Posted on 10/06/2002 11:06:54 PM PDT by HAL9000
What should be done with, or for, the Bells?Investors, lawmakers, regulators and, increasingly, consumers, are engrossed with that question as the large local phone carriers known as the Baby Bells struggle with their first decline in customers since the Depression. The erosion is fueling talk of whether the government should step in to strengthen these companies to protect a vital public service.
At the heart of the debate is an arcane but crucial regulation that requires Verizon Communications, SBC Communications, BellSouth and Qwest Communications International to sell access on their networks to competitors at prices that can be determined by state regulators.
Known in the industry as UNE-P, for unbundled network element platform, the regulation has changed the telecommunications industry by permitting competitors like AT&T, WorldCom and numerous smaller companies to provide local phone service at discounted rates by obtaining access to the Bells' networks at wholesale prices.
Judging by the reaction of consumers, the regulation appears to be stimulating competition. The number of telephone lines served by non-Bell companies using UNE-P access increased to more than 7.7 million at the end of June. That was up 64 percent from June 2001 and more than 400 percent from two years ago, according to the Federal Communications Commission. UNE-P (pronounced YOO-nee-PEE) was created in the wake of the Telecommunications Act of 1996.
This transfer of business from the Bells to competitors has shaken the industry. The three largest local phone companies, Verizon, SBC and BellSouth, have all announced cuts in jobs and investments in their networks. The Bells assert that if their spending on equipment is subsidizing their competitors, there is little incentive to spend the money. Reflecting concern over the prospects of these companies, the share prices of Verizon, SBC and BellSouth are each down more than 40 percent over the last year.
Less spending on switches and other gear, meanwhile, is dimming the outlook for a recovery at equipment companies like Lucent Technologies, Nortel Networks and Alcatel of France, which depend largely on sales to the Bells and large carriers in Europe for their livelihood. The crisis has been especially hard for an industry that has traditionally weathered economic downturns without much pain.
"This is not mostly about the economy; it's about regulations that force us to sell our product at below cost," Edward E. Whitacre Jr., SBC's chairman and chief executive, said in a recent interview, as the company announced it would cut an additional 11,000 jobs, bringing its work-force reduction to 20,000 this year. SBC, which is based in San Antonio, also said it would reduce spending on equipment this year to $5 billion to $6 billion, down from earlier estimates of $7.5 billion.
Mr. Whitacre's views are echoed by comments of chief executives at Verizon and BellSouth. Ivan Seidenberg, the chief executive at Verizon, said in a speech late last month that "uneconomic regulation" had turned telecommunication from "an economic engine to an economic anchor."
Such rhetoric is perhaps understandable, as the Bells try to keep regulators in New York, Michigan, Illinois, Texas and other states from using UNE-P rules to further reduce network-access prices for the Bells' competitors.
But lately, the criticism of UNE-P has expanded beyond the parochial concerns of the Bells and their lobbyists. It has also come under attack because of continued weakness in telecommunications, an industry that has already witnessed the financial collapse of large companies like Global Crossing and WorldCom.
Such is the industry's turmoil that several influential analysts are predicting that the F.C.C. will effectively end UNE-P as a business model during the commission's second triennial review of the Telecommunications Act this winter.
The big issue, these analysts say, is that UNE-P is discouraging network investment. Those spending cuts, these analysts say, are in turn forcing cutbacks in research at equipment companies, curbing innovation that might produce more efficient networks with a greater variety of services.
"The Bells are like the aircraft carrier in a battle group," said Scott Cleland, chief executive of the Precursor Group, a research firm in Washington. "You can have some destroyers go down, but not the carriers. If that happens, the whole sector will spiral toward bankruptcy."
Mentioning the Bells and bankruptcy in the same sentence would have been unthinkable as recently as a year ago. But some of the industry's titans have been notably humbled since then. The downfall of WorldCom, once considered the industry's most formidable upstart, has permitted analysts to freely imagine other catastrophes.
UNE-P advocates brush aside such assertions as part of the noise that comes with greater competition.
"We believe that the loss of market share among monopoly providers is an expected outcome when successful competitive public policies are being implemented in the marketplace," Joan Smith, chairwoman of the National Association of Regulatory Utility Commissioners, said in a recent statement.
H. Russell Frisby Jr., the president of the Competitive Telecommunications Association, a group representing companies that compete with the Bells, was similarly dismissive of resistance to UNE-P. "How can a rule that is a competitive reality be undone?" he said. "The F.C.C. can't just disconnect 7.7 million customers that are currently using UNE-P."
Michael Powell, chairman of the F.C.C., has remained vague when questioned about its plans on the subject. At a recent conference on the communications industry organized by Goldman Sachs, Mr. Powell said only that the F.C.C. planned to make its policy decisions regarding UNE-P sometime in the future. A spokesman for the F.C.C. declined to comment.
But they've done a lousy job, so bring on the retail competition.
The RBOC franchise should be wholesale local line provisioning with a guaranteed rate of return. Retail local service can be offered by a variety of companies, just as long distance service is.
That statement reminds me of how the old Bell system used to claim that the telephone network would be destroyed if consumers were allowed to attach answering machines and modems to their phone lines. Of course, they were overruled in the Carterfone decision, and the network survived.
SBC has been pouring billions of dollars into dubious foreign investments in Mexico, Canada, Africa, the Middle East, etc. - in 22 countries altogether.
Meanwhile, back in the USA, I'm stuck on an antiquated 28.8 kbps modem connection using Southwestern Bell. Most of my neighbors get about 20 kbps. We live about 2 miles from the central office.
SBC has chosen not to sell DSL in this area. It would be a profitable business for them, but they want more than money. They want total control, prohibiting customers from using any other ISP than SBC. So they refuse to sell DSL here until competition is outlawed.
Perhaps SBC should have concentrated on upgrading their infrastructure in the local territories and learning how domestic competition works instead of whining about the problems of their own making.
I hope the FCC and Congress will not cave in to the extortion tactics, but the Baby Bells own several congressmen and senators. It will be a tough battle.
Thankfully, telco equipment wears out eventually and must be replaced with newer equipment. So there have been some gradual improvements in switching technology over the last century.
But the basic quality of the analog voice grade POTS standard has hardly improved over the last century.
My understanding is that the capacity of the DSLAMs installed in many COs greatly exceeds the potential market demand.
Perhaps the Bells could recover their investment more quickly by making more sensible choices for carrier-class equipment.
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