ARMSTRONG WARNS AT&T MAY PULL OUT OF LOCAL PHONE MARKETS

Unless policymakers crack down on Bell companies, AT&T may have to leave markets where it now offers local phone service and not enter new ones, AT&T Chmn. Michael Armstrong said Wed. in speech at National Press Club. On eve of Telecom Act’s 5th anniversary, Armstrong said AT&T, Sprint and other competitors have had so much difficulty breaking into local markets that it might not make sense to keep trying. Biggest problem is inability to lease unbundled network elements (UNEs) at reasonable prices, he said: “We cannot continue to lose money to force competition. If competing doesn’t make business sense, it’s not going to happen.” Armstrong told reporters after speech that AT&T would “no longer go into markets and lose big sums just to show we're competing.” If nothing changes, “we will be forced to shut down our local service business in N.Y. and Tex.,” he said.

Armstrong said Bells had erected 2 barriers -- price and process, meaning operational support systems (OSS). Bell wholesale discounts for local lines average about 10% compared with AT&T’s wholesale discounts for long distance, which start at 55%, he said. “As long as the Bells continue to charge these kinds of exorbitant prices, no business can challenge them for local service,” Armstrong said. On process side, Bell computer systems used by competitors for billing, repair and other back office purposes aren’t adequate, creating “delays and frustration” for customers, he said.

Problem doesn’t involve local telephony provided over AT&T’s cable systems, Armstrong said. However, he contended, there’s cap on number of cable customers that AT&T is allowed to have “so the only chance for competitors like AT&T to offer broad-based competition in the local market is to lease pieces of the Bells’ facilities.”

Armstrong said he wasn’t asking for rewrite of Telecom Act because flaws were in implementation of Act by FCC and states, not in Act itself. Bottom line is that “monopoly markets should be demonopolized,” he said: “Demonopolize, then deregulate.” Statement contrasted with comment by new FCC Chmn. Powell Tues. that it was possible, and even preferable, to deregulate before there was full competition.

Armstrong recommended 3-step process: (1) FCC should “enforce economically viable discounts.” (2) FCC should “abolish rules that keep competitors out of the market,” such as cable ownership limits. (3) States should require structural separation of Bells into wholesale and retail operations so Bell and non-Bell competitors get same prices, service intervals and provisioning cycles. Pa. PUC has ordered such action and “if we're serious about a competitive market, other states must follow Pennsylvania’s lead,” he said.

BellSouth spokesman called Armstrong’s comments about discount price levels “disingenuous.” He said Armstrong knows Bells traditionally charge residential consumers rates that are lower than cost, usually at bidding of state regulators. Bell companies offset cost of providing low-cost consumer service with profits from business service, spokesman said. Since AT&T has been going after business market with vigor, it could do same thing, spokesman said. USTA spokesman said AT&T didn’t mention “how AT&T benefits from an un-level playing field by providing local telephony services over its unregulated cable platform.” He also argued that structural separations don’t work and could “undermine the development of network infrastructure.” He said AT&T for 4 years chose not to offer local service in N.Y. and Tex. Its difficulty in competing in those 2 states isn’t fault of Bells but rather its own fault for “coming late to the game,” spokesman said.

To remarkably large degree, Armstrong’s call for more strict regulation of Bells matched plea by consumer advocates earlier in week. In report issued Mon., Consumers Union and Consumer Federation of America jointly urged policymakers to “insist on effective competition -- demonopolization -- before deregulation” of local phone companies. Report also recommended that federal and state regulators “press the market-opening principles of New York and Texas around the country” to promote “meaningful competition among providers of local phone service” and block further Bell mergers.

In addition, 2 consumer groups advised policymakers to “stop abusive cable TV pricing practices and open up new avenues for cable competition.” Groups contended that regulators should define high-speed Internet access as telecom service no matter whether it was delivered by cable or phone lines and should mandate open access to both networks. Finally, they called on regulators to “enforce ownership limits that promote diversity and rivalry” and prevent further cable consolidation.

Diverging from consumer advocates’ stance on cable-related matters, Armstrong fired several broadsides against govt.’s limit on number of pay-TV subscribers that one company could control. Calling FCC’s 30% cap “outdated,” “unnecessary” and “archaic,” he charged that it had constrained AT&T’s ability to enter new local telephony markets and compete against Bells. “Companies that want to compete with monopolies shouldn’t be under more constraints than the monopolies themselves,” he said. He said AT&T, which has been lobbying against ownership limit in Congress, federal courts and FCC for more than year, would continue its campaign against cap in courts and new Congress.

Despite that continuing campaign, Armstrong insisted that AT&T still would comply with FCC’s divestiture order for MediaOne deal, which requires it to shed some of its cable assets to stay under ownership cap. He said company would keep pursuing sale of its 25.5% stake in Time Warner Entertainment (TWE) to Time Warner and spinoff of its Liberty Media programming unit by Commission’s May 19 deadline, at least partly because he didn’t expect to overturn cap in time. “We're not going to try and get out of the MediaOne divestiture requirements,” he said. “We're going to comply with them.”

Although AT&T arguably needs to take only one of 2 steps to comply with MediaOne order, not both, Armstrong said company was pursuing both options because they were in its regulatory and economic best interest. He also said neither was sure thing, with TWE sale dependent upon continuing negotiations with Time Warner and Liberty spinoff dependent upon favorable tax ruling by IRS. “We can’t count on one against the other,” he said. “I want as much room as I can.”

In other cable matters, Armstrong said: (1) There’s no truth to reports that AT&T is discussing sale of its cable systems to Comcast. (2) AT&T will “go hellbent” with cable telephony drive, continuing push that has seen it sign up 600,000 subscribers and as many as 3,500 per day. (3) Cable prices are rising faster than general inflation rate because of “disproportionate increases in programming prices,” particularly for sports programming.

CWA members distributed flyers outside National Press Bldg., criticizing Armstrong for poor management. Union said company was on right track in building bundled service package that included cable and local telephony but had moved too quickly to dismantle it. “Under Armstrong’s guidance, the bundling strategy cost the company $107 billion in acquisitions, while the value of the company now stands at only $88 billion,” CWA said. “Armstrong mortgaged AT&T’s future with these acquisitions, and now, instead of staying the course, he is abandoning it altogether.” AT&T’s plan to break up company “will have serious… impacts on employees, shareholders and consumers, undermining job security and weakening AT&T’s position in the marketplace,” they said.