Conventional Wisdom Favors Quick AT&T-BellSouth Merger Approval

AT&T’s takeover of BellSouth would be the first between 2 Bells since 1999, when SBC acquired Ameritech. The deal would create a firm active in 22 states, with 300,000-plus employees, 70.9 million landlines and 54.1 million wireless subscribers. With Cingular under one parent, a Bell for the first time could offer a true quadruple play of wireline, broadband, video and wireless under its brand.

In a conference call Mon., top officials at AT&T and BellSouth said they don’t expect regulators to set substantial conditions on the merger. But other officials said the regulatory playing field has changed since last year.

At the FCC, the main question mark is whether the arrival of McDowell, perhaps within weeks, will make a notable difference in how the FCC approaches the merger. McDowell, who for years has represented CLECs, is steeped in the competition issues the merger raises. That could give him a crucial role in developing the order, in what likely will be among his early major votes at the FCC.

“Until I see Rob McDowell as a commissioner, I don’t want to prejudge how he will react,” said a source who opposed the SBC-AT&T merger. “Anybody who does prejudge is going to be off base. He’s working for clients right now. He needs to be responsive to them. Let’s see what he does in the new job.”

“There are enormous risks to competition in an enormous variety of markets by this combination,” a regulatory source said. “My concern is that this generation of regulators is willing to let almost anything through without serious conditions. My fear is that will be true here as well… It’s fair to say almost anyone who is not affiliated with a Bell hopes there will be strict conditions imposed on their broadband activities and on their wireless activities. One hopes McDowell’s sensitivities will combine with those of the Democrats… for strict conditions.”

Last year, vigorous opposition to the Verizon-MCI and SBC-AT&T mergers came in the form of the Alliance for Competition in Telecom (ACTel). ACTel may be back, though configured differently. “My sense is that was a one time coalition,” said an official with ACTel. “The members of that coalition are very interested in participating again in the proposed merger and they're figuring out how to do that… The issues are very much the same. In the business market, they procure switches today in BellSouth’s region from AT&T and they will be harmed from AT&T exiting the market.”

But analysts and regulatory sources see scant likelihood of the merger facing a tough fight, at least in D.C. “Based on what the FCC has said and done I don’t see any [regulatory] problems,” said analyst Jeff Kagan.

The AT&T-BellSouth move is no shock. At Telecom 2005, analyst Blair Levin of Stifel, Nicolaus joked that the only question left about a merger between the then-SBC and BellSouth was “does it happen 48 hours after the AT&T deal is closed, or 48 months?” On Mon. the analyst firm said it sees 2 “wildcards” in the merger: “The extent McDowell, if confirmed, would press for more significant conditions on this deal, and 2nd, whether there is a political shift in the Nov. 2006 election that changes the environment just as the deal is nearing its expected approval.”

“It’s not difficult [to approve] because they don’t really compete against each other very aggressively,” said a regulatory source. “In that way, it makes sense. But it is amazing when you think about the sheer size of what this will be.”

Chmn. Martin said in a written statement on the merger the FCC’s primary responsibility “is to determine whether the proposed transaction is in the best interest of consumers… We will carefully weigh the information presented, examining any allegations of specific harm in individual markets and the potential benefits for the deployment of new services.”

One matter likely to get scrutiny is that the combined company would own all of Cingular, the wireless carrier the Bells formed in 2000 and now the largest U.S. carrier based on customer count. Several analysts said they think Verizon may make a bid for the 45% share of Verizon Wireless owned by Vodafone. “One interesting thing is, we don’t real know what an integrated wireline-wireless company will look like,” an industry source said: “We haven’t had one. Verizon has always had Vodafone in its ownership structure.”

Analysts See Benefits to Deal

UBS endorsed the carriers’ guidance on $2 billion in synergies but added in its past 2 major acquisitions deals SBC (AT&T) “has been able to revise its estimate for synergies upward” over time. Analyst John Hodulik said the merged firm should see savings in 3 areas: (1) “Bell-Bell,” mainly from cutting corporate overhead in “functional areas” like lobbying and compliance, customer care, IT, procurement, real estate and network management. (2) “IXC-Bell,” by transferring long haul traffic onto AT&T’s network and reducing termination fees paid by BellSouth, while giving AT&T local access in BellSouth markets will let it compete more aggressively with Qwest and Verizon on the enterprise side. (3) “Wireless,” especially “retirement of the Cingular brand,” an AT&T goal for some time. UBS said roughly 60% of Cingular’s $1.5 billion in ad spending is related to “brand building,” which would be easier to do under a single wireless-wireline-data-video brand.

This deal won’t send Verizon running to acquire Qwest or Alltel, contrary to popular belief, Hodulik said. Verizon is focusing acquisition efforts on Vodafone’s half of Verizon Wireless, he said. “Qwest takes the operational hit here,” losing BellSouth traffic, but Verizon “has all the right pieces in place” if it stays patient and takes over control of its wireless component, he said.

“This is sending… cable television companies back to the drawing board to offer a better combination of services,” said telecom analyst Jeff Kagan. Far from a monopoly, he said, this boosts pressure on cable companies to keep prices low and innovation high. This is the final coronation of the local Bells in a 10 year battle with long-distance companies begun by the 1996 telecom act, Kagan said; they're buying each other now because there are no more long distance companies to snap up. Kagan said he sees Cingular eventually changing its brand name to “something like AT&T Wireless.”

Competitors Are Critics

The deal has critics. “There are no benefits in this merger for consumers or the U.S. economy,” said CompTel Pres. Earl Comstock, calling it a “resurrection of the old Bell monopoly.” Comstock said regulatory “red flags” should go up on the deal because the 2 companies have advocated advanced network management to the extent of charging content providers like Google and Yahoo. Comstock said the merger also removes AT&T as a competitor in the BellSouth region, in turn reducing competition in the special access market.

The merger seems to reduce business customers’ choices in the carriers’ regions, said US LEC Senior Vp Jeff Blackey, whose CLEC spans parts of 13 states in BellSouth and Verizon regions. The deal is awash in unknowns, he said, especially in the regulatory arena, but there’s “certainly a cause for concern.” Among factors up in the air are the deal’s effects on pricing, service and innovation, he said, and “as the big get bigger… we'd hate to see a day when you have to buy service from one [provider] to get service from the others.”

Free Press sent members letters urging “Stop the Merger Now. Do Not Allow a New Media Monopoly.” The group pointed to the carriers’ polarizing roles in the net neutrality debate. “Both AT&T and BellSouth execs have publicly flirted with plans to undermine the freedoms that keep the internet open to all,” Free Press said.

Organized labor, on the other hand, was surprisingly optimistic about the merger. The Communications Workers of America, whose 700,000 members include 200,000 workers at BellSouth, Cingular and AT&T, said the deal offers a chance for growth. Company executives said only about 10,000 job cuts are planned, almost entirely through attrition over a 3- year period, a proposition to which CWA raises no objection. A spokeswoman said the merger, though under CWA scrutiny, could mean more jobs if the new company expands throughout its geographic region. A top priority of new CWA Pres. Larry Cohen has been to bring the speed and quality of U.S. broadband into line with its industrialized democratic peers around the world. Better, faster and more ubiquitous broadband means more, better-paid communications workers, he said. An official statement Mon. by CWA, which publicly has praised its relationship with Cingular on several occasions, said the deal “could not have come at a more critical time” for boosting broadband capability throughout the carriers’s footprints.

The deal will face some “intense scrutiny” but ultimately be approved, said Medley Advisors analyst Jessica Zufalo. The deal’s pure magnitude, plus the resulting firm’s likely dominance of the U.S. enterprise market, will turn some heads at the FCC, she said, and the timing, coming when the FCC has a new commissioner and a lot of work to do, could complicate things. But the companies will push very hard for -- and likely will get -- total state and federal approval before the 2008 presidential elections, she said.

Consumers groups cried “monopoly” in response to the pact and said it threatens network neutrality. If the deal flies, “at best, the new network giants in telecommunications will square off against the cable behemoths -- a cozy cartel of two companies in each market divvying up the profits from telephone, broadband and video,” said Free Press Policy Dir. Ben Scott: The old telecom monopoly “is being reconstituted, but the consumer protections we swapped for competition have not returned with the network giants.”

“AT&T wishes to be lord of the digital domain, able to impose a raft of tolls, fees and what they term ‘monetization’ strategies to the Internet” across all platforms, said Center for Digital Democracy Exec. Dir. Jeff Chester. He termed the merger the “direct result” of the FCC’s DSL classification decision, which “eliminated long- standing safeguards for the Internet.”

Consumers Union and the Consumer Federation of America (CFA) said they will ask DoJ to block the merger. “The government has been deceived before by promises that somehow more concentration would produce more choices and competition, when the result has been just the opposite,” said Gene Kimmelman, Consumers Union vp-federal & international affairs. Prices for cellphone, local and long- distance calls would rise, especially in the southeast U.S., where AT&T no longer would compete with BellSouth for phone and DSL customers, he said. Cable can’t yet compete effectively with phone companies for telecom services, and VoIP providers are at facilities owners’ mercy, Kimmelman said. If approved, merged company at least should be required to sell the Cingular business, he added. CFA Research Dir. Mark Cooper said a merger approval would be doubly damaging, given the FCC’s DSL decision: “Broadband was one of the few remaining opportunities for competition in telephone service… If [DoJ] approves this merger, it slams yet another door.”