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Local phone giants in a squeeze

The big local phone companies have become the latest casualties of a declining economy, caught between the plunging market and promises made in better times to federal regulators.

The big local phone companies have become the latest casualties of a declining economy, caught between the plunging market and promises made in better times to federal regulators.

The largest local phone companies promised regulators nearly two years ago that they would expand nationally, bringing local phone and high-speed Internet services into each other's back yards. They're now scaling back their promises to compete against each other to a bare minimum, a level that will likely provide little new competition over the next few years.

Giant SBC Communications is the latest company to buckle, saying Monday that it has sharply scaled back its ambitious plans to offer a full range of service in 30 new markets around the United States. While it still plans to turn on local phone service in the new markets, it is cutting data service plans and trimming marketing to a minimum.

SBC's news comes after a long free fall on the part of smaller telecommunications companies that once hoped to snap up a big share of the local phone and data market. Many of these are now teetering on the edge of survival. Consumers are already seeing high-speed Internet prices rise as these smaller companies and Internet service providers go out of business.

Regulators had hoped to see growing competition among the phone giants drive down prices for phone and Net service. But it appears unlikely that the fierce competition dreamed of by policy-makers can be provided by the more stable telecommunications giants.

"Given the carnage among the (smaller competitors), it's doubtful that the Bells will want to follow them off that cliff," said Scott Cleland, a telecommunications analyst with The Precursor Group. "The economy and the expense suggest that the Bells will prudently go slow."

But there is one big difference--even aside from corporate scale--between several of the big local phone companies and their less successful rivals. SBC and Verizon Communications have promised federal regulators that they will enter new markets around the country as a condition of recent megamergers. If they balk, they face fines that could total over $1 billion.

The two companies see Special Report: Assessing the carnageeach say they will continue to do at least the minimum required by their merger obligations. But consumer groups say the companies are dragging their heels even in their own home territories, testing to see how much room they have to maneuver under the new administration's regulatory policy.

SBC and other Baby Bells "are essentially going on strike," said Mark Cooper, president of the Consumer Federation of America. "They're saying, 'We don't want to play by these rules and no one's gonna make us.'"

One near miss after another
The attempt to jump-start competition has been going on since 1996, when Congress passed a landmark deregulation law that would allow the Baby Bell local phone companies into the long-distance business, as long as they opened their monopoly local phone businesses to competition.

The avalanche of small competitors into local markets initially appeared promising. But attempts to spur competition between the giants have been difficult.

The big long-distance companies have made several attempts to get into the local phone business. But in most cases, they have said it is simply too expensive to pay the local companies for use of their networks, even though this is required by law.

The attempt to make an end run around the local phone companies' networks was largely responsible for AT&T's $100 billion-plus purchases of cable TV networks. Sprint and WorldCom each have tried similar tactics, buying up wireless spectrum to offer high-speed Net and telephone service. These have yet to become a significant competitor to the local companies, however.

The merger of SBC with Ameritech, and Bell Atlantic's merger with GTE to create Verizon, appeared to give regulators a strong new lever to force competition. To secure approval, SBC agreed to offer service in 30 new markets inside of 30 months. Verizon agreed to spend at least $500 million outside its regular service area by 2003.

SBC says it already has "several thousand" customers in the eight markets outside its ordinary service area, which it has already entered. But where it has been offering a full set of local phone and data services, it will now ratchet its offering down to a simple local phone connection.

Nor will it market even this service heavily, although it will stay on schedule for the full 30-market plan, a spokeswoman said. The company said it is taking longer to win approval to offer long-distance service in many of those new markets, and in a declining economy it can't afford to offer a package of services without that long-distance component.

Verizon, too, is expanding cautiously, sticking to filling in a few urban gaps in areas where GTE already had suburban coverage. These areas include Seattle, Los Angeles and Dallas, for now.

Even in these areas, the company will focus on business customers and residences in apartment buildings or other areas with extremely dense populations.

"We're saying, let's make a business out of this," said Joe Cascio, Verizon Enterprise vice president for strategic planning. "Let's not do this willy-nilly."

Analysts say the big companies are likely to keep pushing to see how little they can deliver on the promises they made during the mergers, at least as long as the economic downturn continues. The companies are torn between their promises and fear for their bottom lines, Cleland said.

"Remember that those conditions were agreed to under serious duress," Cleland said. "The (smaller companies) are cratering. Doesn't that suggest that the Bells might proceed with caution?"

News.com's Patrick Ross contributed to this report.