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Seidenberg: going the distance with GTE

01 September 1999

Bell Atlantic appears to be on the verge of obtaining approval from the FCC to offer long-distance services and merge with GTE. Projected merger synergies and its ability to offer new services, such as long distance and data, including DSL, are key to the operator's growth. Ivan Seidenberg, Bell Atlantic's chairman and CEO, talks to Mark Holmes about these issues.

Bell Atlantic is one of the largest telcos in the US. After the proposed merger with GTE, it would become one of the top four global players. The merged company would have estimated pro forma revenues of over $63 billion.
Bell Atlantic also hopes to gain approval from the Federal Communications Commission (FCC) to offer long-distance services at the end of this year. So far, however, the FCC has rejected all RBOC applications, claiming that the RBOCs have failed to open up their markets to competition. The situation seems to be changing.
The operator hopes to close its merger with GTE within the next nine months. Once these two major obstacles have been overcome, Bell Atlantic will face other challenges to maintain strong earnings growth, as Simon Flannery, telecoms equity analyst at Morgan Stanley Dean Witter, explains: "I think that they have to close the merger which is tied to long distance, but there is still plenty of legwork to be done with the regulators, although I think that the SBC/Ameritech merger shows there is a path to approval. I think then the challenge facing many of these companies is how they can continue to deliver strong earnings growth, and yet at the same time invest in all the new businesses that need capital, expense, investment and fend off competitive challenges."
As Flannery notes, clearly the operator's data strategy will be strengthened by the merger and FCC long-distance approval: "I think that the merger with GTE will bring in a state-of-the-art long-distance network, optimized for data which GTE bought from Qwest, and also a leading ISP in BBN, but the ability to deliver data services to Bell Atlantic's large business customers is hindered by not being able to offer long-distance data."
In the face of increased competition from new operators, Bell Atlantic has responded with innovation and the roll out of new services. Flannery pinpoints the operator's entrepreneurial flair: "I think that if you think about top tier companies, there are certainly benefits of scale, but there are also dis-economies. I think these companies are aware of the need to be entrepreneurial and fast moving. You can look at how successfully Bell Atlantic has dealt with competition in the wireless market: it is delivering some very strong growth there. The operator has been successful internationally, which indicates that it can thrive in a competitive environment. So that gives you some hope for their core business. I think they are also making some sensible partnerships, in particular in DSL deployment, where they have a deal with America Online. So you are not relying solely on your own distribution capabilities, but you are working through alternative channels, which have very powerful distribution outlets themselves."
In an exclusive interview, Bell Atlantic's chairman and CEO Ivan Seidenberg talks about the new challenges that face Bell Atlantic and explains how the operator's ambitions will change, once it is able to offer long-distance services and close the merger with GTE.
Why do you think that it has taken so long for a RBOC to obtain approval to offer long-distance services? When will Bell Atlantic be able to offer long-distance services in New York?
Seidenberg:
The journey to enter long distance has taken the better part of three years since the adoption of the Telecommunications Act. There are probably two or three reasons why we are where we are.
First, this is new policy. Whenever you have something this big and this new, state and federal regulators tend to be very cautious and conservative. Frankly, this has been a more complex process than we anticipated at the beginning. We have all had to learn along the way. The third reason is related to all the political and emotional focus placed on this issue by carriers - admittedly, as well as the incumbents - but there has been a systematic approach by the long-distance companies to try and delay it.
So when you add these three things, you end up with a programme that has taken the better part of three years. But it is just about over now. We will pass the test in New York State and then file an application with the FCC some time in September. Our expectation is that we will pass the requirements and be in long distance before the end of the year.
Currently, you are only able to address about 10% of the telecoms spend of major corporations owing to your inability to offer long-distance services. What will be the impact on your revenues once you can offer long-distance services?
Seidenberg:
Once Bell Atlantic is permitted to participate in long distance, two things happen: we participate not only in a $20 billion-plus long-distance market in the states that we serve, but also in the global data market, where customers require inter-state and international connections, as well as local connections. For example, if we want to offer Barclays Bank or CitiGroup a set of services to handle all their campus locations, today we can't do that without working with two or three other suppliers. But once we gain access into long distance, we will be able to provide it all.
We are hopeful that long distance will provide us with a revenue boost - at the low-end, $2-3 billion over a 3-5 year period. Hopefully we can do a lot better than that.
Bell Atlantic has clearly faced intense competition in New York from companies such as AT&T and MCI WorldCom. It is assumed that Bell Atlantic has incurred significant losses in the business market. How are you retaining share in this sector? Which value-added services offer you a competitive advantage?
Seidenberg:
The answer to the question is innovation. You cannot retain market share in an industry with lots of new entrants and declining costs, but you can focus on innovation that yields revenue growth.
With the proliferation of new data technologies and high-speed access in our industry, the key is to make capital investments and produce new products and services. Over the past five years, Bell Atlantic has focused on investments in SONET rings and ATM switching, high-speed data and now broadband data for the consumer, and developing new, value-added services. We also have a professional services organization in our data solutions group that offers customers what we call desktop-to-desktop support - networks and services which go right from one PC to PCs in other locations. Over the past two years revenue growth from our business market has pumped back up again above 5%. We have just reported in the second quarter that revenues in our business market have exceeded 7% year-on-year. So while market share may shift because of new entrants, good companies will continue to innovate.
When do you expect to close the merger with GTE? What synergies do you derive from such a merger? How will you integrate two company cultures into one? How difficult is this process?
Seidenberg:
Our target had been to close the merger by the end of 1999. While there is still an outside chance to achieve that goal, more realistically we will close the deal in the first part of 2000.
When you look at the integration of our companies, you start with the fact that we are both in the same business, use a common language, customers and technologies. That makes it a lot easier. We have demonstrated our ability to do that with the integration of Bell Atlantic and NYNEX. GTE displayed a similar ability when it acquired ConTel several years ago. The Bell Atlantic-GTE merger is on a slightly larger scale, but we will follow what we have been doing over the past few years. We are very pleased with the way in which previous mergers have gone. We think that this one will follow in the same footsteps.
Another thing helps a great deal: we are focused on very achievable synergy targets. We have the opportunity, as we have laid out in our plans, to generate $2 billion in annual expense synergies and $2 billion in annual revenue synergies. That tends to bond an organization pretty quickly, as those are aggressive targets. They will also create enormous shareholder value.
Finally, I also think that we have unifying strategies that will help bring us together. We will offer long distance and continue to expand in the home data market with DSL (digital subscriber line) and wireless technologies - and, of course, extend our customer base to international markets.
In a recent interview with Global Telecoms Business James Crowe of Level 3 made this comment on incumbents: "I would have said that history teaches us when major changes occur in the economics of an industry, it is almost always the newer competitors, unfettered by all of the shackles of the past, that create value, rather than major players, which have invested 70-80 years in a old way of doing business." How do you view this statement?
Seidenberg:
I don't know if you know the author, H.L. Mencken. But Mencken had an expression: "For every complex problem, there is a solution that is simple, neat and wrong." Crowe's statement may be a slight over-simplification of the situation. Everybody in the industry is starting from a different place.
We are in the middle of recreating Bell Atlantic. We are being very aggressive in moving and re-creating the entire company.
With respect to our core wireline business, we have seen what needs to be changed. Our strategy has been to focus on achieving scale and scope and generating the cash that allows us to re-invest and increase our capital spending, so that we can create new products and services from our existing business. We are in the middle of converting our entire network to a data-centric format - we are going from circuit switching to packet switching, from analogue to digital. Over the past five years Bell Atlantic has also become a very heavy player in wireless. We have very extensive holdings, not only across the US, but in our global portfolio as well. We have 10 million customers on a proportionate basis. So enormous value has been added in that area.
Admittedly, these things take time. There are lots of issues with the regulators, but if you look at the net present value of what we have done with Bell Atlantic/Nynex, and now GTE/Bell Atlantic, we feel really good about all the capital that we have been able to invest in new products and services. Bell Atlantic is both an incumbent - one that saw what was needed to become much more of a force in the global market - and a new competitor as well.
How do you view competition from DSL providers, such as Covad, NorthPoint and Rhythms? How far have you advanced with the deployment of DSL technology?
Seidenberg:
Bell Atlantic is rolling out DSL as aggressively as anyone in the industry. DSL is a very important technology. We have reached a new point now, where digital compression techniques and all sorts of technological advances allow us to transmit anywhere from one to 7-8 megabits of information over a copper line. It is analogous to the time many years ago, when we went from rotary phones to touch-tone phones. We saw an enormous expansion of capabilities and capacity - all of which was inherent in the public switched network.
That is going to attract a lot of attention. What is good about this is that lots of competitors are coming in and leasing our copper facilities on a wholesale basis and offering variations of DSL services, speeds as low as 64 Kbps all the way up to 256 or even 640 Kbps. So if you are a customer anywhere where we serve, you will find at least two companies offering DSL: that is a pretty good deal. Bell Atlantic can leverage the following advantage: as the technology matures, we can deploy it on a large-scale basis in all customer segments. We can expand the market more rapidly than most other players that try to find a niche and compete in a specific segment.
That is why we announced in late July the most aggressive roll-out of DSL of any company in the US. We will equip some 700 offices by the end of 1999. We will have about 1,000 offices equipped by the first quarter of 2000. That will provide us with access to 10 million homes somewhere in the first quarter of 2000. In each subsequent quarter more and more of our customers' lines will become capable for the service. So we are talking about moving from 50% of our homes with access to DSL to close to 60-70% of our homes within the next 12 to 18 months. That will make Bell Atlantic equal to all the other DSL players combined.
Do you believe that you have to launch new services much more rapidly? Could you have offered the DSL service earlier?
Seidenberg:
When you are in a competitive market like ours, you always want to offer DSL services, or any other new product, as quickly as possible. The important thing is not to launch something prematurely - frankly, the technology is more robust today than it was even six months ago, in terms of speed and convenience.
The PC manufacturers are building DSL modems into the PC now, and we have "splitterless" technology that allows customers to install a series of jacks themselves and separate their high-speed DSL connection into the PC from their telephony connections.
How much do you spend annually on network modernization? Why did you choose Nortel and Alcatel to supply you with ADSL equipment?
Seidenberg:
Our capital programme for 1999 will be a little over $8 billion, which is a hefty amount and represents an increase for the third consecutive year. Our choice of suppliers has depended on the focus of the companies that we do business with. Each company has focused on a different niche and has generated a kind of innovation that makes a lot of sense for us. Alcatel has done a good job on DSL, for example, while Nortel and Lucent have done well in other areas. The three companies account for large portions of our capital expenditure. At the same time, we also work with a lot of other companies. Each manufacturer decides that it wants to be in the top tier in something and makes an effort to do so. Hopefully a company such as Bell Atlantic rewards them for their efforts and innovation.
Could you explain the significance of your partnership with AOL?
Seidenberg:
Our goal is to drive as many ISPs such as AOL as we can to purchase underlying facilities from a reliable carrier such as Bell Atlantic. AOL is very important, as it provides such extensive marketing reach for us through a wholesale-retail relationship. We provide the underlying DSL network service on a wholesale basis, while AOL bundles it with its ISP service on a retail basis. You have a powerful marketing tool.
We have our own very highly rated portal - BellAtlantic.net - but our system is open to all ISPs. We have signed deals with nearly 50. AOL is one such ISP. We also have FlashCom, Prodigy, Splitrock and many others. Our aim is to have as many people use our underlying network as possible and to let them use their portal of choice.
How will you blend the international assets of GTE and Bell Atlantic? Do you believe that your international strategy will change as a result of the merger?
Seidenberg:
With GTE we will have an excellent blend and we can accelerate our international strategy. To be strong internationally, we need to be strong at home. The Bell Atlantic-GTE merger combines GTE's assets in Canada, the Caribbean and throughout the US with Bell Atlantic's assets in the eastern US and Mexico. It allows us to become one of the top-tier companies in north America. That gives us access to lots of customers, and the scale to re-invest in overseas relationships.
Then our international strategy evolves. Bell Atlantic and GTE have adopted a portfolio approach. We have taken opportunities, for example, for wireless or wireline partnerships in liberalized markets. But together we will adopt more of a global carrier approach and work with people with whom we can exchange traffic and extend our services to their customers with communities of interest in north America. We will look for partners that have what we would call a regional market approach - we will look to people in Europe, for example, who have a pan-European view of the market. And we will look to people in Asia who have a pan-Asian view, and people in Latin America with the same.
Will you move aggressively into the European market and make significant investments there?
Seidenberg:
We have made some moves already. As you know, we have always been interested in the UK market. We have stakes in the new CWC-NTL and C&W. We have several great wireless investments, especially Omnitel in Italy - it is the second-largest wireless carrier in Europe - but also STET Hellas in Greece and the Eurotel companies in the Czech and Slovak republics. And we have FLAG, a carrier's carrier cable that we have built from Tokyo to London. GTE already has a significant data presence in Europe through its Internetworking unit. Bell Atlantic and GTE have several directory operations in Europe as well.
But as we obtain long-distance relief in the US, we have the platform to build a presence in Europe. We are focused on what you would expect - the 15-20 largest commercial centres, and our customers here in the US who have offices and operations in London, Paris, Rome or Bonn.
Omnitel has constituted one of the best opportunities in our pre-long-distance, pre-merger portfolio approach. When Olivetti moved to purchase Telecom Italia, we exercised an option to increase our stake. We are always interested in participating on an equity basis, with some operating participation, in markets such as Italy, where Omnitel has been the fastest-growing wireless carrier in Europe.
It has been rumoured that you may partner with a European carrier, such as Deutsche Telekom or Telefonica. Could you describe your European strategy?
Seidenberg:
On that score, I would say that it is important to continue discussions with all companies, both the new carriers as well as the incumbents. About 14 different networks are being built across Europe today. We need to find companies that cross European markets at reasonable rates.
Looking in the other direction and considering what European carriers are looking for in the US, I think that they see two, three or perhaps four companies that look capable of serving the full US market. Bell Atlantic-GTE will cover a large and very attractive part of the market and will give carriers a single source to partner with for extensive US reach and scale.
When we look at Europe, we don't see companies that look like us yet - in other words, companies that have a pan-European approach. Some more restructuring and organizational work needs to be done in Europe, before we can make a decision on who the right partners might be.
How do you view the threat to your business from broadband wireless operators, such as WinStar Communications, which can offer long-distance and local bundling packages?
Seidenberg:
When a new technology such as broadband wireless enters the market, for the first several years the technology tends to be additive, and helps the pie grow, so to speak. Customers will diversify, by using some of the capabilities of broadband wireless, but they continue to buy our fibre and bring it into their buildings. I think that over the next 10-15 years, as the technologies mature and the price points get more stable and the service gets better and all the uncertainty surrounding the technology is eliminated, you will see more of a finite integration of the technology. But it continues to be additive in terms of bringing more capacity and more demand into the system as opposed to cannibalizing the system.
Do you believe that the paradigm has shifted to wireless? Do you believe that Bell Atlantic Mobile will contribute a higher percentage to your overall revenues?
Seidenberg:
I am not sure whether I would make such a lofty proclamation as: "the paradigm has shifted." I would certainly say that wireless is humming along - but so is our core business. Digital wireless is now adding enormous capacity, customers love the stuff, and, yes, Bell Atlantic will get extremely high growth rates from its wireless operations. According to estimates, 20% of wireline minutes will shift over to wireless. This is happening, and more quickly than people think.
As a matter of fact, wireless contributed about 30% of our earnings/share growth in the second quarter of 1999 over the second quarter of 1998. So we love wireless and we will continue to see it build. The thing that we find interesting is that, while wireless continues to build, our core wireline business continues to grow at 7-8% in terms of minutes of use - of course, the core is also making its own transition to a data network.
How do you view the market for wireless data applications? Which new wireless services are you going to offer customers this year?
Seidenberg:
We were one of the first carriers to introduce a wireless data service for access to the Internet. We have a technology called "CDPD" that offers the customer Internet access at up to 28-56 Kbps. Mobile customers - whether it is a young person travelling or a business traveller, or person in school who is moving around - all love to take their PCs and hook up to the Internet. They are doing more and more of their work and business that way. Wireless data will continue to expand usage on the world-wide network.
When you look world-wide, in particular at developing nations, wireless becomes a tool that can help drive penetration in a country a lot more rapidly than if you dig up the streets. Bell Atlantic and GTE both operate in developing nations. We have seen that wireless leapfrogs the ability to wire up whole countries. With the Internet, as countries wire up, traffic flows on to the global network at a much faster rate. All the developed countries in Europe, as well as in the US, benefit a great deal. Wireless data services will stimulate this flow even more rapidly.
Do you plan to acquire out-of-region wireless properties to expand your coverage? How has the Vodafone/AirTouch merger affected your wireless business?
Seidenberg:
We are always going to acquire wireless franchises that fit our portfolio. We have been filling in our footprint by buying small rural licences. We have just purchased a substantial property from Frontier in upstate New York with more than 400,000 customers. And GTE just purchased properties in the mid-west from Ameritech, which they had to sell to address some of the overlapping properties that they had with SBC.
As far as Vodafone/AirTouch is concerned, we always had an outstanding relationship with AirTouch. They operate primarily in markets where we don't, so I suspect - in fact, I know - we will always have good arrangements with them for the exchange of traffic, roaming, inter-connection and things of that nature. So I am not sure that the change of control from AirTouch to Vodafone alters very much the things that we continue to do with them in the US.
Do you believe that the FCC has been doing a good job opening up telecoms markets in the US? What are your views on the conditions set down for the SBC/Ameritech merger? How do you think that those conditions will affect your position?
Seidenberg:
I think that, at a high level, both the FCC and the Department of Justice have been practical and realistic in understanding that we are in an industry that is consolidating and changing. Technology and consumer demand are driving the globalization of markets, which means that companies are consolidating and new entrants are emerging. In my opinion regulators have coped fairly well. When you look at the past 5-6 years, whether it be the creation of a super WorldCom or the creation now of a super-cable TV company in AT&T, or the mergers of some of the RBOCs, I think that the Department of Justice and the FCC have recognized that the forces involved are positive for the consumer.
Now, at a lower level, sometimes companies such as Bell Atlantic become frustrated with the degree of oversight. As far as SBC's agreement with the FCC staff, obviously SBC feels comfortable with the terms. SBC's ability to reach an agreement bodes well for Bell Atlantic/GTE.
I would point out that our deal is different. One of the FCC staff's theories of the case was that they were going to hold SBC accountable for moving into national markets - well, the Bell Atlantic/GTE merger by its very definition creates a national business.
So I am encouraged by the fact that Bell Atlantic has done in one way or the other most of the things that the FCC has asked SBC to do. I am concerned that to some extent some of the conditions, which appear reasonable on the face of it, don't appear to have anything to do with our merger. So we always worry a little about how aggressive some of these lower-level negotiations get. But overall I happen to think that the government has understood the nature of these markets at a higher level. I wish that there was not as much regulatory oversight as there is at a more routine level.
How do you view the situation in the US, where companies such as Global Crossing and Qwest, with a good stock price, can bid for a much bigger entity such as a US WEST? Did these events surprise you? What merger and acquisition trends do you see happening in the future?
Seidenberg:
None of us are prophets, so you never know what will happen in the future. But, looking back, at Bell Atlantic we anticipated that if we sat still, we could find ourselves in a position similar to US WEST, which is not quite big enough to execute on its own and therefore is subject to potential arrangements, such as an acquisition or a partnership with a company that has a higher stock valuation. So I am not surprised. We moved quickly. We chose a course that has made it difficult, almost impossible, for a company the size of a Global Crossing or a Qwest to make a move on us.
As far as their high valuations go, they deserve credit for being aggressive, smart and moving ahead, but they are also managing in a time period when they can arbitrage public policy - in this case, the failure to allow the Bell companies into long distance. And this helps to contribute to valuations that, over time, may or may not be sustainable. As companies such as Bell Atlantic move into the long-distance business, it changes the mix a little bit. These companies have also reached a point where they need scale, customers and cash flow. So they all find themselves looking to merge or partner in some fashion with companies that have real customers.
When all is said and done, I think that Bell Atlantic has done the things it has done - its merger with NYNEX and then GTE, its expansion of wireless, its investment in a $8 billion capital programme - to deal with the very issues facing these new carriers. We decided to be one of the shakers and the survivors and we intend to be one of the top-tier players. I think that so far most people would say that we are on the way to doing that.
Following AT&T's push in cable telephony, does Bell Atlantic plan to increase its focus on satellite, wireless cable, VDSL and fibre to the home to enter the video market?
Seidenberg:
We are not in a rush to try to match the cable product one-to-one. Today we are reselling DBS and customers like the product. But in the longer term, we believe that the Internet will transform all the intermediaries delivering entertainment and information to the home - in fact, it will remove some of them - and so we are changing our video business model.
Where we need to go with video is to really focus in the next year or two on the Internet, by deploying DSL and bringing bandwidth from one to seven or eight megabits into customers' homes. At the same time, the cable industry will undergo all sorts of transformations in terms of what it delivers to the home. A lot of content-based companies will innovate and create different kinds of content as we create a new medium.
Why do you think that, despite strong volume growth, revenue growth (excluding proportionate revenues from international assets) continues to lag behind the sector? In the first quarter of 1999, for example, Bell Atlantic's revenues grew at 4.1%, compared to a 7% average for the sector.
Seidenberg:
We reported second quarter revenue growth at 4.6%, a half point increase from the first quarter. Underlying business volumes compare very well with those of our peers. And if you look at our proportionate revenue growth in the second quarter, it is 6.3%.
We do have slightly lower revenue growth than our peers, which is attributable mostly to population movement, and a little bit to the fact that we have more competition. Our answers to the situation are to grow vertically faster and diversify geographically through our merger with GTE.
When you compare our core revenue growth to that of SBC and BellSouth, almost all the differences in core revenue growth are attributable to what we call the "sunbelt shift" here in the US, a population shift from the east to the south and the south-west - which forces Bell Atlantic to really innovate. That is one reason why we have been so focused on growing our wireless business, entering long distance and deploying DSL very quickly, as we will have to be much more aggressive in innovation in vertical products and services to increase our revenue growth. Now, with our merger with GTE, we will become much more diversified geographically and enter the sunbelt, where GTE has a lot of its assets, such as in Florida, Texas and California.
Some of the difference is also attributable to the fact that we face more competition. As we have been in the competitive game a lot longer than others, we have already absorbed the effects. As others start to face such competition, they will go through the growing pains that we have experienced.
It has been said that earnings are adversely affected by dilutive acquisitions. Would you plan to issue tracking stock, as Sprint did with Sprint PCS?
Seidenberg:
As long as we are going through mergers and regulatory approvals to get into long distance, it is not clear what the right answer is for the long-term financial structure of the company. We just don't know whether trackers would represent a value creation opportunity for us.
If we look at what other trackers have done, I think that they have almost always led to the dissolution of the company: while that is not the intention, such a risk exists. Furthermore, as we go downstream, we will be using technologies that have an integrating effect - IP telephony using data networks will bring wireless and the core wireline businesses together over time. So while we are open to anything that would generate sufficient value, we have some issues to get through, before we consider what the right long-term financial structure of the company might be.
What are your hopes and ambitions for the company over the next two-three years? What trends do you see emerging in the world of telecoms?
Seidenberg:
My ambition is to complete the transformation of our company to digital formats, and to achieve the national and global scale and scope that our customers want.
You want to pick up your phone, PC or wireless instrument and be in digital play right away, with the opportunities that digital brings to you - the capacity, clarity of signal, bundling of services and the lower prices and reach that you gain. So we have a massive project to renovate our entire company, by introducing wireless technologies and converting to digital, data-centric formats on the wireline side as fast as we can. This will allow us to participate in the growth markets - global wireless, global data and mass market data with DSL.
Once we complete our merger with GTE and enter long distance, we will have the makings of the next top-tier company to enter the global scene - we will start out as a $60 billion business, and we certainly will have the scale, scope and reach to participate in a big way. As well as a new name and a little bit of a juice-up in our image, we will be able to participate in a big way in bringing these new technologies to all the major markets in the world.






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