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Will BellSouth Stay on the Sidelines?

The U.S. telecom industry is going through its biggest shakeout in more than a decade. In the last two weeks, SBC Communications (SBC) announced plans to buy AT&T (T), the nation's largest long-distance company, for $16.3 billion. MCI (MCIP) is negotiating with another regional Bell, Qwest Communications (Q), for a possible combo. And some analysts believe Verizon (VZ) could also be in the hunt.

But remaining on the sidelines so far is another giant telco: BellSouth (BLS). The third-largest regional Bell has courted several possible partners in recent years, bidding $100 billion for Sprint (FON) in 1999 and coming close to buying AT&T in 2003. Neither of those deals was consummated, however. Now, analysts ponder whether BellSouth could be left behind as its rivals merge, cut costs, and swallow up lucrative big business customers.

Will that happen? In his first public comments since the spate of telecom deals began two weeks ago, BellSouth Chief Executive F. Duane Ackerman discussed his company's strategy with BusinessWeek Atlanta Correspondent Brian Grow on Feb. 8. Here are edited excerpts from their conversation:

Q: These have been some interesting days for the telecom industry. What do make of it all?

A: Whether you're a little company or a colossus, you're going to have to position your assets where they can grow. We fundamentally think growth in this industry is in the wireless and the data sides. Everything else has been pretty tight.

We now have approximately 40% of our revenue coming from wireless. Our domestic business, plus advertising and publishing, is probably about $18 billion, with flat to slow growth over the last three years. We're now past 2 million customers in broadband. So, when you look at wireless, broadband, advertising, and publishing, and add it all up, roughly 60% to 65% of our assets are positioned where they can grow. It's never over. So we have additional work to do. We like what we see.

Q: Many are speculating about BellSouth's role in the SBC-AT&T deal and discussions between Qwest and MCI. Will you step in with an offer for either AT&T or MCI?

A: Obviously we wouldn't comment on mergers and acquisitions. We're positioning our assets where they can grow. That's not to discount the business market. Ten percent of our revenues come from business. We serve -- from the very, very small to the very, very large -- roughly 1 million customers across that spectrum. We certainly are interested in the [business] marketplace.

But it's also a marketplace where we've seen a lot of disruptive activity, especially in revenues. There are a couple of reasons. One is price competition. The other is the direction of technology. Large business is moving more and more toward bigger and bigger pipes. Other players are providing applications on those pipes in addition to the voice application.

If you look at an AT&T, they had a revenue stream of about $30 billion last year. That was down about 12%. If you look at MCI, their revenues are in the $20 billion range, and through the third quarter of last year they were down about 15% to 16%. The story is fairly consistent.

Q: So, is it still possible that you could step in with an offer for one of those two companies?

A: I would not comment. But I am clear about where we are focusing our attention and investments.

Q: Some analysts say being left out of these deals will handicap your ability to be able to compete aggressively in the enterprise segment. Do you agree?

A: I've never seen so much written with so few numbers. I'm not going to be concerned. I like our hand.

Q: You've said you'll focus on wireless and broadband. With a combined SBC-AT&T likely to be a more aggressive competitor in your territory, is the Cingular joint venture [between SBC and BellSouth] sustainable?

A: First, Cingular is a big business. It's big enough so that both partners will have an interest in making it succeed. The other piece to remember is that, even though we're a 40% financial partner, we share governance 50-50. We certainly have a governance position which enables us to represent the interest of our shareholders.

Q: What about speculation that the deal could be structured to allow SBC and BellSouth to have options such as marketing Cingular under your own brand?

A: It's way too early to talk about that. We just closed the AT&T Wireless deal. Cingular has two networks to integrate and two companies to integrate. They probably have two to two-and-a-half years of hard work ahead of them. The good news is, given the revenue per customer that it generates, the opportunity to improve margins from where they are today, and the fact that they've demonstrated they can grow, it all signals good things for BellSouth.

Q: Are we moving to a new era in which the wireline telecom business will be an oligopoly, maybe even a duopoly, led by SBC and Verizon?

A: I hardly think so. A lot of players are out there. Bandwidths continue to escalate. We started with a DSL [digital subscriber line high-speed Net access] offering that began at 1 megabit, then it went 1.5 megabits. Now we're talking about 6 megabits and 24 megabits. Pipes will continue to get bigger.

All of that application work won't be done by the traditional telcos. Think about what has happened on the wireless side. Would you have believed two years ago that ringtones would be a $2 billion market in the U.S.? America is a great place. We have just begun to touch the applications business.

Q: Analysts often say BellSouth tests its applications for a long time. That's part of what they say is a conservatism at the company. They both applaud it, and they criticize it. Is conservative a fair description of BellSouth?

A: It comes down to one question for me: Can we make money doing it? We're in business to make money for our shareholders. That's the question that we focus on. You can interpret that as conservatism or common sense.

Q: In three years, will BellSouth be an independent entity as it is today, or will it have gotten together with another company?

A: I see no reason why it can't be an independent entity, especially when you think about 60% to 65% of its assets positioned in a part of the industry that can grow. We continue to work on the rest of the puzzle.

Q: You've gone far down the road on some deals in the past -- Sprint, AT&T -- over the last six years. Why haven't you pulled the trigger?

A: At the end of the day, you still have to have discipline, and you have to make money doing it.

Q: Will you support or oppose the SBC-AT&T deal in state or federal antitrust reviews?

A: It's too early to tell. We'll have to see what it means for our shareholders.

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