Bottom Line of Phone Deals May Simply Be Market Share

When Bell Atlantic Corp. announces its merger with Nynex Corp. today, as expected, there will be plenty of echoes from the announcement earlier this month of SBC Communications Inc.’s acquisition of Pacific Telesis Group.

Philadelphia-based Bell Atlantic, a profitable company that has operated in a less regulated environment, is swallowing a poorly managed New York-based Baby Bell operating in a competitive market under tight regulatory oversight. That parallels the profitable San Antonio, Texas-based SBC’s taking over comparatively troubled Pacific Telesis, based in San Francisco.

Bell Atlantic and SBC both justify the mergers on the grounds that new communications legislation from Congress requires them to be bigger to compete as one-stop service super-providers.

And in both cases, the Baby Bells are having trouble providing convincing rationale as to why these marriages should take place--especially given the fact that they were all broken up from AT&T; by court order only a decade ago. As a result, both deals are ripe targets for local public utilities commissions concerned with protecting consumers and local jobs.

“The philosophy is that bigger is better,” says Michael Noll, professor at USC’s Annenberg School for Communications. “I don’t think this is what Congress had in mind when it passed legislation to increase competition.”

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SBC and PacTel spoke of complementary technology. SBC is strong in cellular, and PacTel is strong in high-tech services like ISDN, or integrated services digital network, the high speed phone lines attractive for heavy users of the Internet. But if that was so important, PacTel should never have spun off its cellular operation, AirTouch Communications, in 1994.

Bell Atlantic and Nynex will similarly talk of complementary, continguous markets. But in the key market where moving from territory to territory is a problem--cellular phones--the two companies have already merged their operations. Analysts point out that the two have had plans to do the same in long-distance services once regulators allowed them to.

The administrative savings from both deals, analysts say, would be marginal.

So why all the spending on investment bankers and the traumatic corporate slam dances? The only rationale that really makes sense is the one explanation no Baby Bell is going to give: that in spite of all the talk of competition, the local-phone business remains a powerful monopoly.

The Baby Bells and GTE Corp. control the telephone lines to virtually every home in the nation. That’s an infrastructure too costly for any competitor to replicate for many years. This infrastructure, and the tie to millions of customers it provides, can be richly exploited by selling extra phone lines, answering services, Internet offerings and a range of other services.

In this monopoly environment, when a Bell Atlantic or an SBC buys another Baby Bell, it is simplying buying market share.

The local-phone business “is an excellent franchise,” says Noll. “It’s a bottleneck with no way around it.”

Well, that’s not exactly true. There is wireless, for example. But how soon will it be before we can make phone calls on our cellular phones as cheaply as on our regular phones? And telephone service over cable TV wires, most engineers now admit, will only be a supplement to your regular phone service for the foreseeable future.

As a result of its acquisition, SBC would have 25 million customers and control over the nation’s two largest states, California and Texas, and monopolies in seven of the nation’s 10 largest metropolitan areas.

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If Bell Atlantic completes its deal with Nynex, it will have 36 million residential and business customers stretching from Maine to Virginia, and including the all-important Washington-New York nexus.

Of course Nynex and Pacific Bell are both facing heavy competition in some markets for business customers where it is worthwhile for competitors to install fiber-optic networks that can compete with the existing infrastructure.

And as the Baby Bells prepare to battle in the long-distance market against AT&T; Corp. and MCI Communications Corp., the ability to control larger tracts of territory may give them an edge. More of their phone calls can start and terminate within their own territories, reducing the need to use competitors’ lines and switches.

But to regulators, that kind of added power could simply raise more red flags.

Already consumer advocates are warning that the Baby Bells may try to justify the premiums they are paying for their partners by putting additional pressure on regulators to raise rates.

SBC paid a 40% premium for PacTel, and rumors of a Bell Atlantic-Nynex merger have pushed Nynex’s stock price up by 30% over the last year.

The phone companies do, of course, continue to face regulatory oversight. The new, larger SBC would still have to get rate approval from the California Public Utilities Commission, and Bell Atlantic would have to do likewise in New York.

But the reality is that telephone companies have powers of their own. And they are only beginning to flex their muscles.

When the Washington state public utilities commission recently rejected Englewood, Colo.-based US West’s request for a 100% increase in telephone rates, for example, US West hinted that the move could hurt the state by reducing the phone company’s investment in the state’s infrastructure.

With the growing importance of technology worldwide, states cannot take such threats lightly.

As for the other Baby Bells, speculation about potential links centers on US West joining with the merged SBC-PacTel company to create a Western phone behemoth. Ameritech Corp. of Chicago and BellSouth Corp. of Atlanta both insist they have no merger plans.

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Companies at a Glance

Bell Atlantic Corp.

--Headquarters: Philadelphia, Pennsylvania

--Chairman/Chief Executive: Raymond Smith

--Vice Chairmen: James Cullen and Lawrence Babbio

--Number of Employees: 61,800

--Origin: Bell Atlantic’s operations are rooted in the AT&T; Corp.’s Bell System, which began in the 1870s. Bell Atlantic was created in 1984 as part of the breakup of AT&T; under an antitrust settlement. Since then, Bell Atlantic has had a monopoly on local phone service in six states and Washington, D.C.

--In the first quarter of 1996, net income rose 14 percent to $470.5 million, or $1.07 a share, from $414.5 million, or 95 cents, in the year-earlier period. Revenue fell to $3.21 billion from $3.45 billion, primarily because the company’s 1996 first-quarter revenue doesn’t include sales of its wireless operations.

--Products and Services: Provides local telephone services in Delaware, Maryland, New Jersey, Pennsylvania, Virginia, Washington, D.C., and West Virginia and cellular services in many metropolitan and rural areas of the United States. International operations and investments are located in Australia, Indonesia, Italy, Mexico, South Korea and the Czech and Slovak Republics.

Nynex Corp.

--Headquarters: New York City

--Chairman/Chief Executive: Ivan Seidenberg

--Vice Chairman: Frederic Salerno

--Number of Employees: 65,800

--Origin: Nynex was also created under the breakup of AT&T; in 1984. Nynex provides local phone services throughout New York and most of New England.

--Financials: In the fourth quarter of 1995, profit from operations rose 12 percent to $378.7 million, or 88 cents a share, from $339.1 million, or 80 cents a year ago. Revenue, not including its cellular joint venture with Bell Atlantic, rose to $3.32 billion from $3.18 billion.

--Products and Services: Nynex offers local phone service in Connecticut, Maine, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont and cellular service with Bell Atlantic. International operations and investments are located in the Czech Republic, Gibraltar, Greece, Indonesia, Japan, Poland, Slovakia, Thailand, and the U.K.

--Last year, Bell Atlantic and Nynex combined their U.S. cellular businesses, now known as Bell Atlantic Nynex Mobile.

Source: Bloomberg Business News

* MERGER AGREEMENT

Nynex, Bell Atlantic agree to merge in $22-billion deal. A1

More merger coverage, D2, D5