IP Democracy: Will Consolidation Help AT&T Stay Competitive?

As public interest groups fight the merger of AT&T and BellSouth, arguing that too much power in the hands of one phone company will harm consumers, Business Week’s Steve Rosenbush has this piece today that makes the opposite case. He points to Wall Street’s renewed attraction to AT&T and BellSouth given the growth in profits both companies reported for Q3 06.

Although Rosenbush seems to accept the telcos’ arguments a little too uncritically (i.e. they need national scale to mount video services), he does raise the fundamental problem for the phone companies, namely that cable competition is poised to do some serious damage.

The fact is, AT&T and Verizon must invest in new technology. Cable TV operators such as Comcast (CMCSA) and Time Warner (TWX) are selling high-quality digital phone services loaded with features. “It’s easier for the cable companies to expand into phone service than it is for the phone companies to expand into TV, so for now the cable companies have the edge,” says Richard Siderman, a telecom credit analyst at Standard & Poor’s.

I’m not sure, however, that getting bigger will help ease the telcos’ competitive woes. They’ll save money, that’s for sure, and the ability to cut costs is one big reason why AT&T and BellSouth generated such soaring profits during the past quarter. As Rosenbush notes “the companies are doing better financially; investors are being rewarded.”

But it’s going to be increasingly hard for the telcos to reward investors with bigger profits and at the same time spend money on new technologies to keep pace with cable operators. Verizon knows this well — its FiOS fiber-to-premises initiative is a costly endeavor that doesn’t help earnings but will pay off in the long run with a robust network capable of eating away at cable’s technological superiority.

And unlike AT&T, Verizon isn’t getting any bigger. It isn’t currently aiming for national scale to justify its investments in video technology. So it’s not clear how the merger of AT&T and BellSouth is necessary to keep the telcos competitive, reward investors and help consumers at the same time. Which is not to say the merger shouldn’t go through…it’s just that getting bigger won’t likely help AT&T and BellSouth in their competitive battles.

Posted by Cynthia Brumfield on October 25, 2006 9:21 AM to IP Democracy