TCS Daily

SBC Doth Protest Too Much

By James K. Glassman - October 22, 2001 12:00 AM

FALLS VILLAGE, Conn., Oct. 22 -- Woke up to a dazzling New England morning, leaves gorgeous yellow, orange and red. Switched on CNBC, and there was David Faber, one of my favorites, reporting that SBC Communications had boosted earnings and sales, though not enough to please Wall Street. But that wasn't the story.

The story was that Ed Whitacre, SBC's chairman, was whining about too much regulation. In fact, he was pointing to "pervasive and uncertain regulation" as the reason SBC was cutting "our work force by several thousand jobs" and "cut[ting] our capital spending 20 percent."

He blamed the Telecom Act of 1996 (which he had enthusiastically supported when it passed), and claimed, "Primarily because of the regulatory environment, SBC will slow its build-out of a broadband network that is capable of high-speed Internet access to more neighborhoods and towns."

Aw, poor SBC!

Here is America's 14th-largest corporation, with $51 billion in sales and an incredible $8 in net profits last year. SBC, a mega-Bell combination that controls 61 million lines in 13 states, including California, Texas and Illinois, has a market value that's greater than AOL Time Warner -- in fact, greater than AT&T, WorldCom, Sprint, the New York Times and Dow Jones combined.

Plus, Whitacre has a good regulatory environment. SBC is a local monopoly. Unlike fiercely competitive long-distance companies, the locals raise rates and rake in the dough. And, thanks to the puny penalties of the 1996 Telecom Act, SBC can drag its feet on allowing its competitors to hook up with the "last mile." Those competitors, called CLECs, are dying by the dozen, but SBC is doing fine.

For example, since the start of the year, SBC stock has lost 11 percent - not bad, considering that the average stock has lost 18 percent. And look at McLeod USA, generally considered one of the two or three best-run CLECs. It' s lost 93 percent since the start of the year.

Still, SBC wants to finish off the CLECs once and for all. Hence, his complaints about regulation - and his message, clearly aimed at Congress, that relief, in the form of the Tauzin-Dingell bill, is needed, otherwise more layoffs and more cutbacks in investment.

David Faber, meanwhile, was bewildered. "Interesting," he said in response to SBC's whines. "If anybody - as the smoke from the '96 Telecom Act has cleared - has benefited, it would appear to be the Baby Bells."

Remember Project Pronto, the plan to bring DSL Internet service to SBC customers? Well, despite the terrible Telecom Act, it seems to have worked pretty well. SBC had 1.2 million DSL lines in service at the end of the third quarter - more than double the number a year ago. The truth is that SBC, a regulated monopoly for a century, doesn't like competition. What monopoly would?

Whitacre is right about one thing, though. The Telecom Act can be improved. Since it's not being enforced the way it's written, the answer is to revert to the system that worked extremely well with long distance back in the 1980s: break up the Bells once more, this time into last-mile infrastructure companies and liberated service companies. It's called structural separation or divestiture, and it would bring true competition.

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