Fight -- or Flight -- in Long-Distance?
The big carriers may have to abandon the consumer market if new rules make their leasing of networks from the Baby Bells too costly
businessweek.com
JUNE 14, 2004
By Steve Rosenbush
Business Week
For years, long-distance outfits were the powerhouses of the consumer telecom market. Even in the early '90s, AT&T (T ) had a stunning 80 million residential accounts, serving nearly every home in America. More recently, their influence has waned, as the Bells have taken about half of the consumer long-distance market. AT&T is still a giant but not quite telecom's consumer colossus of old. It's down to its last 35 million accounts.
Now comes a major blow: New rules governing local-phone competition could force the big long-distance carriers to reassess their future in the consumer market. On June 9, the U.S. Solicitor General announced that it would not appeal a D.C. circuit court ruling that overturned regulations making it easier for the long-distance concerns to compete in the consumer voice market.
The circuit court ruling earlier this year struck down Federal Communications Commission guidelines that forced the Bells to share their local-phone lines with rivals at government-set wholesale rates (see BW Online, 6/10/04, "Finally, a Free Market for Telecom"). Unless the Supreme Court takes up the appeal, which is unlikely, the Bells are expected to raise their wholesale rates next year, after the Presidential election.
"BAD TO INTOLERABLE." Faced with the prospect of lower profit margins, the long-distance carriers must reassess their future in the $65 billion market for residential local and long-distance phone service. While the Bells can offer local, long-distance, and wireless services over their own networks, long-distance providers like AT&T and MCI are in a tough spot. They're big players -- but they lease much of their infrastructure in the consumer market, the same way smaller rivals do.
Such lease arrangements in the local-phone market are going to get more expensive. But since consumer voice services can't easily be divided into local and long-distance segments anymore, any player that fails to address a chunk of it is at an extreme disadvantage. "For the long-distance carriers, it presents a major setback in their efforts to make the consumer segment a viable long-term strategy.... If wholesale prices increase substantially, the economics of the bundled strategy will go from bad to intolerable," UBS telecom analyst John Hodulik wrote in a June 10 report.
The choices are stark. As leasing phone lines owned by their rivals becomes untenable, long-distance players must decide whether to invest more heavily in the consumer segment or abandon it. They could decide to double-down their bets on alternative technologies, such as wireless and voice over Internet protocol. AT&T said earlier this year it would sign up 1 million VoIP customers by yearend 2005. AT&T chief spokesman Paul Kranhold says it's "one of AT&T's highest priorities" to deploy new technologies such as VoIP and wireless to bypass the Bell monopolies.
CONSOLIDATION COMING? Kranhold says it's "premature" to say what other actions his outfit might take as a result of the latest ruling from Washington, adding that AT&T still plans to appeal this decision to the Supreme Court. The long-distance carriers could find advantages, however, in simply deciding to cut their losses and scale back sharply in consumer markets.
By getting out, these players could make themselves more attractive potential acquisitions. While the carriers' consumer units generate a lot of cash, they're shrinking, which makes potential buyers nervous. And the big rivalry between the Bells and the long-distance concerns in the consumer market makes consolidation more difficult on antitrust grounds. Leaving the market would reduce some of the financial and regulatory issues that have made the industry's consolidation difficult.
The pressures to leave the consumer market are likely to only grow. Cable-TV operators will blanket the U.S. with cheap, feature-rich phone service based on the Internet by 2006, making the market even more competitive. The price of unlimited local and long-distance phone service across the U.S. and Canada already has dropped to about $30 a month, from $35 earlier this year, and it's headed lower. The long-distance companies may soon decide that this is one fight not worth bruising over. |
