AT&T-BellSouth: Together at Last

A compromise on Net neutrality and other price concessions finally allow the long-awaited telecom merger to get the O.K.

It took longer than expected, but AT&T (T) finally won government approval for its $85 billion deal to combine with BellSouth (BLS). On Dec. 29, the last business day of 2006, the Federal Communications Commission voted to approve the largest merger ever in the U.S. telecom industry.

Market analysts originally expected the deal to be approved months ago. The process was extended as critics tried to block the deal or push for tougher concessions, arguing that the combined company would raise prices and exert too much control over the distribution of phone calls and Internet traffic.

But in the end, the concessions weren't dramatic at all. The approval would be a huge step forward for AT&T, which has been on a roll (see, 10/25/06, "Telecom: Bulking Up to Take On Cable").

In fact, the latest concessions offered by AT&T late on Dec. 28 are well within the parameters of outlines in letters the company submitted to the FCC in mid- and late October. The latest agreements address the timing and financial details of the concessions that have been discussed for the past two months.

Net Neutrality: Not Quite Resolved

The most publicly discussed issue was whether the combined company would be allowed to charge Internet content companies such as Google (GOOG) a premium for transporting huge volumes of bandwidth-hogging files, such as video. That issue, known as Net neutrality, will become more important as the rise of Internet video continues.

Net pricing has been level until now, and Internet giants such as Google and Yahoo! (YHOO), as well as countless startups, have benefited from that structure. Some fear that the Web itself, which has proven to be a crucial breeding ground for companies and innovative products and technology, could be hurt if telecom companies are allowed to charge a premium to some big users. But telecom companies say they need to make a return on their network investments as IPTV (for Internet Protocol TV) becomes a reality (see, 2/7/06, "Cisco on IPTV: 'When, Not If' ").

In the concessions outlined late on Dec. 28, AT&T agreed not to impose premiums on big customers for up to two years. That effectively freezes prices industrywide. Rivals such as Verizon are unlikely to raise rates if AT&T holds the line.

It's a relatively narrow concession, though. The letter exempts AT&T's new Internet-based TV service from the pricing conditions. And AT&T's big corporate customers are exempted from the pricing agreement as well. The concession expires after two years, or sooner if Congress passes new laws on Net neutrality.

The Market Shrugs

The other main concession focused on the wholesale telecom business. AT&T agreed to price caps for the sale of certain telecom services to smaller rivals that resell the services. A&T also agreed to sell basic DSL for $19.95 a month to consumers that don't subscribe to other AT&T services, such as wireless or basic phone service. AT&T also agreed to spin off certain wireless spectrum.

The deal had little impact on the stock market. AT&T shares were up 26 cents to $35.76 in late afternoon trading. David Barden, a telecom analyst with Banc of America Securities (BAS), issued a report on Dec. 29 saying the concessions would have "nominal" impact on the stock's value.

Why did it take so long to reach such a routine agreement? The answers have more to do with politics. The deal itself rubs many consumer advocates and some members of Congress the wrong way, and the opposition was hard to ignore, particularly after the Nov. 7 general election put Democrats in control of Congress. The government spent years trying to break up the old AT&T monopoly, and now, 23 years later, many people don't like seeing parts of it put back together.

Late in the Game

The negotiations were further complicated by the status of FCC Commissioner Robert McDowell, who recused himself from the AT&T-BellSouth deliberations because he once worked for companies that compete with AT&T. FCC Chairman Kevin Martin tried to get McDowell to participate after it seemed that the FCC was deadlocked 2-2 along partisan grounds. McDowell, a Republican, was expected to support the deal, even though he once worked for AT&T's rivals.

Democrats were bothered by the prospect of McDowell entering the deliberations so late in the game (see, 12/1/06, "Winning Ugly"). But once McDowell made it clear early in December that he would not participate, the negotiations between the other four members of the FCC and the companies picked up steam.

The turning point may well have been comments from Representative John Dingell (D-Mich.). He is expected to chair the House Energy & Commerce Committee, which oversees the FCC. Even though he had been skeptical of the merger, he urged the FCC not to bog down the approval process with conditions that have nothing to do with the deal itself.

That seemed to be a signal that Congress, not the FCC, should tackle Net neutrality issues with a broader law that applies to the entire industry. In that sense, Dingell was the hidden "fifth" member of the FCC, much as George Martin was the behind-the-scenes fifth Beatle.

Once Dingell weighed in, AT&T and BellSouth were set to rock and roll.

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