Only those who risk going too far can possibly find out how far one can go.T. S. Eliot
Dear Vorticians,
A relatively brief missive from the snow-bound Bay State. I’d planned to introduce you to another new company that’s hoping to capitalize on the morphing enterprise IT market, but that must wait in light of the highly publicized developments with SBC and AT&T this week. (Also, I must spare you non-New Englanders any crowing about the Patriots reaching the Super Bowl for the third time in four years.)
Will SBC buy AT&T, for a price rumored to be near $16 billion? We’ll see. There are plenty of thorny issues on which this potential marriage could get snagged. But, boy, this feels strange. I began reporting on telecom around the time of AT&T’s divestiture in 1984 and if you’d predicted this particular combination back then, you’d have been laughed out of the room.
Remember the seven Baby Bell spin-offs with their cute names – NYNEX, Ameritech, U.S. West, BellSouth, Bell Atlantic, Southwestern Bell, Pacific Telesis? Remember those stodgy, wireline voice companies that seemed to embody all the worst qualities of the old Bell system?
Thanks to various corporate combinations, the seven became four. And two of those four – Verizon and SBC – are the top telecom companies in the U.S., far outstripping their forebear AT&T. The once-region bound carriers now offer nationally a variety of data services, including broadband access, wireless and even video.
Sadly, AT&T took a different trajectory. From dominating the telecom landscape, it has seen the consumer business collapse. It has shed its wireless assets and suffered through a costly, failed foray into the cable business. Its enterprise business is under attack from a variety of competitors.
The latter is the real prize here, the supposedly juicy asset SBC seeks. But that prize is tarnished. AT&T’s corporate customer base remains large, but AT&T’s enterprise revenue continues to fall – it dropped more than 7% in the fourth quarter alone – and there’s no assurance it will stabilize in the years ahead. In contrast, SBC has shown growth in enterprise – albeit on a smaller base – year-over-year.
Where the companies win business from each other – and MCI and Verizon – is on price, and therein lies the rub for all providers. Telecom companies continue to struggle to find new sources of profit within the enterprise. Beyond bundling and high-speed access, they have largely failed to innovate around new high-margin services for an age of convergence.
SBC’s acquisition of AT&T won’t change that. In fact, it could exacerbate the problem. Threatened by the newly combined SBC/AT&T, Verizon, MCI and others are likely to get even more competitive on price, and everyone will suffer the consequences. Pundits like to predict when the telecom market will rebound, but this isn’t about finances. The finances won’t rebound until the industry undergoes a profound transformation from traditional services (like ATM, frame relay and private lines) to a new generation of non-generic services with meaningful margins.
If SBC can lead that charge across the vast corporate market it would control with AT&T, it will dominate the landscape like a Colossus. Whether SBC has that vision is the real question everyone should be asking.
What are your thoughts on this potential deal? Let me know at mailto:jgallant@vortex.net.
Bye for now.
