Chapter 3. Vertical Mergers

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CHAPTER III

VERTICAL MERGERS

A. Introduction

Depending on relevant market conditions and structure, vertical

integration can either create significant economic efficiencies or

significant economic harms.1 Telecommunications policymakers have

expressed varied views on whether, as a public policy matter, vertical

integration is predominantly pro- or anticompetitive in effect.

Under the old Bell system monopoly, U.S. policymakers agreed that

the vertical integration of every component of the network – from the

land-lines, through the switch, through the central office, and right down

to the handset of the phone on your desk – was necessary for the efficient

operation of the entire Bell System.2 Similarly, policymakers originally

saw no problem having downstream distributors of video programming

(both broadcasters and cable Multiple System Operators) control their

key upstream input of production by owning studios or even entire

networks themselves.3

About twenty years ago, however, policy makers decided that in

many instances the costs of vertical integration outweighed the economic

benefits. As a result, either by legislative or regulatory fiat, or via

consent decrees with the U.S. Department of Justice (DOJ) or Federal

Trade Commission (FTC), U.S. policymakers attempted to force

mandatory disaggregation of industries by carving out those sectors

thought to be eventually capable of competition from those sectors

deemed to be either natural or de facto monopolies.

Policymakers seeking to limit the negative effects of vertical mergers

have employed tools ranging from requiring standardizing technical

interfaces to outright divestiture. For example:

1. See, e.g., Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 54-

55 (1977).

2. See, e.g., Hush-A-Phone Corp. v. United States, 238 F.2d 266, 1267-69

(D.C. Cir. 1956).

3. See generally, James W. Olson & Lawrence J. Spiwak, Can Short-Term

Limits on Strategic Vertical Restraints Improve Long-Term Cable

Industry Market Performance? 13 CARDOZO ARTS & ENT. L.J. 283

(1995).

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(1) The AT&T Modified Final Judgment (MFJ) by which DOJ was

successful in structurally separating the local access monopoly

from long-distance service;4

(2) Concurrent with the MFJ, the FCC’s Competitive Carrier

Proceeding in which to promote long-distance and international

competition, the FTC, inter alia, essentially prohibited AT&T

from owning any local bottleneck distribution companies in the

United States or abroad;5

(3) The FCC’s old financial interest and syndication (“fin/syn”)

rules, which in an effort to limit network control over television

programming, placed significant restrictions on the ability of the

established networks (ABC, CBS, and NBC) to own television

programming and engage in the practice of syndication;6

(4) Computer II, in which the FCC essentially “carved out”

customer premises and terminal equipment from the old Bell

monopoly by, among other things, imposing mandatory standard

technical interfaces and separate affiliate requirements;7 and

4. See infra Chapter VI.

5. See Policy & Rules Concerning Rates for Competitive Common Carrier

Services and Facilities Authorizations Therefore, CC Docket No. 79-252

(Competitive Carrier); First Report & Order, 85 F.C.C.2d 1 (1980);

Second Report & Order, 91 F.C.C. 2d 59 (1982); recons. In the Matter of

Amendment of Part 1 of the Commission’s Rules to Provide for the Use

of Unsworn Declarations under Penalty of Perjury, Order, 93 F.C.C.2d 54

(1983); Policy Statement, Third Report & Order, 48 Fed. Reg. 46,791

(1983); Fourth Report & Order, 95 F.C.C.2d 554 (1983), vacated, AT&T

v. FCC, 978 F.2d 727 (U.S. App. D.C. 1992), cert. denied, MCI

Telecommunications Corp. v. AT&T, 113 S.Ct. 3020 (1993); Fifth

Report & Order, 98 F.C.C.2d 1191 (1984); Sixth Report & Order, 99

F.C.C.2d 1020 (1985), rev’d, MCI Telecommunications Corp. v. FCC,

765 F.2d 1186 (U.S. App. D.C. 1985); Mot. of AT&T Corp. to Be

Reclassified as a Non-Dominant Carrier, Docket No. 95-427, 11 F.C.C.R.

3271 (1995).

6. See Network Television Broad., 23 F.C.C.2d 382, 400 (1970), aff'd sub

nom. Mt. Mansfield Television v. FCC, 442 F.2d 470 (2d Cir. 1971);

Report and Order in the Matter of Evaluation of the Syndication and Fin.

Interest Rules, MM Docket No. 90-162, 6 F.C.C.R. 3094, as modified,

Mem. Op. and Order, 7 F.C.C.R. 345 (1991), rev’d, Schurz

Communications, Inc. v. FCC, 982 F.2d 1043 (7th Cir. 1992); Mem. Op.

and Order in MM Docket No. 90-162, 8 F.C.C.R. 8270 (1993), aff’d sub

nom. Capital Cities/ABC, Inc. v. FCC, 29 F.3d 309 (7th Cir. 1994).

7. See Amendment of Section 64.702 of the Commission’s Rules and

Regulations, 77 F.C.C.2d 384 (1980) [hereinafter Computer II Final