Phone frenzy
A spate of mergers signals a new era in telecom services
Taking a page from its own "Join the Neighborhood" advertising campaign, MCI hopes to join its neighbor Verizon to bring local and long-distance phone service back together again.
In a transaction valued at $6.75 billion, MCI earlier this month agreed to be acquired by the nation's largest regional Bell operating company. While the purchase is still subject to last-minute wrangling by competing suitor Qwest, as well as legal brinkmanship from some MCI shareholders and regulatory approvals that could take a year, there is no doubt that the plain old telephone service you used to love--and hate--will soon be no more.
Indeed, the Verizon purchase of MCI is the culmination of what has been a vertiginous round of mergers and acquisitions in the telecommunications industry in the past few months. In January, regional Bell operator SBC announced it planned to buy AT&T, the nation's largest long-distance company, for $16 billion. In December, Sprint agreed to merge with Nextel, creating a company with a combined equity value of approximately $70 billion. Just weeks earlier, wireless behemoth Cingular finalized its $41 billion purchase of AT&T Wireless, creating the nation's largest cellular service with more than 49 million subscribers.
If all the outstanding deals are consummated, there will be just four major phone companies--BellSouth, Qwest, SBC, and Verizon--putting more phone lines under the control of fewer firms. The combined forces of SBC and AT&T alone, for example, would control 27 percent of the nation's local phone service and 37 percent of the country's consumer long-distance service, according to TNS Telecoms, a telecommunications market and analysis firm. Moreover, there will be just as few national wireless providers left standing: Cingular, Sprint Nextel, T-Mobile, and Verizon Wireless. The consolidation is even more stunning when one considers that SBC owns 60 percent of Cingular, and Verizon owns 55 percent of Verizon Wireless, which has 43.8 million subscribers.
The recent pairings have sparked concern. Both the Consumer Federation of America and Consumers Union have asked Congress to investigate the possible anticompetitive threat of the Verizon-MCI and SBC-AT&T unions. However, it is unclear how the marriages will affect consumers' phone bills, as regional companies will still have to negotiate for access to one another's networks.
In many respects, the implosion of the long-distance and telecom business is due to a host of evolutionary, regulatory, and technological forces that have been percolating for years. But the final shove that pushed stand-alone long-distance service into the telecom grave came from a single source: the Federal Communications Commission. "The number of alternative traditional phone providers is shrinking rapidly because of recent regulatory decisions that make it too expensive to be in the business," says Lisa Pierce, an industry analyst at technology research firm Forrester.
The FCC decided last year, for example, that it would no longer force the regional phone companies to offer their local phone networks at wholesale rates to long-distance companies. That had allowed AT&T and MCI to sell all-in-one long-distance and local service at rates competitive with regional operators. The restrictions are to be gradually lifted this year, however, so Verizon and other regionals will be able to raise the rates they charge AT&T and MCI to use their lines. "The reason we de-emphasized the consumer business a long time ago was the regulatory environment," says MCI company spokesman Peter Lucht.
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