Sunday, June 29, 2003

Feeling depressed and hopeless? Consider Bells' dilemma
By Kevin Maney

Slammed into a very large guy while playing hockey last night. Had roughly the same effect as a Cooper Mini hitting a Cadillac Escalade. Me being the Cooper Mini.

Did my taxes over the weekend.

Caught a cold. A sudden change in atmospheric pressure could, in fact, cause my head to crack like a bottle of Coke left in the freezer.

Despite all that, I'm not even a fraction as miserable as a local phone company CEO.

I know this after two recent meetings. One was with Duane Ackerman, CEO of BellSouth. The other, with Francis McInerney, an often-prescient author and telecommunications research analyst.

Ackerman visited USA TODAY. He had the calm and generous presence of a lawyer who'd come to read the will and put the family at ease. He could be accurately portrayed by Robert Duvall, should Hollywood decide to make BellSouth: The Movie.

Mostly, he came to tell us why regulators should do more to protect the Bells, which are the regional phone companies BellSouth, Verizon Communications, SBC Communications and Qwest Communications' US West.

My word, it was so sad that if I wasn't worried about being embarrassed in front of a room of colleagues, I might've teared up.

The Bells are not the monopolies the media portrays, Ackerman said. ''I've lost 30% to 34% of business customers across our territory -- 50% in some areas,'' he told us, saying he's fighting competition from long-distance companies, start-ups, wireless firms and cable companies. ''On the consumer side, we've lost 8% to 9%.''

Ackerman said he doesn't have the money to modernize to take on new competitors. His stock price is half of its 52-week high. Regulations force him to serve every low-revenue customer while the other companies skim cream.

He brought charts with lines and bars going in worrisome directions. He started talking about damage done by ''Uni-pee.'' I later learned he was saying UNE-P, which stands for unbundled network elements platform. It's one of those rules that forces Bells to open their markets to competition by leasing capacity on their systems to rivals.

Music executives get insomnia over MP3 file sharing. Bell executives sit up nights muttering about Uni-pee.

Because it all sounded so grim, I asked Ackerman why anyone would want to own BellSouth's stock. ''That's just it -- stocks have been pounded in this sector,'' he said. Policies have got to change, he added, or there will be trouble.

How much trouble? That's where McInerney comes in.

His firm, North River Ventures, has been saying for some time that the Bells might crater the American economy. Behind the Bells' pleas, McInerney says, is the reality that their networks are essentially worthless. In this data network era, the Bells' circuit-switched networks are like railroad tracks at the dawn of the jet age. Built for voice, Bell networks carry too little information at too high a cost, and the only way to fix it would be to replace it all. The Bell networks are viable only if monopoly pricing and regulations prop them up.

''That's called socialism,'' McInerney adds.

All told, McInerney estimates that the Bells have $360 billion of obsolete assets on their books. Writing all that off would leave the Bells in financial shambles. They can't do it.

But they can't compete, either. Wireless and cable companies, Wi-Fi start-ups, AT&T and MCI -- they'll all continue to seep away Bell customers, especially if prices remain artificially high.

The Bells' revenue shrank 3.4% in 2002. Yet they have the huge, fixed costs of their networks. As revenue goes down and costs stay up, the Bells have less money for new networks and are less able to lower prices. Before long, McInerney says, some company will offer a homeowner a package of services -- maybe by wireless or cable TV lines
-- for a really low price. ''Then you will hear a giant sucking sound,'' he says.

Which would be a heck of a problem, because the Bells employ hundreds of thousands of people -- far more than the likes of WorldCom and Global Crossing, both in Chapter 11. Think of the potential for crushed 401(k)s and defunct pension plans. And if the Bells aren't there, who's going to wire the Texas trailer parks and Kansas farmhouses -- places upstarts won't want to serve?

As a nation, the USA has a big decision to make. Do we go the socialist route and make taxpayers support the Bells as the Bells turn into the next Conrail?

When you come down to it, that's what Ackerman wants. If regulations let the Bells keep their monopolies, the effect is that prices stay artificially high, and we all help pay to keep an outdated system afloat.

Or can we be real capitalists, break up the monopolies, open the way for competitors and let the Bells succeed or fail on their own?

''Not doing anything would be a disaster,'' McInerney says.

Now you see what's burdening the CEO from BellSouth and all his fellow Bell CEOs. It truly seems bleak -- for the Bells, for thousands of workers and for the economy.

Ackerman and McInerney have managed to make me feel crappier.

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