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Phone Companies: A Frenzy of Splicing
Carriers large and small,
both newbies and old established players, are still up for grabs
Who's left? In the $800
billion telecom industry, reeling from the turmoil of globalization and new technologies
such as wireless services and the Internet, one topic gets more boardroom buzz than all
the others: deal mania. In the past three years, the frenzy of mergers and acquisitions
has been greater than ever, deep-sixing a host of marquee names: Nynex (BEL)
and Pacific Telesis are gone. Ameritech (AIT)
, US West, and GTE are on their way to corporate extinction. AT&T (T)
has veered into the cable industry to gobble up Tele-Communications Inc. and MediaOne
Group for a combined $110 billion.
So is the consolidation craze winding down? Perish the thought. Even for giants with $50
billion in revenues, threats are everywhere. If it's not Net technologies that could make
your assets obsolete, it's a huge new competitor showing up in your backyard, thanks to
deregulation. No company feels big enough--or very secure. Deutsche Telekom (DK)
is the latest to be caught off guard. The company thought of itself as the dominant
European player. Then it got its head handed to it when upstart Olivetti won the takeover
battle for Telecom Italia. ''I don't think anybody thinks the consolidation in the telecom
industry is over,'' says Paul Zodis, head of the telecom practice at Lehman Brothers Inc.,
one of the firms that represented Olivetti.
Now, companies large and small, Old World and upstart, are up for grabs. For starters,
there are sure to be more cross-border deals--on the model of British wireless power
Vodafone Group PLC's purchase of San Francisco's AirTouch Communications Inc. Many experts
think AT&T's joint venture with British Telecommunications PLC (BTY)
is a precursor to a merger between the two heavyweights. And investment bankers have all
but drawn bull's-eyes on Sprint Corp. and BellSouth Corp. (BLS)
, the last two big independent U.S. telecom players.
The upstarts may be even juicier. Consider Alltel Corp. (AT)
and CenturyTel Inc. (CTL)
The two rival independent local phone operators have been quietly building their presence
in smaller, mostly rural markets. Alltel, based in Little Rock, has grown to more than 2
million wireline customers and 4 million wireless ones in 23 states. CenturyTel,
headquartered in Monroe, La., has grown to 2 million customers--thanks, in large part, to
its 15 acquisitions since 1993. ''Alltel and CenturyTel are rolling up the other
independents and making themselves takeover targets,'' says ING Barings analyst Frederick
W. Moran.
Not that they need to post ''For Sale'' signs anytime soon. Each has racked up
double-digit growth in both revenues and profits by focusing on smaller phone markets that
many bigger competitors have ignored. That has propelled them into the Info Tech
100--Alltel at No. 53 and CenturyTel at No. 55. Managers at both companies say they're
confident they can continue to thrive without a shotgun marriage. ''We've positioned our
company to be an acquirer, not an acquiree,'' says Glen F. Post III, CenturyTel's chief
executive. ''But we do have some attractive assets'' (page 142).
So does Intermedia Communications Inc. (ICIX)
The Tampa carrier has licenses to provide long-distance service across the country and to
supply local service in more than 30 states. More important, it has the fourth-largest
nationwide data network. It carries data traffic for US West, Ameritech, and Bell Atlantic
(BEL)
and also offers such services as Web hosting and high-speed Net access. ''We've tried to
anticipate where the market might go,'' says David C. Ruberg, Intermedia's CEO. Ruberg
says he's not looking to sell out, but analysts think a deal is likely. ''Intermedia is
the No. 1 choice to be acquired by a Bell company,'' says Bear, Stearns & Co. analyst
James H. Henry.
As the Bells begin to invade each other's turf, look for them to snatch up regional
players to establish beachheads. If SBC Communications Inc. were looking to push into Bell
Atlantic's territory, it might buy Hyperion Telecommunications Inc. in Coudersport, Pa.,
which sells phone services from New England to Florida. Similarly, if Bell Atlantic or
BellSouth wanted to muscle in on SBC, either would have two solid choices: GST
Telecommunications Inc., a $163 million carrier operating in 10 Western states and Hawaii,
or Electric Lightwave Inc., in Vancouver, Wash.
Once the Baby Bells are allowed into the long-distance business, they may try to acquire
one of the new hotshot players that have seen their stock prices boom as they've laid
networks to carry soaring Net traffic. For example, BellSouth bought a 10% stake in Qwest
Communications International Inc., which many expect will evolve into an acquisition once
the Atlanta Bell can sell long distance. Similarly, SBC this spring agreed to take as much
as a 10% stake in Williams Communications Group Inc. Although parent Williams Cos. says it
plans to maintain a majority stake in its communications unit, SBC could afford to pay a
nifty premium for the whole company.
The established long-distance players are not done shopping, either. They want to bypass
the Baby Bells to serve businesses concentrated in urban areas. So MCI WorldCom (WCOM)
, Sprint, and AT&T may look at what are called ''broadband wireless access providers''
such as WinStar Communications Inc. (WCII)
and Teligent Inc. (TGNT)
These companies use microwave antennae to link a customer's building to a nearby network
hub.
One match seemingly made in heaven recently fell apart, leaving both sides in need of a
dance partner. Earlier this year, MCI, which has no wireless operations, talked about
acquiring Nextel Communications Inc., the McLean (Va.) wireless provider with nationwide
operations. MCI walked away from the deal over the price. Still, MCI needs a way into the
wireless business. And Nextel is unlikely to fly solo. Even after a season of romance,
there are still plenty of belles at the telecom ball.
By David Rocks in Atlanta
Telecom Targets
These outfits may be juicy
prey for competitors bent on expansion
CENTURYTEL
Monroe, La.
1998 REVENUES: $1.6 billion
1998 PROFITS: $229 million
THE SKINNY: The local phone company boasts 2 million customers in the South,
Midwest, and West. It has profited by selling Caller ID and Net access.
ALLTEL
Little Rock
1998 REVENUES: $5.2 billion
1998 PROFITS: $525 million
THE SKINNY: Operating in 23 states, this independent local carrier is cashing in by
focusing on the less competitive rural markets. Key assets: 6 million customers, including
4 million in wireless.
INTERMEDIA
Tampa
1998 REVENUES: $713 million
1998 LOSSES: $487 million
THE SKINNY: Concentrating on corporate customers, the company has built a
long-distance network and local phone operations to compete with the Baby Bells.
WINSTAR
New York
1998 REVENUES: $244 million
1998 LOSSES: $445 million
THE SKINNY: Using wireless technology, the company offers local phone service and
high-speed data connections to small and midsize businesses. It would fit perfectly with a
long-distance company like AT&T or MCI WorldCom.
CenturyTel: Local Hero
It brings high-tech
services to rural customers
It was a humble beginning.
When Clarke M. Williams took over his parents' Louisiana telephone company in 1946, the
carrier had all of 75 lines and the switchboard was in Williams' bedroom. ''When my first
child was born, I began to realize I needed to get more revenue,'' says Williams, chairman
of what's now known as CenturyTel Inc.
What a little motivation will do. Over the years, Williams has used a flurry of
acquisitions--15 since 1993 alone--to amass 2 million customers, mostly in hamlets like
Baraboo, Wis., and Kalispell, Mont., that larger carriers have shunned. There's gold in
these small towns: CenturyTel's revenues grew an average 35% in each of the last three
years, with profits up an average 26%--earning the company the No. 55 spot on this year's
Info Tech 100. Analysts expect earnings to rise 15% this year and next, up from $198.2
million last year.
Without many rivals in the rural outposts, CenturyTel positions itself as the one-stop
source for everything from local service and Net access to high-margin services such as
call waiting. Because CenturyTel was never part of the Ma Bell monopoly like the Baby
Bells, it escapes much of the regulatory oversight brought to bear on the likes of SBC
Communications Inc. That means it offers services such as long-distance that the Bells
only dream of. ''CenturyTel ironically is going to look like telecom companies of the
future,'' says PaineWebber Inc. analyst Walter P. Piecyk. ''This is where some of the guys
in the major markets have been attempting to go.''
There are reasons, of course, the biggies ignore small towns: few free-spending corporate
customers and higher costs per customer to install gear. But federal phone subsidies
continue to support rural areas and carriers. Besides, CenturyTel has made a virtue of its
drawback, casting itself as a hometown company that rural customers can trust to bring
them the latest technology. ''We're more likely to bring state-of-the-art services to
rural areas more quickly,'' says Glen F. Post III, CenturyTel's chief executive.
While some analysts say CenturyTel could be a takeover target (page 140), Williams isn't
waiting for a suitor. Instead, he's focused on improving the company and maybe doing a
little shopping himself. ''Our goal is to do any acquisition within reason,'' he says. If
that doesn't happen, Williams says he needn't worry. He hasn't forgotten how to operate
switchboards like the one in his old bedroom.
By David Rocks
Portals Are Mortal After All
Suddenly, the gloss is
off their image, but they're fighting back
It seemed an offer that a
little-known E-merchant such as Mother Nature.com Inc. couldn't refuse. But in May, 1998,
the natural health-products store defied Web wisdom. It didn't pursue a one-year deal in
which it would pay $5 million to be promoted on powerhouse America Online Inc. (AOL)
Instead, MotherNature.com spent nearly all its precious marketing dollars on traditional
radio and print advertising. So far, the gutsy move has paid off: Traffic is up fivefold
since last fall, to a million visitors a month, and the number who bought something also
rose five times, to 1.25% of visitors. ''We declined to pursue the AOL deal because we
didn't see how we could ever make money,'' says Michael T. Barach, MotherNature.com's
chief executive.
Suddenly, neither do a lot of other online merchants. These days, more E-tailers are
casting a jaundiced eye on Internet portals such as Yahoo! (YHOO)
and Lycos (LYCOS)
. Deals with the Web's central jumping-off points are getting pricier by the month--even
as their growth rates are cooling. The percentage of Net traffic that the top nine portals
generate will plateau at 20% by 2003, from 15% in 1998, estimates Forrester Research Inc.
The result: Fewer than 5% of the 22 E-commerce executives polled in an April survey by
researcher Jupiter Communications are highly likely to renew their contracts with portals.
Says Jupiter analyst Marc Johnson: ''Commerce sites are increasingly looking at portals as
a necessary evil but not the silver bullet.''
This rethinking of the value of the Net's most eye-catching deals shakes up accepted Web
notions. Until now, portals have been the Internet's superstars, attracting millions of
people with a wide swath of information and free services such as E-mail and chat rooms.
As the number of people flocking to portals skyrocketed, the sites offered the tantalizing
promise that the Web could one day be a mass medium and a commercial success. They became
the distribution and marketing partners of choice, and E-merchants and Web-site operators
paid dearly for the connection. AOL, for example, jumped to No. 1 on this year's ranking,
up from No. 6 in 1998, while Yahoo! and Lycos edged up slightly, to 35 and 66
respectively.
COSTLY DEALS. Can they keep it up? As the deals become more costly, prospects for a
payoff are becoming less certain. Financial institutions, for instance, pay about $200 to
acquire each customer by traditional means; Forrester estimates they would pay $452 per
customer for a $12.5 million deal on AOL. Now it's unclear whether these portal
partnerships are bringing home the bacon in terms of building brands and gaining
customers. Already, the number of people who click on banner ads has dwindled to less than
0.5% from 2% last year, Forrester estimates. ''It's not necessarily that the portal deals
don't work,'' says Julie Wainwright, CEO of online pet supplies store Pets.com Inc.
''They're effective, but at what cost?''
That debate has sent E-merchants searching for other ways to get customers. They don't
have to go too far. As the Web widens, they have a lot more marketing choices--from direct
E-mail to targeted sites that appeal to specific audiences, such as home buyers, women, or
techies. ''It's very easy for the big companies to think they're optimizing the Web by
making a deal with the top five or 10 sites,'' says David L. Smith, president of ad firm
Mediasmith Inc., whose clients include CBS MarketWatch. Now, he counsels tougher portal
deals and advertising on targeted sites.
These specialized sites are becoming savvier in catering to E-merchants, too. Since
October, technology news service CNET Inc., for example, has offered services that give
partners data on which products are selling and why. Those efforts are paying off. At the
end of March, 85 merchants--93% of CNET's partners who originally signed up in
October--renewed their marketing agreements. ''The category-specific portals and even the
commerce portals do a much better job of delivering for what they charge than the other
portals,'' says Keith Halloran, vice-president of marketing at CNET partner NECX, an
electronics and computer merchant.
MORPHING. E-commerce sites, such as Amazon.com Inc. (AMZN)
, also are morphing into portal-like hubs by adding services that keep Netizens hanging
around. It dishes up a Shop the Web feature that helps people find products around the
Net, while scheduling programs alert them to upcoming birthdays or anniversaries in their
family. At some point, analysts say, Amazon may not need to pay portals. Instead, it could
charge other sites for access to its 10 million customers.
Many Net merchants are even finding that traditional media may reach potential customers
at less cost than portals. To appeal to the masses, more companies such as eToys (ETYS)
and Priceline.com (PCLN)
are turning to TV and radio advertising. An April Forrester survey of 47 online marketing
managers found they expect to spend an average of 52% of their promotional budgets on
traditional media in two years, up from 44%.
Still, the ever-innovative portals are far from being written off. Some, including Yahoo!
and AOL, get high praise from merchants for working closely with them to make sure the
deals get results. An AOL account team speaks daily with 1-800-Flowers.com, for instance.
''We go out of our way once somebody is a customer to make sure they succeed,'' says AOL
President Robert W. Pittman. Other E-merchants take a hands-on approach. Health products
site eNutrition keeps close tabs on its three-year, multimillion-dollar deal with Excite
Inc. The site did extensive testing to figure out where to best place ads within the
portal. The result: Ads in the diet and nutrition areas did better than those in areas
that dealt with illnesses. ''I tell anyone who thinks these deals are a panacea to get
real--you have to work really closely with your partner,'' says eNutrition CEO Randolph D.
Gale.
Leading services Yahoo! and AOL remain a tremendous draw for new companies piling onto the
Web, analysts say. While Jupiter estimates that online commerce driven from portals will
only grow slightly from 18% this year to 20% in 2002, that still translates into $8.7
billion of E-merchants' revenues, up from $2.4 billion now. In fact, AOL says it has a
$1.8 billion backlog in business and a 95% renewal rate with partners in its shopping
area. And portals are offering broader and deeper services than ever. Yahoo!'s purchase of
Web broadcasting service Broadcast.com and its new Yahoo! Health area, chock- full of
health-care information and services, give it the appeal of more targeted sites. ''It's
not like we're one single thing,'' says Jeff Mallett, Yahoo's president and chief
operating officer. ''We're made up of niches and small communities.''
All that means it's too early to sound the death knell for portals. But to continue
prospering, portals will have to craft new offers that E-merchants can't refuse.
By Heather Green in New York, with Linda Himelstein in San Mateo, Calif.
The Big Internet Winners
PROSPECTS
AMERICA The No. 1 online service is going strong, although
ONLINE it faces hurdles as it tries to deliver its
service via broadband and expands internationally.
INKTOMI By adding shopping services to its already
well-established search and network maintenance
software products. Inktomi continues to aggressively
expand its appeal. Now it just has to keep up the
momentum.
eBAY It's come a long way from its early days auctioning Pez
dispensers to the 2 million items now being auctioned
off daily. It's on a roll, but eBay must now contend
with Amazon.com, which entered the auction business.
AMERITRADE The online brokerage pioneer claims a hefty 428,000 accounts,
HOLDING but it will have stiff competition as rival E*Trade beefs up
through acquisitions and traditional firms such
as Merrill wake up to the Web.
YAHOO! The powerhouse portal has pulled out ahead of most of
the pack in the first round of Net competition. Now
traditional rivals like America Online are beefing
up through acquisitions and new rivals like NBC
and Disney appear to becoming more competitive.
SALES SALES PROFITS
(MILLIONS) (GROWTH) (MILLIONS)
AMERICA $4,191.0 59.7% $625.0
ONLINE
INKTOMI 39.9 325.3 24.2
eBAY 75.4 577.8 8.1
AMERITRADE 228.6 94.0 23.6
HOLDING
YAHOO! 258.7 186.5 38.8
DATA: STANDARD & POOR'S CORP., BUSINESS WEEK
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