Race is on to see if inevitable new upheaval preserves "third carrier"

The Wall Street Journal reported today that Qwest is seeking a buyer for its long-distance network, essentially reducing itself to what was originally the US West regional Bell operating company.

You can look at this report as the opening salvo of the inevitable next phase of U.S. telecom industry restructuring, the one following formation of the AT&T and Verizon local/national/wireless megacarriers several years ago. For the enterprise market, the outcome of this new phase will hinge on the preservation or loss of effective national deal competition. Either result is possible.

It's not just about Qwest. Sprint is in the mix here, too. Today's press report is about Qwest and its need to reduce its stubbornly high $14 billion in debt and avoid some painful debt maturities in late 2010. But Sprint also has megabillions in debt, and like Qwest, it has essentially a two-part structure. Qwest is a local phone company married to a wireline long distance carrier. Sprint is a wireless provider also married to a wireline long distance carrier.

Wall Street analysts are making this connection. Already J.P. Morgan is out with a report posing one scenario under which both Qwest and Sprint could spin out their long distance divisions, which would then merge and create a dedicated competitor to AT&T and Verizon.

Theoretically, that would be a nice solution to the looming possibility of a duopoly of AT&T and Verizon. But practically, it sounds tough. Both the remaining Qwest (local company) and Sprint (wireless company) would want to come out of such a deal with reduced debt. That means the new Sprint/Qwest LD company would have to be saddled with the offloaded debt. When you consider that such a company would also lack local facilities to compete with AT&T and Verizon, it could result in a carrier with some handicaps right off the bat, never mind the usual merger messiness for current Sprint and Qwest customers.

But it's an idea that's arguably better than many alternatives. On its own, Qwest could simply sell its LD network to a Level 3 or a foreign investor, and that's fine. But Qwest might instead try to attract AT&T or Verizon to buy the network. That last option is probably the most straightforward, but it's also very worrisome. That would simply reduce competition by one carrier, and it would open up the door for AT&T or Verizon to swallow up any other remaining national competitor.

Such a result could be avoided if Level 3, which has consolidated many smaller business carriers, steps up to be an even greater national consolidator with a Qwest network acquisition. But the price of a Qwest LD network sale would have to be quite modest, and without ruinous debt terms, for Level 3 to afford it. It's questionable whether there's a financial match there, but we'll see.

Believe it or not, there's money out there to do mergers and acquisitions from other players. Not all potential acquirers have been wiped out by the recession and financial crisis. But through all this, our eye has to be on the competition in business-to-business telecommunications. The bottom line is that for non-AT&T and Verizon enterprise customers, changes in the ownership of your supplier are becoming more and more likely. That's something that many users have come to accept, and they realize the ultimate question mark is whether such ownership changes result in a boon or bust for competition. We'll know the answer by judging whether a truly capable, stable and motivated No. 3 enterprise carrier shakes out from the mix of any upcoming deals, or the concept of a Big 3 bites the dust.