The Coz,
This came from the WSJ-
Business World
Wake-Up Call for Bill Kennard
By HOLMAN W. JENKINS JR.
Short explanation of the phone wars: Ed Whitacre of SBC wins.
Long explanation: Congress did a dumb thing in the 1996 telecom law, trying to preserve the distinction between local and long distance. Vaguely, legislators hoped that the long-distance companies would then challenge the local monopolies of the baby bells. Can we now admit this was a failure?
The idea was to withhold permission for the baby bells to get into long distance until they faced serious competition locally. Naturally, this didn't work. It simply became a powerful incentive for the long-distance companies to stay out of local.
But water blocked from its natural channel must flow somewhere, and the incentives created by the doofus Congress have encouraged the long-distance companies to do some fairly weird things. AT&T is shaking and popping rivets left and right, as Mike Armstrong throws his $120 billion Hail Mary to make Ma Bell a broadband cable company. That football is now sailing out of the endzone and into the stands.
Meanwhile, Sprint jumped into the arms of MCI WorldCom last week, in a deal that may break the scales at $115 billion, but has a lot less industrial logic than the spurned offer from BellSouth.
Some believe we'll get a marvelous broadband future out of all this, but the future was coming anyway. We'll just end up wasting a lot of money.
A decade ago, the federal government signed a long-distance contract with AT&T for 13 cents a minute. When it was up for renewal this year, the same contract was split between Sprint and MCI WorldCom at a rate that begins at four cents and will eventually drop to less than a penny. In other words, the price is headed toward zero--as it should. Long distance is a virtually costless segment of a larger product known as "phone service," whose real costs are administering and billing millions of individual accounts.
But before getting excited about the "nickel nights" being offered to households, consider that less than seven cents of every dollar actually pays for the cost of switching and carrying a call. The rest is marketing, overhead and taxes. Billing alone accounts for 11 cents, or more than the cost of the call itself.
Another way of looking at it is that 93 cents of every dollar you pay for long distance goes to maintain an obsolete, artificial and unnecessary long-distance industry.
When the cost of selling a product exceeds the value of the product, something has to give, and that something should have been a consolidation of the local and long-distance industries. But regulators and Congress have thrown themselves crosswise in the path of reality.
AT&T's natural urge to align itself with a baby bell having been blocked off, Mr. Armstrong has to find a way to give customers something for their 93 cents. You start with a billing relationship, and the way you add value is by creating more and more services of value to the consumer that can be handled through that billing relationship. To do so, though, you have to have the services and a way to deliver them--a pipe directly into the home.
The problem with Mr. Armstrong's scheme to make cable the pipe is that no one has done it successfully before. The technological hurdles are immense, and he has only a limited amount of money and time to throw into the job. Worse, he's spending billions to duplicate a service consumers already have--local dialing. His baby bell rivals are spending billions to give customers something new--high-speed Internet access through digital subscriber lines.
Mr. Armstrong may be a heck of a CEO, but we wouldn't want to be playing his hand. Since our last funeral oration on this subject, AT&T's share price has headed south again.
Over at MCI WorldCom, Bernie Ebbers also has figured out he needs a broader relationship with his long distance customers because the poor dummies won't keep paying $1 to get seven cents of long distance forever.
He really has his eye on Sprint's wireless business, which he hopes will be a pathway to delivering broadband services that will justify millions of households continuing to have a billing relationship with him. In the meantime, he hopes to squeeze a few more pennies out of the 93 cents by combining MCI's overhead with Sprint's overhead.
Luckily for him, Mr. Ebbers is also far less dependent on consumer long distance revenues than Mr. Armstrong is. Yet his shareholders haven't exactly swooned at the feet of his Sprint merger.
That's because the top merger cop at the Federal Communications Commission, William Kennard, tooted his whistle last week, saying the Sprint deal represented an undesirable surrender" in the "price wars" of the long-distance business. Mr. Kennard is obliged to utter such inanities because of politics, but all he has to do is get his foot off the tail of the baby bells, which are drooling to get into the long-distance business.
But he should also realize "price wars" are not evidence of a healthy, well-functioning industry. And that's the real problem. Sooner or later, industrial logic will have to be turned right side up again.
As the media was busy celebrating insanity last week, Mr. Kennard quietly approved the merger of Ameritech with SBC, forming a super baby bell encompassing California, Texas, the Midwest and everything in between.
SBC's Ed Whitacre now has a billing relationship with 80 million households and businesses based on the irreducible physical necessity of running copper into their premises to provide local phone service--to which he will be able to add seven cents of long distance at very little extra cost in billing and overhead as soon as the FCC lets him.
Mr. Kennard is going to fight off the logic of putting local and long distance together? Standing amid the wreckage of the 1996 telecom law, he's going to tell SBC customers in 13 states to go on paying the other 93 cents to keep Congress happy?
It is time to recognize reality. We're not going to start crying monopoly, but the long-distance business is going to drop in SBC's lap from sheer exhaustion anyway. And Congress won't be able to blame anybody but itself. But SBC needs a competitor. In a sane world, Sprint would have jumped at BellSouth's offer last week, and the regulators would have supported it. The baby bell surely was prepared to offer a richer price, but the bankers and lawyers advised that it was safe to ignore any offer because regulators would never approve it.
If Mr. Kennard wants to get ahead of the curve for a change, he will begin signalling like crazy that a BellSouth bid would stand a better chance than the MCI WorldCom bid.
Copyright ¸ 1999 Dow Jones & Company, Inc. All Rights Reserved.
Printing, distribution, and use of this material is governed by your Subscription Agreement and copyright laws.
For information about subscribing, go to wsj.com |
