AT&T Says Bye-Bye Bells

Ma Bell is making a local call, and the Baby Bells don't want to answer.

After wavering over how to re-enter local competition,

AT&T

(T) - Get Report

has unveiled a daring plan to bypass local carriers altogether through a "wireless local loop" business. Such a strategy, while still in its earliest stages, potentially could slash prices for AT&T and undercut an important revenue stream for the Baby Bells.

AT&T stock has risen modestly, from 39 7/8 to 41 1/8, since news of the wireless loop plan was reported in

The Wall Street Journal

on Monday.

More interestingly, however, the Baby Bells have lost ground. On Tuesday,

Ameritech

(AIT) - Get Report

fell 1 1/8 to 63 3/4, and

Nynex

(NYN)

slipped 1 to 51 3/4.

The far-reaching AT&T plan calls for the telecommunications giant to "bundle" a full set of communications services, including local access, long-distance, mobile phones and Internet connections. Moreover, AT&T intends to offer that set of services through its own network.

While building the network will likely cost several billion dollars (AT&T wouldn't specify an amount), the company believes the alternative -- renting the Bells' networks for a small fortune -- has become too costly. Already AT&T pays huge access charges to the Baby Bells for long-distance calls, with roughly 40% of Ma Bell's long-distance revenue funneled back to the Baby Bells. While that payout has declined modestly in the last year, AT&T has complained to the

Federal Communications Commission

that access charges cost twice what they should. The company intends to bypass the local networks to reduce its own local and long-distance access expenses.

AT&T has a three-stage plan to pierce the local market. In the first stage -- which is upon us -- the company will lease the lines and switches of Nynex and other entrenched Baby Bells in so-called interconnection or resale arrangements. While that's a quick way to promote the AT&T brand name, it really amounts to arbitrage -- AT&T buys capacity at a fixed wholesale rate, then resells it to customers at a minimal profit or even a loss.

In the second stage, AT&T wants to start running traffic through its own wireline equipment -- a costly initial buildout is underway in the Chicago area -- and through the lines of "competitive local exchange carriers," a rising breed of telcos that have made their mark already by connecting long-distance traffic. To that end, the company announced an agreement with

Brooks Fiber Properties

(BFPT)

on Thursday, the latest in a series of alliances.

In stage three AT&T will manage its own infrastructure, connecting calls end-to-end within most metropolitan areas, drawing heavily on its own wireless systems. Only then can it fully control its operating costs. AT&T decided that adding another layer of wireless infrastructure to the existing cellular system of its

AT&T Wireless

unit was the most efficient option.

"That's how they bypass the Bells," says Dave Maney, president of

Worldbridge Broadband Services

, who has advised cable companies on wireless technology. "That's a profound story."

"Wireless has a lower cost of deployment, and lower cost of access," says Bob Egan, research director of the wireless industry for the

Gartner Group

research firm.

AT&T spokesman John Heath did not give a timeline, but he says the company wants to operate its own facilities -- both wireline and wireless -- as soon as possible. "In the long run, it offers us the best profitability picture," Heath says. "It also gives us control over our own destiny."

As part of its attack on the local market, AT&T is entering new a sideline business: The company has announced it is designing and building most of its new wireless gear in-house.

This development was reported in

The Street

earlier Tuesday.

By Kevin Petrie

kpetrie@thestreet.com