Thrown for a Loop

  • For Will Harpest, a third-grade teacher who lives in Lisle, Ill., the ad campaign was the last straw. A longtime customer of one of the big phone companies known as Baby Bells, Harpest, 54, had grown weary of having to deal with separate phone bills for local and long-distance calls. But, like most Americans, he couldn't do much about it until recently. Sure, he could change long-distance carriers and chase the lowest rates as often as he pleased, but he was still a virtual captive of SBC Ameritech, the sole owner of the prized last mile of copper wire into his home.

    Then Harpest saw a couple of SBC ads telling customers that switching to the new local services offered by the likes of AT&T; was as foolish as poking a fork into a toaster or sticking your tongue to a metal pole in freezing weather. Far from amused, Harpest thought the ad could "give kids bad ideas." But it gave him a good idea. He called AT&T;, already his long-distance provider, to sign up for its local service, seeking only the convenience of a single bill. He was surprised to learn the switch would also save him about $10 a month. "I was impressed," he says, "that someone would offer to get me a lower cost without my even inquiring about it."

    Harpest is just one of the small but growing number of consumers who are firing their local phone companies. Six long years after the Telecommunications Act was supposed to help break the Baby Bells' hammerlock on local phone service, competition in the residential market is finally starting to heat up — and the Bells' once dependable growth is cooling down. Thanks to newly aggressive state regulators who are forcing BellSouth, SBC Communications, Verizon and the much smaller Qwest to lease their networks to competitors at lower prices, rivals like AT&T; and MCI are for the first time snapping up some of the most lucrative customers. "Now we have a real fight," says former Federal Communications Commission (FCC) chairman Reed Hundt, a key architect of the 1996 landmark legislation.

    That may well be, but the Bells complain that it's not a fair fight. The way they see it, by requiring the Bells to lease access to their networks at a price that doesn't cover the cost of running and maintaining them, the states are essentially forcing the Bells to subsidize the competition. But given how vigorously the Bells have protected their turf and helped push up local rates over the years, few outsiders are shedding tears for what many view as a bunch of crybabies. As often happens in this combative, litigious industry, both sides are waging the battle as furiously in the regulatory arena as in the marketplace, sparking debate about the very nature of competition. Scott Cleland, ceo of the Precursor Group, an independent investment-research firm in Washington, thinks the Bells have a legitimate beef. "Do we want a marketplace of forced reallocation of wealth," he asks, "where shareholders pay consumers?" Certainly investors don't. The Bell stocks are widely held, and some Americans end up saving less on their phone bill than they are losing in their mutual funds and 401(k)s.

    Over the past 12 months, AT&T; has lured about 2 million new local customers. By the end of this year, MCI should have 3 million; in just the past six months, 1 million customers have signed up for its new Neighborhood Plan, a bundle of local and long-distance service that allows unlimited U.S. calls for $50 to $60 a month. From December 1999 to the end of 2001, the number of Bell lines leased by rivals quadrupled, to about 8 million. That's one of the few bright spots for the otherwise floundering long-distance giants, which have been able to grab nearly 10% of the market in certain states, such as Michigan and New York. It's no wonder that Wall Street has dragged down the stocks of the three major Bells as much as 30% over the past 12 months or that, with revenues and earnings flat or dropping, BellSouth, SBC and Verizon have been handing out thousands of pink slips. "The Bells have started to bleed. This is what everyone was waiting for," says Jeffrey Kagan, an independent telecom analyst in Atlanta, referring to the original intent of the Telecommunications Act. "Now the question for regulators is, When do you give them a Band-Aid?"

    Some of the Bells' wounds may not be easily healed. More and more Americans, especially the young and single, are relying on wireless phones as their primary mode of communication; 3% to 5% of Americans have no landlines into their homes. Wireless calls account for fully 30% of all personal calling minutes and are expected to reach 50% by 2006, according to the Yankee Group, a tech consultancy based in Boston. Verizon owns the nation's largest wireless carrier, and SBC and BellSouth jointly own its closest competitor, Cingular. But the fiercely competitive, low-margin wireless business is no substitute for the steady profits the Bells long reaped from local service.

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