BellSouth faces long, tough journey to Qwest

By David Rohde
Network World, 06/14/99

WASHINGTON, D.C. - BellSouth last week revealed in a government filing that it is in merger talks with long-distance starlet Qwest Communications.

But the filing indicates that any potential merger may require arduous negotiations - and that a combination of the two companies might not result in any immediate benefits to users.

In a Securities and Exchange Commission filing, BellSouth said it is talking to Qwest executives about a marriage as a follow-up to BellSouth's recent 10% investment in the long-distance carrier.

The same filing reveals that Qwest is limiting BellSouth's leverage as even a minority stockholder until BellSouth rids itself of a key regulatory restriction. Under the 10% stock deal, the filing says, BellSouth is not entitled to any Qwest board seats until it has won long-distance authority from state and federal regulators in five of the nine states in its region, including Florida or Georgia.

BellSouth currently may not sell long-distance in its states, either on its own or with a long-distance merger partner. In fact, nearly 3 1/2 years after enactment of the Telecommunications Act of 1996, no RBOC has won long-distance authority anywhere. By contrast, GTE and some other non-Bell local exchange carriers can and do offer long-distance voice and data services.

According to one analyst, the board restriction is a bargaining chip by Qwest CEO Joe Nacchio. Qwest wants BellSouth - or any other potential RBOC merger partner - to go much faster in obtaining long-distance authority from the FCC, says Robert Rosenberg, president of Insight Research, a consulting firm in Parsippany, N.J.

Nacchio has chosen BellSouth as his partner because "he wants access to a customer base in high-growth areas," Rosenberg says. But Nacchio could just as easily switch to Bell Atlantic or another RBOC if either seems more likely to get a majority of its states approved for long-distance first.

The same logic applies to other recent RBOC investments in long-distance carriers, says Eileen Eastman, director of telecommunications research and consulting at The Yankee Group in Boston. "SBC owns 10% of [new long-distance carrier] Williams," Eastman notes. "Is it likely that somebody will eventually, some day, buy Williams? Yes. Is it imminent? I don't think so."

But there's a big factor setting up all the new discussions: AT&T's move into residential local telephony and broadband Internet access via its newly acquired cable lines.

"A&T buying Tele-Communications, Inc. has kind of put the fear of God into the RBOCs," Eastman says. "They thought that the consumer market was pretty safe. Now they're going to have a contender on their doorstep."

"They're highly resentful of the fact that AT&T is doing whatever it damn well pleases," adds Alan Pearce, president of Information Age Economics, a Washington, D.C., consulting firm. "They're determined to unleash themselves." BellSouth and Qwest could announce a merger knowing that it would take a long time to receive antitrust approval, and "in that time they could get at least five of their nine states approved for long-distance," Pearce says.

A BellSouth spokesman says a prompt BellSouth/Qwest merger could provide value because the two could legally sell bundled services together outside the BellSouth region. But he concedes that without FCC long-distance approval for BellSouth, the two could be prohibited from marketing together in the BellSouth region and Qwest could be temporarily banned from selling long-distance in the Southeast until BellSouth wins the long-distance nod. The telecom act says Bell long-distance rules apply to RBOCs and their affiliates.

BellSouth's long-distance approval effort is going "full-bore" despite past FCC rejections, the spokesman says. And reaching a majority of states might not be as lengthy a process as it seems, he adds: "There's a general belief that once one state gets [long-distance approval], that sets a template for the rest of the states in that region."

A Qwest spokeswoman declined comment. o