Editor-In-Chief

Paul M Broadbent 766 East 750 North #12, Provo, UT 84606 voice: 801.885.0138 email: [email protected]

15 April 2006

Bob Wallace Editor-in-chief Telecommunications Americas 685 Canton Street Norwood, MA 02062

Dear Mr. Wallace:

I am interested in submitting my report "Mergers: Bigger and Better?" for publication in Telecommunications Magazine. This report focuses on mergers and acquisitions in the telecommunications industry as new technology is implemented in addition to service providers changing each year. With this much activity, I wonder if a larger corporation is actually better for the customers, the company, and the economy.

Many corporations will agree that a merger will benefit the company with reduced costs and increased revenue but many consumers are concerned about a reduction in competition and an increase in fees. In this report, I will cite from companies and newspapers the opinions of both sides to see what the economic impact is of mergers and is there concern for monopolies arising from these mergers.

I hope that you find this report interesting and applicable to readers of the Telecommunications Magazine. Thank you for time in reviewing this report. Please feel free to call or email me with any questions or concerns.

Sincerely,

Paul M Broadbent

Enclosure: Manuscript Mergers: Bigger and Better?

Prepared by

Paul M Broadbent

15 April 2006

i SUMMARY

Many people are actively concerned that upcoming mergers and acquisitions in the telecommunications industry will definitely result in higher prices and less competitive businesses. The main companies—BellSouth, AT&T, MCI, Cingular, and Verizon—have the capacity of producing mergers that will benefit the market with reduced costs, bundled services, and better technology. The negative aspects seem to outweigh the positive for consumer unions, but a look at the past monopolies and mergers shows quite a different story—changes in the marketplace and changes in technology produce difficult circumstances for large companies to form a successful monopoly.

ii INTRODUCTION

The company AT&T continues to grow in size from merging with SBC and the upcoming merger with BellSouth. With this increase, some think back to the darker days of

AT&T in the 1970's. The U.S. Government filed an antitrust lawsuit against AT&T for monopolizing the local calls market. From 1974 through 1984, the Justice Department had AT&T on trial until an agreement was made when "AT&T agreed to divest itself of the wholly owned

Bell operating companies that provided local exchange service" (AT&T 2005). The Bell System

(predecessor to the AT&T) spilt up into eight companies: AT&T retained long distance, manufacturing, and research and development divisions and the Regional Bell Operating

Companies (RBOC) divided the national local division into seven regions—independently functioning from AT&T management and other RBOC's. Some of these RBOC's exist today as

SBC (formerly Pacific Bell and Southwestern Bell), Verizon (formerly Bell Atlantic and GTE),

Qwest (formerly US West), and BellSouth. The current merger of BellSouth and AT&T is reunion of the mother (AT&T) and her child (BellSouth), just as the merger between SBC and

AT&T was considered to be such an event.

The telecommunications industry continued to change when, President Clinton in 1996 signed the Telecommunications Act to allow competition of local and long distance carriers to thrive without regulations from the government (AT&T 2005). The result of this act can be seen as companies evolve, appear, and disappear within the industry. AT&T is not the only company that is involved with mergers; as one company becomes larger, their competition will also merge with smaller companies to be larger competitive company.

Many consumers and analysts are raising questions on the chance of monopolies forming from these multi-billion dollar mergers. Mike DeWine along with Herb Kohl, members of the

1 House of Representatives, voiced their opinion on the latest acquisition of AT&T: "A key question will be, simply, is bigger going to be better for consumers? We need to see whether the increased size of the new AT&T will bring consumer benefits, or harm competition" (Clark

2006). As this is a large concern, this article will focus on the economic impact of mergers— positive and negative—and the idea of monopolies and antitrust laws in consideration of current mergers.

POSITIVE IMPACT

With so many different services that are available to consumers from the telecommunications industry, consumers will generally have a different provider for each service; e.g., Cingular for mobile, AT&T for long distance, and BellSouth for DSL. Companies today are interested in merging various corporations to provide consumers with bundled services or multiple services from one company. As companies merger and acquire like AT&T acquiring

BellSouth and Verizon acquiring MCI, they promise a better and bigger company that will produce a host of notable qualities: better technology, faster service with better customer integration, and lower prices for bundled services.

AT&T and BellSouth. AT&T will be acquiring BellSouth for a $67 billion as shareholders of BellSouth will receive 1.325 shares of AT&T in exchange for each BellSouth share. In order for AT&T to be a premier provider in the U.S., better service will be provided in wireless, broadband, video, voice, and data markets. A larger network is another result as

BellSouth combines its fiber network which provides service to millions of loyal customers with

AT&T's existing network. With these benefits added to AT&T's company, Chairman and CEO of

AT&T, Edward E. Whitacre Jr., stated that this company is capable of producing "innovative services to more customers" (AT&T 2006). AT&T promises a company that is better equipped in finances, technology, research and development to provide quality service to customers. This better financial standing will be manifested in this new company's revenue growth by 2007 and double-digit earning per share growth with additional dividend payments (AT&T 2006). With a

2 combined network, a good reputation, and a great financial outlook, AT&T has the potential of producing excellent customer service.

Cingular. The merger of BellSouth and AT&T, independent owners of Cingular

Wireless, will unite the parents of Cingular Wireless. Having Cingular owned by one company will improve its revenue as Mr. Whitacre stated that ". . . no partnership between two independent companies . . . can match the speed, effectiveness, responsiveness, and efficiency of a solely owned company" (AT&T 2006). As Cingular is transferred to one owner, the cost of advertising will be significantly reduced; currently, large amounts of money are needed to advertise the individual independent brands of AT&T, BellSouth, and Cingular (Wirbel 2006). All three brands will become united under the AT&T brand; this reduction along with other cost reductions will amount to an estimated $18 billion savings (AT&T 2006). The benefit for adopting the

AT&T name comes from consumers' awareness of the AT&T legacy (SBC 2005). Not only will there be a reduction in costs, but Cingular will be able to produce and implement new technology faster into the market (Searcey, et al. 2006). This leading provider of wireless service will benefit from this merger in management to reduce expenditures.

Verizon. Verizon Communications Inc. and MCI merged for $7.6 billion on January 6,

2006 to combine Verizon's broadband and wireless services with MCI's international business endeavors. Verizon wants this merged company to be the leader in providing wireless and landline technology in these various markets: residential, business, and government. This is possible through the use of their leading IP (internet protocol) network which allows Verizon to

"deliver the highest quality end-to-end experience for our customers" (Verizon 6 Jan 2006).

Verizon stands to reduce costs by implementing a fiber network and by providing a division that will influence businesses of America. The combination of their networks produces a division focused on businesses—Verizon Business. This unit will integrate the services of Verizon and the former business-associated units of MCI (Verizon 6 Jan 2006). The implementing of new technology, fiber broadband, and video network will ultimately allow for reduced costs and

3 increased efficiencies (Verizon 28 Feb 2006). The use of the IP network will be a large benefit to

Verizon Business to provide better services to businesses while reducing costs.

These mergers will be able to make bigger companies that can provide better service. The combination of existing networks will allow better coverage for regional markets and will reduce cost significantly. Reduction in costs allow for companies to use the money in other sectors like researching and developing new technology or upgrading older technology.

NEGATIVE IMPACT

As new management leads the merged company, changes will occur to sustain the positive impacts the larger corporation produces. One change is the implementing of higher prices for necessary services. Consumer unions are concerned that as prices increase competition will decrease, unemployment will increase, and brands will disappear. All of these concerns together could cause reaction from the government in forms of antitrust lawsuits.

Prices. Before BellSouth and AT&T combine, AT&T and SBC merged. The Ad Hoc

Telecommunications User Committee feared that the merger between SBC and AT&T would eventually raise prices. This Committee also was concerned about MCI and Verizon proceeding in the same steps as AT&T and SBC. AHTUC urged the Federal Communications Commission to put more restrictions on the merger so that AT&T and Verizon could not raise prices and restrict access to networks (Wilson 2005). Consumers Union and the Consumer Federation of

America raised complaints to the FCC that these mergers would increase fees for local, long distance, and wireless services (Wirbel 2006). Consumer unions want both companies to offer customers the option of ending their contracts up to one year after the merger is finalized (Wilson

2005). The increase in prices could cost consumers more money for services than what is really required. As prices of communication services increase, other dependent commodities can increase in price.

Competition. A competitor in the industry, Qwest, is interested in keeping competition alive in certain areas of the country. Qwest also wants the companies to give up

4 overlapping services when they merge so that there is opportunity for others to take the business.

Many feel that the issue of competition is made worse when a prominent company merges with its competition, reducing the amount of competitive companies. (Wilson 2005). Mark Cooper stated that mergers in the telecommunication industry will produce an "unregulated duopoly with just two major players [Verizon and AT&T]" (Granelli 2006). As the amount of competition decreases, there is a larger risk of a monopoly forming to take control of the industry.

Unemployment. The merger of BellSouth and AT&T will result in laying off at least

10,000 employees. When SBC acquired AT&T in 2005, 13,000 employees were laid off in addition to 13,000 employees laid off from economic changes (Wirbel 2006). The Governor of

Georgia and the Mayor of Atlanta hoped to see that headquarters of the new AT&T will be in

Atlanta, but AT&T will continue to operate out of San Antonio. This merger will take one of the largest corporate headquarters out of Atlanta (Associated Press 2006). Moving headquarters not only means loss of jobs but also means loss of revenue for dependent companies in the region.

Branding. When AT&T and SBC merged, large amounts of money were spent to inform the public of the new company's acquired name—AT&T—and logo (SBC 2005). This same task is going to be duplicated as three companies merge under one name, AT&T. This task will involve more money than spent previously (AT&T 2006). This move causes concern for a former Qwest executive as changing the brand of Cingular will have adverse effects on the company as AT&T Wireless is a less notable brand than Cingular. Cingular revenue constitutes one-third of the revenue of the combined AT&T BellSouth company (Wirbel 2006). A lot can be determined by a company's name; changing a company's name can bring undesirable affects to the corporation as consumers worrying about the reputations of the former companies.

The various negative impacts of these mergers come down to the issue of whether the costs will outweigh the benefits created. Certainly increasing prices and unemployment are a large concern, but a closer look at competition and monopolies is needed; some believe that bigger cannot be better with so many negative aspects.

5 MONOPOLIES AND ANTITRUST

Positive and negative impacts come when companies merge and sometimes a merged company can bring a monopoly to the industry. As current mergers set up new businesses, a look at past mergers can help predict what is going to happen with current mergers. Some of the previous mergers buckled from changes in the industry while others collapsed from fraudulent activities; companies are subject to constant change that reduces the risk of monopolies from occurring.

The advent of new technology has provided a wealth of opportunities for companies to appear, grow, and compete in this market. When the Bell System was separated, local and long distance services were the only markets that existed. This separation allowed competition to grow with more companies to provide better customer service and telephone service in the industry

(Searcey, et al. 2006). Changes in the economy and industry in the late 1990's forced AT&T to spilt into smaller companies, not from a government lawsuit, but to survive. AT&T Corporation carried the telephone services while AT&T Wireless was created to provide wireless services, and the cable inventory was sold to Comcast Corporation (Searcey, et al. 2006). Changes in the industry will negate changes in the businesses; monopolies cannot exist forever.

In addition to AT&T past mergers, there is the sad story of MCI and WorldCom. When these companies agreed on the merger of $40 billion, the Chairman of FCC warned other mergers of this magnitude to be careful of stricter rulings from the FCC (BBC 1998). This merger was considered to be quite a large merger; however, MCI-WorldCom suffered from bankruptcy and other scandals that to lead the company's downfall. MCI was purchased by Verizon for only $7.6 billion (Verizon 6 Jan 2006). This once profitable company was reduced in size in a matter of years.

In defense of the new AT&T, management states that this new company will not make a monopoly since BellSouth and AT&T are not competitors in local, long distance, and video markets (AT&T 2006). Mr. Whitacre stated in response to the accusation of being a monopoly, "I

6 think there's more than enough competition" (Economist 2006). This merger will not reduce the amount of competition in the industry since both companies provide slightly different services. A host of other companies still exist in the industry in various regions: Verizon has a business in the north and the east while Qwest has business in the west (Kanell 2006).

Subtracting from the implications of AT&T forming a monopoly, Verizon continues to grow with more mergers and acquisitions. Verizon Communications Inc. may gain full control of its entity Verizon Wireless by buying out Vodafone from its 45 percent ownership of this entity.

This purchase would put all of Verizon Wireless profits on Verizon's income statement. In addition to expanding its wireless division, Verizon may invest in Comcast or Qwest (Belson

2006). Verizon has also the plans to buy Alltel Corporation to form a larger wireless provider to compete with Cingular (Searcey, et al. 2006).

As companies combine to form bigger companies, changes in the economy allow for large companies to disappear. Current mergers have a number of issues to face before becoming a monopoly. A larger company is still vulnerable to extraneous circumstances; monopolies are not an ending point for a company.

CONCLUSION

The telecommunications industry changes with the invention of better technology and the merging of competing companies. The positive impact of these mergers seems to diminish the negative impact; a better network provides customers with more reliable services which allow consumers to communicate effectively. Costs of communication have certainly increased from previous eras, but the technology and the capabilities of communication have also increased. The concern of a monopoly forming is calmed after looking over the previous candidates for monopolies. Changes in the economy or the business helped to bring those companies to their downfall. As for the current mergers, it is too early to tell whether these larger companies will turn out to be a monopoly. As far as monopolies are concerned, the industry is too volatile to predict if monopolies will arise from these bigger companies and current mergers.

7 BIBLIOGRAPHY

Associated Press. 2006. Jobs cuts planned after AT&T-BellSouth deal. http://www.msnbc.com (accessed March 18, 2006).

AT&T Inc. 2005. A Brief History: The Bell System. http://www.att.com/history/history3.html. (accessed April 8, 2006).

AT&T Inc. 2006. AT&T, BellSouth to Merge. San Antonio, Texas; Atlanta, Georgia: AT&T Knowledge Ventures.

AT&T Inc. 2005. Milestones in AT&T History. AT&T Inc. http://www.att.com/history/milestones.html. (accessed April 8, 2006).

Belson, Ken. 2006. Question for Verizon: To buy or not to buy? International Herald Tribune. March 10, 14.

British Broadcasting Corporation. 1998. Business: The Company File WorldCom-MCI merger gets go-ahead. London: BBC.

Clark, Drew. 2006. Proposed AT&T-BellSouth Merger Could Slow Telecom Bill Debate. National Journal's Insider Update: The Telecom Act. Washington D.C.: National Journal Group.

Economist. 2006. Big is Beautiful. The Economist 378 (8468): 68.

Granelli, James S. 2006. AT&T to Buy BellSouth for $67 Billion. Los Angeles Times, March 6, A1.

SBC Communications Inc. 2005. SBC Communications to Adopt AT&T Name. San Antonio, TX: SBC Knowledge Ventures, L.P.

Searcey, Dionne, Almar Latour and Dennis K. Berman. 2006. Wedding bells: A reborn AT&T to buy BellSouth; $67 billion deal sets field for a race with cable over phones and TV; 'an explosion of technology'. Wall Street Journal, March 6, A 1.

Verizon Communications Inc. 2006. Verizon and MCI Close Merger, Creating a Stronger Competitor for Advanced Communications Services. New York, NY: Verizon Communications Inc.

Verizon Communications Inc. 2006. Verizon Vice Chairman Says Fast MCI Integration, Fiber Network Deployment Scale Set Stage for Cost-Reduction and Revenue Opportunities, Future Earnings Growth. New York, NY: Verizon Communications Inc. Wilson, Carol. 2005. Competitors Ask FCC to Impose Conditions on Mega-Mergers. Telephony Online 246(21): 20-21.

Wirbel, Loring. 2006. Analysis: AT&T's Proposed BellSouth Acquisition Revives 'Ma Bell'. InformationWeek, March 5. http://www.informationweek.com/industries (accessed March 18, 2006).