With its $3.9 billion purchase of business e-commerce software and consulting company Sterling Commerce today, SBC Communications is attempting to raise the stakes substantially for telecommunications providers looking to expand their business.
The company is betting that adding Sterling's business-focused Web commerce expertise will help persuade customers--and Wall Street--that SBC is much more than a voice-oriented network operator with a "Baby Bell" heritage.
"If you crawl inside a phone company and start looking at where the growth is, you see that a lot of their traditional business is going to flatline," Yankee Group analyst Boyd Peterson said. "All of these companies, including SBC, are trying to participate where the growth is happening."
SBC's purchase is the largest in a string of recent moves by telecommunications providers aiming outside their traditional voice and data transport businesses. Most of the new offerings are less ambitious, focusing on Web hosting or more traditional network services, although some--like US West and AT&T--are moving farther afield into Web content and applications services support.
The moves are driven by declining revenues in the traditional telephone business, as well as the entry of dozens of new network providers offering their own high-speed pipes and Internet and voice service--often at prices equal or lower to the traditional companies.
That's forced the big telephone companies to start looking elsewhere for their growth. Most are investing heavily in rolling out new high-speed Net infrastructure, and packaging this with traditional voice or even wireless telephone service. But increasingly the companies are looking at Web business and services with an envious gleam in their eyes.
"Services are going to become more important than the traditional (communications) transport business," said Jilami Zeribi, an analyst with research firm Current Analysis. "Anyone who sits on the sidelines during this acquisition frenzy is going to be at a disadvantage."
SBC's purchase of Sterling is the industry's most ambitious move into the e-commerce business, and analysts say it will be closely watched by others in the business as a kind of experiment.
Sterling Communications is one of a handful of companies that helps businesses buy the products they need to operate. It sets up marketplaces--essentially online catalogs--where companies can access products they need from suppliers, ranging from office pens and pencils to gasoline for corporate truck fleets.
The model has drawn influential clients, with 487 of the Fortune 500 involved in Sterling's procurement communities, the company says. That was one of the key selling points for SBC, executives said.
"Sterling is a very strategic provider to many of our large business customers," said Steve McGaw, SBC's managing director of corporate development. "We were familiar with Sterling before this process began."
Veering from its previous acquisition model, SBC will allow Sterling to remain as an independent subsidiary, a decision analysts say is critical to keeping Sterling's reputation and employee base intact.
That's similar to what GTE did with its purchase of network and Net services pioneer BBN, which it still maintains as a largely separate operating unit. Nevertheless, the marriage will require a "delicate" balance in order to maintain enough independence to keep Sterling on track while still allowing SBC to get its money's worth, Peterson said.
SBC has enough on its mind that it will likely keep the integration fairly slow, analysts added.
The company recently finished its acquisition of Ameritech, giving it ownership of about a third of all U.S. local phone lines. It is expanding services into 30 markets outside its own local territories and investing about $6 billion in making high-speed Internet service available to more of its subscribers.
Wall Street, which has pushed SBC's stock sharply downward in recent months, wasn't initially impressed, however. The telephone company's stock had fallen more than 6 percent in late afternoon trading. Sterling's shares had spiked nearly 40 percent, driven by the high purchase price.