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US Incumbents Go the Distance

Light Reading
News Analysis
Light Reading
4/30/2003

Recent earnings news from U.S. carriers illustrates that regional Bell operating companies (RBOCs) and inter-exchange carriers (IXCs) are making progress in the markets that opened up for them after the Telecom Act of 1996. As ever, the legislation that promised to introduce competition to the telecom markets seems to be making incumbent carriers more powerful.

BellSouth Corp. (NYSE: BLS), SBC Communications Inc. (NYSE: SBC), and Verizon Communications Inc. (NYSE: VZ) are expanding their share of the U.S. long-distance services market, where IXCs such as AT&T Corp. (NYSE: T), Sprint Corp. (NYSE: FON), and WorldCom Inc. -- now to be known as MCI (Nasdaq: MCIT) -- once dominated.

The RBOC progress is mainly evident in consumer voice lines, where RBOCs find low-hanging fruit once they achieve approval via Section 271 of the Telecom Act (see RBOCs Get Long Distance Go-Ahead). Business long distance is thought to be a big opportunity, too, but it appears to be growing more slowly, thanks to the economy. Consider the following:

  • BellSouth reported it now has 1.9 million subscribers in the nine-state region where it is approved to offer service (see BellSouth Scores Two More).
  • SBC increased its long-distance lines fourfold last quarter (see SBC's Quarter: Growth in Key Areas). SBC now has 7.6 million long-distance lines in Arkansas, California, Connecticut, Kansas, Missouri, Nevada, Oklahoma, and Texas. The RBOC is still trying to get long distance approval in Illinois, Indiana, Michigan, Ohio, and Wisconsin.
  • Verizon reports it has seen more than 100 percent growth in consumer long-distance lines (see Verizon Earnings Don't Disappoint). The RBOC now has 13.2 million lines total. Verizon offers long distance throughout the U.S.; West Virginia was last on board and will have service May 13.

Qwest Communications International Inc. (NYSE: Q), which only started offering long-distance services this year in 12 states, says it plans to discuss its penetration rates in a forthcoming quarterly earnings report.

While RBOCs report increased long-distance revenues, IXCs are seeing declines in the same area. AT&T reported a drop of 5.9 percent year-over-year in overall revenues, "primarily due to continued declines in long distance (LD) voice services" (see AT&T Results Are Upbeat). Sprint's latest report cites a 16 percent decline in global voice revenues (see Sprint CEO: Can You Hear Me Now?).

Interestingly, MCI reported a slight increase in long-distance revenue in its monthly statement for March 2003, but until the company is back to normal reporting it may be tough to generalize about patterns in its business.

Despite their woes, the IXCs are pursuing local access opportunities opened to them by legislation. They're also trying to tap their long-distance customer base with bundles of services that add local to long distance:

  • AT&T: This quarter, AT&T provided local service to about 2.8 million consumers, up 119 percent from the prior year's first quarter. The carrier offers local service in California, Georgia, Illinois, Indiana, Michigan, New Jersey, New York, Ohio, and Texas and plans to enter Massachusetts and Washington, D.C., later this year.
  • MCI: The carrier can offer local service in the continental U.S. and claims more than 3 million customers have integrated local access and long-distance services via bundled offerings.
  • Sprint: Earnings this quarter held steady year-over-year for local access. The carrier has 8.1 million local access lines in 18 states, using its own facilities. Local access lines in 34 more states are being trialed, using facilities Sprint leases from RBOCs or other local carriers. Sprint plans further announcements later on.

Despite these inroads, analysts say the RBOCs are getting the better portion of deregulation, for a couple of reasons. First, the RBOCs benefit as incumbents from the surge in local access, while the IXCs' traditional market, long distance, has been decimated, owing to wireless encroachment, pricing pressure, and network overcapacity.

"The IXCs are doing really poorly in consumer voice. Their major historical source of revenue is headed for the dustbin of history," says Jim Lawrence, program director at Stratecast Partners. He says the recent FCC ruling (see Powell Loses FCC Vote) may be all that's standing between the IXCs and extinction or forced mergers. If the RBOCs had been allowed to proceed without the competition preserved by the UNE-P, the IXCs would have been "wiped out," Lawrence says.

At least one analyst says it's easier for RBOCs to break into long distance than it is for IXCs to go local. "Once RBOCs have gotten 271 approvals and met certain criteria on the state level, they're allowed into long distance," says Courtney Munroe, telecom analyst at IDC. "They just lease the capacity, put in a billing system, and launch a marketing campaign... There's more of an established resale infrastructure in place."

In contrast, he says, IXCs face a lack of facilities in local markets, along with political issues surrounding UNE-P, including lawsuits and regulatory delays at the state and federal levels.

The situation makes the IXCs more vulnerable to consolidation than the RBOCs right now, experts say. But one observer says it's also forcing a different view of the telecom market. "We have to stop thinking in terms of separate local and long-distance industries and companies trying to get into each other's businesses, and start thinking about them integrating into one any-distance industry where... both offer the same kind of... blended local and long distance [bundled] offering," writes Jeff Kagan, an independent analyst in an email. "Once the product mix and pricing starts to look the same, it will depend on the marketing. The one with the best bundle... wins."

— Mary Jander, Senior Editor, Light Reading

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