Regulators Are Expected to Demand WorldCom Sell Off Internet Holdings
By JENNIFER L. SCHENKER
Staff Reporter of THE WALL STREET JOURNAL, 5/12/98
interactive.wsj.com
European regulators are expected to insist that WorldCom Inc. divest itself
of some of its Internet holdings before clearing its proposed merger with
MCI Communications Corp., say telecommunications industry executives
familiar with the issue.
The European Commission is holding closed hearings on the deal in
Brussels Tuesday and Wednesday. The executives say European and U.S.
regulators agree that the combined strength of WorldCom and MCI's
Internet infrastructure holdings pose a problem.
Critics of the merger, such as GTE Corp., are pushing for regulators to
require WorldCom to sell off its UUNet unit, an Internet backbone-service
provider. Phone-company executives on both sides of the Atlantic say that
the divestiture of a sizable holding such as UUNet would most likely satisfy
both the European Commission and the U.S. Justice Department on the
Internet infrastructure issue.
Phone companies, such as GTE, Sprint Corp.
and a number of European ones, will argue at
the hearing that the proposed merger would
allow WorldCom and MCI to dictate both
pricing and the pricing mechanism used to
hand off traffic over the Internet. Some are
expected to cite independent research to
bolster their case that WorldCom/MCI would
dominate Internet services.
The commission, which is looking only at the
Internet infrastructure issue, has until July 15 to make a final ruling. It
previously notified WorldCom and MCI about its objections to the
merger. The Justice Department must still rule on whether the proposed
merger might have a negative impact on the U.S. long-distance market,
and a decision on that issue isn't expected for eight months.
A spokesman for the commission's merger task force said the object of the
hearings is to determine a fair way to measure market power over Internet
infrastructure. A commission official said three options are being
considered: measurements based on network capacity; measurements
based on how many Internet-service providers are connected to the
network, or measurements based on how much traffic is carried over the
network.
Some of the phone companies testifying embrace the third option and are
expected to use methodology developed in an soon-to-be-released report
by the Paris-based Organization for Economic Cooperation and
Development to bolster their arguments about why the proposed merger
shouldn't be approved without modifications.
OECD research on Internet traffic exchange traced routes to the 100 most
popular sites on the Internet. While a combined WorldCom and MCI
would be able to handle traffic to and from about 50 of the sites without
relying on any other carrier, Sprint, the next biggest market competitor, is
able to do the same only for about 18 of the sites.
The OECD's research shows that even a large Internet-service provider
like Sprint needs MCI/WorldCom more than MCI/WorldCom needs it.
For example, MCI/WorldCom would need to hand off to Sprint to reach
only three of the top 100 sites while Sprint would have to go to
MCI/WorldCom to gain access to 26 of the top sites, according to the
OECD research.
Bell Atlantic Corp. has made similar observations, based on separate
research it has conducted that also measures market power based on the
third option. Using its own measuring tool, Bell Atlantic argues that the
proposed merger would control between 50% to 60% of Internet
infrastructure in the U.S.
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