Whitacre: creating a strong north American player

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SBC Communications, the second largest local phone company in the US, has just received permission from the FCC to complete its merger with fellow RBOC Ameritech. It hopes to gain long-distance approval next year. SBC chairman and CEO Edward Whitacre talks to Mark Holmes about the operator's ambitions

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 aggressive."

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 players."

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 customers?

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 statements?

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 competitors?

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 should be.

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 international investments?

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?

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 services.

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?

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 been?

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 Communications?

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 need it.

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 customers?

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?

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?

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 Internet.

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?

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 schedule.

What are your views on DSL technology?

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 connection.

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 business customers.

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 DSL.

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?

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 their networks.

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 one?

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?

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?

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?

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 market?

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 apart.

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 growth?

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 impact?

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?

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 distance.

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?

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?

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 them.