TELCOS CALL FOR REGULATORY CERTAINTY AS WIDER 271 ENTRY LOOMS

Armstrong said in lunch keynote speech that he was heartened by recent ruling by N.Y. judge who had been asked by state PUC to look into whether cost-based rates for resale of local exchange service were appropriate. He said judge recommended dramatic change in those rates to 40% discount from 10%, which PUC is expected to act on by end of year. “The viability of competition in the state of New York at a 40% margin versus a 10% margin is enormous,” Armstrong said. “We resell our long distance loops to the RBOCs,” he said, with AT&T’s discount close to 55%: “It’s that kind of gross margin that allows a competitor to come in and hit market share and get a return. At 10% it’s just not possible.” In Mich., state policy is about 45% discount to list for local service, with Ill. having similar percentage, Armstrong said. He cited data on extent to which AT&T felt “big impact” in both revenue and market share when RBOC entered long distance in particular state. Most disproportionate impact is in first 6 to 8 months that Bell company begins to offer long distance, and then trend of company’s taking market share levels off, he said. “Where we are permitted to economically compete for the local exchange business and put our own package together, that has less of an economic impact,” he said. “That’s why having an economically viable resale is so very fundamental to this transition.”

Like several CEOs who have made presentations at 3-day conference that started Mon., Armstrong described 2000 and 2001 as transition period. On broadband side, he said digital cable subscribers had reached 1.3 million year-to- date, for penetration rate of 23%. For cable telephony, subscriber rate is near 925,000, with penetration of 14% , he said. Company is completing video-on-demand pilots in Atlanta and L.A. and results so far show 3 to 4 activations per month per subscriber. Company also is planning to implement open access market trial in Boston that it expects will bring in local ISPs and test tiered price offerings for data services. While digital video services are growing “very, very fast,” he said that uptake for basic video packages was different story. Growth in basic packages sold hit positive levels for first time last quarter, he said. Amid declining economic conditions, “for our industry and our company, the basic subscriber growth is going to be very difficult to sustain.”

While Armstrong warned of potential “remonopolization” as risk of local exchange service’s not becoming more viable economically viable, Seidenberg struck familiar chord, raising concerns that price cap regulation in virtually every state created disincentive for carriers to invest in efficiencies. Seidenberg several times gave kudos to FCC Chmn. Powell’s recent statement on his competition policy for next several years. He also pointed to last week’s FCC decision to lift spectrum cap to 55 MHz until 2003, when ceiling would sunset. Seidenberg said he was pleased with speed with which Powell dealt with 45 MHz cap. “I thought it was going to be a 4-or 5-year program,” he said, and decision represented “sweeping” policy change. “If he does the same thing on the broadband side, it’s good for customers, it’s good for industry and it certainly is going to be good for our business.”

Separately, while cautioning that settlement of NextWave licenses wasn’t final yet, Seidenberg said: “We are just about there.” In Q&A with analysts and investors, he said: “Until it happens, it could fall apart. We are hopeful they could get it done in the next couple of days.” Verizon Wireless, joint venture of Verizon and Vodafone, was highest in bidder in Jan. re-auction of NextWave wireless licenses and has been among key mobile carriers in working out settlement. “Critical to us are the terms and conditions about how to go forward,” Seidenberg said. “The biggest issue to us is to make sure that when the government renders the licenses, they are ours.” Key issues for Verizon are finality of license hand-off and timing of payments. “Given the length of time that’s involved with this, we didn’t want to wake up one morning and not have sufficient enough time to finance this,” he said.

On issue of Genuity, of which Verizon spun off majority control of over period of time as condition of GTE merger, Seidenberg said decisions about whether to take back that stake or complete spinoff weren’t likely to be issue until 2003 because company still would be making its way through Sec. 271 long distance approval process through mid-2002. He acknowledged Genuity’s losses as result of its network buildout, but said Verizon still was interested in pulling it “back into the fold” when those financial issues were resolved. “It could be combined with other things. There’s a lot we could do with it,” he said.

While Seidenberg said he expected further consolidation in industry this year in recessionary economy, he said Verizon wasn’t likely to be affected by merger trend. “Most everybody else has to consolidate except us,” he said.

SBC Senior Executive Vp & CFO Randall Stephenson told investors regulatory uncertainty was having impact on how companies such as his made decisions on what data products to offer. In certain product sets, SBC is being “a little more passive” than it would like because some regulations create disincentives based on rates at which Bell companies have to make such offerings available to competitors, he said, citing “silly UNE-P type rates… So we are sitting there balancing all those issues.” Asked how he reconciled that with Armstrong’s concerns that certain resale rates didn’t carry deep enough discounts, he said: “Unbundled network elements will never be a good model. It requires us to sell our network architecture to competitors at rates lower than we would use ourselves.”