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SBC told to unhook phone from broadband

California regulators call for "naked DSL." Company says the rules are outdated and plans to appeal.

SBC Communications must sell local phone and broadband services separately in California, state regulators have ruled, forcing a showdown with the telecom giant over forced bundling practices in its largest market.

The California Public Utilities Commission this week ruled that SBC, the state's largest broadband provider, must give its DSL (digital subscriber line) customers the option to switch local phone providers. Currently, SBC's broadband product--called SBC Yahoo DSL--and local phone services are inextricably linked. Consumers can order local phone service on a standalone basis, but they must be phone subscribers to get DSL.

If the order stands, SBC would be forced to change its policies. Local phone lines are the foundation of the company's business, and the growing demand for broadband has helped it defend itself against consumer defections to other independent phone providers, cellular services and cable offerings. SBC is reluctant to separate its lucrative local phone dollars from its growing DSL business.

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But the company does not stand united in its resistance to unbundling phone service from DSL. Two other Baby Bells, Verizon Communications and Qwest Communications, plan or have already started to offer "naked DSL," as it's commonly called. While the standalone services are likely less profitable than the bundles, they could represent an opportunity to grow new businesses such as Internet phone calling, the companies have said.

DSL "is not providing a great profit margin for companies, but especially when phone companies roll out VoIP (voice over IP), I think it will be a good way to upsell VoIP applications to someone who might not want or need local phone line," said Patrick Mahoney, an analyst at The Yankee Group.

Not surprisingly, SBC plans to appeal the decision. The company said the order was based on outdated regulations and that previous rulings from the Federal Communications Commission did not require it to offer DSL to customers of competing phone companies.

"SBC strongly disagrees with the ruling by the administrative law judge, which was based on an 80-year-old statute that never even envisioned DSL service, nor a competitive telecommunications marketplace," the company said in a statement. "We will file an appeal of the decision with the California Public Utilities Commission."

There are plenty of reasons for SBC to protect its local phone franchise. The company already faces tremendous competition from cellular phone and cable companies, which are stealing local phone customers. More people now make local calls from cell phones than land lines, according to market researcher Gartner.

Cable companies such as Comcast and Time Warner Cable are packaging voice calls with video and broadband and selling the "triple play" package to customers. Both companies also have begun exploring ways to offer VoIP on their broadband networks. Comcast will begin selling VoIP services nationwide in 2006. Time Warner Cable's Digital Phone service is already available in some of its smaller markets.

SBC has countered that threat by selling DSL at discounted prices for as low as $26.95 a month. Other Bells have joined the trend of offering discounted broadband access, and the strategy has helped them keep pace with cable in market growth.

But all of SBC's moves, from DSL discounts to packaging in other services, are meant to preserve its local phone franchise. In the meantime, the company is determined not to let local regulations drastically affect its business.

"I don't think from an operational standpoint that (unbundling DSL) is something devastating to SBC," Yankee Group's Mahoney said.