The Bells seem to have scored another win with AT&T's ( T) decision to throw in the towel on the consumer phone game.
Shares of the big local phone giants -- Verizon ( VZ), SBC ( SBC) and BellSouth ( BLS) -- have risen more than 4% since Thursday in the wake of Ma Bell's residential retreat. Now industry watchers look ahead to Verizon's second-quarter earnings report Tuesday for signs that the local phone giants can achieve another victory. Some observers expect Verizon to show progress toward reclaiming its turf and, at least for now, reversing a 3-year-old line-loss trend. Great gains in wireless subscribers have eased the painful erosion of Verizon's core phone business, as reflected in the company's access line count. The continued success of Verizon Wireless, a joint venture between Verizon and Vodafone ( VOD), is expected to be a big part of the company's results. (On Monday, Vodafone's earnings report pointed to a stronger-than-expected subscriber-addition trend at Verizon Wireless.) But some analysts are hopeful that Verizon can show it has slowed the access line declines -- or even turned the tide around. The Bells passed a troubling milepost in 2001, when, for the first time in history, the number of total phone lines actually shrank. The rate at which consumers were switching to wireless service, and canceling second home lines, suddenly began to outpace new customer additions. The shift began a slow erosion of revenue for the Bells, and it has cost the group more than a third of its market value over the past three years, as investors grew pessimistic about the sector. SBC reported Thursday that its consumer line count dropped by 558,000 in the second quarter ended in June. The decline was made worse by shutoffs as college students left school for the summer. The recent slide, while greater than the 305,000 decline in the first quarter ended in March, is an improvement from the 721,000 lines lost in the year-ago period.
In the first quarter ended in March, Verizon lost 314,000 residential lines, the lowest shrinkage rate in a year for the New York phone titan. Barring a big seasonal increase in shutoffs, Verizon could improve on that number when it reports second-quarter earnings on Tuesday. Investors and analysts expect Verizon Wireless to post another blowout quarter with increased average revenue per user, or ARPU, and fewer defections, or churn. On the core phone side, analysts are looking for Verizon to post second-quarter earnings of 60 cents a share on sales of $17.4 billion. That is slightly better than the 58-cent net on $17.1 billion in the first quarter and 79 cents of profit on $16.8 billion in revenue in the year-ago period. In fact, now that AT&T and MCI ( MCIP) are backing away from residential competition, some see a chance for the Bells to regain lost ground. "I think by the third quarter, SBC and maybe Verizon could have access line growth," says one New York hedge fund manager who is long Verizon and SBC and short BellSouth. He hastens to add, however, that any gains "won't last long." Some telecom trend watchers agree. "If the line losses stop, it will only be temporary," says industry guru David Isenberg of isen.com. A former AT&T strategist who was the first to point out the significance of access line declines , Isenberg says the conventional phone business is steadily being eclipsed by the Internet. "Optimists will say phone companies can adapt by selling Internet protocol connections," says Isenberg. "But selling broadband is a whole different game." This could be difficult for companies used to selling phone service to a captive audience, says Isenberg. "Selling connectivity means you have to compete in a commodity world," Isenberg says.
Even though AT&T tried a last-minute bribe of promising 5,000 new U.S. jobs to help gain support for the deal, the Justice Department filed a complaint to fight the combination of the nation's No. 2 and No. 4 wireless carriers.