A different type of consolidation

America's Network, Jan 15, 2004 by Shira Levine

When the Federal Communications Commission voted in 2001 to repeal the wireless spectrum cap on Jan. 1, 2003, industry pundits predicted a mad rush of mergers among wireless operators. One year later, the industry is still waiting.

Rick Brecher, a partner in law firm Greenberg Traurig's technology, media and telecom practice, attributes the lack of wireless consolidation to market conditions and wireless carriers' other priorities. "It was a soft market, and people were busy fighting the implementation of local number portability," he says. "That's where the wireless industry was focused, and for at least part of the year, it believed that effort would be successful."

But Brecher is convinced that 2004 is the year for consolidation in the telecom industry--both wireless and wireline. "There are 2,000-plus registered carriers out there right now, and that's way too many," says Muayyad Al-Chalabi, managing director within Advisory Services at RHK. "Consolidation is inevitable."

But industry experts believe that consolidation in 2004 will be different from what they predicted for 2003--a year of vertical, rather than horizontal, mergers. "There's the real possibility for consolidation to occur across wireless and wireline," says Lawrence Kenny, global telecommunications industry leader for IBM Business Consulting Services. "We're seeing mobile substitution for fixed wireline services, and it's important for carriers to have the capability to move quickly to new platforms that are cannibalizing old ones." Al-Chalabi agrees, speculating that SBC and Verizon could assume total ownership of Cingular and Verizon Wireless, respectively, forcing BellSouth and Vodafone to look for potential wireless acquisition targets.

The recent AT&T/BellSouth merger talks notwithstanding, Brecher doubts that a Bell buyout of a long-distance carrier is likely. "When I hear that the RBOCs are looking at the long-distance companies as strategic acquisition candidates, I have to ask why," he says. "The RBOCs have demonstrated conclusively that once they get the green light to get into long distance, they can capture in-region market share. The only advantage of an acquisition would be to get the network, and the question becomes, at what price? AT&T has a much higher opinion of its worth than any RBOC has."

A far more likely scenario would be a Bell purchasing a CLEC, or its assets. Qwest's purchase of Allegiance Telecom reflects the carrier's strong interest in delivering out-of-region local service.

"It wouldn't surprise me to see the RBOCs focus on out-of-region local service, and the most economical way for them to do that is to buy networks in out-of-region markets," Brecher says.

TREND:

Consolidate or wither. Acquire to own different platforms is the new rule.

GUIDANCE:

Verizon breaks Vodafone marriage; SBC takes all of Cingular. allallofCingularmarriage.