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Ma Bell is calling again, with a big voice
AT&T seeks dominance with its plan to buy BellSouth, though the field is more complex.
By James S. Granelli, Staff Writer
Los Angeles Times
Tuesday, December 26, 2006

More than 22 years after the federal government broke up the AT&T phone monopoly, Ma Bell's family is getting back together.

With its $84.5-billion plan to buy BellSouth Corp., AT&T Inc. stands poised to reassemble much of the old network that controlled how America communicated.

AT&T would end up managing more than a third of the nation's land lines and dominating local service in California and 21 other states.  It would hold 23% of the broadband Internet market, leave nearly 95% of the offices in major cities without real choice in service and run the nation's largest cellular carrier, Cingular Wireless.

That makes consumer advocates and some industry analysts ask:  How big is too big?

AT&T's political might already is unrivaled in its sphere.  In the last eight years, it has contributed more to federal politicians and spent more on lobbying than the entire cable and satellite TV industries combined and more than any communications, media or technology company, according to the Center for Public Integrity.

"They wield a very significant amount of political influence because of their nationwide reach and their large number of employees," said Washington lawyer Philip L. Verveer, who was the Justice Department's first lead trial lawyer in the case that broke up the Ma Bell monopoly.  "And because of that, they can play regulatory authorities off each other."

To be sure, the rise of cellular and Internet technology makes even a reconstituted AT&T less powerful than it once was, said analyst Victor Schnee of Probe Financial Associates.

"That old Bell system as a pervasive social, economic and political power structure was unique," he said.  "You'd have to merge AT&T, Microsoft and half a dozen other companies to match that clout."

Only Verizon Communications Inc. comes close to matching AT&T's political might or its reach in telecommunications products and services.  Because of the regional land line monopolies that phone companies enjoy, the two compete only for cellphone and some big business customers.

Likewise, cable companies with territorial franchises don't compete against one another.  But phone and cable firms are locked in bitter fights to win customers state by state, city by city.

"The communications field is a natural oligopoly," said analyst Maribel Lopez at Forrester Research Inc.  "If anyone thinks there will be 15 providers of communications services, they're sorely mistaken."

Phone and cable companies increasingly are putting together bundles of voice, video, wireless and high-speed Internet services.  That allows them to offer new products that integrate those services, such as being able to send phone messages to the TV screen or allowing cellphone calls to be answered on the home phone.

Those bundles and the different features in them should mean more effective competition because even an oligopoly would find it hard to coordinate activities in a way that would violate antitrust laws, said Donald Baker, a former Justice Department antitrust official who was involved in the Ma Bell case.

In announcing the BellSouth deal in March, AT&T Chairman Edward E. Whitacre Jr. stressed that the combination would bolster innovation, competition and integration of services.  His company already has ways to make cellphones and land lines work together.

"Our focus is on providing great service and innovative, competitively priced products for consumers and businesses throughout the Southeast, the nation and the world," he said.

There are two big differences between the old Ma Bell monopoly and the new AT&T behemoth, based in San Antonio.

One is that today, AT&T must compete with a range of new technologies cellular, wireless broadband, Internet telephony and broadband over power lines and confront new rivals, from the cable industry to a host of small phone service firms.

The other is that Ma Bell was heavily regulated, and regulators set service rates.  In the new order, control over pricing and other key areas has been lifted, changes some say bode ill for consumers who again face the prospect of high prices and little choice in providers.

"AT&T still gets politicians and other people standing up and saying this acquisition is good for competition," said Mark Cooper, research director at the Consumer Federation of America.  "This deal is not good for consumers or for competition."

The BellSouth purchase would give AT&T greater control over the backbone network that connects both land line and wireless calls, said Earl W. Comstock, president of the Competitive Telecommunications Assn., a trade group representing companies that lease the regional carriers' lines to serve their own customers.

AT&T "will be able to raise prices for rivals in the wireless and business marketplaces absent new regulatory restraints, and those costs will be passed on to consumers," Comstock said.  "It will result in less competition, which means consumers will have fewer choices, higher prices, lower quality of service and less innovation."

Jeannine Kenney, senior policy analyst at Consumers Union, the publisher of Consumer Reports magazine, believes AT&T would amass so much power that it could squeeze any competitor out.

"Reassembling Ma Bell is still a concern," she said.  "If this merger cannot be denied, what is to stop a merger with Verizon?"

The Federal Communications Commission, which has postponed a vote on the all-stock acquisition of BellSouth three times, is expected to approve it soon with conditions that probably will be more stringent than previously expected.  That's because the panel is split, 2 to 2, along party lines after Republican Commissioner Robert M. McDowell disqualified himself because of a conflict of interest.  AT&T now must work out a deal to win over the two Democrats.

One key issue yet to be resolved is whether AT&T would be prohibited from giving companies that pay more money special priority on its high-speed Internet lines.  Ensuring equal access to those lines is known as network neutrality.

Another issue is whether it must keep a lid on wholesale prices phone service rivals pay to lease lines and equipment on AT&T's backbone.  A third is whether it would have to sell some of the wireless spectrum held by BellSouth.

The Justice Department already cleared antitrust issues without imposing conditions, a move many see as a way to avoid judicial review.  "The only way you get that rosy picture is if you ignore all the facts and reality," Comstock said.

Once the dust settles, the smallest and weakest of the seven so-called Baby Bell local phone companies created in the 1984 dismantling of Ma Bell would emerge as the biggest.  It would be the third Baby Bell acquisition by the company initially known as Southwestern Bell Corp. and later SBC Communications Inc.

Last year, SBC bought the old AT&T Corp., then mainly a long-distance carrier, and renamed itself AT&T Inc.  Early this year, Verizon bought the other major long-distance company, MCI Inc.  The deals, still under judicial review, wiped out the two biggest competitors to the local Bell companies.

If the BellSouth acquisition is completed, only Verizon and Qwest Communications International Inc. would remain among the original Baby Bells, along with AT&T.  And the deal making may not be over.

With two years still to go for the business-friendly Bush administration and its compliant Justice Department antitrust division, AT&T could be on the prowl to pick up another major property.  Most analysts guess it could be Dish Network satellite TV, operated by EchoStar Communications Corp.  AT&T already sells Dish service as part of a marketing arrangement.

Analyst Blair Levin at Stifel, Nicolaus & Co. questions whether it's important to be such a large company.  In filings with the FCC, he said, AT&T argued that it needed scale to compete, invest and innovate.  Yet its competition "amounts to 400 small Internet phone companies," Levin said.

"If scale really is important, they are the only ones who are ever going to have it.  Game over," he said.  "And if there are other attributes that make a successful company, do you need scale?"

james.granelli@latimes.com

http://www.latimes.com/business/la-fi-att26dec26,1,1121098,print.story