Both SBC Communications Inc. (NYSE: SBC) and BellSouth Corp. (NYSE: BLS) had their Christmas wishes granted a bit early this year, when the Federal Communications Commission (FCC) voted on December 19 to allow the two regional Bells to substantially extend their long-distance offerings.

In the case of SBC, the Commission voted 3 to 1 in favor of allowing it to sell long-distance services in California, the nation’s largest long-distance market, with an estimated value of $10 billion (see SBC Gets LD Approval in Cali).

The decision came despite a ruling by California regulators in September that SBC hadn’t met all the necessary requirements for offering long-distance services in the state. The FCC concluded that the state could put in place additional safeguards to ensure fair competition, but that it is the FCC's prerogative to decide which companies should be allowed to offer long-distance services.

According to the 1996 Telecommunications Act, the regional Bells have to open the local markets to competitive carriers in order to receive state and federal approval for offering long distance in their regions. To achieve a more level, competitive playing field, the RBOCs have to allow their competitors access to their networks under the unbundled network elements platform (UNE-P) at set, wholesale prices. SBC estimates that it has spent about $1 billion on installing the necessary equipment to open its network to competitors.

The FCC ruled that SBC complies with all 14 items on its checklist. The California Public Utilities Commission (CPUC), however, has said it doesn't think SBC has met two of the requirements -- but it is nevertheless expected to approve the decision at a meeting on December 30. That is also the date on which SBC has been authorized to start offering its long-distance services.

In the case of BellSouth, the Commission voted 4 to 0 in favor of allowing it to enter long-distance markets in Florida and Tennessee, making BellSouth the first regional Bell to win long-distance approval throughout its territory (see BellSouth Gets LD All Over). BellSouth says that the two states hold 9.4 million, or 38 percent, of its phone lines. The carrier says that it has devoted 4,500 employees and approximately $2.5 billion to gaining long-distance approval in all nine states of its area.

“We’re ready to compete head-to-head with any competitor in our region,” says BellSouth spokesman Joe Chandler, saying that the long-distance market in the entire BellSouth region is estimated at between $11 billion and $13 billion. “We believe that we can capture between 20 and 25 percent market penetration in all our states within 12 to 18 months of approval.”

Despite the fact that offering long-distance services is far less lucrative today than it was expected to be when the 1996 act was passed -- due in large part to the growth of wireless and Internet use -- the approvals are great news for the RBOCs. They have been steadily losing customers and revenues to the competitive carriers, which because of the UNE-P regulations have been able to bundle local services with their traditional long-distance offerings. According to SBC spokesman John Britton, the carrier has been losing 7,000 customers a day to competitors in California alone (see Whitacre: Regulations Will Wither).

“California has very low UNE-P rates,” says Network Conceptions LLC analyst Phil Jacobson, pointing out that that has inspired a lot of competitors to take advantage of the platform. “This approval gives SBC a chance to fight back… This is all about bundling local and long distance.”

But while the Bells insist that long-distance approvals will improve the competitive landscape by allowing them to offer bundled services too, competitive carriers are claiming that the move could actually lead to an RBOC monopolization of the market. They are quick to point out that the RBOCs have put a lot of lobbying effort into convincing regulators that UNE-P is unfair and should be discontinued. The FCC is currently reviewing the regulations and is expected to make a decision on whether or not they should be dismantled early next year. If they decide in favor of the RBOCs, the CLECs claim, the competitive diversity that has allowed Bells like SBC to start offering long distance will disappear.

”A lot of consumer groups have…legitimate concerns that this move could put them in a monopoly position,” says Rich Sayers, editor and founder of 10-10PhoneRates.com, a telecom consumer Website.

“They want to have their cake and eat it, too,” says Claudia Jones, a spokesperson for AT&T, which put out a statement on December 20 criticizing the approvals (see AT&T Chary of LD Approvals). “They’re saying: ‘Now that we have all our marbles, we’re going to kick you out of the sandbox so you won’t be able to play anymore.' ”

“That’s a ridiculous statement,” SBC’s Britton says. “There’s tremendous choice in the marketplace… and there are tremendous safeguards in place.”

In the long-distance approvals, the FCC does reserve the right to enforce continued compliance with the regulatory requirements, and can suspend the approval if necessary. “We have enforcement tools to deal with that issue,” says FCC spokesman Michael Balmorris. “We’ve fined post-entry 271s in the past.”

Network Conceptions' Jacobson says he doesn’t think the CLECs have a lot to fear from the RBOCs' long-distance entry, for although the Bells have typically gained a large market share when they first enter a long-distance market, they usually get a lot of small customers that don’t generate large amounts of revenue. “They end up with all the low-hanging fruit,” he says. “That’s not hurting the IXCs' profits.”

To date, the FCC has approved RBOC applications to provide long-distance services in 26 states. It has denied five applications and 16 applications have been withdrawn. Applications for 12 states are currently pending.

Chart provided by the FCC.

— Eugénie Larson, Reporter, Light Reading