Critics blast the SBC mega-deal

By Tim Greene, David Rohde and Sandra Gittlen
Network World, 5/18/98

SBC Communications, Inc. got away with buying Pacific Telesis last year, but taking over Ameritech Corp. may not be so easy.

[map] SBC's proposed $56 billion deal, only a week old, is already in trouble. First, critics claim that SBC, by buying regional Bell operating companies, would wipe out major potential competitors. The carrier already did so with the PacTel purchase. In addition, critics contend, SBC could become so large that it could easily squash upstart competitive local exchange carriers (CLEC).

Lastly, the business of merging the two companies would stall new service initiatives from both carriers until SBC and Ameritech could be integrated, analysts said they fear.

Some on Capitol Hill are rallying against the deal, claiming it is due to serious flaws in the Telecommunications Act of 1996.

Different breeds

Adding Ameritech will give SBC a grip on the midsection of the country from Texas to Michigan, as well as control of a third of all telephone access lines in the U.S.

But while SBC and Ameritech are both baby Bells born of the divestiture of AT&T, they are far from twins. Ameritech, based in Chicago, serves five states and has a reputation for being among the leading carriers in the deployment of new technology. For instance, it is one of only three of the RBOCs to offer a commercial digital subscriber line service, although that is in a limited part of Illinois.

Ameritech also heavily promotes its managed service packages, getting inside the corporate LAN and managing equipment down to the desktop.

By contrast, San Antonio-based SBC offers digital services including ISDN, dedicated lines, frame relay and ATM, but this RBOC's offerings come bare-bones, without management packages. The exception is in California, where Pacific Bell has continued with its managed service offerings, despite being bought by SBC.

Plus, SBC has lagged in the deployment of advanced data services, according to Daniel Briere, president of TeleChoice, a consultancy in Verona, N.J.

But the single strongest contrast between the SBC and Ameritech is in their relationship with regulators. SBC is combative where Ameritech is diplomatic. Ameritech started its Customers First campaign in 1993 to convince Illinois regulators that Ameritech promoted local phone competition and deserved to get into long-distance service.

SBC, on the other hand, went to court and won a ruling that states that telecom-act rules outlining what it takes for RBOCs to get into long-distance are unconstitutional. That ruling is under appeal.

Competitive spin

In an effort to present the merger as pro-competitive, SBC and Ameritech announced a ``national/local" strategy, the companies' intent to sell local phone service in 30 cities outside of their region. Because the already-mighty SBC has barely taken any steps in that direction, the promise was scorned by some. ``You don't need to combine Ameritech and SBC to do the national/local strategy," said Bob Taylor, president and CEO of Focal Communications Corp., a Chicago-based CLEC. ``I think that's just a bunch of hooey."

But SBC and Ameritech insist they need the bulk of their combined companies to afford to deploy local services outside their region. The strategy was discussed by Ameritech's CEO Richard Notebaert and SBC's CEO Edward Whitacre Jr. during talks that started in earnest about six weeks ago. The talks culminated in a vote May 10 by both carriers' boards of directors.

Despite the claims of increased competition, some users fear the effects of local carriers becoming even bigger. Among the skeptics is Carl Weinaug, city manager of Stillwater, Okla., who has been trying without success to get an alternative carrier to replace SBC.

CLECs seem to flock only to major cities, Weinaug said, where they compete against the RBOCs. Bigger RBOCs mean less chance of survival for CLECs, he said. ``SBC is already a big gorilla in a small cage. It looks to me like its becoming impossible for the small CLECs to make it," he said.

Other customers acknowledge that small CLECs might suffer but several large carriers with national reach are what is really needed. ``I think you're going to have two or three big players, AT&T, WorldCom/MCI, Time-Warner. I think all the little companies will go by the wayside," said Phillip Skinner, telecommunications director, Ohio State University Medical Center, Columbus, which has a frame relay/ATM network.

But Skinner said the smaller CLECs have helped him by undercutting Ameritech prices and forcing Ameritech to come back with 12% to 15% price cuts. ``Having the little guys around has opened up the avenues," Skinner said. That may all change. ``You won't have little companies competing, you'll have the big conglomerates competing. That's when you'll see competition reach its peak," Skinner continued.

Smaller carriers are just not capable of meeting global networking needs, said Mort Rahimi, vice president of IT for Northwestern University in Chicago, which is a big Synchronous Optical Network (SONET) customer of Ameritech's. ``To the extent that larger national companies make their presence known, I think it will reduce costs. Frequently networking problems are national, not regional. I would rather see four to eight national companies than eight regional companies," Rahimi said.

``It may be advantageous to leverage size. I've anticipated five or six truly global carriers that could provide all services to all people. The jury is out on that," said Phil Evans, telecom manager at Perot Systems.

Even so, for at least two years after the merger, SBC will be distracted from focusing on competition, one analyst said. ``The resources that might have gone into spurring market competition now all go into the merger. There might be bodies allocated to competition, but they don't have a budget behind them," said Christine Heckart, vice president of broadband for TeleChoice.

Regulation

Congress could get involved in the deal. Senate Commerce Committee Chairman John McCain (R-Ariz.) voted against the 1996 act on grounds that it fails to give RBOCs the freedom to innovate. He said the law forces them to merge to survive. ``The 1996 Telecom Act unintentionally, but quite effectively, stymies competition," McCain said in a statement. ``The proposed merger of SBC and Ameritech is yet another example of the Act's real-world effects."

In addition, the two top members of the Senate Judiciary Committee's antitrust subcommittee said they were very concerned about the deal and demanded an extensive review by the FCC and the U.S. Department of Justice.

Subcommittee chairman Mike DeWine (R-Ohio) and ranking minority member Herb Kohl (D-Wis.) warned in a letter to regulators that the proposed merger could lead to ``something approaching the old Bell system rather than the vigorously competitive landscape that the [Telecommunications Act of 1996] envisioned."