The two companies have touted a "national-local" strategy for several months, under which they say they would move into local phone markets across the country if regulators approve their merger.
Both already are allowed by law to move into local markets outside their home territories. But the companies say they need the resources of a combined company in order to compete with firms like AT&T and MCI WorldCom.
"Launching in these three dynamic markets allows us to solidify our position on both coasts, particularly when you factor in our presence in California and Connecticut," said Stephen Carter, SBC's director of strategic markets, in a statement today. "We're also going to expand into other markets across the country and fully develop our national networks as quickly as possible."
The companies have said they plan to expand eventually into the 30 top U.S. markets outside their home territories. Executives have said they want to reach 15 new local markets within 18 months of the merger's completion.
The companies have given few details, however, on exactly how they would compete in new markets. Many other companies, ranging from long distance giants like MCI WorldCom to tiny telecommunications startups, have also tried to break into local markets around the country.
While these alternative local providers have had some success in taking high-profit business customers away from the dominant local companies, few residential customers have truly benefited from the new competitive environment.
SBC has said that its own national-local strategy will be jeopardized if it does not gain the ability to offer long distance service in its home territories. But under federal law, the company can not do this until regulators are satisfied it has successfully opened up its local phone service market to competition.
In the three years since the passage of the 1996 Telecommunications Act, no Baby Bell has convinced federal regulators that it has opened its markets enough to satisfy regulators' conditions.
SBC also has said that it would pursue the same high-profit business customers that other new alternative local companies seek. Keeping up profit margins in new states is critical if the company is to continue offering residential service to all customers in its home states, Carter said.
"These business customers generate a disproportionate share of revenue that we rely on to invest in the network and keep residential rates low," he said. "That's why we need to retain these important customers."
In hearings on the merger in front of Illinois regulators, SBC officials have said that they could pull back from their national-local strategy if it does not prove to be profitable.
Illinois regulators completed a week of hearings on the merger last Friday, and are expected to rule on the deal in April or May. Staffers at the commission recommended that several strict conditions be placed on the merger if it is allowed to go through.
The FCC also must approve the deal.