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CORRECTION: Merger Trend Rings a Bell for Telecom Services

Posted on: Wednesday, 9 February 2005, 18:00 CST

Feb. 7--The story slugged HO-TELECOM-MRGR, filed by Knight Ridder/Tribune Business News for Feb. 7, contained an error in the fifth paragraph from the bottom of the text. The sentence should say that if the SBC-AT&T merger is approved, it would overtake Verizon, which is the biggest telecom provider in the United States.

Please delete the previous version of the story and use the following corrected one.

Merger trend rings a bell for telecom services

By John C. Roper

Houston Chronicle

Feb. 7--When SBC bought Pacific Telesis in 1997, it marked the first time a Baby Bell had purchased one of its siblings.

Last week's announcement by SBC that it plans to buy AT&T, its former parent, has even grander implications: It signals the return to an era where consumers have fewer companies to choose from when hunting for the telecom services they expect.

Analysts predict only a few mega-telecommunications companies like SBC, Verizon and cable giant Comcast will dominate the market. From those, consumers will choose all of their many telecommunications needs.

That's a far cry from the system created in 1984, from which seven regional Bell companies emerged along with competition in the long-distance business.

But that was a time when, other than telephones, basic utilities such as gas, water and electricity were the only services typically purchased for American households.

Technology, along with a 1996 deregulation law, can be credited or blamed for the reuniting of the Bells.

Today, homes are commonly packed with high-speed Internet connections, cell phones, wireless networks and digital television services, the number of households with land line phones is actually decreasing, and BellSouth is the last true Baby Bell left standing.

Because the market demands the industry provide all of those services, telecom companies are seeking mergers, acquisitions and partnerships to fill the necessary gaps to do so.

The gaps include services not currently offered by some companies, such as video or wireless services. The mergers are also expected to bring cost savings.

"In terms of stability and the friendly old phone company that existed for years, it has to be a little bit worrisome for those consumers who were used to them," said Rob Rich, executive vice president of telecom research for the Yankee Group in Boston. "Whether consumers realize it or not, this has been going on for years."

The breakup of AT&T was the beginning of the end of the monopoly popularly known as Ma Bell. At the time, AT&T had roughly 1 million employees and was easily the largest company in the world. It controlled virtually all of the nation's local and long-distance services. The federally ordered breakup unleashed a wave of deregulation and market competition in favor of customers having more choice in equipment and services.

And it spawned 22 local telephone companies that were formed into seven roughly equally sized regional Bell telephone businesses referred to as the Baby Bells.

At its roots, the breakup required AT&T to provide long-distance services and equipment manufacturing and sales, and the Baby Bells to stick with local telephone service.

Importantly, it created long-distance competition as the regional Bells were ordered to provide equal access to their circuits for all long-distance carriers, including MCI and Sprint. Rates fell.

Tracing the family tree of the Baby Bells is an arduous task. After implementation of the 1996 Telecommunications Act, which allowed regional Bells to compete in long-distance, a flurry of mergers and acquisitions began to reunite them.

San Antonio-based SBC is a combination of three Baby Bells: Southwestern Bell, Ameritech and Pacific Telesis. Verizon gets its roots from the union of Bell Atlantic and Nynex as well as independent telecom giant GTE. US West became part of Qwest Communications.

BellSouth has explored mergers -- some argue it missed a big opportunity by not acquiring AT&T itself -- but has so far shunned them. It remains the only Baby Bell that still operates like a phone company, as it largely sticks to its original region in the Southern United States with its land line operations.

"BellSouth has never felt that we needed to get big for the sake of being big," said Jeff Battcher, a BellSouth spokesman who has been with the company for 15 years. "We like the position we're in."

"In terms of a true-to-character Baby Bell, it will be the only one," Rich said.

But BellSouth also owns 40 percent of Cingular Wireless, the nation's largest wireless carrier. The rest is owned by SBC, which, with the addition of AT&T's network, means it will soon compete with BellSouth in its own back yard for long-distance and Internet services.

Independent telecom analyst Jeff Kagan predicts there will be many mergers in the next five years, but he believes BellSouth won't be a participant.

"I don't think they need to do anything," Kagan said. "The size of their market stays constant; BellSouth is not a company that's struggling."

BellSouth, based in Atlanta, can attribute much of its success to the location of its operations, which includes Georgia, North Carolina and Florida.

The South grew 17.3 percent in the last decade, according to the most recent census, and continues to be one of the fastest growing regions in the country.

BellSouth supplies its growing customer base with local and long-distance phone service, broadband Internet and, through a partnership with DirecTV, satellite television.

Kagan said BellSouth doesn't have to be big, but it and others need to be able to provide telecom's triple play of services: wireless, broadband Internet and video.

If the SBC-AT&T merger is approved some time next year as expected, it will overtake Verizon, the biggest telecom provider in the United States.

MCI is the last best option for Verizon to purchase to place it on an even keel with SBC. MCI was the first company to compete with AT&T after deregulation.

Qwest has lagged the other former Baby Bells but now is reportedly pursuing MCI for around $6 billion to acquire its nationwide network. Analysts say the move could kick-start a bidding war with Verizon over MCI or could cause Verizon to seek out other acquisitions to bolster its market position.

Rich predicts that, as the industry consolidates, there will be less price competition and more battles over the types of services offered, which he says will be bundled together at discount prices.

"The good news for those consumers interested in bundles is, the surviving companies will be more capable of delivering that portfolio," Rich said.

PHONE HISTORY

--1876: The telephone is invented by Alexander Graham Bell, founder of the company that would become AT&T.

AT&T becomes the parent of the Bell System. -- 1879: Galveston gets its first telephone exchange under the Bell name.

--1920: Southwestern Telegraph and Telephone Co. is renamed Southwestern Bell Telephone Co., operating in Texas, Arkansas, Kansas, Missouri and Oklahoma.

--1929: Southwestern Bell officially opens Houston offices.

--1984: AT&T's Bell System is broken up into seven companies. Southwestern Bell Telephone Co. becomes a subsidiary of Southwestern Bell Corp.

--1995: Southwestern Bell Corp. is renamed SBC Communications.

--2002: The Southwestern Bell brand is retired.

--2004: AT&T announces it will leave the traditional consumer phone business.

--2005: SBC agrees to acquire AT&T. San Antonio-based SBC employs 166,000 people, with 7,158 in Houston.

Sources: SBC, AT&T

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(c) 2005, Houston Chronicle. Distributed by Knight Ridder/Tribune Business News. For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints@krtinfo.com.

T, SBC, VZ, CMCSK, MCIP, FON, Q,

Source: Houston Chronicle

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