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Study: State Local Phone Competition Is Minimal

SBC dismisses report sponsored by its rivals that also says its profit margin is as high as 42% even as rates are lower.

May 14, 2003|James S. Granelli | Times Staff Writer

California residents save $189 million a year on local telephone bills since state regulators reduced wholesale rates on an interim basis 12 months ago, according to a study released Tuesday by a UC Berkeley economist.

Despite claims by SBC Communications Inc. that the rates are below its cost, the study -- paid for by SBC's rivals -- found that California's dominant local carrier still maintains a profit margin as high as 42%.

The new era of competition, however, remains in jeopardy as SBC and other Baby Bells flex their "near monopoly control" of local service to win quick gains in long-distance and high-speed data markets, according to the report by Yale M. Braunstein, a professor at Berkeley's School of Information Management and Systems.

"Local telephony still is not competitive, even after a year at these lower prices," Braunstein said in an interview Tuesday.

One example of SBC using its market control, he said, is the company's refusal to provide high-speed DSL, or digital subscriber line, service to those who switch their voice line to another carrier. There are no technical barriers to such line-sharing, he noted, just SBC's efforts to continue dominating the market.

SBC charged that the study overlooks the destructive effect of discount pricing on investments, jobs and the Bells' financial strength. The low rates give rivals such as AT&T Corp., WorldCom Corp.'s MCI unit and Sprint Corp. access to all the gear they need to provide dial tone without installing their own equipment.

"This study cherry-picks facts, just as AT&T and MCI cherry-pick [SBC's high-end] customers," said Marc Bien, a SBC spokesman. "Consumers ... don't need a study to know they are saving money -- they just need to check their wallets."

SBC has been a vocal critic of federal and California rules that force it to lease its lines and gear to competitors in metropolitan areas at $13.97 a month per line, which it argues is below cost. The San Antonio company is seeking state approval to raise those rates to $29.39 a month per line to recover its expenses.

Braunstein argues that a rate that high would stifle competition. Consumer savings, he said, have come from the competition generated by the low interim wholesale prices set by the California Public Utilities Commission a year ago and by SBC's moves to meet its rivals' offers.

Even with the reduced revenue, the company's profit margin runs from 9% to 42% before taxes, interest, depreciation and amortization expenses, according to the Berkeley study.

In his research, Braunstein found that SBC reported revenue of $29.81 a month per line, mainly through high-priced features such as call waiting, and earned $11.92 to $14.91 a month per line. Backing out pre-tax earnings and an assumed 17% retail mark-up, he calculated the wholesale cost at $9.83 to $12.82.

But a Duke University professor found the calculations flawed and said that SBC probably would lose money this year.

James Vander Weide, a research professor at Duke's Fuqua School of Business, said the study relies on older profit margins of 40% to 50% that are higher than what analysts now expect. Using a 35% profit margin, SBC would end up losing nearly $2 a month per line, he said.

Vander Weide has consulted for Verizon Communications Inc., another Baby Bell and California's second-largest local carrier.

Braunstein's study was financed by the California Assn. of Competitive Telecommunications Companies, a statewide trade group representing AT&T, MCI, Sprint and other SBC rivals. Braunstein said the group paid him less than $10,000.

The PUC is expected to set permanent wholesale rates on SBC's network gear by late this year.

The PUC's decision in March to reduce wholesale rates on Verizon was not part of the study. Competitors have yet to offer service in Verizon areas, basically the old GTE Corp. region along the coast from Long Beach to Ventura County.

SBC covers 79% of the state and has 16.3 million lines, or 90% of the total, in its area. It has picked up 1.3 million long-distance customers in the first three months of this year since given permission at the end of 2002 to enter that market. It lost 388,000 local lines in the same period to wire-line and wireless rivals and to weaker demand for two lines in homes.

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