Telcos aim for one-stop shops
SBC's $62 billion buyout of Ameritech is another bold move to create a "one-stop shop" for phone and data services.
It comes in the wake of MCI's proposed merger with WorldCom, AT&T's buyout of Teleport, Bell Atlantic's merger with NYNEX, and SBC's other big acquisition--Pacific Bell.
The deals largely are being put together to create powerhouses in the long distance and local telephone markets, which still represent the bulk of profits for telcos.
But they also are aimed at grabbing market share in data communications--a fast-growing business and potential moneymaker for those companies that can build national and global networks.
Under its hard-charging chief executive Ed Whitacre, SBC--one of the five remaining independent Baby Bells--is doing just that. His strategy, gobbling up telcos like Pac Man, is akin to that of WorldCom CEO Bernard Ebbers. The SBC-Ameritech merger still is subject to regulatory approval; if approved, it would cut the number of independent Bells to four from seven after the AT&T breakup in 1984.
"Consolidation is the name of the game," said Dave Novosel, an analyst at First Chicago.
Network systems are in place, so growing economies of scale help companies become more efficient without much more cost, he added.
These billion-dollar mergers may not be a seamless transition because of the size of the two companies, but from a cost perspective and a revenue perspective, the telco companies have managed to find new avenues of growth.
The local telephone market was thought to be a mature market a few years back, but with additional services, such as Internet lines, high-speed access, and cellular, they have managed steady growth, Novosel said.
"These businesses are going to same number of homes, but getting more money out of each one with the addition of these services," he said. "And it is also a benefit for the consumer, too, because they now have just one bill for everything."
But it is yet to be determined if such deals help consumers get better prices for these services. While they have helped these companies reward shareholders with rising stock prices, Novosel wonders if customers really benefit. "I don't see much evidence of that yet," he said.
One of the challenges ahead for these companies could be maintaining their focus on growing their businesses. Such companies, with their considerable size, could run into problems in attacking certain markets.
And there is more consolidation to come, said Novosel, warning that that there are "too many" cellular and PCS companies at the moment.
In data services, Ameritech has become a pioneer among the Baby Bells in offering high-speed Internet access across copper wires, dubbed DSL. Ameritech is one of a handful of telcos that already has launched DSL in some markets, and it has teamed up with software giant Microsoft to provide Net access.
Another company testing DSL is Pac Bell, which SBC bought last year. Pac Bell has launched a DSL trial in Silicon Valley. It also provides dial-up Internet access for consumers.
SBC, through its own Southwest Bell operation, also is testing DSL in Austin--another high-tech mecca.
SBC-owned Pac Bell also offers editorial material on the Web through a site called "AtHand." It includes search, a shopping guide, real estate listings, and information about entertainment and sports, among other features.
Stitching together the operations of Pac Bell, Southwest Bell, and now Ameritech gives SBC a national data-services "footprint" to take on other telcos.
But it could mean good news for the cable industry.
While the companies did not specifically mention Ameritech's cable television operations on a conference call discussing the merger, the agreement combines Ameritech, which has been the most aggressive RBOC, in building up a cable business to compete with the cable operators. SBC, which has been the least aggressive in pursuing a cable business, instead has focused on its core telecommunications and data businesses, said Aryeh Bourkoff, a CBIC Oppeheimer analyst.
Today's deal leave's SBC shareholders in charge of 56 percent of the company, while 44 percent will be owned by Ameritech shareholders.
"Control over the merged company could potentially lead to a slowdown of the over-build [of the cable business," said Bourkoff.
SBC's decision to slow or cease Ameritech's invasion of the cable television business would benefit the competitive environment of the cable companies operating within Ameritech's telephone service region, including: TCO in Illinois, Time Warner in Ohio, Adelphia Communications in Ohio, Cablevision Systems in Ohio, he said.
The potential slowdown in new competion, he said, boosted some of the stocks of some of those companies today on news of the merger.
Bourkoff noted, however, that the combined entity would compete with cable operators for high-speed Internet access customers.
Competition is intense, however. The proposed MCI-WorldCom deal, for instance, creates a massive Internet backbone.
AT&T's deal with Teleport creates another big competitor in the phone and data market for business. Analysts have speculated that AT&T also could strike an alliance with @Home, which provides Net access via cable. (Whitacre previously held talks to merge with AT&T, but those talks broke down.)
Start-ups, such as Qwest, also are providing competition to telco giants.
Besides facing intense competition, winning customers poses another challenge for Baby Bells such as SBC. The telcos, including Pac Bell, have been highly criticized with their marketing efforts for ISDN, another Net access technology.
The mergers also face intense scrutiny from regulators and consumer groups. They worry that the consolidation will result in price increases and too much concentration in the Internet and phone markets.
MCI's merger with WorldCom already has run into criticism from regulators, consumer groups, and labor unions. Last week, GTE sued to block the buyout. The deal is still pending.