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RealTime IT News

And Then There Were Two in Telecom?

The long-awaited telecom industry consolidation is here, and it's changing everything.

It began with SBC's bid for AT&T , which prompted Verizon and Qwest to scrap over MCI .

Strong in local calling and home and small business broadband, the Baby Bells lack the large network operators' IP data service deals with government agencies and corporations.

SBC, Qwest and Verizon see those long-term, high-margin contracts as crucial to their future prosperity, as cable operators, VoIP upstarts and wireless carriers try to hone in on their traditional businesses.

Against this backdrop, AT&T and MCI continue to see their long-distance businesses erode, so they're choosing to merge rather than risk slowly bleeding to death.

But mega-mergers bring a new reality to an industry that was the picture of stability for decades under the Bell monopoly. It follows two other disruptive events -- deregulation in 1996 and the economic boom and bust of the early 21st century.

"What we're seeing is the bifurcation of the industry," Lisa Pierce, a Forrester Research vice president, told internetnews.com.

Pierce expects both deals to be approved by shareholders and regulators, but not until 2006. When completed, the U.S. market will be dominated by "mega-carriers" SBC-AT&T and Verizon-MCI, she said.

Consider the numbers. SBC has 52 million access lines and 5.1 million DSL connections and adds AT&T's Fortune 1000 accounts and a global network that spans 50 countries.

Verizon, which boasts 53 million access lines and 3.6 million DSL hookups, gains MCI's IP backbone spanning 140 countries and key enterprise customers, including 75 U.S. government agencies. MCI is also the nation's second-largest long-distance carrier.

Antitrust regulators could force SBC and Verizon to divest some assets before stamping their deals, but the two will still be far bigger than remaining players. Not to mention that both SBC and Verizon have stakes in the largest wireless carriers in the United States, Cingular and Verizon Wireless.

"I'm not sure a duopoly is a good thing," Pierce said, noting that the shrinking market could lead to pricing pressure.

Some consumer groups have criticized the proposals, but corporations have been silent. Pierce finds that curious, given that telecom expenses comprise one-third or more of enterprise IT budgets.

Besides an impact on merging companies and customers, carriers that were barred from the process, or chose to sit out, could be regulated to second- or third-tier status.

Qwest is most concerned about being marginalized, as evidenced by its sweetened bid for MCI yesterday. The Denver company has 15.5 million access lines, 1 million DSL lines and 4.6 million long-distance customers, mostly in the Midwest and Western United States.

In a recent research note, Bryan Van Dussen, an analyst with Yankee Group, said Qwest has limited options to grow by acquisition if it can't sway MCI. "Sprint is an unlikely candidate given its efforts to focus more on wireless markets and new expensive capital structure," Van Dussen said.

The next group of providers -- Broadwing, XO and TelCove/KMC -- tend to target smaller companies, he said.

Meanwhile, BellSouth remains conservative, eschewing mergers and concentrating on the Southeast. While it has a strong balance sheet, the strategy has its dangers, In-Stat analyst Daryl Schoolar said.

"If MCI goes with Verizon, BellSouth could get boxed out," Schoolar said. Under that scenario, BellSouth could face competition for high-end business customers from Verizon-MCI and SBC-AT&T, while fending off low-end consumer and small business offerings cable companies, VoIP and mobile carriers.

Clifford R. Holliday, an analyst with Information Gatekeepers Group, believes BellSouth should have bid for MCI, because the companies' assets and geographic presence was a good fit.

Regardless, it may not be too late for BellSouth to act. If Qwest fails to convince MCI, it may itself become a takeover target, and its relatively new network might be attractive to BellSouth.

"I could imagine BellSouth bidding for [Qwest] and spinning off most or all of the local exchange assets," Holliday said.