Baby Bells ready to ring in the new year

The year opened still reeling following the shocking announcement that MCI and WorldCom would merge, creating a new telco powerhouse that would control local, long distance, and data lines around the world. That deal was approved mid-year, after MCI shed its Internet assets to satisfy regulatory concerns in the United States and Europe.

But the transformation of the No. 2 long distance player proved to be only the first step in the industry's ongoing makeover.

MCI's chief rival, long distance giant AT&T, decided to make its own end run into the local phone industry by merging with cable company Tele-Communications Incorporated. The deal, which has yet to be approved by regulators, also brings cable Net access company @Home under AT&T's wing, giving the long distance company a leg up on its rivals in the race to bring high bandwidth options into the home.

In the midst of long distance merger madness, local phone companies made some noise of their own.

SBC Communications, fresh from its earlier acquisition of Pacific Bell, struck a $69 billion deal to merge with Ameritech. Bell Atlantic, which already had picked up Nynex, agreed to join forces with GTE, the country's largest non-Baby Bell local provider, in its own $71 billion merger.

The two mergers combined would put nearly two-thirds of the country's local phone lines under the controls of the two new companies. Regulators are examining the deals closely, and have already hinted they are skeptical of the Baby Bells' argument that they need to expand to compete outside their home markets.

But many analysts say the market is likely headed for even more consolidation, both internationally and at the local level, as companies struggle to stay ahead in a newly-competitive market.

"You're going to continue to see consolidation," said Terry Barnich, president of the New Paradigm Resources Group, a Chicago-based telecommunications consulting firm. "Everybody's striving to have a global footprint. On the national scene, everyone's striving to have a continental footprint."

Competition slow in coming
Although the face of the telecom industry changed dramatically this year, much of its core business seemed to move at a slower pace.

The slew of mergers is one of the clearest signs that Congress' Telecommunications Act of 1996 is shaking up the industry. But lawmakers' chief goal--to kick-start competition at all levels of service--has still been slow to unfold, prompting mutterings in Washington that the legislation may need revision.

As a part of the 1996 law, legislators offered the big local phone companies a serious deal. If the Baby Bells would let competitors into local markets, offering unbundled services such as dial tone and operator service at wholesale rates, the local companies would finally be allowed to join the long distance game.

Nearly three years later, it hasn't happened. The past year saw the Baby Bells appeal to state regulators and, in a few cases, to the Federal Communications Commission for permission to enter the long distance market. But in most state decisions--and in every federal decision--regulators said the Baby Bells had yet to complete a checklist of items measuring how well they have opened their markets.

This struggle between the local companies and regulators--along with sideline jeers from long distance companies and alternative local providers--prompted many court battles, not to mention bitter rhetoric from both sides, for much of the year.

Baby Bell executives say they are doing their best to open their markets, and claim competitors are cherry-picking their most profitable business customers. On the flip side, long distance companies and smaller firms trying to break into local markets consistently accuse the dominant local companies of dragging their heels in opening their monopolies.

Analysts say both charges contain nuggets of truth. New local companies are targeting business customers since they are more profitable, and technically easier to reach. This combination of factors will likely keep most residential customers from seeing competition for their local phone service for some time, analysts add.

But many observers do expect to see the Baby Bells gradually enter the long distance arena as early as mid-1999, probably led by Bell Atlantic in New York.

Data uber alles
But while long distance and local telephone companies quarreled over the still-profitable voice markets, the rest of the telecommunications marketplace was being turned on its head.

Data traffic is quickly outstripping the amount of voice traffic in the nation's communications networks, and will likely pass up voice next year, analysts say. A recent Merrill Lynch study forecast that 80 percent of all the nation's bandwidth will be dedicated to data by the year 2003.

The big telephone companies are painfully aware of this change. MCI WorldCom vice president John Sidgmore said in a recent speech that data traffic on his company's networks is growing by 10 times a year, and that voice would soon become a "niche" in the communications industry.

Analysts say WorldCom, though its UUNet subsidiary, is well-poised to lead the big telcos into the data age. But the big networks are experiencing strong new competition from companies like Qwest and Level 3, who are rolling out their own networks for both voice and data.

The shift brought about by the explosion of the Internet is also forcing Washington policymakers to rethink the deregulation act passed just three years ago. Some influential legislators have said they would try to reopen the debate over the Telecommunications Act next year, in part to bring the legislation closer in line with the demands of the data era.

"Only three years past the passage of the act, we are looking a little antiquated now by looking at voice competition in the local loop," said Lauren Belvin, Senate Commerce committee general counsel and an advisor to Senator John McCain, R-Arizona, at a recent telecommunications policy conference. "It's a much bigger stakes game now."

One of the most controversial pieces of this issue, the way regulators will treat high-speed data services like digital subscriber lines (DSL), will carry over into next year.

The FCC proposed last fall that the Baby Bell companies be allowed to offer DSL services directly to consumers and businesses, only if they also sold the service at discounted wholesale rates to their competitors. The Bells also could offer the service through a separate subsidiary company.

The local companies, which desperately want to offer a full range of voice and data services, don't like this idea. Early in December, they petitioned the FCC to allow them to offer high-speed DSL services directly, joined by a handful of computer companies who expect bandwidth increases to drive meatier Internet applications.

The FCC is scheduled to resolve that issue by the end of February next year, kicking off what may be another round of repositioning as the companies high-bandwidth strategies evolves.