The Empire Strikes Again

I’m on the road, in CA. Heard the big merger news yesterday – AT&T (T”) acquiring Bellsouth (BLS). It’s funny to watch the various media groups go through the customary “Shock and Awe” of a big merger, which in my mind, was as logical as a merger between Oreo Cookies and Milk. The question was not if it would happen, only when and for how much. I am particularly entertained by the consumer groups acting in mock surprise and voicing opposition to the merger.

Like it or not, big Telco was already back in style. Nothings changed, it’s just that more people are starting to notice.

I’ll make a few statements that express my opinion of what sort of landscape we will be looking at in 12 months. None of it is new thinking, just additional events that we feel are logical conclusions.

• AT&T buys Bellsouth. The merger is approved by the FCC with the same terms applied to the SBC/AT&T merger. Regardless of concerns, the fact is AT&T and Bellsouth don’t share a customer base today so it isn’t anti-competive in the sense it offers consumers less choice. The merger is driven by one thing only: a need to unify ownership of wireless and wireline assets. Acquisition of additional voice subscribers within Bellsouth and the additional scale is secondary. This gives AT&T complete freedom to market universal wired/wireless voice services to residential customers, something Vonage, Sunrocket, Comcast, Time Warner cannot do.
• Verizon buys the 45% share of Verizon Wireless it does not own from Vodaphone. The negotiation is rather odd in the sense that only one real buyer exists for the property, and Vodaphone cannot currently extract any real strategic value from it’s share. Verizon gets a good deal.
• Comcast (CMCSA) buys Sprint/Nextel (S”). This gives them the same ability as Verizon and AT&T to offer unified wired/wireless voice to subscribers. AT&T and Verizon both have their own enterprise business units and backbones so the Enterprise connectivity business unit of Sprint is most valuable with a carrier that currently lacks this capability – Comcast. While Sprint/Nextel is the most favored Telco on Wall St, I’ve heard that the Sprint/Nextel merger is a disaster, with both original companies maintaining seperate HQ’s. Comcast’s CEO Roberts will put their executive teams out of their misery.
• Comcast has secured the last remaining wireless property and have an Enterprise business unit, therefore Cablevision (CVC) and Time Warners cable assets (TWX) are exposed and capitulate to Comcast. Now that Telcos have the will and technology to offer video, no major regulatory barrier exists, and a merger of a single national coax based carrier is born as Comcast, Time Warner, and Cablevision unite in order to acheive the scale to meet the new Telco threat.
• Wildcards: Qwest, T-Mobile. Qwest (Q”) could go to Comcast to provide an Enterprise service unit, though they might also be acquired by AT&T or Verizon in a defensive move. Deutche Telekom will sell their wireless business before all of the above mergers take place. T-mobile is worth more now than it ever will be as the number of prospective buyers dwindles. If Comcast cannot buy Sprint, they will buy T-Mobile and Qwest. It’s also possible Time Warner/Cablevision buy T-Mobile to compete with Comcast/Sprint.

That leaves us with three major carriers for Enterprise services, one or no standalone wireless companies (although MVNO’s will still exist, and may be more valuable), and residences with a choice of two wireline options. Wireless and wireline as products lose distinction and companes bundle them together. Standalone VoIP companies that charge for service vaporize as wireless voice becomes the prime mover for customer retention.

The other area that will finally see dramatic change is the equipment supplier space, as these new behemoths whittle down their equipment supply chain. Om Malik sees this as very good for Optical Ethernet, though I am not sure why. I think it’s going to be good for suppliers to the old SBC as well as Sprint. Two equipment companies that fall into this category are Ciena (CIEN) and Adtran (ADTN). Expect to see Huawei to show up in North America at the same time.

Anyone who was shocked by the Bellsouth announcement just hasn’t been paying attention. The next steps are just as logical in my mind. In 5 years, the only fundamental difference between the telcos and the telcos will be copper pairs and coax.

Note… if you don’t understand the Star Wars reference in the title, see here.