At&T: This Deal Is Good For Competition, Honest

How AT&T plans to make the SBC deal palatable to regulators

Officially AT&T won't even confirm yet whether it is negotiating a $50-billion merger with SBC Communications Inc. That didn't stop Chairman and CEO Robert E. Allen from kicking off what is being seen across the industry as the start of a campaign to get the unprecedented merger past regulators. In a June 10 speech to the Chief Executives Club of Boston, Allen suggested that a hypothetical union between the long-distance giant and some Baby Bells might actually promote competition---that is, if such a deal were to present itself. "Partnerships of the kind I have hypothesized need not be unthinkable," he said. "Our industry has done very well constantly daring to think the unthinkable."

Since then, the lobbying has started in earnest. AT&T sent letters and copies of Allen's speech to Washington policymakers, including Senator Ernest F. Hollings (D-S.C.). An AT&T executive met with Blair Levin, the Federal Communications Commission chairman's chief of staff, to discuss a potential merger's implications. SBC has also retained Washington power hitter Jack Quinn, Al Gore's former chief of staff, to advise on the merger. And AT&T's regular lobbyists in Washington are schmoozing with decision makers, assuring them that the company's aim really is a competitive local-calling market.

UPHILL BATTLE. AT&T knows it has an uphill battle, given all the negative reactions the rumored deal generated. Still, says Robert S. Strauss, former Democratic National Committee Chairman and an AT&T lobbyist at Akin, Gump, Strauss, Hauer & Feld: "I think the speech by Allen was the beginning of turning the herd mentality."

What possible spin could the company put on a merger that, on the surface, seems totally contrary to the so-called telecommunications reform of only 18 months ago? AT&T has developed a politically astute plan that could, in fact, make a merger with SBC more palatable to regulators and legislators. Sources close to the company say that AT&T and SBC are considering a bold strategy to spin off SBC's local infrastructure into a separate company. That company would supply local phone service and sell it wholesale to AT&T-SBC-- or to any other company that wants to offer local service--on equal terms. SBC would continue to sell local service in its territory, but it would not own the local infrastructure. "This is their best shot at convincing skeptical regulators," says Jeffrey Kagan of Kagan Telecom Associates.

The spin-off argument could work, because AT&T can claim that it will make local calling in the seven states where SBC operates more open to competition than other markets. Instead of blocking potential SBC competitors, the wholesale company would have a financial incentive to attract them to boost its sales.

SAFEGUARD. AT&T declines to comment on the spin-off scenario but takes the position that, in theory, such an arrangement would encourage competition. "Completely independent of any kind of merger, that form of structural safeguard would not be a bad way to make it more likely for competition to develop in the local exchange," says Mark Rosenblum, vice-president for law and federal government affairs.

The spin-off would not answer all questions about how an AT&T-SBC alliance would affect competition, however. Even with low wholesale rates, any local competitor considering a foray into AT&T-SBC turf would also have to contend with the merged enterprise's potent marketing combination. "Together, they have an almost insurmountable brand name," says Kagan.

Another issue is the huge overlap of the cellular-calling business that AT&T-SBC would have. One possible solution, people close to AT&T say, is to spin off one of the wireless operations in places such as Chicago, where both companies hold licenses.

Still, AT&T will have a tough time convincing people who count in Washington that it's not trying to put old Ma Bell back together again. Like Allen, the critics of this hypothetical merger aren't waiting for the final details to stake out their positions. Some critics point to the record of SBC, which has done as much as any other Baby Bell to postpone the advent of competition into the local market.

An AT&T-SBC merger "won't be countenanced here," says Colin Crowell, legislative assistant to Representative Edward J. Markey (D-Mass.). "They asked for competition, and we're going to give it to them."

Likewise, Reed E. Hundt, outgoing chairman of the Federal Communications Commission, is taking a public stand against the hypothetical combination. On June 19, he was slated to give a speech blasting the merger as clearly anticompetitive. "It doesn't behoove the government to hide its head in the sand in these circumstances," he told BUSINESS WEEK. "The normal wait-and-see approach is not appropriate." Hundt is angry that, instead of airing its frustration about the difficulty of getting into local service, AT&T started dealing. If companies have a problem with market entry, he says, "Go to the FCC. Go to the courts. Go to Congress. Don't go to the other guy's boardroom."

Some analysts think AT&T has no hope of making an SBC deal fly. "This merger is going to get wrapped around the government's axle," says Scott Cleland, an analyst at Legg Mason Wood Walker Inc. That won't stop AT&T, its image makers, and lobbyists from trying--if, of course, there really is a deal.