Just when you expected the Baby Bells to resort to carping and lawsuits, Wall Street analysts have discovered a sweet technical loophole that could steer the beleaguered big telcos around tough new federal price rules.
Late last week, the Federal Communications Commission released its final review of local phone competition and forced discount policies. The latest version of the ruling elaborates on
a February decision that, among other things, preserved mandatory discounts for the Bells' local-phone rivals and shifted pricing jurisdiction back to the states.
The FCC's objective was to create a more competitive market for local phone service, which continues to be dominated by the Baby Bells, and to encourage the expansion of more modern network technologies. Many in the Bell camp -- namely
-- viewed the rules as a major setback that could allow rivals such as
to resell local phone service essentially at the Bells' expense.
But it seems a potentially liberating alternative has been uncovered amid all the rancor. And happily for investors, this readily available technology could simultaneously boost margins at the financially pressed Bells and brighten a dim revenue picture at some telecom-equipment houses.
Consider the humble softswitch. Since the mandatory discounts apply to the Bells' conventional phone system, one way to dodge the rules would be to upgrade some of the old circuits to Internet technology.
Voice-over-the-Net has long been one of the most popular ways to bypass typical phone networks and all the access charges and fees that come along with them. Now suddenly, the Bells themselves have reason to bypass their old systems -- not so much in the name of progress, perhaps, as in an effort to defend their turf.
The companies haven't indicated whether they'll adopt the technology en masse. But one thing is clear: The way the rules are set up, says Legg Mason analyst Timm Bechter, "The Bells will get relief if they use packet technology."
Typically, a conventional phone conversation is carried on an analog signal over a continuous electronic circuit between points. Though this setup creates a reliable, clear-sounding channel, the dedicated circuit represents an inefficient use of the network.
While less reliable and clear-sounding, the more-efficient method of the Net, a.k.a. Internet protocol, sends conversations via digital signals that are separated and shipped in packets between points.
Softswitches are seen as the essential next step in network evolution. These next-generation boxes help connect traffic from old-wire phone systems to the Internet.
On a conference call with analysts Friday, regulators were asked if packet-switched portions of the network would have to be unbundled, i.e., shared with competitors. The reply was no.
That answer has triggered a few ideas among the telecom equipment analysts who are suddenly seeing a few packet switch or softswitch vendors in a new light, regardless of the Bells' fence-sitting. Verizon said Friday that it was still reviewing the FCC order and couldn't comment on whether it would change packet-upgrade plans.
The leader in converting phone networks to packets has been
, which is currently working with local phone giants such as SBC to upgrade their systems. But don't forget softswitch specialty shop
, which made great headway around the turn of the century selling tandem switches and gateway devices that helped divert mostly long-distance traffic off the conventional network to the Net.
Some analysts, such as J.P. Morgan Chase's Ehud Gelblum, say outfits such as Nortel,
and Sonus would be the most likely to benefit from the loophole in the ruling.
The hexed networking giant
was hamstrung by
hard times and a poor reception among customers, causing it to largely abandon most of its early efforts on the softswitch. But J.P. Morgan's Gelblum doesn't completely write Lucent out of the equation, saying there may yet be some interest in its remaining softswitch upgrade.
The Home Office
One of the stumbling blocks that has hindered the phone industry's migration to packets has been the inability to replicate some of the essential features of standard telecom service. Features such as 911 emergency dialing and federally mandated wiretapping capabilities have been elusive in the packet domain.
But Legg Mason's Bechter says technology isn't the biggest obstacle to Big Phone's packet revolution.
"I think the bigger issue is in the back office," says Bechter. "They have so much invested in the software and billing systems involved with running their circuit switched networks, so it's not the kind of thing you can make happen in a few years."
Bechter says he expects the Bells will likely bring in the packet technology where they "have the greatest competitive threat."
After years of paying lawyers and lobbyists to find loopholes in the laws, now the Bells could be shifting the effort to the engineers to help work the angles.