Bells Face the Music on Pricing Rules

Having lost hundreds of thousands of customers already to resellers like AT&T (T) and MCI, the Bells have vowed to fight back -- both in the marketplace and in the courthouse. Recent flat-rate and bundled service packages have helped the Bells stem the loss of customers.

Wall Street viewed the original order as a hard blow to the Bells, sending their shares on a sharp three-week decline. But some analysts later predicted that the final version of the FCC order would soften some of the impact. The Bell stocks are all now above their February levels.

Rewind

Few expect any significant changes to the order, which has some investors betting that the final version will amount to a replay of the disappointment of the original. With no obvious relief from the discounting rules, these investors suspect that an unchanged order will dash some of the recent Bell-side optimism.

With massive debts, no revenue growth and a shrinking core local phone business, the Bells don't exactly offer much right now to entice investors. Even the new growth areas -- think of the cash-burning digital subscriber line, or DSL, business -- only compound the problem, in some regards.

The FCC order won't change the picture much for the Bells, says money manager Craig Nedbalski of Victory Capital Management.

"Clearly the economy hasn't helped, business spending has not picked up and there's been no new demand for services," says Nedbalski, who owns SBC and Verizon. "But I am encouraged by the strong DSL rollout."

That's the angle some investors are playing on the FCC ruling. The one positive from the Feb. 20 guidance was that the agency left the Bells alone when it came to data lines.

Nedbalski says the Bells' DSL technology, which falls under that part of the ruling, is loaded with untapped potential that is as yet underappreciated. Now that the FCC has dropped the requirement that the Bells share the lines with competitors, they are free to capitalize.

"Now it's just a matter of hitting critical mass," says Nedbalski. "Before the FCC review, there was no incentive because they had to build it and then sell it below cost to competitors."

So the Bells might well be hoping that investors focus on that DSL opportunity when the final order comes out -- and not on the continuing customer exodus from the local phone business.

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