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SBC's Fed Up, But So Are Its Critics

Regulations are to blame for massive layoffs and capex cuts, SBC says. Analysts say its the bad business model

September 27, 2002

5 Min Read
SBC's Fed Up, But So Are Its Critics

Consider them casualties of war. The 11,000 employees about to be cut by SBC Communications Inc. (NYSE: SBC) might simply be pawns in the regional Bells’ ongoing battle against government regulations.

SBC used a layoff and capital spending cut announcement yesterday to kick off a rant against government telecommunications policy; it contends the poor economy and regulatory pressure are forcing it to cut 9,000 jobs before year end and 2,000 more jobs in the beginning of 2003 (see SBC Cuts Capex, Jobs).The news has fired up debate in the industry about RBOC lobbying in Washington and the current telecom environment. SBC says it needs to slash money because it's forced give competitors access to its networks. But critics say it's just more RBOC whining and that SBC’s war on the unbundled network elements platform (UNE-P) could be a very slippery slope (see MCI Criticizes BellSouth on UNE-P).

"SBC’s incredible press release is an amazingly risky gambit on their part,” Network Conceptions LLC analyst Phil Jacobson writes to Light Reading in an email. “They are treating defeat of UNE-P as an all or nothing deal. If they lose they will be in extremely deep trouble.”

SBC's layoffs, which constitute about 6 percent of its workforce, will occur across the 13 states in which it operates and will affect every department. About one third of the jobs being cut are management positions, the company says. The cuts come in addition to the 10,000 jobs SBC has already eliminated this year.

The company expects to take related accounting charges in its third and fourth quarters this year but wouldn’t say how large those charges will be.

In addition to reducing headcount, SBC also says it will slash its capital spending budget for 2003 to between $5 billion and $6 billion, down from an $8 billion budget for 2002.

The capex cut will certainly put additional pressure on the already very hard-hit telecom equipment vendor space. While Nortel Networks Corp. (NYSE/Toronto: NT) will probably be feeling the most pain from yesterday’s announced cuts, analysts say they expect most industry players to suffer. And there’s more trouble ahead. Observers say they expect other RBOCs will soon follow suit.

SBC seems to think that the regulations that followed the 1996 Telecommunications Act have had a lot to do with it. The company claims that the prices it is allowed to charge its competitors for the use of its local access lines is far below even what they pay for the upkeep of the lines. “In the Ameritech area, it may cost us $27 to provision a line, and our competitors are able to get the line for $14,” says SBC spokesperson Larry Solomon. That, he says is a problem not only for SBC, but for customers and the entire industry, since the competitors coming in to mooch off of SBC’s lines aren’t investing in building out the network.

"When unrealistic and outmoded regulation results in our having to lay off highly-trained workers and constrains our investment in our networks, it is a disservice to all local phone users in the states we serve,” SBC chairman and CEO Edward Whitacre stated in yesterday’s release. “After all, our competitors are relying on our network. And if there’s a weather emergency or other problem, it’s our workers who must respond.”

While most analysts agree that SBC and the other Bells are facing mounting competitive pressures from UNE-P, they say pricing has nothing to do with it (see RBOCs Should Stop Whining, Says Report). In a recent report titled “Access to the Network: Catalyst for Massive Change in Local Telecom,” Jacobson and fellow Network Conceptions analyst Farooq Hussain argue that the RBOCs are losing money not because of unfair pricing, but because they haven’t optimized their own cost structures and networks in order to make wholesale profitable. “The level of service they provide is minimal,” Jacobson says.

Yesterday’s release, several analysts say, was more than anything a ploy to force regulators to give SBC relief from competition. “I think that what they’re doing is extremely self-serving,” Jacobson says.

“We’re working with regulators to find a solution,” was all SBC’s Solomon would say on the issue.

The Federal Communications Commission (FCC) says there are multiple proceedings underway reviewing the regulations, which should be concluded by the end of the year. “No conclusion has been reached yet,” says an FCC spokesperson.

Craig Johnson, an independent analyst based in Portland, Ore., however, says that what the outcome of the proceedings will be is pretty clear. “I think Powell -- the guy is such a politician it’s amazing -- is going to cater to the Bells,” he says. “Money always talks in politics. The consumer will continue to lose.”

But SBC says relief from regulated UNE-P pricing will allow it to offer better service to consumers. The carrier blames the pricing for the nearly 3 million retail access lines it has lost so far in 2002, as well as for the more than $1 billion in revenue it lost in the first half of the year. If its wireline revenues continue to drop at the current rate, the company said, it will lose another $2.3 billion in revenues over the next four quarters.

But is SBC simply in denial about the degradation of its business?

"Gee how many of those lines went to wireless or were reduced because folks now only need one line for Internet access if they have DSL?” Johnson writes in an email to Light Reading. “If you do simple math, this stuff doesn’t add up… They overbuilt like everybody else.” Johnson also points out that the RBOCs were only too happy with the 1996 Act when it looked as if long distance would remain a lucrative business. The RBOCs agreed to open their networks to the competition in exchange for being allowed to apply for entry into the long-distance market.

The bottom line is, there are now more layoffs and capital spending cuts coming to the industry, with no relief in sight.

SBC’s stock price dropped nearly 8 percent in trading today, falling $1.75 to $20.15 a share. The company’s stock has plunged more than 50 percent over the past year.

— Eugénie Larson, Reporter, Light Reading

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