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Phone Giants Still Losing Local Lines

The regional Bells have been improving their consumer operations on the heels of a favorable regulatory ruling, yet they have been unable to reverse a pattern of line losses in the face of wireless substitution and other competition.

SBC Communications Inc. added 16,000 “primary” residential lines in the three-month period ending March 31, marking its first quarterly increase in five years. SBC also reported a 3.9 percent increase in consumer wireline revenue, while losing 364,000 wholesale lines that were leased to rivals at low rates under rules the FCC has eliminated.

SBC is one beneficiary of an FCC ruling that ended regulations requiring the four Bells to lease their local networks to rivals at low rates under the unbundled network elementplatform, or UNE-P. CLECs still offer service to consumers and businesses via 6.1 million lines owned by SBC under the old rules.

SBC lost 88,000 retail consumer lines in the first quarter, according to a research note by Prudential Equity Group LLC. That marked an improvement over Prudential’s estimate of 171,000 line losses. That was the good news. The San Antonio-based phone giant still lost 488,000 total lines sequentially, exceeding a line loss estimate of 390,000 lines at Merrill Lynch & Co. Inc. Total switched-access lines declined 4.4 percent year-over-year.

“We believe that wireless substitution is still having the greatest impact on primary line losses,” Merrill Lynch analyst David Janazzo wrote in a research note, a point reiterated by SBC spokeswoman Anne Vincent.

Wireless and broadband substitutions are the main reasons consumer lines are shrinking at Verizon Communications Inc., Verizon CFO Doreen Toben said during a first-quarter conference call. Total access lines at Verizon declined 5.1 percent year-over-year, with residential lines falling 6 percent and business lines declining 3.6 percent.

Total wireline revenue of $9.5 billion, a 1.2 percent decrease over the year-ago quarter, marked the division’s lowest rate of revenue decline in nearly four years. Wireline revenue was in line with the forecast of Credit Suisse First Boston, but earnings before interest, taxes, depreciation and amortization (EBITDA) of $3.49 billion fell below CSFBs estimate of $3.67 billion.

“We are seeing an improving trend in the level of retail residential line losses due to both UNE-P declines and our win-back program,” Toben says.

However, the regional phone companies face further strains in the traditional wireline business as Comcast Corp. and other cable companies expand IP phone service to millions of homes. “Our concern over the long run is access line erosion will continue as cable telephony gets further rolled out in the second half of [2005],” says Standard & Poor’s analyst Todd Rosenbluth, whose firm expects the access lines at the Bells to decline 4 percent this year.

One good sign for the phone companies: Rosenbluth says the Bells have been successfully packaging multiple services. SBC, for example, reported that its penetration of retail consumer lines with at least one key service - long-distance, DSL, joint-billed Cingular Wireless or SBC | DISH Network video - increased to 64 percent at the end of the first quarter, up from 50 percent a year earlier. “They’re enticing the customer with more services,” Rosenbluth says. “These are positive signs in our view. They’re taking steps to improve customer loyalty, but wireless substitution and cable telephony are still serious threats.”


Wireless Drives Bell Growth

By Josh Long

Wireless sales continue to drive growth at the biggest local phone companies.

Verizon Communications Inc. reported that Verizon Wireless - its joint venture with Vodafone Group Plc - contributed $7.4 billion, or 40.8 percent, of revenue in the first quarter. This compares with wireless sales of $6.2 billion, or 36.1 percent of total revenue, in the quarter a year ago. The wireless results topped estimates on Wall Street. Verizon Wireless added 1.6 million customers, beating by 14.5 percent the forecast at Credit Suisse First Boston (CSFB). CSFB attributed the good results to lower churn than anticipated.

Verizon Wireless exceeded nearly all the estimates at Prudential Equity Group LLC, including the firm’s forecast for revenue, net additions, churn and average revenue per user. “We believe the strong performance of Verizon Wireless may ease some concerns among investors that believed Verizon [Wireless] could be losing market share to other carriers that have also performed well,” Prudential analysts wrote in a research note.

Merrill Lynch & Co. Inc. analyst David Janazzo said in a research note healthy results at Sprint PCS and Cingular, the joint venture between BellSouth Corp. and SBC, reflect a stable pricing environment and growth in data services. “We had expected solid wireless subscriber growth during the first quarter but the revenue results in our view reflect healthy underlying demand and an improving market structure,” Janazzo stated.

Atlanta-based Cingular added about 1.4 million subscribers, beating by 18 percent the forecast at CSFB. Cingular also had a better churn rate and slightly higher average revenue per subscriber than CSFB had projected.

Links

BellSouth Corp. www.bellsouth.com
Cingular Wireless www.cingular.com
Comcast Corp. www.comcast.com
Credit Suisse First Boston www.csfb.com
FCC www.fcc.gov
Merrill Lynch & Co. Inc. www.ml.com
Prudential Equity Group LLC www.prudential.com
SBC Communications Inc. www.sbc.com
Verizon Communications Inc. www.verizon.com
Verizon Wireless www.verizonwireless.com
Vodafone Group Plc www.vodafone.com


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