Baby Bells ready to ring in the new year
By John Borland
Staff Writer, CNET News.com
December 29, 1998, 11:30 a.m. PT
year in review The face of the U.S. telecommunications
industry changed more dramatically in 1998 than in any
year since the breakup of Ma Bell, as deregulation and
the Net explosion pushed companies to expand their
traditional operations.
The year opened still reeling following the shocking
announcement that MCI and WorldCom would merge, creating
a new telco powerhouse that would control local, long
distance, and data lines around the world. That deal was
approved mid-year, after MCI shed its Internet assets to satisfy
regulatory concerns in the United States and Europe.
But the transformation of the No. 2 long-distance player proved
to be only the first step in the industry's ongoing makeover.
Do you want to know more?
Read related news
View story in The Big Picture
Go to Message Boards
Search News.com
MCI's chief rival, long distance giant AT&T, decided to make its
own end run into the local phone industry by merging with
cable company Tele-Communications Incorporated. The deal,
which has yet to be approved by regulators, also brings cable
Net access company @Home under AT&T's wing, giving the
long distance company a leg up on its rivals in the race to
bring high bandwidth options into the home.
In the midst of long distance merger madness, local phone
companies made some noise of their own.
SBC Communications, fresh from its earlier acquisition of
Pacific Bell, struck a $69 billion deal to merge with Ameritech.
Bell Atlantic, which already had picked up Nynex, agreed to
join forces with GTE, the country's largest non-Baby Bell local
provider, in its own $71 billion merger.
The two mergers combined would put nearly two-thirds of the
country's local phone lines under the controls of the two new
companies. Regulators are examining the deals closely, and
have already hinted they are skeptical of the Baby Bells'
argument that they need to expand to compete outside their
home markets.
But many analysts say the market is likely headed for even
more consolidation, both internationally and at the local level,
as companies struggle to stay ahead in a newly-competitive
market.
"You're going to continue to see consolidation," said Terry
Barnich, president of the New Paradigm Resources Group, a
Chicago-based telecommunications consulting firm.
"Everybody's striving to have a global footprint. On the national
scene, everyone's striving to have a continental footprint."
Competition slow in coming
Although the face of the telecom industry changed dramatically
this year, much of its core business seemed to move at a
slower pace.
The slew of mergers is one of the clearest signs that Congress'
Telecommunications Act of 1996 is shaking up the industry.
But lawmakers' chief goal--to kick-start competition at all levels
of service--has still been slow to unfold, prompting mutterings
in Washington that the legislation may need revision.
As a part of the 1996 law, legislators offered the big local
phone companies a serious deal. If the Baby Bells would let
competitors into local markets,
offering unbundled services such
as dial tone and operator service
at wholesale rates, the local
companies would finally be
allowed to join the long distance
game.
Nearly three years later, it hasn't
happened. The past year saw the
Baby Bells appeal to state
regulators and, in a few cases, to
the Federal Communications
Commission for permission to
enter the long distance market.
But in most state decisions--and
in every federal
decision--regulators said the
Baby Bells had yet to complete a
checklist of items measuring how
well they have opened
their markets.
This struggle between the
local companies and
regulators--along with
sideline jeers from long
distance companies and alternative local
providers--prompted many court battles, not to mention
bitter rhetoric from both sides, for much of the year.
Baby Bell executives say they are doing their best to
open their markets, and claim competitors are
cherry-picking their most profitable business customers.
On the flip side, long distance companies and smaller
firms trying to break into local markets consistently
accuse the dominant local companies of dragging their
heels in opening their monopolies.
Analysts say both charges contain nuggets of truth.
New local companies are targeting business customers
since they are more profitable, and technically easier to
reach. This combination of factors will likely keep most
residential customers from seeing competition for their
local phone service for some time, analysts add.
But many observers do expect to see the Baby Bells
gradually enter the long distance arena as early as
mid-1999, probably led by Bell Atlantic in New York.
Data uber alles
But while long distance and local telephone companies
quarreled over the still-profitable voice markets, the rest
of the telecommunications marketplace was being
turned on its head.
Data traffic is quickly outstripping the amount of voice
traffic in the nation's communications networks, and will
likely pass up voice next year, analysts say. A recent
Merrill Lynch study forecast that 80 percent of all the
nation's bandwidth will be dedicated to data by the year
2003.
The big telephone companies are painfully aware of this
change. MCI WorldCom vice president John Sidgmore
said in a recent speech that data traffic on his
company's networks is growing by 10 times a year, and
that voice would soon become a "niche" in the
communications industry.
Analysts say WorldCom, though its UUNet subsidiary,
is well-poised to lead the big telcos into the data age.
But the big networks are experiencing strong new
competition from companies like Qwest and Level 3,
who are rolling out their own networks for both voice and
data.
The shift brought about by the explosion of the Internet
is also forcing Washington policymakers to rethink the
deregulation act passed just three years ago. Some
influential legislators have said they would try to reopen
the debate over the Telecommunications Act next year,
in part to bring the legislation closer in line with the
demands of the data era.
"Only three years past the passage of the act, we are
looking a little antiquated now by looking at voice
competition in the local loop," said Lauren Belvin,
Senate Commerce committee general counsel and an
advisor to Senator John McCain, R-Arizona, at a recent
telecommunications policy conference. "It's a much
bigger stakes game now."
One of the most controversial pieces of this issue, the
way regulators will treat high-speed data services like
digital subscriber lines (DSL), will carry over into next
year.
The FCC proposed last fall that the Baby Bell
companies be allowed to offer DSL services directly to
consumers and businesses, only if they also sold the
service at discounted wholesale rates to their
competitors. The Bells also could offer the service
through a separate subsidiary company.
The local companies, which desperately want to offer a
full range of voice and data services, don't like this idea.
Early in December, they petitioned the FCC to allow
them to offer high-speed DSL services directly, joined
by a handful of computer companies who expect
bandwidth increases to drive meatier Internet
applications.
The FCC is scheduled to resolve that issue by the end
of February next year, kicking off what may be another
round of repositioning as the companies high-bandwidth
strategies evolves. |
