Call For Relevance
By David M. Ewalt
Tuesday, Monday, March 6, 2006
Chief Executive Edward E. Whitacre Jr. announced Sunday that
his company would acquire
BellSouth in a
deal worth $67 billion, it signaled a new era for big
telephony as well as the near complete undoing of the 1984
breakup of Ma Bell, with four out of seven Baby Bells soon
subsumed back into the company.
If approved by U.S. regulators and completed, the merger
will create a telecom giant with a market capitalization of
more than $150 billion, far greater than its $92 billion
But AT&T's purchase of
BellSouth isn't really about undoing regulatory
action or increasing market cap. For that matter, it isn't
even about phone service. This merger is about buying the
lines that connect to the homes of BellSouth customers and
selling them everything you can squeeze down a fiber-optic
line, including television, Internet, movies and music.
In a statement announcing the merger, Whitacre outlined the
company's strategy. "This merger is a logical next step,"
he said. "Together, we will lead the way into a new era of
converged and bundled communications, video and
entertainment services while also improving our ability to
manage complex networks."
At the heart of things, the last few years' flurry of
telecom merger activity -- including AT&T's union with
(which was completed just last November) and Verizon's
buyout of MCI
-- was a response to the fact that the traditional telephone
business is breathing its last, done in by cellular
technology and, perhaps more pertinent, by the Internet.
Consumers are rapidly realizing that voice is just another
kind of data, and it can be cheaply and easily sent over an
Internet connection. And why pay for both a phone line and
a broadband Internet connection when you only need the
To make up for the death of their oldest and historically
most important business, the phone companies have had to
scramble to find alternatives. Wireless telephony proved to
be one great way to make cash -- the burgeoning growth of
No. 1 wireless vendor
Cingular, co-owned by
BellSouth, was doubtless a major motivator for the two
companies to merge.
But while cellular is still hugely important, it's rapidly
becoming a mature market. More than 80% of adults in the
U.S. already own a cell phone. Companies like AT&T know
they have to compete directly with fast-growing Internet
phone services and turn the tables on the cable companies
that provide them.
"They are gearing up to fight new competitors, the
cable-television industry, for the complete bundle of
services, including telephone, television, wireless and
Internet," said independent telecom analyst Jeff Kagan.
"AT&T is getting ready to roll out their television service
on a nationwide basis. This is much more advanced than
traditional television," Kagan continued. "Customers, for
example, can watch four channels at one time. This is
sending companies like
Comcast and the other cable television companies
back to the drawing board to offer a better combination of
What's this all got to do with BellSouth? Simple. The
company maintains 20 million access lines in service, has
approximately 7.2 million long-distance customers and nearly
2.9 million digital-subscriber-line subscribers. It's the
biggest telecom provider in the Southeastern U.S. And it
was, until now, the biggest and best way for AT&T to quickly
pick up giant handfuls of potential television and data
With BellSouth off the table, the remaining lines out there
become all the more valuable -- and another regional phone
company will probably soon take center stage.
International is the last of the seven Baby
Bells, and the only one not re-absorbed by either Verizon or
AT&T. Expect the company to attract its own takeover bids,
perhaps from Verizon, which needs to bulk up to take on its
now significantly larger rival.
Ultimately, it's likely the telecom industry will become
something of a duopoly, with Verizon and AT&T competing
head-to-head, and both companies squaring off against the
"Telecommunications as an industry in the United States is
going through massive changes," says Kagan. "We are in the
middle of a major 20- to 30-year transformation. When we
come out the other side, we'll have the choice of our
telephone company versus our cable-television company for
the same big bundle of services."