February 7, 2005 4:00 AM PST

Merger mania promises fewer, bigger telcos

Something had to give in the telecom industry.

For years, analysts and industry execs have warned it was only a matter of time before the glut of U.S. telephone operators caused a market collapse. There simply weren't enough people, homes and offices to keep every existing phone company in business. Now SBC's proposed $16 billion acquisition of AT&T is forcing its fellow Baby Bells to look harder at merger options.

"When you have a bunch of companies all trying to get into each others' businesses, and increasing competition from new players, consolidation becomes a necessity," said Brad Wilson, an analyst with Legg Mason. "But I think it's happening a lot quicker than we had expected."

The mergers began about six months ago in the wireless market. Top-tier cell phone operators AT&T Wireless and Cingular Wireless merged. Then in December, local, long distance and cell phone giant Sprint made a $31 billion bid for wireless operator Nextel Communications. Additionally, a number of failing rural cell phone operators have been devoured by second-tier wireless operators.


What's new:
Cingular-AT&T Wireless, then SBC-AT&T, now maybe Qwest-MCI. In the mad rush to create the few multifaceted providers meant to dominate the new century, who's next on the auction block?

Bottom line:
Someone's getting MCI. And maybe Sprint. Qwest is the only one to make a move so far, but you know Verizon execs are taking meetings.

The scoop on telecom mergers

Last week, merger madness hit a fever pitch when local phone giant SBC announced it was buying AT&T for $16 billion. Now a game of musical chairs is underway as the three remaining Baby Bell local phone providers--Verizon Communications, Qwest Communications and BellSouth--scramble to find partners and position themselves in the changing telephony market.

"Right now there's definitely a battle shaping up over MCI," Wilson said. "After that, it's hard to say what will happen."

Word leaked out last week that Qwest offered to gobble up MCI, the No. 2 U.S. long-distance company, for $6.3 billion. But MCI seems to be holding out for a better offer. Verizon and Bellsouth could still make a play for the company, experts say. Verizon is reportedly already looking into an acquisition. All three local providers would get a boost from MCI's enterprise customers.

Qwest could benefit from MCI's small debt load and $5.6 billion in cash, which it could use to help pay down its own $17 billion debt load. But analysts say it's the least attractive potential suitor. The company's traditional phone business has been declining at a rate of roughly 4 percent a year. Its 14-state region is thinly populated, so it has far fewer broadband and long-distance customers than the other three Bell companies. It also doesn't own its own wireless business.

Whoever ends up with MCI, one thing is certain--there will still be two Baby Bells left without nationwide partners. And then what? If struggling Qwest loses MCI to a better bid from Verizon, it might end up with fellow local carrier, Bellsouth, say some analysts. There's also talk that Verizon might be eying Sprint to get its hands on the carrier's wireless business.

And of course there's always the prospect that nothing happens at all.

Your 21st century telco
In some ways, the idea of the regional Bell companies buying up long-distance players seems like a bad one. All three long-distance carriers--AT&T, MCI and Sprint--have seen revenue in their traditional voice business decline rapidly over the past few years. The very fact that these companies are up for sale is a result of a business model in decline.

But the mergers and acquisitions are creating a new type of phone company, and long distance is only a part. The traditional local and long-distance phone company sold only local phone services, and very little else. The new telecom provider will be a national company that packages voice, video, cell phones and broadband--wireless and wireline.

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Instead of concentrating on buying each other out, worry about high speed/long distance wireless access (wimax). Acquiring that and any resources to accomodate it, on a nationwide basis is your ticket to the future. This is my vision, everything will be on Internet Protocol. Sony, Toshiba, Philipps, Motorola and others will come out with phones that tap into a wimax wireless connection. Traditional phone lines as we know it will not be around much longer. Once a company has aquired nationwide wimax access, they can use all that bandwidth to bring VOIP, IPTV, and Internet access at an affodable price. Long distance, Cell phones, satellite/cable TV and traditional phone service will be quickly vaporized. I use VOIP on a daily basis, and when it is done correctly it sound better than a traditional phone line. Spend your investors dollars on a technology that will be the future, dont spend it on aquiring old technology that will be useless in a couple of years.
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Telco Consolidation
Telco consolidation is the result of the money the already consolidated "baby bells" made by being able to set prices, rather than compete on price. This new wave of consolidation is a sign of oligopolies finding it cheaper to by their competition than fund innovation or compete on price. The result will be less consumer choice, as with the Oracle/PeopleSoft debacle, at arbitrary prices with more limited feature sets, as with MicroSoft's Longhorn.
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