It’s a Pick-and-Choose Phone Market

John Higdon knows enough about telephones and telephone companies to wring exactly what he wants out of California’s ferociously competitive telecommunications market.

Ignoring pitches for increasingly popular service bundles, the San Jose radio engineer worked the system to build his own custom communications package. He picked SBC Communications Inc. for local service, AT&T; Corp. for long-distance and a small Oakland company for high-speed Internet access. And to score the best prices, he rearranged features, canceling some and adding others, on the five lines in his home several times.

“Competition,” Higdon said, “is good for the consumer.”

Indeed, Higdon figures he wouldn’t have his high-tech smorgasbord were it not for the state of telecommunications in California, where customers are seeing more choices at lower prices as companies fight for position in the nation’s most lucrative telecom market.

In the seven months since SBC, the state’s dominant local carrier, has been allowed to sell long-distance, the Baby Bell and its competitors have blitzed Californians with ads touting ever more elaborate packages that mix traditional local phone service with such lures as fast Internet connections, unlimited long-distance and wireless phones.

Consumers have responded by snapping up the so-called bundles, getting discounts on DSL or other products if they buy local phone time, or, like Higdon, cutting costs by picking and choosing among ever-expanding service menus.

“The competition is intense today. There are all kinds of ... products and services being offered,” said Jeff Weber, SBC’s vice president for corporate planning. “It’s not going to get any less intense. In fact, it’s going to get even more intense.”

With revenue from conventional land-line service falling -- and the number of lines in use dropping -- telecoms are selling a wide variety of services not only to shore up the bottom line but to compete in the fast-changing marketplace.

In addition to national players such as AT&T; Corp., Sprint Corp. and the MCI unit of WorldCom Inc., cable companies, led by Cox Communications Inc. and Comcast Corp., are carving out bundling opportunities for themselves.

Sometimes the bundling goes far afield from a company’s roots: SBC is getting into the satellite TV business. And as phone and cable companies diversify, wireless providers are gaining subscribers at sometimes double-digit rates and finding that customers increasingly are ditching land lines altogether.

In California, the stakes are highest for SBC, formerly Pacific Bell. The state is SBC’s biggest market, accounting for a third of its access lines throughout its 13-state region. In California, the San Antonio company serves 17.4 million lines, or 69% of all lines in the state.

But SBC has lost nearly 4% of its lucrative local lines in the year since regulators lowered the price competitors must pay to lease the infrastructure SBC owns.

SBC is determined to avoid the kinds of losses it has suffered in some Midwest markets. And since the company began offering long-distance in January, its aggressive marketing and pricing have captured more than 18% of California’s long-distance market.

“The crown jewel of SBC is California,” said Berge Ayvazian, senior analyst at the Yankee Group research firm in Boston. “Wouldn’t you defend the crown jewel?”

Competition in California got a jump-start last year when the state Public Utilities Commission slashed the wholesale rates that SBC could charge rivals to lease basic network parts, such as copper lines to homes and switches to connect calls. The agency did the same in March to Verizon Communications Inc., the state’s other major local phone company.

Competitive Rates

Those rules form the cornerstone of competition in California by guaranteeing that companies other than SBC and Verizon can offer all-important local service at competitive rates.

The Bells don’t like it: SBC is seeking to more than double lease rates to $30 a month, and Verizon appealed its rate reduction June 17 to the U.S. District Court in San Francisco. And a PUC that has become more business-friendly this year may well be inclined to raise rates at the risk of stifling the nascent competition.

Increasingly in the last year, that competition has been hot for SBC. Now, in the wake of the PUC rate change in March, rivals soon will turn up the heat on Verizon. It’s all gratifying for consumers.

Last November, Lisa Wataba of Walnut Creek went shopping after AT&T; and MCI lowered local and long-distance prices.

“If I had saved $5 a month, I’d be very happy,” said Wataba, who is on a tight budget. In fact, she’s elated: She figures she is saving $6 to $7 a month after switching her local and long-distance carrier to AT&T.;

The competitive landscape could change with the see-saw fortunes of MCI, the nation’s second-largest long-distance carrier behind AT&T.;

WorldCom, which filed for bankruptcy protection last year after unveiling the worst accounting irregularities in corporate history, had hoped to emerge from the process late this year with little or no debt and with MCI as its new name -- poised to undercut competitors’ prices.

But another scandal threatens to delay, or possibly derail, the company’s effort to emerge from Chapter 11 bankruptcy protection. Justice Department officials are looking into allegations that WorldCom rerouted calls through small companies in the U.S. and Canada to avoid paying hundreds of millions of dollars to AT&T; and the Baby Bells to complete those calls.

Consumer advocates count on MCI’s presence to help provide more choices in phone service and keep a lid on prices. “The loss of an aggressive competitor like MCI would probably not be good news for consumers,” said Bill Hardekopf, chief executive of consumer service SaveOnPhone.com.

California is a key battleground for the industry. The state has more Internet access lines and more customers willing to take DSL than any other state, and telecom executives are banking on people seeing high-speed communications as the norm in two to three years.

SBC and Verizon are taking different paths to maintain their dominance. Both plug their DSL products.

But while Verizon is pushing wireless technology and risking billions of dollars to run blazingly fast fiber-optic cable lines to homes and businesses, SBC is looking to be the over-arching provider now of everything that comes into a home by wire, except for electricity.

‘Quadruple Play’

SBC announced in late July that it would soon be offering EchoStar Communications Corp.’s Dish Network satellite television service in its bundles. The deal is more than the typical marketing arrangement: SBC employees will handle all customer calls for Dish service, from ordering and installing to complaints.

SBC Chairman Edward E. Whitacre Jr. crowed that the deal, which involves little upfront money, would make SBC the only company offering a “quadruple play” -- all voice services, DSL, wireless and video.

The company is going further as it sees competition mounting from cable companies and other telecoms. Its buzzword is changing from “bundling” to “integration” as it offers such features as one voicemail box for both wire-line and wireless phones as well as a bucket of minutes at one price that both lines can share.

SBC expects to have 20% of California’s long-distance market by the end of the year, a “pretty substantial” amount, said Forrester Research Inc. analyst Lisa Pierce.

“But SBC is buying its share by matching AT&T;’s bundled rate,” she said.

That is taking a toll on SBC’s revenue and earnings, and if it continues, she said, Wall Street will punish the company. One analyst, Richard G. Klugman of Jeffries & Co. in New York, expects that SBC’s stock price, which closed up 4 cents at $23.40 on Friday, will drop to $16 in the near future largely because of continued weak earnings.

Rivals, meanwhile, are forging ahead.

Long-distance carrier AT&T;, which has 3 million local service customers across 13 states, is preparing to roll out its partnership with DSL provider Covad Communications Inc. in California and nationwide this fall. And AT&T; Wireless, a separate company, will join the package early next year, giving AT&T; the basic elements to compete more aggressively with many products all under the AT&T; brand name.

Several analysts wonder whether the bundling strategy fueling the competition will backfire.

“One danger,” said analyst Pierce, “is that the public will find out how much they’re really spending on telecom ... and start cutting back.”