Bell, Nynex facing hurdles Muscular giant looking at wider opportunities, lower access revenue

Long-distance fever

Insiders gleeful while some outsiders point to the problems

April 28, 1996|By Michael Dresser | Michael Dresser,SUN STAFF

When Bell Atlantic and Nynex announced their $23 billion merger agreement last week, the chief executives of the two companies could barely contain their glee over the lucrative long-distance Northeast Corridor market they had stitched together.

"This is going to be a lean, mean outfit and a good competitor for the likes of AT&T, MCI and Sprint," said Bell Atlantic Chairman Raymond W. Smith, who observed that 45 percent of the nation's long-distance calls either begin or end in the combined region. He predicted that the combined company could seize 30 percent of the long-distance business in the region.

It's a juicy prospect that has a lot of investors salivating, but it won't be easy to achieve.

Now that the hoopla has died down, it is clear that, while the merger will help the combined company get into the long-distance business, it is no magic bullet that will blow the competition away.

The problem is that all the two companies did is create a bigger regional Bell operating company. And regional Bells have far less experience at competing than do the companies they will be challenging.

That doesn't mean the merger was a wasted effort. Far from it.

By expanding the region to include the entire Northeast, the merger vastly increases the numbers of calls the company will be able to handle from beginning to middle to end.

That means higher margins on each call the new Bell Atlantic can capture from competitors.

There are also distinct advantages in marketing. For example, the sonorous voice of James Earl Jones will reach millions more ** as he intones the praises of a bigger Bell Atlantic.

The merger will also reunite the New York metropolitan market, ripped apart by a divestiture agreement that gave New York to Nynex and New Jersey to Bell Atlantic.

Now a single company will be able to market to the entire region without wasting dollars.

But some analysts believe that the companies passed up a chance to make a better match. They say that swallowing Nynex won't necessarily promote Bell Atlantic's competitive edge. They note that getting bigger seldom makes a company more nimble. The merger adds territory and eliminates a potential competitor but doesn't bring a new set of skills into the company.

Mark Heckendorn, president of Versus Strategy Group in Washington, said the two companies made a "comfortable" choice of partners. "I think they would have been much better off to merge with a long-distance company at this stage," he said.

The No. 1 challenge

Before the new Bell Atlantic can enjoy those tempting margins on end-to-end long-distance calls, it will have to win the business. It's the most serious challenge facing the company.

Realistically, long distance is the only place they can go to recover the billions of dollars that will drain away as the bloated prices long-distance companies pay for access to the local network shrink.

Access charges, which make up about 40 percent of the cost of long-distance calls, have been artificially inflated for decades to subsidize residential service. This has been easy money for Bell Atlantic and Nynex -- 31 percent of their telecommunications revenues gained with no marketing, no hustling, no competitors.

With the passage of the new Telecommunications Act, access charges will have to go down to a level based on cost. How much they will fall depends on how federal and state regulators define cost.

If regulators accept their long-distance companies' arguments, access charges could dwindle to a fraction of the $6.8 billion they brought to Bell Atlantic and Nynex in 1994.

"If they lose the access charges, these fellows are in very serious financial trouble," said Allan Tumolillo, chief operating officer of Probe Research in Cedar Knolls, N.J.

That new telecommunications market structure outlined in the 1996 Telecommunications Act also removes many of the advantages of owning the network to create the "level playing field" that telecommunications companies profess to want.

The primary leveling mechanism is called resale.

Resale has been a pillar of the long-distance market since the downfall of Ma Bell's monopoly, and now it's coming to the local network. It's what lets hundreds of small long-distance companies compete with AT&T, MCI and Sprint. And it's what will let AT&T and MCI compete to be your local phone company.

Mandatory resale, a concept long fought by Bell Atlantic, is now enshrined in the telecommunications law. It means that local exchange carriers such as the Bells will have to make the essential elements of their networks available to competitors at a cost-based wholesale price.

So when Mr. Smith said Bell Atlantic will be able to offer one-stop shopping for a package of telecommunications services, he was entirely correct. What he didn't mention was that so will AT&T, MCI, the local cable TV company and possibly your brother-in-law.

First things first

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