SBC'S WHITACRE VOICES OPTIMISM ON UNE-P OUTCOME AT FCC

In response to question on merger possibilities, Whitacre said current UNE-P arrangements between Bell companies and IXCs would make merger between RBOC and long distance carrier less than likely. “I believe that directionally the rules will come out in a way that we will like.”

On UNE-P front, Whitacre reiterated theme he and other Bell chiefs have sounded forcefully in recent speeches that policy would be “improved” to encourage investment and provide incentives to facilities-based competition. When announcing last month that SBC planned to trim its workforce by 11,000 and cut capital spending, Whitacre pointed to prices at which Bell companies had to share UNEs with competitors as key factor. In Tues. lunch speech in packed ballroom at Plaza Hotel, Whitacre said UNE-P pricing allowed competitors to engage in “cherry-picking” high-revenue customers without investing in infrastructure. Citing recent Powell comments, he said that was “clear indication that regulators recognize the problems created when competitors go after UNE-P rates.” He said it also was clear that Powell understood “benefits of increased investment in facilities- based competition.” Whitacre said he was “very positive” FCC would provide “positive outcome” in debate, although he acknowledged that didn’t mean SBC necessarily would get everything it wanted.

Whitacre said he expected FCC in next few months to act on both wireline broadband proceeding and UNE Triennial Review, which is examining whether any UNEs should be eliminated or their use restrained -- for example, to certain geographic areas. He said SBC was preparing to roll out new product that would offer local, long distance, DSL and wireless on single bill and for one price in areas where carrier could offer interLATA services. Noting that FCC is to vote on SBC’s long distance entry in Cal. by mid-Dec., Whitacre said he expected long distance approvals to be granted in 6 Ameritech states by end of first half of 2003. He reiterated that company planned to reduce capital spending to $7 billion this year and to $5 billion next year. “The industry environment and the economic environment are pretty tough and no amount of cost-cutting will offset what is going on out there,” he said.

UNE-P policy has been regulatory issue raised most frequently in 3-day conference that ends today (Wed.) with panel on FCC’s Triennial Review that includes agency’s Office of Plans & Policy Chief Robert Pepper, USTA Senior Vp Daniel Phythyon, CompTel Vp Robert McDowell, KDW Group co-founder Thomas Cohen.

Whitacre also reiterated that wireless consolidation from existing 6 national wireless carriers was inevitable, narrowing field to 3 or 4. While carrier always needs more spectrum, consolidation would be opportunity for network build-outs, he said in Q&A after speech. With flat-rate pricing plans, customers and network traffic have gone up, but revenue hasn’t grown at similar pace, he and others said. “We also need to be building these networks for future revenue growth and future products and none of us are in a position to do that,” he said. Consolidation is likely in “the next few months,” he said. “I hope Cingular is involved in one of those.” (Cingular Wireless is joint venture that SBC owns with BellSouth.) He said there were “no discussions going on” on such deal. Earlier this year, T-Mobile reportedly had been in discussions on possible sale to Cingular. Asked whether SBC would be interested in buying IXC, Whitacre said extent to which IXCs have used UNE-P to enter local market for consumer and business customers “would, I think, make it very difficult” to envision Bell- long distance carrier merger. “There’s a lesser chance that would happen. There would be a lot of regulatory hurdles to us doing that.” Whitacre said in response to question about state of equipment manufacturing sector that he had worries about impact on telecom R&D. “It concerns me a great deal,” he said. “It’s not good for this industry.”

Cisco CEO John Chambers told Warburg conference in keynote Tues. that his company planned to continue R&D spending at annual rate of $3.3 billion. “We will continue to be careful in our acquisition strategy but we will continue to be proactive,” he said.

BT Chmn. Christopher Bland said company had seen greatly improved relationship in last year with U.K. regulators and had brief window to make greater incursions in broadband arena while cable companies restructured. Separately, asked about rumors that BT would be interested in reacquiring its recently sold interest in U.K. mobile operator mmO2, Bland dismissed that possibility. Recently de-merged mobile operator is cash intensive, won’t pay dividend and isn’t about to generate cash in near term, he said. By comparison, BT does pay dividend, is “far less” capital intensive and generates revenue, he said. “The regulators, at least in the U.K. environment, stop you from enjoying the full benefits of mobile and fixed line integration,” he said. Bland downplayed competitive impact of wireless business in U.K., saying although subscriber numbers were rising, impact of wireless substitution hadn’t been felt yet.

In general, in last 12 months, BT has developed “less confrontational relationship” with U.K. regulator, Bland said. “Part of that is due to the recognition that having a strong, well-financed incumbent is not necessarily a bad thing,” he said: “The competitive model, you could argue in certain respects, has somewhat failed.” In U.K., 2 cable competitors are in disarray, “so if you want broadband in Britain, BT is the only place you are going to get it for now.” That dynamic won’t last forever, he said, but it gives BT 12-month window to take advantage of cleared field. “That at least creates more of a benign political environment,” he said. “We still have some pretty tough arguments with the regulators, but it’s a distinctly improved environment.”

Separately, Sprint CFO Robert Dellinger told investors that despite recent turmoil in long distance sector, “we are seeing a sea change here.” Extent of financial fraud allegations involving WorldCom made clear that it was pricing services “well below cost,” Dellinger said. “We would have needed to increase prices in the neighborhood of 20 to 40%” to deliver operating results it actually reported, he said. “In trying to achieve this cost structure in the last couple of years, we found that we could not duplicate it because of this fraud,” he said. In Jan. 2001, there were 27 competitive long distance carriers, Dellinger said, but figure now has dropped to 2 -- AT&T and Sprint -- that aren’t under SEC investigation, in bankruptcy court or otherwise troubled. “Industry disruption has led to a rather abrupt and radical change in the competitive landscape,” he said, and after long-term price declines, “firmer” pricing now is appearing. In 3rd quarter, Sprint generated sales of $250 million in “lifetime contract value” from customers who previously were with one of those distressed carriers.

Dellinger said speculation had persisted about what would happen to these distressed carries when they emerged from bankruptcy. “From a public policy perspective, it’s a little frustrating that someone can commit fraud, go through bankruptcy and emerge with what could potentially be a competitive advantage of no debt,” he said. “But it’s not our job to opine on public policy and bankruptcy laws. But we do find it unlikely that these carriers are going to emerge and drop prices.” Creditors, bankruptcy courts and equity and bondholders have issue in front of them, Dellinger said: “They have seen such drops in price and they know it does not produce viable economical returns. Irrational pricing is unsustainable and destructive and I don’t think they have any desire for a return to that.” Sprint’s hope is that creditors will want return on investments and that carriers will have to price to cover costs to deliver that return, he said. “Every analysis we have done has said that the only way for that to happen is for prices to go up.”

Dellinger echoed theme that emerged in investor sessions, touting importance of bundled services. To meet that need, he said, company is starting trial to assess feasibility of using Sprint’s existing switches to provide bundle of local, long distance and data services to small business customers in markets adjacent to its current local territories. Effort will start in Columbus, O. Plan now is to finalize test to support current system infrastructure in 2nd quarter next year, he said. -- Mary Greczyn

UBS Warburg Global Telecom Notebook…

Driven by interoperability of its push-to-talk service, govt. is fastest growing customer segment for Nextel, Nextel CEO Timothy Donahue told UBS Warburg’s Annual Global Telecom Conference in N.Y. Mon. “We have seen a significant uptick in govt.,” he said, and Sept. 11 attacks underscored importance of interoperability for public safety providers. “You are going to see more and more of that business coming over to the Nextel side,” he said. Other significant growth market is young customers, Donahue said. To that end, carrier is conducting test in Cal. of Direct Connect-based service aimed at 15-25-year-old market. He said it probably would take about 12 months to assess trial’s progress and he called carrier’s push-to-talk service “voice SMS” for this market, reference to short-message service that has swept young subscribers in Europe. Donahue said Nextel was “trying to stay out of the swamp” of competitive pool of 5 other national wireless carriers with different services, including wireless data offered ahead of rivals, he said. “The packet data business is starting to come alive,” he told investors. “You're not going to make money in data selling stock quotes, news briefs or horoscopes,” he said, saying revenue was in selling applications to business users. Nextel has 2 million customers who use data, of whom 50% pay monthly fee and rest pay for service as part of bundle, he said. -- MG

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“We believe the road to recovery will be rocky but it will pick up over that period of time,” Motorola Chmn. Christopher Galvin told conference, saying company was nearing end of its massive 5-year restructuring project and looking to next year. “Modest” sales growth is expected in 2003, he said: “We will lower the break-even sales level even further. The idea is to maintain momentum as we work through a difficult period in this industry.” Company’s key end markets are beginning to recover, said David Devonshire, exec. vp-CFO. Talk of recovery was muted throughout conference, with executives offering generally cautious expectations about turnaround in sector. Verizon CEO Ivan Seidenberg said shakeup in telecom industry had meant change in how Bell top brass were viewed. “Companies [previously] got premiums for not having Bell management,” he said. “For those of you who haven’t looked, I think all of the non-Bell management companies now have Bell management,” he said, apparent reference to former Ameritech CEO Richard Notebaert’s taking over helm at Qwest in last year.

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With 6 major European wireless operators set to introduce version of 3G in 2003, Nortel Pres.-Wireless Networks Pascal Debon said he was seeing more work being done on applications side but he still expected dual mode 2G/3G handsets. “I see more and more focus on what is going to work and not going to work,” he said: “It’s not a technology story anymore, it’s a marketing story.” Orange, T-Mobile and Vodaphone are among carriers gearing up for rollout next year, with specific offerings depending in part on each carrier’s spectrum position, Debon said. “Wireless data is happening -- not as quickly as we thought, but it is there,” he said. In general, wireless has been cited throughout Warburg conference as continued bright spot in relatively bleak telecom landscape. Among challenges outlined by executives are how to continue to drive revenue increases from flat-rate pricing plans and customer retention when wireless local number portability deadlines take hold next year. AT&T Wireless Exec. Vp-Chief Mktg. Officer Michael Sievert cited industry shift to share battle from “land grab phase.” Now that U.S. is hovering around 50% wireless penetration, he said, next question is how to reach other half of “underpenetrated” market, including Latino customers and youth segment. Among customers who haven’t yet signed up for wireless, he said: “We will only be taking on new growth in this area if our company will not be taking on undue risks from customers who simply don’t like to pay their bills.”

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Editor’s Note: Additional coverage of UBS Warburg’s Annual Global Telecom Conference was included in special report e-mailed to most subscribers Mon. To obtain copy, please call 800-872-9202 or email us at info@warren-news.com.