The wailing is getting louder, but the Baby Bells' claims still don't ring true to some ears.
As the Federal Communications Commission prepares its "triennial review" of telecom policy, the complaints from one corner are reaching a fever pitch. The local phone giants are increasingly portraying themselves as hamstrung by rules that they say give big long-distance carriers a free ride on their dime.
The government-set pricing plan has long been a sore spot with the Bells. But recently
, and to a lesser degree
, have grown increasingly assertive in arguing that the setup -- known in the industry as unbundled network elements platform, or UNE-P -- gives their newly hatched local phone competition an unfair advantage.
But some analysts and investors say the Bells are once again talking out of both sides of the receiver, painting a woeful picture in Washington even as they highlight sunnier trends to Wall Street. The reality of the matter, these people say, is that as phone service trends evolve, the Bells are gaining long-distance and wireless subscribers even as their local businesses erode. And so, rather than unmasking a truly unfair network-pricing situation, the Bells are merely flexing their ample lobbying muscles in a more public setting.
Like many telecom industry disputes, this one starts with the Telecommunications Act of 1996. That landmark piece of legislation dictates that the Bells can't offer long-distance service in an area until they've given competitors a reasonable amount of access to their local network.
The Bells insist that the act allows outfits like
to essentially freeload by getting cut-rate access to the Bells' local customers. And if that's not bad enough, these phone squatters aren't saddled with the responsibility of buying gear or investing in the all-important "last mile" of network access.
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.
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.
Typically, the Bells' slice of any given long-distance market, once they gain regulatory approval to offer service, has been believed to hover in the 20% to 30% range, says Insight Research Corp.'s Bob Rosenberg.
"The benefits more than make up for losses from UNE-P, at least at the revenue line," says Hodulik, who expects the margins will also catch up as the Bells add more long-distance customers.
An SBC spokesman begs to differ, saying the gain of long-distance customers "doesn't even come close" to making up for the loss of higher-margin local customers. He says the company needs about five long-distance subscribers to compensate for the loss of one local account, and that the company loses $20 of revenue per month for each lost local account.
The Bells also argue that they are seeing significant flight of their local phone traffic and customers to wireless services. But what they neglect to point out is that much of that traffic and many of those customers are simply migrating to another side of the same business. Two of the largest wireless service providers -- Cingular and Verizon -- are owned by the Bells.
The Bells certainly face some challenges when it comes to network-sharing, but for the most part their complaints amount to "self-serving arguments," says Insight's Rosenberg.
Indeed, some of the best work the Bells have done lately hasn't come from sweeping technological innovation or groundbreaking efforts in customer care. Their real strength has been the defense of their markets, say analysts.
Perhaps the best proof of that may have come in the six years since the passage of the telecom act. That conflict-plagued body of law sought to stimulate competition by, among other things, giving rival phone companies access to the regional Bells' monopoly. Thanks to countless appeals and fortunes spent on lobbying, the Bells have succeeded in delaying any meaningful competition until this year.
"The whole deregulation process has been in works for a while, but it's starting to have a growing impact on the Bells," says UBS' Hodulik. "I think it's clear now that their strategy is to try head it off from the regulatory angle before the pain becomes too great."
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