Now What? Exploring The AT&T/BellSouth Deal

By Burstein, Dave

Early in December 2006, AT&T swore it couldn’t accept network neutrality, but by the end of the month, the company was saying, “Let’s make a deal.”

That deal made the next-to-last freestanding Baby Bell part of the “new” AT&T (Qwest is, at least as of this writing, still independent). The deal sets an historic precedent by its “striking inclusion of the first strong network neutrality language yet seen in any broadband regulatory device,” according to Tim Wu, a Columbia Law School professor who is playing a key role in a coalition of public interest advocates that is redefining issues in Washington.

Besides accepting net neutrality-at least on paper and to some extent-the AT&T/BellSouth deal also includes additional conditions that should benefit large enterprise buyers: A reduction in AT&T DSl and DS3 special access pricing in many cities; freezes on most special access rates and CLEC connection costs; and FCC fast-track mediation of disputes over special access rates (see sidebar, “Merger Commitments, Questions and Comments”).

The primary challenge, however, remains: less competition makes prices higher. AT&T CFO Rick Lindner likes what he sees. “Pricing in the enterprise market is better,” he said at the Citigroup Entertainment, Media and Telecommunications Conference in Las Vegas on January 9. “We’ve seen improvements versus what our expectations were a year ago.”"Better” pricing for AT&T, of course, means higher costs for AT&T customers.

Fortunately, the aforementioned terms in the merger agreement will help bring down some costs directly, and they may encourage more service providers to get competitive on comparable offerings. That may make this year a good time to look more closely at new access and WAN strategies. For example, can you accelerate your move from frame relay to metro Ethernet- and/or IP-based access connections? Is it time to re-bid your private-line network, or to consider replacing it with an IP-VPN?

While the “new” AT&T may make an eager bidder and stir the pot on enterprise WAN procurements, it promises to have other ramifications as well.

More Reliable Internet Service?

Net neutrality in practice will require maintaining the quality of public Internet service. Enterprise customers can therefore expect more reliability for standard Net connections-something residential and small business DSL customers have come to expect already. In the five years since the notorious days of “DSL Hell,” U.S. broadband networks have grown much more robust, and performance problems much less common. For example, my DSL connection from Verizon has been a rock-solid, nearly 3-Mbps downstream, 768-kbps upstream for two years. It can reliably handle a 384-kbps, corporate- quality videoconference.

Corporate video has been a niche application so far, but this could change as a new generation, accustomed to cameras in their mobile phones and webcams in their portable computers, joins the workforce. Of course, if AT&T “prioritizes” large volumes of video traffic, the quality of all other services could be diminished-but net neutrality protection makes that far less likely.

Of more immediate interest, many corporate locations could save money by swapping out expensive frame and VPN services for ordinary business/consumer DSL service, often carried on the same equipment and outside plant as the frame and VPN links. The quality and reliability will often be comparable. Unless carrier-provided security is critical, there’s little reason to pay a service provider premium prices for VPN.

Choosing a less expensive service, like standard DSL access, also allows redundancy, the best path toward reliability. You can typically have two consumer-grade connections for less than the price of a single VPN termination. For branch offices, that could be AT&T DSL plus any competitor. For teleworkers, get both the cable modem service and the DSL. If you can combine them at the router, you not only have better reliability and redundancy, but higher throughput as well (for more on redundancy for teleworkers, see BCR, January 2007, pp. 10-12).

Are You Ready To Consider Some Different Competitors?

With the “old” AT&T and MCI gone, you need to reach out to other service providers. Fred Knight in BCR January 2007 (p. 2) despairs, “consolidation continues to be the dominant trend among carriers.” But that might make this a very opportune time to listen to a pitch from a new vendor.

The typical WAN services short list a year or two ago might have included only AT&T/SBC, MCI/Verizon and the local Bell, if there was one, that served the corporate headquarters. Today, consider getting bids from Qwest, Level 3 and a national CLEC like EarthLink’s New Edge network.

“We’re very hungry,” said Dick Notebaert, CEO of Qwest, in a recent interview with Jim Barthold of Telecommunications Magazine, adding, “We’re small, [with only] 5 percent national share, and we’re going against people that have double digit shares.”

He also told Barthold, “We’re looking to acquire new customers.” Notebaert’s “we want your business” pitch is timely-and Qwest is not alone in stepping up. Level 3 is also becoming more appealing, as a $500 million reduction in debt just strengthened their balance sheet. The company’s future prospects continue to improve. Warren Buffet has invested, and Wall Street values Level 3 stock at more than $7 billion, suggesting the financial stability that corporate customers seek.

Enterprise customers also might be surprised to learn that EarthLink’s little-known New Edge subsidiary has one of the largest provider footprints in the U.S. Founder Dan Moffat began New Edge in 1999 as a rural DSL provider, but quickly discovered his best customers needed broader coverage. New Edge accommodated that demand by becoming a reseller of circuits from Covad, from all the Bells and from several independents.

Last year, New Edge was acquired by EarthLink. The company can configure and package nationwide networks, and typically has deals that extend your high-volume pricing to harder-to-serve and less- competitive areas.

Cable companies also want market share, and they have extended both voice and high-speed data across nearly their entire footprint. At January’s Consumer Electronics Show (CES), Comcast CEO Brian Roberts projected investing $3 billion over 5 years to serve businesses. A Reuters news story from January CES added that Comcast intends to grow corporate sales from $250 million this year to more than $2 billion in five years. That growth rate will require them to make extra efforts to win customers, and the cablecos may be willing to make the concessions you need.

In New York where I work. Cablevision has a division that for several years has been winning substantial data and voice contracts. Don’t be discouraged if the local cable serves residential neighborhoods and your facilities are in business districts. Most cable companies are experimenting with running or leasing fiber where it’s not economical for them to extend coax.

Fixed wireless is another option, although a decade of false starts has soured many on its prospects. Pay attention now, however, because AT&T will have to sell BellSouth’s 2.5-GHz spectrum, as part of the merger terms. The likely buyer is Craig McCaw’s Clearwire, which already raised over $1 billion from Intel Capital and Motorola, and has an IPO pending.

Clearwire and Sprint are separately building their own WiMAX networks across the country. The international deployment of WiMAX is rapidly driving down equipment costs. Expect both companies to aggressively seek your business before the end of 2007. That’s not just a data network-Sprint is using WiMAX for voice, and the “data” WiMAX can support voice over IP (VOIP).

And don’t discount the ability of the “new” AT&T to rise to the occasion. Brian Washburn, principal analyst-business network services at Current Analysis, suggests your first step. “For businesses nationwide, from small offices to major global enterprises, AT&T is a baseline carrier that everyone should have on their purchasing shortlist,” he said. “Business customers should see whether AT&T can provide them with a doorstep-to-doorstep solution, with the entire network running directly on infrastructure owned by AT&T.”

“As businesses shop around for the best possible package to suit their needs,” he continued, “they should expect other carriers’ plans to match or beat AT&T’s prices, feature richness, service quality, and/or customer service.”

Thinking Like A Telco

While nearly every major corporate network is in the process of moving to IP, many still are connected by frame relay links. AT&T CFO Lindner sees “IP growth so strong it’s replacing the traditional frame services.”

Since IP is the growth area, Lindner said AT&T will concentrate its efforts on IP cost reduction. Frame relay customers can expect little investment in their services, and hence few improvements in price/performance. One particularly attractive alternative is metro Ethernet over bonded DSL for connections of 2-15 Mbps. BellSouth has pioneered this service, which they describe on their website as a “less expensive and more reliable a\lternative to private lines.” Working with familiar Ethernet connections also is likely to reduce your administrative costs (also see BCR, October 2006, pp. 20-25).

Whatever new choices you make, think like a telco, and go with standards. Verizon resists being locked into a proprietary vendor whenever possible, and so should you. The savings from being able to switch vendors can be enormous over time. Learn from the ‘Net, and give preference to open standards.

Working The Deal

Some reductions in special access pricing were included in the merger conditions, and many existing deals were protected from price increases. Knowing the choices under the arcane regulations might point to possible savings, whether you buy directly from AT&T or indirectly when you buy from a CLEC.

The AT&T agreement includes discounts on DSl and DS 3 special access lines, noted Brian Moir, an attorney who represents large telecom users in Washington. “Step one is to identify your circuits in the AT&T states and what rules apply,” said Moir. “The savings can be large for AT&T customers. Verizon/old MCI, Sprint LD and Qwest customers might look for some concessions, especially when considering AT&T/ BellSouth in-region circuits.”

“Since non-AT&T customers might be able to save money now by purchasing its DSl and DS3 circuits directly from AT&T,” he continued, “Verizon may discover some flexibility if pushed.”

Don’t count your chickens before they are hatched, however, warned Jessica Zufolo, senior policy director for telecommunications and technology at Medley Global Advisors. “A huge cloud of litigation is hovering over this issue,” she said, “so we don’t know how it will play out. Everything seems positive, but look closer and you’ll find unknowns.”

Zufolo pointed out that some of the special access concessions are available to most customers but exclude Qwest and other carrier resellers, who have already suggested they will test the rules in court. Commissioners Kevin Martin and Deborah Taylor Tate, in their statements, disagreed with much of the deal, which they wanted approved without any conditions. When specific tariffs that carry out the deal come to the FCC, Martin, Tate and fellow Republican Robert McDowell will have to approve the terms and could thereby revise die specifics.

Conclusion

The climate of opinion in DC has changed, at least enough so that the Bells couldn’t muscle through a new telecom act. Getting the AT&T/BellSouth merger approved, ended up requiring a deal that AT&T had dismissed as unthinkable only a month before. How did this happen, after the Bells have been winning at the FCC and in Congress for several years now?

One factor is that the fight for the open Internet brought new actors to DC. Consumer advocates were joined by “new thinking” intellectuals including Wu at Columbia, Dave Isenberg at Harvard/ Berkman, and Larry Lessig at Stanford. These folks, and now key officials-including Commissioners Michael Copps and Jonathan Adelstein, who approved the merger terms-are dedicated to competition in the enterprise market. Perhaps it’s time for some “new thinking” at your firm as well

Merger Commitments, Questions and Comments

Want to mull over in more detail what the “new” AT&T is promising? You can read the Merger Commitments for yourself; they are available online at www. fcc.gov/ATT-FINALMergerCommitmentsl2- 28.pdf. I read them first when they were released, December 28, looking for breaking news, and I returned to the originals for this article, seeking passages that apply to large users as well as the more discussed net neutrality issue.

Net neutrality excerpt: “AT&T/ BellSouth also commits that it will maintain a neutral network and neutral routing in its wireline broadband Internet access service. This commitment shall be satisfied by AT&T/BellSouth’s agreement not to provide or to sell to Internet content, application or service providers, including those affiliated with AT&T/BellSouth, any service that privileges, degrades or prioritizes any packet transmitted over AT&T/ BellSouth’s wireline broadband Internet access service based on its source, ownership or destination. This commitment shall apply to AT&T/ BellSouth’s wireline broadband Internet access service from the network side of the customer premise equipment up to and including the Internet Exchange Point closest to the customer’s premise.”

Comment: The commitment here, to remain neutral out to the Internet Exchange peering point (DCP), is crucial. The first important exception, in the next excerpt, allows AT&T to offer higher-quality WN service.

Excerpt continues: “This commitment does not apply to AT&T/ BellSouth’s enterprise managed IP services.”

Comment: This means AT&T could, and probably will, give priority to VPN customers. Will that priority yield substantially better performance in practice, if non-priority service is also high quality? Kevin Martin has made clear he expects regular service to be reliable, saying, “If you sell 3 megabits, that’s what you should deliver.” Martin added that the government, perhaps the FTC, should enforce the law against false advertising as an indirect way to persuade companies like AT&T to maintain quality.

Excerpt continues: “This commitment also does not apply to AT&T/ BellSouth’s Internet Protocol television (IPTV) service.”

Comment: A potentially big loophole for prioritizing more- profitable video traffic. Net neutrality advocates in DC are confident AT&T won’t take advantage of this, but others, including me, fear AT&T could use their “IPTV” network and routers to do what is prohibited above. There’s no technical reason AT&T couldn’t route whatever traffic they wanted to prioritize over “IPTV” routers, then claim that it is “IPTV” and therefore exempt.

UNE Excerpt: “The AT&T and BellSouth ILECs shall continue to offer and shall not seek any increase in stateapproved rates for UNEs or collocation that are in effect as of the Merger Closing Date.”

Comment: A UNE-L is the basic copper line that connects to your branch office and to most residences. Such Unbundled Network Elements are crucial to every CLEC, and this should prevent AT&T raising rates to put CLECs out of business.

DS1 and DS3 Excerpt: “AT&T/BellSouth shall not increase the rates paid by existing customers (as of the Merger Closing Date) of DSl and DS3 local private Une services.”

Comment: This is a protective rate freeze for existing customers.

Price Cut Excerpt: “In areas within the AT&T/BellSouth in-region territory where an AT&T/BellSouth ILEC has obtained Phase II pricing flexibility…AT&T/BellSouth also will reduce by 15 percent the rates.”

Comment: This may reduce your rates in many cities if you use AT&T as your carrier. If you use a competitor like Verizon/MCI, you can threaten to switch to get new AT&T rates and negotiate from there.

Rate Dispute Excerpt: “AT&T/BellSouth will not oppose any request by a purchaser of interstate special access services for mediation by Commission staff of disputes relating to AT&T/BellSouth’s compliance.. .nor shall AT&T/ BellSouth oppose any request that such disputes be accepted by the Commission onto the Accelerated Docket.”

Comment: You never want a dispute to go as far as the FCC. But if it does, this simplifies the process and accelerates a decision.

Minimum Annual Revenue Commitments Excerpt: “Within 14 days of the Merger Closing Date, the AT&T/BellSouth ILECs will give notice to customers of AT&T/ BellSouth with interstate pricing flexibility contracts that provide for a MARC that varies over the life of the contract that, within 45 days of such notice, customers may elect to freeze, for the remaining term of such pricing flexibility contract, the MARC in effect as of the Merger Closing Date.”

Comment: Minimum commitments make it harder for customers to switch part of their purchasing to AT&T competitors. The Commissioners insisted on provisions that reduce customer minimums and give you more flexibility

Maybe the “new” AT&T will rise to the competitive occasion

Companies Mentioned In This Article

AT&T (www.att.com)

Cablevision (www.cablevision.com)

Clearwire (www.clearwire)

Comcast (www.comcast.com)

Covad (www.covad.com)

Earthlink (www.earthlink.com)

Intel capital (www.intel.com/capital)

Level 3 (www.level3.com)

Motorola (www.motorola.com)

New Edge Networks (newedgnetworks.com)

Qwest (www.qwest.com)

Sprint (www.sprint.com)

Verizon (www.verizon.com)

Dave Burstein is editor of DSL Prime, www.dslprime.com, and writes about broadband and television over IP. He can be reached at daveb@DSLprime.com

Copyright CMP Media LLC Feb 2007

(c) 2007 Business Communications Review. Provided by ProQuest Information and Learning. All rights Reserved.