The long-awaited telecom industry consolidation is here, and it's changing
everything.
It began with SBC's (Quote) bid for AT&T (Quote), which prompted Verizon (Quote) and Qwest (Quote) to scrap over MCI (Quote).
Strong in local calling and home and small business broadband, the Baby
Bells lack the large network operators' IP (define) data
service deals with government agencies and corporations.
SBC, Qwest and Verizon see those long-term, high-margin contracts as crucial
to their future prosperity, as cable operators, VoIP upstarts and wireless
carriers try to hone in on their traditional businesses.
Against this backdrop, AT&T and MCI continue to see their long-distance
businesses erode, so they're choosing to merge rather than risk slowly
bleeding to death.
But mega-mergers bring a new reality to an industry that was the picture of
stability for decades under the Bell monopoly. It follows two other
disruptive events -- deregulation in 1996 and the economic boom and bust of
the early 21st century.
"What we're seeing is the bifurcation of the industry," Lisa Pierce, a
Forrester Research vice president, told internetnews.com.
Pierce expects both deals to be approved by shareholders and regulators, but
not until 2006. When completed, the U.S. market will be dominated by
"mega-carriers" SBC-AT&T and Verizon-MCI, she said.
Consider the numbers. SBC has 52 million access lines and 5.1 million DSL
connections and adds AT&T's Fortune 1000 accounts and a global network that
spans 50 countries.
Verizon, which boasts 53 million access lines and 3.6 million DSL hookups,
gains MCI's IP backbone spanning 140 countries and key enterprise customers,
including 75 U.S. government agencies. MCI is also the nation's
second-largest long-distance carrier.
Antitrust regulators could force SBC and Verizon to divest some assets
before stamping their deals, but the two will still be far bigger than
remaining players. Not to mention that both SBC and Verizon have stakes in
the largest wireless carriers in the United States, Cingular and Verizon
Wireless.
"I'm not sure a duopoly is a good thing," Pierce said, noting that the
shrinking market could lead to pricing pressure.
Some consumer groups have criticized the proposals, but corporations have
been silent. Pierce finds that curious, given that telecom expenses
comprise one-third or more of enterprise IT budgets.
Besides an impact on merging companies and customers, carriers that were
barred from the process, or chose to sit out, could be regulated to second-
or third-tier status.
Qwest is most concerned about being marginalized, as evidenced by its sweetened bid
for MCI yesterday. The Denver company has 15.5 million access lines, 1
million DSL lines and 4.6 million long-distance customers, mostly in the
Midwest and Western United States.
In a recent research note, Bryan Van Dussen, an analyst with Yankee Group,
said Qwest has limited options to grow by acquisition if it can't sway MCI.
"Sprint is an unlikely candidate given its efforts to focus more on wireless
markets and new expensive capital structure," Van Dussen said.
The next group of providers -- Broadwing, XO and TelCove/KMC -- tend to
target smaller companies, he said.
Meanwhile, BellSouth (Quote) remains conservative, eschewing
mergers and concentrating on the Southeast. While it has a strong balance
sheet, the strategy has its dangers, In-Stat analyst Daryl Schoolar said.
"If MCI goes with Verizon, BellSouth could get boxed out," Schoolar said.
Under that scenario, BellSouth could face competition for high-end business
customers from Verizon-MCI and SBC-AT&T, while fending off low-end consumer
and small business offerings cable companies, VoIP and mobile carriers.
Clifford R. Holliday, an analyst with Information Gatekeepers Group,
believes BellSouth should have bid for MCI, because the companies' assets
and geographic presence was a good fit.
Regardless, it may not be too late for BellSouth to act. If Qwest fails to
convince MCI, it may itself become a takeover target, and its relatively new
network might be attractive to BellSouth.
"I could imagine BellSouth bidding for [Qwest] and spinning off most or all
of the local exchange assets," Holliday said.
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