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For years, telecommunications industry watchers longed for consolidation to thin the crowded herd of U.S. mobile carriers that regularly undermined each other with competitive pricing. A combination of at least two of the six national wireless companies seemed inevitable but loomed over telecommunications as a stubborn fait un-accompli that was impeded by haggling over valuations and management ego. The fait submitted quickly to fate in early 2004, however. After attracting renewed merger interest, Redmond, Wash.-based AT&T Wireless Services Inc. set up auction rules in January. Several carriers kicked the tires, but Cingular Wireless LLC of Atlanta swiftly prevailed with a $47 billion offer by mid-February. It was the first marquee telecom deal since Qwest Communications International Inc. sold its Yellow Pages operation to Carlyle Group and Welsh, Carson, Anderson & Stowe for $7.05 billion in 2002-’03 — and that was really a publishing deal. The transaction establishes Cingular as the largest U.S. mobile carrier, and modestly eases the competitive pressures by reducing the number of national carriers to five from six. It carries an even larger significance for the company’s owners, SBC Communications Inc. and BellSouth Corp. The Bells in general have been transforming themselves from phone companies into wireless, broadband and video companies as they prepare for wide-ranging changes in the telecommunications industry. In a number of ways, the AT&T Wireless auction was the $47 billion fight that Cingular and its parents could not afford to lose. It will not be the last such battle. All of the incumbent carriers were scrambling in early 2004 to offset erosion in what has historically been their main business — wireline services. Mobile operators, competitive exchange carriers like AT&T Corp. and MCI Inc. and, to a growing extent, the Internet phone services of the cable companies and providers such as Vonage Holdings Corp. were eating away at land-line business. If someone were going to cannibalize their customers, the reasoning went, SBC and BellSouth had better do it themselves. The main competitor in the bidding for AT&T Wireless, Britain’s Vodafone Group plc, had a fat wallet and plenty of reason to acquire AT&T Wireless. Its motivations were ultimately more abstract, though, and it lacked Cingular’s urgency. The London carrier wanted to push its brand name overseas, assume a controlling stake in a U.S. carrier and invest in technology compatible with its overseas networks. Its position in Verizon Wireless is a minority stake in a company using an incompatible standard under the marque of its partner, Verizon Communications Inc. Even after losing the bidding for AT&T Wireless, Vodafone could (and did) walk away with a lucrative 45 percent investment in what may be the strongest U.S. wireless carrier, with the highest quality of service. Cingular’s owners, however, would have been left with a lagging player in a market crucial to its growth. SBC and BellSouth have touted the early successes of the AT&T Wireless acquisition, which closed ahead of schedule in October. They expect the beefed up company to turn a profit in 2005 — a year sooner than they originally projected-and some analysts predict Cingular will lose fewer customers during integration than previously anticipated. Meanwhile, the next battle that the Bells cannot lose is already taking shape. Increasingly, cable providers such as Cablevision Systems Corp. and Cox Communications Inc. are rolling out voice over Internet protocol services that will allow them to compete head on with BellSouth, Qwest, SBC and Verizon. No undercapitalized upstarts, the cable companies will bring vast resources to the fight. As the competition heats up, UBS Investment Research says the Bells could lose 39 percent of their residential lines over the next six years. To thwart cable’s so-called triple play of video, broadband and voice, UBS also expects the Bells to offer TV services in the next 12 to 18 months to prevent the competition from poaching their high-end customers. SBC underscored the value of the triple play back in the summer of 2003, when it considered a bid for satellite provider DirecTV, before Rupert Murdoch’s News Corp. acquired control. SBC, BellSouth, Verizon and Qwest Communications International Inc. eventually chose the less-costly path of reselling the services of either DirecTV or Echostar Communications Corp. to add video to their bundles. The government has since given the Bells incentives to invest in their own advanced networks by ruling that they won’t have to share the new fiber with competitors. The Bells have responded with promises to plow money into fiber assets that will allow them to carry broadband Internet, video and voice services into their customers’ homes and offices. SBC, for example, said in November that it will spend $4 billion over the next three years on its Internet protocol television, data and voice network. Verizon is expected to invest $6 billion over 5 years. Analysts suggest that the Bells could also spin off millions of copper lines in less competitive markets to concentrate on more lucrative areas, making Ma Bell’s makeover even more dramatic. Just as SBC, BellSouth and the other incumbent phone companies will have to fight part of the coming battle in an unfamiliar arena, namely video, the cable multi-system operators may also have to venture into new territory. Consumers will find the bundles a little light if they don’t have a wireless option, though that is not an insurmountable challenge. The cablers can become resellers of mobile phone services, and Sprint Corp. of Overland Park, Kan., has been more than willing to offer its wavelengths to companies such as Qwest and even Walt Disney Co.’s ESPN for a price. The cable companies will be operating in the shadows of wireless giants that are owned, not coincidentally, by the Bells. As that battle takes shape, and Cingular integrates AT&T Wireless, it should become clear whether its parents got their full $47 billion worth. Copyright �2004 TDD, LLC. All rights reserved.

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