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Mr. James F. Geiger
June 22, 2006
Senate Judiciary Committee
Founder, President and CEO
II. About Cbeyond Communications
Cbeyond was founded in late 1999 with the sole mission to deliver "big business" communications services to small business customers at prices they could afford and that we could deliver profitably. We define the market we serve as small businesses with 5 to 249 employees. Cbeyond correctly anticipated that this entrepreneurial class of customers, like large businesses, would embrace productivity-enhancing applications creating a need for more bandwidth. And we knew that they would seek a simple, integrated package of communications services from one provider with one bill and that it had to be affordable and easy to use.
Cbeyond began providing service during 2001 in Atlanta, which is also the location of our corporate headquarters. Since 2001, Cbeyond has opened additional markets in Dallas, Ft. Worth, Denver, Houston, Chicago and most recently in Los Angeles. We currently serve over 22,000 small business customer locations, all of this attained through organic growth. Our strategy is to achieve deep market share penetration in our geographic markets while at the same becoming more operationally efficient and more in tune with the local small business community as we expand our network scope and penetration within a city.
As a result, Cbeyond enjoys a 99% customer retention rate and is one of the nation's fastest-growing providers of broadband services-growing organically over 35% year over year. Moreover, successfully satisfying small business customers has translated into financial success as well. Less than eight months ago, Cbeyond completed its initial public offering ("IPO") raising over $70M with a share price of $12. Today, Cbeyond trades at around $20 per share, or just over $500 million in market capitalization.
III. The Merger Will Enhance AT&T's Ability to Raise Rivals' Costs
Most "intra-modal" competitors (firms like Cbeyond) and so-called "inter-modal" competitors (like wireless carriers) rely on access to wholesale transmission facilities to move telecommunications traffic between geographically dispersed nodes in their networks. These transmission facilities are provided to an overwhelming degree by the incumbent local exchange carrier (e.g., BellSouth in Atlanta, and AT&T in Chicago or Dallas). As I discuss in more detail below, the Merger will foreclose competition in the wholesale transmission market, and--ultimately--severely undermine the potential for intra-modal and inter-modal competition within both the AT&T and the BellSouth incumbent local exchange carrier regions.
More specifically, this Merger will (1) directly eliminate AT&T as a competitive wholesale provider of local transmission services in the BellSouth territory; (2) increase the ability of the post-merger firm to prevent wholesale competition in the provision of local transmission facilities from the developing in the future; and (3) increase the incentive of the post-merger firm to harm competition while reducing competitors' and regulators' ability to stop the merged firm from harming competition and consumers.
a. The Merger Will Directly Eliminate AT&T As A Wholesale Competitor For Both Last Mile and Transport Facilities.
After this FCC order, we began to seek out non-Bell providers of T-1 facilities that--we thought--might be able to provide us with more economical access to our customers. In the most densely populated cities we serve (Atlanta, Dallas, Houston and Denver), we were able to identify seven alternative access companies all of which provided connectivity using fiber optic cables. Of these seven, only five were potentially suitable partners for Cbeyond because the others did not offer data speeds designed for smaller businesses. When we compared Cbeyond's customer lists to the available service locations for the remaining five alternative last mile providers, we discovered that they could potentially provide replacement service for only 600 of our more than 25,000 T-1s (or 2.4%). Further, the companies providing these services tended to have unsophisticated order processing systems that made it difficult if not impossible to install customers with the speed they expected. In short, Cbeyond--despite a diligent search--was unable to find a viable alternative to Bell-company T-1s at a time when the pricing umbrella should have facilitated bringing new competitors into the market.
In light of this information, you may be tempted to assume that the situation can't get worse so the merger should be approved. But this is not the case. While it is certainly true that AT&T is not a competitive option for Cbeyond's last-mile needs because its last-mile facilities generally serve very large enterprise-level business customers, AT&T's presence in the market serves as a real check on what would otherwise be BellSouth's unfettered ability to set prices. The reason for this is quite simple: BellSouth is acutely aware that AT&T, as its most well-capitalized competitor for both last-mile and transport facilities, pays close attention to market opportunities, and will begin to deploy additional facilities if BellSouth raises its prices too high. Accordingly AT&T's mere presence in the market has, until now, served as a check on BellSouth pricing, a check that will be lost if this merger is completed. In short, it is critical that AT&T be preserved as an independent competitor to BellSouth.
The impact of the proposed merger is even more insidious in the market for transmission facilities connecting carrier locations because in this market AT&T is a viable competitor to BellSouth on a huge percentage of routes across the southeast. In fact, eliminating AT&T's competitive influence on the pricing of these transmission facilities will eliminate what I would conservatively estimate to be 75% of the competitive transmission facilities that remain. This merger--should it be allowed to proceed--will take the only currently viable competitive telecommunications facility market in the BellSouth region and deliver it directly to the dominant provider: BellSouth. If this merger is complete, the final check on BellSouth's ability to price its competitors out of the market will be gone. The Antitrust Division should not allow this to happen.
b. The Merger Enhances the Ability of the Post-Merger Firm to Avoid Future Last-Mile Competition
The Bell Companies reduce their rivals' revenues by forcing companies like Cbeyond and Sprint-Nextel to purchase local transmission facilities pursuant to volume-term agreements that have the effect of "locking up" the market and preventing competitive providers of wholesale transmission from competing effectively. The net effect of these contracts is that the Cbeyond, Sprint-Nextel and other carriers commit to purchasing transmission services from the Bell Company that they would otherwise choose to purchase from competitors. The competitors accede to these commitment contracts in order to get any discount at all on the extremely high "off the shelf" prices that the Bell Company charges for the transmission facilities in locations where the Bell Company has a monopoly over transmission facilities..
Another feature of these contracts is that customers must pay high penalties if they fail to meet their volume commitments. This means that even if other competitors could offer a better base rate for part of the customers' transmission facilities needs, customers would still be unable to use these services from competitors because the high penalty imposed by the incumbent when the customers could not meet their volume commitment are far greater than any savings recouped from using transmission facilities provided by Bell Company's competitor in the wholesale market. While customers do not like these contracts, they have little choice but to sign them.
The source of the Bell Company's market power in this area is easy to see: over the range of output covered by the contract (i.e., commitments to buy circuits in multiple states/locations) only the Bell Company can supply all of any wholesale customer's demand. Thus, a merger that further expands the geographic territory in which one firm is dominant--like the AT&T-BellSouth Merger--further enhances the ability of the dominant firm to engage in behavior designed to prevent rivals from achieving the scale necessary to become viable competitors.
c. The Merger Increases the Post-Merger Firm's Incentive to Harm Competition While Reducing Competitors' and Regulators' Ability To Constrain this Conduct
In addition, by eliminating BellSouth as an independent BOC, the merger would eliminate a benchmark against which to judge the reasonableness of AT&T's conduct. Benchmarking one BOC against another is an important means of policing BOC conduct. We at Cbeyond use this technique whenever possible in interconnection negotiations and in other contexts when dealing with BellSouth and AT&T. In fact, given that neither we nor the regulators have as much information about the BOCs' costs or networks as the BOCs themselves, the ability to compare one BOC's conduct against another is indispensable for detecting unreasonable practices. Unfortunately, by eliminating BellSouth as an independent BOC, the merger would eliminate this mechanism. As a result, competitors and regulators would be left with virtually no ability to constrain the merged firm from acting on its now increased incentive to engage in anticompetitive behavior.
IV. The Merger Will Allow Anti-Competitive Warehousing of Wireless Spectrum
In addition to the threat posed by the proposed AT&T-BellSouth Merger to wireline services, the proposed merger also poses a serious threat to wireless services. This is because the post-merger firm will have a dominant share of a prime block of spectrum that could be used to provide broadband wireless service. The post-merger firm, if allowed to warehouse this spectrum, will do just that.
Assuming that AT&T's licenses are spread equally around the U.S. and that BellSouth's licenses are located primarily in the BellSouth service area (as appears to be the case), then the pre-merger situation looks like this: 40% of the BellSouth spectrum and 30+% of the AT&T spectrum is located in-region where the Bells have a huge incentive NOT to deploy. As for the other 60% of the spectrum the combined entity would control, the Bell company record of competing against their out-of-region brethren is nonexistent. They simply don't do it. In short, absent action by the DOJ, this merger is likely to result in the permanent warehousing of a valuable public asset that would otherwise be used to enhance consumer choice and bring innovation to our telecommunications infrastructure.
V. The Committee Must Apply Vigilant Oversight to the DOJ In Order to Avoid the Potential Anticompetitive Consequences of this Merger
The Antitrust Division seemed strangely unwilling to exercise its authority when conducting its last round of investigations of giant telecommunications mergers of the kind the Committee is looking at here. In the case of the SBC-AT&T merger and the Verizon-MCI merger, the Division's "remedy" required nothing of the parties and did nothing to constrain prices. Astonishingly, it was left to the Federal Communications Commission to craft the only conditions placed on those mergers with any teeth. With the proposed AT&T-BellSouth merger, the Department of Justice is facing a much more dramatic consolidation of network power than occurred with last year's mega-mergers (a designation used then that seems quaint today). We are hopeful that the DOJ will take a harder look at this merger, and we ask that you demand this of them. Telecommunications competition in this country has made great strides over the last ten years, but all that has been gained could be lost if the former Bell monopoly is allowed to reform without effective oversight from the very agencies that the American public rely on to be their watchdogs in this area.
To conclude, the Committee asks, as the central question of this hearing, "what does this merger mean to consumers?" It is my fondest hope, as both an entrepreneur bringing innovative services to other entrepreneurs, and as an American citizen, that the message the Committee delivers loud and clear to AT&T and to the DOJ is that even our largest corporate citizens are subject to our time-tested anti-trust laws and the important public policies that support them. The best way to accomplish this is for the Committee to vigilantly use its oversight authority over the DOJ to ensure that a thorough investigation takes place, and every case that can be brought under Section 7 is, in fact, brought. Thank you for your time, Senators.