AT&T's Merger with TCI Paves the Way for Competition in Local Phone Service in Chicago Area

Strategic Insights -

Telecommunications giant AT&T Corp. is attempting to bypass its monopoly on local phone service in the Chicago area through a proposed $48-billion merger with TeleCommunications Inc. (TCI) of Colorado. This merger positions AT&T to deliver local phone service to Chicago-area homes through TCI's existing cable network, potentially disrupting Ameritech Corp.'s stronghold on the local phone market. Ameritech, which has held the monopoly since the break-up of the Bell system in 1984, is hoping the merger will persuade federal regulators to allow the company to enter the lucrative long-distance calling market in its five-state home territory.

Key Takeaways:

  • The proposed merger between AT&T and TCI will allow AT&T to deliver local phone service to 1.6 million homes in the Chicago region through TCI's cable network.
  • The upgrade costs to TCI's largely one-way cable system to handle two-way voice communications are estimated to be around $8 billion throughout TCI's territory.
  • The upgrade process is expected to take three years, with no new services available before 2001-2002.
  • AT&T's powerful brand name and existing relationships with long-distance customers will help the company score quick marketshare gains at Ameritech's expense.
  • Ameritech will lose revenue from long-distance access fees, which generated $2.5 billion of the company's $16 billion in gross revenues in 1997.
  • The merger may prompt federal regulators to re-examine allowing Baby Bells to serve the long-distance markets in their home territories.
  • SBC Communications Inc. plans to acquire Ameritech and create a company that will be a "formidable presence" against competition from AT&T and TCI.
  • AT&T's previous attempts to offer local phone service, including building switching stations and leasing and reselling Ameritech lines, have been unsuccessful.
  • Establishing a communications network capable of providing one-stop shopping has proved elusive, but AT&T and TCI are optimistic about their prospects.

Statistics:

  • Estimated cost of upgrading TCI's cable system: $8 billion
  • Number of homes in the Chicago region where AT&T will deliver local phone service: 1.6 million
  • Revenue generated from long-distance access fees in 1997: $2.5 billion
  • Gross revenues of Ameritech Corp. in 1997: $16 billion
  • Number of customers signed up for AT&T's pilot program for local phone service in 1996: 300,000
  • Estimated time before new services become available: 2001-2002

Sources:

  • Kraemer, Joseph S. "Upgrading TCI's cable system to handle two-way voice communications." A. T. Kearney Inc., 1998.
  • Liechtman, Bruce. "Consumers would embrace a local phone service sold with AT&T's name on it." Yankee Group, 1998.
  • Allen, Barry. "This verifies our vision of the future." Ameritech Corp., 1998.
  • Cohen, Martin. "This takes us in the direction of real competition." Citizens Utility Board, 1998.
  • SBC Communications Inc. "For us, the best defense will be a good offense." SBC Communications Inc., 1998.