In June 1997, then-U.S. Federal Communications Commission (FCC) chairman Reed Hundt called a hypothetical merger between AT&T and one of the regional Bell operating companies (RBOCs) spun off in the 1984 AT&T divestiture “unthinkable” on antitrust grounds. After all, the structural separation of AT&T’s long distance telephone services and the RBOCs’ local telephone services was the very point of the divestiture and had been enshrined in the 1996 Telecommunications Act by the U.S. Congress.

And yet, when the FCC and U.S. Department of Justice approved the merger of AT&T and BellSouth in December 2006 — after allowing SBC to acquire AT&T and take its name — the once unthinkable had happened. The remaining consolidated former RBOC companies — AT&T, Verizon and Qwest — offer long distance and local services and have become far more than just local telephone companies. Each also is striving for the triple-play grail of voice, data and video services offered in bundled packages. Moreover, their competition is not merely each other, as the AT&T divestiture and 1996 Telecommunications Act assumed, but also cable operators, Internet service providers and satellite operators, which each have their own mature subscriber bases and triple-play plans.

Times change, and so do competitive markets.
The lesson that business combinations once deemed unthinkable on legal and regulatory grounds may later pass muster is instructive for the current satellite market.

In 1997, the FCC granted licenses for satellite digital audio radio service (DARS) service to two new entrants — the companies now known as Sirius Satellite Radio and XM Satellite Radio. At the same time the AT&T-BellSouth merger was closing, market speculation about a merger of the two DARS operators intensified, fueled by their own executives and by flattening growth patterns and the high costs of content acquisition. Speculation was dashed, and the two companies’ share prices tumbled, when current FCC Chairman Kevin Martin stated Jan. 17 that FCC rules prohibited one company from holding the two DARS licenses, precluding a Sirius-XM merger.

Martin also compared a Sirius-XM merger to the proposed 2002 merger between digital broadcast satellite (DBS) operators DirecTV and EchoStar Communications, which was withdrawn after the FCC found that anticompetitive harms would result from it. (This writer’s published opinion was that the merger should be reviewed as the combination of two of the players among the multichannel video programming distribution providers, meaning that the DBS operators were in functional competition with terrestrial cable service rather than only each other).

The FCC and Department of Justice concurrently review satellite mergers pursuant to the Clayton Act, which prohibits acquisitions if their effect may be substantially to lessen competition or tend to create a monopoly; and the Communications Act of 1934, as amended by the Telecommunications Act of 1996, which requires the FCC to administer its licensing authority in the “public interest.”

Both regulators employ for their review the 1992 Joint Department of Justice/Federal Trade Commission Horizontal Merger Guidelines (revised in 1997), which provides for measurement of specific product and geographic markets to determine the extent to which the proposed transaction will increase market concentration and may decrease competition. Under the guidelines, the primary analysis evaluates the ability of consumers in a given market to switch to other goods or services in the face of a price increase by a potential post-merger monopolist. The Horizontal Merger Guidelines also provide for consideration of whether the merger would promote efficiency gains that could not be achieved reasonably by the parties through other means and whether, if the merger is not allowed, one of the parties would be likely to go out of business.

In general, the Department of Justice performs a “negative” review to determine whether competition will be decreased; the FCC performs a “positive” review to determine whether the public interest will be served.

The very pressure on the DARS and DBS operators to merge is due in large measure to the competition they face from terrestrial competitors, indicating that regulatory market analysis which takes account of that competition is appropriate.
Times change.


Owen D. Kurtin is a partner in the New York office of law firm Dickstein Shapiro LLP and a member of the firm’s Corporate & Finance Practice. He may be reached at +1.212.277.6770 or by e-mail at [email protected].