United States v. AT&T Corporation and McCaw Cellular Communications, Inc.; Public Comments and Response on Proposed Final Judgment

DEPARTMENT OF JUSTICE

Antitrust Division

[Civil Action No. 94-01555 (HHG), D.D.C.]

United States v. AT&T Corporation and McCaw Cellular

Communications, Inc.; Public Comments and Response on Proposed Final

Judgment

Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.

16 (b)-(h), the United States publishes below the comments received on

the proposed Final Judgment in United States v. AT&T Corporation and

McCaw Cellular Communications, Inc., Civil Action 94-01555 (HHG),

United States District Court for the District of Columbia, together

with the response of the United States to the comments.

Copies of the response and the public comments are available on

request for inspection and copying in Room 200 of the U.S. Department

of Justice, Antitrust Division, 325 7th Street, NW., Washington, DC

20530, and for inspection at the Office of the Clerk of the United

States District Court for the District of Columbia, United States

Courthouse, Third Street and Constitution Avenue, NW., Washington, DC

20001.

Constance Robinson,

Director of Operations, Antitrust Division.

United States District Court for the District of Columbia

In the Matter of: United States of America, Plaintiff, v. AT&T

Corp. and McCaw Cellular Communications, Inc., Defendants. Civil

Action No. 94-01555 (HHG). Received July 25, 1995.

Response to Public Comments to the Proposed Final Judgment

Pursuant to the requirements of the Antitrust Procedures and

Penalties Act, 15 U.S.C. 16 (b)-(h) (1994) (``APPA''), the United

States of America hereby files its Response to Public Comments to the

proposed Final Judgment in this civil antitrust proceeding. The United

States has reviewed the comments on the proposed Final Judgment and

remains convinced that its entry is in the public interest.

A proposed Final Judgment, Stipulation and Competitive Impact

Statement have been filed with this Court.\1\ The proposed Final

Judgment is subject to approval by the Court after the expiration of

the statutory sixty-day public comment period and compliance with the

Antitrust Procedures and Penalties Act, 15 U.S.C. 16 (b)-(h).

\1\ See 59 FR 44,158 (1994).

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I. Compliance with the APPA

The APPA requires a sixty-day period for the submission of public

comments on the proposed Final Judgment, 15 U.S.C. 16(b). The United

States has received four comments\2\ and a response

[[Page 49862]]

to those comments from AT&T,\3\ all of which are filed with this

response. Upon publication of the comments and this response in the

Federal Register, pursuant to 15 U.S.C. 16(d) of the APPA, the

procedures required by the APPA will be completed. The United States

will then move the Court for entry of the proposed Final Judgment, and

the Court may then enter it.

\2\ Comments objecting to the proposed decree were submitted to

the Department by Bell Atlantic and NYNEX (jointly), SBC

Communications Inc. (``SBC''), BellSouth Corp. (``BellSouth'') and

the Ad Hoc Association Long Distance Carriers (``Ad Hoc IXCs''). SBC

requested permission from the Court to file supplemental comments on

January 17, 1995; however, that request has not been granted by the

Court. SBC's supplemental comments request that the decree be

clarified and modified to provide that pending conversion of the

McCaw systems to equal access, AT&T is prohibited from (1) expanding

its calling areas, and (2) advertising its existing interLATA

calling areas so as to disadvantage cellular systems that are

competing with the McCaw systems. SBC also believes that AT&T should

be required to restrict the scope of such calling areas pending

conversion to equal access. AT&T's response to these comments

asserts that it has not expanded the McCaw calling areas, and that

the purpose of the proposed decree is not to establish identical

calling areas with those of the Bell Operating Companies (BOCs).

Further, AT&T maintains that to impose additional requirements

pending the completion of its conversion to equal access this fall

would simply encourage additional frivolous complaints with no

competitive benefit and could delay the conversion of its cellular

systems to equal access. The Department believes that the changes

proposed by SBC are inappropriate, and that the scheduled conversion

of the McCaw systems will achieve the competitive benefits sought by

the proposed decree.

\3\ Defendant's Response to the Public Comments on the Proposed

Final Judgment, submitted to the Department of Justice on March 15,

1995.

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Under the APPA, the primary responsibility for enforcing the

antitrust laws and protecting the public interest in competitive

markets rests with the Department of Justice.\4\ In carrying out its

responsibilities, the Department has very broad discretion in

prosecuting alleged antitrust violations and determining appropriate

relief for the settlement of cases.\5\ Before entering a proposed

consent decree, the Court must determine that the decree is in the

public interest, 15 U.S.C. 16(e).\6\ That test, however, is limited to

ensuring that the government has met its public interest

responsibilities--that is, determining that the proposed Final Judgment

falls within the range of the government's antitrust enforcement

discretion.\7\

\4\ United States v. Waste Management, Inc., 1985-2 Trade Cas.

(CCH) para. 66,651 at page 63,045 (D.D.C. June 6, 1985).

\5\ United States v. Microsoft, Nos. 95-5037, 95-5039, slip op.

(D.C.Cir. June 16, 1995); United States v. Mid-America Dairymen,

Inc., 1977-1 Trade Cas. (CCH) para. 61,508 at page 71,980 (W.D. Mo.

May 17, 1977) (citing Sam Fox Publishing Co. v. United States, 366

U.S. 683, 689 (1961) and Swift & Co. v. United States, 276 U.S. 311,

331-32 (1928)).

\6\ This determination can be properly made on the basis of the

Competitive Impact Statement and this Response. The additional

procedures of 15 U.S.C. 16(f) are discretionary, and a court need

not invoke any of them unless it believes that the comments have

raised significant issues, and that further proceedings would aid

the court in resolving those issues. See H.R. Rep. 93-1463, 93d

Cong. 2d Sess. 8-9 reprinted in 1974 U.S.C.C.A.N. 6535, 6538.

\7\ United States v. Microsoft, Nos. 95-5037, 95-5039 slip op.

(D.C.Cir. June 16, 1995); United States v. Western Electric Co., 993

F.2d 1572, 1577 (D.C. Cir. 1993).

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II. Background

The transaction giving rise to the government's complaint was the

acquisition by AT&T Corp. (``AT&T'') of the stock of McCaw Cellular

Communications Inc. (``McCaw'') in exchange for AT&T stock valued at

$12.6 billion. The transaction was the largest acquisition in the

history of the telecommunications industry. Immediately upon the

announcement of the transaction, the Department received complaints

from competitors of McCaw and cellular equipment customers of AT&T

expressing concerns as to the possible anticompetitive effects of the

proposed transaction.

The Department commenced an extensive investigation of the

acquisition during which these complaints were thoroughly examined. The

Department received more than one million pages of documents from AT&T,

McCaw, other cellular service providers including the BOCs, and AT&T's

cellular equipment competitors. In addition, the Department conducted

more than a dozen on the record interviews with employees and officers

of AT&T and McCaw and interviewed dozens of persons in various

positions in the wireless industry.\8\

\8\ In order to complete the transaction, AT&T needed the

approval of the FCC for the transfer to it of McCaw's radio

licenses. After the Department completed its investigation of the

transaction and filed the proposed consent decree with the district

court, the FCC approved the license transfers. Applications of Craig

O. McCaw and AT&T, File No. ENF-93-44, Memorandum Opinion and Order,

FCC 94-238 (Sept. 19, 1994). The Court of Appeals recently affirmed

the FCC action after considering some of the same issues that were

raised by the commenters in this proceeding. SBC Communications Inc.

v. FCC, Nos. 94-1637, 94-1639, slip op. (D.C. Cir. June 23, 1995).

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AT&T is the largest domestic long distance provider with about 60%

of the overall interexchange market and a higher percentage of the

cellular long distance market.\9\ McCaw is one of the largest cellular

mobile telephone providers and owns interests in systems that provide

service to about 17% of cellular customers.\10\ McCaw's systems all

operate in the ``A Block'' of the cellular spectrum that was originally

assigned by the FCC to non-local exchange carriers.\11\

\9\ AT&T Response at 57.

\10\ AT&T Response at 9.

\11\ The ``B Block'' spectrum was awarded to the local telephone

companies serving the areas covered by the cellular licenses. After

these licenses were issued, the local exchange carriers were

permitted to purchase the systems of the nonwireline carriers in

areas where they did not have the wireline licenses, and the BOCs

and GTE then acquired a substantial portion of these licenses as

well. See Cellular Communications Systems, 86 FCC 2d 469, 493-95

(1981); 47 C.F.R. Sec. 22.901(d) (1994).

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Cellular carriers provide mobile telephone service using

transmitters that are located in multiple ``cell sites'' to establish

radio connections with the customers' terminal equipment. These cell

sites are linked to centralized mobile telephone switching offices

(``MTSO's'') by either fixed microwave radio links or landline

transmission facilities. In general, calls to telephones within the

service area of the cellular system are completed over connections from

the MTSO to the local landline telephone company that are arranged for

by the cellular provider.

Calls originating on the cellular system to telephones outside the

cellular service area, with some exceptions, are transported from the

MTSO to an interexchange carrier either through direct trunks or

through the switched network of the local telephone company. These long

distance calls are generally charged to the customer separately from

the cellular service and are provided either as a service rendered to

the customers directly by the interexchange carriers or as a resold

service provided by the cellular carrier. Prior to its acquisition by

AT&T McCaw mostly provided long distance service by reselling AT&T

services, which it procured at wholesale rates. McCaw also did not

offer its customers their choice of interexchange carriers, except in

those systems which it jointly owned with a BOC.

Under the Modification of Final Judgment entered in United States

v. Western Electric Co. (``MFJ''),\12\ the BOCs are required to provide

equal access to all interexchange carriers for the origination and

termination of interexchange calls. Interexchange calls under the MFJ

are those which transit the boundary of an exchange area or ``LATA.''

The LATAs applicable to the BOC's cellular systems have been modified

by numerous waivers granted by the Court. Pursuant to a request made by

the BOCs, the District Court has recently ruled on a waiver request for

the BOCs to provide interexchange services from cellular systems.\13\

\12\ United States v. American Tel. and Tel. Co., 552 F. Supp.

131 (D.D.C. 1982), aff'd mem. sub nom. Maryland v. United States,

460 U.S. 1001 (1983).

\13\ United States v. Western Electric Co., Civ. No. 82-0192

(D.D.C. April 28, 1985) (``April 28 Order'').

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III. The Complaint and Proposed Final Judgment

The Complaint alleges that the proposed acquisition by AT&T of

McCaw violates Section 7 of the Clayton Act, as amended, 15 U.S.C.

Sec. 18, in the markets for cellular service, cellular infrastructure

equipment, and interexchange service to cellular subscribers. On the

same day that the complaint was filed, the Department also filed a

proposed Final Judgment that would mitigate the anticompetitive

consequences of the transaction in each of these markets.

First, the proposed Final Judgment contains provisions that

substantially mitigate the incentive and ability of the merged AT&T-

McCaw to disadvantage other cellular companies which compete against

McCaw. It requires that

[[Page 49863]]

McCaw's wireless systems be maintained in a separate subsidiary from

AT&T and restricts the flow of certain confidential information between

these entities and within the AT&T unit that sells cellular

infrastructure equipment. It obligates AT&T to continue to deal with

unaffiliated cellular equipment customers on terms established prior to

the acquisition, and on terms not less favorable than those offered to

McCaw after the acquisition. In addition AT&T is required to assist,

and not to interfere with, an incumbent customer's decision to change

infrastructure suppliers, and to buy back network equipment sold to a

competitor/customer if AT&T fails to comply with its obligations to

that customer under Section V of the judgment. The decree does not,

however, prohibit AT&T from using information relating to its own

interexchange customers to market cellular services.

Second, to mitigate the anticompetitive concerns in the cellular

interexchange market, the proposed Final Judgment requires McCaw

cellular systems to provide equal access to interexchange competitors

of AT&T, which McCaw did not provide prior to the acquisition in its

systems (other than systems jointly owned by McCaw and a BOC). The

provisions of equal access on these systems will increase competition

in interexchange services to cellular customers. Finally, the proposed

Final Judgment restrains McCaw from providing certain confidential

information related to its cellular infrastructure equipment suppliers

to AT&T's manufacturing division to prevent anticompetitive harm to the

cellular infrastructure equipment market.

IV. Comments on the Proposed Decree

A. Concerns That the Vertical Relationship Created by Merging AT&T's

Manufacturing Business With McCaw Will Have Anticompetitive Effects on

McCaw's Cellular Competitors

The Joint Bell Atlantic and NYNEX Comments (``Joint Comments'')

argue that the merger of the manufacturing business of AT&T with the

McCaw cellular operations will have anticompetitive effects on cellular

markets that are not sufficiently mitigated by the terms of the

proposed decree. These alleged effects are primarily the result of the

``lock-in'' that occurs when a cellular system operator purchases a

cellular switch and associated radio equipment from a manufacturer.

Once a cellular operator selects a manufacturer, it must purchase

upgrades and additional equipment from the same manufacturer, as other

manufacturers' equipment will not function with the existing equipment.

The interfaces between the switches, radios, and software are today

generally proprietary. Thus, the cellular operator cannot change

equipment vendors without replacing most or all of the system's

equipment, and is to an extent ``locked-in'' to the manufacturer for

further purchases of radio equipment to expand or enhance its

services.\14\

\14\ To a somewhat lesser degree, the cellular operator may also

face a ``lock-in'' effect with regard to the purchase of additional

switches within a cellular operating area, since there are

proprietary interfaces between switches that are more efficient than

the open interfaces that have been standardized by the industry.

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The Joint Comments allege that the injunctive provisions of the

proposed decree intended to remedy the lock-in problem are not

sufficient, and that in order to prevent anticompetitive harm the

government should either (1) require the divestiture of McCaw, (2)

require the divestiture of AT&T's cellular equipment business, or (3)

require AT&T, along with other injunctive relief, to build switches and

other equipment pursuant to publicly available standards and to license

the use of any necessary intellectual property so that third parties

could manufacture and sell equipment fully compatible with AT&T

equipment.\15\ The provisions of the proposed Final Judgment are

insufficient, according to Bell Atlantic and NYNEX, because AT&T can

engage in certain anticompetitive activities that would be difficult to

police and punish. They state ``AT&T can raise equipment prices in a

disparate fashion without an appearance of discrimination.'' \16\ and

``AT&T can restrict or delay equipment customers' access to important

new features or technologies without detection.'' \17\ Finally,

although the decree prohibits the transfer of commercial information of

AT&T's equipment customers to McCaw, NYNEX and Bell Atlantic maintain

that the prohibitions are inadequate because they allow such

information to go to senior officers of AT&T's manufacturing unit, who

may use that information for the benefit of McCaw.\18\

\15\ Joint Comments at 2. The Joint Comments argue that such

relief is appropriate because evidence exists that AT&T has engaged

in efforts to thwart the development of open standards for cellular

equipment sponsored by other industry manufacturers. Joint Comments

at 3. In order to comply with such a requirement, AT&T would

presumably have to design and implement an additional open interface

which would allow other manufacturers' radio equipment to work with

its switches, and possibly would also need to disclose proprietary

engineering data about its current system design. The imposition of

such a requirement would necessarily involve the Department and the

Court in determinations of numerous technical and controversial

issues of system design and is unnecessary in light of the ability

of the proposed decree to alleviate the potential problems

associated with the acquisition.

\16\ Joint Comments at 4. Apparently, the concern is that AT&T

will be able to selectively alter prices of cellular infrastructure

equipment so as to disadvantage the cellular systems it competes

with in a manner that would not violate the proposed decree or would

not be detectable by the parties or the Department.

\17\ Joint Comments at 5.

\18\ Joint Comments at 6.

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AT&T has responded to the Joint Comments largely by contending that

the ``lock-in'' effect is much less significant than alleged by McCaw's

cellular competitors. In fact, AT&T claims to face intense competition

for its cellular equipment business, even where it is the incumbent

supplier.\19\ In addition, AT&T argues that courts have rejected

``lock-in'' as a basis for establishing market power and, therefore,

additional relief cannot be predicated on its alleged impact.\20\ AT&T

maintains that the telecommunications equipment market is very

competitive and that because it is a significant market for AT&T,\21\

it has very incentive to bend over backwards to satisfy its customers.

Finally, AT&T contends that the proposed decree adequately protects

competing cellular systems from anticompetitive conduct since it

expressly enjoins each type of anticompetitive activity of concern to

the Department, and also contains provisions that reduce the alleged

``lock-in'' effect and that increase AT&T's incentives to abide by the

restrictions contained in the decree.

\19\ AT&T notes that there have been several ``swap-outs'' of

recently installed infrastructure equipment in the last few years

and that progress in the development of open standards for

interconnecting different manufacturers' equipment is lessening

whatever barriers currently exist to switching between different

vendors' products. AT&T Response at 19-23.

\20\ AT&T Response at 5, 35-40.

\21\ AT&T maintains that its $10 billion manufacturing business

is too important to it to risk engaging in predatory conduct against

its customers. AT&T Response at 5.

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The Department concluded that certain competitors of McCaw were

``locked-in'' to AT&T cellular equipment and, therefore, disagrees with

AT&T's attempts to minimize this problem. However, the Department has

concluded that the provisions contained in the proposed Final Judgments

combined with other market factors would constrain AT&T's ability to

impede competition in cellular markets. As described in the CIS, the

proposed decree contains provisions aimed specifically at preventing

anticompetitive abuse by AT&T of

[[Page 49864]]

cellular systems which use AT&T equipment and which compete against

McCaw systems. Misuse of nonpublic information is prohibited by section

V.A of the decree to prevent McCaw from gaining access to information

AT&T obtains as an equipment vendor to its wireless competitors. The

details of how these provisions will be implemented are to be set forth

in the implementation plan required by Section VII.A to be filed with

the Department. Section V.A.4.b assures that nonpublic information of

unaffiliated wireless infrastructure equipment customers is not misused

by AT&T as a result of any proprietary development work it performs for

these customers.

The proposed Final Judgment also contains provisions that will

prevent AT&T from raising the costs of McCaw's wireless competitors

that are currently using AT&T equipment. Section V.B.1 requires AT&T to

provide its unaffiliated cellular infrastructure equipment customers

with the following products and services, in accordance with the same

pricing and business practices that prevailed prior to August 1, 1993:

(a) Technical support and maintenance; (b) installation, engineering,

repair and maintenance services; (c) additional switching and cell site

equipment to be deployed in that system; (d) upgrades and other AT&T

cellular infrastructure equipment developed for use with these systems;

and (e) spare, repair or replacement parts. AT&T also may not

discriminate in favor of McCaw cellular systems or McCaw minority owned

cellular systems in the way in which such products or services are made

available to cellular systems that compete with McCaw or McCaw minority

owned cellular systems. If AT&T discontinues offering any cellular

infrastructure equipment service, part or product, it must either

arrange an alternative source of supply for the product or, if

unsuccessful, provide any affected cellular carrier with the licenses

to use (and rights to sublicense) whatever technical information is

necessary to provide such services, parts or products (to the extent

AT&T is able to do so), so that the carrier can obtain the service,

part or product from another source.

The proposed decree will also prevent AT&T from discriminating

against McCaw wireless competitors that are using AT&T equipment by

failing to provide or develop new products and features. If AT&T

engages in the development of new features or functions for use with

AT&T equipped cellular systems that are not intended for a single

customer, AT&T shall disclose such enhancements to unaffiliated

carriers at the same time it discloses them to McCaw or McCaw minority

owned cellular systems, and shall make them available to unaffiliated

customers at the same time it makes them available to McCaw.

Section V.D contains provisions that would make it easier for

customers that desire to replace AT&T equipment to do so. In the event

that a customer has deployed or contracted to deploy an AT&T equipped

cellular system prior to the entry of the judgment, and the customer

wishes to redeploy the AT&T equipment (e.g., to facilitate its

replacement) or to replace or supplement it with another manufacturer's

equipment, AT&T is required to provide reasonably necessary technical

assistance and cooperation to allow the customer to accomplish such

replacement or redeployment and to permit inter-operation of the AT&T

equipment with the new manufacturer's equipment.

To provide additional assurance that AT&T will abide by these

requirements, Section V.E provides that AT&T will be required to buy

back the cellular infrastructure equipment it has sold to an

unaffiliated customer that competes with McCaw if the Department

determines that it has violated any of its duties under Section V of

the decree.

Finally, Section III requires that, so long as the judgment is in

effect, McCaw and McCaw affiliates that are involved in the operation

of wireless systems and the provision of local wireless services shall

be maintained as corporations or partnerships separate from AT&T, and a

structural separation plan is to be filed for approval by the United

States pursuant to section VII.A. McCaw and McCaw affiliates are to

maintain their own officers and personnel, and books, financial or

operating records, and to retain all wireless service licenses and

title and control of the wireless infrastructure equipment used by its

systems, and the responsibility for the operation of their wireless

services. It may not delegate substantial responsibility for such

business activities to AT&T.

Although the Department recognizes that some forms of

discrimination feared by the BOCs may be hard to detect and prove,

McCaw's cellular competitors are very sophisticated customers of

infrastructure equipment and are well informed about the quality and

prices of equipment provided to the industry. They therefore are able

to identify and report any conduct that might violate the decree. In

view of the likelihood of detection and the severe sanctions that would

befall AT&T's manufacturing business if an investigation were to

determine that it had discriminated against its equipment customers to

advantage its affiliate wireless services business, the Department

considers the likelihood of such conduct by AT&T to be minimal.\22\ If

prohibited conduct should occur, the proposed decree provides adequate

authority to correct such abuses so that any substantial damage to

competition would be punished.

\22\ It is also not in AT&T's business interest to treat its

existing equipment customers unfairly as AT&T must compete against

other equipment manufacturers for new business (including the sale

of PCS equipment) to these same customers.

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The proposed final judgment contains substantial constraints on the

operation of AT&T's equipment business. These constraints were

formulated after extensive consultation with, among others, the firms

that are now objecting to the settlement. Other constraints suggested

by the commenters were considered and rejected, such as development of

an open interface, which the Department believed would not be feasible

in the short term, would require the cooperation of other equipment

suppliers not parties to this transaction, and in any event would not

alleviate the ``lock-in'' of customers who had already installed AT&T

equipment.

The Department believes that the constraints contained in the

proposed decree are sufficient to alleviate the potential harms to

McCaw's cellular competitors from this acquisition and, therefore,

additional relief is unwarranted.

B. The Effect on Competition From the Combination of McCaw's and AT&T's

Cellular Long Distance Businesses

As stated in the CIS, the merger will ``foreclose competition

between the two largest providers of interexchange service in the

highly concentrated markets in which McCaw currently provides

interexchange service to its cellular customers.'' 59 FR 44,169 (1994).

NYNEX and Bell Atlantic argue that the antitrust violation resulting

from the acquisition of AT&T's strongest competitor for cellular long

distance is not cured by the proposed decree because the decree's equal

access provisions cannot make up for the loss of McCaw itself as an

independent long distance provider. Although McCaw provided long

distance services to its cellular customers primarily by reselling

services procured from interexchange carriers (mainly AT&T), it also

deployed some of its own interexchange facilities. The Joint Comments

state that ``McCaw's long distance network was already significantly

completed at the state and regional levels * * *

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particularly the Pacific Northwest and Florida.'' \23\ The Joint

Comments also allege that the evidence developed in their private case

showed that AT&T regarded McCaw as a potentially powerful interexchange

competitor.\24\

\23\ Joint Comments at 7.

\24\ Bell Atlantic and NYNEX filed a private suit against AT&T

that raised issues common to the Department's action. They suggest

that the Justice Department should review the record in their case.

Although the Department has reviewed selected materials from that

case, it was not necessary, in light of the extensive investigation

that the government conducted in connection with this transaction,

that the entire record of the private litigation be reviewed.

Subsequent to filing their comments, Bell Atlantic and NYNEX reached

a settlement with AT&T and dismissed their action.

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AT&T responds to the concerns raised in the Joint Comments by

maintaining that there really is not a cellular long distance market

separate from the overall long distance market, and that in an overall

long distance market, McCaw is not a significant competitor. AT&T

argues that, in any event, the proposed decree mitigates the effect of

the acquisition on long distance competition by imposing on McCaw's

cellular systems equal access requirements that are more stringent than

those to which AT&T stated publicly it would commit and assures that

the acquisition will create competition for the first time in the

provision of long distance services used by McCaw's customers.\25\

\25\ AT&T Response at 6-7.

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The Department agrees with the comments of BellSouth and NYNEX that

the acquisition of McCaw by AT&T without the proposed decree would have

substantially reduced cellular long distance competition. Although

McCaw resold AT&T long distance service, it was free to use another

interexchange carrier, or to build its own facilities, and, thus, was

in competition with AT&T just as other resellers compete with AT&T. The

Department investigation showed that McCaw has insisted that its

customers for cellular services use its long distance services, and has

refused customers' requests to use alternative long distance providers'

services, thereby preventing the customer from establishing a separate

relationship with an interexchange carrier. McCaw's customers in

geographic areas where the other cellular carrier was not providing

equal access were only able to choose between McCaw's cellular service

combined with its interexchange service or the competing cellular

carrier and the long distance services offered by that system. Where

the competing cellular carrier offered equal access to long distance

carriers, its customers were able to choose among a number of

interexchange carriers including AT&T. In such markets, AT&T held a

predominant share of the long distance business and was clearly

competing at the retail level with McCaw's package of cellular and long

distance services.

The Department found that in areas where both McCaw and AT&T long

distance services were offered, McCaw's long distance service differed

in rates and calling areas from AT&T's. Particularly in the case of

large business customers, AT&T offered discounts for cellular long

distance services that were not available to McCaw's customers. In some

instances, AT&T encouraged corporate customers to purchase cellular

services from an equal access carrier in order to obtain AT&T long

distance offerings which included the ability of employees to access

the corporations's private network services from their cellular phones,

a feature not available from McCaw. If after AT&T and McCaw merged

their operations, and McCaw had been permitted to continue its refusal

to allow equal access to other interexchange carriers, there would have

been many areas in which competition would have been lessened, as

customers would have had fewer alternatives and AT&T-McCaw would have

had less incentive to offer competitive long distance services to

cellular customers.

The Department disagrees with Bell Atlantic and NYNEX, however, on

whether the stringent equal access conditions contained in the decree

are sufficient to remove the adverse effect on long distance

competition from the AT&T-McCaw acquisition. The Department believes

that the decree, on balance, will enhance competition in long distance

services. By giving the other interexchange carriers access to McCaw's

cellular exchange customers for the first time, the Department expects

the proposed decree to offer substantial new opportunities for reducing

the concentration in the provision of long distance cellular service.

Many of McCaw's ``captive'' customers are presumably customers of other

long distance carriers who will now have the option of using the same

carrier for cellular and wireline interexchange calling.

The equal access requirement also removes a possible impediment to

competition in the overall long distance market by assuring that AT&T

will not be the only interexchange carrier able to offer its customers

the ability to combine its cellular long distance service with its

landline long distance services to obtain volume discounts or to offer

additional services to employees using cellular phones, such as private

network services. Thus, the Department believes that subject to the

terms of the proposed decree, the acquisition will not adversely affect

competition for long distance cellular services.

C. Concerns Relating to Use of Competitively Sensitive Information

About AT&T's Customers

The Joint Comments and SBC Comments contend that allowing McCaw to

use information regarding AT&T's cellular long distance customers in

marketing cellular services will cause serious anticompetitive harm.

Use of this information allegedly will permit McCaw to target its

marketing effort on the BOCs' customers that have the most attractive

usage patterns.\26\ AT&T strenuously defends its right to use

information regarding its own cellular long distance customers for

marketing other services, including wireless services. AT&T maintains

this is consistent with the FCC's policies on the use of customer

information.\27\

\26\ SBC comments at 9-10, 14.

\27\ AT&T Response at 50-58.

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The Department believes that interexchange carriers preselected by

a customer in an equal access process should be able to use the

interexchange usage information they obtain from serving those

customers to market other services or equipment. All the interexchange

carriers (not just AT&T) providing services to customers of the BOCs'

and McCaw's wireless exchange systems will naturally accumulate

information about their customers' interexchange usage patterns.

D. The Application of the Decree to Cellular Properties Where McCaw Has

Only 50% Ownership

BellSouth comments on the provision that imposes obligations on

systems in which McCaw is a 50-50 partner with BellSouth and in which

McCaw has only ``negative control,'' i.e., the ability to veto actions

with which it disagrees. BellSouth argues that the proposed decree

should not be construed to apply to such systems, arguing that in such

situations, McCaw ``would lack `the power to direct or to cause the

direction of the management and policies' of the cellular system.''\28\

\28\ BellSouth Comments at 13.

---------------------------------------------------------------------------

The Department rejects this suggested clarification from BellSouth.

The purpose of the decree language applying the equal access

requirements to systems with ``negative control'' was in part intended

to avoid a situation where the BOCs and AT&T are 50-50 partners in a

system and both claim that they do

[[Page 49866]]

not have the authority to implement equal access and nondiscrimination

requirements. BellSouth's proposal would create exactly this situation,

where both parties could seek to avoid responsibility for such conduct.

E. Concerns Regarding Alleged Disparities Between the Terms of the

Proposed AT&T-McCaw Decree and the MFJ

BellSouth argues that the Court should not consider the entry of

the proposed AT&T-McCaw decree until after it has acted on the generic

wireless waiver and determined whether the BOCs wireless operations are

subject to the interexchange prohibition of the MFJ.\29\ Since the

Court has denied BellSouth's motion seeking to have the Court find that

the MFJ is not applicable to wireless, and ruled on the BOCs' motion

for an interexchange wireless waiver,\30\ this point is now moot.

\29\ BellSouth Comments at 2.

\30\ April 28 Order.

---------------------------------------------------------------------------

BellSouth also contends that the proposed decree is deficient by

not covering possible future AT&T wireless ventures in the PCS spectrum

band. It argues that PCS and cellular services will be competitive with

each other and that there is no justification for applying the equal

access obligations only to McCaw's cellular systems. The basis for

BellSouth's concern is that the MFJ waiver under which it would be

permitted to provide interexchange services from wireless exchange

systems requires that such systems provide equal access regardless of

whether they operate on the cellular or PCS spectrum band.

The Department believes that it was correct in not extending the

proposed decree's equal access obligations to include possible PCS

operations of AT&T. The equal access provisions of the proposed decree

are intended to remedy the effects of the acquisition on cellular long

distance competition in the geographic markets where McCaw and AT&T

competed prior to the acquisition. Absent this provision, AT&T would

have been able to control the use of McCaw's exchange access facilities

which constituted about half of the spectrum available for mobile

services in those markets. Under the FCC regulations, McCaw's use of

one of the cellular frequency blocks in those markets substantially

restricts the ability of AT&T to acquire PCS spectrum in those

geographic markets. If AT&T were to acquire any PCS spectrum for use in

the McCaw markets, it would not be as a result of this acquisition. In

addition, it is not possible at this time, to predict if the services

to be offered using the smaller PCS spectrum bands will be directly

competitive with the services of the cellular carriers.

Both the Joint Comments and SBC Comments complain the McCaw is not

prohibited from providing interexchange routing from its cellular

switches while the waiver that would permit the BOCs to provide

interexchange services from wireless systems prohibits such a function.

SBC maintains that because it would be limited under the wireless

interexchange waiver to the resale of switched services, they would be

effectively prohibited from obtaining the efficiencies from the

implementation of MTSO to MTSO trunking of interexchange calls.\31\

Although the Department agreed to permit McCaw to provide interexchange

routing, the proposed decree would only permit such a function if it

could be offered to all interexchange carriers on a nondiscriminatory

basis. It is our understanding that this function cannot presently be

implemented so that it would be equally available to all interexchange

carriers, and AT&T equal access plan for its wireless systems contains

no indication that AT&T intends to provide interexchange routing. If

McCaw, in the future, develops such a capability, the Department will

determine in its review of changes to the equal access plan whether it

will in fact be nondiscriminatory.

\31\ SBC Comments at 20-22.

---------------------------------------------------------------------------

The Joint Comments and SBC also maintain that the AT&T-McCaw decree

is inappropriate as it does not impose the same requirement for a

separate sales force as is required under the BOCs'

wirelessinterexchange waiver of the MFJ.\32\ The complaint seems to

substantially misread the requirements of the proposed decree. The

decree requires that AT&T maintain the McCaw cellular operations in a

separate subsidiary, which will have responsibility for the marketing

of cellular services. It does permit certain joint marketing of

cellular and interexchange services, as long as the services are not

offered as packages with interdependent pricing of the two services.

Essentially the same approach was incorporated in the BOCs' wireless

interexchange waiver, except that the BOCs were not required to put

their interexchange operations in a separate subsidiary from their

cellular businesses.

\32\ Joint Comment at 13; SBC Comments at 23-25.

---------------------------------------------------------------------------

BellSouth argues that the proposed decree permits the provision of

``local cellular service in 19 areas that are larger than those

available to the BOCs'' cellular system under the MFJ.\33\ The Joint

Comments specifically complain that the AT&T McCaw decree permits a

broader calling area in the Pittsburgh, PA-West Virginia region than

Bell Atlantic is permitted to serve under the MFJ.\34\ The BellSouth

and Joint Comments also assert that while AT&T-McCaw is automatically

given the benefit of any waiver expanding the calling areas under the

MFJ, the BOCs have not been given equal treatment regard to the

expanded calling areas provided for in the proposed AT&T-McCaw

decree.\35\ Finally, the Joint Comments complain that Section IV(G) of

the AT&T-McCaw decree provides a procedure whereby AT&T can apply for

relief from the Department if there is not sufficient demand for

interexchange access from any of its cellular systems.\36\ Under this

procedure, the provision of access could be centralized to encompass

more than a single LATA.

\33\ BellSouth Comments at 10.

\34\ Joint Comments at 13.

\35\ BellSouth Comments at 11-12.

\36\ Joint Comments at 14-15.

---------------------------------------------------------------------------

AT&T maintains that the BOCs are in a fundamentally different

position than McCaw, in light of their control of the wireline

bottleneck facilities that are used in connection with most cellular

calls, and, therefore, terms of the AT&T/McCaw decree need not be the

same as the MFJ.\37\ Since the BOCs and AT&T submitted their comments,

the Court has acted on the BOC's request for an MFJ waiver to permit

them to provide interexchange services from wireless exchange systems.

In that proceeding the Court denied the broader relief sought by the

BOCs which they had argued, in part, should be granted based on the

impending competition they would be facing after the merger of AT&T and

McCaw. In view of this development the BOCs' ``disparity'' complaints

have already been addressed.

\37\ AT&T Response at 8-9.

---------------------------------------------------------------------------

The purpose of this proceeding is to decide whether the proposed

Final Judgment is in the public interest in alleviating concerns raised

by the AT&T/McCaw transaction, not whether the MFJ places the BOCs at a

competitive disadvantage vis-a-vis a non-BOC cellular provide.

Therefore, the Department believes that the complaints raised by

BellSouth and SBC are irrelevant. In any event, BellSouth and SBC

remain free under the provisions of the MFJ to Requests appropriate

waivers modifying the cellular exchange areas.

[[Page 49867]]

F. Concerns Raised by AD Hoc Interexchange Carriers.

The comments of the Ad Hoc IXCs relate to alleged past

anticompetitive conduct at AT&T and, thus, do not raise any issues

germane to the competitive effects of the transaction that was the

subject of the government's complaint. Therefore, we will not respond

to those comments here, although we will consider the statements

contained therein in connection with our other responsibilities for

enforcing the antitrust laws.

V. Conclusion

After careful consideration of the comments, the United States

continues to believe that, for the reasons stated herein and in the

Competitive Impact Statement, the proposed Final Judgment is adequate

to remedy the antitrust violations alleged in the Complaint. There has

been no showing that the proposed settlement constitutes an abuse of

discretion by the United States or that it is not within the zone of

settlements consistent with the public interest. Therefore, entry of

the proposed Final Judgment should be found to be in the public

interest and it should be entered.

Respectfully submitted,

Dated: July 25, 1995.

Anne K. Bingaman,

Assistant Attorney General.

Constance K. Robinson,

Director of Operations.

Donald J. Russell,

Chief, Telecommunications Task Force.

Nancy Goodman,

Assistant Chief.

Luin P. Fitch,

Patrick J. Pascarella,

Attorneys.

U.S. Department of Justice, Antitrust Division, 555 4th Street,

N.W., Washington, D.C. 20002, (202) 514-5621.

Attachments

1. Defendants' Response to the Public Comments on the Proposed

Final Judgment.

2. Comments of Bell Atlantic Corporation and NYNEX Corporation

on Proposed Final Judgment in United States v. AT&T Corp. and McCaw

Cellular Communications, Inc.

3. Comments of BellSouth Corporation on Proposed Final Judgment.

4. Comments of SBC Communications Inc. on Proposed Final

Judgment.

5. Comments and Objections of the Ad Hoc IXCs to the Proposed

Final Judgment Between the United States, AT&T Corp. and McCaw

Cellular Communications, Inc.

United States District Court for the District of Columbia

In the matter of: UNITED STATES OF AMERICA, Plaintiff, v. AT&T

CORP. and McCAW CELLULAR COMMUNICATIONS, INC., Defendants. Civil

Action No. 94-01555 (HHG).

TO: THE JUSTICE DEPARTMENT

Defendants' Response to the Public Comments on the Proposed Final

Judgment

At the Justice Department's request, defendants AT&T Corp.

(``AT&T'') and McCaw Cellular Communications, Inc. (``McCaw'')

respectfully submit their joint response to the public comments on the

Proposed Final Judgment (``Proposed Decree'') \1\--for inclusion in the

response that the United States files hereafter.

\1\ Pursuant to 15 U.S.C. Sec. 16(d), comments have been filed

by SBC Communication Corporation (``SBC''), by BellSouth Corporation

(``BellSouth''), by Bell Atlantic Corporation and NYNEX Corporation

(``Bell Atlantic/NYNEX''), and by the Ad Hoc Interexchange Carriers

(``Ad Hoc IXCs'').

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Introduction and Summary

This Tunney Act proceeding presents an antitrust issue that is both

very narrow and very straightforward. The Proposed Decree settles the

challenges to the AT&T-McCaw merger that are raised in the Complaint

that the Justice Department simultaneously filed under Section 7 of the

Clayton Act. In determining whether this Proposed Decree is in the

``public interest,'' the question is whether the Proposed Decree is

virtually certain to harm competition or whether the Justice Department

otherwise acted irrationally, in bad faith, or contrary to its duties

to the public in settling its claims on these terms. See United States

v. Western Electric Co., 993 F.2d 1572, 1577 (D.C. Cir. 1993). As

explained in detail below, it is patent that no such determinations

could be made and that the Proposed Decree can now be approved

summarily, especially given the extensive public records that already

exist on the competitive effects of this merger.

The overriding fact is that the Department agreed to the Proposed

Decree because the Department concluded that the AT&T-McCaw merger can

produce substantial procompetitive benefits and that the provisions of

the Proposed Decree are adequate to prevent each of the threats to

competition that the Department believed might otherwise result from

the merger. These conclusions are rational. Indeed, they are

unassailable.

Foremost, the AT&T-McCaw merger will promote competition and

benefit consumers in many significant respects. The Justice Department,

the FCC, and the California and New York state utility commissions

previously found--and no commentor here disputes--that the merger will

foster competition in cellular and other local telecommunications

markets which the divested Regional Bell Operating Companies

(``RBOCs'') and other local exchange carriers (``LECs'')

``traditionally have provided on a monopoly basis.'' \2\ For example,

the merger will offset some of the RBOCs' immense advantages in

providing cellular services and enable the debt-laden McCaw to

``compete more vigorously with the BOCs'' by strengthening McCaw

financially, by giving it a strong brand name, by enhancing its

customer support, technological, and marketing capabilities, and by

enabling AT&T-McCaw efficiently to offer one-stop-shopping and engage

in ``cross-selling.'' \3\ As the Department stated, the merger, as

conditioned by the Proposed Decree, will bring the ``benefits of

competition to millions of consumers of cellular telephone service'' by

leading to ``lower prices'' and ``better service.'' DOJ Press Release,

pp. 1-2 (July 15, 1994). In addition, the preservation of McCaw as an

independent firm with no affiliation with landline monopolies will

further foster the development of cellular alternatives to landline

bottleneck monopolies if and when that becomes economically and

technologically feasible.\4\

\2\ Applications of Craig O. McCaw and AT&T, File No. ENF-93-44

(``AT&T-McCaw FCC Proceeding''), Memorandum Opinion and Order (``FCC

Order''), para. 60, FCC 94-238 (Sept. 19, 1994), appeals pending sub

nom. Southwestern Bell Corp. v. FCC, Nos. 94-1637, 94-1639 (D.C.

Cir.); see Joint Application of the American Telephone & Telegraph

Company, et al., Decision 94-04-042, pp. 30-31 (Cal. Pub. Utils.

Comm'n Apr. 6, 1994) (``California PUB Decision''); Joint Petition

of AT&T, Ridge Merger Corporation, and McCaw Cellular

Communications, Inc., Case 93-C-0777, Order Asserting Jurisdiction

and Approving Transaction, p. 6 (N.Y. Pub. Serv. Comm's Dec. 31,

1993) (``N.Y.P.S.C. Order'').

\3\ FCC Order, Paras. 57-60, see California PUC Decision, pp.

30-33.

\4\ FCC Order, para. 60; accord N.Y.P.S.C. Order, p. 6.

---------------------------------------------------------------------------

Those are all the reasons that the Department had argued in 1982,

and Judge Greene then found, that it would be ``antithetical to the

purposes of the antitrust laws'' and detrimental to the public interest

to prohibit AT&T from participating in local cellular markets through

alliances with firms like McCaw or otherwise.\5\ Conversely, as was

also recognized in 1982, there is no realistic possibility that such a

merger could otherwise harm competition. AT&T and McCaw do not directly

compete in any market, and neither controls a bottleneck monopoly that

[[Page 49868]]

could be leveraged into an adjacent market. To the contrary, AT&T's

long distance and manufacturing businesses and McCaw's cellular

business each depend on access to different sides (or aspects) of the

LECs' local exchange monopolies.

\5\ United States v. AT&T, 552 F. Supp. 131, 175-76 (D.D.C.

1982) (``MFJ Opinion''), aff'd sub nom. Maryland v. United States,

460 U.S. 1001 (1983).

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In this regard, while the Department's Complaint raised two basic

challenges to the merger, defendants believe--as Professors Lawrence

Sullivan, Robert Willig, and Douglas Bernheim previously testified

before the FCC--that each of these theories is unsound as a matter of

law, fact, and economics, and that the merger could not be found to

violate Section 7 of the Clayton Act if there were a trial in this

case. In all events, because the provisions of the Proposed Decree

enjoin even these theoretical threats to competition, it patently was

reasonable for the Department to settle each of its challenges to the

merger under the terms of the Proposed Decree.

First, the Department's complaint alleges that the merger could

lead AT&T to use its position as a telecommunications equipment

manufacturer to harm competition in those cellular services markets

where McCaw's rival (an RBOC or GTE) uses AT&T cellular equipment. In

particular, while the manufacture of telecommunications equipment is an

intensely competitive business, the Department's Compliant alleges that

the RBOCs and GTE will nonetheless be ``locked-in'' to AT&T for the

purchase of certain types of cellular equipment during an interim

period and that the merger would give AT&T an incentive to raise the

costs, or degrade the services, of the RBOCs and GTE during this

interim ``lock-in'' period.

However, there is substantial, indeed overwhelming, evidence that

there in fact is no ``lock-in.'' Further, even if there were, it would

be suicidal for AT&T to engage in the hypothesized predatory conduct.

That would cause the customers (GTE and the RBOCs) on whom AT&T's $10

billion manufacturing business depends to, in the Second Circuit's

words, ``retaliat[e]'' by ``shifting'' present and future purchases of

cellular and landline equipment alike to AT&T's competitors--which is

why courts have rejected indistinguishable ``lock-in'' claims when they

were raised in prior case. See Fruehauf Corp. v. FTC, 603 F.2d 345, 355

(2d Cir. 1979).

In any case, the Proposed Decree removes any possible doubt on this

issue and precludes any claim that it is likely, much less virtually

certain, that the merger would lead AT&T's manufacturing unit to engage

in the predatory conduct that the Department had feared. The Proposed

Decree not only expressly enjoins each type of predatory conduct that

the Department has hypothesized, but also contains other provisions

that both further reduce the alleged ``lock'in'' and otherwise

dramatically reinforce AT&T's overwhelming incentives to treat all its

equipment customers equally and to satisfy their needs.

Second, the Department's Complaint also alleges that the merger

would cause McCaw to use market power over local cellular radio service

to favor AT&T's putatively ``dominant'' long distance service and

thereby reduce horizontal competition in a purported ``market'' for the

provision of ``cellular long distance service.'' \6\ However, there is

overwhelming evidence that there is no such competition between AT&T

and McCaw today and no such market. McCaw now provides all the long

distance services that originate on its cellular systems (which

represent less than 0.1% of national long distance usage), and it does

so by reselling the same AT&T long distance services that are provided

to landline customers. Because AT&T had further independently committed

that McCaw will begin offering presubscription and other basic features

of equal access to all long distance carriers following the merger, the

merger would have promoted competition in long distance markets, and

reduced AT&T's role, even if there had been no decree.

\6\ The Department similarly raised the concern that McCaw's

market power as a cellular equipment buyer might enable it to impede

``upstream'' equipment manufacturing competition by sharing

nonpublic information of AT&T's cellular equipment competitors with

AT&T. The Proposed Decree contains structural and injunctive

provisions to bar any such conduct as well.

---------------------------------------------------------------------------

In any case, here, too, the Proposed Decree removes any doubt on

this score. It imposes equal access obligations on McCaw cellular

systems that go far beyond those to which AT&T had voluntarily

committed, and assures that the merger will create competition for the

first time in the provision of long distance services used by McCaw's

customer.

Indeed, that the Department acted reasonably in settling its two

challenges on these grounds is vividly confirmed by the conduct of the

only two commentors who discuss the adequacy of the Proposed Decree to

address the Department's concerns: Bell Atlantic and NYNEX. As their

joint comments note, they had filed a private antitrust suit that

sought to enjoin the merger on each of the two grounds alleged in the

Department's Complaint. However, Bell Atlantic and NYNEX thereafter

abandoned their horizontal long distance claim, and then (on the eve of

trial) they dismissed the vertical manufacturing claim with prejudice

after AT&T and these RBOCs entered into a settlement agreement.

Finally, none of the other comments even challenge the sufficiency

of the Proposed Decree to prevent either of the potential competitive

harms addressed in the Department's Complaint. Rather, they seek to use

this proceeding collaterally to attack the 1982 Decree that broke up

the Bell System (``MFJ'') and otherwise to challenge Procompetitive

features of the AT&T-McCaw merger that the Department appropriately did

not challenge.

Most prominently, three of the RBOCs (SBC, NYNEX, and Bell

Atlantic) claim that the Decree will not be in the public interest

unless a provision is added that bars AT&T-McCaw from directly

marketing cellular service to AT&T long distance customers who are

existing cellular customers of RBOCs. The RBOCs recognize that AT&T has

many satisfied customers, and the RBOCs fear that the ``power of the

AT&T-McCaw brand'' and the ability to offer attractive services may

cause cellular customers who have presubscribed to AT&T's long distance

service to choose to obtain cellular service from AT&T if it engages in

this direct marketing.

However, extending these choices benefits consumers, and courts

have thus uniformly held that it is procompetitive for integrated firms

to be free to offer new services to customers of their existing

offerings and that this is a legitimate efficiency that all multi-

product firms enjoy. The RBOCs overlook that the antitrust laws protect

competition, not the RBOC's selfish interests as competitors. Further,

the RBOCs' claims are hypocritical because the ability of AT&T-McCaw to

make such offers could only marginally offset some of the immense other

advantages that the RBOCs enjoy by reason of their bottleneck

monopolies and these RBOCs are seeking to preserve advantages for

themselves, not create ``parity.''

In addition, despite Judge Greene's prior rejections of these

claims, the RBOCs also continue to argue that the approval of the

Proposed Decree should be conditioned on removal of the MFJ's ban on

their provision of interexchange services to wireless customers, and

they claim that a series of additional ``equal access'' restrictions

should be imposed on AT&T-McCaw in the interest of ``parity'' unless

the Court removes the MFJ's restriction. While some of the RBOCs'

individual claims here rest on misunderstandings of the Proposed

[[Page 49869]]

Decree, the short answer to the RBOCs is that they are properly subject

to different restrictions from AT&T-McCaw because the RBOCs have

bottleneck landline monopolies and AT&T-McCaw to not--as Judge Greene

and now the FCC have repeatedly held.

Background

This is an unusual Tunney Act proceeding in that the AT&T-McCaw

merger has been the subject of extensive prior proceedings before the

FCC, the New York Public Service Commission, the California Public

Utilities Commission, judge Greene (in the MFJ section I(D) waiver

proceeding), and a federal court in Brooklyn. These proceedings created

extensive records regarding the competitive effects of the merger, and

it is thus possible to highlight the salient facts about the cellular

service, equipment manufacturing, and long distance markets--with

citations to affidavits and other filings from the prior proceedings.

1. McCaw's Cellular Service and the Reasons for the Merger

McCaw Cellular Communications, Inc., its wholly-owned subsidiaries,

and its 52%-owned LIN Broadcasting subsidiary (collectively referred to

as ``McCaw'') have interests in a number of cellular radio, paging,

air-to-ground, and other mobile radio services. In particular, McCaw

has interests in cellular systems that collectively serve about 17% of

the nation's cellular subscribers. McCaw has small minority interests

in a number of these systems (e.g., St. Louis), has what could loosely

be referred to as joint control with an RBOC or successor to an RBOC in

others (San Francisco Bay, Kansas City, Los Angeles, Houston, and

Galveston), and has a majority and unilateral controlling interest in a

number of others (e.g., Seattle, Portland, Denver, Las Vegas,

Minneapolis, Miami, Tampa, Jacksonville, Dallas, Oklahoma City,

Pittsburgh, and New York City). The systems in which McCaw has

``unilateral'' control serve about 13% of the nation's cellular

subscribers.

All of McCaw's interests are in ``A'' Block cellular systems that

were initially reserved for ``nonwireline carriers.'' Each system

further competes with the RBOC or other LEC with the local telephone

monopoly in that area. As shown in the Appendix to this filing, the

dispersed nature of McCaw's systems means that it competes with only a

fraction of the systems of any one RBOC or LEC (and with an even

smaller fraction of any one AT&T-equipped cellular system that

individual RBOCs or LECs have).

Because McCaw entered this business as a start-up company, it

inherently faced severe disadvantages in competing with the well-known,

well-financed, and technologically adept affiliates of RBOCs and other

LECs. In this regard, while the FCC imposed separate subsidiary

requirements on RBOC cellular systems, the FCC's regulations place no

significant restrictions on the RBOCs' financing of their cellular

operations, and these regulations further allow the RBOCs to use their

well-known trade names in marketing cellular services and jointly to

advertise cellular and monopoly landline service. See Cellular

Communications Services, 86 FCC 2d 469, 493-95 (1981); 47 C.F.R.

Sec. 22.901(d)(1).

One disadvantage arises because cellular systems require

interconnections with landline exchange monopolies, and substantial

portions of the revenues of cellular systems are remitted to local

telephone monopolies to compensate them for terminating cellular-

originated calls. RBOCs previously used this monopoly power to

frustrate cellular competitors (see United States v. Western Elec. Co.,

673 F. Supp. 525, 551 (D.D.C. 1987)), and McCaw had to expend time and

resources obtaining appropriate interconnections.\7\

\7\ See AT&T-McCaw FCC Proceeding, AT&T's and McCaw's Opposition

to Petitions to Deny and Reply to Comments (``AT&T-McCaw FCC Opp.'')

(Dec. 2, 1993), Affidavit of James L. Barksdale, para. 15

(``Barksdale FCC Aff.''); United States v. Western Elec. Co., Civ.

No. 82-0192 (D.D.C.), Memorandum in Support of AT&T's Motion for a

Waiver of Section I(D) of the Decree Insofar as It Bars the Proposed

AT&T-McCaw Merger (May 31, 1994) (``AT&T's Section I(D) Mem.''),

Affidavit of James Barksdale and Wayne Perry, para. 7 (``Barksdale/

Perry Section I(D) Aff.'').

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These disadvantages, in turn, were radically compounded by the

regulatory preferences that the RBOCs and other LECs received. Whereas

McCaw generally had to pay fair market value for initial licenses in

each licensing area, the FCC reserved one of the two cellular licenses

(the ``B'' Block license) for an affiliate of the RBOC or other LEC

that had the landline monopoly in the Metropolitan Statistical Area

(``MSA'') or Rural Service Area (``RSA'') in question, such that the

RBOCs generally acquired ``B'' Block cellular licenses at no cost.\8\

Second, because RBOCs provide landline exchange services in contiguous

areas throughout their regions, the FCC's regulations also meant that

RBOCs automatically received licenses in the contiguous MSAs and RSAs

that comprise natural mobile markets. By contrast, McCaw and other

nonwireless carriers had to incur large amounts of debt to acquire

their licenses and consolidate them in contiguous areas.\9\ Even today,

there are many areas in which RBOCs have established cellular systems

that serve areas that are larger than McCaw or their other ``A'' Block

competitors.\10\

\8\ See Barksdale FCC Aff., para. 15; Barksdale/Perry Section

I(D) Aff., para. 16.

\9\ See Barksdale FCC Aff., Paras. 16-17; Barksdale/Perry

Section I(D) Aff., para. 17.

\10\ See Barksdale FCC Aff., Paras. 15-17; Barksdale/Perry

Section I(D) Aff., Paras. 16-18.

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Third, the FCC gave the RBOCs and other ``B'' Block carriers

substantial headstarts--of one to three years--over their ``A'' Block

competitors. In particular, the FCC granted the RBOCs these headstarts

in face of claims by ``A'' Block competitors that the RBOCs would

thereby have an initial monopoly over the customers with the greatest

demand for cellular service, thereby both allowing the RBOCs to earn

monopoly profits during the headstart period and forcing their

nonwireline competitors to seek to dislodge existing customers of an

incumbent monopolist when the ``A'' Block systems became

operational.\11\

\11\ See Barksdale FCC Aff., Paras. 15, 17; Barksdale/Perry

Section I(D) Aff., Paras. 16-18.

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The net result of these disadvantages is that McCaw (as well as

other nonwireline carriers) had to borrow heavily to acquire and

consolidate its licenses, to construct its systems, and to finance each

system's operations for a period of many years after it commenced

operations. One reflection of the significance of these disadvantages

is that every significant nonwireline carrier other than McCaw ended up

selling its ``A'' Block licenses to RBOCs or other LECs, which

eliminated the ``independent'' cellular systems that the FCC sought to

create and meant that RBOCs and GTE control ``A'' Block systems serving

some 60% of the nation's population.\12\ In the case of McCaw, it

became a highly-leveraged firm with some $5.7 billion in debt and a

debt ratio of over 70%.\13\ Further, McCaw is saddled with an

additional, unique obligation. It cannot retain some of its most

significant properties--the New York City, Houston, Los Angeles, and

Dallas interests of McCaw's 52%-owned LIN subsidiary--unless McCaw can

raise what is likely to be in excess of $3 billion required to purchase

the remaining 48% of LIN in 1995.\14\

\12\ See Barksdale FCC Aff., para. 17; Barksdale/Perry Section

I(D) Aff., para. 18.

\13\ See Barksdale FCC Aff., Paras. 13, 19; Barksdale/Perry

Section I(D) Aff., para. 14.

\14\ See United States v. Western Elec. Co., Civ. No. 82-0192

(D.D.C.), AT&T's Reply in Support of Its Motion for a Waiver of

Section I(D) of the Decree Insofar As It Bars the Proposed AT&T-

McCaw Merger (July 18, 1994), Supplemental Affidavit of Wayne Perry,

Paras. 2-4; AT&T Section I(D) Mem., Affidavit of Alex J. Mandl,

Paras. 3, 25 (``Mandl Section I(D) Aff.'').

[[Page 49870]]

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Against this background, McCaw determined that just as other ``A''

Block nonwireline carriers had exited the business, it could not be an

effective competitor with RBOCs, other LECs, and other participants in

emerging wireless businesses unless it formed an alliance with a

financially strong firm like AT&T.\15\ In particular, McCaw had

concluded that it could not obtain the billions of dollars that it

needed to maintain and enhance its cellular and other mobile systems at

an acceptable cost in traditional debt and equity markets.\16\ McCaw

further determined that an alliance with AT&T would otherwise

strengthen McCaw. It would provide technological strengths that McCaw

lacks, and McCaw identified a number of service improvements that an

alliance with AT&T would permit. AT&T has a strong brand and

relationships with satisfied customers of other AT&T offerings, Phone

Stores, and other marketing resources that would enable McCaw to market

its services more efficiently and effectively. AT&T further has unique

customer care and support resources (and standards of quality)--as

reflected in the Baldridge Award that AT&T's Universal Card received

and its revolution of the credit card business.\17\

\15\ See Mandl Section I(D) Aff., Paras. 17-21.

\16\ See Barksdale/Perry Section I(D) Aff., Paras. 19-20; Mandl

Section I(D) Aff., para. 18.

\17\ See Barksdale FCC Aff., Paras. 12, 25; Barksdale/Perry

Section I(D) Aff., para. 24; Mandl Section I(D) Aff., para. 20.

---------------------------------------------------------------------------

AT&T found the merger with McCaw attractive for these, and other,

reasons.\18\ AT&T determined that the quality of the cellular service

provided by McCaw and its competitors alike had been poor, and

transmission quality (as well as blockage rates) is not what it could

be.\19\ Customer education, care, and satisfaction had been low--as

reflected in the higher industry churn rates. Fraud is such as serious

problem that it absorbs some 8% of industry revenues. AT&T perceived an

immense opportunity to improve the quality of McCaw's service and to

offer cellular services that adhere to the high quality standards that

the use of the AT&T name warrants. In this regard, AT&T believed that

satisfied customers of other AT&T services (e.g., long distance, CPE,

the Universal Card) would find an AT&T cellular service very

attractive, and that AT&T's relationship with these customers would

enable AT&T-McCaw to market cellular service them at a lower cost.

Further, while cellular today is not a substitute for the landline

exchanges, it could conceivably develop into a substitute hereafter,

and AT&T believed that an alliance with McCaw could cause that to

happen more rapidly.\20\

\18\ See Mandl Section I(D) Aff., para. 20.

\19\ See Mandl Section I(D) Aff., Paras. 20-24, 26.

\20\ See Mandl Section I(D) Aff., Paras. 21-24.

---------------------------------------------------------------------------

Entry in cellular was also attractive to AT&T in light of the

unrelenting efforts of the RBOCs to obtain (through legislation or

otherwise) premature removals of the MFJ's core long distance

restriction: i.e., before the RBOCs lose the ability to leverage local

bottleneck monopolies. While premature removal of the restriction would

allow RBOCs to use their local monopolies to capture large percentages

of the long distance business, AT&T believed that these harms could be

somewhat reduced if AT&T were providing cellular service.

While there are today only two cellular service licensees in each

market, the FCC is now in the process of licensing an additional five

carriers to provide ``personal communications services'' or PCS

services.

2. Long Distance Service

Since it commenced its operations, McCaw has provided the ``long

distance'' as well as the ``local'' services of its cellular

subscribers. In particular, with the exception of the McCaw cellular

systems that are ``BOCs'' within the meaning of the MFJ, no cellular

system in which McCaw has an interest has provided equal access, and

its customers generally have been unable to reach other interexchange

carriers on 1+ or a 10XXX basis. Rather, subscribers have used a

``McCaw'' long distance service, which McCaw has offered by reselling

long distance services obtained from AT&T under a long-term service

contract.\21\ As RBOCs have correctly stated in proceedings under the

MFJ, the long distance rates that McCaw has generally charged are the

same ``retail'' MTS rates that AT&T charges.\22\

\21\ McCaw owns private microwave facilities that are used for

certain connections of cell sites and cellular switches (``MTSOs'')

or between MTSOs serving contiguous areas. These facilities are

overwhelmingly intraLATA, and the few facilities that cross LATA

boundaries provide connections within systems or between contiguous

systems and generally serve the same functions as interLATA

facilities that RBOC cellular systems are permitted to lease in

areas where they are authorized to provide cellular services on a

multiLATA basis pursuant to MFJ waivers.

\22\ See Barksdale/Perry Section I(D) Aff., Paras. 10-11.

---------------------------------------------------------------------------

The RBOCs have emphasized in their marketing literature and

activities that they offer presubscription and the ability to

presubscribe not only to the interexchange carrier of the customers

choice, but also to particular services (e.g., AT&T's SDN or MCI's

VNET).\23\ AT&T believes that McCaw's failure to offer presubscription

makes McCaw's cellular services less attractive. Shortly after the

August 16, 1993 announcement of the merger, AT&T committed to Congress

and to the FCC that McCaw would offer presubscription after the merger

is consummated.\24\

\23\ See AT&T's Further Opposition to RBOC's Motion to Exempt

``Wireless'' Services from Section II of the Decree, pp. 19-23 (May

3, 1993).

\24\ See Transcript of Hearing of U.S. Senate Committee on

Commerce and Transportation, p. 102 (Sept. 8, 1993) (testimony of

AT&T Chairman Robert Allen) (``It would be our intent to give all of

our cellular subscribers equal access to any interexchange carrier

they wish''); AT&T McCaw FCC Opp., pp. 54-55; FCC Order, para. 64.

---------------------------------------------------------------------------

There are several hundred firms that resell long distance services

of AT&T, Sprint, MCI, WilTel, and other facilities-based interexchange

carriers. There are numerous such firms whose long distance revenues

from resale are substantially in excess of the approximately $38

million in long distance revenues that McCaw had in 1993.\25\

\25\ See AT&T-McCaw FCC Opp., p. 52.

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3. The Competitive Telecommunications and Wireless Equipment

Manufacturing Markets

Following AT&T's January 1, 1984 divestiture of the RBOCs,

competition in the manufacture of telecommunications equipment

intensified, and the divested RBOCs established relationships with

multiple suppliers and played them off against one another. AT&T's

share of the RBOCs' purchases of ``landline'' switching products,

transmission equipment, transmission media, and other

telecommunications products thus has dropped from over 90% before

divestiture to less than 40% today. AT&T competes for these sales in a

global market with Northern Telecom (of Canada), Siemens (of Germany),

Alcatel (of France), Ericsson (of Sweden), NEC (of Japan), and many

other firms.

AT&T Network Systems, and each of its business units, critically

depend on sales to the seven RBOCs and GTE. Of AT&T Network Systems'

approximately $10 billion in 1994 external sales, roughly $6 billion

were to the seven RBOCs and GTE and roughly $5 billion were to the

seven RBOCs. The seven RBOCs regularly use their leverage as purchasers

of landline equipment to seek to affect AT&T's behavior in other areas.

Cellular and other wireless infrastructure equipment is a critical

and rapidly growing segment of

[[Page 49871]]

telecommunications equipment manufacturing. Of AT&T's approximately

$1.25 billion in anticipated 1994 sales, approximately $650 million was

to the seven RBOCs and GTE; nearly $500 million was to the seven RBOCs,

and over $130 million was to Bell Atlantic and NYNEX.\26\ In addition

to cellular infrastructure equipment, AT&T's wireless infrastructure

unit is actively developing equipment for use in providing PCS. Total

domestic PCS equipment sales are estimated to amount to billions of

dollars by 1997.

\26\ By contrast, McCaw's principal supplier of cellular

infrastructure equipment is Ericsson.

---------------------------------------------------------------------------

Cellular infrastructure equipment (which includes cell sites and

MTSOs) is manufactured and sold in a worldwide market in which AT&T

competes with Ericsson, Motorola, Northern Telecom (NTI), Nokia,

Siemens, Hughes, and others. The competitiveness of the markets is

reflected in shifts in market positions from year to year, with

Motorola having lost share (until it rebounded in 1994), and AT&T and a

recent new entrant (Nokia) having gained. AT&T has estimated worldwide

shares of cellular infrastructure equipment sales between 1988 and 1993

as follows:

----------------------------------------------------------------------------------------------------------------

Ericsson Motorola AT&T NTI Nokia Other

Year (percent) (percent) (percent) (percent) (percent) (percent)

----------------------------------------------------------------------------------------------------------------

1988.............................. 33.0 25.0 7.9 6.0 0.0 28.1

1989.............................. 33.0 25.0 9.9 6.0 0.0 26.1

1990.............................. 33.0 25.0 10.5 6.0 2.0 23.5

1991.............................. 33.0 25.0 17.1 6.0 5.0 13.9

1992.............................. 34.2 19.0 14.1 6.9 7.8 18.0

1993.............................. 34.7 18.5 14.3 6.1 8.6 17.8

----------------------------------------------------------------------------------------------------------------

Percentages of sales of the specific cellular equipment

manufactured to the U.S. AMPS and related standards used in North

America, South America, and certain Asian countries have been estimated

by AT&T as follows:

----------------------------------------------------------------------------------------------------------------

Ericsson Motorola AT&T NTI Other

Year (percent) (percent) (percent) (percent) (percent)

----------------------------------------------------------------------------------------------------------------

1988........................................... 20.0 35.0 24.2 5.0 15.8

1989........................................... 21.0 33.0 26.1 5.0 14.9

1990........................................... 23.0 29.0 24.3 5.0 18.7

1991........................................... 25.0 26.0 35.0 5.0 9.0

1992........................................... 28.8 20.0 29.9 5.0 16.3

1993........................................... 28.2 19.5 34.3 5.0 13.0

----------------------------------------------------------------------------------------------------------------

Swap-Outs of Equipment. A cellular carrier typically will make

procurement decisions in a cycle in which it requests bids and

proposals to meet its needs over a period of years. A cellular carrier

will issue a request for proposals and purchase an initial integrated

system of MTSOs and associated cell sites from the successful vendor.

Thereafter, the carrier buys new cell sites and upgrades and

supplemental equipment from that vendor until (1) the vendor's

equipment or support fails to be satisfactory to the cellular carrier,

or (2) new technological developments provide a basis for a substantial

overhaul of the existing network system. In either instance, a ``swap-

out'' can result. In fact, there have been a large number of instances

in which cellular carriers have replaced, in whole or in part, the cell

sites and other cellular infrastructure equipment of their incumbent

vendors with those of another manufacturer.

In particular, cellular carriers have ``swapped out'' one vendor's

cell sites and MTSOs and replaced them with another's long before the

equipment was obsolete when the carrier was not satisfied with the

original vendor's performance. For example:

--In 1988, McCaw swapped out recently-installed AT&T cellular equipment

in Florida. It relocated the AT&T cell sites and switches to other

markets.

--U S West is in the process now of replacing AT&T Series II equipment

in Phoenix and four other markets in Arizona with Motorola equipment.

--Ameritech recently swapped out a system in St. Louis.

--GTE has swapped out Motorola equipment and replace it with AT&T

equipment in a number of markets.

--In 1993, McCaw swapped out Motorola equipment in Dallas and replaced

it with Ericsson equipment.

--In 1994, McCaw swapped out Northern Telecom equipment in Minneapolis

and replaced it with AT&T equipment.

--Southwestern Bell is in the process of swapping out Motorola

equipment in Boston.

--BellSouth recently announced that Hughes will replace its existing

vendors in many systems.

Notably, while the Department is correct (Competitive Impact Statement,

p. 8) that the rapid growth in cellular services has meant that

aggregate investment in cellular equipment in each market is greater

today than it was previously, the costs per subscriber of a swap-out

have remained constant, or even declined. Moreover, carriers who ``swap

out'' existing equipment can recover all or most of the current value

of that equipment by relocating the equipment to other markets, by

selling the equipment themselves, or, most frequently, by negotiating

substantial buy-back or credit arrangements with the new supplier.

Further, in addition to these complete ``swap-outs,'' a cellular

carrier can replace an existing supplier's equipment in part by

purchasing new equipment to serve part of an existing service area or

certain customers in an area. These ``partial'' swap-outs are made

increasingly possible by developments that have allowed calls to be

handed off between switches of different manufacturers. In particular,

a standard (IS-41) was developed for an interface between two different

manufacturers' MTSOs. While initial versions of IS-41 (Rev. O and Rev.

A) did not allow all calling features to follow the call, the current

version of IS-41 (Rev. B) allows key features to do so, and the

[[Page 49872]]

subsequent version approved in 1994 (Rev. C) would allow for transfer

of nearly all existing features.

Manufacturers are further constantly making proposals to replace

incumbent vendors in whole or in part. Indeed, this is a significant

aspect of ongoing competition between manufacturers in the equipment

market. Consequently, even when swap-outs end up not occurring,

carriers have used the threat of complete or partial swap-outs to

obtain more favorable pricing and other commitments from AT&T and other

suppliers. For example, in 1993 (after the AT&T-McCaw merger was

announced), a large AT&T cellular infrastructure customer negotiated

new contracts in which it would obtain additional price discounts and

other valuable rights if it continued to purchase cell sites from AT&T

in markets that already had AT&T MTSOs and cell sites. Similarly, other

price protection clauses have been demanded by customers, and agreed to

by AT&T, since the AT&T-McCaw merger was announced.

In this regard, one RBOC recently requested proposals that would

cap its purchase of AT&T's equipment in a major market. It sought

proposals from Motorola and others to provide cell sites and MTSOs that

would be used to provide digital cellular service in portions of the

cellular service area and that would rely on IS-41 connections for

handoffs with AT&T MTSOs in that area. AT&T then made a counterproposal

to provide the digital capability by upgrading the already-installed

AT&T equipment to digital.

Other pending or impending developments will make swap-outs even

easier for cellular carriers. The imminent improvements in IS-41 will

make partial swap-outs easier, especially as more and more features are

offered through centrally located advanced intelligent network

(``AIN'') computers, not MTSOs. Finally, because RBOCs and other AT&T

equipment customers have increasingly requested an ``open'' interface

between cell sites and MTSOs, AT&T is proposing an industry standard

interface for these connections and will, once any such standard is

adopted, manufacture equipment that will enable customers to mix and

match different vendors' cell sites and MTSOs. While these efforts were

underway previously, this undertaking was a publicly-announced feature

of AT&T's settlement with Bell Atlantic and NYNEX.\27\

\27\ See Joint Press Release of AT&T, Bell Atlantic, and NYNEX

(Nov. 7, 1994).

---------------------------------------------------------------------------

In AT&T's internal assessment of the merger with McCaw, AT&T

recognized that the merger could have a severe negative effect on its

manufacturing businesses unless AT&T demonstrated its continued

reliability as a supplier. In particular, AT&T personnel believed that

some RBOCs might have strong adverse reactions to an AT&T alliance with

McCaw and retaliate by swapping out AT&T in some cellular markets and

by buying less landline and wireless equipment. Accordingly, AT&T

personnel launched elaborate programs both to bend over backwards to

preclude any RBOC concerns about unfair treatment and to communicate

the conviction and assurance that the McCaw alliance would not affect

AT&T Network Systems' commitment to meet all its customers' needs.\28\

\28\ AT&T's manufacturing subsidiary strengthened AT&T's already

rigorous existing procedures for safeguarding any information that

cellular (and other) purchasers' equipment have designated as

confidential or proprietary. When RBOCs responded adversely to the

merger announcement by threatening to swap out AT&T's cellular

infrastructure equipment, AT&T negotiated more favorable

arrangements with them.

---------------------------------------------------------------------------

4. The Prior Proceedings

The AT&T-McCaw merger could not be consummated until it received

the prior approvals of the FCC and the state utility commissions in

California, New York, and other states, and a waiver of Section I(D) of

the MFJ. In these proceedings, RBOCs not only raised the same

challenges to the merger that are resolved by the Proposed Decree, but

also sought to use the proceedings to force modifications of the MFJ's

restrictions on the RBOCs or to obtain conditions that would nullify

procompetitive features of the merger in order to achieve ``parity''

for RBOCs. Each body rejected these claims.

Each regulatory body found that the merger would serve the public

interest by promoting competition in wireless and other local

telecommunications services that are offered by RBOCs and other local

telephone monopolists (and Judge Greene granted the Section I(D) waiver

because the Rufo standard for modifying consent decrees \29\ was met).

Each regulatory body further found that the merger, as conditioned, can

realistically have no adverse effects on competition in any market,

that the merger would otherwise benefit the public in a number of ways,

and that there was no basis to impose conditions that nullify these

benefits to create ``parity for parity's sake.'' \30\ Similarly, Judge

Greene rejected RBOC efforts to consolidate the Section I(D) waiver and

Proposed Decree with the RBOCs' pending request for MFJ relief.\31\

\29\ See Rufo v. Inmates of Suffolk County Jail, 112 S. Ct. 748

(1992).

\30\ See, e.g., FCC Order, Paras. 32, 57-61, 68-70, 90, 97-100,

104-05; California PUC Decision, pp. 12-16, 37; N.Y.P.S.C. Decision,

pp. 6-7.

\31\ See United States v. Western Elec. Co., Civ. No. 82-0192,

Opinion, pp. 22-26 (D.D.C. Aug. 25, 1994) (``Section I(D) Waiver

Opinion''), aff'd, No. 94-5252 (D.C. Cir. Feb. 17, 1995).

---------------------------------------------------------------------------

Argument

While four sets of comments have been filed on the Proposed Decree,

only one (Bell Atlantic/NYNEX) even suggests that the Decree does not

reasonably address the competitive concerns raised in the Department's

Complaint. Otherwise, the commentors challenge the Decree because it

does not address other concerns that they have. Part I will demonstrate

that the Proposed Decree's provisions are palpably in the public

interest. Part II will demonstrate that the extraneous other claims are

out of order and challenge procompetitive features of the merger.

I. The Provisions of the Proposed Decree Are in the Public Interest

No commentor has claimed that the Proposed Decree is itself

virtually certain to harm competition.\32\ Nor has any commentor

claimed that the Proposed Decree is not a reasonable settlement of the

two claims that the Department raised in its Complaint. Indeed, the

only comments that even address these issues are those of Bell

Atlantic/NYNEX. Yet they make no attempt to show that the Proposed

Decree is outside `` `the reaches of the public interest.' '' United

States v. Western Elec. Co., 900 F.2d 283, 306 (D.C. Cir. 1990)

(quoting United States v. Bechtel Corp., 648 F.2d 600, 666 (9th Cir.

1981)). Indeed, Bell Atlantic/NYNEX's comments here merely summarize

the arguments that these commentors had intended to advance in a

private antitrust suit that they brought against the AT&T-McCaw merger

in federal court in Brooklyn. However, in

[[Page 49873]]

that private suit, Bell Atlantic/NYNEX first abandoned their horizontal

long distance claims (after the district court in Brooklyn criticized

them) \33\ and then (on the eve of trial) dismissed their manufacturing

claims with prejudice after settling them with AT&T-McCaw--which

vividly confirms that the Justice Department acted reasonably in

settling its claims rather than litigating the lawfulness of the

proposed merger.

\32\ BellSouth has used its comments here to repeat its claims

(from the Generic Wireless proceeding under the MFJ) that the

imposition of equal access requirements on cellular systems is

contrary to the public interest. Quite apart from the fact that

these claims have been previously rejected by the Department, Judge

Greene, and now also the FCC (FCC Order, para. 68), BellSouth

ignores that the Proposed Decree would impose no such provisions or

obligations in the unlikely event that BellSouth's claims were

accepted in the pending MFJ proceeding. In that event, just as RBOCs

could provide cellular-originated calls to anyone in the world with

no equal access duty under the MFJ, McCaw cellular systems would

have that same right under Section X(A) of the Proposed Decree.

\33\ See Bell Atlantic Corp. v. AT&T Corp., No. 94-CV-3682

(ERK), Transcript of Cause for Civil Hearing, pp. 27-28, 45-46

(Sept. 13, 1994).

---------------------------------------------------------------------------

However, because Bell Atlantic and NYNEX have not withdrawn these

aspects of their comments, AT&T-McCaw will briefly reiterate why the

Department's settlement is reasonable. In reality, each of the

antitrust challenges to the merger rests on legal theories that are

novel, that have been rejected in other indistinguishable contexts, and

that would prevent procompetitive benefits of the merger--which is why

the Department and Judge Greene previously stated that restriction on

AT&T's entry into cellular radio would be detrimental to the public

interest.\34\ In any event, while the merger, in AT&T's view, could not

have been found to violate Section 7 of the Clayton Act if there were a

trial, the Proposed Decree specifically enjoins each of the

hypothetical threats to competition raised in the Department's

Complaint.

\34\ See MFJ Opinion, 552 F. Supp. at 175-76; United States v.

Western Elec. Co., Civ. No. 82-0192 (D.D.C.), Response of the United

States to Public Comments on Proposed Modification of Final

Judgment, pp. 72-73 (May 20, 1982); id., Brief of the United States

in Response to the Court's Memorandum of May 25, 1982, p. 49 (June

14, 1982).

---------------------------------------------------------------------------

A. The Justice Department Reasonably Settled Its Challenges to the

Putative ``Horizontal'' Combination of AT&T's and McCaw's Long Distance

Businesses

One of the two claims raised in the complaint is that the merger

would enable McCaw to use its alleged market power as one of two

cellular carriers (and its undisputed ability to program its cellular

switches to prevent long distance carriers from reaching McCaw's

customers) to favor AT&T and reduce competition in competitive long

distance markets. In this regard, the Department also alleged that the

merger would eliminate competition between the two largest participants

in various ``cellular long distance markets'' and that the merger would

lead to increased long distance prices or reduced output.

However, while the provision of equal access by McCaw and other

cellular carriers is indisputably in the public interest, AT&T submits

that the horizontal allegations in the Department's Complaint could not

have been proven at trial and that it plainly was reasonable for the

Department to settle these claims under the provisions of the Proposed

Decree.

First, contrary to the Department's allegation, the merger does not

eliminate long distance competition between AT&T and McCaw. There has

never been any such competition. AT&T has been unable to offer

interexchange services to McCaw cellular customers, for McCaw has not

provided equal access, but has provided the interexchange services used

by its customers (by reselling AT&T services). Conversely, McCaw has

not offered long distance service to any other customers, for it has

not competed with AT&T in providing interexchange service to any

cellular customers (or landline customers) of RBOCs or any other

carriers. In short, no cellular or other customers today can choose

between AT&T and McCaw for their long distance service.\35\

\35\ The Department and Bell Atlantic/NYNEX suggest that there

is ``indirect'' competition between AT&T and McCaw long distance

services in the sense that any cellular customer who subscribes to

McCaw cannot obtain retail interexchange services from AT&T. But

there is no evidence that the existence of this attenuated and

indirect alleged ``competition'' had any effect on the price of long

distance services offered by McCaw, and, by affording McCaw

customers equal access to the carrier of their choice, the merger

allows McCaw customers a choice of long distance carriers for the

first time.

---------------------------------------------------------------------------

In this regard, rather than eliminate existing competition, it was

clear long before this suit was filed that the AT&T-McCaw merger would

create competition for McCaw cellular customers for the fist time by

enabling them to choose long distance services other than the AT&T long

distance services that McCaw resold under its own name. In particular,

shortly after the August 16, 1993 announcement of the merger, AT&T

committed to Congress and to the FCC that McCaw cellular systems would

offer each customer the ability to presubscribe to the interexchange

carrier of his or her choice and that the McCaw cellular systems would

be reconfigured so that local cellular service is provided, on an

unbundled basis, in geographic areas that are always comparable, and

generally identical, to those applicable to the RBOCs under the MFJ.

See p. 17 & n.24, supra. In this regard, in approving the merger, the

FCC stated that it expected AT&T to comply with these commitments,\36\

and the FCC relied on the increased choices that McCaw cellular

customers would thereby receive in finding that the public interest

would be ``served'' by the merger.\37\

\36\ See FCC Order, para. 70.

\37\ See FCC Order, para. 57.

---------------------------------------------------------------------------

Second, even if AT&T and McCaw had previously competed, AT&T

submits that the Department could not have proven at trial that the

merger could lessen long distance competition in a ``cellular long

distance service market'' or otherwise. The reality is that AT&T and

other long distance carriers provide the same long distance services at

the same price to landline and cellular long distance customers.

Because McCaw provides less than 0.1% of long distance services

nationally and does so by reselling AT&T service, there is no

possibility that the AT&T-McCaw merger would increase the price or

reduce the output of long distance services used by cellular or other

customers. In particular, even if AT&T could attempt to increase long

distance prices to cellular customers alone, those customers could

readily turn to other long distance carriers, including carriers that

today serve only landline customers. These facts both show that there

is no ``cellular long distance market'' and establish, in all events,

that there is no threat to competition.

The Department's suggestion that there is a separate ``cellular

long distance market'' rests on the ground that cellular customers pay

a premium for mobility--an airtime charge of up to 40 cents per minute

for use of the cellular system, which is incurred whenever the customer

places or receives any call, be it long distance or local. However,

that is the charge imposed on the customer by the cellular system, and

the long distance rates charged by long distance carriers for long

distance service are the same, regardless of whether the customer

accesses a long distance network from a cellular phone or from a

landline phone. Thus, the Department's suggestion ultimately rests on

the ground that the demand of cellular customers is less elastic than

that of landline customers: i.e., that even though cellular customers

do not pay higher rates for long distance calls than do landline

customers, cellular customers may well be willing to do so.

However, even if true, that does not establish that the cellular

subclass of all long distance customers is a separate market. All

services and products (be they corn flakes or long distance) are used

by subclasses of customers who would be willing to pay more than the

market rate, but these subclasses of customers do not constitute

separate

[[Page 49874]]

antitrust markets unless suppliers could in fact single them out to

charge higher prices.\38\ There has been no allegation that long

distance carriers could charge higher prices for calls originating on

cellular telephones, and the fact that none do (despite the less

elastic demand of these customers) is potent evidence that charging

them higher rates is infeasible for regulatory, practical, and other

reasons.\39\

\38\ See Department of Justice Federal Trade Commission

Horizontal Merger Guidelines, 4 Trade Reg. Rep. (CCH) para. 13,104,

Sec. 1.12 at 20,573 (1992) (``Merger Guidelines'').

\39\ See AT&T-McCaw FCC Proceeding, AT&T's and McCaw's Response

to Comments on Hart-Scott-Rodino Materials (July 1, 1994), Affidavit

of Robert D. Willig and B. Douglas Bernheim: An Analysis of the

Alleged Anticompetitive Effects of the AT&T-McCaw Combination, pp.

12-13.

---------------------------------------------------------------------------

More fundamentally, such price increases could not be maintained

because cellular customers receive the same long distance services

provided to landline customers. Even if AT&T had a monopoly on long

distance calling by cellular customers, it could not impose even a

``small but significant and nontransitory increase in price,'' for

cellular customers (or carriers) could then subscribe to the long

distance services used by landline customers. The reality is that

because the same long distance services are used by landline and

cellular carriers alike, any long distance carrier can easily supply

interexchange services to cellular systems, and would do so if

incumbent long distance providers sought to raise prices above

competitive levels. In turn, because McCaw represents less than 0.1% of

total long distance calling and was indistinguishable from hundreds of

other resale long distance carriers,\40\ the merger of AT&T and McCaw

would not have any effect on competition in long distance markets or on

the price or output of long distance services used by cellular or any

other customers even if AT&T and McCaw had competed, as they had not.

Indeed, in this circumstance, the Department's Merger Guidelines,\41\

the nation's antitrust authorities,\42\ and judicial decisions \43\ all

agree that a merger threatens no harm to competition.

\40\ Indeed, as the FCC found, McCaw was far less likely to

develop into a major facilities-based long distance carrier than

other resellers. McCaw's current debt of $5.7 billion (and debt

ratio of over 70%), its need to raise over $3 billion in 1995 merely

to retain some of its most important properties, and its need to

raise additional untold billions to acquire PCS licenses all made it

improbable in the extreme that McCaw ``would be able to embark on

any large-scale investment in interexchange facilities in the

foreseeable future.'' FCC Order, para. 30 & n.73.

\41\ See Merger Guidelines, Sec. 3.0 at 20,573 (where entry is

easy, ``the merger raises no antitrust concern and ordinarily

requires no further analysis'').

\42\ See, e.g., Phillip E. Areeda, Herbert Hovenkamp & John L.

Solow, IIA Antitrust Law 257 (1995) (``Of course, whichever market

definition is employed, relative ease of entry by other firms should

always be taken into account. The one course that would be clearly

wrong would be to define the market as A alone while ignoring the

ease of entry from B producers'').

\43\ See, e.g., Rothery Storage & Van Co. v. Atlas Van Lines,

Inc., 792 F.2d 210, 218 (D.C. Cir. 1986) (``Because the ability of

consumers to turn to other suppliers restrains a firm from raising

prices above the competitive level, the definition of the `relevant

market' rests on a determination of available substitutes'');

Vollrath Co. v. Samni Corp., 9 F.3d 1455, 1461-62 (9th Cir. 1993)

(``No matter how the market is defined * * * the ease of entry into

it and the number of potential participants on every level of it

abundantly demonstrates that [market power] would never be

possible'').

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Finally, in all events, the provisions of the Proposed Decree

constitute a palpably reasonable settlement of the Department's claims

and are in the public interest. They impose equal access,

nondiscrimination, and antibundling requirements that go considerably

beyond the voluntary commitments that AT&T made. They require the

balloting of all existing customers; they prohibit any wide area

calling plans in which discounted rates are offered only when local and

long distance services are ``bundled'' through wide area calling plans

or otherwise; and they contain detailed other provisions designed to

afford all interexchange carriers an equal opportunity to serve McCaw

customers. These provisions reasonably assure that McCaw customers will

hereafter have choices other than the AT&T long distance services that

McCaw has resold these customers and that all interexchange carriers

will have access to McCaw's cellular customers.

B. The Proposed Decree Represents a Reasonable Settlement of the

Department's Vertical Manufacturing Allegations

The other allegation advanced in the Department's Complaint is that

the merger could lead AT&T to use its position as a cellular equipment

supplier to engage in predatory conduct that could impede competition

in certain local cellular service markets: i.e., those in which McCaw

competes with a cellular carrier that uses AT&T cellular equipment. In

advancing this claim, the Justice Department acknowledged that

telecommunications manufacturing generally, and cellular equipment

manufacturing in particular, are intensely competitive businesses in

which AT&T and other manufacturers are dependent on the RBOCs, GTE, and

other LECs, and in which a carrier has a choice of multiple vendors

when it is installing or replacing (``swapping out'') a system. See pp.

17-23, supra.

However, the Department claims there is a short-term interim period

in which individual LECs are nonetheless dependent on AT&T's

manufacturing unit for certain essential inputs to their cellular

service and that the merger would give AT&T-McCaw the ability and

incentive to exploit this short term ``monopoly power'' to disadvantage

these companies in those markets where they compete with McCaw. In

particular, the Department alleged that (1) those RBOCs and GTE that

purchased AT&T cellular systems (i.e., MTSOs and cell sites) in fairly

recent years would incur such substantial costs if they sought to

replace this AT&T equipment in whole or in part that they are ``locked-

in'' to AT&T for upgrades to these systems during an interim period,

and (2) the merger would give AT&T the incentive to exploit this lock-

in by charging RBOCs inflated prices for the new cell sites and

switching software needed to expand or enhance their systems, by

providing them inferior service, by sharing their confidential

information with McCaw, or by discriminating in favor of McCaw.

It was patently reasonable for the Department to settle these

claims under the provisions of the Proposed Decree. The competitive

theories are exceedingly tenuous ones, and the Department, in AT&T's

view, could not have proven a violation of Section 7 of the Clayton Act

at trial. In all events, the Proposed Decree contains prophylactic

injunctions--backed by unusual and severe sanctions--that would

prohibit each of the kinds of predatory misconduct that the Department

fears, that further would reduce the alleged lock-in, and that thus

reduce even the tenuous risks of predatory conduct that harms

competition.

The Risks of Competition Harm Were Virtually Nonexistent Even in

the Absence of a Decree. Foremost, the Department's allegations

represent an exceedingly novel theory for challenging a vertical

merger. The theory is not supported by the Department's merger

guidelines.\44\

[[Page 49875]]

Professors Lawrence Sullivan, Robert Willig, and Douglas Bernheim

submitted testimony that rejected the hypothesized harms to

competition.\45\ Further, this basic theory was rejected as a matter of

law in the only case in which it has been raised under Section 7 of the

Clayton Act: Fruehauf Corp. v. FTC, 603 F.2d 345 (2d Cir. 1979).

\44\ The Department's guidelines provide for challenges to

vertical mergers in only three narrow circumstances, none of which

is present here. The first is when the vertical merger would

substantially raise entry barriers because two markets would (as a

consequence of the merger) be so integrated that entrants to one

market would also have to enter the other market simultaneously. See

U.S. Dept. of Justice 1984 Merger Guidelines Sec. 4.21 (reprinted in

4 Trade Reg. Rep. (CCH) para. 13,103 (1984)). The second is where

the vertical merger would facilitate collusion in an upstream market

either by permitting vertically integrated manufacturers more easily

to monitor price in retail markets or by eliminating a particularly

disruptive buyer in a downstream market. See id., Sec. 4.22. The

third is where the vertical merger involves a regulated monopoly

utility and would enable it to evade rate regulation. See id.,

Sec. 4.23.

\45\ See AT&T-McCaw FCC Proceeding, AT&T-McCaw Opp., Affidavit

of Lawrence A. Sullivan, pp. 2-3, 6-11, 17-19, 22-24; id., Affidavit

of Robert D. Willig & B. Douglas Bernheim: An Analysis of the

Alleged Anticompetitive Effects of the AT&T-McCaw Combination, pp.

36-55.

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Fruehauf concluded that even if a manufacturer in an otherwise

competitive market will have market power over the supply of particular

essential products during a short time period (there due to an assumed

shortage), a vertical merger cannot be found to create a ``reasonable

probability'' of harm to competition in violation of Section 7 of the

Clayton Act \46\ based merely on the theory that the merger gives the

manufacturer an incentive to use that power to discriminate in favor of

a merger partner and against its competitors. 603 F.2d at 355. To the

contrary, the Second Circuit held that it was ``highly unlikely'' that

the manufacturer would then engage in such opportunistic misconduct,

for it would recognize that (1) The other customers could thereafter

``retaliat[e]'' and ``could cause it greater economic harm'' by

``shifting to competing suppliers not only their [future] purchases of

the [allegedly `locked-in' product] but of other products presently

bought from [the manufacturer],'' and (2) such predatory conduct

``would invite antitrust damage actions.'' Id. at 355. In this regard,

AT&T is aware of no case that supports challenging a vertical merger on

such grounds.\47\

\46\ It is well settled that a merger cannot violate Section 7

unless there is a ``reasonable probability'' that it will ``lessen

competition'' (i.e., harm consumers) in a relevant market and that a

``mere possibility'' of these harms is insufficient. See, e.g.,

Brown Shoe Co. v. United States, 370 U.S. 294, 323 & n.39 (1962).

\47\ In prior challenges to the merger, RBOCs have relied on the

Supreme Court's decision in Eastman Kodak Co. v. Image Technical

Services, Inc., 112 S. Ct. 2072 (1992). But Kodak was not a case to

enjoin a merger under Section 7 of the Clayton Act on the theory it

was likely to lead to harm to competition. Rather, it was a case

under Sections 1 and 2 of the Sherman Act in which an independent

photocopy repair service firm challenged a tie-in in which Kodak had

concededly in fact excluded independent firms from the equipment

repair market by refusing to supply them spare parts for Kodak

copying machines. The RBOCs ironically have relied on the Supreme

Court's rejection (by a vote of 6-3) of Kodak's attempt to defend

against otherwise unlawful exclusionary conduct by arguing that, as

a matter of law, no consumer could be harmed by Kodak's conduct.

Kodak had contended that the market for original sales of

photocopiers was competitive, and that interbrand competition in

this market meant, as a matter of law, that Kodak could not have

market power in a separate ``aftermarket'' for repair of machines

and could thus not use that power to exploit consumers. The Supreme

Court held that while this latter claim might be correct as a matter

of fact, it could not be sustained purely as a matter of law ``in

the absence of any evidentiary support.'' Id. at 2087. The Supreme

Court reasoned that while ``large-volume, sophisticated purchasers''

could be presumed to take steps to protect themselves from

exploitative behavior in the ``aftermarket,'' smaller,

unsophisticated consumers might lack the necessary information and

buying power to take protective steps before they need repairs and

will ``tolerate some level of service-price increases before

changing equipment brands'' ``[i]f the cost of switching is high.''

Id. at 2086-87.

Here, the only relevance of Kodak is that it undercuts any

``lock-in'' claims. RBOCs epitomize the large sophisticated

customers who can, under Kodak, be presumed to protect themselves

from exercises of ``market power'' after initial purchases are made.

Indeed, RBOCs vigorously negotiate supply contracts prior to large

purchases and use threats of complete or partial swap-outs to

renegotiate those supply contracts both before and after the AT&T-

McCaw merger was announced.

---------------------------------------------------------------------------

In this case, AT&T's manufacturing subsidiary has far less ability

to engage in the hypothesized misconduct than did the firm in Fruehauf

and radically greater competitive economic and legal incentives not to

do so. Indeed, this case is a much clearer one than Fruehauf in that

the provisions of the Proposed Decree preclude any reasonable risk of

the competitive harms that the Department initially feared and palpably

are within the broad reaches of the public interest.

The Claimed ``Lock-In'' Is Tenuous, and, in AT&T's View,

Nonexistent. First, while AT&T would have overwhelming economic and

legal incentives not to engage in the hypothesized conduct even if it

could, AT&T will not have anything remotely approaching ``monopoly''

power over ``essential inputs'' required by RBOCs or other LECs even in

the immediate future. In this respect, RBOCs epitomize large

sophisticated purchasers who can and do protect themselves against

exploitative behavior in ``aftermarket'' transactions and who have done

so since the merger. Eastman Kodak, 112 S. Ct. at 2086-87.

Further, the assertions that RBOCs and other cellular equipment

customers are ``locked-in'' to AT&T is, in AT&T's view, unsustainable

and could not have been proven at trial. It is true that some RBOCs

(and GTE) acquired AT&T cellular equipment in the past and that they

will need to purchase more cellular equipment to expand and improve

their systems in the future. However, there is no basis for any

allegation that the costs of switching cellular infrastructure

equipment suppliers are so prohibitive that these customers are

absolutely locked-in to AT&T and have no choice except to buy new cell

sites, MTSOs, and upgrades from it in existing markets.

The short answer to this allegation is that cellular carriers can,

and regularly do, swap out an incumbent equipment supplier when they

are dissatisfied with its performance, even when the equipment had been

recently purchased. See pp. 19-21, supra. RBOCs and other LECs use

threats of complete swap-outs or partial swap-outs (through use of IS-

41 interface) to extract more favorable terms from AT&T and other

independent suppliers. See pp. 21-22, supra. This practical experience

refutes any theoretical claim that switching costs are ``prohibitive''

or that it is harmful to competition for cellular carriers to incur

those costs. These are grounds on which the FCC rejected the RBOC's

lock-in claims.\48\

\48\ The FCC stated as follows:

[W]e are unpersuaded by the BOCs' arguments about ``lock-in'',

which occurs when a cellular service provider is unable to switch to

the equipment of a different manufacturer for technical or financial

reasons. As an initial matter, we find the argument unpersuasive

because, at the same time the BOCs complain of the technical and

financial impediments to switching equipment suppliers in their

systems, they allege that AT&T/McCaw will replace McCaw's Ericsson

equipment with AT&T equipment. If the difficulties of switching are

so great, we doubt that AT&T/McCaw will be able to rush to switch

equipment. On the other hand, if AT&T/McCaw could switch so readily,

we find it difficult to believe that the BOCs would have much

greater difficulty in switching their systems if AT&T/McCaw product

or product servicing quality dropped. More importantly, the advent

of the recently-adopted IS-41 standard of the Telecommunications

Industry Association, which facilitates the use of different

suppliers' equipment within the same cellular system, should reduce

the cost of switching cellular equipment providers and,

consequently, any potential ``lock-in'' effect. Finally, affiants on

both sides of the debate agree that the merger of AT&T and McCaw

will not enhance AT&T's ability to discriminate or exploit ``lock-

in.''

FCC Order, para. 98 (footnotes omitted).

---------------------------------------------------------------------------

In addition, the facts on which a lock-in is claimed will

themselves dissipate rapidly over time. Industry efforts are underway

to establish an open and satisfactory cell-site-to-MTSO interface that

will enable cellular customers to obtain cell sites and switches from

different vendors (see pp. 22-23, supra), and the IS-41 interface

(allowing incompatible switches in a single market) has recently been

improved so that virtually all existing features can be handed off with

calls. See p. 21, supra. Further, with each passing day, recently-

purchased cellular systems are further depreciated, and the other

[[Page 49876]]

provisions of the Proposed Decree (facilitating re-location and sales

of a carrier's cell site equipment and requiring AT&T's cooperation in

a partial swap-out) will further reduce existing costs of switching

suppliers. A procompetitive merger cannot be held unlawful and enjoined

based on short term conditions that are dissipating.

Competition Otherwise Precludes the Hypothesized Predatory Conduct.

Even if AT&T's manufacturing arm could have some degree of ``market

power'' over certain customers in an interim period, it is even clearer

here than it was in Fruehauf that it is ``highly unlikely'' that the

merger will lead to predatory misconduct that harms competition in

local wireless markets. The competition that AT&T's manufacturing unit

faces in equipment manufacturing generally--and its dependence on RBOCs

and GTE--creates a greater inhibition on discrimination against those

firms than was present in Fruehauf.

Quite simply, competition means that AT&T's manufacturing arm has

overwhelming incentives not to engage in any conduct that degrades any

customer's service or that discriminates in favor of McCaw--or that

even creates an appearance of such misconduct. The consequences of such

conduct for AT&T's manufacturing arm would not merely be severe, but

devastating. It would not merely assure AT&T's replacement with another

cellular equipment vendor at the end of the claimed ``lock-in'' period.

Cellular carriers can and do swap out a vendor whenever they are

dissatisfied with its performance, regardless of whether the incumbent

vendor is thought to have engaged in actionable or provable misconduct

(see pp. 19-20, supra), so AT&T would then risk immediately being

replaced in those markets. Further, as in Fruehauf, the discriminatory

misconduct would also lead RBOCs and other customers to ``retaliat[e]''

by refusing to purchase other products that they ``presently'' purchase

from AT&T. Compare Fruehauf v. FTC, 603 F.2d at 355 (emphasis added).

For example, if such discrimination by AT&T were even suspected, RBOC

wireless subscribers would refuse to buy AT&T's PCS equipment (which

they would use to compete with McCaw in many markets) and which should

be a multibillion dollar market given the imminent issuance of PCS

licenses. Even more significant, RBOCs and GTE could then also buy less

landline equipment.

In this regard, in contrast to Fruehauf, moreover, McCaw's

competitors are not ``insubstantial'' customers of AT&T Network

Systems. Compare Fruehauf, 603 F.2d at 354. To the contrary, McCaw's

competitors (RBOCs and GTE) accounted for some $6 billion of Network

Systems' $10 billion in 1994 revenues, and it would be devastating if

any significant portion of these sales were lost to competitors.

That market forces preclude any substantial concerns was explained

in detail by the FCC when it rejected the RBOCs' claims that the

competitiveness of equipment manufacturing markets creates potent

disincentives for any of the conduct that the RBOCs purport to fear:

We believe that market forces will largely eliminate AT&T's

ability to discriminate unreasonably. AT&T/McCaw cellular affiliates

by themselves are not a large enough consumer of AT&T products to

make it profitable for AT&T/McCaw to provide poor products or

service to other customers, especially customers with the market

power and sophistication of the BOCs, who have the choice of buying

from other cellular equipment suppliers. Moreover, if unhappy with

AT&T/McCaw's cellular products or servicing of those products, the

BOCs also could shift their purchases of wireline network equipment

to other suppliers. These threats to AT&T/McCaw's equipment sales

create a powerful incentive for AT&T/McCaw to offer all of its

cellular equipment customers, not just its cellular affiliates,

quality products and services. As we have previously stated, AT&T's

sales could otherwise decline as the fact of discrimination became

known.\49\

\49\ FCC Order, para. 97 (footnotes omitted). For the same

reasons, the FCC found it unlikely that AT&T Network Systems would

engage in the misuse of proprietary information. Id., para. 112.

On that basis, the FCC found that the ``market forces combined with the

threat of litigation [if administrative duties are breached] will

adequately deter AT&T/McCaw from discriminating in favor of its

cellular affiliate, even in the subtle ways described by [the RBOCs],''

and that the merger, as conditioned by the FCC, cannot realistically

---------------------------------------------------------------------------

have any adverse effect on competition.\50\

\50\ FCC Order, para. 100.

---------------------------------------------------------------------------

The Proposed Decree's Provisions Enjoin the Hypothesized

Misconduct. The provisions of the Proposed Decree reduce even the

slight risks that exist. It requires that McCaw be maintained as a

separate corporation with separate officers and personnel who cannot

delegate responsibility for the operation of McCaw's cellular systems

to AT&T and that McCaw obtain services and products from AT&T under

filed tariffs or by contract. Further, the Proposed Decree contains

detailed provisions enjoining each kind of predatory misconduct that

RBOCs purport to fear.

First, the Proposed Decree requires AT&T's manufacturing subsidiary

to treat its customers in the same way it would have if no merger had

occurred. It requires AT&T to continue to provide each of its existing

equipment customers with additional equipment, upgrades, technical

support, maintenance, spare parts, and all other related products and

services ``in accordance with the same pricing and other business

practices that prevailed prior to August 1, 1993'' (a date before the

merger was announced). Sec. V(B)(1) (emphasis added).\51\ Any deviation

from pre-merger practices in the timing of delivery of cell sites, in

the provision of upgrades and support, and in the manner in which

prices are determined would violate this prohibition.

\51\ AT&T is further prohibited from ``discriminat[ing] in favor

of McCaw * * * in the way in which such services or products are

made available'' to other cellular carriers. Sec. V(B)(1). And if

AT&T discontinues the offering of any such product or service, it is

required to seek to arrange an alternative source of supply or

provide the carrier with whatever licenses and technical information

are required to provide the product or service. Sec. V(B)(2).

---------------------------------------------------------------------------

Second, the Proposed Decree prohibits AT&T from discriminating

against McCaw's competitors in the development of new features and

functions. If AT&T develops new features or functions that are intended

for more than one customer prior to the date the AT&T-McCaw Decree is

entered, it must make them available to all affiliated customers at the

same time as it does to McCaw. Sec. V(C)(1). If AT&T develops features

or functions for McCaw that are technologically applicable only to

McCaw's network or proprietary to McCaw, it must provide all other

carriers with the opportunity to contract for such features and

functions on the same or more favorable terms. Sec. V(C)(2-3).

Third, the Proposed Decree contains detailed protections against

any misuse of competitive information that AT&T might obtain in the

course of providing equipment to unaffiliated cellular carriers. It

requires AT&T to establish separate sales and marketing teams to serve

McCaw and unaffiliated cellular carriers and separate equipment

development teams for proprietary equipment development work.

Sec. V(A)(4). It prohibits AT&T from disclosing ``Nonpublic

Information'' of an unaffiliated equipment customer ``for any reason''

to McCaw (including any system in which McCaw has only a minority

interest), to any McCaw personnel, to any person marketing any McCaw

service or AT&T telecommunications service, or to any of the marketing,

sales, or equipment

[[Page 49877]]

personnel that market to or perform development work for AT&T or McCaw.

Sec. V(A)(1).

Fourth, the Proposed Decree requires AT&T to facilitate the

replacement of its equipment, in whole or in part, with integrated

systems of switches and cell sites of competing manufacturers if AT&T's

existing customers wish to do so. AT&T must waive any contractual

provisions granting it rights of prior notice or consent if the

customer chooses to redeploy AT&T equipment to a new location, and must

provide all reasonably necessary technical assistance and cooperation

to help the customer replace its equipment and operate AT&T's system in

conjunction with systems of AT&T competitors in whole or in part.

Sec. V(D).

The AT&T-McCaw Decree contains elaborate compliance and enforcement

provisions. For example, in addition to penalties for imprisonment or

fines for contempt of court, the Proposed Decree provides that if the

Department determines that AT&T has violated any of the Decree's

requirements in its dealings with McCaw cellular competitors who

purchased AT&T equipment prior to the Decree's entry, the Department

will have the authority to require AT&T to ``buy back'' that equipment

at the original purchase price, less depreciation calculated on the

straight line basis with useful lives of ten years for switches and

eight years for all other hardware--irrespective of any shorter

depreciation schedule actively used by any carrier. Sec. V(E). The

Department would have ``sole and unreviewable discretion'' to make that

determination, and AT&T ``irrevocably waive[s] any right it may have to

appeal, contest, or otherwise challenge any adverse determination.''

Id.

Bell Atlantic/NYNEX appear to concede that these provisions mean

that it is improbable that AT&T's manufacturing or other personnel

would engage in any misconduct that is detectable and provable. They

are thus reduced to suggesting that AT&T's manufacturing arm could

engage in subtle misconduct that would degrade their cellular service

but that would not be ``detectable.'' However, anything that degrades

an RBOC's cellular service is by definition detectable by it (otherwise

it could have no competitive consequences), and anything that is

detectable in this way can be the subject of complaints and potentially

of proof and adverse findings. Indeed, the only way that AT&T

conceivably engage in misconduct that would degrade an RBOC's service

in markets where it competes with McCaw, but that would not be

provable, would be if AT&T engaged in the identical misconduct in every

market in the country in which AT&T supplies cellular equipment,

including the vast majority of AT&T-equipped systems that do not

compete with McCaw. See Appendix (attached hereto). Obviously, AT&T has

powerful disincentives to engage in such conduct in these other areas

for no benefits to McCaw could offset harm to AT&T.

Procompetitive Effects of the Merger. For all these reasons, the

provisions of the Proposed Decree--and sanctions availble--reduce the

already tenuous risks that AT&T would engage in the hypothesized

misconduct. See Fruehauf, 603 F. 2d at 355; Emhart Corp. v. USM Corp.,

527 F.2d 177 (1st Cir. 1975). Furthermore, the Department was also

entitled (and required) to weigh the fact that, in addition to the

remote threat that AT&T could use its manufacturing position to impede

competition in local cellular markets, the merger would otherwise

promote competition and benefit consumers in these same local cellular

markets and potentially landline services as well. See pp. 2-3, 24,

supra. In short, there is no question that the Department acted

rationally in not seeking to enjoin an otherwise procompetitive merger

and in instead settling its vertical manufacturing claim.

II. The Ad Hoc IXC's and RBOCs' Claims That the Proposed Decree Should

Be Modified To Create ``Parity'' Are Outside the Scope of This

Proceeding and Constitute Hypocritical Attempts To Nullify

Procompetitive Features of the Merger

The foregoing discussion establishes that, if anything, the

provisions of the Proposed Decree go far beyond what is reasonable to

address the Department's concern that the combined AT&T-McCaw could use

their positions in cellular services or in manufacturing to harm

competition in adjacent markets. Nothing more need be said to establish

that the Proposed Decree is in the public interest.

However, four of the RBOCs and a group of switchless resellers of

interexchange services (the ``Ad Hoc IXCs'') claim that the Proposed

Decree is contrary to the public interest because it does not contain

other provisions that address a different set of purported competitive

concerns that these commentors have, but that the Department does not.

These RBOCs claim that AT&T-McCaw could enjoy ``advantages'' over their

cellular businesses by reason of the MFJ's restriction on RBOCs and

AT&T's putatively ``dominant'' position in interexchange services. On

this basis, the RBOCs contend that the Proposed Decree will not be in

the public interest unless ``parity'' is achieved by (1) barring AT&T-

McCaw from using names, addresses, and usage information of AT&T's long

distance customers to market cellular services to any individuals who

are cellular customers of RBOCs, and (2) granting the RBOCs' motion for

``generic wireless'' relief from the MFJ's long distance restriction

and imposing the same equal access restrictions on AT&T-McCaw as apply

to the RBOCs cellular systems under the MFJ. Similarly, the Ad Hoc IXCs

appear to fear that the combined AT&T-McCaw could extend AT&T's long

distance ``dominance'' by converting McCaw's cellular systems into

alternatives to the landline exchange monopolies.

The short answer to these claims is that they go beyond the

violations alleged in the Department's Complaint and they therefore

cannot be raised in this Tunney Act proceeding. See 15 U.S.C.

Sec. 16(e). The Department's Complaint alleged only that the combined

AT&T-McCaw could use power in manufacturing and cellular services to

impede competition in adjacent markets. Although RBOCs have previously

raised (and the FCC rejected) it, the Complaint does not make the

allegation that the RBOCs and Ad Hoc IXCs make: that AT&T's putatively

dominant position in long distance services could give it advantages in

cellular markets. The Department's failure to pursue these claims is

not reviewable in a Tunney Act proceeding.\52\

\52\ See U.S.C. Sec. 16(e); S. Rep. No. 298, 93d Cong., 1st

Sess. 3 (1973); In re IBM Corp., 687 F.2d 591 (2d Cir. 1981)

(Justice Department's decision to dismiss competitive claims is not

reviewable under the Tunney Act).

---------------------------------------------------------------------------

Further, even if the Department's decision not to pursue these

claims could be reviewed, there is not the slightest doubt that the

Department's determination was reasonable and, indeed, was compelled by

the antitrust laws. Because AT&T neither has a bottleneck over long

distance services nor controls any facilities or information that is

essential to cellular carriers or their customers, the four RBOC's and

Ad Hoc IXCs' claim is not that AT&T has power over them or their

customers that it could exercise to distort free choice in cellular

markets. Rather, it is that AT&T's position in long distance RBOCs

``[b]ecause of MFJ requirements'' (Bell Atlantic/NYNEX, p. 10), that

the RBOCs may lose certain customers and profits because of these AT&T

advantages, and that the ``public interest'' therefore requires

``parity.''

[[Page 49878]]

However, it is elementary that ``the purpose of antitrust policy *

* * is not to make competitors equal, or to avoid all forms of

advantage; the antitrust laws are for the protection of competition,

not competitors.'' Environmental Action, Inc. v. FERC, 939 F.2d 1057,

1061 (D.C. Cir. 1991). As Judge Greene has elsewhere held, the

antitrust laws are not intended ``to assure positive results for

[individual] competitors'' but to ``protect the competitive process.''

United States v. Western Electric, 698 F. Supp. 348, 363 (D.D.C. 1988).

Further, it is sheer hypocrisy for the RBOCs to complain about a

lack of parity and about the MFJ. The Department has previously found

that the MFJ has not competitively disadvantaged the RBOCs in competing

with McCaw.\53\ To the contrary, the RBOCs' exchange monopolies have

given their cellular businesses immense regulatory and other advantages

over McCaw and other nonwireline carriers, and the RBOCs' newly-found

interest in ``parity'' is simply an attempt to nullify legitimate

efficiencies of the merger that could offset some of the advantages

that the RBOCs have received from their bottleneck monopolies. In this

regard, Judge Greene and now even the FCC have repeatedly rejected the

RBOCs' claims that the MFJ's restrictions could either be removed from

the RBOCs (or be imposed on firms that have no bottleneck monopolies)

in the name of ``parity.''

\53\ See United States v. Western Elec. Co., Civ. No. 82-0192

(D.D.C.), Memorandum of the United States in Response to the Bell

Companies' Motions for Generic Wireless Waivers, pp. 18-19 (July 25,

1994) (``DOJ Generic Wireless Memorandum'').

---------------------------------------------------------------------------

In this regard, all of the specific claims that the RBOCs and Ad

Hoc IXCs advance constitute challenges to procompetitive features of

the merger.

A. The RBOCs' Proposal for a Marketing Restriction Is Both Antithetical

to the Antitrust Laws and Hypocritical

The four RBOCs' principal claim is that the Proposed Decree would

be anticompetitve and contrary to public interest unless a new

marketing/solicitation restriction were added that barred AT&T-McCaw

from using the names, addresses, and long distance usage information of

AT&T's long distance customers to market cellular service to any

individual who is also an existing cellular customer of an RBOC. E.g.,

SBC, pp. 6-15; Bell Atlantic/NYNEX, pp. 10-12. The RBOCs assert that

AT&T-McCaw would otherwise obtain ``anticompetitive'' advantages from

its ``dominance'' in long distance service, that the customer

information in question is the RBOCs' ``property'' which the Proposed

Decree (and the MFJ) elsewhere protect, and that it was thus

``inexplicable'' and ``inconsistent'' for the Department to allow AT&T-

McCaw to use this information.

These claims are not merely baseless. They are transparent attempts

to prevent competition for RBOC customers and to preserve advantages

that the RBOCs derive from their control over bottleneck local

telephone monopolies.

The Claims Are Antithetical to Antitrust. First, the marketing

restrictions that the RBOCs seek are antithetical to the antitrust

laws. As courts have uniformly held and as the RBOCs have elsewhere

argued, the ability of a firm to offer new services (e.g., cellular) to

customers of its own services (e.g., long distance) is procompetitive

and beneficial to consumers. Here, moreover, the ability of AT&T-McCaw

to engage in this ``cross-selling'' is one of the principal ways in

which the merger would create genuine efficiencies and consumer

benefits that would offset advantages the RBOCs derive from their local

exchange monopolies.

In particular, AT&T provides an array of telecommunications

services and products to actual or potential cellular customers--long

distance services, cellular and other CPE, computers, and the AT&T

Universal Card (a combined telephone calling/credit card). The

relationships that AT&T has with these customers will enable the

combined AT&T-McCaw both to identify actual or potential customers of

cellular services and to inform them about AT&T cellular service at

very low cost: e.g., through inserts in billing envelopes, direct

mailings, or the like.\54\ In this regard, because AT&T has provided

high quality services, superior customer support, and attractive

prices, the AT&T brand is a strong warranty of quality, and there may

be many existing AT&T customers who would value receiving an ``AT&T

cellular service'' offering that same quality and who would choose to

do so if AT&T engages in this direct marketing to its customers.

\54\ Contrary to the RBOCs' suggestions (see SBC, Affidavit of

John T. Stupka, para. 7), the Proposed Decree prohibits AT&T from

providing long distance services on more favorable terms to cellular

customers of McCaw than to other cellular customers (see

Sec. IV(F)(1)), so AT&T could not make ``targeted offers'' for long

distance services that would not be available to RBOCs' cellular

customers.

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At the same time, contrary to the RBOCs' suggestions (e.g., Bell

Atlantic/NYNEX, pp. 10-11), such marketing efforts would not and could

not themselves cause any customer to switch to AT&T. Rather, they would

merely be an efficient, low-cost way for AT&T to give its own long

distance (and other) customers information about AT&T cellular service

and the choice whether to use it or not. Those customers who are

satisfied with the RBOC cellular service, who believe it will be

improved, or who otherwise do not regard the AT&T-McCaw cellular

offering as more attractive would say ``no'' to the AT&T offer.

Conversely, those customers who value dealing with AT&T, who were

dissatisfied with RBOCs, and who perhaps have dealt with them only

because of doubts about McCaw, might say ``yes'' to the AT&T offer. In

either event, consumers will benefit from the solicitation because

additional choices will have been extended to them efficiently and

because rivalry for their business will increase.

In this regard, these RBOCs have elsewhere admitted that they are

seeking to block these AT&T marketing efforts in order to protect the

RBOCs' customer bases and profit margins, not to benefit consumers and

competition. In particular, when NYNEX and Bell Atlantic unsuccessfully

sought this same restriction on AT&T-McCaw at the FCC, these RBOCs

claimed that the ``power of AT&T-McCaw brand'' and the ability to offer

cellular packages that contain this same warranty of quality could

cause the RBOCs to lose significant percentages (``10% to 25%'') of

their existing customers ``in the first year.'' \55\ These assertions

are likely hyperbole, for it is difficult to believe that even a

slothful monopolist could have offered such poor service and so

alienated its customers that so many would immediately switch to AT&T-

McCaw. However, the RBOCs have one and only remedy under the antitrust

laws if they have created such a situation. It is to compete on the

merits and to seek to retain customers, and to win back any that are

lost, by improving the quality of their cellular services, reducing

their price, or otherwise making their own cellular offerings more

attractive. That would benefit consumers, and it is extraordinary that

RBOCs would suggest that an antitrust court should seek to protect an

RBOC's customer base and profits from competition.

\55\ See AT&T-McCaw FCC Proceeding, Petition of NYNEX

Corporation and Bell Atlantic Corporation for limited

Reconsideration, p. 7 (Oct. 19, 1994).

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Similarly, SBC makes the anticompetitive and paternalistic

assertion that many of its customers would be better off if they were

protected from competition because they spend ``as little [sic] as''

$100 a

[[Page 49879]]

month and are thus not ``sophisticated.'' SBC, p. 13. In particular,

SBC contends that these customers would not know to respond to AT&T's

solicitations by seeking better ``offers'' from competitors.\56\ Quite

apart from the fact that the antitrust laws reject this paternalism,

SBC ignores that the RBOCs are always free themselves to make these

``better offers'': e.g., by reducing the price or improving the value

of their services, by making ``counter offers'' to any customers who

seek to terminate cellular service to go elsewhere, or by making

targeted offers to ``win back'' customers who leave. Again, that is the

competition that the antitrust laws seek to foster, and SBC's argument

is an admission that it is seeking restrictions that would harm

consumers and diminish rivalry.

\56\ See Southwestern Bell v. FCC, Nos. 94-1637 & 94-1639 (D.C.

Cir.), Brief for Appellant SBC Communications Inc., p. 29 (Dec. 28,

1994).

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It is for these reasons that federal courts have uniformly held

that restrictions on customer solicitations are alien to the antitrust

laws. For example, courts of appeals have held that the antitrust laws

cannot be used to enjoin or punish a firm's use of customer lists to

market services even when the lists may have been misappropriated from

a competitor in violation of state unfair competition laws \57\--as

AT&T's lists of its own long distance customers were not. These courts

hold that the customer solicitation ``enhance[s] rivalry rather than

reducing it,'' that it benefits consumers to receive additional

choices, and that while regulatory statutes and ``unfair competition

laws'' may place some constraints on these activities, the antitrust

laws cannot, for they are designed to protect competition, not

competitors.\58\

\57\ See, e.g., Northwest Power Products, Inc. v. Omark

Industries, Inc., 576 F.2d 83 (5th Cir. 1978) (rejecting claim that

it violated antitrust laws for dealer and new distributor to

conspire to take away plaintiff old distributor's customers by

hiring a contingent of its employees, together with a customer

list); accord Seaboard Supply Co. v. Congoleum Corp., 770 F.2d 367,

375 (3d Cir. 1985).

\58\ See Northwest Power Products, 576 F.2d at 88-91 (noting

that the challenged conduct, even if unfair, ``enhanced rivalry

rather than reducing it,'' and holding that ``the purposes of

antitrust law and unfair competition law generally conflict. The

thrust of antitrust law is to prevent restraints on competition.

Unfair competition is still competition and the purpose of the law

of unfair competition is to impose restraints on that competition.

The law of unfair competition tends to protect a business in the

monopoly over the loyalty of its employees and its customer lists,

while the general purpose of the antitrust laws is to promote

competition'') (emphasis added).

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Indeed, courts have thus uniformly held that it raises no issue

under the antitrust laws when, as here, a large integrated firm uses

its own customer lists to market new services (like cellular) to

existing customers of its own services (like long distance). In

particular, it is well-settled that when no essential facilities are

involved, it is efficient and procompetitive for a large multi-product

firm to take advantage of its integration in the same way a smaller

multi-product firm would. See Berkey Photo, Inc. v. Eastman Kodak Co.,

603 F.2d 263 (2d Cir. 1979). On this basis, courts have held that it is

procompetitive and raises no issue under the antitrust laws when even a

local gas monopoly uses lists of its own gas customers to advertise and

market related products (there, gas vent dampers) because no essential

facilities are involved and the conduct constitutes a legitimate and

procompetitive efficiency of integration, not an abuse of monopoly. See

Catlin v. Washington Energy Co., 791 F.2d 1343, 1345-48 & n.1 (9th Cir.

1986) (rejecting claim of a group of suppliers of vent dampers that the

gas company ``should be barred from permitting its merchandising

division to use the list [of gas company customers] to advertise vent

dampers to the detriment of competit[ors] in the vent damper market'')

(internal quotation omitted).

In this regard, the RBOCs' contention that AT&T is a ``dominant''

long distance carrier with ``market power'' is both erroneous and

irrelevant. The claims are erroneous because the RBOCs' claims rest on

FCC findings that were made in 1982 and that have no current

validity.\59\ The reality is that AT&T faces up to 35 long distance

competitors in each RBOC cellular system. Whereas AT&T believes that

its share of cellular-originated long distance calling is not

materially different from its share of switched long distance calling

(currently 57.8% of minutes),\60\ the fact is that each AT&T long

distance customer freely chose AT&T in a competitive market. In all

events, the RBOCs' claims are irrelevant, for the foregoing cases

squarely hold that it is procompetitive and beneficial to consumers for

even ``the dominant firm in any market * * * [to] create demand for

[its] new products'' by marketing new services to its existing

customers.\61\

\59\ The RBOCs rely on the fact that AT&T is classified as a

``dominant'' carrier because the FCC previously found AT&T to

possess market power. However, AT&T was so classified in 1982. Since

that time, the FCC has eliminated price cap and other economic

regulations of AT&T's 800 and large business services (Baskets 2 and

3). See Competition in the Interstate Interexchange Marketplace, 6

FCC Rcd 5880, 5893-96, 5908 (1991) (Basket 3); id., 8 FCC Rcd 3668,

3671 (1993) (Basket 2). In addition, based on its finding of

``adequate competitive alternatives,'' the FCC recently announced

its intention to remove all commercial long distance services from

Basket 1. See Revisions to Price Cap Rules for AT&T Corp., CC Docket

No. 93-197, 1995 FCC LEXIS 250, para. 26 (Jan. 12, 1995). The FCC

has retained price cap regulation of AT&T's residential services

only because the FCC stated that it cannot determine (one way or

another) whether AT&T has market power in these segments of the long

distance market. See Competition in the Interstate Interexchange

Marketplace, 6 FCC Rcd at 5908 (``there are unresolved issues and

insufficient information in the record about the competitiveness of

Basket 1 operator services''); Price Cap Performance Review for

AT&T, 8 FCC Rcd 6968, 6970 (1993). Finally, AT&T has now shown that

it has no such market power and should be classified as

``nondominant.'' See Motion for Reclassification of American

Telephone & Telegraph Company as a Nondominant Carrier, CC Docket

No. 79-252 (FCC, filed September 22, 1993).

\60\ The FCC has reported that, in the third quarter of 1994,

some 71% of telephone lines were presubscribed to AT&T, but it has

only 57.8% of total minutes. The discrepancy reflects that customers

who make no, or few, long distance calls disproportionately select

AT&T, which gives it a higher percentage of presubscribed lines that

AT&T has of actual long distance calling. Similarly, whereas the

Department has found that in excess of 70% of cellular customers

select AT&T (Competitive Impact Statement, pp. 12-13), that figure

does not reflect the percentage of cellular-originated calls or

minutes that AT&T carries.

\61\ Foremost Pro Color, Inc. v.Eastman Kodak Co., 703 F.2d 534,

546 (9th Cir. 1983). Accord Berkey Photo, 603 F.2d at 273-76; Catlin

v. Washington Energy, 791 F.2d at 1345-48.

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In this regard, whereas regulatory agencies have authority to adopt

solicitation restrictions, the FCC has also concluded that it promotes

competition and benefits consumers to allow AT&T to market other

products or services to its long distance customers. For example, at a

time in which AT&T's long distance market share was 90%, the FCC held

that AT&T could use lists of its long distance customers and their

usage information to market CPE and enhanced services to any customer

who did not notify AT&T that it did not wish to receive such

solicitations,\62\ and the FCC extended the same regulation to AT&T's

marketing of cellular service in the order approving the AT&T-McCaw

merger.\63\ In this regard, the FCC found that the ability of AT&T-

McCaw to engage in joint marketing and ``cross-selling'' is one of the

principal ways in which the merged entity can compete more effectively

with the local RBOC monopoly and that the RBOCs' ``parity for parity's

sake'' arguments are contrary to the Communications Act as well as the

antitrust laws.\64\

\62\ See Amendment of Section 64.702 of the Commission's Rules

and Regulations, 104 FCC 2d 958, 1089 (1986).

\63\ See FCC Order, para. 83.

\64\ See FCC Order, Paras. 32, 83.

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The RBOCs' Claims Are Hypocritical. The RBOC pleas for ``parity''

are not only anticompetitive, but also hypocritical, for they are

simply seeking to preserve (and extend) advantages that the RBOCs

received because of their

[[Page 49880]]

local exchange monopolies. These monopolies meant that the RBOCs

received ``B'' Block cellular licenses at no cost in their franchised

monopoly territories, that they received one to three year headstart

monopolies over nonwireline competitors which guaranteed the RBOCs the

exclusive right initially to sign up the best cellular customers, and

that the RBOCs are able to ``piggy back'' (SBC, p. 12) on the local

exchange monopoly through use of common trade names and joint

advertisements and the receipt of monopoly financing. See pp. 10-12,

supra. These factors help explain why every significant nonwireline

carrier (save McCaw) was forced to sell out to RBOCs, and why McCaw has

the $5.7 billion debt, and marketing weaknesses, that led to the

merger. See pp. 12-13, supra. The RBOCs previously defended this lack

of ``parity.'' See pp. 10-13, supra.

In this regard, if there were any basis for Bell Atlantic/NYNEX's

prediction that they could immediately lose significant numbers of

customers to AT&T-McCaw, the only possible explanation would be that

these RBOCs have acquired and retained many of their customers solely

because of the foregoing advantages. In particular, that prediction

could be accurate only if these RBOCs had obtained and retained these

customers solely by exploiting fears about McCaw's weaknesses and

competence and the benefits of dealing with large, experienced

telecommunications carriers, not because these RBOCs in fact provided

high quality and competitively-priced services.

Further, the RBOCs' proposal is hypocritical for the added reason

that they have elsewhere argued the precise opposite of what they here

urge. As noted above, there are conditions in which the FCC has the

authority to impose the kinds of marketing/solicitation restrictions

that RBOCs seek, and the RBOCs have opposed the adoption or

continuation of these restrictions on the RBOCs' offerings. The RBOCs

have argued to the FCC on the basis of Catlin and other authorities

cited above that it is procompetitive for RBOCs to be free to use their

monopoly local exchange customer lists and usage information to market

competitive enhanced services and CPE to their customers.\65\ Indeed,

the RBOCs succeeded, on that basis, in overturning FCC regulations that

previously barred these direct solicitations.\66\ In each instance, the

RBOCs are able to market their CPE and enhance services to local

exchange customers who currently use other vendors for those

competitive offerings and who are, in the RBOCs' words, a ``joint''

customers of an RBOC and an independent CPE and enhanced services

vendor.

\65\ For example, in defending against ``competitive equity''

challenges to the Commission's regulations that allow RBOCs to use

their customers' names and usage information (``CPNI'') to market

``enhanced services,'' the RBOCs, citing Catlin, ``argue[d] that

their access to CPNI is no different from an unregulated company's

access to its customer records and should therefore be permitted.''

Computer III Remand Proceedings, 6 FCC Rcd. 7571, 7608 (1991).

\66\ See Furnishing Customers Premises Equipment by the Bell

Operating Telephone Companies, 2 FCC Rcd 143, 152-53 (1987)

(removing restrictions on RBOCs' use of local customer information

in marketing CPE); Amendment of Section 64.702 of the Commission's

Rules and Regulations (Third Computer Inquiry), 104 FCC 2d 958, 1091

(1986) (removing restrictions on RBOCs' use of local exchange

customer information to market enhanced services), recon., 2 FCC Rcd

3072, 3094-95 (1987), recon., 3 FCC Rcd 1150, 1162-63 (1988),

recon., 4 FCC Rcd 5927 (1989), vacated and remanded, California v.

FCC, 905 F.2d 1217 (9th Cir. 1990), on remand, 6 FCC Rcd 7571, 7609-

14 (1991), vacated and remanded in part and affirmed on this ground,

California v. FCC, 39 F.3d 919, 930-31 (9th Cir. 1994).

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Even more pertinently, the RBOCs seek the same rights in cellular.

While FCC cellular regulations have barred RBOCs from using local

exchange customers' information in marketing cellular service (47 CFR

Sec. 22.901(d)), the RBOCs are seeking to overturn these restrictions

and obtain the same rights to use their customers' information in the

marketing of cellular radio service that AT&T possesses.\67\

\67\ See, e.g., Petition of Bell Atlantic, NYNEX, and

Southwestern Bell for Investigation and for Order to Show Cause pp.

3, 12-14, FCC File No. MSD 93-13 (Jan. 27, 1993) (arguing that these

and other Part 22 restrictions on RBOCs should be removed).

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The RBOCs also argue that AT&T would not have independent long

distance customer relationships with RBOCs cellular subscribers if the

MFJ did not bar RBOCs from providing interexchange services and require

them to provide equal access. But that claim is irrelevant and

erroneous. The plaintiffs in Catlin and the RBOCs' CPE and enhanced

services competitors were legally barred from providing the monopoly

gas and exchange services, but courts and the FCC nonetheless held that

it was efficient and procompetitive for the monopolies in Catlin (and

the RBOCs) to use their customer lists in marketing competitive

products and services. Those principles apply a fortiori in the case of

AT&T, for its long distance services are competitive.

More fundamentally, the RBOCs' arguments simply confirm the wisdom

of the MFJ. The MFJ restrictions on the RBOCs have been upheld by Judge

Greene, the Court of Appeals, and the Supreme Court precisely because

of the substantial likelihood that RBOCs would otherwise use their

bottleneck monopolies to impede long distance competition, harm

consumers, and thwart the objectives of the antitrust laws. The RBOCs

are here seeking to prevent AT&T-McCaw from competing more effectively

with the RBOCs' cellular services by claiming that they would now have

long distance monopolies if the MFJ did not exist. That shows that the

MFJ promotes competition in cellular as well as long distance services.

The Information at Issue Is the Customers' Property, Not the

RBOCs'. The RBOCs also claim that information that AT&T possesses

consists of ``property'' or ``trade secrets'' that the Proposed Decree

(and the MFJ) elsewhere protect, and that the Department acted

inconsistently by allowing AT&T-McCaw to use AT&T's long distance

customer information in marketing cellular services. There is no basis

for this claim. The information that AT&T has consists of the names,

addresses, and long distance usage information of AT&T's own long

distance customers who freely choose AT&T services and who allow AT&T

to use the information to offer other products or services. In this

regard, the pertinent FCC regulations recognize that this information

is the customer's not any carrier's, and the customer controls how the

information is to be used. By contrast, the only information that the

Proposed Decree protects is the nonpublic information of cellular

carriers in their capacity as customers of equipment manufacturers.

Preliminarily, there is no basis for the RBOCs' insinuations that

AT&T's long distance arm has the lists and cellular usage information

of the RBOCs' cellular customers. Lists of RBOC cellular customers and

usage information are not provided to AT&T or any other long distance

carrier when cellular systems ``cut over'' to equal access or

otherwise. For example, to the extent that long distance carriers mail

out marketing literature to cellular customers, they do so by providing

the literature to independent agents who receive the customer lists

from the RBOCs and who mail out the long distance carrier's literature.

That has been the practice under the MFJ, and the Proposed AT&T-McCaw

Decree similarly limits the use of McCaw's cellular lists to the

marketing of long distance services. Proposed Decree, Sec. IV(C).

Conversely, when a cellular customer selects an individual

interexchange carrier, that customer's name, address,

[[Page 49881]]

and long distance (but not local cellular) usage information is

forwarded to the long distance carrier to whom the customer

subscribes.\68\ Long distance carriers, in turn, are free to use that

information to offer their long distance customers any other products

or services, be they CPE, enhanced service, or cellular service,

subject only to FCC regulations. Notably, contrary to these RBOCs'

assertions (e.g., SBC, p. 8), the same rule applies under the Proposed

Decree. If a McCaw cellular customer subscribes to Sprint, MCI, or any

other AT&T competitor, that firm obtains the foregoing information from

its customers and is free to use that information in offering other

products or services, including cellular service or substitutes for

cellular service (e.g., PCS), subject only to FCC regulations.

\68\ SBC concedes the point, for it is reduced to making

contrived arguments to the effect that AT&T could make guesses about

whether a particular AT&T long distance customer is an ``above-

average'' cellular customer of an RBOCs. See SBC, p. 9. For example,

SBC states that many cellular customers (an alleged 75%) who make

over 275 minutes of long distance calls a month are above average

local cellular users--meaning that 25% of even the heaviest long

distance users are below average cellular customers. Conversely, as

SMC's charts show, there are a significant percentage of ``above

average'' customers (50%) that make few long distance calls (120

minutes) and a significant percentage of ``above average'' cellular

customers

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