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AT&T Gives a Little in Attempt to Close BellSouth Deal

By Keith Regan
Dec 29, 2006 9:57 AM PT

Hoping to clear the way for its US$85 billion takeover of BellSouth before the calendar turns to 2007, AT&T has offered additional concessions, including some limited network neutrality guarantees to win Federal Communications Commission (FCC) blessing for the delayed deal.

AT&T Gives a Little in Attempt to Close BellSouth Deal

AT&T had balked at requests by the Democratic members of the FCC to put guarantees in place that third-party Internet traffic would not be relegated to second-class status on the sprawling network that will be created when AT&T and the former Baby Bell combine assets.

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The Democratic votes became essential, however, after Robert McDowell, one of the three Republican members of the FCC, announced last week he would abstain from voting on the deal, citing his past work as a consultant to a telecom industry group that has opposed the merger on the grounds it would harm smaller telecom concerns.

In a 19-page letter delivered to the FCC late Thursday, AT&T pledged to make high-speed Internet service available in 100 percent of the regions its high-speed network will cover, and to provide free DSL modems to subscribers who sign up for broadband service within 18 months of the merger date. It also agreed to make a $10 per month high-speed option available.

AT&T also said it would guarantee some net neutrality for two years or until Congress addresses the issue with new legislation, and offered to divest itself of some BellSouth wireless spectrum assets.

It also agreed to bring back 3,000 jobs that BellSouth had outsourced in recent years to offshore locations -- a nod to labor interests favored by the Democratic commissioners. At least 200 of those jobs will be based in and around New Orleans.

The possibility remained that the FCC could meet sometime Friday to vote on the deal, but as of midday on the East Coast, no such meeting had been officially scheduled or posed, a spokesperson in the commission's Washington, D.C., office said. FCC rules allow it to vote without a scheduled, public meeting, however, and a decision can be announced at any time.

AT&T is hoping to close the BellSouth purchase -- which would mark the largest merger in telecom industry history -- early in 2007 and begin the extensive work of combining two networks and two corporate cultures.

Above and Beyond

In the letter to the FCC, AT&T Vice President Robert Quinn Jr. said the additional concessions were being made even though AT&T's takeover had been approved by the Department of Justice and numerous state agencies.

He also said that two earlier mergers -- the AT&T and SBC link-up that formed the current AT&T and Verizon's purchase of MCI -- had more "competitive overlap" and yet were approved "with fewer, less extensive commitments than we offered."

"Merger opponents continue to demand even more concessions, including those they were unable to obtain from Congress, or that are being considered in pending, industry-wide rulemaking proceedings," Quinn wrote.

In the document, AT&T agreed to meet an FCC policy statement on net neutrality adopted in 2005 and went slightly further, saying it would not segregate Internet traffic from the point where it reaches the approximately 25 regional hubs around the country that process Web traffic. From there until it enters customer homes, all traffic will be treated equally, AT&T said. That condition also expires in two years.

The net neutrality concessions could resonate with the rest of the industry and become a model for the new, Democrat-controlled Congress to emulate in the form of legislation when it convenes early in the new year.

The most recent Congress held extensive hearings on net neutrality, with Google and other Internet companies pushing hard for guaranteed access to broadband networks, but stopped short of adding the requirement to a telecom bill passed late in the year.

Another key concession came in the form of price caps on corporate data traffic, which had been in place previously under an FCC rule that has since expired. That concession is key because the ability to derive more revenue from business customers is one of the main reasons for the merger.

Time Flies

AT&T shares were up 1.2 percent in midday trading Friday to $35.91.

In the end, the concessions were more than AT&T wanted to give, but getting the deal done became more important.

"AT&T didn't want this dragging on into 2007," telecom industry analyst Jeff Kagan told the E-Commerce Times. The prospect of a new, Democrat-led Congress taking office may have been one motivating factor that helped spur AT&T to negotiate with the FCC through the holidays.

"They no doubt have a timeline for the merger, tasks to get to work on that start to get pushed around if they held their ground for too long," Kagan said. "The most important thing for the company and its shareholders is to get the merger completed."

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