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Telephone Giants' Proposal Rings False for Consumers


Maybe AT&T and SBC Communications were inspired by a dinosaur movie. In their merger talks they're trying to restore a lost world of monopoly suppliers of telecommunications services.

If the merger were allowed to go through, the combined company would account for 30% of the telephone business in the United States, with important concentrations in California and Texas. Those are the two markets in which SBC, itself the result of a merger of Southwestern Bell and Pacific Telesis Group, holds a leading position.

And right there is the most obvious reason the proposed merger should not go through. It would be bad for customers.

"It would remove a competitor, and that has to be bad for California, the most communications-intensive place on Earth. It would be disadvantageous for both Silicon Valley and Hollywood," said analyst David Goodtree of Forrester Research, a Cambridge, Mass., firm that advises the communications industries.

Yet the stock market on Tuesday didn't care about customers. Investors boosted the share prices of both AT&T and SBC, believing that merger talks would lead to the creation of a telecommunications giant with total stock market value of $100 billion.

Such a company, investors and company managements believe, could dominate the rapidly growing but confusing world of global telecommunications. The thinking is that big will be better and that a merger will give the combined firm control of a large customer base.

But the thinking is flawed. The very concept of a big company "controlling" customers is dated, and thinking that big is better truly recalls the time of the dinosaurs.

Since 1984, when American Telephone & Telegraph's regulated monopoly was broken up, smaller companies have been responsible for virtually all advances in telecommunications.

That, of course, was the intention of the policymakers who broke up the phone company--that competition would bring U.S. industry and consumers better, cheaper and more varied services.

By and large, that has happened. In long-distance service, MCI and Sprint have offered vigorous competition to AT&T, which still leads the market. And prices for service have fallen.

In cellular telephony, although much bigger regional Bell companies offered service, the innovative leader was McCaw Cellular, an entrepreneurial firm that AT&T acquired for $11.5 billion in 1994.

In local phone service, which remained regulated until last year, innovative companies such as Metropolitan Fiber Services--now part of WorldCom Inc.--managed to bring better, cheaper service to business customers. Numerous small operators were able to buy phone time from the local monopolies, sell it cheaper to business customers and still make a profit.

So the Telecommunications Act of 1996 opened local service to all competitors. And one of the biggest new competitors was supposed to be AT&T, going after the lucrative local business. AT&T has mounted campaigns promising billions of dollars of investment to gain local customers, particularly in growing markets such as California and the Southwest.

Yet the talks disclosed Tuesday say that AT&T once again has chosen to acquire its way into local markets, purchasing SBC and eliminating a competitive contest for customers.

Even experts who admire AT&T's technical and customer service capabilities are dismayed.

"Management of the communications industry seems unable to offer anything more creative than acquisitions as a way to shape the future," says A. Michael Noll, a professor at USC's Annenberg School of Communication.

Will AT&T succeed? Will the clock turn back? Hardly. "Even a sleeping Justice Department like this one would oppose such an anti-competitive merger," said one analyst reflecting the views of many. Others noted that a union with SBC would be no help to AT&T in competition for global markets.

Truth is, the merger talks signal a desperation move by AT&T, which has been criticized by institutional investors for poor management and a stock price that has lagged those of other major companies.

And the long-distance giant has shown little ability to lead the newest growth field of business communications on the Internet. Instead, rivals MCI and WorldCom are ahead of AT&T in Internet service. GTE Inc., the independent phone company, is acquiring Internet provider BBN Inc. and making joint ventures with Cisco Systems, the fast-growing Silicon valley company that supplies hardware and software for Internet communications.

Sadly, with all the changes occurring in telecommunications, once-brilliant AT&T looks increasingly like a laggard--and vulnerable perhaps to takeover itself.

"AT&T could be ripe for a leveraged-buyout firm, such as KKR, to acquire, break apart, strip down and sell at a profit," said Peter Bernstein, head of Infonautics Inc., a New Jersey consulting firm near AT&T's headquarters.

It was noted by many analysts on Tuesday that the real beneficiary of a merger with AT&T would be SBC, which would increase its range and market capitalization and whose young managers might ultimately get to run the proposed combination.

The AT&T-SBC talks themselves are likely to arouse further interest in telecommunications acquisitions, speeding up a merger derby that already has Nynex and Bell Atlantic combining.

Maybe the original dinosaurs did themselves in the way telecommunications giants are doing today. Maybe AT&T's managers did spend the weekend at the movies.

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