Real Issue Facing Baby Bells Is: What Do They Want to Stand for?
Q. What does SBC Communications Inc.’s proposed $16.7-billion acquisition of Pacific Telesis Group say about the future of local telephone service in California?
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A. Absolutely nothing of importance . . . and that’s important to know.
So ignore the tired bleats of telecom pundits predicting an endless future of mergers and consolidations in a relentless bid for reach and economies of scale. Scale is a mug’s game: If scale were everything it’s cracked up to be, IBM would be running computerdom, General Motors could have ignored Toyota and AT&T; wouldn’t be breaking itself up. Believe it or not, there are still a few economists out there who feel that telecommunications is a “natural monopoly.” It’s not.
Ignore SBC Chairman and CEO Edward Whitacre Jr.’s boilerplate when he tells the media: “In this new competitive environment, customer satisfaction, a strong market presence, efficient and lower-cost operations, a substantial financial base and innovative services will be crucial to success.” Gee, since when are they not? Let’s hope he gets a better speech writer as part of the merger.
Maybe more of the Baby Bells will merge; maybe they won’t. Maybe AT&T;, MCI and the PCS companies will make major competitive inroads into the local service or maybe they won’t. Maybe there will be massive telecom layoffs; maybe there won’t. But the real issue facing the Bells isn’t who acquires whom or who competes with how much. It’s: What do they want to stand for? What does their brand mean? What entitles them to command a premium in an increasingly competitive marketplace? What is their value proposition?
It is a fact, not an opinion, that a large portion of Baby Bell profits come from both the access fees and the billing services they charge the long-distance carriers. Indeed, billing is one of the true “core competencies” the Baby Bells possess. But how do you profitably leverage that ability in the marketplace? By taking over a cable company? By going into “content” businesses like Tele-TV, backed by three Baby Bells? When push comes to shove, does diversification, consolidation or innovation make the most strategic sense for companies that are culturally stodgy and customer-confused?
There is absolutely no inherent technical reason why a Baby Bell couldn’t be as good or better an Internet access provider as an AT&T; or MCI. Consumers should legitimately ask why their local phone companies don’t offer e-mail addresses and the opportunity to set up Internet home pages with the same ease and facility it takes to get a local phone number. Indeed, who should know the telecom and datacom needs of consumers better than their local phone companies? In fact, the Bells have been successful in adding features such as call waiting and Caller ID to their core voice services. And you could make a strong case that a local phone company could easily become a Wal-Mart of telecommunications--retailing anything and everything having to do with creating digital interactions.
In theory, no companies are better positioned to become the gateways to virtual communications than the Baby Bells. They are already in everybody’s homes and businesses; they have adequate financial resources; and their ownership of the local loop--the bottleneck-cum-pathway of local service--gives them a terrific perspective into what kind of traffic flows across the network. With the Yellow Pages franchise, they’re ideally placed to participate in electronic commerce.
In practice, however, few companies have squandered more time, money and opportunities than the Baby Bells. They were literally given their lucrative franchises in cellular telephonics. They pay billions of dollars for cable TV systems that they have yet to wring any profitable “synergies” from. And where were they as the Internet and its World Wide Web have transformed data communications? You tell me: Who has a bigger impact on the future of value-added digital commerce: PacTel-SBC or Netscape?
By the way, who do you think will have a bigger influence on the evolution of networking standards: Microsoft or British Telecom-MCI? So much for economies of scale and scope! We are living in a network environment where market forces do not reward those who have the most financial capital to invest, but reward those who annihilate technological barriers of entry.
Unfortunately, these companies don’t yet understand how to be gateways to a new generation of digital products and services. Instead, their cultures, traditions and business as the local telecom monopolist have turned them into gatekeepers instead. But in an era of increased competition and network architectures that are growing more open
than proprietary, that is an extraordinarily vulnerable place to be. Mergers and acquisitions have nothing to do with building the brand or effectively leveraging the local franchise. Mergers are about restructuring existing assets rather than growing new ones.
What’s so ironic about this particular merger is that it should remind us that, even as telecommunications strives to make location irrelevant, that location is itself a driver of network innovation. What better place to explore telecommuting than Los Angeles (versus, say, SBC’s home base of San Antonio, Texas).
The technical challenges of supporting everyone from the digital entrepreneurs in San Francisco’s Multimedia Gulch to the bandwidth-greedy aerospace giants of Southern California offer fantastic opportunities for learning how to innovate to serve customers. Alas, a lethal combination of regulation and the absence of competition reduced the necessary urgency for that innovation to take place.
However, no matter what entity owns a PacTel, the fact remains that the company will have to decide what its value proposition is or risk having that defined by its new competitors. That’s the true test for SBC-PacTel: Will it define what the most cost-effective gateways to cyberspace will be? Or will it be just another company that sells you dial tones?
