FCC Approves AT&T/BellSouth Merger

UPDATED: AT&T’s  $85 billion merger with BellSouth got its long-awaited blessing from the Federal Communications Commission (FCC) today after the two sides hammered out new concessions on network neutrality, cuts in broadband rates and divesting some of its spectrum allocation.

The approval puts to end the delays over the FCC’s vote on the merger that boiled down to network neutrality provisions.

AT&T agreed to promise that it wouldn’t prioritize Internet traffic over its platform, a key concession that helped seal a bipartisan vote by the FCC commissioners.

In a release today, the FCC said the commission decided that significant public interest benefits are likely to result from the deal. They include deployment of broadband throughout the entire AT&T/BellSouth in-region territory in 2007; increased competition in the market for advanced pay television services via AT&T’s IPTV plans and improved wireless products and services via the companies’ joint management of Cingular Wireless, now a joint venture of BellSouth and AT&T.

The FCC’s approval helps make AT&T the largest provider of landlines in the U.S., with roughly 70 million customers across 22 states. With 9.1 million broadband customers, the combined company has vaulted into the No. 2 slot in high-speed Internet in the U.S. behind cable provider Comcast, which counts about 9.3 million customers. Cingular, the wireless company AT&T and BellSouth manage, counts about 57.3 million subscribers.

It was Internet policies that led the FCC to an impasse on approving the merger, especially over network neutrality provisions. AT&T, which had resisted including network neutrality provisions in the merger agreement, eventually gave in.

In a letter to the FCC last night, Robert Quinn, Jr., senior vice president of AT&T’s regulatory group, said AT&T’s latest concessions were “significantly more extensive” than the merger terms already approved by other state and federal regulators.

“AT&T/BellSouth commits that it will maintain a neutral network and neutral routing in its wireline broadband Internet access service,” the letter said.

“This commitment shall be satisfied by AT&T/BellSouth’s agreement not to provide or to sell to Internet content, application, or service
providers, including those affiliated with AT&T/BellSouth, any service that privileges, degrades or prioritizes any packet transmitted over AT&T/BellSouth’s wireline broadband Internet access service based on its source, ownership or destination.”

Internet content companies, such as Google, had lobbied hard over what they argued the telcos could someday do: start to prioritize traffic over others. The issue would become a political dividing line that changed when Democrats regained control of Congress after the midterm elections.

Two Democratic members of the five-person FCC wanted to see more network neutrality promises in the deal before signing off. Two Republicans wanted to approve the merger conditions as they stood, and as were already approved by other agencies, including the Department of Justice.

One Republican member, Robert McDowell, recused himself from the vote because he had done lobbying work for a trade group of companies that competed with AT&T and BellSouth. The FCC had reached a 2-2 deadlock over net neutrality, which eventually led to more backroom negotiations leading to last night’s concessions.

Quinn’s letter acknowledged that network neutrality was one of the major issues holding up the FCC’s approval. “Merger opponents continue to demand even more concessions, including those they were unable to obtain from Congress, or that are being considered in pending, industry-wide rulemaking proceedings. In the face of these continuing demands, the merger has yet to be approved.”

In addition to the network neutrality principles, AT&T also said it would offer “naked” broadband access to customers in select service areas at a monthly rate of $19.95. That means those customers can opt for the broadband service without having to purchase other services bundled in. In other AT&T/BellSouth service areas, it offered a trial-service for as little as $10 a month.

In addition, the former Ma Bell promised it would ease off on interconnect rates to competitive local exchange carriers (CLECs) by as much as 15 percent.

The network neutrality provision would be for two years, or until Congress enacts its legislation on the issue. The provision, however, does not apply to backbone network customers, major enterprise customers, or AT&T’s plans to offer its own branded IPTV service.

AT&T also agreed to divest a chunk of BellSouth’s wireless allocation by divesting its 2.5 GHz spectrum within a year of the merger conclusion.

Although the network neutrality provision is seen as breaking the impasse on the AT&T/BellSouth merger, which ranks as the largest of its kind, one industry spokesperson noted that AT&T agreed to conditions in order to get the bi-partisan approval it needed. AT&T is still widely viewed as eager to see Congress debate network neutrality as an industry-wide issue, rather than a political issue that held up the AT&T/BellSouth merger.

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