Market is shaken, not stirred

Fewer telecom players mean more services, but benefits still years away

The federal telecommunications market is entering a new era that will be marked by fewer carriers, but a broader range of services that will help agencies streamline how they manage communications.

Driving this shift is a wave of mergers and acquisitions that show a telecom industry shaking off the baggage of the last decade ? a bleak period of bankruptcies, corporate misbehavior, overspending and oversupply.

But transformation of the telecom landscape will take up to five years, industry analysts and telecom executives said.

In recent months, three major telecommunications deals were announced. In mid-February, Verizon Communications Inc. of New York said it would purchase MCI Inc. of Ashburn, Va., for $6.7 billion. Denver-based Qwest Communications International Inc., however, is making a second attempt to buy MCI with an improved $8 billion offer and more favorable terms. Some of MCI's investors filed lawsuits because the company rejected the higher offer.

In January, SBC Communications Inc. of San Antonio announced it was buying AT&T Corp. for $16 billion. And In December, long-distance provider Sprint Corp. agreed to pay $35 billion for wireless company Nextel Communications Inc. of Reston, Va.

All deals must clear regulatory hurdles before being complete, either late this year or in 2006.

"After this wave of change is completed over the next few years, telecom will become an industry of giants, offering everything to everyone ? voice, television, wireline and wireless," said Jeff Kagan, an independent telecom industry analyst.

FAVORABLE FOR FEDS

The consolidation will be a boon for federal agencies.

The new class of megacarriers will provide integrated voice and data services, bundled prices, integrated operations support systems and more tightly woven end-to-end, keyboard-to-keyboard solutions, said Warren Suss, president of Suss Consulting Inc. of Jenkintown, Pa.

"For the federal government, it makes it easier, because they have to do business with fewer companies that offer all services," Kagan said.

"The government customer won't have to go to two vendors; they'll go to one. And that's the reason, obviously, for any merger," said Michael Maiorana, vice president of federal government sales and operations at Verizon Wireless, regarding the Verizon-MCI deal.

As these deals take center stage, federal lawmakers are holding hearings to reform and modernize the nation's telecom legislation and include new Internet-related technologies.

A new chairman of the Federal Communications Commission will be appointed to replace Michael Powell, who steps down this month. As the industry's primary regulator, FCC can significantly influence the telecom market.

In the meantime, the carriers will continue to compete separately for federal business.

"These announcements are big and powerful, but they take a long time to culminate, so we keep our heads down and move forward," said Jerry Edgerton, vice president of government markets and systems integrators at MCI.

After the companies clear various regulatory hurdles, they will have to spend substantial time combining their legacy systems and organizational structures, Suss said.

SBC and AT&T, for instance, expect to cut thousands of jobs. Sprint also will reduce headcounts when the Nextel acquisition is completed. And thousands more jobs will be lost at Cingular Wireless LLC, which purchased AT&T Wireless Services Inc. last year.

In the midst of the changes, wireless companies plan to focus on grabbing more federal business by offering alternative voice and data services to the government, industry professionals said.

"Most, if not all, the wireless carriers have identified the federal government as a strong player for wireless services," Maiorana said. "The federal government has a mobile workforce and a VIP workforce. People need information in real time, and they have embraced the technology across the scope from voice to data."

Verizon Wireless expects to continue increasing its foothold in the federal market after seeing its federal business grow by 110 percent from 2003 to 2004, he said.

The wireless company, jointly owned by Verizon Communications and Vodafone, believes the Defense and Homeland Security departments will be especially ripe, as both have groups that work on mission-critical projects and are "prone to use our technology," Maiorana said.

NOTHING TO NETWORX

As the mergers and acquisitions move forward, the effect will be minimal on one of the biggest prizes in the government telecom market: the General Services Administration's FTS Networx contract, analysts and industry insiders said.

With an estimated value of up to $20 billion, the 10-year, governmentwide telecom and IT contract is the government's largest telecom procurement. It will replace FTS2001, which expires in 2006.

"The timing of Networx is such that we will proceed with business as usual, and other vendors probably will do the same," MCI's Edgerton said.

GSA took into account the changing marketplace when it wrote its strategy for Networx, officials said.

GSA's strategy is based on a two-part procurement approach, with contracts to be issued for Universal and Enterprise segments.

The Universal part favors large telecom carriers and will provide federal agencies with a range of services wherever needed, while Enterprise is geared toward systems integrators and smaller and midsize IT companies that can offer a mix of more specialized and localized services.

MCI and Sprint, incumbents on GSA's FTS2001 contract, also will compete for Networx.

The request for proposals for Networx's two parts are scheduled to be issued next month. John Johnson, assistant commissioner for service development and delivery at GSA's Federal Technology Service, said he didn't anticipate any delay with the RFPs, but that GSA might consider changing the RFPs' issuance date if the agency finds it needs more time to adjust the Networx procurement to improve the product.

The mergers will help ? not hurt ?Networx, said an industry executive who works for one of the companies involved in the mergers.

"What buyers, including the federal government, don't want is a bunch of wounded carriers and competitors that are not going to be able to take advantage of innovation" through investment and research and development, he said.

"What government is looking for is companies to help them solve large-scale problems," such as compliance with the federal telework initiative and voice and data integration through an Internet protocol network on a global basis, he said.

Staff Writer Roseanne Gerin can be reached at rgerin@postnewsweektech.com.

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