DIAL "M" FOR MERGER
APRIL 22, 1996
NYNEX and Bell Atlantic, two of the largest of the "Baby Bells" formed after the break up of AT&T, announced today that they would merge. The single company, which would retain the name Bell Atlantic, could be the second largest corporate merger in American history. The company would provide service for an area stretching from Maine to Virginia. Economics correspondents Paul Solman explains the proposed combination with Dennis Kneale, technology editor of the "Wall Street Journal."
MR. LEHRER: The big phone merger is first tonight our economics correspondent Paul Solman of WGBH-Boston has the story.
PAUL SOLMAN: Two more babies want to play together it seems, Baby Bells that is. For the second time this month, two of the original Baby Bell phone companies that split off from Ma Bell, AT&T, 12 years ago, have announced a merger. Today it was NYNEX, which provides service to six Northeastern states, and Bell Atlantic, which serves six mid-Atlantic states. The new company will use the Bell Atlantic name and will be the second largest telecommunications company in the nation after AT&T. If approved, the deal would be the second largest merger in America after RJR Reynolds Nabisco. At a press conference today, the chairmen of the two companies talked about the deal.
SPOKESMAN: The two of us together can enter the long distance market, create more competition there, and to the cable market, create more competition there, participate in the global growth throughout the world. In turn, as we mentioned before, opening up the market will bring other competition into our local market. What will happen is I believe it will great opportunities for pricing and packaging and product development on the long distance and the local side.
SPOKESMAN: Despite all the sound and fury, there has been no price competition in long distance. It's been a cozy cartel, and the prices have gone up across the board for the last five years. We are going to enter this market as this new powerful company. We're going to give AT&T and MCI and Sprint some real competition. And the people who are going to benefit are going to be the long distance customer.
PAUL SOLMAN: Here to tell us about the merger and the changing telecommunications world is Dennis Kneale, technology editor of the "Wall Street Journal." And Mr. Kneale, welcome.
DENNIS KNEALE, Wall Street Journal: Thank you.
PAUL SOLMAN: First off, why is this deal considered to be important, or is it?
MR. KNEALE: Well, for a couple of reasons. You have two of the largest local telephone companies in the county suddenly getting together to take on their former ma, AT&T. Now, that could mean new kinds of packages of services. That could mean price cuts. In addition, however, it also means that NYNEX just got rid of one of the best competitors, Bell Atlantic, that otherwise could have invaded NYNEX's own local phone market. So simultaneously while they're going to play up the pro-competitive effects in long distance, they're also going to make it, I think, even harder for newcomers to enter the lucrative New York market and local phone service.
PAUL SOLMAN: Why these two companies--why do these two companies--why would they have competed with each other more than any other two companies?
MR. KNEALE: Well, they're neighbors for one thing. They're right next to each other. Bell Atlantic has a nice base in New Jersey among its markets, and NYNEX is right here in New York. By getting together, you eliminate that threat entirely. These two have been talking for much of the past year or two. This is sort of--in telecommunications this is Prince Charles and Lady Di, and finally today they've kind of consummated.
PAUL SOLMAN: Well, that may not be the best analogy, given what's happened to those two. But, how much is this deal expected to shake up the telecommunications industry? I mean, that's what I guess the larger story is here.
MR. KNEALE: In the longer-term, the effects could be awfully real. 45 cents out of every dollar of a long distance call is the fee that the long distance provider pays to the local phone company for routing that call into the home.
PAUL SOLMAN: So wait a second. So that's AT&T, in other words, pays 45 cents on the dollar that it bills to like NYNEX or Bell Atlantic.
MR. KNEALE: Bell Atlantic, yes, exactly. Now imagine you have two local phone companies that have all the reach they want into 36 million homes and businesses, and while technically regulations require them to set up a separate long distance unit and to pay an access fee to the local phone company, the money is going from one pocket to the other. Now, that could allow those two Bells to grant significant price decreases to customers. Buy our long distance service, we'll give you nice discounts, we'll give you especially high discounts. We'll give you especially high discounts when you fall within our 12 state region.
PAUL SOLMAN: You mean, so they become a competitor to AT&T and Sprint and MCI, the big long distance carriers?
MR. KNEALE: Exactly.
PAUL SOLMAN: And that's--that's what they're going for? I mean, that's what--
MR. KNEALE: Long distance is probably the single biggest reason they want to do this merger. In their two territories combined, they probably have a shot at 13 to 15 billion dollars in long distance traffic annually, excluding those access fees that now start in some of their states.
PAUL SOLMAN: But now does AT&T or, again, Sprint or the others, the long distance companies, do they get to compete with these guys? I mean, I thought the telecommunications bill was trying to open up competition so you'd have competition on local service, which is what it does.
MR. KNEALE: It's going to require them to open their local markets, but any newcomer that comes in doesn't have what the Bells have. They have these million of phone lines directly into every home and business. If you want to come in and compete with NYNEX, you either have to build the line from scratch, which will cost billions of dollars and not be worth it in the short-term, or you have to rent the line from NYNEX and re-sell it to the consumer, which means you're going to not be able to charge as low a price probably as NYNEX charges, or you're going to have to go on cable TV lines the way some of the Bells are hoping to do.
PAUL SOLMAN: But what about wireless, all this stuff, personal communications services and cellular obviously, I mean, can't AT&T come into my market here in New England--I mean, not mine personally, but the one I use--and bypass the line, the cable coming into my home from the phone company?
MR. KNEALE: Well, cellular service is awfully spotty, it can be. If you've ever been on a cell phone and had your call cut off, you know that. And most cell phones don't go cell phone to cell phone; they go cell phone to a regular, wired phone. And the Bells own those lines that end up going right into the home. So every cell phone often ends up going straight back onto the Bell line anyway. Now, Bell Atlantic and NYNEX merged their cellular operations two years ago. It's gone spectacularly well. I think in the first quarter they were able to have an 80 percent increase in their cash flow by operating together so they've become an even more potent competitor to an AT&T wireless by getting together on that front.
PAUL SOLMAN: All right now, this is a selfish question, but I'm a NYNEX customer and an AT&T customer, and there are millions of people who are presumably in my category. What happens to somebody like me, and how soon?
MR. KNEALE: In the short-term, nothing is going to happen. NYNEX has agreed to freeze its local phone rates for five years unrelated to the deal today, so nothing is going to happen to your phone rate there.
PAUL SOLMAN: My local phone rate?
MR. KNEALE: Your local phone rate.
PAUL SOLMAN: Okay.
MR. KNEALE: I think that in a very short time, a year, maybe at most two years, you could get nice discounts on long distance calling if Bell Atlantic and NYNEX are kind of freed up to go ahead and get together and offer nice packages.
PAUL SOLMAN: Can they do that right away? Are they legally allowed to?
MR. KNEALE: There's this--the new Telecommunications Act, which was supposed to rip down all these barriers--
PAUL SOLMAN: Right.
MR. KNEALE: --between markets requires them to meet a certain checklist that says, yes, we've opened up our local market and, therefore, we now deserve to be into the long distance market that we, the Baby Bells, were banned from for 12 years. The checklist, it depends on how strictly the FCC enforces it, but NYNEX need really only kind of show that one building in the New York market is able to use a different local phone company for it to argue that we now are competitive, now let us into long distance, so they might gain entry relatively fast.
PAUL SOLMAN: Now, wasn't Bell Atlantic the one, isn't that the company that's kept out local competition fiercely and sued people and so forth?
MR. KNEALE: Bell Atlantic is pretty aggressive. You know, all seven of the Baby Bells were born as monopolies, and critics say they still operate as monopolies. They use lobbying at the state and federal level, they use lawsuits to keep competitors out. Bell Atlantic has been especially aggressive and especially effective.
PAUL SOLMAN: Okay. Well, what's labor's response likely to be to this and or has labor already responded and, if so, how?
MR. KNEALE: They're already marshalling forces to oppose this. The question is whether they're going to be effective at all at getting anything done. Bell Atlantic and Mattox are playing this very smart. They're saying there's only going to be a couple of thousand layoffs in a company that will have thousands and thousands of employees.
PAUL SOLMAN: A hundred and thirty-four thousand, a hundred and forty thousand, something like that, right?
MR. KNEALE: I thought it was something like that, and I was afraid to guess. But the unions are simply going to run out of steam awfully fast when they are complaining about a couple of thousand layoffs at a time when other companies are laying off ten, twenty, thirty, forty thousand people, and I really think that their complaints are going to fall on deaf ears ultimately.
PAUL SOLMAN: Last, very quick question. How many companies are expected to survive when the dust settles on all this merging?
MR. KNEALE: Well, at the "Wall Street Journal" every time another deal like this happens, we keep saying, and then there were five, and then there were four. And now there are three independent Baby Bells left after the merger of the two pending mergers. A lot of analysts believe you'll only end up with three or four major companies doing everything in Telecom services after a few years. Now the three Bells left are insisting they're going to go it alone, but a lot of people feel like that's just not the way it's really going to turn out.
PAUL SOLMAN: All right. Well, thank you very much, Mr. Kneale. Thanks for coming by.
MR. KNEALE: Thank you.