SBC, MCI, Qwest

Telecom Mergers Limit Choices Of Customers

SHAWN YOUNG and JESSE DRUCKER / Wall Street Journal 4feb2005

The nation's independent long-distance phone industry could be dramatically reduced in the wake of SBC Communication Inc.'s pending purchase of AT&T Corp. and MCI Inc.'s merger talks with Qwest Communications International Inc.

"The traditional competition as we have known it is going out the window," says Maribel Lopez, an analyst at Forrester Research in Boston.

Long-distance giants AT&T and MCI have been fixtures of the nation's households for decades. Despite recent pullbacks from the consumer business, AT&T has about 24 million household customers and roughly three million business customers. MCI serves roughly 14 million homes and about one million businesses of various sizes.

For consumers and companies, whose options for buying phone and data service have multiplied in recent years, the disappearance of the two would mean fewer choices -- and, potentially, higher prices. New technologies, including cable phone service, and wireless and Internet calling, have created alternatives. But for low-tech households, taking advantage of the new options is likely to mean paying an extra bill for a cellphone or high-speed Internet access.

Businesses also could have reason for concern. Many have come to take for granted dramatic price cuts on phone and data service when they renegotiate their telecommunications contracts. They could see those discounts shrink as the regional Bell companies absorb rivals AT&T and MCI. The deals could leave many companies heavily dependent on one provider and force them to change negotiating tactics on telecom-service purchases.

Some industry observers also worry that consolidation could cut down on innovation. They say the advancement of technologies such as Internet phone calling could be held back by Bell companies with no AT&T or MCI to fight back. AT&T, for example, has been one of the biggest proponents of Internet calling as a way to bypass the Bells' connections into U.S. homes and businesses.

"We're seeing that industry structure is catching up to technological reality," says Reed Hundt, who was Federal Communications Commission chairman under President Clinton. He and others say the selection of a new chairman of the FCC will have a tremendous impact as all the change is sorted out.

Since the 1996 Telecom Act, millions of telephone users reaped the rewards of greater competition as the local phone giants and long-distance companies invaded each other's businesses. That all changed last year, when regulators dropped rules that required local phone companies to allow competitors to use their networks at deep discounts to offer local service. By that time, the local companies already had made deep inroads into long distance.

All the competition caused long-distance-per-minute prices to plummet. In 1995, the average household spent $32.78 a month on long distance. Now, it is $13.70, according to TNS Telecoms, a Jenkintown, Pa., market-research firm.

But those gains could erode with the disappearance of the country's two biggest long-distance providers. With their rivals reduced mainly to small niche companies, the local-phone and cable companies quickly could start to behave like a classic duopoly in which neither side considers it worthwhile to start a war for market share.

"The loser is the customer," says Brian Adamik, president of Yankee Group, a Boston-based technology consulting firm.

Cable companies increasingly are entering the telephone business, with nearly every major operator announcing plans to roll out phone service. Close to 29 million households are offered phone service by their cable company, and that figure should increase to 71.1 million by the end of this year, according to Kagan Research LLC. (By year's end, 5.7 million households are expected to actually get their phone service from cable companies.)

But cable companies long have irritated customers with frequent price increases, and they are marketing phone service as part of packages that also require television and high-speed Internet access. Cablevision Systems Corp., for example, won't sell phone service unless a household also subscribes to its broadband Internet service -- making the total package cost about $80 after promotional periods end, and the deal also requires a customer to buy TV service.

Time Warner Inc.'s cable unit will sell phone service separately for $49.95 a month, which is 25% more than the $39.95 it charges for phone service if customers take its video and high-speed Internet service.

Consumer advocates say the biggest savings are going to the biggest spenders as companies try to lock them up. "Only 20% of consumers buy all three," says Mark Cooper, director of research at Consumer Federation of America. That being the case, he says, 80% of the people "have to spend more to get the benefits of the bundle competition."

Internet-based calling is growing quickly as an alternative to traditional calling and likely to attract about 16 million customers by 2008, says Jon Arnold, an analyst at Frost & Sullivan. But so far, the service has fewer than one million customers -- and it requires a broadband connection, which usually costs $25 to $45 a month from a phone or cable company.

Broadband service is widely available, but there remain pockets where it isn't an option. Broadband was available in 94% of the nation's ZIP codes by July 2004, and 81% of ZIP codes had more than one provider, according to the Federal Communications Commission. But only 5% of towns with fewer than 10,000 residents had broadband access, according to an October 2003 report from the Center for the Study of Rural America.

Internet-based phone service generally costs $25 to $40 a month for unlimited calling. "It's not ready to be a mass-market product yet," says Mr. Arnold.

Another problem with Internet calling is that most local phone companies, except Qwest, won't sell Internet-based phone service à la carte. That means customers who have DSL from their Bell and want Internet-based service must continue to pay for basic local phone service.

Although their choices may narrow, consumers who are tech-savvy or determined to find bargains still will be able to find deals. Cut-rate long-distance services abound and are easy to find on Web sites such as www.lowermybills.com or www.saveonphone.com. And new wireless and data technologies continue to tempt upstarts to enter the market, analysts say.

Businesses, meanwhile, could feel the pinch from consolidation because the Bell companies have been competing very aggressively on price to lure companies away from AT&T, MCI and Sprint Corp., which are far more established in the highly competitive market for corporate customers.

Qwest, the only regional Bell that has its own nationwide fiber-optic network, has been aggressive in the business arena. Because the Bells so far haven't deeply penetrated this "enterprise" market, some companies say a Qwest-MCI merger -- more than an SBC-AT&T merger -- would reduce choices.

This could be a shock to corporate telecom managers. "With very, very little effort, they've been saving millions," says Nick Wray, a vice president at Control Point Solutions, a Rutherford, N.J., company that helps large businesses negotiate and manage their telecom contracts.

Other businesses point out that consolidation could bring some stability to the battered telecom sector. Arvind Sabharwal, director of global technology offices for GMAC Financial Services, says: "At this current level of consolidation, we should be able to benefit from that if they execute correctly. In the longer view, if it gets down to one player, that would be a very strong concern to us."

--Peter Grant contributed to this article.

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