Merger a Continuation. Please Adhere Directions Required

¶ … Merger a continuation. Please adhere directions required information needed, ensure a good grade. Title: Expansion Merger This paper a continuation Assignment 1.

ISP industry: Expansion and merger

Government regulation

Because of the rapid expansion of the ISP (internet service provider) industry and the rapid expansion in general of telecommunications technology, there is a tendency towards under-regulation of these entities which exert such an influence over Internet consumer's lives. Recently, there was a firestorm of controversy to stop SOPA (the Stop Online Piracy Act), which would have taken down websites without a court order for the piratical content the sites unwittingly hosted. However, it was less controversial in 2006 when the FCC "let effective Net Neutrality protections expire in August 2006 as the result of a technical change in the way they address Internet governance" (Net neutrality, 2012, Common Cause). Free speech advocates should have been alarmed given that "today there is no rule or regulation to prevent phone and cable companies from doing what they have said they want to do: charge content providers for the right to be on 'their' Internet pipes, and make special deals with some companies to ensure their sites and services work faster and are easier to find by Internet users" (Net neutrality, 2012, Common Cause).

While the cause of net neutrality may not have drawn the attention of the stop SOPA movement, it exerts an undeniable impact upon consumers' lives. The political action group Common Cause has said that net neutrality government regulations are "the reason that the Internet has been able to grow exponentially, fuel innovation, and alter[ed] how we communicate" (Net neutrality, 2012, Common Cause). Given the current absence of net neutrality laws, ISPs have tremendous leeway, despite the fact that only one or two providers dominate a particular marketplace. Because of the lack of net neutrality laws ISPs have the right "to block or impede any online content or services, for any reason" (Net neutrality, 2012, Common Cause). In effect, this means that some people will have access to greater and freer online content than others, simply because of who their provider is in their area. ISPs also have the right to charge specific websites or applications priority service fees, making smaller, poorer, and less popular sites difficult to find, effectively turning over content provision to a handful of wealthy sites. "That could spell the end of innovation, as small businesses, entrepreneurs, local governments, nonprofits and others would be locked out of a system controlled by the big telephone and cable companies [without net neutrality]. If network providers are allowed to control the flow of information, the open and freewheeling nature of the Internet could be lost" (Net neutrality, 2012, Common Cause),

Justify the rationale for intervention

Given the tremendous power ISPs can have on government freedom, more and more people are calling for government regulation in terms of how much they can consolidate and exert their influence upon the access to information of the greater American public. In 2005, the Verizon-MCI merger was widely criticized. According to the California ISP Association "Duopolies or oligopolies do not create competition in the marketplace. More importantly, the structure of telecommunication coverage areas in our state will create monopolies in geographical areas" (ISP group criticizes Verizon-MCI merger, 2005, Phone Watch). Another merger in 2005 was the $16 billion deal of San Antonio-based SBC and AT&T. The two were able to "become the nation's largest communications company" after previously purchasing 60% of Cingular Wireless (SBC and AT&T to become nation's largest telecom firm, 2005, PBS News Hour).

With this consolidation, many consumers experienced substantially higher prices in their areas as well as more limited choices. In California, for example, the two merged entities "dominate the business market, controlling service in at least 90% of the commercial buildings in their territories," fueling a "15% increase in wholesale prices for local access, which in turn will drive up retail prices to businesses by a similar amount. The elimination of primary competitors -- and the continued collusion of SBC and Verizon not to compete in each other's territory -- ensures that conditions for the business customer will worsen, not improve" (ISP group criticizes Verizon-MCI merger, 2005, Phone Watch).

Self-expansion: An alternative strategy

The mega-mergers between these ISP companies were hotly criticized, and it is questionable if more mergers will be permitted in the industry, particularly if the current administration remains in power, versus an even more business-friendly administration. In terms of expanding the current companies, for example, the SBC/AT&T transaction was "subject to approval by shareholders of both companies, two federal agencies, and at least 26 states" (SBC and AT&T to become nation's largest telecom firm, 2005, PBS News Hour). Mergers, however, have a far greater attraction for ISPs. Once a customer has become accustomed to a particular service provider, there are high transaction costs and a high level of aggravation in terms of switching. This is why mergers are a far easier method, from the company's perspective, of expanding their outreach, as it enables them to acquire a large swath of customers with comparatively little effort. During a merger, customers within the area are automatically subsumed into the merged entity's grasp, and must actively refuse service (or cannot refuse service, in the absence of viable competitors) to avoid becoming the new, larger entity's customer.

Convergence between the interests of stockholders and managers

When large ISP companies such as the Verizon-MCI merger have taken place, they company immediately reorganized its managerial structure to ensure that the company could still be an efficient and effective service provider to customers. "Verizon created a new business unit, Verizon Business, to provide service to large business and government customers" (Verizon-MCI major complete, 2007, Phone Watch). During the reorganization, efforts were also made to compensate shareholders at a fair price. MCI shareholders received "0.5743 shares of Verizon and cash for each of their MCI shares. Verizon elected to make a supplemental cash payment of $2.738 per MCI share (or $779 million in the aggregate), rather than issue additional shares of Verizon, so that the merger consideration was equal to at least $20.40 per share of MCI" and the merger was structured as a tax-free reorganization (Verizon-MCI major complete, 2007, Phone Watch).