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..or are they?



Thursday February 28, 1:27 pm Eastern Time Bells Are Ringing, But Too Soon By Mark Lewis

Despite the Baby Bells’ victory in the House of Representatives yesterday, Congress is hardly on the verge of unleashing the Bells by scrapping the Telecommunications Act of 1996. But the overall trend is toward deregulation, so the House action apparently encouraged investors to play the consolidation angle today by snapping up every telecom issue in sight.   The four Bells were up in morning trading–but so were the three major long-distance carriers, which had bitterly opposed the Tauzin-Dingell bill that passed the House yesterday. The bill, which would let the Bells carry long-distance data traffic, now faces a cold reception in the Senate. But rejection there would not leave the Bells permanently shackled, since the Federal Communications Commission is busy loosening its rules governing media and telecom companies. The federal courts and the FCC clearly are not waiting for Congress to act; they are moving on their own to deregulate the communications market.

The signs all point toward further consolidation, although it is not yet clear who will be swallowing whom. This morning, investors seem to be playing all the angles at once. They were buying the Bells, led by Verizon Communications and SBC Communications ; the long-distance carriers, including AT&T and WorldCom ; and all the big media conglomerates other than Walt Disney , which fell into disfavor after being whacked today by a Goldman Sachs analyst.

Investors might be better off waiting for the smoke to clear. “The courts and the FCC continue to relax various telecom and media restrictions, but we caution investors not to base their strategy on any single rule change, as it is the combination of all the rule changes and the reaction of industry players that will determine the winners and losers,” Legg Mason analyst Blair Levin said today in a research note. “While we continue to believe the trend will produce more consolidation over time, we do not expect an immediate flood of deals.”

In effect, the Tauzin-Dingell bill is just an opening shot in a long war over how to rewrite the Telecommunications Act, which has not worked out as hoped. Everybody wants to push the Internet Revolution on to its next stage, in which broadband access is universal and the longed-for convergence of voice, video and data services finally becomes a reality. But there is no real consensus yet about how to get there. The Bells, which were expected to wither away, are still standing tall, while those nimble upstarts founded in the wake of the 1996 act are dropping like flies.

Amid such chaos there is opportunity, but investors may be overreacting today. The Bells’ victory in the House does not herald a new dawn for the telecom sector. It is just another move in the ongoing chess game over the 1996 telecom law.