ATT Proposes BellSouth Buyout

RAY SUAREZ:

For decades, the telecom giant AT&T, often called Ma Bell, dominated local and long distance telephone service in the U.S. The extent of the company's power was even parodied by Lily Tomlin on "Saturday Night Live."

LILY TOMLIN, COMEDIAN:

Here at the phone company, we handle 84 billion calls a year, serving everyone from presidents and kings to the scum of the earth. But we realize that, every so often, you can't get an operator, for no apparent reason your phone goes out of order, perhaps you've been charged for a call you didn't make; we don't care.

UNIDENTIFIED OPERATOR:

Thank you for using AT&T.

RAY SUAREZ:

By the mid-'70s, the federal government insisted Ma Bell's monopoly wasn't a good deal for consumers. The U.S. launched a decade-long anti-trust case against the company, arguing AT&T stifled competition.

In 1984, a court order split the monopoly into eight different pieces, one long distance company, still called AT&T, and seven local telephone service providers, known as the Baby Bells. The bells operated separately for more than a decade, but, by the late '90s, the industry had changed, and the bells began buying each other.

NYNEX and Bell Atlantic joined forces in 1997 to form Verizon. Three years later, US West joined the long distance company Qwest. And AT&T expanded by joining Pacific Telesis and Ameritech. AT&T was then bought out by Southwestern Bell, known as SBC Communications, but both companies retained AT&T's corporate name.

With the new $67 billion bid by AT&T to acquire BellSouth, that would leave just three local telephone service providers. The new AT&T would become the largest U.S. Provider of telephone services, with 71 million phone lines in 22 states, and the largest supplier of broadband Internet access. AT&T would also own Cingular Wireless, the nation's largest mobile phone company. The new company would have 54 million wireless subscribers.

BellSouth Alabama President Tom Hamby said the deal would broaden consumer choice in a changing industry.

TOM HAMBY, PRESIDENT, BELLSOUTH ALABAMA:

What customers will really share in is great innovation, new services, more competition, and I think those are the real benefits to customers.

RAY SUAREZ:

But Gene Kimmelman, director of the Consumers Union, said the merger was bad news for consumers.

GENE KIMMELMAN, CONSUMERS UNION:

We're losing a lot of that aggressive competition that drove cell phone prices down. And I think the days in which those prices keep falling through the floor are probably gone.

RAY SUAREZ:

The deal is expected to save the company some $2 billion annually. Most of the savings will come from the 10,000 job cuts, coming through attrition, reduced advertising expenses, and combined infrastructure.

The Justice Department and the Federal Communications Commission still need to approve the merger; that could happen in the next 12 months.

RAY SUAREZ:

For more on the AT&T story, I'm joined by Blair Levin, managing director and regulatory analyst for Stifel, Nicolaus and Co. He was the chief of staff for the Federal Communications Commission from 1993 to 1997. For the record, he doesn't consult for AT&T or any of the other Baby Bells, but his firm has several other telecom clients.

And Louis Galambos, a professor of history who specializes in economics and business at Johns Hopkins University in Baltimore. He's also co-author of the book "The Fall of the Bell System."

Blair Levin, what makes these companies so attractive to each other?

BLAIR LEVIN, STIFEL, NICOLAUS & CO.: Well, the primary thing is that they both owned a wireless asset in common, Cingular, the nation's largest wireless company. And it was going to be very difficult down the road to continue to operate that company as a joint venture.

And so the notion of bringing that wireless asset together under joint ownership was extremely attractive for branding reasons, marketing reasons, bundling the wireless with the enterprise operations; there's a lot of synergies that can be had there.

RAY SUAREZ:

Anything happening in the wider market that sort of is pushing companies toward bigness or even more bigness?

BLAIR LEVIN:

Well, there are a lot of different things going on in the marketplace, some of which are driving toward bigness, some of which are driving in other directions. For example, Sprint, a wireless company, is selling off their wire-line assets, as is the company Alltel.

But in the case of AT&T, one of the things that's happening is they're getting into the video market, so the broader geographic area they cover, the bigger a video buyer and distributor they're going to be. And that's another attractive thing about this transaction.

RAY SUAREZ:

Professor Galambos, does this deal make sense to you as an observer of that market?

LOUIS GALAMBOS, PROFESSOR OF HISTORY:

Certainly. I think the driving force here is economies of scale. And you're seeing that throughout telecom. And you've seen it for a number of years now, so I think that the idea of reducing costs and getting a larger footprint is what's driving the deal at this point.

RAY SUAREZ:

But isn't that same idea of bigness helping create economies of scale, one of the things that bothered people when AT&T as a unitary company had much bigger chunks of the American communications business?

LOUIS GALAMBOS:

The bell system — this is not a reincarnation of the old bell system or the old AT&T. That was a vertically integrated corporation that produced its own equipment, that handled long distance, as well as local calls, and had virtually zero competition.

Now you've got an intensely competitive situation. You've got a company that's competing in a service industry. It's not vertically integrated in the way it was; it's responded to these forces of competition. So it's a changed situation, and particularly important, I think, is that technological change that's taking place. It's taking place very rapidly, and you're seeing responses to it.

RAY SUAREZ:

So this changed situation, as you call it, means the logic that prevailed 20 years ago behind the breakup of the bell system doesn't even come into play anymore as these companies are finding each other once again?

LOUIS GALAMBOS:

Well, I think that you're going to still see people watching this company, and seeing how it performs, and seeing whether the forces of competition are still working and technological change are still working. So the situation has changed.

Yes, it's changed in terms of the technology. It's changed in terms of the competition. It's changed in terms of the kind of markets now that they're dealing with. So I think it is a drastically changed situation.

RAY SUAREZ:

Blair Levin, in the earlier report, you heard a consumer advocate say that the kind of competition that drove down prices in long distance, in wireless, simply won't exist any more as there are fewer competitors and bigger companies.

BLAIR LEVIN:

Well, in terms of wireless, which was the specific example he chose, this doesn't really change the picture in wireless, because these two companies already were combined, in terms of wireless.

It could have been that BellSouth might have gotten into serving big businesses and they won't get into that business now. It could have been that AT&T would have entered the BellSouth region and offered a VOIP or some kind of alternative phone service. And they're not going to do that now.

But the major competition that the government is looking for is not competition between the phone companies; it's between wireless companies. It's between the cable companies and the phone companies. And this merger doesn't really affect that kind of competition.

RAY SUAREZ:

Well, you mentioned VOIP; that's voice over Internet protocol. But it's only an example of what's been happening in this business. As cable companies started offering phone service, phone companies are offering cable service, and television, and wireless. Wireless companies are offering Internet access.

BLAIR LEVIN:

Right.

RAY SUAREZ:

So do you end up with just a few enormous, integrated players at the end of this scenario?

BLAIR LEVIN:

Well, I don't think we're going to end up — it's not going to be like, you know, a sandwich shop where you're going to have hundreds of different players. But if you look at the wireless market, where we had, from after the auctions in 1994 where the FCC essentially helped create a number of new wireless players so that we got to about six or seven in a lot of different markets, wireless prices started to drop about 20 percent a year.

We've now consolidated to about four. Wireless prices aren't going down so much, but there's still significant competition, in terms of services, and different kinds of handsets and applications, so there's a great competitive impulse.

It's not clear that we need tons of competitors, but there's a good question about whether we need two, three, four, how many in a market; you're not going to have a lot, but you're going to have some.

RAY SUAREZ:

Well, Professor Galambos, how many competitors do you need to keep prices at least stable or low, to keep the companies with incentives to provide good service and back-up to the equipment they sell, to have enough pressure in the pipeline to keep customers well-served?

LOUIS GALAMBOS:

I think you're going to drift toward a sort of stable oligopoly with a few producers of the basic service. I think you're going to have maybe two to three. And you're going to have alternatives coming from the technology.

That's been changing so rapidly and putting so much pressure on the industry, I think that that's been a major factor that's made for — that's prevented a solidification of any kind of monopoly power. So I think that's likely to continue in the future; we don't see the end of it right now.

RAY SUAREZ:

Looking back — and you're one of the historians of the breakup of the bell system — did it do its magic? Did it do what it was supposed to do, to dismember that enormous monopoly?

LOUIS GALAMBOS:

I think that the breakup of the bell system accelerated innovation in the industry. If you ask me, "Could it have been done a better way? Could it have been an easier way? Could it have been done a little bit cheaper socially?" I think that's probably true.

I think we could have allowed the competition to play out and it would have had the same long-term result. The effort to create an ideal structure at that time has failed, and we're drifting back toward a different structure.

RAY SUAREZ:

Blair Levin, same question. Now, looking back, knowing the way things played out, and knowing what you know now, was it worthwhile for the federal government to force such a huge change in a basic industry?

BLAIR LEVIN:

I think so, absolutely. But what's interesting is that probably the best things it did were things that could not have been anticipated at that time. The wireless industry that we have today, the very competitive, innovative, dynamic player or market would not have happened if we had let AT&T stay in monopoly.

I don't think we would have had the Internet develop in the kind of exciting, dynamic way that it's developed. If you had one company kind of controlling the end-to-end network, with all of its economic power and all of its political power, it wouldn't have created the space where you really had innovators at the edge of the network and at other places pushing the innovations.

And that's the key. Far more than lower prices, it's: Do we get the kind of innovations in the technology that drive new services and applications?

RAY SUAREZ:

So how does this new merged company fare, as you look at the somewhat transformed marketplace and this big new player?

BLAIR LEVIN:

Well, you know, it's a very large company. It's got a lot of terrific assets, but I think it's going to be really tough. I mean, one thing that — people talk about they're bringing AT&T back together. But as your report talked about before, look at the markets that they're in: wireless, broadband, video. Those were not the markets of AT&T.

Running a company that's in all of those markets and trying to take advantage of size as opposed to flexibility, it's going to be a real challenge. You've got to admire what the CEO, Ed Whitacre, has done in bringing it back together and in handling a lot of difficult situations from when he took over at Southwestern Bell.

But on the other hand, the future is going to be very tricky. It's a much more dynamic future. Technology, as the professor said, is a key player here. It's going to be a challenge, but it will be fun to watch.

RAY SUAREZ:

Well, professor, in the recent past, AT&T has been punished by the stock market after making acquisitions. It's been a company that's been talked about and written about as one with real weaknesses. How does it look going forward from here, if the merger goes through?

LOUIS GALAMBOS:

It's going to be a real test; I think we're agreed about that, and that is that it's going to be a difficult test to combine the assets. It's a difficult test — it's going to be facilitated somewhat by the common bell experience in the past, and you can see that in the leadership.

But I think it's going to be difficult to bring it off, and then I think it's going to be difficult to stay ahead of the technology. That's the real challenge: The challenge is to move quickly, and that's what they're going to have to do.

RAY SUAREZ:

And do you anticipate a rough road in the regulatory approval?

LOUIS GALAMBOS:

No, I don't see that. I think the time for that has passed. I think people realize now that they're going to have to have very large players, that it's going to be a search for economies of scale; I think they understand that. I think we understand that a lot better, and our historical experience has helped us in that regard. So I think it will move through rather quickly.

RAY SUAREZ:

Professor Galambos, Blair Levin, thank you both.

BLAIR LEVIN:

Thank you very much.

LOUIS GALAMBOS:

Thank you.