When SBC Comes Calling

The old AT&T; may be coming back together, only this time it will be called SBC.

With Monday’s agreement to buy Ameritech, SBC Communications comes a giant step closer to reconstituting the old Ma Bell network that regulators broke up--for the benefit of consumers--in 1984.

Including the California and Nevada territories it picked up by acquiring Pacific Telesis last year, SBC would provide phone lines to 52.5 million customers in 13 states, if regulators and shareholders approve the deal.

Sometime before the end of next year, SBC expects to begin selling long-distance service--in addition to local and wireless services--under provisions of the Telecommunications Act of 1996.

But consumer advocates and some analysts say that a monopoly is just as bad for customers today as it was 14 years ago, when AT&T; was split up. In the absence of meaningful competition, the Baby Bells have protected their profit margins instead of lowering rates, investing in their networks or improving customer service, watchdogs say.

“Apparently, size really does matter,” said Regina Costa, telecommunications research director for the Utility Reform Network, a consumer watchdog group in San Francisco.

“The old Bell System is coming back together again,” said A. Michael Noll, professor of communications at USC’s Annenberg School.

SBC’s experience in California demonstrates some of the ways consumers pay the price of industry consolidation. In the last year, SBC has diverted investment dollars from cutting-edge broad-band networks to wireless services and retreated from plans to deliver video over phone lines. On top of that, the state Public Utilities Commission has reported a major increase in customer complaints about PacBell.

At the same time, profit-minded SBC has shifted PacBell’s priorities toward revenue-generating activities. PacBell has been much more aggressive in marketing lucrative add-on services, such as caller ID and call-waiting, even shifting some customer service agents to sales duties, said Michael Shames, executive director of the Utility Consumer Action Network, a San Diego watchdog group that has filed several complaints about PacBell with the PUC.

Concerns about high prices and poor service are what prompted federal regulators to break up AT&T.; They decided that the markets for long-distance and equipment manufacturing could be open to competition. But because of the massive investment required to build a phone network reaching every home and business, regulators decided that local phone service was a natural monopoly that should be subject to regulation.

By the time Congress reformed the nation’s telecommunications laws in 1996, the picture had changed. Thanks to new technology, cable TV companies were promising to provide phone service over their lines. Wireless phone providers said they didn’t need extensive infrastructure to reach customers in their homes. The satellite networks and the Internet were expected to offer alternatives to the local phone companies. Even electric utilities were flirting with the idea of providing dial tones.

So Congress loosened its regulatory grip on local phone companies with the expectation that new competitors would keep them in check.

“Technology has changed the rules of the game,” said Gary Getz, who follows the telecommunications industry at Strategos, a corporate strategy group in Menlo Park, Calif. “Having a broader geographic territory reach with twisted copper strand is no longer the exclusionary competitive force that it once was” for the Baby Bells.

But even in the face of all those potential competitors, the Bells’ copper wires still carry nearly all local phone traffic.

“Congress was basically betting that the technology was there to make the [competitive] marketplace work, and I think it was a fatal mistake,” said Gene Kimmelman, co-director of the Washington office of Consumers Union, which will ask regulators to block the SBC-Ameritech deal. “The result has been consolidation that reinforces the monopoly, as opposed to blasting apart the monopoly.”

Analysts say San Antonio-based SBC has been the most aggressive of the Bells in leveraging its control of those critical copper wires to the detriment of would-be competitors.

“As long as people have to go through SBC to get access to an individual customer, SBC has the wherewithal and the power to frustrate that competition,” said UCAN’s Shames.

In California, for example, SBC delayed the onset of local competition by at least six months by changing the procedures for allowing other carriers to connect to PacBell’s network, said Mark Cooper, director of research for the Consumer Federation of America in Washington.

Complaints about PacBell’s service quality have increased since the SBC takeover, according to the Utility Reform Network. Many customers have been frustrated by delays in having second phone lines installed, and money that was originally earmarked for upgrading the phone network has been redeployed to the Pacific Bell Mobile Services wireless network, Shames said.

In March, PacBell said it would invest $2 billion in California’s local phone network next year, which is in line with the company’s historical spending patterns.

Jack Leutza, director of the PUC’s telecommunications division in San Francisco, said state regulators have “general concerns about service quality’ and may investigate the phone companies, but added that problems with PacBell are not directly related to the SBC acquisition.

So far, SBC has complied with the merger conditions set forth by the commission, Leutza said. But he added that “ ‘satisfaction’ is too strong a word” to describe the PUC’s feelings about SBC’s dealings here.

SBC and Ameritech do not need the PUC’s permission to merge, but the commission does reserve the right to impose new conditions on SBC’s merger with Pacific Telesis if SBC merges with anyone else.

* More Coverage: Walter Hamilton looks at some of the hot stocks in the booming telecom arena. D4

* Telecommunications stock mutual finds have been this year’s standouts. D5

* The acquisitions would probably make SBC later yet to the Internet party. D12

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The Biggest Bell?

SBC Communications’ proposed $56-billion acquisition of Ameritech would make it the largest of the remaining Baby Bell companies. Under the terms of the deal, which requires federal and state regulators’ approval, SBC would exchange 1.316 of its shares for each Ameritech share.

The Territories: US West, Ameritech, Bell Atlantic, Bell South and SBC Communications*

(* SBC’s $4.4 billion purchase of Southern New England Telecommunications Corp in connecticut was announced in January but is pending.)

*

And Then There Were Four

A comparison of the remaining Baby Bells:

*--*

Access minutes Net Access lines of use income (millions) (billions) (billions) Employees SBC/Ameritech 52.5 205.1 $5.7 189,000 Bell Atlantic 39.9 160.5 3.8 141,000 BellSouth 23.2 97.1 3.3 81,000 US West Communications 16.0 67.1 1.2 47,568

*--*

Note: Figures are for year-end 1997.

The New Giants

The largest U.S. mergers in history:

*--*

Value Companies Date announced (billions) 1 Travelers Group/Citicorp** April 6, 1998 $70.0 2 NationsBank/BankAmerica** April 13, 1998 59.3 3 SBC Communications/Ameritech** May 11, 1998 56.0 4 Daimler-Benz/Chrysler** May 7, 1998 38.6 5 WorldCom/MCI Communications** Oct. 1, 1997 35.3 6 Banc One/First Chicago NBD** April 13, 1998 28.9 7 Kohlberg Kravis Roberts/RJR Nabisco Oct. 24, 1988 24.6 8 Bank of New York/Mellon Bank** April 22, 1998 23.3 9 Bell Atlantic/Nynex April 22, 1996 19.5 10 First Union/CoreStates Financial Nov. 18, 1997 19.5

*--*

**Pending

Sources: Company reports, Houlihan Lokey’s Mergerstat

*

Consumer Benefits?

Critics Say:

* Merged company may divert resources away from California, possibly leading to poorer service.

* The deal would reduce competition by eliminating Ameritech as a competitor and by sparking other mergers.

*

The Companies Say:

* The merger could create new efficiencies, leading to lower prices.

* The new company’s national/local strategy would require it to invade other Baby Bells’ markets, thus boosting competition.

Researched by JENNIFER OLDHAM / Los Angeles Times