Let The Telecom Consolidation Begin

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NEW YORK (AP) -- Local and long-distance telephone service, forced apart by the government 20 years ago to create competition, are rushing back together by way of corporate mergers.

The chief culprit is again the regulatory hand of government. And this time, technology is providing an able assist.

In a deal long seen as unthinkable, AT&T Corp. announced Monday that it had agreed to be acquired for $16 billion by SBC Communications Inc., itself the product of once-unthinkable mergers among three regional phone companies created by AT&T's breakup in 1984.

With the AT&T deal stoking the flames, speculation was bubbling within days that another long-distance player, MCI Corp., is set to be acquired by another of the ``Baby Bells,'' Qwest Communications International Inc., in a marriage of scandal-tainted survivors from the telecom bubble.

That, in turn, prompted conjecture that the remaining regional Bells, Verizon Communications Inc. and BellSouth Corp., will need to make a play for MCI, Sprint Corp. or even AT&T in response to SBC's aggressive move.

While somewhat abrupt, the sudden spate of deal-making isn't exactly a surprise.

Analysts have been predicting the reunification of local and long distance for at least a few years, pointing to the fierce competition that has turned the telephone business into a slugfest of diminishing revenues.

Hardest hit have been AT&T and MCI, which lacked a direct connection with most of the nation's homes and businesses. But advances in technology, especially cell phones and Internet-based calling, hurt the Bells as well.

Despite the industry's troubles, merger fever didn't materialize until after a regulatory seesaw in Washington was resolved.

First the Federal Communications Commission walloped the long-distance industry by letting the local Bells enter that market starting in late 1999. By the end of 2004, the four Bells had stolen about 50 million long-distance customers from the likes of AT&T, MCI and Sprint.

Federal and state regulators also sustained the long distance players for several years, letting them sell local phone service by leasing Bell lines at discounted rates.

Until, that is, an appeals court ruling suddenly pulled the plug nearly a year ago. By then, AT&T, MCI and others had signed up about 20 million local phone customers formerly served by the Bells.

Once the rules changed, AT&T and MCI stopped marketing to consumers. The impact was immediate: AT&T, which once had 60 million residential customers, has been losing accounts at a clip of 2 million per quarter, ending the year at 24 million.

The Bells, though big beneficiaries of that slide, have their own growing motivations to join forces with their longtime adversaries against some common enemies.

Unlimited off-peak cellular plans have been stealing business from the long-distance industry for some time. But it wasn't until last year that wireless and Internet-based calling began stealing customers away from traditional local phone service in significant numbers.

Based on FCC figures for the first half of 2004, Standard & Poor's analyst Catherine Cosentino estimated Friday that more than 5 million Americans turned off their wired phone service and went all cellular in 2004, and that a similar number may do so in 2005.

That trend also has been fueled by another regulatory change, in this case an FCC ruling that allowed users to move a home number to a cell phone.

Meanwhile, Internet-based phone service hit the mainstream in 2004 as AT&T and several cable TV companies began rolling out the product, which transmits calls over a high-speed Internet connection. Cosentino estimated that by the end of 2005, cable companies may have 7 million telephone subscribers.

And much like national calling plans have become common with traditional and cellular phone service, Internet-based calling plans generally treat local and long distance as the same.

This reality, combined with the fierce competition from other modes of service, has made the AT&T-SBC merger and other similar deals acceptable 20 years after the government ordered the separation between local and long distance.

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