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‘SNET Sold Out Cheap’
A national telecom expert argues that SNET didn't need
to sell — and that maybe Connecticut shouldn't allow it
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Business New Haven
2/9/1998
By: BNH
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For an outsider's perspective on the purchase of SNET by the Texas-based SBC Communications, we turned to an outsider - outside Connecticut, that is, though firmly inside the telecommunications hive. Harry Newton is editor-at-large and co-founder of Computer Telephony, Call Center, Imaging and Teleconnect magazines, as well as author of Newton's Telecom Dictionary, now in its 13th edition. Newton spoke to BNH from his Manhattan offices.
The prime reason cited by SNET for their need to merge with a larger company was size. What were their real vulnerabilities?
I don't know that they had any real vulnerabilities. It seemed to me that all their competitors had real vulnerabilities. AT&T lost a huge percentage of their [long-distance] market share to SNET, and SNET has little competition locally. So I don't know what their concern is.
So why do you suppose they elected to sell?
It's fashionable, firstly. Secondly, the executives of all these [selling] companies typically get a large payoff when they get sold, whether they stay on or don't stay on - a reverse golden handshake. There's been no revelations on that at all, but it would be nice to know. But all the other executives at other [taken over] operating companies got golden handshakes - huge amounts of money.
What spooks a company like SNET into believing that they can't compete at the size they are?
They're a telephone company. Telephone companies have limited vision; they're glacial operating companies. There was some very smart cookie who came in and gave [SNET] a sales pitch, and they believed him. And they were wrong.
Could Bell-Atlantic have moved into SNET's territory, and was that threat what moved them to sell?
You could also develop a theory that General Motors is getting into the telephone business and was going to move into Connecticut as well. If you want to fantasize, fantasize. But there was no indication that that was or was not going to happen. They could also fantasize that a rocket was going to come down from Mars and shoot up their main telephone office. It's fantasy.
But if a company like Bell-Atlantic had purchased SNET, presumably that would have had a different [local] employment outcome?
No, it would be the same outcome.
How so?
What difference would it make if Bell-Atlantic bought them or SBC bought them? All they're doing is selling out to a larger company, and the larger company has its own agenda. That agenda may or may not include developing Connecticut's resources. I would assume that SNET did a very good job - I know they did - of developing resources for the state and people of Connecticut. A company based in Texas - who knows what their agenda is? They may take all the money from SNET and invest it in consulting in...China. It's been done before.
Do you think this merger will arouse any serious opposition from regulators?
Regulators are not very economically savvy, first of all, and have a limited scope of things they can relate to. Hypothetically, in a business situation where the regulators were representing the people of Connecticut collectively, they would say to SBC, 'We will allow you to buy this company if you make certain provisions. One is, you have to make certain investments in the state of Connecticut. Two is, you have to agree to drop your prices for people who are using SNET's services. Three is, you have to wire up the schools in Connecticut. You have to stick in high-speed lines for the universities.'...You get the drift of what I'm saying? You have to go to the company and say, 'If you want to buy this company, then you have to do something for me.' But I don't see the regulators doing that. They're just lying there and falling over dead and saying, 'Aw, that's a big company; they've got lots of money; therefore, we'll get lots of money; therefore, everything will be lovely.' That's nonsense.
What kind of company is SBC, since few people here know them?
And that's a good reason to be very wary about this deal. They're a telephone company that's interested in expanding. They don't seem to have a very strong vision. They bought Pacific Telesys; they bought Pacific Bell; they're buying SNET; they'll probably buy some other companies. Is their vision to put together the old Bell system? They've enunciated nothing to us on the outside to indicate there's any compelling vision there other than buying companies and getting bigger - which doesn't really contribute anything to the people of Connecticut.
Why has the Telecommunications Act of 1996 in effect backfired? It was supposed to foster competition; instead it has resulted in consolidation throughout the industry. Were there flaws in the legislation?
I don't think there were flaws in the legislation; I think the legislation just gave the telephone industry a message that they could expand. And somebody came up with the idea that it was easier to buy local assets than to actually invest cash in trying to build a local loop. And since the local loop seems to be the one remaining monopoly in the telephone industry, that's a nice deal, right? AT&T said they invested $3 billion in trying to get into local telephone service, and their total revenues from it were $65 million to date. The new guy in charge at AT&T just closed that whole business down, saying, 'We're not a non-profit organization.' And MCI also had announced a huge amount of money they'd invested in local service and had incurred substantial losses. So it's become increasingly evident that local service is a real key business, and since building it is exceptionally expensive, buying it for paper [stock] is exceptionally cheap. I don't think you can blame that one the [telecom] act.
What role does the stock market play in this?
These executives are heavily driven by Wall Street. They go to these meetings on Wall Street where these analysts stand up and ask questions. Well, most of the analysts are not very well informed on the industry, and how many questions can you ask about the phone industry before you get bored? So suddenly someone says, 'Why don't you buy something?' So they start asking questions, and pretty soon - bingo - you've got a new business 'strategy.' And SNET was available, so they bought it. But I don't think it will contribute anything to SNET or to the people who work at SNET. If anything, there will be negative connotations. Probably there will be firings, first of all.
What about technology?
You've got to understand: A service industry like the telephone industry is not like manufacturing. In manufacturing, Ford bought Jaguar. Now, Jaguar was a piece of dreck automobile company - Jaguar was a lovely driveway car, but you could never take it out of your driveway because it wouldn't run more than 100 yards. The reason for that was not because Jaguar was good or bad, but because the company was very small, and couldn't afford the R&D to create the new technologically advanced componentry that it really needed - particularly the new electrical systems. Ford has gigantic R&D, so Ford came in and just threw some of their R&D into Jaguar. So now Jaguar's going up again. That's something you can do in manufacturing. But the telephone industry is strictly prohibited from actually investing any money in R&D that's going to lead into manufacturing. All the telephone industry's R&D is done by Lucent or Northern Telecom or Ericksson. So those guys have a degree of value from [the standpoint of] size, because they can invest more stuff in more things. But the telephone industry? They haven't invested in anything.
But what about video-on-demand?
In 1994, SNET announced that they were going to wire 500,000 households for cable with high-speed access by 1996. Why didn't that
happen?
Over the last 20 years there have been a lot of examples of new service offerings in the phone industry. Let's look at the phone industry: Over 100 years, the phone industry has been growing by three percent a year whether we were going through depression, recession - whatever - it just kept growing little by little. The name of the game was just to put in more phone lines, make them work, and you just sell the same line. Very, very boring business. But every few years someone comes along with a new value-added idea. We've had not only video-on-demand; we had the 'smart house'; we had meter readings over the phone; security service over the phone - a million different things. Most of them never came about, because they were pre-announced - announced as ideas rather than actual products. People thought that after World War II, every American would have a helicopter in their driveway. These were fantasies, and video-on-demand was a fantasy.
Why didn't it happen?
There are a lot of reasons. Video takes a large amount of bandwidth, for one thing; if you want video-on-demand, you need a server who's ready to send out information constantly to 20 different people a minute apart - it's a fairly heavy bit of technology to do this.
The reason for all these acquisitions is somebody realized that they had hit on something: We're no longer three percent [growth] a year. The first thing that led to a lot of growth was the fax industry, with everyone putting a second line in. The next thing was all the corporate downsizing, [after which] everyone went to work at home. The third and last thing - which has made telephone companies substantially more valuable than anyone ever dreamed of - is the Internet. It's no longer three-percent growth a year; it's 20 percent a month. For the first time ever people are saying to the phone company, 'We're willing to pay $50 a month instead of $15 if you'll just give us more speed [on the Internet].' That's a substantial increase in numbers, right? That's why the phone industry has suddenly become more profitable and a more desirable acquisition. 'This is a 'factory' that instead of running at X is suddenly going to run at 5X, and in the next few years, we're all going to make a --load of money out of this, and it doesn't matter if we pay 20 or 30 percent more than it's trading at now, because the damn thing will be worth three or four or five times that in the next few years.' So to make a long story short, SNET sold out cheap.
Anything else?
There are people and businesses in Connecticut who increasingly owe their business lives and their personal lives and their medical lives to the phone lines that come into their houses and their businesses. Those phone lines are a very serious social trust. They were originally entrusted to a Connecticut company; they're now going to be entrusted to a company 2,000 miles away that has no roots in Connecticut whatsoever. I'm not so sure that if I were going to let my life's blood be passed in ownership to someone that far away, that I'd want to do it without asking serious questions.
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