Hearing of Senate Judiciary Committee on SBC/AT&T and Verizon/MCI Mergers--Remaking the Telecommunications Industry

Hearing of Senate Judiciary Committee on SBC/AT&T and Verizon/MCI Mergers--Remaking the Telecommunications Industry

STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE STATE OF OHIO

Senator DeWine. Mr. Chairman, thank you very much for your good statement and for holding this hearing to examine these
mergers. These deals have received really an unusual reception in the press and within the industry, an unusually friendly
reception and one that I am not really sure is wholly deserved. In fact, one might normally expect that mergers worth $23
billion, combining four of the country's leading phone companies, would raise great concern among those who follow the
industry.

But recent changes in the telecommunications industry have given an air of inevitability to these deals. Market pressures
and regulatory changes have significantly limited the options of the long-distance carriers, so that AT&T has already
announced that it is exiting the market for residential service, and MCI appears headed in the same direction. Under
these circumstances, it is not surprising that many have done a quick analysis and concluded that these deals do not pose any significant antitrust concerns.

However, Mr. Chairman, a quick analysis, whatever the outcome, is really not enough and is not adequate. In fact, I
think that certainly there are some antitrust issues that require more thorough examination. Perhaps the most obvious
area of concern is the so-called enterprise market, that sector of the market comprised of large businesses with sophisticated
telecommunications needs. In this market sector, all four of the merging parties currently compete, and so competition there
will be affected by these deals. There are also questions regarding the impact of these deals on the markets for long-
haul capacity and the market for Internet backbone. These are all areas that we should explore today.

Even beyond these specific market evaluations, however, is the larger competition issue. Certainly, these mergers
represent a loss of competition among the phone companies, but the remaining players will tell us that competition is
flourishing via different platforms, specifically that we will have cable companies, wireless companies and companies that
provide voice over IP services. In other words, so-called intermodal competition will protect competition in these
markets. This, I believe, is the key issue--the broader competition issue that this Committee must examine most
thoroughly and must consider as the most obvious candidate for Committee action.

For one thing, we must keep in mind that intermodal competition, by definition, does not always provide the type of
direct competition that we are used to seeing. Wire line, wireless, cable--these services are inherently different, much
like planes, trains and automobiles, all of which provide a similar service, but in different ways, with different pluses
and minuses. Not all will always provide sufficient competitive benefits for all consumers.

Further, in this context, we must discuss today whether or not conditions are required in order to ensure that multiple
modes of competition are, in fact, available. For example, voice over IP is a very promising product, but is not in and of
itself a separate facilities-based form of competition. Instead, it is a type of service that is only available to a
consumer if he or she has broadband access, and currently that access is only available from the phone company or the cable
company. In order for voice over IP to be a legitimate competitor to the merged companies, must we require the phone
companies to sell DSL separately? These are important questions and we must begin asking them today.

On a final note, Mr. Chairman, as you know, only the four merging companies are represented here today. While we
anticipate that this hearing will provide the Committee with a good base of knowledge regarding the deals, we all agree that
we cannot responsibly conclude our examination without hearing directly from those who are critical of these deals.

Accordingly, with the consent of the Chairman and the full Committee, on April 19 Senator Kohl and I are planning to hold
a follow-up hearing in the Antitrust Subcommittee with a panel of non-company witnesses who have expressed concerns about these mergers. That hearing, which will be essentially part two of today's hearing, will help us to more fully examine these
mergers and explore the competitive impacts.

I thank the Chair.

BREAK IN TRANSCRIPT

Senator DeWine. Mr. Whitacre and Mr. Seidenberg, the biggest antitrust issue presented by these mergers appears to
be in the so called enterprise market. I would like to examine the impact of these deals on small and mid-size businesses, the
companies served really most often by AT&T, MCI and their own regional Bell.

It makes sense that you have so far focused on medium and smaller accounts within your region. It also makes sense that,
post-merger, you will have a great deal of incentive to pursue the major accounts even if they are out of your home region.
But what about pursuing the smaller and mid-sized business accounts out of your region? Doesn't it make more sense to
leave those to the other regional Bell which already has a relationship with them and the local facilities to serve them?

Why attempt to compete out of your region, where you would need access to your competitor's network? And if that is the
case, aren't we moving from a situation where we have three major competitors--AT&T, MCI and the local Bell--down to only
one? Isn't that a clear antitrust problem?

Mr. Seidenberg. Does Ed get this one first? Mr. Chairman, do you want me to do this one first?

Senator DeWine. Well, you know, you went first last time.

Mr. Seidenberg. I think he should go first.

Senator DeWine. Do you think it is his turn?

Mr. Seidenberg. I think so. [Laughter.]

Mr. Whitacre. You keep talking and I will forget the question.

Doesn't it make more sense? There are many, many competitors in that space that you are talking about. We compete now against Verizon, as an example, against AT&T, against MCI across the country in some medium, some small and some enterprise businesses. There are many other people or other companies in that business, though, that people don't think about everyday. You can think of Cisco, you can think of IBM, you can think of many manufacturers, you can think of Qwest. You can go on and on, so the competition in that space is not three; it is three times maybe, I don't know how many, but it is many, many competitors in that space.

So it is not going down to three. There are many competitors in that space and I think it makes sense on a
business case basis--on a case-by-case basis, you would have to decide where you would compete, but certainly we would
anticipate doing that.

Senator DeWine. Mr. Seidenberg.

Mr. Seidenberg. Yes, Senator, I would just add this. I think the way we would see it is the market is globalizing. So
a small-business customer in Pittsburgh or in Milwaukee or in Nashville want a choice of suppliers, and I think Ed said it.
Small-business customers get services from cable companies in the form of modems. They get service from wireless companies.

And with our combination with MCI--MCI has a network that extends into many of these cities, so we would have the
capability of being a third or a fourth or a fifth supplier to these accounts. Actually, I think it is just the opposite. With our heft, muscle, brand, our operations focus and the assets that MCI brings to the table, I think we are in a better position to provide more choice for the small and medium customer across the country. So I think we are just following the natural evolution of the market.

Senator DeWine. Mr. Whitacre, the three I mentioned are the three biggest, though, are they not?

Mr. Whitacre. You know, Senator, I don't know. We certainly would be up there, but I think we often overlook the impact
these other companies have had. I mean, we are not talking small companies. We are talking about companies that have
thousands and thousands of customers that are, I guess, below this radar screen.

As far as the enterprise business goes, SBC is a small player, a very small player. Mr. Dorman would have to answer
for AT&T, but we are quite small in the enterprise space. In medium and small business, we are stronger in our region, but
we certainly have a lot of competition.

Senator DeWine. Does anybody else want to jump in here?

Mr. Seidenberg. If I might--I am sorry, guys, but I just want to address something you said in your opening remarks. If
the nature of the question goes to how many telcos will provide these services, then your point is fair that you can look at
one, two or three that do that. But the customer's dollar is green and they don't care who they buy these services from.

So the fact is the market now has five, six, seven different places to buy the services they used to buy just from
the telco. So as we move into these markets, we are dealing with a very different base of competitive activity in these
areas.

Senator DeWine. Anybody else? Mr. Dorman.

Mr. Dorman. What we have found that happens on a local basis is smaller companies that compete locally do a very good
job of serving small businesses in their home areas. Examples of that are people like McLeod Communications up in the upper
Midwest has done a very good job and built a business of almost $1 billion of revenue.

You have Broadwing, XO, Global Crossing, Level 3. Cox Cable just announced that they had just passed 300,000 business
customers, and they just started selling to business customers about two-and-a-half years ago. Time Warner Telecom is another cable-affiliated company which has done very well in the medium-business market.

So what we find competing nationally is, yes, we do see the Bell company certainly competing in the region, but typically
there are at least five to seven other providers besides MCI and ourselves. We didn't mention Sprint. Sprint is still a $7
billion-plus company in the long-distance and communications space, and more than half of that comes from business
customers, about $4.5 billion, in fact.

So my perspective is that there is an abundance of choice for business customers. Certainly, in the context of medium and
small customers there is even more. Large customers typically buy more sophisticated things, but even there, there are five
to six competing providers. I think Ed mentioned IBM. In almost every one of our large-customer bids these days, we see IBM,
EDS, CSC, even Lockheed as systems integrators offering communications and IT services as a bundle. Recently, we lost
Bristol Myers Squibb to BT, British Telecom. So there are a number of different competing players across the market.

Senator DeWine. Mr. Capellas and Mr. Dorman, as part of your efforts to compete with the Bell companies in serving
enterprise customers, both of your companies purchase local access facilities that would allow you to provide facilities-
based service to many business customers. Now that you are planning to merge with Verizon and SBC, respectively, wouldn't
competition be best served by a divestiture of any of those overlapping assets to other CLECs who could use them to compete
against the newly-merged entities?

Mr. Capellas. I think first, to put it in perspective, about 52 cents on every dollar we spend has traditionally gone
for local access. In fact, we actually have very few facilities which are local. That, in fact, is part of the reason for the
merger, but right now we have very, very limited local access capabilities. So while no decision has been made on how we deal with those, it is a very, very small part of our business.

Senator DeWine. Mr. Dorman.

Mr. Dorman. In the case of our direct overlap with SBC, we do business in SBC's 13 States, as I recall, in over 100,000
different establishments or buildings. We have facilities overlap with them in something like 2 percent of the cases
where we have a fiber into a building that they have service into.

In most mergers, redundant facilities like that end up becoming synergies anyway. So while not committing anything for
SBC looking into the future, I think that on a case-by-case basis the major thing I would be concerned about is disrupting
customers. If you have a major data network for an American Express and five of the locations happen to be in buildings
where you had fiber and SBC didn't and you had to convert them over, I would just simply be wary of the impact on customers.
But rejecting that out of hand, I don't think is necessary. In other words, it should be something that we would look at.

Senator DeWine. Let me move to another ramification of these proposed mergers. Ever since the break-up of AT&T in
1984, we always could count on AT&T and MCI to be on the opposite side of the fence from the Bells on public policy
disputes in front of Congress or at the FCC or in the courts. Now, while many of those issues are now resolved, there are
many that will no doubt arise in the near future as we consider possibly rewriting the Telecom Act and as we attempt to
navigate our way into an era of enhanced services.

Who is going to take the place of AT&T and MCI? As policymakers, who will we look to for an alternative view now
if this takes place? And really to get into the crass business and political reality of all of this, what if one or both of
the merged entities decides they don't like a decision at the FCC or of the Congress? Really, there is no one else who has
the nationwide resources, the political heft or the large constituencies in each State. Who is going to have the resources to fight the merged entities in court or at the FCC? Isn't that a practical problem?

Mr. Capellas. I think like lots of things, you can look at it as an opportunity. If you look at where the innovation and
technology has been and the movement particularly in customer requirements, the goal has become how do we take these what should be complementary, seamless technologies and put them together.

If you are a customer and you sort of look at local access, wireless bundling, IP, the software access to reside it, the
customer's goal is to actually bring it together to a common goal, and then to set standards across the industry which allow
that to happen, to allow these networks to talk to each other.

So maybe the new construct is how do we actually get an industry consortium that drives standards that gains for
productivity so all these devices could talk to each other. So as a practical matter, maybe the nature of the beast is no
longer in an open warfare, but actually in a set of collaborative sort of efforts and consortia that allow these
standards to develop so we can actually take it to the next level.

BREAK IN TRANSCRIPT

Mr. Whitacre, let me ask you a question about the SBC consumer market. First, with regard to the consumer market and
SBC's territory, take a State like Texas. My understanding is that in the State of Texas, the consumer long-distance market
share held by SBC is about 70 percent. Is that correct?

Mr. Whitacre. I don't know exactly, Senator, but that is in the ball park.

Senator DeWine. That is in the ball park?

Mr. Whitacre. Yes.

Senator DeWine. How long has SBC been able to offer long-distance service to its customers in Texas? Do you know?

Mr. Whitacre. I think about 3 years. I would have to check, but it has been several years.

Senator DeWine. My understanding also is that AT&T holds about 15 to 20 percent of the consumer long-distance market in
Texas. Does that sound about right?

Mr. Whitacre. I don't know, Senator. You would have to ask Mr. Dorman.

Senator DeWine. Mr. Dorman, is that about right?

Mr. Dorman. I am not sure. It would be less than 20 percent, would be my expectation.

Senator DeWine. More than 10?

Mr. Dorman. Yes.

Senator DeWine. So if the merger were approved, the combined companies would account for 80, 90 percent of consumer
long distance in Texas. Would that be right?

Mr. Dorman. Well, if you don't count wireless and you don't count cable, if you talk traditional wireline long distance,
that fact might be true. But I suspect on the basis of actual usage, if you included all the long distance originated on cell
phones, I don't think the number holds up as a percentage.

Senator DeWine. I want to be fair about this. What do you think the percentage would be if you included those?

Mr. Dorman. I would bet that wireless originates about as much long distance in Texas as wireline, maybe more.

Senator DeWine. So you would put it, then, at 45 percent, approximately?

Mr. Dorman. That would be my guess.

Senator DeWine. Of that universe?

Mr. Dorman. Yes.

Senator DeWine. Let me ask an additional question, Mr. Whitacre. What are SBC's market share goals for consumer long
distance in California?

Mr. Whitacre. I guess broadly put, we want to serve all our customers. We are not the only company operating in California.
For example, Verizon is there. There are many competitors there. The cable companies are quite strong and have recently
put out that they probably have a bigger share than we do where we traditionally operated.

I think any business person who is truthful would like to have as much share as they can get. As a practical matter, that
is a function of a lot of things--price, what you do. But certainly we are trying to serve the consumers we have in California with our long-distance service. That is a goal of ours. We would like for all our customers to have SBC long distance. They do not now.

Senator DeWine. What about in the Midwest, former Ameritech States?

Mr. Whitacre. Senator, I can't recall the percentages. As you know, we got in long distance much later, so our percentages would be considerably smaller there. I would just have to get you the correct number, but it would be much smaller.

Senator DeWine. All right. When you do that, could you also get Missouri, Oklahoma and Kansas?

Mr. Whitacre. Sure. I would be happy to do that.

Senator DeWine. Mr. Capellas, there is a great deal of interest in the sale of your company. As we all know, there is
still a certain degree of uncertainty as to whether or not Verizon or Qwest will be successful in their efforts to
purchase MCI. We certainly don't want you to disclose any corporate secrets or anything you don't feel you can tell us
about, but can you tell us what the status is of MCI's deliberations and when we might expect to see a decision?

Mr. Capellas. Well, we do have a signed merger agreement with Verizon, and so that is the first order of business.

Senator DeWine. Right.

Mr. Capellas. There has been a process undertaken with which, with the consent of Verizon, there could be some
additional discussions. That is a time period that ends on Thursday, this coming Thursday, and so at this point there are
some deliberations between the teams. But we do have a signed merger agreement and if there is any reason to reevaluate, if
the situation warrants, we will, but at this point we have a signed merger agreement.

Senator DeWine. There was one report--and I may have read it very quickly, but one report that Qwest's offer was a bigger
offer. Could you comment on that? That was a published report, and again I may have not read all the fine points and there may be fine points you would like to elaborate on.

Mr. Capellas. Every economic decision, no matter what it is, has a balance of risk and reward and a balance of short
term and long term. So the real question here is when we entered into our agreement with Verizon, the thing we were
looking for was the ability to compete in a market which was changing--wireless capabilities, access economics, financial
strength. And, you know, it is the fiduciary responsibility to take in all the considerations, and so again all those considerations were taken in and our deal with Verizon was really based on long-term ability to go to market.

Senator DeWine. Do you want to comment on Qwest?

Mr. Capellas. No. I don't think it would--there has been a period open in which some conversations could take place, but I
would have nothing to add at this point.

Senator DeWine. Fair enough.

Mr. Whitacre, let me talk for a minute about jobs, and I will put my hat on as U.S. Senator from Ohio for a moment, if I
could. There has been some discussion about job losses for your company overall, and I wonder if you could comment on that and also comment on what impact this might have for the State of Ohio.

Mr. Whitacre. Well, Senator, for the past several years SBC's workforce has decreased in size. It has decreased because
our revenues have been falling, our earnings have been falling. That is part of the problem I addressed in my remarks with this
industry. It is an industry that has lost a lot of jobs because of declining revenues.

Specifically, with the AT&T merger, we have said generally about, it looks like, 13,000 jobs would be impacted across both
companies. But you have to remember SBC would normally lose by attrition 12,000 a year; that is retirements, et cetera. So I
suspect with normal attrition, there is probably not much change.

We are not doing this merger to continue to shrink. This is about changing something in this industry and making these two
companies viable and being able to grow again. This is an environment in which you would hope you could increase jobs if
it is successful, and you do something exciting for a business that has been in the doldrums for quite some time.

As it impacts Ohio, I can't tell you specifically this early in the talks because I don't know what AT&T has located
there. I know what SBC has, and I doubt if our workforce is impacted significantly, if at all, in Ohio.

Senator DeWine. Let me take advantage of the fact that we have the CEOs of four of the biggest phone companies in the
country here to ask a question that may not really have a direct relationship to the merger, but I do have you here and I
think it is an important issue.

As we move and see more and more innovation in the telecommunications arena and develop greater broadband
capability, I think it is extremely important that we work hard to ensure that the disabled are not left behind. As we make
broadband and improve Internet applications, we should be able to come up with better mechanisms to include the disabled in
the communications revolution.

Let me ask each one of you if you could address this question, and that is what are you doing and what can we all do
as policymakers to take steps toward this specific goal? How can we use all this technology to serve constituencies with
different needs and help customized products so that many different people can use them?

Mr. Whitacre?

Mr. Whitacre. Well, I think the new technology is going to enable us to do that, Senator. I can't speak to all the
specific ways, but certainly voice over IP lends itself much more than circuit-switching does to uses of all people of the
United States, be it disabled, be it whatever.

I don't know some of the new uses. Perhaps some of the other participants do, but I think it does give us the ability
to move things around, change things, switch things, have broadband access, wireless broadband access, which certainly in
itself might be a terrific way for the disabled, and that is right around the corner. So I think the era we are moving into
lends itself very much to do more in that, and SBC has always been a greater supporter of that.

Senator DeWine. Mr. Seidenberg.

Mr. Seidenberg. Yes, sir, just two points. We have a good record in this area. We have a disabilities center that we have
in the East. We opened one in the West, so we serve customers directly out of these centers.

I would make the point that a company of our size and scale has the financial capacity to address these markets. These
markets are important to us. People believe that, given our brand and our position, that we should address these markets.
We have the financial capability to do so.

For the past 22 years, chasing all these new entrants in the business, I don't ever remember a new company coming into
the marketplace and saying we are going to compete in the disabled market. So I think that one of the things that we want
to do is to the extent that we can continue to create the financial capacity to address the markets, the disabled market
is one we will always keep our eye on.

Senator DeWine. Mr. Dorman.

Mr. Dorman. I think the promise of being able to fungibly take text and speech and voice and interact them is an
important attribute for various disabilities, the point being if you can type, you can communicate. If you can speak, but not
see, you can be able to communicate your words and have them translated into text for other people. So the mixing of media
between e-mail and voice is going on right now.

This so-called unified messaging capability, as Ed suggests, comes together with voice over IP very nicely because
the interface is typically something as simple as a Web page, where you can listen to your e-mail, you can listen to a voice
mail and you can translate. So we are moving that ahead. AT&T actually holds a significant amount of intellectual property on
speech processing, which is a very important part of this.

Mr. Capellas. Just to echo Dave's point, we also have a center in California which is for the hearing-impaired which
actually will take speech to text and text to speech. So if you have a call that you can't hear, you will send it in, it will
be translated and go back.

I think there is tremendous progress being made in the area of linguistics. Particularly for those who have English as a
second language, it can be deployed over networks and you see that happening. There is voice activation and all the voice
activation that goes with it.

There is a new thing that is being deployed over networks which is called pace-based training for those people who may
not have the same skills educationally to be able to actually have educational programs at a different pace, which is
actually starting to revolutionize some things in education.

There is another one I think we can all do. When you create an environment of a diverse workforce, you will find that those
attitudes actually create environments where people will think of things that are not normal to them. I think just promotion
of diversity in your workplace probably does more to let the creativity out than probably anything we can do, because
creative people will come up with creative ideas.

Senator DeWine. Good. Well, I appreciate your statements, all four of you. This is something that this Subcommittee will
continue to look at. To state the obvious, the new technology that you all are engaged in and what your business is all about
provides just wonderful opportunities for people today that we couldn't have envisioned 10, 15 years ago, maybe even 5 years
ago. It presents just tremendous opportunities for people to improve the quality of life, and we would encourage you to
continue to make that part of what you do and part of your mission. Mr. Seidenberg, I think, speaks very well of looking
at that as part of the mission, being big enough to do it and carry it out, and we appreciate it very much.

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