1
Competition Law and the Telecommunications Market:
What Will the Big Three Alliances Mean?
Diane Serritella
I.INTRODUCTION
II.THE TELECOMMUNICATIONS MARKET IN THE US AND EU
III.THE REGULATORY FRAMEWORK: US AND EU COMPETITION LAWS
IV.THE BIG THREE
V.SOLUTIONS
VI.CONCLUSION
©All rights in this paper are reserved. No part of the paper may be reproduced in any form without permission of the author.
I.INTRODUCTION
In 1974, the United States Department of Justice (“DOJ”) commenced an antitrust suit against the American Telephone and Telegraph (“AT&T”) Company charging the company with monopolization which was destroying competition in the telecommunications market.[1] Ten years later, AT&T agreed to a settlement requiring the divestiture of its local telephone services.[2] The AT&T divestiture was supposed to introduce competition to a sector that had long been held by a monopoly. Fifteen years after the divestiture, there are still many questions surrounding the competitive benefits gained from this, the largest antitrust proceeding at the time.[3]
What is certain is that the AT&T case introduced major changes to the telecommunications market both in the United States (“US”) and in the European Union (“EU”). While the US worked to make its telecommunications sector more competitive, the EU, influenced by actions in the US, decided to undergo its own procedure to create a competitive telecommunications market. The US and EU began their respective projects independently and differently because US and EU competition laws[4] vary greatly. However, both were unexpectedly tied together with the creation of international telecommunication joint ventures that unite companies based in the US and the EU. Suddenly, both the US and EU found themselves not only grappling with legal and regulatory issues involving their own competition laws but also entangled in each other’s antitrust concerns. Both wonder if the new international joint ventures signaled the beginning of a new monopoly. And both wonder how they will cope with such an impact on competition.
This paper addresses the issues that led to this situation, the issues currently plaguing the US and EU and the questions raised about the future. In the first section, addressing the issues resulting in this situation, the paper explains the telecommunications market in both the US and EU, highlighting the similarities and differences between the two markets. Next, the paper compares and contrasts the two sets of competition laws. Finally, there is a discussion of the antitrust concerns raised by the telecommunications market and how the EU competition laws are applied to such issues.
The second section discusses the issues raised by the current telecommunications sector by addressing the big three international joint ventures and the antitrust concerns raised by their creations. The third section of the paper addresses the possible solutions proposed, including the idea of international antitrust laws.
II.THE TELECOMMUNICATIONS MARKET IN THE US AND EU
The telecommunications markets in the US and EU had one
thing in common for most of the past century. Both markets were dominated by monopolies. In the EU, the monopolies were state owned while in the US, a private corporation monopolized the telecommunications sector of the economy. Since its founding during the late nineteenth century, AT&T has been the dominant force in the US telecommunications market. Originally a subsidiary of the American Bell Company, AT&T was designed to develop long distance service for its parent company.[5] Following a turn of the century stock purchase, AT&T became the parent company of the Bell system.[6] At the time, there was plenty of competition in the long-distance service market.[7] However, long-distance and local service remained separated, thus creating a dual service system.[8] AT&T devised a plan to eliminate the two levels of service by providing one company that could serve customers with both local and long-distance service. Its goal, however, remained to do so by forming “a nationally interconnected monopoly administered by Bell but supervised by regulators." [9] This introduced not only AT&T’s position as a monopoly but also the important role regulations would play in the US telecommunications field.
Through sublicensing to independent operators and buyouts of competing companies, AT&T managed to achieve its goal rather quickly.[10] The sublicensing and buyouts effectively destroyed competition because they worked to “isolate and eventually squeeze out the remaining competitive telephone systems.”[11] This led to the first government backed antitrust lawsuits against AT&T, both at the state and federal levels.[12] AT&T, in an attempt to avoid litigation, agreed to a number of conditions including ending its acquisition of companies that directly competed with the Bell System.[13] However, any effectiveness resulting from this compromise was stopped by the passing of the Willis-Graham Act by Congress in 1921.[14] This act exempted telephone company mergers from any antitrust review and firmly established AT&T as the sole owner and operator of nearly all long distance and local telephone service.[15]
Prior to the divestiture, AT&T controlled 80-90% of all US domestic and international outbound long-distance service.[16] Furthermore, an AT&T subsidiary, Western Electric, supplied nearly all installation for the entire Bell telephone system.[17] Western Electric was also the largest producer of telephone equipment in the United States.[18] Finally, AT&T and Western Electric jointly owned the research facility which developed much of the new domestic telecommunications technology.[19] During the time of its dominance, AT&T managed to maintain its monopoly due to US policy. The US government continued to grant the deference awarded to AT&T in the Willis-Graham Act by balancing it with federal and state telecommunication regulations. By the time the Federal Communications Commission (“FCC”) was formed in 1934, the federal government had decided that regulation, not the courts, would control the telecommunications market.
Regulation has always been a key component to US telecommunications policy. Later, when the US decided to inject competition in the market, it would do so through regulation of the AT&T restructuring.[20] Prior to the AT&T divestiture, the government turned to regulation administered by the FCC to continue to balance the monopolistic nature of the market with consumer welfare. One of the earliest examples involves a petition filed with the FCC challenging AT&T’s control over private telephone lines. The FCC’s decision to allow non telecommunication companies to provide microwave services wherever an existing provider would not provide such a service opened the way for Microwave Communications Inc. (“MCI”) to join the market.[21] Other FCC decisions followed which continued to open the market to competition, particularly with regard to telephone equipment.[22] Regardless, AT&T continued its monopoly of at least standard telephone equipment and private lines. It was becoming increasingly clear to the FCC that although its piecemeal regulatory work was introducing some competition into the market, so long as AT&T remained the monopoly, true competition could not exist. Still, the government remained hesitant in applying its antitrust laws to AT&T practices. However, US antitrust laws allow suits to be brought by private parties. More companies looking to enter the telecommunications market found the government to be inadequate in handling AT&T’s monopoly. Therefore, they decided to take action themselves.
In 1974, the year the DOJ filed its antitrust suit against AT&T, thirty-five antitrust suits had been filed by private parties against AT&T and its subsidiaries.[23] The DOJ then joined many of these cases and filed a new suit accusing AT&T of leveraging its dominant position in several markets to “monopolize the entire domestic telecommunications industry.”[24] The DOJ believed that AT&T needed to be recreated as three separate companies, one for each of the markets it held a
dominant position in.[25] Instead, AT&T agreed to a settlement that required it to divest itself of all operating companies which would become independent and provide local services only.[26] This would effectively end the dual service benefit that allowed AT&T to become a monopoly in the first place. As a result of the divestiture, the monopoly held by AT&T in the
US telecommunications market ended.[27]
Although the end of the AT&T monopoly injected more competition into the market, it did not result in full competition. As soon as AT&T divested, the entire process began to be questioned and the effectiveness of US antitrust law doubted. Regulation continued to play a key role in the telecommunications market. In 1996, Congress enacted the Telecommunications Act[28] with the goal of finally introducing full competition to the market. The most comprehensive reform of US telecommunications law in sixty years, the Act moved barriers to new long-distance market competition.[29] The Act served two purposes. First, it took over where antitrust law had thus far failed. Second, and just as important, is the fact that the Act showed that federal regulation is an absolutely necessary component of open and competitive markets in US telecommunications.
In Europe, all the activity surrounding the US telecommunications market was watched very closely. As in the US, the telecommunications market in Europe was dominated by monopolies although state owned rather than private. And like the US, the EU was looking to inject competition in its rapidly growing telecommunications market, as well as in other sectors where state monopolies retained control.[30] Beginning in the late 1980s, the European Commission (“Commission”), encouraged by the AT&T divestiture, turned its attention to the telecommunications market.
Europe’s telecommunications monopolies controlled quite a bit more than AT&T did in the United States. Prior to liberalization, state monopolies controlled the post, telegraph and telephone services (“PTT”), effectively extending the state’s power to all areas of telecommunications.[31] Unlike the heavily regulated US market, the state owned monopolies decided factors such as the price to be charged to end-users based on politics rather than any related market concerns.[32] This despite the existence of the International Telecommunications Union (“ITU”). The role of the ITU was to prevent state monopolies from “overreaching.”[33] Although the Member States participated in the ITU, it was completely ineffective because it was unable to enforce compliance or develop operational services of its own.[34] The ITU’s precarious position was due to the fact that its goals contradicted the Member States domestic interests. Each MemberState had its own standards for the various aspects of the telecommunications market and they refused to compromise.[35]
The failure of the ITU to create a united interest in the telecommunications market notwithstanding, the Commission believed that the key to competition in the market would require “a common approach to telecommunications . . . both in its economic goals and world market position.”[36] The 1984 AT&T divestiture only confirmed this belief. The United States had shown that by presenting a united front, it could use its antitrust laws to eliminate current monopolies and change the entry barriers to the telecommunications market. Thus, 1984 marked the beginning of the creation of a uniform European telecommunications policy. The Commission’s first step was to determine the role of the Treaty in promoting competition in the telecommunications market.[37]
III.The Regulatory Framework: US and EU Competition Law
Although US antitrust law and EU competition law are
equally important factors in their respective telecommunications market, they have fundamental differences that alter their effectiveness. The procedural and substantive differences between the two laws are attributed to the significant difference in basic philosophies.
Although EU competition law is generally “patterned on” US antitrust law, there is one fundamental difference.[38] The EU wants to eliminate the national barriers which have resulted in state owned monopolies and have created competition laws that will help lead to the formation of a single market.[39] This is not an issue the US must deal with since national barriers ceased to exist in the US following the formation of the republic and a single American market. From this basic philosophic difference comes the two varying sets of laws. US antitrust law is based on an interest in protecting the consumer while promoting optimal output.[40] EU competition law, on the other hand, focuses on open markets and business opportunities, with its main concerns being abuse of dominance and relationships between companies.[41] It promotes competition by controlling abuse, promoting fairness in the marketplace and fostering growth of small and mid-sized firms.[42] In short, the EU envisions itself as the “anchor of stability from the ship of a friendly neighbor,” because the EU believes it must play a large role in the fight for competition or the Member States will continue to remain divided. Its goal is to do whatever it takes to “prevent anticompetitive conduct from hindering integration.”[43] In marked contrast, US
antitrust law encourages less government involvement and is therefore more flexible than its EU counterpart.[44]
From their basic philosophies, US and EU competition law were developed. In the US, two major statutes control a vast assortment of business transactions and practices.[45] Together, they establish that competition is the national economic policy and that competition-spurred efficiency maximizes social welfare. By bidding down the price to marginal cost, resources will achieve their most productive use without passing on hefty prices to the consumers. Therefore, US antitrust law focuses on the two factors upon which competition takes place, price and quality. The Sherman and Clayton Acts promote this philosophy. Section 1 of the Sherman Act states that “every contract, combination . . . or conspiracy in restraint of trade” is per se illegal.[46] Therefore, section 1 prevents companies from joining together to harm competition.[47] Section 2, in turn, prohibits a single firm from causing the same harm to competition by declaring monopolization and its attempt as per se illegal.[48]
Finally, section 7 of the Clayton Act regulates how a company acquires or merges other businesses.[49] Furthermore, it has the power to control how firms form joint ventures.[50] Section 7 prohibits a company from acquiring the assets of another company, or merging with another company, if the effect of such actions will be to lessen competition or create a monopoly.[51] To assist the courts in determining whether business activities violate antitrust laws, two forms of analysis are provided. The first is a simple per se test. Certain actions are considered per se offenses of antitrust laws and their very existence means the laws have been violated.[52] The second, and more complicated test, is the rule of reason analysis. Under this analysis, courts must use all the relevant factors of the transaction under consideration to determine whether the anticompetitive results of the transaction outweigh any procompetitive results.[53] This particular analysis requires considerable time and money, thereby making US antitrust law rather complex and, at times, inconsistent.[54]
Both the Sherman and Clayton Acts are very broad, thereby giving the parties involved and the courts great power and discretion.[55] The Acts grant power to both public and private parties by providing them with a variety of actions they may file suit under, including tort action, equity action and criminal action.[56] Likewise, the courts can cite among their powers the wide range of sanctions they may levy on a company. In the US, antitrust remedies take a remedial approach, allowing for civil, criminal and regulatory penalties.[57]
The difference in the power and deference granted to all those involved in competition issues is just one of the many substantive and procedural differences between US and EU competition law. The number and variety of remedies and actions afforded the courts in the EU is substantially less than in the US.[58] Furthermore, US antitrust law is not as centralized as in the EU. US antitrust law consists of many statutes which are to be used by a number of enforcement agencies.[59] EU competition law, however, is addressed in three Treaty articles and is enforced primarily by the Commission, which is given, through a number of regulations, a big role in the “formulation and execution of competition laws” and the regulation of large mergers and acquisitions in Europe that affect the Common Market.[60]
The basic principles of EU competition law are established in Articles 81, 82 and 86 of the Treaty of Rome.[61] Article 81 prohibits companies from entering into agreements and practices that are anticompetitive in nature.[62] This article focuses in particular on practices such as price fixing, and limiting or controlling markets.[63] Article 81(3) also provides an exemption to its prohibition for agreements and practices that are considered economically progressive or beneficial to consumers.[64] Article 82 prevents companies from abusing any dominant positions they may have in a market.[65] It does so by prohibiting any conduct by a company with a dominant position that affects trade between Member States or is incompatible with the Common Market.[66] Together, Articles 81 and 82 have a very important role in EU competition law. They jointly establish the EU’s competition rules and how they apply to undertakings.[67] They also establish where they can be applied. They are applicable to non-Community enterprises, to arrangements that are “wholly or partially carried out outside the territorial boundaries of the Common Market” and have an extraterritorial reach.[68]