US telecoms face a shake-up after the merger of AT&T and Cingular

Rethink IT, March, 2005

The face of US telecoms has changed dramatically in the past year. Following the consolidation of the cellular sector with the mergers of Cingular Wireless with AT&T Wireless, and then Sprint with Nextel, the most dramatic of them all has been agreed--the acquisition of AT&T by SBC, one of the regional 'Baby Bells' it was forced to spin off when its monopoly was broken up. Apart from the potential loss of a venerable brand, the shock value lies in the price and the ease with which the transaction is expected to pass regulatory hurdles. A few years ago, few could have conceived of AT&T being sold for just $16bn, and for the antitrust and communications agencies not to be concerned.

This demonstrates not just a current regulatory climate that is very friendly towards the Baby Bells or RBOCs (SBC, BellSouth, Verizon and the far smaller Qwest), but the collapse in value and perceived importance of AT&T and its primary business of long distance lines. Further mergers may well be triggered--Verizon, currently the largest RBOC, is said to be interested in buying another long distance carrier, MCI, while Sprint, which plans to spin off its own long fixed line business, could put that up for sale.

The net result--assuming, as most people do, that Qwest will be acquired--could be a US telecoms industry based around three RBOCs, each controlling the local loop, long distance links, cellular operators (SBC and BellSouth through their Cingular joint venture, now the largest US cellco), and increasingly pushing into the 'quadruple play' of delivering voice, video, data and mobility to residents and enterprises. (We can assume, or at least hope, that even the current regulatory climate would not permit the confessed dream of SBC chief Ed Whitacre, of merging with BellSouth to gain full control of Cingular).

The only challenge to these massively powerful operators will be the cable operators, themselves looking to enter the mobile and broadband wireless sectors, and suffering far less heavy regulation than the RBOCs; cellular services run under MVNO (mobile virtual network operator) deals, in which they lease capacity on a 3G or, in future, WiMAX network; and the biggest of the ISPs, with Clearwire, SK-Earthlink and AOL all looking to deliver quadruple play on a national basis.

Consolidation has become imperative for the RBOCs as these competitors get stronger, and they seek to rely on sheer weight and bullying power to fend off newer challengers, from municipal hotzones to broadband wireless ISPs.

"It is not only a question of lower cost alternatives for high speed wireless access, but of more intense price competition for an expanding number of operators," said president Harvey Cohen. "Operators, including Verizon, Cingular/AT&T, and Sprint/Nextel will make more than $100bn in investments into advanced wireless capabilities over the next four years, but the returns may not be as high as initially expected due to the growing intensity of competitive forces."

The other contender will be Sprint-Nextel, which has no local operations but has the huge double advantage of a national cellular network on which it has built an extremely successful MVNO business, which may well be the basis of the cableco's mobile push; and the spectrum to build a parallel broad band wireless network for enterprise services and for MVNO use.

While Sprint may gain from the consolidation, if it turns the situation to its advantage and becomes the key ally of all the challengers to the RBOCs, Clearwire has a similar opportunity on the broadband wireless side. However, it will suffer, short term, from the takeover of AT&T, as may Intel--both companies were becoming increasingly close to the telco, with major joint ventures surrounding WiMAX equipment and services, and AT&T was widely expected to lease Clearwire's evolving capacity for its own grand WiMAX plans.

These plans will not be on hold, since their main motivator was to enable the telco to bypass paying fees to the RBOCs to deliver services to the last mile. While SBC has made broadband wireless part of its ambitious planned next generation network, this will be a small piece compared to its massive fiber roll-outs. It may also use WiMAX to avoid paying fees to fellow RBOCs outside its territories, but this roll-out will almost certainly be more patchy than AT&T's plan would have been. While not important for WiMAX long term--at least, as long as other national plans such as Clearwire's and SK-Earthlink's remain on track, delivering very advanced services to the US consumer and business--in the short term AT&T's aggressive timescales would have created an early major boost to the new market, stimulating confidence and volume.

The SBC deal has, naturally, sparked speculation on who will be next, since both Verizon and BellSouth seemed more inclined to grow through their own acquisitions than by counterbidding for AT&T. The main candidates are MCI (formerly WorldCom) and Sprint, which is looking to spin off its long distance wireline business, but which could also be a more ambitious target in its entirety.