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To: rachel who wrote (4647)	6/28/1999 9:31:00 PM
From: Anthony Wong	Read Replies (1) \| Respond to of 11568

Where will telecom stocks go when acquisition mania ends? A conversation with telecom analyst John Bain By Colleen Bazdarich, CBS MarketWatch Last Update: 8:42 PM ET Jun 28, 1999 DALLAS (CBS.MW) -- The telecom world has been buzzing with news of a potential acquisition of U.S. West and Frontier by Qwest. Will they? Should they? Could they? Mergers and acquisitions have had a big impact on telecommunications stocks since the beginning of the year. But analyst John Bain of Hoak Breedlove Wesneski sees potential for trouble as voice-grade traffic going over digital lines takes a bite out of local phone companies' access charges. Bain talked with Colleen Bazdarich of CBS MarketWatch about the Qwest buzz and the future of digital line access. A lot has been going on in telecommunications lately. Which events should investors be watching closely? Bain: Of course there always has been ongoing consolidation and acquisition activity. In telecom stocks this year, there has been phenomenal rush of Internet IPOs that have affected the whole group from time to time. The first part of the year, everything went absolutely crazy on the upside, and now recently the Internet IPOs have had a tougher time. Probably about half of them came out actually trading below their IPO price. But clearly it has been the merger-and-acquisition mania that has been moving stocks around. How do you see the Qwest's (QWST: news, msgs) possible acquisition of US West (USW: news, msgs) and Frontier (FRO: news, msgs) affecting stocks? Bain: I think it will create higher value. The way the market is acting, it appears that there are economies of scale in this business, so scale counts, and also the major players believe that there is a lot to this so-called one-stop-shopping theory where companies are trying to acquire their way into all areas of business. Access charges long-distance companies pay to local carriers just went down last week due to a court order. What affect will this have? Bain: It should help telecom stocks ... long-distance carriers: AT&T (T: news, msgs), MCI WorldCom (WCOM: news, msgs), Sprint (FON: news, msgs), Frontier. What is basically happening is there is going to be cheaper usage charges, offset by higher basic monthly rates. People will be using the service more because it is cheaper. ... There appears to be quite a price-elastic stipulation of demand as prices come down. At the time of the Bell breakup, to make a coast-to-coast call during the first minute during the business day cost 62 cents. You can make that call for a dime today. More companies are offering digital lines to their consumers. Is this a wholly positive prospect for stockholders? Bain: It will generate some more revenue, and presumably it will generate more usage of the system. One of the problems is, with the current technology, digital subscriber lines will not be available to everybody. There are distance limits, and in some cases the configuration of the outside plant, the copper wires, doesn't permit it without some extensive rebuilding. But the telephone companies, I think, are frightened to death of the cable modem companies. If indeed some kind of two-way capacity emerges over the existing coaxial cable plan from the cable TV companies, one assumes it would be fairly easy to add a voice-grade circuit to that as well and take over the whole thing. The cable companies must be frightened to death of the DSL technologies, which should have ability to carry video pictures as well. Is the digital line the next big thing? Bain: They are already available now. I can get one in my home in Texas. But right now there [are] not killer applications, so to speak, that would require a digital subscriber line. I think ... full-motion streaming video, video on demand, videoconferencing -- if a huge ... demand develops for those kind of services that can't be done any other way [there will be a market for that]. What we essentially have got right now with the digital line is a technology that does things that are being done today but does them faster. ... [W]hat I have said to investors is, Is it really going to change your life if you can download a file in 2 milliseconds instead of 20 seconds? You can go out a get a cup of coffee while you are waiting for it to download. There is not a radical change in the functionality. But services like video on demand or full-motion videoconferencing cannot be done with today's copper-wire plans. Could digital lines have any negative effect on stocks? Bain: What is being jeopardized is the access charge based on long-distance carriers. A whole bunch of companies are trying to put voice-grade traffic on some sort of digital capacity. That is not using the regular old dial-up part of the subscriber line but using the Internet-access piece to make phone calls on the Internet itself, which is considered an enhanced service and therefore doesn't have to pay access charges. Access charges are roughly a third of the total revenue of the local phone companies. If, all of sudden, huge amounts of toll traffic starts going over digital services that don't make an access payment to support local service, they could lose revenues. cbs.marketwatch.com