Former FCC Chief Economist finds SBC will reap $1B and Verizon $400M Million from tacit collusion following mergers

October 21, 2005

3 Min Read

RESTON, Va. -- SBC and Verizon will realize $1.4 billion by colluding not to compete with one another in the wholesale market following their respective mergers with AT&T and MCI, according to a new study by FCC former Chief Economist Simon J. Wilkie.

In an ex parte filed at the Federal Communications Commission on behalf of XO Communications, Inc. (OTCBB:XOCM.OB), Wilkie finds that SBC and Verizon deliberately pursue a strategy of tacit collusion not to compete today, and that this will continue as an "equilibrium strategy" after the mergers.

"It pays not to compete, and the payoff for SBC and Verizon will be very rich," Wilkie said. "Such tacit collusion will continue to occur as the two companies act in tacit agreement to reduce competition."

As reported in the FCC's Automated Reporting Management Information System (ARMIS), SBC has revenues of approximately $4.5 billion from special access and an operating margin of about 64 percent, while Verizon has revenues of some $3.7 billion from special access and an operating margin of roughly 36 percent. In contrast, the potential revenues and operating margins from competing providers are much lower.

Wilkie's econometric model examines the impact on the revenue and profits of SBC and Verizon when AT&T and MCI - currently the largest competitors in the wholesale market - are eliminated as independent operators. According to Wilkie's findings, SBC would earn $1.0 billion more and Verizon nearly $400 million more by continuing to avoid directly competing.

In a separate release:

XO Communications, Inc. (OTCBB:XOCM.OB) today denounced the argument made by incumbent monopolies that new market entry into the local wholesale arena is "easy" and presents a viable cure to the competitive harms of the SBC-AT&T and Verizon-MCI mergers.

In an ex parte to the FCC, XO reiterated the importance of adhering to federal guidelines for evaluating the anticompetitive impacts of and the remedies for giant mergers. XO pointed to AT&T's testimony to the Commission during the Triennial Review proceedings, where AT&T confirmed high cost and the excess capacity of incumbents as major barriers to entry or expansion by competitive operators. XO further termed the surrogate benchmarks for determining post-mergers, proposed by SBC and Verizon, as inadequate.

According to The Horizonal Merger Guidelines set forth by the U.S. Department of Justice and the Federal Trade Commission, market entry must be "easy" in order to overcome the market power created by large mergers. Entry that is timely must be achieved within two years from initial planning to significant market impact. When entry occurs more than two years after a consummated merger, it cannot counteract the anticompetitive impact of market power.

"By any measure, the market power about to be unleashed by these mergers is off the charts, and the walls newcomers must scale are too high," said Heather Gold, Senior Vice President, Government Relations for XO Communications. "It is critical that the FCC determine with great precision the timing, likelihood and sufficiency of post-merger entry."

XO Communications Inc.

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