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BellSouth's Wrongheaded Qwest, Part 2

A court rules that regional Bells can't resell long distance service from Qwest or any other third-party provider.

Quick update for investors following the confusion over the possible deal between Qwest (QWST) , which I am long, and BellSouth (BLS) and, for that matter, for anyone following the telco business.

A three-judge panel of the

U.S. Court of Appeals

in Washington ruled Tuesday that the regional Bells can't resell long distance service from Qwest or any other third-party provider.

Why? A September 1998 decision by the

Federal Communications Commission

held that under the Telecommunications Act of 1996, the so-called marketing agreements under which


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U S West


last year began offering Qwest long-distance service were illegal attempts to circumvent the law.

Under the Telecom Act, the former Baby Bells cannot begin offering long distance service until they have shown that they have fully opened their local-service networks to other, competitive local-service carriers. U S West and Ameritech -- and of course Qwest -- thought that by setting up marketing agreements under which they would offer Qwest's service to their local subscribers they could duck that provision. That way, the two RBOCs weren't literally getting into the lucrative $90 billion domestic long-distance market themselves, they said, but only serving as sales agents for Qwest.


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took the matter to court, and the appeals panel agreed.

This has obvious negative implications for Qwest, though not particularly devastating ones (keep reading), as well as for the RBOCs.

On the other hand, the entire U.S. telecom industry has been waiting for the "breakout case," in which a federal court somewhere would declare either that part of the Telecom Act invalid, or -- likelier -- that a given RBOC had adequately demonstrated the opening of its networks, and could now get into the long distance business.

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The working assumption has been that once that decision, seen as inevitable, perhaps as soon as this fall, comes down, and is upheld on appeal, the rest of the RBOCs will find friendly courts within their service areas that will allow them in, too.

AT&T, of course, wants to delay this inexorable move to long-distance service from the RBOCs as long as possible. Qwest has played the two sides off against each other effectively: Despite its standing as the fourth-largest U.S. long-distance company, it has been cozying-up to the RBOCs, resulting in the two marketing agreements with Ameritech and US West.

Trying to judge asset value and correct share pricing in these companies based on probable outcomes of court decision is a dangerous game, perhaps a fools' game. But however you value telecom players on both sides of the long-distance fence, investors must recognize that this changing landscape will inevitably change relative values substantially.

Qwest and the other independent long-distance companies with their own networks look like long-term winners here, either as eventual suppliers/partners for the RBOCs or as acquisition targets for them: Put simply, they've got what the RBOCs need.





MCI WorldCom


, which I am long, and others are relying on size, momentum and the appeal of "single billing" to consumers as their chips in this game.

Stay tuned, as telecom continues its jagged path through the legal system. But keep your eye on the end game, too: RBOCs will be selling long-distance, and today's independent long-distance providers will be, at least for a while, in the catbird seat, as highly desirable suppliers, joint venturers or partners for the RBOCs.

A final thought on any BellSouth-Qwest deal: Remember that although BellSouth already owns 10% of Qwest, and Qwest managers have spoken highly of their relationship with BellSouth and its management -- such as their ability to close a complicated investment in just 40 days -- speculation about a BellSouth buyout of Qwest is just that: speculation.

All we really have is a BellSouth filing with the

Securities and Exchange Commission

that the company is thinking about such a deal. Just as, we may fairly assume, every other RBOC is thinking about possible acquisitions of long-distance providers.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long AT&T, Qwest and MCI WorldCom, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

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