GAO report could boost resistance to AT&T/BellSouth deal

WASHINGTON-Top mobile-phone carriers may have gained leverage to have stringent conditions imposed on AT&T Inc.’s $79 billion acquisition of BellSouth Corp., with the Government Accounting Office concluding competition in the special access market is generally lacking in major U.S. cities.
Jessica Zufolo, a telecom analyst at Medley Global Advisors, said the GAO report casts a shadow on the AT&T-BellSouth negotiations at the Federal Communications Commission.
“The release of this report comes at an inconvenient time for AT&T, which continues to face pressure from competitors and Democratic [Capitol] Hill and FCC officials to adopt conditions as part of the merger. In particular, pressure is likely to increase on AT&T to freeze special access rates for longer than the 30 months currently on offer and possibly require the FCC to re-examine its rules permitting Bells to increase special access rates,” said Zufolo. “As we have said in previous reports, the final set of conditions agreed upon between the parties will probably not manifest in any material harm to AT&T.”
No. 1 wireless carrier Cingular Wireless L.L.C., currently co-owned by AT&T (60 percent) and BellSouth (40 percent), would be held in total by AT&T if the deal manages to gain final regulatory consent by the FCC.
Sprint Nextel Corp. and T-Mobile USA Inc., the No. 3 and No. 4 U.S. wireless carriers, have urged the FCC to subject the merger to strict conditions on special access lines. In context for the wireless industry, the lines are dedicated links used to carry traffic from a wireless base station to a mobile-switching center and/or onto the public switched telephone network.
Sprint Nextel declined to comment on the GAO report. T-Mobile USA was unable to immediately comment.
Special access requirements were rolled into FCC and Justice Department approvals of last year’s SBC Communications Inc.’s acquisition of AT&T Corp. and Verizon Communications Inc.’s acquisition of MCI Inc. The Justice Department’s handling of the deals is currently under review by a federal judge.
AT&T has proposed special access conditions similar to those in the AT&T-SBC and Verizon-MCI deals, but telecom competitors and consumer groups have not been impressed.
AT&T does not view the GAO report as an indictment of excessive concentration in the special access market.
“The GAO report confirms that prices for special access services have been falling for the past five years, including where pricing restrictions have been lifted,” the company noted. “This conclusion stands in stark contrast to the claims of those who have been urging the commission to re-regulate special access, a step the GAO specifically refuses to endorse.”
Another flashpoint in the deal is BellSouth’s control of 2.3 GHz and 2.5 GHz wireless spectrum. Clearwire Corp., the wireless broadband firm founded by Craig McCaw, claims an AT&T-BellSouth hookup would have a strong incentive to warehouse and underutilize its spectrum in Southeast region markets.
AT&T said the newly merged company would launch 10 trials of wireless broadband Internet service in the 2.3 GHz or the 2.5 GHz bands by the end of 2007, with at least five of the trial conducted in BellSouth’s territory.
The Republican-led FCC has twice postponed votes on the deal since early October, when Democrats and consumer advocates raised an uproar over the Justice Department’s unconditional approval of the transaction and 11th-hour negotiations between FCC Chairman Kevin Martin’s staff and AT&T officials. The FCC recently moved back its open meeting on the subject to Dec. 20.
Martin has been hampered in efforts to get the AT&T-BellSouth deal approved to date because he lacks the vote of fellow Republican Robert McDowell. McDowell disqualified himself from the AT&T-BellSouth review in August because of a possible conflict of interest related to his past work for a trade group representing competitors to Bell telephone companies.