Spinning out of control?

Talking with a relatively well-known financial person within the independent telco market recently (who shall for obvious reasons remain anonymous), it became obvious pretty quickly that the segment is about to get a lot more crowded and focused all at the same time. We were discussing the possibility of the Bell companies spinning off large portions of their rural access lines into separate entities. We both agreed that it was going to happen sooner than most people anticipate.

The question, however, is which lines will get spun off. In a meeting with one of the Bell companies, this analyst had come up with a list of several hundred markets that would be good candidates for spin off. Most of the markets were relatively small and didn't have the kind of growth prospects the executives in New York, San Antonio, Denver and Atlanta like to see. The response back, however, was that this particular RBOC had its own list. It consisted of markets where, frankly, they just don't get along with the regulators.

That's a logical thought in the same way that the enemy of my enemy is my friend. At the time of the conversation, the general consensus was the large line spin-offs were probably five years down the road. Now, however, Alltel appears ready to kick start the process. When the company announces its third-quarter earnings next week, it's also expected to announce the conclusion of a reassessment process for its 2 million-plus access lines. Speculation continues that CenturyTel will end up with a good portion of those, but with no personal insight whatsoever, I'm placing my marker on Alltel opting for a spinoff company paying a nice fat dividend.

Last month's column on why independent telcos have lower broadband penetration rates than RBOCs despite having greater availability generated quite a few letters and ideas from readers. Several readers pointed out that while rural telcos have done an excellent job of getting broadband out to the user, the demographics of users tended to be poorer than in urban areas. Additionally, the cost of providing the service changes the entire economic model. "Our cost for CPE and installation is ridiculous--we are betting we will keep each customer at least three years in order to finally see a little profit on that customer, and in order to keep the initial and monthly cost low enough to get some customers to buy the service," one independent telco CEO wrote.

Still another reader wrote to say that he was perfectly satisfied with his dial-up line because he simply had no application that would be vastly improved by broadband.

All of these are valid points, and there isn't really an easy answer.

Many independent executives talk with pride about the development that they've been able to attract to their small towns. And the market should be proud of its role in shepherding many of the technologies currently in vogue at the RBOCs. But until rural broadband penetration rates catch up to rest of the nation, the chasm between the information haves and have-nots is only going to grow wider.

E-mail me at vvittore@primediabusiness.com.