WASHINGTON-The pending $21 billion merger between MCI Communications Corp. and British Telecommunications plc will turn on a relatively new foreign ownership policy and be shaped by powerful political forces that are conspiring to liberalize telecom markets for heavyweight global competition in the 21st century.
The 1995 policy, known as the economic competitiveness opportunities (ECO) test, gives the Federal Communications Commission the flexibility to waive the 25 percent foreign ownership cap if the country of the carrier seeking U.S. entry provides now, or in the near future, comparable market access for American telecommunications firms.
While the ECO test is only one element of the FCC’s public interest determination in such cases (impact on U.S. competition, national security, law enforcement, foreign policy and trade policy also are examined), it is one of the more important both in real and symbolic terms.
Clinton administration efforts in recent years to open global telecom markets have been undercut by foreign ownership restrictions at home. Initiatives to relax U.S. telecom trade barriers through legislation and treaties have yet to produce results.
While the push for free trade continues on domestic and international fronts, the ECO test enables the United States in the meantime to open its telecom market to foreign carriers and to send a strong signal to the rest of the world about its commitment and its expectation of others.
The United States has perhaps the most to gain from telecom liberalization abroad because it has a competitive edge in telecom and information technology.
Though novel, the ECO test is not without precedent. The FCC in late August agreed to let Shell Offshore Services Co., a U.S. firm of Dutch and British joint ownership, operate a broadband common carrier digital microwave network in the Gulf of Mexico.
Federal regulators found that the United Kingdom’s market has opened significantly since the government unlocked BT’s state-owned, monopoly grip on telecommunications services (wireless and cable particularly). Such was not the case in the Netherlands.
However, the fact that the Dutch Parliament in March passed legislation to end preferential treatment to the government-controlled telecom provider and to liberalize wireless and wireline services next year was sufficient to persuade FCC officials that comparable opportunities for U.S. firms in the Netherlands were forthcoming.
Yet, that proceeding does not compare in magnitude to the proposed BT-MCI alliance.
“The FCC’s examination of BT-MCI is going to be much broader,” said John Riordan, a telecommunications attorney at the Washington, D.C., law office of Keller and Heckman who represented Shell.
Brian Ashby, another lawyer in the firm who worked with Riordan in successfully persuading the FCC that Shell’s entry did past muster with ECO, agreed. “It’s not going to be a slam dunk by any means,” he said.
Yet both said they believe the deal will win FCC approval and get the blessing of antitrust officials at the Justice Department and/or the Federal Trade Commission, despite opposition from AT&T Corp. and others.
“The relative openness of telecom markets is not just a U.K. issue,” said Robert Allen, chairman of AT&T Corp. “The ability of a company with this kind of market power to negatively impact competition and reduce customer choice makes the evaluation of this proposed merger a global priority of the highest order.”
However, the BT-MCI combo-named Concert Global Communications plc-would still rank behind AT&T, the largest U.S. long distance carrier and the second biggest international telecom service provider, and Nippon Telephone and Telegraph Corp. of Japan, the world’s top telecom concern. Concert would be roughly on par with the Global One venture of Deutsche Telekom, France Telecom and Sprint Corp.
Nevertheless, the merger reportedly would be the largest foreign takeover of a U.S. firm in history.
Don Gips, chief of the FCC’s International Bureau, said the ECO test also has been used in other cases where foreign investment in U.S. carriers exceeded the 25 percent cap.
“This [the ECO test] is very important,” said Gips, referring to the key role the policy plays in allowing foreign firms to increase their presence in U.S. telecom markets. But he added that national security issues take precedence in considering foreign ownership waivers.
The planned merger would have BT purchasing the remaining 80 percent of MCI that it doesn’t already own. BT in 1993 spent $4.3 billion for 20 percent of MCI.
In the meantime, the United States and other World Trade Organization members are striving to reach an agreement by Feb. 15 to remove all telecom trade barriers in 125 countries. Renewed optimism for a pact was fueled last week by an improved offer of the 15-member European Union. Talks broke down in April.
The EU is scheduled to liberalize telecom markets by Jan. 1, 1998.
A spokesperson for Rep. Mike Oxley (R-Ohio) said the congressman plans to pursue telecom free trade next year. Oxley pushed for inclusion of telecom trade reciprocity in the telecommunications reform bill, but it got pulled because of objections by Sen. Ernest Hollings (D-S.C.), a key member whose support was essential for passage of the legislation.
