SBC – What's Really Wrong

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					                          B AND C CONSULTING
                       2712 MEADOWVIEW DRIVE
                       COLLEYVILLE, TEXAS 76034
           PHONE 817-267-8086 FAX 817-545-9211, c.holliday@ieee.org
             "TELECOM TECHNOLOGY & MARKET PLANNING:
          FIBER OPTIC NETWORK PLANNING AND ENGINEERING"




                                   September 30, 2002



                           SBC – What’s Really Wrong?


SBC Communications has recently (September 26, 2002) added to the pink slip torrent of
layoff notices by announcing that it was cutting an additional 11,000 jobs and that it was
establishing its planned 2003 capital expenditures at a very low level. SBC blamed (in
addition to misguided regulatory policy) the cuts on its loss of retail access lines (almost
3,000,000 lost year-to-date through August,) and a year-over-year loss of revenue of
more than $1 billion. The 3,000,000-line loss is a little hard to reconcile with their
published data (www.sbc.com/investor_relations) for second quarter 2002. That reference
– which, granted, is for two less months – indicates a loss of 1,573,000 lines thru the end
of the second quarter. (Total voice grade equivalents which include all classes of lines
showed a gain of over 2,000,000 for the same period!) Although fairly evenly split
between business and residence, most of these losses were consumer (residential) lines –
amounting to 817,000.

In the same period, SBC gained 396,000 xDSL lines. The question this analysis seeks to
answer is how important is that gain of high-speed data lines to the results of SBC, and
how important would an even better market performance in this area have been? To
investigate this we are going to use a simple revenue model to evaluate current h-s line
competitive performance, and to postulate how improvement in that performance would
impact SBC results

To start, we will estimate the impact of current market performance. The main competitor
to SBC in the area of h-s accesses are the cable companies in the SBC areas. These
companies are selling cable modem high-speed services in direct, and very successful,




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competition to xDSL services. There are also satellite and a sprinkling of other h-s
offerings, but they are very minor and will be ignored in this analysis. First, we will
assume that SBC is gaining xDSL lines at the rate of 200,000 a quarter or 800,000 a year.
(As previously noted, this is very close to their current actual performance.) The current
rate of growth for cable modems vs. xDSL lines nationwide is approximately two to one,
(i.e., two cable modem services gained for each xDSL line gained.) We will thus start
with that ratio, as the current measure of actual market performance against the best
competitor.

We will further assume that each new h-s line is actually a conversion from a dial-up
access. (This may seem like a big assumption, but it really just says that the people
converting to h-s access are still the early adopters, who are already very familiar with
on-line usage, and are likely big users.) Of these dial-up to h-s access conversions, some
portion will have a residential line that they are now primarily using for dial-up access.
Of these some will have that line disconnected, often as a part of the basic justification
for the h-s line. We are going to assume that 75% of the h-s conversions result in the
disconnection of a dial access line. It is interesting to note that this assumption is very
close to the actual loss that SBC is experiencing in residential lines, based on the first six
months of 2002. (Actual 817,000 for six months; assumption 900,000 lines loss for six
months.)

For our financial assumptions, we will assume first that each dial access line results in a
$25 a month revenue stream to the telco, and secondly we will assume that each h-s line
provides a $50 per month revenue stream. We will reference all calculations to a one-year
timeframe.

Base Case

Using this set of assumptions and the current actual relationship to cable modem gains,
we find that SBC will gain 800,000 xDSL lines in a year, and their competitors, the cable
companies, will gain 1,600,000 h-s lines. This 2,400,000 h-s access will result in the loss
of 1,800,000 dial lines (75% of the total h-s lines). These added xDSLs will provide SBC
with a new revenue stream of $480,000,000. However, the loss of the dial lines will cost
$540,000,000! This is an annual net loss of revenue to SBC of $60,000,000.

Equal Gain Case

Let us now consider the impact of improving the competitive result to a break even with
the cable companies on h-s access. In other words, the number of cable modems gained
will just equal the number of new xDSL lines. With this market improvement, SBC gains




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1,200,000 xDSLs in the year (300,000 a quarter instead of the actual 200,000.) With this
change, SBC now enjoys a net gain of $180,000,000 revenue per year!

Market Reversal Case

If SBC could reverse the current situation and gain two xDSL lines for each cable modem
line, then SBC would achieve a net annual revenue gain of $420,000,000!

The following graph illustrates this situation:

                                                           SBC Net Revenue




                                66%




 Percent of H-S Gain xDSL       50%




                                33%




               ($100,000,000)         $0        $100,000,000   $200,000,000   $300,000,000   $400,000,000   $500,000,000

                                    33%                            50%                           66%
    SBC Net Revenue             ($60,000,000)                  $180,000,000                  $420,000,000




New Focus Needed

It’s obvious that SBC realizes the importance of better performance, in this market. They
are taking many steps to improve their marketing picture. Perhaps the most important




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recent one is the joint offering with Yahoo! This package has the potential to really make
the point of the utility of h-s access to the relatively uninitiated. This may be the first time
a vendor has really tried to do that. That’s a good start, but the company still seems to be
obsessed with outside influences, rather than their own performance.

The market turnaround outlined above would add almost a half billion dollars to SBC’s
annual revenue. While that wouldn’t correct all of SBC’s problems, it sure would go a
long way towards improving their position! Perhaps SBC should put more focus on
succeeding in the market and less on trying to blame all their problems on ‘outmoded
regulation’ and a weak economy.



(Clif Holliday is an analyst and consultant for IGI Consulting. His latest reports deal
with the upcoming Telecom market recovery. They are the Recovery Trilogy – “Return of
the Telco Market: When?” “The Winners and Losers,” and “Recovery from the Edge.”
These are available from www.igigroup.com under the Lightwave Series.)




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