IP: Regional Bell Giants No Longer Invulnerable

[David Farber <dfarber () earthlink net>]

-----Original Message-----
From: Richard Shockey <rich.shockey () NeuStar com>
Date: Tue, 23 Jul 2002 13:09:16 
To: dave () farber net
Subject: Regional Bell Giants No Longer Invulnerable

New York Times
July 23, 2002
Regional Bell Giants No Longer Invulnerable
By SETH SCHIESEL with SIMON ROMERO


Shortly after BellSouth, the nation's No. 3 local phone company, sent its 
stock plunging yesterday by saying it would fail to meet its financial 
targets for 2002, one analyst released a report titled, "It's Official — 
There Is No Place to Hide."

In some ways, the pronouncement was as startling as it was apt. Just 18 
months ago, the nation's big local phone service providers, led by the huge 
regional Bell companies, seemed poised to emerge from the 
telecommunications industry's troubles in a position of strength. While the 
long-distance carriers pummeled one another in savage price battles, and 
start-up local carriers withered, the Bell companies could sit back with 
their near-monopolies and reap growth, profits and the adulation of investors.

Or so the story went. And as with so many other visions in the troubled 
telecommunications industry, that story is now over. The bankruptcy filing 
of WorldCom has added to the local phone companies' problems, but their 
real troubles are more fundamental. The Bell companies are now facing a 
raft of strategic, technical and financial difficulties that may take years 
to overcome.

To begin with, for the first time in memory and perhaps for the first time 
ever, their core customer base is shrinking: According to preliminary 
figures from the Federal Communications Commission, the total number of 
local phone lines in the United States shrank to 179.8 million last year, 
from 188.6 million in 2000. That was the first annual decline going back at 
least as far as 1984, when the local companies were spun off in the breakup 
of the old AT&T.

In roughly the same period, the Bells' entry into the consumer 
long-distance market failed to provide much benefit to their businesses. 
And the companies' digital subscriber line, or D.S.L., high-speed Internet 
service is widely considered inferior to competing cable modem technology 
from the cable television companies.

These industrywide issues may explain stock price losses beyond BellSouth, 
whose shares plummeted 18 percent yesterday, to $22.61. Among the stocks of 
its big peers, shares of Verizon Communications, the largest local phone 
company, fell $3.85, to close at $28.65, and is now down 39.6 percent this 
year. Shares of SBC Communications, the No. 2 local service carrier, fell 
$2.72, to $23.96, down 38.8 percent for the year. Investors will be bracing 
for SBC's second-quarter financial results, which are to be reported this 
morning before the stock market opens.

To be sure, the problems facing the Bells seem trivial compared with those 
of the long-distance providers. With their wild price wars, brash young 
companies like Global Crossing and WorldCom seem to have driven the 
long-distance industry to the brink of ruin even as executives at those 
companies were running afoul of accounting rules. With the exception of 
Qwest — which was the stodgy old regional Bell company U S West before it 
was taken over two years ago by the billionaire investor Philip F. Anschutz 
— the local phone industry appears so far to have escaped accounting scandals.

But the Bells' problems keep mounting. In its bankruptcy filing, WorldCom 
said it paid local phone companies about $750 million a month for access to 
their networks. If WorldCom, under bankruptcy court priorities, loses the 
ability to pay those fees, it will obviously hurt the Bells, too.

Longer term, BellSouth, SBC and Verizon seem to face the same basic set of 
challenges. Consider the shrinking number of telephone lines. In the 
1990's, the phenomenon known in the communications industry as second-line 
growth was propelled largely by the desire of customers for dedicated modem 
lines.

Now, many of the technology-astute consumers who once used dedicated modem 
lines are turning to high-speed, or broadband, connections. At the end of 
2001, about 3.4 million homes used D.S.L. service, which is provided over 
local phone lines, according to the Yankee Group, a research firm in 
Boston. But more than twice as many, 7.2 million, used cable modems, which 
are provided over cable television lines.

Richard Klugman, a telecommunications analyst with Jefferies & Company, 
said his family recently disconnected its second local phone line when it 
started using cable modem service.

"If you're spending $20 a month for a local line and $24 for AOL, you might 
as well have the cable modem," Mr. Klugman said. "It's not saving the 
world, but at my house we saved $20 a month because we didn't need the 
second line anymore."

Moreover, many consumers are now using cellphones instead of second lines. 
And some young callers now use cellphones as their sole phones.

Of course, BellSouth, SBC and Verizon are major wireless competitors as 
well, but wireless customers are not as profitable as traditional local 
phone callers — largely as a result of the price wars and capital 
investments required in the wireless industry. And not all of the customers 
who switch to cellphones move to a Bell-owned service (Some might sign up 
for AT&T Wireless, for instance.).

Even within the shrinking local telephone market, the Bell companies' share 
is shrinking. Alternative choices, primarily the local units of AT&T and 
WorldCom, now serve perhaps eight million lines for consumers and small 
businesses.

The Bell companies have long maintained that the F.C.C.'s rules force them 
to share their networks with outsiders on an unprofitable basis.

"Our first problem is regulation that doesn't make any sense," SBC's 
chairman, Edward E. Whitacre Jr., said in an interview yesterday. "They are 
allowed to buy access to our network at a 60 percent discount to our rates, 
and that is below what it costs to provide it."

If the Bells had some blockbuster new products on the horizon, their 
outlook might be brighter. In the 1990's, for instance, SBC forged a 
reputation as perhaps the nation's best-run local phone company — one 
successful at selling highly profitable services like call waiting, caller 
ID and voice mail. Now, most consumers who want those sorts of services 
already have them, and the prospects for growth are limited.

Not long ago, Bell company executives thought that D.S.L. would be their 
product of the future. But in the face of robust cable modem use, D.S.L. 
has largely been a disappointment. Yesterday, for instance, BellSouth, 
which serves roughly 25 million local lines, said it had signed up only 
74,000 D.S.L. customers in the second quarter, bringing its total to about 
800,000.

Executives of the regional Bell companies privately acknowledge that they 
can hope only to stabilize their core consumer businesses. They hope that 
wireless can provide sustainable profit growth in the future, but that will 
probably not happen unless there is significant consolidation in the 
wireless industry. Meanwhile, as the Bell companies are allowed into the 
long-distance market, it is clear that significant long-distance profits 
will have to come from business customers, not residential callers. And if 
the Bell companies are to become major competitors in business 
long-distance service, they may well end up acquiring companies like AT&T 
and Sprint.

Asked yesterday about his company's growth prospects, a Verizon spokesman, 
Peter Thonis, said, "We see long-term growth on the wireless side, and also 
a great opportunity to offer wireless services to our enterprise customers."

He made no mention of plain old telephone service.






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