Twelve months and $16 billion from now, SBC is scheduled to complete its acquisition of AT&T. During the intervening months analysts, journalists and regulators will take turns casting aspersions on the deal. From a financial point of view, it’s hard to see synergies emerging from SBC’s stepped up growth-through-acquisition strategy. As the ‘safe harbor’ saying goes, “past performance does not predict future results,” but several Wall Streeters have already observed that the erosion of AT&T’s top line more than offsets the meager growth that SBC has generated in the past few years.

As scrutiny steps up, I believe that the opinion needle will gradually but emphatically point toward the “negative.” It has already started with insiders like Precursor Group’s Scott Cleland and S&P’s Todd Rosenbluth; both of whom have chimed in with widely quoted negative assessments. Look for consumer advocates and regulators to pile on with their own sets of concerns and objections. Now that QWEST, Verizon and (probably others) have started their courtships with AT&T’s long-time rival, MCI, we’ve all assumed that the deal will go through. However, completion is by no means certain and, even if it is, the public utilities commissions (PUCs) in the 26 states served by SBC and its affiliates, will all have a chance to propose or enforce changes based on the impact it has in local service areas.

Less Competition Means Less Choice for Residential Customers
Advocates for end-users rightly observe that consolidation among the largest service providers does note bode well for either choice or competitive pricing. The number of firms knocking on the door of business enterprises with innovative services, competitive pricing and creative bundling of features, functions and capabilities will be limited. The counter argument, which outgoing FCC Chairman Michael Powell has been articulating for the past four years, is that telephone companies have plenty of competition from cable TV companies, competitive local exchange carriers (CLECs) and wireless carriers.

Powell’s argument is a canard. Over the next three years, savvy customers may ‘port’ their long-time fixed line numbers to wireless carriers or they may plug their phones into the Internet by using a VoIP carrier like Vonage. However, those progressive households number in the hundreds of thousands while SBC and its peers serve 100 million households in the U.S.

Here on Earth, there’s a hiatus in the introduction of innovative services bundles. This is the era of the quadruple play – which brings together voice communications (not distinguishing between local and long distance), mobility, broadband Internet and entertainment. SBC-Cingular-AT&T still lack the ‘entertainment’ card except in partnership with DirectTV. Only Verizon emerges as a competitor with the size, footprint and wherewithal to take on SBC. In areas where SBC subsidiaries like Ameritech, Southwestern Bell, Pacific Bell or SNET are the incumbent local carriers, SBC is truly advantaged over competitors large and small.

Scrutiny at the Local Level
Regulators will give a cold, hard look to the apparent reconstruction of the telecom industry’s Humpty Dumpty. We’ve learned from experience that objections will not take place at the federal level. Although the modified final judgment (MFJ) which governed the break-up of Ma Bell in 1983 expressly forbade the regional bell holding companies (which have morphed into SBC, Verizon, BellSouth and QWEST) from offering long-distance, the Bell Companies successfully overcame the prohibition in 2002, under terms of the Telecommunications Reform Act of 1996.

The FCC, Department of Justice and the Federal Trade Commission – through their approval of mega-mergers between Cingular and AT&T Wireless and Sprint and Nextel have, in effect, emboldened SBC to propose this acquisition. With Washington paying homage to global competition from NextGen carriers and VoIP, the toughest scrutiny will come from the public utility commissioners in the 26 states served by SBC’s local affiliates. The San Antonio-based company has proven extremely adept at managing the Texas Public Utilities Commission and the regulatory bodies in the states that were initially served by Southwestern Bell Telephone Company (SWBT). It has some tigers by the tail as the deal comes under scrutiny by the likes of the Illinois Commerce Commission, the California PUC and local regulators in the other states served by Ameritech and SNET.

Conversational Access to the Forefront
AT&T brings two seldom mentioned, but major assets to SBC. Most mentioned is the installed base of enterprise customers with long-term contracts with AT&T for carrier services. As the inventor and originator of toll-free 800 services in the mid-60’s and a monopoly supplier role until 1993, AT&T has amassed the first portfolio of services that married voice response and enhanced network features. They showed the way back then with ‘Intelligent 800’ services and features which supported high-volume applications and CallPrompter which set the precedent for pre-processing of inbound calls in the long-distance network.

Today, AT&T’s solutions (based largely on features of the public switched telephone network – PSTN) are baked into the inbound support services of the marquee names in travel and transportation, financial services, healthcare and consumer goods. If SBC’s acquisition of AT&T passes muster, the business is literally SBC’s to lose. The good news is that enterprise spending on self-service infrastructure and communications services is on an uptick. Our research, conducted in conjunction with AmComm Publications shows that much of that investment is tied to three initiatives: (1) migration to Voice over IP (VoIP), (2) multi-channel self-service (involving the Web, e-mail, IVR and live agents), and (3) introduction of “natural language understanding” (NLU) to support ”how may I help you“ types of interactions.

AT&T has been one of the major proponents and implementers of “How May I Help You”. The true litmus test for SBC’s acquisition of AT&T is not its success in managing Wall Street or state regulators, it is how well it transfers the age-old learnings of AT&T as the premier ‘old school’ provider of conversational access technologies into successful deployments in the new millennium. SBC is a relative newcomer to long-distance services – it was not until 2002 that the FCC and DoJ became convinced that local services had become truly competitive.

From a CAT (Conversational Access Technologies) perspective, the group to watch is SBC Call Center Solutions. With AT&T’s roster of enterprise customers as a prospect base, the offer is to help them migrate from the ‘old school’ (meaning expensive) legacy speech processing and enhanced routing services offered by AT&T, onto more cost effective and robust IP-based services. Like Verizon Enterprise Solutions, SBC has the personnel and partnerships to help their customers make the move. It will be their installed base to cultivate and, conversely, theirs to lose.

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