AT&T STOPS COMPETING IN RESIDENTIAL MARKETS IN 7 STATES

The decision will “likely not be the last such announcement from my company,” AT&T Gen. Counsel James Cicconi said in identical letters sent to NTIA Acting Dir. Michael Gallagher, FCC Chmn. Powell and White House National Economic Council Dir. Stephen Friedman. An AT&T spokeswoman said the company planned to send letters to state regulators notifying them of the decisions, even though she said it wasn’t required.

Powell said in a statement the departure of AT&T, as of any other provider, was “disappointing,” but said “today across the country competition from wired, wireless and voice over the Internet providers is accelerating and it is going to be even better.” He said as the industry transitioned to “more sustainable forms of competition, the Commission is working hard on interim protections to enhance and preserve consumer choice.”

AT&T said the reversal of local competition policy would allow the Bells to raise wholesale rates as early as Nov. That means “AT&T will likely be unable to economically serve customers with the competitive bundles currently available,” it said. “We foresee a future with less choice for consumers,” said AT&T Chmn. David Dorman: “As AT&T loses the ability to provide [consumers] with an alternative to the Bell companies, they will have virtually no choice of telecommunications provider.” The company spokeswoman didn’t comment on how many customers AT&T had in the affected states or what the financial impact of the decision would be.

AT&T said it would continue to serve its existing residential customers in the affected states and the announcement wouldn’t affect its enterprise, govt. and small- and medium-sized business customers. It also won’t affect customers with DSL and cable modem offerings subscribing to the company’s VoIP service.

The AT&T decision didn’t come as a surprise, many sources agreed. “I don’t think it took anybody by surprise,” one FCC official told us: “Clearly, it was reasonable to expect there would be some reaction from [the competitive industry] and it was played into what the FCC did” when it decided not to appeal the court decision. But the official clarified “it’s very difficult to quantify exactly how much it played into the decision.” The official said “regardless of this move, we still have significant UNE-P and transport issues, so we have to consider interim regime on transport and high capacity loops. The [AT&T] announcement doesn’t change that dynamic.” The official said the “open question” was whether the announcement “is driven by an advocacy strategy or business concerns.”

In the letter, Cicconi urged Powell, Gallagher and Friedman to develop “as soon as possible, a policy framework that will allow carriers to continue to compete in local telephone markets.” He said the competitive industry needs “the certainty of a regulatory framework that the Administration and the FCC will this time support… And we need that certainty in a matter of weeks, not months.” He said preserving competition would require “a significant transition period using” UNE-P and “elimination of the hurdles to facilities-based alternatives, including competition using unbundled loops.”

The competitive industry expressed its disappointment. Wayne Hill, exec. dir. of CLEC-based Coalition for Consumer Choice, said AT&T’s decision was “an understandable reaction to a number of decisions at both the federal and state levels that signal a U-turn on the road to more customer choice, lower prices and better service in the local telephone market.” He said such govt. decisions led to “the absurd situation of wholesale prices some competitors pay to [ILECs] for access to their lines actually being higher than the price those same companies charge consumers. The result is predictable and the residential consumers will be the losers.”

NARUC Gen. Counsel Bradford Ramsay said states were concerned about “the loss of any competitor.” He said AT&T owned facilities in each of the affected states. “The state- set platform prices are supposed to be compensatory and CLECs using this form of entry have had a demonstrable impact on pricing and services to end-users,” he said. He said states were also concerned that some states from which AT&T was removing its operation didn’t have alternative competitors. Ramsay also said it was “reasonable to assume these actions are not going to be ignored during the election year.”

The Bells criticized the AT&T announcement, saying it appeared to be a political statement rather than a business announcement. USTA Pres. Walter McCormick said AT&T was “engaged in sleight-of-hand.” He said that while claiming it wouldn’t compete in offering voice service to residential consumers, AT&T still intended to serve “more profitable business markets and will offer to residential consumers its new, high margin [VoIP] product in the same states it is withdrawing from.”

SBC said “plenty of competitive options remain” and “consumers can rest assured that competition will continue.” It said there were “scores of other wireline competitors” throughout SBC’s region and AT&T’s departure meant there was “one less than a lot. It’s not a seismic event.” SBC said if AT&T wanted to use an incumbent’s network it had to negotiate a commercial agreement that would guarantee such access. “In a world of dozens of other choices of providers and technologies, policymakers need to reassess whether AT&T’s action even matter.”

Verizon’s Harry Mitchell said AT&T’s exit in those markets would have “little impact.” He said there was “every indication that AT&T planned to abandon the use of the legacy phone network in these states with or without a change in rules.” He said AT&T had already launched VoIP service in one of the 7 states and planned to re-enter the wireless business following the Cingular-AT&T merger.

Consumer groups said the loss of a competitor resulted from the Bush Administration not appealing the federal court decision hurt local telephone market consumers. Consumer Union (CU) said the AT&T’s decision “indicates how damaging the [Bush] Administration’s decision is to local phone competition -- and lower phone bills for consumers.” CU Senior Public Policy Dir. Gene Kimmelman said the AT&T move was “just the beginning of the end of local phone competition. By failing to stand up for a policy that supports competition, the Bush Administration effectively sentenced consumers to a fate of higher prices and poorer service when it comes to their local and long-distance service.”

Consumer Federation of America Research Dir. Mark Cooper said the AT&T announcement was “the expected and unfortunate result” of the Administration’s and the FCC’s decision not to appeal. “Anyone who said that the decision would not be a problem for the competing telephone companies was simply trying to fool American consumers,” he said. Cooper said preserving competition would “require the Commission’s close attention and careful regulation as it prepares interim rules during the next two weeks.” He said the Commission “must not simply phase out UNE-P. Instead, under the law, it needs to evaluate local markets and find in which areas competition is too nascent to flourish on its own.”

Kimmelman said he expected companies competing against the Bells would “quickly be priced out of the market” as a result of the Administration’s decision. He said “many of the so-called ‘competitors’ to traditional local phone service -- such as wireless and [VoIP] -- also are owned or dominated by the Bells.” For example, he said Verizon Wireless controlled “much of the local phone market on the East Coast,” and Cingular, owned by SBC and BellSouth, which controlled local phone markets in Cal., the South and Midwest, was in the process of buying AT&T Wireless.

Ohio-based Consumers’ Counsel’s Janine Migden-Ostrander said her group was “disappointed but not surprised.” She said the AT&T action was “a direct result of a federal climate that has failed to provide any assurance that competitors will be able to use the local facilities they need at a fair and reasonable price.” She urged the Ohio PUC to reject SBC Ohio’s request to double its wholesale rates. “Increasing these rates would further devastate competition and bring fewer choices to Ohioans,” she said.

CLECs withdrawing their businesses from different states will benefit the Bell companies, analysts said. “We believe that the UNE-P business is not a profitable business for the large carriers and a slowdown or exit from markets would help lift margins for these carriers in the short-term,” UBS said in a report: “However, the absence of a bundled offering would put the long-term sustainability of their consumer strategy in jeopardy and negatively impact revenues.”

UBS said following the expiration of the UNE-P rules June 16, “the Bells could see a dramatic slowdown in competition” from major CLECs, such as AT&T, MCI, Z-Tel, as well as other UNE-P based providers. AT&T said it would stop selling residential services in the BellSouth region (Tenn., La.), Qwest region (Wash.), Verizon (N.H.) and SBC (O., Mo. and Ark.), where SBC had lost 16% of its access lines to UNE- P competitors. Z-Tel, which provides services in 48 states, has also said it would no longer accept new residential customers in 8 states (CD June 23 p6), and MCI has said it would slow down the marketing of its UNE-P based “Neighborhood” plan.

UBS said AT&T and MCI’s exit from the local residential markets could lead to Bells transitioning their UNE-P lines to retail lines, which it said could add $12-18 per line per month to revenue and EBITDA for each carrier. “In the extreme case, we estimate that stemming UNE-P growth at the end of 2006 could add roughly $3 billion in annual EBITDA for the Bells,” it said. Legg Mason said it expected the financial impact of the AT&T decision would be “de minimis for each of the RBOCs.”

Some analysts said AT&T’s action was politically motivated. Legg Mason said in a report the announcement was “a political maneuver designed to keep pressure on the FCC and legislators to maintain the status quo regarding UNE-P as long as possible.” It said it was “not likely a coincidence” that the announcement came the next day after SBC said it intended to increase its capex by 20% to build a next generation network as a result of the recent legal and regulatory decisions. “We would expect this political maneuvering to continue on both sides, at least until the FCC issues new rules around year-end,” it said.