ISPs In Uproar Over Verizon-MCI Merger

CISPA represents more than 180 ISPs. Mike Jackman, executive director of the Sacramento, Calif.-based organization, said the multibillion-dollar Verizon-MCI merger, announced in February, will run many pure-play ISPs out of business or force them to diversify their offerings--possibly into more value-added services that could compete with those provided by VARs and system integrators.

Verizon and MCI expect to close their merger by the end of the year. Another blockbuster telecommunications merger--between SBC Communications and AT&T--also is slated to close by the end of this year or in early 2006.

Spurring the CISPA complaint is an Aug. 5 Federal Communications Commission decision to reclassify DSL service as an information service instead of a telecom service, which Jackman said frees phone companies like Verizon from regulations requiring them to share bandwidth with ISPs. The FCC has placed a one-year grace period on enforcement of the change, he added.

"So the result is that Verizon-MCI, as well as [SBC-AT&T], will no longer have to lease DSL to ISPs," Jackman said. "They probably will, but it will be at such an outrageous price that ISPs won't be able to make any money on it."

Big carriers want to “own” the customer, he noted. "This merger will reduce the number of ISPs dramatically. If you're in the [ISP] channel, the number of customers you have will drop dramatically. And you'll either be unable to make money, or what you'll do in a worst-case scenario is add value-added services. You'll still be able to buy DSL, but you'll have to add more services to compensate for little or no margin."

Mark Esser, vice president of CISPA&'s board of directors, protested the Verizon-MCI merger in hearings before the California Public Utilities Commission (CPUC). Referring to the Verizon-MCI and SBC-AT&T deals, he said, "Duopolies or oligopolies do not create competition in the marketplace," according to CISPA. He added that other state PUCs say the mega-mergers are bad for business and could invite “tacit collusion” among the large carriers.

CISPA&'s complaints are "largely a replay of material aired several times already,” MCI said in a statement. Verizon couldn't be reached for comment.

“As Verizon and MCI have explained in filings with the state of California and the FCC, the Verizon-MCI transaction will benefit customers and the economy while allowing the new combination to compete effectively in a changing marketplace,” the MCI statement said. The company added that the merged Verizon-MCI would have a 16 percent to 22 percent share of the enterprise market.

Jackman disagreed with those market-share figures. "They will be the baseline [telecom] providers of 80 percent of the customers," he said.

CISPA, which was formed in 2000 to battle the big carriers over line sharing, believes there&'s no way the telecom megamergers will lead to fair play among ISPs, according to Jackman. "The idea of having ISPs is foreign to their culture," he said of the large carriers. "They are monopolistic. They have always resisted change."

Amid all of the market flux, some DSL resellers have started seeking creative ways to diversify their offerings.

Pac-West Telecom, a large CLEC in Stockton, Calif., has begun partnering with cable providers assist them with their voice offerings, said John Sumpter, Pac-West's vice president of regulatory. As a result, Pac-West essentially is going head-to-head with the big phone companies by working from the corner of the cable providers, a group competing with the Baby Bells to offer what Sumpter called "the triple play: TV, Internet, and voice service."

"Our new line of business is to be the back-room support for a cable TV company that wants to add voice to broadband and cable TV services," he said.