The SBC/AT&T merger: Beginning or end?

SBC's planned $16 billion acquisition of AT&T similarly marks, in many respects, the end of the beginning. The great experiment in deregulation that began with the 1982 modified final judgment is now officially over.

Winston Churchill famously remarked after one of the first significant British victories of World War II: "This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

SBC's planned $16 billion acquisition of AT&T similarly marks, in many respects, the end of the beginning. The great experiment in deregulation that began with the 1982 modified final judgment (MFJ) is now officially over. The MFJ broke apart the Bells and opened the gates to competition, which laid the groundwork for virtually every significant development in modern telephony, from wireless to broadband to IP services. Now with the acquisition of the parent AT&T by its combined offspring (SBC was formed from the mergers of Ameritech, Pacific Bell and SNET) the experiment has come full circle.

Was it successful? That depends. The goal of the MFJ and its successor agreements (such as the Telecom Act of 1996) was to balance customers' needs for stability with the desire for newer, better, less expensive alternatives. From that standpoint, the MFJ was clearly a resounding success: Telecom prices have plummeted, and a staggering range of new services have appeared.

Yet the (re)acquisition of AT&T by SBC highlights a fundamental truth the deregulation architects ignored: Scale matters.

One basic law governing the network business is the "network effect" (generally attributed to Ethernet pioneer Bob Metcalfe): The usefulness of a network equals the square of the number of users. A bigger network, in other words, is worth orders of magnitude more than a smaller one.

In that context, breaking apart a network by geography (as the MFJ did) was clearly insane. Customers don't want to piece together connectivity from a patchwork quilt of geographic providers — what they really want is a provider (or providers) that reliably, securely and cost-effectively deliver a range of high-quality services across an end-to-end unified infrastructure.

The combined company could clearly do that by marrying AT&T's IP backbone with SBC's portfolio of broadband local access and wireless services (SBC owns 60% of Cingular). But will it? That depends largely on the guiding philosophy of the merged company.

SBC is in many respects a typical "old school" Baby Bell. Notorious for alienating its residential customers, it's had limited success appealing to the business market. AT&T, on the other hand, seems to have learned from its mistakes. After giving IP the cold shoulder in the late 1980s, the company reversed course and built out one of the world's premier IP backbones. AT&T embraced VoIP in the late 1990s, while competitors were trying to wish it away.

So a key factor is the overall philosophy of the combined management team. If SBC's Edward Whitacre and AT&T's David Dorman fundamentally view the merger as "rectifying the mistakes of the MFJ" by recreating the old Ma Bell, then the company's doomed. But if they've truly absorbed the competitive lessons of the past 20 years, SBC/AT&T could write the first chapter of the post-deregulation telecom history.

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Copyright © 2005 IDG Communications, Inc.

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