Consolidation has become imperative for the RBOCs as these competitors get stronger, and they seek to rely on sheer weight and bullying power to fend off newer challengers, from municipal hotzones to broadband wireless ISPs.
"It is not only a question of lower cost alternatives for high speed wireless access, but of more intense price competition for an expanding number of operators," said president Harvey Cohen. "Operators, including Verizon, Cingular/AT&T, and Sprint/Nextel will make more than $100bn in investments into advanced wireless capabilities over the next four years, but the returns may not be as high as initially expected due to the growing intensity of competitive forces."
The other contender will be Sprint-Nextel, which has no local operations but has the huge double advantage of a national cellular network on which it has built an extremely successful MVNO business, which may well be the basis of the cableco's mobile push; and the spectrum to build a parallel broad band wireless network for enterprise services and for MVNO use.
While Sprint may gain from the consolidation, if it turns the situation to its advantage and becomes the key ally of all the challengers to the RBOCs, Clearwire has a similar opportunity on the broadband wireless side. However, it will suffer, short term, from the takeover of AT&T, as may Intel--both companies were becoming increasingly close to the telco, with major joint ventures surrounding WiMAX equipment and services, and AT&T was widely expected to lease Clearwire's evolving capacity for its own grand WiMAX plans.
These plans will not be on hold, since their main motivator was to enable the telco to bypass paying fees to the RBOCs to deliver services to the last mile. While SBC has made broadband wireless part of its ambitious planned next generation network, this will be a small piece compared to its massive fiber roll-outs. It may also use WiMAX to avoid paying fees to fellow RBOCs outside its territories, but this roll-out will almost certainly be more patchy than AT&T's plan would have been. While not important for WiMAX long term--at least, as long as other national plans such as Clearwire's and SK-Earthlink's remain on track, delivering very advanced services to the US consumer and business--in the short term AT&T's aggressive timescales would have created an early major boost to the new market, stimulating confidence and volume.
The SBC deal has, naturally, sparked speculation on who will be next, since both Verizon and BellSouth seemed more inclined to grow through their own acquisitions than by counterbidding for AT&T. The main candidates are MCI (formerly WorldCom) and Sprint, which is looking to spin off its long distance wireline business, but which could also be a more ambitious target in its entirety.
Verizon will be pushed into a close second place in the US telco stakes by the SBC-AT&T merger, as its wireless arm was by the Cingular-AT&T Wireless marriage. In both markets, its aggressive organic growth strategy could well enable it to regain its top spot without further acquisition, but most analysts expect it to make a play for another telco at some point. However, this may not be immediate--Verizon could have made a counterbid for AT&T, but is likely to be retaining its resources for a different purchase, buying Vodafone out of its 49% stake in Verizon Wireless. However, since failing in its own bid to acquire AT&T Wireless, Vodafone seems intent on retaining its presence in the US market by clinging on to its Verizon Wireless stake.
This stand-off is unlikely to be resolved soon, since Verizon Wireless is becoming an increasingly attractive asset, and the other options for Vodafone (or Verizon) in the US mobile market are fading fast. Cingular Wireless would be a massive acquisition with all kinds of integration risks plus almost certain regulatory problems. Deutsche Telekom shows no signs, these days, of wanting to sell its T-Mobile USA unit, and this is too spectrum starved to be a great attraction to Vodafone anyway, and falling behind in the 3G roll-out race.
This leaves Sprint-Nextel, now the third US cellco. Indeed, if Verizon, or indeed Vodafone, is looking for a major buy, all roads have to lead to Sprint. The newly merged company has some migration headaches ahead for Nextel's ageing iDEN network, but it has good national cellular coverage as well as the undervalued asset of its national WiMAX-suitable spectrum holdings in . Nextel was famously profitable and resistant to customer churn, while Sprint has, in the past two years, accomplished much of the turnaround that potential acquirers would have been forced to take on themselves in its darker days. It also has advanced plans to spin off the wireline business, which could be carried through by a purchaser if it decided to stay out of that constricting area of operation--as Vodafone almost certainly would.
Although we see Sprint as the real catch in the US telecoms market, it is on MCI that most of the speculation is centering, partly because it has made little secret of its willingness to be acquired and a deal would face fewer regulatory hurdles. MCI emerged from bankruptcy protection in April last year, and now has less debt than AT&T and $ in cash. It would be a fairly cheap purchase, with its market capitalization being $, less than half of AT&T's. However, it also has only half its larger rival's market share in the enterprise sector and it is less efficiently run. It is investing less in its networks than its competitor and has margins eight percentage points lower (after deducting access fees paid to the RBOCs). Its main benefits to Verizon or BellSouth would be to enable them to bundle in long distance services with local, and to give them a better foothold in the enterprise voice and data sector. But it has a tarnished brand and the enterprise market itself is losing margin rapidly.
The RBOC showing the most immediate interest in MCI is Qwest, the smallest of the four and itself keen to find a buyer, It is in merger talks with MCI, and is said to be offering about $. Verizon could easily outbid this price, of course, and the talks may provoke it into action. Qwest has market value of about $ but debt of $, and is well behind the other Bells in rolling out broadband networks. MCI would at least bring it greater flexibility with its debt and some cash. However, it would be a merger of two weak players and it is hard to imagine it being able to make a significant turnaround. Instead, it could become a rather more attractive acquisition prospect than either partner is on its own.
BellSouth's reaction will be interesting too. Like Verizon, it may be keen to gain access to long distance and global networks in its own right, rather than having to pay a third party, now that SBC has made this move with AT&T. It, too, could make a bid for MCI, with or without Qwest involved, or could go for Sprint. Like Verizon, such a bold move might involve a change of relationship within its current cellular joint venture (it holds 45% of Cingular).
Buying MCI would smack of the RBOCs chasing size and weight at the expense of a forward thinking strategy. Sprint, for all the complexities of the merger process, would speak of a far more creative approach to the next generation network and the quadruple play. However, we hope Sprint-Nextel is preserved from the RBOC clutches to remain one of the best counterbalances to their growing power.
MICHAEL POWELL QUITS FCC
If the road to telecoms hell is paved with good intentions, Michael Powell's tenureship of the US Federal Communications Commission (FCC) may well have pointed the US towards perdition. Undeniably pro-competition and supportive of radical new choices, many of his greater visions were not translated into meaningful action because of a failure to stand up against the power of the big players. But his instincts were sound and liberal and, for all his failures, his worst decision may still prove to be the one to resign at this crucial juncture, when the Regional Bell Operators are grasping power more aggressively than ever. It would be a remarkable FCC chair, in the current political climate, who could manage to stem that tide now in the interests of competition and innovation--especially if an SBC-AT&T merger proposal does materialize, providing the greatest imaginable test of telecoms competition policy (see separate item).
Powell announced in January that he would step down as both chair and commissioner after more than three years in the top job, immediately sparking fears that the Bush administration will replace him with someone who is less supportive of free competition among service providers or of boosting new network technologies such as Wi-Fi and WiMAX.
Powell's rulings in these areas were frequently compromised by pressures from the major service providers, whose influence grew enormously during his reign, but it would be hard to question the sincerity of his belief that telecoms policy must encourage increased competition, greater access for the entire population to a wider choice of services and providers, and the spread of technologies that would enable the US to develop a better communications infrastructure as an integral part of remaining economically competitive.
Powell can be criticized for giving in too often to the pressures of the RBOCs (Verizon, SBC, BellSouth and Qwest), but has certainly also been a strong advocate of technologies that could be used by alternative operators to challenge those incumbents, including Wi-Fi and WiMAX. The main problem was that, in reality, the sops thrown to those challengers were overshadowed by the concessions made to the frantically lobbying telcos and cellcos. UltraWideBand was permitted, despite the intense opposition of the mobile carriers, but under a spectral mask so stringent as to rob the high data rate technology of many of its advantages. New spectrum was opened up for unlicensed operators, but the Baby Bells were allowed to consolidate their dominant positions with new rules on unbundling.
Wireless was the best of Powell's FCC. While it made weak decisions regarding unbundling, Baby Bell control of the networks, and media ownership and consolidation, the wireless moves were generally in the right direction, if sometimes too timid.
Powell initiated a process of spectrum liberalization and opened up an unprecedented swathe of new bands in the spectrum-starved US, for unlicensed Wi-Fi use. Other bands are to be auctioned, or their usage conditions relaxed, in the coming year to boost broadband wireless roll-outs.
Powell's greatest legacy will probably be the long term effects of opening up additional spectrum and allowing innovative secondary use of occupied bands. This has created a stronger framework for new services to be launched that will provide attractive alternative to incumbent offerings.
With the number of wireless subscribers up from 130m to 175m during his tenure, this has been a central theme of his FCC. In a list of policy highlights distributed with the resignation statement, wireless decisions were prominent, with Powell picking out the creation of the spectrum policy taskforce in June 2002; unlicensed and licensed spectrum allocations in May 2003; elimination of the spectrum cap in November 2001; settling the NextWave Telecom case and moving the spectrum back into public use; wireless local number portability and pushing hard for E911 emergency response measures. Although generally on the side of industry--big or small--Powell could be consumer focused too, as the number portability issue highlights.
The other achievement for which Powell should be remembered is the reduction of regulation, taking some steps to modernizing the anachronistic web of rules that the communications industries have inherited from the earliest days of government policy in this area. By refusing to subject some innovative new services to the old rules that govern the telcos, he opened the way to important new options, such as VoIP.
Notably, by classifying the cable modem as an 'information service' in 2002, the FCC was able to block efforts to apply existing, complex and often anachronistic telephony regulations to new broadband technologies. It scored a similar win last year with wired and wireless Vole keeping the emerging technology largely free from local and state regulators.
Although Powell had hinted that he would resign before, it is not clear why he chose this timing. Political pressure from the regional Bell operating companies (RBOCs) is suspected, but the chairman was widely thought to be weary of the thankless task of arbitrating between competing interests, all pushing him to shackle their competitors.
"There's no shortage of people asking us to help them hobble their competitors," he said in his recent speech at the Consumer Electronics Show. "Welcome to the hell that is the FCC."
Powell had suffered a string of defeats--including the critical one over media ownership rules (although he has still to decide whether to appeal the final decisions in the Supreme Court)--and may have seen the possible issue of an SBC-AT&T merger proposal as a bridge too far for his chairmanship.
Powell has not been cowardly in taking on sacred cows in US communications--his predecessors preferred to leave thorny issues like local competition well alone. The media ownership outcome may not have been successful, but at least Powell tried--the ancient rules had gone unreformed before his day.
Yet, despite this courage in raising difficult issues, Powell's successes were usually tempered by political compromises, and in the end, while the agenda was visionary and the intentions laudable, the big names were allowed to dominate it to an extent that disturbed most pro-competition lobbies. Many aspects of telecoms reform were dropped or watered down, and the much publicized success of the Baby Bells in influencing states to stifle municipal hotzones may be a stronger indicator of the future than the rise of Vonage. A situation has been created under Powell that has strengthened the position of the regional Bells so much that it will be hard for them to be challenged effectively, however much new spectrum is opened up.
The worst of Powell's FCC has been its inconsistency and its occasional timidity. The best has been its support of modernizing the wireless infrastructure, opening up more spectrum than any previous agency, and its ability to stir up debate. Issues like regulation of VoIP and the implications of the digital revolution have been well aired and can no longer be ignored.
It will be a long time before campaigners get their wish for a new Telecoms Act that takes into account digital communications and media and the internet--and before that time, the moves of the RBOCs look set to drag the US backwards rather than forwards in competition terms. Powell's FCC has set the stage for both developments, the radical and the backward looking. But it has also shaped the terms of a whole new debate, on the future face of communications--one that the US is having far too late and far too negatively, that without Powell' energy, it might still not be having at all.
DETAILS OF THE SBC/AT&T DEAL
The acquisition is a mainly stock transaction which creates a company with $70bn in sales and over 200,000 staff. SBC expects, if the deal is approved, to generate about $15bn in cost reductions through consolidation of workforces, headquarters and other operations. The company overtakes Verizon as the US' largest telco. CEO Edward Whitacre will remain in his position while AT&T chief David Dorman is expected to be president.
SBC offers voice and DSL services to 50m customers in 13 states in the west and Midwest and is now upgrading its network to support fiber to the home and the quadruple play in many areas.
AT&T has 30m customers and has upgraded its global fiber network over the past few years to be one of the most advanced in the world. It has about 3m business contracts, which will be one of its chief attractions to the residentially focused SBC. Its global network spans over 50 countries and it manages 26 advanced internet data centers round the world.
SBC CEO Edward Whitacre said: "The communications industry is undergoing a profound transformation as it transitions to unified, IP-based networks capable of delivering a host of integrated services. To manage this evolution, customers need a partner with the resources to provide new service platforms and product sets, while maintaining world class reliability and security. This merger creates that company."
Under the terms of the agreement, approved by the boards of directors of both companies, shareholders of AT&T will receive total consideration currently valued at $ per share, or $16bn. AT&T shareholders will receive shares of SBC common stock for each common share of AT&T. Based on SBC's closing stock price on January 28, this exchange ratio equals $ per share. In addition, AT&T will pay its shareholders a special dividend of $ per share.
THE NEW FCC
The choice of the new chair of the FCC will an important indicator of the approach that the Bush administration wants to take towards communications in its second term.
Commissioner Kevin Martin, a Republican with close ties to the White House, is acting chairman once Michael Powell departs and thought likely to take over his job on a permanent basis. Most of the other likely candidates have close ties to Bush and would be likely to follow his preferred route of stepping up deregulation. This is almost inevitable given the heavy lobbying of the Baby Bells for more rapid deregulation--Verizon and SBC, both major contributors to the Bush administration, have both criticized the FCC for its slowness in this respect, and Verizon led a group of companies last summer that sued the FCC for delaying regulatory reform.
One favored candidate is Michael Gallagher, deputy director of the National Telecommunications and Information Administration (NTIA) and an assistant secretary for the Department of Commerce.
High on the agenda of the new chairman will be the transition of broadcasts to digital signals; the financial problems of the Universal Service Fund, which subsidizes phone service for rural and low income Americans; how to treat VoIP; and how much further to open up new wireless spectrum.
Powell aims to hand over power this month but the process may take even longer. Even before his official leaving date of March 10, Power has a busy agenda. He hopes that the FCC will address the certification of cognitive radio, decide whether unlicensed devices can operate in the .7GHz spectrum and examine an upcoming report from the wireless broadband taskforce.
Other possible candidates are Rebecca Klein, a lawyer, Bush advisor and former chair of the Texas Public Utility Commission; Patrick Wood, another former Texas PUC chair and now chair of the Federal Energy Regulatory Commission; and Janice Obuchowski, a telecoms consultant who was an assistant secretary of commerce under the first George Bush.
Powell's closest ally on the FCC, Kathleen Abernathy, is expected to resign soon.
