Yes, I Can Hear You Now

Last month, I posted on the impending merger of Baby Bell SBC with its former parent, AT&T. I claimed that this would create a megacompany with its hands in all aspects of telephony. Well, I stand corrected: There are now two companies that can make this claim.

Mid-February, Baby Bell Verizon agreed to buy the once-mighty WorldCom, the remnants of which are now known as MCI. (Another Baby Bell, Qwest, also offered to buy MCI, but they're debt-ridden, and would have to cut around 15,000 jobs to make the merger. In the business, this is what they call "a bad fit".) This merger creates one of the largest telecommunications companies in the world. If taken in conjunction with the SBC/AT&T merger, we now have two companies that: are the market leaders in residential phone service; are the market leaders in long-distance service; are the market leaders in cell phone service; are the market leaders in broadband internet service; have huge data networks; and have cemented a foothold in the burgeoning VoIP market. This, my friends, is what is known as a duopoly. But, that's not the "Big Deal" of this merger; the "Big Deal" is that the 20 year division between residential and long-distance service has been erased.

Residential phone service is provided through localized networks of phone lines. The service in these networks is restricted to certain regions (the reason for area codes). This network is fine if you want to call someone in the same area, but the restricted nature of these lines don't allow for calls across the country. This is where long-distance lines come in. They are able to carry calls (or data, for that matter) over a "long distance", unlike the local phone lines. In the Ma Bell days, AT&T controlled all phone lines, including the long-distance lines. After the breakup, the Baby Bells had the residential lines, and AT&T retained its long-distance lines. Until the 90s, AT&T was pretty much the only game in town if you wanted long-distance service. Needless to say, they built a fairly large customer base. (They are still the largest long-distance company.) Then, companies like MCI and Sprint began to lay their own long-distance lines, and began to eat away at AT&T's customer base. But this is all just a history lesson. The real point is that, since 1984, residential and long-distance service have been two separate businesses. Oh sure, you could get long-distance service from your residential provider, and vice versa, but what each business is actually doing is leasing the use of the others' lines, and then reselling the service to their customers. (Last year, SBC successfully petitioned the FCC to deregulate the fees associated with reselling their residential service; AT&T stopped offering this service shortly after.) But now, that is all over. When SBC and Verizon acquire the assets of AT&T and MCI, they will own the long-distance lines they once used to rent. It's really a deal you'd be insane not to make: Not only do you effectively kill your residential competition, you now get access to long-distance service for free, and you inherit the total customer base for both. Less competition, less money going out the door, more customers: Why has it taken 20 years for this to happen? Have these companies just now realized the potential of what they can accomplish? I don't think so...

Verizon has gotten well under way with plans to entirely replace its existing phone lines, which are made from copper wire and are very old, with fiber optic cable. Now, this may not seem like a big deal, because there's already a lot of fiber optic cable involved in telephony. But these only run between switching stations or serve as backbones for high-traffic metropolitan networks. The phone line that goes from the switch to the jack in your wall is copper wire. Verizon wants it to be a fiber optic cable. Copper wire is an extremely poor way to transfer data, which is why you can basically only get phone service from your phone line. (You can get broadband internet from it, too, but it's relatively slower than what a cable would provide.) Fiber optic cable can handle much more data at a faster rate. It's actually quite similar to the "cable" lines run by cable TV companies. Oh, speaking of cable TV...

Huge cable TV companies, like Comcast and Cox Communications, also offer phone service. They have cables that are able to handle both telephonic and television transmissions on the same line. The problem is at the end, i.e. your home. Because they don't own any actual phone lines, they have to lease the lines from one of the Baby Bells. They can get the calls from place to place without a phone company's assistance, but they can't actually put them into your home without it. When Verizon's plans come to fruition, they will have done what the cable companies cannot, which is run the cable/phone line right to the jack in your wall.

So, what do these mergers do in the larger scheme of things? Here's how I see things shaking out: SBC and Verizon will begin to offer long-distance service at discounted rates, because they no longer have to pay rent on the lines, and can make up for any price cuts with the added volume. Their residential and cell phone service will remain unchanged, unless SBC and Verizon decide to buy out their shared cell phone businesses from BellSouth and Vodaphone, respectively, then we'll see some price slashing. It makes for lots of competition in the phone biz, but Verizon will take it a step farther. Once they get fiber optic cable into some larger cities (it's only in test markets now), they'll begin to offer digital cable. They'll offer hyper-fast DSL connections (we're talking in the GB range, which is unprecedented in this country). And they may even phase out traditional phone service for VoIP, because, if all of your phone lines are broadband, why wouldn't you?

When I posted on the SBC/AT&T merger, I made it sound like the end of the world. Now that this other merger has happened, I've flip-flopped. I think this will be good for the phone business. One megacompany holding all the cards is a bad thing; two is a good thing. It makes for a lot of bloody price wars that are good for the consumer. Let's just hope the merger fever stops here. Should one (and pray this never happens) buy the other, we're all fucked. Be prepared to take out a second mortgage to pay your phone bill.