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July 25, 2005

More on AT&T

Steve Rosenbush

The Precursor Group, the independent financial research house, raised a warning on SBC today. Most of the report, which only is available to subscribers, talked about the rising risk of competition from cable TV companies entering the phone business. SBC still benefits from a ruling last year that allows it to resell its traditional phone service to rivals at more favorable rates. But the cable company threat is a different matter, because cable companies don't resell SBC phone service. They use their own broadband networks to sell phone service as part of a package that includes TV (high def, of course) and high-speed Internet access. That threat is going to really hit home in '06, Precursor says.

Part of the rationale behind SBC's acquisition of AT&T is to diversify its revenue base, so the company is less vulnerable to an incursion into its consumer market. But Precursor's Patrick Brogan raises a point that I addressed a few days ago. AT&T's revenue base is in decline. SBC is buying the company on the expectation that AT&T's revenue problem will be reversed as a strong economy, fewer rivals and a host of wireless products for business customers change the game.

Now, there's some evidence that this analysis is correct. The rate of decline at AT&T has slowed. That's welcome news. If it turns out that SBC is right, its acquisition of AT&T (and Verizon's acquisition of MCI) will be smashing successes.

But there's reason to wonder if the turnaround in AT&T's business will be quick enough to make this deal work as well as expected. The market has seen the elimination of many traditional rivals that went bankrupt in the telecom bust a few years ago. But the rise of broadband and the Internert may make it easier for new rivals to enter the market, espeically in the high-margin network consulting arena. Thus, Brogan's warning: "The T merger, which is still likely to close in late ’05 or early ’06, is a double-edged sword. The focus on cost synergies and integration will likely distract from some of the wireline drain. But, the merger diverts resources and distracts from cable competition, just when cable entry into the core consumer segment is beginning to gain steam. And we continue to believe that enterprise telecom will be a declining business for years to come due to IP substitution."

SBC, which has done a fine job of overseeing Cingular's acquisition of AT&T Wireless, may face its biggest challenge yet with the integration of AT&T. And the stakes, telecom's very business model, couldn't be much higher.

01:35 PM

M&A

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