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Regional Bell Operating
Company (RBOC) Revenues,
Expenditures and
Profits:
(2000-Second Quarter 2002)
The Bell Companies are
Misleading Congress, the FCC, and the Public with a Shell
Game of Statistics.
October
2002
Presented by
New Networks Institute
Bruce Kushnick, Executive
Director
826 Broadway, Suite 900
New York, New York 10003
212-777-5418
http://www.newnetworks.com
Table of
Contents
Executive Summary
1. Regional Bell Company Revenues and
Profits
2. Examining Telecom and Directory
Revenue
3. Competitive Threat"
4. Bell Staff Cuts Are
Excessive
5. The Affect of Staff Cuts: Harm to
Security and Competition
6. Construction and Capital
Expenditures are Seriously Decreasing
7. Compensation of Bell
Executives
8. The Number of Bell Phone Lines is
GOING UP, NOT Going Down
9. The Bells Don't Care About Rural
Customers
10. Bell Write-offs and Foreign
Investment Losses
11. Broadband Incentives: Case Study
The Pennsylvania Bait and Switch
APPENDIX ONE Verizon Senior
Management, 2001
EXECUTIVE SUMMARY
Regional Bell Operating Company
(RBOC) Revenues, Expenditures and Profits:
The Bell Companies are Misleading Congress, the FCC, and the
Public
With a Shell Game of
Statistics.
The American public is still using
their local phone services. They are still going online and
the overwhelming majority of Americas business and
residential customers still pay their local phone Bell
"monopolies".
NOTE: The Bell Companies are:
BellSouth, Qwest (formerly US West), SBC (including
Ameritech, Pac Bell and SNET) and Verizon (including Bell
Atlantic, GTE and NYNEX)
The Bell companies would like us to
believe that the sky is falling. They are telling Congress,
the FCC, and the media that they are losing business at an
alarming rate because the number of phone lines are
declining and that they are being hit by major losses due to
competition.
There is a recession at hand and every
company is having its problems. It can also be said that the
Bell companies helped in the economys decline because
of their harm to the competitive telecom markets which
precipitated the economys woes.
As we will show, all of these issues
pale to the truth--- the Bells are misrepresenting their
business problems so that they may receive regulatory relief
from Congress. They are still some of the richest companies
in America.
Here are the highlights:
Overall Revenues and
Profits
- The Bells profits are still beyond
anything that could be considered fair and reasonable for
companies that are monopolies.
- Verizon, BellSouth and SBC had
122% higher return on equity than the Business
Week Corporate Scoreboard for 2001.
- Instate local Bell return on
equity went up 40% since 1996.
- Bell revenues from 2000-2001
increased --- Telecom and Directory generated $60
billion in cash.
- Yellow Pages and Directory have a
57% profit margin, making it one of the most
profitable businesses in the US.
- 90% of all profits come
directly from monopoly customers ---Local phone
service is financing the other lines of
business.
- SBCs second quarter
2002, shows dividends are up since 2001, "Free Cash
Flow" went up 277%, expenses, including capital
expenditures and employees are decreasing further while
profits per-phone line increased.
Major Cuts in Expenses Should Be
Leading To Lower Prices.
Phone prices should be declining
because the two major costs, construction and staff, are
decreasing sharply.
- 107,000 cuts in staff in
the last two years, mostly from the local phone
companies.
- 50% drop in capital
expenditures/construction, which will affect security
and competition.
The Competitive Threat Remains
Relatively Small
- Overall, only 6.9% of the RBOC
lines are used by CLECs to provide resale or "UNE-P"
competition.
Executive
Compensation
- Since 1999, the top
executives from the Bell companies received an
estimated 54 million shares of stock options with
an estimated value of $1 $2.1 billion dollars
---almost 10% of all stock options.
- As a group, the top 4
executives made $160 million dollars in salaries and
bonuses, and an additional 25.5 million shares of
stock options, worth an estimated $404 $818
million.
- Since 1999, Ivan
Seidenberg, Verizons CEO, made $54 million
in salary, bonus and retirement funds, as well as
stock options of 2.6 million shares, estimated value
between $83-215 million dollars.
- The mergers of the various Bell
companies have benefited the senior executives with
bonuses and rewards worth millions per
person.
- Executives can get free
personal use of aircraft, apartments, spending
money for "club" memberships, and "golden
parachutes" worth millions of dollars.
- Who Controls the Board of
Directors? The Bell Tell Retirees claim that
Verizons Board of Directors is "infested with
conflicts of interest", who control the executive pay
and perks.
The Number Of Overall Phonelines Is
Not Going Down.
- The overall growth of phonelines
is NOT going down. It is going up. There has been a
13% increase in "Voice Grade Equivalents" in 2001
and most of the Bells do not count data lines, including
DSL in their equations.
- Why did 25% of US homes have to
purchase a second line into their home when a service to
provide two voice channels could have been done saving
hundreds of dollars?
- Care about Rural Customers? In
2001, Verizon sold approximately 1.3 million lines in
rural areas.
Overseas Investments and
Write-offs.
- $15.6 billion in losses and
write-offs for investments overseas.
- $16 billion in write-offs
for the mergers and domestic losses.
- $9.7 billion in write-offs and
losses in first half of 2002 major losses in
South America.
Customers Paid For A Fiber-Optic
Broadband Network They Will Never Receive.
- Customers in most states paid for
broadband networks they will never receive through higher
phone prices. Pennsylvania is holding Bell accountable
for their promises to provide a fiber-optic wire with
speeds of 45mps (in both directions) to 50% of rural and
urban customers homes by 2004. We estimate that
$3.5 billion was already collected in the state,
counting excessive phone charges and tax
write-offs.
1. Regional Bell Company Revenues
and Profits
The Regional Bell Operating Companies
(RBOCs) are holding companies that control literally
thousands of ventures throughout the globe. (For example,
BellSouths 2001 Annual report showed 269 separate
subsidiaries, in dozens of countries.)
While the year 2001 is something to
forget, the Bells overall profits compared to other
companies still showed strong earnings.
Bell companies "Return
on Equity" and Earnings Per Share Compared with and
"Business Week Scoreboard and Telecom Equipment
Manufacturers, 2001
|
ROI
|
|
EPS
|
Bell
companies
|
12.6%
|
|
$ 1.24
|
|
All industry
|
5.7%
|
122%
|
$ 0.58
|
113%
|
Telecom Equipment
|
-9.1%
|
239%
|
$
(0.91)
|
236%
|
Source: Business Week Business
Corporate Scorecard, 2/25/02
In the exhibit above, the Bell
companies (without Qwest) had 122% higher return-on-equity
and 113% higher earnings per share (EPS) as compared to the
rest of the Business Week Corporate (2/25/02) Scoreboard.
Compared to the Telecom equipment manufacturers who had
negative returns on equity and earning per share, the Bells
had 239% higher returns.
Unfortunately these statistics do not
begin to tell how well the Bells local phone business
has been performing. The next exhibit shows SBCs
revenues and "operating expenses" for 2nd Quarter
2002. Of the $10.5 billion dollars profit, approximately 87%
of profits was from the local phone and directory services.
The exhibit also demonstrates that the "International"
businesses are being funded through these excessive profits,
because those businesses lost money.
SBC Revenues and Operating
Expenses, EBIDTA for 2ndQ 2002
|
Revenue
|
%
Revenue
|
Op.
Expense
|
EBIDTA
|
EBIDTA
|
%
profits
|
Local Telecom
|
$19,518
|
76.0%
|
$11,348
|
42%
|
$ 8,170
|
78.1%
|
Directory
|
$ 1,755
|
6.8%
|
$ 809
|
54%
|
$ 946
|
9.0%
|
Wireless
|
$ 4,375
|
17.0%
|
$ 3,009
|
31%
|
$ 1,366
|
13.1%
|
International
|
$ 17
|
0.1%
|
$ 40
|
-135%
|
$ (23)
|
-0.2%
|
|
$ 25,665
|
100%
|
$15,206
|
|
$ 10,459
|
100.0%
|
Of the $25.7 billion dollars, SBC had
over $10.5 billion in cash. Of these profits, the Directory
business, the business that supplies yellow pages to small
businesses, had a whopping 54% EBITDA, (Earnings Before
Income Taxes, Depreciation and Amortization), making it one
of the most profitable businesses in the country.
Unfortunately these statistics do not
reveal the profits that are coming directly from the local
phone customer. This is because even the category of local
telecom has built into it thousands of costs not associated
with local service. This includes the expenses for the Bells
launch of their long distance services, the costs to provide
competitive DSL, or even specific costs associated with
changing the name of the company or the compensation of the
executives.
Case in point - Verizon will spend
$1/2 billion dollars to establish its name (Verizon is the
merger of GTE and Bell Atlantic and NYNEX), while the top 6
executives have received $$194 million in salaries and other
perks in the last three years.
The profits from local phone service
have increased almost 40% since 1996. The FCCs
statistics quoted below shows that the Bell companies
intrastate return on equity went up almost 40% from 1996
through 2001, from 14.7% to 20.3%. "Intrastate" revenues are
from local services within the state jurisdiction). It
should be noted that when the Bell companies were under
rate-of-return regulations that limited the
Bells profits (so as to keep rates "fair and
reasonable"), the standard returns were from 10-12%. --- A
69% increase from current returns.
Bell Intrastate Return on
Equity, 1996-2001
|
1996
|
2001
|
|
BellSouth
|
14.4%
|
19.4%
|
35%
|
Qwest
|
14.0%
|
22.1%
|
59%
|
SBC
|
15.7%
|
22.4%
|
42%
|
Verizon
|
14.5%
|
17.2%
|
18%
|
Increase
|
14.7%
|
20.3%
|
38%
|
Source: FCC,
2002
2. Examining Telecom and Directory
Revenues:
Another way of examining the
Bells performance is to look at the Telecom and
Directory revenues. It also illustrates that a lower overall
return on equity is not from local phone services but other
costs, such as overseas losses. From 2000-2001 there were
increases in revenues for local telecom services--- from
$117 billion to $121 billion. The Bells "Operating
Cash" (which is operating revenue minus operating expenses
identical to the EBITDA analysis) went up to $52.6
billion dollars.
Bell Local Telecom Revenues
for 2000-2001
|
2000
|
2001
|
Increase
|
Revenues
|
$ 116,769
|
$ 120,927
|
4%
|
Expenses
|
$ 65,814
|
$ 68,318
|
4%
|
EBITDA
|
44%
|
43%
|
-1%
|
Operating Cash
|
$ 50,955
|
$52,609
|
3%
|
As we mentioned earlier, these local
telecom revenues include all local phone services, from the
Bells DSL services to offering competitors
services.
What is most astonishing has been the
profits from Yellow Pages and other telephone directories.
The Bell companies not only had an increase in profits and a
decrease in expenses, but the EBITDA is 57% which means that
over half of all revenues are profit. Historically, prices
for yellow page advertisements were kept inflated because
the income was used to subsidize phone services. It is clear
that small businesses that depend on yellow page
advertisements are still paying inflated prices, with little
competition to lower these fees.
Bell Directory Revenues for
2000-2001
|
2000
|
2001
|
Change
|
Revenues
|
$12,080
|
$12,476
|
3%
|
Expenses
|
$5,602
|
$5,415
|
-3%
|
EBITDA
|
55%
|
57%
|
5%
|
Operating Cash
|
$6,478
|
$7,061
|
9%
|
This next example demonstrates how
profitable the Bells are from their mostly original monopoly
products. Last year the companies had $133 billion in
revenues and almost $60 billion in
cash.
Bell Telecom and Directory
Revenues, 2000-2001
|
2000
|
2001
|
change
|
Revenues
|
$128,849
|
$133,403
|
4%
|
Expenses
|
$71,416
|
$73,733
|
3%
|
EBITDA
|
50%
|
51%
|
2%
|
Operating Cash
|
$ 57,433
|
$59,670
|
4%
|
Another way of looking at this data is
from the Bells Operating statistics. Using SBC as an
example, (though all of the Bells have close if not
identical results), this exhibit from SBCs 2001 annual
report shows that over the last year, the average monthly
revenue has gone up $1.51 per line a month, the profit per
line went up, the expenditures per line (CAPX) declined, and
the revenue per employee has increased.
SBC 2000, 2001 Operating
Statistics
|
|
|
Operating
Statistics
|
2000
|
2001
|
Average Monthly Revenue per
Access Line
|
$ 54.33
|
$ 55.94
|
Average Monthly EBITDA per
Access Line
|
$ 24.51
|
$ 25.05
|
Average Monthly CAPX per
Access Line
|
$ 16.49
|
$ 15.50
|
Average Monthly Revenue per
Employee
|
$ 17.99
|
$ 18.01
|
In the second quarter 2002, dividends
are up since 2001, "Free Cash Flow" went up 277%, while
expenses, including capital expenditures and employees are
decreasing further. In fact, the number of "Voice Grade
Equivalents" is increasing.
SBC Communications
Inc.
|
|
|
|
Supplementary
Financial and Operating Data
|
|
|
Dollars in millions
except per share amounts
|
|
|
Unaudited
|
Six Months
Ended
|
|
|
|
6/30/02
|
6/30/01
|
%
Chg
|
|
(NOTE: Dividends
and Profits are Going Up)
|
|
|
|
Dividends Declared
Per Share
|
$ 0.54
|
$ 0.51
|
5%
|
Dividends
Paid
|
$1,762
|
$1,727
|
2%
|
Free Cash Flow
6
|
3,137
|
833
|
277%
|
|
(NOTE: Expenses
are Being Slashed)
|
|
|
|
Capital
Expenditures
|
$ 3,496
|
$ 5,744
|
-39%
|
Total
Employees
|
186,030
|
216,600
|
-14%
|
|
(NOTE: Number of
Lines Are Increasing)
|
|
|
|
Voice Grade
Equivalents (000)
|
113,507
|
108,495
|
5%
|
6
|
Net cash provided
by operating activities less construction and
capital expenditures.
|
If there was a serious competitive
threat, the company would not be able to raise
dividends.
3. Competitive
Threat?
There is a great deal of data that
begs the question, "Why are the Bells complaining about
competition?" For example, Verizons second quarter
2002 shows that the number of competitor services, "Resale
and UNE-P" declined.
NOTE: Local phone and DSL
competitors (commonly known as CLECs) purchase the
local phone networks at "wholesale" prices. UNE-P (Unbundled
Network Elements platform) and "Resale" are the services
that are offered to competitors so that they can use the
phone networks. This is the simple
explanation.
Example One - According to
Verizons 2ndQ 2002 results, the number of "Resale and
UNE-P services" decreased since last year about 1%.
Therefore, the statements made by the Bells that they are
increasingly losing revenues to competitors are ridiculous.
Secondly, using these same stats, comparing the total
Verizon lines we find that of 60 million lines by the end of
the quarter 2002, only 6% of the lines are used by CLECs to
provide competitive services via resale or UNEP
Comparing Verizon Resale and
UNE-P Lines to Total Lines
2nd Quarter 2001,
2002
|
2001
|
2002
|
Drop.
|
Resale & UNE-P
lines (000)
|
3,726
|
3,698
|
(.8)
|
Total Verizon
Residential and Business
|
62,465
|
60,373
|
(3.3)
|
Compared Wholesale to Total
Verizon
|
6%
|
6%
|
|
Please note that the when a competitor
resells local service or provides it through the Unbundled
Networks Element Platform (UNEP), the Bells also receive
money for each resold and UNE-P Line. Additionally there are
also other competitive services such as "Unbundled Loops",
which are phone lines rented from the company to be used for
voice or data services.) However, the Bells specifically are
calling for help with UNE-P. Unbundled loops can be also
used for SDSL data services, and therefore are not supposed
to be part of the local voice phone service
wholesale price issue. (The Bell companies do not specify
how these unbundled loops are used.)
Example Two - The next exhibit
shows that overall, the CLEC lines represent only a small
portion of the RBOCs phonelines in America --- only
6.9% in second quarter 2002.
Bell Phonelines as Compared to
CLEC Lines, 2001-2002,
(2nd Quarter)
(000)
|
2001
|
2002
|
Total Lines
|
158,745
|
151,455
|
CLEC
|
8,625
|
10,382
|
% of lines
|
5.4%
|
6.9%
|
Missing Data: Please note that the
Bell companies have different ways of representing their
competitive lines. Many of the companies are adding the DSL
and other data service resale lines to the overall
competitive numbers.
Except for Qwest, none of the Bell
companies gave actual revenue figures, and none of the Bell
companies gave EBITDA margins, or other information about
their resale or UNE Services. They have not even published
information about the number of resale DSL lines in which
the Internet Service Provider is reselling the Bell product
but adding their own Internet service.
4. Bell Staff Cuts Are
Excessive
- 82,000 employees have been laid
off from the Bell companies between 2000 and
2002.
- The total loss from the
Bells, including job closings and attrition will
be approximately 107,000 staffers -- a drop in two
years of 17%.
The exhibit below highlight the
announced staff cuts for the last two years.
Bell Staff Cuts Announced,
2001-2002
|
2001
|
2002
|
Total
|
BellSouth
|
6,300
|
5,000
|
11,300
|
Qwest
|
6,500
|
7,000
|
13,500
|
SBC
|
5,581
|
26,000
|
31,581
|
Verizon
|
10,000
|
18,000
|
28,000
|
Annual Change
|
28,381
|
56,000
|
82,381
|
Sources: Bell Annual
Reports, Articles, 2001-2002
The Bell companies have been
aggressively cutting staff in the last two years; the major
reasons cited being a poor economy and "too stringent
regulations".
According to an article in ISP Worlds
interview with SBC's president William Daley, it is
regulation that discourages investment or new
jobs.
"Policymakers could provide
this industry and the U.S. economy with a boost by
creating rules which provide an incentive for
companies to invest and create jobs," said William
Daley, SBC president. "As the rules stand now, SBC is
discouraged from investing in new infrastructure or
new jobs. These rules are not economically rational
and they are uncertain at best."
SBC has made announcements to make
15,00 cuts in the last two business quarters
"Executives at SBC
Communications announced Tuesday the elimination of
5,000 employees this quarter
The announcement
brings the total number of cuts at 15,000: in the last
two quarters."
An additional 11, 000 job cuts were
announced in September 2002, making SBCs total cut for
the year 26,000 staffers.
BellSouth's announcement to reduce
staff by 4,000-5,000 on May 17, 2002 was attributed to a
slow economy, competition and 'regulatory pricing
pressures"
"BellSouth announced today that
it will reduce its workforce by 4,000-5,000 employees.
The reduction will involve both non-management and
management positions and is designed to reduce
operating costs in response to a slow economy,
increased competition and regulatory pricing
pressures.
Meanwhile, Verizon has also been
making announcements of very large staff cuts at the local
phone companies. In Verizon's first quarter report 2002, the
company is saving money through reductions and
"productivity" initiatives, saving 12,000 job
"equivalents".
"Domestic Telecom's
expense-control and productivity initiatives, such as
capturing attrition and reductions in overtime
expenses, produced an equivalent headcount reduction
of 12,000 in the first quarter."
According to the NY Post, Verizon
eliminated an additional 29,000 in "job equivalents". NY
Post 3/5/02.
"Verizon eliminated the
equivalent of 29,000 jobs in 2002"
Meanwhile, on October 4th,
2002, Verizon announced an additional 8000 jobs would be
cut.
A great deal of these reductions are
also being made because of "duplicative functions' that
occur during mergers of large conglomerates. Qwest
writes:
"In connection with the
Merger, Qwest reduced its employee and contractor
levels by over 14,000 people primarily by
eliminating duplicate functions. These employees
were terminated prior to December 31,
2001".
Make no mistake that cutting staff
also cuts the costs of operating the networks. Verizon in
its 2002 annual report states it decreased expenses over
$600 million because of staff cuts among other items. It
should also be noted that most cuts are from the Bell local
phone services.
"Operations and support
expenses, which consist of employee costs and other
operating expenses, decreased by $609 million, or 2.5%
in 2001 principally due to lower costs at our
domestic telephone operations. These reductions
were attributable to lower overtime for repair and
maintenance activity principally as a result of
reduced volumes at our dispatch and call centers and
lower employee costs associated with declining
workforce levels. Operating costs have also decreased
due to business integration activities and achievement
of merger synergies."
These announced cuts do not take into
account the attrition of jobs and other closings. If we add
the cuts attributed to attrition and other cuts at the
company, the total loss from the Bells will be 106,601
staffers. A drop in two years of 17%
Regional Bell Staffing,
2000-2002
(2002 estimates)
|
2000
|
2001
|
2002
|
Total
Cuts
|
% of cuts.
|
BellSouth
|
103,918
|
87,875
|
82,875
|
21,043
|
20.20%
|
Qwest
|
67500
|
61000
|
54,000
|
13,500
|
20.00%
|
SBC
|
220,089
|
208,274
|
182,274
|
37,815
|
17.18%
|
Verizon
|
263,552
|
247,309
|
229,309
|
34,243
|
12.99%
|
Total Bell Staff
|
655,059
|
604,458
|
556,458
|
106,601
|
16.85%
|
5. The Affect of Staff Cuts: Harm
to Security and Competition.
A report released in August 2002 by
the Communications Workers of America outlines the dramatic
staff cuts taking place in New York. The cuts were based on
a recent deregulation plan that was passed by the state
Public Service Commission.
To read the report http://newnetworks.com/cwareportaugust2002.htm
According to the report, approximately
20% of non-management staff will have been cut over the last
20 months.
"After the latest cuts, Verizon
will have reduced its non-management workforce (in New
York) by almost 5,000 workers or 15.5% over an
eight-month period and by 6,780 or 20% over a 20-month
period."
These cuts can have a direct impact on
a number of issues, including competition and security
issues within New York.
Security issues include potential
problems with the E911 Emergency Networks.
According to CWA:
"Both CWA technicians and
internal Verizon memos reveal
how the company's reduction in force poses, in the
words of the Verizon Operations Report, 'significant
risks and consequences' for the public. E911 is an
enhanced version of the 911 Emergency
Hotline."
The primary equipment that enables New
Yorkers to have E911 service is owned and maintained by
Verizon.
These cuts in staff also hurt the
competitors. According to the report,
"Since the Verizon Incentive
Plan was approved it has become clear that Verizon is
instituting a downsizing policy that, by its own
admission, degrades services and network reliability."
The report continues "Verizon is responding to the
market place by eroding service quality and directly
hurting its competitors. "
Historical perspective
Note: New Networks Institute has published information
about the Bell staff cuts since 1992. We have supplied
information in a report titled "How the Bells Stole
Americas Digital Future", published by NetAction. From
the Bells inception since 1984, there has been over a 50%
cut in employees-per-line, the original standard for the
Bell system. http://www.netaction.org/broadband/bells/prices.html
6. Construction and Capital
Expenditures are Seriously Decreasing.
According to the Bell companies
quarterly reports, from June of 2001 through June of 2002,
there has been a major drop --- almost 50% --- in the
Capital Expenditures for local domestic telecommunications.
The Bells spending has declined from a total of $17.6
billion for second quarter 2001, to a low of only $9.1
billion dollars in 2002, a decrease of $8.5 billion dollars
from last year.
RBOC Construction and Capital
Expenditures in Domestic Telecom
(Second quarter 2001- 2002)
|
Jun2001
|
Jun2002
|
Diff.
|
Decrease
|
BellSouth
|
$2,894
|
$1,840
|
$1,054
|
-36%
|
Qwest
|
$2,616
|
$618
|
$1,998
|
-76%
|
SBC
|
$5,664
|
$3,467
|
$2,197
|
-39%
|
Verizon
|
$6,406
|
$3,175
|
$3,231
|
-50%
|
Total
|
$17,580
|
$9,100
|
$8,480
|
-48%
|
Construction and Capital expenditures
are the amount of money the Bell companies are investing in
maintenance, new installations, new network equipment and
additions to the local phone and data networks. It should be
understood that these numbers represent ALL construction by
the local phone companies, including their DSL, Long
Distance, Data and other non-local phone
services.
From the customer perspective, this
brings up a very serious issue. Historically, the price of
local phone service is directly related to the construction
expenses of the local phone companies. If construction
budgets have been cut in half, why hasnt the price of
local service for phone customers declined?
These next two exhibits should make
the concern of every phone customer real. First, the Bell
companies are still behemoths who collectively made $58.5
billion in just the first six months of 2002. Although they
are experiencing some decrease in overall revenues, the drop
for BellSouth, Verizon and SBC has been only 3.3% percent,
and as a group, counting Qwest, the drop in revenue has been
approximately 5.7%. (In the case of Qwest, the company lost
over $1.1 billion dollars in wholesale revenues, in many
cases from companies they, ironically, helped to put out of
business.)
RBOC Revenues for Domestic
Telecom Services,
(Second Quarter, June 2001, June
2002)
|
2000
|
2001
|
change
|
BellSouth
|
$ 9,456
|
$ 9,353
|
-1.1%
|
Qwest
|
$ 10,273
|
$ 8,688
|
-15.4%
|
SBC
|
$ 20,447
|
$19,518
|
-4.5%
|
Verizon
|
$ 21,873
|
$ 20,942
|
-4.3%
|
|
$ 62,049
|
$ 58,501
|
-5.7%
|
Without Qwest
|
|
|
-3.3
|
In the next exhibit, the Bells
telecom revenues are compared to their spending on
construction. We see that in 2001, construction expenditures
represented approximately 28% as compared to their revenues,
but by 2002 the Bells construction expenditures were only
15%.
Comparing RBOC Revenues to
Capital Expenditures
(Second Quarter, June 2001, June
2002)
|
2001
|
2002
|
BellSouth
|
31%
|
20%
|
Qwest
|
25%
|
7%
|
SBC
|
26%
|
17%
|
Verizon
|
29%
|
15%
|
Total
|
28%
|
15%
|
Historically, Bell construction
expenditures were 20-25% of the revenues. In short, they are
spending less than ever before. Customers are therefore on
the short end of the stick because the price of local
service is being inflated to give the Bells more profits.
The money is NOT going back into the network.
As mentioned before, these funds are
for all phone and data services the Bells provide. The real
question for customers is how much money are the Bells
spending to provide local phone service? Additionally, are
local phone service revenues funding the Bells other lines
of business, such as Long Distance services, at the
customers expense
7. Compensation of Bell
Executives
To read the full report
see:
http://www.teletruth.org/docs/compensationFIN.doc
The recent revelations about executive
pay and perks at GE, TYCO, Global Crossing and Worldcom
question the behavior of top executives at companies,
rewarding themselves over the other employees or their
shareholders.
The Bells compensation plans for
top executives appear to have the same foilables. To make
matters worse, the question becomes whether companies that
still serve utility functions (who are required to serve the
public at fair and reasonable rates because of
their monopoly status) should be held to the same standard
as "free market companies with competition?
The exhibit below gives the number
shares and estimated values of the Bell Executives
stock options for the last three years, 1999-2001. Based on
the Bells own valuations of the stock, the top
executives in the four companies have options that are
estimated in value between $1 billion and $2 billion
dollars. (Please note that Verizon and Qwest have estimates
of 5% and 10% increases, while BellSouth and SBC use another
method to calculate potential earnings.)
Bell Senior Management Stock
Options, 1999-2001
($000 for Estimated Values)
|
Shares
|
Estimated
value
|
Estimated
value
|
Verizon
|
14,756,166
|
$ 424,441
|
$ 1,019,324
|
Qwest
|
26,500,000
|
$ 428,270
|
$ 1,085,087
|
BellSouth
|
5,006,760
|
$58,111
|
|
SBC
|
7,399,000
|
$ 93,392
|
|
|
53,661,926
|
$1,004,214
|
$ 2,104,411
|
This represents between 7-10% of all
stock options the companies give to employees.
This next exhibit gives the salary and
stock options for the top executive at each of the four Bell
companies. This group had approximately $160 million in
salaries over the last three years and stock options with an
estimated value of between $400-800 million dollars. (As we
stated previously, the companies have different methods or
representing the potential values of the stock.)
Bell Executives Salary
and Stock Options, 1999-2001
|
Salaries
|
Stock
options
|
Est.
Value
|
Est.
Value
|
Joseph P. Nacchio,
Qwest
|
$36,420
|
16,250,000
|
$237,956
|
$603,028
|
F. Duane Ackerman,
BellSouth
|
$10,101
|
1,864,138
|
$22,570
|
|
Ivan Seidenberg,
Verizon
|
$54,495
|
2,552,560
|
$82,832
|
$214,660
|
Edward Whitacre,
SBC
|
$ 58,934
|
4,814,000
|
$
60,539
|
|
Total
|
$159,950
|
25,480,698
|
$403,897
|
$817,688
|
(Note: This information does not
contain all perks and stock awards.) For a discussion of
each Bell companys executive salaries and stock
options, see the full report.)
Senior Management Gluttony - As
a group, Verizon, (the merger of Bell Atlantic (NYNEX) and
GTE) had the highest group pay and salaries and options with
6 executives getting $194 million in salaries and almost 15
million shares of stock, valued at $424 to $1.1 billion -
This includes two CEOs (GTE Charles Lee and Bell
Atlantics Ivan Seidenberg.)
Top 6 Verizon Executives,
1999-2001
|
Salaries
|
Shares
|
Est.
value
|
Est.
value
|
Verizon
|
$193,638
|
14,756,166
|
$ 424,441
|
$ 1,019,324
|
Perks of the Job - Verizon
gives its executives a number of perks, which include
$31,000 to pay for club dues and memberships, personal use
of the corporate aircraft, a car with driver, and an
apartment.
Merger Related Executive Gifts -
All executives received stock options and other
incentives for the various mergers. For example,
the Verizon executives got $13 million in bonuses, while the
CEOs of Verizon and GTE got stock estimated at $56
million dollars.
How the Executives Control the
Environment: Control the Board of Directors -According
to the BellTell Retirees, the Verizon Board is "infested
with conflicts of interest" and "at least eight of Verizon's
16 directors are non-independent. In addition to the two
co-CEOs, six outside directors are viewed as non-independent
due to board interlocks or because their own employer
receives grants, fees, or business from the Company, or did
in the recent past".
Golden Parachutes - Almost all
of the executives have lucrative packages that guarantee
almost as much money when the leave, including salaries,
bonuses and even increases
8. The Number of Bell Phone Lines
is GOING UP, NOT Going Down.
The Bell companies have been giving
the media and regulators the impression that there have been
serious decreases in local phone service customer lines.
According to the Washington Post: "For the first time in
decades, the number of telephone lines served by local phone
companies is declining." and this loss in phone lines will
"increase pressure on regulators to consider easing
requirements on the Bells to resell their networks to
competitors".
According to the Bells Annual
Reports, the number of phone lines decreased 3% from 2000
through 2001.
Bell Residential and Business
Access Phone Lines, 2000-2001
|
2000
|
2001
|
change
|
BellSouth
|
17,135
|
16,773
|
|
Verizon
|
62,902
|
61,551
|
|
SBC
|
36,078
|
34,518
|
|
Qwest
|
18,089
|
17787
|
|
Total
|
134,204
|
130,629
|
3%
|
A closer examination of the number
reveals that the Bells statistics cover a healthy growth in
their number of "Voice Grade Equivalents". In this next
exhibit we see that the number of "Voice Grade Equivalents"
increased some 13% from 2000 to 2001.
Bell Voice Grade Equivalents,
2000-2001
|
2000
|
2001
|
change
|
Qwest
|
47,609
|
58,961
|
19%
|
BellSouth
|
53,800
|
65,629
|
18%
|
Verizon
|
116,883
|
132,126
|
12%
|
SBC
|
103,456
|
111,769
|
7%
|
Total
|
321,748
|
368,485
|
13%
|
Source: Bell Annual Reports, New
Networks Institute, 2000-2002
According to SBC, voice grade
equivalents that include data circuits are a more accurate
approach to growth than compared to simply looking at the
installed lines.
"Given the growing importance
and magnitude of data revenue streams and circuit
volumes, access line growth has become less than a
comprehensive measure of strength in the market. The
development of Voice Grade Equivalents (VGEs), which
include data circuits, provides a consistent and
quantifiable means for bridging the gap between access
lines and data services."
How can the Bells issue statements
that the numbers of lines are declining? This is because the
Bells have selectively left out services such as DSL or
services that use their wire, such as resold" lines,
i.e., part of the "voice grade equivalents".
In the exhibit below we see that
BellSouths residential line statistics shows a decline
from 17 million lines in 1999 to 16.8 million lines in
2001--- a drop of 1.3%.
BellSouth Residential Phone
Lines, with DSL and Resale 1999-2001
|
|
1999
|
2000
|
2001
|
change
|
Residential
|
|
17,002
|
17,135
|
16,773
|
-1.3%
|
Residential with
DSL
|
17,032
|
17,350
|
17,394
|
2.1%
|
DSL with resold
|
17,848
|
18,658
|
19,131
|
7.2%
|
But the BellSouth residential phone
line category does not include the number of DSL lines it
has sold. And if you look at "Residential with DSL" you see
that the number of phone and data services being sold is
increasing.
The issue is "line-sharing" ---
The same copper wiring can now supply both the DSL service
as well as the voice phone service. In the case of a "second
line" into the home, the Bell company physically puts an
additional piece of wire into the home. If someone had a
second phone line for their Internet, they could get rid of
the extra charges and just install the new service on the
already existing first line.
The Bell companies also have left out
another critical piece of the picture: "Reselling". This is
when a competitor uses the same copper wiring that the Bell
phone service used to offer a local customer phone service.
In reselling, the competitor is essentially renting the
already existing phone line and is paying usually high fees
to do this. The Bell companies have not included these lines
in their calculations. If you examine the "DSL with Resold"
you see that these services - which use existing copper
wiring but still provide Bell companies revenues - have
grown 7.2%.
In short, the Bells have distorted the
current picture by excluding information. This entire
exercise should have every reader wondering --- if the Bell
companies could supply DSL over the same phone wire, why
didnt they provide a service that offered 2
phone-channels with two separate phone numbers over the same
wire? Why do 25% of Americas households have to pay
many additional charges and installation fees for a second
line when one line could have been used and saved hundreds
of dollars?
We are not arguing that there
havent been inhibitors to growth. We argue that using
the "Resale and UNE-p" and the "loss of copper lines"
argument is more politically driven than one that can be
substantiated from their own annual report and other
financial statements. Some of the
other factors:
- It's the Economy -
Though there are few customers who have simply
stopped using telephone service, companies have been
scaling back their use of local and long distance
services, affecting all segments of the phone usage and
even phone equipment sales.
- Cannibalization Of DSL
Line Sharing For Second Lines - As we suggest,
anyone who purchases ADSL that uses line sharing no
longer needs to have a 'second' wireline connection into
the home.
- Harm to Competitors
Local Phone and DSL Services - The collapse of
the competitive local phone market has in part been
caused by the Bell companies anti-competitive
treatment. Hundreds of companies have gone bankrupt or
have severely cut back service offerings and these
companies were major purchasers of local phone lines.
They also drove the sale of new Bell installations, since
even competitive local phone service and SDSL services
use the Bell networks.
- Holes in the Copper
Deployments - Many of the competitors have heard
when asking for the installation of a new copper wire
installation that there are "no facilities" meaning that
the Bell companies' network does not have enough new
copper wire to give the customers their new services.
This has been documented in August 2002 in report from
the Communications Workers of America.
- The Implosion of the
Internet Explosion - After numerous years of
major growth, the entire Internet industry, consisting of
millions of individuals and companies, had a reality
check and thousands of companies went bankrupt or cut
back dramatically. Since the Internet is largely based on
the copper networks, companies either closed shop and
cancelled their phone services, or they cut back,
requiring a much smaller telecom budget.
- Cannibalization of the
Bells' Own Local Wireline Services Through
Wireless - We estimate that 3% of customers have
shifted to relying solely on wireless services and have
dropped their local wireline phone service. The
Bells own wireless offerings are therefore taking
away customers from one service to another.
- Cannibalization of the
Bells' Local Wireline Payphones Through Wireless. -
The other effect of wireless has been the drop
in payphone revenues, though a recent report about
payphone usage in the New York City subways showed a high
percentage of payphones weren't working.
9. The Bells Don't Care About Rural
Customers.
Over the last two years, there has
been a trend to drop rural communities in various western
states, Utah, Arizona, North Dakota, South Dakota. And this
trend is seen as raising revenues, not about handling the
customers who have been clients for decades. Qwest
states
"During 2001, Qwest sold
approximately 41,000 access lines in Utah and Arizona
resulting in a gain of $51 million and cash proceeds
of $94 million. In 2000, the Company sold
approximately 20,000 access lines in North Dakota and
South Dakota resulting in proceeds of $19 million and
a gain of $11 million. "
Verizon and GTE have sold, or are
planning to sell a great deal more phone customers.
According to Verizon's 2001 annual report, the company is
committed to sell almost 3 million phonelines or the
equivalent of 2.2% of domestic line
"equivalents".
"We have either sold or
committed to sell wireline properties representing
approximately 2.9 million access lines or 2.2% of the
total Domestic Telecom access line
equivalents."
From 1999 through 2002, the company
has made $11 billion from these sales..
Verizon (with GTE) Sale of
Wireline Services, 1999-2002
(In the millions)
Sold in 2001
|
$4,100
|
Year 2000:
|
$ 766
|
GTE, 2000
|
$5.028
|
1999
|
$1,151
|
Total Sales
|
$11,045
|
Source: New Networks Institute, Verizon Annual Reports
and 10Qs.
For example, in 2001 Verizon sold
approximately 675,000 lines for $2.2 billion
"In October 2001, we agreed to
sell all 675,000 of our switched access telephone
lines in Alabama and Missouri to CenturyTel Inc. for
$2.2 billion. The sale must be approved by the
Missouri public service commission, the FCC and the
Department of Justice (DOJ). The Alabama public
service commission approved the sale in December 2001.
We expect to close the sale and transfer our
operations to CenturyTel during the second half of
2002.
10. Bell Write-offs and
Foreign Investment Losses
For the full report see
http://www.teletruth.org/ForeignBellinvest.doc
It is clear that the Bells excess
profits from local service has been funding their overseas
and non-phone service investments. Unfortunately, the
Bells investment track record has yielded major
losses. The exhibit below highlights these losses. (This
exhibit only focuses on the large investment
losses.)
The Bells write-offs for 2001
were $14.8 billion dollars and so far for 2002 the Bells
have written off or lost $9.7 billion dollars.
Bell Write-downs and Foreign
Investment Losses,
1999-June, 2002
|
1999-2000
|
2001
|
1/2 of
2002
|
To
date
|
BellSouth
|
$381
|
$1,980
|
$2,254
|
$4,615
|
Qwest
|
$470
|
$3,190
|
$592
|
$4,252
|
SBC
|
$3,942
|
$1,350
|
$409
|
$5,701
|
Verizon
|
$2,471
|
$8,240
|
$6,425
|
$17,136
|
Totals
|
$7,264
|
$14,760
|
$9,680
|
$31,704
|
Sources: New Networks Institute, Bell
company SEC filings, 1999-2002
The write-offs and losses total
approximately $31.7 billion dollars from 1999 through the
second quarter of 2002. The write-offs are almost equally
distributed to merger and CLEC write-offs and losses at
$16.1 billion, as compared to $15.6 billion for
overseas/foreign losses.
Bell Write-offs and Losses for
Mergers/CLEC and Foreign Investments.
1999- June 2002
Merger & CLEC
|
$16,126
|
Foreign
|
$15,578
|
Total
|
$31,704
|
Sources: New Networks Institute, Bell
company SEC filings, 1999-2002
The first group of massive write-offs
can be attributed to losses in investments of telecom
companies. These deductions include investments in Qwest,
and write-offs from the various Bell mergers, such as the
creation of Bell Atlantic and then the creation of Verizon
(adding GTE) or the creation of SBCs mergers with Pac
Bell and Ameritech.
The other major area of loss has been
created from investments in overseas companies, especially
losses from South American investments due to the
devaluation of the various currencies.
Sample Losses, Verizon's 2001
June 2002 Write-offs and Charges
|
|
2001
|
2002 (2ndq)
|
Venezuela (CANTV).
|
|
|
$1,400
|
CTI Argentina
|
|
$672
|
$230
|
C & W, NTL, Metromedia
Fiber
|
|
$4,686
|
|
Cable & Wireless plc
(C&W)
|
|
|
$303
|
TELUS Corporation
|
|
|
$580
|
Sources: New Networks Institute,
Verizons 10K and 10Q reports
1999-2002
Qwests KPNQwest Write-down.
The value of the companys KPNQwest holdings
dropped from $7.9 billion dollars to $1.3 billion dollars in
approximately one year. The stock was originally valued at
$7.9 billion as "Class C" shares.
Qwest Charges, 2001- first
half 2002
|
|
2001
|
2002
|
KPNQwest
|
$3,000
|
$462
|
BellSouth has been losing money
steadily from their Latin American investments in 11
countries. These include the devaluations of Brazilian and
Argentinean currencies.
Sample, BellSouth Investment
Losses,-2002
First Q.
2002
|
|
|
|
Brazilian
investment,
|
|
|
$ 275
|
Argentinean
devaluation
|
|
|
$ 277
|
Second Q
2002
|
|
|
|
Foreign currency transaction
|
|
|
$ 353
|
Brazil (BCP SA
default
|
|
|
$ 375
|
SBC Communications Since 1999,
SBC merged with Pac Bell then with Ameritech and SNET. The
company has taken over $4 billion dollars in write-offs
including restructuring charges of many of the various
companies Ameritech owned, including Security Link. Here are
just a few items, taken from SBCs annual
reports.
SBCs Write-offs for
Mergers, 1999-2000
Merger with
Ameritech
|
$1,205
|
SecurityLink,
Ameritech
|
$971
|
Ameritech merger
(1999)
|
$1,766
|
Cable business
|
$205
|
11. Broadband Incentives: Case
Study: The Pennsylvania Bait and Switch
On March 28th, 2002, the
Pennsylvania Public Utility Commission (PPUC) found
Verizon not in compliance with the states Alternate
Regulation plan, concluding that the giant Bell company
had not satisfied its specific commitments to state
residents and its legal obligations under the plan to
supply broadband services at 45Mbs. In exchange for
Verizons commitment to deliver robust broadband to
Pennsylvania residents and businesses, state regulators
agreed to eliminate the regulated ceiling on Verizon
profits. As of today, Verizon has collected the profits,
but has not delivered the promised broadband service.
Heres a summary of the promises and the costs to
customers.
Myth
|
Reality
|
Verizon is committed to Bring
the State of Pennsylvania Broadband
|
In 1994, Verizon committed to
a fiber-optic network with speeds of 45 Mbs in both
directions. This is 50-100 times faster than the
copper wire-based ADSL "broadband" service
currently available from Verizon in Pennsylvania.
Verizon has not and has no plans to
deliver the advanced broadband service it
promised.
|
Verizon committed to
installing fiber optic connections to 50% of the
states residences and businesses by 2004.
Importantly, its commitment included stringing
fiber optic lines to residences and businesses of
all sizes in both rural and urban areas.
|
No fiber rollout or highspeed
services have been rolled out. Today, only
businesses can afford to obtain the broadband
speeds promised through older, much more expensive,
but for Verizon highly profitable T-1 services.
|
Verizon claims it now needs
additional and new financial incentives to roll out
broadband
|
NNI and TeleTruth estimate
that Verizon PA has already collected $2.1 billion
in surplus earnings and overcharges from
Pennsylvania customers and took advantage of $1.5
billion in questionable write-offs to pump up
earnings. Virtually all of this should have been
used to build the promised fiber-optic network for
Pennsylvanians orshould be returned to
customers in the form or rebates or lower phone
rates.
|
Verizon says none of this
actually effected phone rates since rates were
"capped" under the new regulation scheme.
|
NNI and TeleTruth estimate
that the surplus collected by Verizon after its
profits were deregulated cost each household $785
from 1994 to 2002. (In 2002 alone, this surplus
amounted to $165 on average per household. This
surplus should be returned to
customers.)
|
ADSL is a suitable substitute
for the type of broadband service originally
promised.
|
ADSL (Asymmetric Digital
Subscriber Line) service is mostly-one-way
(thats why they call it "asymmetric), much
slower speed service than the high-speed, two-way
fiber optic-based service Verizon promised to get
it profits deregulated. ADSL is much cheaper to
deploy and much more limited in terms of how many
customers can access it because it uses
Verizons old copper wire plant. Customers
should not pay forced to pay for an expensive,
advanced broadband service network and then be
forced to settle for less. They should get the
promised network or get a refund.
|
This is an isolated incident,
relating just to Pennsylvania.
|
Verizon has made a litany of
similar false and misleading promises to customers
and regulators in ALL of the states where it serves
and has collected billions of dollars in surplus
earnings without delivering on its commitments.
Its time for a reckoning.
|
Trust Us -- We know best.
We're the Phone Company.
|
This was one of the largest
bait-and switches in history. Verizon-PA (and its
other states) must refund the money.
|
NEXT STEPS?
|
Take either the money away
from Verizon and give it to customers or use it to
build an independently run wholesale focused fiber
optic-based broadband service network for all
(wholesale and retail) users in Pennsylvania. The
latter will ensure Pennsylvanians will enjoy
the competitive choices they deserve in the market
for broadband services.
|
To read other reports about this topic
see:
|