By Allan Sloan
Tuesday, June 3, 1997; Page C03

When it comes to telecommunications, talk is cheap -- and we're not talking about long-distance rates. Rather, we're referring to the endless talk about the so-called New World of Telecommunications, which has been all the buzz since Congress passed the landmark Telecommunications Act of 1996.

This legislation was supposed to usher in a new world in which phone companies, long-distance companies and cable TV companies would all poach on one another's turf. All sorts of new companies would join the fray, too. This would give us consumers lower prices and better and more innovative services. Bye-bye, big, clunky corporations. Welcome, lean and hungry.

Hello? The new telecommunications world is sure starting to look a lot like the old telecommunications world, full of giant companies about as eager to compete with one another as operators are to refund your quarter when your call gets messed up at a pay phone. Instead of competing, the giants are combining by buying one another.

Take last week's stunning development: The news, disclosed in the Wall Street Journal, that AT&T Corp. and SBC Communications Inc. were negotiating what would be the biggest merger in history. This combination of the country's largest long-distance company and its largest local phone company effectively would reverse a good part of the 1984 AT&T breakup, which separated local service from long-distance. Assuming, of course, that such a deal goes through. That's a big assumption given the hurdles this combination would face.

An alternate possibility is that AT&T's real heartthrob is GTE Corp., and that AT&T leaked news of its talks with SBC to make GTE come across. GTE would be an especially desirable partner because it's already in both the local and long-distance businesses, it's not covered by the restrictions of the 1984 AT&T breakup, and it's exempt from some constraints of the 1996 telecommunications act. No one would talk on the record about an AT&T-GTE deal.

Having behemoths such as AT&T, SBC and GTE devour one another isn't quite what Congress had in mind when it passed last year's telecommunications act. The law lets local phone companies enter the lucrative long-distance business provided that they open up their own markets to competitors.

But you can expand quicker by buying than by building. Take Bell Atlantic Corp. Instead of competing with neighboring Nynex Corp., which is arguably the most vulnerable Baby Bell because of its high prices and crummy service, Bell Atlantic is buying it. SBC, the former Southwestern Bell, already has bought Pacific Telesis. So the original seven Baby Bells are down to five.

Meanwhile, MCI Communications Corp., the second-largest long-distance company, has a pending deal to sell itself to British Telecommunications PLC. Sprint Corp., No. 3, has formed a joint venture with giant French and German phone companies. Time Warner Inc., the nation's second-biggest cable company, largely has given up its plans to get into the local phone business. And big phone companies have pretty much given up on moving into cable. Someday, things may work as planned, but the results so far aren't encouraging.

What's going on here? "In a time of uncertainty, it's not surprising that different companies would look for the comparative security of mergers and consolidation and joint ventures," Federal Communications Commission Chairman Reed E. Hundt said in an interview with my Newsweek colleague Michael Hirsh. "That's why government has to come in and say, `This is okay, and that is not okay.' Now where that line is, we haven't said it clearly yet."

What is clear, though, is that an effort by AT&T to combine with SBC or GTE would turn the grumbling over telecommunications mega-mergers into an uproar. AT&T would become a lightning rod for criticism of galloping gigantism the way it drew fire for downsizing by announcing 40,000 job cuts last year.

That AT&T is considering an SBC or GTE deal shows how it has fallen since 1984 -- and how the world has changed. In 1984, AT&T gave up its local phone business in return for being allowed to keep its computer and equipment businesses. Last year, AT&T unloaded computers and equipment, and is hot to get into local phones. To be blunt, AT&T is a mess. It's losing market share in long-distance; it blew billions on computers; it botched international expansion.

There's also turmoil in the executive suite. High-level defections have plagued AT&T, most notably the 1996 departure of Alex Mandl, president and heir apparent to Chairman Robert Allen. AT&T hired a new president, John R. Walter, last October. But Walter, 50, has clearly irritated Allen, 62, by acting as if he expected to actually run things. Allen reportedly has told prospective partners there's no reason to give Walter the top job. Combining AT&T with another huge phone company would allow Allen to solve the succession problem and declare victory. AT&T declined comment, and a spokeswoman said that neither Allen nor Walter would talk.

AT&T, formerly the Bell System, isn't just another company that's lost its way. Its badly battered shares are owned by more U.S. investors than any other stock, and it reaches out and touches millions of people on a regular basis. Now, this once-great outfit has been reduced to trying to get some other phone company to help solve its problems. That rumbling noise you hear is old Ma Bell spinning in her grave.

Allan Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.