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

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## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** September 27, 1995
- **Citation:** 60 FR 49861

## Text

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 * * *

[[Page 49865]]
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.
---------------------------------------------------------------------------

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'').
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

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.'').
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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]]

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

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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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 f

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A95-23636. Public record. Not legal advice.