The rich bonuses Ed Whitacre and Duane Ackerman take into their imminent retirements make them the only sure winners of the compromises required to close AT&T’s acquisition of BellSouth on Dec. 29, 2006.
The M&A euphoria lifting AT&T’s stock in 2006 does not diminish the threat the Internet poses to Ma Bell’s $120 billion in revenues and $240 billion enterprise value in 2007. Ed Whitacre says the acquisition of BellSouth makes wireless the “heart” of AT&T. The merger announcement did not point to grand plans regarding the Internet, because the network of networks remains the primary
source of “heartburn” for the new Ma Bell.
Net neutrality advocates forced AT&T to disavow discrimination plans as the price of closing the deal. AT&T’s net neutrality phobia arises from the fact that broadband undermines the other elements in the bundle. The DSL business generates only 5 percent of the company’s revenue and threatens the other 95 percent.
Vonage and the cablecos use the Internet to take voice customers. YouTube and the Venice Project diminish the prospects for video revenues. AT&T’s lobbyists do not admit the company seeks to control all customers and devices attached to the network, but dreams of vertical integration remain the heart of their opposition to net neutrality.
AT&T’s Internet discontent traces to three developments in 1968 – the founding of Intel, the FCC’s MCI and Carterfone decisions, and the first Internet-related DARPA contract. The forces unleashed by these events continue to build momentum, as the infotech industry leverages software and
faster-cheaper hardware to expand communications-related applications. The post-SBC AT&T business model looks rather unchanged from the pre-1968 AT&T. The new “at&t” touts a “triple play” of broadband, voice, video and now a “quad play” with Cingular. This merely puts a friendly label on the same old vertical integration strategy.
The winner of the 40-year struggle between AT&T and the Internet remains unknown, but FCC trend stats point to a 40 percent decline in wireline minutes since 2001. Wireless gets much of the credit, but adding wireless minutes to wireline still leaves total minutes down 15 percent over the period. This means we either communicate less than five years ago or the Internet (e.g. email,
IM, VoIP) is taking traffic away from the PSTN. The $85 billion acquisition of BellSouth does not reverse this trend any more than the $140 billion spent to acquire PacBell, Ameritech, SNET, AT&T Wireless, and AT&T.
For a second act, the expanding mobile Internet options will produce the same forces in wireless as wireline. The wave of municipal Wi-Fi deployments and the carrier’s own broadband services create a slew of new bypass problems for AT&T in the form of applications (Jajah, Fring, Rebtel) and devices (VoIP handsets and dual-mode phones).
The bad news keeps coming. Apple’s iPhone represents an entirely new category of Internet-based communication device, and we can certainly expect more such devices now come to market. AT&T finds itself trying to sell rooms in a prison in competition with a hotel. The two-year commitment to
preserve net neutrality means AT&T can’t even lock the doors.
Daniel Berninger is a Washington, D.C.-based financial analyst working for Tier1 Research. He is a veteran of the telecom industry.