SBC Buys AT&T for $16 Billion — The Baby Bell Grows Up

If you wanted a sign that the telecommunications landscape has been turned upside down, here it is: SBC Communications, one of the seven Baby Bells created by the 1984 breakup of AT&T, just announced it's buying AT&T itself.

The deal is valued at approximately $16 billion. Once it closes (assuming regulatory approval), SBC will absorb AT&T's long-distance business, its enterprise customer base, its global network infrastructure, and — perhaps most symbolically — the AT&T brand name. The combined company will be called AT&T Inc.

Think about what just happened. Ma Bell was broken up in 1984 because the federal government decided AT&T's monopoly on American telephone service was harmful to competition. Seven regional "Baby Bells" were spun off to handle local phone service in their respective territories. AT&T retained the long-distance business and the manufacturing arm that became Lucent Technologies.

Twenty-one years later, one of those Baby Bells has grown so much larger than the parent company it was spun off from that it can buy AT&T outright and put its own employees in the corner offices. AT&T as an independent company is finished.

How We Got Here

AT&T's collapse from American icon to acquisition target is one of the great corporate stories of the post-breakup era.

Through the 1990s, AT&T tried to reinvent itself multiple times. It bought NCR (a computer company) for $7.4 billion, then spun it back out at a fraction of the price. It launched AT&T Wireless, which it eventually sold to Cingular (a joint venture between SBC and BellSouth, ironically). It bought TCI and MediaOne to enter the cable industry, creating AT&T Broadband — which it then sold to Comcast in 2002 because it couldn't make the cable business work.

Each move made strategic sense in isolation. Together, they amounted to a slow-motion dismantling. AT&T kept selling off pieces of itself to focus on its "core" business — long-distance telephone service — even as that core business was being eroded by wireless calling, VoIP, and aggressive pricing from the Baby Bells themselves.

By 2004, AT&T's residential long-distance business was in freefall. The company stopped marketing to consumers entirely. Its enterprise business — selling network services to large corporations — was profitable but couldn't grow fast enough to offset the consumer revenue collapse. The company's market value, once over $200 billion in the dot-com era, had fallen to around $14 billion.

Buying AT&T at $16 billion is, in retrospect, a steal for SBC.

What SBC Gets

The acquisition gives SBC several things:

The AT&T brand. SBC has decided to rename the combined company "AT&T Inc." and adopt the AT&T name and logo. It's a powerful brand — one of the most recognized in American business — and SBC is choosing to leverage it rather than its own. The "SBC" name will gradually disappear.

Enterprise relationships. AT&T serves a huge percentage of Fortune 500 companies for their network and telecommunications needs. SBC has wanted to grow its enterprise business for years and never had the customer relationships to do it at scale.

Long-distance and global infrastructure. AT&T's long-distance network spans the continent and connects to international carriers around the world. SBC's network has historically been more regional. The combination creates a true national footprint.

Government contracts. AT&T has long been a major provider of telecommunications services to the federal government and military. These contracts are valuable, sticky, and come with SBC into the new entity.

For SBC's broadband and DSL business, the acquisition doesn't change much directly — AT&T didn't have a meaningful consumer DSL operation. But it does give the combined company a much larger national platform from which to roll out services like Project Lightspeed and compete with cable.

The Consolidation Wave

The SBC-AT&T deal isn't an isolated event. It's part of a larger consolidation wave reshaping American telecommunications:

Verizon and MCI. Just last week, Verizon and Qwest were both reportedly bidding to acquire MCI (formerly WorldCom, which emerged from bankruptcy in 2003). A deal is expected within weeks. Whichever company wins, the result will be similar to the SBC-AT&T merger: a Baby Bell absorbing a long-distance carrier to create a more vertically integrated giant.

Sprint and Nextel. The two wireless carriers announced a $35 billion merger in December. Combining the third- and fifth-largest U.S. wireless carriers creates a stronger competitor to Verizon Wireless and Cingular.

Cingular and AT&T Wireless. Already completed in late 2004, this merger combined the second- and fourth-largest wireless carriers into the new market leader.

The pattern is clear: the telecommunications industry is consolidating into a small number of very large players. Where there were seven Baby Bells in 1984, there will soon be effectively two — the post-merger AT&T (SBC plus AT&T) and Verizon (which already absorbed Bell Atlantic, NYNEX, GTE, and is now buying or competing for MCI). BellSouth and Qwest remain as smaller standalone Bells, but both are widely expected to be acquired eventually.

What It Means for DSL Customers

If you're an SBC DSL customer (or, in a few months, an AT&T DSL customer), you probably won't notice much difference in the short term. Your modem will keep working. Your bill will keep arriving. The company name on the bill will change, and the logo will change, but the service will be the same.

Longer term, the consolidation has mixed implications:

Pro: More resources for network upgrades. A larger, more diversified company has more capital to invest in things like Project Lightspeed's FTTN deployment. DSL speeds and availability should improve faster under a well-capitalized parent.

Pro: Enterprise expertise. AT&T's experience with large network deployments could benefit consumer broadband too. Better network engineering, more sophisticated traffic management, improved reliability.

Con: Less competition. With fewer telephone companies in the market, consumers have fewer alternatives. The main competition for DSL is now cable internet — a duopoly in most markets, and a monopoly in many. Less competition typically means higher prices and slower innovation.

Con: Less regulatory oversight. The bigger and more politically powerful the telcos become, the harder it is for the FCC to regulate them effectively. The trend toward broadband deregulation is likely to accelerate.

Will It Be Approved?

The merger needs approval from the FCC and the Department of Justice's antitrust division. Given the current administration's generally permissive attitude toward telecom consolidation, approval is likely — though probably with some conditions attached. Possible conditions could include commitments to maintain wholesale access for competitors, limits on price increases for certain services, or requirements to invest in broadband deployment.

Don't expect the merger to be blocked. The current regulatory climate makes that extremely unlikely. The deal will probably close in late 2005 or early 2006.

The End of an Era

There's something poetic — or maybe tragic, depending on how you look at it — about the original AT&T disappearing into one of its own offspring. The 1984 breakup was supposed to introduce competition to telephone service. For a while, it did. But over the decades, the competitive landscape kept reshuffling itself, and now we're consolidating back toward a structure that looks suspiciously like the pre-breakup AT&T — minus a few pieces and with some new entrants like the cable companies.

For consumers, the practical effects are gradual. Your phone still works. Your DSL still works. The names on the bills change, but the underlying services don't transform overnight.

The bigger story is what this merger says about the trajectory of American telecommunications: bigger companies, less competition, more bundled services, and a regulatory environment that's largely OK with all of it. Whether that produces the best outcomes for broadband consumers in the long run is something we won't know for years.

For now, raise a glass to the original AT&T. Twenty-one years after being broken up, it's gone for good — and one of its children is wearing its name.