Telcos scramble to ride the light

The nation's local phone giants are scrambling to get a piece of the new high-speed, long distance networks, even if they aren't yet allowed to use them.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
4 min read
The nation's local phone giants are scrambling to get a piece of the new high-speed, long distance networks, even if they aren't yet allowed to use them.

BellSouth's $3.5 billion investment in Qwest Communications International today follows SBC Communications' similar investment in Williams Communications, another newcomer stringing the country with high-speed fiber.

The investments, and the short-term marketing arrangements associated with the deals, are largely placeholders in the near-term. Federal law bars the Bell companies from selling or carrying long distance voice or data until they have proved their local markets are open to competition.

Nevertheless, the local phone companies intend to have a strategy in place that will allow them to dive into long distance data and voice traffic the moment they are given the green light for these markets.

"Like a good Boy Scout, they're prepared," said Scott Cleland, a telecommunications industry analyst with the Legg Mason Precursor Group. "This is a complicated business. They can't wait for regulatory approval."

BellSouth's investment in Qwest gives it a stake in one of the most dynamic of the new telecommunications companies.

Just two years after going public, Qwest is already valued at more than $28 billion. It has spent the last year striking partnership deals that have given it easy access to capital, and helped it speed construction of a strong network in the United States and Europe.

In the initial stages of the BellSouth agreement, the two companies will be limited to a kind of joint marketing pact. Even here they will have to walk a fine regulatory--Qwest had similar arrangements with US West and Ameritech nixed last September, after the Federal Communications Commission decided the agreements would essentially allow the Bells to sell long distance services.

Analysts said that until the local phone companies are allowed to offer long distance--an uncertain process--they'll have to use their investments for Web hosting and some other out-of-region data services.

"The real order of business for these companies is getting FCC approval to go into [long distance], but there's very little indication outside of Bell Atlantic that any of these companies are anywhere close," said Robert Rosenberg, president of Insight Research, a telecommunications market research firm.

In the meantime, analysts said BellSouth is likely to utilize Qwest's growing Internet Protocol-based data services such as Web hosting, an advantage that SBC does not have with its stake in Williams. Williams is focused on simply selling capacity to other carriers.

"Qwest has a lot of data assets that BellSouth will be in a position to leverage," said Mark Langner, an analyst with investment bank Hambrecht & Quist. "Will all this be recognized right out of the box? No. But there's a lot more there than just a bunch of pipes."

Once BellSouth is allowed to enter long distance markets, the two companies will be able to join their network operations more explicitly.

This capability is particularly important in targeting the company's business customers, who will be able to use the pair for local and national high-speed data services.

BellSouth has been the most aggressive company Sharing the wires in seeking federal regulators' approval for its long distance efforts, but has been turned down twice.

Analysts say, however, that it has made significant progress in at least one state. Bell Atlantic and SBC are likely to win the first rounds of long distance approval, but BellSouth is probably within six months to a year of entering long distance in Georgia, Cleland said.

Once it begins winning long distance approval, the company can begin rolling the Qwest services into its package of service offerings on a state-by-state basis.

More deals ahead?
Other Bell companies are likely sniffing around the remaining independent carriers, analysts said.

The BellSouth investment, in addition to the SBC stake in Williams and Global Crossing's recent acquisition of Frontier, means there are fewer independent players left in the fiber optic network arena.

Bell Atlantic is already positioned to inherit a nationwide network through its merger with GTE, though the construction of these lines lags well behind carriers like Williams or Qwest. US West is likely looking at its own options with the likes of Level 3 Communications or IXC Communications, analysts said.

"This raises the big question of who will align with Level 3," Cleland said.

Level 3, IXC, and Enron Communications, a unit of energy giant Enron, all are building similar nationwide fiber optic networks. Despite searching for several months, IXC has not yet landed a buyer--perhaps since the company lags behind others in the industry, analysts said.

Others, such as Janco Partners analyst Tom Friedberg, believe Level 3 intends to operate alone.

"For them to partner with [a Baby Bell], I think it would be a departure from their vision of a pure IP and ATM [asynchronous transfer mode] network," Friedberg said.

Many industry observers have said the next-generation carriers would face a period of consolidation soon. But some analysts are not convinced that the investments by SBC and BellSouth mean those local phone companies will necessarily buy their new partners.

"This is not Qwest locked up with BellSouth," Langner said. "There's no guarantee that BellSouth would buy them, it just puts them first in line to bid."

But most experts agree the market will continue to remake itself through alliances or mergers, with the ebb and flow of regulatory and industry pressures.

"I think we will see at least one more iteration of this," said Peter Jarrich, a telecommunications analyst with the Strategis Group. "That's probably assured in the short term."