SBC Can't Buck Erosion

Local access telephone lines keep falling even as DSL efforts pick up.
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Multiservice bundles and cheaper high-speed Net access don't seem to be shoring up SBC Communications' (SBC) core phone business.

The San Antonio telecom giant

posted some healthy first-quarter numbers Monday. Those included big gains in digital subscriber line, or DSL, users, and an adjusted bottom line that came in just above year-ago adjusted profits. SBC shares rose 21 cents, to $23.41 in late afternoon trading.

But there were no pleasant surprises from the company's local phone operations, which continue to get squeezed by rivals.

SBC lost 500,000 access lines last quarter, a 4.2% slide from levels it held a year ago. This rate of decline has not changed much in the past five years, and investors have grown concerned that the erosion may soon speed up as cable companies like

Time Warner

(TWX)

and

Comcast

(CMCSA) - Get Report

push phone-over-the-Internet efforts.

Like Bell peer

Verizon

(VZ) - Get Report

, SBC's shares hit a one-year low last week as Wall Street fretted over the steady slide of the old-line telcos.

When asked on an earnings conference call with analysts Monday about access lines disappearing into the ether, SBC executives couldn't put a finger on exactly where the company's customers were going.

"I think what you see," said CFO Rick Lindner during the call, "is growth in access lines moving to wireless-only households. That's one reason we are pleased to be in partnership in Cingular," the wireless joint venture SBC owns with

BellSouth

(BLS)

.

Lindner added that cable companies are also starting to have an impact as they offer calling service through cable modem connections.

"We increasingly see voice going with broadband," said Lindner. "That's why we are aggressive with DSL."

Cable companies like Time Warner and

Cablevision

(CVC)

have been adding 1,000 to 2,000 new customers a day for voice-over-the-Net calling services. As Verizon and SBC have learned, this trend is

disturbing. For one thing, it promises to speed up the 4% annual shrinkage rate for local phone line totals. For another, unlimited Net calling tends to siphon off some of the higher-spending customers first.

Perhaps even more troubling is the entry of new phone competition from the likes Net giants

AOL

and potentially

Google

(GOOG) - Get Report

, as well as upstarts like

Vonage

and

Skype

.

To better battle on the broadband front, SBC cut its monthly DSL price to $20 in some markets, hoping to get new users to take cheaper Net access along with a bundle of phone and even satellite TV service.

But for all the expensive installation efforts, the payoff isn't exactly guaranteed.

It takes several months of payments for phone companies just to start recouping initial hookup costs, and by the time they start to see a return, the customer may have switched to a better offer.

SBC doesn't disclose financial results or subscriber defection rates for its DSL business. But on the conference call, Lindner said that the company improved monthly churn rate by 60 basis points.

Fans say SBC is playing its old-line network hand as well as it can until its new-line fiber optic venture Lightspeed is up and running. The company is also hoping to cash in on a big business opportunity when its acquisition of

AT&T

(T) - Get Report

is complete.

The end game for SBC and Verizon's consumer services rides on new bundles of video, Internet and calling services delivered over fiber optic cable. The problem for the Bells is investors are focused too much on today's erosion and not tomorrow's promise.