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The Bells and the companies that use their networks to provide local phone services are locked in an increasingly bitter debate over the future of telecom regulations. The outcome could dramatically shift the balance of power in telecommunications. By the end of the year, the Federal Communications Commission should finish its review of policies that require the Bells to offer “unbundled network elements” to competitive local exchange carriers. If the FCC preserves the requirements, the Bells would face the prospect of a prolonged erosion in their core business and could have to consider a long-distance acquisition to bolster their revenues, making AT&T Corp., WorldCom Inc. and Sprint Corp. targets. If the commission ends the requirements, the long-distance providers and smaller companies that offer local service on unbundled network element platforms (UNE-Ps) could face devastating losses and could be picked up in bargain hunting by the the former Bells — SBC Communications, BellSouth Corp., Verizon Communications and, if it ever rights itself, Qwest Communications International Inc. Recent comments by FCC Chairman Michael Powell have led many industry observers to believe that the commission will scale back at least some of the requirements, though analysts said a complete rollback is unlikely. “That would slow down some of the growth of AT&T, Sprint and WorldCom,” said Rick Black, senior telecom analyst at Blaylock & Partners LP, who thinks that AT&T will be a survivor but Sprint is a tougher call. “That could aid consolidation in long distance and hinder the CLECs that are trying to enter new markets.” There is uncertainty over how much the FCC would be willing to change the regulations and how quickly. “I think UNE-P will be phased out for the business market, but I don’t think it will be for consumer markets,” said Vik Grover of Kaufman Brothers. Even if only residential requirements were kept, the Bells could face tremendous pressure. “[They] would either have to compete with each other or consolidate, otherwise they’re going to get killed,” said Phil Jacobson of Network Conceptions. “It could result in AT&T, WorldCom and Sprint being taken over by the Bells.” Several analysts have viewed SBC Communications as a potential buyer of AT&T. But such a deal could be complicated if Cingular Wireless, a joint venture between SBC and BellSouth, were to buy the U.S. operations of Deutsche Telekom AG’s T-Mobile wireless division. “I wouldn’t expect to see wireline consolidation until a year, year and a half,” said John Hodulik of UBS Warburg, who thinks the T-Mobile deal will happen within six months and would dissuade SBC from pursuing a major long-distance acquisition in the near term. “I think that a Bell could buy AT&T,” said Legg Mason’s Blair Levin, a former FCC chief of staff who co-wrote former FCC chief Reed Hundt’s “unthinkable” speech that shot down the possibility of an SBC/AT&T merger in 1997, when the companies were reportedly in talks. “There’s a window, but it’s starting to close.” AT&T’s advances in local service have made the company a more attractive target. It is now the second-largest local service provider in many of its markets, and it has become stronger in the business market because of WorldCom’s troubles. But the company’s gains could raise anti-trust problems for a potential deal with one of the Bells. “The completion of the 271 [long distance application] process is far more significant in my view,” said Levin, referring to the Bells’ requests for permission to offer long-distance service in the states where they provide local services. Levin explained that the Bells would not be likely to pursue a long-distance deal until they were sure they would receive approvals for their entire region. But the overlap in markets and services would add a level of complexity regarding governmental approval, in the period between the announcement and approval of a prospective deal. “It would be awkward if, during the review process, they were ramping up competition and at the same time trying to convince regulators that it would not diminish competition for them to merge,” Levin said. There are also other possible combinations. Jacobson said that a competitive local exchange carrier such as Allegiance Telecom Inc., which has local facilities in 36 cities across the U.S., could make an attractive target for AT&T. “One thing that I would love to see would be a consolidation of the best competitors who are left into a mega-CLEC that could then become another player in the industry,” Jacobson added. “Something like Time Warner Telecom, which has incredible fiber assets, with Allegiance, which has a great sales team and operations focused on the enterprise market — which Time Warner has never had. Maybe even throw in some of the long-haul fiber from someone like Level 3 Communications,” he said. “I’m not sure it can happen, because it would require a much more open view toward capital, like we had before this nuclear freeze.” “That which the FCC taketh away from the CLECs, the states may well give back,” Levin said. “If the FCC decides on a national basis to eliminate switching as an unbundled element, there are a number of states who have said they would, in their state, put it back in.” �Copyright 2002, The Deal, LLC. All rights reserved.

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