Government regulation of internet service provider mergers and net neutrality

¶ … 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),

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).

However, profits for shareholders are not always salutary for employees. In the SBC-AT&T merger, 13,000 jobs in the combined company were eliminated, creating a leaner company but devastating to the persons whose jobs were lost. The CEO of SBC drew fire from net neutrality activists "when he stated that he [was] investing billions of dollars to upgrade its phone network for TV and advanced multimedia services, [and] has the right to charge Web-based providers of rival services to deliver their products to customers over SBC's line" (SBC and AT&T complete merger, 2005, Red Orbit). Regarding shareholders, AT&T paid a special dividend of $1.30 per share to its 2.3 million stockholders.

The FCC did exercise oversight over the merger, stating that SBC and Verizon could not continue to require customers with high-speed DSL to buy local- phone service as well. "The FCC also required them to freeze for 30 months the wholesale prices they charge competitors to lease certain high-capacity business lines" (SBC and AT&T complete merger, 2005, Red Orbit).

But to preserve net neutrality and consumer rights, however, it is likely that more stringent oversight is required by the FCC over these newly-created mega-ISPs. Both companies have promised not to limit the flow of information online despite their regional dominance of so many areas, but in light of a lack of legislation by Congress to preserve net neutrality, there are no guarantees in the merger-happy ISP market.