RBOCs on the rocks

Conventional wisdom is that the regional Bell operating companies are fat, dumb and happy. In reality, they are none of these things - they are lean, smart. . . and decidedly unhappy. Their whole business model is starting to look "iffy."

Why? To start with, these guys simply aren't growing. Access-line growth used to be the metric of which they were most proud. Guess what? Access lines aren't growing; they're declining. So here is an industry that has thrown billions into new infrastructure . . . and its basic business is shrinking.

Another reason: The effect of the Telecommunications Act of 1996 is finally starting to hit. The goal of regulation from 1980 to 1995 was to bring competition to the long-distance market, which was so well done that now long-distance is a rotten, no profit, commodity business. The goal of regulation from 1996 to the present has been to bring competition to the local loop, and for the longest time not much happened. AT&T and a bevy of companies rushed in, lost billions and fled.

Now a dozen states have forced the RBOCs to lower their wholesale rates, and competitors new and old have jumped back into the market. So what has happened? The Bells get the right to get into the profitless long-distance market, but they lose their monopoly on high-profit local communications. Seem fair to you?

What else? To begin with, there isn't a stream of highly profitable new products coming out of RBOC land - products such as caller ID, which cost the RBOCs nothing to provide and was 99% pure profit. Even ATM is getting long in the tooth as the world moves to IP. All in all, voice revenues are the lifeblood of the RBOCs and that isn't looking good.

What we are faced with is glut, the scariest word in the communications industry. Yes, we have seen these revenues from local fixed-line telephone service and access lines decline.

You and I used to buy second and third lines all the time. Now we have stopped. We use our cell phones.

One of the reasons we bought those second lines was our use of PCs. The number of PCs grew just 1% last year. So while demand has flattened, capacity has more than doubled.

What has happened is that the RBOCs and enterprise customers grossly misread demand. Corporate America has so overbought servers and routers that on average they only run 10% of capacity. Even software sales are moribund, as the Fortune 500 pigged out on "volume discounts" and bought capacity from companies such as Oracle and Siebel Systems that they won't use and don't need. We all have so much capacity on our hard drives - assume 30 gigabytes - that it will be years before we use it up. Prognosticators like me used to figure that the amount of desktop capacity increased by 80% per year, but right now most desktops have three times the capacity they need.

What's this have to do with the RBOCs? For one thing, they have drastically cut their capital spending. I estimate that there are 3,000 equipment vendors that have pinned their hopes on selling to the few carriers still standing (AT&T, BellSouth, SBC Communications and Sprint) - and that's about 2,500 too many. Even now the glut of fiber has forced pricing down. A fiber link from New York to London used to cost $2,000 per month. Now it costs $400 - and might go down to $150 per month.

What we really need are new applications. Here's one: e-mail at night. The U.S. Postal Service now charges 37 cents for first-class mail. The nation's switched network operates at 2% of capacity at 3 a.m. We could build an entirely new service such as video mail - one that sucks up bandwidth and combines RBOC network capacity with innovation.

So where are we? The world is moving to IP phones at long last, which will hurt the existing carriers, particularly the RBOCs. The new applications, such as paying for Cokes with your cell phone or sending color pictures on your PDA, are downright silly.

Where are Theodore Vail, the organizational genius of AT&T, and Bill McGowan, the charismatic leader of MCI, when we need them?

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