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SBC: Uncle Sam Killed Broadband

Light Reading
News Analysis
Light Reading
10/22/2001

Broadband deployments appear to be getting narrower and narrower by the minute.

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
http://www.lightreading.com

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ride-the-right-light
ride-the-right-light
12/4/2012 | 7:41:35 PM
re: SBC: Uncle Sam Killed Broadband
It's hard for me to imagine anyone from SBC whining about the regulatory environment. It's that very environment itself that has allowed SBC to retain the monopoly status in the local phone market. And now, they are entering the LD market, with nothing but upside opportunity. The bottom line is; The RBOCs have won the war!!! They are walking the battlefield by all of the fallen competitors enjoying the spoils of victory. Where do we go from here?
leathert
leathert
12/4/2012 | 7:41:35 PM
re: SBC: Uncle Sam Killed Broadband
The RBOCs have certainly not won the war, the cable guys look like they have certainly won the first few major battles, and now control the high ground. The interesting things I found about that article was missing the most salient points:

a) DSL, much like ATM, is FAR to complex to scale properly.
b) The cable companies just have much more bandwidth at their disposal with no distance issues.
c) The single biggest problem with DSL is that most of the RBOCs think it competes with their T1 business, so they have been very reticent to even deploy it!

The cable guys are going to win in the end because they can cream skim, let the RBOCs do voice stuff, which is rapidly decling to a 0 profit business, and reap the rewards of delivering what people will really pay money for, video, high speed data, and residential video conferencing so I can show the kid to grandma.
green
green
12/4/2012 | 7:41:34 PM
re: SBC: Uncle Sam Killed Broadband
RBOCs didn't want to cannibalize their T1 revenue by offering DSL to business. it is also amazing to see the same idiots who thrived b'cause of government sanctioned monopoly are now complaining about providing equal access to their phone lines. I hope the cable guys win this one!!
whose
whose
12/4/2012 | 7:41:34 PM
re: SBC: Uncle Sam Killed Broadband
Let's see - $2B in profits, in today's market, and they are whining?
PantomineHorse
PantomineHorse
12/4/2012 | 7:41:33 PM
re: SBC: Uncle Sam Killed Broadband
RBOC lobbyists real busy at work, using crisis as the opportunity to sneak legislation that gives them jurisdiction over access, thereby officially killing off CLECs.

Hope Congress is the wiser.

rjmcmahon
rjmcmahon
12/4/2012 | 7:41:33 PM
re: SBC: Uncle Sam Killed Broadband
Cheering for the cable companies to win seems like cutting off the nose to spite the face. Producers and consumers won't win if distribution can be monopolized (and then can be used to control consumer-to-producer pricing).

Not wanting to cannibalize T1 revenue makes economic sense. (Reducing employee salaries is not a fun job.) Finding a new and replacement revenue stream is yet to be done (otherwise the RBOCs would be mining that).
rjmcmahon
rjmcmahon
12/4/2012 | 7:41:33 PM
re: SBC: Uncle Sam Killed Broadband
It does seem like the cable guys are taking the lead though its hard to say who is going to win the war in the race to deploy the real, next generation, fiber optic network. (It's easy to say that CLEC stakeholders lost.)

It seems that there may be two generic markets. One market is the many/many network where access to the network drives the revenue. Things like voice calls seem to be monetized best over this type of network. A second market is the one/many market where content producers can unicast their products to consumers. Things like movies on demand should be monetized best over this network.

It doesn't make economic sense to converge the networks just because one can. And I don't know that network convergence really reduces the expense structure (employee base) that much.

Distributing entertainment to homes makes sense.
Offering access to voice networks for people (who tend to be mobile) makes sense. Developing data networks for autonomous computer conversation makes sense. Its hard to determine which of the above will constitute the most revenue for a network operator.

PS. Grandma won't pay enough to justify a video conference w/the grandchildren, so residential video conferencing seems like a non starter.
connector
connector
12/4/2012 | 7:41:32 PM
re: SBC: Uncle Sam Killed Broadband
I've often wondered about the viability of creating a new class of monopoly dedicated to providing data services. Currently there are (at least in my area) 2 monopolies: the local RBOC and the cable company. To date neither of these offer me broadband service. The main reason I would think a monopoly is needed is because there probably needs to be some control of the wiring plant in the last mile and I don't think we'll ever see a cable sharing arrangement which will be satisfactory to the cable owners.

Many CLECs failed after being hit by the realization that there was no business case under the current set of regulations which placed them at the mercy of the RBOCs. Now, after winning the CLEC wars the RBOCs are bitching about making ONLY 2 Billion and are almost surely flooding washington with lobbyists to help cement their victory. I don't believe that we'll ever see cheap 100Mbps data services as long as the RBOCs and the cable companies are the only competitors for broadband access.

After watching the cable companies cover the country in 10 years or so I don't think that an argument can be made that building a new residential cable plant is an insurmountable problem. A data services monopoly may be a viable way to break open the last mile.
rjmcmahon
rjmcmahon
12/4/2012 | 7:41:31 PM
re: SBC: Uncle Sam Killed Broadband
I've often wondered about the viability of creating a new class of monopoly dedicated to providing data services.

[snip]

A data services monopoly may be a viable way to break open the last mile.
______________________________________________

This question does seem worth pursuing. There doesn't seem to be a business case where the exisiting monopolies will deploy a high speed unicast network with unfettered access.

The cost associated with deploying such a network is expensive. Obtaining easement rights wouldn't be as easy at it was for the cable roll out.

But the main challenge seems to be finding the consumable(s) which will generate enough revenue to pay everyone.

Rockefeller used oil demand to take the advantage over the railroads. MSFT used their software to take the advantage over the PC distributors.
Finding the consumable(s) for the new monopoly seems to be the missing link. BW ain't energy.
Lighteating
Lighteating
12/4/2012 | 7:41:30 PM
re: SBC: Uncle Sam Killed Broadband
From a consumer's perspective I pay $40 a month to a telco organization for an on-demand voice circuit and $40 a month to a cable organization for always available bit transport. Total outlay $80 a month and I would be prepared to pay more for more bandwidth.

I cannot see why it is taking so long for someone to realize they can deliver both voice and bits over FTTH and charge me $60 a month and then sell me further services on a regular basis - 2 or three movies a month, video-conferences with the relatives, on-line tax preparation, sports events without the commercials and with the ability to manage my own replays, access to an online game center with both human and computer opponents, etc, etc. I already choose suppliers based on them accepting e-mail contact and, where possible, am moving to vendors who support online billing so I do not have to handle a monthly ream of paper. I do not believe that I am the only one with these demands.

If $60 a month sounds low you have to go back and read earlier posts on the CORV thread. There are communities with FTTH high bandwidth connections delivering everthing I have described for a monthly fee of $40.

I suspect the cable guys will, in the end, win this battle as the telcos are too afraid of cannibalizing their existing voice revenue stream. The cable guys already understand the economics of delivering a user selected range of services at different price points. Adding voice to their product mix will be a lot easier then getting some telco to understand why I would want to pay for uninterrupted F1 coverage or, heaven forbid, WWF, or even worse, some esoteric show on the peasant food of Puglia. All the telcos understand is truck rolls and lobbyists.
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