Scary Splice

By JOSHUA COOPER RAMO

Perhaps you saw Ivan Seidenberg back in the 1960s when he got his start working for New York Telephone. Those were the good old days of telecommunications, when "phone company" and "AT&T" were synonyms. Interstate calls cost a small fortune. Copper wires, pioneered by Alexander Graham Bell in 1876, were still state of the art. And Seidenberg was the guy you might have spotted crawling into manholes in New York City and cheerfully splicing phone lines together deep underground--peeling back the rubber coating on the finger-thick wires, laying the cable on the splicer and then gently pressing the copper wires together. He made a living wage; they called him a splicer's assistant.

Last year Seidenberg made $8.5 million in salary and bonus. Letters that spooled from the fax in his office at Bell Atlantic generally addressed him as "Dear Vice Chairman." For the past half decade, Seidenberg, 51, has been working to make that copper sing and dance with stuff no one could have dreamed of in 1966--video, for instance, or 3-D Web pages. He is also making that copper work closely with its successor: hair-thin fiber-optic cables that offer vastly expanded speed and capacity--which translates to consumer value and, he hopes, corporate profit. Seidenberg, who oversaw NYNEX's merger with Bell Atlantic two years ago, has risen to the top not because he knows how to splice phone lines but because he knows how to splice phone companies.

Last week the CEO proposed his most spectacular link-up yet: a plan to merge $70 billion Bell Atlantic (which serves roughly 40 million customers in 13 states) with GTE, a $52 billion company with some 21 million widely scattered customers. Earlier in the week AT&T had announced a multibillion-dollar joint venture with British Telecom. Driven by a violent reworking of the competitive and technological landscape, phone giants were embracing one another mostly out of mutual fear and defensiveness.

The stimulus for all this furious merging is the growth of competition from nontelephone companies. A decade ago, most Americans picked up their phones to hear a dial tone linking them to one of the Baby Bell companies. But in recent years that monopoly has slipped away. And in the eyes of traditional telecom bosses, the antidote is conglomeration, a kind of circle-the-wagons strategy they hope can hold off competition's inevitable charge. The approach has roots in an earlier boom time. In the 1920s the nation's railroad firms consolidated in a vain attempt to stave off competition from cars. The phone companies--which think a large customer base will make it cheaper to develop and sell new services--believe this time will be different.

Ironically, much of this consolidation is the result of the 1996 Telecommunications Act, a law that purported to stop this kind of customer hoarding. It hasn't worked. Says Senator John McCain: "The FCC's obfuscation and delay have blocked competition, so when companies can't get into each other's businesses, they buy in." Is there any chance of a federal rewrite to fix the problems? Says McCain: "The horse has left the barn, which I deeply regret."

While the 1996 Act did touch off this buyout binge, it also allowed other competitors, including cable-TV firms, to enter the business. And on Wall Street, the big phone mergers are now regarded with skepticism (and some concern that Washington will intervene). Both GTE and Bell Atlantic stocks slipped last week. AT&T--which took a hit after announcing a merger with TCI--ticked up after the British Telecom deal.

This is not, of course, simply a story of business combinations. The Internet plays a leading role as well, providing the technology that makes competition possible. The relevant hocus-pocus is the "Internet protocol," which is not the title of a Robert Ludlum novel but is rather a geeky delight that sits at the heart of the Web and e-mail revolution. Internet protocol (generally called IP) is a language computers use to talk to one another: a hyperefficient chatter that lets phone-company machines banter by sending digital data "packets" back and forth. These packages can contain anything--a frame of video, a few lines of a fax or a split second of conversation. The computers don't care what kind of data they are moving, which makes for a faster, cheaper way to send information.

Like letters at the post office, each packet is individually addressed. IP tells the network how to read the packets and where to send them. Unlike a traditional phone call, which sets up a circuit between two phones (think of the 1930s operator plugging wires into jacks), IP allows phone carriers simply to throw the packets onto a network, where they will be sorted and delivered by any one of thousands of machines (called routers), just as if they were postcards at a post office.

And though IP telephony uses Internet standards, it doesn't generally use the Internet itself. Instead it typically runs on private, superfast networks that deliver the most speed at the least cost from IP-data traffic. Some companies--like International Discount Telecommunications--do offer telephone service over the Internet, posing yet another threat to traditional phone giants. In two years, IDT has gained a million customers (who do not, by the way, need to make calls through a computer; a regular phone works fine).

These fast, cheap networks are rewriting what used to be the first commandment of telecommunications: Thou shalt be huge. No phone company now has to invest billions in an expensive network. Instead it can just piggyback on other folks' networks, which have excess capacity to rent. Some upstarts are building networks of their own. Says Joseph Nacchio, CEO of Qwest, a telecom upstart based in Denver: "All the old reasons for scale are gone." Nacchio, who left the No. 3 slot at AT&T to run Qwest, compares the latest round of mergers to "an oligarchy buying a monopoly." The future, he predicts, will bring a more pluralistic, competitive system.

That should be good for consumer service and savings. Even Bell Atlantic's Seidenberg has said, to FORTUNE magazine, that he foresees a world where, rather than pay for phone calls by the minute, "people will in effect just pay a subscription rate to have access to a network." And while all-you-can-talk (or watch, or surf) lines could be a dream for consumers, they will be a nightmare for the mega-Bells, which must add new subscribers faster than they lose revenue to new competitors and pricing pressures. Some firms, like AT&T, hope to find lucre in international markets, where telephone demand is growing in the triple digits. Says AT&T CEO C. Michael Armstrong: "Societies are attempting to rise in the economic order, and multinationals are reaching out to serve them."

It is surely a new world, and the signs are not just global. Even those old New York manholes where Seidenberg spent his youth are changing. Once threaded with a few Bell Atlantic cables, they are now knitted by dozens of other "local loops" from competing firms--proof that at the end of the day, there may be only one set of guys who are guaranteed to profit in this new telecom world: the cable splicers.

--Reported by Daniel Eisenberg/New York, Richard Woodbury/Denver and Bruce van Voorst/Washington

With reporting by Daniel Eisenberg/New York, Richard Woodbury/ Denver and Bruce van Voorst/Washington