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AT&T and BellSouth Merger - Analysts Speak Out

The proposed merger/acquisition of BellSouth by AT&T essentially rebuilds the old Bell system. My fellow analysts have a lot to say about the proposed merger, and this is the place to find out what everybody thinks.

The purpose of this discussion is both to allow commentary and to raise issues, especially as related to Enterprise networks. I hope you find these observations to be both interesting and providing food for thought.

If you wish to add a new thread, please email Steven Taylor at


To a very large degree this is old news. I'd hate to be a sales rep selling into BS because I just saw a lot of commissions go down the drain. AT&T will roll into BS with its own brand of network, something that will push the fiber deeper but not all the way to the homes I'd bet. There will be some whining on Capitol Hill, but I really doubt they'll block it -- not in this administration. That battle was fought and lost a while ago. They want a cable v. telco battle, and they are getting it.

As inevitable as the AT&T/BellSouth merger may have been, so to will be the inevitable network integration and support issues that will arise from the consolidation of the companies' two operations. Rather than create greater integration and better support, the merger will force customers to suffer through a series of service issues as the two companies assimilate their operations. They will also have to withstand a greater level of complacency and lower level of innovation from the 'new AT&T' because of its enlarged sense of empowerment brought on by eliminating another competitor.

It's very interesting that Ma Bell is getting resurrected in an IP telecommunications environment that will cover much more than wired voice connectivity. The stakes now include wireless mobility services and devices, federated presence management services, personalized business application information access and delivery, and what I have dubbed "transmodal communications." This new combination of capabilities, coupled with standards-based communication application software and IP-based remote management, will enable the big service gorilla, in partnership with specialized application software developers, to attack the wide-open SMB market and perhaps even the large enterprise market with hosted and managed services. Those markets are very vulnerable because they have little experience with new IP technologies. Enterprise executive management may also feel that such expertise is no longer fully needed inhouse if the technology can be hosted by a trusted entity, but managed operationally controlled inhouse. With communication application software becoming "open," we can look forward to frequent patches, releases, and competitive product offerings. Who wants to "own" something that will be constantly evolving?

It will be interesting to see if the old SBC (new ATT) entertainment video initiatives will be extended to BS. Project Lightspeed aims to deliver IPTV as part of a triple play service bundle over a hybrid fiber-copper access network. HomeZone (a joint venture with EchoStar Communications Corp) plans to introduce a new set-top box that will enable consumers to get both satellite-TV and movies, programs and other content via the Internet.

BS, has been slow to embrace IPTV or other forms of residential video, unsure about the potential payoff, readiness of the technologies, and the high upfront investment required.

AT&T already had the most aggressive plans for pushing entertainment TV into living rooms. Adding BellSouth's customers would lift AT&T's annual sales to $120 billion (source: WSJ), giving the company cash and scale to pursue its TV strategy nationwide. Forget about their terrible track record in this area (huge failures in 1993-1995). My guess is that the old BS management will reluctantly accept one or both of ATT's video projects.

Whether it succeeds or not, the enterprise network customer will likely be neglected as investment is redirected at residential video and quadruple play service bundles. The technology likely to benefit from increased spending on IPTV/ residential video is BPON and GPON.

As SBC/AT&T grow, by swallowing BellSouth whole, Verizon/MCI will probably feel a need to absorb Qwest. We will then have two Ma Bells that don't compete against each other; can you say, "less service, bigger price tag!"

A key question is whether typically underrated diseconomies of scale and scope will outweigh the usually exaggerated economies claimed or foreseen for the same reasons. At the same time, if experience from previous mergers (Pacific Telesis and Ameritech) is any guide good people without Texas connections will leave or be forced out, while many others will spend a lot of time worrying about their jobs rather than their customers.

I agree with Danny B. that ultimately, this is about MSO v.s Telco (at least for residential customers). I also agree with Alan W. that the enterprise market will be neglected compared to the residential market ...

To some extent, this merger is natural and healthy for shareholders as it reflects the maturing of an industry ... "Delivering connectivity is no different than delivering power to the home". Thus bigger is better thanks to economies of scale. In fact, lower opex and capex should translate into lower BW prices for consumers .. if they decide to pass onto consumers?

The fundamental question, in my opinion is "are two competitors enough" or will this lead to a duopoly .. for example "let's agree to raise the price by 5%".

A second problem is related to the fact that Telcos and MSO are delivering "connectivity" and delivering "service" (voice, video, etc.)

So, the second question on my mind is "will the bigger players abuse their power to control IP innovation?" .. For example "Only Ma Bell IP devices work on a Ma Bell converged network" or "a Ma Bell IP device works better than a Vendor-X appliance" ... That is a problem only because The IP appliance industry has not matured yet ...

Anyone remember MediaOne? AT&T Local & Long Distance? AT&T Wireless? AT&T tried to be a one-stop shop in the late 90's, buying up seemingly everything in sight. Then, through their own mismanagement, they failed miserably, selling off everything it acquired, costing thousands of jobs until it was a mere shell of itself. In comes Ed Whitacre to save the day, and POOF! 13,000 more jobs are gone (See Network World - 02-07-05 "What the AT&T / SBC deal means to you").

The Telecom Act of 1984 was meant to break up a monopoly. Now, 20+ years later, we have three uber-telecoms and less competition. With network neutrality now becoming a very serious issue, that argument becomes more and more US (consumers) against THEM (telecom giants). Telecom Giant will spend HUGE $$$ lobbying Congress. EFF and a slew of smaller groups will battle for the consumers. We were successfull in blocking media consolidation a couple of years ago. We'll have to wait and see how this all turns out.

I agree there will be little resistance to the "new" AT&T/Bell South merger. I'm doubtful there will be "improved services" or lower prices or any job creation. Wait until Telecom Giant decides to charge us for emails (like AOL is proposing). Heck, they've already opened up their networks to the NSA's domestic spying efforts. At this rate it will be all one Big Brother Network.

SBC's project Lightspeed is a joke. Still light-years away from service-delivery. BellSouth is much father ahead in their plans. Moreover, based upon SBCs plans, Lightspeed will only target the most affluential markets, with the bulf of SBC markets left with aging, low-speed DSL service. BellSouth is taking a more widespreed approach. ATT would do well to adopt BellSout's initiatives & approach rather than continuing down the doomed path of project lightspeed.

If anything, Telecom Act 1984 allowed faster new technology deployment!! much earlier than a monopoly would have liked. This, in my view, is the most important result from the Act.

Previous comments have implied if, but let's make explicit, what looks like a huge issue: if the telcos and cablecos (the "broadcos") have their way with network neutrality -- i.e., lack thereof -- the remonopolization (or duopolization) will be worse than the old AT&T ever was, because it will include not only transport but those applications the broadcos choose to absorb as well. Thus, the new monopolies will extend to the top of the protocol stack, not just pertain to transport. And, thanks to ill-advised decisions by the FCC and Congress, the safeguards that might otherwise still help (as limited in effectiveness as they always were, due to ILEC truculence), like separate applications subsidiaries, comparably efficient interconnection (open network architecture), and the like, will be totally absent this time around.

umm ... to respond to the point made about BS being farther ahead in deploying FTTC than AT&T's plan to deploye FTTN. Get real. Ever since SBC went on a buying spree (Pacific Telesis, Ameritech, AT&T, etc.) have they really embraced any of those companies senior management? Ah No!

For the most part "Big Ed" still has many of the same direct reports he had prior to the first acquisition. Where there are new ones they are legacy SBC executives not executives from his bought companies. Oh maybe the General Counsel, or External Affaris. Some have retired, but his core management team is basically the same as it was.

So I ask you ... do you really thing AT&T plans to switch their strategy of a "selected" deployment of FTTN to the BS plan of FTTC? I don't.

I'll grant you AT&T's plan for FTTN deployment is, shall we say challenged, but I can't see them changing.

Now another question. How are they going to make money after they have deployed all of Lightspeed?

Sure there are optional services, PPV, Premium Channels, etc. but the broadband prices are coming down (have to take market share from cable). What if they started to charge for services on the wired side like they do on the wireless side?

On the wireless side they can charge for connection time, media time, etc. In the wired world what if they bundled basic broadband services as a flat fee, but charge for "special services"? Say downloading/uploading files larger than 9mb. Or broadband use during "peak" times?

I figure they will need to find a way to grow revenue. In the the "flat rate" model there are only so many ways to grow revenue. Sure you can grow revenue by taking market share and adding services (with new fees), but they will still need something else.

You asked where do we go from here. As an ex-NYNEX (oops, it was Bell Atlantic, briefly, when I was FMP-ed) Network Planner and ex-Lucent network wonk, I'll offer my somewhat biased and rather cloudy crystal ball responses to your questions.

What, if anything will happen to Qwest?

Nothing. They struggle on alone and try to survive. Who would want it? Other than Seattle, Portland, Denver, and Phoenix, what is there? A mountain of debt, lots of scenery with nobody blocking your view – or buying telecommunications service, and some of the worst relationships with state commissions extant. That’s why their original ad featured the Marlboro cowboy out in the middle of nowhere.

Are either AT&T or Verizon likely to acquire an equipment vendor such as Lucent or possibly Avaya? (Either or both of these acquisitions by AT&T would be fascinating from a historical perspective.)

Fascinating, yes. Logical, no. Financially reasonable, no. Legally, maybe questionable (see the original divestiture documents). At least one issue is the shaky health of the two traditional vendors, Lucent and Nortel, and the problem of if one telecommunications provider buys an equipment manufacturer (or services provider, a la much of the current Lucent), what competitor will buy from that supplier? Did MCI ever become a Western Electric/Network Systems customer when AT&T owned it?

Will the government begin to regulate VoIP providers more strictly?

Neat question. In the current political environment and near term, I doubt it. But if the providers do not address the 911 issue, that may spur some regulatory action. And if some politically acceptable method of continuing to subsidize rural service is not found, there will be pressure to keep the universal service fund filled. And it’s not just telephone service and rural districts anymore. It’s universal fast and efficient access to the internet and in any economically less attractive area (see: inner city areas). The money has to come from somewhere. Question is how Congress or the FCC can hide the source.

Will the two behemoths (AT&T and Verizon) vigorously compete or function as an oligopoly; a.k.a., I have mine and you have yours, so let's not fight?

Based upon their track record and their preoccupation with the provision of high speed access with attendant services (TV, etc) I’d place my bet on continued oligopoly, with some competition in the areas of cellular and prized business opportunities. But that is really just what they are doing now.

What does all of this mean to service providers such as Masergy and Virtela?

Got me. Been away a tad too long to evaluate them.

Will the cable companies finally provide a real threat to the traditional service providers for enterprise customers?

I don’t think so. They still don’t really understand telecommunications, and their plant is still maximized for downstream flow, not bi-directional. The more users they attract, the poorer the service they can provide. And looking at Cablevision, which is the local competitor where I am, the Dolans are having too much “fun” messing up the professional sports franchises they bought and messing in local politics. Telecommunications is a low priority add-on.

Will another potentially disruptive technology such as WiMAX enable the next MCI to emerge?

MCI wasn’t as much a disruptive technology as it was a legal office which wouldn’t go away. So your question is phrased wrong. I don’t see a disruptive technology, unless somebody comes up with something very inexpensive. Between the cost of provisioning to a significant market size, and the still-remembered telecoms bubble, I don’t see that. But a legal case? In this country – any time. Except that if Verizon and AT&T learned anything from the Carter Phone and MCI track record, it’s that it may be better to continue to defend and appeal than to settle and surrender the toe hold.

The bigger they become the less responsive they become to problems. Service has continued to degrade with each merger and I have been on the winning side each time! One example, the help desks moves further away with each merger and is staffed with less experienced staff each time.

Your March 13th comments on the merger makes a lot of good points, but the last paragraph MISSES the point badly. You say, "We contend that the next big wave of competition isn't going to come from who controls the local loop, but over who can provide superior applications and content over broadband connections. And we think there's going to plenty of competition for network-provided applications and content, no matter who controls the last..." What is missing here is that if the big players have their way on Net Neutrality, then the entity that controls the loop is ALSO in a position to control the applications and content users can access. Unless/until neutrality is resolved in favor of openness and non-discrimination, I see little basis for your bullish attitude that there will be robust applications and content competition, because the "loopcos" will control them as well.

A prerequisite for any sizeable merger should be, how will the public / consumer benefit. Price, improved service, loss of jobs, etc.
However with the current administration the above would be the least consideration and probably not considered at all.

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