AT&T to buy BellSouth. Why it matters.

April 6, 2006   

We East-Coasters have Verizon -- why should we care that AT&T and BellSouth are going to merge? Out west (Gabe) you have Qwest (I assume), so why the heck should you care about this merger? (Jenny, what do you have in Cleveland?)

Anyway, there are a number of reasons why this is very very important to keep an eye on.
1). It could change the democratic face of the internet.
2). We Westheimers have significant holding of AT&T

As for the future of the internet: Both and separately, AT&T and BellSouth have been promoting the idea that the internet in the future should work on a tiered system. Since its inception, the only thing between you and billions of webpages and terabytes of information on the internet was your internet connection. If you wanted to see video on the internet, you needed to upgrade from a dial-up modem (remember those??) to a DSL or cable line. That was it. It's open terrain once signed on -- it's called "net neutrality."

But in a tiered system, as apposed the the "net neutrality" system, the internet providers would make Google, Apple,  eBay, MTV and Reuters - all providers of "high bandwidth" services like audio and video - pay for the delivery of their information. In a tiered system, the first proposed tier would include blogs and simple web pages, and there supposedly would be no charge for distributing the content. But for all the high bandwidth things we like to consume, AT&T would start to charge Google and the rest.

Why is this bad for us as consumers? Well, it's a complicated issue. First, it wouldn't just affect the big guys with money to spend - if I wanted to start making short films, or if Marisa started a heavy metal band, and we wanted distribute that content over the internet, it would effect us too, potentially. And while that would be bad, it would be most felt as the big providers started cutting back on content, or not providing it at all (for instance, Google hosts a lot of video on its site for free, though it doesn't profit from doing so directly, so there would be a disincentive to continue).

In short making a two tiered internet could end the internet as we know it. To illustrate the seriousness of it in a single partnership, and the NRA have joined forces to fight against any "tiering" of the internet (them specifically regarding a connected email tiering issue).

So it that it for us Westheimers?? Nope. We actually own shares of AT&T. The story behind how we came upon shares of the company is interesting, but this blog entry is getting kinda long so I won't write about it now. However, it is important to note how this will affect our shares of the company.

Thanks to Uncle Pete, we have some insight regarding the merger:
He mentioned to me in a note this morning, "The question is whether this acquisition accelerates AT&T's escape from thier legacy of largely unionized work force and switched network. CEO Whitacre has steered the company pretty well I believe, [and] if nothing else he is definitely action oriented."
Indeed, legacy costs - or the financial burden of past employees and their pensions, as well as older, costly assets - weigh on a lot on the proposed merger. Why? It's complicated and I don't know the entire story here (maybe Pete can expand on this later), but both these companies have huge costs linked to things that don't really make them money (again, ex-employees and old technology are examples). The hope that Pete seems to express is that by combining their forces, they can reduce the overall costs, not just legacy costs (but also advertising, etc), therefore making the company more profit (good for us!).
When companies combine and create more efficiency it's called synergy, and analysts believe this merger could provide a lot of it (Merrill Lynch says more than $18 billion worth!). This could help our company make more profit at a better margin going forward.
Lastly, here are a few words from analysts today:
Merrill Lynch says: "The merger is logical, but the price appears full, and regulatory and execution questions could weigh on the stock."
CIBC said: "Broadly speaking, we believe       the proposed merger is generally positive for both companies and the       entire telecommunications industry."
And from Lehman:
AT&T remains our favorite name in the rural telecom space. Lehman also upgraded the entire sector of telecom stocks.
(Thanks Pete for providing this material.)

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