America's regional Bell operating companies fought long and hard to get the right to offer long-distance services. But now that they've achieved their goal in some states, a question mark over whether it was worth the hassle has been raised in a report published earlier this week by analyst firm Network Conceptions LLC.

“RBOC success in selling Long Distance to in-region customers in FCC-approved states is illusory,” says the report, which was written by Phil Jacobsen and Farooq Hussain, general partners at Network Conceptions.

Although the RBOCs are winning plenty of customers for long-distance services, they're customers that nobody else wants, according to Network Conceptions, because they spend so little. To make matters worse, the report adds, the RBOCs are losing money on the deal they had to strike in order to get into long-distance markets -- giving interexchange carriers (IXCs) access to their infrastructure.

This paints a very different picture from what appears at first glance to be a huge success in winning long-distance subscribers in approved states by RBOCs such as Verizon Communications Inc. (NYSE: VZ), SBC Communications Inc., BellSouth Corp. (NYSE: BLS), and Qwest Communications International Inc. (NYSE: Q).

SBC, for instance, already has 35 percent line penetration in Texas after just two years of offering long distance in the state, and Jacobsen and Hussain expect that RBOC long-distance penetration should meet industry expectations of 20 percent share of all access lines by the end of 2003.

“We have found that while the RBOCs have been very successful in terms of the numbers of access lines they converted to their LD services,” the report states, “the actual dollar value of these sales has been approximately 50% less than is expected by anyone outside the RBOCs themselves.”

Many analysts have made the “misguided” assumption that each access line will generate average monthly usage of between $25 and $30, according to Jacobsen. That’s a far cry from what the report calculates is the actual average monthly usage among RBOC customers of between $10.95 and $12.26, with the first quarter of 2002 representing the lowest quarter since the first FCC approvals in 1999.

“The problem is that they’re getting the customers that no one really wants,” says Jacobsen. "Over time, we don’t see any increase in average revenue. They continue penetrating the low end, but don’t seem to get beyond it.”

“It is completely untrue that [the RBOCs] are making gains in long distance,” Hussain agrees. “That’s why the IXCs haven’t complained more: They haven’t been losing any money.”

Unlike most of the RBOCs, the IXCs have been investing in next-generation technology, and are positioning themselves to continue serving high-end customers, according to the report.

The RBOCs are, however, expected to continue benefiting from all the scandals surrounding IXCs like WorldCom Inc. (Nasdaq: WCOME). And Hussain says the RBOCs will certainly join in the race to snatch up some of the assets of IXCs as more and more of them enter restructuring and bankruptcy.

The analysts add that it’s a mistake to tar all RBOCs with the same brush. BellSouth, especially, doesn’t seem to follow the same patterns as SBC and Verizon. BellSouth is the only one of the regional Bells that has actually seen an increase in its long-distance revenues, and is, according to the Network Conceptions analysts, the only company that has followed through and offered next-generation services on the data side (see BellSouth to the Rescue?).

“There is a lot of emphasis from Verizon’s side that there’s no revenue in data, and that it was a mistake to go there. It’s all voice,” Hussain says. “You should look for Verizon to start downplaying its data [involvement],” Jacobsen agrees.

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com