Well Connected
AT&T Inc.

In 2005, SBC Communications bought the "old" AT&T in a $16 billion deal. The product of industry giant SBC's merger with the enfeebled long-distance carrier was the "new" AT&T — AT&T Inc. — which posted a 2005 revenue of $43.8 billion.

With its 183,000 employees, AT&T is already big. But the company's March 2006 agreement to acquire BellSouth for $67 billion will transform the company into a telecom colossus.

The Justice Department antitrust division approved the merger, without imposing conditions, on Oct. 11. The deal now awaits the approval of the Federal Communications Commission. But FCC Chairman Kevin Martin's attempts to secure approval faltered on Oct. 12 as the agency's two Democrats called for a delay on the vote.

Although Republican Commissioner Deborah Taylor Tate was expected to vote for approval with Martin, Republican Robert McDowell recused himself from the vote. Before joining the FCC on June 1, 2006, McDowell was assistant general counsel for Comptel, an association of Bell company rivals.

The AT&T-BellSouth merger was opened back up for public comment, and a new FCC open meeting is scheduled for Nov. 3.

In an Oct. 13 letter to the two Democratic FCC commissioners, Jonathan Adelstein and Michael Copps, Martin said that at the Nov. 3 meeting, "we could consider this application again to the extent that the Commission has not completed its review of this transaction before then."

Twenty-two years after "Ma Bell" was broken up in the landmark antitrust case,   AT&T's new deal would reunite several of its offspring: Ameritech, Pacific Telesis and Southwestern Bell (the three that joined forces to become SBC), and BellSouth. Three of the seven former "Baby Bells" remain at the heart of telecommunications companies AT&T, Verizon Communications and Qwest Communications International.

Even before the BellSouth merger, AT&T is the nation's top U.S. telecommunications provider by number of telephone subscribers, and also ranks as the No. 1 wireless provider because of its 60 percent interest in Cingular Wireless.

The company is the No. 2 U.S. provider of high-speed Internet service with 7.8 million customers, surpassed only by Comcast, with 9.3 million. But with the BellSouth acquisition, its 3.3 million broadband customers in 2006 would put AT&T on top there, too.

Despite AT&T's top positions, it has not escaped the market-wide drop in land-line telephone subscriptions as consumers increasingly have switched to use of cellular phones or Voice-over-Internet-Protocol (VoIP). In 2001, the company, then operating as SBC, had 59.5 million access lines in service. By 2005, the number of fixed lines dropped to 49.4 million, a 17 percent decline.

The company's revenue growth instead has been in broadband Internet services. In 2001, 1.3 million customers had broadband access through AT&T. By the end of 2005, the number of users had grown to 6.9 million, business that represented 30 percent of AT&T's consolidated revenues.

With that in mind, AT&T is promoting its Project Lightspeed as a network capable of delivering digital television, higher-speed broadband and VoIP services to its residential and small business customers. To reach the company's expectations of selling bundled services to approximately 18 million households by the end of 2008, AT&T has started investing a promised $4.4 billion in network-related deployment costs and construction expenses over two years.

The company's big challenge will come in rolling out video service. Current law requires cable television providers to obtain local franchise agreements. AT&T has refused, arguing that its Internet-based video service is not like traditional cable. Instead, it has pushed for federal and state laws that would allow entry into the market without a municipal franchise. AT&T has statewide franchises in three of the eight states that have passed such legislation (Indiana, Kansas and Texas), and plans to seek one in California after the law goes into effect. The company also has 12 local franchises in Arkansas, California, Illinois, Nevada and Ohio.

AT&T is gambling its video future on a bet that Congress will, as AT&T's 2005 annual report says, "streamline the regulatory process for new video competitors to enter the market." Competitor Verizon, on the other hand, has been actively negotiating franchises with localities and in other states. Verizon currently offers video service to more than 3 million households in about 130 franchise areas across nine states.

Although Verizon could be in better shape if the proposed revisions to the 1996 Telecommunications Act before Congress fail, both companies are pushing for the changes. Failure "could have a material adverse effect on the cost, timing and extent of our deployment plans," according to AT&T's 2005 annual report.

The key stumbling block for current legislation may be the demands by many in the Internet community for "network neutrality." That term refers to the traditional way the Internet has operated, which does not allow the network operator to favor some destinations or classes of application over others. The FCC's deregulation since 2003 has stoked fears that dominant telecommunications and cable companies would discriminate in the speeds and content that they offer over Internet connections. Proposals to add strict neutrality requirements would bar AT&T from charging Web site owners like eBay or Google, for speedier Internet delivery of content to consumers.

AT&T has entered the lobbying fray with gusto, bankrolling an organization called Hands off the Internet. The group hired Mike McCurry, former President Bill Clinton's press secretary, as its spokesman and co-chairman. Other corporate backers include equipment manufacturer Alcatel, BellSouth and Cingular. The coalition opposes neutrality rules, arguing that they violate the laissez-faire nature of the Web.

Between January and June 2006, AT&T spent almost $1.8 million on anti-Net neutrality ads nationwide, and Hands Off the Internet spent almost $700,000, according to a study conducted by TNS Media Intelligence/CMAG, a campaign media analysis group. The study was commissioned by the It's Our Net coalition, which includes Internet companies that support neutrality rules.

— Alejandra Fernández-Morera, Drew Clark

October 2006

Sources: Associated Press, Company Web site, Hoover's online, Securities and Exchange Commission filings

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