Big phone's ties in Washington could rope Ma Bell into a bit of a controversy. Among the hurdles ahead for AT&T's ( T) $67 billion acquisition of BellSouth ( BLS) are the inevitable antitrust and consumer-protection reviews by the Justice Department and Federal Communications Commission. But adding an even stickier dimension to the debate will be concerns that AT&T is getting too big to maintain so-called
Net neutrality , and too cozy with the Bush administration's unpopular domestic spying efforts. The debate intensified this week as AT&T proposed a megadeal with BellSouth that would help make the nation's largest telco even bigger. The combined company would control more than 70 million local phone lines, serve 54 million cell-phone customers and operate nearly 10 million broadband Net connections. Attention now turns to Washington, where industry observers and politicians expect to hear what role AT&T -- along with No. 2 Verizon ( VZ) and No. 3 Sprint ( S) -- played in the National Security Agency's warrantless surveillance activities. While phone companies regularly work with law enforcement and government agencies on court-approved wiretaps and call traces, the question now is whether the big telcos helped the feds step over the legal line. Privacy watchdogs say they fear that the Bush administration's get-tough-on-security effort has overreached a bit. "There is a balance" between national security and people's privacy -- "it's called the Fourth Amendment," says Barry Steinhardt, director of the Technology and Liberty Program at the American Civil Liberties Union. The guidelines are simple, says Steinhardt: "Government has to go to court and get a warrant. And AT&T should be insisting on that court order." Critics say the telcos' cooperation with the executive branch can provide rich rewards like government service contracts and influence over business-deal approvals.
The big phone companies were pulled into the NSA's domestic spying controversy last month when Sens. Ted Kennedy and Russ Feingold asked executives at AT&T, Verizon and Sprint what information they helped gather for the NSA without court authorization. Then later last month, responding to a Freedom of Information Act lawsuit brought by the Electronic Privacy Information Center, U.S. District Judge Henry Kennedy ordered the Justice Department to release information about the NSA's domestic eavesdropping activity. The Justice Department was expected to respond to the request this week, or to provide an explanation of its refusal. An AT&T representative said: "We can't comment on matters involving national security." Some industry observers say the domestic spying issue may raise the volume on the debate over whether bigger phone companies are better. But seasoned Washington telecom expert Scott Cleland says "this is just noise." Phone companies do what they are asked in top-secret programs, says Cleland. He adds that "this is a constitutional issue that will not be resolved until long after this merger is closed." "This issue has zero traction" among regulators who will be reviewing the merger, Cleland adds. But any discussions about the telcos playing a role as big brother's agent aren't going to help win support in the square-off over unfettered network access. AT&T and Verizon have argued that not all traffic is equal on the Net and that they may throw up toll roads to help recoup the costs of network expansion. Observers say this highlights big phone's dominant role in the communications network market, and some see it as an abuse of power. The fear is that once telcos start to identify the source and content of the traffic, the next step will be shunting rivals' services in favor of their own or others who agree to pay up for service.
The phone companies say big bandwidth users shouldn't get a free ride. Alternatively, they say that users paying for first class would see the quality of the service, like that of movie downloads, increase. Of course, it takes specialized gear like deep packet inspection technology from outfits like Cisco Systems ( CSCO), Juniper Networks ( JNPR) and Nortel Networks ( NT) to make traffic prioritization possible. And boosting the telcos' snooping powers helps fuel even greater concerns among privacy advocates. "We are moving toward a society where we have wholesale surveillance. And where there are no rules," says the ACLU's Steinhardt.