SBC Hit With Antitrust Lawsuit as DSL Sales Soar

Hours after SBC Communications Inc. boasted Thursday of a big run-up in DSL customers, four California Internet service providers filed an antitrust lawsuit accusing the company of using its dominance in local phone service to squeeze them out of the high-speed market.

SBC tried to put a good face on what some analysts called discouraging second-quarter results -- a 5% decline in sales and a 22% drop in net income -- by trumpeting “tremendous” gains in long-distance business and digital subscriber line, or DSL, service.

The lawsuit, filed in federal court in Los Angeles, claims SBC has been violating the law for years to build its DSL market share. Internet service providers, or ISPs, say the nation’s three other Baby Bell companies engage in the same practice.

“They’ve destroyed competition,” said David Robertson, head of the Texas Internet Service Providers Assn. “They use DSL and broadband to maintain their monopolies.”

SBC spokesman John Britton called the suit “without merit.” He said the company has been working with ISPs, in some cases lowering prices, to battle the major providers of broadband service: cable companies that hold more than two-thirds of the market.

ISPs rely on SBC for access to homes and businesses -- leasing from the company the so-called last mile of copper wire -- and often for other equipment.

The suit contends that SBC’s wholesale rates are so high that they either leave little profit margin for ISPs or are actually higher than the retail prices SBC charges its own customers.

The suit also alleges, among other things, that SBC unreasonably delays switching DSL service when it means losing its customer to a competitor.

SBC has been charging ISPs about $36 a month for the line to a customer, plus a one-time $99 fee for the DSL modem the customer needs, but has sold full broadband service to its own customers for $30 a month, giving them the modem free, said Dane Jasper, president of the California Internet Service Providers Assn.

“We hope this lawsuit will lead to a restructuring of the DSL business to help ISPs survive,” said Maxwell M. Blecher, a Los Angeles antitrust specialist who represents the plaintiffs.

San Francisco lawyer David Simpson, another plaintiff’s lawyer, said the suit was the first antitrust action by ISPs against a Bell company.

One of the plaintiffs, InReach Internet in Stockton, already has stopped providing DSL service, Blecher said. The other three companies are LinkLine Communications Inc. in Ontario; Om Networks in Davis, doing business as OmSoft Technologies; and Nitelog Inc. in Monterey, doing business as Red Shift Internet Services.

On Thursday morning, SBC Chairman Edward E. Whitacre Jr. heralded the company’s DSL and long-distance gains, saying that bundling services was driving sales.

Though SBC added 304,000 DSLs and 2.3 million long-distance lines throughout its 13-state region, its core wire-line business saw a 33% drop in income to $1 billion, from $1.6 billion.

SBC’s net income fell to $1.4 billion, or 42 cents a share, from $1.8 billion, or 53 cents, in last year’s second quarter. Revenue, including SBC’s share of Cingular Wireless sales, sagged to $12.5 billion from $13.1 billion.

The San Antonio company lost 488,000 local lines to AT&T; Corp. and other competitors.

It lost 383,000 additional lines to wireless and cable companies and to decisions by many customers with two lines to eliminate one in favor of a DSL used both for voice and data.

“Despite bundling and other efforts to retain customers, SBC’s position continued to deteriorate,” said analyst F. Drake Johnstone of Davenport & Co. in Richmond, Va.

He was among several analysts who downgraded SBC stock from “neutral” or “hold” to “sell” recommendations.

The shares lost 67 cents to $23.30 on the New York Stock Exchange.

Also Thursday, AT&T; posted second-quarter income of $536 million, or 68 cents a share, a turnaround from last year’s quarterly loss of $12.8 billion, or $17.11 a share, which included a significant loss from discontinued operations.

But the profit was lower than its earnings a year ago from continuing operations, which was $603 million, or 80 cents a share. Quarterly sales slid to $8.8 billion from $9.6 billion.

“The problem is that there’s too much capacity and too many players chasing too little demand, and all of them are pricing down services,” Johnstone said.

AT&T; stock gained 47 cents to $20 on the NYSE.