In re of Verizon Communications Inc., 05-75

• Decision Date: 17 November 2005
• Docket Number: 05-75
• Parties: In the Matter of Verizon Communications Inc. and MCI, Inc. Applications for Approval of Transfer of Control Reply Commenters Abbreviation File No. Authorization Holder Authorization Number File No. Authorization Holder Authorization Number TABLE 1B - 2004 LOCAL VOICE CUSTOMER SHARES - LARGE ENTERPRISE CUSTOMERS TABLE 1C - 2004 LONG DISTANCE CUSTOMER SHARES - LARGE ENTERPRISE CUSTOMERS TABLE 1D - 2004 LONG DISTANCE CUSTOMER SHARES - LARGE ENTERPRISE CUSTOMERS TABLE 1F - 2004 FRAME RELAY CUSTOMER SHARES - LARGE ENTERPRISE CUSTOMERS TABLE 1H - 2004 T1 CUSTOMER SHARES - LARGE ENTERPRISE CUSTOMERS TABLE 2A - 2004 LOCAL VOICE CUSTOMER SHARES - MEDIUM ENTERPRISE CUSTOMERS TABLE 2B - 2004 LOCAL VOICE CUSTOMER SHARES - MEDIUM ENTERPRISE CUSTOMERS TABLE 2C - 2004 LONG DISTANCE CUSTOMER SHARES - MEDIUM ENTERPRISE CUSTOMERS TABLE 2D - 2004 LONG DISTANCE CUSTOMER SHARES - MEDIUM ENTERPRISE CUSTOMERS TABLE 2E – 2004 FRAME RELAY CUSTOMER SHARES - MEDIUM ENTERPRISE CUSTOMERS TABLE 2F - 2004 FRAME RELAY CUSTOMER SHARES - MEDIUM ENTERPRISE CUSTOMERS TABLE 2G - 2004 T1 CUSTOMER SHARES - MEDIUM ENTERPRISE CUSTOMERS TABLE 2H - 2004 T1 CUSTOMER SHARES - MEDIUM ENTERPRISE CUSTOMERS TABLE 3A – 2004 LOCAL VOICE CUSTOMER SHARES - SMALL ENTERPRISE CUSTOMERS TABLE 3B - 2004 LONG DISTANCE CUSTOMER SHARES - SMALL ENTERPRISE CUSTOMERS TABLE 4A 2004 LOCAL VOICE CUSTOMER SHARES - SMALL ENTERPRISE CUSTOMERS TABLE 4B 2004 LONG DISTANCE CUSTOMER SHARES - SMALL ENTERPRISE CUSTOMERS State Local Service Long Distance Service Local and Long Distance Bundle Verizon Pre-Merger % Verizon Post-Merger % Verizon Pre-Merger % Verizon Post-Merger % Verizon Pre-Merger % Verizon Post-Merger % Tier 1 Provider Pre-merger Revenue ($M) % Share (pre-merger) Post-merger Revenue ($M) % Share (post-merger) MCI Peer 3/2004 Ratio 6/2004 Ratio 9/2004 Ratio 12/2004 Ratio 3/2005 Ratio Cable 2003 2003 % of Regional Share 2005 Estimate 2005 % of Regional Share Verizon Total * MCI MCI + Verizon 2005 % Share 2005 64 Ckts 2005 % Share 2005 2005 % Share 2005 64 Ckts 64 Ckts Total Americas Region Cable 2003 2003 % of Regional Share 2005 Estimate 2005 % of Regional Share Verizon Total * MCI MCI + Verizon 2005 % Share 64 Ckts 2005 % Share) 64 Ckts Cable 2005 Est. % of Regiona l Share Verizon MCI MCI + Verizon U.S.-DR U.S.-DR U.S.-DR U.S.-Ven. U.S.-Ven. U.S.-Ven. U.S.-DR U.S.-Ven. U.S.-DR. U.S.-Ven. Own IRU Total Own IRU Total
• Court: Federal Communications Commission Decisions

In the Matter of Verizon Communications Inc. and MCI, Inc. Applications for Approval of Transfer of Control

No. 05-75

Federal Communications Commission

November 17, 2005

Adopted: October 31, 2005

MEMORANDUM OPINION AND ORDER

By the Commission: Chairman Martin and Commissioner Abernathy issuing separate statements; Commissioners Copps and Adelstein concurring and issuing separate statements.

TABLE OF CONTENTS

Para.

I. INTRODUCTION ........................................................................................................................... 1

II. EXECUTIVE SUMMARY ............................................................................................................. 3

III. BACKGROUND ............................................................................................................................. 5

A. Description of the Applicants .................................................................................................. 5

1. MCI, Inc.. ...................................................................................................................................... 5

2. Verizon Communications Inc. . ..................................................................................................... 7

B. Description of the Transaction ............................................................................................... 9

C. Applications and Review Process ........................................................................................... 14

1. Commission Review ................................................................................................................... 14

2. Department of Justice Review .................................................................................................... 15

IV. STANDARD OF REVIEW AND PUBLIC INTEREST FRAMEWORK .................................... 16

V. POTENTIAL PUBLIC INTEREST HARMS ............................................................................... 20

A. Analytical Framework ........................................................................................................... 20

B. Wholesale Special Access Competition ............................................................................... 24

1. Relevant Markets ........................................................................................................................ 25

2. Competitive Analysis .................................................................................................................. 31

C. Retail Enterprise Competition ............................................................................................... 56

1. Relevant Markets ........................................................................................................................ 57

2. Competitive Analysis .................................................................................................................. 65

D. Mass. Market Competition ....................................................................................................... 82

1. Relevant Markets ........................................................................................................................ 83

2. Competitive Analysis ................................................................................................................ 102

E. Internet Backbone Competition ........................................................................................... 109

1. Background ............................................................................................................................... 110

2. Relevant Markets ...................................................................................................................... 113

3. Competitive Analysis ................................................................................................................ 117

F. Wholesale Interexchange Competition ............................................................................. 145

1. Relevant Markets ...................................................................................................................... 146

2. Competitive Analysis ................................................................................................................ 148

G. U.S. International Services Competition ........................................................................... 152

1. Input Markets ............................................................................................................................ 157

2. Intermediate Facilities-Based Markets ...................................................................................... 163

3. End-User Markets ..................................................................................................................... 170

4. Foreign Carrier Affiliations and Related Safeguards ................................................................ 178

5. Submarine Cable Landing Licensee Notification ..................................................................... 182

H. Verizon's Qualifications to Acquire Control of MCI's Licenses ................................ 183

I. Other Issues .............................................................................................................................. 189

VI. POTENTIAL PUBLIC INTEREST BENEFITS .......................................................................... 193

A. Introduction ............................................................................................................................. 193

B. Analytical Framework ......................................................................................................... 194

C. Enhancements to National Security and Government Services ................................. 197

D. Efficiencies Related to Vertical Integration .................................................................. 202

E. Economies of Scope and Scale .............................................................................................. 205

F. Cost Synergies ......................................................................................................................... 208

VII. PROCESS AND ENFORCEMENT ............................................................................................ 215

VIII. CONCLUSION ............................................................................................................................ 219

IX. ORDERING CLAUSES .............................................................................................................. 222

APPENDIX A: LIST OF COMMENTERS

APPENDIX B: LIST OF MCI LICENSES AND AUTHORIZATIONS SUBJECT TO TRANSFER OF CONTROL

APPENDIX C: ENTERPRISE DATA

APPENDIX D: MASS MARKET DATA

APPENDIX E: INTERNET BACKBONE DATA

APPENDIX F: U.S.-INTERNATIONAL SERVICES DATA

APPENDIX G: CONDITIONS

I. INTRODUCTION

1. Verizon Communications Inc. (Verizon) and MCI, Inc. (MCI) (collectively, "the Applicants") have filed a series of applications^[1] pursuant to sections 214 and 310(d) of the Communications Act of 1934, as amended (Communications Act or Act)^[2] and section 2 of the Cable Landing License Act^[3] in connection with their proposed merger. This merger would combine one of the largest regional Bell Operating Companies (BOCs) with one of the largest providers of interexchange and competitive local service. This proposed merger occurs against the backdrop of ongoing change in the industry, including the pending merger of SBC and AT&T, and the recent merger of Sprint and Nextel.^[4] Verizon and MCI offer competing services in many communications markets, and each also supplies wholesale inputs relied upon by the other Applicant and other competitors in various retail markets. Thus, the proposed merger requires us to examine its effects on competition – which are both horizontal and vertical in nature – in a wide range of significant communications markets.

2. In accordance with the terms of sections 214(a) and 310(d), we must determine whether the Applicants have demonstrated that the proposed transfers would serve the public interest, convenience, and necessity.^[5] Based on the record before us, and as discussed more fully below, we find that the transaction meets this standard. After analyzing the record, we conclude that significant public interest benefits are likely to result from this transaction. These benefits, which are likely to flow to consumers, relate to enhancements to national security and government services, efficiencies related to vertical integration, economies of scope and scale, and cost savings. We further conclude that, in light of the consent decree executed between the Department of Justice and the Applicants (DOJ Consent Decree), ^[6]the transaction is not likely to have anticompetitive effects in the relevant markets discussed below. Moreover, to the extent that the merger increases concentration in relevant markets, we find that the public interest benefits of the merger outweigh any potential public interest harms. Finally, we note that the Applicants have offered certain voluntary commitments.^[7] Because we find these commitments will serve the public interest, we accept them and adopt them as conditions of our approval of the merger.

II. EXECUTIVE SUMMARY

3. As discussed below, our analysis of the competitive effects of the merger, which focuses on the following key services, finds that the merger is not likely to result in anticompetitive effects in relevant markets:

• Special access competition. The record indicates that, in a limited number of buildings where Verizon and MCI are the only carriers with direct connections, the merger is likely to

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