In re: ) ) FCC MERGER EN BANC ) ) Date: October 22, 1998 Pages: 1 through 106 Place: Washington, D.C. Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In re: ) ) FCC MERGER EN BANC ) ) Commission Meeting Room FCC Building 1919 M Street, N.W. Washington, D.C. Thursday, October 22, 1998 The hearing commenced, pursuant to Notice, at 12:08 p.m., before the Commissioners of the United States Federal Communications Commission, the William E. Kennard, Chairman, Presiding. APPEARANCES: On Behalf of the FCC: WILLIAM E. KENNARD, CHAIRMAN MICHAEL K. POWELL, COMMISSIONER SUSAN NESS, COMMISSIONER HAROLD FURCHTGOTT-ROTH, COMMISSIONER GLORIA TRISTANI, COMMISSIONER On Behalf of AT&T/TCI: C. MICHAEL ARMSTRONG Chairman and Chief Executive Officer AT&T Corporation LEO HINDERY President Tele-Communications Inc. APPEARANCES (Continued): On Behalf of SBC/Ameritech: EDWARD E. WHITACRE, JR. Chairman and Chief Executive Officer SBC Communications Inc. RICHARD C. NOTEBAERT Chairman and Chief Executive Officer Ameritech Corporation On Behalf of Bell Atlantic/GTE: IVAN SEIDENBERG Vice Chairman President and Chief Executive Officer Chairman Designate Bell Atlantic CHARLES R. LEE Chairman and Chief Executive Officer GTE Corporation JAMES R. YOUNG General Counsel Bell Atlantic GEOFF GOULD P R O C E E D I N G S 12:08 p.m. CHAIRMAN KENNARD: Good afternoon. Today we begin the public hearings concerning three major proposed mergers among telecommunications firms. In each of these mergers, the parties promise substantial public benefits. Others have raised some doubts. These three mergers would significantly and perhaps permanently alter the structure of telecommunications markets in the United States. AT&T seeks to acquire TCI, the nation's largest cable systems operator, promising to use the merger as a springboard to develop competitive local telephone systems while also proclaiming that AT&T, the original parent of most local phone companies in this country, does not have the resources to develop local exchanges by itself. SBC, one of the original seven Bell operating companies formed after the AT&T divestiture, seeks to acquire Ameritech, another Bell-operating company. Two years ago, SBC acquired Pacific Telesis, still another of the seven Bell operating companies. SBC today says that only through its acquisition of Ameritech will the merged company be able to offer competitive local exchange service in markets outside its territory. Bell Atlantic, the Bell-operating company that two years ago acquired NYNEX, another of the original banc, now seeks to acquire GTE. GTE is the country's largest non-banc provider of local exchange service. GTE, which unsuccessfully sought to acquire MCI and later opposed the merger of MCI and WorldCom, now argues that GTE can best compete with WorldCom by merging with Bell Atlantic. All of these mergers are being considered against the backdrop of the 1996 Telecommunications Act. That Act, as we all know, promised American consumers more competition. And anyone who reads that Act in the legislative history and anyone who was there when that Act was signed and heard all of the statements from the members of Congress that enacted that legislation know that the vision of that Act was more competition, first and foremost. And the vision was also that the companies, including the companies represented here, would be competing against one another, moving into new markets and not merging with one another. Well, now you have presented us with a somewhat different reality than that vision that was presented in the 1996 Act. And this agency is given the task of having to reconcile that vision, that Congressional vision, with -- with your vision of a more pro-competitive marketplace through merger. I firmly believe that we have to have a comprehensive, robust, public discussion of these issues. This Commission is confronted with transactions which will fundamentally alter the telecommunications landscape. And we need to know, the public deserves to hear why these mergers have been proposed, why do the parties claim that these mergers will be good for American consumers, how will average Americans benefit, how will it bring more competitive -- competition to telecommunications markets, how do you reconcile these proposals with the pro- competitive vision of the Telecommunications Act. I'm pleased that the leading principals of each of the proposed merging parties is here with us today. And I want to thank you each for taking time out of your schedules to join us today. I was -- I must say though, I was a little bit worried when I saw you all congregating earlier, getting ready for this meeting because I was afraid you would announce yet another merger in the telecommunications industry. (Laughter.) But as we proceed with this en banc, I hope that each of you will answer the following question: How will your merger, not hinder, but advance competition and further our goals of promoting competition, lowering prices and giving greater choice to America's consumers? Thank you again for being here. Commissioner Ness? COMMISSIONER NESS: Thank you, Mr. Chairman. Looking out over the executives that we have here today, I feel a little bit like a minister or a rabbi interviewing couples that are proposing to engage in holy matrimony. It's an odd feeling. Under the Telecommunications Act, the construction permits and radio licenses cannot be transferred unless this Commission affirmatively determines that the transfer serves the public interest. And clearly the public interest is implicated by these transactions we're talking about today. These mergers hold the potential to dramatically and irreversibly alter the communications landscape to either enhance or deter competition. And I recognize that a merged entity may be better able to serve consumers than either of the pre-merger entities. It may be able to make synergistic use of existing plant. It may have greater economies of scope or scale. It may be a stronger competitor, better able to challenge others, both domestically and globally. But mergers can also have negative consequences. They may eliminate the potential for merged parties to compete one against the other. They may make it harder for other parties to enter markets dominated by one merger partner or the other. They may reduce the potential for regulatory benchmarking. We need to review these proposed transactions carefully to assess their likely effects, both pro and con. So I am interested in hearing from all of the interested parties, the participants to the proposed mergers, other proponents of the mergers, competitors and consumers. Today's hearing is but the first step in that process. And I would also add that we have an obligation at the Commission to move as expeditiously as we possibly can. I know that when you are in a merger setting, a lot of things come to a grinding halt. It is difficult for employees. It is difficult for the market. And it is difficult for competitors. And so we have an obligation to move as expeditiously as we possibly can to consider and evaluate the proposals before us. We have a truly distinguished panel of witnesses today: Chairman Armstrong, Hindery, Whitacre, Notebaert, Lee and Seidenberg. I really very much appreciate your taking time from your schedules to come here and join us today as we discuss how these mergers will benefit the American public. Thank you, Mr. Chairman. CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Furchtgott-Roth. COMMISSIONER FURCHTGOTT-ROTH: Thank you, Mr. Chairman. I, too, would like to thank the CEOs for taking time out of their busy schedules to come to the FCC today. Millions of Americans invest in the companies that these CEOs head up. They expect those companies to make wise and prudent decisions, and they are rewarded when they do and they are punished when they do not. We have before us today potentially the consideration of three mergers. I would suggest that we have no specific record before us. The Commission has yet to fully collect information on any of these. And so at least I for one am not in a position to comment on the specific facts that these potential mergers may create. I am interested, though, in process, in the process of this Commission in reviewing mergers. Mergers are common in America today. They occur not just in the telecommunications industry. The past few years have been boom-times for mergers. It's been a good time for Wall Street. But it's also been a good time for the American consumer. It is not necessarily the case that mergers and competitive forces that benefit consumers are antithetical to one another. There have also been many mergers in the telecom industry this year and there have been many mergers in the telecom industry in the past decade. I think it is worth noting that there is today more competition in telecommunications than there was a year ago, more competition than there was five years ago, more competition than there was ten years ago. And I have every reason to believe that this trend will continue regardless of what happens to these specific potential mergers. I hope that the witnesses today will focus on the legal authority of the FCC. Does it pertain just to review of licenses or does it pertain to the review of entire mergers? Does the FCC have the authority to establish specific criteria that are not in legislation? Do we have the authority to go beyond the public interest? Do we have the authority to specify what that public interest is? Do we have the authority to place conditions on mergers that are unrelated to specific license transfers? And finally, I think we are particularly blessed today to have before us CEOs who have set up -- who have been through the merger process time and time again. They know the process. They've been through DOJ. They've been through the SEC. I would be very interested in their opinion about how the two interact. Are there issues that the Department of Justice does not consider? Are there instances where the Department of Justice allows mergers to go through that are not in the public interest? Are there issues that the FCC raises that the Department of Justice does not have the authority to review? Are there issues where the review of the FCC does not overlap directly with the review of the Department of Justice? These sort of process issues are very important to me. I would like to understand better what the proper role of the Federal Communications Commission is in reviewing these mergers. These are the same questions that I will be asking to parties who are quite opposed to these mergers. But I think that it is very important that we understand how we should proceed as an agency. Thank you, Mr. Chairman. CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Powell. COMMISSIONER POWELL: Thank you, Mr. Chairman. Just out of respect for Y2K Action League (phonetic), I would note that all of you would please take note, we only have 435 days. And I hope each of you is taking this as seriously as your various agents represent. But I'll be back to you on that. (Laughter.) This is an unprecedented if not auspicious occasion to have such an interesting collection of CEOs and have an opportunity to hear from them, their perspectives on not only their -- the consolidations and mergers that are facing them directly, but the trends in the industry generally. I would like to interject a very important note of caution from my perspective. I am firmly convinced that you can make no grand generalizations about merger and consolidation activity and it is dangerous and foolish to do so. I will take public issue with those who would say that any given merger, before looking at any document or any box of filings, would declare it unthinkable merely as a matter of policy. I find that to be not only wrong, but naive. Mergers, in my experience, are incredibly facts- intensive, case-specific exercises and they should continue to be treated as such whether that's at the -- urging the Department of Justice or it be the Federal Communications Commission or anywhere else that might have a role in that regard. I also take issue with any suggestion that one can declare that consolidation and competition are automatically mutually exclusive. The notion that one cannot equal the other in any way, shape or form is also wrong or naive. The mergers can be both competitive or anti-competitive, depending on the case specifics that are presented. And I would always urge the reservation of judgement with respect to that without -- without making those generalizations. This process is useful, however. But the usefulness lies, it seems to me, into hearing from those who are in this industry. What are the trends and pressures, the competitive trends and pressures, the economic trends and pressures, the -- the situation in capital markets and the competition for capital and most importantly perhaps, the technological trends in the industry that have forced you all and your board of directors to make decisions that these are in the best interest of your shareholders and your companies. I am very interested in hearing your insights as to those trends. Any one merger may or may not be blocked or approved, but it will be quickly replaced with another if the trends or the tidal wave that's underlying them continues to be present. And what's most important for us to do is to understand those forces as much or more as understanding the parties that are before us. Let me finally say something about the public interest standard and our standard of pro-competitiveness. These are by definition in a sense very vague and ambiguous terms. And they certainly offer the Commission a wide degree of discretion. But I would insist that they should not be unguided or unprincipled. We should always be rigorous of asking ourselves, irrespective of what we might think about the merger, do we first and foremost have jurisdiction over it. Secondly, even if we do have jurisdiction over it, does it truly -- do the issues presented truly implicate core functions that are a responsibility of the Commission? Is it really about telecommunications or is it another issue disguised to look like it? And finally we have unique expertise and that unique expertise can be valuable in this exercise. But we also need to make sure that the issues presented truly implicate that unique expertise. I've seen it in the context of a number of mergers, very important issues of public interest raised in the proceedings but they don't in any way implicate our expertise, schooling or core jurisdictional functions. And I think that we have been very good to be guarded against accepting those invitations. And with that, I, in the interest of time, will turn the mike back over and look forward to hearing from each of you. Thank you. CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Tristani. COMMISSIONER TRISTANI: Thank you, Mr. Chairman. Some people have said that in resolving the three merger applications now pending before us, we will effectively decide what the telecommunications market will look in the future. Some say the most efficient, pro-consumer market structure is to have a handful of national or global carriers providing end-to-end service. I expect some of our panelists will make that argument today and I look forward to hearing that viewpoint. The other viewpoint is that allowing these mergers to occur will go too far in concentrating markets and that consumers ultimately will suffer if all the proposed mergers are granted. Indeed, if one is to believe popular magazines and the surveys that they take of consumers in America, some of them say that over 50 percent of Americans are very skeptical of mergers that are occurring not only in the telecommunications industry, but in all the industries. They are skeptical because they do not see consumer benefits. But since that discussion is left for another day, I would simply reiterate that today's hearing is only one side of a very important and multi-faceted public policy debate. I, too, want to thank the panelists for coming here today and I look forward to hearing your comments. CHAIRMAN KENNARD: Thank you, Commissioner. Just a note on our housekeeping matters and procedure. The way we're going to handle this is each of the merger proponents will have 15 minutes to tell us about their merger proposal. And then we'll have a round of questioning from the Commissioners. And then we'll go to the next proposal. I'm told that Mike Armstrong had a pressing engagement and won't be able to stay perhaps for the entire en banc hearing. So if we see you get up and leave, we won't read that the wrong way. And with that, we will begin with the AT&T/TCI presentation. MR. ARMSTRONG: Good afternoon, Mr. Chairman and Commissioners. And thank you for inviting me to talk about what is to me a very exciting subject, and that's our proposed merger with TCI. I am pleased to share why we are proud of this merger and to explain the important benefits it offers to the American consumer. This merger means most importantly real local phone competition for residential customers. It will create a facilities-based alternative to the Bell companies in areas TCI reaches by allowing residential customers to make phone calls over broad band cable. AT&T/TCI consumers will also get more services for less money. After the merger is completed and TCI systems are upgraded, consumers should be able to have many phone lines and services tomorrow for the price they pay for a few phone lines and services today. This merger will also speed the potential of digital, two-way, broad band to the home. AT&T believes that digital broad band is the future of telecommunications. In fact, one of the great attractions of TCI's systems is the potential of bringing digital two-way broad band to the home. AT&T will offer a fully integrated package of communications, electronic commerce, and video entertainment services. And it will do it with the quality and reliability that people have come to expect from AT&T. With this merger, AT&T will become the first major long distance carrier to bring about facilities-based local competition. For several years, AT&T has been trying mightily to find ways to provide our customers with a choice in local phone services. We have previously invested billions of dollars on the premise that two of the paths provided to us by the Telecom Act of '96, resale and the use of unbundled network elements could be made to work. Unfortunately, a combination of incumbent foot- dragging and court-induced uncertainty has made those options either unprofitable or fraught with too many difficulties on which to base a business plan. Our frustration has been particularly acute with respect to reaching our residential customers who are widely dispersed, making facilities deployment to them almost infeasible and always time-consuming and very costly. By tapping into TCI's pre-existing wire into the home, this merger will enable our local entry and allow us to begin to provide competitive services to some of America's telephone consumers, even as we continue to fight for economic access to the incumbent's network. This merger is also just what Congress wanted to see happen when it passed the Telecom Act back in '96. Congress' hope was that cable companies would provide a competitive two-way pipe into residential homes to give these customers a choice of local telephone providers. It's in the conference report for Section 271 which says that "meaningful facilities-based competition is possible given that cable services are available to more than 95 percent of the United States' homes." In short, when it passed the Telecom Act, Congress was counting on the cable wire to help eliminate the Bell monopoly on local telephone service. AT&T with its 48 billion dollar investment aims to begin to make that hope a reality. In order to achieve these ambitious goals, a great deal of work with have to be done to the facilities currently in place. This vision just cannot happen overnight. It's going to take time and capital to overhaul TCI's network. TCI has already independently committed to a 1.8 billion dollar, three-year upgrade of its network to add more digital capacity, more video channels, two-way capability, and wider access for high speed internet connections. This work will be two-thirds done by year-end '99 and about 90 percent complete year-end 2000. After the cable base is upgraded, we then can add the capability for telephone service. The build-out will be driven by our upgrade ramp rate and, of course, market demand. The timing of this deployment will turn directly on when the merger is approved. The fact is that this Commission, together with your colleagues at the state and local levels, have the ability to speed these efforts by a prompt review of the merger. As such, I would respectfully ask your help in this matter. We are committed to making the initial investment and will make significant additional investments to provide residential customers competition for local service as soon as possible. Getting this merger approved as submitted and allowing us to move forward with our plans is vitally important if we hope to see competition develop for the residential telephone customer. It's also important that I touch just briefly on the question of what happens to consumers outside of TCI's service area. AT&T's goal is to offer all consumers a broad array of communication services which are simple to use and affordable to enjoy. But this merger is only a step in that direction. Of more than one million households in the country, TCI only connects to ten million and passes another seven million. If we are successful in our commercial arrangements with MSOs in which TCI has an interest, we might be able to 20 million homes connected and 30 million passed. But that leaves another 70 million customers without a choice. So our merger is a good start, but only a start. We must still find ways to reach the other two-thirds of American households. For AT&T to be able to serve all of its residential customers and to provide competitive alternatives to the broader market, we will require the use of more facilities including RBOC facilities. AT&T and other new entrants will need your steadfast enforcement of Sections 251 and 271 of the Act to be able to offer all consumers a competitive choice of local services. AT&T's merger with TCI is not an excuse for the incumbents to avoid opening the local exchange market, but rather a step that highlights the necessity to do so. Thank you and I'll welcome your questions. CHAIRMAN KENNARD: Mr. Hindery. MR. HINDERY: Good afternoon, Mr. Chairman and Commissioners. We are very excited about the pending TCI and AT&T merger, and the opportunity to offer consumers a broad range of video, telephony and data services. I would like to provide some context on the thinking that led TCI to join forces with AT&T and on what this merger will mean for consumers. In particular I want to stress, as Mr. Armstrong has, that this merger is about competition. We are committed to competing in local telephony and in all of our businesses. And our merger with AT&T is critical to achieving this goal. Prior to the merger announcement, TCI had been considering a number of options on where to take our business in the next millennium. Underlying each of these alternatives was a central defining vision: TCI had to build an advanced digital, broad band platform that would deliver a wide array of interactive services to our customers. We, therefore, initiated a multi-billion dollar digital upgrade and we began to organize our systems into more efficient geographic clusters. Although we were making significant progress, we recognized that this transformation would take considerable time and investment. Meanwhile, other companies, especially the regional Bell-operating companies, were combining their assets to stake out their own new ground for the broad band future. We realized that if we were going to be a serious competitor in this new world, we had to find a partner that could help us achieve our vision in a much more accelerated time frame. Fortunately, along came Mike Armstrong of AT&T who shared TCI's vision on the future of the broad band network. Before long, Mike, John Malone, John Zagless (phonetic) and I concluded that the synergies made possible by joining our companies were palpable and they were undeniable. As part of the merger, AT&T will combine its current consumer long distance, wireless and internet divisions with TCI's cable, high speed internet and local telephony businesses. Some of these businesses will be -- will be placed in a new subsidiary, AT&T Consumer Services. As you know, I will serve as president of this company. AT&T Consumer Services will provide the most compelling selection of high quality, high value local and long distance telephone, video, wireless and internet services ever offered by a single entity, all under the AT&T brand name. It will be the first fully integrated communications shopping center for consumers, making it easy for them to subscribe to, upgrade, downgrade and customize the services of their choice. We will offer these services over a highly sophisticated network platform. TCI's cable head-ins ultimately will be transformed into the nerve centers of an ungraded network based on internet protocol technology. This technology will make it possible to offer video, voice and data services and electronic packets over the same wire. In the home, our customers will receive these packets through advanced digital customer terminals. These terminals are highly complex network computers with enormous processing power and memory. The technical sophistication and investment required to build this advanced platform are significant. This is one of the key reasons, perhaps the most important reason why the merger makes sense. AT&T has unparalleled technical expertise in the areas of network design and implementation. Moreover, AT&T provides a very strong financial base to our rebuild efforts. The merger will significantly accelerate the upgrade of our networks and the delivery to consumers of the advanced services Congress had in mind when it passed the Telecommunications Act of 1996. I am not going to recite here all of the services that will be offered over this new, advanced broad band platform. Rather, I simply want to stress that this merger is the first -- the first truly significant effort to achieve Congress' goal of creating local telephone competition. Absent this merger, both of our companies would have had a difficult time competing in this business. Prior to the merger, TCI did not have plans or the capital in the short-term to provide telephony over its cable systems on a significant commercial basis. However, by combining the complementary assets and expertise of TCI and AT&T, we will be able to provide widespread competition to incumbent local telcos. Let me assure you that Mike and I are both fully committed to this strategy. Equally important, our merger will create local telephone competition without reducing competition in any service. For example, although TCI is one of the largest providers of cable television service in the U.S., AT&T does not compete in the distribution of video programming. As a result, the merger will in no way -- in no way reduce competition in the multi-channel video marketplace. Chairman Kennard, you have spoken forcefully about the need to accelerate the provision of broad band services. In a recent speech, you noted that you do not care who wins the race to bring high capacity broad band services to America's homes. Rather, your goal is "simply to get this capacity into these homes and to get it there quickly." Our merger is premised upon this very same goal. The most important thing the Commission can do to achieve our shared vision is to expeditiously approve this merger. Thank you once again. And I, like Mr. Armstrong, look forward to your questions. Thank you. CHAIRMAN KENNARD: Thank you. A couple of questions. And either Mr. Armstrong or Mr. Hindery could field this. Mr. Armstrong, you mentioned that you will need access to the RBOC facilities in order to provide competition in telephony outside the TCI service areas. And I have two questions that flow from that. First, I'm interested in knowing how competitors who want access to your networks will be able to get access. I mean, you -- you spun out a very compelling vision of a digital, two-way, broad band world for residential consumers. I met not long ago with a gentleman by the name of Rob Glazier who is -- has a very interesting streaming video technology. He tells me that there are agreements between TCI and AtHome which prohibit more than ten minutes of continuous streaming video, presumably to protect the multi- channel video business. Now, obviously, I need to learn a lot more about this situation. But I'm curious about how you assess the competitive dynamic on the AT&T/TCI network for those who want access. And second, I'm interested in your assessment of how the other mergers that we will hear about today might implicate or impact your ability to compete in telephone outside of the TCI regions. MR. ARMSTRONG: Well, let me start, if I may, with access to the broad band infrastructure. I had said in previous testimony before the Congress that to the degree that AT&T in its ownership of TCI, and to the degree that AT&T in its interest in AtHome, but we don't own AtHome, we would further an open broad band strategy. That would be our business philosophy and our business strategy. And it's really predicated on two things: First, it's the right thing to do. And second, it's in our self- interest. Now, if you can't count on one, you should surely be able to count on the second. Content is essential to make money in networks. The only way to make money in networks is to have the highest degree of utilization. It's a very capital- intensive, high fixed cost business. And to invite as much content over that broad band set of network facilities is absolutely, Mr. Chairman, what we want to do. And when I express open broad band, let me be more specific, if I may. By open broad band, I would mean a level playing field in terms of access to that broad band. Number two, I would think that commercial terms of conditions would prevail between the infrastructure and the content providers, and not something that regulators would attempt to get in the middle of. Three, that there be common interfaces so that the content could be at least cost-presented to the distribution system and not a discombobulation of different forms and standards and protocols and specifications and platforms in which for that distribution to take place. The second major point I would make is that our open broad band would be predicated on customer choice in that the broad band facilities would be an open gateway to the internet and not a means for enterprises to capture customers and keep them from the open internet. Number two, we would be very much a supporter of the AtHome approach called AtMedia which enables content- providers to capture customers like a channel today of an HBO captures us when we select it or ESPN or whatever. And so AtMedia, which is a means for content to capture consumers and have a direct relationship. And third, we would also believe that by putting this altogether, what could set us apart is lower prices and that we would favor the unbundling of the modem in order to provide consumers choice and lowest prices. So my answer to your first question is an open broad band environment with a level playing field, commercial terms and conditions, common interfaces, customer choice and lower prices. In terms of the other mergers, before hearing the comments of my compatriots to the left, it is hard to comment before I've heard the proposed great advantages that are going to benefit me. But I would assume that the greatest benefit for America would be the greatest benefit for AT&T, and that is that markets truly open on both an operational and an economic basis so that the resale equation makes sense. All the rhetoric in the world and all the checklists in the world are not worth anything down at the customer level if you cannot operationalize their choice or competitively make the investment of interest. And that probably is my greatest interest that I hope I can stay long enough to hear how that's going to be fulfilled. CHAIRMAN KENNARD: Thank you. Mr. Hindery? MR. HINDERY: Mr. Chairman, if I could just offer a quick -- two quick comments. Before our merger was announced, we had committed ourselves to the same open and level playing field that Mr. Armstrong describes. Everything that we have done in the one area about which there has been some question raised, which is our internet access strategies, has been designed around the concept of complete neutrality -- complete neutrality for any and all OSPs, portals and aggregators. It's a passionate commitment on my part. It's a passionate commitment on Mr. Armstrong's part. We have specifically had conversations with the dominant OSP in this area. We have already offered them the same, the very same access opportunity that they have in the narrow band, dial-up world without any reservation or limitation. On your specific question about Mr. Glazier, the limitation that you're referring to is -- is an AtHome restriction which we imposed on AtHome so that we were the -- we were the determiner of how streaming video worked in our world. I have all the opportunity in the world to have my own relationship with Mr. Glazier. I have met with him on numerous occasions. I think he is a gifted, gifted visionary in this area. I can do anything I want with Mr. Glazier as TCI/AT&T and may well do so. The limitation that he was referring to is one that I imposed on AtHome so that I -- I determined my future in the area of streaming video. But I would simply repeat, this open and level playing field is one that we are both passionately committed to. Every action we've taken has been to stress complete neutrality vis-a-vis any OSP -- any OSP, any portal, any aggregator. And as I said, we have already made overtures to offer them all of the same opportunities that exist for them in the narrow band, dial-up world that they mostly live in today. CHAIRMAN KENNARD: Thank you, both. Commissioner Ness? COMMISSIONER NESS: Thank you, Mr. Chairman. Just to clarify, Mr. Hindery. Does this mean, for example, that a TCI subscriber -- or TCI/AT&T subscriber would -- who chooses to have modem service -- dial-up modem services would not have to pay for AtHome if it wished to have access to a different ISP, or would it still have to pay for that effectively two internet service providers if it chose a different ISP? MR. HINDERY: Commissioner, there is -- there is a distinction between internet service providers and on-line service providers, as you know. COMMISSIONER NESS: Correct. MR. HINDERY: Every customer in my service area has four choices today to access the internet. They can do it in a dial-up, telephone modem-based environment. They can do it through DSL which the gentleman on my left can talk to you more capably than I. They can do it in a wireless setting or they can do it on the broad band network of the cable operator. That -- that's the world that's out there, four ways into the internet. There is this category of provider called an on- line service provider. And there is another group of companies that work in this space called portals or aggregators. What I have adopted, as I said, is a strategy of complete neutrality vis-a-vis both the on-line service providers and the portals and aggregators. And to give you an example, a TCI/AT&T customer who is an AtHome subscriber, having chosen my form of access to the internet as opposed to the other three alternatives, can go to an on-line service provider through my screens where I have designed everything that they can in a sense -- a phrase we use called "double click". They can go straight through to the OSP-provider world to the portal and aggregator world without any interference through my system. So the customer has made a choice as to how he or she would like to access the internet. If that choice is my delivery mechanism, then I have gone a further step which is the one I describe of complete neutrality into the internet vis-a-vis the OSPs and the portal-aggregator community. COMMISSIONER NESS: So bottom line, if one wanted to have a different on-line service provider, one would not have to pay twice effectively for the same service. Is that correct? MR. HINDERY: That's correct. Let me give you a specific example. One of the dominant OSPs, Commissioner, has a program called "Bring Your Own Access". It's called BYOA. $9.95, you bring your provider, whoever he or she might be, and for $9.95, you then get the services of that OSP. I have specifically confirmed our willingness to support, embrace that program. So very specifically to your question, there is no interference. My BYOA opportunity is exactly similar to that of any other ISP in the country with no limitation. COMMISSIONER NESS: Okay. So that essentially means that we are not going to have objections brought to bear on this merger from on-line service providers. Is that correct? You've addressed their concerns. MR. HINDERY: You should not have them. Whether you will have them, you know -- COMMISSIONER NESS: Okay. MR. HINDERY: -- the -- the crickets will tell us whether you will have them. No, you should not, Commissioner. COMMISSIONER NESS: Okay. You have described your plans for upgrading your cable plant to provide two-way service and to provide telephony. I remember from previous conversations well before the announced AT&T merger, that you were well along the way to doing that. And I had applauded your efforts at that time. Two questions. Number one, how does this merger affect those plans? Have you significantly increased your plans to provide telephony and other services, enhanced services to your customers by virtue of this merger because you were already on track to do so previously? And secondly, who will be paying for the plant upgrade? Will these be the rate payers? Will this be your -- your shareholders? MR. HINDERY: I think it has, Commissioner, been greatly accelerated in one respect. My video and data plans and aspirations were -- were, to be frank, fairly well along prior to this announcement. It was the telephone opportunity for my customers that I -- when you and I met on numerous occasions, I was always apprehensive about my company's ability, given some of my prior service history which I am respectful about, the way that I have come in to telecommunications as a company and as an industry, to be successful in all-distance telephony. It was really the -- the opportunity to accelerate that that drove me personally so much in favor of this opportunity. We have at Mr. Armstrong's urging planned -- and we certainly will make no plans prior to your approval and others who might have had oversight on the transaction. But we will greatly accelerate by several factors the number of markets in which we will introduce local telephony by reason of this merger. It will be in -- in two senses, both in terms of the number of markets, Commissioner, and in timing magnitudes quicker than you and I have discussed in the past. The capital upgrade to achieve that has largely been under my budget. Both Mr. Armstrong and I spoke about the billion eight number that I've often spoken with you about, as well. That number was already committed by me, but over a much longer time frame than will occur with Mr. Armstrong's encouragement and support. What all of our customers will do then from that point forward is the -- everything sort of from that point forward is incremental per customer. If we are successful in this endeavor as I hope we will be, then it will be a combination as it has always been, to be frank, of my shareholders, my lenders and my customers in balances that have served their interests well and served my shareholders well at the same time. I personally believe strongly that I will deliver telephony services -- specifically telephony services to those customers much more cheaply because of Mr. Armstrong's support and encouragement than I would have for the technology reasons that I alluded to in my opening comments. COMMISSIONER NESS: Thank you very much. Thank you, Mr. Chairman. CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Furchtgott-Roth. COMMISSIONER FURCHTGOTT-ROTH: Thank you, Mr. Chairman. Mr. Armstrong, Mr. Hindery, you are both relative newcomers to your respective companies. And you bring with you a great deal of experience in corporate management. And you both have a lot of experience dealing with the Department of Justice and the FCC. The -- your respective companies have had a great deal of experience in mergers and acquisitions, and going through the Department of Justice review and the SEC review. I would be very interested in your comments and suggestions and guidance as to what you believe the FCC's authority and proper responsibility in reviewing your merger is. And perhaps you might frame that in terms of the experiences that you all have had in going through this process before. What should we be doing and what should we not be doing? MR. ARMSTRONG: I think it is fair to say that, first, I'm not a lawyer; and second, I didn't come fully schooled and prepared to address that which I will do more homework on to get back with you directly and individually on. My prior expectation as AT&T chairman was that there would be interest on the part of the Federal Communications Commission, that your interest would be driven by the public interest, and not necessarily the issues of law that the Justice Department would be reflecting on and judging on. I did have prior experience with the Federal Communications Commission in my first job in Hughes when we put up a satellite to compete with this cable stuff. And maybe it's a little bit because we didn't do too badly there that, today, cable is most interested in digital and two-way and interactive. But I remember those days, too, of confronting issues such as the must-carry issues and the BNB issues, etcetera. And, again, I found that the Commission executed its responsibilities primarily in the area of public interest. That's about as far as I -- I'm sorry, that's about as far as I can go in answering that. And I'll have to get back to you on the jurisdiction issue per se. MR. HINDERY: Commissioner, I have two quick comments. One, I appreciate yours and the other Commissioner's observation of the need for urgency. I think that is the one thing that the Commission can be helpful to us on. In terms of jurisdiction issues, I, like Mr. Armstrong, don't have the privilege of being a lawyer. But the three things that I would comment, there seem to be three interested parties, those that have the -- the men and women who put together the Telecommunications Act of 1996 which governs so much of what we do, certainly the Department of Justice and this Commission. I fully am respectful of the Commission's license transfer oversight opportunity. I respect it. I've been a party to it many times in my career and I think it's in the confluence of those three: your very specific license transfer review opportunity, Department of Justice and the framing of the '96 Act that this transaction will be reviewed. Thank you, Mr. Chairman. CHAIRMAN KENNARD: Commissioner Powell? COMMISSIONER POWELL: Well, time is running short. But I did want to talk about an area that there are potential overlaps that neither of you have mentioned, and that's particularly with respect to wireless. As I understand it, TCI does have not trivial ownership interest with respect to Sprint's wireless properties. And AT&T, of course, is a dominant player in wireless. And it's one of the areas that there may actually be potential overlap concerns. And so I just would open up that question in a -- in a general way and see what your responses to that would be. MR. HINDERY: Commissioner, the -- it is my company that has that -- that interest, and so I will comment, if I might. We fully anticipate that our ownership in Sprint must be treated in a way that distinguishes it going forward from what Mr. Armstrong and I are contemplated in AT&T Consumer Services. And whether that be through a voting trust or -- or a disposition, either of those outcomes have been anticipated by us and both were respectful to either if that is the choice of, I would suspect in this instance, a mix of yourself and the Department of Justice. The only caution that I would ever raise -- and it's raised not on my behalf, but so much on Sprint's behalf -- is that whatever the resolution of the Commission and the Department is, whether it's voting trust or disposition, it should be over a respectful period of time to not disrupt the capital plans and opportunities of Mr. Esrey who has got a business to build. But we have no interest or intention of seeing that asset go forward in a way that conflicts with AT&T Consumer Services. COMMISSIONER POWELL: Thank you. CHAIRMAN KENNARD: Commissioner Tristani. COMMISSIONER TRISTANI: Yes. I would like to know what your plans are in entering the telephone market, the residential telephone market in places like New York City where TCI has a large equity stake in the incumbent cable operator and in similar areas. MR. HINDERY: Commissioner, we actually do not have that interest any longer. We exchanged our systems in New York for a shareholding in a company called CableVision. We did not have a dominant position in New York. We were not going to be able to be successful. But let me comment because it's an important issue -- COMMISSIONER TRISTANI: And you have similar interests in other areas. MR. HINDERY: -- regardless -- yes, regardless of the geography. One of the wonderful things about my industry, Commissioner, is that it is ubiquitous or darn near ubiquitous in this country; 92 or 93 percent of the homes in America are passed by cable. And in my service areas, the number is exactly the same; that I have this -- this wonderful opportunity to deal with all customers in my market. It's sort of the magic of the broad band network. It is my intention -- I know it is Mr. Armstrong's intention -- to offer a wonderfully seamless world of video data and telephony, all distance telephony, to every one of those homes just as quickly as I can because to do so otherwise would be rude; it would be bad business and it certainly wouldn't be good for my shareholders. So our intention is ubiquitous deployment to every home as quickly as possible in our service areas of a seamless offering of video, data and telephony services, Commissioner. COMMISSIONER TRISTANI: I have a follow-up on the jurisdictional question that Commissioner Furchtgott-Roth raised. And you talked about -- and maybe I misheard you -- but the FCC's opportunity, license renewal opportunity. And I thought it was an obligation. MR. HINDERY: I -- my glass is half full and yours is half empty. It's a great -- this one is a great opportunity for you, Commissioner. (Laughter.) Go at us. It's a great opportunity. It's a semantic distinction, Commissioner. I was not trying to be disrespectful of your oversight. COMMISSIONER TRISTANI: Thank you. CHAIRMAN KENNARD: Thank you. Were there any additional questions for the proponents of the AT&T/TCI merger? We're running out of time, but please go ahead. COMMISSIONER NESS: One quick last question. Your last answer prompted this. MediaOne, Cox and CableVision are all in various stages of offering telephony on their systems. We are finally beginning to see that competition and it's coming not just from folks like Richard Notebaert's company, but also from companies such as these cable systems. Are you prepared where you -- you were talking about ubiquitously going in and offering telephony and other services. Are you prepared to go in and compete against these other cable systems and the provision of all of those services or will we have what has historically been the case with cable where the land has kind of been divided up among the major players? MR. ARMSTRONG: I think, if I could take that on, Commissioner, Leo mentioned that there are a number of ways to bring these services. There is wireless, and that's both fixed and mobile. There is the ADSL. There is the narrow band that exists today. And there is cable. Obviously, all of those are going to be competing for some similar markets, taking their technologies and trying to exploit their inherent advantage against each other. And so from an AT&T perspective, we would like to engage with as much broad band as we can, be it fixed wireless, be it ADSL, or be it cable, in order to bring those services to our some 66 million consumers. And I can envision that, indeed, where we do not engage in commercial arrangements or equity arrangements or affiliate arrangements or any other kind of definition of an arrangement, that we will be competing with those that we have not been able to define an arrangement with. COMMISSIONER NESS: Thank you. CHAIRMAN KENNARD: Thank you very much. We will now move to the next panel which will be the SBC/Ameritech proposal. Mr. Notebaert and Mr. Whitacre are here representing that combination. MR. NOTEBAERT: Good afternoon, Mr. Chairman, Commissioners. Thank you for the opportunity to address the full Commission. For many years, when we talked about a global marketplace, our discussions were largely conceptual. As we approach the twenty-first century, that concept has become a reality. The competitive global marketplace is here, delivered to us by a breakdown of trade barriers, the opening of markets through means such as the WTO and TA '96, sweeping political changes; increased international exchange among individuals, institutions and businesses; and significantly enhanced by communications capabilities. The worldwide business community's response to this paradigm shift is clearly predictable. Visionary companies within the industry and within other industries such as pharmaceuticals, to auto manufacturing and to petroleum, are consolidating. They increasingly recognize that success is a -- in a competitive global environment will necessitate larger, more diverse footprints than they currently possess. And although some insist on casting this logical response in dark and devious light, at least when it applies to others, more rational voices explain that such mergers are predictable. In fact, they are inevitable. In testimony before the Senate Judiciary Committee, for instance, Federal Reserve Chairman Alan Greenspan explained that the U.S. is experiencing not the first, not the second, but the fifth period of major consolidation in this century. He counseled Senators to view mergers in a broader context by saying -- if I could use his quotation -- "When trying to understand how to react to this development, I would hope that we appropriately account for the complexity, the dynamicism of modern free markets." It is those modern free markets, their implications for our industry, and the response of SBC and Ameritech to those implications that I will briefly address before you this afternoon. An international business environment requires an international communications infrastructure. That is fundamental. And quite reasonably, customers increasingly demand that the builders of these infrastructures provide them with the capability to deliver data or connect people across town, across the country or across the world. Corporations with worldwide business interests seek the efficiency of a single provider for all their telecom services. It is clear that the business of these largest and most sophisticated business customers will move to those companies that come closest to providing the goal of one-stop shopping for end-to-end service. And it is clear that to be competitive in the critical high-end market, communications providers must have significant global reach, a large base of existing business customers and a wealth of technical, financial and human resources. Providers here in the United States and around the world are racing to achieve these goals. Over the last couple of years, MCI acquired MFS and UUNet (phonetic) then was acquired by WorldCom. Now, VectrumMine Company (phonetic) had facilities in 21 foreign cities and a clear intent to compete on a worldwide basis. AT&T, already the world's largest communications provider, has reenforced its competitive position by buying TCG and McCaw Cellular forming an alliance with British Telecom as well, and proposing to acquire TCI and Vanguard Cellular. Japan's NTT and the GlobalOne alliance led by DeutscheTelecom, FranceTelecom and Sprint are aggressively targeting international businesses including those headquartered here in the prosperous American market. Please understand, I am not here criticizing any business combination. These companies understand the realities that we understand. They are preparing to compete in the same market environment that is ahead of all of us. We realize that the telecommunications marketplace is moving towards a world in which two kinds of companies will have the opportunity to succeed. One will consist of six to eight large, international providers that offer a full range of services. The other will be a larger number of market-focused niche players that provider services to specific customer groups. Particularly relevant to this discussion, we also realize that those customers caught in the middle are likely to be nibbled away from the top and from the bottom. Now, what does that mean to SBC and Ameritech? That we must grow and be better able to meet our customers' needs. Otherwise, we will be vulnerable to a number of risks including the erosion of business revenues, profitability and eventually viability. Ameritech's preference is to align with a similarly well-run, domestic provider, one that shares our commitment to growth and our excitement about the future of this industry. Our proposed merger with SBC has never been driven by cross-cutting. It has always been driven by growth. Growth sufficiently in scope and scale to meet customer needs and to compete for a place among the global, full-service providers that will emerge to serve a dynamic international marketplace. By merging, we'll have the opportunity to continue to serve customers with whom we have built successful, longstanding business relationships. We will be able to create economies of scale to become an effective global competitor. And we'll be able to capitalize on the technical, financial and human resources needed to carry out a global competitive strategy. In addition, by merging, we will have the freedom to leverage our core competency in providing local service, but in a broader context. Unlike AT&T or MCI which already operate throughout the United States, SBC/Ameritech must as a step in our global effort become competitive in major markets throughout the United States where we do not now operate. Our combined enterprise cannot set out to provide integrated service to global customers in London or in Tokyo without also providing service in New York and in Atlanta. And in a moment, Ed will offer you a more comprehensive explanation of our plans in this area. Ladies and gentlemen, the world is not standing still as we debate this issue. The decisions made here may slow, but they cannot halt the inexorable march toward the global communications marketplace. America's policy decisions will instead determine the extent to which American companies will have the opportunity to be players in the global marketplace. It should be up to customers to decide which companies succeed. The FCC should not try to design the free market up front and push winners and losers. It has an important role in this future, one of enforcement on the back end. The SEC, Securities and Exchange Commission, works this way and it works very effectively. And so should the Federal Communications Commission. Stifling the competitive benefits of mergers in the telecom industry will only result in a diminished leadership role for the United States. The visionary course is to maximize the chances for global success by United States-based telecommunications enterprises. By approving the SBC/Ameritech merger, the Federal Communications Commission will take a significant stride towards that desirable end. Thank you. CHAIRMAN KENNARD: Mr. Whitacre. MR. WHITACRE: Thank you, Mr. Chairman, and good afternoon, Commissioners. Thank you for the opportunity to discuss this merger and why I believe it is in the public interest. I believe this merger is the event that allow SBC and Ameritech to enter local markets served by other companies, be it RBOCs or CLECs or IXCs, and to bring a competitive alternative to the business and residential customers. We are focusing on not just the lucrative business markets, but we are focusing on the business and residential customers. In-region customers I believe will benefit because business customers who have multiple locations outside our territory will have a chance to deal with one vender, and they want that. And I believe they sent you letters to that effect. Another point I think is important, large business customers, as you know, provide a disproportionate share of contribution to our companies. The continued loss of these customers, big customers, as is now occurring and the fixed costs associated with it, which are large, will be spread over residential and small business customers. That will result in rising cost, the very thing that public policy has discouraged up until this point. I believe consumers will have a greater selection of products and services because other companies will be forced into our territory to compete. These other companies will respond to our competitive interests into their companies. And frankly, I think that is already happening because our biggest competitors seem to be our most vocal -- seem to be our most vocal opponents. I also believe our capabilities for in-region customers is enhanced by our ability to offer new products and new services due to the scope and scale of this merger. I feel like I must address the question, "Are we trying to recreate AT&T on our own; are we trying to create an AT&T East and an AT&T West. We are not trying to do that. That's wrong. If you will think back, the old AT&T had 50 states. It had one hundred percent of the long distance market. It had a legally protected franchise monopoly for 80 percent of the access lines and was vertically integrated with the most powerful equipment manufacturer. Look at that in the context of this merger. We will be competing with many other carriers: Bell Atlantic, AT&T, MCI WorldCom, Sprint, CLECs and on and on. We will have zero marketshare in long distance. We will have no legally protected franchise monopoly. Maw Bell is not and should not be put together again. I believe it is in the interest of this country to have another national and international carrier to complete in -- to compete in the global markets as Dick said. This merger is essential, I believe, for SBC to have the size to compete with the AT&T, BTs, the Sprint, DeutschTelecom, FranceTelecoms, the MCI WorldComs and the NTTs. This merger and the national-local plan associated with this merger will open competition as envisioned by the law and it will deliver the benefits of competition to markets around the country. In summary, I believe this merger is good for customers, it's good for employees, it's good for stockholders, it's good for competition and it's good for this country. Thank you. CHAIRMAN KENNARD: Thank you, Mr. Whitacre. Mr. Notebaert, you mentioned your -- your goal which is to be a global competitor. And I certainly don't disagree with that. We obviously -- in this country, we have the finest telecommunications system in the world. We have been in the forefront of developing many technologies that have been driving economic growth here and around the world. And I think I speak for all of my colleagues here in saying that we want to do everything we can to advance that. But my question for you, sir, is don't you think that another important and equally important, I might add, role for this Commission is to ensure that there is competition in local telephony. And what I don't understand about your proposal, and perhaps you can clarify that for me today, is you have told this agency that you have -- you plan to move aggressively into local markets outside your regions. And you are prepared to make huge investments to that end, and to serve residential consumers outside your region. We just heard Mike Armstrong say that his company has invested huge amounts of money in this exercise and been unable to do so for a variety of reasons. Why will you be different? How will you be able to -- to meet the challenges that apparently AT&T was not able to in competing outside your regions? MR. NOTEBAERT: Mr. Chairman, I think -- I think first of all that it is important for a participant in the international or in the world communications marketplace to compete both home and abroad. I think both are important and, therefore, it is within the purview of the Commission to look at both. If I look at our experience in cable television, we've been willing to make investments in 80 franchises to stay the course in spite of a long period of payback or cashflow break-even over three years and five years on profitability. I can't speak to why another company was unwilling to make the type of investment and stay the course and approach profitability the way we have, by investing in infrastructure and facilities. The fact that we have done this already and the fact that we have stated publicly that we will follow a national-local strategy is one that will take the resources of both of our combined companies and create the kind of competition this Commission wants in the domestic markets. MR. WHITACRE: I would say, Mr. Chairman, that we think about 65 or 70 percent coverage is what we need to make this work. This merger will allow us to get 65 or 70 percent coverage of the U.S. and the major markets, the 20 major markets inside and 30 major markets outside. With that kind of coverage -- and we are willing to make the commitment to go both residential and business - - we think we can make a business case that will work. Now, make no mistake about it, our entry into long distance is critical to that working, the national-local strategy and the bringing long distance. It's certainly a very key part of that. And we're starting with -- we think it will take 8,000 employees to do the national-local piece. And remember, we're starting with no brand name in these 30 locations, we have no network, we have no business office, we have no long distance, we have no markets. But we believe that given the coverage that Ameritech and SBC can cover, and with our expertise, and with the addition of employees, we believe we can make a viable business case. And this is the first, to my knowledge, promise that a company will go compete in both the residential and business markets. CHAIRMAN KENNARD: Well, is this going to be an acquisition strategy? I mean, wouldn't it be easier if you were to -- to take the efficiencies from this proposed merger and go out and buy CLECs and move into out-of-region markets that way as opposed to trying to do it on the ground, if you will, by hiring employees and doing it from scratch? MR. WHITACRE: Well, we'll do a combination of those. I don't want you to think it's totally from scratch. We will be network-based. We plan to put in our switching machines, as an example. We will put in some of our outside plan. But we will do some of the things that you're talking about, or certainly leasing. And maybe I should look forward to purchasing from Mr. Armstrong unbundled loops in the cable television business where he operates. I might be a customer of his. (Laughter.) CHAIRMAN KENNARD: I'm so sorry you left now. MR. WHITACRE: Yes. (Laughter.) MR. WHITACRE: But there are many different ways to do it. We've done extensive planning as far as we can go. We realize it's a risky strategy, but it's one that will, we believe, bring the competition that the law requires. CHAIRMAN KENNARD: And can you tell us, just for the record, why you haven't pursued this strategy independently to date? MR. WHITACRE: I just told you most of it, is that I don't have 8,000 employees. Ameritech gives us a nucleus of managers to do that is one reason, the big reason. We do not have the financial ability to try this on our own. We are a big company. So is Ameritech. But this is a big project. MR. NOTEBAERT: Mr. Chairman, I would also say it's one thing to do it in one market. But to do it on the scale that we are discussing here takes a great deal of resource. If you look at my company, the company that I work for, we're a fourth or a fifth of the size of an AT&T. We aren't even comparable in revenue streams. And so the idea of gaining the financial resources, we would still combined be smaller than many of our competitors. But we would have the resources to go out and do this on a broader scale which is very important to the success of the venture. CHAIRMAN KENNARD: But, Mr. Notebaert, I'm sure you're familiar with the CLEC industry and its growth over the last few years. And those companies have been able to execute strategies that allow them to compete quite successfully in many cases in local markets without having the economies of scale that a combined SBC/Ameritech would have. MR. NOTEBAERT: There are no CLECs that operate in 30 national markets. The CLECs are mostly targeted in individual markets. And if you look at what they have done, they also run from a financial analyst point of view on a cashflow market valuation basis, on a cashflow basis. We are on an earnings model significantly different. And we intend to target a far broader reach rather than to just be in one town or another town. And, yes, you're right, I do have familiarity with it because we have 50 competitors in our market, 20 of whom are building facilities. But they aren't broad across the entire country. MR. WHITACRE: And that's a key difference. We're talking about going to 30 markets and globally versus CLECs who are mostly in one region, one area or are niche players. The commitment we're making is much larger here. CHAIRMAN KENNARD: Thank you. Commission Ness. COMMISSIONER NESS: Thank you, Mr. Chairman. The commitment that you're talking about, going into 30 markets including providing residential service, not just in isolated pockets, but broad-brush, is that an enforceable commitment? MR. WHITACRE: Well, I would hope you wouldn't think it would have to be enforced, you know. Our management decided that together. We've made that commitment to our board of directors and presented that business case to them and they approved it. We've made that commitment to our share-owners and have substantially represented that in the information and material we've put out. I guess there is a matter of trust here. But when we say we'll do it, we'll go do it. I would hope your -- I don't know if that answers your question or not in terms of enforcing. But we're honest people and we'll go do it. COMMISSIONER NESS: One concern that we've had about mergers in general is our ability to benchmark. And benchmarking we've talked about previously in other contexts where multiple Bell-operating companies said that something or other was possible and then it would turn out that a small company called Ameritech would break ranks and would go and do it with customers' first proposal. For example, with the LRN approach to number portability as another example. Mr. Notebaert, hasn't this led to better, more pro-competitive public policies? MR. NOTEBAERT: Well, my comment on benchmarking is that this is a practice we started back in the early '80s. Benchmarking today, I don't believe -- and we -- we have used this -- is as useful as it has been in the past. Most of the benchmarking that, for example, our company does now is outside of our industry. Where we look, for example, for inventory control to a Toyota, we don't look within our industry, where we look for customer service to a Neiman-Marcus or a Nordstroms. And so I think benchmarking, as far as the way it's been used in the past, is something that we've moved away from. I think it's important for the Commission to consider that the utilization of benchmarking is not as effective a tool as it has been in the past. It just doesn't work the same way. And that's all I would say there. COMMISSIONER NESS: We have been pursuing -- actually, now opening up all of the markets across the country to competition. You talk very eloquently about how you plan to go into other markets to provide local competition on the ground. Can you comment on the record what you will be doing to increase the openness of your markets, the combined market to your competitors with specificity? MR. WHITACRE: I guess we both can answer that. I think the market is open. I'm sure you expected me to say that. COMMISSIONER NESS: You didn't disappoint me. MR. WHITACRE: Good. But it is open. I went back and looked at some statistics. We've lost almost two million customers. We have exchanged -- I went back and looked just for the heck of it. We have exchanged 17 billion minutes with CLECs. Well, that sounds like an open market to me. It's not like there is no traffic, no competition. There are hundreds of competitors against us. And we're wrangling with the 271 process as you know. But if you look at the statistics, they are quite dramatic. I personally believe the market is open. I believe it's open under the definition of the law. And I think the numbers would back that up. I don't know, Dick, if you would want to add something to that or not. MR. NOTEBAERT: Well, I would repeat the fact that in our area, we have 50 competitors. Twenty of them are building facilities. We exchange hundreds of millions of dollars in reciprocal comp. There is competition. We've stated publicly that we've lost close to a million lines in five states. We have competition. It may not be the kind of competition that some people want where a specific company is chosen to compete because of its own strategies. But there are numerous companies who have entered niches or individual cities and communities. And if you read their prospectus and if you listen to what they say to the analysts, they would tell you that they are being very successful. What they may say in this room may be a different agenda. COMMISSIONER NESS: Finally, Mr. Notebaert, your company is saying that its planned entry into Missouri was a limited wireless play on the part of Ameritech Cellular. Sprint, on the other hand, says Ameritech Communications International sought certification from the Missouri Commission to provide exchange services in all areas served by SBC and that ACI had negotiated with SBC comprehensive interconnection agreements covering resale and bundled network elements, etcetera. Can you comment on -- on those two, what would appear on the surface to be very different perspectives on the same transactions? MR. NOTEBAERT: St. Louis was specifically targeted at wireless. All of the work and all of the investment was done within the wireless business, within our St. Louis wireless business. It was not done by any other part of Ameritech. As far as ACI goes, the fact that we applied for those licenses across the entire United States, in almost every state, we did that specifically for a given customer so that a customer such as United Airlines that might tell us that they wanted us to do something, that we could be in a position to do what they asked us to do. That filing was not part of any strategy at all other than to take care of the few customers we have, over 20 customers -- around 20 customers -- under our managed services agreements. COMMISSIONER NESS: Thank you, Mr. Chairman. MR. WHITACRE: I might add, in Missouri, there are 45 others licensed to compete in Missouri. CHAIRMAN KENNARD: Thank you. Commissioner Furchtgott-Roth. COMMISSIONER FURCHTGOTT-ROTH: Thank you, Mr. Chairman. Mr. Notebaert, Mr. Whitacre, you both have been in business for many years and you probably have seen a lot of mergers and acquisitions, not just in the telecommunications industry, but perhaps among your suppliers, perhaps among your customers, perhaps just reading about it in the general trade press. There is a CEO -- what's his name, Bill Gates or something like that -- he has a little company that's in a little bit of trouble with a little agency down the street here. That little agency I think may be reviewing your merger. They certainly review all mergers of any size in this country. I can think of some mergers that have gone through the Department of Justice process that never got out. The Department of Justice imposed conditions or took them to court. The parties backed out. I can think of other instances of mergers that did get through the Department of Justice that turned out to be whopping failures, very bad for business, very bad for their shareholders. The Department of Justice is not a -- they're not an amateur agency. They work very hard at what they do. And I -- I'm sitting up here and I'm trying to think of an example. And I'm hoping maybe you all can help me think of an example of a merger that was not challenged by the Department of Justice or that got through the Department of Justice after being challenged, after having a lot of conditions put on it, that turned out to be in some sense of the words, not in the public interest. I was wondering if you all could help me think of something like that. MR. NOTEBAERT: Well, I can't think of any transaction that goes through the scrutiny that our company goes through every day that would fit your description of not turning out because there are very few companies in this country that go through the daily scrutiny that a company like Ameritech goes through at multiple levels of government: public interest, antitrust. It would be very hard for me to think of one. But that's not to say there isn't one, Commissioner. But I can't think of one. MR. WHITACRE: Well, I'm -- I'm not a lawyer either. But my understanding is that Justice looks at the anti-competitive parts or the antitrust parts of a merger. And then this Commission, for an example, would look at the suitability of the applicant and take into consideration the public interest that it would go with. I'm not experienced particularly mergers. We've done a couple. In fact, we have one pending before you now and we've done Pacific. But what Dick says is correct, and I would hope that we don't get this merger hung up on the fact that the Commission would revisit a lot of things that the Justice Department is charged with doing because it does need to move on. But I can't think of any in the category that Dick is referring to or you are referring to. COMMISSIONER FURCHTGOTT-ROTH: Thank you. CHAIRMAN KENNARD: Commissioner Powell. COMMISSIONER POWELL: I would address this question to both of you because I think there is a tendency, probably drive by the 271 process, to view as synonymous the notion that there are competitors in a market or even that the market is open and blur that with the concept of market power. It would seem to me that you would have to concede, or I will at least let you challenge the proposition, that within your regions you have some significant degree of market power by virtue of the percentage of the markets over which you have customers and the percentage of those customers and markets that are dependent on essential facilities that are within your control. And one thing I think, to get to the nub of it, that I think raises some concern with respect to this merger is not so much that the national -- national-local strategy is not potentially an exciting one or viable one or one that might suit the public interest, but more at what cost; whether the extension of market power over a significant degree of the country in the short-term, how that weighs against the potential benefits of a strategy of national- local. So that would -- I'm going to ask both of my questions at the same time for expeditious purposes. So -- so, one, just sort of a general commentary about how you perceive the question of having market power over essential facilities that would exist now in a combined basis in two regions covering a substantial part of a market rather than the focus on national-local strategy. Secondly, Mr. Notebaert, particularly for you, I couldn't agree more at the trend globally. And I can also sympathize with the desire to want to compete effectively with that. And I would -- I think I would go so far as to say that that really is a relatively significant company in terms of size and resources, etcetera. But it doesn't translate or is not intuitively obvious to me why the company that you would want to join up with in that venture would be another domestic local exchange company instead of, for example, a significant company that already had overseas operations or maybe you're going to tell me that each of you do in your own regards, which you do. But -- or potentially even a long haul carrier or long distance carrier as opposed to a domestic purchase. So help me with the story that the -- the importance of globality leads to a combination of two at least primarily domestic local exchange operations. MR. NOTEBAERT: Do you want me to do the first one -- COMMISSIONER POWELL: Sure. MR. NOTEBAERT: -- on the market power over the physical infrastructure? The Telecom Act and what has occurred, our markets have been opened up and there is a great deal of scrutiny to ensure fair treatment towards anyone who would like to use an unbundled loop or who would like to buy our product. We have complied with your pricing methodology, our state commissions have. And, in fact, I think if you go back and look under the prior administration with this Commission, Ohio was used as one of the examples to help you create that. So, in fact, we have complied with that. And that takes away any market power we would have that's looked at by the state. And it is definitely looked at by you. And I would also tell you, some mornings when I am standing in my office and I look up and I see AT&T's logo or WorldCom's logo or I pick up the paper and look at 20 ads in the Chicago Tribune maybe or the Detroit Free Press, I think there is a lot going on and a lot of very strong participants in the competitive communications business that we are in. To your second question, as I traveled Europe and the world and I talked to other corporations, what I found was that our customers, a hundred plus Fortune 500 companies that operated out of the upper midwest, operated in far more than just the upper midwest. And they want a global reach. I also found that when I went to other international companies, not American companies, they felt the need to have a larger domestic footprint for us to be able to form alliances and ventures. That brought me to a situation where if you want to participate in the global marketplace, communications marketplace, you needed a partner to increase your footprint. In discussions with SBC, we found a common script. We found a common approach in the sense of customers. That was important to us. We cannot join, nor could we ever nor did we consider in a serious way, joining with a company that is in the long distance business. That would have been a very interesting hearing if I would have been sitting here with you -- COMMISSIONER POWELL: That's the next one. (Laughter.) MR. NOTEBAERT: That would have been very interesting. So that is kind of off the table. It's no different than we cannot invest in an ISP facilities carrier, UUNet or anyone like that. We are precluded by you from doing that. So the need for the broader footprint, to follow our customers, to deal with those customers such as Chrysler or General Motors or Ford or the banking industry or manufacturers like Motorola, we had to do this for our customers. Our customers took us down this path. COMMISSIONER FURCHTGOTT-ROTH: Can I just follow up on that real quick? The pro-competitive components that you assert with respect to the global strategy as I hear it seems to be primarily accrues to the benefit of the business segment of the market. Are you simultaneously making an argument that that global connectivity has significant pro- competitive benefits with respect to residential customers? MR. NOTEBAERT: Absolutely. If you look at pricing methodology that we use in this country, social pricing, where we sell to residence consumer customers at or below cost, or very close to that level, you find that the moneys to do that come from other segments of the businesses, business access charges, etcetera. If we lose those major accounts, those large businesses that we're talking about, then in fact the source of funds that we create for the social pricing, it underpins the social pricing that we have in this country and it will be jeopardized. And its viability will really be in question. We are today dealing with access charges. You are; we are. We have been cutting them every year. We also have to deal with the fact that we have to find a way to make sure that service to consumers is affordable -- COMMISSIONER FURCHTGOTT-ROTH: Thank you. MR. NOTEBAERT: -- and stays affordable. CHAIRMAN KENNARD: That's interesting. Thank you. Commissioner Tristani. COMMISSIONER TRISTANI: Yes. I have a couple of questions. One is a follow-up on Commissioner Ness' question on benchmarks. And as I understood you said, you don't use them any longer -- MR. NOTEBAERT: No. COMMISSIONER TRISTANI: -- because you use -- well, you use other -- MR. NOTEBAERT: We don't use them as much as we did in the '80s. COMMISSIONER TRISTANI: But -- but what do we as regulators do if we lose the benchmarks because they've been very, very useful? MR. NOTEBAERT: I would urge you to consider enforcement and a shift in the direction that you go. If you look at the 271 filings and what the number of benchmarks that have been created by the regulatory bodies and the Justice Department in that case, you know, it is a huge number. None of us managing a business would consider that number of benchmarks for any purpose. COMMISSIONER TRISTANI: No, but I'm talking about having less players to compare. MR. NOTEBAERT: You still have the same number of customers that you have to deal with. You still have multiple players. In fact, today we have more people participating in the communications industry than we had five years ago. There are far more companies. I think fewer benchmarks that are more specific and targeted should still be used. But not to -- not to the extent -- I mean, it's gone -- it's not even micro. It's really detailed. COMMISSIONER TRISTANI: We may be talking about two different things. MR. NOTEBAERT: Yes, I'm sorry. COMMISSIONER TRISTANI: But let me -- let me follow up on something else which Mr. Whitacre brought up. He said we shouldn't be concerned about a new AT&T, AT&T West, AT&T East. It's a very different picture we're seeing here. I would like to ask both of you, would it be okay to end up in a year or two with one big local exchange company? MR. WHITACRE: Well, I said we shouldn't put AT&T back together. That was a bigger description. Would it be okay? I don't know because it's not even a possibility. It's not going to happen. There are too many companies. There are too many niche players. There are too many regions. I think there is over 1,300 local exchange companies now. COMMISSIONER TRISTANI: But if we -- MR. WHITACRE: It's not going to happen. COMMISSIONER TRISTANI: -- approve the two mergers and some of the players aren't here that are before us, who is to say that in a year or so, you come back, say, to even compete better globally, to even do a better job to promote competition because everything hasn't worked the way we wanted; we need to get together. MR. WHITACRE: Well, I suspect -- I'm no lawyer, but I would suspect there would be antitrust concerns crop up, there would be other concerns. And what you -- what you propose or suggest in my opinion is just not going to happen. You reach a certain scale and that's really what you need to do what you want to do, and that's it. MR. NOTEBAERT: You have two national players now in WorldCom and in AT&T and Sprint, so you have three. The fact that you're going to have two or three more or four more, what I said in my opening remarks, six to eight, I think it is a good thing for the country. We should get rid of the expression, "regional". We should think about this as no safe haven. Every company should be able to compete. It should be inclusive. We have a lot to do. I think when you get to that level of having that number of large national and international players, what you will see is not a further consolidation domestically, but something that more along the lines of an outreach on an international basis, the formation of alliances that way. And you've already seen AT&T start that with BT and Sprint, implement that with FranceTelecom and DeutscheTelecom. So I think you will see a shift. COMMISSIONER TRISTANI: Thank you. CHAIRMAN KENNARD: Thank you very much. I wish we had more time. But unfortunately, we will have to move on. But thank you very much for being here. We really appreciate your participation. The next panelists are the principals from Bell Atlantic and GTE who have been waiting patiently in the back of the room through the other panels. I am reminded of my days in law school. When I wasn't quite prepared, I used to back-bench it, which I would sit in the back of the room and hope I didn't get asked questions. So I'm glad that you're now in the front row and prepared to tell us about your merger. MR. LEE: Thank you, Mr. Chairman. And I -- I thank you and the other Commissioners for inviting us and giving us a chance to talk about our merger and how it is going to help this nation move forward in continuing the number one global telecommunications country in the world. Let me say, I submitted some prepared remarks. But in the spirit of time, in essence what I would like to do is just stipulate those for the record and just say a few things off the cuff -- CHAIRMAN KENNARD: Certainly. MR. LEE: -- kind of summarize them and then get to the fun part of the day. And Ivan I think will do the same. The fun part of the day is some questions. First, we're here today to ask for your enthusiastic support for this merger because we are going to convince you that it is pro-competitive and it is pro- consumer. The Telecom Act was intended clearly to breakdown geographic barriers and product line restrictions in the spirit of promotion broad-based competition. We ask you to think of our merger in the spirit of this open market, this new national market that is being created and that is being talked about so far. The characteristics of that market are pretty straight forward. One is it's going to be national; that you need a national footprint to be competition. Two, you need international reach. Three, you need a full range of products. The product restrictions do not please customers and are inappropriate for the longer term. And fourth, you have to have a data capability. You have to be -- the internet is exploding. The internet is exciting. All telecommunications companies in the future need internet capabilities in order to serve their customers. Our company has invested a lot in IP networks and IP technologies. That started originally dominated by three inter-exchange carriers. This merger is critical to helping us, our new company, be a major player for expanding and growing the internet. Second, we have a unique footprint that my associate, Allen, will point up here. And, in fact, it gives us unique opportunities to be a player in this new national market that we're talking about. You can see, in essence, GTE is a chain of islands within what we call a see of RBOCs. As a result, going out of our franchise is an opportunity. But it's slow and it is expensive. Unlike the inter-exchange carriers that -- one of whom was here today, we do not have a national brand. We are not known outside our own franchise territory. Plus, we don't have an existing customer base. We have to start from scratch. We have not -- the inter-exchange carriers have customers across this country ubiquitously today. We do not. So what we have in our merger with Bell Atlantic is an opportunity to follow the customers. They are, as you know, regionally in the northeast. They have major divisions and major operations. They are customers where they have relationships now across the country. And it gives us an opportunity to build our franchise opportunity, many of which are close to our current franchises, but not in our franchises; and then to build after that success into the residential and consumer market. We also have a national backbone. Allen, if you could just put the other chart up for a minute. The red dots on that chart, by the way, are the Bell Atlantic customers who are close to our franchises and would be targets for us in an out-of-franchise strategy. Lastly, we have our -- our national network that we're building. Obviously, it is -- it is principally IP- oriented. It's going to be very expensive to put new products and services on there with our dispersed customer base. It will be much, much more efficient and will do much more for the Internet by having the merger behind us. And lastly, of course, we're also in the long distance business and we have total confidence in Ivan and the Bell Atlantic team winning your approval of 271 applications. And by becoming the fourth major facilities- based carrier as a result of this merger, this network will be a significant contribution to the -- to the nation's telecommunications system. In summary, what -- what I'm trying to say, this - - I'm trying to describe the world of future, not the world of the past. Clearly, the new company will be able to enter this new market faster and more effectively than either company could have done before. So we think this merger is clearly in the public interest. And we look forward to your support and we look forward to answering your questions today. CHAIRMAN KENNARD: Thank you, Mr. Lee. Mr. Seidenberg. MR. SEIDENBERG: Good afternoon. Just a quick introduction. We do have a lawyer at the table. (Laughter.) Okay? Jim Young is our general counsel and Geoff Gould of course you all know. I think in the interest of getting to your questions, if you would agree, I can stipulate that all of these mergers are good for America and you would agree with that. (Laughter.) And what I'll try to do here is I'll pass over my written comments and try to address just I think a couple of the points. Chuck and actually all of the panelists made some points I would have made in my own words. But let me just see if I can put emphasis. There are three points I would like to make. It has been said the telecom industry is changing. We all understand that from a different perspective. What I would add to your debate here is the following: The technology and the silos that you have traditionally regulated are breaking down. Wireless is national. Pricing for wireless is national. You have substitutability between current long distance switched and wireless services. Internet and data are boundary-less. Customers want bundling and packaging. They want sole sourcing for service and things of that nature. So as we look at our business, we are not looking at the incumbent industry, but rather looking at industries that are converging across the board, which leads, Commissioner Tristani, to our view of the issue of benchmarks, is you need new ones. The old ones don't work anymore because you can't compare the future industry by looking in the rear-view mirror of companies that used to be incumbents that are no longer incumbents. Under this definition, AT&T is an upstart. And we don't see them that way. So I think our view is you do need benchmarks, but we need to create the kind of benchmarks around the new five or six global players. The second point I would make is that the Bell/GTE merger is clearly pro-competitive. As we said in our public interest filing, if you look at the local, long distance, internet and wireless areas today, the Bell/GTE mergers produces significant new competition in every one of those markets in various degrees. It actually accelerates the competitive model. In fact, the charts that Chuck has described to you show that we don't have to hire 8,000 people. We have an in-place structure between the two companies to get out there and compete in all of these markets the day the merger is closed. To the question, the jurisdiction on this point, just, again, not being an attorney -- and you can question Jim on this -- I'll just explain the experience we had with the Bell/NYNEX merger. At the time, it was perceived to be one of the most radically proposed transactions in the history of the industry. And the primary issue was the issue of competitive potential competition between Bell Atlantic and NYNEX which far oversees any of these potential competition issues that exist in the SBC or even in the GTE/Bell merger. There is nothing the FCC looked at that the Department of Justice didn't look at for 12 months in its infinite detail before that. Not that my view is whether the Commission feels it should look at it or not, the point being is there was nothing that came up afterwards that was any different than we had addressed in the DOJ issue. You do have a question of license transfers. We understand that. I would hope that we would be careful from a businessman's perspective, that in looking at the public interest question, we don't so broaden it that we miss the forest and we get stuck behind any of the trees because what we're looking at here is industries in which you do not regulate: the internet, software companies. So many industries are impacted by the kind of transactions we're talking about, I think we have to be careful to go beyond the license transfer issues and not in effect create standards that really aren't in tune with the future structure of the industry in general. The third point I would like to make that hasn't been made earlier today is that mergers in a restructuring set of industries are actually good for the public. You should welcome them for a different perspective. The Bell/NYNEX merger, the experience there is that everything that we said would happen, happened. And I will just go over a couple of points. We've increased our capital spending by over 600 million dollars as a result of the merger. We have increased spending in customer care. We have improved service across the board. We have introduced new products we would never have been introduced to on our own. We've added 4,000 jobs in the company in the areas of service and capital investment. We have also funded the opening of the network in the 271 process. We never would have been able to do the things we are doing in New York State in operating support systems and our attempts to open the network. Without the Bell/NYNEX merger, it never would have happened. And all of this is possible because of the efficiencies and the synergies that were gleaned from the putting together of two companies that can today tackle the globe in the manner in which Ed Whitacre and Dick Notebaert have mentioned. We have the same view of creating a company here between GTE and us that would in effect be one of the five or six global players that would participate in these markets as we go forward. Thank you for your listening to us. CHAIRMAN KENNARD: Thank you. Mr. Lee, you talked about the importance of being able to follow your customers around and that that's one of the principal benefits you see from this proposal. I would like to explore that with you for just a moment. I see from your chart here that you've got facilities located in Los Angeles and San Diego, Phoenix, a number of cities. And I can understand your desire to be able to offer your business customers one-stop shopping. We have seen a fair amount of competition for business consumers in this country. I believe that the principal challenge before us is to bring more competition to residential consumers. And I'm curious what this proposal would do for America's residential consumers. What do you tell the residential consumer in Los Angeles, where my family lives, that this merger -- or how do you respond to the following question that they might propose to you: This merger is in effect eliminating a potential competitor from my market. We have GTE. We would like to have Bell Atlantic someday. But with Bell Atlantic and GTE merging, we won't have Bell Atlantic as a competitor against GTE in that marketplace. How do you respond to that question? MR. LEE: That's a great question. And I obviously feel passionately about the response and it goes a number of ways. First, and that is with our footprint and our history, we have launched a grow strategy for our company which in fact involves BBN and the internet and data and GNI or our global network infrastructure which is -- but it also involves a CLEC. And we are in places where we can within a hundred miles of our current franchise, we are beginning to develop hotter franchise strategies which is focused on small business and high-end consumers or residential. But I think what I would ask the Commission to understand, that is in a very expensive process. We have spent hundreds of millions of dollars developing systems and platforms to compete for this. Now, the distinction I would like to make is that our company has not stopped. Now, you're -- I wish you would have asked one of the people on the panel earlier, the first panel, why he stopped. Our company hasn't stopped. We're going forward. Maybe he has a different agenda for stopping. But we're going forward. Now, how will this merger help us? This merger will help us because it is an expensive proposition. You need -- particularly out-of-franchise, the more you have brand recognition or you have business customers to build the network, to build the capability, to build the scale, the more fundamental and solid the business is going to be over the long term. So not only -- again, the key view that I have on our merger is that it makes the new company faster and more effective by a long shot than either would have been individually. Ivan can tell you about Bell Atlantic. But from my standpoint, faster and more effective is the key to this merger and the key to bringing real competition to the consumer in a residential market. CHAIRMAN KENNARD: Mr. Seidenberg, did you want to add something? MR. SEIDENBERG: Well, no. The only thing I would say is you do get Bell Atlantic in LA through GTE. I mean, the assumption would be that you would get us both. Well, we're too far behind; it's too expensive; we don't have any assets in California to let us do that. I think with a wireless network, with an IP network on a data architecture, what you can do over time is we can then ramp up the scale and compete with the people who are already there like the WorldComs and the AT&Ts and the Sprints and other people. So I don't think you would see a Bell Atlantic having the capacity to tackle the whole country all by itself. We can't do it. We're too far behind and, oh, by the way, without long distance relief, it's not going to happen anyway. So until we get to the full bundle, you're not going to see us venture very far from our footprint simply because customers won't take us seriously. CHAIRMAN KENNARD: Well, should we draw from this discussion today the following conclusion: That the economics of telecommunications in the world today is that an RBOC will not venture outside of its region to compete out of region unless it does through -- does so through merger or acquisition? Is that a fair statement? Is that what we should draw from what we've heard today? MR. SEIDENBERG: No, I don't think that's an accurate statement since I'm the only RBOC left here I guess. The -- here's what I would say, that an RBOC -- CHAIRMAN KENNARD: You may be the only RBOC left one day. MR. SEIDENBERG: Yes, well, to be honest about it, that's a little bit of the lens I want to change because don't think of RBOCs, think of cable companies and wireless companies and long distance companies. We're all the same. In a couple of years, we'll all be in the same place. But what I would say is this: The venture out of the region, it's a combination of mergers. It's a combination of acquisitions. We just signed a capacity agreement with a CLEC called InterMedia that said -- basically said when we get into long distance, they will provide us the facilities and the access to terminate in Atlanta, in Tampa and in all those other places. So, no, there is no way you should think that we won't go out unless we do it through merger and acquisition. We'll do it through a variety of things. But we do need the basic scale to tackle the global requirements. And we think we're getting closer. I wouldn't suggest we're all the way there, but I think at this point -- and the other -- the only last point on this, if I might, we see this as a little different merger in that Bell Atlantic was not interested in another RBOC-to-RBOC merger. We were interested in a merger that would give us vertical capability in terms of product because within customers, we're looking for bundled services from us in time. GTE has done marvelous work in the area -- in the data area. They've got a great wireless footprint. And they've done some terrific things with bundling in their CLEC strategy. So we feel we have a little different proposition. We weren't looking for a like business. We were looking for one that would add vertical capabilities to let us compete out of territory. MR. LEE: Mr. Chairman, again, we're not an RBOC as you well know. But we do have some of the same characteristics. And what I want to come back to is, again, our footprint and our map because we have gone out of franchise. And we have the ability to bundle now because we are different than -- than an RBOC. So we're bundling long distance, local exchange, international, wireless, paging. And we are developing a business that data-centric; it's centered around BBM. So we are doing business in Chicago. We are doing business in Houston. We are doing business in Dallas. Now, what we need because of the cost and the expense and the scale and the building the brand name and following customers, we need the economics that come as a result of a combination with Bell Atlantic to help us be successful against these other people who are going to be doing the same thing. AT&T, we heard it today, they're going to be doing the same thing. We know MCI WorldCom is going to be doing the same thing. We know SBC and Ameritech are going to be doing the same thing. There are four players. And that doesn't limit what happens to Bell South or what happens to Sprint. And there are going to be lots and lots of competition because of changes in technology and because of the evolution and growth of this industry well into the twenty-first century for as far as I can see. CHAIRMAN KENNARD: Thank you. Commissioner Ness. COMMISSIONER NESS: Following up on the Chairman's question, you said you needed basically to bulk up in order to be able to provide nationwide services or to compete outside of your own territory. How far do you have to go? MR. LEE: Commissioner, let me just correct you. COMMISSIONER NESS: Okay. MR. LEE: One simple way is to talk about bulking up. But the specific thing I said is the new company, the combination of these two, will do it much faster and much more effectively than either of us could do it individually. And that's what America is about. That's what our country is about. That's what the marketplace is about. COMMISSIONER NESS: How large -- how large will you have to be in order to be able to do that. Is the current proposal sufficient in order to be able to advance in markets throughout the country or is it likely that, once again, you are going to have to do another acquisition in order to be able to get that kind of market recognition in areas where you're not presently competing? MR. LEE: Well, I can't deal with hypothetical questions. But I'll tell you who and where that will get answered. And it's very clear. The marketplace will answer that. Our customers and the stock market. And if our customers demand and other companies get some big cost advantage against us because they double and quadruple, then we will have to take action. COMMISSIONER NESS: So in other words -- MR. LEE: So it will be a market dynamic constrained by the Department of Justice and the antitrust laws of this country which, you know, I have no doubts about. I mean, we know they're effective as -- as the other Commissioner said. We know the Department of Justice and the laws of this country are very good in limiting the elimination of competition in marketplaces. MR. SEIDENBERG: Can I offer a little different perspective on that? COMMISSIONER NESS: Yes. MR. SEIDENBERG: I just want to clarify the word, "bulk-up". We feel we need to, to use your term, bulk-up to be horizontally -- to expand horizontally. We also feel we need to bulk up to provide technological leadership. To get ADSL out there and all the high speed new networks out, we needed some additional scale. So it isn't just to -- to go nationwide. I feel that with this transaction, we will create an irreversible tract that will answer the question you just raised differently once we get into these markets. See, I think GTE has an enormous integrated data network already that we don't need to buy a long distance company to -- that doesn't mean it won't happen, but it just says you don't need it. We have a wireless footprint that gives us enormous reach, so I think. So I think the opportunity here kind of is the road not traveled. If we're not careful, you'll find companies navigating through the regulatory rules as opposed to chasing the market. If we get into 271 like we feel we can in the first quarter, we can pursue a national wireless footprint. We can pursue a national data footprint. That question gets much differently in three or four years. The long distance companies could have made the investments that Dick Notebaert did, an alternative network, 15 years ago. They didn't have to lose whatever they say they lost on local resale. Now they make a 48 billion dollar acquisition. The answer to me is let us build it organically and then we'll see how far that goes. But we think we're pretty big at this point in terms of covering the American footprint. Internationally, I think we have a long way to go to say that we've covered the right territories. COMMISSIONER NESS: You mentioned, Mr. Seidenberg, that we need to look at new benchmarks. I was intrigued by that. What would those new benchmarks be in your view? MR. SEIDENBERG: Bell/GTE. It will be the only company that has it all and will compete across the whole country right on day one, no promises. You don't have to wait for the cable companies to upgrade and you won't have to wait for SBC and AT to acquire the 8,000 people. But I think the answer to the question is, without being flip, is that -- that if we're looking at the companies of the future, I think you should be trying to think through the kind of benchmarks that exist. And just be careful how much the old benchmarks work. You know, the -- if you look at the IBMs of the world, the EDSs of the world, what you'll find is there are companies moving into these spaces that are doing what we're doing in large regard. And I think we have to be careful about it. I -- Dick Notebaert said you look at benchmarks for individual processes in your company like billing or inventory control. We've all been doing that. The Justice Department, when they looked at the Bell/NYNEX merger, looked at a future model and recognized that Bell and NYNEX were never going to compete with each other in a large way. And they got out of the way at that point. As a -- as a businessman, that's the way I read it. So I don't have a specific answer for you. And I think this is the truth we all need to find. But new benchmarks are the answer. The old ones are anachronism to the past. MR. LEE: Another perspective maybe -- and definitely a little bit down the road from the days that Ivan was describing, is that if the vision of these new national markets evolves with your support and your help, the need for benchmarking data is going to be tremendously reduced because benchmarking is going to be done by the customers. There is going to be so much competition across all these markets and against all these products and all these services that the customers are going to do the benchmarking. I mean, people don't ask -- people internally do benchmarking in General Motors. But I don't know of a regulatory agency that is looking over -- COMMISSIONER NESS: It sounds wonderful. MR. LEE: So it's internal benchmarking. COMMISSIONER NESS: But we still are faced around this country with very few options for consumers, for residential consumers who wish to have alternatives for local telecommunications services or even a panoply of services. And we still are faced with the enormous cost that has been discussed at length today of being able to enter into a new market where you don't have brand recognition, where you don't already have a footprint, where, as some have said today, the cost perhaps is even -- the revenues perhaps are even below cost of providing the local service. How will this help with companies combining to ensure that the residential consumers of this country have alternatives for local service? MR. SEIDENBERG: Well, A) the premise -- let me -- there are two halves to this. First, I would like to just address the premise of the question that consumers don't have choices. I think -- we can get into a long discussion. We probably have had this before. But customers today have all sorts of choices in calling plans, all sorts of choices in wireless, all sorts of choices in data. There is one access line into the home in a lot of places. But the uses of those access lines have changed so extraordinarily, pervasively over the last three or four years that customers have more choice in what they do with that than they've ever had before. There is one statistic that we've been looking at in the last couple of months that has been very instructive here. Bell Atlantic today has 41 million access lines. That's our -- the way we used to measure access lines. What our data-centric people are telling us is that we have another 15 million DSO equivalents that have been introduced into our business through data services over the last three or four years. What is happening is customers -- you can have an access line. But they are getting multiple channels over that. And we're finding CLECs are able to offer services over those things and nobody is counting them. So I think there is a different paradigm coming. Now, to your point, how do you stimulate the obvious optic of having other choices? Well, these mergers, if they go through, you will create five or six national companies all competing. Everybody on the panel said they are coming into New York. Fine, we've got competition; we'll get some more. We have competition everyplace. You won't get competition if you try to grow it regionally. If you want to get it, you will have to let it occur through the formation of national and global businesses. MR. LEE: The one -- the definite adder to everything Ivan says, which I agree with, and I've talked to each of the Commissioners about this point, is the whole issue of the universal service subsidy has got to have a dramatic impact. Madam Commissioner, you just said the revenues for residential service may be below. It's not may be. Revenues for residential services is dramatically below the cost. And overall, our companies are okay because we make up for it on universal service. But we need in a competitive place to have prices that have a true relationship to economic cost. And then people who have stopped building out in the residential market I think you'll see dramatically run to that because it will be a fair opportunity for them to make some money. So I come back with my ongoing dialogue with the Commission and ask that we keep our focus on this universal service which the Telecom Act says very fluidly, "All subsidies are to be made explicit and evenly borne by all competitors in the industry." And I just applaud the efforts you're making to -- to complete that task in the near term. COMMISSIONER NESS: Thank you. CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Furchtgott-Roth. COMMISSIONER FURCHTGOTT-ROTH: Thank you, Mr. Chairman. Mr. Lee, Mr. Seidenberg, we've heard a lot of discussion today about several mergers. And as you know, I'm very interested on views on what this Commission should be doing. Let's leave aside Bell Atlantic/GTE for a moment. I think you may have something of an interest in that particular merger. How would you recommend this Commission proceed in reviewing in the public interest some of the other mergers that may have been discussed here or just any hypothetical merger? What -- what should this Commission do? MR. SEIDENBERG: Well, I'll take a cut at it. What the heck. The -- here is what I would say, is that when I look at the other mergers, I frankly think if they passed muster at the Justice Department, assuming that they do all the things that they're supposed to do, you'll -- you'll deal with a good portion of the issues that you need to deal with. If there are license transfers, you will deal with those. The only other point I would make is -- and it goes to the issue of if there are existing Commission policies that would be violated by any of these mergers. And I think you have an obligation to stand up and tell those companies what they need to do about that. An example of that might be the open broad band promise we heard today. If -- if -- maybe there is some work that needs to be done in that area. Or if there is something in the Bell/NYNEX merger that would be violated as a result of the Bell/GTE merger, then I think the Commission has an obligation to do that. But other than capturing the enforcement of existing policies, I struggle with how far we take the process only because I worry that none of us really knows how this industry will change. And you always worry that -- that however well-intentioned, the combination of federal and state regulation tends not to be able to keep up with the technology itself. I worry I can't keep up with it, let along having a process that's intended to do it. So in this general way, I think that's sort of the coming out point. Now, Counsel might have a lot of specific things here that you may want to talk about at another point. But I'm sure we can let that go for another time. MR. LEE: I would just say, very quickly, number one is -- per your question earlier, Mr. Commissioner, I know of no example where the Department, based on my judgement -- where the Department of Justice hasn't done an appropriate job of reviewing the antitrust laws and concentration in various industry. So I know of none. Maybe somebody could prove me wrong. Two, I respect and understand the specific roles of the Commission in terms of transferring licenses, satisfying that its in the public interest. And -- and I think Ivan makes a great point in terms of other conflicts with other policies that should be sorted out by the Commission. And so I feel real, real black and white on the issues that I've just described. MR. SEIDENBERG: If I just could put an exclamation point because I have to live here again is this point: I think that debate and the forum is very positive. I think it's what you do that I think a lot about as we go forward. So I think the question of having the forum and the debate is good. I think you generate the kind of understanding that's necessary to go forward. But the law is the law and you'll decide what that is later on and then we'll see what happens. MR. LEE: Thank you, Mr. Chairman. CHAIRMAN KENNARD: Thank you. Commissioner Powell. COMMISSIONER POWELL: Well, time is getting late and I won't ask but one question. And, Ivan, let me first ask you because I'm intrigued by your statement about the difficulty of growing competition from a regional -- from a regional base or growing it -- and I would expand the question to growing it with the consideration of any kinds of artificial boundaries. That is, I wonder if you wouldn't say something about the pressures being generated by modern technology trends. In particular, sort of the coming of the truly borderless network model which really, less so than the other one ever did, does not respect in any meaningful way a number of boundaries over which legal concepts are drawn. I mean, I primarily think about latas and their inherent artificiality. I think about state boundaries which are constitutionally commanded, but of course they are not necessarily meaningful for efficient network operation. And then we've heard a lot about global and national stresses. And everything seems to be pressuring toward making concepts such as distances and boundary limitations be less important as organizing principles for policy decisions. And I've heard a lot about -- discussion about the economics and the efficiencies, the operational efficiencies. I get 8,000 employees. I get, you know, more money. I get that. That's all very obvious. But could you expand just a little bit on what you believe the technological inevitabilities are that are pushed -- MR. SEIDENBERG: Well, I think what you'll see in that question is the very big difference in this merger. I will answer that question using wireless as an example. And I know Chuck will explain the whole data issue. If you look at wireless, years ago you got all these analog licenses. They were all regional. No problem. People put in the systems. They built them up and everything was fine. What happened is you found that technology started driving the prices down. We moved to digital. We expand capacity. People started to expand their footprints. And now what you're finding is we're offering -- when Bell/NYNEX merged, we were the first company that reduced its roaming charges to zero. We were the first company that gave first incoming minute free. Now you're finding we're going to ten cents a minute, no roaming, no long distance. You need scale. There are no boundaries to that. So state commissions can't regulate air over this. So you're finding that the wireless business, in its transition from analog to digital, has obliterated the technological boundaries and drove pricing down. It is forcing us to re-think our business and think of ourselves not in a geographic constraint because our customers are looking for the national services and the products to do that. The internet and data networks have done exactly to the core business what wireless has done. MR. LEE: Ivan is exactly right. And, Mr. Commissioner, let me describe two products. And we're int his business now through our acquired company, BBN. But the whole industry is going to IP technology and IP networks. And so we will see more of this in the years ahead. We go to customers and we want to build their IP networks; well, not only their access to the internet, but their own data packet, switching networks that -- that go back and forth. And we say, "Okay, we'll do it here and we'll talk to another RBOC or we'll talk to a long distance guy", and they say no. They -- end-to-end productivity. The technology is so sophisticated, the equipment, the fine- tuning. And in fact, they want us to run the networks because it's so complicated, in addition to building it and to run it and keep operating. Another example is web hosting. And these are just examples. Interesting enough, one of the other panelists earlier talked about a portal company connected with the internet. Well, one of the most famous ones -- and I've probably restricted from using the name -- uses us to be their web host. And so we -- and it's a very big web site. And we -- we tried to build their network and make it access and use other web hosts around the world. And web hosting has gotten complicated with all the demands. And we have a system called hop-scotching where the network is smart enough to figure out which web site, if you have multiple web sites -- which web site is available for the quickest response time. So we call it hop-scotching. So we're selected by this customer because we have this technology. But he wants a global business. So he says, "Where is your hop-scotch, web site, web hosting location in Europe, in Asia?". We are having -- now, this is an important customer so it's all right and it's a pending thing. This guy not only wants the network connectivity all under our control, us running the network, but he wants us to have web sites around the world managed by this hop- scotch technology. So it's -- it's all -- distance is becoming irrelevant with fiber optic technology and all. And it's all becoming one small world, one integrated network. And it's going to be a very vicious competitive battle between us and the other big companies and these top four or five companies that are going to survive this -- this dramatic restructuring of our industry. COMMISSIONER POWELL: I would just add more of a summation of a point that I think is going to become increasingly important that I've heard each of you allude to which is that understanding of the communication trend means the universe of entrants and competitors is probably much broader than if you just want to think of the world as voice telephony. We're talking about the introduction of core competencies from the likes of IBMs and CISCOs and enormous numbers of other people who at least for many of the total portfolio of services being offered by a classic phone company today, there will be many, many other participants with respect to them. And it is important that we remember that while local --local residential phone service is incredibly important and I think one of the highest priorities of Congress and our own. But it is one in a whole range of communication suites that we're also trying to foster. And there may be unique challenges with respect to that last one. But I also wouldn't want the last one to dominate everything we think about the others. So thank you for -- did you -- MR. SEIDENBERG: Okay. No, we'll go on. I know you're -- it's late. Thank you. CHAIRMAN KENNARD: Commissioner Tristani. COMMISSIONER TRISTANI: Mr. Chairman. Let's say I'm a little old fashioned. And let's say I come from New Mexico where the world is pretty different from here in the east. I haven't been there in a while, but I don't think they are about to offer me new cable service any time soon or as a -- if I were living in a residence, any kind of alternative. And I'm a consumer out there and I've heard about the new Act, local competition, and I haven't seen any. And all I see is mega-mergers. And I keep hearing they're good, they're good, they're good. And I asked the previous panelists -- and I think you were here -- what if we end up with one local company. And he said, "Can't happen." And I said, "What if it could happen? Would that be okay?". It's a hypothetical. MR. SEIDENBERG: Well, if I can address it this way. While New Mexico is different, we have communities in Vermont and Maine that are just like that. COMMISSIONER TRISTANI: I know. MR. SEIDENBERG: And we serve just the same -- the same thing. And here's what goes on. In the Bell/NYNEX merger, those customers got better service, lower rates, more feature and functions. And the better we did for those customers, the quicker AT&T got off it's whatever it is and they moved into those markets a lot faster. So I think what's happened is there are lucrative markets in every single state whether they be rural or suburban or the most urban markets. And I think that a strong, healthy, technologically and financially leadership company will incent the kind of people going into those markets. Now, you say, "Can there be one?". The -- the reason we -- COMMISSIONER TRISTANI: If -- if there were one. MR. SEIDENBERG: Well, the question that we all struggle with when we hear that is very obvious; that you categorize us as being one group and the long distance companies as another and the cable as another. I think even if there were one of each, that's three. And in the future, there isn't going to be one of anything or we're going to be merged. So in our view, is there can never be less than the three or four providers that you have now. And incenting them to get on with the investments they need to make I think is the right structure in terms of what you are looking for. I don't ever worry that there will ever be one. It's never going to happen. It doesn't exist today and it won't exist in the future. MR. LEE: The antitrust laws in this country, in the Justice Department, just as Attorney General Reno and Joe Kline, I'm sure they would say there is no way there is going to be one. I mean, that's -- that just isn't going to happen. So it's another world. Secondly, in terms of -- we're a company that (inaudible). We are a CLEC. We are what our corporate growth strategy moving us out of our franchise. And I don't know where we are in your -- your home town in New Mexico. But it is very time-consuming and expensive. You heard every panelist, every -- all three enterprises here, AT&T/TCI is going to be competing and presumably your cable company will compete. SBC and Ameritech. So there is competition that is developing. But this is not a quick and easy fix. It is going to take time. But it seems to me that we can feel good about the progress that has been made so far and the commitments that you're hearing out of the -- the future of these arrangements. MR. SEIDENBERG: Commissioner, if I just might, I just can't let go of this question here. You know, the -- the -- when Bell and NYNEX merged, which was a cataclysmic event in the legal system here, everybody said, including the long distance companies, the world would come to an end. Well, we merged. We've done our job. What's happened? WorldCom has consolidated with MCI. They are restructuring. What you're finding is AT&T has acquired Teleport. AT&T has acquired now TCI. Bell Atlantic moved a lot quicker to get into 271. So I think that the restructuring of the industry is causing the benefits to flow exactly the way you would like to see them. And you're not going to get to a point where you have to worry about having one monopoly left. It can't happen. COMMISSIONER TRISTANI: Thank you. CHAIRMAN KENNARD: Thank you. I appreciate everyone's patience. We are now about an hour behind our allotted time. But it has been a very, very useful and worthwhile session. And I want to thank each of the witnesses for participating in this en banc hearing. This is the beginning of a process in my view. We're going to have another en banc hearing. And over the next several weeks, we are going to be hearing from lots and lots of people who have interesting things to say about these merger proposals. We've heard some very interesting views today about how technology in the marketplace is changing. And, you know, as we hear more, we're going to be carefully analyzing the records -- the record that is being developed in this proceeding. But I want to emphasize one thing. We are not here to pick winners and losers. The only winner from this process has got to be the American consumer. That's who we represent up here. And we've got to make sure that we are acting in their best interests. We've heard a lot about the efficiencies of these proposals and how they are going to be good for shareholders. And I think that we -- at least speaking for myself, I fully understand that. We've also heard a lot of promises to consumers about how this will be good for consumers, residential consumers. And we have to have a good understand of the basis for those promises. And the only way we can do that is to develop a comprehensive record, talk to a lot of people in a very transparent fashion. And that's what we're going to do. I want to say a word about the respective jurisdictions of the FCC and the Department of Justice. We've heard a lot of non-lawyers speak to this issue today. And as a former general counsel -- and I still consider myself a lawyer -- I wanted to address that issue. We have in this country a Department of Justice and a Federal Communications Commission with related and in some respect overlapping jurisdictions. That's what Congress intended. That's why Congress wrote a communications act that gave this agency responsibility for enforcing some aspects of the anti-trust laws. Now, the Department of Justice, they have primary responsibility for enforcing the anti-trust laws. When they consider a proposed merger like the ones we've heard about today, they have to determine whether they can make a case that that merger violates the anti-trust laws. That is their charge. Our charge is different. Our charge is to determine -- is to determine whether a combination will serve the public interest. Unlike the Department of Justice which carries the burden of demonstrating whether there is a violation of those laws, in our case, the applicants have to come before us and make an affirmative demonstration. You all carry the burden of demonstrating whether these proposals serve the public interest. It is our obligation at this agency, as the expert agency in telecommunications policy, to survey the overall marketplace, determine industry trends and determine whether any of these combinations sink either individually or collectively to serve the public interest. That system has worked well in this country for most of this century. I do not believe the that the way it has been applied, either historically or will be applied today will be duplicative. We will certainly try to do our job efficiently and to minimize the burdens on the applicants and the public. But we will do our job and we will follow the law. And in doing that, I don't believe that we will or should implement any dogmatic or open-ended conception of the public interest. Again, our burden and our job is not to pick winners or losers, not to handicap everybody or not to give everybody advantages. Our job is to analyze carefully the facts of each merger, recognizing that each is different; but that each of them are operating in a marketplace that has lots of dynamics and these companies are going to interact. And above all, to make sure that we keep our eye on the ball which is consumers, ensuring that they get the benefits that they were promised by the United States Congress; more competition, lower prices, more innovation. We are going to do that. We look forward to the next en banc which we will be having on December 14th where we will hear from lots of other people, consumers and competitors and anyone who has an interesting thing, a serious thing to say about these proposals. So, again, I thank you very much for your participation. Commissioner Ness, did you have any closing remarks? COMMISSIONER NESS: No thank you, Mr. Chairman. Just to thank everyone for their participation today and your thoughtful comments. CHAIRMAN KENNARD: Commissioner Furchtgott-Roth? Commissioner Powell? Commissioner Tristani? COMMISSIONER TRISTANI: Thank you all. CHAIRMAN KENNARD: Thank you very much. (Whereupon, at 2:30 p.m. on Thursday, October 22, 1998, the hearing was adjourned.) REPORTER'S CERTIFICATE FCC DOCKET NO.: N/A CASE TITLE: FCC MERGER EN BANC HEARING DATE: October 22, 1998 LOCATION: October 22, 1998 I hereby certify that the proceedings and evidence are contained fully and accurately on the tapes and notes reported by me at the hearing in the above case before the Federal Communications Commission. Date: __________ __Carla Wright_______________ Official Reporter Heritage Reporting Corporation 1220 "L" Street, N.W. Washington, D.C. 20005 TRANSCRIBER'S CERTIFICATE I hereby certify that the proceedings and evidence were fully and accurately transcribed from the tapes and notes provided by the above named reporter in the above case before the Federal Communications Commission. Date: __________ __Bonnie Niemann______________ Official Transcriber Heritage Reporting Corporation PROOFREADER'S CERTIFICATE I hereby certify that the transcript of the proceedings and evidence in the above referenced case that was held before the Federal Communications Commission was proofread on the date specified below. Date: __________ __Lorenzo Jones_______________ Official Proofreader Heritage Reporting Corporation