For Whom The Baby Bells Toll

Why the Bell Atlantic-Nynex merger rattles AT&T and MCI

What a difference a law makes. Two years ago, Bell Atlantic Corp. Chairman and Chief Executive Raymond W. Smith was eagerly promoting the convergence of telephones and TV. At the time, video was the only new market the highly regulated Baby Bells were allowed to enter. So Smith made a $22.1 billion bid for cable operator Tele-Communica-tions Inc. and announced a plan to build interactive-TV networks in 20 markets. But convergence wasn't as easy as it seemed: the TCI bid failed, and technology glitches slowed the video rollout.

No matter. Thanks to telecom reform, Bell Atlantic and its kin won the right to enter all kinds of markets. The result: Conver-gence was barely mentioned as Smith and Nynex Corp. Chair-man and CEO Ivan G. Seidenberg announced their $22 billion merger on Apr. 22. This deal is all about one thing: long distance.

It's a market, Smith says, that "you can enter with almost no investment, and [find] customers more than willing to try you out." The two CEOs still insist the merged company will market video services--eventually. But Smith, who will be CEO of the new company the first year, says it will take 2 1/2 to 4 years before the company can offer interactive video in even six cities. "We are still at the very early stages," admits Seidenberg, who will succeed Smith.

Meanwhile, the new Bell Atlantic, as the merged company will be called, will go after bigger fish--AT&T, MCI, and Sprint. That is why the long-distance giants hate this deal. Both AT&T Corp. and MCI Communications Corp. have decried the merger and called on the Justice Dept. to investigate potential antitrust implications. Sprint has been quieter--perhaps because Nynex and Bell At-lantic have agreed to resell Sprint's out-of-region long-distance service.

Legal experts say there is little basis for blocking the merger. Shareholders are likely to approve the deal too, despite grumblings that Nynex' shares, at 51 1/2, are undervalued in the stock swap. Nynex' stock dropped from 53 before the merger was announced to 49 two days afterward. But bankers familiar with the deal argue that the price is still above the 48 range Nynex was trading at before word of the merger leaked out.

TOP TURF. Once the deal is complete, the company should have an easy time scooping up long-distance business in the world's richest communications market. The new Bell Atlantic will be the second-largest phone company in the U.S. It will rule over 13 Eastern Seaboard states and 26 million local customers that hold some 30% of the nation's wealth. About $30 billion in domestic long-distance calls either start or terminate in the region, as well as another $4 billion to $6 billion in international calls--one-third of the nation's total overseas calls. And the new Bell Atlantic is the only company with a wire into every home and business in the region.

Smith knows that well. A certain percentage of the region's long-distance business "falls into your lap," he says. Certainly it has done so in cellular: The Bell Atlantic-Nynex joint cellular-phone venture, begun in July 1995, has gained 150,000 subscribers since it started offering long distance to some customers at the end of February.

It won't take much to make the same offer to local-calling customers. Smith says the new Bell Atlantic will have to spend just $400 million to add long-distance capability to its local networks, a process that has already begun. The new company aims to pass the Federal Communications Commission's 14-point checklist for entering the long-distance, in-region market by the end of the year.

It won't be as easy for long-distance carriers to grab local-calling customers. Under the new law, they can enter the market immediately. But for now, long-distance carriers will mostly have to lease capacity from Bell Atlantic at a small wholesale discount and resell it. Yankee Group Inc. consultant Brian Adamik figures the long-distance companies will still be able to grab about 15% of the local market this way during the next two years, but they won't make much of a profit. Bell Atlantic, though, could grab 15% of the long-distance business in its region--at a much lower cost.

PROMISES, PROMISES. The new giant'S long-distance profits will go a long way toward financing its entry into video, says Seidenberg. It plans to start signing up customers in 1997 for CAI Wireless, a video company that delivers programming via large ground antennas. Seidenberg sees the new Bell Atlantic winning 500,000 subscribers in a year.

Cable operators can rest easy, though. Sharon Armbrust, analyst with Paul Kagan Associates, figures Time Warner, TCI, and Comcast, big operators in the new Bell Atlantic's region, are about to become the partners of choice for long-distance companies. "Cable companies have access to the local customers that are crucial for new services," she says.

Besides, the cable industry has heard Smith's grand promises before. "How often do you hear Ray say something that sounds very convincing and then he doesn't do anything?" laughs one cable executive. "He always puts out timetables and then he always misses them." Bell Atlantic promised in late 1994, for example, that it would offer video to 3 million households by 1997. So far it has one experimental system in Virginia, and a tiny commercial system in New Jersey. With that kind of track record, Smith must give thanks every day for telecom reform.

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