Competition takes a hit

Bell Atlantic/GTE merger could limit users' choices.

By Tim Greene, Denise Pappalardo and Sandra Gittlen
Network World, 8/3/98

So, this is competition?

Bell Atlantic and GTE have agreed to a $53 billion merger that will create the single-largest local telecom carrier in the U.S., part of a runaway trend that is leaving the industry with fewer but bigger players.

Company profiles The companies contend this will spawn supercarriers that can offer a full portfolio of services unheard of since the breakup of the Bell system - everything from local to international voice, video and data as well as Internet access and wireless support.

Some observers say these deals fly in the face of what Congress had in mind when it passed the Telecommunications Reform Act of 1996, which was meant to increase competition and spur innovation and lower rates.

Instead, GTE and the seven regional Bell operating companies, which together own the bulk of local facilities in the U.S., are combining forces, effectively decreasing the number of local-loop options.

"If competition means choice, you can't take eight, turn it into three and tell me that I have more choice. That is easy math," says Robert Rosenberg, president of Insight Research, a telecommunications research firm in Parsippany, N.J. But he acknowledges it is probably too late to stop the trend.

The latter sentiment is shared by some users. "I anticipate there will be five or six truly global carriers that offer a full range of services," says Phil Evans, senior telecom consultant with Perot Systems.

But others say that when mergers work the whole can be greater than the sum of the parts. That's why PBS, which operates 350 television stations around the world, is looking forward to Bell Atlantic merging with GTE, said Dave Drucker, senior director of global technology at PBS headquarters in Old Town Alexandria, Va.

"We were entertaining the idea of using Bell Atlantic as our second Internet service provider. If they merge with GTE we would get an even stronger ISP," he said.

Still, customers that have been through them say mergers aren't all they are cracked up to be. For example, carriers that offer multiple services should be able to offer a single, simple bill. But since Bell Atlantic merged with NYNEX, their bills have become more confusing, said Sharleen Smith, director of new technology at USA Networks, a New York-based television network.

"[Traffic is] being metered all over the place, and I think users are getting hosed. No, I'm not looking forward to another merger," Smith said. And it might get even more messy when and if Bell Atlantic is given the green light to offer long-distance services.

Concerns may be a bit premature, though. This latest deal cannot go through until the Federal Communications Commission signs off on it, and FCC Chairman William Kennard seems to have reservations about whether the Bell Atlantic/GTE merger will promote choice. "I hope the parties will demonstrate how this merger advances the pro-competitive thrust of the Telecommunications Act," Kennard said.

Despite his reservations, it will be hard for the FCC to say no to this deal because the commission has already approved other RBOC deals. SBC Communications has swallowed up Pacific Telesis and plans to consume Ameritech. Similarly, Bell Atlantic has already devoured NYNEX, leaving U.S. WEST and BellSouth as the only original RBOCs still standing alone.

The merger does have one troublesome aspect, according to Steve Sazegari, principal with Tele.Mac, a telecom market research firm in Foster City, Calif. Bell Atlantic is forbidden from selling long distance until it proves it supports local-access competition, but if it buys GTE, that will include GTE's long-distance business.

A Bell Atlantic spokesman says that problem could be resolved by putting the long-distance division at arms length from the rest of the merged company. Also, by the time the FCC could approve the merger, in 12 to 18 months, Bell Atlantic might have already won permission to sell long distance, the spokesman says.

Sazegari also noted that GTE competes directly against Bell Atlantic in a few markets. With the merger, Bell Atlantic eliminates a deep-pocketed competitor.

The Colossus

If the merger does win approval, it will create a $53 billion company with an imposing presence. Bell Atlantic occupies the lucrative Atlantic seaboard from Maine to Virginia, and GTE has a local presence in some 28 states, although some of that territory ranges from small cities to sparsely populated regions.

Together, they will have:

Customers responsible for generating 30% of all international phone traffic.
Local assets in 81 of the top 100 U.S. telecom markets.
Outposts in 30 countries.
Wireless holdings that would make the company the largest cellular carrier in the U.S., with 10.6 million customers.

Bell Atlantic promises to build a high-speed fiber backbone to support both voice and data, which would complement the long-distance service GTE sells today.

Both Bell Atlantic and GTE already offer a range of data services, including dedicated lines, frame relay and ATM, and they promise more. For example, GTE has run some of the more extensive trials of high-speed digital subscriber line technology, which Bell Atlantic has also tested.

Last year GTE acquired BBN Planet, a national ISP. Today BBN Planet is called GTE Internetworking, which is in the process of deploying a new OC-192 nationwide Internet backbone. Bell Atlantic essentially resells the services of other national ISPs.

With such impressive credentials, the new Bell Atlantic could pose problems for upstart carriers trying to compete in local markets. But according to company executives, the merger would be good for competition - between Bell Atlantic and the other emerging supercarriers.

"The combined enterprise will have the financial, operational and technical resources to compete against AT&T, SBC/Ameritech, WorldCom and others," said Ivan Seidenberg, CEO of Bell Atlantic.

That kind of clout is welcome to corporate users like Thomas Magee, network operations manager of Mentor Graphics, outside Portland, Ore., and a GTE local customer. "When they are ready to compete with AT&T and MCI at least nationally, I think we would put them on the list for our bidding process," Magee said.

In the meantime, GTE remains a local carrier in his mind, and "local exchange carriers don't tend to be the most central factor in what we do. They are like a necessary evil to get to AT&T," Magee said.

This merger could also benefit companies that want end-to-end service level guarantees for their wide area networks, according to John McFarlane, CEO of Software.com, an Internet applications developer in Santa Barbara, Calif.

"This merger is good because we have GTE service in California and Bell Atlantic in Lexington [Mass.] This will give us one provider. A service level agreement can only come from one vendor," McFarlane said.

Using multiple carriers also lends itself to finger-pointing when trouble arises, he said. "Right now, if there's a problem with service, it could be GTE, it could be Bell Atlantic, it could be MCI," McFarlane said.

Some customers, including Mel Beckman, director of network operations at the Systems and Software Consortium in Santa Barbara, Calif., and a GTE customer, are less than keen about the prospective merger.

"If I were to use a Bell company and I had a problem with service, it would take me five to 10 hours to get a response. At GTE, they say, 'Hi, Mel.' They just have a great relationship with customers," he said.

Despite these worries, when the dust settles the competitive picture will be favorable to customers, PBS' Drucker said. "I think there will be enough players left after all of the mergers that competition will continue to grow. I would be surprised if it would actually go back to the days when AT&T was the only choice."