Home & Office

My analysis: what will the AT&T-BellSouth merger mean?

 That's AT&T CEO Ed Whitacre, superimposed on a Google Earth map of territory that for the most part,will fall under his company's domain if a blockbuster acquisition of BellSouth goes through.We have lots of details here, as well as my FAQ-style explanation and vision of what is going to happen, how, and why.
Written by Russell Shaw, Contributor

That's AT&T CEO Ed Whitacre, superimposed on a Google Earth map of territory that for the most part,will fall under his company's domain if a blockbuster acquisition of BellSouth goes through.

We have lots of details here, as well as my FAQ-style explanation and vision of what is going to happen, how, and why. 

AT&T-which is still digesting its conversion from SBC after what was then SBC formally acquired "the old" AT&T last fall- said late Sunday afternoon it is set to purchase Atlanta-based telecommunications giant BellSouth.

The deal is expected to reach $67 billion. Here's the official announcement.

Frankly, I am not surprised. The two companies have been jointly operating Cingular Wireless for years now, and the heritage of both companies as predominantly Sunbelt-oriented exchange carriers gives them a track record of understanding the communications infrastructure and opportunities of the U.S.' southern tier from California to Florida.

Not that the new layout would represent a solid bloc of states- Qwest will for the time being, remain the one ILEC (Incumbent Local Exchange Carrier) with a major multi-state presence. 

Here's a FAQ of what I see are the key issues emanating from this merger announcement:

Q. Will this merger be approved? 

A. Given their friendliness toward big telecom, the Bush Administration and the Federal Communications Commission are likely to let the deal sail through with only minor revisions. 

Q. What does this mean for "net neutrality"?

A. Ed Whitacre is both the driving force and the CEO of the acquirer. He is on record at favoring a multi-tiered Internet where large broadband content vendors (such as competing VoIP providers) pay for the privileges of fast and efficient network transport. Although the Democratic minority on the FCC is likely to raise some major concerns, they are, after all, not in charge. Given that political reality, I don't see the Feds pushing the wholescale abandonment of those goals as a pre-condition to merger approval. 

Q. Yes, but what about fears that Robert McDowell- a new FCC Commissioner nominee who may appear before a Senate confirmation committee hearing as early as this Thursday- will not be sympathetic to AT&T? Currently counsel for a small telecommunications firm, McDowell is on record at opposing the AT&T-SBC merger, as well as the one between Verizon and MCI.

A. I am going to sound jaded here, but I have to think McDowell has been throughouly vetted by the White House. If there was doubt about his positions, they would have found someone else to nominate. So think of Robert McDowell as the "Samuel Alito" of telecommunications- inspected and selected.

Q. You said the Feds would not push for "wholesale abandonment" of a multi-tiered Internet that AT&T wants. Will there be any effort to modify AT&T- and to a more muted but just-as-determined Verizon's - position?

A. Yes, there may be some such effort. There may be dictates that an expanded AT&T as well as Verizon may be prohibited from overt crippling of competing services. I do think this provision may be specified, but other practices, such as favored bandwidth allocation won't be specifically prohibited or allowed. There, I see some sort of "shall be required to negotiate in good faith" provision that will be sufficiently vague and toothless for AT&T and Verizon to accept.   

Q. Yes, but what about Senator Ron Wyden's "net neutrality" bill?

A. This bill was largely sparked by Ed Whitacre's rhetoric. News that the company he runs wants to take over yet another telecommunications giant will ramp up the fever pitch among the measure's adherents. Yet with a party in control of the Senate that tends to defer to big business interests, I don't see Wyden's bill passing in present form. Some sort of diluted measure has a chance, only because this is an election year. 

Q. One-third of the Senate and all of the House are up for re-election this year. How does the timing of the merger announcement take the upcoming  2006 mid-term elections into account?

A. It most certainly factors this in. Democrats- the party of which Wyden is a member- sense an opportunity to re-take the Senate this November. If that happens a net neutrality bill might find a better chance of passing. If the merger has already been approved by regulatory agencies before November, that means that a net neutrality law with provisions that could conceivably affect the nature of what is approved would not be in place before the merger goes thru. 

Q. OK, enough about politics. I have some questions about what an AT&T acquisition of BellSouth would mean for VoIP. The first one: what about Packet8?

A. Packet 8 (8x8) ought to be concerned because their deal with BellSouth o be a VoIP provider may well go away when this deal is approved. It may go away because BellSouth will go away. I expect AT&T to push their CallVantage VoIP offering as the major residential VoIP offering here. This event is likely to push Packet8 into one of two directions that may not be mutually exclusive.

Q. Such as? 

A. We are seeing a big build-up of formerly IM-only platforms into full-fledged PC-to-PSTN (Public Switched Telephone Network) offerings. Packet8 is a specialist in this technology. A strong marketing effort by Packet8 to this sector would clearly be in their best interests. I also see the sale of the company to either a private investor group, or to a telecommunications provider who needs a VoIP component to offer a triple or quadruple-play of services to compete with those being brought to the table by key telecoms or major broadband cable providers.

Q. I'd like to know who those acquirers would be, but first, what about Vonage? 

A. With well over one million subs, Vonage has far more of a footprint in the VoIP market than any other "pure play" VoIP provider. Still, I think they are caught in a tough position between deep-pocketed providers with an IM heritage and the telecom giants such as AT&T. Both types of companies are strong on the bundled-services, bundled-pricing model to which Vonage does have easy access. But with VoIP technology and infrastructure in place, Vonage would be an ideal acquisition for a deep-pocketed company that wants a fully deployed VoIP solution, no assembly required.

Q. Like who?

A. We have to rule out Yahoo!- an ally and business partner of AT&T (and before that, SBC). AOL already has the infrastructure, and to a less-gestated extent, Microsoft does too. So I wouldn't rule out a Google acquisition of Vonage.

Q. There are two major telecommunications providers you have not mentioned yet- SprintNextel and Qwest. What should they do? What will they do?

A. I am long on record at favoring a SprintNextel acquisition of an established VoIP provider. SprintNextel needs this because they already compete with AT&T's Cingular in nationwide cell services, and in mobile delivery of television - but they are missing a VoIP component that would enable them to build up their service set. As companies with solutions-in-place, Vonage or Packet 8 would qualify.  

Q. Where does this leave Qwest?

A. They will stand as a relic- the only regional phone provider without a national service offering of any type to buttress them. I predict that they will be acquired within two years, probably less. And since Qwest's largely West Coast, desert Southwest and Intermmountain service territory more topographically and demographically matches AT&T's than Verizon's - I see AT&T as the logical acquirer. I expect an announcement by the end of 2007, perhaps sooner.  

Q. One last question: what about my phone bill?

A. I don't see any huge price hikes, but I do see a tug in opposite directions. Without effectively powerful regulation, there may be some "under-the-hood" tweaking of a two-tier Internet. Accelerated access will be accomplished by means not disclosed to the consumer, but with the fee machine in full force.

As IM VoIP grows up to PC-to-PSTN adulthood, there will be pressure placed on these services by big telecom who in the absence of net neutrality, might want to push a fee-for-carriage model on these companies. Still, there may be substantial discounting (with fees passed on to consumers) on the part of the IMs that may force some big telecoms to offer VoIP for very little more than a base price. It is inevitable that the big telecoms will do this via service contracts that are very similar to cell: you get free or very cheap VoIP as part of our four-play bundled service, but you have to sign a two-year contract.

And, as has been said very often in bank CD ads and in far more cloistered environs, "substantial penalty for early withdrawal."

Editorial standards