The Texas-based Regional Bell Operating Company (RBOC), SBC
Communications, is the second largest local telco in the US,
with 38 million access lines, equivalent to 20% of the market.
This figure will rise to 32%, once its planned merger closes.
In May 1998, SBC had announced that it was to merge with fellow
RBOC Ameritech in a merger worth $62 billion. The merger will
enable SBC to expand beyond its 13 state territory and become a
national player in the US.
SBC has a proven track record of merger integration. The
operator is already deriving faster than expected synergies
from its merger with Pacific Bell. Tom Aust, telecoms analyst
at Chase Securities, believes that this merger was the catalyst
for ensuing consolidation in the US: "It was smart of them to
recognize the opportunity in PacBel when they did. This was a
very important and far-sighted merger. It changed the industry.
It was the harbinger for the mergers we are seeing now,
including their merger with Ameritech, which was also
aggressive and came as a surprise.
Aust believes that the operator may well have galvanized Bell
Atlantic into its recent mergers: "It paved the way for Bell
Atlantic/NYNEX, which was probably a more important merger than
SBC/PacBel, but it would not have happened if they had not
happened first. I don't think that Bell Atlantic/GTE would have
been proposed, if SBC/Ameritech had not been proposed. I think
that the mergers have in a way fed off each other, but it is
very important that Whitacre and SBC have been tough and
In June 1999 the FCC, Ameritech and SBC reached agreement on
the terms of the merger. The company will have to establish a
separate subsidiary to provide services such as high-speed
Internet access through ADSL. The company will not be allowed
to charge its residential customers minimum monthly
long-distance fees for at least three years after entry into
the long-distance market. The FCC has set a number of stringent
performance targets. The company could have to pay more than $2
billion, if certain goals are not met.
Aust summarizes the merger's implications: "In my opinion, it
mostly looks like a horizontal merger, where it is larger, has
some scale, scope and economies, but I would be surprised if
there were any big synergies with regards to long-distance
traffic between the two regions or anything like that. I think
that personally it makes them cover a much larger part of the
US, and preserves a seat at the table, rather than just
standing in the room in terms of international consolidation.
If you have an interest in a local phone operator in the US
with a major US presence, these guys will be one of only three
SBC Communications is hoping that the FCC will soon approve
its long-distance application. Since the Telecom Act in 1996,
no RBOC has gained approval to offer long-distance services.
The company hopes to gain approval in Texas soon. According to
Bruce Roberts, telecoms analyst at Dresdner Kleinwort Benson,
it may well take longer to obtain the FCC's approval than SBC
has projected: "They are supposed to obtain approval in Texas
sometime in the first quarter. That is their hope. But these
things end up taking more time than they project that they
will. It is very possible that this may not happen until the
second quarter of next year. I think that the best way to
explain this is that they should be in Texas and California in
2000. That is good, as they are both very large states. Both of
these are in the top five states in terms of telephone lines.
By gaining access to those states, they can secure a very large
proportion of their customers for long-distance services.
According to our projections, they will achieve $270 million in
long-distance sales next year. That goes up to $8.7 billion by
2005, which approximates to 10% of their revenues."
In November 1999 SBC announced a $6 billion initiative called
Project Pronto. The operator aims to make broadband services
available to 80% of its customers over the next three years.
The new network will use advance packet-switching technology
and voice trunking over Asynchronous Transfer Mode (ATM) and is
projected to generate $1.5 billion in annual expenditure and
capital savings by the year 2004.
According to Roberts, Project Pronto is a sign of a more
aggressive broadband strategy: "With Project Pronto, they are
really accelerating the build-out. In general, I think that
their broadband strategy is just fine. They are doing all the
right things by the book, laying a lot of fibre, using ATM as
the transport medium, which allows them to do everything -
intranet, frame relay and video. What they have with Project
Pronto is a success-based strategy, which allows them to add as
much fibre as they need to accommodate demand. You could
continue to add it on a modular basis, as the demand comes in
the door. So it is a less risky strategy. While it is something
they had to do, they laid out a very nice plan."
SBC also announced recently that it was taking a 43% stake in
the independent ISP, Prodigy Communications. This will allow
the operator to become a leading provider of DSL broadband
Internet access. Under the terms of the agreement, SBC will
make Prodigy its exclusive retail consumer and small business
Internet access to about 10 million people in SBC's service
area. Roberts is positive about this move and SBC's marketing
of this acquisition: "What SBC did here was say that Prodigy is
great. It has a named brand and it is great at being an ISP and
we have got the network and we have got our own ISP customers,
let's use their expertise and facilities and use their name.
Let us use their distribution expertise in particular to become
a stronger, overall player in that field. I think that it was a
very good move."
Internationally, SBC is bidding to become a shareholder in the
Polish incumbent operator, TPSA. Previously SBC had focused
more on Latin America, while Ameritech had built a
more-European focused strategy. Aust talks about the leadership
of Ameritech CEO, Richard Notebaert: "Notebaert has been a very
strong leader of Ameritech. They have done some very smart
things. They have produced some very strong results. They have
had a very good international expansion policy. In that
category, they have probably surpassed SBC a little bit. So
that is also another nice complement. They have focused their
time and attention on Europe, while SBC has looked more to
Mexico and the Caribbean."
Ameritech has invested in big European operators such as Tele
Danmark, Matav and Belgacom and is the main US player to focus
on Europe for its international strategy. Roberts believes that
SBC may well expand in Europe: "I think that they are very
interested in Europe. Ameritech was very aggressive there.
Following the build-out of all these pan-European networks by
US carriers, such as Level 3, Qwest and MCI WorldCom, I think
that they realize that they are going to have to do something
there. The question is, do they buy a PTT or do they buy more
minority holdings in PTTs. I don't think that they want
minority positions: I think that they want to own some of them
or have majority holdings in some of those. I really don't know
if they want to build a pan-European network. They are being
really tight-lipped about that issue."
Aust explains how the international assets combine
particularly well in North America: "Over the past year
Ameritech has invested 20% in Bell Canada, which would be a
strong complement and also seal up North America, providing
them with the potential to create a strong unified north
American presence. Bell Canada also brings Teleglobe with
international connections, which would be very complementary
and desirable for a combined SBC/Ameritech."
In an exclusive interview with Global Telecoms Business, the
chairman and CEO of SBC Communications, Edward Whitacre, talks
about the changing telecoms landscape in the US and explains
how SBC Communications aims to be one of the major global
telecoms service providers in the 21st century.
What kind of synergies will you derive from the
Ameritech merger? Do you believe that mega-mergers such as
SBC/Ameritech and Bell Atlantic/GTE are healthy for
Whitacre: I think that we will see synergies in the
areas that you would expect, such as procurement, engineering,
research and marketing. For that reason I think that we will be
able to make product development more efficient and less costly
and introduce products and services faster than ever. We are
talking about a wide variety of products and services at
competitive prices. That is healthy for customers.
The Ameritech deal also helps us build both our nation-wide
presence and our presence internationally. The new SBC is now
situated in 23 countries: Ameritech makes us the largest
non-European telecoms investor in Europe. So we are reaching a
position where we can serve our customers' global needs, which
is what they want.
In an interview in the March edition of Global
Telecoms Business, the CEO of MCI WorldCom called the
SBC/Ameritech merger "anti-competitive", adding that the merger
makes "SBC a local company which certainly won't compete with
itself". He cites the example of St Louis where you had
previously been competing with Ameritech. How do you view these
Whitacre: I think that he has competed with Sprint in
many locations - and now he wants to buy Sprint. We have only
competed with Ameritech in a small overlap area in St Louis in
our wireless businesses: that is being addressed. In actual
fact our competitors are acting in the same way to be able to
meet customers' global needs. We also need to be global.
Acquisitions help to make that happen.
How do you view AT&T and MCI WorldCom as
Whitacre: I think that they are our top competitors
in the US. There is no doubt that at this moment they benefit
from being able to offer everything, including long distance.
But we are on the verge of gaining long-distance approval - and
once we do, we will be on an even playing field and we will be
ready to go head-to-head with them. That is exactly how it
AT&T's plans for cable will create an exciting race to
watch. I think that they face more technological hurdles than
us, but I am convinced that they can overcome them.
We also have some formidable competitors outside the US.
Deutsche Telecom, Nippon Telephone and Telegraph, British
Telecom and other companies are trying to gain a foothold in
the US and other areas outside their traditional boundaries.
How do you view the combined international assets of
SBC and Ameritech? Which areas are you targeting for
Whitacre: We have a strong footprint in Europe:
Ameritech really helped achieve this goal. We now need to hook
the countries together. I also think that we have a solid North
American backbone, with investments in Telmex and Bell Canada.
As far as other areas, we will go wherever our customers go -
whether it is Asia, Africa or the Americas. We want to connect
major centres of commerce across the world. We are going to
continue moving fast to keep up with customers and stay ahead
of the competition.
How do you view the Canadian market? Do you plan to
expand your North American borders beyond the US?
Whitacre: It really will represent the northern
anchor of the strongest telecoms backbone in the northern
hemisphere. We will expand our borders anywhere that customers
expand their borders. Customers today demand a single provider
with the reach and resources to provide a full spectrum of
In a recent interview in Global Telecoms Business,
Ivan Seidenberg said that he expected Bell Atlantic to gain
approval to offer long-distance services in New York by the end
of the year. When do you expect SBC to be in a position to
offer long-distance services in Texas?
Whitacre: I think that Bell Atlantic may be first.
But I think that we will be next in Texas, some time early in
2000. We are going to be very effective in long distance, both
on the data and voice sides.
How quickly we obtain market share will be a function of how
well we market and the kinds of products that we put out there.
I think that we will obtain a pretty good market share, because
we have great marketing capabilities.
The long-distance market needs competition, because we are now
down to two providers: AT&T and MCI WorldCom, assuming that
they acquire Sprint. I think that we have a good package for
our customers, if we are allowed into this market, but at this
stage we will just have to see how it goes.
Did you envision that it would take so long to enter
the long-distance market? After all, the Telecom Act is well
over three years old? How frustrating has this experience
Whitacre: I am very surprised that it has taken this
long. It will be four years in February. We are getting close,
so I am optimistic. But it has been frustrating - we pretty
much have had one hand tied behind our backs. The Telecom Act
really had two key goals - deregulation and the removal of
artificial barriers to competition in all areas of telecoms.
Neither is fully achieved.
Why did you decide to invest in Williams
Whitacre: Williams is putting in place an
outstanding, state-of-the-art long-haul network - one that is
essential for making connections between major cities across
the globe. We are going to leverage that network to gain
long-distance entry. It will serve as our backbone for the
delivery of data at super-fast speeds, wherever our customers
Why did you decide to bundle phone, Internet and
satellite TV services on one bill? How important has it been
for SBC to reinvent itself as a one-stop shop for
Whitacre: According to our market research, about
two-thirds of our consumers would like to have bundled
services. So I think that it is very important - it can be a
condition of success.
Today's consumers no longer accept geographic limits. They
want wireless access from anywhere to anywhere, including the
Internet. They also want super-fast Internet access from their
home and work.
Of course, they still want long distance, traditional wireline
service and video entertainment. When they look at all this,
they want to be provided with these services in a way that is
extremely affordable and convenient. So it is a great solution
for them, if they can contact just one provider and obtain one
bill, with one price.
You recently launched a new service that enables
e-mail to be sent without using a PC. Could you describe for
readers the benefits and perceived potential market for a
computer-free e-mail service?
Whitacre: This is another example of responding to
customer demand. About 50% of households don't have a PC.
eMessage is targeted to that audience - people who want e-mail,
without having to use a PC. As this device is affordable and
simple to use, it will become very popular.
How do you view operators such as Qwest and Level 3?
Do you believe that these operators have an advantage because
they can build state-of-the-art networks from scratch? Do you
believe that established players such as SBC are at a
disadvantage because their networks were originally built to
handle voice, rather than data?
Whitacre: I don't think that one company can leverage
a significant network advantage over another. Our networks are
second-to-none. We recently announced Project Pronto, which
will provide with us a network built for the future and the
This is a $6 billion project to put together a
next-generation, packet-switched network that will integrate
voice, data and video capabilities. This project will also push
fibre and DSL equipment deeper into the neighbourhoods that we
serve and make broadband available to 80% of our customers over
the next three years.
How much do you spend annually on network
modernization? Who are your main suppliers?
Whitacre: We have already spent $4 million purely on
the network. We will spend an additional $6 billion with
Project Pronto. We are using six primary suppliers for that
project - Advanced Fibre Communications, Alcatel, Lucent,
Newbridge Networks, Nortel Networks and Siecor. These suppliers
are committed to helping us meet our aggressive build-out
What are your views on DSL technology?
Whitacre: We are very committed to DSL. It is fast,
dependable and reasonably priced and will enhance significantly
the on-line experience for customers. They are going to obtain
near-instantaneous downloads of complex files. They are not
going to have to wait to dial up, as it is an always-on
The biggest obstacle with DSL concerned its availability - and
now we are taking care of that limitation. Over the next few
years we are going to make the service available to most of our
customers. In that regard, we will lead the industry. And we
are going to provide this service for both our residential and
At home, people will be able to enjoy consistent, super-fast
speeds for home networking, video-conferencing, interactive
gaming and other applications. On the business side, we have
already signed deals with several major companies, such as IBM
and E-Trade - to provide their employees and customers with
In addition we recently entered into an arrangement with
Prodigy, which is one of the nation's best known Internet
Service Providers. Soon we will offer our Internet customers
the Prodigy service over SBC's network, including an option to
receive it over our affordable DSL service. This new
SBC-Prodigy ISP will be the most broadband-focused Internet
provider out there. It will really increase our presence.
How did the coast-to-coast negotiations go with Bell
Atlantic, BellSouth, US West and GTE to enter into 30 new
markets and compete head-to-head for local and business
customers? How many new markets are you targeting?
Whitacre: We didn't hold any negotiations with them.
We simply declared that we would voluntarily enter the top 30
markets outside our operating territory to provide customers
with more telecoms competition.
So we will resemble a CLEC in those territories. We are,
however, in the process of obtaining inter-connection
agreements with these incumbents in order to gain access to
Assuming the merger with Ameritech goes through, will
you have to undergo a widespread restructuring programme? Will
you have to make significant cuts in the numbers of employees?
How difficult will it be to transform two company cultures into
Whitacre: I think that the two cultures are pretty
close. So I don't think that this will be much of a problem. We
have said that this merger is about growth and that we plan no
employee cuts. We may shift a few people around, but our total
staffing levels should hopefully stay the same.
When we acquired Pacific Bell, we ended up adding 5,000
employees. So we hope to see similar results with Ameritech.
There will be some changes, but I think that our employees will
find it an exciting and worthwhile undertaking.
How important is wireless in your overall strategy? Do
you plan to build a national wireless footprint? How many
subscribers will the new merged company have? What is the
average ARPU/ subscriber?
Whitacre: Wireless represents a significant part of
our strategy. We are good at it - and our customers like it.
Right now we have more ten million subscribers and that figure
is growing. We really already have a national footprint, as an
SBC customer can go anywhere and use the wireless instrument
and technology with roaming capabilities.
In terms of our average revenue/subscriber, I can tell you
that it has been decreasing. The decline is attributable to
competition. There are more packages and rate plans than ever -
as you see more of that, customers end up with more choices and
better prices. Wireless is a big part of our plans and will be
a valuable part of our bundle.
How do you view the demand for wireless data
applications? Which services are you offering customers? Which
technology is your wireless network based on?
Whitacre: It is an exciting new field. I think that
wireless data is going to grow quickly. While we are not
offering wireless data on any significant scale right now, we
hope to make a significant move over the next two years.
TDMA is our technology, but it is anticipated that a two-chip
handset will become available early next year. So you can
freely roam between PCS and TDMA.
What are your views on E-commerce? How do you view the
potential for IP telephony?
Whitacre: Data constitutes the fastest growing part
of our business: E-commerce is a big part of that. That is the
reason why we are investing in Project Pronto: we want a
super-fast and reliable network that allows customers to take
full advantage of the Internet.
As for your question on IP telephony, I don't know if it is
quite there yet in terms of quality. But it will become a
reality over the next two or three years.
What are your competitive advantages in the business
Whitacre: We have a great network. We are going to
have global reach. We will be able to offer customers a
complete range of products and services. We are also going to
have the most attractive broadband offering available, backed
by a reliable, secure and proven high-speed network. This is
especially important, because customers are relying more and
more on their network for mission-critical services. A few
competitors may offer similar benefits, but our employees, our
high standards of service and our sound execution will set us
Second quarter revenues rose to $7.4 billion, a 5.2%
increase on the same point last year. Are Internet and wireless
services going to be the key drivers for your future
Whitacre: There is no question about it - Internet
and wireless services will both form a big part of our growth.
As that is where much of the customer demand is, we will move
to meet it. If you look at our investment in Project Pronto, we
are building a network geared for the Internet and the future.
With wireless, we are looking at tremendous demand - for voice
and now data. So SBC will continue to work to develop and sell
products and services to meet this demand.
Why did you decide to form an alliance with DirecTV?
Do you believe that SBC should increasingly diversify its
operations to focus on areas such as broadcasting? Do you see
video and digital TV as an area where you need to make a bigger
Whitacre: First of all, I don't see SBC as a
broadcaster. We formed the alliance with DirecTV, because it
gives us the video and entertainment piece to help complete our
service bundle. I think that digital television is a great
product with superior quality.
Video will constitute a big part of the future of the Internet
- and our broadband capabilities will be there to back it up.
You can obtain entertainment-quality video through DSL at the
speeds that Pronto will provide.
Do you believe that the FCC has been effective in
opening up competition in US telecoms markets?
Whitacre: I think that it is difficult to answer this
question about the FCC. Almost four years have elapsed since
the Telecom Act and yet no company has gained access into long
The business markets in the US are very open. So are the
consumer markets. But we don't see that in long distance, as
the best competitors are being kept out. So it is really a
mixed result, and we have really been operating with one hand
tied behind our backs.
When mergers happen in the telecoms industry, data
networks can go down owing to a telco's inability to transfer
traffic from a legacy network to another network. Surely there
is a risk of incompatibility issues between SBC and Ameritech?
Surely there is a threat that customers may be tempted to avoid
such problems by switching to another provider?
Whitacre: That is not true. The two networks are very
compatible - and they are state-of-the-art networks, loaded
with fibre and electronics, SONET rings and SS7 signalling
systems. They are not incompatible: as you know, competitors
use our network now. So those issues really don't apply to us.
Finally, what are your hopes and ambitions for the
company over the next two-three years? Where will SBC be on the
global telecoms landscape?
Whitacre: Our goal is to be a global telecoms
provider. To accomplish that goal, we plan to do more
internationally, including on the wireless front. We also need
to obtain that long-distance piece and successfully gain access
into the 30 markets which we are targeting in the US.
We are making terrific progress in all those areas - so we are
right on plan. We are heading towards a time when there will be
a handful of major players out there. We want to be one of