By Steven Pearlstein
Washington Post Staff Writer
Tuesday, May 12, 1998; Page C01

In rewriting the nation's telecommunications law three years ago, Congress envisioned a competitive free-for-all in which long-distance companies and local telephone companies, cable operators and even Internet providers would invade one another's businesses.

But in the years since, much of this new competition has bogged down in technical difficulties and regulatory skirmishing -- leaving consumers little to show for the new law in the way of lower prices, new services or greater convenience.

Now SBC Communications Inc., with its bold move yesterday to acquire Ameritech Corp., has placed a huge bet that the competitive free-for-all won't occur any time soon. Instead, it has concluded that the best telecommunications strategy is simply to buy up as many local phone customers as possible -- and try to sell consumers as many other services as technology and regulations allow.

"The keys to this kingdom are the local telephone loops," said Ken McGee, a vice president of the Gartner Group Inc., a market research firm in Stamford, Conn. "The local phone companies have figured out that it is better for their shareholders to combine with each other than to accept the risks and the expense of getting into price wars, building new facilities and providing lots of new services through their networks."

If its bid for Ameritech -- along with a previously announced acquisition of Southern New England Telephone Co. -- is allowed to proceed, SBC would control one of every three phone lines in the United States. It also would control one in every two of the business phone lines. Business users provide a disproportionate share of revenue for telephone companies.

Analysts predicted yesterday that the SBC-Ameritech merger would trigger other combinations, as rivals try to match the scale of the new giant. For example, Bell Atlantic Corp. -- which only recently swallowed up Nynex Corp. in the Northeast -- would be tempted to extend its hold on the eastern seaboard by acquiring BellSouth Corp. in the country's booming Southeast.

Such combinations -- because they involve combining relatively well-run local phone monopolies from different areas -- won't generate big cost reductions or service breakthroughs. "You combine one boring phone company with another and what you get is a bigger boring phone company," McGee quipped yesterday.

But both SBC and Bell Atlantic are banking on the fact that by having such a huge base of customers, they would eventually be able to steal a march on long-distance providers AT&T Corp. and MCI Communications Corp. by turning what is now a long-distance call between New York and Atlanta (in the case of Bell Atlantic) or Chicago and Los Angeles (in the case of SBC) into a local call carried exclusively on their own networks.

According to Raul Katz, an industry consultant with Booz-Allen & Hamilton Inc., that kind of geographic range would give the local companies a big price advantage over a long-distance carrier, which would be required to pay a local "access charge" to complete the call at both ends.

The local phone companies also would have a marketing advantage, Katz argued. He contended most consumers, if given a choice, would rather buy all their telecommunications services from their local provider, rather than their long-distance companies.

But according to the Gartner Group's McGee, the same research also shows that business customers "can't wait to fire their local phone companies and give their business to long-distance carriers," who respond favorably to the more innovative services and tailored packages for voice and data communications.

The most powerful trend, some analysts say, is market segmentation. Rather than splitting along the old lines of geography or local vs. long distance, the telecommunications market may be dividing itself by customer group -- with some companies focusing on services to consumers and small business and others providing comprehensive packages to large businesses.

That certainly seems to be the way things are going for AT&T, the once mighty-giant in the telecommunications industry that is now struggling to find a viable strategy.

Over the last three years, the company has stumbled badly trying to break into the local telephone market by essentially "renting" capacity from the regional Bell companies at wholesale rates and reselling it. AT&T invested $4 billion in that effort, but the company's new chairman, Michael Armstrong, recently pulled the plug.

At the same time, AT&T has seen intense competition from MCI and no-name carriers erode the once-generous profit margins on its huge residential long-distance business. By one estimate, some 20 million of those customers make so few long-distance calls that servicing them actually generates losses of about $500 million a year.

On the positive side, however, AT&T now has a booming $4 billion division providing a broad package of voice and data services to large and mid-sized businesses. And it recently paid $11.4 billion for Teleport Communications Group, which has been a pioneer in wooing high-volume business customers from the local phone monopolies. AT&T's cellular division is also doing well.

MCI also has been pulling back from a frontal assault on the local phone market. If regulators approve its proposed sale to WorldCom Inc., the new company will focus on building the biggest global network to carry data and voice over the Internet.

But while local and long-distance companies have, at least for the moment, decided to step back from the head-to-head battle envisioned by the new telecommunications law, most analysts predict it will be a temporary redeployment.

"Eventually, you're going to see the industry left in the hands of four, five, maybe six global super-carriers, each one capable of providing a full range of services to all regions and market segments," said Brian Adamik, who follows the industry for the Yankee Group, a Boston-based consulting firm.