Telecom Rules: A Break In The Logjam?

SBC-Ameritech may push the feds into rewriting the regulations

Will the biggest merger in the history of the telephone industry finally produce competition for your local phone company? That could be the result of the $62 billion bid by SBC Communications Inc. for Ameritech Corp., announced May 11.

Not that the deal itself will accomplish that. Rather, it's the specter of the mammoth company to be created in the marriage of SBC and Ameritech-- stretching from California to the Gulf of Mexico and north to the Great Lakes, and reaching a third of the phone customers in America. The birth of such a behemoth guarantees a thorough review of existing rules of competition and the creation of new ones.

Certainly the authors of the Telecommunications Act of 1996, the law intended to produce greater competition in the U.S. phone business, never anticipated the dealmaking frenzy that now will reduce the Baby Bells from seven to four. And that figure could go lower if BellSouth Corp. and U S West Communications--now relative midgets--succumb. "Congress clearly wanted companies like these to compete with each other and not merge. They couldn't have been clearer," says FCC Chairman William E. Kennard.

Indeed, boasted Edward E. Whitacre Jr., chief executive officer of SBC on the day he announced his deal: "This merger creates a new breed of telecom company." But to bring his new creation to life, Whitacre needs the approval of the Federal Communications Commission and the Justice Dept. To get it, Whitacre--the executive who has done the most to thwart the 1996 law--is willing to negotiate on the rules keeping him out of long distance, which he has challenged in court. "If the FCC can force concessions across all SBC in exchange for [entry into] long distance, this could be a catalytic event," says Joseph S. Kraemer, director of communications consulting at A.T. Kearney Inc.

Clearly, the deal gives the FCC and Congress a chance to rethink ways to deliver the competition in local calling that the Telecom Act has failed to bring forth. Kennard still figures the 1996 law can do the job. As to the SBC deal, he says: "We've got to challenge the parties to show us that this will advance the goals of the Telecom Act." In Congress, Senator Orrin Hatch (R-Utah), chairman of the Senate Judiciary Committee, has already promised hearings on the SBC deal, saying it "must be analyzed closely to understand its effect on competition and consumer welfare."

Thus begins the haggling. Whitacre and Kennard--with Congress putting in its two cents--may be in for months of horse-trading that, many observers say, could produce a new approach to deregulation. Key to breaking the logjam may be reaching an arrangement similar to what Bell Atlantic Corp. offered to smooth its Nynex Corp. acquisition. Last July, the Baby Bell agreed to open its network and offer rates and other concessions that the FCC sought to encourage competition. San Antonio-based SBC says it's ready to deal on similar terms. "It wouldn't be unreasonable for the FCC to say, `If you want this merger approved, that's the kind of deal you must accept,"' says a key SBC strategist.

That gives the FCC the leverage to push hard on SBC to open its markets. And it has further justification to do so since the merger announcement. Until then, Ameritech had planned to offer local service in St. Louis--within SBC's region. Now, it's killing the initiative.

What would the FCC ask? It might require SBC and Ameritech to double discounts to 40% or 50% to competitors that wish to resell local service. It might even require SBC to drop lawsuits challenging the 1996 law.

Reaching some sort of agreement--even a truce--with Whitacre would be a major accomplishment for Kennard. Although SBC helped craft the Telecommunications Act of 1996, Whitacre has been attacking the law ever since. In July, the U.S. Court of Appeals is expected to consider a Justice Dept. appeal to SBC's stunning New Year's Eve court victory, when a federal judge threw out as unconstitutional key provisions of the Telecom Act that kept the Bells out of long distance.

If SBC and the FCC come to terms, the deregulation of local services could move into high gear. "This deal is the catalyst for opening markets up for real," says an SBC strategist. If not, SBC "goes back to the old way of shooting down [the Telecom Act] in the courts." Indeed, if SBC-Ameritech makes local-service competition a reality, it would encourage the other Bells to respond, and enourage MCI Communications Corp. and AT&T, which have suspended local-service efforts, to jump back in.

Meanwhile, Ameritech and SBC will continue their attempts to win approval by state regulators and the FCC to gain entry into long distance. SBC expects to petition the FCC in June to begin providing long distance in Texas, says Senior Vice-President and General Counsel James D. Ellis. Ameritech is planning to resell long-distance service from Qwest Communications International.

Back in Washington, an energized Justice Dept. antitrust unit could give the deal tough scrutiny. Joel I. Klein, Justice's assistant attorney general for antitrust, created a political firestorm when he let the Bell Atlantic-Nynex merger go through without change. State regulators are also eyeing the deal. Says Joan H. Smith, a commissioner with the Oregon Public Utility Commission, which won't rule on the deal: "This is too big.... It will have too much market power."

Whitacre has a tactic to win over regulators: He promises to jump into local calling markets in major cities outside the SBC-Ameritech region. He's offering to spend $200 million a year installing switching and renting network capacity. SBC says it expects to grab 5% to 10% of the customers now held by BellSouth, U S West, and Bell Atlantic by 2010. That may not be likely, given the $200 million SBC is budgeting. But if regulators want more, SBC, which will have revenues topping $43 billion post-merger, is willing to ante up. "We will be the first company to go national with [local] service for both residential and business customers," says Ellis.

Skeptics question SBC's motives. "They could have done this before," scoffs Gary Miller, CEO of telecom consultants Aragon Consulting Inc. He calls the pledge to pursue local service nationwide "a marvelously silver-tongued spin." Some analysts see SBC's plan as a response to the inroads competitive newcomers have made in targeting lucrative business customers on SBC's turf.

Will Whitacre and regulators come to terms and make the deal happen? Even those who give the merger a solid chance of succeeding say the hurdles will be high. "There's a presumption on the part of SBC and regulators that each will have to give up a pound of flesh. The question is, are they using the same scales?" says J.P. Morgan Securities Inc. telecom analyst Simon Flannery.

Still, there's no doubt Whitacre has changed the terms of the deregulation debate. If, as SBC now says, it's willing to compromise on the issues that have most crippled deregulation, the deal just might get local-service competition steaming. But if it sputters, some analysts think Whitacre will go after even bigger deals--in Canada or into alliances with European telephone giants. One way or another, the idea of local-service company will never be the same.

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