FCC 'Stops the Clock' on Carrier Merger

WASHINGTON (05/04/2000) - The staff of the U.S. Federal Communications Commission has told MCI WorldCom Inc. and Sprint Corp. that they cannot move forward on their merger application until they present yet more data on long-distance and Internet market shares.

The move - revealed in a previously unpublicized April 19 note placed in the FCC's merger docket - came soon after user consultants told the FCC that they questioned the two carriers' earlier claims that large business users have numerous options for voice and data services.

Network World has learned that FCC staffers have been calling lawyers and vertical industry trade associations asking for their views on the state of competition for enterprise network services. In an April 10 meeting, two partners in the Washington, D.C. law firm Levine, Blaszak, Block & Boothby met with a group of FCC officials to explain how large business users buy network services. The firm specializes in negotiating carrier contracts.

A note placed the following day in the merger docket by partner Ellen Block said: "We stated that large business users with complex network requirements currently look overwhelmingly to AT&T, MCI WorldCom and Sprint, and at this time do not consider the other carriers to be suitable candidates to meet those requirements."

In March, MCI WorldCom and Sprint presented the FCC with a chart of 11 carriers they claim provide all, or almost all, of a bedrock set of seven enterprise services: frame relay, ATM, Internet access, private lines, outbound voice, advanced toll-free routing and virtual private networks.

The chart included Williams Communications and Level 3 Communications. Both are generally considered wholesale carriers, selling mostly to other service providers. Other representatives of user interests say the number of carriers that can truly bundle all those services - at least in a contract sense, if not in the technological sense of a single, converged network - is fewer.

"Enterprise customers still look to acquire as many services from one carrier as possible, for reasons of price, support and quality," says Doug Jarrett, a Washington lawyer who attended the recent FCC meetings on behalf of the American Petroleum Institute's Telecommunications Committee. "That market is going to suffer when one of the three [largest] carriers goes away."

Certain gaps in the enterprise-network carrier-services market are by no means the fault of MCI WorldCom or Sprint, but self-inflicted wounds by others, according to people who attended the meetings.

"Qwest was moving there," Jarrett says. "But by virtue of their [proposed] merger with US West, when you have that merger where there's a gap - a big doughnut hole - they've really limited themselves in the marketplace." The FCC is forcing Qwest to suspend long-distance operations in the 14-state US West region as a condition of the merger because US West is not approved for long-distance traffic.

After the recent round of meetings, the subsequent April 19 instruction to MCI WorldCom and Sprint stated they must "submit additional information on the Internet and long-distance markets, and provide certain consultant reports that are relevant to this information." The note said until this information is certified, the FCC is stopping a "180-day clock" that represents a six-month timetable in which FCC Chairman William Kennard originally promised to review the complete merger filing. The clock currently stands frozen at Day 75.

An MCI WorldCom spokesman says the statements of the user representatives represent a "difference of opinion" from the merger applicants' filings, and the two companies stand by their earlier claims. An FCC official said the clock had to be stopped because this merger is the first in which the agency has promised Congress a 180-day review on what has become unusually complex. The official added that the question of whether wholesale carriers should be counted as effective competitors to the Big 3 long-distance companies "is something that we have to figure out."

The merger partners are also facing challenges from other fronts. This past month the European Union announced it has serious reservations about the merger and will continue an in-depth review. A study issued by the Washington think tank Economic Policy Institute recommended that Sprint should not only spin off its Internet backbone business, but also its other long-distance operations - including ATM and frame relay - in order to make the merger palatable to regulators and users.

MCI WorldCom and Sprint shareholders approved the merger on April 28. The companies say they still expect to get all required approvals for the merger by the third quarter.

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