Grubman's take on proposal (purportedly affecting BBFW):
Access Chrg Prop--Neutral to Positive; Spc Acc Issue
Non-Event
Salomon Smith Barney
Tuesday, August 03, 1999
--SUMMARY:----Telecommunications Services
* Industry proposal on access reasonable, shifting access burden to end
users and away from LD carriers.
* Net impact basically neutral to industry.
* On special access pricing flexibility for Bells, it is irrelevant since
the Bells already have term and volume discounts in the marketplace; also,
CLECs are buyers, not sellers of special access
--OPINION:------------------------------------------------------------------
After years of dissension, the Bells and LD carriers have jointly
proposed a compromise on access charge reductions and monthly line charge
increases. Specifically, the Bells and LDs are proposing that switched
minute driven access charges be reduced for LD players but offset by
higher recurring charges to the end-user. This proposed access
compromise is a variation of what the FCC came up with in 1997 which is
to take terminating minute charges down and slap them onto line charges
in the form of presubscribed interexchange carrier charges (PICCs) and
higher subscriber line charges (SLCs). In fact, this is simply a
continuation of the shift of access subsidy from long distance carriers
to end users, that has been occurring since 1984 when access charges were
over 50% of LD revenues and there was no end-user charge. Below we
outline our view of the impact for the major industry players:
Implications for Bells: Not Quite Nirvana
It is true that from day one, this proposal will be revenue neutral for
the Bells. Also, having access revenue shift from minutes to lines does
produce stability. However in the 1997 access charge order, switched
minute charges were going to go down to 1.0 cent to 1.2 cents per
minute. Under this proposed compromise, switched minute charges are
required to go down to a half a penny on either side before the
productivity factor goes away. Secondly, while initially revenue neutral
for the Bells, if more access charges are attached to lines than minutes,
and minutes have consistently grown faster than lines at annual rates of
8% to 9% vs. 4 to 5% annual growth for lines, with the spread even wider
in business, then the effect of this proposal will actually be slightly
negative over time.
Implications for CLECs: Good - Business as Usual
For companies that are pure CAPs (there aren't many), the access charge
reductions will pose a problem no matter what. Also, access bypassers
like dial-around voice-over-IP companies will be squeezed. (Note,
companies like Level 3 are offering something entirely different with
their packet voice products, and will not be affected in the same way.)
But most of the CLECs we follow, are facilities-based, have their own
switches, and have revenues driven by selling lines and services to end
users. In fact, the CLEC's have benefited from the 1997 FCC actions.
They are already collecting PICs and SLCs from businesses (and relative
to the Bells, the CLECs are not carrying a lot of LD traffic). Thus, the
more market share they take away from the Bells in terms of business
lines (CLEC's already account for 60% of growth), the higher revenues per
line given the increase in recurring revenues from these lines.
Therefore, for the CLECs, the lines they gain are 'richer' lines.
Implications for LDs: Nice Positive
Given the fact that LD carriers are paying more in access charges than
any rational cost analysis would suggest, the proposed reduction in
access charges should be viewed as a very positive development. This is
because LD carriers will not be paying the Bells dramatically above
cost-based rates for access. This levels the playing field post 271.
Also, the bulk of the access reductions will be up front. However,
consumers will most likely be indirect beneficiaries of this proposal via
bundled offerings by their LD carriers. Clearly, the long distance
carriers would like to keep these savings, but will likely pass much
through to customers.
Special Access Pricing
The other issue worrying investors is pricing flexibility for the Bells
on special access. Its irrelevant. Every Bell has term and volume
discount plans. They therefore already have pricing flexibility in the
marketplace for special access. Also, as seen by the Bells' lack of
aggressiveness in business DSL, because of cannibalization of T-1, should
tell one about how aggressive the Bells will be. Secondly, most CLECs
are buyers of special access, not sellers of special access. Thus, any
lowering of prices is great. Finally, companies like MCI WorldCom and
AT&T use dedicated facilities to connect to their large customers.
Discounting by RBOCs is not going to dislodge existing strategic
relationships between a large customer and a carrier like MCI WorldCom or
AT&T. Therefore, the ruckus over special access is much ado about
nothing. The CLECs are unaffected and the MCI WorldCom's of the world are
not using special access as a product but rather as connectivity to large
users.
NET/NET: We view this proposal as a natural extension of what the FCC
has put forth in 1997 and we believe that it does indeed make sense to
shift the subsidy to the end-user as opposed to LD carriers. For the
Bells, although this proposal if implemented, will initially be revenue
neutral, we believe that over time it will be slightly negative given the
fact that lines grow slower than minutes. For the CLECs, it really is
business as usual, but with the higher recurring charges per line, their
acquired lines are actually richer. For LD carriers, we would argue that
this is a potential positive because they will be benefiting from the
reduced access charges and will most likely retain some of these savings
and not pass all of them through. Special access pricing flexibility for
the Bells is not meaningful in the marketplace. |
