Verizon-MCI deal: New era of telecom giants

Recent mergers point to a future in which large carriers offer a wide range of services to a wide range of customers

WASHINGTON - Verizon Communications' announcement Monday that it intends to acquire MCI for $6.7 billion, the third multibillion-dollar telecommunications merger announced since mid-December, effectively ends a two-decade experiment in which the U.S. government attempted to break up a huge telecom monopoly.

The Verizon/MCI deal, coupled with the Jan. 31 announcement that SBC Communications plans to acquire AT&T in a deal worth $16 billion, means two of the three largest long-distance carriers will be swallowed up by SBC and Verizon. SBC and Verizon are two of the four surviving regional Bells that traditionally focused on local telephone services after the court-ordered breakup of the old AT&T in 1984.

In many ways, the mergers, if approved by state and federal regulators, would end an evolution where phone companies traditionally offering local service and carriers traditionally offering long-distance had already begun to look a lot like each other.

Verizon and SBC, in the last five years, have started offering long-distance products to customers, and AT&T and MCI have attempted to compete with local telephone packages. The two recent mergers point to a future where giant telecom carriers offer a wide range of services to a wide range of customers -- from phone, television and Internet service for individual customers to huge long-distance and data networks deployed at the world's largest enterprise businesses.

"The competitors are getting larger and offering everything: telephone, cable TV, wireless, Internet," said Jeff Kagan, an independent telecom analyst, responding by e-mail. "There is still lots more action to go. Cable television companies and baby Bells are going to start to compete with the same bundles. We will stop calling them phone companies and cable companies and start to call them all communications companies."

Add the SBC and Verizon deals to the December announcement that long-time long-distance carrier Sprint plans to merge its wireless operations with Nextel Communications and spin off its local phone business, and the result will be fewer telecom options for the largest enterprise businesses.

Kagan cheered the move toward fewer telecom giants offering a wide range of services, saying it's good for the long-term health of the telecom industry, and two or three huge companies should provide enough competition to keep prices reasonable.

"It's been 20 years since the phone company was broken up, and now it's coming back together again, except there are multiple providers and it's a much bigger industry," he said. "Telecom has gone through amazing change in the last 20 years and it's becoming a much healthier place after the next several years of consolidation and change. I'd say the historic shift in telecom is under way, and now that it has started, it's happening quickly."

Other analysts disagreed. With two giant telecom carriers, the largest companies can expect higher prices for telecom products and services, said Ken McGee, group vice president and research fellow at Gartner Inc. While both SBC and Verizon expect to eventually save billions of dollars in their acquisitions, partly through laying off thousands of workers, large companies will have fewer options for price shopping, he said.

"There aren't five providers out there to which you can turn over all your traffic, as there were five years ago," McGee said. "Five years ago, there were viable alternatives out there for every vendor."

Businesses with telecom contracts expiring in the next year may have a window of opportunity to negotiate low rates before the SBC and Verizon deals win government approval, added Pete Wilson, executive vice president of Telwares Communications LLC, a firm that advises enterprises on telecom contracts.

"Longer-term consolidation, once it runs its course, will bring an end to price wars and a cessation of year-over-year write-down of rates for enterprises," Wilson said by e-mail. "This move will assist in ushering in a more application, IP-driven environment where the challenge shifts from negotiating low prices to correctly evaluating and judging capabilities in an increasingly value-added telecom marketplace."

For smaller businesses, the two huge mergers may not bring a lot of change, said Yosef Rabinowitz, managing director of TBRC Cost Recovery LLC, a telecom expense management firm for small and midsize businesses. Rabinowitz has steered most of his customers to regional long-distance carriers because AT&T and MCI haven't offered competitive packages to smaller businesses, he said.

"We've moved some clients to other carriers after (MCI) made little or no serious effort to keep their business, not surprising after all the layoffs of the last couple of years," he said.

The 1984 court-ordered breakup of the old AT&T, which followed a 1982 antitrust settlement between the U.S. Department of Justice and AT&T, has been coming apart for years. As SBC, Verizon and the other regional Bells moved into the long-distance market, the U.S. Federal Communications Commission (FCC) in the last two years has moved to limit requirements from the Telecommunications Act of 1996 in which the four regional Bells had to share parts of their networks with competitors at discounted prices.

The '96 Act attempted to encourage broad competition among telecom carriers by requiring the regional Bells to share the network facilities they largely inherited after the breakup of the old AT&T monopoly. The FCC, pushed by outgoing Chairman Michael Powell, moved in the last two years toward "facilities-based competition," favoring the regional Bells. Powell argued that the old network-sharing rules discouraged the incumbent Bells from investing in new technologies and discouraged competitors from investing in their own facilities.

Some analysts called the old government-enforced competition dead once the recently announced deals go through.

"Together with the acquisition of AT&T by SBC, the U.S. fixed market has now been completely reshaped," said Julian Hewett, chief analyst at Ovum Ltd. "With the wonderful perspective of hindsight, the competitive industry structure imposed by the enforced breakup of AT&T in 1984 can be seen as a failure. Everything has changed: in those days, all the profit was in long-distance; today, the profit is in local access. The power has moved back to the Baby Bells, and the separation of local access and long distance has disappeared."

The Verizon deal with MCI leaves the two remaining regional Bells, Qwest Communications International Inc. and BellSouth Corp., potentially without merger partners, although Sprint's fixed-line assets may still be in play. While the SBC and Verizon deals make those companies international players, Qwest and BellSouth don't need to merge, Kagan said.

Qwest had made a bid for MCI in recent weeks. "BellSouth and Qwest ... can continue to compete in their regions instead of nationally -- no problem," Kagan said. "But the wave of mergers isn't done yet. There will be many more over the next few years."