Baby Bells Cry Foul, but Are They Crying Wolf?

Bell defenders argue that the rule allows competitors to cherry-pick the Bells' valuable local customers. The Bell bulls say that the loss of local customers, who tend to buy high-margin services such as voicemail and call waiting, isn't easily overcome by adding lower-margin long-distance subscribers.

As a Verizon spokesman asserts, the rent charged to rivals is below the cost providing the service, and that "essentially makes us pay our competitors to compete agains us."

But some industry observers just don't buy the Bells' complaints. From a revenue standpoint, the Bells are treading water when it comes to the loss of local customers against the gain of long-distance ones, says UBS Warburg analyst John Hodulik.

The Bells lose about $18 per month of revenue when a subscriber jumps, but they gain about $11 per month from each new long-distance customer. And the Bells have been adding more than 1.5 long distance customers for every local subscriber they lose, says Hodulik.

Encouraging Signs

In fact, while SBC was blaming its latest round of job cuts and customer losses on those evil regulators, company executives were telling analysts and investors that they were seeing some encouraging signs on the long-distance side of the business. Not the least of which, SBC CEO Dick Notebaert told analysts on a conference call last week that he expected that SBC's long-distance market share should ultimately reach 50% to 60% in markets in which it competes, judging by the company's experience in Connecticut. SBC has been offering long-distance service in that state for some four years.

Verizon also helped put the disadvantaged-Bells argument in doubt last week when the company said on its earnings call that it was already profitable in its young long-distance business as of last quarter. "One reason we are a financially stable company is that we have a diverse revenue stream," a Verizon spokesman explains.