Will AT&T Value BellSouth's Vendors?

If the future of the U.S. telecom scene calls for one fewer RBOC, some equipment vendors will face a challenge in trying to cope while one of their name-brand customers is overtaken.

Analysts believe that AT&T Inc. (NYSE: T), being the dominant player and the initiator of the $67 billion merger with BellSouth Corp. (NYSE: BLS), is likely to impose its strategy and vendor relationships when the two carriers combine. Analysts say this raises questions about Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), Redback Networks Inc. , and other BellSouth vendors. (See AT&T Deal Could Spur Cable Buys.)

Vendors already “in” with AT&T and its Project Lightspeed fiber initiative include Alcatel (NYSE: ALA; Paris: CGEP:PA), Cisco Systems Inc. (Nasdaq: CSCO)/(Scientific Atlanta), Ciena Corp. (NYSE: CIEN), Motorola Inc. (NYSE: MOT), and Siemens AG (NYSE: SI; Frankfurt: SIE). (See AT&T Shines a Light on Lightspeed and SBC, Microsoft Defend Lightspeed.)

AT&T also said recently it will be upgrading its optical backbone to OC768 throughout 2006. “This should work out well for folks providing equipment for that AT&T IP/MPLS and optical backbone, because the goal is to move the traffic from the three combined companies to a single network that will support a whopping huge amount of traffic,” says Heavy Reading analyst Stan Hubbard.

Siemens, Cisco, and Ciena could each benefit if AT&T extends its backbone upgrade into BellSouth territory. Siemens would provide long-haul DWDM equipment, Ciena would provide its Coredirector and optical switches, and Cisco would provide its IP/MPLS technology.

But some equipment vendors may not have such a well defined future inside the AT&T/BellSouth combo. Tellabs and Redback, for instance, are two names analysts are batting around as ones to watch as this merger commences.

Tellabs won a contract to provide BellSouth’s fiber to the curb (FTTC) equipment roughly a year ago, at which time analysts said the FTTC business could yield the company $150 million in sales during 2005. (See Analysts See Tellabs Win at BellSouth.) AT&T uses a fiber-to-the-node strategy (FTTN), which it says is complementary to BellSouth's access efforts. But, still, the option to go with FTTN all over does exist. And if AT&T does go with FTTN everywhere, Tellabs will have a tough time holding on to its place in the network, writes UBS AG analyst Nikos Theodosopoulos in a research brief.

AT&T said Monday it would continue apace with the fiber rollouts of both companies, but made no specific comments on the technologies that would be used.

"All I can say is that we have close relationships with both companies and we have for years," says Tellabs spokeswoman Ariana Nikitas. "We sell a range of products that address both transport data and fiber access needs."

For Redback, too, the AT&T/BellSouth merger brings some anxiety over future business. “People are wondering just what happens to Redback if the combined company decides to leverage its R&D progress on the Lightspeed Project across the BellSouth territory,” Heavy Reading’s Hubbard says.

BellSouth has been using Redback’s SmartEdge B-RAS device for Ethernet aggregation, subscriber management, and edge routing in its own triple-play build. (See Alcatel Names Its 21CN Partners.) Redback investors were worried too, apparently, as the company's shares fell $3.35 (15.40%) to $18.40 in trading on Monday.

Redback did not immediately return calls seeking comment.

For suppliers to Cingular Wireless , Prudential Equity Group LLC analyst Inder Singh sees the AT&T/BellSouth merger as neutral in the near term. (See Cingular's Converged Future.) “We do not expect any slowdown in spending on 3G upgrades at Cingular, with Ericsson AB (Nasdaq: ERIC) representing the largest vendor in this network,” Singh writes in a brief Monday (See Ericsson Expands Cingular.)

Lucent Technologies Inc. (NYSE: LU) should also benefit from this spending, though it may be offset to some degree by slower spending on the AT&T/BellSouth wireline network,” Singh adds. (See Lucent Expands Cingular.)

In terms of the overall effect of the merger on capex, analysts’ views are mixed. “It would create even more customer concentration for equipment suppliers, and a combined T/BLS would likely pursue even more discounts,” writes UBS's Theodosopoulos.

On the other hand, Theodosopoulos suggests, the wireline networks of AT&T and BellSouth do not overlap, so no basic capex “synergies” will happen there.

Prudential's Singh stresses that because the merger will speed the movement of the BellSouth network toward next-generation IP technology, it can only be seen as positive for overall equipment spending.

— Mark Sullivan, Reporter, Light Reading

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Mark Sullivan 12/5/2012 | 4:02:39 AM
re: Will AT&T Value BellSouth's Vendors? One of our sources, equities analyst and former FCC bigwig Blair Levin says the merger will go through without hitting many "speedbumps." If the FCC does place some requirements on the merger, what might they look like and would they involve broadband networks and services?
materialgirl 12/5/2012 | 4:02:45 AM
re: Will AT&T Value BellSouth's Vendors? The merger cc was a joke. It was long on "we know each other from Cingular" and "BLS has a solid service mentality and an open hiring policy, so things will go fine." They gave some merger synergy ballpark numbers, most of which focused on operational savings in the 2009 time frame.

When asked why their revenue synergies (upsides) were missing, management said they were "conservative" and focused on what they could control. They highlighted IMS-based upside at some point in time, even though they have no idea what they will offer. The other synergy was in downsizing ATT offerings to BLS small businesses, and putting BLS traffic on the ATT backbone. This, despite their claim that the deal will not reduce competition, and therefore will have no FCC problems.

WHile the deal already seems done from a regulatory standpoint, it seems that ATT is trying to become "too big to fail", then they will try to block all value-added traffic in order to extort content vendors and just run to the government if this does not work. That is their revenue synergy plan.
douggreen 12/5/2012 | 4:02:47 AM
re: Will AT&T Value BellSouth's Vendors? "...how do you achieve efficiency with legacy equipment and multiple networks?"

Easy. Consolidate organizations and lay people off. Eliminate redundant networks where possible to save operations costs. Due to a reduced overall market for products and a larger combined company, squeeze the vendors even more.

I agree with your point that, in the long run, the company has to be innovative to stay competitive. However, I don't think that AT&T has the DNA at present to do so. They will put off the ultimate problem by doing what they know best first, i.e. layoffs and consolidations.

The real winners in the short term will be whoever gets the contract for the consolidation work.
alcatell1 12/5/2012 | 4:02:48 AM
re: Will AT&T Value BellSouth's Vendors? Hi -

Think Alcatel will try to throw out Juniper and Redback at the edge? I saw the SR 7710 but it looks like a Y2K box from Juniper. 3 slots with PICs. Bunch of T1s, DS3s, 10/100s. Thats all. The box alone is 30000 American. I don't think Juniper will have much trouble against this M*rde.
sgan201 12/5/2012 | 4:02:49 AM
re: Will AT&T Value BellSouth's Vendors? I do not know whether the AT&T or SBC is in charge now. But, the old AT&T has a philosophy of designing their network in such a way that they have at least two choices at each part of the network. And, either choices will work fine with their network design. So, they can essentially pick and choose who to buy depending on who give them a better deal.

databoy12 12/5/2012 | 4:02:52 AM
re: Will AT&T Value BellSouth's Vendors? I totally agree that efficiency will be the first objective. However, how do you achieve efficiency with legacy equipment and multiple networks? AT&T will have to modernize and converge networks to achieve this efficiency. It would seem the equipment manufacturers that can help AT&T modernize and converge networks will prosper, while legacy or single purpose equipment manufacturers will suffer. In my opinion at least, vendors such as Nortel, Lucent, Tellabs will suffer while vendors such as Juniper, Redback and Microsoft will prosper. The Alcatel Lightspeed solution does not incorporate a best of breed concept and forces AT&T into an architecture that is totally dependant on Alcatel. If I were AT&T, this is not a situation I would want to be in and I would hope AT&T realizes this in due time.
douggreen 12/5/2012 | 4:02:54 AM
re: Will AT&T Value BellSouth's Vendors? Mark,

Yes, the merger seems to be driven by competition from cable companies. The merger, however, will do little to help them become more competitive. What it will do is to help them maintain profitability in the face of shrinking revenues by reducing their combined cost structure. Since efficiency, not new services, will be the first objective, the effect on the equipment market will not be positive.
Mark Sullivan 12/5/2012 | 4:03:13 AM
re: Will AT&T Value BellSouth's Vendors? I doubt the FCC will agree with you. This merger is driven by competition from Internet companies and cable triple-play. And the FCC will OK it.
Mark Sullivan 12/5/2012 | 4:03:14 AM
re: Will AT&T Value BellSouth's Vendors? The analysts say AT&T will impose its network strategy and vendor choices on the BellSouth network. Your post describes how that happens at a personal level. Organizations are made of people. People are driven by greed and fear, among other things.
Mark Sullivan 12/5/2012 | 4:03:17 AM
re: Will AT&T Value BellSouth's Vendors? As for layoffs, the number will be around 10K, according to AT&T.
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