BellSouth Wholesale Under New Management

LIKE THE OTHER MEGAMERGERS

before it, the $67 billion merger of AT&T Inc. and BellSouth Corp. is not likely to be denied, but will face challenges from competitors seeking network access as a condition of the merger, which creates the largest telephone company in the country.

AT&T will rebrand BellSouth and Cingular under the AT&T name. Combined, the trio still records about $10 billion less than their mutual competitor, Verizon Communications Inc. In terms of customers and reach, AT&T will be the largest, says ATLANTIC-ACM Founder and CEO Judy Reed Smith.

This heft is not lost on resellers who depend on these networks to deliver service to their customers.

The mergers biggest impact will be on resellers, says Josh Holbrook, senior analyst at Yankee Group Research Inc., because it leaves some carriers with only a single wholesale provider and thats going to be a real hot-button issue, he says. Holbrook says regulators probably will try to mitigate those effects by demanding divestiture of some of the carriers assets to ensure at least more than one wholesale provider.

Indeed, one BellSouth reseller exec who agreed to talk on background, says the merger represents an opportunity to lobby the FCC for some concessions on the wholesale front namely longer commercial agreements (for former UNE-P lines) with set pricing. [Former FCC Chairman Michael] Powell sold the commercial agreements based on trimodal competition, says the CLEC executive, identifying services provided over three separately owned and operated networks, such as cable, wireless and wireline. With two of the largest wireless providers Verizon Wireless and Cingular now being owned by landline providers, the playing field has narrowed to cablecos versus telcos, he adds. Two competitors is not competition; its collusion.

He is hopeful the FCC will see the need to protect other wireline and fixed-wireless competitors like his CLEC business by imposing conditions on the merger.

The FCCs prerequisites for the AT&T Corp./SBC Communications Inc. and Verizon/MCI Inc. pairings were that the merged companies offer naked DSL; abide by network neutrality rules the FCC adopted earlier this year regarding access to a competitors VoIP or video services; agree to peering requirements not to block Internet traffic; and maintain special access pricing for 30 months and unbundled network element pricing for two years.

These efforts will face detractors. Pundits at the Washington think tank Competitive Enterprise Institute (CEI) chastise regulators for approving the recent megamergers with strings attached. They argue the FCC should instead allow the marketplace to guide the future of communications technology.

Although I agree that AT&T and SBC have not been the most open to regulated access, AT&T enjoys and has committed to grow wholesale revenues of the combined company, says John E. Romagnoli, senior analyst of wholesale communications strategies for Yankee Group. This means it will start raising wholesale prices. Although that may spell trouble for some smaller players, I see it as a positive for overall wholesale growth. It benefits anyone who owns a network in the [BellSouth] territory.

BellSouths wholesale partners, however, could feel the sting of this merger: BellSouth counted Qwest (Communications International Inc.), MCI (now Verizon) and Sprint Nextel Corp. among its major wholesale partners, and after a merger it would migrate these contracts over to AT&T in order to reduce costs and increase operational control, says Cindy Whelan, senior analyst of U.S. wholesale markets for Current Analysis Inc.

On the other hand, she says in-region competitors like Progress Telecom LLC may find this a good time to pay visits to BellSouths wholesale customers, which may be wary of post-merger upheaval.