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The Baby Bells Are Finally Growing Up


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THE BABY BELLS ARE FINALLY GROWING UP

A recent court ruling may give them coast-to-coast reach

They're unlikely to be called the Baby Bells much longer. Following a stunning New Year's Eve court ruling that--if it stands--would allow the regional phone companies into the nation's $80 billion long-distance market, the Bells are poised to grow up fast. In fact, some local operating companies that were carved out of the Bell System with the breakup of AT&T in 1984 are working to remake themselves in the image of old Ma Bell--delivering long-distance and local phone services across the U.S.

A week after the court decision, SBC Communications Inc.--the most aggressive of the Bells--showed how this could be done. On Jan. 5, the San Antonio-based company, which instigated the court case last July, signed a $5.6 billion deal to buy Southern New England Telecommunications Inc. That makes SBC, which had already scooped up Pacific Telesis Group in 1996, the first Bell with national reach in long distance.

Post-merger, SBC will be nobody's idea of a baby. It will have $24.5 billion in revenue and the ability to offer service in 20 states. SNET also gives it a wedge into the lucrative New York market-- Bell Atlantic Corp.'s territory.

And nobody doubts that SBC will fight hard in its new markets. SBC's combative CEO Edward E. Whitacre Jr. has chafed against the restrictions on expansion into long distance that the Telecommunications Act of 1996 imposed. As soon as it passed, he cajoled the Texas legislature to write its own law, raising barriers to long-distance companies trying to enter SBC's market.

The SNET deal and the New Year's ruling by Federal Judge Joe Kendall may embolden other Bells. Kendall's decision essentially invalidates a key limit of the telecom act--that the Bells must prove to the Federal Communications Commission that there is competition in their local markets before they can get into long distance. The law, says Judge Kendall, "ties [the Bells'] hands while competitors such as GTE, AT&T, and MCI take their punches."

The decision was immediately challenged by AT&T and other long-distance carriers as well as the federal government. But the Bells are hailing it as a new turn in deregulation, allowing them to enter long distance wherever state regulators approve. Although the case was brought by SBC and U S West, Judge Kendall allowed Bell Atlantic to join on Jan. 7. Ameritech also has sought entry. And BellSouth Corp. expects to use the same legal argument to market long-distance services in South Carolina. If the decision stands up in court, says James G. Cullen, president of Bell Atlantic's telecom group, "we'll be in the long-distance business very quickly."

In the two years since the Telecommunications Act became law, there have been just four requests presented to the FCC. U S West now expects to file for permission in most of its 14-state region within the next six weeks. SBC Operations Vice-President Royce Caldwell says it, too, will quickly submit applications to the 7 states in its territory. "In most cases, I would expect we would be filing this month," he says. Already, the Bells have approval from four states and have requests before five others (map).

Even if the ruling is eventually overturned--which many analysts expect--the Bells will continue to challenge the FCC. "This is about whether the FCC can regulate telecom the way it wants," says Scott C. Cleland, an analyst at brokerage Legg Mason Precursor Group.

It's also about the Telecom Act itself. Execs at long-distance companies, frustrated by the barriers to entering local markets, are now openly critical of the law, too. "We have a Telecom Act that is currently not operational," says AT&T CEO Michael C. Armstrong.

Count on the Bells to keep pressing their case in court, too. BellSouth chief strategist C. Sidney Boren says his company expects to appeal the FCC's December ruling turning down its petition to enter the South Carolina long-distance market. And SBC says it will fight to keep selling long-distance in Southern New England Telephone's territory. That's hardly baby talk.By Gary McWilliams, with Catherine Yang in Washington, David Greising in Atlanta, and bureau reportsReturn to top


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