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Be a Commerce Partner |
DSL Prime News Weekly: The Inside Source —Continued
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"We currently see no fight between cable and the telcos for the local loop" |
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Feels like I've been chasing my own great white whale, trying to find out why SBC raised prices to $50. Decimated competition, I argue below, is the reason SBC could raise prices, and financial incentives are driving the decision. No one should be fooled into thinking that price hikes were inevitable or would be economically justified if SBC had any competition.
Verizon, six weeks ago, had a clear strategic plan to bring prices down over time, and Bell Canada is already at $28 (US). DSL chip prices have come down 25% to 40% in the last four months, and backbone internet connectivity costs are plummeting amid fiber glut. Multiple truck rolls have been replaced by customer self-installs. All the carriers, SBC in particular, tell us they are getting more efficient.
I don't have a "deep throat", to confirm the clear inference that SBC fears no competition for the voice customer, but dozens in the industry agree, and the analysis below will help you to make up your own mind. It hurt to hold the article from the previous issue to give SBC more opportunity to respond, but I care more about about accuracy than about the big scoop. I would have looked like a prophet on Wall Street, as after I held the story SBC surprised the street with a reduced Q1 forecast, citing DSL startup costs as a key driver—as described below. —Dave Burstein
SBC prices up 25% plus, DSL install plans down
400-800K
self-install mandatory
Below: Competitive and financial explanations for the move
In an amazing move, SBC has raised the price of basic service from $40
to $50, established a $200-350 charge if customers can't self-install
(they've transferred installers), and imposed equipment and service order
charges that are higher then their typical previous levels.
The only consumer benefit is that they have eliminated one year contract previously required to get the standard rate. They also indicated a planned install rate (3,500-4,000 per day, or about 900K for 2001) lower than the 250K of Q4, and 40% lower than the rate projected in September for Q4.
The result, we've established to our satisfaction—400-800,000 fewer subscribers than planned, or easily reached. (SBC has not denied this, but emphasizes they have made no such announcement.) SBC's move has only two obvious explanations: they no longer fear competition, and the four to seven cents per share increase in 2001 earnings is crucial to them. The rest of the analysis is detailed, so we moved it to the end of this letter.
What SBC's price move means
Assumption #1: SBC is a smart company
Verizon, BellSouth, Qwest, Bell Canada, also smart,
saw price drops instead
Ed Whitacre and his team are among the sharpest analysts in telecom, which
allows us to assume this move is well-considered, and draw conclusions
from their pricing behavior. Major corporations make irrational mistakes,
of course; AT&T is in crisis because they overpaid for cable franchises
($4,500 per subscriber) and eventually couldn't bury the $20-30 billion
loss. Xerox wouldn't be facing bankruptcy if they had taken advantage
of PARC, and the inventions of Ethernet, laser printers, object-oriented
programing, and windows. So if some division head, seeking to make short-term
numbers, upped prices to the ultimate detriment of SBC, such human error
could negate this analysis. But SBC's Grasso told us "DSL is the etone
of the future," and watched from the top; I don't see the price move as
just a careless mistake.
Explanation #1 SBC is not concerned with competition
CLECs insignificant
Bankruptcy at NorthPoint and ICG, and the disasters almost everywhere
else, are clear to every reader of this piece. Survival is the goal now,
and there is no plausible circumstance in which they could finance enough
new customers to make an impact on SBC's strategy. CLECs overall have
lost $27B in market cap and funding. Some investors may jump in (smart
time to find a good deal), but there are at least more more bankruptcies
that will generally discourage money coming in.
AT&T and other cable crippled
The telcos never considered the CLECs major competition, but were instead
reacting to the threat that cable would sell a bundle that included telephony
as well as video and data. "We're going to beat cable!" Bell Atlantic's
Pete Castleton told the Times as the struggle began. It's more than a
year later, and Time Warner is finally starting to build a customer base
in New York, their home and Verizon's—and isn't even attempting to
market telephony, which was the real fear. AT&T, the mothership, controls
much of the US cable market, purchased for more than the entire company
is now worth ($85B). A year ago, AT&T had a market cap over $200B. Now,
it's cut its dividend, is half the size of SBC and dwarfed by Verizon
as well, and is flailing about trying to find a way to manipulate the
market by splitting into pieces. So AT&T is clearly not telco competition.
Mike Armstrong, still holding on as CEO at AT&T, is very clear about their strategy in 2001 and 2002. They will improve their financial base, and emphasize earnings. Forget about aggressive bundles or serious competition for telephony customers. They turned back enough equipment last quarter to cause panic among their suppliers.
That trend is continuing in 2001, based on the shortfall in Tellabs sales of cable telephony equipment, reported by Nikos Theodosopoulos of UBS. AT&T Voice over cable is far behind targets, and will be spun off. Instead, AT&T Consumer plans to focus on reselling DSL. But so far, they have done little in DSL, and given no reason to believe they will expand their DSL offering sufficiently to affect SBC. AT&T's subscriber count is so low, they do not even release the number.
AOL TimeWarner, the second largest cable company, also lacks the financial resources to take on SBC. The Wall Street Journal reported the cash flow goals are so aggressive even their own employees doubt they can achieve them, and expansion projects into bundled telephony are far off. Most of the other cable companies are also holding back.
Other telcos not coming in
Verizon's dumping of the NorthPoint deal was a clear signal they would
limit their out-of-territory expansion. Verizon's Larry Babbio made that
clear, explaining their alternate strategy would be to expand out of district
through MFN fiber and Genuity service to business—and provided no
plans to offer consumer service, much less facilities that combine data
and voice in a bundle that would require a response. Qwest's out-of-territory
move will be large, but Nacchio reports they are going after business,
not residential customers.
SBC's Whitacre last spring told Wall Street that national expansion would be a critical growth area for SBC, and not just an exercise to please regulators. We believe that was his intent, but the evidence of followup on SBC's national plans is scant. Again, like pricing, we are trying to infer strategy from actions—the conclusion is that SBC has changed its plans. Gene Kimmelman of Consumers Union told Shawn Young "Only about 3% of consumers currently have a choice in local phone service. We've never seen aggressive, competitive challenges by one Bell monopoly against another," (WSJ)
Will competition for consumers ever come?
DSL Prime hopes the industry consensus is wrong, because the vast majority
believe consumer competition is neither likely nor viable, other than
from cable. A not-for-attribution comment from a senior FCC official was
typical "We know the CLECs are crippled, but hope AOL/TimeWarner or Microsoft/AT&T
will be big enough to take on the telcos. If not, we don't know what to
do." The lights going out in California, and the rising power costs around
the nation, are creating a backlash against deregulation, of course. But
Mike Powell, a firm believer in less obtrusive government, will find it
hard to reverse course and regulate telcos as a monopoly.
DSL Prime is more hopeful about possible competition, and agree with Verizon it must be expected and matched. Once the cable companies protect their balance sheets, the marginal cost of adding telephony to their systems make it an overwhelming likely move. The CLECs have built nationwide networks, whose primary costs are sunk; they may, like NorthPoint, be forced through Chapter 11 to clear the debt, but the physical network—and potential competition—will remain in place. The economics will give them an incentive to expand to consumers one day.
Sprint may turn out to be the great hope for telco competition. They have DSLAMs in 1200 COS, with 800 more contracted for, the largest network among the CLECs. They have consumer Voice over DSL working on their own equipment. Their target for 2001 is low (60,000), but making a nationwide success is crucial to their long-range plans. Wall Street disagrees, and assumes the company will drop ION and consumer expansion.
Copyright 2001 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.
"The power of the printing press belongs solely to those who own the
presses"
—A.J. Leibling
The Internet is the cheapest printing press ever invented.
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3.
SBC Justifies DSL Price Hike
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