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Regional Telephone Companies Are Shedding Local Lines Rapidly

Posted on: Friday, 13 August 2004, 06:00 CDT

Aug. 13--Call them prospering losers.

BellSouth, Verizon Communications and the other large regional telephone companies are shedding lines at a rapid pace. Customers are defecting to rivals, hurting their core business.

Yet earnings are improving. In the most recent quarter, BellSouth said profit rose nearly 5 percent. Sprint's sales increased 6.3 percent. Verizon's profit surged fivefold.

The companies have gained new life by embracing wireless, fast Web and television services. Once deemed relics of a bygone era, they've adjusted to market trends to become one-stop communications shops for consumers.

They've won regulatory battles that have crimped competitors.

And they're surviving. For now.

"They are better positioned today than they were a year ago," said Jeff Kagan, an independent telecommunications analyst. "A year ago they were phone companies; now they're everything. They're still in the game."

But their success might be tenuous. Cable-television companies have mounted a strong challenge that threatens to roil the phone carriers in the coming months. Once content to route ESPN and MTV into homes, operators such as Time Warner built a high-speed Internet powerhouse. They aggressively promoted the connections in the late 1990s ahead of their telephone rivals, quickly winning customers and an advantage.

Now they're selling phone service, too. Using a cheaper technology based on Internet transmissions, the cable companies can undercut the prices on calling packages. And consumers are signing up.

The phone companies might have "won a battle, but the war is still going on," said Kate Griffin, senior analyst with the Yankee Group, a market research firm in Boston. "They are still under attack from a number of fronts."

BellSouth and its peers are accustomed to strife. For years, they've fought over technology and regulation -- and for their futures.

After Congress passed a law in 1996 breaking the monopoly on local phone markets, some analysts predicted the demise of companies such as BellSouth, North Carolina's biggest phone company. They were huge and slow, and all they really had were aging networks to complete local calls. It would be insufficient, analysts said, in a digital age.

A large crop of competitors emerged to take on the giants.

To fend off the attack, the big companies combined. The original seven Baby Bells merged to become four. They expanded their wireless operations. Verizon Wireless, majority-owned by Verizon Communications, became the nation's largest mobile operator. Cingular Wireless, a venture of local-phone giants BellSouth and SBC Communications, is the second-biggest. It's buying AT&T Wireless to take the No. 1 spot.

The phone companies dusted off a data technology that had sat idle for years to compete in the burgeoning high-speed Internet business. The service, digital subscriber lines, or DSL, was complicated and expensive to set up. Cable operators, faster to market, gained an edge among consumers.

The regional carriers have raced to catch up, introducing tiers of DSL service and promotions within the past year that can cut prices by as much as half. They still haven't overtaken cable, nor are they expected to. But they are gaining ground.

Long-distance also is proving lucrative. To sell the service, most of the large regional phone carriers first had to comply with rules requiring them to open networks to rivals. Verizon, BellSouth and SBC are stealing market share from companies such as MCI and AT&T, leaving those rivals to struggle.

All the while, the big carriers have attacked the competition rules, saying they give an unfair advantage to competitors. At issue: the rates companies must pay to lease pieces of the networks BellSouth and its peers control.

The phone giants won a key victory earlier this year when a federal court tossed out the regulations. AT&T, which had relied on the network-lease rules to provide local service, said it would stop marketing traditional local calling.

"We are in the midst of a market transformation," Griffin said. "The long-term battle will be played on the bundle … and how well [all the services] are connected. We're just beginning to tie these products together."

Communications companies have long held that the more services customers buy, the less likely they are to leave. That's why carriers have re-engineered themselves to offer a suite of services.

Phone companies teamed up with satellite TV operators to sell a complete package to subscribers, mitigating the cable threat. BellSouth, for example, will now sell discounted packages of local, long-distance and wireless calling plus fast Web and TV service from a single sales office.

"We're proud of our transition … but there's still a lot of challenges ahead of us," said Krista Tillman, president of BellSouth's North Carolina operations. "The future holds for us some clear opportunities, but as everyone says, the thousand-pound gorilla is out there."

Cable companies have spent more than $80 billion upgrading their systems and pose the biggest menace to the phone companies, analysts say. In the coming months, expect them to add mobile-phone offerings and raise the stakes in the battle for supremacy.

To the victor will go the spoils: customer loyalty.

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BLS, VZ, DIS, VIA, BLS, SBC, T,

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