TCS Daily

Timing on Telecom

By Duane D. Freese - February 13, 2003 12:00 AM

Timing is everything, so one adage goes. And action speaks louder than words, says another.

The conjunction of the SBC bid for Hughes' DirecTV satellite operation and Federal Communications Commission Chairman Michael Powell decision to delay a vote on new telecommunications' rules from this Thursday to Feb. 20 may be mere coincidence. Nevertheless the timing provides commissioners an opportunity to mull over how their actions may affect the competitive landscape for decades to come.

Washington is a twitter that Powell's decision to delay a vote from today to Feb. 20 results from a bi-partisan compromise proposal by a fellow Republican, new commissioner and former FCC staffer Kevin Martin. Martin's proposal would ensure a strong role for the states in granting competitors access to the Bell's local loop. Martin is right to hold out, as SBC's actions make plain.

Current rules allow competitors to lease so-called unbundled network elements, or UNEs, of the Bells' systems at wholesale rates set by state utility commissions. The leasing can include parts of the Bell system or the whole platform, UNE-P.

SBC senior vice president of public policy Jim Smith argued in December, that Bells' competitors using UNE-P "is not good for this country, for customers or for the sustainability of the industry going forward."

In making that case, Smith was merely echoing the view from the top.

"Our revenues are falling like a rock at SBC," complained SBC chairman Edward Whitacre Jr. last September "They're going down quickly, and they're going down because of something called UNE-P."

"UNE-P keeps us from investing ... and our competitors don't invest," Whitacre has opined over and over again.

This rant, though, has never really made very much sense.

As Chicago Tribune business columnist David Greising noted when SBC made the complaint about low wholesale rates in the former Ameritech region of Illinois, Michigan, Wisconsin, Ohio and Indiana: "Whitacre acts as if state regulators have cold-cocked SBC by setting the rent so low when AT&T and MCI use his network. But Illinois' rules for the rentals were set in 1995 -- three years before SBC swooped in and bought Ameritech. The other Ameritech states quickly followed suit. ... It was clear the Ameritech region would have some of the lowest rental rates in the country."

Despite knowing this, Whitacre was willing to pay $62 billion for Ameritech in 1999 - a 25 percent premium at the time. And to get approvals, he promised the FCC he would compete with Bells outside SBC territory and state regulators that he'd open his lines to competitors.

So, was Whitacre stupid? Or was he banking on getting federal regulators, or federal and state lawmakers, or the courts to bail him out? Or is UNE-P not as bad as he and SBC have made out?

Whitacre is no dummy. He knows how to play the litigate and regulate game. And he knows that UNE-P is hardly as devastating to his bottom line as he has claimed.

Blaming state regulators provides an excuse for him to do - and not do - what he would anyway. Thus, he has used that card as cover to pare back on promises made for Project Pronto, and for cutting back 20,000 redundant jobs created by the mergers with Ameritech and PacBell. It's UNE-P and the regulators fault, not mine, Whitacre can claim.

Meanwhile, though, Whitacre has to come clean in financial statements. And they show that in the last quarter, as UNE-P heated up, and despite SBC revenue declines, that SBC profits went up.

And if SBC is so poor and bereft, how come it can suddenly pony up the more than $10 billion in cash needed to get into the auction for Hughes' DirecTV?

Many analysts are questioning why SBC would try to get into the satellite TV business. The notion that it is purely to compete with cable companies combining their video with high speed Internet and ultimately voice telephony makes little sense. Phone and satellite systems don't intermix. So, why not save the money to spread out fiber to create nodes that could make a broadband network using much of SBC's existing copper network?

That network is hardly the "aging network" that FCC Chief Powell has painted it.

As Bell South's chief of technology, William L. Smith, told the Washington Post's Jonathan Krim, "I'm amazed and encouraged with what we can do with our copper network."

With so-called VDSL - very high bit-rate digital subscriber lines - possible speeds reach 52 megabits per second, or 900 times current dialup 56 kilobit and five times the top DSL speed. That's fast enough to provide video services.

So, what's the sense of SBC going after DirecTV?

One of the things that Powell and other FCC members have often talked about is alternative pipes into the home. In an interview with Business Week last February, Powell spoke glowingly of future competitive telecom platforms, an idea that undergirds his for easing rules on the monopoly Bells.

He counted up five sources of future telecommunications competition - telephone, cable, satellite, wireless and electricity.

Well, the cable companies have accumulated a lot of debt making themselves capable of delivering HDTV. They can provide Internet broadband, but to get deeply into voice telephony will require them buying a lot more switching equipment and building in reliability features they now don't have.

Wireless? SBC, BellSouth and Verizon are heavy stakeholders in that realm. So, much of the competition that would create would be between divisions - like Chevy and Oldsmobile, not GM and Ford.

Electricity? No one here or in Europe has figured a workable path around transformers. That's a dream more likely decades away.

And satellite? Well, last fall the FCC killed Echostar's bid to buy DirecTV from Hughes, thus making satellite provisioning of broadband as well as HDTV-quality multi-channel video dependent on each launching a lot more satellites - a heavy capital expenditure.

If SBC owns the biggest player, what chance is there that that platform will ever make it off the ground? Even if it can just bid up the price to another company, it can delay deployment of sufficient satellites to compete with SBC's ground enterprises.
So, before taking action on UNE-P, FCC commissioners now have time to take a closer look to see what lies over the horizon. And SBC's DirecTV bid gives them an extra reason to do so.

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