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Long-distance: Elevated earnings or eventual erosion?

Even as the top three long-distance companies look to separate themselves from that eroding business, Baby Bells see in the service an entirely new revenue stream.

While telecom giants AT&T, WorldCom and Sprint are all taking different approaches to converting themselves into data-services companies, they all worship one gospel truth: The consumer long-distance business is dead.

Yet the Baby Bells, such as SBC Communications and Verizon Communications, are finally entering the long-distance market, and they're doing it in force.

"Incumbent carriers view long-distance as a losing proposition," said Drake Johnstone, first vice president for investment firm Davenport & Co. "New entrants look at it as a new revenue source."

The question is: Why are the Baby Bells fighting to enter a market that the established players are abandoning?

Last week analysts heard the chief executives of AT&T and WorldCom, C. Michael Armstrong and Bernie Ebbers, read from the same script. Pricing pressures from growing competition, and new technologies such as the Internet and wireless phones, meant that the double-digit revenue declines occurring in these companies' long-distance units were guaranteed to continue.

But SBC and Verizon are offering long-distance service in two states, and they're awaiting the Federal Communications Commission's approval to offer long-distance in additional areas. By all accounts, the Bells that have entered the long-distance market are winning customers--and revenues. In just three months of operation, for example, SBC has signed up more than 1 million long-distance customers in Texas.

One key difference between the incumbent carriers and the Bells, analysts said, is that companies such as AT&T find themselves fighting to defend market share, while Bells find that each dollar earned in long-distance is a dollar they weren't earning before.

Some argue that with a little investment, the established long-distance players could be doing a much better job of defending their turf.

"They're overreacting" with restructuring plans, said Jeff Moore, senior analyst for network services at research firm Current Analysis. "If I were in their shoes, I'd try to be competitive first" before overhauling the company, he said.

And then there's bundling--the combining of services such as local phone, long-distance, Internet access and other features that was considered to be the holy grail of telecommunications marketing. In theory, offering customers one-stop shopping would keep them from going to competitors.

Experts last week pointed to the breakup of AT&T as proof that bundling is overrated. The demand for bundling "hasn't materialized yet," Current Analysis telecommunications analyst Jilami Zeribi said.

But Bell companies, which already have the vast majority of phone users in their regions as customers, find bundling long-distance with that local service to be a quick and easy way to expand revenue per customer.

AT&T and WorldCom last week both said they were shifting company priorities to digital services, and Sprint is expected to make a similar announcement Nov. 3.

Yet Bell companies also are heavily involved in digital services, and Verizon and SBC have seen rapid growth in their DSL offerings. They are forging ahead with digital offerings while still trying to earn new revenues in long-distance.

A torrent of applications
When the federal courts broke up AT&T in 1984, the company was assigned the long-distance market, and the resulting Baby Bells were restricted to local service. However, the Telecommunications Act of 1996 said a Bell could provide long-distance in a state in its territory if it were to meet a list of conditions showing it had opened its local phone network to competitors.

Nearly five years after the passage of that act, only two states are offered long-distance by a Bell offering local service in that state: New York, by Verizon, and Texas, by SBC Communications.

Now Verizon has applied for long-distance service in Massachusetts and has received the approval of local regulators there.

And just last week SBC filed to provide long-distance in Kansas and Oklahoma. The regulators of both states also have approved SBC's applications, and SBC is optimistic that California regulators will approve its entry there by the end of the year.

FCC Common Carrier Bureau Chief Dorothy Attwood, who is in charge of reviewing these applications on behalf of the commissioners, told reporters recently that more applications are expected in the coming months.

In fact, so many are predicted to arrive that she said she may have to borrow workers from other FCC bureaus to handle the workload.

Priscilla Hillard, SBC vice president for federal policy, told reporters Thursday that while "we are prepared for and expect a thorough review" by the FCC and Justice, because the Kansas and Oklahoma applications are so similar to the one approved for Texas, there should be very little difficulty in winning approval.

The incumbent long-distance providers aren't rolling over for these new entrants. WorldCom and others have filed briefs at the FCC outlining why Verizon hasn't met the checklist to gain permission in Massachusetts, and SBC can expect the same opposition with its applications in Kansas and Oklahoma.