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Are telco giants finally awakening?

A year ago analysts and others throughout the high-tech industry sounded an ominous warning: Here come the telephone companies. What happened?

A year ago, analysts and others throughout the high-tech industry sounded an ominous warning: Here come the telephone companies.

Once the long distance and local phone carriers directed their considerable forces online, the thinking went, services like America Online and Prodigy--then leaders in the business--would be done for, as Sprint, MCI, AT&T, and a host of regional Baby Bells claimed the Internet as their own.

But since the telecom companies arrived in cyberspace, they've hardly even caused a tremor. Just about everybody agrees that they haven't even come close to living up to their potential, leading observers to cite everything from inadequate knowledge of an entrepreneurial environment to simply "not getting it."

However, this doesn't mean that ISPs should rest easy.

In fact, Sprint's acquisition of a 30 percent stake in EarthLink might be a strong indication that the telcos are finally awakening. Today's deal follows last month's announced partnership between Yahoo and MCI.

Timing is everything, of course, and some wonder if the telcos can still muster the strength that was once feared at this relatively late stage in the game. But even many naysayers agree that, with their equipment, money, and marketing capabilities, telephone companies maintain vast potential if they decide to get serious about the Internet.

The Sprint-EarthLink partnership, combined with the Yahoo-MCI alliance, may even presage a new trend, analysts acknowledge. Sprint's withdrawal from the race as an independent player is not unexpected--its primary calling is, after all, long distance phone service, not the Internet. But the company clearly knew the Net is important enough to invest in it heavily.

And as Forrester Research analyst Kate Delhagen noted, what better way to gain instant market share than to find someone who is doing it right and then buy a stake in the company?

"Sprint took the aggressive first step in the long distance companies," she said, adding that she expects others may follow.

The telcos "have talked a lot about it but they've done very little. I expect that to change. I would be very surprised to see the other telephone companies, whether regional or national, to stay in the wings anymore," Delhagen added.

If Sprint is a sleeping giant, it's "awake now," she said. "AT&T and MCI are drowsy. At any moment they could awake up and move the market."

Her comments were echoed by Brian Oakes, an analyst with Lehman Brothers. Saying that Sprint is "staking a claim," Oakes speculated that the EarthLink deal might be the move that sets off a domino effect.

And even if they can't figure out how to do it by themselves, he and others say, the telephone companies need to invest in partnerships with Internet companies.

Adam Schoenfeld, an analyst with Jupiter Communications, agreed. "They know the Internet is not going to go away, and they must address it," he said.

"It's been one of the great mysteries of online why the long distance telephone companies have utterly failed to leverage their massive consumer marketing strength to the Internet access piece," he said. "I take the Sprint deal as a very encouraging sign."