Consolidation within the telecom industry has become SOP — standard operating procedure. With rare exception — Bell Atlantic/TCI and Sprint/WorldCom come to mind — announced mergers pass through financial and legal channels relatively unscathed, creating a continually shifting landscape.

AT&T's announced acquisition is yet one more step along a predictable path. It was far from a surprise — only the timing raised any eyebrows, coming so quickly on the heels of the SBC Communications/AT&T merger — but its impact will be considerable. Not only does this merger retire the last of the original seven “Baby Bell” brands, it lays to rest the Bell name altogether, with the exception of big Mama.

And the deal will have technological, competitive and regulatory implications, both for the new behemoth and the industry around it.

BROADBAND DEPLOYMENT

The merging of BellSouth and AT&T brings together two close, but not perfectly aligned, philosophies on the next-generation access network. BellSouth has been steadfast in its deployment of fiber deep into the access network for several years and has long touted the fact that it has more than 1 million homes directly connected to glass. AT&T, through its Project Pronto and, more recently, Project Lightspeed, has been content to bring fiber to a neighborhood node that serves several hundred users.

Does that mean one might expect a pullback in the BellSouth region after closing of the merger? Not likely.

Randall Stephenson, chief operating officer of AT&T, downplayed the different architectures in a conference call with analysts.

“What BellSouth is doing today is very complementary to what we're trying to accomplish with our Lightspeed initiative,” he said. “They have been very aggressive in the past at pushing fiber deeper into their network. They are on a path within the next couple of years to have 12 to 24 [Mb/s] through a substantial portion of their footprint.”

In that last link to the home, there also are some differences in the plans of the two companies. SBC has publicly committed to VDSL2 and as recently as January said its early tests showed it could easily get at least 24 Mb/s per home. Although BellSouth hasn't officially committed to using VDSL2, BellSouth Chief Technology Officer Bill Smith was among the most vocal in his support of VDSL2 and just as aggressive in getting the standard finalized, according to several vendors. BellSouth likely will use a mix of technologies for the final link. At the same time, it can continue using bonded ADSL2+ for some time because of its deeper fiber penetration.

“It's their physical plant and the way it's laid out that drove them to that decision,” said Jeff Porter, vice president of marketing for Netopia. “Based on cost per homes passed, it's also more economical right now. It's not locked in stone, and this merger could have an impact.”

The combined companies also will be significant players in the direct broadcast satellite market with around 1 million combined subscribers, though there is some incongruence there, too. BellSouth has been reselling DirecTV as part of its Answers Package and has captured 523,000 customers. AT&T has been reselling Dish Network and reported 457,000 customers at the end of 2005.

In a report issued the day the deal was announced, UBS analyst Aryeh Bourkoff wrote that as many as 50% of DirecTV's net subscription additions over the next three years are estimated to originate from telco partnerships (Qwest and Verizon also resell DirecTV), and the merger could be ominous for the company.

“We believe there could be downside pressure to DTV sub-growth targets, in the likely event that the BLS/DTV migrates to the broader AT&T/DISH deal,” he wrote.

Stephenson indicated that the merged company may move in that direction.

“Once we close the transaction, we will have to evaluate how we synchronize those and determine which direction to go,” he said, adding that the company has been looking at an out-of-region play for its satellite service.

In January, BellSouth also announced that it would use SES Americom's pre-packaged content and headend service as part of its early IPTV trials. At the time, Don Granger, president of BellSouth Entertainment, said the deal was done in part because SES was able to jump-start the company's test. That arrangement is likely to fall by the wayside with AT&T in the mix because AT&T already is building its own headend facilities.

Perhaps most important to the video aspirations of the combined company is that AT&T is acquiring a level of experience that is hard to match. As the lone large telco not to shelve or sell off existing video assets, BellSouth still counts 40,000 subscribers on its Americast-branded service. The future of that service is uncertain. When SBC bought Ameritech, it quickly ditched the company's more extensive hybrid fiber coax networks, though the market was significantly different at the time.

Regardless of the whether AT&T pushes to sell that piece off, Renee Shaening, cable analyst with Kagan Research, doubts the combined company will have significant impact on the overall pay-TV market. In a report issued earlier this month, Shaening predicted that over the next five years, the nation's telcos would capture around 6 million subscribers, accounting for 5% of the multi-channel pie by 2010.

“Because the telcos aren't expected to roll out video across their entire footprint, that makes a difference,” she said. “To the extent that [the combined AT&T/BellSouth] can throw more marketing dollars behind video, that might make a difference. One would think post-transaction, the BellSouth part of the footprint would become more aggressive.”

COMPETITIVE GIANT

A combined AT&T/BellSouth creates a giant of a company that has many concerned about the competitive influence it will wield.

“It's very scary — I worry about a perception that this is the only game in town,” said Heather Gold, a former president of the Association for Local Telecommunication Services and vice president of regulatory for XO Communications. “Everyone seems to think there's only a big struggle now between telephony and cable. It has been the smaller, more nimble entrepreneurial companies that have brought real innovation to this market. That's a concern — I worry that the larger voice will be the only one heard.”

“The major thing is AT&T and Verizon now have incredible economies of scale that the CLECs just can't replicate,” said Brian Washburn, senior analyst for Current Analysis.

From the consumer standpoint, a duopoly may not be enough competition, said Robert Rosenberg, president of Insight Research.

“We all remember from the earliest days of cellular service that a duopoly didn't bring prices down,” he said. “It wasn't until there were three, four and five players in the market that we got the innovations and the lower prices we have today.”

There will be increased pressure to develop a third or even fourth means of access such as wireless (Wi-Fi or WiMAX) and broadband powerline. But these are still in their very early days, Rosenberg said, and don't yet pose much of a competitive threat.

If there is any bright side to the competitive picture, the consolidation could stabilize prices, and that will enable CLECs to compete without cutting their margins any further, Rosenberg said.

REGULATORY REACTION

Despite concerns about the market power of the new entity, no one is predicting serious roadblocks for AT&T's acquisition of BellSouth.

James Barnette, former general counsel and deputy staff director for the U.S. House Committee on Energy and Commerce and currently a member of the law firm Collier Shannon Scott that represents major competitive service providers, is primarily concerned that the consolidation of power will affect access to last-mile connections.

“Our clients are facilities-based companies, who have invested billions in their networks,” he said. “We just want to be sure we are able to compete.”

Because AT&T and BellSouth have been among the most vocal in saying that Internet content providers must pay more for the fatter pipes they need to deliver advanced services to their customers, this combination is likely to galvanize opposition to the tiered Internet services plan in Washington. “Google has opened a Washington office, and they are being forced to become more involved,” Gold said. “[AT&T] has been very aggressive in this public posture on access to the Internet.”

The company that Google faces off against is likely to have just as much with regulators than the already powerful former RBOCs. It just may go by a different name.