(3 of 5)
"It makes no economic sense for the competitors to invest capital at these prices," says Randall Stephenson, chief financial officer of SBC Communications. "We still maintain the network and provision it, and the cost structure doesn't change. From a financial perspective, the model is unsustainable." As long as they are subsidizing their rivals, the Bells insist, there's no reason for them to upgrade their networks, which puts a further drain on the depressed equipment sector, including companies like Lucent Technologies and Nortel Networks.
The Bells' crying and moaning might elicit more sympathy if, over the past six years of deregulation, they had delivered on their promises to compete against one another for local service. During that period, they have incurred repeated fines by federal and state regulators for not opening their networks. "They were so busy trying to prevent real competition that they let a monster develop," says Royce Holland, CEO of Dallas-based Allegiance Telecom, which has $517 million in annual sales and is one of the few surviving small, competitive local exchange carriers that have built a solid business selling telecom bundles to small and midsize businesses. As for the Bells' poor-mouthing, Holland quips, "If anybody thinks they'll invest more money in their networks if they get their monopoly back, I've got some swampland in Texas to sell."
Many in the know, including staff members at the FCC, share Holland's incredulity about the Bells' dire warnings. Earlier this year, the Bells' critics point out, the U.S. Supreme Court ruled that the resale pricing methods used by regulators are appropriate, guaranteeing the Bells their costs plus a reasonable rate of return. If the rules are such a great deal for the resellers, "why aren't the Bells competing in each other's territory?" asks AT&T president Betsy Bernard. To be sure, both sides in this argument have valid claims. While it's probably true that the Bells aren't heading for bankruptcy, it's also clear that regulators are assessing the Bells' costs on the assumption of super-efficient communications networks that in most cases don't yet exist.
"This is not science. It's a policy goal," says Eli Noam, director of the Columbia Institute for Tele-Information in New York City. "It's pretty clear that, given the head start of the Bells, it's difficult for someone to come in without a little regulatory weighting of the scales. But you don't want to prolong it. It puts regulators in the driver's seat."