Prodigy Follows Up FCC Ruling With SBC Deal

Prodigy Communications Corp. announced the merger of its consumer and small business units with regional telephone company SBC Communications, Inc. today, becoming one of the first beneficiaries of a recent U.S. government order for phone companies and Internet service providers to share phone lines.

Prodigy will take over management of SBC’s 650,000 Internet customers, boosting Prodigy’s total customer base to more than 2 million. In exchange, the phone company gets a 43 percent equity stake in Prodigy.

Just last Thursday, the U.S. Federal Communications Commission ordered major local phone companies to share their lines with data carriers in an effort to hasten the spread of high-speed Internet access into the consumer market by making access to Digital Subscriber Lines (DSL) more affordable.

The FCC ruling, which ends the phone companies’ practice of charging other ISPs a usage fee of $20 to $23 (US$) per month to deliver Internet service via the phone companies’ lines, is expected to drive down prices for high-speed Internet access.

If You Can’t Charge Them, Join Them

Taking advantage of the forced cooperation the FCC ordered, SBC will now work with Prodigy to build on the two companies’ already established Internet user bases. SBC will assume three seats on Prodigy’s board of directors, which will expand from six to nine members overall.

By focusing strictly on the marketing side while Prodigy handles the technical aspects of delivering Internet service, SBC predicts that it will be able to add another 1.2 million new DSL subscribers within three years. SBC will put particular effort into marketing the Prodigy En Espanol service for the country’s Spanish-speaking population. SBC has a presence in nine of the country’s top ten U.S. Latino population centers, which are home to more than 60 percent of all U.S. Spanish speakers.

Prodigy’s service will get a slight name change, becoming co-branded with SBC’s regional telephone company names — Ameritech, Pacific Bell, SNET and Southwestern Bell. Likewise, SBC will be marketed as Prodigy’s preferred provider for the connection provider to the Internet backbone. The company is in the midst of a $6 billion expansion project to make high-speed DSL access available throughout its service area.

Running With The Big Dogs

For Prodigy, the deal will dramatically boost the company’s stature within the highly competitive Internet access business. The company started out as a subscription data service similar to America Online and Compuserve, but was quickly eclipsed by those two services and was forced to branch out into direct Internet access to remain competitive.

The SBC alliance will soon put another competitive weapon at its fingertips: Broadband Internet service. As SBC continues to upgrade its lines and other infrastructure, Prodigy plans to offer new services such as home networking, video-on-demand and other integrated video-data services.

Prodigy will become the exclusive provider of Internet service to 650,000 SBC dial-up customers and will have access to about 100 million homes in SBC territories. Over the next three years, up to 77 million of those homes are slated to get access to high-speed DSL lines. According to SBC, those lines provide guaranteed downstream Internet connection speeds of 1.5 Mbps.

Prodigy Chairman Samer Salameh hailed the deal as putting his company a step above the market’s current ISP leaders. “We now are better positioned than virtually any other ISP to become a leading player in the high-speed Internet access arena — giving our customers the Internet experience they’ve been asking for, which we believe will increase shareholder value,” he said. “Broadband access will redefine the ISP playing field, and DSL is clearly emerging as the technology of choice.”

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