of the 1996 Telecommunications Act to stimulate rivalries between formerly non- competing technologies and industries. Congress specifically envisioned the provision of local telephone service over the cable television infrastructure, and this merger will directly promote that goal on a widespread scale. I am especially pleased by the commitment of AT&T Chairman Michael Armstrong that AT&T will offer service uniformly in all neighborhoods in every city it serves, and that it will pursue every opportunity to bring the most advanced communications services and equipment to our inner cities as well as to our nation's most rural and remote areas. My optimism about this merger, however, is tempered by caution. We need to remind ourselves that mergers by themselves do not bring competition. Investment and deployment of resources, including facilities, bring competition. Combining companies does not expand consumer choices. Building alternative pathways and exploiting new technologies does. The merger of AT&T and TCI may be an end in itself for the companies' shareholders, but that is of no consequence to the FCC. Our job is to advance consumers' welfare. For this reason, to the Commission, the merger is not an end, but at most a beginning endash the beginning of a competitive telecommunications marketplace where Americans have the choice from which to select the best services right for them. During our review of this merger, a number of parties raised questions regarding access to cable networks by Internet Service Providers (ISP). While these concerns are important, they are not unique or specific to this merger. The development and deployment of high-speed, broadband Internet access is one of the most important issues facing us today. It is the foundation of our future economic growth and national strength. It is an issue that I take very seriously. However, given the early stage of deployment of cable's high speed Internet access services, it would be imprudent to act now. In the meantime, we are relying on AT&T's commitment that subscribers will have direct access to the content and on-line service providers of their choice. We will continue to monitor these developments to see how the market develops and how these new high-speed services are benefiting consumers. At this nascent stage in the development of the market, one should not presume to have a regulatory cure for every anticipated marketplace ailment. We must allow the marketplace to evolve. It is my hope that through this combination the parties will work to tear down the boundaries that have needlessly separated telecommunications technologies and will focus just as intently on bringing all Americans the advanced telecommunications services that the world has to offer. -FCC- February 17, 1999 Press Statement of Commissioner Susan Ness Re: In the Matter of Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from Tele-Communications, Inc. to AT&T Corp. The merger we approve today promises to give many Americans their first opportunity to have a meaningful choice for local telephone service. Since passage of the Telecommunications Act of 1996, we have seen a number of developments, including mergers and strategic alliances, that have enhanced competition in telecommunications markets primarily devoted to business customers. This is the first major merger that seems driven by the prospect of enhancing competitive choices to residential customers. In addition, the broadband services that are to be deployed by AT&T/TCI may prod local exchange carriers to accelerate their offering of high speed broadband services to residential customers. Greater competition among broadband services should help alleviate concerns about vertical integration and "bundling" of proprietary information with Internet access. Having closely examined the arguments raised for and against this merger, I expect that this marriage of titans will bring average Americans new choices, lower prices, and better customer service. SEPARATE STATEMENT OF COMMISSIONER HAROLD FURCHTGOTT-ROTH Re: Applications for Consent to the Transfer and Control of Licenses and Section 214 Authorization from Tele-Communications, Inc., Transferor, To AT&T Corp., Transferee, CS Docket No. 98-178 I concur wholeheartedly in the result of this Memorandum Opinion & Order: namely, that the Commission approves TCI's application to transfer station licenses and authorizations to provide international resold communications services to AT&T, subject to compliance with existing FCC wireless spectrum cap rules. In particular, I commend the Commission staff for their prompt action on these applications, and I hope we can process other transfer applications with like timeliness. While I support the bottom line in the Order, I cannot sign on to the general reasoning that underlies it. I do so because the Order focuses its review -- erroneously, to my mind -- on the larger business transaction of the merger as opposed to the simple transfer of radio licenses and international resale authorizations. Merger Review Authority I do not believe that the Federal Communications Commission possesses statutory authority under the Communications Act to review, writ large, the merger of AT&T and TCI. Rather, that Act charges the Commission with a much narrower task: review of the proposed transfer of radio station licenses from TCI to AT&T, and consideration of the extension of common carrier lines by the merged entity. Nothing in either of these provisions speaks of jurisdiction to approve or disapprove the merger that has occasioned TCI's desire to transfer licenses and international resale authorizations. We are required to determine whether the transfer of station licenses serves the public interest, convenience and necessity and whether the transfer of authorizations for international resale serves the public convenience and necessity. To be sure, the transfer of the licenses and authorizations is an important part of the merger. But it is simply not the same thing. The merger is a much larger and more complicated set of events than the transfer of FCC permits. It includes, to name but a few things, the passage of legal title for many assets other than radio licenses, corporate restructuring, stock swaps or purchases, and the consolidation of corporate headquarters and personnel. Clearly, then, asking whether the particularized transactions of license transfers and section 214 transfers would serve the public interest, convenience, and necessity entails a significantly more limited focus than contemplating the industry-wide effects of a merger between the transferee and transferor. For instance, in considering the transfer of licenses, one might ask whether there is any reason to think that the proposed transferee would not put the relevant spectrum to efficient use or comply with applicable Commission regulations; one would not, by contrast, consider how the combination of the two companies might affect other competitors in the industry. One might also consider the benefits of the transfer, but not of the merger generally. And one might consider the transferee's proposed use and disposition of the actual radio licenses, but one would not venture into an examination of services provided by the transferee that do not even involve the use of those licenses. By using sections 214 and 310 as a basis to assert jurisdiction over the entire merger of two companies that happen to be the transferee and transferor of radio licenses and international common carrier resale authorizations, the Commission greatly expands its regulatory authority under the Act. As the Order acknowledges, the transfers at issue will occur "as a consequence of the merger," supra at para. 11, but this causative fact should not be used to bootstrap the Commission into jurisdiction over the merger itself. If the control of licenses were to be transferred "as a consequence of" a licensee's bankruptcy, would the Commission assert jurisdiction to review the legal propriety of the declaration of bankruptcy? That would be preposterous, as that is a job for a bankruptcy court. Here, review of the merger between AT&T and TCI, which, just like the bankruptcy in my hypothetical, is an underlying cause of the transfer, is a job for the Department of Justice. Extending our review of license transfers to a review of the event that precipitates the transfers -- whether that event is a merger, a bankruptcy, or any other event that might lead a licensee to cede control of a license -- is off the statutory mark. Despite the Commission's effort to exercise power over "mergers" under sections 214 and 310, it must be remembered that, in the end, the Commission can only refuse to permit the transfer of the licenses or to authorize international resale for carriers. While such action would no doubt threaten consummation of the merger, the Commission cannot directly forbid the stockholders of one company from selling their shares to the other. But see supra at para. 112 (purporting to prohibit the applicants from "consummat[ing] the merger until we approve the proposed trust agreement"). The scope of our review ought to accord with the scope of our remedies: in this case, then, it ought to be limited to considering (i) whether the public would suffer harm if radio licenses are transferred from Party A to Party B, and (ii) whether the public convenience and necessity would be served by allowing Party A to convey authorizations to operate as an international reseller of phone services to Party B. The fact that today's Order does not even identify the radio licenses or authorizations for international resale that are the subject of AT&T and TCI's applications or discuss their conveyance, but instead moves directly to a discussion of the merger, reflects how far the Commission has strayed from the provisions of the Act that it relies upon today. As I have previously explained, I believe that a finding that the transferee and transferor have a record of compliance with existing Commission rules, and that no extraordinary reason to oppose the transfer of licenses is asserted by the public, meets our statutory obligation to make a public interest determination under section 310. See Application of WorldCom, Inc. and MCI Communications Corp. for Transfer of Control of MCI Communications Corp. to WorldCom, Inc., 13 FCC Rcd 18025 (1998) (concurring statement of Commissioner Furchtgott-Roth). As for the international resale authorizations under section 214(a), we must at a minimum evaluate that transfer application under 47 C.F.R. 63.18, the actual regulation pursuant to which TCI filed its application to transfer those permits. I have reviewed that application, which sets out the information required by subsection 63.18(e)(5), and do not see any conflicts with the terms and conditions of that regulation. I am unaware of any allegation that the transfer of these 214 authorizations would result in a violation of the Communications Act or any other extant FCC regulations. I therefore find that the transfer serves the public convenience and necessity, as section 214(a) requires. For these reasons, I would grant the applications filed pursuant to sections 310 and 214, and I thus agree with the result of today's Commission action. Potentially Arbitrary Review: Choice of Transfers for Full-Scale Review & Substantive Standards To Be Applied Beyond the threshold question of statutory authority to regulate mergers in the general sense, I have concerns about the process employed in FCC merger reviews. The vast majority of license transfers under section 310 -- even those that involve merging entities -- are not subject to the stringent review today imposed upon AT&T and TCI. For example, as I have previously observed, mergers of companies like Mobil and Exxon involve the transfer of a substantial number of radio licenses, many of the same kind of licenses as those at issue here,and yet we take no Commission level action on those transfer applications. I do not advocate extensive review of all license transfer applications, but mean only to illustrate that we apply highly disparate levels of review to applications that arise under the identical statutory provision. Unfortunately, there is no established Commission standard for distinguishing between the license transfers that trigger extensive analysis by the full Commission and those that do not. Nor does today's Order elucidate the standard. The Order suggests that some mergers warrant heavy review and others do not, stating that "the face of some merger applications may reveal that the merger could not frustrate or undermine our policies," see supra at para. 16, and then cryptically cites a bureau level decision, without explaining what sort of facts in an application make it clear that a merger need not be fully processed. Is the question whether the merging firms are large, successful corporations? That is one of the differences one might observe between this merger and the one cited in the footnote. Or is it whether "parties have raised non-frivolous issues" about the merger? Id. What about frivolous contentions, or the absence of any objections at all? Does the level of review depend on the type of services offered by the merging companies, i.e. a telephone/cable merger (such as this one) gets one sort of review, while a telephone/telephone merger (such as the cited case) gets another? In short, merging parties have no clear notice as to the threshold showing for determining the scale of FCC license transfer review when mergers are involved. Apparently, only the Commission knows a facially clear case for review when it sees one, and it is unwilling to say what such a case looks like. If the answer is, as some have suggested, that the Commission reviews extensively only a subclass of license transfer applications -- those occasioned by mergers with the potential to affect the telecommunications industry -- that response is incomplete. Whatever the soundness of this theory for distinguishing among transfer applications, it is not written anywhere, whether in agency rules, regulations, policy statements, or even internal agency guidelines. While the Communications Act does allow the Commission to make reasonable classifications of applications, see 47 U.S.C. section 309(g), the Commission has in no way done so, much less in a way that puts the public on notice as to what those classifications are. Agency decisions regarding which license transfers to review under 310, even as among license transfers occasioned by mergers, are entirely ad hoc and thus run a high risk of being made arbitrarily. Finally, if the Commission did establish a threshold test for determining which license transfer applications should receive strict scrutiny, the Commission would still need to set out the substantive tests for those differing scrutiny levels. As a general matter, our decisional precedents provide little concrete guidance on the substantive standard for approval of title III transfers: the proposition that a merger is in the "public interest" if it is not anti-competitive (or if it is also pro- competitive) is too generalized to be helpful. Moreover, there is clearly a different "public interest" test being applied, sub silentio, in different cases under section 310. The cases that undergo extensive inquiry, as here, exhaustively discuss all kinds of service areas and issues ancillary to the use of the actual radio licenses, and the decisions that are granted at the Bureau level are relatively perfunctory in their public interest analysis. We should, after identifying the threshold test for license transfers that warrant thorough inquiry, articulate clearer substantive criteria to guide the Commission's inquiry. Duplication of Department of Justice Efforts The focus on mergers rather than on license and authorization transfers creates another problem: our work often duplicates that of the Department of Justice's Antitrust Division. As I have previously explained, this agency in its merger review undertakes a wide-ranging analysis that exceeds even DOJ's rubric and examines broad social issues beyond our expertise or authority. See MCI/World Com Order, supra. Merging companies should have to jump through at most one, not two, federal antitrust hoops, and that hoop should be held out by the agency with the express statutory authority and expertise to do so. That agency is the Department of Justice. If the Commission limited its review to the actual subject matter of 310 -- the transfer of radio licenses, as opposed to the proposed merger that triggered the transfer -- this problem of duplicated efforts would be avoided. Conditional Approval of License Transfer and Line Extension Applications Finally, I express some general apprehension about the "conditioning" of grants for license transfer applications and section 214 authorizations. I think it is entirely appropriate, even necessary, for the Commission to condition license transfer and line extension applications on compliance with existing FCC rules. See 47 U.S.C. section 303(r) ("Commission shall . . . prescribe such . . . conditions, not inconsistent with law, as may be necessary to carry out the provisions of this Act"); id. section 214(c) (Commission "may attach to the issuance of [214] certificate such terms and conditions as in its judgment the public convenience and necessity may require"). As discussed above, in order to meet the public interest standard, an applicant should demonstrate compliance with extant FCC regulations. For that reason, I agree that we should take necessary steps to ensure that the transferor, after the license transfer, is not in violation of the wireless spectrum cap rules. I am concerned, however, about situations in which this agency becomes an enforcer of the rules and regulations of other governmental agencies. We have no jurisdiction to enforce rules not promulgated under the Communications Act, see id. section 303(r) (referring to conditions needed to "carry out the provisions of this Act"), and we cannot and should not do the enforcement work of others. This is not to say that we should not take official notice, in the course of making licensing decisions, of findings by another agency that an applicant has violated a regulation in its bailiwick. We should certainly consider such findings in determining whether to grant or deny a license application. But we should not condition such a decision on compliance with another agency's regulation, thus putting ourselves in the position of potential enforcer of non-FCC rules should the transferee fail to conform to that regulation. I am doubly concerned about conditional FCC approval when the rule at issue is not just that of another agency, but when that agency has made no formal, final, and material findings of a violation. That is, I do not think we should take official notice of alleged violations, including matters under investigation or in litigation, or of informal concerns that an agency is not yet ready or willing to pursue through their own established procedures. When we give formal weight to anything short of formal, final findings by other agencies, we create a situation that is rife with incentives for inter-agency gaming of the system, e.g.,registering an objection with an agency about a matter that the complaining agency is not prepared to pursue itself, and requires the Commission to do extensive reviews in areas where it simply has no experience or authority. In sum, at the intersection of two areas -- non-FCC rules and no final determination of a violation by a responsible entity -- our authority to impose conditions on a license or 214 authorization transfer is at its weakest. Where non-FCC rules are at issue but there is a final, record finding of a material infraction thereof, there is a middle ground: we should take notice of that fact in deciding upon the application but not condition approval upon compliance. Finally, where, as here, extant FCC rules are involved, our power to condition a proposed transfer upon compliance with those rules and to enforce compliance, if necessary, is at its apex. I therefore concur in the conditions of the transfers based on compliance with, and enforcement of, the wireless spectrum cap rules. * * * For the foregoing reasons, I am pleased to concur in the Commission's decision to approve TCI's transfer of radio licenses and authorizations for international resale pursuant to sections 310 and 214 of the Communications Act. Again, I thank the Cable Services Bureau, as well as my colleagues, for their efforts in this matter. February 17, 1999 SEPARATE STATEMENT OF COMMISSIONER GLORIA TRISTANI, DISSENTING IN PART Re: Application for Consent to the Transfer of Control of Licenses and Section 214 Authorization from Tele-Communications, Inc., Transferor to AT&T Corp., Transferee While I support the bulk of today's Order, I respectfully dissent on one issue: the majority's refusal to impose a reporting requirement to monitor the upgrade of TCI's cable facilities to provide local telephony, high-speed data and other advanced services. Under the Commission's merger framework, we must weigh the costs and benefits of a proposed transaction to determine whether it would serve the public interest. I believe that the merger of AT&T and TCI has the potential to benefit millions of American consumers by bringing together the complementary assets of these two companies. In the area of telecommunications, AT&T has considerable expertise and an unmatched brand name. TCI possesses a broadband pipe that covers the crucial "last mile" to consumers' homes. This should allow the merged company to furnish local telephone service and high speed Internet access more rapidly and effectively than either company could separately. At this point, however, the plans for this to happen are just plans. That is why I place great emphasis on the parties' express commitment (reiterated most recently in a February 8, 1999 letter from AT&T's Chairman) to upgrade its facilities on a fair and non-discriminatory basis. I believe that in order for this merger to serve the public interest, it is vital that all regions and all neighborhoods share in the merger's promised benefits. Based on my examination of the maps and deployment schedules submitted by AT&T-TCI, I am satisfied that the merged entity is planning to upgrade its facilities in a manner consistent with that important goal. My disagreement with the majority lies not in its assessment of the merged entity's current deployment plans, but in its unwillingness to monitor whether those plans are carried out. As I've said in the context of the MCI-WorldCom merger, a minimal reporting requirement seems to me an eminently reasonable way of determining whether a company follows through on the commitments it makes in obtaining merger approval. If AT&T-TCI intends to honor its deployment commitments, as I assume it does, I can see no harm in keeping the Commission apprised of its progress. A short status report every six months can hardly be characterized as burdensome given the size and nature of the merger and the importance of the issue involved. I recognize that business plans change and that unforeseen events can upset even the best-laid plans. If that happens, a reporting requirement would not mandate that the proposed deployment schedule be adhered to, but simply that the merged entity explain how and why the schedule could not be kept. The difference I have with the majority is that if the deployment plans change I would prefer to know about it. The majority, apparently, would not. Given the stakes involved, especially for rural and low-income Americans, and our continuing obligation to monitor the deployment of advanced telecommunications capability under Section 706 of the Telecommunications Act of 1996, I believe we should err on the side of having more information rather than less.