Cingular’s parents reunite

Is anyone else out there feeling a bit long in the tooth following AT&T’s recent spate of mergers and acquisitions? I, for one, was around to witness the divestiture of AT&T, as well as the subsequent series of events that has led us back to the near-reconstruction of the original company.

The latest chapter, of course, is the AT&T/BellSouth merger, which joins the corporate parents of cellular operator Cingular Wireless. With the move, AT&T has been reunited with a total of 11 of the 24 Bell operating companies it once owned or held an interest in before the 1984 Ma Bell breakup.

Carrier mergers and breakups pose a paradox unique to the networking industry: networks have greater value the farther they reach. Having one operator in charge makes extending consistent network coverage and services operationally smoother. On the other hand, competition provides individual network operators with economic incentive to enhance services, broaden network coverage, and generally add value.

The model for cellular networking, particularly in the U.S., has been for multiple networks owned and operated by separate entities to serve the same set of users in dense populations while ignoring more rural and less lucrative areas. At some point, this setup offers diminishing returns to the consuming public – and to the service providers themselves when commodity pricing hits.

In this spirit, the good news about the AT&T/BellSouth merger, of course, is that two competitive Cingular Wireless parents have become one. It removes the cellular carrier from the tug of war between entities with different agendas, which should theoretically lead to a more consistent set of nationwide services.

The “bigness” of the union should spark yet more competitive activity from Verizon and its Verizon Wireless division. That competitive activity, though, will likely come in the form of an acquisition – perhaps of the remaining incumbent local carrier, Qwest, or a second-tier cellular company.

As a result, the entire cellular industry profile could shift, according to Michael Howard, principal analyst at Infonetics Research in San Jose.

“Ultimately, the creation of a vertically integrated giant in the U.S. may jeopardize some of the current pure-plays like Vonage, Alltell, T-Mobile [and] even Vodafone’s stake….[This] could then trigger some cross-mergers and acquisitions to build competitive players,” Howard says.

Let’s just hope that the carriers don’t get so caught up in buying market share that they put innovation and decent service levels on the back burner.