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Mergers: How big is big enough?

The face of communications changes radically in 1999, driven by an unprecedented stream of multibillion-dollar mergers.

The face of communications changed radically in 1999, driven by an unprecedented stream of multibillion-dollar mergers.

AT&T is now the nation's biggest cable firm. Sprint and MCI have plans to combine their operations. Upstart long-distance company Qwest Communications International is buying US West, one of the country's biggest local phone providers.

In a rapidly changing industry, 1999: The year in technology executives claim that their companies need to expand to survive. New technology has blurred the lines between phones, the Internet and cable TV, and revised regulations allow firms once limited to a certain sector to compete in other niches.

The best example of this trend is telecommunications giant AT&T. Known for its long-distance empire, the firm now plans to offer local phone service and high-speed Net access over cable networks. Other telecom firms are following suit by planning packages of phone, TV and Net access at low costs.

But in the wake of cutthroat deal making, policy makers and consumer advocates are struggling to sort out whether companies can deliver services without abusing their new market power.

"The efficiency and economies of scale of consolidation are easy to see," said Andrew Schwartzman, president of the Media Access Project, a Washington, D.C.-based consumer group. "The discontinuities and the diminished innovation which flows from predatory misconduct are much more subtle, often invisible and hard to measure."

Analysts say it's too early to tell what "too big" means in today's communications market, however.

Deregulation and the explosion

Titans come together
Partners Date Worth Significance
Jan. 15 $56 billion Made Vodafone the largest wireless phone company in world.
Jan. 19 $6.7 billion Gave @Home a leading Web presence, access to millions of dial-up users.
May 5 $54 billion Gives AT&T access to local cable customers for phone and high-speed Net service.
Global Crossing
July 18 $11 billion Gave Global Crossing leading Web hosting and services operation.
US West/
July 18 $36.5 billion Gives Qwest access to local phone network with a near-monopoly in 14 states.
Bell Atlantic
Sept. 21 *$70 billion Merges U.S. wireless operations for a nationwide mobile phone footprint.
MCI WorldCom/
Oct. 5 $129 billion Merges No. 2 and No. 3 long distance phone companies, gives MCI a wireless network.
* Value of joint venture
Source: Staff research
of new data technologies means that nearly all of the once-protected monopolies are facing new competition from giants and fast-moving Internet-based newcomers.

Dozens of new players like Qwest are building new high-speed networks that are capable of handling data and voice transmissions. Internet service providers (ISPs) like America Online are rapidly encroaching on telephone company territory, offering phone service over the Internet.

"The market dynamics are very different," Yankee Group analyst Boyd Peterson said. "There is a very real and visceral fear [at large firms] that they have to move forward at the speed of these new entrants."

Industry consolidation fears are usually linked to concerns that consumers will have to pay higher prices for less choices--but that doesn't seem to be happening yet, analysts say.

Companies from AT&T to Bell Atlantic to Cox Communications all are moving toward offering bundles of local and long distance phone, high-speed Internet and TV services. Several versions of these bundles will ultimately be available in most urban and suburban areas, driving overall prices lower, analysts say.

"It's too early to worry," said Roger Wery, executive vice president of Renaissance Capital, a telecommunications consulting firm. "Because you have a significant number of deep-pocketed newcomers, there will be an expensive fight for consumers. From a consumer point of view, that will be an immediate benefit."

Nevertheless, the unprecedented size of many of the mergers, and the way in which companies are moving quickly to control developing markets like wireless phone service, is giving some critics pause.

Regulators are looking at two proposed mergers in particular. AT&T's bid to acquire cable company MediaOne would give Ma Bell vast new power in the cable TV and local phone businesses. MCI WorldCom's proposed merger with Sprint would combine the nation's No. 2 and No. 3 long-distance providers.

If its MediaOne purchase is approved, AT&T would own or have an interest in more than half of the 95 million homes passed by cable TV lines, if a 25 percent share in Time Warner is included in the total. Depending on how those homes are counted, that may exceed caps that federal regulators have placed on cable ownership.

MCI WorldCom's bid to merge with Sprint has probably raised the most eyebrows in Washington. Federal Communications Commission chairman William Kennard called the deal a "surrender" shortly after it was announced, and an FCC memo recently leaked to the press called aspects of the merger "intolerable."

But the year's merger mania extended far beyond long-distance firms, as wireless companies sought to extend their footprint here and abroad.

Britain's Vodafone kicked off the year, buying AirTouch Communications to become the largest wireless operator in the world. It followed that deal later in the year by striking a venture with Bell Atlantic to combine their U.S. operations. To cap the year, it's in the middle of a $143 billion hostile takeover bid for Germany's Mannesmann, a large wireless phone operator.

MCI WorldCom and Sprint's deal also was driven in large part by wireless ambitions--MCI WorldCom had long desired a wireless phone strategy, and Sprint's PCS division would bring one of the only national footprints in the business.

All of these companies are banking on analysts' predictions that 1 billion people worldwide will be using wireless phones by the year 2003.

Some consumer advocates argue that government regulators are not giving large mergers enough scrutiny, allowing huge new companies to gain enough market power to squeeze out potential competitors.

But many industry insiders say regulators are doing a good job, and are addressing the potential problems of each merger individually.

"We're a big country, and a big economy, and we need big businesses," said Reed Hundt, former chairman of the FCC and now a venture capitalist who invests in communications firms. "But not all deals people want to do are going to be approved."