The secret behind US West's sex appeal

Almost overnight, US West turns into a telecom prom queen with Qwest and Global Crossing in a $40-billion bidding war for its hand.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
3 min read
US West overnight has turned into a telecommunications prom queen, with Qwest Communications International and Global Crossing in a $40-billion bidding war for its hand.

Why is a company that is widely viewed as the least desirable of the Baby Bell local phone companies suddenly the subject of such overwhelming demand?

Analysts point to one overarching reason: It's cheap.

Telecommunications markets have gone through a frenzy of consolidation in the last year, and companies like AT&T and MCI WorldCom are gearing up to offer packages of local, long distance, and data services.

Meanwhile, newcomers like Qwest and Global Crossing have risen to stratospheric market valuations on the strength of quick fiber-optic cable rollouts, but still have a relatively small customer base and limited ability to offer local phone or consumer high-speed Internet services.

That's where US West comes in.

Only a small number of large local phone networks exist in the United States, and this number will be even further cut if the mergers between SBC Communications and Ameritech, and Bell Atlantic and GTE, are approved by regulators.

"After the mergers, there will only be four giant local companies," said Rex Mitchell, a media and telecom analyst with Bank of America Securities. "Assuming that people are eventually going to buy their local and long distance service from the same company, the long distance players need to be affiliated with one of those companies."

US West is the smallest of the big local phone companies, with a market valuation of about $29 billion. The next cheapest independent Baby Bell company is BellSouth, with a market capitalization of $87 billion. This makes US West the only big local phone firm in the price range of a company like Qwest.

"It's much easier to swallow a $30 billion company than a $90 billion company," Mitchell noted.

The full reason behind US West's sudden popularity is more complicated than its price tag, of course.

Although it is the subject of frequent criticism for its outdated local voice network, US West has been a leader among its peers in rolling out high-speed digital subscriber line (DSL) Internet service, and experimenting with other advanced applications such as video over DSL.

But company executives say they have been unable to roll out these services as fast as they would like, partly because of a conservative shareholder base that isn't willing to support risky technology investments.

Because of this, CEO Sol Trujillo has discussed the possibility of merging with several fast-growth telecommunications companies, including both Global Crossing and Qwest. Global Crossing bit the first time around, and both it and Qwest are now touting US West's broadband expertise as the key to their future growth.

"Consumers are going to benefit as we expand broadband communications to homes and businesses nationwide," Qwest CEO Joe Nacchio said in a conference call with reporters this morning.

Analysts agreed that US West's broadband expertise was a critical part of the companies' attraction. But in today's market, the allure of owning a local phone network--and a solid foot in the $110 billion local phone market--is still the primary motivation for the merger offers, they said.

"Data is important," Mitchell said. "But in today's world, local voice service is still overwhelming."