Crandall and Singer Evaluate the Competitive Impact of the Proposed Verizon-MCI Merger

March 10, 2005

On March 10, 2005, Verizon Communications Inc. and MCI, Inc. submitted an expert report by Dr. Robert W. Crandall of the Brookings Institution and Dr. Hal J. Singer that evaluated the competitive impact of the proposed merger between the two telecommunications carriers. In their expert report, which was submitted to the Federal Communications Commission (FCC), Drs. Crandall and Singer explain that due to a variety of marketplace, technological, and regulatory developments, MCI has become a far less active participant in the provision of local and long-distance voice and data services to mass-market customers. Given this change, along with other technological developments in the telecommunications industry, the authors conclude that the proposed transaction will not have adverse competitive effects in either the provision of voice and data services for large enterprise and medium-sized business customers or the provision of voice and data services for mass-market customers.

With respect to the mass-market segment, Drs. Crandall and Singer explain that a properly defined product is not limited to wireline telephony, let alone more discrete segments such as local and long distance. Instead, they argue that cable switched telephony and VoIP offerings are part of the same product market as wireline voice service. In addition, wireless services have become a replacement for traditional landline service, particularly for long distance. They demonstrate that even though these products are not all perfectly fungible for all consumers, a sufficient number of mass-market customers perceive these to be viable alternatives such that they constrain the pricing of one another. Accordingly, a proper analysis of competitive harms with respect to mass-market customers must account for the availability of these competitive alternatives, which will be unaffected by this transaction.

The authors also demonstrate that the proposed merger will not harm competition for telecommunications services delivered to large enterprise and medium-sized business customers. In particular, they explain that the business segment is highly competitive and decentralized, involving traditional carriers, carriers using different platforms (such as wireless and Internet), and other entities such as system integrators. Drs. Crandall and Singer point out that Verizon had less than 10 percent of total enterprise voice and data revenues as of the end of 2003, and even less for Fortune 1000 firms. They explain that small and declining margins combined with low levels of concentration in the enterprise market further show that the market is highly competitive, and that therefore the proposed merger will not produce significant price effects.

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