The champagne is flat; the revelers have stumbled home.

It's been four years since the big Telecom Act celebration, and now it's time to take stock: How have mergers and acquisitions affected the best of competitive intentions?

Do telecommunications mergers help or hurt competition? Good question. Hard answer. As mergers transform the telecom industry, it's difficult to separate their impact from the impact of new technologies, deregulation and other changes.

And with or without mergers, competition was bound to happen.

Even so, telecom mergers and acquisitions have marked the industry indelibly. Since the Telecommunications Act of 1996 became law, U.S. carriers have completed or announced at least 33 deals totaling more than $492 billion (Table 1). The M&As range from mere multimillion-dollar blips to mind-boggling deals that grow like Pinocchio's nose. MCI WorldCom and Sprint hope to consummate a $129 billion marriage. The America Online/Time Warner stock swap is valued at $164 billion.

Is this what competition is about? The Telecom Act, the landmark law that let local, long-distance and cable companies invade each other's businesses, says not a word about mergers. Most people in Congress neither intended nor anticipated this degree of consolidation, experts say. In hindsight, though, it's no surprise.

"It wasn't the intent of the Telecom Act, but it was an expected outcome," says a spokesman for Rep. Billy Tauzin, R-La., chairman of the House Commerce telecommunications subcommittee.

The reasons for merging are as varied as the carriers involved. In many cases, there's a "bigger is better" drive to be all things to all customers. Whether adding services or cities, it's easier for companies rich in cash and stock to buy their way in than to start from scratch. With MCI, WorldCom got wireless. With Nynex, Bell Atlantic got the dominant local exchange carrier (LEC) in seven Northeastern states. Poof, instant expansion.

"There's a sense that to be a national and international player, you need size and critical mass," says Rick Brecher, a telecom lawyer in the Washington office of Miami-based law firm Greenberg Traurig.

Increasingly, telecom mergers are creating a new class of vertically integrated supercarriers that offer bundled services worldwide. "Everyone is engaged in a race to be one of this small circle of players," says Dwight L. Allen Jr., communications industry director at Deloitte Research.

Part of the urge to merge is the desire to achieve economies of scale and to cut networking, marketing and other costs. Bell Atlantic has saved more than $1 billion since it merged with Nynex, according to a 1999 study commissioned by senior citizens' group AARP.

Although it doesn't mention mergers, the Telecom Act itself indirectly has caused them to occur, observers say.

"Prior to the Telecom Act, you had a Chinese wall between markets," Brecher says. "The Telecom Act said there won't be monopoly markets anymore. It gave companies the incentive to become large national players."

A mixed bag

This regulatory impetus to compete - and merge - is clearest among the RBOCs. SBC Communications acquired Pacific Telesis in 1997 and Ameritech in 1999. Bell Atlantic bought Nynex in 1997 and is in the final stages of acquiring GTE. Seven RBOCs have been whittled down to four.

"The creation of competition put the fear of God into the Bell companies. One way to protect themselves was to combine resources so they could fight from a stronger base," says John D. Windhausen Jr., president of the Association for Local Telecommunications Services in Washington.

Stalled by their own litigation over entry into regional long-distance markets, RBOCs had no other way to grow except to merge with each other, says Bob Atkinson, deputy chief of the FCC's Common Carrier Bureau.

Still, there's that nagging question: Do telecom mergers help or hurt competition? Do consumers have what politicians and regulators promised - lower prices, more provider choices and more services? Generally speaking, they do. With the glaring exception of cable TV, prices for telecom services have fallen since 1996, most steeply for wireless and long-distance (Table 2). There also are more services. DSL and many other broadband offerings did not exist before the Telecom Act was passed.

Consumers also have more choices of providers, though that choice varies by market. Nationally, there were more long-distance, wireless and competitive carriers in 1998 than in 1996 but 23 fewer incumbent LECs (ILECs), according to FCC figures.

Most dramatic is the growth of competitive LECs (CLECs) (Table 3). The number of facilities-based CLECs has more than doubled since 1996. They control 5.6% of access lines today, compared with fewer than 1% in 1996, according to ALTS figures. CLECs' share of revenue from local switched-access service stands at about 7%.

What these numbers mean, says FCC Chairman William Kennard and others, is that the Telecom Act is working. Meaningful competition finally is emerging.

But with ILECs controlling the vast bulk of local services, and cable rates rising faster than inflation, critics say the glass of competition is half empty, not half full. In their view, the growing concentration of telecom ownership stifles competition.

"The very structure we broke up to allow [CLECs] to compete is being put back together again. It's appalling," says Randall B. Lowe, chief legal officer of Prism Communication Services, a New York-based CLEC.

"This merger mania is already so out of hand that the most popular services most consumers want and need may be available from only one or two players in the market," testified Gene Kimmelman, co-director of Consumers Union, before the Senate Commerce Committee last November.

While it's logical to think that fewer companies means less competition, others contend that mergers create bigger companies that develop new products and drop prices, ultimately benefiting consumers. A darker view is that the giants amble and stumble, giving an advantage to smaller, more nimble competitors.

From a regulatory perspective, the elimination of any one competitor or potential competitor isn't necessarily harmful because "there are hundreds of companies to fill any void," Atkinson says. "It becomes a problem when there's the effect of lessening competition."

In that case, federal and state regulators can impose conditions that force the new company to take steps it might not have taken or to take action more quickly. For example, SBC must enter 30 or more out-of-region local markets within 30 months of its merger with Ameritech, which closed in October.

In the end, the impact of mergers on competition boils down to deal-specific details: horizontal or vertical, affected markets, affected services. Overall, it's a mixed bag.

RBOCs and IXCs: Partying hard

In general, RBOC mergers generate more teeth-gnashing than long-distance mergers because the RBOCs still hold a near-total grip on local services, executives and analysts say. "The local mergers have had a negative effect," says Glenn Manishin, a partner in Patton Boggs, a Washington law firm. "The best competition for a regional Bell is a company that size."

The RBOC mergers are "more problematic," says H. Russell Frisby Jr., president of the CLEC trade group CompTel and former chairman of the Maryland Public Service Commission. "You set up a situation where you have Ma Bell East and Ma Bell West. It's much more difficult to compete with these companies."

Regulators can't judge if an RBOC merger will lessen local competition because there was no competition to begin with. Instead, they ask if the merger would significantly decrease potential competition. If it does, they can stop it. "The notion of losing potential competition hasn't been successful in the courts," says Paul Glenchur, an analyst at Schwab Washington Research Group.

It hasn't swayed the FCC, either. In the case of Bell Atlantic/Nynex, the agency found that "the merger will eliminate Bell Atlantic as a likely significant independent competitor to Nynex" in the New York City area. In other words, if the merger hadn't occurred, Bell Atlantic likely would have invaded Nynex territory. But instead of denying the merger, the FCC imposed a set of market-opening conditions, which critics say Bell Atlantic has not met (see sidebar on page 34).

But long-distance deals are a different story, experts say.

"Long-distance is a commodity," Manishin says. "There is so much long-distance competition and so much unlit fiber" that a merged provider can't raise prices or have a negative impact, he says.

Still, the specter of a merger between MCI WorldCom and Sprint, the No. 2 and No. 3 interexchange carriers (IXCs), raises eyebrows. Regulators are examining the deal's implications for the long-distance and the Internet backbone markets.

The Consumers Union has asked the Texas Public Utility Commission to review the merger's impact in parts of Texas where Sprint is a local-service provider. Reduced competition could result in "higher telephone bills, reduced quality of service, a lessening of competitive alternatives and a reduction of the availability of technologically advanced services to all parts of the state," the petition states.

As the industry knows by now, the FCC's role is not to watch the parade of mergers. Although some deals have sailed through, including SBC's purchase of Pacific Telesis and AT&T's buyout of Teleport, several other companies were forced to sell assets or agree to conditions to gain regulatory approval.

For example, MCI sold its Internet backbone business when it merged with WorldCom. More recently, approval of SBC's purchase of Ameritech came attached with a lengthy list of conditions and stiff financial penalties for violations. "[The FCC has] been more active than the Justice Department because they have the authority to look at mergers in a more comprehensive way," Glenchur says. States also review mergers if intrastate services are affected.

The FCC watchdogs

The DOJ reviews mergers for potential antitrust violations, while the FCC - which technically votes on the transfer of licenses - also makes sure they are in "the public interest."

"They've interpreted that to mean, `Will the merger enhance competition?'" says Allen of Deloitte Research.

Some critics think the FCC has gone too far by usurping the DOJ in reviewing mergers. Senate Commerce Committee Chairman John McCain, R-Ariz., has introduced legislation that would strip the FCC of its authority to review mergers.

Others say the FCC has gone condition crazy. "The FCC, in its activist role, is taking advantage of companies' desire to merge," charged a spokesman for the U.S. Telecom Association, a trade group of ILECs. "Conditions are part of the game these days. They go beyond what should be required in these mergers."

Not true, says the FCC's Atkinson. "It's only when the FCC concludes that the merger, as proposed, is not in the public interest that you get conditions."

The agency has learned from experience. With Bell Atlantic/Nynex, "the conditions were so general and so vaguely defined, it's been reduced to a squabble over what they mean," says a former FCC official.

With SBC/Ameritech, the FCC made the conditions more specific, detailed and enforceable. "The clearer it is about what has to be done by when, the more you eliminate confusion and disagreement," Atkinson says.

Still, even champions of merger conditions doubt SBC will fulfill its obligations. "It's not clear the conditions are tough enough. SBC will hire enough clever lawyers to find their away around them," says Windhausen of ALTS.

Critics aside, the FCC seems to want an active role in telecom mergers. It's formed an internal team of lawyers to streamline the review process, and Kennard has emphasized the agency's next step - enforcement that is "firm, fast and flexible."

"Merger compliance is a high priority," says David H. Solomon, chief of the FCC Enforcement Bureau, created last November. The 285-person bureau, located in Washington, and 25 field offices investigates and resolves complaints against carriers and enforces the Communications and Telecom acts and FCC order and rules, including merger conditions.

The bureau's arsenal includes a variety of weapons to make bad guys behave, including fines, the extension of conditions and even revocation of license transfers. The latter would be "extraordinary and a remedy of last resort," Atkinson says.

The Enforcement Bureau has teamed with the Common Carrier Bureau to ensure SBC's compliance with the Ameritech merger conditions. "There have been issues we've looked into," Solomon says, refusing to divulge details.

Do mergers help or hurt competition? No knows for sure yet, but the picture may become clearer a few years down the road.

"I think the marketplace will decide," Atkinson says. "If you're big and well-managed, size can be an advantage. With bad leadership and investors, companies will fail."

Now that the dust has settled on the "old" telecommunications mergers - those that took place two or three years ago - it's time for reckoning.

Take Bell Atlantic's $25.6 billion purchase of Nynex in 1997. Did it help or hurt competition? If regulators have any opinions, they aren't talking. The FCC says its report isn't for public consumption. The Department of Justice did not seek to block the merger on antitrust grounds.

But one study says the merger seems to have hurt competition. "The concentration of market power in the merged RBOCs created powerful incentives to continue to limit competitive entry, increase rates charged to captive customers and cut back on service quality whenever it is profitable to do so," according to a 1999 study by Economics and Technology, a Boston-based consulting firm.

On the plus side, service quality and customer satisfaction have improved in New York, Maine, New Hampshire and other Bell Atlantic states since the merger, the report says. On the negative side, the study finds the company has passed on little of the millions of dollars in merger-related savings to customers. Federal and state regulators did not require rate cuts as part of their merger approval.

The report, commissioned by AARP, concludes: "Even the best-constructed regulatory conditions are unlikely to defuse the potential anti-competitive and anti-consumer impacts of mergers between RBOCs. The only way to ensure that consumers actually share in any benefits...is for regulators to approve only those RBOC mergers for which effective competition exists throughout the combined region."

Bell Atlantic's acquisition of neighboring RBOC Nynex created a 13-state powerhouse that dominates local exchange service from Maine to Virginia. Altogether, the carrier generates $33.2 billion in annual revenues and controls nearly 44 million access lines.

The FCC approved the deal in August 1997, but only after imposing eight conditions designed to hold Bell Atlantic to certain performance standards and market-opening actions. Without these conditions, the merger's negatives would have outweighed its benefits to the public, the agency concluded.

Among the FCC's requirements, which sunset in August 2001, were detailed performance reports of Bell Atlantic's operations support systems (OSSs), development of a regionwide OSS and pricing of network pieces based on forward-looking economic costs.

Four states added their own conditions. The New York State Public Service Commission's conditions included hiring more employees to address service problems, investing $1 billion in service-related infrastructure during five years and performing comparative trouble-report tests.

Bell Atlantic says it satisfied the OSS conditions when the FCC OK'd its entry into the New York long-distance market in December. To sell long-distance service in their regions, RBOCs must meet a set of local-competition requirements under the Telecom Act of 1996.

AT&T and MCI WorldCom, which compete against Bell Atlantic in New York, say the carrier isn't meeting FCC conditions. "Bell Atlantic's utter disregard for its obligations makes clear that conditions cannot mitigate perceived anti-competitive harms," AT&T wrote in comments to the FCC last year.

In particular, the interexchange carriers (IXCs) complain that Bell Atlantic has not used forward-looking pricing for interconnection and unbundled network elements and has not negotiated schedules for provisioning order confirmations and other items.

"I think we're meeting both the letter and the spirit of the conditions," says Don Evans, Bell Atlantic's vice president of federal regulatory affairs. "We've had some difficulties along the way. A lot of this market-opening stuff has been more difficult than anyone expected."The FCC's pro ceeding on these complaints, opened in spring 1999, still is open. The IXCs say they don't know why the FCC has not responded to their complaints.

David H. Solomon, chief of the FCC Enforcement Bureau created last November, says he did not know when the agency would act on the Bell Atlantic/Nynex complaints.