Big moves like GTE's US$28 billion cash bid for MCI this week get all the air play in the frantic game of telecommunications domination. But the Scrabble board of three-letter telcos being re-arranged in favor of new players extends far beyond the current MCI buyout fever to a second tier of phone companies busy mapping out a new landscape.
With names like ICG, MFS, and TCG, competitive local exchange carriers - which go by the equally soul-grabbing acronym CLEC - are gobbling up Internet service providers and thereby making themselves attractive - as partners or potential acquisitions - to long-distance companies desperate for local-market access, especially when it comes with both data services and dial tones. Earlier this week, a fast-growing CLEC (pronounced SEE-lek) called ICG acquired Netcom to get its hands on data network facilities as well as the ISP’s 9,000 business customers.
"We're going to be your single-source - local, long-distance - voice, as well as data and Internet access company," said ICG spokesman Scott Chase. "We want to aggressively take away market share from the Baby Bells."
That's a pretty tall order for a company that is projecting $420 million in annual revenue once it is merged with Netcom. SBC Communications, the giant whose Southwestern Bell and Pacific Bell subsidiaries cover much of the same region as the southern and western states ICG has targeted, reported $6.1 billion in revenues just for the second quarter of this year.
But, the goal may not be so far-fetched, given that most telcos have slept while Internet access and data networks have turned into a key piece of their business.
"They are lagging behind in the long-distance data market, in part because they would have to deploy their own network and in part because the Federal Communications Commission has been slowing them down," said Tom Jenkins, a broadband consultant at Telechoice, a telecommunications management consulting firm. The FCC won't let the Bells offer long-distance until they have opened up their local access markets to competition.
Meanwhile, the CLECs "are not garnering a major share of the market - but they are cherry-picking the highest margin, most profitable business accounts," Jenkins said, pointing out that CLECs tend to focus on major metropolitan markets.
"Really it is the data networks and the Internet that are the future of public networking," said Steven Titch, editorial director of Telephony magazine. "The biggest perception shift for regulators is that it's not dial tone that phone companies will compete on anymore, but data."
The CLECs have figured that much out. Prior to the ICG-Netcom deal, Tampa, Florida-based Intermedia - a CLEC serving the Southeast that reported $103 million in revenue last year - bought the business-focused ISP Digex for $150 million in July. And in January, Teleport Communications Group, the nation's largest CLEC with service in 33 states, bought CERFnet, an ISP specializing in large Web-site hosting, for about $60 million.
The CLEC-ISP combo is an attractive one in the eyes of bigger carriers who have long-distance networks and are now looking to provide high-bandwidth services directly to customers without having to share revenues with local phone companies.
Barbara Ells, industry analyst at Zona Research, said alliances like the one between ICG and Netcom are an invitation for a bigger buyout. "They're one of I don't know how many hundreds of small local exchange carriers who are probably all hoping to be acquired," she said of ICG.
New York City-based TCG, which calls itself "the other local phone company," was snapped up in 1992 by cable TV companies Tele-Communications Inc., Comcast Corp., Cox Communications, and, until this week, Continental - which was required to divest its shares as a result of its acquisition by the Baby Bell US West. Together the cable companies controlled 78 percent of the company's stock.
And Brooks Fiber, a three-year-old, second-tier CLEC serving 30 mid-sized US cities, was gobbled up by the insatiable WorldCom on 1 October for an impressive $2.9 billion. MFS, another local telco that focused on the business market and had bought the UUNET Internet backbone provider, was picked up by WorldCom in August 1996. Of course, WorldCom is now (along with British Telecom and GTE) going after the second-largest US long-distance provider, MCI.
(Earlier this year, AT&T attempted to create a similar situation for itself - on the inflated scale it thinks in - with talk of buying SBC and getting into the local market. But given its mammoth market share in long distance, FCC chairman Reed Hundt said his agency wouldn't even consider the proposal.)
When all the deals are laid on the table, it's clear that the industry, despite breaking into hundreds of pieces following the breakup of the AT&T monopoly, is not suffering the fate of a nursery-rhyme favorite. With deregulation, it takes just a few deep-pocketed telcos to start putting some big Humpty Dumpties back together again. Although creating new monopolies would be all but impossible to achieve (consider that a BT-MCI merger would make for a $42 billion telco, one of the world's largest - but with only 6 percent of the worldwide market), the trend is toward a few big players.
"I don't want to say we'll end up with a reconstituted Bell system," said Telephony's Titch, "but we will see consolidation into a handful of companies that operate global networks within the next five to 10 years."
