Regional carriers expand horizons

Mergers are recasting the regional Bell operating companies as national players poised to compete toe-to-toe in long-distance calling, business accounts and possibly even local phone service. Throughout their history, U.S. local phone providers have made great efforts to stay out of each others' territories, going as far as to defy government rules to keep boundaries intact. Now the walls between the Bells are starting to crumble, thanks to growth in cellular and Internet phone services and a shift toward strongly free-market regulatory policies.

"There was that demarcation line that was solidly defined," said David Dixon, an equity analyst at RBC Capital Markets. "That's starting to dissolve now. You will see that happen with high-end enterprise customers and then move down to the commercial space."

The cracks widened on Monday, when Verizon Communications, the largest Bell, said it will pay $6.7 billion to buy embattled long-distance phone company MCI, upstaging a bid on MCI a week earlier by another Bell, Qwest Communications International. The deal was announced a couple weeks after the second-largest local carrier, SBC Communications, put a $16 million price tag on AT&T, in the deal that marked the start of the telecom merger wave.

For Verizon and SBC, the acquisitions represent a way for them to expand beyond their local markets and tap AT&T and MCI's reach across the country. But the Bells also inherit a decades-long rivalry between two powerful companies that have fought tooth-and-nail to sell long-distance phone services to consumers, large companies and the government.

Reconsolidation
The mergers, if approved, signal a major unravelling of the competitive framework first drawn up in 1984 when the federal government broke up AT&T's local phone business. The move created seven independent companies, each granted full control of their geographic regions. These seven companies later became four--Verizon, SBC, BellSouth and Qwest--after a series of mergers during the 1990s.

The government has tried at times to force the Bells to compete in each others' markets, to foster competition and spark broadband Internet growth. But those efforts were rebuffed by the Bells, which preferred to entrench themselves in the local markets, where they enjoyed monopoly status.

What resulted was an unspoken truce between the Bells, which focused their energy on fighting unfavorable regulation, squashing smaller independent phone providers and fending off advances by the cable industry.

That status quo held for the better part of 20 years. But now it is beginning to collapse under the onslaught of new technologies. Having avoided real competition for years, the regional Bell operating companies are now facing pressure from cell phones and voice over Internet Protocol technology, which together are eating into traditional wireline businesses. The result, analysts said, make increasing competition between SBC, Verizon and cable giants such as Comcast inevitable.

"As markets move about, you will see competitive forces ensure that companies such as SBC and Verizon will start to compete in each others' backyards," said Rick Black, an equity analyst at Blaylock & Partners.

Place your bets
Analysts point to the business market as the first area in which SBC and Verizon, in particular, will elbow one another. For decades, AT&T and MCI have sold telecommunications to services corporations and large organizations. Verizon and SBC both said they plan to continue these businesses because they continue to grow and could open new doors to sell wireless services to corporate clients.

In the longer-term future, the shift among the Bells from their circuit-switched network to one based on the Internet protocol raises many scenarios for their businesses. All of the Bells are embracing IP as a way to deliver a range of services--high-speed Internet access, TV programming (much of it high-definition), voice calling and wireless features--over one pipe into the home. Verizon and SBC have outlined plans to spend billions of dollars upgrading their networks with speedier fiber-optic lines to attain these goals.

Verizon and SBC both said they plan to introduce wireless features to their fiber subscribers and plan to bundle wireless into their video, data and voice packages. SBC, which owns 60 percent of Cingular Wireless (the rest is held by BellSouth), and Verizon Wireless currently compete for customers across the country.

While AT&T and MCI on the surface have little influence over Verizon and SBC's fiber initiatives, voice over IP networks--commonly called VoIP--will allow Bells to sell these services in other Bell markets. AT&T, which has made a huge effort to sell its CallVantage VoIP service to consumers, could help SBC expand its reach into Verizon's more lucrative markets, such as the Northeast region.

The rules have changed in telecommunications, and the Bells are scrambling to stay on top of the game.

"What this really says is that a lot of the services that have defined the telecom industry for decades are really going away," said Jim Penhune, an analyst at market researcher Strategy Analytics.