AT&T BellSouth Merger

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AT&T BellSouth Merger

The merger between telecom giants, AT&T and Bellsouth was expected and was mentioned in an Executive Suite interview I had many months ago with Aaron Cowell the CEO of US LEC.

With this merger it seems that the old Ma Bell is set to make a glorious comeback. For many years this nation thought the reason that Ma Bell was broken up was because it was a monopoly and was stifling competition.

It seems recently that politicians have deemed the last few decades of competitive telecom to be a failure and the progress made by allowing different LECs to compete with the likes of companies like AT&T and MCI was apparently a bad idea.

So brick by brick, the old AT&T is being put back together.

It was always obvious that an independent AT&T prior to the SBC merger was a huge thorn in the sides of the ILECs. LECS know how to lobby and so did AT&T. This ensured the incumbents played on an even playing field with AT&T. Now that AT&T is gone, how have consumers benefited?

One would have expected a wealth of new low-cost products from the combined AT&T and SBC but instead AT&T's most competitive product, CallVantage has been hidden since the merger was announced.

The Houston Chronicle has a good amount of information about the merger in the following article and it is worth analyzing parts of it.

The merger will streamline the ownership and operations of Cingular Wireless, which is jointly owned by AT&T and BellSouth. The new company will be more innovative, nimble and efficient, providing benefits to customers by combining the Cingular, BellSouth and AT&T networks into a single fully integrated wireless and wireline Internet Protocol network offering a full range of advanced solutions.
As a result, the combined company will be better able to speed the convergence of new and improved services for consumers and businesses, and embrace the industry's shift to Internet Protocol network-based technologies.

This is true and makes sense. As wireless becomes more and more important in the world of communications taking full control of Cingular Wireless is important and this move will help the company compete with Verizon Wireless.

"Our focus is on providing great service and innovative, competitively priced products for consumers and businesses throughout the Southeast, the nation and the world," said AT&T Chairman and CEO Edward E. Whitacre Jr. "Together, we will lead the way into a new era of converged and bundled communications, video and entertainment services while also improving our ability to manage complex networks."

Of course the company will have greater size and will use this to its advantage. However with more size and more captive customers what is the imperative to keep prices as low as possible? Where will people turn if prices aren't kept low on DSL for example? The single other competitor is Cable. Are these two competitors enough to keep the market honest or do we need many more?

There are many more paragraphs about customer benefits but it is tough to understand how Ed Whitacre has the best interests of customers at heart. Ed's number one priority is to generate a higher stock price. He must do this and if he doesn't there is something wrong.

It is difficult to forget the statements he made last Halloween. Here is an excerpt from an article on the topic:

In an article this past weekend, BusinessWeek.com had an interview with SBC CEO Ed Whitacre and within the article you will find some comments that should scare the living daylights out of any company that thinks the Internet should be open to competition. The question posed was:

How concerned are you about Internet upstarts like Google, MSN, Vonage, and others?

And the answer was as follows:

How do you think they're going to get to customers? Through a broadband pipe. Cable companies have them. We have them. Now what they would like to do is use my pipes free, but I isn't going to let them do that because we have spent this capital and we have to have a return on it. So there's going to have to be some mechanism for these people who use these pipes to pay for the portion they're using. Why should they be allowed to use my pipes?

The Internet can't be free in that sense, because we and the cable companies have made an investment and for a Google or Yahoo! or Vonage or anybody to expect to use these pipes [for] free is nuts!


The irony here is the timing. While SBC openly admits the fact they could start restricting use to SBC broadband connections, and the state governments are bending over backwards to approve its request for approval of the AT&T purchase.

One would imagine that someone in Whitacre's position would actually try to play nice while the regulators are deliberating for fear a regulator might actually read such an article and ask themselves if they are doing the right thing for consumers.

Amazingly this sort of talk comes within the same year the FCC, backed by the Supreme Court have done everything they can to eliminate CLEC competition. From there, they left MCI and AT&T as two of the strongest telecom competitors to the ILECs. These companies too are now gone -- owned now by the very ILECs they used to compete with on some levels. This leaves only cable companies as real competitors. For all the talk of WiMAX and broadband over power lines or BPL these technologies don't really show any promise for the immediate future -- if at all.

I am sure SBC shareholders are thrilled to hear talk like this but what about the shareholders of, eBay, Google and others? What about VoIP providers? How about Apple? Is Whitacre telling us openly he plans on taxing the use of his pipes?

Statements like this are probably the reason why Michael Powell and Carly Fiorina who also keynoted last week's Internet Telephony Conference & Expo explained why the rules need to be overhauled. In Fiorina's case she said we should have light touch regulation with some baseline coverage to protect consumers from fraud. Michael Powell agreed and implied that the telecom rules need to be rewritten. He also said that any attempt to do so will result in a great deal of political wrangling.

Mr. Whitacre has the right to try to generate revenue in any way possible as long as it is legal and we should commend him for creative thinking that has led our country to debate net neutrality in detail these past few months. Still, stories of network neutrality are far from sexy and most people don't understand what is at stake and what they can lose if net neutrality is not assured.

In fact a great article today from Ken Belson of the New York Times titled Internet 'fast lane' could carry heavy toll, details what could happen in a world where broadband providers have free reign to charge content providers and customers more if they watch movies or listen to music online. They would do this by charging a higher fee for a higher quality connection. The challenge is of course how do you police such things. Wouldn't these ISPs be incented to slow down their "no frills" Internet connections so that content providers and consumers alike would have to pay for the high-speed connection?

Here is an excerpt from the New York Times article with a quote from me:

"There's no limit to what they could charge for this high-speed lane, and they could make the slow-speed lane as slow as they want," said Rich Tehrani, president of Technology Marketing, a media company that promotes Internet phone service. "There's no way to know today what the prices might be, but it could be anything, and that's the fear."
 
Tehrani and others fear that companies that compete with the network providers - for instance, say, providers of Internet phone service - might not even get the chance to sign up for faster access if they want it.

But the phone and cable industries have powerful allies in Congress who are already proposing legislation that would approve this tiered service. If the telecommunications companies get their way, the most obvious candidates to pay for the premium service are companies that offer videos, music and other data-heavy products. Consumer advocates worry that if Apple Computer, which runs the iTunes site, starts paying network operators for faster access, it might try to offset the cost by raising the price of its video content.

Another possibility, critics say, is that smaller Web sites would be crowded out. A big company like Apple, they argue, has the money to pay network providers for faster access and absorb the cost. But the small online sites might not. If they were unable to compete with bigger, faster sites, the result could be less diversity of content on the Internet.
 
"Tollbooths and gatekeepers are the exact opposite of what the Internet is all about," said Michael Copps, a commissioner at the Federal Communications Commission. "Down that route, consumers can count on paying more and getting less - less content, fewer services and reduced innovation."
 
 
The Net Neutrality controversy is exactly what has prompted Senator Wyden's excellent Internet Nondiscrimination Act of 2006 (analysis) which hopes to ensure that service providers aren't able to discriminate how they deliver varying types of traffic.

Getting back to the AT&T, Bellsouth acquisition, here is another worthy statement lifted from the Houston Chronicle article above:

Since AT&T and BellSouth are not actual competitors in the local, long distance and video markets, and because BellSouth is not a significant competitor with AT&T in the enterprise market, the merger will not reduce competition in any of those markets.

This statement perhaps explains something very important. Since the day the AT&T and SBC announcement was made, AT&T's CallVantage service which is VoIP based and geographically agnostic was more or less put on hold. Little marketing or PR took place these past few months. Since the time the acquisition was announced Vonage has added nearly one-million subscribers.

It is also interesting to point out that Vonage, a company with limited financial resources was able to add this massive amount of customers and a few cable companies also added subscribers in the hundreds of thousands range.

One would expect AT&T to also be able to add massive amounts of subscribers during this period but they didn't. Perhaps the reason is that if there were many CallVantage subscribers in the BellSouth area, this statement about BellSouth and AT&T not being competitive would be incorrect.

Many industry analysts explain that with two choices in the market, cable and DSL consumers will always lose. They argue that many more competitors need to come into the market to ensure real-competition. I have suggested in the past that if we are going to allow such mergers to take place the government must enforce that the acquiring company guarantee the cost/performance of their Internet connections will be the best in the world.

In other words if you want to keep thinning the market for broadband competition then ensure that your broadband connections have the best speed at the lowest price.

For example if Japan has 100 Mbps access for $49/month then AT&T would have to match or beat this price and performance if they want to buy BellSouth.

An idea like this is essential to ensure the US stays ahead in the broadband race. High-speed Internet access is too important to the health of our country to risk having a few companies controlling access to it without the government ensuring that consumers are benefiting from the consolidation trend.



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