Telecom mergers proceed - cautiously

Recent FCC decisions seem to indicate that regulators are willing to take a broad view of competition. But the message to communications companies that plan to merge and supply converged services - local and long-distance, voice and data - appears to be "proceed with caution."

On Oct. 8, the FCC reaffirmed its 30% cap on cable viewer ownership but effectively relaxed that limit by including direct broadcast satellite customers in that base and by calculating market share based on actual cable-ready homes rather than just homes passed.

In practical terms, that allows a merged AT&T/MediaOne to own systems that provide service to about 36% of landline cable-ready homes.

The company may have to spin off some local networks, but it will be easier to meet the new standard.

"The message is that the FCC wants, above all, to foster competition for local phone service and to encourage the spread of new access technologies," said Christopher Dahl, senior analyst with McKeown Associates. "To achieve that, it's willing to permit a certain amount of concentration in one market: cable."

"The agency is saying, `We'll let you bulk up in one field if that lets you compete in other places that you wouldn't otherwise be able to reach,'" said Pamela Henry, an analyst at Prime Securities. She cited the FCC's recent approval of SBC Communications' merger with Ameritech, creating an RBOC controlling one-third of U.S. local phone lines, on the condition that the new company offer local service in 30 cities outside its territory (see story on page 12). Henry also used as an example the FCC's relaxation of ownership rules for broadcast stations last September.

But it is unclear whether this broad view of competition will apply to the biggest combination on the FCC's agenda - MCI WorldCom's proposed purchase of Sprint.

"The 30% cable cap is the FCC's effort to preserve diversity in the cable market," Henry said. "No one can own more than one-third of the pie." But MCI WorldCom/Sprint would control about 37% of all U.S. long-distance traffic. Taken with AT&T's 42% long-distance share, that would put two companies in control of 80% of the market.

Since announcing the intended merger, MCI WorldCom CEO Bernard Ebbers has cited the eventual entry of the RBOCs into long-distance and the continued growth of long-distance competitors such as Qwest Communications and Level 3 Communications as factors that will help open the converged digital market and lessen the long-distance leaders' dominance.

But that type of competition is years away by most observers' reckoning. In the meantime, the vision of a long-distance market with only two big players may be too much for the FCC to tolerate.

"This one just doesn't jibe with the recent FCC pattern," Dahl said. "No entry to new markets where [MCI] WorldCom wouldn't have gone, no spread of desirable technology - none of the benefits the agency has looked for to offset market concentration. All there is for the public is a real danger of less competition in long-distance."