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The Baby Bells' Two Takes On Broadband
by Teri Rucker
Telecommunications regulations are choking the ability of the regional Bell telephone companies to invest in the Internet's high-speed infrastructure, company representatives have testified before Congress, but those companies concurrently are telling investors through Securities and Exchange Commission filings that their digital-subscriber-line (DSL) businesses are a top revenue generator for them that is spurring customer growth.
"There absolutely is a disconnect between what they tell the Street and members of Congress," an industry source said.
The Industry Line On Capitol Hill
Baby Bell representatives have told lawmakers they need Congress to free them of regulations that discourage investment in broadband infrastructure. In particular, they said they need the Tauzin-Dingell bill, H.R. 1542.
The measure, introduced by House Energy and Commerce Committee Chairman W.J. (Billy) Tauzin of Louisiana and Ranking Democrat John Dingell of Michigan, would free the Bells of regulations in the 1996 Telecommunications Act. The legislation would enable the Bells to offer data services, including high-speed Internet access, across long-distance boundaries before meeting the law's requirements, and they would be freed of requirements to share their upgraded networks with competitors.
"Current regulation hampers significant DSL deployment and denies consumers benefits," Thomas Tauke, Verizon's senior vice president for regulatory affairs, told Energy and Commerce Committee members in April.
If Congress would just "change the regulatory regime that now inhibits investments by some of the most logical players," Tauke said, the sluggish economy might bounce back faster because his company could make the proper DSL investments and drive productivity.
Investing In The Future
Company data, however, indicate that the Bells already are making such investments. Through 2000, the four firms invested $3.3 billion in DSL and are expected to spend $10.3 billion through 2003, according to a recent report from Lehman Brothers.
SBC Communications and Verizon are the two Bells leading in the broadband market, according to the report, and the investment is expected to pay off next year. Earnings before interest, taxes, depreciation and amortization from their DSL investments are expected to be positive in late 2002, as market penetration hits 10 percent.
In an investor briefing in April, SBC noted that "[d]emand for broadband services is robust, and SBC plans to be aggressive in expanding its DSL growth platform." It also identified broadband as one of the major growth drivers for the company. The company spent $458 million on fiber and other telecom infrastructure in the first quarter of 2001, SBC said in its quarterly SEC filing submitted in May.
At the end of the first quarter, SBC was able to reach 2.7 million customers -- more than 50 percent of its customer base -- with its DSL service, up from 1.3 million a year earlier, its investor report said. The company also has completed 34 percent of its Project Pronto, a $6 billion DSL investment campaign launched in 1999.
Verizon also has been investing in DSL, spending $408 million in 2000 and an estimated $480 million in 2001. The company had planned capital expenditures of $1 billion for the year, but the sluggish economy prompted it to hold expenditures at last year's levels, according to a first-quarter earnings report.
At the end of the first quarter, about 42 percent of Verizon's customers had access to its DSL services, with 720,000 subscribers, nearly five times the number at the same period in 2000. Verizon expects to have 1.2 million to 1.3 million DSL subscribers by year's end, according to the company's June investor road show.
In 2000, data services comprised 9 percent of the company's revenue, and Verizon anticipates that share of the total will increase to 25 percent in 2005, according to the road show. Data services include DSL and the company's high-end broadband offerings, such as T1 lines, which allow data to flow more speedily through cable.
Explaining The 'Disconnect'
The levels of investment should come as no surprise, said SBC spokesman John Emra. Data is a high-growth business and is important to the company's bottom line, he said. "We want to be in the broadband market place. To the extent that we can, we are, but the rules now are very limiting."
The company has pulled back its investment in Illinois, Emra said, because the regulatory environment there makes DSL investment unprofitable. The Illinois Public Utilities Commission ordered SBC to unbundle its upgraded networks and allow competitors access to each part of the network. It would cost an additional $500 million to follow those regulations, the company says.
That sort of "regulatory guillotine hanging over your head" makes investment a risky proposition, Emra said. He declined to speculate on whether the company would pull out of other states should they impose similar rules except to say: "If we face that kind of financial situation, we will look long and hard to see if we want to pour our money into that kind of situation. Our shareholders won't put up with it."
"Under the current rules, we have been able to successfully deploy to half our customers, said Verizon spokesman Larry Plumb, but it is not economically feasible to further upgrade the networks with fiber because the return on the investment is not there.
Right now, the company "can't build the business case to extend that fiber if we have to provide that new network to our competitors," added Verizon spokesman Bob Bishop.
The Bells need regulatory relief to build out broadband facilities to the rest of their customers, said Scott Cleland, CEO of the Precursor Group. The Bells are investing "big time," but "they would be able to invest a whole lot more a lot faster with regulatory relief."
Cleland estimated that the companies would invest billions more, with broadband services being made widely available years faster, if they had regulatory relief. Cable companies are not constrained by the same regulations, and they currently have a 70 percent broadband market share, he said.
However, that is a 70 percent share of a fraction of the marketplace, according to an industry source. The Lehman Brothers report estimates that by the end of 2001, cable will have a 9 percent market share, compared with a 6.4 percent share for DSL.
The battle is so heated because broadband is a "sticky" product, according to an industry source. In other words, once a household selects a broadband provider, it is unlikely to change services. Cleland agrees. "There would not be a Tauzin-Dingell fight over chump change," he said. "This is a multibillion-dollar investment question."
Tell Me What I Want To Hear
The lobbying shop often is completely divorced from the investment side of the business, an industry source said in explaining the conflicting messages. And it is commonplace to target a message to one's audience.
"We have always in this town told things differently to regulators than what we've told the financial markets," said Randall Lowe, a partner at the law firm Davis Wright Tremaine. "We want the financial markets to finance the industry, and we want the regulators to pave the way."
Just as Wall Street is not in tune with every nuance on Capitol Hill, it is unlikely that lawmakers emerge from their world of legislating to pay close attention to what companies tell investors, Lowe said -- although most lawmakers "realize how the game is played."
"To some degree, Congress is aware of this ... and they [lawmakers] factor this into their thinking" when considering legislation, he said. An industry source agreed: "It is very logical, and when members of Congress think about it, they kind of get the joke."
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