by STEPHEN N. BROWN
A planted story, a low-profile visit to Japan, and international advantages indicate reconsideration by the Clinton Administration.
Late last year, a rumor spread that at&t and sbc Communications Inc. were considering a merger with each other. A story published in the December 3, 1997, issue of The Wall Street Journal quoted an unnamed at&t executive as saying, "sbc, contrary to what many thought, is not a dead issue at at&t." Rather than issuing a denial after the story appeared, both companies declined comment, thus causing even more speculation.
The business press reacted favorably to the news but lamented that the Federal Communications Commission (fcc) would never allow the merger. In the spring of 1997, at&t hinted to the federal government that such a merger looked promising. Rather than being rewarded for its cautious inquiry, the company was quickly attacked. The fcc`s former chairman, Reed Hundt, speaking at the Brookings Institution on June 19, 1997, denounced the merger, saying, "Combining the long-distance market share of at&t in any rboc [regional Bell operating company] region with any long-distance market share [of] the rboc...is unthinkable." Hundt was in turn pilloried by the industry and the press for reaching a decision before a case was even presented to the fcc.
No longer "unthinkable"
Just two weeks after making the "unthinkable" remark, Hundt was in Tokyo speaking to members of the Keidanren`s telecommunications committee. The Keidanren is a Japan-wide federation of economic interests that serves as an organizing forum for some of the country`s most powerful businesses. Hundt was there to propose that Japan, Europe, and the United States jointly set global guidelines for mergers of telecommunications companies to ensure fair competition in the global market. The English version of the press release describing the meeting was issued by Kyodo News Service on July 2, 1997. It stated, "Hundt said the fcc does not accept at the moment the planned merger between at&t [and]...sbc Communications Inc."
Did one of Japan`s top news-reporting agencies misunderstand what Hundt said? How could the fcc "not accept at the moment" a merger that was "unthinkable" a short time earlier?
The Keidanren speech and its clear contradiction of the Brookings remarks received no media coverage in the United States. Although the fcc has no publicly available records of the Keidanren meeting, the policy articulated there suggests that the Clinton Administration is not unalterably opposed to an at&t-sbc merger. The Administration probably let its position be known to the affected parties, who then decided to test public opinion before taking any action. The test apparently started when an unnamed at&t executive offered an "sbc merger" story to a major newspaper eager to serve its source.
The test`s results won`t be final for several months. In the meantime, there will be plenty of news to soften up any resistance by Congress and the public. The nynex-Bell Atlantic merger is moving forward, sbc and Pacific Telesis are now a cozy couple, and mci has finally yielded to WorldCom Inc. These mergers are in the United States. There is more activity elsewhere. Sprint has partnered with Deutsche Telekom and France Telecom to form Global One. mci`s spurned suitor, British Telecom, may return to its old standby, Cable & Wireless (C&W). The right terms and conditions could make this attractive to C&W because it will soon lose control of one of its most profitable operations, Hong Kong Telecom. It accounts for a major share of C&W`s earnings and is 54% owned by C&W, which is under pressure to reduce its holdings to 30% and sell the remainder to China Telecom, an operating arm of China`s Ministry of Posts & Telecommunications.
Meanwhile, Japan`s major international carrier, Kokusai Denshin Denwa (kdd) is merging with with two other domestic carriers in Japan--ddi Corp. and Telway Corp. Combining the international and local carriers into a single entity would strengthen the newly created company and improve its ability to compete in international markets. The merger is being facilitated by proposed changes in the law that governs kdd. It was created as a special government corporation several years ago, but in November, Japan`s Ministry of Posts & Telecommunications (mpt) announced it would propose to Japan`s Diet that kdd be completely privatized. According to the mpt, privatization will allow kdd "to make autonomous business decisions and to operate flexibly in its business initiatives."
In addition, the mpt has approved a plan by Nippon Telegraph & Telephone (ntt), Japan`s largest carrier, whereby the company will provide international services over its own facilities. Worldwide Network Corp., ntt`s wholly owned subsidiary, is engaged in a joint project with kdd to manufacture submarine optical-fiber cables that will provide leased circuits and other international services to the United States and Asia.
When all this visible activity is supplemented with reports on the less visible kind and recounted to the fcc and Congress, they will see an at&t-sbc merger as necessary to maintain the United States` "international economic competitiveness."
International aspects
This scenario is already unfolding. Last March, both companies were part of a larger consortium that signed a tentative agreement aimed at building a submarine fiber-optic link between the United States and China. In December, the agreement between the consortium and China`s Ministry of Posts & Telecommunications was finalized and signed in Washington (see page 1 of this issue for more details). sbc also has substantial investments in Mexico, Taiwan, South Korea, Britain, France, and a handful of other countries.
Regarding the U.S.-China fiber link, sbc`s president and chief executive of international operations, John Atterbury, said, "With 40% of all U.S. calls to Asia originating from sbc`s local service territory, this network puts us in an excellent position to meet the growing international long-distance needs of our customers--as soon as we`re allowed to enter the market."
If the company were to merge with at&t, the two together would have a huge combined presence in the international market. It is this advantage that at&t`s chief executive Robert Allen referred to when he spoke in Boston on June 10, 1997, and said that "combinations of local and long-distance companies could create U.S. flagship companies that would have a chance to compete on equal footing with mega- enterprises forming around the globe--to date exclusively under the domination of foreign companies....With all that`s changing in the global communications industry right now, we`re certainly not trying to re-create the past. We`re trying to leverage the future."
Bring together The Wall Street Journal story, the dates, the subjects discussed by Allen, Hundt`s low-profile visit to Tokyo, the international advantages of an at&t-sbc combination, and mergers across the world--what comes forth is a picture of American telecommunications policy torn between domestic and international goals.
International telecommunications markets are now governed by the World Trade Organization`s (wto`s) Agreement on Basic Telecommunications Services. The signatories agree to open their markets to each other`s companies, to treat them no differently than a native firm, and thereby to apply competitive pricing to domestic and international telecommunications services. But how would a native firm fare against an at&t-sbc giant or any other creature produced by merger? Monopolistic combinations of large telecommunications companies have the potential to turn the wto agreement upside down. The agreement could be a Trojan horse in some countries, if their domestic telecommunications market is vulnerable to foreign rivals. Hundt`s quiet visit to the Keidanren has to be seen as an early attempt to recognize and curb the anticompetitive potential of mergers, regardless of the participating companies` national origins.
However, there are no global guidelines yet. Thus, it is questionable how an at&t-sbc combination could be evaluated. For example, the threat of such a merger could be a political tool to deter other mergers until such guidelines are established. On the other hand, the specter of guidelines could provoke large international firms to combine earlier than they would otherwise. From a domestic perspective, the "unthinkable" will not happen unless the parties prove that their combined corporate energy won`t be turned on their weaker brethren in domestic markets. The unique nature of the at&t-sbc combination means that its approval must meet unique conditions that could be set only by the fcc or Congress.
Stephen N. Brown specializes in market research and public policy toward new technology in the telecommunications industry. He can be contacted at tel: (615) 399-1239.