Verizon Takes a Stand on Prices

Verizon

(VZ) - Get Report

has seen the price cuts and the damage done.

Despite putting up

disappointing first-quarter numbers in its critical wireless and fast Net access businesses, Verizon hinted Tuesday that it's willing to hold the line on prices. And judging by the company's bold comments regarding broadband offerings, industry observers say Verizon may be pushing broadly toward healthier prices and fatter margins.

That stance, while not quite daring coming from a virtual phone monopoly, could serve as a much-needed cease-fire in the ever-escalating telecom price war. As investors have seen in great detail during the past month, abundant capacity, torrents of red ink and mountains of debt are now threatening the financial health of the entire industry, provoking prolonged plunges in the shares of its biggest players.

Now, observers say, a newfound spending discipline and renewed attention to profits could help usher in an era of recovering finances at the big phone companies, with No. 1 local phone provider Verizon taking the lead. After a day in which No. 2 long-distance player

WorldCom

(WCOM)

took a 15% hit on a staggering 256 million shares traded, there could at last be a glimmering on the horizon for telecom investors.

Out With the Trash

It has increasingly appeared in recent years that the telcos face an unenviable and unavoidable choice between market share and profitability. But now that Verizon, for one, is apparently leaning toward profits, other big players may come to their senses as well and effectively throw their hands up on a game that threatens to bankrupt an entire industry in a massive fit of price-lowballing and customer-stealing.

"Verizon's growth will improve with the economy, so there's no reason for them to walk out tomorrow to trash their business," says Stuart Conrad of 3 Squared Capital Partners, an Atlanta-based hedge fund. "They can pick their fights because, basically, their competitors are going out of business." Conrad holds shares in rival

BellSouth

(BLS)

but not in Verizon.

Of course, this could simply be posturing on Verizon's part, an attempt to show Wall Street that unlike the rest of the teetering pack like

Qwest

(Q)

and WorldCom, it holds profits as a paramount objective.

Verizon has felt the scorn of shareholders this year, in part because investors have been fleeing heavily leveraged telcos of late. Verizon carries $62 billion in debt, the most of any phone company. The stock hit a one-year low Tuesday shortly after the company reported first-quarter results and lowered its profit and sales outlook for the year, before reversing later in the morning and finishing marginally higher at $40.14.

The nation's largest phone company has been plagued by declines in its local phone business -- particularly by reduced numbers of local phone lines, an unprecedented trend that began last year and shows no sign of abating.

The slide in its core business would be much easier to bear if the company were knocking the cover off the ball in its faster-growing units. But Verizon had weak results in digital subscriber line, or DSL, growth, with a 12% increase, which is roughly half the rate of the previous quarter. And wireless subscriber growth was 64% below year-ago levels.

The 'Right Set'

Verizon CEO Ivan Seidenberg, on a conference call with analysts, blamed the poor DSL numbers on the timing of a sales promotion in the prior quarter. With cable modem service running about $40 per month, Seidenberg was asked if he would cut DSL prices below their $50 monthly rate to compete.

Seidenberg said no, that Verizon wouldn't "discount" to match cable prices but would instead offer new products combined with DSL, including such services as in-home networking, though few details were available on that front.

We'll "find the right price with the right set of products to drive further into the market," said Seidenberg. Analysts say that means Verizon plans to upsell Internet, long-distance and eventually wireless services in varying bundles to its captive phone-customer constituency.

"Verizon doesn't need to cut prices," says 3 Squared's Conrad. "They have already had big successes in their home markets. And in wireless, I don't think they are willing to go down that slippery pricing slope."

Now that many of the industry's weaker players have been put out of business and even some of the stronger ones are in dire straits, more of the big telcos may see some upside to winning back investors with bottom-line growth, another observer says. "I think everyone feels that the marginal competitors are gone, and the end of the price wars is in sight," said an analyst who spoke on the condition of anonymity. "What people want to see is the reverse, a sign that pricing is starting to move up."

Verizon certainly knows what investors want to see. The question now is whether the company can give it to them.