THE ARTICLE:Scary Splice
A new round of mergers reflects big phone companies' fears of
competition. But it's coming anyway, through the Internet, bringing
lower rates for callers
By JOSHUA COOPER RAMO
erhaps you saw Ivan Seidenberg back in the 1960s when he got his start
working for New York Telephone. Those were the good old days of
telecommunications, when "phone company" and "AT&T" were
synonyms. Interstate calls cost a small fortune. Copper wires, pioneered by
Alexander Graham Bell in 1876, were still state of the art. And Seidenberg was
the guy you might have spotted crawling into manholes in New York City and
cheerfully splicing phone lines together deep underground--peeling back the
rubber coating on the finger-thick wires, laying the cable on the splicer and then
gently pressing the copper wires together. He made a living wage; they called
him a splicer's assistant.
Last year Seidenberg made $8.5 million in salary and bonus. Letters that spooled
from the fax in his office at Bell Atlantic generally addressed him as "Dear Vice
Chairman." For the past half decade, Seidenberg, 51, has been working to make
that copper sing and dance with stuff no one could have dreamed of in
1966--video, for instance, or 3-D Web pages. He is also making that copper
work closely with its successor: hair-thin fiber-optic cables that offer vastly
expanded speed and capacity--which translates to consumer value and, he hopes,
corporate profit. Seidenberg, who oversaw NYNEX's merger with Bell Atlantic
two years ago, has risen to the top not because he knows how to splice phone
lines but because he knows how to splice phone companies.
Last week the CEO proposed his most spectacular link-up yet: a plan to merge
$70 billion Bell Atlantic (which serves roughly 40 million customers in 13 states)
with GTE, a $52 billion company with some 21 million widely scattered
customers. Earlier in the week AT&T had announced a multibillion-dollar joint
venture with British Telecom. Driven by a violent reworking of the competitive
and technological landscape, phone giants were embracing one another mostly
out of mutual fear and defensiveness.
The stimulus for all this furious merging is the growth of competition from
nontelephone companies. A decade ago, most Americans picked up their phones
to hear a dial tone linking them to one of the Baby Bell companies. But in recent
years that monopoly has slipped away. And in the eyes of traditional telecom
bosses, the antidote is conglomeration, a kind of circle-the-wagons strategy they
hope can hold off competition's inevitable charge. The approach has roots in an
earlier boom time. In the 1920s the nation's railroad firms consolidated in a vain
attempt to stave off competition from cars. The phone companies--which think a
large customer base will make it cheaper to develop and sell new
services--believe this time will be different.
Ironically, much of this consolidation is the result of the 1996
Telecommunications Act, a law that purported to stop this kind of customer
hoarding. It hasn't worked. Says Senator John McCain: "The FCC's obfuscation
and delay have blocked competition, so when companies can't get into each
other's businesses, they buy in." Is there any chance of a federal rewrite to fix
the problems? Says McCain: "The horse has left the barn, which I deeply regret."
While the 1996 Act did touch off this buyout binge, it also allowed other
competitors, including cable-TV firms, to enter the business. And on Wall Street,
the big phone mergers are now regarded with skepticism (and some concern that
Washington will intervene). Both GTE and Bell Atlantic stocks slipped last week.
AT&T--which took a hit after announcing a merger with TCI--ticked up after
the British Telecom deal.
This is not, of course, simply a story of business combinations. The Internet
plays a leading role as well, providing the technology that makes competition
possible. The relevant hocus-pocus is the "Internet protocol," which is not the
title of a Robert Ludlum novel but is rather a geeky delight that sits at the heart
of the Web and e-mail revolution. Internet protocol (generally called IP) is a
language computers use to talk to one another: a hyperefficient chatter that lets
phone-company machines banter by sending digital data "packets" back and
forth. These packages can contain anything--a frame of video, a few lines of a
fax or a split second of conversation. The computers don't care what kind of data
they are moving, which makes for a faster, cheaper way to send information.
Like letters at the post office, each packet is individually addressed. IP tells the
network how to read the packets and where to send them. Unlike a traditional
phone call, which sets up a circuit between two phones (think of the 1930s
operator plugging wires into jacks), IP allows phone carriers simply to throw the
packets onto a network, where they will be sorted and delivered by any one of
thousands of machines (called routers), just as if they were postcards at a post
office.
And though IP telephony uses Internet standards, it doesn't generally use the
Internet itself. Instead it typically runs on private, superfast networks that deliver
the most speed at the least cost from IP-data traffic. Some companies--like
International Discount Telecommunications--do offer telephone service over the
Internet, posing yet another threat to traditional phone giants. In two years, IDT
has gained a million customers (who do not, by the way, need to make calls
through a computer; a regular phone works fine).
These fast, cheap networks are rewriting what used to be the first commandment
of telecommunications: Thou shalt be huge. No phone company now has to invest
billions in an expensive network. Instead it can just piggyback on other folks'
networks, which have excess capacity to rent. Some upstarts are building
networks of their own. Says Joseph Nacchio, CEO of Qwest, a telecom upstart
based in Denver: "All the old reasons for scale are gone." Nacchio, who left the
No. 3 slot at AT&T to run Qwest, compares the latest round of mergers to "an
oligarchy buying a monopoly." The future, he predicts, will bring a more
pluralistic, competitive system.
That should be good for consumer service and savings. Even Bell Atlantic's
Seidenberg has said, to FORTUNE magazine, that he foresees a world where,
rather than pay for phone calls by the minute, "people will in effect just pay a
subscription rate to have access to a network." And while all-you-can-talk (or
watch, or surf) lines could be a dream for consumers, they will be a nightmare
for the mega-Bells, which must add new subscribers faster than they lose revenue
to new competitors and pricing pressures. Some firms, like AT&T, hope to find
lucre in international markets, where telephone demand is growing in the triple
digits. Says AT&T CEO C. Michael Armstrong: "Societies are attempting to rise
in the economic order, and multinationals are reaching out to serve them."
It is surely a new world, and the signs are not just global. Even those old New
York manholes where Seidenberg spent his youth are changing. Once threaded
with a few Bell Atlantic cables, they are now knitted by dozens of other "local
loops" from competing firms--proof that at the end of the day, there may be only
one set of guys who are guaranteed to profit in this new telecom world: the cable
splicers.
--Reported by Daniel Eisenberg /New York, Richard Woodbury /Denver and
Bruce van Voorst /Washington |
