Bells loosen their grip

news analysis Some local phone companies are deciding that they don't need to sell local phone service anymore to some customers--a stunning reversal for an industry reeling from defections to cellular and Internet phone services.

Verizon Communications this week confirmed that it has begun letting some broadband customers drop local phone service without forcing them to abandon the company's DSL (digital subscriber line) plan. The move follows a similar announcement in February by Qwest Communications International and points to the fast-approaching day when the local phone line is just one more item on an a la carte telecommunications menu.

"Things are starting to change," Gartner analyst Tole Hart said. "There's cell phone substitution, people are dropping their second lines, and there's more competition. It adds up."

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What's new:
Verizon and others are shaking Net access loose from phone service bundles to counter growing competition.

Bottom line:
The limited introduction of so-called naked DSL is among the signs that the Bells must face the day when local phone service will no longer be the linchpin to their business.

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After a century of control, the Bells are beginning to lose their iron grip on the local phone market, as technologies that bypass their wires create competition. Voice over Internet Protocol is allowing any company--even retailers like 7-Eleven--to sell local phone service. Dozens of service providers, including big cable TV operators, have announced plans for local phone service in most major U.S. markets.

The enormous popularity of cell phones in the United States is also forcing a dramatic shift in local dialing patterns. Hart said more local phone calls are made over cell phones than the Bells' network. It's expected that 30 percent of all cell phone users will "cut the cord" and go solo with a cell phone in about four years. Cell phones have also replaced landlines as the main choice for a second phone line in the home.

Tellingly, the Bells in 2001 for the first time in their history reported net declines in the number of access lines serviced. According to a triple threat services of video, voice and broadband--a trend that's seen alliances between local phone companies and satellite TV providers.

SBC Communications and BellSouth have insisted that they have no plans to follow Verizon and Qwest, though outside pressure on them to do so is growing. Last October, the Georgia Public Service Commission ordered local phone provider BellSouth, over the company's objections, to let customers buy broadband services alone, what's known as "naked DSL." BellSouth also has similar arrangements in Florida and Louisiana.

Despite ongoing resistance and the increasing importance of service bundles, some believe that the Bells will inevitably face the day when local phone service will no longer be the linchpin to their business.

Bells getting dinged The number of people using local phone service has been decreasing since 2000. Year Active local lines (millions) Percent change 1998 180.59 3.5 1999 186.59 3.4 2000 187.58 0.5 2001 179.81 -4.1 2002 172.27 -4.2 Source: Federal Communications Commission

The limited introduction of naked DSL is among the signs that this shift is taking place, albeit glacially, as the Bells try to shake loose from a century-old business model.

"Local phone service is still a big chunk of our revenue," SBC spokesman Michael Coe said. "But other things are becoming more and more a part of our revenue stream."

Besides DSL, the Bells are adding cell phone service into the mix of offerings they bundle together and offer at discounted prices. It's a natural move, because three of the four Bells partly own U.S. cell phone service providers. BellSouth and SBC are co-owners of No. 2 U.S. cell phone service provider Cingular Wireless, while Verizon is part owner of market leader Verizon Wireless. But again, three of the four Bells require a local phone line. Only Qwest, which does not own a cell phone company, allows customers to separately buy its cell phone service, which uses Sprint's nationwide network.

Although Verizon is preparing to unbundle broadband service from its local phone offering, it isn't about to do the same with wireless--a move that would turn upside down the business model that's been central to the telephone industry for decades. While revenue from local phone service is slipping, "it's just too early to make that jump," according to Verizon spokeswoman Briana Gowing.

Indeed, the Bells' local phone market position may get even stronger in the next two weeks, providing less of an incentive to offer products without requiring local lines. Competitors are bracing for a June 16 deadline, when the Bells will no longer be required to lease phone lines to competitors at rates set by the government. The Bells will undoubtedly see their local phone prowess grow, as they get to negotiate the rates they want.

Also, even though the number of local phone lines is dropping over a sustained period, for possibly the first time ever, carriers all say local phone service is a big revenue generator that they would be foolish to turn their backs on.

Hart believes, however, that one day, that will be the case. He estimates that it could take more than a decade before revenues from DSL, satellite TV or the Bells' current experiments with Net phone services will eclipse local phone's profit prowess.

Undressing broadband
Since Qwest began offering naked DSL on Feb. 25, it has seen its DSL subscriber numbers rise.

"As long as we can make money at it, we should do this," Qwest CEO Richard Notebaert said at the time. "Every time someone fights progress, at end of day, they aren't successful."

BellSouth, a Bell operating in the southeast United States, said it won't bow to competitive pressures to offer its own naked-DSL service. The main reason, a BellSouth representative said, is that the two Bells that have undressed their broadband don't compete with BellSouth.

The representative acknowledged that it's "conceivable" for BellSouth to sell naked DSL, though "the company has "no specific plans to do so, at this point."

SBC is also sticking with its strategy to bundle its local phone service along with other offerings at reduced prices. Why would the company "abandon a strategy that's now penetrated more than half its customer base?" an SBC representative asked.

"At this time, we don't have any plans to change that," the representative said. "I can't speak for what may happen in the next five to 10 years, however."

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