Beginning of the End for AT&T

by Ross Wehner, The Denver Post

DENVER -- AT&T's shareholders -- at what will probably be their last meeting -- are expected to approve a $16 billion merger with SBC Communications in Denver on Thursday, forming the largest telecommunications company in the nation.

The deal, together with the upcoming Verizon-MCI merger, represents an unprecedented consolidation of the telecom industry.

Both deals are expected to gain regulatory approval in the next six months to a year.

Denver-based Qwest dropped out of a bidding war for MCI last month after the MCI board rebuffed it four times in favor of lower bids from Verizon.

"Qwest faces added pressure after losing MCI," said Standard & Poor's analyst Todd Rosenbluth. "Qwest is on the outside looking in at a soon-to-be-consolidated telecom market."

Here's what the new telecom landscape will look like:

SBC and Verizon will be able to compete in Qwest's territory for business customers by offering the two most far-reaching national telecommunications networks.

They could poach Qwest's residential customers by bundling wireless and long distance. They could offer Internet phone service over Qwest's DSL lines at the same time as cable companies like Comcast also are munching on Qwest's broadband customers.

SBC and Verizon already own the two largest wireless operations in the United States and control nearly two-thirds of local phone lines nationwide. The mergers will further boost their financial mass, customer base and technological firepower in relation to Qwest.

Each of the new companies will have market values more than a dozen times greater than Qwest, which is burdened with $17.3 billion in debt. SBC in particular will benefit by integrating AT&T's CallVantage Internet phone service and reviving AT&T's remaining 23 million residential long-distance clients, said Rosenbluth.

"SBC and Verizon, with these mergers, are becoming worldwide telecom players," said Janco Partners analyst Donna Jaegers. "Qwest is stuck in the rural local phone league."

Qwest CEO Richard Notebaert has been one of the most vocal critics of the SBC and Verizon mergers. At the same time, he is shopping for other assets that may help Qwest become what he calls the "third leg of the stool" in the increasingly consolidated industry.

One of Notebaert's main arguments before regulators is the hotly contested idea that the SBC-AT&T and Verizon-MCI mergers are restitching the 1984 breakup of the AT&T monopoly. In the process, Notebaert claims, businesses will see fewer choices and higher prices.

"When five of the seven companies that resulted from the breakup of the AT&T monopoly are reconfigured into two companies that will control the business wire-line market, that's a duopoly," wrote Notebaert in a letter last month to the Wall Street Journal.

SBC and AT&T disagree.

"The competitive landscape has changed radically since the breakup of the Ma Bell system," said SBC spokesman Joe Izbrand. "The argument just doesn't wash."

"The current industry restructuring is a far cry from putting back together the Ma Bell system," said AT&T spokesman Andy Backover.

Both Izbrand and Backover point to an increasingly fragmented and technology-driven marketplace that includes cable companies that offer phone service, cell phone companies that allow consumers to ditch their land lines and a growing bevy of Internet phone companies that compete across the nation.

Phil Weiser, an associate professor of law and telecommunications at the University of Colorado, sees both sides of the argument.

"On the consumer side, wireless, cable and other broadband providers offer competitive alternatives," Weiser said. "But the consolidation of networks in the business market is a huge concern."

A recent study sponsored by Qwest found that SBC and Verizon will control access to more than nine out of 10 office buildings in Chicago and Los Angeles, two cities that lie within SBC and Verizon territory.

Notebaert has predicted that the SBC and Verizon mergers will be approved. His strategy is to convince regulators that the telecom titans need to divest overlapping network assets, which Qwest could then buy to beef up its own money-losing national fiber-optic network.

"With MCI, Notebaert failed to win the whole business," said Rosenbluth. "Now he is looking at picking up the pieces. But is it going to be sufficient to improve Qwest's operations?"

AT&T, the 120-year-old phone company that monopolized U.S. phone service for years as the largest company on the planet, held past meetings in Denver in 1972 and 1988.

But this Thursday's event -- in Qwest's back yard -- came about by chance. The company could not fix a meeting date until merger documents were approved last month by the Securities and Exchange Commission. The Colorado Convention Center was one of the few facilities that was still available.

"This meeting is a very sad and ironic demise of what was once America's greatest corporation," said Weiser. "It has been a demise that has been 50 years in the making that has resulted from deregulation, technological change and management mistakes."

Copyright 2005 Los Angeles Newspaper Group

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