Why A Big Deal Could Be A Bad Deal - For SBC
By Carol Wilson, with Kathleen Cholewka and Louis Trager
Inter@ctive Week May 18, 1998
zdnet.com
Who wins when one giant local phone company buys
another giant local phone company? Very possibly, no
one. At least that's one outcome of last week's
announced acquisition of Ameritech Corp. by SBC
Communications Inc. As contradictory as it may sound,
the deal that would give a single company control of one-third of U.S. phone lines could limit consumer choice, slow the use of new data technology in the phone network and thereby dampen sales of newer,faster computers. It could even make SBC more vulnerable to technologically agile competitors.
Of course, the merger still must pass muster with the
Federal Communications Commission. Many consider
federal approval unlikely since the prospect of
recreating the Bell System is sounding alarms from the
halls of Congress to the streets of Chicago, where the
Rev. Jesse Jackson and his Rainbow Coalition called
on the Clinton administration to move to stop
megamergers among telephone companies.
The greatest concern is that allowing SBC to absorb
Ameritech and its five Midwestern states will trigger a
chain reaction of mergers that will leave the country
with only a few very large local phone service
providers.
If the deal goes through, a domino effect is likely. "Bell
Atlantic [Corp.] and BellSouth [Corp.] probably will
discuss a merger," figured Brian Adamik, senior vice
president at The Yankee Group. "The considerations
will now change radically for AT&T Corp. There's
going to have to be a change in the way regulators look
at a merger between AT&T and a Bell."
A combined Ameritech and SBC had 1997 revenue of
$41 billion, compared with a combined MCI
Communications Corp.-WorldCom Inc. revenue of
$26 billion, Bell Atlantic with $30 billion or BellSouth
with $20 billion. Only AT&T's revenue would exceed
the new partners at $51 billion in 1997.
"This merger would give SBC dominion over one-third
of the [phone lines] in the U.S.," said Dan Taylor of
The Aberdeen Group Inc. "SBC would have 37
[million] to 40 million lines if the merger goes through."
Now The Bad News
That kind of concentration of power will give a new
larger entity disproportionate control over how fast
technology reaches the mass market, according to
Victor Schnee, founder of Probe Research Inc. and the
man who predicted SBC would take over Ameritech in
an April report titled "Mega Strategies: Winning the
Computer-Telecom War."
That prediction was made based not on insider
information, but on 22 years of study of Bell company
behavior that produced what Schnee called the "genetic
code" of the Bells. Schnee and colleague Allan Tumilillo concluded that the big losers as the Bells get bigger are the computer companies that need faster communications networks if they are to continue driving up sales of bigger and faster PCs.
"Popping up on the radar screen of the Bell companies is the technology threat of the Internet," Schnee said. "The Bells are driven to a situation where in order to address the future, they need to get the industry into as small and tight a cartel as is possible. Once a company has mammoth power, it can manage the speed with which new technology - like faster access systems - can move into the network."
The need to "administer" new technologies and network change is fundamental behavior to a Bell company - part of its "genetic code," according to Schnee. A prime example of this behavior was the way the Bells offered Integrated Services Digital Network, a technology available 13 years ago, he said, but still not in widespread use.
That does not bode well for deploying new, higher-speed Digital Subscriber Line technology. Such
digital lines can carry data at speeds 30 or more times
as fast as today's fastest conventional modems.
Computer makers are counting on such fast Net access
to spur demand for more high-performance machines
on corporate and personal desktops.
Which means companies such as Compaq Computer
Corp. should be wary of phone company
consolidation. But, Schnee added, the phone
companies have convinced the computer industry, led
by Microsoft Corp. and Compaq, that they can
generate a lot of revenue selling their computer
software and hardware into telephone networks. Their
status as potentially large customers blunts any action
the computer companies might mount against them.
Based on the FCC's rulings to date, the Bells know
exactly what's required to get into long-distance,
Schnee said. They will open up their local markets
when they're ready - and probably immediately
swallow up some long-distance companies to further
enhance the cartel. He called the result the NeoBell
System.
"These guys are not dumb," Schnee said. "SBC, in
particular, has shown it is methodical about appraising
investment opportunities, but once that's done, the
company acts decisively."
Many industry analysts believe, however, that the Bell companies are dumb when it comes to understanding the Internet. To date, they have been slow to recognize how fast companies are moving to Internet Protocol (IP)-based networks, initially for data but ultimately for voice as well. Expanding the base of aging, if still profitable, circuit-switched voice networks makes less sense than aggressively migrating those networks toward the IP world.
The merger would absorb corporate energy and dilute
marketing efforts at a critical time. Numerous smaller
companies are attacking local phone companies in
every major metropolitan area, and new emerging
potential giants such as Level 3 Communications Inc.
and Qwest Communications International Inc. are
building new coast-to-coast networks that use only
state-of-the-art technology and are designed from the ground up to support high-speed data services.
Developing voice-over-IP technology will enable those
networks also to capture voice services, particularly for
businesses that like the idea of a single integrated
network service provider. Qwest already offers a
high-quality voice service using Internet technology, in
nine cities.
By contrast, the phone company networks include
several generations of technology, most of which were
created to support voice services handled primarily by
circuit switches, the huge, proprietary computers that
direct calls and provide enhanced services. Where the
telephone companies offer data services, such as frame
relay, they usually use network overlays - adding
network equipment that operates over the physical lines
but isn't logically tied into the voice network.
"You're certainly tied down in recovering that [existing]
network investment, and that hamstrings you," said
Terence Barnich, a consultant at New Paradigm
Resources Inc. and former chairman of the Illinois
Commerce Commission.
Where SBC is likely to be hurt is in its revenue from
small to midsized businesses, the target market for
many of the competitive local exchange carriers
(CLECs). While a huge SBC chases big business and
butts heads with WorldCom and AT&T, smaller firms
are likely to be disenchanted with impersonal service.
Opportunity For CLECs
"On a customer-by-customer basis, this is great news
for us," said Bob Taylor, president of Focal
Communications Corp., a CLEC operating in Chicago
and New York. "How are customers in Chicago and
Detroit going to be better served out of a company in
San Antonio? We have been able to create a niche by
providing better service. We can prove we provide
better service than Ameritech - this just makes it even
more appealing."
But Taylor said he believes his company's ability to get
the connections it needs from the new SBC will also be
damaged. "As these companies get bigger, they
become less responsive and they become slower in the
actions necessary to facilitate the CLECs," he said.
SBC is particularly known for foot-dragging, according
to Taylor and other CLEC officials.
Royce Holland, president and chief executive officer of
Allegiance Telecom Inc., is also licking his chops at the
prospects for his firm. The company now operates in
Dallas, providing communications services to
businesses, and plans to be in Chicago, Los Angeles
and San Francisco by year's end.
"The only thing slower than one monopoly is two
monopolies put together," he said.
But Holland said the combined SBC-Ameritech will be
held to conditions at least as tough as those given Bell
Atlantic when it acquired Nynex Corp. Those
conditions already bore fruit, he said, when the New
York Public Service Commission came up with
stringent rules for Bell Atlantic to offer electronic
interfaces into its operations systems before getting
state approval to enter long-distance. This summer, an
independent third party plans to test what Bell Atlantic
has developed.
"By the time this deal has gone through the states and
the antitrust people and reaches the FCC, we will have
completed the course in New York and we'll be a lot
smarter," Holland said. "We'll know exactly what to
push for."
"The merger could be good news for the CLECs," agreed Greg Cline, principal analyst for Internet
infrastructure research at Cahners Business
Information's In-Stat. "To get federal approval, SBC is going to have to be very pro-competition. They'll have
to open their markets even more."
SBC has pledged to go into other local markets around
the country and generate competition for other Bells as
part of this merger deal.
But business and residential customers are not likely to
benefit much, if at all, from such a merger. Potential
competition between SBC and Ameritech will be
stopped, and the combined size of the company and
the intransigence of SBC in allowing potential rivals to
connect to its network will make it harder for
innovation and price-cutting to emerge.
Immediately swept aside in the merger will be
head-to-head battles once planned between Ameritech
and SBC in Chicago and St. Louis.
Despite the burgeoning competition from new rivals,
however, there is no one posing a real threat to any of
the Bells in the local market, Schnee said.
"Every one of these companies wants to be the next
MCI. That's the model they have in mind," he said. "But
if you took all their business plans today and combined
them, it wouldn't equal SBC or Bell Atlantic or
BellSouth."
If SBC moves quickly to open key local markets and
resell its local facilities, there will still be little incentive
to upgrade those local facilities until there is
overwhelming pent-up demand that can guarantee
instant return on investment.
"What are they buying? Old network," said Bill White, a spokesman at Sprint Corp. "But they still have that
control of the end user. The question is, what are they
going to do to upgrade their network to the network of
the future?"
"Many people think this is the dance of the dinosaurs,"
said Adamik of The Yankee Group. "That's the wild
card in this whole thing. [But] owning the wire is the
key thing today - whether it's antiquated local loop or
fiber."
For that control to rest with SBC - not known for its
customer focus - could be problematic.
SBC can be reached at www.sbc.com
The Yankee Group can be reached at
www.yankeegroup.com
Ameritech can be reached at www.ameritech.com
AT&T can be reached at www.att.com
Probe Research can be reached at www.probe.com
Compaq can be reached at www.compaq.com
The FCC can be reached at www.fcc.gov
Qwest cwww.qwest.net
New Paradigm can be reached at www.alts.com
WorldCom can be reached at www.wcom.com
Bell Atlantic can be reached at www.bellatlantic.com
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