Phillip Dampier

Now that the initial shock of an aggressive — some say “audacious” — move by the Justice Department to block a merger AT&T confidently called “a done deal” is past, analysts of all kinds are attempting to discern the inside reasons for the merger’s rejection, where the deal can go from here, and what signals this will send the rest of America’s telecom industry.

In short — was this one merger proposal too far over the line?

The Justice Department reviewed reams of data, document-dumped by AT&T, on the company’s rationale for wanting to absorb T-Mobile and its implications for employees, consumers, and the dwindling number of wireless competitors.

They quickly discovered they did not like what they were seeing:  an all-new AT&T with a combined 132 million wireless customers, completely dwarfing all of their competitors and signaling a full-scale retreat from the company’s historic landline network.  An unregulated, increasingly concentrated wireless marketplace, represents the Wild West of fat profits, ripe for the picking by those large enough to control the market.  Increasingly, that means two former Baby Bells — AT&T and Verizon.

The Wall Street Journal charted more than two decades of mergers and acquisitions, which reduced nearly two dozen players down to five supersized telecom companies.

The Politics

Decisions at Justice are hardly made in a vacuum.  Politics always plays a role, and it’s a safe bet Obama Administration officials well-above rank-and-file lawyers in the Antitrust Division sent clear signals to the Department about how it wanted the review handled.  After all, this same team of lawyers had almost no trouble approving a mega-merger between NBC-Universal and Comcast Corporation, not finding anything ‘antitrust’ about that deal.  But Justice officials hurried out their own lawsuit with a wide-ranging, harsh condemnation of the deal at yesterday’s press conference.  As most Americans already know, competition in the cable industry is hardly robust, but market concentrating mergers and acquisitions are approved regularly in that industry.  So why did the Justice Department have such a problem with AT&T?

America's Wireless Market: Beyond well-behind, third-place Sprint, no other carrier comes close to AT&T or Verizon Wireless.

Many analysts seem to blame the company’s “arrogance” in telling reporters the merger was a breeze to be approved, others point to spectrum issues, as well as complaints about AT&T’s poor service potentially ensnaring T-Mobile customers.  But above all, Justice lawyers believe that America’s wireless marketplace needs at least four national wireless carriers, particularly scrappy T-Mobile, which has a long history of being a disruptive player in the market, loathe to offer the kind of “identical twin”-pricing common at AT&T and Verizon Wireless.  Losing T-Mobile’s aggressive performance in the market would mean declaring open season for price increases and abusive business practices.  After all, where would wireless consumers go?

That “four national carrier”-test could be a big problem for T-Mobile, as it could mean Justice lawyers would also reject an presumed alternative — combining Sprint and T-Mobile,  rumored before AT&T moved in and stole the show.  A new entrant willing to buy-out Deutsche Telekom’s U.S. wireless interests may be the only palatable solution acceptable to Justice lawyers because it would keep T-Mobile intact and running, independent of other wireless carriers.

Justice also completely discounted the relevance of regional carriers like MetroPCS, Cricket, U.S. Cellular, and other smaller providers.  The reason is simple: roaming.  All of these smaller providers are completely dependent on the four large national carriers to deliver essential roaming services for their customers who travel outside of the regions where these smaller companies deliver service themselves.  All national carriers would have to do to control an overly-competitive “problem” carrier is withdraw roaming agreements or raise prices for them.

Sprint, among others, is obviously the most relieved by yesterday’s events.  Their long term viability as a national carrier dwarfed by AT&T and Verizon Wireless would have raised numerous questions about whether that company could survive in the long term.  Sprint would have also felt pressure to beef up its own operations, likely through acquisitions of several regional carriers, particularly MetroPCS and Cricket, which share its CDMA network standard.

Wall Street is livid, of course.

The great gnashing of teeth has begun on Wall Street, evident as stock analysts begin raising questions about President Obama’s “anti-business” policies.  While executives at both AT&T and T-Mobile are at risk of losing substantial bonuses for pulling the deal off (and providing special retention packages to keep key talent from leaving), there is also a lot of money to be lost in New York and Washington should the deal collapse.  Take the “little people” that will be out tens of millions in deal fees and proceeds from extending credit, implementing the merger itself, and structuring the legal mechanics.  They include:

Arnold & Porter: The now infamous law firm that accidentally posted an un-redacted document on the Federal Communications Commission website that exposed, in AT&T’s own words, what consumer groups already strongly suspected: AT&T preferred the long term benefits of knocking pesky T-Mobile out of the marketplace, even though the $39 billion dollar price tag dwarfed the $4 billion estimated cost of building AT&T’s own 4G LTE network.  That’s the 4G network executives deemed “too expensive” earlier this year.  With a deal collapse, the firm can say goodbye to lucrative legal fees and perhaps more importantly, their reputation of properly managing their clients’ business affairs.

Greenhill & Co.: Greenhill is one of several all-star, platinum-priced advisory firms hired by companies acquiring other companies to structure and implement their mergers.  With Greenhill hoping for a substantial piece of at least $150 million set aside by AT&T to cover these specific costs, a merger-interrupted could cost key people some nice year-end bonuses.

JPMorgan (Chase): The House of J.P. Morgan handed over a check for AT&T worth up to $20 billion to help finance the deal.  JPMorgan doesn’t do that for free.  In addition to any interest proceeds, JPMorgan also charges a range of underwriting and administrative fees that could easily total $85 million dollars.  AT&T might have to send the check back.

Cable Business News & Business Media: One of the most ironic developments watching the Justice Dept. decision unfold was the unintentional amount of AT&T advertising promoting the merger that preceded video reports and appeared adjacent to AT&T-related stories.  Those ads may soon end, costing cable news and the business press substantial ad revenue.

Cable business news networks offered up scathing analyses. Among anchors and analysts upset with the news of the merger’s potential derailment, it didn’t take long for “couched questions” to begin, pondering whether President Obama was against big companies, jobs, or the concept of the private sector in general.  Completely missing: coverage of the benefits for consumers who potentially don’t have to endure a further concentration in the wireless marketplace.

Craig Moffett from Sanford Bernstein, who usually celebrates all-things-cable, today told the Wall Street Journal the actions at Justice will harm business at every U.S. wireless carrier.

“Put simply, the industry will be structurally less attractive than it would otherwise have been,” he said. “Pricing is likely to be less stable, and profound technological risks, including free texting and bandwidth arbitrage, that would be manageable in the context of a significantly consolidated industry now become much more threatening.”

Judge Ellen

In other words, a hegemony of AT&T and Verizon Wireless could play rough with third party developers trying to undercut text message pricing and deliver data plan workarounds. With more competitors, consumers could simply abandon abusive providers.  Without those competitors, consumers have to pay AT&T’s asking price or go without service.

The Law

AT&T may be hoping it scored one potential success in its anticipated legal challenge against the Justice Department’s antitrust case.

The judge assigned to hear arguments is Ellen Segal Huvelle, who has a track record of slapping down government overreach.  Huvelle previously rejected Justice Department objections to the merger of SunGard and Comdisco — two disaster-recovery businesses.  The government argued the merger would leave just two major players in that business.  Judge Huvelle dismissed that, claiming the government too-narrowly defined what a disaster-recovery business entailed.  If she finds AT&T’s arguments of robust competition from regional carriers, landlines, and Voice Over IP credible, Justice lawyers may have a problem.  So could consumers.

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PBS Newshour explores where the AT&T/T-Mobile merger goes next, now that the Justice Dept. sued to stop it on antitrust grounds.  (7 minutes)

On September 13, most PBS stations will premiere a new documentary, “Bill McGowan, Long Distance Warrior” exploring the many trials and tribulations of MCI Corporation, the long distance and e-mail provider that was instrumental in breaking up Ma Bell’s monopoly in telephone service.

[flv width=”512″ height=”308″]http://www.phillipdampier.com/video/Long Distance Warrior.flv[/flv]

A preview of PBS’ Long Distance Warrior, which premieres on most PBS stations Sept. 13  (3 minutes)

For those under 30, “MCI” may not mean much.  The company that helped pioneer competitive long distance calling was absorbed into the Worldcom empire in 1997, where it continued to provide service until a major corporate accounting scandal brought Worldcom down in 2002.  Most of what was left was eventually sold to Verizon Communications in 2005.

Remarkably, Microwave Communications, Inc. (MCI) was founded all the way back in 1963, but not as a provider of telephone services.  That MCI sought to build a network of microwave relay stations between Chicago and St. Louis to provide uninterrupted two-way radio service for some of the nation’s largest trucking and shipping companies.

The Bell System

By the late 1960s, William G. McGowan, an investor and venture capitalist from New York won a seat on MCI’s board of directors and part ownership of a newly-envisioned version of MCI — one that would provide businesses with a range of telecommunications products, including long distance telephone connections.  With many American corporations maintaining branch and regional offices, connecting them together was a potentially very lucrative business, especially if MCI could deliver the service at prices cheaper than what the monopoly Bell System was charging.

With their microwave relay network, now expanding across the country, MCI could distribute long distance phone calls cheaply and efficiently, if they could find a way to connect that network to Bell’s local phone system.  After all, it does little good to offer long distance service if you cannot connect calls to the businesses’ existing telephone equipment.

That’s where AT&T and its Bell Operating Companies objected.  For them, only calls originating on and delivered over their own network should be allowed.  MCI, as an interloper, was seeking to use the network AT&T built and paid for.  It’s an argument that has echoed more than 30 years later, when AT&T’s then-CEO Ed Whitacre objected to outside Internet content providers “using AT&T’s pipes for free.”

[flv]http://www.phillipdampier.com/video/MCI First 20 Years.mp4[/flv]

On the occasion of MCI’s 20th anniversary, the company produced this retrospective exploring the difficult times competing with AT&T and the Bell System.  (9 minutes)

MCI's best argument: AT&T's long distance bills

McGowan confronted arguments from AT&T executives who warned that competitive long distance would destroy the business model of America’s Bell System, which provided affordable local phone service to all 50 states, in part subsidized by long distance telephone rates, mostly paid by its commercial customers.  Tamper with that, they warned, and local phone bills would be forced to soar to make up the difference.

MCI called that argument a scare tactic, and suggested instead that AT&T’s monopoly had grown inefficient, bloated, expensive, and resistant to innovation and change.  MCI could deliver a substantially less expensive service and would force AT&T to increase its own efficiency to compete.  AT&T wasn’t interested in that argument and sued, repeatedly, to keep MCI out of its business.

By 1984, federal courts declared AT&T a monopoly worthy of a break-up, and opened the door to MCI’s long distance network.  By that time, MCI was already thinking about evolving itself beyond a business long distance provider, whose network was largely idle after business hours.  Because most Americans were accustomed to making long distance calls at night when rates were substantially lower, MCI developed new residential long distance service plans that encouraged customers to use that idle network at night and on weekends.

[flv width=”640″ height=”447″]http://www.phillipdampier.com/video/crying_mother.f4v[/flv]

One of MCI’s most memorable ads features a sobbing mother who reached out and touched her son over long distance a little too much.  (1 minute)

Thus began more than a decade of heavy advertising and competition for the long distance telephone market.  With equal access rules in place, consumers could choose their own long distance phone company and shop for the one with the lowest rates.  Competitors like Sprint, WilTel, LDDS, RCI, LCI, and yes, even AT&T all pitched their own calling plans.

MCI also pioneered MCI Mail, one of the first commercial electronic mail systems.  The original concept had businesses typing letters on a computer terminal, printed on standard paper at an MCI office closest to the destination, and then mailed in an envelope through the U.S. Post Office.  This poor-man’s version of a telex or telegram worked for businesses that wanted overnight delivery, but not at the prices charged by shippers like Federal Express.  In larger cities, MCI Mail could offer businesses delivery of their electronic communications within four hours, something closer to a traditional telegram of days gone-by.

MCI Mail’s hard copy deliveries wouldn’t last long, of course.  As the 1980s progressed, the fax machine and the more familiar all-electronic e-mail we think of today became firmly established.  As MCI Mail became less relevant, the company innovated into offering low priced telex services, mass-faxing, and data backhaul services to provide connectivity for online networks.

[flv width=”504″ height=”400″]http://www.phillipdampier.com/video/WIBW MCI Mail 1984.flv[/flv]

WIBW explores a new concept in communications — something called ‘electronic mail,’ a service that bewildered consumers in the early 1980s.  This report from 1984.  (2 minutes)

Bill McGowan: Would not approve of AT&T's plans to restore the glory days of the past.

AT&T, in contrast, was still getting over the loss of its local Bell Operating Companies — the regional phone companies most Americans did business with, and the loss of revenue earned from renting telephone equipment.  For years, AT&T long distance was branded as a quality leader, not a price leader.  It maintained its enormous market share partly through consumer indifference — customers who did not initially choose a new long distance carrier remained with AT&T, the default choice.

It took only about a decade after the Bell break-up for telecom industry lobbyists to begin advocating for enough deregulation to allow many of those former Baby Bells to re-combine through mergers and acquisitions.  The result is today’s AT&T, formed from its long distance unit, BellSouth, Illinois Bell, Indiana Bell, Michigan Bell, Nevada Bell, Ohio Bell, Pacific Bell, Southwestern Bell, Wisconsin Bell, and Southern New England Telephone.  Its largest competitor is Verizon Communications, which itself resulted from a combination of Bell Atlantic, NYNEX, GTE, and what was left of MCI after Worldcom was through with it.

McGowan’s fight was a personally costly one.  A workaholic, McGowan routinely put in 15 hour work days and drank up to 20 cups of coffee daily.  His heart finally had enough and McGowan succumbed to a heart attack in 1992 at age 64.  But he leaves a legacy and two decades of fighting to break up AT&T’s monopoly, which he always believed was bad for consumers and business (unless you were AT&T, of course).  That’s an important message as AT&T strengthens its resolve to acquire one of its significant competitors in the profitable wireless market — T-Mobile.  McGowan would have never approved.

[flv]http://www.phillipdampier.com/video/KCSM San Mateo Electronic Mail 6-18-87.mp4[/flv]

“The Computer Chronicles,” a production of KCSM-TV, spent a half hour in June 1987 showing off electronic e-mail service from MCI and how consumers and businesses using something called a “modem” could connect their home computers with online databases and services to exchange information and communications back and forth.  And for those business travelers on the road, away from their office computers, Speech Plus offered a product that could still keep you “connected,” by reading your e-mail to you over the phone.  In 1987, outside of commercial pay networks like CompuServe, Delphi, PeopleLink and QuantumLink, most Americans with modems used them to connect to typically-free hobbyist-run computer bulletin board systems.  Widespread access to “the Internet” would take another 5-6 years.  (29 minutes)

Hurricane Irene did its worst damage in inland areas of New England and Upstate New York

While hardly the “storm of the century,” damages from Hurricane Irene’s whirlwind tour up the east coast cannot yet be estimated because flood waters in the northeast are still rising this afternoon.

But while millions remain without electricity, some for up to several weeks, telecommunications infrastructure has fared better than expected in a number of areas hardest hit by the Category 1 hurricane.

A review of media reports finds the most substantial damage to cable TV and landline telephone service, mostly due to downed trees and flooding which brought down utility poles in a number of states.  The Federal Communications Commission also reported 1,400 cell sites along the coast were down, and several hundred were running on backup power.

North Carolina & Virginia

The most substantial wind-related damage impacted the states of North Carolina and Virginia where hundreds of thousands are still without electricity, cable, and landline telephone service.  Time Warner Cable, which dominates North Carolina, had 160,000 customers without service Saturday evening, primarily due to power outages and line damage.  As of this morning, 38,000 were still without service with the most damage in Wilmington, Newport, Morehead City, Jacksonville, Havelock, Elizabeth City, Murfreesboro and Ahoskie.  Outage information is available from 1-866-4TWCNOW (1-866-489-2669) for residential customers and 1-877-892-2220 for business customers.

Landline service outages are impacting more than 100,000 customers, and the wind damage has made the outages most severe in these two states.  CenturyLink, AT&T, and Verizon all report substantial damages to their respective networks in several areas.

At least 500 cell towers in North Carolina and Virginia are now operating on battery backup power, which guarantees cell phone outages will only grow worse as the hours progress.  Once battery power is exhausted, cell phone carriers either have to go without service or provision generators to deliver emergency power until normal electrical service can be restored, which is expected to take several days.  Physical damage to cell sites was reported to be minimal, however.  The biggest impact is loss of electricity.

[flv width=”670″ height=”380″]http://www.phillipdampier.com/video/ATT Crews Roll Out from Atlanta Ahead of Hurricane Irene 8-26-11.flv[/flv]

AT&T released this video to the news media showing the company’s preparations for Hurricane Irene, including putting trucks containing temporary cell sites on the road from Atlanta heading into North Carolina to restore wireless service knocked out by the storm.  (3 minutes)

Downed poles in neighborhoods are responsible for most of the outages impacting cable and phone companies. (Courtesy: WNYC)

Maryland, Washington, DC, Delaware, Southern New Jersey

A mix of wind and water damage has left sections of this region without electrical service, but damages are reportedly less severe than in North Carolina and Virginia.  The biggest impact is loss of electrical service which has left cell phone towers on battery backup and cable systems offline.  The more urban areas have less infrastructure damage due to underground wiring, but flood waters have created outages on their own.  In southern New Jersey, water damage is still occurring because of slowly rising rivers continuing to flood their banks.

Pennsylania, Northern New Jersey, New York City & Long Island

Substantial damage from excessive rain and downed trees, especially on Long Island, will leave some customers on lengthy waiting lists for service restoration.  Verizon on Long Island is telling some customers it will be at least two weeks before service calls can be completed to restore phone or FiOS service. Substantial neighborhood outages are impacting Cablevision customers on Long Island as well, mostly from downed trees.  At least 700 trees fell in Oyster Bay alone.  In Pennsylvania, the worst damage was actually further inland.  Suburbs of Philadelphia were particularly hard hit.  Electric service repair has been given top priority.  Cable service restoration will probably take longer, especially where utility poles have been damaged.

Upstate New York & New England

The worst damage of all is expected to be in upstate New York and New England, particularly in western Massachusetts and Vermont, unequipped to deal with the floodwaters which have set records in several areas.  A resident of Prattsville, New York escaped with his life and managed to finally reach emergency responders to report the entire community had been washed away in unprecedented flooding.  A great deal of utility infrastructure has gone with it, and the damage for New England’s FairPoint Communications, particularly in Vermont, is still being assessed.  Some communities in the region have been told it may take up to a month restore electrical service, longer for telephone and cable service.  Because large sections of the region are rural, there are fewer cell towers to cope with power outages, but the impact is much more readily apparent.  In some areas, there is only one provider delivering any significant service, and when battery backups fail, no cell service will function.

Verizon and Time Warner Cable all report service problems in the region.

Communities or infrastructure positioned near rivers are most at risk, and flood waters are still rising in many locations.  The damage, according to emergency officials, is likely to become worse before it gets better.

Although winds only achieved tropical storm-force in the region, they came in unusual wind patterns.  The National Weather Service issued high wind warnings as far west as Rochester in western New York in part because trees are unaccustomed to strong northerly winds and were much more likely to be damaged or uprooted from them.  Nearly one million New Yorkers, mostly east of Syracuse, remain without electricity this afternoon.  Some will wait 1-2 weeks before service can be restored in the most difficult-to-reach areas.

Service Credits Are Yours, But Only If You Ask

Telecommunications providers are notorious for providing service credits only when customers ask for them.  If your service was interrupted by the storm, make a note of when the outage occurred and remember to contact your provider for a service credit after service is restored.  In virtually all cases, providers will not automatically reimburse you for lost service and you will lose the chance to request it 30 days after service is back up and running.

If you’ve been affected by a serious storm, consider tree removal Raleigh NC to clean up the debris.

[flv width=”640″ height=”372″]http://www.phillipdampier.com/video/Verizon Wireless Emergency Plan.flv[/flv]

Verizon Wireless encourages its customers to create a natural disaster response plan that includes the use of cell phones to stay in touch with loved ones and employers.  (4 minutes)

'Hurricane Verizon' blows more money out of customers' pockets.

Verizon Communications customers who use the ISP’s personal storage space for running small personal websites have run into a problem: Verizon has banned customers using FTP to manage and update those pages.

Customers are being told the file transfer protocol has been suspended for “security reasons,” but those sobering concerns magically disappear if you agree to pay Verizon an additional $6-10 a month for a “pro hosting plan,” which restores FTP access.

Even more irritating, Verizon customers already pay the company $20 a year for 100MB of space that used to be manageable by FTP, but no more.

“Verizon claims they sent an e-mail notifying me they were shutting off FTP access on Aug. 21, but I never received it,” says Jim Elger, a Verizon DSL customer in Watertown, N.Y.  “I discovered this over the weekend when I couldn’t connect to their FTP server any longer.”

Elger thought Hurricane Irene might have been responsible, but now blames ‘Hurricane Verizon’ for trying to suck more money from his wallet.

“It’s bad enough we pay $20 for what many ISP’s include for free, but now that is rendered money blown out the door because the company wants you to pay for an ‘upgraded’ plan just to update your website,” Elger says.  “There are people in Verizon’s forums who can’t even capture what is already online to move their content somewhere else.”

Elger called Verizon and was also told the change was implemented for security reasons, an explanation he questions.

“How does the security problem go away when you hand over another six dollars a month?”

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/WABC New York Woman Dies After Phone Service Not Restored 8-20-11.mp4[/flv]

While AT&T and Verizon invest billions in their increasingly profitable wireless services, their landline networks have languished across the country.  While that can inconvenience customers who may wait days or longer for service to be restored, one New York family is blaming Verizon for the death of their mother, after the company left their all-important phone line unrepaired for days, even after being notified of its critical need for medical reasons.  Now the family is asking, what does it take to get Verizon to repair basic phone service these days?  WABC has this exclusive report of one family’s anguish.  (4 minutes)