All the king's men

One might expect a $67 billion dollar merger to receive more attention than Sunday’s announced deal between AT&T and BellSouth, particularly so since the deal will reconstitute a large portion of Ma Bell that federal regulators had so tirelessly rent asunder in the 1980s, but by and large, notwithstanding the notable antitrust history of AT&T, antitrust concerns have been markedly understated. In acquiring BellSouth, AT&T adds heft and scale—and little else. The two concerns do not really compete in the local and long distance telephony markets, and since they already jointly own Cingular Wireless, the merger will not reshuffle the competitive deck in the wireless industry either. On purely antitrust grounds, there doesn’t appear to be much to hinder the deal. But if AT&T is not enhancing its share in any one telephony market, why is it so keen to purchase BellSouth?

The answer to that question can be found not so much within the telecommunications industry itself, but the convergence of technologies occurring within the cable industry. For military buffs who enjoy large, Napoleonic set-piece battles, the current rivalry between the cable and telecommunications industries is the closest thing to Austerlitz in the business world. Two large, rich, and powerful armies of lobbyists are bivouacked along K Street, and daily they march against one another within the halls of Congress, fighting over the future of American communications. Can a telephony company provide video services? To what degree must the Baby Bells make its infrastructure available to third-party companies, like ISPs and local phone companies? So forth and so on.

And like Napoleon, each side seeks to defeat the other “simply by marching,” i.e., being first to market a truly integrated solution to communications—telephone, television, and wireless. Cable companies have moved aggressively to bundle a range of services outside of their standard cable TV offering. This, of course, includes the increasingly popular delivery of broadband Internet. Additionally, they are able to bundle much more easily than the traditional phone company simply because of the nature of their technology. As Rachel Ward of Ohio University has written, “Achieving triple play is simpler for cable companies than for phone providers because its coaxial (coax) cable infrastructure can carry more information more quickly than the twisted copper pair technology of the phone operators.” While these developments naturally worried the telecoms, the low-grade conflict between the two industries flared into open warfare once Voice over Internet Protocol (VoIP) became a significantly commercial enterprise. VoIP makes it possible to receive and make telephone calls using nothing but a broadband Internet connection. This, in addition to the saturation of cellular technology, has dealt a crippling blow to the Bells’ ace in the hole: their ownership of the land-line infrastructure, the actual copper and fiber wires through which data flows. Suddenly, if consumers can make telephone calls using the cable companies’ infrastructure, AT&T’s monopoly on the physical network—which, despite the blundering of federal regulators, was never really broken—is worth a whole lot less than it was before.
















As a staff writer at Smartmoney.com recently remarked, “Local and long-distance calling may be dying businesses, but they’re dying slowly, throwing off cash as they expire.” Cash flows are still strong for the Bells, but inevitably, unavoidably, will diminish as the new technologies move through the market with more agility and awareness; therefore, the strategies Ma Bell puts into place within the next 24 to 36 months will have far-reaching effects. VoIP has enabled the cable companies to hit the Bell system in the gut, carving out a piece of the voice telephony business for themselves. In response, the Bells are seeking to return the favor by developing IPTV—the ability of telephone companies to delivery video content to consumers through the telephone line. The main obstacle here is the franchise fee that local communities charge cable companies, enabling the cable operator to broadcast. Telephone companies must circumvent this regulation in order to have a chance, and rather than fight it out in thousands of municipalities, it would be far better for the telecoms to have federal-level regulations knock down those barriers to entry. But as the above quotation hints, time is a factor in rolling out new services for the telecoms.

As telecoms and cable operators scramble to field a triple-play champion, the wildcard, rarely considered, is the fickle consumer. Tell a studied industry observer five years ago that Steve Jobs would come to dominate the music industry or that Apple’s market capitalization would exceed that of Dell Computers, and you’d likely get laughed out of the room. Simply put, the underlying technology that powers the delivery of data content—whether it be a telephone conversation or a Stanley Kubrick movie—is evolving far more quickly than the companies whose charge is to put content in the hands of consumers, and ultimately, that’s what this is all about at the end of the day. One slick gadget, one consumer fad, and much of the regulatory wrangling going on today might seem as relevant as a Greek phalanx.

Further complicating the triple-play model is the fragmentation of audiences. For the TV Guide generation, TiVo, VoIP, and iPod are merely little bits of a confusing alphabet soup. These consumers have entrenched habits concerning the way they consume data content. Conversations are held on telephone handsets; movies are viewed on a TV at the time of Home Box Office’s choosing; the Internet, if it exists at all, flows into the home 56 bits at a time. Yet these consumers still wield considerable clout in the marketplace, and the most profitable model 15 years from now might not be able to tread water now.

This is the greatest reason for granting the BellSouth deal regulatory approval. No one, not even the companies battling it out for market dominance, really knows what that market will ultimately look like. The sum of AT&T and BellSouth might end up being just a big phone company that slowly bleeds itself dry, and as we saw in the gross incompetence of regulators in the attempted bust-up of Microsoft, regulating a quickly evolving industry often means solving a problem that will solve itself in due time.