ATT buys BellSouth: Backing into the future

On Monday morning, March 6, 2006, AT&T announced that it will merge with BellSouth, a Baby Bell in a 67 $billion transaction. This was big, potentially market-moving, news, which triggered a flood of comments and analysis. The gist of it was that the old AT&T was back with vengeance and that the further consolidation was preordained.  
While these statements are undoubtedly true they are not necessarily the most pertinent ones.  The emerging AT&T is very different from the old one. For one thing, it is actually a Baby Bell, SBC, which is running the business. And at the time of the break-up, SBC was generally deemed as the one most likely to be consolidated rather than consolidator. What made the difference was a strategic intent and managerial skill of few people (Ed Whitacre in particular: he may look like a quintessential company man but he is a remarkable business builder). But beyond the corporate identities and human interest stories, the logic of the deal is clearly defensive. And this logic covers not only the declining fixed line business but also the flourishing mobile business. It is the latter that is the key driver behind the deal. As a matter of fact, SBC bought AT&T to get into Cingular and once they have a half-share of it, the merger with the other half-owner (BellSouth) looked unavoidable. This should reduce cost and streamline management. More importantly, it should (in theory at least) help the company focus on the strategic challenges to the mobile business. These challenges include:

• Technological integration among different mobile standards (GSM, TDMA, CDMA) and the speed of convergence to CDMA (and related technologies)


• Pricing structures rationalisation in order to increase usage and to prevent


• Declining ARPU (average revenue per user)

Underlying these challenges lurks a spectre of the wireless high-speed Internet. This is the promise and the menace t of CDMA and other 3G technologies. Much is made of the threat that VOIP (voice over the IP) poses to fixed line telcos business. But the threat is actually as real and economically much more serious to the mobile voice business. And the mobile voice is at present both the cash-cow and the growth driver of the traditional telcos not only in the US but also in Europe. It does not require much of crystal-balling skills to foresee that the VOIP over wireless high-speed internet will cause drastic adjustments in pricing of voice services, similar to the one that broadband Internet imposed on ISPs, forcing them to shift from time-based to fixed-use pricing. To the extent that mobile revenues are much higher and more important than Internet data ever were, the adjustment will be more dramatic and painful.  
Telcos have between eighteen months and three years to put in place alternative pricing structures, based on service and third-party pricing and to further restructure their business. Failing this, we shall witness a destructuring scenario, similar to the one that shook up the computer industry between 1985 and 1995. By the end of this period, none of the major players have survived in its previous incarnation and the sectoral hierarchy was changed beyond recognition with new players (Microsoft, Intel and Dell) becoming market leaders. We can anticipate similar or even bigger upheavals in the telecom domain.