Hawkish on Telecom — R. Scott Raynovich

October 3, 2002

6 Min Read
Hawkish on Telecom

It's time to do something about the dysfunctional fiefdoms and renegade dictators in the war-torn republic. No, we're not talking about Afghanistan or Iraq, we're talking about the telecom industry in the U.S.A.

Back at the ranch (yee-haw!), the politicians and administration look to be doing a whole lot of nothing. Sure, they're rounding up the suspects – many of whom work for their largest campaign donors – and trotting them before the Telecom Tribunal. But that amounts to little more than showboating. Other than making for some nice news copy and scads of rich lawyers, what has been done? Not a lot.

But there's another shoe about to drop, and it may be time to take a look at a preemptive strike. What happens, let's say, if the RBOCs start going down? They're seen as the last bastion of strength – a sad, not to say ludicrous, belief. Take a peek at SBC Communications Inc. (NYSE: SBC), for instance...

22017.jpgDoes that look strong to you?

Let's look at some fuzzy RBOC economics for a moment, to see how healthy they are. They all have huge debt loads, enough to make the World Bank look responsible – how does $60 billion sound? That's Verizon Communications Inc.'s (NYSE: VZ) debt alone. The bean counters like to point to neat things like "free cash flow" (if cash is free, is it worth anything?), but anybody thinking this business will get any easier is ignoring long-term trends.

Local voice minutes are being siphoned off into mobile phones, which might have something to do with why the RBOCs have acquired heavy interests in many of the wireless companies (paranoid, much?). New data services are clearly not coming online fast enough to replace the loss of voice minutes. The long-distance market (which, ironically, the RBOCs whine about not having access to) is wracked by intense competition, from incumbents and upstarts alike.

And what do we have coming down the pike? Let's see: data, video, and voice services over cable; satellite-based data services; DSL services that allow users to merge data and voice into a single line; local voice-over-IP services (VOIP in the core has contributed to the decimation of long-distance pricing); IP-based videoconferencing... All of this makes the RBOC business about as fun as running the Bernie Ebbers fan club.

But wait, there's more: RBOC capital spending is plummeting, which means they now risk falling behind the technology curve. And their core urban T1 business is being slowly eaten into by a new breed of Ethernet services and fiber-rich BLECs, which will eventually be able to run all data and phone services into new office buildings. Sure, many of these competitors are going bankrupt – but the competitive services are still growing.

When you plug these trends into the patent-pending Light Reading Telecom Project-O-Rama Machine, the results aren't pretty. If the RBOCs don't figure out how to move beyond the wood-burning 19th century voice network, they’ll make bankruptcies like Global Crossing Holdings Ltd.'s look respectable. Selling extra phone lines to Beaver Cleaver's family just doesn't cut it anymore.

Simply, something should be done. And nothing is being done.

Federal Communications Commission (FCC) Chairman Michael Powell has shrugged his shoulders: "Telecom 1996? Not my fault." Right now, the thinking from Powell's camp seems to be that the way to prevent RBOCs from tanking is to restore many of their monopolistic super powers.

VCs and investors: "Well, speculative investments aren't any fun if there's a chance you'll lose money."

The local congressman: "I've been a good friend of RBOC Chairman G. Bud Wiseacre all my life. We've got to help old Bud and keep 'dem jobs in our state (unless Bud engaged in fiber swaps)."Meanwhile, the RBOCs gloat: "See, we told you monopolies were better! Bring back the monopoly!"

But herein lies the problem. The RBOC argument pretty much amounts to this: "We are hurting because of flawed policy." But most of their competitors, the CLECs, are already dead. So how could the policy possibly have favored the competition?

If, on the other hand, the RBOCs' problems stem from bloated bureaucracies, archaic plants, and decaying business models and technology, regulatory relief amounts to little more than a few extra years of life support.

The incomplete 1996 Telecom Act started the path to demolition. Why not just finish the job and start over?

It's time to deconstruct the local loop, the last kink in the telecom time bomb. Government entities should sponsor the purchase of large swaths of the local loop, the regional access points where customers hook into the core of the network. This is the bottleneck preventing customers from hooking up to the storied Gargantuan "fiber glut" that nobody seems able to access.

If federal or local governments could snap up pieces of the local loop, or provide incentives for RBOCs to sell or open up the local loop, the industry could truly be reconfigured. If local, state, or national bought pieces of it, it could lease the access back to whoever wants to use it to deploy new services.

It's not nearly as Stalinoid as it sounds. After all, the federal government already determines the unbundling prices in most states, via Unbundled Network Element Pricing (UNE-P). It's already regulated. If the local entities or even the federal government owned pieces of these entities, they could then lease the access at cheap prices or even resell them to more efficient local phone companies. It would spur development of the local loop, rather than discourage it.

There's already proof that the market wants the local loop freed of the RBOCs' icy grip. Take a look at Verizon’s recent decision to sell local access lines to pay down debt (see Verizon Sells Access Lines). It's selling these lines because it doesn't know how to make money off them. But companies are buying them, perhaps, because they will make money off of them.

If the RBOCs were given more opportunities or incentives to sell their local lines, they might think twice about their business. They could use the cash to pay down debt. If they wanted to stay in the local business, they could then lease the lines back from the government or buy them back from another competitor at the wholesale price they have been complaining is "too cheap." This could be part of the deal. A government sponsorship to buy and reconfigure these assets could provide the spark that would completely open up the local loop to competition – this could finally unlock the bottleneck.

Later on, the government would gradually reprivatize the local loop, à la the Internet, after new business models are developed

And let's look at some other regulatory bottlenecks: FCC designation of broadband data services vs. voice services? Well, Internet access is a data service. Duh.Long distance? Let anybody do it. If suicide were legal, would it be that much more popular?

These steps – and possibly more – might speed up the process by which RBOCs are forced to reinvent themselves, which is what they must do. Their business models are dying. Saving dinosaurs is the job of archaeologists.

— R. Scott Raynovich, US Editor, Light Reading
www.lightreading.com

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