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Transforming Telecom: What Megamergers Bring Business

Will SBC-AT&T and Verizon-MCI combos raise innovation--or prices?
Transformation of the telecom industry moved a step closer to reality last week when SBC Communications' $16 billion acquisition of AT&T and Verizon Communications' $8.4 billion acquisition of MCI got the blessing of antitrust regulators. The deals have the potential to affect prices and services as dramatically as did the breakup of the Bell System in 1984, when the government forced AT&T to spin off its local phone companies in an effort to foster competition.

The deals hadn't received Federal Communications Commission approval as of press time last week. If they clear that hurdle and close at the end of the year, the two resulting companies will have much broader portfolios of wired and wireless local and long-distance products than any other telecom service provider in the country, which will appeal to business users seeking a single source for their communications needs. But they'll still face intense competition from rivals such as Sprint, plus new voice-over-IP players such as Skype and Vonage, as well as cellular service providers, that threaten to push the cost of a basic voice call toward zero.

The market will need those competitors to keep the two companies on their toes. SBC and Verizon went after the two leading long-distance companies for their nationwide networks and broad business customer bases. But a battle between two giants won't guarantee widespread competition. Back when cellular service in most major markets was provided by only two companies, prices remained high and phone choice was limited. It wasn't until there were four or five competitors that prices dropped and the variety of phones available multiplied.

Still, some business customers are optimistic that the deals will produce benefits. "It's going to give them more financial resources for innovation and investment in new technology," says Michael Relich, CIO at clothing retailer Guess Inc. He hopes his current carrier AT&T, once merged with SBC, will be able to supply local DSL links to Guess' 300 stores and connect them all with a nationwide VPN, a local and long-distance combo no single company could provide before.

And Then There Were Two
$67.4 billion
Annual revenue
$59.3 billion
$35.6 billion
Business revenue
$12.8 billion
17.6 million
Business access lines
17.8 million
3 million
Business long-distance customers
51.4 million
Cellular customers
49.3 million
Data: Vendors and Department of Justice
"Over time, we'll have more options and more flexibility with the different business combinations," says Steve Novak, CIO of law firm Kirkland & Ellis LLP, which buys services from all four of the companies. The combination of local and long-distance companies could provide businesses with a major benefit, Novak says: "The ability for customers to deal with a single carrier and a single contact point. It simplifies the support structure."

What will happen to prices? Gartner analyst Kathie Hackler predicts prices will increase as fewer companies compete for business customers; independent analyst Jeff Kagan says prices will keep declining as the two big companies compete nationwide for business customers. To encourage healthy competition in the business market, the Justice Department last week required that Verizon and SBC, which will change its name to AT&T, lease fiber to competitors at more than 350 large office buildings apiece in 19 markets.

Too Much Power

There's no doubt the deals would limit choice for businesses. The four companies are the top suppliers of business networks and stand to strengthen that hold as they offer a broader range of services.

The companies face challenges--merging networks and ordering, provisioning, and billing systems can be technically complicated and take time. SBC plans to use AT&T's networks and processes. Verizon's job may be more difficult: Verizon and MCI have different E-servicing programs, multiprotocol label switching networks, and network-management tools.

The market looks headed toward having just two telecom companies that can offer a full menu of business services. Whether it remains a two-horse race depends on how aggressive new competitors are and if technology such as voice-over-IP changes the game.