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Bad Deal of the Century: The worrisome implications of the Worldcom-MCI merger

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Executive Summary

The proposed $37 billion merger of WorldCom Inc. and MCI Communications Corp. would constitute the largest acquisition in business history. If allowed to proceed by regulators, it would combine the nation’s two largest Internet “backbone” systems and two of America’s top four long-distance companies.

The proposed merger raises serious antitrust and competitive issues that affect every U.S. consumer and business. The combined company will control 50% or more of the Internet infrastructure and one-quarter of the U.S. long-distance telephone market, raising concerns that approval of the merger will thwart the pro-competitive intent of Congress in passing the Telecommunications Act of 1996.

WorldCom’s bid to dominate the telecommunications industry rests on three strategic initiatives: privileged access to capital markets, a rapid increase in market power based on expanded control over the Internet backbone, and preferential service for high-volume business and well-off subscribers and neglect of the broader consumer market.

The key concerns raised by this report are the following:

  • The proposed merger is an attempt by WorldCom to develop market power over the Internet. The merger would enable the combined company to dominate the Internet backbone and major network access points of the Internet, giving the company substantial power over the terms and pricing of Internet interconnection. This concentration of power would undermine the Telecommunications Act of 1996, which explicitly intended to promote competition in this critical sector. Indeed, some Internet service providers have already begun to protest that they will face additional levies as a result of the merger.
  • Marketing to high-volume users subverts the intent of the Telecommunications Act of 1996, which codified the objective of universal service for the first time in the nation’s history. WorldCom has gained its current market position through its dedicated pursuit of favored customer groups and an equally deliberate neglect of other subscriber market segments. A WorldCom takeover of MCI will only intensify this focus on business customers and on an elite stratum of high-volume individual users. By integrating the joint company’s exclusionary local networks with its long-distance facilities and, specifically, with its tiered Internet services, the merger threatens to establish a freestanding infrastructure that is largely separate from the inclusive public-switched network and that cherry-picks in favor of high-volume users.
  • The combined company’s financial health is uncertain. WorldCom’s ability to wage battle for MCI rested upon its uniquely inflated share price and its established practice of financing acquisitions by using its strong stock as its chief currency. Since it was incorporated in 1972, the company that became WorldCom in 1995 used its common stock to acquire a succession of 20-odd local, long-distance, and Internet companies. Its $36.5 billion takeover offer valued MCI at nearly double the price the carrier had commanded just months before. A combined MCI-WorldCom faces worrisome financial issues, including an appreciably increased debt burden and the likelihood that an MCI under WorldCom management will not generate profits sufficient to justify the high price paid.
  • Consolidation of the two companies could impose serious social costs. As noted above, the merger may reduce the resources available to modernize the publicly shared telecommunications network. In addition, an increase in market dominance by these two non-union carriers will affect labor relations practices in the industry and will exacerbate the push for lower wages.

MCI-WorldCom is a mistake waiting to happen. The combined company’s financial health would be uncertain. Its prospective dominance over the Internet would crowd out rival vendors and imperil interconnection on nondiscriminatory terms. The premium services that it would target at high-volume business and elite residential users would come at the expense of other residential customers. Together, these changes would harm the nation’s telecommunications system at exactly the moment when the health of that infrastructure is most important to the overall well-being of the economy. Regulators must address these concerns now, before a combined MCI-WorldCom consolidates its market dominance into an effective monopoly position.

Introduction

When AT&T rose to monopoly power early in the 20th century, it relied on a three-prong strategy: it used its privileged access to capital markets to acquire a number of would-be competitors; it exerted leverage over rivals it had not acquired by increasing its stranglehold on crucial communications technology; and it targeted high-volume users with preferential service offerings.

This scenario, carried out decades ago before effective, pro-competitive regulation protected the integrity of markets for consumers, may sound familiar. It applies equally well to WorldCom’s bid to acquire MCI Communications Corp.

The proposed $37 billion WorldCom-MCI merger would be the largest acquisition in business history. If approved, it will create a telecommunications behemoth with revenues of $32 billion, a market capitalization of $60 billion, 63,000 employees, and one-quarter of the U.S. long-distance telephone market. The company will also control 50% or more of the Internet backbone, a system of high-capacity circuits and related facilities that are essential to carrying traffic across the global Internet.

The proposed WorldCom-MCI merger raises serious issues that affect every U.S. consumer and business. There are concerns that it violates antitrust laws, which are formulated to assure that no single company gains sufficient power to dominate a market. There are also concerns that it does not protect the public’s interest and violates the pro-competitive intent of Congress in passing the Telecommunications Act of 1996.

Thus, the proposed WorldCom-MCI merger raises an important question: as the 21st century dawns, can the United States afford to risk the creation of a new telecommunications monopoly?

As this study shows, the answer is no.

The intertwined acquisitions and strategies involved in WorldCom’s offer for MCI constitute an unlawful bid for market domination. WorldCom’s proposed acquisition is overtly anti-competitive, and it calls for federal regulators to protect consumers and competitive markets by rejecting the merger.

The Deal as Finance

In 1894, Bell’s patents on the telephone entered the public domain. Literally thousands of independent service suppliers soon flooded the industry, putting an end to the Bell System’s monopoly over telephone system development. AT&T attempted to reclaim its supremacy by rapidly expanding its network, and it raised the funds it needed by turning to outside sources of capital. Bond sales and, above all, issues of common stock pumped hundreds of millions of dollars into the company, and it was able to buy out leading local and toll network competitors as well as build up its ownership holdings. The company’s total long-term debt ballooned from $10 million in 1899 to $211 million in 1908, and its authorized capital stock increased fivefold between 1900 and 1910, to $500 million.1

WorldCom’s industry consolidation strategy has been no less reliant on finance. Sitting on stage alongside WorldCom executives at the Manhattan news conference announcing WorldCom’s plan to acquire rival MCI was Thomas King, the Salomon Brothers banker most directly involved in the bid. Bankers rarely assume such visibility in the deals they help to arrange. In this case, however, such an elevated status was fitting: in the bidding war for MCI, as well as throughout WorldCom’s corporate history, finance has played an unusually important – and profoundly problematic – role.

Incorporated in 1972, the company that became WorldCom in 1995 used its common stock to acquire a succession of 20-odd local, long-distance, and Internet companies. By mid-1997, WorldCom had suddenly emerged as a power in U.S. telecommunications.2 About its next prospective takeover – that of MCI – Standard & Poor’s declared that WorldCom was “primed to become the next telecommunications giant.”3

The events that led to WorldCom’s bid for MCI began in 1994. In that year, British Telecom acquired a minority ownership stake (20%) in MCI. The action marked a strategic shift toward transnational telecommunications system partnerships between leading U.S. long-distance companies and their overseas correspondents. It was soon followed by similar initiatives on the part of AT&T and Sprint. In November 1996, however, British Telecom raised the ante by offering $24 billion (including assumption of some $5 billion of MCI’s debt) for the 80% of MCI that it did not already own. The U.S. Justice Department, the European Union, and the Federal Communications Commission (FCC) gave their assent to this prospective takeover. MCI reported in July 1997, however, that its ongoing attempts to expand into local telephone service in the U.S. were producing unexpectedly large losses, projected to reach approximately $800 million in 1997 alone.4 Disturbed by this development, major BT shareholders insisted that the deal be restructured.5 In late August 1997, the merger’s value was decreased by 22% to $19 billion; the proportion of the combined company to be owned by MCI investors was also significantly reduced, from 34% to 25%.6

The merger’s sudden repricing shocked and angered the institutional investors that collectively held nearly half of MCI’s stock.7 “I don’t know of any arbitrage firm that didn’t have a big position in this deal,” declared one anonymous investor.8 Leading mutual fund managers also had jumped into the deal headfirst, making big bets that it would go through as initially projected. When the BT-MCI merger was renegotiated, these speculators’ bids on the stock unraveled. Among the investors hit by the restructuring were the Soros Funds Management, Fidelity Investments (that held 43 million shares, amounting to 7.8%, of MCI stock), Lord, Abbett & Co. (4 million shares), and the large investment bank Salomon Brothers – which alone lost a reputed $100 million.9

In a story about the events that followed, the Wall Street Journal reported that “deal-makers flush with junk bonds” and other risky financial instruments were “storming that staid phone industry, where some of the biggest mergers in history have been hatched, prodded by investment bankers seeking to top one another’s deals and fees.”10 There is no available evidence that any particular intermediary induced WorldCom to make an offer for MCI. Indisputably, however, MCI was “put in play” when, after prominent British investors continued to express anxieties about the renegotiated deal, MCI and British Telecom relaxed their merger agreement on October 16, 1997.11 And it is equally certain that the financial terms of WorldCom’s bid for MCI were laden with considerable downside risks.

WorldCom and GTE each made unsolicited attempts to acquire MCI, and their ensuing rivalry generated what one journalist called a “feeding frenzy…for investment bankers and lawyers.” So many firms came to be involved as advisors and financiers that, at the high point of the action, “many of the industry’s best analysts can no longer speak publicly about the deal because their firms are working on it.”12 Hoping to reap advising fees – valued at a minimum of $30 million – Salomon leapt in to assist in WorldCom’s offer. “The only company with as much to gain from WorldCom’s…bid for MCI apart from WorldCom itself may be Salomon Brothers,” wrote the New York Times.13

WorldCom’s (eventual) $36.5 billion takeover offer – which valued MCI at nearly double the price the U.S. carrier had commanded just months before – enlarged qualitatively upon WorldCom’s established practice of financing acquisitions by using its strong stock as its chief currency. WorldCom’s bid for MCI thus was widely seen as a function of extraordinary stock market conditions. A Paine Webber analyst declared that “WorldCom would never have been able to pull off a deal like MCI if it weren’t for the bull markets we’ve had.”14 A commentator in the Financial Times agreed, asserting that the battle for MCI “is about how the massive liquidity in the U.S. equity and debt markets is being used to float corporate takeovers that would have seemed unimaginable even in the go-go 1980s.”15 These claims are certainly valid. But, above and beyond the general conditions of the market, WorldCom’s ability to wage battle for MCI rested upon its uniquely inflated share price.

WorldCom boasts that it has provided investors with 55.8% annual return over the last eight years – orders of magnitude above the returns of other carriers (4.3% for MCI, 9.4% for BT, and 8.8% for GTE).16 WorldCom’s stock price accordingly multiplied to the point that, during 1997, the company had a price-earnings ratio double that of rival long-distance companies.17 Institutional investors, which control over three-fifths of WorldCom’s stock (as compared with just 38% of AT&T’s today), have profited hugely from these holdings.18 WorldCom’s high-flying stock attested to the extraordinary love affair between the company and major investment analysts. The New York Times declared, for example, that “[t]he job of persuading Wall Street that WorldCom is up to the task of buying MCI will fall to Jack B. Grubman” – the same senior analyst who had earlier advised his clients to buy MCI, in hopes of profiting from British Telecom’s bid.19 Wall Street’s goodwill, however, testified not to WorldCom’s stellar record of building a qualitatively enhanced telecommunications infrastructure but to a risky attempt at industry consolidation that threatens the overall course of U.S. telecommunications development.

WorldCom’s stock-denominated offer was – and is – fraught with uncertainty. What if, for example, WorldCom’s stock price were to decrease suddenly before its takeover offer closed? The offer employs a device called a “collar”: if WorldCom’s shares continue to trade between $29 and $41, then the terms of its bid are guaranteed. If its share price trades below $29, however, MCI shareholders will have to be given additional WorldCom stock. Shareholder approval might, or might not, be forthcoming at this altered stock price. On November 12, 1997, WorldCom’s stock price did tip nominally below $29 a share.20

If the deal closes as projected, on the other hand, MCI-WorldCom will face worrisome financial issues. MCI’s capital investment totaled around $3.9 billion during 1997, up from $3.3 billion in 1996 and $2.9 billion in both 1995 and 1994.21 Under its new debt burden, would the combined firm be able to continue investing at this earlier level?

WorldCom claims that the deal will result in cost savings of some $20 billion over five years, enough to underwrite a 20% earnings increase during its first full year of merged operations.22 But the company will have to pay an estimated $1.1 billion in annual pretax interest, on an appreciably increased debt burden.23 If for any reason the combined company’s stock price falls substantially, then the institutional investors who have been at this deal’s center stage from the outset will not be slow to demand that measures be taken to improve MCI-WorldCom’s bottom-line performance. WorldCom’s singular dependence on Wall Street’s goodwill increases the risk that such cost cutting will move into the terrain of productive capital investment and employment.24

Thus, this caution by a writer for the Financial Times, a publication that is hardly given to questioning the propriety of the unfettered free market:

What happens if the financial projections on which such gigantic financial structures are founded prove over-optimistic, and…Mr Ebbers is unable to make a merger with MCI work?

There is little room for error. Based on the high value placed on WorldCom’s stock, Wall Street expects a combined WorldCom/MCI to enjoy a premium rating on the stock market that will set it apart from every other large telecom company. Any suggestion that his company was gravitating to the merely ordinary would be devastating.25

Is an MCI under WorldCom management capable of generating profits sufficient to justify paying nearly double the price it could garner in August 1997? MCI’s single largest shareholder, British Telecom (holding 20% of MCI’s outstanding stock) insisted on summarily cashing out its share holdings for $7 billion in cash.

Does the United States wish to attach its information economy’s most critical emergent infrastructure – the telecommunications system – to such uncertain financial moorings? The industry consolidation strategy on which the deal is predicated gives further reason for skepticism.

The Deal as System Development: The Internet and the telecommunications infrastructure

During the first 15 years of the 20th century, AT&T attempted to use its growing control over the technology of long-distance transmission to build a nationwide monopoly.26 Today, as the telecommunications infrastructure undergoes what is arguably its most significant transformation since that time, WorldCom is following in AT&T’s footsteps – through its attempt to develop market power over the Internet. WorldCom’s bid for market dominance thus must be placed within the context of institutional and technical change that has engulfed telecommunication as the Internet’s role has grown.

Although the shift toward data as opposed to voice carriage commenced many years ago, it has rapidly accelerated during recent years, owing principally to the growth of the Internet. Indeed, for the fourth quarter of 1997, MCI reported that half of its revenue growth came from Internet and data services. The latter in turn already accounted for more than $3 billion of its $5.11 billion in total quarterly revenues.27

The Internet is an astonishingly versatile system, capable of supporting an increasingly diverse range of communication modes. For example, the world’s estimated 70 million fax machines have traditionally passed images to one another over the public-switched telephone network.28 Today, however, fax-over-Internet (IP) service appears on the verge of usurping this market segment. WorldCom’s Internet subsidiary, UUNet (acquired in 1996), deploys its global Internet backbone network to support a high-security fax service – priced at about half the rate of phone-based faxes. WorldCom Chief Operating Officer John Sidgmore predicts that the first commercially significant business telecommunications service to cross over to the Internet will be faxing. The significance of this change may be gauged when we learn that faxes presently constitute half of international phone call volume.29

The core market around which the public switched network is built – voice service – also is not immune to a similar service migration. Though the quality of “voice over IP” services has historically been poor, it has improved, rendering the Internet an increasingly effective rival to conventional forms of voice carriage. The threat of Internet telephony stems, most immediately, from the business users who account for a disproportionate share of overall telecommunications demand – and who, primarily to realize cost savings, have moved rapidly to add IP telephony to their existing internal data networks.30 Trying to reclaim market leadership, established carriers like AT&T have declared that they will furnish Internet telephone services at prices well below established long-distance rates.31 Thus, Internet telephony is poised to assume an increasing share of public telephone traffic. How much and how fast remains unclear.

A raft of additional services – from well-established e-mail to still-emerging Web video, and from inter-corporate electronic commerce to consumer transactions on the Web – are also changing the Internet’s impact on the established telecommunications industry. The Internet is increasingly seen as constituting the basic infrastructure for messages originating in any mode or genre.

This transition, however, involves significant structural change in the technology and policy of telecommunications. The Internet overlaps the physical infrastructure of the telecommunications system, but it simultaneously alters the latter’s mode of operation. As established transmission facilities are enhanced with specialized routers and other instrumentation, a suite of protocols known as TCP/IP is used to transform the underlying network’s functionality. The technology used by the established telecommunications system is “circuit switching,” whereby a switch allocates and holds open a specific pathway, or circuit, for the duration of any given call. The structural technology of the Internet – “packet switching” – is different. Using TCP/IP, messages are chopped up into packets, each of which is addressed and routed individually across the network, before being reassembled in the correct sequence at the ultimate destination. The great economic advantage of packet switching is that, by permitting more extensive sharing of network resources, it affords greater cost efficiency. “Packet-switched networks,” declared then-FCC Chairman Reed Hundt, “will soon carry most of the country’s bits, and that will change the economics, the structure, and just about everything else about the telecommunications industry.”32

Yet perhaps Hundt has overdrawn the extent of the collision between the Internet and the conventional telecommunications system. Substantial rearrangement and augmentation of the Internet’s packet-switched architecture will be needed before the full range of services afforded by established circuit-switched networks can be effectively integrated. In the meantime, carriers can try to get ahead of the process by assimilating key elements of Internet technology into their existing networks. For the foreseeable future, the ability to control and deploy both packet-switched data networks and circuit-switched voice networks will remain critical. The carriers’ attempt is to mesh the rival technologies in order to retain the ability to provide a comprehensive array of service offerings to leading customers.33 “If you don’t control network assets from voice to Internet in the future, you don’t have a prayer of being a significant global player,” sums up one industry analyst.34

Beyond this, it is difficult to see. No consensus has emerged on economic models of Internet cost allocation or effective service pricing,35 in part because the Internet remains highly dynamic, even volatile: the process of system development is nowhere near the point of stability. Therefore, no one business model for the provision of a given service has established long-term viability, let alone dominance. In part, the wide gaps in knowledge are a function of the Internet’s status as a decentralized, layered system, beholden to no single centralized authority and building not only on the existing public telecommunications infrastructure, but also on proprietary local area networks.

The economic bases of Internet services may remain opaque, however, and the system’s growing strategic centrality cannot be doubted. Control over the Internet would confer unique advantages. It is for this reason that the established carriers, at every level from local to transnational, are diversifying into Internet markets.

Systems integrators—organizations that contract to set up and manage business computer networks on an outsource basis—constitute one widening avenue of carrier involvement with the Internet. MCI diversified into systems integration by acquiring Canada’s SHL Systemhouse, at a cost of $1 billion, in late 1995.36 The established carriers are also likely to enter a widening range of other Internet markets, including billing, domain name registration, directory, and other services. But the principal escalation of carrier involvement with the Internet is occurring through their direct forward integration into Internet service provision. Carriers have entered this market in two chief ways: as retailers and as wholesalers. Each is considered briefly below.

Internet service providers (ISPs) manage the retail link with Internet customers, providing connection to the system for a subscription fee and offering various other services. ISPs may be either small or large, and range in scope and orientation. Examples include huge local telephone companies (such as Bell Atlantic), commercial on-line services (such as MSN and AOL), long-distance carriers with abundant local “points of presence” (such as AT&T), and local, not-for-profit organizations. The average number of subscribers per ISP, though it is increasing, is still scarcely 3,000, and there were at last tally some 4,000 ISPs operating in the United States.37

It is an open question whether companies that enter the ISP market (and their subscribers) have been privileged to do so at subsidized rates. Under federal regulations introduced in 1983, U.S. ISPs have been repeatedly classed as unregulated providers of “enhanced” service.38 This designation exempts ISPs from the per-minute interconnection charges that are levied on other long-distance systems that tie in with incumbent local telephone networks. As a result of this sustained federal policy, it is arguable that ISPs enjoy a substantial cross-subsidy that is borne by ordinary voice users of incumbent local telecommunications networks.39 To the contrary, others assert that local carriers are making a profit as a result of Internet traffic.40 Either way, in recent months it has become clear that Internet service capabilities are integral to local telecommunications system development, and local exchange carriers have begun to diversify into Internet service provision.41

Internet capabilities are, if anything, even more critical at the wholesale level. Following the federal government’s spinoff of the earlier Internet backbone network in 1995, several companies entered the market to provide these wholesale Internet distribution services. They did so by interconnecting with each other at the Internet’s officially designated network access points (NAPs) and, increasingly, at privately arranged NAP sites as well. In the United States, 30 such wholesalers (many of which double as ISPs) carry the traffic of the thousands of smaller ISPs.

There exists, however, a sharp differential between the leading wholesalers and the rest; a bare handful of companies dominates this market. All of the five leading backbone suppliers, which together handle an estimated 80% of U.S. Internet traffic (the rest being accounted for by the 25 smaller companies) are, in fact, already either owned or in the process of being acquired by major telecommunications carriers. Some, such as internetMCI or Sprint IP Services, were developed inhouse over a period of years. Others came about through acquisitions: GTE Internetworking was the fruit of GTE’s takeover of BBN – the pioneer of internetworking. A comparative laggard, AT&T experienced pressure to introduce its own backbone when BBN – with which it had previously contracted to host a majority of its 2,000 large corporate Internet customers – was acquired by GTE. AT&T then confirmed the Internet’s growing strategic importance by announcing that it would increase tenfold the capacity of its 40,000-mile distance fiber network, and it begin offering its 10 million business customers access to its own high-speed Internet backbone at 580 points around the United States.42

Although additional would-be wholesalers have announced recently their intent to enter backbone transmission markets,43 it is fair to claim that even the leading wholesale providers are playing catch-up with WorldCom. Its 1996 takeover of UUNet Technologies transformed WorldCom into one of the two biggest supranational suppliers of advanced data services, with hundreds of local access points worldwide at which business subscribers might connect to its network.44 WorldCom went on to take over what had previously been the fifth major wholesaler, ANS (which had operated as a captive unit of America Online). With its attempt to swallow MCI, WorldCom stands to finally achieve its goal – unparalleled market dominance over the entire Internet.

The combined company, with some 3,000 points of presence and more than 500,000 router ports, would control an estimated 40-60% of Internet backbone service.45 It would supply all three leading commercial online services – AOL, CompuServe (which is now an AOL subsidiary), and the Microsoft Network. And it would possess a strategic base for the further rapid build-out of this critical backbone system. MCI announced in December 1997 that it had doubled the core circuit capacity of its Internet backbone, and it predicted that more than half of the company’s total network capacity would be dedicated to Internet traffic by 2001. MCI also said it intends to boost backbone circuit capacity again by the end of 1998.46 Worldcom’s Internet backbone, meanwhile, is undergoing aggressive expansion throughout Europe and Asia.47

Onerous effects of this ongoing consolidation are already plain. Until recently, interconnecting backbone networks exchanged packets through unbilled “peering” arrangements, whereby the different vendors simply agreed to allow each others’ traffic to transit their respective networks without compensation. Peering arrangements of this kind contributed greatly to the Internet’s vaunted “open culture.” Today, in contrast, most of the major backbone operators will only interconnect with other operators who, like themselves, also interconnect at all of the system’s major network access points. That is, they are beginning to choose – and to refuse – to peer in light of their own strategic and economic considerations.

WorldCom inaugurated this destabilizing trend.48 And MCI-WorldCom’s augmented market share of the Internet backbone would grant it even greater power over the terms and pricing of interconnection. At least some ISPs that buy connectivity from WorldCom have already begun to protest that they will face additional levies as a result of the merger.49 Gordon Cook, an authority on Internet economics, goes further, declaring that major backbone providers – none of which will come close in terms of market power to MCI-WorldCom – “are in a position to declare themselves the Internet, and it could mean the costs of access are going to go up sharply.”50 Already there is talk of a rapid thinning among the ranks of Internet service providers, in one projection to fewer than 100 within five years.51

WorldCom’s bid to control the Internet offers an affront to recent legislation. The Telecommunications Act of 1996 explicitly intended to promote competition in this critical sector.52 But, taken together, WorldCom’s string of recent acquisitions – prospectively including MCI – accounts for fully half the total value of the $100 billion-worth of telecommunications deals that have occurred since the act’s passage.53 A recent Merrill Lynch report praises WorldCom’s recent merger with Brooks and the prospective takeover of MCI, in particular, because they will “reduce…the level of intra-industry competition in both the U.S. long distance and local markets.”54

The effects of this prospective buildup of market power will extend beyond the plundering of rivals. They will also encompass a growing measure of preferential service provision, as MCI-WorldCo

m finds means of discriminating in favor of some customers over others. WorldCom’s strategy places corporate users of Internet systems and services first, second, and foremost. Premium-grade Internet service packages will be used to target transnational corporate users with priority-access to network bandwidth. The attempt is to develop pricing structures and service applications in support of more robust and reliable service – for users willing to pay higher fees. A commentator who had worked earlier for a company that was acquired by WorldCom places the MCI-WorldCom deal approvingly in this context: “The good news is that, with one company controlling a large portion of the Internet backbone, we could see much faster implementation of quality-of-service and tiered pricing structures.”55

The leading aim of common-carrier regulation historically was to curtail discrimination in service provision by dominant carriers.56 Yet here is WorldCom, deploying its control over the unregulated Internet to spearhead a powerful discriminatory thrust. To gain a sense of the full import of this strategy, we must look at WorldCom’s Internet initiative within the larger context of changes gripping the telecommunications industry.

The Deal as Strategy: marketing to high-volume users

Economic historians of the telephone industry have shown how, during the early 1900s, the Bell system granted large-volume business users a preferential voice in its rate-setting and system development strategy in return for their political support for its attempts to curtail competition in the industry. Weiman and Levin hypothesize that this divide-and-conquer strategy amounted to a kind of “modified predation” by the Bell system over the U.S. telephone industry.57 While AT&T focused on business users, it continued to discount the needs of working Americans for residential telephone service virtually until World War II – some 65 years after the instrument’s invention. Thus, the gap in telephone subscription by income, writes Claude Fischer, “stayed constant or widened between 1900 and 1940,” as Bell executives “wrote off perhaps one-fourth to one-third of American families.”58 Only during the golden-age prosperity of the post-World War II era did residential telephone service finally become socially inclusive.

A WorldCom takeover of MCI, however, would work to undercut this painfully acquired universal access to the telecommunications network. MCI-WorldCom aims to create a freestanding telecommunications infrastructure, largely bypassing the public-switched network and, with it, tens of millions of residential subscribers. The merger therefore subverts the intent of the Telecommunications Act of 1996, which codified the objective of universal service for the first time in the nation’s history.59

The demand for telecommunications services is highly asymmetric, both for business and residential markets. On one hand, a compact group of large business users generates a skewed percentage of calling volume and carrier profits. Business customers make more and longer calls than residential users; because they also have more phones clustered together, the cost of running wires to a business customer is much more likely to be richly recompensed.60 This same group is, not coincidentally, the principal source of demand for remunerative leading-edge technologies and services.

Just below this top tier of users are medium and small businesses, which again constitute a disproportionate share of overall demand. An elite stratum of high-volume individual users accounts for a high percentage of total residential demand for long-distance service; conversely, perhaps one-quarter of residential subscribers make very few long-distance calls, totaling an unremunerative (for the long-distance carriers) $3 or less per month.61 The pattern of demand for more recent cellular and Internet service offerings only strengthens these skews. As a result, an estimated 20% of AT&T’s subscribers account for 80% of the company’s $6 billion in annual profit.62

WorldCom has gained its current status through its dedicated pursuit of favored customer groups and an equally deliberate neglect of other subscriber market segments. This may be seen most clearly by inspecting recent developments within local telecommunications service.

Incumbent local exchange carriers (ILECs) are the established suppliers that existed at the same time as the Bell System breakup in 1984. Competitive local exchange carriers (CLECs) are the companies that have sprung up to provide local service in the wake of the divestiture. Liberalized policies since that time have encouraged both CLECs and, increasingly, ILECs, to focus on carrying the traffic generated by high-volume business users.

CLECs have been endowed with a signal advantage in this rivalry. “Unburdened by any obligation to provide universal service at a uniform price,” according to an official 1987 report on telecommunications industry structure, “a competitor can cream off large business and urban residential customers who are charged above-cost rates by the LEC.”63 Beginning 10-15 years ago, by 1997 more than 100 CLECs had proliferated – and had raised $14 billion in capital investment since passage of the 1996 Telecommunications Act. All told, these CLECs garnered a total of $2.7 billion in annual revenue in 1997, through approximately 1.4 million access lines.64

This is not a large sum when compared with the revenues of the ILECs. But it is growing rapidly as CLECs continue to make inroads against ILECs. The CLECs have an advantage because they have been permitted to furnish service using fiber optic cables and specialized wireless circuits, almost exclusively to high-volume business users located in the top 125 U.S. cities; they in turn originate about 80% of U.S. data and voice traffic.65 CLECs are free to serve only commercial or industrial parks and central-district high-rise office buildings, while Bell and other ILECs support 161 million subscribers across the nation.66

It is critical to recognize that the CLECs’ success is predicated on an informal, but rigorous, exclusivity in provision. The last thing competitive local exchange carriers want is to be saddled with the costs of supporting ubiquitous access to their networks. WorldCom, which is already one of the largest CLECs owing to its acquisitions of formerly independent local carriers MFS and Brooks Fiber, now aims to extend this exclusionary strategy to an altogether new level – through its takeover of MCI. If the acquisition is completed, then MCI’s own prior strategy would be remade as well.

For large business users, the arrival of the CLECs indicates that significant competition in local markets already exists today, as diverse commentators have recently underlined.67 But what about the needs of residential subscribers? Will MCI-WorldCom deploy its extensive CLEC facilities to engender lower rates and greater value for money in residential service markets? Or will the strategy behind the takeover work to jeopardize inclusive access to telecommunications? It is important to note that in 1996 approximately 3% of total U.S. telephone industry revenue (some $6 billion) was lost to unpaid bills, an increase from the 1% common during the 1970s.68 Residential subscribers are already having to strain harder to retain access to the network they have paid for.

MCI, the second largest U.S. long-distance carrier, has accumulated a substantial residential market base, consisting of some 20 million long-distance customers. As compared with AT&T, however, MCI’s core revenues have depended disproportionately on business users. MCI business services, providing telephone, Internet, and data communications to companies, furnish fully two-thirds of its long-distance revenue – which in turn provide nine-tenths of overall corporate revenue. (The remainder comes from an information technology business aimed exclusively at corporate and governmental customers.) In contrast, the majority of AT&T’s long-distance revenue comes from residential customers.69

In the press of recent competition, MCI’s strategic focus has widened to include provision of local services. After spending an estimated $1.7 billion expanding into local exchanges in 31 cities during 1996-97, MCI accumulated approximately 100,000 residential customers in four states. The company also accrued significant losses, which acquired significance in the decision ultimately not to merge with British Telecom. Even as it continued to negotiate with British Telecom last summer, however, MCI was taking steps to “cut its ambitions to attract customers in return for seeking higher operating profits and margins from business customers….”70 Further, in January 1998, MCI announced that it was abandoning local residential service provision until – reincarnated as a unit of WorldCom – it could construct its own network facilities, perhaps during 1999. For now, the company’s president announced, MCI would proceed “with the only business case that makes sense” – furnishing local service to corporate customers.71

This objective is not confined to local service markets. If its claimed residential buildout actually comes to pass, MCI has already demonstrated a decided preference for marketing to “power users” – high-value residential customers who purchase an extensive basket of telecommunications and information services, typically amounting (on an annual basis) to $650 on cellular, $500 on local wireline phone service, $400 on long distance, $250 on paging, and additional hundreds of dollars on online access.72 (Such multiple-service customers also evince a lower “churn” rate.) Eschewing its earlier advertising pitch to the masses “as an upstart David to AT&T’s Goliath,” therefore, MCI is trying to reposition itself as “an integrated communications service for more affluent consumers. Using targeted prime-time TV ad buys, it will try to reach well-educated professionals, ages 30 to 50.”73 MCI ad chief John Donoghue in 1996 declared that “We’re going to change our focus from being omnipresent to the entire market to talking to the top third of the consumer market that represents opportunities in cellular, Internet, and entertainment.”74

A WorldCom takeover of MCI will only intensify this strategic shift to serve business and well-off residential subscribers across all service markets. So strong was the lure of business users that, when it initially announced its takeover bid for MCI, WorldCom Vice Chairman John Sidgmore predicted that the combined company would pull away entirely from MCI’s consumer long-distance business. The company’s strategic vision, he told the Washington Post, was based on “wholesaling” network capacity and providing services exclusively to business customers. Pressed on the matter, WorldCom issued a subsequent news release under the headline: “WorldCom Will Not Abandon MCI’s Residential Long Distance Customers.”75 But WorldCom’s new-found solicitousness in regard to residential customers, observed commentators, “is mainly a pragmatic accommodation, a requirement for regulatory approval for its merger.”76 There is no doubt, analysts agree, that “business customers, rather than consumers, stand to reap most of the near-term benefits” of the deal.77

Let us concede that a buildout of CLEC networks beyond the 1.4 million local telephone lines they collectively provide today is not likely. Let us even stipulate that this system-development effort will move beyond business markets into residential service. Nonetheless, absent regulatory intervention, such a prospective buildout will only extend the exclusionary logic that has driven CLEC system development from the outset.

A decade ago, when CLECs were just beginning to appear, a Justice Department study noted that “competing providers of short-haul transmission can target only the very largest customers, managing costs by careful selection of the customers they choose not to serve.”78 Has the asymmetric character of telecommunications demand changed since then? If not, then prepaid phone cards and even telephone arcades – whose pay phones today enjoy a complete absence of price restrictions – are likely to be WorldCom-MCI’s chief concessions to residential outreach.79 Indeed, one commentator has suggested that, “[a]lthough it denies it now,” MCI-WorldCom will look seriously at selling its residential voice customers. WorldCom is focused on business services, and may sell its consumer business to help refill its coffers and make up for the inflated purchase price it paid for MCI.80

The Social Costs of Consolidation

MCI-WorldCom stands to become the first carrier since the pre-divestiture AT&T to offer both domestic local and long-distance service nationwide over its own facilities-based network. Joining MCI’s long-distance network and its local CLEC facilities to the CLECs that WorldCom already owns, the combined company would be able to funnel business traffic among leading U.S. (and an increasing number of foreign) cities. This amounts to the consolidation of U.S. telecommunications provision on a radically new basis, which could destabilize the existing telecommunications infrastructure.

The merger of MCI-WorldCom would, first, reduce the combined company’s dependence on incumbent local exchange carrier (ILEC) networks – facilitating a $250 million annual cut in the access charges that the company presently pays for local traffic pickups.81 Second, and more important, the deal elevates exclusionary CLEC facilities to a central place within system-development strategy. By integrating these local networks with its long-distance facilities and, specifically, with its tiered Internet services, the merger threatens to establish a freestanding infrastructure that is largely separate from the inclusive public-switched network that currently predominates. Systematically cherry-picking in favor of high-volume users, MCI-WorldCom seeks to establish a premium network for those able to pay.

Meanwhile, the existing public network languishes. In 1990, the U.S. Office of Technology Assessment observed that recent telecommunications policies were likely to have the effect of making “fewer societal resources…available to modernize the publicly shared network.”82 A few years later, this result had already become apparent. One newspaper reported that “the high-quality phone service that once helped define American prosperity can no longer be taken for granted.” For example, one of the regional Bell companies (Nynex, now part of Bell Atlantic), “let its network deteriorate in parts of Brooklyn and the Bronx, where corroded wires lead to scratchy lines and service outages. It also cut nearly 14,000 jobs from its payroll since 1994, which left it unable to cope with the swelling demand for phone lines in 1995 and 1996.” During the second half of 1995, in the areas served by nine major local exchange carriers, no less than a quarter of all customers complained of a service problem — usually quality or billing — and in some areas the percentage was higher. Nynex’s service record became so poor that some $70 million in fines were levied on it by New York regulators in 1996. Nynex missed no less than 142,300 appointments with customers during the last three months of 1994, up 30% from the year before. And there were 212,800 customers whose phones remained out of service for more than 24 hours during the quarter — a 39.8% annual increase.83 US West, which made significant workforce reductions and construction program cutbacks during the early 1990s, likewise has experienced escalating service problems and customer dissatisfaction throughout its service area.84 Customer complaints to California state regulators more than doubled during a five-year period (1990-94).85

A quick look at one final issue — the changing status of labor relations in the telecommunications industry — further underlines that a WorldCom takeover of MCI would make for poor social policy.

The high-wage unionize

d segment of the telecommunications industry is under strain as a result of liberalized policies. The regional Bell companies that were spun off by the old AT&T, for example, drew “praise from Wall Street for cutting employment, ‘re-engineering’ their companies and diversifying into new businesses.” These seven (now five) giant providers of local telephone service had an employee count of 967,000 in 1984, at the moment of the AT&T divestiture, but this figure had declined to 755,000 by early 1996.86

Downsizing of unionized industry units took several forms. Growing reliance on employees classified as “managers” for purposes of collective bargaining was one source of growth in the scope of nonunion jurisdiction (as well as making these growing strata vulnerable to massive layoffs). Technological change also contributed, as the carriers’ reliance on remote diagnostics, testing and repair, and computerized call centers increased. Data-entry jobs, in particular, often could be moved from one location to another with the flick of a switch; Morton Bahr, president of the Communications Workers of America (CWA), asserts that it is “very easy to move [telecommunications] billing and accounting across the border” from high-wage to low-wage areas.87 This newfound freedom in turn allowed carriers to become more aggressive in responding to employees who attempted to form unions.

The long-distance unit of Sprint set up a San Francisco-based telemarketing subsidiary, relying on Latino workers, to market its long-distance service to the Spanish-speaking community. When these employees of La Conexion Familiar sought aid from the CWA in forming a union local, however, they found that Sprint had already circulated a “Union-Free Management Guide,” offering local executives methods with which to undermine employees’ unionization efforts. Intolerant in principle of collective bargaining rights, Sprint simply shut down its San Francisco operation, laying off 235 workers one week before a scheduled union election. In late 1997, after Sprint appealed an order by the National Labor Relations Board, the U.S. Court of Appeals finally decided that Sprint would have to cease “threatening employees with the closure of any of its facilities if the Union comes in.”88

Weeks before Christmas in 1986, MCI had already demonstrated an identical resolve. Workers in its Southfield, Mich. office had signed cards to have Local 4009 of the CWA represent them, but no election had been held and the workers had no contract. Under the pretext of a nationwide cost-cutting program, on December 3, 1986 MCI terminated approximately 450 Southfield employees with no notice. The action — which MCI attempted to justify as one part of a larger “company wide restructuring” — prompted CWA to file an unfair labor practice suit against MCI.89

As an authoritative account suggests, in consequence, “an antiunion environment increasingly surrounds the core of unionized telephone work.”90 Expansion within the competitive sector of the industry offset somewhat the loss of jobs covered by collective bargaining agreements, but as nonunion carriers gain market dominance, they are beginning to push for lower wages. The extent of their success will likely become visible only when the economy enters its next recessionary phase.

Thus, WorldCom’s acquisition of MCI would do more than merge two existing nonunion carriers. By consolidating the nation’s second-largest carrier in its status as an anti-union employer, the merger will bolster the egregious labor relations practices in the industry’s competitive high-wage sector. This is not a happy prospect if the goal is to preserve a high-wage economy in the United States.

Conclusion

MCI-WorldCom is a mistake waiting to happen. The combined company’s financial health would be uncertain. Its prospective dominance over the Internet would crowd out rival vendors and imperil interconnection on nondiscriminatory terms. The premium services that it would target at high-volume business users would come at the expense of residential services. Together, these changes would harm the nation’s telecommunications system at exactly the moment when the health of that infrastructure is becoming the sine qua non of the overall economy’s well-being. Can the United States afford to risk the creation of a new telecommunications monopoly as the 21st century dawns? Regulators must step up to address this question now and stop the proposed merger before a merged MCI-WorldCom can consolidate its prospective market dominance into a monopoly position.

Endnotes

1. U.S. Federal Communications Commission, Proposed Report, Telephone Investigation, Pursuant to Public Resolution No. 8, 74th Congress, Washington, D.C.: U.S. GPO, 1938: 489-530 (esp. 503-6); Milton L. Mueller Jr., Universal Service: Competition, Interconnection, and Monopoly in the Making of the American Telephone System, Cambridge: MIT Press and AEI Press, 1997, pp. 111-3; J. Warren Stehman, The Financial History of the American Telephone and Telegraph Company, New York: Augustus M. Kelley, 1967 (1925), pp. 107-15, 154-64; Robert W. Garnet, The Telephone Enterprise: The Evolution of the Bell System’s Horizontal Structure, 1876-1909, Baltimore: Johns Hopkins University Press, pp. 131-4.

2. Moody’s OTC Industrial Manual, New York, Moody’s Investors Service, 1997, p. 3073.

3. Standard & Poor’s Stock Reports, WorldCom Inc., Nov. 14, 1997.

4. Mark Landler, “MCI and British Telecom Discuss Renegotiating Terms of Merger,” New York Times, Aug. 21, 1997; Mark Landler, “New Terms Are Expected in MCI Deal.” New York Times, Aug. 22, 1997.

5. British Telecom pushed to reduce the price of the deal, the New York Times reported, “to mollify its institutional shareholders, who…reacted to MCI’s warning with fury.” Mark Landler, “Rescuing a Big Phone Deal From Oblivion,” New York Times, Aug. 25, 1997.

6. Seth Schiesel, “British Slice $5 Billion From MCI Bid,” New York Times, Aug. 23, 1997.

7. Wall Street Research Net Baseline Company Profiles, “MCI Communications,” Jan. 13, 1998, http://www.WSRN.com

8. Patrick McGeehan, “Adjustment in MCI Deal Is Reminder of the Perils for Takeover Speculators,” Wall Street Journal, Aug. 25, 1997.

9. Patrick McGeehan, ibid.; Mark Landler, “For Salomon, as Adviser, Millions Plus Revenge,” New York Times, Oct. 3, 1997.

10. John J. Keller and Steven Lipin, “The Battle for MCI Takes Another Twist: Now, It’s GTE’s Turn,” Wall Street Journal, Oct. 16, 1997.

11. Richard Waters, William Lewis, and Alan Cane, “MCI and BT Relax Terms of Merger Agreement, Financial Times, Oct. 17, 1997.

12. Peter Truell, “As MCI Fight Grows, the Wall St. Entourage Builds,” New York Times, Oct. 17, 1997.

13. Mark Landler, “For Salomon, as Adviser, Millions Plus Revenge.” New York Times, Oct. 3, 1997.

14. Seth Schiesel, “Phone Companies Race to Find Their Suitors,” New York Times, Jan. 5. 1998.

15. Richard Waters, “Return of the Junk Bond King,” Financial Times, Oct. 18-19, 1997.

16. Peter Truell, “An Analysis by Goldman Can Be Used Against It,” New York Times, Oct. 21, 1997.

17. E.S. Browning, “Is the Praise for WorldCom Too Much?” Wall Street Journal, Oct. 8, 1997.

18. Wall Street Research Net, “AT&T,” Jan. 13, 1998; “WorldCom,” Jan. 13,1998, http://www.WSRN.com

19. Mark Landler, “For Salomon,” op cit.

20. Richard Waters, “WorldCom Share Price Fall Casts Doubt on MCI Deal,” Financial Times, Nov. 13, 1997.

21. MCI, 10-K Report to the Securities and Exchange Commission, 1996, p. 7.

22. Telecom A.M., “WorldCom Raised Projections of Synergies From MCI Merger,” Dec. 31,1997; Tim Smart, “Is WorldCom’s Sweetened Bid Too Sweet?” Washington Post, Nov. 11, 1997.

23. Peter Elstrom, Catherine Yang, and Susan Jackson, “WorldCom + MCI: How It All Adds Up,” Business Week, Nov. 24, 1997.

24. Bernard Ebbers stated, at the onset of the WorldCom offer, that the projected cost savings were unlikely to include substantial job cuts. “By and large, the employee base should be stable,” he asserted. Ebbers quoted in Daniel Bogler and William Lewis, “Bid Backed Up by Strong Share Price,” Financial Times, Oct. 2, 1997.

25. Richard Waters, “Return of the Junk Bond King,” Financial Times, Oct. 18-19, 1997.

26. John V. Langdale, “The Growth of Long-Distance Telephony in the Bell System: 1875-1907,” Journal of Historical Geography, Vol. 4, No. 2, pp. 145-59, 1978.; Leonard S. Reich, “The Making of American Industrial Research,” Cambridge: Cambridge University Press. No. 138, pp. 157-64, 1983.

27. John J. Keller, “MCI Posts $391 Million Loss on Charge for Restructuring, With Revenue Strong,” Wall Street Journal, Jan. 30, 1998.

28. Rebecca Wetzel, “The Argument for Internet-Based Facsimile,” Telecommunications, November, pp. 32-6, 1997.

29. Telecommunications Reports Daily, “UUNet Unveils Global Internet-Based Fax Service,” Jul. 9, 1997; Computergram International, “Net Charges Loom as WorldCom Grabs for 60% of Backbone,” Dec. 5, 1997.

30. David S. Isenberg, “The Rise of the Stupid Network,” Computer Telephony, Vol. 5, No. 8, pp. 16-26, 1997; Renee Westmoreland and Richard Grigonis, “Real-Time Voice Over IP Networks Explodes,” Computer Telephony, Vol. 5, No. 8, pp. 70-97, 1997.

31. Seth Schiesel, “AT&T Maps Its Battle Plan for Escalating Phone Wars,” New York Times, Jan. 27, 1998.

32. Reed E. Hundt, “Avoiding Digital Disruptions,” speech to International Engineering Consortium Network Reliability and Interoperability Comforum, Reston Va., Sept. 16, 1997.

33. Kenneth Cukier and Camille Mendler, “Technology or Ideology?” Communications Week International, No. 191, Sept. 22, 1997; Deborah Claymon, “Father Knows Best,” Red Herring, Nov. 1997, pp. 92-94; Jeff Pulver, “When Worlds Collide,” Internet World, May 1997, p. 80; Thomas Nolle, “How the WorldCom/MCI Deal Will Change the Net,” Network World, Nov. 24, 1997.

34. John J. Keller, “GTE Agrees to Buy BBN for $616 Million,” Wall Street Journal, May 7, 1997.

35. Lee W. McKnight and Joseph P. Bailey, eds., Internet Economics. Cambridge: MIT Press, 1997.

36. Geoff Wheelwright, “Hidden Dimension to Historic Deal,” Financial Times, Sept. 10, 1997.

37. Jack Rickard, “Introduction,” Boardwatch Magazine Directory of Internet Service Providers, July/August 1997.

38. U.S. FCC 97-158, Access Reform Order, May 7, 1997; Telecommunications Reports Daily, “Internet Groups Urge Court to Keep ISPS’ Access Charge Exemption,” Dec. 29, 1997; Kevin Werbach, “Digital Tornado: The Internet and Telecommunications Policy,” FCC Office of Plans and Policy Working Paper No. 29, pp. 48-58, Mar. 1997.

39. Nathan Newman, “The Hypocrisy of ISP Welfare and the Myth of the Cyber Free Market,” Enode, Vol. 2, No. 4, 1997; available from newman@garnet.berkeley.edu

40. Robert Cannon, “The Internet at the Federal Communications Commission: Cybernauts Versus Ma Bell,” paper presented at INET ‘97, Annual Meeting of the Internet Society, 1997.

41. Telecommunications Reports Daily, “Frontier to Buy Internet Distribution Services Center,” Jan. 15, 1998.; Salvatore Salamone, “Xcom Urges CLECs and ISPs to Become Allies,” InternetWeek, Dec. 1, 1997; Seth Schiesel, “Three Giants of PC World Turn Focus to Speed,” New York Times, Jan. 26, 1998; Telecommunications Reports Daily, “U.S. West to Roll Out ADSL in 40-Plus Cities by June,” Jan. 29, 1998.

42. John J. Keller, “AT&T Revamping to Trim 18,000 Jobs,” Wall Street Journal Jan. 27, 1998; Telecommunications Reports, “AT&T to Switch Data Traffic to Its Own IP-Based Backbone,” Vol. 63, No. 41, Oct. 13, 1997, pp. 41-2.

43. Terzah Ewing and Stephanie N. Mehta, “Williams Re-Enters Wholesale Market for Long-Distance With US West Pact,” Wall Street Journal, Jan. 6, 1997; Telecommunications Reports Daily, “Qwest to Launch 7.5-Cents-Per-Minute IP-Based Service,” Dec. 15, 1997.

44. Richard Waters, “US Telecom Groups in $19 Billion Deal,” Financial Times, Aug. 27, 1996.

45. Kate Gerwig, “WorldCom, MCI Seal a Deal — The Mother of Network Integration Efforts,” InternetWeek, Nov. 17, 1997; U.S. Federal Communications Commission, “Reply Comments of Consumer Project on Technology, In the Matter of Applications of Worldcom Inc. and MCI Communications Corporation for Transfer of Control of MCI Communications to Worldcom Inc,” CC Docket No. 97-211, Jan. 26, 1998. Investors are told that it would control “about 60% of the world’s Internet traffic.” Standard & Poor’s Stock Reports, “WorldCom Inc.,” Nov. 14, 1997.

46. Telecommunications Reports Daily, “MCI Doubles Core Capacity to Handle Internet Growth,” Dec. 9, 1997.

47. Jared Sandberg, “How One Company Is Quietly Buying Up the Internet,” Wall Street Journal, Sept. 9, 1997; Alan Cane, “Uunet in Dutch Internet Purchase,” Financial Times, Sept. 3, 1997; John Greenwald, “WorldCom: Quiet Conqueror,” Time. Sept. 22, 1997, p. 50.

48. Lee Gomes, “UUNet Technologies Sparks and Outcry With Bid to Charge Internet Companies,” Wall Street Journal, May 1, 1997; Brian Riggs, “Free Ride Is Over for Small ISPs,” LAN Times, Vol. 14, No. 11, p. 19, May 26, 1997.

49. Internet Week, “WorldCom/MCI Deal Questioned,” Jan. 19, 1998; Kenneth Culkier, “MCI-WorldCom Faces Internet Probe,” Communications Week International. Nov. 24, 1997.

50. Andrew Kantor and Michael Neubarth, “Off the Charts: The Internet 1996.” Internet World, Dec. 1996. pp. 44-51; Gordon Cook quoted by Steve Lohr, “The Internet as Commerce: Who Pays, Under What Rules?” New York Times, May 12, 1997.

51. Thomas K. Weber, “Baby Bells vs. The World: A Fight for Internet Fees,” Wall Street Journal, Feb. 27, 1997.

52. 110 Stat. 56, Public Law 104-104-Feb 8, 1996, Telecommunications Act of 1996, “An act to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies.”

53. Seth Schiesel, “In MCI-WorldCom Theory, New View of Competition,” New York Times, Dec. 11, 1997.

54. Merrill Lynch, Global Securities Research & Economic Group, “WorldCom Inc, In-depth Report, Feb. 1998.

55. Christine Heckart, “Looking Good for Voice Over IP…but Everything Else?” Network World, Nov. 17, 1997, p. 14; cf. Werbach, Digital Tornado, p. 54.

56. Alan Stone, Public Service Liberalism: Telecommunications and Transitions in Public Policy, Princeton: Princeton University Press, 1991.

57. David F. Weiman and Richard C. Levin, “Preying for Monopoly? The Case of Southern Bell Telephone Company, 1894-1912,” Journal of Political Economy. Vol. 102, No. 1, pp. 103-26, 1994. Also see Mueller, Universal Service, pp. 36-40.

58. Claude S. Fischer, America Calling: A Social History of the Telephone to 1940, Berkeley: University of California Press, 1992.

59. P.L. 104-104, 110 Stat. 56, Title 1, Sec. 254.

60. Seth Schiesel, “WorldCom Fancies Itself Muffler of the Local Bells.” New York Times, Oct. 13, 1997.

61. John J. Keller, “AT&T Revamping to Trim 18,000 Jobs,”Wall Street Journal, Jan. 27, 1998.

62. John J. Keller, “AT&T Sets Bold New Business Strategy.” Wall Street Journal, Sept. 18, 1998.

63. U.S. Department of Justice, Antitrust Division, The Geodesic Network: 1987 Report on Competition in the Telephone Industry, prepared by Peter W. Huber, Washington, D.C.: U.S. GPO, Jan. 1987, p. 2.11.

64. Heather Burnett Gold, president. Association for Local Telecommunication Services, FCC en banc presentation, Jan. 29, 1998; available at http://www.fcc.gov/enbanc/

65. http://www.phoenixnet.com. “Qwest Acquires Some 40,000 Business Customers Through Purchase of Phoen Network Inc., Jan. 6, 1998.; Peter Elstrom, “Telecommunications Prognosis 1998,” Business Week, Jan. 12, 1998, pp. 92-3.

66. Peter W. Huber, Michael K. Kellogg, and John Thorne, The Geodesic Network II: 1993 Report on Competition in the Telephone Industry, p. 2.42.

67. Alex J. Mandl, “Telecom Competition Is Coming — Sooner Than You Think,” Wall Street Journal, Jan. 26, 1998; Telecommunications Reports Daily, “CLECs Recount Local Competition Successes to FCC,” Jan. 29, 1998; Telecommunications Reports Daily, “Seidenberg Seeks Business Services Deregulation, Urges FCC, DOJ to Provide Section 271 Guidance,” Jan. 28, 1998.

68. Stephanie N. Mehta, “Telecommunications Companies Unite to Track Nonpaying Phone Customers,” Wall Street Journal, Sept. 8, 1997.

69. New York Times, “MCI Loss Was $182 Million in 3d Quarter,” Oct. 24, 1997; Stephanie N. Mehta, “Bargain or Burden? The Question of MCI’s Worth,” Wall Street Journal, Oct. 20, 1997.

70. Steven Lipin and John J. Keller, “BT-MCI Merger Deal’s Value Reduced,” Wall Street Journal, Aug. 22, 1997.

71. Telecommunications Reports Daily, “MCI to Abandon Residential Local Service,” Jan. 22, 1998.

72. G. Christian Hill, “It’s War!” Wall Street Journal, Sept. 16, 1996.

73. Melanie Wells, “MCI Deal Rings in New Ad Strategy,” USA Today, Nov. 6, 1996.

74. Melanie Wells, ibid.

75. Telecommunications Reports Daily, “WorldCom Backs Away From Sidgmore’s Prediction Company Would Farm Out MCI’s Residential Customers,” Oct. 3, 1997.

76. Steve Lohr, “A Pragmatic Agenda for Residential Service. New York Times, Nov. 11, 1997.

77. Seth Schiesel, “MCI Accepts Offer of $36.5 Billion; Deal Sets Record,” New York Times, Nov. 11, 1997.

78. U.S. Department of Justice, Geodesic Network, p. 2.24.

79. Jube Shiver Jr., “New Rules Will Let Pay Phone Rates Climb,” Los Angeles Times, Nov. 9, 1996.

80. Christine Heckart, “Looking Good for Voice Over IP…but Everything Else?” Network World, Nov. 17, 1997.

81. Kate Gerwig, “WorldCom, MCI Seal a Deal — The Mother of Network Integration Efforts,” InternetWeek, Nov. 17, 1997.

82. U.S. Congress, Office of Technology Assessment, Critical Connections: Communications for the Future, OTA-CIT-407, Washington,D.C.: U.S. GPO, Jan. 1990, p. 337.

83. Mark Landler, “For Nynex, Quality Is Suddenly Job No. 1,” New York Times, Nov. 11, 1996; Leslie Cauley, “Nynex Holders Clear Its Purchase, But State Again Fines Company.” Wall Street Journal, Nov. 7, 1996.

84. Annie Hill, Communications Workers of America, “US West Service Quality Decline: The Workers Perspective,” Testimony Before the Regional Oversight Committee of US West Regulators. Seattle, Wash., Oct. 17, 1994.

85. Leslie Helm, “In Rush to Cyberspace, Local Phone Service Is Put on Hold,” Los Angeles Times, Jun. 18, 1995.

86. Carol J. Loomis, “AT&T Has No Clothes.” Fortune, Feb. 5, 1996, pp.77-80; “Fatal Attraction,” The Economist, Mar. 23, 1996.

87. Telecommunications Reports Journal. ” ‘Good Corporate Citizens’ Today Must Address Universal Service, Worker Issues Globally,” Vol. 1, No. 1, 1997, p. 53.

88. Anna Hamilton Phelan, “The Ultimate Hang-Up for Phone Workers.” Los Angeles Times, Aug. 29, 1995; U.S. Court of Appeals for the District of Columbia Circuit # 96-1500, LCT, Inc. D/B/A La Conexion Familiar, and Sprint Corporations, v. National Labor Relations Board and Communications Workers of America, filed Nov. 25, 1997.

89. Jeanne May and Lori Mathews, “MCI Idles 450 in Southfield After Losses,” Detroit Free Press, Dec. 4, 1986; Christopher Cook, “UAW Decries AMC Concessions Threat,” Detroit Free Press, Dec. 11, 1986; Luther Jackson, “Jackson Calls for Action to Help Laid Off Workers,” Detroit Free Press, Dec. 23, 1986.

90. Jeffrey H. Keefe and Rosemary Batt, “United States,” in Harry C. Katz, ed., Telecommunications: Restructuring Work and Employment Relations Worldwide, Ithaca: Cornell/ILR, 1997.


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