ANALYSIS: AT&T and BellSouth

The Telecommunications Act of 1996 directed the Federal Communications Commission to take action to remove statutory, regulatory, economic and operational barriers to local telephone services competition.

Oh what a difference a decade can make.

On Sunday, AT&T announced that it intends to purchase BellSouth for roughly $67 billion in stock. Out of the deal would emerge the largest phone company in the United States – a telecom behemoth that would also control the United States’ biggest mobile phone carrier in Cingular Wireless.

For those of you keeping score at home, that leaves Verizon (which just subsumed MCI this year), AT&T (which was formed from the AT&T and SBC merger in 2005), SprintNextel (which merged in 2005) and … hello? Anybody else out there? Can you hear me now? Hello?

Sure there are other smaller regional players such as Qwest still left, but that’s what BellSouth was before this news broke. BellSouth, Qwest, and other regional and local carriers were supposed to keep the big boys on their toes – to provide that local touch and competition for American consumers and businesses.

No more.

My March 15 cover story, Untangling Telecom, (to be available on March 15) on this complex and ever-changing telecommunications environment addresses this new landscape – where deregulation was once supposed to level the playing field and where telecom pricing, contracts and networking technologies are now bewildering many CIOs and IT organizations.

For the article I spoke with James M. Smith, a telecommunications attorney at Davis Wright Tremaine in Washington, D.C., and a former telecom executive. He spoke at great length about the tectonic changes he has witnessed during the last 10 years in telecom. And, taken all together, this is how he succinctly summed up today’s telecom environment, which is even more applicable given Sunday’s announcement:

“There’s tremendous confusion in the marketplace with all of this consolidation. It’s very unsettled. With the Telecom Act of ’96, the local arena [was supposed to] become more competitive. That does not seem to be the case; it didn’t pan out.

“Five years ago, companies were flooding into this marketplace, and the companies that just five years ago that were the gold standard of competitiveness in telecom, in long distance, now, they don’t exist anymore. They’ve been swallowed up by Bell operating companies.” Or, as Smith also noted, they’ve gone out of business.

“What’s left is that the really, really big players are getting bigger,” he says.

According to telecom analysts and industry experts, CIOs should prepare for service disruptions, increased billing errors and customer service irregularities. Most of the value of a merger comes from removing internal costs and integrating the business and operational support system, the backbone of a telco’s day-to-day operations. The unavoidable consequence of most telecom M&As is at minimum a two-year period of operational and innovation disruption for enterprises, says a Forrester Research report.

The second issue for CIOs is the all-important economic question: Do fewer competitors mean increased prices? That big question won’t be answered for a while, but CIOs need to be mindful of their telecom spend – and that there are other, non-traditional options (cable providers or Vonage- and Skype-type providers) that may be CIOs’ best bet for keeping the big telcos honest.

“For CIOs,” Smith asked near the end of our conversation, “the question becomes what does the future bring, and which horse to ride? Go with the blue chips or go with the Vonages?”

With this latest news, it seems like we’re headed back to the good old Ma Bell days. The question that will linger, though, is: Were the good old days really that good? If you look back at 1996 for reference, then the answer is definitely no.

For related news coverage, read AT&T to Buy BellSouth in $67B Deal.

Keep checking in at our CIO News Alerts page for updated news coverage.

-Thomas Wailgum