SBC: Uncle Sam Killed Broadband
This morning, SBC Communications Inc. (NYSE: SBC) added to the feeling that the DSL market is slipping away, rather than growing. SBC chairman and CEO Edward E. Whitacre, Jr., today blamed government regulation for his company's slowing growth and upcoming job cuts and said that it will result in fewer broadband deployments.
"In today's weak economy, pervasive and uncertain regulation that drives up costs and limits our ability to grow and compete against unregulated companies has become an anchor on the company," Whitacre said in a prepared statement. "In response to these challenges, we must reduce our work force by several thousand jobs and cut our capital spending by approximately 20 percent in 2002." Whitacre made similar comments in a letter to shareholders released this morning. In that letter, he said economic and regulatory concerns would have a serious impact on the deployment of broadband services.
"For example, rules regarding our new DSL Internet service network have added hundreds of millions of dollars in costs and have delayed deployment. Our DSL Internet services are burdened with regulation that our cable modem competitors do not face," Whitacre wrote in the letter to shareholders.
SBC is not the only big phone company reacting to the expense involved with rolling out DSL services. Last week BellSouth Corp. (NYSE: BLS) cut 3,000 jobs and predicted shrinking profits. Sprint Corp. (NYSE: FON) also cut 6,000 jobs as it scrapped its ION (Integrated On-Demand Network) project, which was designed to provide multiple phone lines, high-speed Internet access, and other services via a single connection to the home.
The RBOCs (regional Bell operating companies), in general, take issue with the fact that the FCC counts the remote terminals used to deploy DSL service as a part of the network that should be opened to competitors. RBOCs say the terminals should instead be treated as a new part of the network that's not covered under the same regulatory restrictions governing voice telephone services –- even though the remote terminals are attached, at some point, to the old, regulated network infrastructure.
Again, today, SBC made regulation a centerpiece of its explanation as to why it reported a 31 percent year-over-year decline in revenues and why it will have to lay people off. Including one-time charges, SBC's reported net income for the third quarter of 2001 was $2.1 billion, or 61 cents a share, compared with $3 billion, or 88 cents a share, in the year-ago quarter.
Excluding one-time charges, SBC's reported net income for the third quarter of 2001 was $2 billion or 59 cents a share, compared with $1.96 billion or 57 cents a share for the year-ago quarter. SBC's results were a penny-a-share worse than Wall Street's expectations.
But while times are hard for all phone companies, many take exception to Whitacre's regulation blame game. "To suggest that there are regulatory burdens that are more onerous on SBC is just ludicrous," says Peter J. DeCaprio, an analyst at Thomas Weisel Partners, noting that SBC has been fined several times for being slow to respond to regulatory demands.
So what has hit the RBOCs, if not the government meddling with DSL?
For one thing, RBOCs are just now finding out that the new, data-driven products they've been offering (such as DSL access) aren't immune to economic slowdowns. "Those [new data and Internet services] products are as cyclical as any other product," says DeCaprio.
This means that the RBOCs are going to take even longer to recoup the money they spent to upgrade their old phone networks to carry data. Thus, it becomes necessary to slow down network upgrades to match softer demand.
Even the RBOCs admit that they've either failed to plan properly or were caught off guard by the data demand slowdown. "Almost 60 percent of our customer locations are covered by DSL, and we certainly don't have that many customers [for DSL service]," said Whitacre, during today's earnings conference call.
Also hurting the RBOCs are cable companies that have been quicker to act in reaching residential neighborhoods with broadband access.
Finally, while the RBOCs continue to see most of their revenues from phone lines, DSL's technical efficiencies actually hurt such business. What previously took two separate phone lines can now be handled by DSL -- for example, one phone line can provide both telephone service and Internet access.
"[RBOCs] have to spend to maintain growth, but it eats away at their earnings," says DeCaprio.
- Phil Harvey, Senior Editor, Light Reading