Latest merger hails new telecom era

Verizon buying MCI changes landscape of communications providers

Verizon’s announcement last week that it intends to acquire MCI -- the third telecommunications merger 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 plans to acquire AT&T, 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.

Analysts disagree as to how this consolidation will affect enterprise customers. Whereas some tout the mergers as creating large, healthy companies that can offer a wide range of services to customers, others say the shrinking of options, especially for large business customers, may lead to higher prices.

“The competitors are getting larger and offering everything: telephone, cable TV, wireless, Internet,” said Jeff Kagan, an independent telecom analyst. “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 longtime long-distance carrier Sprint plans to merge its wireless operations with Nextel and to spin off its local phone business, and the result will be fewer telecom options for the largest enterprises.

Kagan cheered the move toward fewer telecom giants, saying it’s good for the health of the industry and that two or three 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,” Kagan said.

Other analysts disagreed. With two giant telecom carriers, the largest companies can expect higher prices for telecom products and services, said Ken McGee, research fellow at Gartner. Whereas both SBC and Verizon expect to eventually save billions of dollars in their acquisitions, partly through laying off thousands of workers, large customers 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.

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, which advises enterprises on telecom contracts.