DSL

Telecom Insider: The First Issue

Competition? Fugeddaboudit! It's the end of regulation in an eighties revival featuring "teflon" Michael Powell, $25 million salaries on Wall Street, and the return of the baby Bell monopolies.

by Dave Burstein of DSL Prime [March 6, 2002]

"No competition necessary over the phone lines!" is the dramatic position Mike Powell implies as he deregulates the telcos even further than they ask. Verizon's Tauke Plan ("New wires, new rules") virtually becomes "new wires, no rules" in Powell's proposals. With no rules to protect access to all consumers, CLECs can't compete except in small niches. This is a sea change, because telecom policy the last decade is based on promoting wireline competition. Abandoning core beliefs is a very hard jump. Until Mike, no official would take it in public. Whatever their doubts in private, everyone proclaimed they were promoting more vigorous direct competition.

Just like physicists before Einstein, the smart ones know the paradigm isn't working in the real world. Eight of the top ten CLECs have gone into bankruptcy, others are tottering, and even multinational carrier Sprint had to abandon their billion dollar ION project. People around Powell privately say that doesn't matter because the CLECs never had a real chance. Powell is smart and well-informed. He must know that his proposed Bell deregulation abandons wireline competition.

The most powerful regulator in the world now proposes a telco/cable duopoly as the best path for many years in the future, although U.S. telcos and cable companies combined for a 25 percent rate hike in 2001. Verizon estimates that even ineffective competition costs the monopoly $30 billion per year, and it's Powell's job to do something about it. The buck stops here, and Powell should be responsible for results. Much more, below.

Walking the street
Prince Dan of Wall Street
The limousines were three deep in front of the Plaza Hotel when I first attended Dan Reingold's CSFB Conference, as Armstrong, Whitacre, Ebbers, Roth, and the other barons came to pay homage to the men with the money, and the man they most listen to, Dan Reingold. Dan's analysis is invaluable, smart, and well informed, distributed rapidly when news is breaking. He has the integrity to downgrade companies that are important to his firm's investment bankers, and I believe his objective calls were critical to his number one rating in this year's Institutional Investor poll.

He's currently recommending an "underweight" on the entire global and U.S. telecom sector, a tough and gutsy call to make about the stocks you cover. Anyone generating large commissions is well advised to steer some in the direction of Dan Reingold and Julia Belladonna's research.

This year's conference is March 4-6 in Orlando, and Mike Powell, Ivan Seidenberg, Ron Sommer, Mike Armstrong, David Dorman, Richard Li, Sang-Chul Lee and many others will address Wall Street. If you're on the financial side of telecom, this is a meeting not to miss. Say hello to there to the round fellow with a beard, Dave Burstein

Going, going, Grubman?
In 1998, Jack Grubman's $25 million paycheck made him the envy of the street, smart and connected. He was analyst number one only a year ago. Now the Wall Street Journal reports Salomon may be looking for his replacement. The only surprise is that it took so long after Gretchen Morgenstern devastated him in The New York Times for bad analysis and tawdry conflicts.

The Wall Street Journal has joined the choir saying, "few analysts embody the conflict between analytical objectivity and cheerleading more than Mr. Grubman." SSB got a $50 million banking deal right after he switched AT&T to a strong buy, but the stock has dropped by half since he made the recommendation. In 2001, he recommended Global Crossing ("a top pick"), XO, McLeod, and Winstar and was paid $10 million. (Maybe I should take an analyst job?)

Editorial
Take the fines from the CEOs' Options
$92 million is a powerful incentive to break the law. Ed Whitacre cashed that much stock in 2000, and others do almost as well. The big telcos have been paying so many fines lately they are no longer an interesting news item. Mike Powell wants increases in fines, but they'll probably still be disregarded. Fraudulent behavior (evidenced in California, Ohio, and FCC proceedings) remains profitable, and top officers get paid based on profits. Instead, their pay and options should be reduced if companies repeatedly break the law.

There's plenty of relevant law about strong punishments for unrepentant repeat offenders, and executive compensation policies are strong evidence of corporate intent. Option and bonus plans that reward executives handsomely while the company is sanctioned would seem to us prima facie demonstrations that the corporation is encouraging executive to break the law. If I were the judge, I'd triple the fines of any company with incentives for profitable illegality.

Copyright 2002 Dave Burstein.
The first issue of Telecom Insider Newsletter is reprinted with permission. For future issues, subscribe at dave@dslprime.com with "subscribe" in the subject line.

1. Telecom Insider: The First Issue

>2. Telecom Insider: Technology

3. Telecom Insider: The End of Competition

4. Telecom Insider: No Alternatives Remain

5. Telecom Insider: What Powell Should Have Done