FCC Could Revive Telcos' Urge to Merge

Investors are hoping a Washington wake-up call will rouse the telecom sector's long-dormant merger instinct.

The Federal Communications Commission, in its triennial review of local competition laws, is expected to decide Thursday whether to free the regional Bells from some of the wholesale pricing laws that force them to rent their networks to rivals. The agency is set to review the so-called unbundled network elements platform, or UNE-P, mandate.

But the ramifications of any FCC action could spread well beyond wholesale pricing. In fact, some investors believe that the agency, noting the poor health of many telecom players and the evolution of wireless service, is ready to pursue policies that would shift its focus away from competition and toward enhancing industry stability. This could mean liberalizing the market to a degree that was unthinkable before the bubble burst three years ago, observers say -- and paving the way for big mergers.

"No matter how much or little the FCC review dismantles UNE-P, it will be a reset of the rules of the road, and eliminate the uncertainty that has precluded mergers and network investment," says independent industry consultant Marty Hyman, who has worked with the Bells on these issues.

Consequences

The potential shift at the FCC stems in part from vast changes in the markets over recent years. The rule the agency is set to review stems from the Telecommunications Act of 1996, which was written to foster competition in local phone markets.

But now, with the advent of wireless anytime all-distance minutes plus the growing voice-over-the-Net movement, the distinction between local markets and long-distance markets looks arbitrary at best.

"Historically, local has been a separate market, but today we are moving to an all-distance market. That obliterates the local-market distinction," says Steve Axinn, a New York antitrust lawyer who worked with the Justice Department to kill the WorldCom-Sprint(FON Quote) merger in 2000.