SBC Sees Bundle of Joy in Broadband

DSL is the center of the telco's bundling strategy, but Wall Street wonders about the cable threat.
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Confronting an eroding core business,

SBC

(SBC)

thinks it has found a solution. A bundle of them, actually.

Addressing the UBS Warburg eighth annual Global Communication Conference Tuesday afternoon in New York, CFO Randall Stephenson said the San Antonio, Texas, telco would stabilize its falling profit margins by the end of next year. Stephenson indicated that SBC would continue to cut costs and signaled it would hold the line on capital spending. But he placed more emphasis on another aspect of the big phone company's plan: selling various services together in so-called bundles.

The centerpiece of this not-new strategy is the digital subscriber line, or DSL, service that phone companies use to offer their customers fast Internet connections. SBC's bundling plan comes as the company pushes to win back local-phone customers who have switched to resellers such as

AT&T

(T) - Get Report

and

MCI

(MCIAV)

, as well as to wireless services. In addition to trimming the company's access line count, each departing customer trims SBC's margins, because the local phone business is a high-margin, monopoly affair.

Bundling DSL with long-distance and local phone service has helped slow customer flight by 73% this year, said Stephenson. But to attract customers to packages, telcos must charge less for each service, and that cuts into margins.

And the margin issue continues to gnaw at SBC investors, as evidenced by the questions Stephenson fielded from the audience at the Grand Hyatt luncheon.

One investor wondered whether a bundle of local and DSL or local and wireless service can possibly allow the company to restore its narrowed profit margins. Stephenson conceded that there would be a near-term hit to margins, but added that this was a case of "new entry pricing." He added that costs come down and profits rise the longer a customer stays with the service.

The bundling comments weren't received with completely open arms. Wall Street continues to wonder whether DSL is a viable long-term business, considering that cable companies' broadband service via the cable modem is widely seen as more robust. "It all depends on bundling, which depends on DSL," one investor shrugged. On Tuesday, SBC slipped 23 cents, to $23.16.

Other issues bubbled up during Tuesday's briefing as well. Asked about the prospect of a costly fiber-to-the-premises upgrade of its phone network, SBC said it has "no sense of urgency" on that issue. Notably, Baby Bell rival

Verizon

(VZ) - Get Report

emphasized its support for the initiative in its public comments recently.

But from SBC's viewpoint, the prospect of replacing the copper wires with fiber cable in the last mile of its network is "not appealing economically." The company believes it can offer other products such as broadband and TV without having to do an expensive buildout.

Investors also asked about the company's cost-cutting plans, what with Verizon having just finished a buyout offer that will trim its ranks by some 10%. Asked about cuts, Stephenson said that accelerating retirements is expensive, and that SBC would prefer to do attrition, which he called "the more economical and preferred method."

SBC has cut its head count by 28,000 over seven quarters.

Stephenson declined to offer guidance on earnings per share or the company's expected growth rate. He did say that selling services to businesses is an "enormous opportunity" that could amount to $34 billion in SBC's region. He added that pension costs won't be an issue next year, after the company's big charge earlier in 2003.