For Whom The Bell Tolls

Phil Jacobs figures some of his formative- lessons as a BellSouth executive happened nowhere near the company’s nine-state Southeastern territory. In fact, they came 15 time zones away, in Australia of all places.

That experience was thousands of miles from the traditional “phone company” training grounds, not just geographically but also intellectually. Jacobs, president of Georgia Operations for BellSouth and responsible for overseeing all of the company’s business in the state, only spent about two years as chief operating officer of Optus, a competitive communications company which BellSouth used to partially own. But Jacobs was selling long- distance services Down Under five years before BellSouth started doing so. And he was competing against an entrenched monopoly telephone company, essentially the Australian version of BellSouth.

Beyond that, Jacobs, who succeeded Carl Swearingen in 1998, had toiled mostly for unregulated parts of BellSouth since 1984, running sales and later the company’s entire operation that sells to large commercial and government customers. It’s a different sort of background from the traditional executive track through local phone company operations and engineering.

But Jacobs readily names four other high-level BellSouth executives with similar non-monopoly credentials. About 20 percent of the company’s officers, he says, were hired from other companies.

“I think that’s reflective of the fact that having that kind of background and experience has proven to be valuable, and given us a different perspective on the business environment that maybe other people don’t have,” Jacobs says.

Jacobs, who joined BellSouth out of Denison University in 1973, was not the first member of his family to work in what back then was known simply as the telephone company. (He and other BellSouth people now bristle at that term.) Jacobs’ father worked at the Chesapeake & Potomac Telephone Co. It was part of AT&T, which before 1984 basically was the only local phone company in America. His family moved frequently when he was growing up, landing, when he was 10, in Washington, D.C., where they stayed.

A balding fellow who leans forward and gestures as he speaks, Jacobs loves the Beatles, golf and watching actionadventure movies at his home theater. He insists that a visitor call him “Phil,” says he does not like to micromanage, preferring to spell out people’s duties and let them do their jobs.

Those jobs, and Jacobs’ own, have been transforming. Because of new competition for local phone customers, formally approved in 1996, and a punishing economy, BellSouth’s world has been turned upside down.

Gone are the days when BellSouth and its Baby Bell brethren were the only places consumers and most businesses could turn for local telephone service. Also gone, at least for the time being, is the South’s headlong economic growth that virtually guaranteed a steady climb in BellSouth’s business.

Losing Lines

Consider that during 2002, BellSouth actually had a net loss of customers – or of phone lines served for the first time since it was broken off from AT&T in the early 1980s. One number that kept rising, though, was lines BellSouth is doling out wholesale to rivals who resell the service. At the end of 2002, the company reported that it had provided about 2.4 million lines to competing carriers, an increase of 35 percent over the year.

In Georgia, the picture is similar. BellSouth’s revenue in the state dipped 1.2 percent from 2000 to 2002, according to a letter from the company to the state Public Service Commission dated Feb. 21.

Net income in Georgia, according to the letter, plummeted from 2000 to 2002, sliding from $261.4 million in 2000, to $156.2 million in 2001 and all the way to $10.9 million in 2002. Meanwhile, the number of retail telephone lines BellSouth serves in Georgia fell 14.6 percent during the same period. Overall lines administered by the company in the state, including those that BellSouth sells wholesale to rivals, dipped 8.2 percent.

The retail number is critical, especially among business customers. Jacobs says a retail business customer is three times as profitable to BellSouth as a wholesale customer.

BellSouth’s rivals are mostly chasing small to medium-sized business customers. That’s the easiest business to take away, observers say, because of the way the regulatory rules regarding pricing are written. Simply put, it’s not that hard to buy service from BellSouth wholesale and then sell it to small businesses. It takes a much more sophisticated approach to serve big corporations, and there’s not nearly as much profit to be made for small players in the residential market where volume is important.

Over roughly six years of competition, BellSouth’s share of the smallbusiness local phone service market in Georgia has shrunk from virtually 100 percent to just over 50 percent, Jacobs says.

On top of that, he adds, more and more consumers, around 18 percent, are ditching traditional wire-line phones altogether for their cell phones. And some large corporate customers, the most profitable of all, are moving some of their communications business to bigger rivals like AT&T and WorldCom that have their own -wires and switching networks in place.

“Add business bankruptcies, business reductions and failures,” Jacobs says, “and it’s pretty easy to see why we’ve had a dramatic, dramatic hit.”

To stem the loss of customers, BellSouth is blending its established reputation for good local service -,vith businesses it has recently been allowed into, such as long distance and highspeed Internet service. On the consumer side, the company offers a package called “Answers” that includes wireless, local and long-distance phone service, Internet service and various other features including voice mail, wireless e-mail and discounted Yellow Pages ads for small businesses. At the end of 2002, BellSouth had amassed 1.2 million Answers accounts, CEO F. Duane Ackerman told a meeting of securities analysts in February.

The linchpin of the BellSouth response is long distance service. In less than a year, the company has reached a 10.5 percent residential long-distance market share in the nine Southeastern states where BellSouth sells local service, Ackerman says. The company, he adds, is signing up 18,000 long-distance customers a day.

In the corporate marketplace, adding long-distance service is also crucial, Jacobs says, because big companies want a comprehensive package of communications services. And because large corporations operate across states and countries, BellSouth has teamed up with Qwest to provide long-distance services outside the nine states where BellSouth is permitted to do so. “It’s kind of akin to bundling in the consumer market,” Jacobs says. “We’re reestablishing with large customers that we’re not a niche player, but a fullservice provider.”

Getting Aggressive

Still, the hit that BellSouth has taken is changing the way it goes about its business. And as rivals enter its business, BellSouth is also venturing into new areas such as long distance and Internet service. Those changes, in turn, are subtly reshaping the role of BellSouth’s Georgia chief And that helps to explain why Jacobs is heading the company’s Georgia business – his experience in unregulated, competitive businesses.

“BellSouth has never really been in the business of marketing; they never had to,” says Chris Mangum, a former member of a BellSouth new initiatives team and a principal at the Atlanta consulting firm Venture X Group. “Nowadays, they do have to market because there are, to an extent, some other offerings in the marketplace.”

That’s changing Jacobs’ job. Historically, a large part of being a “state president” for BellSouth meant serving as the corporate face for the company: lobbying the legislature and regulators, recruiting industry, cutting ribbons, going to Rotary Club meeting and other civic functions.

Good corporate citizenship has paid dividends. BellSouth traditionally got a lot of business based on such goodwill, but that, Mangum figures, is changing. It’s not that BellSouth is no longer active in its communities. Rather, the perception of the company as a benevolent utility is shifting. Now, the company is increasingly viewed as an aggressive competitor that’s starting from an advantage, a perception that is of course nurtured by the competitive local exchange carriers, or CLECs, and others vying to take business away from BellSouth.

“When you don’t have to scrap, you don’t get your suit dirty,” Mangum says. “But when competitors take the gloves off, there’s nothing really that polished or pretty about it. Some of the shine comes off.”

To be sure, community duties remain important to BellSouth and arc still a substantial part of Jacobs’ job. He’s on no fewer than 13 nonprofit boards, but focuses on three: the United Way of Metropolitan Atlanta, the CDC Foundation and the Georgia Chamber of Commerce, where he’s keenly interested in education issues.

But he says the nature of BellSouth’s civic involvement has changed, in part because of different business imperatives. The company’s community activities are more targeted around three issues – economic development, healthcare and education.

Jacobs acknowledges that BellSouth probably is not as broadly recognized as “the good guys that people do business with” because of the increased concentration of its resources in fewer areas. “But I think if we look at it in terms of the impact, both on our business and on the community, that focus has really helped us,” he says.

All three focus areas – especially, perhaps, education – are of great interest to BellSouth because they contribute to the company’s longterm success. An educated workforce is particularly crucial for the company because a third of its 80,000 employees have been with BellSouth for more than 25 years, meaning they’ll be leaving in the next decade or so.

“So we’re in the process of a major transition,” Jacobs says. “We’ve got to have the right people to keep this business healthy in the future, and education is the key to doing that.”

What’s more, community involvement keeps BellSouth officials in touch with other businesses and executives, legislators in state capitals and Washington.

Regulatory Woes

The regulatory arena, too, remains critical, as much of BellSouth’s business is still regulated. These days, the bickering is mainly about the rates and conditions under which the company must charge rivals to use its lines and pieces of its network. The Georgia Public Service Commission in March elected to lower the rates that Jacobs and other BellSouth leaders insist were already so artificially low as to encourage “arbitrage” among sometimes fly-by- night operators, who set up shop simply to buy cheap wholesale lines and resell them for a profit.

It’s unfair, Jacobs argues, because BellSouth must maintain service, including sending crews to fix problems, even though the ultimate customer belongs to another company.

This is where Baby Bell executives, including those at BellSouth, have for the past few years taken the unusual tack of “poor- mouthing.” While most companies talk up their prospects, it probably helps BellSouth to foster the idea that it is suffering from unfair regulatory constraints that don’t limit its rivals; so the company does its share of complaining about how awful its business is.

Jacobs, for instance, basically blames the sorry state of the telecommunications industry on over-regulation by the federal and state governments. He says that $2 trillion in stock market value has disappeared in or because of problems in the telecom industry, and that regulaton, policy is perpetuating the industry Is economic decline.

“What it creates beyond anybody’s argument is uncertainty,” he says. “Whose economic policy is it to perpetuate uncertainty and keep this market, which could be a driver for recovery, in the hole?”

In ongoing PSC debates over wholesale pricing and other rules regarding the sharing of BellSouth’s network, a BellSouth lawyer wrote that “It is apparent that the CLECs …. are attempting to lead this Commission into a muddy legal swamp through which the entire industry would be required to slog.”

Jim Geiger has heard all this. Geiger, CEO of an Atlantabased CLEC called Cbeyond Communications, says BellSouth, like all the regional Bell operating companies, is a tough competitor. The Bells, says Geiger, have all the customer information, started fife with all the customers, paid for all the infrastructure and continue to enjoy generous cash flow from those services. He acknowledges that on some points, the Bells have a beef, but not all of them.

“Despite their whining in the regulatory arena, they make fabulous money,” Geiger says. “We’d all like to have BellSouth’s problems.”

Bobby Baker, a member of the Georgia Public Service Commission, says that while the economy and competition have dented BellSouth’s results, the falling number of BellSouth access lines is a healthy sign for consumers. It shows, he says, that competition in communications services is a reality.

Like Geiger, he’s shedding no tears for the hometown Baby Bell, which is sort of backhanded compliment. “Of all the incumbent companies out there, I think they’re probably in one of the strongest positions of any of them around the U.S.,” Baker says. “I think there’d be a lot of companies willing to trade places with them and their financial status.”

Geiger, whose company operates in Atlanta, Dallas and Denver, gives Jacobs high marks. He says BellSouth runs a better business than the other regional Bells he deals with, SBC Communications and US West. “We’re also a very large customer of BellSouth, and we have a high esteem for the way they run their business in Georgia,” Geiger says.

Copyright Grimes Publications Jun 01, 2003