Teleconglomerate Tango

This article is from The Economist, and is a nice summary of another giant media merger.

While this is long distance and phone related, this is also dealing with a lot of the infrastructure that brings you your internet and cable.

Those same industries are working harder and harder to bring you music, movies, and other content over their lines. The line between television content/delivery and internet content/delivery is being blurred further with every one of these mergers. What happens when MCI is bought by Sony? Clear Channel anyone?



Feb 17th 2005
From The Economist print edition
A new breed of telecoms firm emerges

THE telecoms business in America, as well as being built with wires and switches, has been based on imaginary divisions: between local and long-distance calls; wireless and wire-line; regional and national service; voice and internet. But recent deals by America's two biggest "Baby Bells" to buy long-distance operators have laid to rest this old, fictional industry structure. A new corporate beast is emerging: the telecomglomerate, competing across all categories of communications.

On February 14th, Verizon, a large regional telecoms operator, said that it would acquire MCI, a long-distance provider, for $6.7 billion. Provided the deal goes through (some MCI shareholders still prefer a higher bid by Qwest) the combined firm will have annual revenues of over $90 billion and 250,000 employees. Along with the agreement two weeks ago by SBC, another regional Bell company, to buy AT&T, it brings to a close America's long-distance phone industry.

The logic behind both deals is to enable the regional operators, which have near-monopolies on local calls in their area, to move into supplying communications services to businesses, a lucrative market. Yet the deals will ultimately mean much more. They will end the old non-aggression pact among regional operators to avoid competing in each other's territory. Competition will come (first for business and, later, for residential customers) not across copper wires, but from wireless and fibre lines for internet access.

Both Verizon and SBC will be new "oligopolies" able to offer the full gamut of communications services, says Raul Katz of Adventis, a telecoms consultancy. Eli Noam, the director of Columbia University's Institute for Tele-Information, calls the consolidation a natural evolution to achieve scale and diversify risk. "The telecom industry has moved from utility to volatility, and it is difficult to survive in the commodity part of the business," he says.

Ironically, MCI was devoured by the very competition it instigated. Founded in 1963 as Microwave Communications Inc, it set up wireless towers for radio dispatchers, and eventually took on AT&T's monopoly in 1968. In its first years, the joke was that it had more lawyers than linemen; the firm even placed its headquarters one block from America's telecoms regulator. Its 1974 antitrust suit against AT&T culminated in the 1984 break-up of "Ma Bell". MCI was bought by WorldCom in 1998 and disappeared, until its name was resurrected after WorldCom emerged from bankruptcy protection in 2004 following an $11 billion accounting scandal.

The sudden removal of America's long-distance companies by the regional operators poses new regulatory questions, just as America's politicians debate revising the nation's telecoms laws and a new chairman of the Federal Communications Commission (FCC) has to be appointed to replace the current boss, Michael Powell, who steps down in March. Together, it heralds a massive overhaul of America's telecoms regulatory landscape.

"The new FCC chairman either has a big eraser or a new pen, one or the other," says Reed Hundt, the FCC chairman from 1993 to 1997. Whether there are fewer rules or more, however, the mergers are expected to be approved by regulators with conditions, such as to ensure transparency for internet pricing for businesses.

But the new telecoms war will be not just between the telecomglomerates, Verizon and SBC, and the remaining Baby Bells, but among cable firms, too. They are now offering phone and internet service, just as telecom firms are now vying to offer TV service. Battle lines are being drawn.