Ever since the wave of telecom mergers began, people have asked whether an established long-distance carrier and a regional Bell operating company would make an ideal match. The long-distance carrier would get local loops with ubiquitous coverage, and the RBOC would get into long-distance.
Well, such a merger could happen, but it wouldn't bring any of those benefits - at least not right now.
RBOCs are hobbled by Section 271 of the Telecommunications Act of 1996. Under that section, RBOCs are barred from the long-distance market until they meet a 14-point local-competition checklist demonstrating that new local carriers in their areas can interconnect and compete freely. The RBOCs must file Section 271 applications one state at a time.
For example, in the nine-state BellSouth region, BellSouth must win Section 271 cases at the Federal Communications Commission nine times to get complete long-distance authority. Or to take another example, Bell Atlantic could first win long-distance authority in New York and Massachusetts, but not receive authority in the rest of its region until later. Indeed, that's the scenario many analysts expect to play out in the Northeast over the next year.
But so far, no RBOC has yet won a Section 271 case anywhere. What's more, an RBOC can't shake its legal roots via a merger. Section 271 carefully applies its rules to RBOCs and their "affiliates." And in 15 years of RBOC court battles since the original AT&T divestiture in 1984, federal judges have consistently applied their rulings to the Bell companies and their "successors." Plus, the current FCC will brook no loopholes. Last year, Qwest made a deal with US WEST and Ameritech under which the RBOCs would merely act as marketing agents - say through direct mail - for Qwest consumer long-distance, with no attempt at bundling. The RBOCs even began selling the service until a federal court ordered a stay. The FCC then ordered Qwest and the RBOCs to cut it out.
None of this means that a Bell and a long-distance company can't merge their corporations if they pass a U.S. Department of Justice antitrust test. But legal experts agree that in such a merger, the local and long-distance arms would be barred from bundling the two types of services within the RBOC's territory until they pass the Section 271 test. Some go further, maintaining that the merged company would have to take a step backward and stop selling long-distance altogether in the RBOC region until the merged company secures Section 271 approvals.
So why are these companies talking to one another? It's simple: Telecom CEOs all know that it will take 18 months to get regulatory approval for any merger involving an RBOC. During those 18 months, the Bell side of the merger could work on its Section 271 applications, keeping a close eye on AT&T and its new residential telephony and Internet business over cable lines. If AT&T makes progress, the two merger partners could guarantee the FCC true regionwide local competition in exchange for simultaneous merger and Section 271 approvals. If AT&T stumbles, the partners could always call the merger off. Even when he's not part of the deal, AT&T CEO C. Michael Armstrong is still the key man affecting almost everything in the carrier business today.
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