VARs, CLECs Ponder Telco Consolidation

Thursday's news that Qwest Communications International is reportedly in discussions to buy MCI for about $6.3 billion made for the second possible megamerger in a week for the telco industry. On Monday, SBC Communications announced it had reached an agreement to purchase AT&T for $16 billion, a deal expected to close by the first half of 2006, according to SBC, San Antonio.

MCI, Ashburn, Va., and Qwest, Denver, are in advanced discussions of a possible merger, but it has not yet been finalized. Verizon Communications is also reportedly in talks with MCI concerning a possible merger deal and could be a spoiler to the MCI-Qwest ambitions, according to a report in The Wall Street Journal.

Allan Tumolillo, COO of Probe Financial Associates, Ironia, N.J., said the SBC-AT&T deal will force the hand of further consolidation. "SBC will inherit AT&T's substantial enterprise customer base in Verizon's operating territory, especially in New York," Tumolillo said. "This merger will allow SBC to leap ahead of Verizon and BellSouth and challenge MCI for enterprise market leadership. Verizon will have to respond."

But many VARs and CLECs say they see the SBC-AT&T deal and the potential further consolidation of the big telcos as nothing more than a sideshow because the telco services that can be provided to VARs by CLECs are just as comprehensive--and more agile--than what a big carrier can offer.

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In this way, carrier consolidations such as the deal between SBC and AT&T ultimately don't matter to solution providers, said Pat Scheckel, Cisco practice director at Madison, Wis.-based Berbee Information Networks, a $250 million solution provider that competes against carriers such as SBC in the VoIP space.

"SBC acquiring AT&T doesn't really affect what is going on at the ground level with VoIP," Sheckel said. "What you are seeing is that CLECs and hosted service providers are teaming up to offer more innovative solutions. And VARs such as Berbee are developing solutions tailored to specific vertical industries. That is not innovation that is coming from a Ma Bell or a Baby Bell."

The SBC-AT&T merger and the speculated subsequent mergers of other larger carriers, such as Verizon and MCI, empowers smaller telecom providers that can provide more customized, agile telecom services to VARs than large carriers can, said Jason Talley, president and CEO of Nuvio, an Overland Park, Kan.-based MSP specializing in VoIP.

"VARs are uniquely positioned to be the conduit for the next generation of voice services," Talley said. "VARs are looking for somebody reliable who can deliver next-generation telco services today and are more in touch with the customer. Frankly, SBC doesn't know how to sell into [the VAR] space. They are buying AT&T for their enterprise customers."

Mike Shaw, vice president of product development at Powernet Global Telecomm, said that the more consolidation seen within the ranks of the large carriers, the more competitive the smaller telco providers become.

"Being able to provide a niche solution will be harder as the larger organizations consolidate together," Shaw said. "As far as offering next-generation solutions like VoIP, high-speed Internet on top of long-distance and wireless services, I think companies like Powernet Global are in a solid position to keep growing. We aren't weighed down or slowed by a lot of capital investments and legacy systems. We can continue to partner and utilize our network to any target customer base."

However, John Sumpter, vice president of regulatory compliance at Pac-West Telecomm, a CLEC in Stockton, Calif., said the signs of further consolidation among the big carriers could be a bad thing. Sumpter said that consolidation could lead to a scenario where four major carriers--SBC, Verizon, BellSouth and Qwest--could end up owning the lion's share of the Internet backbone, giving them price control that could shut out smaller players like the CLECs.

ELIZABETH MONTALBANO contributed to this story.