With the bidding battle for MCI over, the reshaping of the telecom landscape is moving into its next phase, as other service providers prepare to compete with, or be trampled by, the industry's new supercarriers, SBC/AT&T and Verizon/MCI.

The consolidation will be dramatic. The wholesale and retail business revenues of Qwest, BellSouth and Sprint combined will not be enough to equal the share owned by either one of the industry's two new ubercarriers, which together control more than half of the market.

Early indications, however, are that no one's backing down, even as the Wall Street Journal reported last week that the new mega-mergers have the edge on attracting business.

To Qwest, the supercarriers are a significant threat to its already-eroding base of business customers. Qwest's business access lines have been dropping in single-digit percentages for the last two years, and revenue from business customers sank 1.4% sequentially in this year's first quarter.

Qwest won't sit still for this, of course. Chairman and CEO Richard Notebaert was already hinting at Plan B acquisitions in the company's earnings call last week.

“We have a number of strong options before us,” Notebaert said. “There are a number of opportunities in our sector, a number of companies. We've already begun looking at those options in earnest. There will be lots of us in the sector looking at how we can create a meaningful third leg to this.”

Meanwhile, BellSouth sees no reason to bulk up. “We've competed against AT&T and MCI in the Southeast for years,” said a BellSouth spokesman. “It appears to us to be the same thing as the old AT&T and MCI. They may have different backers and some new funds, but we've been sitting across the table and battling every day. We don't think it's going to change much in terms of how we compete.”

BellSouth is widely credited with staying tightly focused on its growing Southeast region. Also, Kevin Mitchell, of Infonetics, said the company is similar in many ways to Verizon, as it has built up its IP network facilities using MPLS and offered a diversity of business services.

More than 60% of BellSouth's business customers are under contracts that extend for another two to three years, the spokesman said, and BellSouth is actively courting businesses that might be concerned about how mega-mergers will affect them.

“I can guarantee you that every large business customer that we have is getting personal contact, we are making personal touch points,” he said. “We do see that as an opportunity as these companies have to go through the integration process.”

Many CLEC executives have said the same thing since SBC and AT&T first announced their merger plan. AT&T and MCI currently operate as the two largest CLECs in the U.S. market.

“Verizon and SBC already have a lot of trouble with CLECs that pinpoint tightly focused geographic markets and do a good job,” said Brian Washburn, an analyst with Current Analysis. “The big incumbents have to sit there and try to launch promotions on a market-by-market basis.”

Regulatory requirements and the need to do things at scale hinder the incumbents' ability to effectively compete with regional players, “and getting bigger isn't going to help that,” said Washburn, who cites Cbeyond and Lightpath as examples of highly focused CLECs who are doing a good job competing against a large incumbent (see story on page 16).

Still, as Notebaert suggested, Qwest still might have plenty of options to join the consolidation craze. Speculation has already swelled that Qwest might acquire a CLEC such as Time Warner Telecom, with its growing enterprise base, or Broadwing Communications. In late 2003, Qwest offered to buy Allegiance Telecom only to lose those assets to XO Communications. This year, Qwest might simply buy XO.

However, the appeal of MCI to Qwest was not just its enterprise customer base or its network but also its cash flow, which would have eased the burden of Qwest's $17 billion debt. The same can't be said of most CLECs, which offer more debt and far fewer enterprise customers than post-bankruptcy MCI.

Industry analysts don't completely agree on exactly how the coveted business markets will shake out.

Rick Black, a Blaylock Partners analyst, believes MCI and AT&T will continue to win large enterprise customers, and the majority of small business customers will stick with their local incumbent. “It's the area between those two, the small-medium to medium-large [businesses] — that's what they'll fight for,” he said. “You'll see a lot of market shares change. And the shift should begin about a year after the mergers close.”

Washburn said he has heard many large enterprise customers say they'll hold off making any major changes or signing new long-term contracts.

“It's essentially fear of the unknown,” he said. “One place that gets interesting is as MCI and AT&T are rolling out new services. Enterprise customers are not necessarily going to bite, because they may be concerned about which lines of business wind up being integrated. Where there's integration, there are always winners and losers. They don't want to end up on a dead-end service that gets essentially stranded.”

Meanwhile, Qwest and other carriers in the shadow of the new behemoths are likely to pressure regulators to force SBC and Verizon to divest as much of the combined assets as possible so others can grab them. Notebaert also hinted that regulators might impose conditions on the two giants regarding rivals' access to their combined networks. “The government will take a hard look at the concentration levels being created by these two mergers,” he said. “That lays out lots of opportunities [for Qwest].”

Analyst Washburn believes there is solid reason for having AT&T divest local assets it owns in SBC territory, and for having MCI divest local facilities it built out in Verizon territory.

“Those customers that bought service from AT&T or MCI made a conscious decision not to go with Verizon or SBC,” he said. “They shouldn't be forced to now take services from the incumbent.”

Similarly, residential customers who bought MCI Neighborhood or AT&T's local service before it was terminated last summer, “were consciously avoiding SBC or Verizon” and should not be pushed back onto their service, he said. “I'm looking with great interest to see if they have to spin out local optic assets in order not to reduce local competition.”

Sprint, meanwhile, has a different strategy altogether. Following its Nextel merger, analysts expect Sprint to focus purely on the wireless market, competing with the wireless offerings of giants as well as fighting for a share of the broadband market with wireless broadband. Sprint will keep its nationwide backbone (to wholesale and use for its own transport) and spin off its local wireline assets, which could represent another key acquisition target for Qwest or another carrier.

Sprint is also working hard to partner with the cable companies, which are also making major inroads into local voice service with their voice-over-IP services.

“[Sprint] are definitely aligning themselves with the cable industry on the residential side,” said Kevin Mitchell. “They'll be competing with the incumbent telcos there.”

2005 THE YEAR OF THE SUPERCARRIER?

Jan. 31

SBC announces it will acquire AT&T, ending much speculation

Feb. 14

Verizon offers $6.75 billion to buy MCI.

Feb. 18

Qwest files papers with the SEC alleging that Qwest's previous offer of nearly $8 billion wasn't duly considered by MCI.

Feb. 23

SBC, AT&T file acquisition documents with the FCC.

March 17

MCI re-affirms Verizon bid; Qwest increases its bid to $8.45 billion.

April 25

Verizon increases bid to $8.44 billion.

May 2

MCI rejects Qwest's latest offer and accepts Verizon's latest offer. Qwest says it will not re-bid.