Thursday, March 09, 2006

The "New" AT&T Part 1

It has taken me all week to reflect on the news this past Monday that the "new" AT&T now includes BellSouth.

While others, with shorter memories and less visceral experience in the matter than me, have quickly analyzed the event in terms of current market opportunities, I take a different, multi-faceted approach in my response.

First, I must credit Alan Murray and Holman Jenkins, Jr., both of the Wall Street Journal, for their excellent written and spoken pieces this week regarding the ATT-BellSouth merger. In email exchanges with both of them, I confirmed that, beyond agreeing with their thoughts and insights, they also largely agree with my own further musings.

As both of them wrote, this is primarily a defensive move on the part of two aging CEOs who hail from the days of the original MFJ- the Modified Final Judgement which split the old AT&T into the various parts, including the seven regional bell holding companies. Despite Judge Greene's animosity toward AT&T, stemming from his involvement in an earlier antitrust case, as part of the DOJ, and his consequent decision to split the company up, much of AT&T's structure was always a necessity of minimum economic size in the telecommunications industry.

The problem was never with the monopoly on local, or even long-distance, services. It was with the cross-subsidization of equipment design and manufacture by local and toll call revenues. In fact, this was the actual relief sought by the DOJ when they brought the case. And, in the end, it probably would have been better for everyone had Charlie Brown, then-CEO of AT&T, simply acceded to the DOJ's wishes.

So, this week's reunification of more pieces of the old local service monopoly simply demonstrates that even Judge Greene's venom could not overwhelm the longer-term economic laws of costs and revenues in this sector. The purveyors of old, landline-based telecommunications are in a bad spot now. This merger may stave off economic hardship for the two companies, but it in no way has anything to do with their future growth.

Holman Jenkins, Jr.'s piece provided detail on this point. I will go further. Cellular and broadband internet access are already destroying the remaining landline telephonic revenue streams of Verizon, AT&T, and Qwest. They are fervently hoping to somehow play in the new world of broadband content before they implode with the unplugging of the last landline phone. Mr. Jenkins pointed to the arrival of WiMax as causing the ultimate collapse of even the cable monopolies. He is right.

The key point about this entire situation is that it is, as Mr. Jenkins ends his piece, "far from over." Telephone companies must, to merely survive, migrate from copper wires, but even this massively expensive move doesn't guarantee them anything. Ask Mike Armstrong, one-time CEO of the failed "old" AT&T's similar strategy. By the way, I stand by my remarks of a few months ago, that the AT&T name should be retired, in order not to make it endure the same failure, twice, by different inept managers.

To Be Continued in Part 2- Content vs. Delivery

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