‘Last Mile’ to Local Service Growing Longer for AT&T;
For AT&T; Corp., the last mile is proving to be the longest.
Faced with rising costs, plummeting profit and an uncertain regulatory environment, the company founded by Alexander Graham Bell soon will decide whether to abandon its nationwide foray into local phone service, according to analysts and company insiders.
The stumbling block for AT&T; has been the so-called last mile of copper wire that connects home telephones to the main network. All around the country, the last miles are owned and controlled by regional companies like SBC Communications Inc. that were created when the government in 1984 broke up the original AT&T;, the national monopoly known as Ma Bell.
The regional companies, called Baby Bells, took over local service and AT&T; became the largest long-distance carrier. With the Telecommunications Act of 1996, AT&T; and other long-distance providers were allowed to get into the local phone business, leasing the necessary lines from the Baby Bells, and that has been a hard slog for AT&T.;
If it decides to give up, the ramifications could be huge. Only a company as big as AT&T; can roll out new technologies in the mass market to bypass existing networks.
People familiar with the situation said the direction the company would take would be discussed at a board meeting Tuesday, two days before AT&T; reports second-quarter earnings that are widely expected to be weaker than last year.
“I don’t know if they can decide in one day, but they will have to examine things quickly,” said one person close to the company.
AT&T; shares have lost 27% of their value this year. The stock rose 18 cents to $14.78 on Friday on the New York Stock Exchange, but Jeffries & Co. analyst Richard Klugman predicted it could fall to $10 after the second-quarter numbers are released.
Second-quarter revenue was probably 13% lower than a year earlier, Klugman said, and per-share earnings may have dropped to 7 cents from 68 cents.
AT&T;’s dilemma is precipitated by a federal court ruling in March that threw out key phone competition rules written by the Federal Communications Commission to implement the 1996 Telecom Act.
The rules had allowed AT&T; and other carriers to lease from Baby Bells at regulated wholesale rates the lines and equipment necessary to provide local service; because building local networks from scratch would be prohibitively expensive, the act required the Baby Bells to lease theirs to rivals.
Ironically, AT&T; had laid or strung many of the local lines when it was Ma Bell.
SBC and other local phone companies complained that the regulated lease rates were below their costs, and they fought them before state and federal regulators. For the Bells, the March court ruling was a victory. They are seeking lease-rate increases in markets across the country.
In California, the Public Utilities Commission is expected to decide next month whether to increase the rates by as much as 25%, a hike that AT&T; has said would make it think twice about continuing to offer local service in the state.
Analysts and competitors point out that AT&T; has said the same thing about other markets where prices are on the rise. It has yet to disconnect any of its 4 million local-service customers, though it has stopped offering some plans and stopped marketing in seven states.
“We can’t afford to fight ... in every state,” said one AT&T; insider. “We’ll fight in some key states, like California and Michigan and New York, but there’s a real sense of regulatory fatigue.”
The company had threatened to send affected customers letters blaming its scaling back on Bush administration policies. Instead, it has decided to wait for the FCC to enact new, interim leasing rules, expected to be made public by the end of the month.
“Once you say you’re going to oust the king, then you negotiate with him, it makes your position weak,” said analyst Blair Levin of Legg Mason Equity Research in Washington.
If AT&T; did quit the local phone market, it probably would focus on its lucrative business customers, sell long-distance service wholesale to other phone companies and speed up its rollout of phone service that uses Internet protocol to transmit calls like e-mail.
Executives at Bell companies have long derided AT&T;’s “sky is falling” threats. They say AT&T; won’t get out of the local market, especially as it tries to leverage its CallVantage service, which lets consumers use any high-speed Internet connection to make phone calls cheaply.
With thin margins, phone companies depend on being able to sell a bundle of services -- long-distance, local calling, Internet access, wireless -- to be profitable. SBC, California’s dominant phone company, and Verizon Communications Inc., the state’s second-largest, both offer that range.
Despite its nationally known name, though, AT&T; is in a relatively weak position because it essentially acts as a reseller for everything but long-distance. That’s partly AT&T;’s own fault, analysts said. The company sold its wireless and high-speed Internet units to raise needed cash just as those businesses were growing. And for years, analysts said, AT&T; has failed to define its strategy clearly and pursue it with conviction.
“They have no business model,” said David Willis, an analyst at Meta Group Inc. “Let’s face it: The Bells have won.”
In a sign of how the financial markets view AT&T;, the company’s stock was bumped in April from the Dow Jones industrial average, the nation’s best-known market barometer. Verizon replaced it.
Analysts say investors still gravitate to AT&T; because of the brand name and a 95-cent annual cash dividend. Whether they will be patient enough to wait for AT&T; to bypass the last mile remains to be seen.
The company has come up with a technology to do that: Called power-line, it allows telephone calls and Internet traffic to travel over standard electrical lines.
Power-line technology, two to three years from a commercial rollout, not only would help AT&T; get around that last mile, it would help give the company a key feature to distinguish itself from other carriers.
“Power-line technology holds the great promise to bring high-speed Internet access to every power outlet in America,” FCC Chairman Michael K. Powell said at recent power-line demonstration in Menlo Park. “What I saw today has the potential to play a key role in meeting our goals to expand the availability and affordability of broadband.”
For California PUC member Susan P. Kennedy, who oversees most telecom proceedings, the demonstration showed how PUC decisions about sharing old technology affect the ability to roll out new technologies. She said the PUC had to be careful in setting the wholesale rate next month that it doesn’t push AT&T; out, yet provides enough compensation for SBC.
Analyst Levin said he figured AT&T; could keep waiting, holding out hope for regulatory help until it bridged the last mile. AT&T; has sufficient cash flow and brand-name cache to carry the company beyond 2005, he said.
“If trends don’t improve, they have a couple of years before they have a day of reckoning,” Levin said. “They can afford to wait, but the earlier they make a decision the better.”
