XO Disputes SBC and Verizon Claim That New Market Entry Will Remedy Harms of Mergers to Local Wholesale Market

Market Concentration of New Duopoly, Coupled with High Costs and Excess Capacity, Pose Significant Barriers to New Market Entrants in Local Wholesale Market

XO Communications, Inc. (OTCBB:XOCM.OB) today denounced the argument made by incumbent monopolies that new market entry into the local wholesale arena is “easy” and presents a viable cure to the competitive harms of the SBC-AT&T and Verizon-MCI mergers.

In an ex parte to the FCC, XO reiterated the importance of adhering to federal guidelines for evaluating the anticompetitive impacts of and the remedies for giant mergers. XO pointed to AT&T’s testimony to the Commission during the Triennial Review proceedings, where AT&T confirmed high cost and the excess capacity of incumbents as major barriers to entry or expansion by competitive operators. XO further termed the surrogate benchmarks for determining post-mergers, proposed by SBC and Verizon, as inadequate.

According to The Horizonal Merger Guidelines set forth by the U.S. Department of Justice and the Federal Trade Commission, market entry must be “easy” in order to overcome the market power created by large mergers. Entry that is timely must be achieved within two years from initial planning to significant market impact. When entry occurs more than two years after a consummated merger, it cannot counteract the anticompetitive impact of market power.

“By any measure, the market power about to be unleashed by these mergers is off the charts, and the walls newcomers must scale are too high,” said Heather Gold, Senior Vice President, Government Relations for XO Communications. “It is critical that the FCC determine with great precision the timing, likelihood and sufficiency of post-merger entry.”

High Costs as a Barrier to Entry

AT&T’s submissions during the Triennial Review buttressed the accepted view that high fixed costs reduce the ease of entry and expansion and decrease the odds of entry deemed timely by federal guidelines. AT&T also pointed to the significant cost advantages enjoyed by incumbent local exchange carriers.

A key AT&T declaration in the proceedings stated: “Thus, as the Commission has recognized, there will be severe short run asymmetries between the incumbent and a competitor that make it very difficult, if not impossible in many instances, for new market entrant competitive carriers to deploy bypass transmission facilities.”

AT&T further cited the high fixed costs of market entry, noting that “nearly two-thirds of interoffice transport costs are fixed,” and separately that, “The huge fixed costs of facility-based collocations require a means to aggregate demand that does not require building at every LSO.”

Excess Capacity

New market entrants also must contend with the vast fiber optic resources that will accrue to the new merged SBC/AT&T and Verizon/MCI. This capacity threatens an entrant with low prices, which in turn facilitate the incumbents’ ability to prevent future entry.

AT&T’s earlier testimony also confirmed the problem of incumbents’ excess capacity and the pressure on newcomers to quickly recover costs: “ILEC networks thus have substantial excess capacity and can be expanded without need for new construction,” and “The new entrant recognizes that when it deploys this sunk plant, it must recover its incremental costs within the span of a typical customer contract – generally three years.”

“Merger advocates appear to suffer from short-term memory loss,” said XO’s Gold. “Over the past decade, when AT&T testified on the trials faced by all new competitors, they spoke with conviction based on competing against local incumbents. Now they’ve conveniently forgotten that experience.”

Inadequacy of SBC and Verizon Proposed Surrogate Benchmarks for Determining Post-Merger Market Entry

XO disputed the RBOCs’ argument that competitive providers will rapidly fill the void left by AT&T and MCI, leveraging existing fiber optic facilities and collocations as springboards for massive new network builds. According to XO, the era of “build it and they will come” network construction ended with the telecom downturn, and today all capital expenditures must be success-based. Today, operators first win the customer, then build the network to support the service for that customer.

The unlikelihood of the RBOCs’ ease of market premise is further demonstrated by the steady rise in prices for special access services, despite the existence of significant competition from AT&T, MCI and other competitive carriers. If market entry were as easy as SBC and Verizon claim, such a proliferation of network facilities would have driven prices down, not up.

About XO Communications

XO Communications is a leading provider of national and local telecommunications services to businesses, large enterprises and telecommunications companies. XO offers a complete portfolio of services, including local and long distance voice, dedicated Internet access, private networking, data transport, and Web hosting services as well as bundled voice and Internet solutions. XO provides these services over an advanced, national facilities-based IP network and serves more than 70 metropolitan markets across the United States. For more information, visit www.xo.com.