Federal regulators gave final approval to the biggest merger in telecommunications history Friday after AT&T; Inc. agreed to major concessions to resolve an impasse over its purchase of BellSouth Corp.
The $86-billion deal gives San Antonio-based AT&T; a third of the nation's land lines, dominating local phone service in California and 21 other states. AT&T; also becomes the nation's largest provider of high-speed Internet access and gains full control of Cingular Wireless, the country's biggest cellphone company, which was 40% owned by Atlanta-based BellSouth.
"AT&T; will be an engine for innovation, competition and growth for our customers at home and abroad," AT&T; Chairman and Chief Executive Edward E. Whitacre Jr. said in a statement. "We can't wait to show people what the new AT&T; can do."
But consumer groups fear exactly that.
Worried that the enormous new AT&T; will approach the reach of the old Ma Bell monopoly -- broken up in 1984 by the federal government -- public interest advocates and some key Democrats demanded regulatory restrictions to prevent the company from using its new market power to bully competitors and drive up prices.
Although the Justice Department unconditionally approved the deal in October, unusual circumstances gave the two Democrats on the Republican-controlled Federal Communications Commission leverage to hold up final regulatory approval until AT&T; made the concessions. Desperate to close the deal by the end of the year, AT&T; caved in to the commissioners' demands late Thursday.
The FCC approved the transaction 4 to 0 on Friday, removing the last regulatory hurdle to the takeover of the nation's third-largest phone company by the largest. The deal formally closed shortly afterward.
"This is a historic merger and I think it merits historic conditions," said FCC Commissioner Jonathan S. Adelstein, who with fellow Democrat Michael J. Copps forced AT&T;'s hand.
AT&T;'s most significant concessions were to provide high-speed Internet access to customers for $19.95 a month without requiring them to purchase phone or other services; to lower and freeze for four years the fees it charges other phone companies to use its lines; to sell some of its wireless spectrum to promote competition for high-speed Internet access; and to treat all Internet content equally as it travels over its lines.
Those conditions came on top of earlier AT&T; pledges to offer broadband service for $10 a month to customers with AT&T; phone service, give free high-speed modems to customers now using dial-up service and to install at least 30% of its new broadband lines in rural and low-income areas.
Natalie Billingsley, a supervisor with the California Public Utilities Commission's Division of Ratepayer Advocates, which advocates for consumer interests, said the new concessions improved the outlook for AT&T; and BellSouth customers. But she said consumers would have been better off if the merger had not been approved and expressed skepticism that customer service would improve.
"You hope that service will improve, but it hasn't been seen with prior mergers," she said.
AT&T;'s foremost concession Thursday was its promise that for two years it would not charge websites for higher-speed delivery of video or other content over its Internet lines. Such nondiscriminatory treatment of data is known as "network neutrality" and has become a politically charged issue.
AT&T; and other major high-speed Internet providers successfully lobbied to stop Congress from enacting such nondiscrimination regulations this year. The telecommunications companies said they needed the ability to charge Internet giants such as Google Inc. and Amazon.com Inc. for preferential treatment of data-heavy content to recoup the cost of building new high-speed networks.
Big Internet companies, backed by thousands of online activists, contended that the charges would amount to toll lanes on the Internet that would squelch innovation and free speech.
FCC Commissioners Adelstein and Copps took up their cause and forced AT&T; to become the first telecommunications company to voluntarily agree not to sell or provide "any service that privileges, degrades or prioritizes" data over its high-speed Internet lines "based on its source, ownership or destination."
"We have taken steps that will preserve and encourage the truly transformative openness and power of the Internet," Copps said.
AT&T;'s decision to agree to the network neutrality restrictions could be a milestone in Internet history, said Timothy Wu, a law professor at Columbia University and co-author of the 2006 book "Who Controls the Internet?"
"You have the nation's now-largest broadband carrier basically agreeing to the basic standards of network neutrality," he said. "That will set the rules of the game going forward."
Paul Misener, vice president for global public policy at Amazon.com, said the issue was important for his company's customers.
"We want to ensure that there aren't intermediaries that affect how well we can serve our customers," he said. "Every AT&T; customer who is an Amazon customer will now be able to get our services."
AT&T;'s agreement on network neutrality should provide an impetus for Congress or the FCC to apply it to all Internet service providers, Misener said. Rep. Edward J. Markey (D-Mass.), a strong supporter of network neutrality who will chair a key telecommunications subcommittee in the new Democratic-controlled Congress, said Friday that he hoped to use the AT&T; agreement as the basis for legislation in 2007.
But FCC Chairman Kevin J. Martin and fellow Republican Deborah Taylor Tate sharply criticized the network neutrality provisions in a joint statement Friday as unnecessary and a potential regulatory hindrance to the deployment of new high-speed Internet lines.
"The conditions regarding net neutrality have very little to do with the merger at hand and very well may cause greater problems than the speculative problems they seek to address," Martin and Tate said. Although AT&T; was free to voluntarily agree to the condition, Martin and Tate said they would not support extending it to all Internet service providers.
Normally it would be difficult for the FCC's two Democrats to dictate terms to the three Republicans. But Republican Commissioner Robert M. McDowell, who joined the FCC in June, did not participate in the AT&T-BellSouth; deliberations because he had previously worked for an association of smaller phone companies that opposed the deal.
McDowell's recusal gave Adelstein and Copps unusual leverage. With negotiations at an impasse this month, Martin tried to force McDowell into the process to break the tie. Although the FCC's general counsel ruled that McDowell could vote on the deal without violating ethics guidelines, McDowell disagreed last week and stayed out.
"Commissioners Copps and Adelstein clearly got the best possible deal, making a bad merger less bad," said Andrew Jay Schwartzman, president of the Media Access Project, a Washington-based public policy law firm.
Mark Cooper, director of research for the Consumer Federation of America, said the network neutrality provisions were the most important and worth holding out for.
"Competition in the Internet space is what consumers really benefited from in the last decade. That's what they're threatening to destroy," he said of AT&T.; "We're fighting hard to preserve that consumer-friendly environment."
Times staff writer Alana Semuels contributed to this report.