The chorus of praise hasn’t stopped since Monday’s announcement that SBC will merge with AT&T. The storyline is attractive: Baby Bell grows up, buys parent; $15 billion in synergy; local and long distance back together; a new day for telephony. Alexander Graham Bell would be so proud, mostly because he would recognize a lot of the equipment from 1875, especially the copper wires going into homes. Gimme a break. This deal is about freezing the “phone” business, after winding back the clock to 1983 (or is it 1883?)
Bells are milking us for $20 a month for a service that is worth pennies, but already there are a few leaks in this huge price umbrella. With broadband, people are canceling second lines that were used for dialup. Primary lines are shut off in favor of cell phones. No wonder SBC’s sales have been dropping. Buying AT&T will merely slow SBC’s swirling descent. With the stroke of a pen, prices might still collapse on plain old telephone service. Watch out below.
that’s like figuring the price of getting to Europe using the hypothetical cost of digging a tunnel under the Atlantic Ocean
In this day and age, there shouldn’t even be a “phone” business. Communications is 20 years into a digitalization process, and the Bells don’t like it one bit. Real competition actually works. Judge Greene divided Ma Bell geographically back in 1984, and competitive long-distance rates dropped 95% in 20 years. So why haven’t local rates?
The incumbents have used every trick in the book to avoid the competition a digital world brings: legal delays, bullying, lobbyists, fat dividends to keep their stock up, and promises not to raise rates before elections. Whatever it takes. But they are almost out of options. Dig deep enough, and you’ll figure out that SBC’s fate hangs on the thread of a carefully worded section of the Orwellian named Telecommunications Reform Act of 1996.
Congress was duped by Reed Hundt into thinking they were getting real competition. The ’96 Act insisted that regional Bells should share their lines with others, and voila, competition. Not so. Tucked in the legalese were pages of gobbldey-gook on how to set prices to share these copper wires—a formula known as TELRIC, total element long-range incremental cost. Rather then use historic costs that with depreciation would likely be close to zero, TELRIC is a fuzzy future cost. Its pie in the sky—the hypothetical cost of stringing new phone lines today.
But that’s like figuring the price of getting to Europe using the hypothetical cost of digging a tunnel under the Atlantic Ocean, instead of computing airfare. It gives Bells a license to steal. Only a fool would string copper phone lines today—you’d run fiber capable of gigabit speeds—yet copper is how we determine prices.
A phone call is just 16K of data bandwidth. The math is easy. Based on current gigabit fiber line monthly fees, the value of phone service is a meager 1.6 cents per month. That’s it. Amazingly, SBC charges $18-$22 and rising per month and complains that’s below their costs! (By the way, that’s what AT&T does for businesses today—runs data lines of fiber to bypass SBC and lower corporate phone costs.)
Current line-sharing costs are not just slightly off, they are on a different planet. So how does SBC, Verizon, Bellsouth or Quest transition from phone-company to data-company? They don’t. They pray TELRIC is written in stone.
The telcos whine to legislators that prices should be high to incent them and others to string new lines. That’s bogus. Intel invests billions in R&D for new microprocessors specifically because prices of today’s parts are dropping. Cisco just spent $500 million on their new terabit router because prices of their old routers have dropped. If they didn’t invest, they’d be dead. It’s just the opposite for SBC. It’s the prospect of lower prices that stimulates investment, not higher prices, yet our telecom policy is exactly backwards. We desperately need a Telecom Act of 2006.
Competition is here just itching to grow. Voice over Internet Protocol (VOIP) works over broadband and allows unlimited local and long-distance dialing for $30 a month. But almost half of those fees go to Bells like SBC to interconnect to their antiquated phone network, so it’s not real competition. For the same reason, cellular phone plans (which SBC and Verizon control) cost us twice what they should. Even cable modem service would be half the price without TELRIC. Because of nonsensical accounting, it’s one of those circular “prices are high because prices are high” things.
Cool stuff is coming. Fiber is being strung away from the telcos. Soon, a mesh network of wireless transmitters on old neighborhood telephone poles will offer cheap data plans with, oh by the way, free phone calls. Burned badly, the stock market will pay for all this only if it sees a truly competitive market. SBC stock and the entire telecom market has been dead money for years. Buying AT&T only props up the corpse a little longer.
Mr. Kessler is the author, most recently, of “Running Money: Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score,” (HarperBusiness, 2004).
Great read!
Posted by: eric | September 08, 2006 at 02:46 PM