FCC Could Revive Telcos' Urge to Merge

So should the FCC agree to phase out the wholesale pricing discounts, resellers such as AT&T(T Quote) and WorldCom could find the business unprofitable and decide to pull out of local competition.

Meanwhile, with their core local phone businesses declining, the Bells face an unsavory prospect of watching their livelihood slowly fade away, unless they attempt to break into new markets. SBC (SBC Quote), for example, is reported to be discussing the purchase of GM's(GM Quote) DirecTV satellite business.

Control

Previously, regulators have objected to large telecom mergers on the grounds that too much of a given market would be controlled by too few companies, thereby muting competition. The thinking has been that the more choices consumers have, the more market incentive there is for pricing and service innovation.

But now, to some antitrust experts, any backpedaling on the discounts would signal that top regulators are satisfied with the health of local competition. If that's true, combinations between large local Bells such as Verizon (VZ Quote), SBC, BellSouth (BLS Quote) and Qwest (Q Quote), on the one hand, and long-distance outfits such as AT&T and WorldCom, on the other, would suddenly be fair game.

"If the FCC does what people assume it will do, it will profoundly affect the government's thinking on mergers and what constitutes antitrust violations," says Axinn.

"Assuming the review takes away [discounts], the dominoes will start to fall," says Axinn. "Those doing UNE-P will withdraw and AT&T, WorldCom and Sprint could be the subject of takeovers by the regional Bells."

NutraSweet

While critics charge that the FCC is simply bailing out the Bells just as competition heats up, supporters say that competition was artificially supported by below-cost network rental prices.

If it comes down to a legal battle, which history suggests is inevitable, Axinn says it's unlikely that the courts will ultimately say that the Telecom Act requires companies to fund their competition.