a technology consultant firm predicting business as usual

from: Gartner [1]

AT&T Closes BellSouth Deal by Making Only Small Concessions

4 January 2007

Jay E. Pultz Kathie Hackler Phillip Redman

AT&T made several minor concessions to win FCC approval of this deal. Now larger and with a wholly owned wireless capability, AT&T is strengthened as a global telecom leader. But enterprises shouldn't overlook alternatives.

Event
On 29 December 2006, the U.S. Federal Communications Commission (FCC) approved AT&T's plan to acquire BellSouth and AT&T announced that it had closed the deal. AT&T had made several concessions to obtain the FCC’s approval of the proposed acquisition, which AT&T announced on 5 March 2006. AT&T’s stock price has increased this year, causing this all-stock transaction to increase in value from $67 billion when announced to $86 billion on completion.

Analysis
As we predicted, this deal closed within a year of being announced despite opposition. Our views on this deal have not changed since it was announced: This deal makes a megacarrier even larger and stronger. Full control of the wireless carrier Cingular was the primary impetus behind this deal (Cingular, a joint venture, was 60% owned by AT&T and 40% owned by BellSouth).

We expect most fixed-line services to be based on the legacy AT&T platforms. However, the primary affect on enterprise customers is much less than, for example, Verizon acquiring MCI (see "Verizon/MCI Deal Should Lead to More Stable Telecom Pricing"). What does require additional analysis is the terms AT&T accepted to get this deal done. The concessions AT&T provided over this holiday season are “gifts” for major stakeholders. Stakeholder groups have publicly stated that they got what they wanted. AT&T's concessions included the following:

AT&T made commitments for 100% broadband coverage (DSL, satellite or WiMax) to all residences in the combined territory by year-end 2007.

Consumers who had not subscribed before got a low-cost DSL choice ($10 per month and a free asynchronous DSL modem), and a stand-alone DSL option was added.
Enterprises and other carriers received rate caps on special-access circuits.

In wireline, AT&T agreed to treat all Internet traffic equally, in a bow to "net neutrality" advocates.
In wireless, AT&T is giving up the 2.3 and 2.6 GHz spectrum owned by BellSouth.

Despite media reports to the contrary, we view these concessions as small and rather insignificant:

Several of the conditions (such as net neutrality) expire two years after the transaction closes.
Most conditions represent directions that the market would have likely pushed AT&T toward without the agreement.

The spectrum AT&T is giving up is relatively minor, was not exploited and is not strategic. It is also likely to be picked up by providers other than Sprint or Verizon Wireless, AT&T's wireless competitors.

All customers: If you haven’t done so yet, re-evaluate your needs and strategies for using network service providers (NSPs), both wireline and wireless. Strongly consider a multicarrier strategy that includes second-tier NSPs such as Qwest and Level3. Because we expect most fixed-line services to be based on the legacy AT&T platforms, don't sign up for new BellSouth data services unless you must.

Customers continuing with BellSouth, AT&T and Cingular: Renegotiate contracts to take into account your total spending with all three providers. Ensure that your contracts are aligned with the new special access ter